Bankwell Financial Group, Inc. — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020. This is an annual filing, not a standalone fourth-quarter report. Bankwell is a Connecticut community bank holding company operating primarily in Fairfield and New Haven Counties and the New York metropolitan area.
Financial performance and position
| Metric | 2020 | 2019 |
|---|---|---|
| Total revenue | $57.7 million | $59.0 million |
| Net interest income | $54.8 million | $53.8 million |
| Provision for loan losses | $7.6 million | $0.4 million |
| Net income | $5.9 million | $18.2 million |
| Diluted earnings per share | $0.75 | $2.31 |
| Net interest margin | 2.77% | 3.03% |
| Efficiency ratio | 73.9% | 60.2% |
- Return on average assets fell to 0.28% from 0.97%; return on average common equity declined to 3.35% from 10.20%.
- Year-end assets were $2.25 billion, up from $1.88 billion; gross loans were $1.63 billion versus $1.60 billion; deposits were $1.83 billion versus $1.49 billion.
- Cash and cash equivalents rose to $409.6 million from $78.1 million. Operating cash flow was negative $1.5 million, compared with positive $6.6 million in 2019; financing cash flow was positive $355.0 million, principally reflecting deposit growth.
- Year-end shareholders’ equity was $176.6 million, down from $182.4 million. Tangible common equity ratio was 7.73%, versus 9.56%.
- Funding included $175 million of FHLB advances and $25.3 million of subordinated debt. The subordinated notes have a 5.75% coupon and mature in August 2025. The Bank reported regulatory capital ratios above well-capitalized thresholds: Tier 1 leverage 8.44%, Tier 1 risk-based 11.06%, and total risk-based capital 12.28%.
Material changes and notable items
- Net income decreased 67.6% year over year. The company recorded $7.6 million in loan-loss provision, including $9.0 million of COVID-related reserves, partly offset by portfolio mix and growth effects.
- Noninterest expense increased 20% to $42.8 million, including $3.9 million of fourth-quarter charges: $2.0 million for office and branch consolidation, $1.1 million for termination of a legacy technology contract, and $0.8 million for retirement and severance costs. Management expected the related processes and payments to be substantially completed by the first half of 2021.
- Net interest income increased by $1.1 million, as lower deposit costs more than offset lower asset yields. Net interest margin declined amid lower rates and elevated liquidity. Noninterest income fell 45% to $2.9 million, primarily because loan-sale gains and fees were lower and some customer fees were waived.
- Deposits increased 22%, reflecting core commercial deposit gathering and temporary pandemic-related liquidity accumulation. Gross loans increased $21.1 million; excluding $34.8 million of PPP loans, they decreased $13.7 million.
- Credit quality weakened: nonperforming loans rose to $33.4 million from $10.6 million, and nonperforming assets reached 1.48% of assets from 0.56%. The allowance rose to $21.0 million, or 1.29% of gross loans, from $13.5 million, or 0.84%. Management attributed much of the deterioration and reserve build to COVID-19 uncertainty.
- Active COVID-related payment deferrals were $29.4 million at year-end. The filing states that qualifying deferrals were not classified as troubled debt restructurings under applicable relief provisions.
- Interest-rate swap marks drove an $8.1 million unfavorable change in accumulated other comprehensive loss; year-end accumulated other comprehensive loss was $15.6 million. The swaps are intended to hedge funding-rate exposure.
Outlook, risks and contingencies
- The filing provides no quantified earnings, growth, margin, or credit-loss guidance. Management says the pandemic’s duration and financial effects remain uncertain.
- Key exposures include the concentration in commercial real estate (about 71% of loans), geographic concentration, large borrower relationships, COVID-related borrower stress, collateral values, and the subjectivity of allowance estimates. The independent auditor identified qualitative adjustments to the loan-loss allowance as a critical audit matter.
- Interest-rate sensitivity disclosures show the Bank remained liability sensitive. The estimated economic value of equity declined 47.3% under a 100-basis-point rate decrease, outside internal policy limits; management cited the Bank’s well-capitalized position and said no further action was planned at that time. The filing also flags the transition away from LIBOR, which underlies some loan and swap exposures.
- Liquidity sources include deposits, cash, securities, FHLB capacity and unsecured lines. The company reported $347.9 million of additional immediate FHLB borrowing availability and $62 million of listed credit lines/letter-of-credit capacity, none outstanding at year-end.
- Off-balance-sheet commitments to extend credit totaled $237.1 million, up from $189.7 million. These are contingent and may not be fully drawn. The company also had a $2.8 million remaining commitment to an SBIC associated with a director.
- Management reported effective disclosure controls and internal control over financial reporting. The financial statements received an unmodified audit opinion; the auditor did not provide an opinion on internal controls. Management reported no material litigation expected to have an adverse effect.
Important facts for investors to verify
- Whether elevated nonperforming loans, especially commercial real estate and construction exposures, lead to additional losses or reserve increases.
- How much of the deposit growth is durable core funding versus temporary or brokered funding, and the resulting cost and liquidity profile.
- Whether the $3.9 million restructuring and contract-termination charges are fully nonrecurring, and whether anticipated expense savings materialize.
- The assumptions and collateral valuations behind the $21.0 million allowance, including the COVID-affected loans and active deferrals.
- The effect of interest-rate changes on net interest margin, swap-related accumulated other comprehensive loss, and the out-of-policy 100-basis-point decline scenario for economic value of equity.
- Dividend and capital actions: 2020 dividends were $0.56 per share; a $0.14-per-share dividend was declared for February 2021. The company also repurchased 58,499 shares in 2020 and reported subsequent purchases of 65,626 shares through February 28, 2021.