Business context and reporting period
Bankwell Financial Group, Inc. is a Connecticut bank holding company operating through Bankwell Bank, serving commercial and consumer customers mainly in Connecticut and the New York metropolitan area. This unaudited Form 10-Q covers the quarter and six months ended June 30, 2018; comparisons are to the corresponding 2017 periods unless otherwise noted.
The company opened three Connecticut branches in the quarter, bringing its total to 12. It had stopped originating residential mortgage loans in the fourth quarter of 2017.
Key financial metrics
| Metric | Q2 2018 | Six months 2018 |
|---|---|---|
| Net interest income | $13.9 million; up 2.0% | $27.6 million; up 3.9% |
| Net interest margin, fully taxable equivalent | 3.14%, versus 3.32% | 3.15%, versus 3.34% |
| Net income | $4.7 million, versus $3.8 million | $9.3 million, versus $7.5 million |
| Diluted earnings per share | $0.60, versus $0.49 | $1.19, versus $0.97 |
| Provision for loan losses | $0.3 million, versus $0.9 million | $0.3 million, versus $1.4 million |
| Noninterest income | $1.1 million, up 11% | $2.4 million, up 8% |
| Noninterest expense | $8.8 million, up 16% | $18.0 million, up 14% |
Quarterly pretax income declined to $5.9 million from $6.2 million, while net income increased as the effective tax rate fell to 20.6% from 38.8%, primarily reflecting the federal corporate tax-rate reduction. For the six months, the effective rate was 20.8%, versus 35.6%. Returns on average assets and equity were 1.02% and 11.21% for Q2, respectively; six-month returns were 1.03% and 11.28%.
At June 30, 2018, total assets were $1.87 billion, loans $1.59 billion, deposits $1.47 billion, and shareholders’ equity $169.6 million. Total loans grew $51.4 million, or 3.3%, from year-end, primarily from commercial real estate growth. Deposits increased $67.2 million. Cash and cash equivalents were $89.3 million and available-for-sale securities were $92.6 million.
For the six months, operating cash flow was $9.1 million, investing cash outflow $56.8 million, and financing cash inflow $66.2 million, producing an $18.6 million increase in cash and cash equivalents. FHLB advances were $199.0 million and subordinated debentures were $25.1 million at quarter-end. The notes bear 5.75% interest and mature in 2025. The Bank’s capital ratios included a 11.31% Common Equity Tier 1 risk-based ratio and a 10.03% Tier 1 leverage ratio; management reported that the Bank met applicable capital requirements and was well-capitalized.
Material changes versus prior periods
- Interest income and loan balances increased, but higher deposit pricing and funding costs compressed net interest margin. Deposit interest expense rose 39% in the first half; management attributed the increase to higher balances and competitive rate increases.
- First-half noninterest expense rose 14%, led by salaries and benefits, occupancy and equipment, professional services, data processing, and marketing. Management linked staffing and occupancy costs in part to the three new branches and infrastructure improvements.
- Nonperforming assets increased to $23.3 million, or 1.25% of assets, from $5.5 million, or 0.31%, at year-end. Nonaccrual loans were $23.3 million, with the increase primarily attributed to two recently impaired commercial loan relationships. Past-due loans over 90 days rose to $19.5 million from $3.7 million.
- The allowance for loan losses was $19.0 million, or 1.19% of loans, compared with $18.9 million, or 1.23%, at year-end. The provision was lower year over year; management cited its late-2017 methodology change and improving historical loss trends, partly offset by loan growth and specific reserves.
- The investment portfolio’s net unrealized position moved from a $1.4 million gain at year-end to a $1.8 million loss at June 30, 2018, largely reflecting unrealized losses on U.S. government and agency securities. Management said it intended and was able to hold the securities until recovery or maturity.
Outlook, risks and unusual items
- The filing gives no specific earnings or growth guidance. Management described a strategy centered on customer service, strategic acquisitions, scalable infrastructure, and disciplined risk management. It cautioned that interim results may not indicate full-year results.
- Interest-rate risk is material. Management characterized the Bank as liability-sensitive. Modeled net interest income declined 13.5% under an immediate +200 basis-point shock and 20.3% under +300 basis points. These modeled declines exceed stated policy thresholds; the filing notes the Bank was well-capitalized and describes policy treatment for remaining outside limits.
- Credit risk includes significant commercial real estate exposure and geographic concentration in Connecticut and the New York metropolitan area. Management warned that weaker economic conditions or falling property values could impair collateral and borrower repayment capacity.
- After quarter-end, a nonperforming commercial loan with an unpaid balance of approximately $4.0 million was recovered through sale of the loan note. The Q2 allowance included approximately $0.6 million of specific reserves for this loan. The board also declared a $0.12-per-share dividend payable August 27, 2018.
- Management concluded that disclosure controls and internal control over financial reporting were not effective at June 30 because of an ongoing material weakness in controls over the allowance for loan losses, including loan-report completeness and accuracy and the precision of management’s reserve review. The filing says the weakness did not cause a financial-statement misstatement; remediation was ongoing.
- The company reported no material expected loss from pending legal proceedings and no material changes to previously disclosed risk factors. Adoption of several accounting standards had no material impact; the company was still evaluating the forthcoming expected-credit-loss standard.
Important facts for investors to verify
- Whether the two impaired commercial loan relationships are resolved, and how nonaccrual balances, delinquencies, and specific reserves trend in later filings.
- Whether allowance-control remediation is completed and independently validated, and whether the material weakness is subsequently cleared.
- Whether deposit pricing and funding costs continue to outpace asset-yield improvements and pressure net interest margin.
- Whether branch expansion produces sufficient revenue and deposit growth to offset higher staffing, occupancy, and operating costs.
- Whether interest-rate exposure, liquidity sources, brokered deposits, and capital remain within management and regulatory tolerances as rates and balances change.