Bankwell Financial Group, Inc. — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; the filing also presents unaudited fourth-quarter results. Bankwell is a Connecticut bank holding company serving businesses and consumers primarily in Fairfield and New Haven Counties.
Financial performance and condition
| Metric | 2016 | 2015 |
|---|---|---|
| Net interest income | $49.1 million | $42.8 million |
| Net income | $12.35 million | $9.03 million |
| Diluted EPS | $1.62 | $1.21 |
| Net interest margin | 3.54% | 3.77% |
| Efficiency ratio | 56.5% | 62.3% |
| Total assets | $1.629 billion | $1.330 billion |
| Gross loans | $1.366 billion | $1.148 billion |
| Deposits | $1.289 billion | $1.047 billion |
| FHLB advances | $160.0 million | $120.0 million |
| Shareholders’ equity | $145.9 million | $131.8 million |
- Net interest income rose 14.7%, supported by loan growth; higher deposit costs and subordinated-debt expense contributed to a 23-basis-point decline in net interest margin.
- Provision for loan losses was $3.9 million, up from $3.2 million, primarily reflecting loan growth. Allowance was $18.0 million, or 1.32% of loans, versus $14.2 million, or 1.23%.
- Noninterest income fell 23% to $2.7 million, mainly because loan-sale gains and fees declined. Noninterest expense increased 1% to $29.5 million.
- Net cash provided by operating activities was $17.8 million. Investing activities used $292.1 million, primarily for net loan growth and securities purchases; financing activities provided $282.1 million, largely from deposit growth and FHLB advances. Cash and cash equivalents ended the year at $96.4 million.
- Bank regulatory capital remained above well-capitalized thresholds: total risk-based capital 12.85%, Tier 1 risk-based capital 11.59%, and Tier 1 leverage 10.10%. Tangible common equity ratio was 8.78%, down from 9.68%.
- At year-end, nonperforming assets were $3.2 million, or 0.20% of assets, compared with $5.0 million, or 0.38%, in 2015. Net charge-offs were $101,000, or 0.01% of average loans.
Material changes and notable items
- Assets grew 22% year over year, primarily from organic loan growth. Commercial real estate loans increased 21% to $845.3 million and represented 61.9% of gross loans; commercial business loans rose to $215.9 million.
- Deposits increased 23%. Time deposits reached $601.9 million and 46.7% of deposits; management cited promotional pricing and a higher-cost deposit mix. The weighted-average cost of deposits increased to 0.86% from 0.73%.
- Noninterest income included a $115,000 net loss on securities sales, principally the sale of a Puerto Rico COFINA bond, and a $128,000 gain on foreclosed real estate sales. Loan-sale gains and fees were $466,000, versus $1.1 million in 2015.
- The company purchased an additional $9.0 million of bank-owned life insurance in fourth-quarter 2016; year-end BOLI was $33.4 million.
- Quarter-four net income was $3.32 million, versus $2.62 million in fourth-quarter 2015; diluted EPS was $0.43 versus $0.35.
- Common dividends declared totaled $0.22 per share in 2016, including an increase to $0.07 per share for the fourth quarter.
Outlook, risks and contingencies
The filing provides no quantified earnings, revenue, or growth guidance. Management describes a strategy focused on organic growth, relationship banking, selective acquisitions, scalable operations, and disciplined risk management. It attributes 2016 earnings growth mainly to organic loan expansion and notes continued pressure on margins from funding costs and competition for deposits.
- Credit exposure is concentrated in real estate: approximately 84% of loans were real-estate related. Commercial real estate, construction, and commercial business lending carry greater risks than residential lending; management also cautions that rapid portfolio growth leaves many loans relatively unseasoned.
- The five largest borrowing relationships totaled approximately 13% of the loan portfolio. Local economic weakness or falling property values could disproportionately affect the company.
- Interest-rate simulations showed liability sensitivity. Under a +300-basis-point parallel shock, modeled net interest income declined 6.78% and economic value of equity declined 31.3%; these are scenario estimates, not forecasts.
- Commitments to extend credit totaled $168.4 million. Contractual obligations included $160.0 million of FHLB advances, $25.5 million of subordinated debt, and $601.9 million of time deposits.
- Subordinated notes carry a 5.75% fixed coupon, are non-callable for five years, and mature in 2025. Bank dividend capacity and growth are subject to regulatory capital and approval constraints.
- Management reported no legal proceedings expected to have a material adverse effect. The auditor issued an unqualified opinion on the financial statements; the audit report did not express an opinion on internal control effectiveness.
Most important facts for investors to verify
- Whether commercial real estate and large-borrower concentrations remain within underwriting limits as the loan book expands.
- Whether the allowance for loan losses remains adequate as the portfolio seasons and credit conditions change.
- Deposit retention, time-deposit maturities, funding costs, and the resulting direction of net interest margin.
- Actual results against the interest-rate-risk scenarios, particularly the modeled decline in economic value of equity under rising rates.
- The sustainability of organic loan growth, operating efficiency, and earnings given lower loan-sale income and higher funding costs.
- Regulatory capital and liquidity headroom, including the effect of future growth, dividends, and off-balance-sheet commitments.