Bankwell Financial Group, Inc. — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019; unaudited. Bankwell is a Connecticut-based bank holding company serving commercial and consumer customers primarily in Connecticut and the New York metropolitan area.
Key financial results
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net interest income | $13.0 million | $14.2 million | $40.9 million | $41.9 million |
| Net interest margin, FTE | 2.96% | 3.21% | 3.07% | 3.17% |
| Noninterest income | $1.6 million | $0.9 million | $4.2 million | $3.3 million |
| Noninterest expense | $8.7 million | $8.9 million | $26.4 million | $26.8 million |
| Net income | $4.1 million | $4.9 million | $14.7 million | $14.2 million |
| Diluted earnings per share | $0.52 | $0.62 | $1.87 | $1.80 |
Q3 net income declined about 16% year over year, while nine-month net income rose about 4%. Q3 interest income was nearly flat year over year, but interest expense increased 20%, primarily from higher deposit costs. Nine-month interest expense increased 33%. Loan prepayment fees were $0.5 million in Q3 and $2.6 million year to date, compared with $0.04 million and $0.3 million in the prior-year periods. Returns on average assets and equity were 0.87% and 9.12% in Q3, and 1.05% and 11.06% for nine months.
Balance sheet, liquidity and capital
- At September 30, total assets were $1.86 billion, down 0.8% from year-end 2018. Net loans were $1.55 billion; total gross loans were $1.56 billion, down $40.4 million from December 31.
- Deposits were $1.47 billion, down $32.0 million from year-end. FHLB advances were $150 million, down $10 million; subordinated debentures were $25.2 million, with a stated 5.75% rate and August 2025 maturity.
- Cash and cash equivalents were $83.1 million and available-for-sale securities were $86.0 million. The Bank reported $427.8 million of additional immediate FHLB borrowing availability. Loan commitments to originate were $32.8 million and undisbursed approved lines totaled $184.2 million.
- Shareholders’ equity was $176.0 million. Tangible book value was $22.34 per share and the tangible common equity ratio was 9.33%. Bank capital ratios included 12.65% Common Equity Tier 1 and 13.47% total risk-based capital; the Bank met applicable capital requirements.
- Operating cash flow was negative $3.1 million for the first nine months, compared with positive $15.1 million in 2018. Investing activities provided $54.0 million and financing activities used $46.0 million; cash increased $5.0 million. The operating cash flow comparison was affected by a $33.5 million increase in other assets.
Material changes and credit quality
- Loan balances fell, principally reflecting elevated prepayments. Commercial real estate loans were $1.10 billion; commercial business loans declined $40.8 million, while construction loans increased $16.7 million.
- The allowance for loan losses was $13.2 million, or 0.84% of gross loans, versus $15.5 million, or 0.96%, at December 31, 2018. Nine-month provision was $0.1 million versus $0.6 million in 2018; Q3 provision rose to $0.8 million from $0.3 million.
- Nonaccrual loans declined to $9.9 million from $14.1 million at year-end. Total past-due loans increased to $17.2 million from $12.5 million; loans 90 or more days past due were $5.0 million. Nine-month net charge-offs were $2.4 million versus $0.2 million in 2018.
- Total other comprehensive loss was $10.2 million for the first nine months, mainly reflecting a $12.5 million after-tax loss on interest-rate swaps, partly offset by securities gains. Accumulated other comprehensive loss was $11.2 million at quarter-end.
Outlook, risks and unusual items
- The filing provides no quantitative earnings or revenue guidance. Management described elevated deposit costs and loan prepayments as drivers of lower net interest income and margin, and reported that the Bank remained liability-sensitive to interest-rate changes.
- Management said it was working to resolve a previously disclosed large nonperforming lending relationship; after quarter-end, it submitted a claim to the Small Business Administration for the remaining balance. Recovery amount and timing are not stated.
- Key exposures include commercial real estate concentration and the regional economy, property values, borrower repayment capacity, deposit competition and interest-rate movements. Management cautioned that interest-rate simulations rely on assumptions and may not predict actual results.
- Six designated hedging swaps had $200 million notional and a reported net fair-value liability of $15.4 million; changes in rates materially affect other comprehensive income. The company stated that falling rates reduce OCI under its current positions.
- Lease accounting adoption added a $10.6 million right-of-use asset and liability at January 1, 2019 and a $0.5 million after-tax opening retained-earnings adjustment. Q3 included a $0.1 million loss on sale of other real estate owned and a credit to FDIC insurance expense.
- The Board declared a $0.13 per-share dividend on October 30, payable November 25, 2019. Management reported no material change in previously disclosed risk factors and no material expected loss from pending legal proceedings.
Important facts for investors to verify
- Whether deposit pricing and funding mix continue to pressure net interest margin as time deposits reprice or mature.
- Progress, expected recoveries and potential further charge-offs on the large troubled lending relationship and the SBA claim.
- Loan credit trends, especially past-due commercial real estate and business loans, charge-offs, and allowance adequacy ahead of expected-loss accounting adoption.
- Interest-rate exposure and the sensitivity of swap valuations, OCI and funding costs to changing rates; the company’s simulations are assumption-dependent.
- Deposit retention, brokered funding levels, available borrowing capacity and the ability to meet commitments while maintaining regulatory capital and dividends.