Bankwell Financial Group, Inc. — Q2 2015 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2015; balance-sheet comparisons are with December 31, 2014. Bankwell is a Connecticut bank holding company serving commercial and retail customers principally in Fairfield and New Haven Counties. Its business is conducted through Bankwell Bank. The October 2014 Quinnipiac acquisition is included in 2015 results but not in the 2014 comparable periods, limiting year-over-year comparability.
Financial results and condition
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net interest income | $10.7 million | $7.1 million | $20.6 million | $14.3 million |
| Provision for loan losses | $654,000 | $70,000 | $1.4 million | $282,000 |
| Noninterest income | $854,000 | $682,000 | $1.5 million | $1.5 million |
| Noninterest expense | $7.4 million | $5.9 million | $14.4 million | $11.9 million |
| Net income | $2.3 million | $1.2 million | $4.2 million | $2.4 million |
| Diluted EPS | $0.31 | $0.23 | $0.57 | $0.51 |
| FTE net interest margin | 3.97% | 3.68% | 3.93% | 3.82% |
- Q2 net income attributable to common shareholders was $2.26 million; six-month common income was $4.10 million. Management reported Q2 returns on average equity/assets of 6.91%/0.80%, and six-month returns of 6.36%/0.75%.
- At June 30, assets were $1.215 billion, up 10.5% from year-end; net loans were $1.022 billion and deposits were $951.6 million. Total loans before allowance and deferred fees grew $107.4 million from year-end, led by commercial real estate (CRE), up $105.8 million.
- Cash and due from banks was $75.6 million; available-for-sale securities were $46.9 million. FHLB advances were $124 million, down $5 million from year-end. Shareholders’ equity was $133.7 million, versus $129.2 million; equity/assets was 11.0%, versus 11.8%.
- For the six months, operating cash flow was $6.9 million, investing cash use was $91.3 million, and financing cash flow was $111.4 million. Cash increased $27.0 million to $75.6 million.
- The allowance for loan losses was $12.23 million, or 1.18% of loans, versus $10.86 million, or 1.17%, at year-end. Nonperforming assets were $2.9 million (0.24% of assets), down from $4.3 million (0.39%). Nonaccrual loans were $2.1 million; TDRs totaled $7.4 million and were reported performing under modified terms.
- The Bank’s June 30 regulatory ratios included 11.44% common equity Tier 1/risk-weighted assets, 12.59% total capital/risk-weighted assets, and 10.71% Tier 1 capital/average assets. Management said the Bank met capital requirements and was well-capitalized.
Material changes versus comparable periods
- Net interest income rose 50.3% in Q2 and 44.4% for the first half, reflecting substantial loan growth and a shift toward higher-yielding CRE and commercial business loans. Management also cited higher loan prepayment penalties, concentrated in Q2, as a contributor to margin expansion.
- Interest expense rose 83.6% in Q2 and 87.8% for the first half, driven by higher average funding balances and deposit pricing, including promotional rates. Loan growth and deposit growth also reflect the larger post-acquisition franchise; 2014 comparisons do not include Quinnipiac.
- The loan-loss provision increased materially year over year. For the first half, CRE-related allowance provision was $1.35 million; management cited its assessment of portfolio risk and probable losses.
- Noninterest expense increased 25% in Q2 and 20% for the first half. Salaries and benefits and occupancy/equipment were key drivers; staffing rose from 104 to 129 FTE employees year over year, and costs included Quinnipiac branches and a new Norwalk branch.
- First-half noninterest income was flat despite higher service charges and bank-owned life insurance income; lower loan-sale gains and other income offset those increases.
Outlook, commentary, risks and unusual items
- No quantified earnings or revenue guidance was provided. Management’s stated strategy emphasizes organic growth, strategic acquisitions, scalable infrastructure, customer service, and disciplined risk management. Management anticipated adequate funding for current commitments.
- Liquidity demands include $59.9 million of commitments to originate loans, $120.1 million of undisbursed credit lines, and $224.0 million of time deposits scheduled to mature within one year. Management noted that historically a significant portion of maturing deposits remained with the Bank.
- Credit exposure is concentrated in CRE and in the Connecticut market; management warned that regional property-value declines could materially affect the company. Construction lending carries additional completion, cost, and repayment risks. CRE comprised approximately 60% of the loan portfolio.
- Interest-rate risk remained liability-sensitive. Management said the sensitivity increased during the quarter, partly due to rate-sensitive savings inflows and replacing $25 million of one-way brokered CDs with floating-rate brokered accounts. The Bank remained within internal limits.
- Series C preferred stock paid a 1.0% dividend rate, scheduled to reset to 9.0% in Q2 2016. The company had not declared common dividends. Existing warrants, if fully exercised during the extended October 1–December 1, 2015 window, could provide $4.3 million and issue 304,640 shares.
- A Form S-3 filed July 29, 2015 would permit offerings of up to $50 million of securities once effective; it is a financing capacity, not an announced issuance. Management identified no subsequent events requiring financial-statement adjustment or note disclosure through August 10, 2015.
- Unrealized investment-security losses were considered temporary by management. The filing reported a $778,000 pretax Q2 unrealized loss on available-for-sale securities, partly offset in other comprehensive income by swap gains.
- Management reported no material change in previously disclosed risk factors, no expected material loss from pending legal proceedings, and effective disclosure controls.
Important facts for investors to verify
- Whether loan growth—especially CRE growth—can be sustained without deterioration in delinquency, criticized-loan, charge-off, or allowance trends; review the full credit-quality disclosures and concentration limits.
- How much of the earnings and margin improvement came from prepayment penalties and acquisition-related scale, and whether operating costs continue to grow faster than recurring revenue.
- Deposit pricing, mix, brokered funding, and retention of the $224 million of time deposits maturing within one year; compare funding costs with loan yields.
- The impact of the 2016 preferred-stock dividend reset, potential warrant dilution, and any securities offering under the $50 million shelf registration.
- Exposure to interest-rate changes and whether actual results remain consistent with the filing’s modeled sensitivity, which depends on assumptions about deposit behavior and loan prepayments.