Bankwell Financial Group, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Bankwell is a Connecticut-based bank holding company operating through Bankwell Bank, focused primarily on commercial and retail banking in Connecticut and nearby markets. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $24.0 | $23.8 | $49.5 | $43.3 |
| Net interest margin (FTE) | 3.07% | 4.01% | 3.15% | 3.65% |
| Provision (credit) for credit losses | $2.6 | ($1.4) | $3.4 | ($1.2) |
| Noninterest income | $1.4 | $1.2 | $2.9 | $2.1 |
| Noninterest expense | $12.6 | $10.9 | $25.3 | $20.9 |
| Net income | $8.0 | $12.0 | $18.4 | $20.2 |
| Diluted earnings per share | $1.02 | $1.55 | $2.34 | $2.58 |
- Loan interest income and yields rose with loan growth and higher rates, but higher deposit costs compressed margin. Q2 interest expense on deposits was $20.8 million versus $2.0 million a year earlier; the average rate on interest-bearing deposits increased to 3.46% from 0.46%.
- Q2 return on average assets was 0.99% and return on average equity was 12.91%, down from 1.96% and 22.09%, respectively, in Q2 2022.
- At June 30, total assets were $3.253 billion, gross loans $2.774 billion, deposits $2.789 billion, and shareholders’ equity $248.8 million. Gross loans rose $98.2 million, or 3.7%, from year-end 2022; deposits declined $12.0 million, or 0.4%.
- Cash and cash equivalents were $262.1 million, down from $355.7 million at year-end. For the first six months, reported operating cash flow was $19.7 million; investing activities used $98.4 million and financing activities used $14.9 million.
- Funding included $90.0 million of FHLB advances and $69.1 million carrying value of subordinated debentures. The Bank reported $385.4 million of immediate additional FHLB borrowing availability and multiple other borrowing lines.
Material changes and credit quality
- Net income fell 33.6% in Q2 and 9.3% for the first half versus 2022. Management attributed the decline primarily to higher credit-loss provision and operating expenses, partly offset by increased revenue.
- First-half noninterest expense rose 21.4%, driven mainly by salaries and benefits, including one-time severance costs, and FDIC insurance expense. FDIC expense increased to $2.1 million from $0.5 million.
- The allowance for credit losses on loans was $30.7 million, or 1.11% of gross loans, versus $22.4 million, or 0.84%, at year-end. CECL adoption on January 1 added $5.1 million to the loan allowance and $1.3 million to the unfunded-commitment reserve, reducing beginning retained earnings by $4.9 million after tax.
- Nonperforming assets were $15.5 million, or 0.48% of assets, compared with $16.4 million, or 0.51%, at year-end. Past-due loans increased to $36.0 million, or 1.30% of gross loans, from $16.1 million, or 0.60%; the filing says $9.3 million of these loans subsequently became current. No loans were over 90 days past due and still accruing.
- Commercial real estate represented $1.931 billion of loans; construction loans increased to $219.6 million from $155.2 million at year-end. The filing identifies regional and commercial real estate concentration, property-value declines, and borrower repayment capacity as risks.
Liquidity, capital, outlook and other matters
- Time deposits were 47.6% of deposits, compared with 43.8% at year-end; noninterest-bearing deposits declined to 13.2% from 14.4%. Brokered CDs totaled $918.1 million. Approximately 75% of deposits were insured through FDIC coverage or FHLB letters of credit.
- The Bank’s June 30 regulatory capital ratios were 10.34% CET1, 11.41% total risk-based capital, and 9.41% Tier 1 leverage. The Company and Bank met applicable capital adequacy requirements. The Company stated it will no longer qualify under the Small Bank Holding Company Policy Statement beginning March 2024 because consolidated assets exceeded $3.0 billion.
- Management provided no specific earnings or financial guidance. It described continued focus on organic growth, client relationships, scalable operations, and disciplined risk management. Interest-rate simulations characterized the Bank as liability-sensitive; under a +300-basis-point shock, modeled one-year net interest income declined 8.6% and economic value of equity declined 14.9%. Actual outcomes may differ from these estimates.
- Available-for-sale securities had $9.9 million of gross unrealized losses at June 30; the filing says management intended and was able to hold securities until recovery or maturity. Accumulated other comprehensive loss was $1.7 million.
- The Board declared a $0.20-per-share dividend on July 26, payable August 24, 2023. No shares were repurchased in the first half. Management reported no material expected loss from pending legal proceedings and no material change to previously disclosed risk factors except for added discussion of potential effects from recent and future bank failures, including higher FDIC assessments and deposit outflows.
Important facts for investors to verify
- Deposit retention, pricing, brokered funding reliance, and time-deposit maturities as competition for deposits continues.
- Commercial real estate and construction exposures, delinquency trends, criticized loans, and the adequacy of the CECL allowance.
- Whether loan yields and growth can continue to offset higher funding costs and the reported decline in net interest margin.
- Capital and liquidity resilience, including borrowing availability, capital-buffer requirements, and the implications of losing small-bank-holding-company treatment in March 2024.
- Assumptions behind interest-rate simulations and the effect of market-rate changes on earnings, securities values, and equity.