Bankwell Financial Group, Inc. annual report, FY2015

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Business context and reporting period

Bankwell Financial Group, Inc. is a Connecticut bank holding company operating through Bankwell Bank, serving primarily Fairfield and New Haven Counties. This Form 10-K covers the fiscal year ended December 31, 2015; it is an annual report, not a standalone fourth-quarter filing. The filing also provides unaudited quarterly results.

Financial performance and position

  • Growth: Year-end assets were $1.330 billion, up 21% from $1.100 billion in 2014. Gross loans reached $1.148 billion, up 23%, and deposits were $1.047 billion, up 25%.
  • Earnings and revenue: Net income was $9.0 million versus $4.6 million; diluted EPS was $1.21 versus $0.78. Total revenue, as defined by the company, was $46.3 million, compared with $34.7 million. Net interest income rose to $42.8 million from $31.7 million.
  • Margins and expenses: Net interest margin narrowed to 3.77% from 3.84%. The efficiency ratio improved to 62.68% from 69.09%. Noninterest expense increased 13% to $29.2 million, largely reflecting staffing and occupancy costs.
  • Credit costs and quality: Provision for loan losses rose to $3.23 million from $2.15 million, primarily reflecting loan growth. The allowance was $14.2 million, or 1.23% of loans. Nonperforming assets were $5.0 million, or 0.38% of assets; net recoveries were $79,000.
  • Cash flow: Operating activities provided $14.2 million; investing activities used $194.6 million, including $218.8 million of net loan growth; financing activities provided $220.4 million. Cash and cash equivalents increased $40.0 million to $88.6 million.
  • Debt, liquidity and capital: Year-end funding included $120.0 million of FHLB advances and $25.0 million of subordinated debt (issued at $25.5 million principal, bearing 5.75% interest and maturing in 2025). Reported liquidity sources totaled $697.0 million, or 52% of assets. Bankwell Bank’s total risk-based capital ratio was 13.39%; its Tier 1 leverage ratio was 10.84%. Tangible common equity was 9.68% of tangible assets.

Material changes versus comparable periods

  • Annual net income nearly doubled, principally due to higher loan interest and fees from organic growth. Average loans increased 45%; FTE net interest income increased to $43.2 million from $32.1 million.
  • Funding costs rose: the weighted average deposit cost increased to 0.73% from 0.58%, and the net interest margin declined 7 basis points. The company attributed pressure to promotional deposit pricing and the new 5.75% subordinated notes.
  • Commercial real estate loans grew 34% to $697.5 million and represented 61% of gross loans; commercial and consumer real estate together represented about 85% of the portfolio.
  • The company issued subordinated notes, redeemed all $10.98 million of SBLF preferred stock, and declared its first common dividend, $0.05 per share. The Norwalk branch opened in 2015.
  • Fourth-quarter net income was $2.62 million, versus $0.73 million in fourth-quarter 2014; diluted EPS was $0.35 versus $0.10. Fourth-quarter provision was $0.35 million, compared with $1.31 million a year earlier.

Outlook, commentary, risks and unusual items

  • Outlook: The filing provides no numerical earnings or growth guidance. Management emphasizes organic growth, possible strategic acquisitions, operating efficiency and disciplined risk management, while cautioning that forward-looking statements are uncertain.
  • Key risks: Credit and collateral risk, especially from a fast-growing and relatively unseasoned commercial real estate-heavy portfolio; local economic concentration; large borrower exposures; interest-rate and funding-cost sensitivity; competition; acquisition execution; and regulatory, operational and cybersecurity risks. Management described the company as liability-sensitive, meaning rising rates could pressure net interest income under its modeled scenarios.
  • Credit watch items: Five largest borrower relationships represented about 14.3% of loans. Troubled debt restructurings increased to $7.3 million from $3.6 million; approximately $2.5 million of performing loans were identified as potential problem loans.
  • Unusual items and contingencies: The 2015 results included a $3.23 million loan-loss provision and the costs of the new subordinated debt and SBLF preferred redemption. A $1.0 million Puerto Rico COFINA bond was below investment grade; management considered its unrealized loss temporary, but noted Puerto Rico’s proposed debt restructuring could affect valuation. The company reported no litigation expected to have a material adverse effect. Consolidated financial statements received an unqualified audit opinion; management concluded disclosure controls were effective. The auditor did not opine on internal control over financial reporting.

Important facts for investors to verify

  1. Whether loan growth and earnings remain sustainable as the portfolio seasons, and how credit quality, problem loans and the allowance develop.
  2. Commercial real estate concentration, largest borrower exposures, and the company’s local-market concentration.
  3. Deposit mix and pricing, large time-deposit maturities, reliance on FHLB funding, and the effect of higher rates on margin and net interest income.
  4. Capital and liquidity after the subordinated debt issuance and preferred-stock redemption, including constraints on dividends and growth.
  5. The valuation and credit outlook for the Puerto Rico bond, and any material developments in regulatory, control or contingent-liability disclosures.