Bankwell Financial Group, Inc. — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015. Dollar amounts are in millions unless stated otherwise. Bankwell is a Connecticut bank holding company serving commercial and retail customers primarily in Fairfield and New Haven Counties. The 2014 comparison does not include Quinnipiac Bank, acquired October 1, 2014, and is therefore not fully comparable.
Financial performance
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Net interest income | $10.9 | $7.6 | $31.6 | $21.9 |
| Provision for loan losses | $1.5 | $0.6 | $2.9 | $0.8 |
| Noninterest income | $1.2 | $0.8 | $2.6 | $2.2 |
| Noninterest expense | $7.2 | $5.5 | $21.5 | $17.5 |
| Net income | $2.3 | $1.5 | $6.4 | $3.8 |
| Net income available to common shareholders | $2.2 | $1.5 | $6.3 | $3.8 |
| Diluted EPS | $0.31 | $0.22 | $0.87 | $0.72 |
| FTE net interest margin | 3.67% | 3.69% | 3.83% | 3.78% |
Management attributed higher net interest income primarily to loan growth and a shift toward higher-yielding commercial real estate loans. Deposit pricing and the new subordinated notes increased funding costs; the notes also contributed to the slight year-over-year Q3 margin decline. Q3 return on average assets was 0.69% and return on average equity 6.92%; nine-month figures were 0.74% and 6.45%, respectively.
Financial position, liquidity and capital
- At September 30, total assets were $1,313.3, up $213.8 (19.4%) from December 31, 2014. Net loans were $1,108.4 versus $916.0; deposits were $1,025.7 versus $835.4.
- Loan growth was concentrated in commercial real estate: commercial real estate loans increased $162.9 from year-end. Total loans before deferred fees and allowance were $1,125.7, up $195.9.
- Cash and due from banks was $86.8; available-for-sale securities were $45.0. Management said liquidity was sufficient for current commitments. Loan-originating commitments were $38.9 and undisbursed approved credit lines $134.7; time deposits due within one year totaled $236.6.
- Nine-month operating cash flow was $10.1; investing cash use was $178.4, largely reflecting $197.0 of net loan growth; financing cash flow was $206.6. Cash increased $38.3 to $86.8.
- FHLB advances were $120.0, down from $129.0. The company issued $25.5 of 5.75% subordinated notes, due in 2025 and non-callable for five years, qualifying as Tier 2 capital. Net proceeds were intended partly to redeem $11.0 of SBLF preferred stock by year-end 2015; the filing does not establish that redemption had been completed.
- Shareholders’ equity was $135.8, and equity to assets was 10.3%. The Bank reported a 10.75% common equity Tier 1 ratio, 11.94% total capital ratio and 9.84% Tier 1 leverage ratio; management said capital requirements were met.
Material changes, credit and risks
- Net income increased year over year, alongside rapid balance-sheet and loan growth. The provision rose to $2.9 for nine months from $0.8, and noninterest expense increased 23% to $21.5, led by salaries and benefits and branch-related occupancy costs.
- The allowance for loan losses was $13.7, or 1.22% of loans, versus $10.9, or 1.17%, at year-end. Nonperforming assets were $3.7 (0.28% of assets), down from $4.3 (0.39%). Nonaccrual loans were $2.4; foreclosed real estate rose to $1.3.
- Troubled debt restructurings increased to $7.4 from $3.6 at year-end; the filing says all were performing under modified terms. Total past-due loans were $11.5, including $1.1 more than 90 days past due and still accruing.
- Credit exposure is concentrated in commercial real estate and in the Connecticut market; management notes that regional property-value declines could materially affect the company. Construction lending also carries project completion, valuation and repayment risks.
- Q3 noninterest income included $0.3 of “other” income, primarily from payoffs of purchased credit-impaired loans. Interest-rate swap fair-value losses reduced nine-month other comprehensive income by $0.6 net of tax; the swap liability was $1.2 at quarter-end.
- Management gave no specific earnings or growth guidance. It described the bank as within its internal interest-rate-risk limits. In modeled parallel shocks, one-year net interest income declined by 1.48% for a +100-basis-point shock; economic value of equity declined 15.50% for +300 basis points.
- The board declared a $0.05-per-share dividend payable December 21, 2015. Management said no material loss was expected from routine legal proceedings; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether fast commercial real estate and construction loan growth is accompanied by stable underwriting, collateral values and credit performance.
- Whether the larger provision, rising TDR balance and past-due acquired loans signal further credit deterioration, and whether the allowance remains adequate.
- Deposit retention and pricing, including the scale and cost of time, promotional-rate and brokered deposits, and the effect on net interest margin.
- Completion and terms of the planned SBLF preferred-stock redemption, plus the ongoing cost and capital treatment of the subordinated notes.
- Whether liquidity can support loan commitments and near-term deposit maturities without materially higher funding costs.
- How much reported growth and year-over-year improvement reflects the Quinnipiac acquisition, and how operations and expenses integrate over time.