Bankwell Financial Group, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. Comparisons are with Q1 2018 for operating results and with December 31, 2018 for balance-sheet changes. Bankwell is a Connecticut bank holding company serving commercial and consumer customers primarily in Connecticut and the New York metropolitan area.
Financial performance
- Earnings: Net income was $5.1 million, up 10.4% from $4.6 million; diluted EPS was $0.65 versus $0.59. Return on average assets was 1.10% and return on average equity was 11.60%.
- Net interest income and margin: Net interest income was $14.3 million, up 4.1%. Fully taxable-equivalent net interest margin increased to 3.19% from 3.15%. Interest income rose 15.4% to $21.5 million, while interest expense increased 46.9% to $7.2 million, primarily from higher deposit rates and balances.
- Revenue and expenses: Noninterest income was $1.3 million, broadly flat. Noninterest expense declined 2.5% to $9.0 million. The efficiency ratio is not stated as a clear value in the provided filing text.
- Cash flow: Operating cash flow was $0.5 million versus $8.5 million in Q1 2018. Investing activities provided $6.9 million, financing activities provided $8.1 million, and cash and cash equivalents increased $15.5 million to $93.6 million. The filing attributes a substantial operating cash-flow swing in part to changes in other assets.
Financial position, funding and asset quality
- Assets and loans: Total assets were $1.898 billion, up $24.1 million from year-end. Gross loans were $1.596 billion, down $8.3 million; management cited elevated loan prepayments. Commercial real estate and construction loans were approximately $1.186 billion combined.
- Deposits and liquidity: Deposits totaled $1.521 billion, up $19.1 million, largely from a $35.0 million increase in time deposits. Cash and cash equivalents plus available-for-sale securities totaled approximately $190.0 million. The Bank reported $432.9 million of additional immediate FHLB borrowing capacity. Brokered deposits were $100.9 million.
- Debt: FHLB advances were $150.0 million, down $10.0 million from year-end. Subordinated debentures had a $25.5 million face value and a $25.2 million carrying value; they bear fixed interest at 5.75% and mature in 2025.
- Capital: Shareholders’ equity was $176.8 million. Bankwell Bank reported Common Equity Tier 1 and total capital ratios of 12.00% and 12.94%, respectively, and management said the Bank met applicable capital adequacy requirements. Tangible common equity ratio was 9.18%; tangible book value was $22.38 per share.
- Credit quality: Nonperforming assets were $13.2 million, or 0.70% of assets, down from $14.1 million, or 0.75%, at year-end. The allowance for loan losses was $15.4 million, or 0.97% of gross loans, versus 0.96% at year-end. Past-due loans rose to 1.32% of gross loans from 0.78%; management said a delayed renewal of one lending relationship was the principal reason. No loans over 90 days past due were still accruing interest.
Material changes, outlook and risks
- Q1 interest income and net interest income benefited from elevated loan prepayments, including just under $1.0 million of fees from one lending relationship. Management cautioned that interim results may not indicate full-year results; the filing provides no specific earnings or financial guidance.
- Other noninterest income included a $0.5 million increase, primarily from an interest-rate-swap fee. This offset lower loan-sale income and the absence of securities-sale gains recorded in Q1 2018.
- Net interest income simulations indicate liability sensitivity. A parallel upward rate shock was modeled to reduce net interest income by 7.3% at +100 basis points, 15.3% at +200 basis points and 23.0% at +300 basis points. Actual results may differ because of deposit pricing, customer behavior, prepayments and other assumptions.
- Commercial real estate is a significant portfolio concentration, and the company’s lending is geographically concentrated. Management identifies declines in regional property values and borrower cash flows as risks. Management said it continued work on a previously disclosed large nonperforming lending relationship, with progress in line with estimates.
- Adoption of the new lease standard added a $10.2 million right-of-use asset and a $10.3 million lease liability at March 31; Q1 operating lease cost was $0.5 million. The company recognized a $0.5 million after-tax transition adjustment to retained earnings.
- The expected-credit-loss standard, CECL, was scheduled for adoption on January 1, 2020. Management was evaluating its effect with outside consultants; the filing does not provide a clear impact estimate. Management reported no material change in previously disclosed risk factors and expected no material loss from pending legal proceedings.
Important facts for investors to verify
- Whether the roughly $1.0 million loan-prepayment fee and swap-related fee are recurring, and how earnings trend excluding them.
- Updates on the large nonperforming lending relationship, past-due loans and the adequacy of the loan-loss allowance, particularly given the commercial real estate concentration.
- Deposit pricing, time-deposit maturities and brokered-deposit levels, and their effect on funding costs and net interest margin.
- Interest-rate sensitivity assumptions and the impact of adverse rate scenarios on earnings and capital.
- Management’s eventual CECL implementation estimate and any resulting allowance or capital effects.