Business context and reporting period
Bankwell Financial Group, Inc. is a Connecticut bank holding company serving businesses and consumers primarily in Fairfield County, with operations expanded into New Haven County through its October 1, 2014 acquisition of Quinnipiac Bank and Trust Company. This 10-K covers the fiscal year ended December 31, 2014; the financial statements were audited, and the auditor issued an unqualified opinion. The company completed its IPO in May 2014, raising approximately $44.7 million net.
Key financial results and position
Unless otherwise indicated, amounts are in U.S. dollars; balance-sheet figures are as of December 31.
| Metric | 2014 | 2013 |
|---|---|---|
| Total revenue (net interest income plus noninterest income) | $34.7 million | $30.1 million |
| Net interest income | $31.7 million | $25.3 million |
| Net income | $4.6 million | $5.2 million |
| Net income attributable to common shareholders | $4.5 million | $5.1 million |
| Diluted EPS | $0.78 | $1.44 |
| Net interest margin | 3.84% | 3.94% |
| Efficiency ratio | 69.09% | 75.71% |
| Total assets | $1.10 billion | $779.6 million |
| Gross loans | $929.8 million | $632.0 million |
| Deposits | $835.4 million | $661.5 million |
| FHLB borrowings | $129.0 million | $44.0 million |
| Shareholders’ equity | $129.2 million | $69.5 million |
Net interest income rose 25% as loan growth more than offset lower asset yields and higher funding costs. Provision for loan losses increased to $2.2 million from $585,000. Noninterest income fell to $3.0 million from $4.7 million, as 2013 included a $1.3 million Wilton acquisition gain and $648,000 of securities gains. Noninterest expense increased 17% to $25.8 million, including $1.8 million of merger-related expense. Return on average assets was 0.52% (0.77% in 2013); return on average equity was 4.66% (8.17%).
Operating cash flow was $9.2 million; investing cash flow was negative $238.7 million and financing cash flow was positive $196.1 million. Cash and cash equivalents declined $33.5 million to $48.6 million. Management reported liquidity sources of $578.7 million, or 53% of assets. The Bank’s capital ratios were 13.55% total risk-based, 12.47% Tier 1 risk-based and 11.12% Tier 1 leverage; it was categorized as well capitalized under applicable 2014 standards. The tangible common equity ratio was 10.47%.
Material changes versus the prior comparable period
- Assets increased 41%, loans 47%, and deposits 26%, reflecting organic growth and the Quinnipiac acquisition. Quinnipiac contributed approximately $97.9 million of loans and $100.6 million of deposits at acquisition; the company recorded $2.6 million of goodwill.
- Common earnings declined despite higher net interest income: net income fell 11%, and diluted EPS fell to $0.78 from $1.44. The IPO and acquisition-related share issuance substantially increased the weighted-average share count.
- Net interest margin contracted 10 basis points to 3.84%. Management attributed this to lower yields on new loans and runoff of higher-yielding balances; deposit costs rose as the funding mix shifted toward time deposits.
- Asset quality measures weakened from 2013 levels: nonperforming assets rose to $4.3 million, or 0.39% of assets, from $1.8 million, or 0.23%. The allowance was $10.9 million, 1.17% of loans, down from 1.33%; the company attributed the ratio decline partly to acquired loans recorded at fair value without a transferred allowance.
- At year-end, $3.4 million of loans were nonaccrual, $8.0 million were past due, and $9.3 million were identified as potential problem loans. Acquired purchased-credit-impaired loans of $1.9 million were more than 90 days past due but were excluded from reported nonperforming assets under the accounting treatment described in the filing.
Outlook, management commentary, risks and unusual items
No formal earnings or growth guidance is provided. Management expected modestly lower net interest margins in the near term, citing low market rates, loan repricing and runoff of higher-yielding assets. Its stated strategy emphasizes organic growth, acquisitions, scalable operations and disciplined risk management. A Norwalk branch opened March 1, 2015.
- Credit and concentration: Approximately 84% of loans were real-estate related; commercial real estate was 56% of gross loans. Non-owner-occupied commercial real estate loans were reported at $396.2 million. The five largest borrower relationships totaled approximately 11% of loans, and the loan portfolio was relatively unseasoned.
- Interest-rate risk: Management characterized the balance sheet as liability sensitive. Its simulations estimated that a parallel 200-basis-point rate increase would reduce one-year net interest income by 5.61%; actual results may differ because simulations depend on behavioral and other assumptions.
- Funding: Time deposits, including CDARS, and short-term FHLB advances increased. Approximately $239.8 million of time deposits and CDARS balances of at least $100,000 were outstanding; $109 million of FHLB advances were due within one year.
- Acquisition and accounting matters: Quinnipiac integration, acquired-loan valuations, goodwill and the allowance for loan losses involve execution risk and significant estimates. The 2014 provision increase reflected portfolio growth; acquired loans had no carried-over allowance at acquisition.
- Regulatory and capital matters: Basel III requirements began phasing in January 2015. The Bank also expected additional FDIC internal-control reporting and auditor-attestation requirements for 2015. The company said it expected to meet Basel III minimum capital requirements.
- Preferred stock: The $11.0 million SBLF Series C preferred stock carried a 1% dividend rate; the filing describes a 9% step-up in 2016 and also states repayment was due by February 4, 2016. Confirm the precise applicable dates and terms.
- The company reported no material pending legal proceedings and no material change in internal control over financial reporting. Disclosure controls were deemed effective; an internal-control audit opinion was not provided under the applicable newly public company transition.
Most important facts for investors to verify
- Whether Quinnipiac integration delivers expected cost savings and growth, and how much of reported growth reflects acquisition versus organic activity.
- Subsequent trends in net interest margin, deposit pricing and mix, FHLB borrowing levels, and the company’s liability-sensitive rate exposure.
- Performance of the concentrated, relatively unseasoned commercial real estate and business loan books, including the $9.3 million potential-problem balance and past-due acquired loans.
- Adequacy of the loan-loss allowance and treatment, performance and cash-flow assumptions for acquired and purchased-credit-impaired loans.
- Liquidity and refinancing exposure, including the maturity of large time deposits and the $109 million of FHLB advances due within one year.
- The SBLF preferred stock’s repayment deadline, dividend step-up terms and resulting effect on capital and distributions.
- Progress on 2015 regulatory internal-control reporting and attestation requirements.