Bankwell Financial Group, Inc. — Q2 2014 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2014. Financial statements are unaudited; dollar figures below are in millions unless otherwise noted. Bankwell is a Connecticut community bank focused on commercial and consumer customers in Fairfield County.
Financial results and position
| Metric | Q2 2014 | Q2 2013 | Six months 2014 | Six months 2013 |
|---|---|---|---|---|
| Net interest income | $7.15 | $6.25 | $14.29 | $12.33 |
| Provision for loan losses | $0.07 | $0.25 | $0.28 | $0.44 |
| Noninterest income | $0.68 | $1.52 | $1.45 | $1.81 |
| Noninterest expense | $5.90 | $5.13 | $11.94 | $9.73 |
| Net income | $1.23 | $1.47 | $2.35 | $2.48 |
| Net income attributable to common shareholders | $1.17 | $1.42 | $2.24 | $2.39 |
| Diluted EPS | $0.23 | $0.42 | $0.51 | $0.72 |
- Net interest margin, fully taxable equivalent, was 3.68% in Q2 and 3.82% for the first half, down from 3.97% and 4.03%, respectively, in the comparable 2013 periods. Management attributed the decline to the low-rate environment and excess cash following the IPO.
- Management reported Q2 return on average assets of 0.58% and return on average equity of 5.46%, versus 0.90% and 9.71% a year earlier. First-half returns were 0.59% and 5.93%, versus 0.80% and 8.34%.
- At June 30, total assets were $901.8, loans before deferred fees were $682.6, deposits were $730.2, and shareholders’ equity was $117.2. Compared with December 31, 2013, assets rose 16%, loans 8%, deposits 10%, and equity from $69.5, primarily reflecting the IPO.
- Cash and due from banks totaled $130.5; available-for-sale securities were $49.1. FHLB advances were $47.0, compared with $44.0 at year-end. Six-month cash flows were $1.0 provided by operations, $69.0 used in investing, and $116.5 provided by financing; cash increased $48.5 to $130.5.
- The allowance for loan losses was $9.0, or 1.32% of loans, compared with $8.4, or 1.33%, at year-end. Nonperforming assets were $1.94, or 0.22% of assets; nonaccrual loans were $1.11. The filing reports $1.29 of acquired loans more than 90 days past due but still accruing.
- The Bank was reported as well capitalized: total risk-based capital 16.48%, Tier 1 risk-based capital 15.23%, and Tier 1 leverage 12.49% at June 30.
Material changes and notable items
- Net interest income increased 14% in Q2 and 16% in the first half, supported by loan growth. Average loans rose $81.1 in Q2 and $97.7 in the first half year over year; commercial real estate and commercial business lending were major contributors.
- Net income declined year over year in both periods. Q2 noninterest income fell 55%, largely because 2013 included a $0.65 securities-sale gain and higher loan-sale gains. Noninterest expense rose 15% in Q2 and 23% in the first half, led by higher staffing, occupancy and equipment, data processing, and merger-related costs.
- On May 20, Bankwell completed its IPO of 2,702,703 shares at $18 per share, receiving approximately $44.7 net proceeds. The shares began trading on Nasdaq; proceeds were intended for general corporate purposes, bank capital, growth, liquidity, and potential acquisitions.
- The company has a pending agreement to acquire Quinnipiac Bank & Trust, expected to close in Q4 2014 subject to shareholder and regulatory approvals and other conditions. Stated consideration is approximately $15 million, with a planned 75% stock/25% cash mix; expected change-in-control payments are approximately $0.63 million. Bankwell also expected a Norwalk branch to open in Q4 2014.
- Recorded troubled debt restructurings were $3.4 at June 30; all were reported performing under modified terms. The filing also reports $1.1 of loans modified as TDRs that experienced payment default during the period.
- Management said it expects modestly lower net interest margins in the near term as new loans yield less than runoff loans and the benefit from lower funding costs may not offset asset-yield pressure. No specific earnings or financial targets were provided.
Outlook, risks, and contingencies
- Credit exposure is concentrated in Fairfield County and commercial real estate; management specifically notes risks from local property-value declines and higher construction-loan risk. Management considered the allowance adequate and investment-security unrealized losses temporary.
- At June 30, loan-originating commitments were $84.1 and undisbursed approved credit lines were $49.8. Time deposits of $195.4 were scheduled to mature within one year. Management expected sufficient funds to meet current commitments.
- The company’s interest-rate position remained liability-sensitive, though management said sensitivity improved and remained within internal guidelines. A $25 million interest-rate swap was entered into in February to hedge an FHLB advance.
- Effective August 7, 2014, CEO and President Peyton R. Patterson resigned. The board appointed Executive Chairman Blake S. Drexler to assume her responsibilities while the company searches for a permanent CEO. The filing warns that the transition could affect results or relationships; Drexler had no prior experience as a depository-institution executive.
- Management expected no material loss from pending routine legal proceedings. The filing reports no material change to previously disclosed risk factors other than the CEO departure.
Important facts for investors to verify
- Progress and approvals for the Quinnipiac acquisition, its final consideration, integration costs, and expected change-in-control payments.
- CEO succession and any resulting impact on customer, depositor, employee, and investor relationships.
- Trends in net interest margin, deposit pricing, loan yields, operating expenses, and loan growth.
- Credit performance of acquired and TDR loans, including the $1.1 million reported payment default and acquired loans past due but accruing.
- Liquidity against credit commitments and near-term time-deposit maturities, and use of the IPO proceeds.
- The cover page marks “No” for having filed all required reports during the preceding 12 months; confirm the context for this response.