Bankwell Financial Group, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019; unaudited. Bankwell is a Connecticut-based bank holding company serving commercial and retail customers in Connecticut and the New York metropolitan area. Its loan portfolio is concentrated in commercial real estate and in Fairfield and New Haven Counties.
Financial performance and position
- Q2 earnings: Net income was $5.6 million, up from $4.7 million a year earlier; diluted EPS was $0.71 versus $0.60. Return on average assets was 1.20% and return on average equity was 12.48%.
- First-half earnings: Net income was $10.7 million versus $9.3 million; diluted EPS was $1.35 versus $1.19. Return on average assets was 1.15% and return on average equity was 12.05%.
- Net interest: Q2 net interest income was $13.6 million, down 2.3% year over year; first-half net interest income was $27.9 million, up 0.9%. Fully taxable-equivalent net interest margin was 3.07% in Q2 and 3.13% for the first half, down 7 and 2 basis points, respectively, year over year.
- Revenue and expenses: Q2 noninterest income was $1.3 million, up 20.7%; first-half noninterest income was $2.6 million, up 8.4%. Noninterest expense was essentially flat at $8.8 million for Q2 and decreased 1.3% to $17.7 million for the first half. Deposit interest expense rose 35.3% in Q2 and 40.8% in the first half year over year.
- Balance sheet at June 30: Assets were $1.86 billion, down 0.7% from year-end 2018. Gross loans were $1.57 billion, down $36.9 million; deposits were $1.48 billion, down $24.5 million. Shareholders’ equity was $176.9 million, and tangible book value was $22.47 per share.
- Credit and asset quality: Allowance for loan losses was $13.9 million, or 0.89% of gross loans, compared with $15.5 million, or 0.96%, at year-end. Nonperforming assets were $12.9 million (0.69% of assets), including $11.7 million of nonaccrual loans and $1.2 million of other real estate owned. Total past-due loans were 0.89% of gross loans, versus 0.78% at year-end.
- Cash flow and liquidity: First-half operating cash flow was negative $0.7 million, compared with positive $9.1 million in 2018; investing activities provided $39.0 million, mainly reflecting a decrease in loans, while financing activities used $37.5 million. Cash and cash equivalents were $78.9 million, and available-for-sale securities were $93.0 million. The Bank reported $443.8 million of additional immediate FHLB borrowing availability against eligible collateral.
- Debt and capital: FHLB advances were $150.0 million; subordinated debentures were $25.2 million carrying value, with $25.5 million face value. The Bank reported a 12.40% CET1 risk-based capital ratio and a 10.75% Tier 1 leverage ratio, and stated it met applicable capital requirements and was well-capitalized.
Material changes versus comparable periods
- Higher loan yields and interest income were offset by sharply higher deposit costs. Q2 interest income rose 8.4%, but interest expense increased 35.3%; the first-half increases were 11.8% and 40.8%, respectively.
- Management attributed part of the interest-income support to elevated loan prepayments: fees were $1.0 million in Q2 and $2.1 million in the first half, versus $0.3 million for each comparable 2018 period. Loan balances declined as originations were offset by prepayments.
- Q2 earnings improved despite lower net interest income, supported by a $0.8 million credit to the loan-loss provision, higher loan-sale gains and securities gains. First-half provision was also a $0.6 million credit, versus a $0.3 million provision in 2018.
- Nonaccrual loans declined from $14.1 million at year-end to $11.7 million, while other real estate owned increased from zero to $1.2 million. The allowance fell, primarily due to improving historical loss trends, according to management.
- Accumulated other comprehensive loss widened to $6.9 million from $1.0 million at year-end, largely reflecting fair-value losses on interest-rate swaps. Shareholders’ equity nevertheless increased by $2.7 million, as earnings outweighed dividends, repurchases and the OCI decline.
Outlook, risks and unusual items
- No quantified earnings or growth guidance was provided. Management said it expects available funding to cover current loan and other commitments and emphasized customer-focused banking, disciplined risk management and efficient infrastructure.
- Management described the Bank as liability-sensitive. In its June 30 simulations, a parallel +100/+200/+300 basis-point shock reduced estimated one-year net interest income by 6.6%/13.8%/20.9%; a +300 bp shock also reduced estimated economic value of equity by 24.9%. These estimates rely on assumptions about deposit pricing, balances and loan prepayments. The +300 bp NII result exceeds the stated 18% policy limit, although the filing notes an exception where forecast capital ratios are well-capitalized.
- Key risks include commercial real estate concentration, regional property values and economic conditions, competition-driven deposit repricing, interest-rate movements, and borrower repayment capacity. Management said progress resolving a previously disclosed large nonperforming lending relationship was in line with its estimates.
- At quarter-end, the Bank had $14.6 million of commitments to originate loans and $183.8 million of undisbursed approved credit lines. Brokered deposits were $120.1 million, up from $91.8 million at year-end; $520.4 million of time deposits of $100,000 or more were outstanding, including $176.6 million maturing within three months.
- The Company adopted the new lease standard in January 2019, recording a $10.6 million right-of-use asset and lease liability initially; both were about $9.9 million at June 30. It recorded a $0.5 million after-tax transition adjustment to retained earnings. The expected-loss credit standard was under evaluation; management anticipated it might qualify for a proposed deferral, which had not been finalized in this filing.
- The Board declared a $0.13 per-share dividend payable August 26, 2019. The Company repurchased 34,168 shares during the first half for $1.0 million. Management reported no material expected loss from pending legal proceedings, no material change in previously disclosed risk factors, and effective disclosure controls.
Important facts for investors to verify
- Whether deposit costs continue to rise faster than asset yields, and whether prepayment fees remain a meaningful support to net interest income.
- Developments in the large nonperforming lending relationship, nonaccrual trends, past-due loans, charge-offs and the adequacy of the reduced allowance.
- Actual deposit retention and pricing, brokered-deposit dependence, and the maturity and renewal profile of large time deposits.
- How interest-rate exposure and hedge fair values evolve, including the assumptions behind the reported rate-shock simulations.
- The final timing and balance-sheet impact of expected-credit-loss accounting adoption, and the effect of lease obligations and unfunded commitments on liquidity.