Bankwell Financial Group, Inc. — 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing also reports fourth-quarter results. Bankwell is a Connecticut community bank holding company serving Fairfield and New Haven Counties and surrounding areas through Bankwell Bank and 12 branches.
Financial performance and position
| Metric | 2018 | 2017 |
|---|---|---|
| Total revenue | $60.2 million | $59.0 million |
| Net interest income | $56.3 million | $54.4 million |
| Net income | $17.4 million | $13.8 million |
| Diluted EPS | $2.21 | $1.78 |
| Net interest margin | 3.18% | 3.30% |
| Efficiency ratio | 59.2% | 54.9% |
| Gross loans at year-end | $1.605 billion | $1.543 billion |
| Deposits at year-end | $1.502 billion | $1.398 billion |
| Total assets at year-end | $1.874 billion | $1.797 billion |
| Shareholders’ equity at year-end | $174.2 million | $161.0 million |
- Profitability improved: return on average assets was 0.94% versus 0.80%; return on average equity was 10.19% versus 8.93%. The lower 2018 tax expense helped: effective tax rate was 17.6%, compared with 45.0% in 2017.
- Net cash provided by operating activities was $20.0 million; investing activities used $74.6 million and financing activities provided $62.0 million. Cash and cash equivalents increased $7.4 million to $78.1 million. These cash-flow figures reflect banking balance-sheet activity.
- Year-end funding included $160.0 million of FHLB advances and $25.2 million of subordinated debt, net of issuance costs. The Bank reported capital ratios above regulatory well-capitalized thresholds, including 11.56% Tier 1 risk-based capital and 10.14% Tier 1 leverage.
Material changes and fourth-quarter results
- Loan growth was led by commercial real estate: CRE loans rose 11% to $1.094 billion and represented 68% of total loans. Total deposits grew 7%; the average cost of deposits increased 41 basis points to 1.47%.
- Higher earning-asset yields and loan growth lifted interest income, but increased deposit costs contributed to a 12-basis-point decline in net interest margin. Noninterest expense rose 10%, partly reflecting staffing and occupancy costs for three branches opened in 2018. The efficiency ratio therefore worsened.
- Credit quality weakened on certain measures. A $6.2 million charge-off tied to one lending relationship was recorded in the fourth quarter; full-year net charge-offs were $6.9 million, or 0.44% of average loans. Nonperforming loans increased to $14.1 million (0.88% of loans) from $5.5 million (0.36%); nonperforming assets rose to 0.75% of assets from 0.31%.
- Fourth-quarter net income was $3.3 million, or $0.41 diluted EPS, compared with $2.1 million, or $0.27, in fourth-quarter 2017. The 2018 quarter included a $2.8 million loan-loss provision, with the $6.2 million relationship charge-off noted above.
- Shareholders’ equity increased by $13.2 million, supported by earnings and offset by $3.8 million of dividends and $2.7 million of other comprehensive loss, primarily from fair-value changes in hedge positions.
Outlook, risks and unusual items
- The filing provides no quantified earnings or growth guidance. Management describes a strategy of organic growth, local relationship banking, scalable operations, disciplined risk management and potential strategic acquisitions.
- The Board authorized repurchases of up to 400,000 shares in December 2018; no shares were repurchased during 2018. A subsequent $0.13-per-share dividend was declared for payment in February 2019, an 8% increase from the prior quarterly dividend.
- Bankwell reported liability-sensitive interest-rate exposure. Its modeled one-year net interest income declined 7.3%, 15.2% and 22.7% under parallel rate increases of 100, 200 and 300 basis points, respectively; these exceed the stated internal decline limits of 6%, 12% and 18%. Results rely on assumptions and a static balance sheet.
- Key risks include concentration in commercial real estate and the local Connecticut/New York metropolitan market, large borrower exposures, loan seasoning, credit losses, deposit-pricing competition, interest-rate sensitivity, and execution of branch and acquisition plans. The company also identifies cybersecurity, regulatory compliance and the transition away from LIBOR as risks; it had $225 million of LIBOR-linked swaps and limited LIBOR-linked loan exposure.
- The allowance for loan losses ended at $15.5 million, or 0.96% of loans, down from $18.9 million, or 1.23%, in 2017. Management considered it adequate, but the 2018 charge-off and rising nonperforming loans warrant scrutiny. The 2017 comparison also included a $3.3 million deferred-tax-asset write-down following the federal tax-rate change.
- The independent auditor issued an unqualified opinion on the financial statements. Management said internal control over financial reporting was effective at year-end and that a 2017 material weakness in allowance-related controls had been remediated; the auditor did not provide an ICFR attestation.
- Management said routine legal proceedings were not expected to have a material effect. The filing does not identify a material pending contingency.
Important facts for investors to verify
- Details, collateral, borrower exposure and recovery prospects for the $6.2 million charge-off, and subsequent performance of the related lending relationship.
- Whether nonperforming loans, troubled debt restructurings and criticized commercial credits continue to rise; verify allowance coverage and reserve assumptions.
- Deposit mix, brokered and listing-service deposits, deposit maturities, and the ability to retain funding without further margin pressure.
- Interest-rate sensitivity assumptions and the implications of modeled net-interest-income declines exceeding internal limits under rising-rate scenarios.
- Costs and deposit/loan growth from the three new branches, progress toward operating efficiencies, and any use of the authorized share-repurchase program.
- Capital and liquidity capacity after commitments to extend credit of $266.3 million, and the company’s plan for transitioning LIBOR-linked contracts.