Key Points
The company just posted strong third-quarter earnings and revenue growth.
Bankwell's stock has performed phenomenally well this year.
But is the stock now under- or overvalued?
Bankwell Financial Group (NASDAQ:BWFG), a small-cap bank headquartered in Connecticut, delivered record earnings per share (EPS) of $1.58 on total revenue of roughly $35.3 million.
EPS grew over 25% year over year, while revenue grew 24%. Adjusting for core conversion costs for broader investments in technology, Bankwell would have reported $1.86 in diluted EPS.
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"The third quarter was one of real progress for Bankwell. Margin expansion continued. We resolved our largest legacy problem credit. Our SBA platform had its best quarter yet, and we announced our core conversion, an important step in strengthening the infrastructure and technology that will support our future growth," Bankwell's CEO Chris Gruseke said on the company's third-quarter earnings call.
Is the stock a buy after its latest earnings report?
Image source: Getty Images.
Bankwell is generating strong returns while managing credit
Bankwell is largely a commercial lender, with over $2 billion in commercial real estate loans, over $726 million in commercial and industrial loans, and also roughly $130 million in construction loans.
The bank has been delivering strong results on return on average assets (ROAA) and return on average tangible common equity (ROATCE), two very important metrics for banks.
In the third quarter, Bankwell generated a 1.45% ROAA and a nearly 15.3% ROATCE. The threshold for solid performance is typically a 1% ROAA and 10% ROATCE. On an operating basis, excluding expenses related to core conversion, the bank would have generated a 1.71% ROAA and an 18% ROATCE.
Meanwhile, the bank's net interest margin, a measure of the spread banks earn on their loan books after covering the cost of deposits and other funding sources, expanded 0.13% to 3.71%.
Credit quality also improved in the quarter. Non-performing loans, those that haven't received payments in at least 90 days, fell from 0.54% of total loans to 0.24%.
Past-due loans also fell, and the bank recorded negative loan charge-offs, meaning it actually recovered loans it had previously written off as losses.
During the quarter, Bankwell sold a legacy problem credit associated with a commercial real estate property in Westchester, New York, that stemmed from the COVID-19 pandemic and had been the bank's largest non-performing asset. The sale resulted in a $2.5 million recovery.
In a slide presentation, Bankwell noted a $27 million increase in "special mention" loans in the quarter, which are still performing but flagged for potential borrower weakness.
However, that's not an alarming level and compares to similar "special mention" loan levels in past quarters. Additionally, management noted that all borrowers on these loans are current on their payments, and 90% are guaranteed by ultra-high-net-worth sponsors.
Is the stock under- or overvalued?
While the bank is performing well, investors must keep in mind that every asset has a value, so it's important to look at the current valuation, especially after Bankwell's stock has soared this year.
Bankwell currently trades at 1.69x its tangible book value (TBV), a metric that compares a bank's market cap to its theoretical liquidation value, which is often how banks are valued.
The rule of thumb in banking is that a 10% ROATCE typically means the bank should trade at 1x TBV valuation. That means a 1.69x TBV means the bank should be generating around a 17% ROATCE.
On an operating basis, Bankwell just generated an 18% ROATCE, so the stock may be slightly undervalued, although this is only one quarter’s results.
Now, this is a high-performing bank, and the investments it just made could position it to grow its earnings power. So investors can certainly buy the stock, but I don't view it as largely fairly valued. Rather, it can continue to appreciate through earnings expansion.
Bram Berkowitz has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.