Bankwell Financial Group, Inc. — Q2 2016 Form 10-Q
Reporting period: Three and six months ended June 30, 2016. Bankwell is a Connecticut bank holding company serving commercial and consumer customers, primarily in Fairfield and New Haven Counties. Unless stated otherwise, dollar amounts below are in millions.
Financial performance and position
| Metric | Q2 2016 / June 30, 2016 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.90; diluted EPS $0.38 | Q2 2015: $2.29; $0.31 per diluted share |
| Six-month net income | $5.89; diluted EPS $0.78 | Six months 2015: $4.16; $0.57 per diluted share |
| Net interest income | Q2: $11.88; six months: $23.28 | Q2 2015: $10.74; six months 2015: $20.63 |
| FTE net interest margin | Q2: 3.50%; six months: 3.52% | Q2 2015: 3.97%; six months 2015: 3.93% |
| Assets | $1,516.1 | December 31, 2015: $1,330.4 |
| Loans, before deferred fees and allowance | $1,276.9 | December 31, 2015: $1,147.5 |
| Deposits | $1,180.6 | December 31, 2015: $1,046.9 |
| Allowance for loan losses | $16.1; 1.26% of loans | December 31, 2015: $14.2; 1.23% |
| Cash and cash equivalents | $94.7 | December 31, 2015: $88.6 |
| FHLB advances / subordinated debentures | $165.0 / $25.0 | December 31, 2015: $120.0 / $25.0 |
- Q2 net income increased about 27% year over year; six-month net income increased about 42%. Six-month return on average assets was 0.85% and return on average equity was 8.77%, versus 0.75% and 6.36% a year earlier.
- Net interest income rose as loan growth increased interest income, but FTE margin contracted. Management attributed the pressure to lower yields on new loans, higher promotional deposit rates and the 5.75% subordinated notes issued in 2015.
- For the six months, operating cash flow was $6.9; investing cash outflow was $179.0, principally reflecting loan growth and securities purchases; financing cash inflow was $178.2, including deposit growth and $45.0 of additional FHLB advances. Cash increased $6.1.
- Noninterest expense was $7.2 in Q2 and $14.3 for six months, broadly flat to slightly lower year over year. The six-month provision for loan losses rose to $1.95 from $1.39.
- The company paid common dividends of $0.05 per share in each quarter; six-month dividends were $0.10 per share.
Material changes and credit quality
- Assets increased 14.0% from year-end 2015; loans grew $129.4, or 11.3%, led by commercial real estate, up $87.5. Deposits grew $133.6, including a $107.0 increase in time deposits. Brokered deposits were $76.6.
- Nonperforming assets declined to $4.1, or 0.27% of assets, from $5.0, or 0.38%, at year-end. Nonaccrual loans were $3.6; net charge-offs were minimal.
- Commercial real estate represented 61.5% of the loan portfolio. Management said asset quality remained strong and considered the $16.1 allowance adequate, while noting that allowance estimates involve judgment.
- Shareholders’ equity was $137.1, but equity to assets declined to 9.04% from 9.90%. The Bank reported well-capitalized ratios at June 30: common equity Tier 1 11.76%, total capital 13.01%, and Tier 1 leverage 10.59%.
Outlook, risks and unusual items
- The filing provides no quantified earnings or growth guidance. Management stated it expected sufficient funds to meet current loan and other commitments.
- Liquidity included $94.7 of cash and $83.8 of available-for-sale securities. Loan commitments were $51.7 and undisbursed approved credit lines were $138.8; time deposits of $305.8 were scheduled to mature within one year.
- Interest-rate simulations showed the company remained liability sensitive. A parallel +200 basis-point shock was estimated to reduce one-year net interest income by 2.33%; economic value of equity was estimated to decline 19.5%. Management said results remained within internal policies.
- The investment portfolio included a Puerto Rico COFINA bond with $995 thousand cost and $695 thousand market value, rated two levels below investment grade. The company had not recognized impairment but said Puerto Rico’s debt moratorium, restructuring uncertainty and PROMESA oversight process could affect future valuation and impairment assessments.
- Management identified geographic and commercial real estate concentration as risks; local property-value declines could materially affect results. Other key estimates include the loan-loss allowance, stock compensation and derivative valuation.
- Management reported no material changes to previously disclosed risk factors, no expected material loss from pending legal proceedings, and effective disclosure controls. The filing states that interim results are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether loan growth and deposit growth can be sustained without further margin compression or increased funding costs.
- Commercial real estate and construction underwriting, concentrations, delinquency trends, and the adequacy of the allowance as the portfolio expands.
- Developments affecting the Puerto Rico COFINA bond, including recoveries, market value and any impairment charge.
- Deposit pricing and retention, brokered-deposit reliance, near-term certificate maturities, and the use and cost of FHLB funding.
- Interest-rate sensitivity assumptions and capital headroom, particularly given the reported liability-sensitive position and decline in equity-to-assets ratio.