Bankwell Financial Group, Inc. quarterly report, Q2 FY2020

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Bankwell Financial Group, Inc. — Q2 2020 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2020. Bankwell is a Connecticut-based bank holding company focused on commercial and consumer banking in Connecticut and the New York metropolitan area. Results reflect the effects of the COVID-19 pandemic and related economic disruption.

Financial performance and position

  • Q2 earnings: Net income was $1.2 million, or $0.16 per diluted share, versus $5.6 million, or $0.71, in Q2 2019. For the first half, net income was $2.6 million, or $0.33 per diluted share, compared with $10.7 million, or $1.35.
  • Interest income and margins: Q2 net interest income was $13.6 million, little changed from a year earlier; first-half net interest income was $26.9 million, down 3.4%. Net interest margin declined to 2.81% in Q2 from 3.07%, and to 2.89% for the first half from 3.13%. Lower loan yields and excess low-yield cash weighed on results; lower deposit costs partly offset these pressures.
  • Credit provision: Q2 provision for loan losses was $3.0 million, compared with an $0.8 million credit in Q2 2019. First-half provision was $6.2 million, versus a $0.6 million credit in 2019. The allowance rose to $19.7 million, or 1.22% of gross loans, from $13.5 million at year-end.
  • Other income and expenses: Q2 noninterest income fell 56.8% to $0.6 million, principally because there were no loan-sale gains and fees; service charges also declined. Noninterest expense rose 11.0% to $9.7 million, mainly on higher compensation and occupancy costs. The six-month changes were down 37.6% in noninterest income and up 9.3% in noninterest expense.
  • Profitability: Q2 return on average assets was 0.23% and return on average equity was 2.82%, compared with 1.20% and 12.48%, respectively, a year earlier. First-half measures were 0.26% and 2.92%, respectively, versus 1.15% and 12.05%.
  • Balance sheet and liquidity: Total assets were $2.04 billion, up 8.6% from year-end, largely due to higher liquidity. Cash and cash equivalents increased to $207.3 million from $78.1 million. Loans, net of allowance, were $1.59 billion; deposits were $1.62 billion, up $128.1 million. FHLB advances were $175.0 million, up from $150.0 million.
  • Funding and debt: Subordinated debentures were $25.2 million carrying value, with $25.5 million face value. Brokered CDs were $214.2 million and brokered money-market accounts $71.9 million. The Bank had $397.9 million of additional immediate FHLB borrowing availability, subject to qualified collateral.
  • Cash flow: First-half operating cash flow was negative $12.7 million and investing cash flow negative $7.9 million; financing activities provided $149.9 million, primarily from deposit growth and FHLB advances. Cash increased $129.2 million overall.
  • Equity and capital: Shareholders’ equity was $170.4 million, down from $182.4 million at year-end, mainly reflecting a $12.2 million after-tax other comprehensive loss on swaps, dividends, and repurchases. Tangible common equity ratio was 8.21% and tangible book value was $21.70 per share. The Bank’s CET1, total risk-based capital, Tier 1 risk-based capital, and Tier 1 leverage ratios were 12.44%, 13.63%, 12.44%, and 9.93%, respectively; the Bank met applicable capital requirements.

Material changes and credit trends

  • Gross loans increased $10.2 million from year-end. Commercial business loans increased $50.8 million, including $56.5 million of SBA-guaranteed Paycheck Protection Program loans; real estate loan balances declined.
  • COVID-19-related payment deferrals covered 159 loans totaling $339.9 million, approximately 22% of gross loans excluding PPP loans. Initial deferrals were generally no longer than three months. Management said the deferral population was expected to fall below 10% of gross loans excluding PPP loans during Q3 2020.
  • Nonperforming assets were $10.8 million, or 0.53% of assets, versus $10.6 million, or 0.56%, at year-end. Nonaccrual loans were $10.6 million; $4.6 million was SBA-guaranteed. Past-due loans were 0.57% of gross loans, down from 0.77%.
  • Accumulated other comprehensive loss widened to $19.7 million from $7.5 million at year-end, substantially due to lower long-term rates reducing the fair value of interest-rate hedges. Net swap liability fair value, including accrued interest, was $29.4 million.

Outlook, risks, and other notable items

  • The filing provides no earnings or revenue guidance. Management said the full impact of COVID-19 could not be estimated and depends on uncertain developments, including the duration of the pandemic and economic recovery.
  • Management identified possible further credit losses, delinquencies, defaults, collateral-value declines, additional loan-loss provisions, reduced demand, and potential goodwill impairment as pandemic-related risks. The portfolio is concentrated in commercial real estate and in the company’s regional markets.
  • Management attributed weaker earnings to pandemic-related credit reserves, lower loan yields, excess liquidity, lower fee income, and higher operating costs. It also noted that results could remain affected by a prolonged recession.
  • Interest-rate simulations indicated liability sensitivity. Under the June 30 parallel-shock analysis, estimated one-year net interest income declined 9.6% for a 300-basis-point increase; estimated economic value of equity declined 38.4% for a 100-basis-point decrease. Management cautioned that model assumptions and actual outcomes may differ.
  • The Board declared a $0.14-per-share dividend on July 28, 2020, payable August 24, 2020. No shares were repurchased during Q2; 58,499 shares were repurchased during the first half.
  • Management reported effective disclosure controls and no material change in internal control over financial reporting. It stated that no material loss was expected from pending legal proceedings and reported no other material change to previously disclosed risk factors apart from COVID-19.

Important facts for investors to verify

  • Whether the $339.9 million of loan deferrals declined as management anticipated, and whether borrowers resumed scheduled payments.
  • How subsequent economic conditions affected commercial real estate borrowers, collateral values, criticized loans, and the adequacy of the $19.7 million allowance.
  • Deposit mix, brokered funding, certificate maturities, and whether the elevated cash balance can be redeployed without further pressure on net interest margin.
  • The effect of interest-rate movements on swap valuations, accumulated other comprehensive loss, and the company’s reported interest-rate-risk sensitivities.
  • Whether the Q2 dividend and future distributions remain supportable given earnings, credit costs, liquidity needs, and regulatory capital requirements.