Bankwell Financial Group, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Bankwell is a Connecticut bank holding company whose subsidiary primarily serves small and medium-sized businesses and retail customers. Lending is concentrated in commercial real estate, with most activity in Connecticut and the New York metro area.
Financial performance and condition
| Metric | Q3 2021 / September 30, 2021 | Comparable period / prior date |
|---|---|---|
| Net income | $6.9 million; diluted EPS $0.87 | Q3 2020: $3.0 million; $0.38 |
| Net interest income | $17.7 million; FTE net interest margin 3.39% | Q3 2020: $13.6 million; 2.67% |
| Net income, nine months | $18.8 million; diluted EPS $2.37 | Nine months 2020: $5.6 million; $0.71 |
| Net interest income, nine months | $49.0 million; FTE net interest margin 3.08% | Nine months 2020: $40.5 million; 2.81% |
| Total assets | $2.23 billion | December 31, 2020: $2.25 billion |
| Gross loans | $1.82 billion | December 31, 2020: $1.63 billion |
| Total deposits | $1.88 billion | December 31, 2020: $1.83 billion |
| Shareholders’ equity | $196.2 million | December 31, 2020: $176.6 million |
- Drivers and expenses: Lower deposit funding costs and loan growth lifted net interest income. Noninterest income rose to $1.4 million for the quarter and $4.8 million year to date, mainly reflecting resumed loan sales. Nine-month results also included a $0.9 million federal COVID-19 payroll tax credit. Noninterest expense was $10.4 million in Q3 and $30.1 million year to date; year-to-date increases in occupancy, data processing and FDIC insurance partly offset lower compensation.
- Credit: The loan-loss provision was $0.1 million in Q3; year-to-date provision was a $0.2 million credit, versus $6.9 million of provision in the first nine months of 2020. The allowance was $16.8 million, or 0.92% of gross loans, versus $21.0 million at year-end 2020. Nine-month net charge-offs were $4.0 million, primarily reflecting a previously reserved commercial real estate exposure.
- Asset quality: Nonaccrual loans were $28.9 million, down from $33.4 million at year-end; nonperforming assets were 1.30% of assets. Past-due loans were 1.69% of gross loans, compared with 0.93% at year-end. Troubled debt restructurings totaled $26.9 million, up from $9.1 million. No loans remained on active CARES Act deferral at quarter-end.
- Cash flow and liquidity: Nine-month operating cash flow was $30.2 million, investing cash flow was negative $206.0 million, and financing cash flow was negative $56.3 million. Cash and cash equivalents ended at $177.5 million, down from $409.6 million at year-end, primarily as loan growth used funds. Management reported $87.6 million of available-for-sale securities and $359.2 million of additional immediate FHLB borrowing availability. Outstanding loan-originations commitments were $137.0 million, with $268.3 million of undisbursed approved lines.
- Funding and debt: FHLB advances fell to $80.0 million from $175.0 million. Brokered CDs were $200.1 million, while brokered money-market deposits increased to $104.0 million from $13.5 million at year-end. The company repaid $10.0 million of subordinated notes in May; $15.5 million remained at September 30.
- Capital and shareholder returns: The Bank reported a 10.59% Common Equity Tier 1 risk-based capital ratio and a 9.61% Tier 1 leverage ratio, and met applicable capital requirements. Year-to-date dividends declared were $0.46 per share and stock repurchases totaled $3.2 million. Tangible common equity ratio was 8.70%; tangible book value per share was $25.25.
Changes, outlook and risks
- Compared with Q3 2020, quarterly net income more than doubled, net interest margin increased 72 basis points, and noninterest income rose largely because loan sales resumed. For the first nine months, net income improved substantially, principally due to higher net interest income, loan-sale income and much lower credit provisioning than in 2020.
- Management provided no specific earnings or financial guidance. It described continued uncertainty from COVID-19 and potential future outbreaks, despite improving economic activity, and said the pandemic’s ultimate business impact remained difficult to predict.
- Commercial real estate concentration exposes the company to deterioration in local property values and borrower cash flows. Management considered the allowance adequate, but credit estimates depend on economic conditions and collateral values.
- The company is liability-sensitive in its interest-rate simulations. A parallel 100-basis-point rate decline showed a 25.2% reduction in economic value of equity, outside internal policy parameters; management characterized the scenario as unlikely and took no further action. The simulations rely on assumptions and actual results may differ.
- Interest-rate swaps produced a favorable $6.2 million year-to-date effect on accumulated other comprehensive income. Management notes that the positions can reduce comprehensive income when rates fall and increase it when rates rise.
- Subsequent events: On October 14, 2021, the company issued $35.0 million of 3.25% fixed-to-floating subordinated notes due 2031 and called the remaining $15.5 million of 2015 notes for redemption on November 15. On October 27, the Board declared a $0.18 per-share dividend and authorized an additional 200,000-share repurchase.
- Management reported no material change in previously disclosed risk factors and no expected material loss from pending legal proceedings. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Whether rapid commercial real estate loan growth and the $4.0 million in year-to-date net charge-offs are reflected adequately in reserves, especially given higher past-due balances and TDRs.
- The sustainability of margin improvement and earnings, including the contribution from lower deposit costs, resumed loan sales and the one-time payroll tax credit.
- The cost and stability of funding, particularly the increase in brokered money-market deposits and the maturity profile of time deposits.
- The interest-rate sensitivity assumptions and potential impact of the EVE decline under falling rates, along with the effect of derivatives on reported equity.
- The terms, capital treatment and use of proceeds of the new subordinated notes, and the planned redemption of the 2015 notes.