Bankwell Financial Group, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017. Bankwell is a Connecticut bank holding company serving commercial and consumer customers primarily in the New York metropolitan area, including Fairfield and New Haven Counties. Amounts below are in U.S. dollars; financial-statement amounts are generally in millions unless stated otherwise.
Financial performance and position
- Earnings: Net income was $3.70 million, up 23.8% from $2.99 million in Q1 2016. Diluted EPS rose to $0.48 from $0.40. Return on average assets was 0.93% (0.89%); return on average equity was 10.12% (9.01%).
- Interest income and margin: Net interest income was $12.95 million, up 13.6% year over year; fully taxable-equivalent net interest income was $13.08 million. Net interest margin declined to 3.35% from 3.54%. Average earning assets grew 19.9% to $1.56 billion, while their average yield eased to 4.24% from 4.29%.
- Other income and expenses: Noninterest income increased 88% to $1.27 million. Noninterest expense rose 16% to $8.23 million. Provision for loan losses was $0.54 million, compared with $0.65 million.
- Loans and credit: Gross loans were $1.43 billion at quarter-end, up $62.8 million, or 4.6%, from December 31, 2016; commercial real estate drove most growth. The allowance for loan losses was $18.5 million, or 1.30% of loans, versus $18.0 million, or 1.32%, at year-end. Nonperforming assets were $4.7 million, or 0.28% of assets, versus $3.2 million, or 0.20%; nonaccrual loans increased to $4.4 million from $2.9 million. Net charge-offs were $14,000.
- Balance sheet, funding and liquidity: Total assets were $1.67 billion, up 2.7% from year-end. Deposits rose $38.4 million to $1.33 billion. Cash and cash equivalents were $74.0 million; available-for-sale securities were $87.4 million. The company cited $34.8 million of loan-origination commitments and $133.3 million of undisbursed credit lines. Time deposits maturing within one year totaled $336.9 million.
- Debt and capital: FHLB advances remained $160.0 million; subordinated debentures were $25.1 million. Shareholders’ equity was $149.7 million, and the equity-to-assets ratio was 8.95%. Bank capital ratios were 11.16% common equity Tier 1, 12.41% total capital to risk-weighted assets, and 10.06% Tier 1 leverage. Management said the Bank met well-capitalized requirements.
- Cash flows and dividends: Operating cash flow was $7.3 million; investing cash flow was negative $67.9 million, including $62.8 million of net loan growth and a $5.0 million purchase of bank-owned life insurance. Financing cash flow was positive $38.2 million. Cash and cash equivalents decreased $22.4 million during the quarter. The declared dividend was $0.07 per share, versus $0.05 in Q1 2016.
Material changes and management commentary
- Higher average loan balances, particularly commercial real estate and commercial business, supported interest income and net interest income. Management attributed the lower margin mainly to higher deposit pricing and slightly lower loan yields; deposit costs rose as the Bank competed for funding.
- Noninterest income benefited from $324,000 of loan-sale gains and a $165,000 gain on an available-for-sale securities sale. Bank-owned life insurance income also increased to $291,000 from $174,000.
- Expense growth included a $323,000 increase in “other” expense, primarily attributed to a reserve for unfunded commitments. Occupancy and equipment expense increased $284,000, reflecting IT costs, one-time back-office consolidation charges and maintenance on the recently acquired headquarters building. FDIC insurance expense increased $214,000.
- Commercial real estate represented 62.1% of gross loans. Special-mention commercial loans increased to $12.8 million from $6.4 million at year-end. Nonperforming assets rose, with acquired commercial real estate nonaccruals among the changes noted in the loan disclosures.
- The Bank described itself as liability-sensitive. In its March 31, 2017 simulations, a parallel 200-basis-point rate increase was estimated to reduce one-year net interest income by 5.59%; a 300-basis-point increase was estimated to reduce economic value of equity by 33.40%. These are model estimates based on assumptions, not forecasts.
Outlook, risks and contingencies
The filing provides no specific earnings, growth or margin guidance. Management stated that it expected available funds to cover current loan and other commitments. Forward-looking results remain subject to interest-rate and deposit behavior, credit performance and local economic and property-value conditions. The company noted significant commercial real estate exposure and concentration in its regional market. Management said no material loss was expected from pending legal proceedings; it reported no material changes to previously disclosed risk factors. The allowance for loan losses, stock-based compensation and derivative valuation were identified as estimates particularly susceptible to near-term change. Management said adoption of the expected-credit-loss standard was under evaluation and could lead to earlier loss recognition.
Important facts for investors to verify
- Whether loan growth and deposit growth continue without further deterioration in credit indicators, particularly commercial real estate and special-mention loans.
- Drivers and persistence of the increase in nonaccrual loans, nonperforming assets and the reserve for unfunded commitments.
- Deposit pricing, funding mix—including $101.8 million of brokered deposits—and the scheduled maturity of $336.9 million in time deposits within one year.
- Whether the decline in net interest margin continues as funding costs adjust, and how actual results compare with the filing’s interest-rate sensitivity assumptions.
- Whether higher noninterest expenses, including one-time consolidation costs, persist; and the contribution of loan-sale and securities-sale gains to earnings.
- Capital and liquidity headroom as the Bank grows, and the implications of applicable regulatory requirements and pending accounting standards.