Bankwell Financial Group, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Dollar amounts are in millions unless otherwise noted. Bankwell is a Connecticut-based bank holding company whose principal business is commercial and consumer banking through Bankwell Bank.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net interest income | $22.7 | $24.6 | $72.2 | $67.9 |
| Net interest margin | 2.85% | 4.12% | 3.04% | 3.81% |
| Credit provision/(credit) | $(1.6) | $2.4 | $1.8 | $1.2 |
| Noninterest income | $0.8 | $0.4 | $3.7 | $2.5 |
| Noninterest expense | $12.2 | $11.0 | $37.5 | $31.9 |
| Net income | $9.8 | $9.2 | $28.1 | $29.4 |
| Diluted earnings per share | $1.25 | $1.18 | $3.58 | $3.75 |
- For the quarter, net interest income fell 7.8% as higher loan income was more than offset by sharply higher deposit and borrowing costs. Deposit interest expense rose to $23.8 million from $4.1 million; the average rate on interest-bearing deposits increased to 3.85% from 0.96%.
- Quarterly net income increased mainly because of a credit for credit losses, partly offset by lower net interest income and higher operating expenses. Nine-month net income declined 4.3%, as expense growth outweighed higher net interest income and fee income.
- At September 30, total assets were $3,249.8 million, gross loans $2,770.1 million, deposits $2,768.6 million and shareholders’ equity $257.9 million. Since December 31, 2022, gross loans grew 3.5%, deposits declined 1.1%, and assets were nearly unchanged.
- Cash and cash equivalents were $258.1 million, down from $355.7 million at year-end. For the first nine months, operating cash flow was $32.5 million, investing activities used $93.3 million and financing activities used $36.7 million; cash declined $97.6 million.
- Balance-sheet funding included $90.0 million of FHLB advances and $69.1 million of subordinated debentures. The Bank reported $362.1 million of additional immediate FHLB borrowing availability based on eligible collateral. The filing also lists substantial FRB and other credit facilities; amounts and conditions should be checked in the liquidity disclosures.
- The Bank’s September 30 regulatory capital ratios were 10.82% CET1, 11.86% total risk-based capital and 9.60% Tier 1 leverage. Management reported that the Bank met applicable capital requirements and was well capitalized.
Material changes and asset quality
- The allowance for credit losses on loans was $29.3 million, or 1.06% of gross loans, versus $22.4 million, or 0.84%, at year-end. The company adopted CECL on January 1, 2023, reducing beginning retained earnings by $4.9 million after tax, including the impact of reserves for loans and unfunded commitments.
- Nonaccrual loans rose to $28.0 million from $16.4 million at year-end; nonperforming assets increased to 0.86% of assets from 0.51%. Total past-due loans were $39.8 million versus $16.1 million. No loans over 90 days past due were still accruing interest.
- Management attributed much of the nonaccrual increase to a $7.9 million insurance-premium consumer loan and two commercial business loans totaling $5.5 million, of which approximately 82% was SBA-guaranteed. The insurance-premium loan had been reduced to $3.9 million by October 4, 2023; the Bank reported collateral worth approximately twice the remaining balance.
- The portfolio is concentrated in commercial real estate: commercial real estate loans were $1,956.0 million, with additional construction loans of $200.0 million. Management notes geographic concentration in Connecticut and the New York metro area and exposure to declines in property values and borrower cash flows.
- The investment portfolio had $12.2 million of net unrealized losses at September 30, compared with $9.2 million at year-end. Management stated it intended and was able to hold securities in unrealized-loss positions until recovery or maturity.
Management commentary, outlook and risks
- Management cited loan growth and higher loan yields as drivers of nine-month net interest income growth, but rising deposit costs compressed margin. The company described itself as liability sensitive; its rate simulations show estimated one-year net interest income down 3.2% under a +100-basis-point shock and down 10.2% under +300 basis points.
- Expense growth reflected higher FDIC insurance costs and salaries and benefits. Nine-month FDIC expense rose to $3.1 million from $0.7 million; salary and benefits expense increased to $18.5 million from $16.2 million. Management also cited one-time severance costs.
- The filing provides no specific earnings or financial guidance. Results are subject to uncertainty from interest rates, deposit pricing and outflows, loan and commercial real estate credit performance, economic conditions, and management’s CECL estimates. Management expects bank-failure-related FDIC assessments may increase costs; it did not expect the failures identified in the filing to have a material negative effect, while continuing to monitor developments.
- The board declared a $0.20 per-share dividend on October 25, payable November 20, 2023. No shares were repurchased in the first nine months of 2023. Management reported effective disclosure controls and no material expected loss from pending legal proceedings.
Most important facts for investors to verify
- Whether deposits, particularly time and brokered deposits, remain stable and what repricing costs mean for net interest margin.
- Subsequent payment, collateral value and loss exposure for the $3.9 million remaining insurance-premium loan, as well as performance of the two SBA-backed commercial loans.
- Trends in criticized, past-due and nonaccrual loans, especially commercial real estate and construction exposures, and whether the allowance remains adequate.
- Availability and terms of contingent borrowing capacity, deposit maturities and uninsured-deposit exposure; 71% of deposits were FDIC insured at quarter-end.
- Effects of interest-rate changes on earnings, securities valuations and capital, and whether higher FDIC assessments or other expenses further pressure profitability.