Bankwell Financial Group, Inc. — 2017 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended December 31, 2017; quarterly figures include unaudited fourth-quarter results. Bankwell is a Connecticut bank holding company serving businesses and consumers primarily in Fairfield and New Haven Counties. At year-end, it reported $1.80 billion in assets, $1.52 billion in net loans, $1.40 billion in deposits and $161.0 million in shareholders’ equity.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Total revenue | $59.0 million | $51.8 million |
| Net interest income | $54.4 million | $49.1 million |
| Provision for loan losses | $1.3 million | $3.9 million |
| Net income | $13.8 million | $12.4 million |
| Diluted EPS | $1.78 | $1.62 |
| Net interest margin | 3.30% | 3.54% |
| Efficiency ratio | 54.9% | 56.5% |
| Return on average assets / equity | 0.80% / 8.93% | 0.85% / 8.94% |
- Growth and mix: Assets increased 10% and gross loans rose $177.1 million, or 13%, year over year. Commercial real estate loans reached $987.2 million, 64% of the portfolio; commercial business loans were $260.0 million. Deposits grew 8% to $1.40 billion.
- Costs and margins: Interest expense increased 42% to $16.8 million as deposit pricing rose; average deposit cost increased 20 basis points to 1.06%. Noninterest expense rose 10% to $32.5 million, reflecting staffing, occupancy, professional services and growth initiatives. Net interest margin contracted 24 basis points.
- Tax and earnings: The Tax Cuts and Jobs Act reduced the corporate rate from 35% to 21%; remeasurement of deferred tax assets caused a $3.3 million one-time increase in income tax expense. Reported tax expense was $11.3 million and the effective rate 45.0%, versus $6.0 million and 32.6% in 2016. Without the tax charge, reported earnings growth would have been stronger; the filing does not provide a full pro forma adjusted result.
- Cash flow: Operating cash flow was $20.6 million; investing activities used $194.5 million, principally reflecting loan growth; financing activities provided $148.3 million. Cash and cash equivalents decreased $25.6 million to $70.7 million.
- Funding and capital: Year-end FHLB advances were $199.0 million, up $39.0 million; subordinated debt was $25.1 million. The $25.5 million subordinated notes carry a 5.75% fixed rate and mature in 2025. Bankwell Bank’s total risk-based capital ratio was 12.19%, Tier 1 risk-based ratio 10.99%, and Tier 1 leverage ratio 9.61%; each exceeded applicable well-capitalized thresholds. Tangible common equity ratio was 8.81%.
- Liquidity: Management cited deposits, cash, unpledged securities, FHLB capacity and credit lines as funding sources. The Bank had $257.6 million of additional FHLB borrowing availability based on qualified collateral at year-end. Liquidity still depends on deposit retention and access to secured and other funding.
Material changes, outlook and risks
- Management attributed higher earnings chiefly to organic loan growth, partly offset by the tax-law deferred-tax-asset write-down. The 2017 allowance methodology was revised using updated industry, peer and product loss trends, producing a nonrecurring pretax $1.3 million reduction in the reserve. The allowance ended at $18.9 million, or 1.23% of loans, versus $18.0 million, or 1.32%, in 2016.
- Credit indicators worsened: total past-due loans rose to $25.8 million from $6.4 million, and past-due loans as a share of total loans increased to 1.67% from 0.47%. Nonaccrual loans reached $5.5 million from $2.9 million; nonperforming assets were 0.31% of assets versus 0.20%. Troubled debt restructurings increased to $4.9 million from $1.4 million; three restructured loans totaling $1.2 million defaulted during 2017. Management cited portfolio growth and administrative delays in legal and collection proceedings as factors in higher delinquencies.
- In the fourth quarter, management decided to stop originating residential mortgage loans. The company also planned three additional Connecticut branches for 2018. No quantified earnings, revenue or margin guidance is provided.
- Interest-rate exposure is material: management characterized the bank as liability-sensitive. Its model estimated that a parallel +200-basis-point shock would reduce one-year net interest income 7.3% and economic value of equity 22.9%. These estimates depend on assumptions about deposit behavior, rates and prepayments.
- Credit risks include concentration in commercial and real estate lending, large borrower exposures, a relatively young loan portfolio and dependence on the local Connecticut/New York metropolitan economy and property values. Competition for deposits and rising funding costs may pressure margins.
- Control issue: Management concluded disclosure controls and internal control over financial reporting were ineffective at December 31, 2017 because of a material weakness in the allowance-for-loan-losses process, including controls over loan-report completeness and accuracy and the precision of management review. Management reported no resulting financial-statement misstatement and described remediation plans, including hiring a Director of Internal Audit and redesigning allowance-process controls. The auditor gave an unqualified opinion on the financial statements but did not attest to internal-control effectiveness.
- Management reported no legal proceedings expected to have a material adverse effect. Forward-looking statements are subject to economic, credit, interest-rate, competition, regulatory, technology and execution risks; the company disclaims any obligation to update them.
Most important facts for investors to verify
- Whether the allowance-control material weakness is remediated and independently tested, and whether future filings report effective controls.
- Whether the rise in delinquencies, nonaccrual loans, impaired loans and restructured-loan defaults continues, and whether reserve levels remain adequate after the methodology-driven release.
- How loan growth is funded, including deposit pricing and mix, large time-deposit maturities, FHLB borrowing, and available collateral and liquidity.
- Whether net interest margin and modeled interest-rate sensitivity improve or deteriorate as rates and deposit competition change.
- Execution and costs of the planned 2018 branches and the residential mortgage origination exit; the filing provides no quantified forward guidance.