Bankwell Financial Group(BWFG) - 2020 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements (unaudited) This section presents the unaudited consolidated financial statements for Bankwell Financial Group, Inc., including the balance sheets, income statements, comprehensive income statements, shareholders' equity statements, and cash flow statements, covering the periods ended March 31, 2020, and December 31, 2019 (or March 31, 2019, for income and cash flow statements) Consolidated Balance Sheets This section provides a snapshot of the company's financial position, detailing assets, liabilities, and shareholders' equity as of March 31, 2020, and December 31, 2019 Consolidated Balance Sheet Highlights (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :---------------- | | Total Assets | $2,053,625 | $1,882,182 | | Cash and cash equivalents | $209,996 | $78,051 | | Loans receivable (net) | $1,602,146 | $1,588,840 | | Total investment securities | $100,883 | $100,865 | | Total deposits | $1,681,132 | $1,491,903 | | Total liabilities | $1,883,411 | $1,699,785 | | Total shareholders' equity | $170,214 | $182,397 | Consolidated Statements of Income This section presents the company's financial performance, detailing revenues, expenses, and net income for the three months ended March 31, 2020, and 2019 Consolidated Statements of Income Highlights (Three Months Ended March 31, in thousands) | Metric | 2020 | 2019 | | :------------------------------------ | :--- | :--- | | Total interest and dividend income | $20,096 | $21,476 | | Total interest expense | $6,810 | $7,203 | | Net interest income | $13,286 | $14,273 | | Provision for loan losses | $3,185 | $195 | | Total noninterest income | $1,072 | $1,308 | | Total noninterest expense | $9,659 | $8,975 | | Income before income tax expense | $1,514 | $6,411 | | Income tax expense | $151 | $1,331 | | Net income | $1,363 | $5,080 | | Basic Earnings Per Common Share | $0.17 | $0.65 | | Diluted Earnings Per Common Share | $0.17 | $0.65 | Consolidated Statements of Comprehensive (Loss) Income This section outlines the company's comprehensive income or loss, including net income and other comprehensive items, for the three months ended March 31, 2020, and 2019 Consolidated Statements of Comprehensive (Loss) Income (Three Months Ended March 31, in thousands) | Metric | 2020 | 2019 | | :------------------------------------------ | :--- | :--- | | Net income | $1,363 | $5,080 | | Unrealized gains on securities, net of tax | $1,730 | $1,098 | | Unrealized losses on interest rate swaps, net of tax | $(13,548) | $(3,217) | | Total other comprehensive loss, net of tax | $(11,818) | $(2,119) | | Comprehensive (loss) income | $(10,455) | $2,961 | Consolidated Statements of Shareholders' Equity This section details changes in the company's shareholders' equity, including net income, other comprehensive loss, dividends, and stock repurchases, for the three months ended March 31, 2020, and 2019 Consolidated Statements of Shareholders' Equity (Three Months Ended March 31, in thousands) | Metric | December 31, 2019 | March 31, 2020 | | :---------------------------------- | :---------------- | :------------- | | Total Shareholders' Equity | $182,397 | $170,214 | | Net income | $1,363 | | | Other comprehensive loss, net of tax | $(11,818) | | | Cash dividends declared | $(1,092) | | | Stock-based compensation expense | $385 | | | Repurchase of common stock | $(1,037) | | Consolidated Statements of Cash Flows This section presents the company's cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2020, and 2019 Consolidated Statements of Cash Flows (Three Months Ended March 31, in thousands) | Metric | 2020 | 2019 | | :------------------------------------------ | :--- | :--- | | Net cash (used in) provided by operating activities | $(16,842) | $500 | | Net cash (used in) provided by investing activities | $(13,329) | $6,871 | | Net cash provided by financing activities | $162,116 | $8,108 | | Net increase in cash and cash equivalents | $131,945 | $15,479 | | Cash and cash equivalents, end of period | $209,996 | $93,591 | Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the consolidated financial statements, offering context on accounting policies, specific financial instruments, and significant events 1. Nature of Operations and Summary of Significant Accounting Policies This section describes the company's business, its primary market areas, and the significant accounting policies applied in preparing the financial statements, including the impact of COVID-19 - Bankwell Financial Group, Inc. is a bank holding company operating through Bankwell Bank, providing financial services primarily in the New York metropolitan area and throughout Connecticut[23][24] - The COVID-19 pandemic negatively impacted the company's earnings and resulted in an increase to the provision for loan losses compared to the same period in 2019. The full impact remains uncertain[27][28][29] - The company evaluated goodwill for impairment as of March 31, 2020, due to the economic impact of COVID-19 and determined there was no impairment[30] - The company has