Bankwell Financial Group, Inc. — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017. Unaudited consolidated results. Unless otherwise noted, amounts are in U.S. dollars; financial statement amounts below are rounded to millions.
Business context
Bankwell is a Connecticut bank holding company serving commercial and retail customers primarily in the New York metropolitan area, particularly Fairfield and New Haven Counties. Lending is concentrated in commercial real estate, with deposits the principal funding source.
Financial results and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income | $13.6 million | $11.9 million | $26.6 million | $23.3 million |
| Provision for loan losses | $0.9 million | $1.3 million | $1.4 million | $1.9 million |
| Noninterest income | $1.0 million | $0.9 million | $2.3 million | $1.5 million |
| Noninterest expense | $7.6 million | $7.2 million | $15.8 million | $14.3 million |
| Net income | $3.8 million | $2.9 million | $7.5 million | $5.9 million |
| Diluted earnings per share | $0.49 | $0.38 | $0.97 | $0.78 |
- Q2 return on average assets was 0.88% and return on average equity was 9.89%; for the six-month period, 0.90% and 10.00%, respectively.
- Fully taxable equivalent net interest margin was 3.32% in Q2 and 3.34% for the first half, down 18 basis points year over year in each comparison.
- At June 30, total assets were $1.756 billion, net loans $1.463 billion, deposits $1.414 billion, and shareholders’ equity $153.6 million. Compared with December 31, 2016, assets increased 7.8%, loans before fees and allowance increased 8.8%, and deposits increased $125.2 million.
- Six-month operating cash flow was $9.8 million; investing activities used $135.1 million, mainly reflecting loan growth; financing activities provided $114.9 million. Cash and cash equivalents ended at $86.0 million, down from $96.4 million at year-end.
- Funding included $150.0 million of FHLB advances and $25.1 million of subordinated debentures. The notes bear fixed interest at 5.75%, are non-callable for five years, and mature in 2025.
Material changes and credit quality
- Higher average earning-asset balances, mainly from commercial real estate and commercial business lending, lifted net interest income. However, deposit repricing increased funding costs: interest expense rose 42.9% in Q2 and 38.6% for the first half, contributing to margin compression.
- Noninterest income rose 17% in Q2 and 48% for the first half, supported by bank-owned life insurance income, loan-sale gains and fees, and rental income. Noninterest expense increased 5% and 11%, respectively; management cited strategic initiative fees, occupancy and IT costs, headquarters expenses, and higher staffing.
- Commercial real estate loans increased $57.8 million and commercial business loans increased $53.4 million from year-end. The portfolio remains heavily concentrated in commercial real estate and in the local market.
- The allowance for loan losses was $19.5 million, or 1.31% of loans, versus $18.0 million, or 1.32%, at year-end. Six-month net recoveries were $116,000. Nonperforming assets increased to $5.5 million, or 0.31% of assets, from $3.2 million, or 0.20%; nonaccrual loans increased to $5.3 million from $2.9 million. Past-due loans totaled $3.4 million.
- Capital remained above regulatory well-capitalized thresholds: Bank common equity Tier 1 was 10.91%, total risk-based capital 12.16%, and Tier 1 leverage 9.75%. Consolidated equity-to-assets was 8.75%, down from 8.96% at year-end.
Liquidity, outlook and risks
- Management stated it expects sufficient funds to meet current loan and other commitments. At quarter-end, cash and equivalents were $86.0 million and available-for-sale securities were $91.0 million. Loan origination commitments were $111.3 million, undisbursed credit lines $121.3 million, and time deposits maturing within one year $356.1 million.
- No earnings or margin guidance was provided. The filing notes that interim results may not indicate full-year results.
- Interest-rate risk: management characterized the company as liability-sensitive. In the +200 basis-point parallel shock scenario, estimated one-year net interest income declined 5.35%; estimated economic value of equity declined 24.4%. These are model estimates subject to assumptions about rates, deposits, prepayments and balance-sheet behavior.
- Key risks include local real-estate values, commercial real estate and construction lending, deposit competition and rising funding costs, and reliance on estimates for credit reserves and valuations. Management reported no material change in previously disclosed risk factors.
- Unusual items: the company established servicing assets and liabilities related to prior loan sales and participations in Q2, recording approximately $0.1 million of pretax interest income and $0.1 million of pretax noninterest income. The effective tax rate increased to 38.8% for Q2 and 35.6% for the first half; management attributed the increase to tax-return adjustments related to acquisition items and increased out-of-state lending, describing it as temporary.
- Management expected no material loss from pending routine legal proceedings. No subsequent event requiring recognition or disclosure was reported.
Important facts for investors to verify
- Whether loan growth and higher interest income can offset deposit repricing and sustain net interest margin.
- Developments in nonaccrual loans, nonperforming assets, criticized loan categories and the adequacy of the allowance, especially in commercial real estate and commercial business lending.
- Funding and liquidity trends, including brokered deposits, near-term certificate maturities, credit commitments and use of FHLB advances.
- Whether modeled interest-rate sensitivity and capital levels remain appropriate as rates and deposit behavior change.
- The ongoing costs and benefits of strategic initiatives, headquarters/occupancy spending, and the servicing-related accounting effects.