Bankwell Financial Group, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. Bankwell is a Connecticut bank holding company serving primarily commercial and retail customers in Fairfield and New Haven Counties. This unaudited filing covers the quarter and nine months ended September 30, 2016. Financial statement amounts below are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net interest income | $12.5 | $10.9 | $35.8 | $31.6 |
| Provision for loan losses | $1.2 | $1.5 | $3.2 | $2.9 |
| Noninterest income | $0.8 | $1.2 | $2.3 | $2.6 |
| Noninterest expense | $7.5 | $7.2 | $21.8 | $21.5 |
| Net income | $3.1 | $2.3 | $9.0 | $6.4 |
| Diluted earnings per share | $0.41 | $0.31 | $1.19 | $0.87 |
| Net interest margin, FTE | 3.57% | 3.67% | 3.54% | 3.83% |
- Quarterly net interest income rose 14.7%; net income available to common shareholders increased to $3.1 million from $2.2 million. Nine-month net income available to common shareholders was $9.0 million versus $6.3 million.
- Management attributed higher interest income mainly to loan growth, particularly commercial real estate and commercial business lending. Growth in funding costs, including deposit promotions and subordinated debt, compressed margins.
- At September 30, total assets were $1.566 billion, up 17.7% from December 31, 2015. Gross loans were $1.326 billion, up $178.7 million; deposits were $1.217 billion, up $170.0 million. Commercial real estate loans accounted for the largest loan growth.
- Cash and cash equivalents were $96.1 million; available-for-sale securities were $82.8 million. Nine-month operating cash flow was $11.4 million, investing cash outflow $228.1 million and financing cash inflow $224.2 million. The net increase in cash was $7.5 million.
- FHLB advances were $175.0 million, up from $120.0 million at year-end; subordinated debentures were $25.0 million. Total shareholders’ equity was $140.6 million, while equity-to-assets declined to 8.98% from 9.90% at year-end.
- Bankwell Bank reported a 11.64% common equity Tier 1 ratio, 12.89% total capital ratio and 10.45% Tier 1 leverage ratio. Management stated the Bank met regulatory capital requirements and qualified as well capitalized.
Changes, outlook and risks
- Net interest margin declined year over year, while net interest income increased on higher average earning-asset balances. Deposit pricing and the 5.75% subordinated notes issued in 2015 contributed to higher funding costs.
- Noninterest income fell 38% in Q3, principally because of lower gains and fees on loan sales and lower other income. Nine-month noninterest income declined 14%, partly offset by gains on sales of foreclosed real estate and securities.
- Loan-loss allowance increased to $17.3 million, or 1.30% of loans, from $14.2 million, or 1.23%, at year-end. Nonperforming assets were $3.9 million, or 0.25% of assets, versus $5.0 million, or 0.38%, at year-end. Nonaccrual loans were $3.6 million; no loans over 90 days past due were still accruing.
- Credit exposure is concentrated in commercial real estate and the Connecticut market; management notes local property-value declines could materially affect the company. Construction and commercial business lending carry additional repayment and collateral risks.
- Liquidity commitments included $46.6 million of loan origination commitments and $128.6 million of undisbursed approved credit lines. Time deposits of $369.3 million were scheduled to mature within one year. Management expected sufficient funds to meet current loan and other commitments.
- The company described itself as liability-sensitive to interest-rate changes but within internal risk limits. It reported no material change in previously disclosed risk factors, no expected material legal loss, and effective disclosure controls.
- After quarter-end, Bankwell sold its Puerto Rico COFINA bond on November 2, 2016, realizing a $251,600 loss. The board declared a subsequent-quarter dividend of $0.07 per share, up 40% from the prior quarterly dividend of $0.05. No formal earnings or financial guidance is provided.
Important facts for investors to verify
- Whether loan and deposit growth can continue without further margin compression or increased reliance on higher-cost funding.
- Credit trends in commercial real estate, construction and commercial business portfolios, and the adequacy of the allowance as the loan book expands.
- The effect of deposit repricing, rate changes and the company’s liability-sensitive position on net interest income and economic value of equity.
- The post-quarter COFINA sale loss and any continuing exposure to securities with credit or valuation concerns.
- Liquidity and funding implications of upcoming time-deposit maturities, credit commitments and increased FHLB advances.
- Regulatory capital headroom, including the phased-in capital conservation buffer, and the sustainability of the increased dividend.