significant concentrations in commercial real estate loans in its market areas but management does not believe they present any special risk[34] - ASU No. 2016-13 (Credit Losses - CECL) effective date for smaller reporting companies has been deferred to fiscal years beginning after December 15, 2022. The company is evaluating the impact[38] 2. Investment Securities This section details the composition and fair value of the company's investment securities portfolio, including available-for-sale and held-to-maturity categories Total Investment Securities (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :---------------- | | Total investment securities | $100,883 | $100,865 | | Available for sale securities (fair value) | $82,342 | $82,439 | | Held to maturity securities (amortized cost) | $16,252 | $16,308 | - At March 31, 2020, available for sale securities had gross unrealized gains of $3.4 million and no unrealized losses[43] - The company held marketable equity securities with a fair value of $2.3 million at March 31, 2020, primarily an investment in mutual funds for CRA purposes[46] - There were no sales of investment securities during the three months ended March 31, 2020 or 2019[44] 3. Loans Receivable and Allowance for Loan Losses This section provides a breakdown of the loan portfolio, details the allowance for loan losses, and discusses the impact of COVID-19 on credit quality and payment relief requests Loan Portfolio Composition (in thousands) | Loan Type | March 31, 2020 | December 31, 2019 | | :------------------ | :------------- | :---------------- | | Real estate loans: | | | | Residential | $139,353 | $147,109 | | Commercial | $1,131,206 | $1,128,614 | | Construction | $107,594 | $98,583 | | Commercial business | $242,705 | $230,028 | | Consumer | $113 | $150 | | Total loans | $1,620,971 | $1,604,484 | Allowance for Loan Losses (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :---------------- | | Allowance for loan losses | $16,686 | $13,509 | | Provision for loan losses (3 months) | $3,185 | $195 | - The allowance for loan losses for the three months ended March 31, 2020, included $3.0 million in incremental reserves due to increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic[59][218] - Nonaccrual loans totaled $10.654 million at March 31, 2020, with $4.6 million guaranteed by the Small Business Administration (SBA)[75] - As of March 31, 2020, the company received 190 requests for payment relief on loan balances totaling $235.5 million due to COVID-19, which are not considered troubled debt restructurings (TDRs) based on the CARES Act[90][244] 4. Shareholders' Equity This section outlines the company's common stock outstanding, share repurchase activities, and dividend policies, along with regulatory constraints on dividend payments - The company had 7,871,419 shares of common stock outstanding at March 31, 2020[92] - During the three months ended March 31, 2020, the company repurchased 58,499 shares of its Common Stock at a weighted average price of $17.69 per share under a Board-authorized program[95][288] - The ability of the Company to pay dividends depends on the Bank's ability to pay dividends, subject to Connecticut statutes and regulatory capital requirements[94] 5. Comprehensive Income This section defines comprehensive income and details changes in accumulated other comprehensive income (loss), including unrealized gains/losses on securities and derivatives - Comprehensive income includes net income and other comprehensive income or loss, such as net unrealized gains or losses on securities available for sale and net unrealized gains or losses on derivatives[96] Changes in Accumulated Other Comprehensive Income (Loss) (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :------------------------------------------ | :------------- | :---------------- | | Net Unrealized Gain (Loss) on Available for Sale Securities | $2,658 | $928 | | Net Unrealized Gain (Loss) on Interest Rate Swaps | $(21,992) | $(8,444) | | Balance at March 31, 2020 | $(19,334) | $(7,516) | - The company's current derivative positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment[96] 6. Earnings per Share ("EPS") This section explains the company's EPS calculation methodology using the two-class method and presents basic and diluted EPS figures along with weighted average shares outstanding - The company computes EPS using the two-class method, allocating net income between common stock and participating securities (unvested restricted stock awards)[100][101] Earnings Per Common Share (Three Months Ended March 31) | Metric | 2020 | 2019 | | :-------------------------- | :--- | :--- | | Basic earnings per common share | $0.17 | $0.65 | | Diluted earnings per common share | $0.17 | $0.65 | Weighted Average Common Shares Outstanding (Three Months Ended March 31) | Metric | 2020 | 2019 | | :---------------------------------- | :---------- | :---------- | | Weighted average shares outstanding, basic | 7,750,135 | 7,760,460 | | Weighted average shares outstanding, diluted | 7,778,762 | 7,776,378 | 7. Regulatory Matters This section confirms the