Bankwell Financial Group, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018. Bankwell is a Connecticut-based bank holding company serving businesses and retail customers in Connecticut and the New York metropolitan area. Amounts below are in millions unless stated otherwise.
Financial performance and condition
- Q3 earnings: Net income was $4.9 million, or $0.62 per diluted share, versus $4.3 million, or $0.55, in Q3 2017. Return on average assets was 1.04%; return on average equity was 11.13%.
- Nine-month earnings: Net income was $14.2 million, or $1.80 per diluted share, versus $11.7 million, or $1.51, in the comparable 2017 period.
- Revenue and margin: Q3 net interest income was $14.2 million, up 2.8%; nine-month net interest income was $41.9 million, up 3.5%. Fully taxable equivalent net interest margin declined to 3.21% from 3.30% in Q3 and to 3.17% from 3.32% for nine months. Higher loan balances and yields supported interest income, while more expensive deposits pressured margin. Noninterest income was $0.9 million for Q3 and $3.3 million for nine months.
- Expenses and credit provision: Noninterest expense rose 9.1% to $8.9 million in Q3 and 12.1% to $26.8 million for nine months, driven mainly by staffing and costs related to three new branches. Provision for loan losses was $0.3 million for Q3 and $0.6 million for nine months, down from $0.4 million and $1.8 million, respectively, in 2017.
- Balance sheet and liquidity: Total assets were $1.885 billion at September 30, up 4.9% from year-end 2017. Loans were $1.608 billion and deposits $1.493 billion. Cash and cash equivalents were $87.1 million; available-for-sale securities were $94.4 million. The company reported $343.4 million of additional immediate FHLB borrowing availability. It had $26.6 million of commitments to originate loans and $177.6 million of undisbursed credit lines.
- Funding and debt: Deposits increased $94.8 million from year-end, while FHLB advances declined to $180.0 million from $199.0 million. Subordinated debentures were $25.1 million, bearing 5.75% interest and maturing in 2025.
- Cash flow and equity: Nine-month operating cash flow was $15.1 million; investing activities used $72.6 million and financing activities provided $73.9 million. Cash and cash equivalents increased $16.4 million during the period. Shareholders’ equity was $174.8 million; tangible book value was $22.20 per share.
- Capital: Bankwell Bank reported Common Equity Tier 1 and total risk-based capital ratios of 11.43% and 12.61%, respectively, and a Tier 1 leverage ratio of 10.14%. The filing states the Bank met applicable capital adequacy requirements and was well-capitalized.
Material changes and notable items
- Loans grew $64.6 million from year-end 2017, led by commercial real estate and commercial business lending. The company had ceased originating residential mortgages in Q4 2017.
- Nonaccrual loans rose to $22.0 million from $5.5 million at year-end; nonperforming assets increased to 1.17% of assets from 0.31%. Management attributed the increase primarily to one impaired commercial loan relationship. The allowance was $19.3 million, or 1.20% of loans.
- Available-for-sale securities had a net unrealized loss position of $2.7 million, versus a net unrealized gain of $1.4 million at year-end 2017. Management said it intended and was able to hold securities in unrealized loss positions until recovery or maturity.
- Three new branches opened in Darien, Westport and Stamford in June 2018. The company cited related staffing and occupancy costs as drivers of expense growth.
- The effective tax rate fell to 17.9% in Q3 and 19.8% for nine months, from 30.8% and 33.9%, respectively, primarily reflecting the reduction in the federal corporate tax rate.
- The Board declared a $0.12-per-share dividend after quarter-end, payable November 26, 2018. Dividends remain subject to regulatory and capital restrictions.
Outlook, risks and controls
- The filing provides no specific earnings or revenue guidance. Management notes that interim results may not reflect full-year results and makes no commitment to update forward-looking statements.
- Management described the Bank as liability-sensitive. In the September 30 simulations, a parallel 200-basis-point rate increase was estimated to reduce one-year net interest income by 14.8%; a 300-basis-point increase was estimated to reduce it by 22.1%. These estimates depend on assumptions about deposit pricing, balances, prepayments and other behavior; management cautions actual results may differ.
- Key risks include concentrated commercial real estate lending and exposure to property values and local economic conditions, increasing nonaccrual loans, competition for deposits and rising deposit costs, and interest-rate sensitivity.
- Management concluded that disclosure controls and internal control over financial reporting related to the allowance for loan losses were not effective at September 30 because of a previously identified material weakness in loan-report completeness and accuracy controls and the precision of management review. The weakness did not result in a reported financial statement misstatement. Management said remediation was substantially complete, subject to effectiveness testing.
- Management reported no material change in previously disclosed risk factors and no expected material loss from pending legal proceedings. No specific contingent loss amount is provided.
Important facts for investors to verify
- Whether the increase in nonaccrual loans, particularly the impaired commercial relationship, is resolved or requires additional reserves or charge-offs.
- Whether remediation controls for the allowance calculation operate effectively, and whether any subsequent filings report changes in control status.
- Whether deposit costs continue to rise and pressure net interest margin, given the Bank’s rate sensitivity and competitive funding environment.
- Whether loan growth, new-branch costs and credit quality support improved earnings without materially weakening capital or liquidity.
- How unrealized securities losses and the assumptions underlying interest-rate simulations evolve in subsequent periods.