Bankwell Financial Group - Earnings Call - Q3 2025
October 23, 2025
Transcript
Operator (participant)
Thank you for standing by. My name is Jordan, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the Bankwell Financial Group Third Quarter 2025 Earnings Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star one again. Thank you. I'd now like to turn the call over to Courtney Sacchetti, Executive Vice President and Chief Financial Officer. Please go ahead.
Courtney Sacchetti (SVP and CFO)
Thank you. Good morning, everyone. Welcome to Bankwell's Third Quarter 2025 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. I'll turn the call over to Chris Gruseke, Bankwell Financial Group's Chief Executive Officer.
Chris Gruseke (CEO)
Thank you, Courtney. Welcome, and thank you to everyone for joining Bankwell's quarterly earnings call. This morning, I'm joined by Courtney Sacchetti, our Chief Financial Officer, and Matt McNeill, our President and Chief Banking Officer. We appreciate your interest in our performance and this opportunity to discuss our results with you. Bankwell delivered another strong quarter with GAAP net income of $10.1 million, or $1.27 per share, up from $9.1 million, or $1.15 per share last quarter. Pre-provision net revenue return on assets was 1.7% for the quarter, up 27 basis points from the prior quarter. Our results reflect the continued expansion of the company's net interest margin, as well as growth in non-interest income generated by our SBA division.
We've also made further progress in reducing our non-performing asset balances during the quarter and continue to have a positive outlook on credit for the quarters ahead. Our NIM continued to expand this quarter as we forecast for the last several quarters. This is the result of the combined impact of repricing approximately $1 billion of time deposits, increased asset yields, and the growth of our low-cost deposit balances. Low-cost deposits include non-interest-bearing deposits as well as NOW accounts at rates of 50 basis points or lower. These accounts' average balances collectively grew by $20 million over the prior quarter and $64 million, or 16%, since the fourth quarter of 2024. Loan originations remained strong. During the third quarter, we funded $220 million of loans, bringing our year-to-date fundings to just over $500 million.
Our SBA division increased its momentum as gains on sale rose to $1.4 million for the quarter. SBA originations totaled $22 million for the quarter, bringing our year-to-date total originations to $44 million. The government shutdown has potential to temporarily impact our SBA results for the remainder of this year. While there may be potential for short-term impact, the SBA division has been a strong performer, reaching nearly 90% of our full-year origination goal of $50 million within the first three quarters of this year. Year-to-date non-interest income, including SBA gains on sale, totaled $6 million. Credit trends in the portfolio continue to improve. Non-performing assets as a percentage of total assets fell to 56 basis points compared to 78 basis points last quarter. This improvement was driven by the collection of $5 million on three SBA guaranteed loans and the sale of a $1.6 million commercial real estate loan.
Additionally, special mention loan balances decreased by $30 million. Finally, our efficiency ratio improved to 51.4% in the quarter, down from 56.1% last quarter, as we continue to balance growth with fiscal discipline. Now, I'll ask Courtney to provide a more detailed review of our financial results.
Courtney Sacchetti (SVP and CFO)
Thank you, Chris. For the third quarter, pre-provision net revenue totaled $13.9 million, or $1.77 per share, representing a 21% increase from the second quarter. Net interest income reached $26 million, while non-interest income increased to $2.5 million, driven by $1.4 million in SBA sales gains. Net interest margin expanded to 3.34%, up 24 basis points over the prior quarter. This growth was driven by a 13 basis point rise in loan yields, with approximately three basis points of both margin and yield attributable to one-time interest income from resolved SBA loans. Deposit costs also improved 10 basis points, now at 3.30%. Improvement in both deposit costs and loan yields have contributed materially to our NIM expansion this year, up 74 basis points from the fourth quarter of 2024. Interest-bearing deposit costs are down 37 basis points from the fourth quarter of 2024.