company's compliance with capital adequacy requirements, its 'well-capitalized' status, and details regulatory adjustments and waivers - As of March 31, 2020, the Bank and Company met all capital adequacy requirements and exceeded the regulatory minimum capital levels to be considered "well-capitalized" under the regulatory framework for prompt corrective action[112][258] Bankwell Bank Capital Ratios (March 31, 2020) | Capital Ratio | Actual Ratio | Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer | Minimum Capital to be Well Capitalized Under Prompt Corrective Action Provisions | | :------------------------------------------ | :----------- | :-------------------------------------------------------------------------- | :----------------------------------------------------------------------------- | | Common Equity Tier 1 Capital to Risk-Weighted Assets | 12.14% | 7.00% | 6.50% | | Total Capital to Risk-Weighted Assets | 13.13% | 10.50% | 10.00% | | Tier I Capital to Risk-Weighted Assets | 12.14% | 8.50% | 8.00% | | Tier I Capital to Average Assets | 10.84% | 4.00% | 5.00% | - The Bank exercised its one-time opt-out option to exclude unrealized gain (loss) on investment securities from regulatory capital calculations[108] - The Federal Reserve Bank (FRB) waived the minimum reserve balance requirement at March 31, 2020, due to the COVID-19 pandemic[117] 8. Deposits This section details the composition of the company's deposit base, including noninterest-bearing, NOW, money market, savings, and time deposits, and related interest expenses Deposit Composition (in thousands) | Deposit Type | March 31, 2020 | December 31, 2019 | | :-------------------------- | :------------- | :---------------- | | Noninterest bearing demand deposit accounts | $168,448 | $191,518 | | NOW | $69,562 | $70,020 | | Money market | $455,634 | $419,495 | | Savings | $164,673 | $183,729 | | Time certificates of deposit | $822,815 | $627,141 | | Total deposits | $1,681,132 | $1,491,903 | - Total deposits increased by $189.2 million to $1.681 billion at March 31, 2020, primarily due to an increase in brokered deposits to expand on-balance sheet liquidity[249] Interest Expense on Deposits (Three Months Ended March 31, in thousands) | Deposit Type | 2020 | 2019 | | :-------------------------- | :--- | :--- | | NOW | $28 | $47 | | Money market | $1,492 | $1,981 | | Savings | $672 | $769 | | Time certificates of deposits | $3,517 | $3,303 | | Total interest expense on deposits | $5,709 | $6,100 | 9. Stock-Based Compensation This section describes the company's stock-based compensation plans, including restricted stock activity and the associated expense recognition - The company has stock options or unvested restricted stock outstanding under the 2012 BNC Financial Group, Inc. Stock Plan, with 658,109 shares reserved for future issuance[121] Restricted Stock Activity (Three Months Ended March 31, 2020) | Metric | Number of Shares | Weighted Average Grant Date Fair Value | | :------------------------------ | :--------------- | :------------------------------------- | | Unvested at beginning of period | 110,975 | $30.88 | | Granted | 61,040 | $28.72 | | Vested | (16,578) | $31.44 | | Forfeited | (1,425) | $31.58 | | Unvested at end of period | 154,012 | $29.96 | - Restricted stock expense for the three months ended March 31, 2020, was $0.4 million, with $3.9 million of unrecognized expense remaining, expected to be recognized over a weighted average period of 2.0 years[130] 10. Derivative Instruments This section explains the company's use of interest rate swaps for risk management, detailing their notional amounts, fair values, and impact on comprehensive income - The company uses interest rate swaps to manage economic risks, including interest rate risk, and does not use derivatives for speculative purposes[132] - As of March 31, 2020, the company was a party to seven interest rate swaps designated as hedging instruments (notional amount $175 million) and one forward-starting interest rate swap (notional amount $25 million)[132][144] Fair Value of Derivatives Designated as Hedging Instruments (in thousands) | Metric | March 31, 2020 | December 31, 2019 | | :------------------------------------------ | :------------- | :---------------- | | Fair Value (Net Liability) | $(28,117) | $(10,691) | - Unrealized losses recognized in accumulated other comprehensive income related to interest rate swaps were $(17.426) million for Q1 2020, compared to $(4.072) million for Q1 2019, net of tax[145] 11. Fair Value of Financial Instruments This section provides fair value disclosures for financial instruments, categorized into a three-level hierarchy based on input observability, and discusses the company's interest rate risk management - GAAP requires disclosure of fair value information for financial instruments, classified into a three-level hierarchy based on input observability: Level 1 (quoted prices in active markets), Level 2 (significant observable inputs), and Level 3 (significant unobservable inputs)[171][172] - Interest rate risk is the company's primary market risk, and management attempts