Bankwell Financial: loan book focused on home and business loans
Bankwell Financial Group (NASDAQ: BWFGlisten)) is the owning holding company of Bankwell Bank, operating in Connecticut. The bank’s balance sheet is mostly made up of loans tied to commercial real estate assets, and I wanted to take a closer look at the numbers before keeping an eye on this small regional bank.
Bankwell Financial Group has just under 7.9 million shares outstanding and at the current share price of just over $34, the bank’s market capitalization is just under $270 million. dollars.
The annual results are good
Before looking under the hood of the loan portfolio, it’s always worth taking a look at the income statement as a first step.
The bank saw its net interest income increase by almost 25% thanks to the combination of higher interest income and lower interest expense. This is quite remarkable, as the expanded loan portfolio was effectively funded with a higher amount of incoming deposits, but interest charges decreased to just under $13.5 million. Total net interest income was $68 million, compared to less than $55 million in fiscal 2020
The bank also reported non-interest income of $5.7 million and non-interest expense of just under $40 million, which also helped the bank increase its profitability. as non-interest income increased while expenses decreased. On a pre-tax and pre-loan loss provision basis, Bankwell saw its performance improve to $33.8m from less than $15m.
A great year, and net income was even better on a reported basis as the bank had to record $7.6 million in loan loss provisions in 2020 while it was able to record a very small reversal of provisions for losses in 2021. On a reported basis, Bankwell Financial generated pre-tax profit of $33.9m, resulting in net profit of $26.6m on EPS of $3.38. This is based on an average share count of just over 7.7 million shares and as the share count has now increased slightly, EPS will be negatively impacted by a few percent.
I’m a bit surprised to see no additional provision for loan losses
The size of the balance sheet increased from $2.25 billion to just over $2.45 billion, resulting in a substantial expansion of the loan portfolio which grew by more than 15% to just under $1.9 billion. It also means that the bank’s exposure to liquid assets increased from $515 million to $454 million as the bank’s management decided to further expand the loan portfolio.
While the ratio of cash and marketable securities to total balance sheet size was nearly 23% at the end of 2020, the combination of an expanded balance sheet and an even stronger expansion of the loan portfolio reduced this ratio to just under 18.5%. That’s still a pretty good percentage, but it’s clear the bank is looking for higher yielding loans.
The vast majority of the $1.875 billion loan portfolio is invested in commercial real estate, which accounts for over 70% of the loan portfolio. With “commercial loans” accounting for an additional $351 million, Bankwell Financial has very clearly focused on CREs and commercial loans, with these two items accounting for 91% of the total loan portfolio.
I generally like to see more diversification in a loan portfolio because if I want to have exposure to commercial real estate I generally prefer investing in a REIT rather than investing in a bank where the loan portfolio is still a bit of a “black box” as you never really know what the underlying assets of a loan portfolio are.
Unlike other regional banks I have recently reviewed, the total amount of loans classified as “overdue” in the loan portfolio is not exceptionally low. By the end of 2021, more than $32 million in loans were past due, about half of which were already past due for more than 90 days. Interestingly, the main culprits are construction loans since almost 10% of loans in this segment are currently classified as “overdue”.
The total amount of delinquent loans in the commercial real estate portfolio is relatively small, at just over 1% of the total loan portfolio. In its corporate presentation, Bankwell provided more details on the CRE portfolio. Office and retail assets represent around 50% of this portfolio and the average LTV ratio is around 64-65%.
I am mainly surprised to see that the total provision for loan losses is slightly less than $17 million while more than $30 million of the loan portfolio is in default. Although the bank seems to emphasize the amount of non-performing loans rather than delinquent loans (a loan goes to unearned status if no payment has been made for more than 90 days), I generally like see a higher loan loss provision. However, in its presentation, Bankwell made it clear that it expects to avoid any losses on the $8.9 million construction loan which is currently not accumulating. Not only is the LTV ratio around 57%, but the loan is also a full recourse loan and Bankwell will be able to recoup any losses from the guarantors. And as you can see below, another $4 million in non-performing loans are backed by the SBA and Bankwell also appears to be expecting a full recovery.
I currently do not hold any position with Bankwell Financial Group and do not expect to be there for long. The total amount of delinquent and non-performing loans sounds frightening, but Bankwell does a good job of explaining why the situation isn’t as bad as the numbers seem to indicate. About 77% of non-performing loans are backed by either the SBA or high net worth guarantors and these issues are expected to be resolved this year. The bank has done a great job growing its tangible book value per share over the past few years as we ended 2016 with a TBV of $18.98 per share and just five years later the TBV/share has already increased to over $26/share. .
I like the bank’s earnings profile, but I’m not sure the composition of the loan portfolio meets my criteria, but that’s obviously a personal opinion.