Bankwell Financial Group, Inc. — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020; unaudited. Bankwell is a Connecticut bank holding company serving commercial and retail customers in Connecticut and the New York metropolitan area.
Financial performance and condition
- Q3 earnings: Net income was $3.0 million, or $0.38 per diluted share, versus $4.1 million, or $0.52, in Q3 2019. Net interest income rose 4.6% to $13.6 million, while noninterest income fell 60.4% to $0.6 million and noninterest expense rose 12.2% to $9.7 million.
- Nine-month earnings: Net income was $5.6 million, or $0.71 per diluted share, versus $14.7 million, or $1.87, in the prior-year period. Net interest income was $40.5 million, down 0.9%; provision for loan losses was $6.9 million versus $0.1 million.
- Margins and returns: Net interest margin was 2.67% for Q3 and 2.81% for the nine months, down 29 and 26 basis points year over year, respectively. Nine-month return on average assets was 0.36% (1.05% in 2019); return on average equity was 4.23% (11.06%).
- Balance sheet at September 30: Assets were $2.19 billion, up 16.5% from year-end 2019. Gross loans were $1.625 billion, up $20.2 million; excluding $56.7 million of PPP loans, gross loans decreased $36.5 million. Deposits were $1.768 billion, up $275.6 million. Shareholders’ equity was $174.3 million, down from $182.4 million.
- Credit quality: Allowance for loan losses was $20.4 million, or 1.25% of gross loans, versus $13.5 million, or 0.84%, at year-end. Nonperforming assets were $10.2 million (0.46% of assets), compared with $10.6 million (0.56%). The company recorded $7.9 million of COVID-related provision for the nine months, including $6.9 million total reported provision.
- Liquidity and funding: Cash and cash equivalents were $339.5 million, compared with $78.1 million at year-end; available-for-sale securities were $90.6 million. The company reported $355.8 million of additional immediate FHLB borrowing capacity. FHLB advances were $175.0 million, up $25.0 million. Brokered CDs increased to $296.0 million from $179.8 million.
- Cash flow: For the nine months, operating cash flow was negative $8.5 million, investing cash flow negative $26.4 million, and financing cash flow positive $296.3 million, producing a $261.4 million increase in cash and cash equivalents.
- Capital and debt: The Bank’s Common Equity Tier 1 and total risk-based capital ratios were 12.36% and 13.57%; management said the Bank met regulatory requirements and was well-capitalized. Subordinated debentures, net, were $25.2 million; FHLB advances were $175.0 million.
Material changes and notable items
- Lower rates reduced interest expense, but also lowered loan yields and interest income; excess low-yield cash held to support pandemic liquidity weighed on net interest margin.
- Lower loan-sale gains and fees, including the absence of SBA loan-sale gains, drove much of the decline in noninterest income. COVID-related customer fee waivers also contributed.
- Higher compensation, occupancy and equipment costs, and FDIC insurance expense contributed to higher noninterest expense.
- Accumulated other comprehensive loss increased to $18.2 million from $7.5 million at year-end, principally reflecting fair-value marks on interest-rate hedges. The swaps’ fair values and OCI are sensitive to interest-rate movements.
- At quarter-end, 12 loans totaling $32.7 million had active COVID-related deferrals; the company was evaluating 10 additional loans totaling $31.3 million for a second deferral. These deferrals were not treated as troubled debt restructurings under the cited CARES Act provisions and guidance.
Outlook, risks and contingencies
The filing provides no quantified earnings or growth guidance. Management said the pandemic’s duration and effects were highly uncertain and could lead to higher delinquencies, defaults, charge-offs and credit provisions, collateral impairment, reduced demand, or goodwill impairment. The portfolio’s concentration in commercial real estate and exposure to local property values are additional risks. Management stated it could not estimate the pandemic’s full impact.
Subsequent to quarter-end, the board declared a $0.14-per-share dividend, payable November 23, 2020. The company committed to permanently closing its North Haven branch by December 31, 2020 and rolled out a voluntary early retirement incentive plan. Management said it expected sufficient funds to meet current commitments. It reported no material expected loss from pending legal proceedings and no material change in previously disclosed risk factors apart from the COVID-19 risks described.
Important facts for investors to verify
- How pandemic-related deferrals, including loans under review for second deferrals, perform after relief periods end; and whether reserve levels remain adequate.
- Commercial real estate and commercial business credit trends, including criticized loans, collateral values, and the extent of SBA guarantees on nonaccrual loans.
- Deposit stability and funding cost, especially the growth and maturities of brokered and large time deposits.
- Whether liquidity balances and rate movements affect future net interest margin, and how derivative marks affect reported equity and OCI.
- Execution and financial effects of the branch closure and voluntary retirement plan.