KBRA Affirms Ratings for Bankwell Financial Group, Inc. and Subsequently Converts the Ratings to Unpublished

KBRA affirms the senior unsecured debt rating of BBB-, the subordinated debt rating of BB+, and the short-term debt rating of K3 for New Canaan-based Bankwell Financial Group, Inc. (NASDAQ: BWFG) (“the company”). In addition, KBRA affirms the deposit and senior unsecured debt ratings of BBB, the subordinated debt rating of BBB-, and the short-term deposit and debt ratings of K3 for the subsidiary, Bankwell Bank. The Outlook for all long-term ratings is Stable. Additionally, KBRA is converting the ratings for Bankwell Financial Group, Inc. and its subsidiary, Bankwell Bank, to unpublished from published.

Key Credit Considerations

The ratings reflect BWFG’s lower than peer level core capital which materially declined in 2022 following the $0.9 billion increase in risk-weighted assets associated with strong loan growth concentrated in the healthcare and senior housing vertical. More recently, the company has rebuilt core capital, reflected in the CET1 ratio increasing by 130 bps from the 4Q22 low point to 9.5% as of 1Q24. Also related to the 2022 asset growth, the company leaned on its wholesale funding sources to support the balance sheet while the market for deposits has been extremely competitive with higher costs driven by the Federal Reserve’s interest rate hikes. Core deposits as a percentage of total funding troughed at 57% and loans-to-core deposits peaked at 165% in 1Q23, which have improved more recently with core deposits-to-total funding improving to 60% and loans-to-core deposits falling to 159% at 1Q24. BWFG is strategically focused on rebuilding its capital ratios, reducing reliance on noncore funding, and being opportunistic in generating lower risk-weighted loans. KBRA views the company’s strategic focus of rebuilding its capital ratios and enhancing its core deposit gathering strategies to reduce reliance on wholesale funding as important steps in strengthening the credit profile going forward. While the company has displayed pristine asset quality metrics over its contemporary operating history, with the NCO ratio averaging <10 bps from 2014-2023, loss content has increased more recently with a NCO ratio of 0.54% in 1Q24 and NPA ratio of 1.79% in 2Q24. Problem assets, primarily in the suburban office, retail spaces, as well as select SBA loans, have resulted in higher charge-off levels, weighing on earnings from increased provision expense. The negative impact on the company’s earnings profile from a weaker NIM due to higher funding costs and the liability sensitive balance sheet has reduced BWFG’s ability to absorb credit losses going forward. More recently, the company has experienced some idiosyncratic issues within the credit portfolio which has negatively impacted the risk rating migration, with criticized and classified balances rising to 6% of total loans at 2Q24 (from 2.3% at 2Q23), and nonperforming loans (NPLs) representing 2.12% of total loans. Management has expressed that a significant portion of the criticized and classified loans have experienced improvements in their operating performance which could result in positive credit migration over time. Given that the company’s loan loss reserve does not cover NPLs, in tandem with its current capital position, KBRA views BWFG’s total loss absorbing capacity as weakened due to its earnings profile and lower capital.

Rating Sensitivities

A rating upgrade is unlikely over the intermediate term. Rebuilding core capital measures closer to averages for higher rated peers, an improved funding profile, and normalization of credit metrics driving improved and stable earnings are key factors necessary for positive rating momentum to occur. Continued credit deterioration or a meaningful reduction in profitability could pressure the ratings.

To access rating and relevant documents, click here.

Methodologies