Bankwell Financial Group, Inc. — Q1 2016 Form 10-Q
Business context and reporting period. Bankwell is a Connecticut bank holding company serving commercial and retail customers primarily in Fairfield and New Haven Counties. This unaudited report covers the three months ended March 31, 2016; balance-sheet comparisons are with December 31, 2015 and earnings comparisons with Q1 2015. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Interest income | $14.0 million | $11.3 million in Q1 2015 |
| Net interest income | $11.4 million; FTE basis $11.5 million | $9.9 million reported; FTE basis $10.0 million in Q1 2015 |
| Net interest margin | 3.54% on an FTE basis | 3.89% in Q1 2015 |
| Net income / diluted EPS | $3.0 million / $0.40 | $1.9 million / $0.26 in Q1 2015 |
| Noninterest income / expense | $0.7 million / $7.1 million | $0.6 million / $7.0 million in Q1 2015 |
| Operating cash flow | $3.6 million | $2.8 million in Q1 2015 |
| Total assets | $1.42 billion | $1.33 billion at December 31, 2015 |
| Loans, gross / net | $1.196 billion / $1.178 billion | $1.148 billion gross / $1.130 billion net at year-end |
| Deposits | $1.094 billion | $1.047 billion at year-end |
| FHLB advances / subordinated debentures | $160.0 million / $25.0 million | $120.0 million / $25.0 million at year-end |
| Shareholders’ equity | $134.6 million; 9.48% of assets | $131.8 million; 9.90% of assets at year-end |
Net interest income increased 15.2% year over year, while net income available to common shareholders rose from $1.8 million to $3.0 million. Return on average assets was 0.89% and return on average equity was 9.01%, compared with 0.70% and 5.81%, respectively, in Q1 2015. The filing does not provide a clear standalone revenue total or an efficiency ratio.
Cash and cash equivalents were $72.7 million at quarter-end, down from $88.6 million at year-end. Investing cash outflow was $106.2 million, principally reflecting $58.1 million of securities purchases and $49.0 million of net loan growth; financing cash inflow was $86.7 million, including increased deposits and $40.0 million of additional FHLB advances. The resulting net decrease in cash was $15.9 million.
The Bank reported Q1 capital ratios of 12.24% common equity Tier 1 to risk-weighted assets, 13.48% total capital to risk-weighted assets, and 10.85% Tier 1 capital to average assets. Management said the Bank met applicable capital requirements and qualified as well-capitalized. The filing reports $48.1 million in commitments to originate loans, $56.5 million in undisbursed credit lines, and $267.0 million of time deposits scheduled to mature within one year. Management anticipated sufficient funds to meet current loan and other commitments.
Material changes and management commentary
- Gross loans grew $49.0 million from year-end, led by $54.0 million growth in commercial real estate. Commercial business loans fell $12.0 million.
- Net interest income benefited from loan growth and higher earning-asset balances. FTE net interest margin fell 35 basis points year over year: management cited promotional deposit pricing and the addition of 5.75% subordinated debt issued in 2015. Interest expense rose 89% year over year.
- Noninterest expense increased 2% year over year, with higher data-processing and foreclosed-real-estate costs partly offset by lower salary and benefit expense. Staff declined to 123 full-time-equivalent employees from 128 a year earlier.
- The allowance for loan losses was $14.8 million, or 1.24% of gross loans, versus $14.2 million, or 1.23%, at year-end. Q1 provision was $646,000; net charge-offs were $5,000.
- Nonperforming assets declined to $4.3 million, or 0.30% of assets, from $5.0 million, or 0.38%, at year-end. Nonaccrual loans were $3.4 million; foreclosed real estate was $0.9 million. Recorded troubled debt restructurings were $6.4 million, and two nonaccrual TDRs totaled $1.1 million.
- The investment securities portfolio increased to $108.5 million from $50.8 million at year-end, primarily reflecting purchases. The company held a Puerto Rico COFINA bond with $995,000 cost and $607,500 market value; it had not recorded an other-than-temporary impairment but warned that Puerto Rico restructuring and moratorium developments could affect future valuation.
Outlook, risks, contingencies, and unusual items
The filing gives no specific earnings or growth guidance. Management described a strategy centered on customer service, organic growth, strategic acquisitions, scalable infrastructure, and risk management. It cautioned that interim results may not indicate full-year results and that forward-looking statements are subject to risks and uncertainties.
Management reported that the company remained liability-sensitive to interest-rate changes. Its simulations showed estimated net interest income declines under the disclosed parallel rate scenarios; economic value of equity was estimated to decline 17.5% for a 200-basis-point increase and 26.3% for a 300-basis-point increase. Management said results remained within internal policy limits. Interest-rate swaps hedged $100 million of FHLB advances; the swaps’ quarter-end fair-value liability was $1.7 million, and the after-tax unrealized swap loss in other comprehensive income was $915,000.
Credit risks include the company’s concentration in commercial real estate and exposure to property values in its Connecticut markets. Construction lending also carries project completion, cost, and repayment risks. The filing identifies the allowance for loan losses, stock-based compensation, and derivative valuation as estimates particularly susceptible to near-term change. Management said no material loss was expected from pending legal proceedings and reported no material changes to previously disclosed risk factors. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether commercial real estate growth and geographic concentration remain consistent with underwriting standards, and whether delinquency, nonaccrual, and credit-quality trends continue to improve.
- The adequacy of the loan-loss allowance as the portfolio grows, including the assumptions and judgments used to estimate probable losses.
- Developments affecting the Puerto Rico COFINA bond, including any impairment assessment or change in fair value.
- Deposit pricing, time-deposit maturities, brokered deposits, and reliance on FHLB advances, and their effects on funding costs and net interest margin.
- Whether liquidity, capital ratios, commitments, and interest-rate exposure remain within management’s stated expectations and regulatory requirements.