to match maturities of assets and liabilities to minimize this risk[156] Fair Value of Key Financial Instruments (March 31, 2020, in thousands) | Instrument | Carrying Value | Fair Value | Level 1 | Level 2 | Level 3 | | :-------------------------- | :------------- | :--------- | :------ | :------ | :------ | | Marketable equity securities | $2,289 | $2,289 | $2,289 | — | — | | Available for sale securities | $82,342 | $82,342 | $10,258 | $72,084 | — | | Held to maturity securities | $16,252 | $18,771 | — | $82 | $18,689 | | Loans receivable, net | $1,602,146 | $1,604,879 | — | — | $1,604,879 | | Derivative asset | $5,710 | $5,710 | — | $5,710 | — | | Derivative liability | $33,827 | $33,827 | — | $33,827 | — | | Time deposits | $822,815 | $831,409 | — | — | $831,409 | | Advances from the FHLB | $125,000 | $125,114 | — | — | $125,114 | | Subordinated debentures | $25,220 | $24,552 | — | — | $24,552 | 12. Fair Value Measurements This section details financial instruments measured at fair value on both recurring and nonrecurring bases, providing their classification within the three-level fair value hierarchy Financial Instruments Measured at Fair Value on a Recurring Basis (March 31, 2020, in thousands) | Instrument | Level 1 | Level 2 | Level 3 | | :------------------------------------------ | :------ | :------ | :------ | | Marketable equity securities | $2,289 | — | — | | U.S. Government and agency obligations (AFS) | $10,258 | $72,084 | — | | Derivative asset | — | $5,710 | — | | Derivative liability | — | $33,827 | — | Financial Instruments Measured at Fair Value on a Nonrecurring Basis (March 31, 2020, in thousands) | Instrument | Level 1 | Level 2 | Level 3 | | :-------------------------- | :------ | :------ | :------ | | Impaired loans | — | — | $21,987 | | Servicing asset, net | — | — | $840 | - Level 3 impaired loans are valued using appraisals (discount to appraised value 8.00-28.00%) and discounted cash flows (discount rate 3.50-7.50%)[180] 13. Subordinated debentures This section describes the company's subordinated notes, their interest rate, and their qualification as Tier 2 capital under regulatory guidelines - The company completed a private placement of $25.5 million in fixed-rate subordinated notes in August 2015, bearing interest at 5.75% per annum[183] - The notes are structured to qualify for the company as Tier 2 capital under regulatory guidelines[184] - The company recognized $0.4 million in interest expense related to its subordinated debt for each of the three-month periods ended March 31, 2020, and 2019[185] 14. Subsequent Events This section reports significant events occurring after the balance sheet date, including dividend declarations, Paycheck Protection Program (PPP) loans, and additional COVID-19 related payment relief requests - On April 29, 2020, the Board of Directors declared a $0.14 per share cash dividend[186] - Subsequent to March 31, 2020, the company approved over 350 Paycheck Protection Program (PPP) loans totaling approximately $60 million, fully guaranteed by the U.S. Small Business Administration (SBA)[187] - Through May 7, 2020, the company received approximately 60 additional requests for payment relief on loan balances totaling approximately $115 million due to COVID-19, which are not considered troubled debt restructurings under the CARES Act[188] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results, highlighting the adverse impact of the COVID-19 pandemic on earnings, particularly through increased loan loss provisions. It details changes in net interest income, noninterest income and expense, and asset quality, emphasizing the company's focus on customer service and risk management - The company focuses on being a "Hometown" bank, offering customer-centric products, pursuing organic growth and strategic acquisitions, utilizing efficient infrastructure, and maintaining disciplined risk management[194] - The COVID-19 pandemic had an adverse impact on earnings for Q1 2020, primarily due to a $3.0 million increase in the provision for loan losses. The full extent of the impact remains uncertain[197][203] Key Financial Performance Metrics (Three Months Ended March 31) | Metric | 2020 | 2019 | | :------------------------------------ | :--- | :--- | | Net interest income | $13.3 million | $14.3 million | | Net interest margin | 2.98% | 3.19% | | Noninterest income | $1.1 million | $1.3 million | | Noninterest expense | $9.7 million | $9.0 million | | Net income available to common shareholders | $1.4 million | $5.1 million | | Diluted EPS | $0.17 | $0.65 | | Return on average stockholders' equity | 3.03% | 11.60% | | Return on average assets | 0.29% | 1.10% | - Total assets increased by $171.4 million (9.1%) to $2.1 billion, and total deposits increased by $189.2 million to $1.7 billion at March 31, 2020, driven by increased cash and brokered deposits for liquidity[225][249] - Total shareholders' equity decreased by $12.2 million to $170.2 million, mainly due to an $11.8 million unfavorable impact from fair value marks on interest rate swaps in accumulated other comprehensive income, dividends, and share