Bankwell Financial Group, Inc. annual report, FY2019

Full document

Bankwell Financial Group, Inc. — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019. Bankwell Financial Group is a Connecticut bank holding company operating through Bankwell Bank, serving businesses and consumers primarily in Fairfield and New Haven Counties. The filing also reports unaudited fourth-quarter results. Financial statements received unqualified audit opinions; the auditor also gave an unqualified opinion on internal control over financial reporting.

Financial results and position

  • Annual earnings: Net income was $18.2 million, up 4.5% from $17.4 million in 2018. Diluted EPS was $2.31 versus $2.21. Return on average assets was 0.97%; return on average equity was 10.20%.
  • Revenue and margins: Net interest income was $53.8 million, down from $56.3 million; net interest margin fell 15 basis points to 3.03%. Total revenue was $59.0 million versus $60.2 million. Noninterest income rose to $5.2 million, while noninterest expense was essentially flat at $35.6 million. The efficiency ratio increased to 60.2% from 59.2%.
  • Credit costs: Provision for loan losses fell to $0.4 million from $3.4 million. Net charge-offs declined to $2.4 million (0.15% of average loans) from $6.9 million (0.44%). The allowance was $13.5 million, or 0.84% of gross loans, compared with $15.5 million, or 0.96%, a year earlier.
  • Assets and lending: Total assets were $1.88 billion; gross loans were $1.60 billion, essentially unchanged year over year. Commercial real estate represented 70.3% of loans. Commercial construction loans increased to $98.6 million from $73.2 million, while residential real estate and commercial business loans declined.
  • Deposits and liquidity: Deposits were $1.49 billion, down 1% for the year, though management reported 6% annualized deposit growth in the fourth quarter, including strong noninterest-bearing growth. Cash and cash equivalents were $78.1 million. The Bank reported $440.4 million of additional FHLB borrowing availability based on eligible collateral and $52 million in other lines of credit, with none outstanding at year-end.
  • Debt and capital: FHLB advances were $150.0 million, down from $160.0 million; subordinated debt was $25.2 million, with a 5.75% coupon and August 2025 maturity. Shareholders’ equity was $182.4 million. Bank capital ratios included 12.53% Tier 1 risk-based capital, 13.35% total risk-based capital, and 10.99% Tier 1 leverage; the Bank exceeded well-capitalized thresholds.
  • Cash flow: Operating activities provided $6.6 million, investing activities provided $18.7 million, and financing activities used $25.4 million. Cash and cash equivalents decreased by $0.1 million to $78.1 million.

Material changes and notable items

  • Higher deposit funding costs pressured earnings: interest expense rose 23% to $29.2 million, and the weighted-average cost of deposits increased to 1.87% from 1.47%. Loan prepayment fees of $2.7 million, compared with $1.3 million in 2018, partly offset margin pressure and supported interest income.
  • Net income benefited from lower loan charge-offs and higher loan-related fees. The 2018 comparison included a $6.2 million charge-off associated with one lending relationship.
  • Noninterest income increased 34%, principally due to higher loan-sale gains and fees and loan-related interest-rate swap fees. The company recorded a $0.1 million loss on sale of other real estate owned.
  • Accumulated other comprehensive loss widened by $6.5 million, largely reflecting lower market rates and fair-value marks on interest-rate hedges. At year-end, the reported derivative liability was $13.0 million before collateral netting; $13.5 million of cash collateral was posted.
  • Shareholders received $0.52 per share in dividends during 2019. The company repurchased 34,168 shares for approximately $1.0 million. A subsequent quarterly dividend of $0.14 per share was declared, an 8% increase from the preceding quarter.
  • The company adopted lease accounting guidance in 2019, recognizing a $10.1 million right-of-use asset and $10.2 million lease liability at year-end.

Fourth-quarter results

Unaudited fourth-quarter 2019 net income was $3.47 million, or $0.44 per diluted share, compared with $3.26 million, or $0.41 per diluted share, in fourth-quarter 2018. Net interest income was $12.9 million versus $14.5 million; provision for loan losses was $0.31 million versus $2.80 million. Quarterly net income declined sequentially from $4.09 million in Q3 2019.

Outlook, risks and contingencies

  • The filing provides no specific earnings, growth, margin, or other quantified financial guidance. Management describes a strategy centered on relationship banking, organic growth, selective acquisitions, scalable infrastructure, and disciplined risk management.
  • Management identifies interest-rate sensitivity as a key risk. The Bank was liability-sensitive; its modeled net interest income declined 6.2% under an immediate 100-basis-point rate increase and 19.5% under a 300-basis-point increase. These are model estimates, not forecasts, and depend on assumptions about deposits, prepayments, and balance-sheet behavior.
  • Credit exposure is concentrated geographically and in commercial real estate. The largest borrower relationships, local economic conditions, collateral values, loan seasoning, and repayment or refinancing capacity are material risks. Nonperforming assets improved to $10.6 million, or 0.56% of assets, from $14.1 million, or 0.75%; however, impaired loans increased to $22.6 million from $19.1 million, and total troubled debt restructurings rose to $9.6 million from $7.2 million.
  • Management was pursuing resolution of a previously disclosed large nonperforming relationship and had submitted an SBA claim for a remaining $1.9 million balance. The filing does not establish the timing or outcome of recovery.
  • LIBOR transition presents operational and contractual risk. The company reported derivative contracts and limited loan exposure tied to LIBOR and was monitoring the proposed transition to SOFR.
  • Other risks include competition for deposits, reliance on brokered funding, cybersecurity and third-party systems, regulatory and compliance burdens, acquisition execution, and the possibility that the allowance for loan losses proves insufficient. The company reported no legal proceedings expected to have a material adverse effect.

Most important facts for investors to verify

  • Whether the recent improvement in charge-offs and nonperforming assets is sustainable, and the resolution and recovery status of the large criticized lending relationship.
  • Commercial real estate concentrations, borrower exposures, criticized and impaired loan trends, and the adequacy of the $13.5 million allowance.
  • Deposit pricing, brokered deposit levels and maturities, and the effect of funding costs on net interest margin and profitability.
  • Interest-rate and hedge exposure, including the impact of derivatives on accumulated other comprehensive income, collateral requirements, and LIBOR-to-SOFR transition plans.
  • Actual liquidity and capital availability after considering deposit outflows, credit commitments, FHLB collateral requirements, dividends, and repurchases.