Bankwell Financial Group, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; balance sheet comparisons are with December 31, 2022. Bankwell Financial Group is a Connecticut bank holding company operating through Bankwell Bank, focused on commercial and retail banking, primarily in Connecticut and the New York metro area.
Financial performance and condition
- Revenue and earnings: Interest and dividend income was $44.3 million, up 98.6% from $22.3 million in Q1 2022. Net interest income increased 30.9% to $25.5 million. Net income rose to $10.4 million from $8.2 million; diluted EPS was $1.33 versus $1.04. Noninterest income increased to $1.5 million from $1.0 million.
- Margins and returns: Net interest margin on a fully taxable equivalent basis was 3.24%, compared with 3.30% a year earlier. Return on average assets was 1.30% versus 1.35%; return on average equity was 17.48% versus 16.05%.
- Expenses and credit costs: Noninterest expense increased 27.9% to $12.7 million, including higher salaries, professional services and FDIC insurance. Provision for credit losses was $0.8 million, versus $0.2 million. Effective tax rate increased to 23.4% from 20.4%.
- Loans and asset quality: Gross loans increased 3.1% from year-end to $2.76 billion, led by commercial real estate, construction and commercial business lending. Nonperforming assets declined to $14.3 million (0.44% of assets) from $16.4 million (0.51%). Past-due loans increased to $26.1 million, or 0.94% of gross loans, from $16.1 million, or 0.60%; management reported that $10.0 million of the quarter-end past-due balance subsequently became current. Net charge-offs were $0.4 million.
- Credit reserves: The allowance for credit losses on loans was $28.0 million, or 1.01% of gross loans, versus $22.4 million, or 0.84%, at year-end. The January 1 CECL adoption increased the loan allowance by $5.1 million and the unfunded-commitment allowance by $1.3 million before tax, reducing beginning retained earnings by $4.9 million after tax.
- Liquidity and funding: Total assets were $3.25 billion, broadly unchanged from year-end. Deposits were $2.80 billion, also broadly unchanged, while cash and cash equivalents declined to $277.2 million from $355.7 million. Interest-bearing deposit costs rose materially; the average rate was 2.89%, compared with 0.52% in Q1 2022. Brokered deposits were approximately $1.03 billion; uninsured deposits were $747.8 million. The Bank reported $362.3 million of additional immediate FHLB borrowing availability and a $694.4 million FRB line with no balance outstanding.
- Debt and capital: FHLB advances were $90.0 million; subordinated debentures had a $70.0 million face value ($69.0 million carrying value). Bank capital ratios at March 31 were 10.17% CET1, 11.16% total risk-based capital and 9.22% Tier 1 leverage. The Bank reported meeting applicable capital requirements.
- Cash flow and equity: Operating cash flow was $7.1 million; investing activities used $81.7 million, primarily reflecting loan growth; financing activities used $3.9 million. Cash decreased $78.5 million during the quarter. Shareholders’ equity increased to $242.3 million, reflecting earnings partly offset by CECL adoption, dividends and a $0.9 million other comprehensive loss. The quarterly dividend was $0.20 per share.
Material changes and notable items
- Loan interest income rose with portfolio growth and higher yields, while higher deposit rates drove a sharp increase in funding expense. The average rate on total interest-bearing liabilities rose to 2.98% from 0.62% a year earlier.
- FDIC insurance expense rose to $1.1 million from $0.2 million. Management attributed the increase to balance-sheet growth, greater use of brokered deposits and higher insurance rates.
- Available-for-sale securities had a $7.9 million gross unrealized loss at quarter-end; the total investment portfolio’s net unrealized loss was reported as $8.0 million, improved from $9.2 million at year-end. Management said it had the intent and ability to hold securities in unrealized-loss positions until recovery or maturity.
- The Company adopted CECL on January 1, 2023. This accounting change increased reserves and reduced beginning retained earnings; management said the future effect depends on assumptions, portfolio changes and economic conditions.
- The Company entered into a $150 million portfolio-layer fair value swap during Q1 to hedge interest-rate exposure on loans. It reported no material impact from other recently adopted accounting guidance discussed in the filing.
Outlook, risks and contingencies
- The filing provides no formal earnings or financial guidance. Management’s discussion cautions that interim results may not indicate full-year results and that forward-looking statements are subject to risks and uncertainties.
- Management described the Bank as liability sensitive: its modeled one-year net interest income declined 2.4% under an immediate +100 basis-point rate shock and 7.8% under +300 basis points. These are simulations based on assumptions, not forecasts.
- Key risks include deposit competition and outflows, dependence on brokered funding, rising funding costs, interest-rate and securities-value movements, and concentrated commercial real estate lending. Management also cited exposure to local economic and property-value declines.
- The filing added that recent or future bank failures could disrupt the business environment, prompt deposit withdrawals and increase FDIC assessment costs, potentially affecting earnings and capital. Management was monitoring these developments.
- The Company and Bank are involved in legal proceedings in the ordinary course; management did not expect a material loss. No material changes to previously disclosed risk factors were reported other than the bank-failure risk described above.
- After quarter-end, the Board declared a $0.20-per-share dividend payable May 23, 2023. The Bank also relocated a Stamford branch in April 2023.
Important facts for investors to verify
- Deposit stability and mix, including uninsured deposits, brokered funding, and maturities of large time deposits.
- Whether higher deposit costs continue to outpace loan-yield increases and pressure net interest margin.
- Commercial real estate exposure, criticized loans, past-due trends and the adequacy of CECL reserves.
- Liquidity capacity and regulatory capital under stress, including the assumptions behind rate-sensitivity simulations.
- Reconciliation of reported credit-loss disclosures and period-to-period comparisons in the full filing, particularly following CECL adoption.