repurchases[225][257] - The company actively manages asset quality through underwriting practices and collection operations, with oversight from the Directors Loan Committee and Audit Committee[232] - The company measures interest rate risk using simulation analysis (net interest income at risk and economic value of equity at risk). As of March 31, 2020, the company remains liability sensitive[260][266] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is interest rate risk, which is managed through asset/liability management and simulation analysis. Inflation generally increases costs and affects yields, with interest rates having a more significant impact on financial institutions than general inflation - Interest rate risk management is the company's primary market risk[272] - Inflation generally increases the costs of funds and operating overhead, and affects yields on variable-rate assets. Interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation[274] Item 4. Controls and Procedures The company's management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures and concluded they were effective as of March 31, 2020. There were no material changes in internal control over financial reporting during the quarter - The Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of March 31, 2020[275] - There has been no material change in the Company's internal control over financial reporting during the quarter ended March 31, 2020[276] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company and Bank are periodically involved in various legal proceedings as a normal incident to their businesses, but management expects no material loss from any pending lawsuit - The Company and the Bank are periodically involved in various legal proceedings, but management expects no material loss from any such pending lawsuit[277] Item 1A. Risk Factors The COVID-19 pandemic is a significant new risk factor, adversely affecting the company and its customers, leading to economic disruption, potential credit losses, and operational challenges due to remote work. The full impact remains uncertain and could exacerbate other existing risk factors - The Coronavirus (COVID-19) pandemic is adversely affecting the company and its customers, leading to significant economic disruption, lower interest rates, depressed equity market valuations, and heightened financial market volatility[278][279] - The pandemic could cause an increase in loan delinquencies, defaults, and charge-offs, additional provisions for credit losses, adverse asset values, goodwill impairment, and reduced demand for products and services[284] - The company is unable to estimate the full impact of COVID-19 on its business and operations at this time, and the extent of such impact depends on future developments[284] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 58,499 shares of its common stock during March 2020 under a publicly announced share repurchase program, with 307,333 shares remaining authorized for repurchase Issuer Purchases of Equity Securities (Three Months Ended March 31, 2020) | Period | Total Number of Shares Purchased | Average Price per Share | Shares Purchased as Part of Publicly Announced Plans | Maximum Shares Remaining Under Plans | | :------------------------------------ | :------------------------------- | :---------------------- | :--------------------------------------------------- | :----------------------------------- | | March 1, 2020 - March 31, 2020 | 58,499 | $17.69 | 58,499 | 307,333 | | Total | 58,499 | $17.69 | 58,499 | 307,333 | - The share repurchase program, authorized on December 19, 2018, allows for the repurchase of up to 400,000 shares of Common Stock[288] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities during the reported period - There were no defaults upon senior securities[289] Item 4. Mine Safety Disclosures There were no mine safety disclosures required - No mine safety disclosures were required[290] Item 5. Other Information No other information was required to be disclosed - No other information was required to be disclosed[292] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and XBRL formatted financial statements - Exhibits filed include certifications (31.1, 31.2, 32) and XBRL formatted financial statements (Consolidated Balance Sheets, Income, Comprehensive Income, Shareholders' Equity, Cash Flows, and Notes to Consolidated Financial Statements)[294][295] Signatures The report was duly signed on behalf of Bankwell Financial Group, Inc. by Christopher R. Gruseke (President and CEO) and Penko Ivanov (Executive Vice President and CFO) on May 11, 2020 - The report was signed by Christopher R. Gruseke (President and Chief Executive Officer) and Penko Ivanov (Executive Vice President and Chief Financial Officer) on May 11, 2020[297] Certifications Certifications by the CEO and CFO pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002 are included as exhibits - Certifications of Christopher R. Gruseke and Penko Ivanov pursuant to Rule 13a-14(a) and Section 906 of the Sarbanes-Oxley Act of 2002 are filed as exhibits 31.1, 31.2, and 32[294][295]