Bankwell Financial Group, Inc. — Q3 2022 Form 10-Q
Business context and reporting period. Unaudited results cover the three and nine months ended September 30, 2022; balance-sheet comparisons are with December 31, 2021. Bankwell is a Connecticut-based bank holding company focused primarily on commercial real estate and commercial business lending in Connecticut and nearby markets.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $24.6 million | $17.7 million | $67.9 million | $49.0 million |
| Provision for loan losses | $2.4 million | $0.1 million | $1.2 million | ($0.2) million credit |
| Noninterest income | $0.4 million | $1.4 million | $2.5 million | $4.8 million |
| Noninterest expense | $11.0 million | $10.4 million | $31.9 million | $30.1 million |
| Net income | $9.2 million | $6.9 million | $29.4 million | $18.8 million |
| Diluted EPS | $1.18 | $0.87 | $3.75 | $2.37 |
| Net interest margin | 4.12% | 3.39% | 3.81% | 3.08% |
- Growth and returns: Total assets were $2.72 billion, up 10.9% from year-end 2021. Gross loans grew $391.9 million to $2.29 billion; deposits increased $162.7 million to $2.29 billion. Q3 return on average assets/equity was 1.47%/15.73%; nine-month returns were 1.59%/17.94%.
- Cash flow: For the first nine months, operating activities provided $65.0 million, investing activities used $413.4 million—principally reflecting $436.9 million of net loan growth—and financing activities provided $226.9 million. Cash and cash equivalents declined $121.6 million to $223.1 million.
- Funding and liquidity: FHLB advances were $90.0 million, versus $50.0 million at year-end. The company reported $95.1 million of available-for-sale securities and $426.4 million of additional immediate FHLB borrowing availability. Loan origination commitments were $187.3 million and undisbursed credit lines were $318.8 million.
- Debt and capital: Subordinated debentures totaled $68.9 million net of issuance costs, including $35 million of new 6.0% fixed-to-floating notes issued in August. Bank capital ratios were 11.42% CET1, 12.16% total risk-based capital, and 11.31% Tier 1 leverage; management said regulatory capital requirements were met. Shareholders’ equity was $231.5 million.
- Credit quality: Allowance for loan losses was $18.2 million, or 0.79% of gross loans. Nonaccrual loans were $16.8 million (0.73% of gross loans); past-due loans were $17.8 million (0.78%), down from $32.6 million (1.72%) at year-end. No loans were over 90 days past due and still accruing.
Material changes versus comparable periods
- Net interest income rose 38.8% in both Q3 and the first nine months year over year, reflecting loan growth and higher loan yields. Q3 loan prepayment fees were $1.3 million, compared with $0.1 million a year earlier. Deposit repricing increased Q3 interest expense.
- Net interest margin improved 73 basis points year over year in both the quarter and nine-month period. Noninterest income declined, largely because of lower loan-sale income; prior-year comparisons also included rental income and a $0.9 million COVID-related payroll tax credit in Q1 2021.
- Noninterest expense increased 6.4% in Q3 and 6.1% year to date, mainly due to salary and professional-services costs; occupancy expense declined. The allowance increased from $16.9 million at year-end, while the nine-month provision followed a prior-year credit.
- Deposits shifted toward time deposits: time certificates rose to $771.0 million from $457.3 million, including brokered CDs of $587.5 million versus $249.4 million. Available-for-sale securities had $9.0 million of unrealized losses at September 30, compared with a $2.1 million unrealized gain at year-end; the total investment portfolio’s disclosed net unrealized loss was $10.4 million.
Outlook, commentary, and risks
- The filing provides no quantified earnings or balance-sheet guidance. Management said it intends to resume loan sales in 2023 and expects available funding to meet current loan and other commitments.
- Management described the bank as liability sensitive. Its September 30 simulations estimated net interest income declines of 8.8% under a +200-basis-point shock and 13.0% under +300 basis points; the filing cautions that simulations rely on uncertain assumptions and static-balance-sheet scenarios.
- Key exposures include commercial real estate concentration, regional property values and borrower repayment capacity, rising deposit costs, and interest-rate effects on securities, liquidity, earnings, and equity. Management stated it intended and was able to hold securities in unrealized-loss positions until recovery or maturity.
- Q3 included $2.4 million of loan-loss provision and elevated prepayment fees. The company also issued subordinated debt, repurchased 53,546 shares during Q3, and declared a subsequent $0.20-per-share dividend payable November 21, 2022.
- The Wilton branch closed October 7, 2022. Management reported no material change in previously disclosed risk factors, no material loss expected from pending ordinary-course legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth and higher yields can continue to offset deposit repricing, funding costs, and the effect of fewer loan sales.
- The composition, pricing, maturity and renewal risk of brokered deposits, including the significant increase in brokered CDs and near-term certificate maturities.
- Credit performance within the commercial real estate and construction portfolios, and whether allowance levels remain adequate as the portfolio expands.
- The implications of unrealized securities losses and the reported interest-rate sensitivity for tangible equity, liquidity, and future net interest income.
- Use and cost of the new subordinated debt, as well as the sustainability of dividends and share repurchases relative to capital and funding needs.