Bankwell Financial Group, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020; comparisons are to Q1 2019 unless otherwise indicated. Bankwell is a Connecticut-based bank holding company serving businesses and retail customers in Connecticut and the New York metropolitan area, with lending concentrated in Fairfield and New Haven Counties.
Financial performance and condition
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $13.3 million | $14.3 million in Q1 2019 |
| Net interest margin | 2.98% | 3.19% in Q1 2019 |
| Provision for loan losses | $3.2 million | $0.2 million in Q1 2019 |
| Net income; diluted EPS | $1.4 million; $0.17 | $5.1 million; $0.65 in Q1 2019 |
| Return on average assets / equity | 0.29% / 3.03% | 1.10% / 11.60% in Q1 2019 |
| Total assets | $2.05 billion | $1.88 billion at Dec. 31, 2019 |
| Total loans, gross | $1.62 billion | $1.60 billion at Dec. 31, 2019 |
| Total deposits | $1.68 billion | $1.49 billion at Dec. 31, 2019 |
| Cash and cash equivalents | $210.0 million | $78.1 million at Dec. 31, 2019 |
| Shareholders’ equity | $170.2 million | $182.4 million at Dec. 31, 2019 |
Interest and dividend income was $20.1 million versus $21.5 million. Noninterest income was $1.1 million, down 18%; noninterest expense was $9.7 million, up 8%. The effective tax rate was 10.0%, versus 20.8%, primarily reflecting a discrete tax benefit. The filing does not provide a clear consolidated revenue measure as a single headline figure.
Net cash used in operating activities was $16.8 million and net cash used in investing activities was $13.3 million; financing activities provided $162.1 million. Cash increased by $131.9 million, largely reflecting deposit growth and balance-sheet liquidity actions.
At quarter-end, FHLB advances were $125.0 million and subordinated debentures were $25.2 million net of issuance costs. The Bank reported capital ratios of 12.14% common equity Tier 1, 13.13% total capital to risk-weighted assets, and 10.84% Tier 1 capital to average assets; management stated the Bank met applicable capital requirements and was well-capitalized.
Material changes and credit quality
- Net income fell to $1.4 million from $5.1 million, primarily because the loan-loss provision increased by $3.0 million in response to COVID-19-related economic uncertainty.
- Net interest income declined 6.9%, partly because Q1 2019 included approximately $1.0 million of elevated loan prepayment fees. Net interest margin declined 21 basis points; lower deposit interest expense partly offset reduced interest income.
- The allowance for loan losses rose to $16.7 million, or 1.03% of gross loans, from $13.5 million, or 0.84%, at year-end. Management attributed approximately $3.0 million of incremental reserves to COVID-19 risk in collectively evaluated loans. Net charge-offs were $8,000.
- Nonaccrual loans were $10.7 million, approximately 0.66% of gross loans; $4.6 million was SBA-guaranteed. Total past-due loans were 0.90% of gross loans. The portfolio is heavily weighted toward commercial real estate.
- Deposits increased $189.2 million, with management citing brokered deposits to expand liquidity. Brokered CDs rose to $337.6 million from $179.8 million. Cash and available-for-sale securities totaled approximately $292.3 million; the Bank reported $467.4 million of additional FHLB borrowing availability.
- Shareholders’ equity declined $12.2 million, mainly due to an $11.8 million after-tax other-comprehensive loss on interest-rate swaps, dividends, and stock repurchases, partly offset by net income. Tangible book value was $21.69 per share versus $23.15 at year-end.
Outlook, risks and unusual items
- Management said the pandemic’s full effect could not be estimated and warned of potential higher delinquencies, defaults, charge-offs and credit provisions; collateral-value declines; reduced demand; goodwill impairment; and prolonged recession effects. No specific earnings or financial guidance is provided.
- By March 31, the Company had received 190 payment-relief requests covering $235.5 million of loans, mostly commercial real estate. It granted appropriate initial deferrals generally for up to three months; SBA loans were subject to automatic six-month deferrals. These qualifying relief modifications were not treated as troubled debt restructurings under the CARES Act. Through May 7, it received about 60 additional requests covering approximately $115 million.
- After quarter-end, the Company approved more than 350 Paycheck Protection Program loans totaling approximately $60 million; none had been approved by March 31. The loans are SBA-guaranteed.
- Interest-rate swap fair-value changes drove substantial other-comprehensive loss. Management stated the swaps are used primarily to hedge interest-rate exposure; falling rates can reduce reported comprehensive income. The Company expects $2.6 million to be reclassified as increased interest expense over the next 12 months.
- Management identified the allowance for loan losses, derivatives, securities valuation and deferred taxes as estimates susceptible to near-term change. Interest-rate simulations indicate the Bank remained liability-sensitive. The filing reported no material expected loss from pending legal proceedings and no material change to previously disclosed risks other than COVID-19.
- The Board declared a $0.14-per-share dividend on April 29, payable May 28, 2020. The Company repurchased 58,499 shares during Q1 at an average $17.69 per share.
Important facts for investors to verify
- Whether payment deferrals convert into delinquencies, defaults, charge-offs, or further reserve needs, especially in commercial real estate and other concentrated lending exposures.
- Subsequent growth and renewal costs of brokered deposits, and whether liquidity and borrowing capacity remain adequate as deposits mature and commitments are funded.
- Quarter-to-quarter movements in net interest margin, deposit costs, loan yields and prepayment income amid changing rates.
- The sensitivity of reported equity and tangible book value to swap valuations, collateral requirements and interest-rate movements.
- PPP loan volume, fees, guarantees and servicing economics, and whether dividend and repurchase activity remain consistent with capital needs and regulatory limits.