Bankwell Financial Group, Inc. (BWFG) is a bank holding company headquartered in New Canaan, Connecticut, that operates through its wholly-owned subsidiary, Bankwell Bank. The company has a rich history of serving small and medium-sized businesses, as well as retail clients, in the northeastern United States. Over the years, Bankwell has established itself as a trusted financial institution known for its personalized service, diverse product offerings, and strategic growth initiatives.
Company Background and History
Founded in 2002 as a Connecticut state-chartered commercial bank, Bankwell Bank has grown to become a leading regional bank with a focus on commercial and consumer lending, as well as deposit services. The company's unwavering commitment to building long-term client relationships and attracting new clients through superior service has been a hallmark of its success. Throughout its history, Bankwell has gradually expanded its commercial real estate, construction, commercial business, and consumer lending portfolios. The bank has also focused on establishing a stable deposit base to fund its lending activities.
Navigating Economic Challenges
Bankwell has successfully navigated various economic conditions and challenges since its inception. During the Great Recession in the late 2000s, the bank carefully managed its asset quality and credit risk. More recently, in the early 2020s, Bankwell confronted the COVID-19 pandemic, which impacted certain sectors of its loan portfolio. The bank worked diligently with impacted borrowers and took measures to maintain the strength of its balance sheet during this challenging period.
Financials
Bankwell's financial performance has been marked by both achievements and challenges in recent years. In 2024, the company reported GAAP net income of $6.8 million, or $0.86 per diluted share, compared to $28.1 million, or $3.58 per diluted share, in 2023. This decline was primarily driven by an increase in the provision for credit losses and higher interest expense.
For the third quarter of 2024, Bankwell reported revenue of $47,843,000 and net income of $2,507,000. The company's operating cash flow (OCF) for the quarter was -$557,000, while free cash flow (FCF) stood at -$672,000. Net income available to common shareholders was $1.90 million, or $0.24 per diluted share, for the third quarter of 2024, compared to $9.80 million, or $1.25 per diluted share, for the same period in 2023.
Despite these headwinds, Bankwell has remained steadfast in its efforts to enhance its operational efficiency and position the company for future growth. The company's non-interest expense to total asset ratio has remained stable, operating at approximately 170 basis points or better, even as it has made significant investments in human capital, particularly in the areas of technology and risk management.
Strategic Initiatives
One of Bankwell's key strategic initiatives has been the successful launch of its Bankwell Direct product, which has helped the company reduce its reliance on broker deposits. In 2024, Bankwell Direct balances grew by $39 million over the third quarter, reaching a total of $136 million, while broker deposits fell by $78 million on a linked quarter basis. This shift towards a more stable and diverse deposit base has been a priority for the management team.
Furthermore, Bankwell has laid the foundation for an SBA lending division, having started originating SBA loans in December 2024. The company is anticipating that this new line of business will contribute to a doubling of its non-interest income in 2025, from $2.8 million in 2024 to a projected $7 million to $8 million.
Future Outlook
Looking ahead, Bankwell is optimistic about its prospects for 2025. The company is forecasting modest loan growth of 3% to 5%, with net interest income expected to grow to the range of $93 million to $95 million. Additionally, Bankwell anticipates that its noninterest income will benefit from the growth of its SBA lending division, while maintaining a disciplined approach to controlling noninterest expenses, which are projected to be approximately $56 million to $57 million, inclusive of investments in growth initiatives.
The company expects its net interest margin to expand in 2025 as term deposits continue to reprice, with $1.3 billion in time deposits maturing in the next 12 months. This is expected to save Bankwell $4.4 million on an annualized basis, which equates to a $0.44 pickup in earnings per share and about 14 basis points of margin expansion. The effective tax rate going forward is expected to be 24.5%.
Asset Quality Management
One of the key challenges that Bankwell has faced in recent years has been the management of its nonperforming assets (NPAs). In the fourth quarter of 2024, the company took steps to address this issue, fully disposing of a nonperforming C&I loan with a book balance of $1.7 million and taking possession of a nonperforming construction loan, transferring the property to other real estate owned (OREO) and charging off $1.2 million.
Subsequent to the end of 2024, Bankwell has signed purchase and sale agreements for the sale of its largest nonperforming loan of $27.1 million at par value, as well as the OREO asset. These transactions are expected to have a neutral impact on future net income and reduce the company's nonperforming asset ratio by over 100 basis points.
Liquidity
Bankwell's capital position remains strong, with the Bank's ratio of Common Equity Tier 1 capital to risk-weighted assets standing at 11.8% as of September 30, 2024. This solid capital base, combined with the company's efforts to address its nonperforming assets, positions Bankwell to navigate the challenges it has faced and pursue its growth initiatives.
As of September 30, 2024, Bankwell reported cash holdings of $291,340,000. The company has a secured borrowing line with the Federal Reserve Bank, a letter of credit with the Federal Home Loan Bank, and unsecured lines of credit with Zions Bank, Pacific Coast Bankers Bank, and Atlantic Community Bankers Bank. The total available credit lines amount to $1,310,000,000, with $199,850,000 outstanding as of September 30, 2024.
Product Segments
Bankwell operates through several key product segments:
1. Commercial Real Estate: This segment includes loans secured by commercial real estate, multi-family dwellings, owner-occupied commercial real estate, and investor-owned one-to-four family dwellings. As of September 30, 2024, commercial real estate loans totaled $1.89 billion, representing 71.97% of the total loan portfolio. The commercial real estate portfolio is diversified across property types, with the largest concentrations in residential care facilities (33.5%), retail (20%), and multifamily (15.1%) properties. The weighted average loan-to-value ratio for the commercial real estate portfolio was 61.1% at origination.
2. Construction: This segment includes commercial construction loans for development projects, such as apartment buildings, condominiums, office buildings, retail, and other income-producing properties, as well as land loans. As of September 30, 2024, construction loans totaled $160.29 million, or 6.11% of the total loan portfolio.
3. Commercial Business: The commercial business segment includes loans secured by assignments of corporate assets and personal guarantees of business owners. As of September 30, 2024, commercial business loans totaled $490.29 million, or 18.69% of the total loan portfolio.
4. Residential Real Estate: This segment consists of first mortgage loans secured by one-to-four family owner-occupied residential properties, home equity loans, and home equity lines of credit. As of September 30, 2024, residential real estate loans totaled $45.55 million, or 1.74% of the total loan portfolio.
5. Consumer: The consumer segment includes loans secured by savings or certificate accounts, as well as unsecured personal loans, overdraft lines of credit, and loans to finance insurance premiums. As of September 30, 2024, consumer loans totaled $39.13 million, or 1.49% of the total loan portfolio.
The company's total loan portfolio amounted to $2.62 billion as of September 30, 2024, down 3.5% from $2.72 billion at the end of 2023. The allowance for credit losses (ACL) on loans was $27.75 million, or 1.06% of total loans, at September 30, 2024, compared to $27.95 million, or 1.03% of total loans, at the end of 2023.
Conclusion
In conclusion, Bankwell Financial Group has demonstrated resilience and a commitment to long-term success, even as it has navigated a challenging operating environment. The company's strategic focus on reducing broker deposits, expanding its SBA lending division, and improving its asset quality, coupled with its strong capital position, provide a solid foundation for future growth and success. With a diversified loan portfolio and a focus on key market segments, Bankwell is well-positioned to capitalize on opportunities in the Northeast region while managing risks and maintaining a strong financial position.