Bankwell Financial Group, Inc. — Q2 2022 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2022. Bankwell is a Connecticut-based bank holding company whose subsidiary provides commercial lending and banking services, primarily in Connecticut and the New York metro area. Amounts below are in millions unless noted.
Financial performance and condition
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net interest income | $23.8 | $16.6 | $43.3 | $31.2 |
| Net income | $12.0 | $6.2 | $20.2 | $11.9 |
| Diluted EPS | $1.55 | $0.79 | $2.58 | $1.50 |
| Net interest margin | 4.01% | 3.12% | 3.65% | 2.93% |
| Noninterest income | $1.2 | $1.4 | $2.1 | $3.4 |
| Noninterest expense | $10.9 | $10.1 | $20.9 | $19.7 |
- Management attributed stronger net interest income chiefly to loan growth, higher loan yields, lower deposit costs and elevated loan prepayment fees. Q2 loan prepayment fees were $1.8 million, versus $0.8 million a year earlier.
- Credit-loss accounting produced a $1.4 million credit in Q2 and a $1.2 million credit for the first half, primarily from releasing specific reserves on improved or repaid impaired loans. The allowance was $15.8 million, or 0.77% of gross loans, at June 30.
- Noninterest income fell year over year. The first-half comparison included a $0.9 million COVID-related payroll tax credit in Q1 2021; 2022 also had lower loan-sale revenue and no comparable rental income from a previously disposed headquarters building.
- Total assets were $2.44 billion, down 0.8% from year-end 2021. Gross loans grew $161.7 million to $2.06 billion; deposits declined $90.5 million to $2.03 billion. Commercial real estate loans were $1.50 billion, about 73% of gross loans.
- Cash and cash equivalents were $171.0 million. Six-month operating cash flow was $46.6 million; investing cash use was $177.8 million, principally reflecting $171.8 million of net loan growth; financing cash use was $42.4 million. Cash declined $173.7 million from year-end.
- At June 30, FHLB advances were $105 million and subordinated debentures were $34.5 million net of issuance costs. The Bank had $286 million of additional immediate FHLB borrowing availability, supported by pledged eligible loans.
- Shareholders’ equity was $225.5 million. Bank capital ratios included 11.10% common equity Tier 1, 11.80% total risk-based capital and 10.15% Tier 1 leverage; the Bank met regulatory capital requirements. Six-month dividends were $0.40 per share and share repurchases totaled $3.8 million.
Changes, outlook and risks
- Compared with Q2 2021, net income nearly doubled and diluted EPS increased to $1.55. Net interest margin rose 89 basis points. Expense growth—particularly salaries and professional services—partly offset revenue gains.
- Asset quality improved modestly from year-end: nonperforming assets were $15.3 million, or 0.63% of assets, versus $16.6 million, or 0.68%; past-due loans were $28.8 million, or 1.40% of loans, versus $32.6 million, or 1.72%. A $10.5 million matured commercial real estate loan was in active refinancing negotiations. No loans remained on active CARES Act deferral.
- Interest-rate simulations described the Bank as liability-sensitive. A parallel +300-basis-point shock was estimated to reduce one-year net interest income by 8.5%; estimated economic value of equity fell 8.2% under the same shock. Results depend on assumptions about deposit behavior, repricing and prepayments.
- Available-for-sale securities had $4.6 million of gross unrealized losses at quarter-end; the total securities portfolio was in a reported net unrealized loss position of $5.0 million. Management said it intended and was able to retain securities in loss positions until recovery or maturity. Interest-rate swap fair-value gains helped lift accumulated other comprehensive income.
- Management said liquidity was sufficient for current commitments. Outstanding commitments to originate loans were $181.2 million, with $336.6 million of undisbursed approved credit lines. The filing provides no earnings or other forward guidance; management cautions interim results may not indicate full-year results.
- After quarter-end, the Company announced the Wilton branch would close effective October 7, 2022; the Wilton branch building had been sold during Q2. The board also declared a $0.20-per-share dividend payable August 25, 2022.
- Key risks include commercial real estate concentration, local economic and property-value weakness, deposit competition and outflows, interest-rate sensitivity, and uncertainty in credit-loss and fair-value estimates. Management reported no material change to previously disclosed risk factors and expected no material loss from pending legal proceedings.
Most important facts for investors to verify
- How sustainable are the improved margin and earnings, given the contribution from loan prepayment fees and the reserve release?
- Are deposit outflows seasonal as management stated, and how will brokered funding and FHLB borrowing affect funding costs and liquidity?
- What is the status and collateral coverage of the $10.5 million matured CRE loan and other criticized, impaired and nonaccrual credits?
- How will rising rates affect deposit pricing, loan yields, net interest income and economic value of equity relative to the filing’s model assumptions?
- What are the eventual credit-loss effects when the Company adopts the expected-credit-loss standard (CECL), which it had not yet adopted?