Bankwell Financial Group, Inc. (BWFG) Earnings Call Transcript

Hello, everyone. Thank you for joining us, and welcome to the Bankwell Financial Group Third Quarter 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Courtney Sacchetti, Executive Vice President and Chief Financial Officer. Courtney, please go ahead.

Thank you. Good morning, everyone. Welcome to Bankwell's Third Quarter 2026 Earnings Conference Call. To access the call over the Internet and review the presentation materials that we will reference on the call, please visit our website at investor.mybankwell.com and go to the Events and Presentations tab for supporting materials. Our third quarter earnings release is also available on our website. Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures. All participants should refer to our SEC filings, including those found on Forms 8-K, 10-Q and 10-K for a complete discussion of forward-looking statements and any factors that could cause actual results to differ from those statements. And I will now turn the call over to Chris Gruseke, Bankwell's Chief Executive Officer.

Thanks, Courtney. Welcome, and thank you to everyone for joining Bankwell's quarterly earnings call. This morning, in addition to Courtney, we're joined by Matt McNeil, our President and Chief Banking Officer. 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. For the third quarter, we reported record GAAP net income of $12.7 million or $1.58 per share compared to $12.4 million or $1.52 per share in the second quarter. It's important to note that these record results include $3 million of pretax expenses tied to our core conversion. These expenses are primarily attributable to the termination of our existing core provider contracts. Courtney will address those items in a couple of minutes. Excluding those charges, operating net income was $15 million or $1.86 per share. Our earnings momentum is strong and continues to grow. Looking ahead, the core conversion will expand our capabilities and improve efficiency and scalability across the organization. We anticipate completing the conversion in the second half of 2027, and we'll keep you updated as the project progresses. Lending activity was healthy. We originated approximately $222 million of loans in the quarter, including $30 million of SBA originations, resulting in net loan growth of $23 million. Year-to-date, loans have grown by $143 million or 5%. We remain selective in the credits we originate and retain, supporting both margin and credit quality. Core deposits were down less than 1% from the second quarter, but remained well above prior year levels. Compared with a year ago, core deposits have increased by $340 million or 18% and now represent 76% of total deposits, up from 69% a year ago. Net interest margin increased 13 basis points to 3.71%, marking the third consecutive quarter of expansion. The improvements reflect higher earning asset yields, the cumulative benefit of deposit repricing in prior quarters and a more favorable funding mix. Funding costs were essentially stable compared with the second quarter. Noninterest income increased by 21% this quarter to $4 million, primarily attributable to a record $2.8 million of SBA gain on sale income during the quarter. Year-to-date, SBA gains totaled $7.6 million compared to $2.9 million generated through the same period of 2025. Credit metrics improved meaningfully during the quarter. We sold the COVID-era retail commercial real estate loan in Westchester County, New York, which had been our largest nonperforming asset. The sale resulted in a $2.5 million recovery of amounts previously charged off and contributed to net recoveries of $1.4 million for the quarter. Nonperforming loans declined to $7.1 million, while nonperforming assets fell 26 basis points to just 20 basis points of total assets. Tangible book value per share increased to $41.59, up $1.34 during the quarter and $3.75 since the beginning of the year. We understand and emphasize every day that growing tangible book value in a consistent and safe manner is our primary responsibility to our shareholders. And now I'll turn the call over to Courtney to cover the financials in greater detail.

Thanks, Chris. I'll begin with this quarter's return. On a reported basis, return on average assets was 1.45% and return on average tangible common equity was 15.28%. Excluding conversion costs, return on average assets was 1.71% and return on average tangible common equity was 18.02%. Pre-provision net revenue was $15.5 million as reported or 1.76% of average assets. On an operating basis, PPNR was $18.5 million or 2.11% of average assets. Net interest income reached $31.4 million, up from $29.5 million last quarter. Earning asset yields rose 8 basis points to 6.34%, while loan yields increased 6 basis points to 6.72%. New loan pricing remains attractive with our 2026 origination yields running approximately 90 basis points above the yields on loans running off. Total deposit costs were essentially flat at 2.92% as the benefit from time deposit repricing moderated. Approximately $1.3 billion or 44% of our loans are now floating rate. At the same time, time deposits represent a shrinking share of our funding, while noninterest-bearing and low-cost NOW balances now represent 19% of total deposits, up from 15% at the end of 2024. Together, these changes on both sides of the balance sheet have reduced our earnings sensitivity to movements in short-term rates. While the future path of rates remains uncertain, our earnings are less dependent on that path than they have been historically. Noninterest income was $4 million, including $2.8 million of SBA gains on sale. Service charges and fees also increased to $951,000. Noninterest income represented just over 11% of total revenue, reflecting continued progress in broadening our revenue mix. Noninterest expense was $19.8 million compared to $15.3 million in the second quarter. The increase was primarily driven by $3 million of core conversion costs, including $2.7 million related to contract termination costs. Looking ahead, we currently anticipate conversion-related expense of approximately $400,000 to $500,000 per quarter over the next 4 quarters as implementation activities progress. We expect these costs to primarily reflect third-party consulting support, temporary resources and other costs associated with the implementation. Importantly, the elevated expense this quarter was largely driven by onetime termination costs. As the project progresses, we will continue to refine our estimates and update our expectations accordingly. Additionally, salaries and employee benefits increased, reflecting targeted investments in talent to support our growth as well as higher performance-based compensation. The reported efficiency ratio for the quarter was 56.1% and 53.1% year-to-date. Utilizing our operating noninterest expense of $16.8 million, our operating efficiency ratio was 47.5% for the quarter and 50% year-to-date. Credit performance resulted in a $1.3 million benefit to earnings driven by net recoveries during the quarter. NPAs stand at 20 basis points of assets or $7.1 million. The primary remaining component is our suburban New Jersey office participation, which has a carrying value of $4.3 million following a $0.6 million charge-off this quarter. We have now charged off approximately 64% of the original balance. The allowance held steady at 1.03% of total loans and coverage of nonperforming loans increased to 431%. Our capital position continues to strengthen. Total assets were $3.6 billion, deposits were $3 billion and shareholders' equity increased to $334.1 million. Tangible common equity to tangible assets rose to 9.33%. The company's consolidated common equity Tier 1 ratio was 10.8%, while the bank's total capital, common equity Tier 1 and leverage ratios were 12.67%, 11.64% and 10.25%, respectively. These levels provide meaningful capacity to support our continued growth. With that, I'll hand it back to Chris.

