Bankwell Financial Group, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; financial statements are unaudited. Bankwell is a Connecticut-based bank holding company focused primarily on commercial real estate, construction, and commercial business lending in Connecticut and nearby markets.
Financial performance and condition
- Profitability: Net income was $8.2 million, versus $5.7 million in Q1 2021. Diluted EPS was $1.04, versus $0.71. Return on average assets was 1.35% and return on average equity was 16.05%, up from 1.02% and 12.67%, respectively.
- Revenue and margin: Net interest income was $19.5 million, up 33.1% year over year; fully taxable-equivalent net interest margin increased to 3.30% from 2.74%. Interest and fees on loans rose with loan growth and higher yields, while deposit interest expense declined. Noninterest income fell 51.0% to $1.0 million, largely because Q1 2021 included a one-time $0.9 million COVID-related federal payroll tax credit. Noninterest expense rose 3.0% to $9.9 million, including higher professional-services and data-processing costs associated with projects and banking-system upgrades.
- Credit costs: The company recorded a $0.2 million provision for loan losses, compared with a $0.3 million credit in Q1 2021, citing loan growth. The allowance was $17.1 million, or 0.86% of gross loans, versus $16.9 million, or 0.89%, at year-end. Net charge-offs were not material.
- Balance sheet: Total assets were $2.50 billion, up 1.7% from December 31, 2021. Gross loans grew $90.4 million to $1.99 billion, led by commercial real estate, construction, and commercial business loans. Deposits increased $42.2 million to $2.17 billion. Shareholders’ equity was $210.2 million, compared with $202.0 million at year-end.
- Cash flow and liquidity: Operating activities provided $22.0 million; investing activities used $104.0 million, principally reflecting $96.1 million of net loan growth; financing activities provided $36.8 million. Cash and cash equivalents ended at $299.5 million. The company also reported $98.7 million of available-for-sale securities and $314.5 million of additional immediate FHLB borrowing availability. Loan-origination commitments were $148.3 million, with $301.7 million of undisbursed approved credit lines.
- Debt and capital: FHLB advances were $50.0 million and subordinated debentures were $34.5 million net of issuance costs. The Bank’s capital ratios were 11.20% CET1, 12.00% total risk-based capital, 11.20% Tier 1 risk-based capital, and 9.80% Tier 1 leverage; management reported compliance with capital requirements. Tangible common equity ratio was 8.32%.
Material changes, outlook, and risks
- Earnings growth reflected stronger net interest income, partly offset by the prior-year payroll tax credit not recurring, higher provision expense, and modestly higher operating costs. Loan growth and deposit growth increased during the quarter.
- Nonaccrual loans were $15.7 million, or 0.79% of gross loans, down from $16.6 million, or 0.88%, at year-end. Total past-due loans were 0.85% of gross loans, versus 1.72% at year-end. The portfolio is concentrated in commercial real estate and is geographically concentrated in Connecticut and the New York metro area, exposing the company to property-value and regional economic weakness.
- Available-for-sale securities had $2.8 million of gross unrealized losses at quarter-end; management stated it intended and was able to hold securities in unrealized-loss positions until recovery or maturity. Rising rates improved the reported value of hedge positions and accumulated other comprehensive income during the quarter, but securities values and derivative marks can move adversely as rates change.
- Management described the Bank as liability-sensitive. Its one-year net-interest-income simulations estimated declines of 1.5% to 4.5% under +100 to +300 basis-point instantaneous rate shocks. The -100 basis-point economic-value-of-equity scenario showed a 12.3% decline, outside the company’s policy parameter; management said it considered the scenario unlikely and took no further action. Simulation outcomes depend on assumptions about deposit behavior, prepayments, and rate changes.
- No specific earnings guidance was provided. The company stated it expected sufficient funds to meet current commitments. The Board declared a $0.20-per-share dividend on April 27, 2022, payable May 23, 2022. Q1 share repurchases totaled 112,829 shares at a weighted-average $34.01 per share.
- Management reported no material change in previously disclosed risk factors, no expected material loss from pending legal proceedings, and effective disclosure controls. The company had not adopted the expected-credit-loss standard (CECL) and was evaluating its impact; adoption was deferred to fiscal years beginning after December 15, 2022 for the company as a smaller reporting company.
Important facts for investors to verify
- Whether loan growth and the stronger net interest margin persist as market rates, deposit costs, and deposit mix change.
- Credit quality in commercial real estate and construction, including criticized, nonaccrual, and past-due exposures, and the adequacy of the allowance.
- The extent of reliance on brokered funding: brokered certificates were $249.4 million and brokered money-market accounts were $100.3 million at quarter-end.
- Potential effects of interest-rate movements on securities values, hedge-related other comprehensive income, net interest income, and economic value of equity.
- CECL adoption effects, and the cost, timing, and benefits of the core-system conversion and online-banking projects.