Business context and reporting period
Bankwell Financial Group, Inc. is a Connecticut bank holding company serving commercial and retail customers, primarily in Fairfield County. This unaudited Form 10-Q covers the quarter and nine months ended September 30, 2014; balance-sheet comparisons are with December 31, 2013. Results include the Wilton acquisition completed in November 2013, but exclude Quinnipiac Bank & Trust, acquired October 1, 2014.
Key financial metrics
| Metric | Q3 2014 | Q3 2013 | Nine months 2014 | Nine months 2013 |
|---|---|---|---|---|
| Net interest income | $7.6 million | $6.4 million | $21.9 million | $18.7 million |
| Provision for loan losses | $566,000 | $47,000 | $847,000 | $489,000 |
| Noninterest income | $757,000 | $1.1 million | $2.2 million | $2.9 million |
| Noninterest expense | $5.5 million | $5.3 million | $17.5 million | $15.0 million |
| Net income | $1.5 million | $1.3 million | $3.8 million | $3.8 million |
| Net income attributable to common shareholders | $1.4 million | $1.3 million | $3.7 million | $3.7 million |
| Diluted EPS | $0.22 | $0.37 | $0.72 | $1.10 |
| FTE net interest margin | 3.69% | 4.00% | 3.78% | 4.04% |
At September 30, total assets were $895.5 million, up 15% from year-end 2013. Loans receivable, net, were $730.1 million; gross loans before deferred fees were $742.1 million, up 17% from year-end. Deposits were $695.3 million, up $33.7 million. Shareholders’ equity was $118.5 million, compared with $69.5 million at year-end, principally reflecting $44.7 million of net IPO proceeds.
For the first nine months, operating cash flow was $1.9 million, investing cash outflow was $159.9 million, and financing cash inflow was $111.6 million. Cash and cash equivalents decreased $46.4 million to $35.6 million. Available-for-sale securities were $67.5 million. FHLB advances were $77.0 million, up from $44.0 million at year-end.
The allowance for loan losses was $9.6 million, or 1.28% of total loans, versus $8.4 million, or 1.33%, at year-end. Nonperforming assets were $2.1 million (0.23% of assets), including $1.2 million of nonaccrual loans and $829,000 of foreclosed real estate. The Bank reported regulatory capital ratios of 15.27% total capital to risk-weighted assets, 14.02% Tier 1 risk-based capital, and 11.93% Tier 1 leverage; it was categorized as well-capitalized.
Management reported Q3 return on average assets of 0.67% and return on average equity of 5.02%, compared with 0.75% and 8.23%, respectively, a year earlier. Nine-month returns were 0.62% and 5.84%, versus 0.78% and 8.30%.
Material changes versus comparable periods
- Quarterly net interest income increased 18.8%, and nine-month net interest income increased 16.9%, mainly on loan and securities growth. Lower asset yields and a higher proportion of cash after the IPO reduced FTE margin by 31 basis points in the quarter and 26 basis points for the nine-month period.
- Common net income increased modestly in Q3 and was nearly unchanged for the nine-month period, while diluted EPS fell as the share count increased following the IPO.
- Noninterest income declined 30% in Q3 and 23% for the nine months. Lower loan-sale gains were the principal quarterly factor; the year-to-date comparison also includes a $648,000 securities-sale gain in 2013 that did not recur.
- Noninterest expense rose 4% in Q3 and 16% year to date, reflecting occupancy, technology, staffing, data-processing and acquisition-related costs. Nine-month acquisition expenses were $408,000.
- The loan portfolio expanded, particularly commercial real estate. The company recorded a $566,000 Q3 provision, compared with $47,000 a year earlier; nine-month net recoveries were $323,000.
Outlook, risks, contingencies and unusual items
- Management said it expects modestly lower net interest margins in the near term: yields on new loans and runoff of higher-yielding loans may outweigh savings in funding costs. No specific earnings or revenue guidance was provided.
- Liquidity sources include deposits, FHLB advances, securities cash flows and loan repayments. At quarter-end, the company had $35.6 million cash and $67.5 million in available-for-sale securities, against $59.9 million of commitments to originate loans and $105.2 million of undisbursed credit lines. Time deposits of $164.4 million were due within one year. Management expected sufficient funds to meet current commitments.
- Credit exposure is concentrated geographically in Connecticut and includes substantial commercial real estate lending. Management identified construction lending and property-value changes as credit risks. It judged the $383,000 of gross unrealized securities losses to be temporary and attributed them to market conditions, not credit deterioration.
- Recorded troubled debt restructurings were $2.1 million at September 30; the filing says all were performing under modified terms. It also reports $1.1 million of TDR loans with a payment default during the three- or nine-month periods, warranting review of the underlying detail.
- The May 2014 IPO issued 2,702,703 shares at $18.00 per share and generated approximately $44.7 million net proceeds. The company said proceeds could support liquidity, bank capital, growth and acquisitions.
- Quinnipiac was acquired October 1, 2014 for 510,122 Bankwell shares and $3.6 million cash. At September 30 it had approximately $117.8 million in assets, $97.1 million in loans and $100.4 million in deposits. Purchase accounting values remained under evaluation; the company anticipated approximately $1.1 million of additional acquisition expenses in Q4.
- The company’s CEO and president resigned effective August 7, 2014. Executive Chairman Blake S. Drexler assumed those responsibilities while the company searched for a permanent CEO; the filing notes he had no prior experience as a depository-institution executive officer.
- Management said no material loss was expected from pending legal proceedings. Disclosure controls were deemed effective, and no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether loan growth, commercial real estate concentration, criticized loans and TDR payment defaults affect subsequent credit costs and allowance adequacy.
- Whether margin compression continues and how loan pricing, deposit costs, cash deployment and FHLB funding affect net interest income.
- Quinnipiac’s final purchase accounting, integration costs, acquired credit quality and contribution to results beginning in Q4 2014.
- Leadership-transition developments and any effect on customer, depositor or employee relationships.
- Capital and dilution implications, including the IPO share issuance, outstanding warrants and restrictions on dividends.