Thanks, Courtney. This quarter, we took an important step towards strengthening the platform that will support Bankwell's next phase of growth while continuing to deliver strong core results. Absorbing the conversion costs while reporting record earnings demonstrates the underlying momentum in our business. Given our year-to-date performance, I'd like to make some minor updates to prior guidance we've given. We are increasing our full year net interest income outlook to $119 million to $121 million compared to our prior range of $115 million to $117 million. Given the strength of our SBA division, -- we're raising our noninterest income guidance to $14 million to $15 million from a prior range of $12 million to $13 million. We continue to expect full year loan growth of 5% to 7% and excluding core conversion costs, full year noninterest expense outlook remains stable at $65 million to $67 million. Before ending our prepared remarks, I'd like to thank our incredible team. None of these results were easy to achieve. They required hard work and a singular focus on our clients. Our success demonstrates what is possible when a talented team works together on an intentionally designed plan. I also want to thank our clients and shareholders for giving us their confidence. We look forward to a strong finish to this year and to delivering even better results in the year ahead. Operator, we are ready to open the lines for questions.

[Operator Instructions] Your first question comes from the line of Feddie Strickland with Hovde.

Just wanted to go ahead and start off on loans. It sounds like you're still pretty optimistic here on loan growth. Are slowing paydowns at all a part of that story? Or are you starting to see payoffs and paydowns slow a little bit as you get into the fourth quarter? Or have they been relatively consistent?

We have seen them slow down a bit from last year. There's still -- we still have healthy payoffs coming. We're having to originate to backfill, but the pipeline has been strong. And so payoffs haven't been. We updated our assumption a couple of years ago and just assumed that the payoff number was going to be in the years to come. Proven that, that was the right call. So it's healthy to make up that backfill. It's reduced slightly, but it's still healthy payoffs.

Great. And just on the deposit side, I saw end-of-period DDAs were a little lower this quarter, they kind of maybe spiked up in the second quarter. The average balances were pretty stable. Can you talk through some of the dynamics there, whether there's anything seasonal or end of quarter moves that drove the differences there?

We think that the DDA balances, we're not losing customers and shrinking DDA balances. We think that these are seasonal changes. We expect to continue to grow DDA balances really just normal ebbs and flows.

It's important, Feddie, this is Chris. What's important is that we just keep signing up new customers and that continues to happen. So the flows of the business are the flows of the business.

Got it. And just one question on the margin. Was there any onetime benefit this quarter on the interest income side from the loan recovery that we should think about as we look forward on the margin? Or was there not anything in there related to that?

Freddie, there was nothing in there related to that.

Your next question comes from the line of Mark Shutley with KBW.

Maybe just a follow-up on the NIM. How should we think about the deposit beta for this cycle? I saw that the exit rate on deposits were maybe a couple of bps higher, and we have some -- maybe a little bit of remix going on as well. So just how should we think about that?

Mark, are you talking about prior results? Or are you asking about how we should look prospectively at another Fed hike?

Yes. Prospectively, just how should we think about the deposit beta through the cycle with -- yes, assuming Fed hike.

So we have just recently increased our CD rates, our retail CD rates actually effective today. So we are starting to reprice some of our deposits up already. But for another 25 basis point increase, we do expect to be relatively neutral over the next 4 quarters. We've got $1.6 billion of assets that would reprice immediately plus we have $600 million of our existing loan book rolling off at a rate of approximately 580 basis points. That should reprice materially higher based on today's rates. So those are our fixed rate loans maturing and repricing. But that benefit is going to be offset by higher funding costs, again, the increase in the retail CD rates. So we have $600 million of retail CDs that are now repricing roughly 50 basis points higher than their current rates. Our brokered CDs and FHLB borrowings are rolling into higher market rates as well. We do have some indexed deposits to Fed funds, approximately $300 million. But overall, we view the puts and takes on both sides of the balance sheet to really be a net neutral position, a basis point or 2 each quarter. And I think on our interest-bearing non maturity deposits, we're probably looking north of a 50% beta, somewhere 60% to 70%, and that's on $1.1 billion of deposits that aren't indexed.