Bankwell Financial Group, Inc. — First Quarter 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three months ended March 31, 2018, with balance-sheet comparisons to December 31, 2017. Bankwell is a Connecticut-based bank holding company serving commercial and consumer customers in Connecticut and the New York metropolitan area. Commercial real estate is its largest lending segment.
Financial performance and condition
- Earnings: Net income was $4.6 million, up 24% from $3.7 million in Q1 2017. Diluted EPS was $0.59 versus $0.48. Return on average assets was 1.03% and return on average equity was 11.35%.
- Revenue and margins: Net interest income rose 5.8% to $13.7 million. Fully taxable-equivalent net interest margin fell 20 basis points to 3.15%. Noninterest income increased 5% to $1.33 million. Noninterest expense rose 12% to $9.20 million.
- Interest rate drivers: Average earning assets grew 11.8% year over year to $1.75 billion, while the average yield rose to 4.28% from 4.24%. Higher deposit and borrowing costs lifted total interest expense 40.6% to $4.90 million; the average cost of interest-bearing liabilities rose to 1.35% from 1.10%.
- Taxes and credit provision: The effective tax rate declined to 21.0% from 31.9%, primarily following the federal corporate tax-rate reduction. Loan-loss provision was $13,000 versus $543,000 in Q1 2017; management cited its updated allowance methodology adopted in Q4 2017.
- Balance sheet: Total assets were $1.83 billion, up 1.9% from year-end. Gross loans were $1.56 billion, up $13.4 million; net loans were $1.53 billion. Deposits grew $28.1 million to $1.43 billion. Shareholders’ equity was $165.9 million, and tangible book value was $21.12 per share.
- Funding and liquidity: Cash and cash equivalents were $83.4 million and available-for-sale securities were $99.1 million. FHLB advances were $199.0 million; subordinated debentures were $25.1 million. The Bank reported $253.4 million of additional immediate FHLB borrowing capacity. Loan-origination commitments were $35.2 million, with $177.7 million of undisbursed credit lines.
- Cash flow: Operating activities provided $8.5 million; investing activities used $23.8 million; financing activities provided $28.0 million. Cash and cash equivalents increased $12.6 million during the quarter.
- Capital: The Bank reported CET1 and Tier 1 risk-based capital ratios of 11.18%, total risk-based capital of 12.35%, and Tier 1 leverage of 9.90%. The filing states the Bank met applicable capital requirements and exceeded well-capitalized thresholds.
Material changes versus comparable periods
- Year-over-year earnings increased, supported by loan growth and a lower effective tax rate, while higher funding costs compressed net interest margin and operating expenses increased.
- Nonaccrual loans rose to $20.4 million from $5.5 million at year-end; nonperforming assets increased to $20.9 million, or 1.14% of assets, from $5.5 million, or 0.31%. Management attributed the increase primarily to two recently impaired commercial real estate loans.
- Past-due loans totaled $21.0 million, down from $25.8 million at year-end, but loans more than 90 days past due increased to $6.4 million from $3.7 million. No loans over 90 days past due were still accruing.
- The allowance for loan losses was $18.8 million, or 1.21% of loans, versus $18.9 million, or 1.23%, at year-end. The 2017 methodology change had reduced the reserve by a nonrecurring $1.3 million pretax.
- Investment securities increased to $120.6 million. The portfolio moved from a $1.4 million net unrealized gain at year-end to a $1.2 million net unrealized loss at March 31, 2018; management said it intended and was able to hold securities in unrealized-loss positions until recovery.
Outlook, risks, contingencies and unusual items
- The filing provides no specific earnings or financial guidance. Management anticipated sufficient funding for current commitments and expected three new branches to open in Q2 2018.
- Management described the Bank as liability-sensitive. A modeled instantaneous +200 basis-point rate shock reduced one-year net interest income by 11.6%; a +300 basis-point shock reduced it by 17.5%. Modeled economic value of equity fell 37.4% under a +300 basis-point shock. Results depend on assumptions about deposit pricing, repricing, prepayments and customer behavior.
- Key risks include concentration in commercial real estate and in the Connecticut/New York metropolitan region, changes in property values and borrower repayment capacity, deposit competition and rising funding costs, and sensitivity to interest-rate movements. Construction and commercial business lending also carry elevated credit risks described in the filing.
- Three loans were modified as troubled debt restructurings during the quarter, totaling $2.9 million after modification. Two modified loans, with $2.1 million recorded investment, experienced payment defaults during the quarter. Total TDRs were $7.5 million at March 31.
- Management concluded disclosure controls and internal control over financial reporting were not effective because of an unremediated material weakness concerning allowance-for-loan-losses controls, including loan-report completeness and accuracy and the precision of management review. The filing says the weakness did not cause a financial-statement misstatement; remediation remained ongoing.
- Management expected no material loss from pending legal proceedings. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether the elevated nonaccrual and impaired commercial real estate loans stabilize, and how the two recently impaired loans perform.
- Whether reserve levels remain adequate given credit migration, TDR defaults, portfolio growth and the recent allowance-methodology change.
- Whether deposit pricing and funding costs continue to outpace asset repricing and pressure the 3.15% net interest margin.
- Whether planned branch openings and higher staffing and professional-services costs produce expected business growth and operating leverage.
- Progress and evidence of remediation of the material weakness in allowance-related controls.
- Rate-risk exposure and the assumptions underlying the filing’s interest-rate simulations, particularly given the modeled decline in economic value of equity.