Bankwell Financial Group, Inc. — Q2 2021 Form 10-Q
Reporting period: Three and six months ended June 30, 2021. Unaudited consolidated results. Bankwell is a Connecticut-based bank holding company whose subsidiary primarily serves business and retail customers in Connecticut and nearby markets.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Net interest income | $16.6m | $13.6m | $31.2m | $26.9m |
| Net interest margin | 3.12% | 2.81% | 2.93% | 2.89% |
| Provision/(credit) for loan losses | ($0.02m) | $3.0m | ($0.32m) | $6.2m |
| Noninterest income | $1.4m | $0.6m | $3.4m | $1.6m |
| Noninterest expense | $10.1m | $9.7m | $19.7m | $19.4m |
| Net income | $6.2m | $1.2m | $11.9m | $2.6m |
| Diluted EPS | $0.79 | $0.16 | $1.50 | $0.33 |
- Q2 net interest income increased 21.6%; lower deposit costs were the principal driver. Six-month net interest income rose 16.0%, despite lower loan and cash yields.
- Loan-sale gains and fees were $0.8m in Q2 and $1.3m year to date, following resumed SBA loan sales. Six-month noninterest income also included a one-time $0.9m federal COVID-19 payroll tax credit.
- Net income improved substantially against 2020, when COVID-related reserve building contributed to higher loan-loss provisions. Q2 returns on average equity and assets were 13.06% and 1.11%; six-month returns were 12.87% and 1.07%.
- Q2 noninterest expense included $0.8m of identified nonrecurring costs: office consolidation ($0.4m), COVID cleaning ($0.3m), and online banking implementation ($0.1m). The new headquarters lease and online banking conversion also contributed to expense increases; lower staffing costs partly offset them.
Financial position, funding and credit
- At June 30, 2021, total assets were $2.27bn, up $16.1m from year-end 2020. Gross loans were $1.74bn, up $112.9m; excluding PPP loans, management reported growth of $139.8m.
- Deposits were $1.94bn, up $112.0m. Noninterest-bearing deposits increased to $328.5m from $270.2m; time deposits declined to $486.2m from $627.2m. Brokered money-market balances rose to $104.0m from $13.5m.
- Cash and cash equivalents were $301.9m, down from $409.6m at year-end. Six-month operating cash flow was $18.3m; investing used $124.1m, chiefly reflecting $116.9m of net loan growth. Financing used $2.0m. Available-for-sale securities were $91.0m.
- FHLB advances fell to $75.0m from $175.0m. The company repaid $10.0m of subordinated notes; remaining subordinated debentures were $15.4m. The bank reported $411.5m of additional immediate FHLB borrowing availability based on eligible collateral.
- Allowance for loan losses was $16.7m, or 0.96% of gross loans, versus $21.0m at year-end. Six-month net charge-offs were $4.0m. Nonaccrual loans were $27.3m, down from $33.4m; nonperforming assets were 1.20% of assets. Total past-due loans increased to $28.8m from $15.1m at year-end, including $25.7m at least 90 days past due; none of the 90-plus-day loans were still accruing.
- Troubled debt restructurings totaled $16.0m, up from $9.1m at year-end. No loans remained on active CARES Act deferral at June 30.
- Shareholders’ equity was $190.8m, up $14.2m from year-end. The bank’s CET1, total capital, Tier 1 risk-based and Tier 1 leverage ratios were 10.95%, 11.84%, 10.95% and 9.19%, respectively; management stated the bank met applicable capital requirements and was well-capitalized.
Outlook, risks and notable items
- The filing gives no quantified earnings or balance-sheet guidance. Management noted continuing uncertainty around the pandemic and possible future outbreaks, and said interim results may not indicate full-year results.
- Management described the bank as liability-sensitive. Its June 30 simulations estimated one-year net interest income declines of 1.4% to 2.6% in parallel upward shock scenarios of 100 to 300 basis points, and a 2.0% decline under a 100-basis-point downward shock. Estimated economic value of equity fell 29.4% under a 100-basis-point decline, outside policy parameters; management considered that scenario unlikely and took no further action.
- The loan book is concentrated in commercial real estate and Connecticut-area markets, exposing results to borrower stress and falling property values. COVID-19 impacts, interest rates, deposit repricing, liquidity, and credit-loss estimates remain important uncertainties.
- Interest-rate swaps generate fair-value changes in other comprehensive income; the company reported a $17.0m net swap liability including accrued interest. It expects $3.6m to be reclassified to interest expense over the next 12 months.
- The board declared a $0.18-per-share dividend on July 28, payable August 26, a 29% increase from the prior-quarter dividend. After quarter-end through July 31, the company repurchased 52,277 shares at a weighted average $27.26.
- Management reported no material change to previously disclosed risk factors, no expected material loss from pending legal proceedings, and effective disclosure controls.
Key facts investors should verify
- Whether loan growth, particularly commercial real estate growth, is accompanied by stable delinquency, nonaccrual and charge-off trends.
- Whether the lower allowance remains adequate given $25.7m of loans 90 or more days past due and the increase in TDRs.
- The durability of earnings after excluding the one-time payroll tax credit, SBA loan-sale gains and identified nonrecurring expenses.
- Deposit composition and funding costs, especially the increase in brokered money-market deposits and the maturity profile of time deposits.
- Actual sensitivity to rate movements versus the disclosed simulations, including swap-related effects and the out-of-policy down-rate EVE result.
- Capital, liquidity and regulatory capacity to support the increased dividend, ongoing repurchases and future loan growth.