Bankwell Financial Group, Inc. — Q3 2017 Form 10-Q
Reporting period: Three and nine months ended September 30, 2017; balance-sheet comparisons are to December 31, 2016. Bankwell is a Connecticut-based bank holding company serving businesses and consumers in Connecticut and the New York metropolitan area. Amounts below are in U.S. dollars; financial statement amounts are rounded to millions where appropriate.
Financial performance and condition
| Metric | Q3 2017 / Sep. 30, 2017 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $18.35 million | $15.63 million in Q3 2016 |
| Net interest income | $13.86 million; FTE $14.02 million | $12.53 million GAAP in Q3 2016; FTE $12.66 million |
| Net interest margin | 3.30% for Q3; 3.32% for nine months | 3.57% and 3.54%, respectively, in 2016 |
| Net income | $4.26 million; diluted EPS $0.55 | $3.14 million and $0.41 in Q3 2016 |
| Nine-month net income | $11.73 million; diluted EPS $1.51 | $9.03 million and $1.19 in 2016 |
| Assets | $1.805 billion | $1.629 billion at Dec. 31, 2016 |
| Loans, net of allowance | $1.501 billion | $1.344 billion at Dec. 31, 2016 |
| Deposits | $1.410 billion | $1.289 billion at Dec. 31, 2016 |
| FHLB advances / subordinated debentures | $195.0 million / $25.1 million | $160.0 million / $25.1 million at Dec. 31, 2016 |
| Cash and cash equivalents | $96.4 million | $96.4 million at Dec. 31, 2016 |
- For the first nine months, operating cash flow was $14.4 million, investing cash outflow was $169.8 million, and financing cash inflow was $155.4 million; cash increased by $0.1 million.
- Q3 return on average assets and return on average equity were 0.96% and 10.78%; nine-month figures were 0.92% and 10.27%.
- Noninterest income was $0.82 million in Q3 and $3.09 million for nine months. Noninterest expense was $8.13 million and $23.94 million, respectively.
- The allowance for loan losses was $19.6 million, or 1.28% of loans, versus $18.0 million, or 1.32%, at year-end 2016. Nine-month provision was $1.84 million; net charge-offs were $0.25 million.
- Shareholders’ equity was $158.3 million (8.77% of assets), compared with $145.9 million (8.96%) at year-end. Tangible book value was $20.41 per share, versus $18.98.
- The Bank reported September 30 capital ratios of 10.94% CET1, 12.19% total capital, and 9.78% Tier 1 leverage, and management said the Bank and Company met applicable requirements and the Bank was well capitalized.
Material changes versus comparable periods
- Q3 net income rose to $4.26 million from $3.14 million; nine-month net income rose to $11.73 million from $9.03 million. Higher loan balances and lower loan-loss provision supported results.
- GAAP net interest income increased 10.7% in Q3 and 13.0% for nine months. Growth in average earning assets was partly offset by margin compression: FTE margin declined 27 basis points in Q3 and 22 basis points year to date.
- Management attributed margin pressure to higher deposit rates needed to remain competitive. Nine-month interest expense increased 40.7%, reflecting both higher average interest-bearing liabilities and higher deposit rates.
- Loans before deferred fees and allowance grew $157.6 million, or 11.5%, from year-end. Commercial real estate loans increased $97.6 million; commercial business loans increased $56.6 million.
- Deposits increased $120.8 million. Money-market balances rose $104.4 million and certificates of deposit rose $45.2 million; FHLB advances increased $35.0 million. Noninterest-bearing deposits declined $24.8 million.
- Nonperforming assets increased to $4.46 million, or 0.25% of assets, from $3.21 million, or 0.20%, at year-end. Nonaccrual loans increased to $4.24 million from $2.94 million. Total past-due loans were 0.62% of loans versus 0.47%.
- Nine-month noninterest income grew 36%, helped by bank-owned life insurance income and rental income from the headquarters building acquired in late 2016. Expenses grew 10%, including higher staffing, occupancy, professional services, data processing, and FDIC insurance costs.
Outlook, risks, and unusual items
- The filing provides no specific earnings, growth, margin, or other numerical guidance. Management said it anticipates sufficient funds to meet current loan and other commitments.
- Liquidity included $96.4 million cash and $86.3 million available-for-sale securities. Commitments to originate loans were $53.7 million, with $146.8 million of undisbursed approved credit lines; $368.3 million of time deposits were scheduled to mature within one year.
- Management described the company as liability-sensitive to interest rates. Its simulations showed a 5.53% decline in one-year net interest income under a +200-basis-point parallel shock and a 21.9% decline in economic value of equity under the same shock. Results depend on assumptions about rates, deposit behavior, prepayments, and balance-sheet composition.
- Credit risk is concentrated in commercial real estate and in Fairfield and New Haven Counties. Management cited construction lending risks, including cost overruns, delays, and dependence on project completion or sale. It considered the allowance appropriate, while warning that estimates may differ from actual losses.
- Brokered deposits were $71.5 million, up from $58.2 million at year-end, and are used as an additional funding source. Subordinated notes of $25.5 million face amount bear 5.75% interest, mature August 15, 2025, and are non-callable for five years.
- A servicing asset of approximately $0.5 million and liability of approximately $0.4 million were established in Q2 for prior loan sales and participations where servicing was retained; this generated approximately $0.1 million of interest income and $0.1 million of noninterest income.
- There were no material subsequent events requiring disclosure. Management expected no material loss from pending legal proceedings and reported no material change to previously disclosed risk factors. Disclosure controls were deemed effective, with no material quarterly change in internal controls.
Most important facts for investors to verify
- Whether loan and deposit growth can continue without further material compression in net interest margin or a greater rise in funding costs.
- Commercial real estate and commercial business underwriting, geographic concentration, delinquencies, nonaccruals, TDRs, and the adequacy of the allowance as the portfolio expands.
- Liquidity and funding resilience, including brokered deposits, upcoming time-deposit maturities, FHLB borrowing, and commitments to fund loans and credit lines.
- Interest-rate exposure and the sensitivity of earnings and economic value to actual deposit repricing, customer behavior, and rate movements versus simulation assumptions.
- Whether higher operating expenses, the nine-month effective tax rate of 33.9%, and one-time or acquisition-related items affect future earnings comparability.
- Regulatory capital headroom as capital conservation buffer requirements phase in, and the Bank’s capacity to support growth and dividends.