Loan yields widened, with our year-to-date average originations yield approximately 136 basis points higher than the runoff yield, generating a 41 basis point increase on yield for the total portfolio from the fourth quarter of 2024. These results do not reflect our response to the September rate cut made by the Fed. In response to the rate cut, we reduced our CD rates by 25 basis points and repriced approximately half a billion dollars of non-maturity deposits. We expect $1.25 billion in time deposits to reprice favorably over the next 12 months by approximately 27 basis points. The annualized incremental benefit of this repricing is approximately $3.4 million. Please refer to page 10 of our investor presentation for more detail on our time deposit maturity schedule.
Although we expect to realize the benefit of lower cost time deposits over the next 12 months, we also have approximately $800 million in loans tied to prime that repriced at the end of September. We anticipate the short-term impact of these recent rate changes to hold our net interest margin relatively flat in the fourth quarter. However, as term deposits mature, we expect our margin to improve as liability repricing aligns with assets. For a future 25 basis point rate cut, we would anticipate a modest annualized increase in our net interest margin of approximately five basis points. Since the start of the year, we have strategically increased our proportion of variable rate loans from just over 20% to 35%. As we have constructed a more neutral balance sheet, the impact of future interest rate changes on our results is expected to diminish.
Non-interest income of $2.5 million increased 24% versus the linked quarter, largely driven by $1.4 million of SBA gain on sale income, an increase of $0.3 million over the last quarter. As you can see on page 14 of our investor presentation, non-interest income now represents 8.8% of total revenue compared to 4.6% in the fourth quarter of 2024. Total revenue grew 10% compared to the prior quarter, while non-interest expense increased just 1%, resulting in positive operating leverage. While our non-interest expense to average assets was 180 basis points, our efficiency ratio improved to 51.4% for the quarter. We're pleased with this progress and expect further improvement in our efficiency ratio as profitability expands. Turning to credit, third quarter results reflect continued positive trends. We reduced our non-performing assets by $7 million, bringing our NPA to assets ratio to 56 basis points.
We recorded modest recoveries and a small provision of $372,000 in the quarter. Our allowance for credit losses remains at 110 basis points of total loans, while our coverage of non-performing loans increased to 177%. A few final thoughts on our financial condition. Our balance sheet remains well capitalized and liquid, with total assets of $3.2 billion, up slightly versus the linked quarter. The holding company and bank both saw expanding capital ratios during the third quarter, with our consolidated common equity tier one ratio now at 10.39% versus 10.18% in the prior quarter. Our tangible book value also increased, reaching $36.84. I'll now turn it over to Matt to provide an update on loan originations.
Matt McNeill (President and Chief Banking Officer)
Good morning. As Chris mentioned, loan fundings in the first three quarters remain strong. The bank has funded $500 million in new loans as of 9/30. 2025 year-to-date loan fundings have already outpaced full year 2023 and 2024, respectively. Payoffs have been at record levels and are projected to remain high through the end of the year. Despite our strong origination numbers, net loan growth only increased $49 million in the quarter and $12 million year-to-date. I would like to point out that some of our payoff activity is being encouraged by the bank, where we would like to exit some less attractive credits. Overall, we believe the recycling of the loan book is a sign of good health, and it provides the bank the opportunity to make new loans at more favorable yield.
Now, I will hand it back to Courtney to summarize our guidance for the remainder of the year.
Courtney Sacchetti (SVP and CFO)
Thanks, Matt. Due to our elevated payoffs, we are revising our low single-digit loan growth guidance to flat for the year. We affirm our non-interest income guidance of $7 million-$8 million for the full year, and the resumption of the SBA program would be additive to that total. We also affirm our net interest income guidance of $97 million-$98 million, along with our guidance on non-interest expense of $58 million-$59 million. With our fourth quarter earnings in January, we will provide additional guidance on our 2026 outlook. I'll now turn the call back to Chris for closing [audio distortion].
Chris Gruseke (CEO)
Thank you, Courtney. We've continued to make excellent progress and to deliver on our strategic objectives of diversifying our income streams, improving our deposit base, and continuously attracting talented banking professionals who value the opportunities afforded by working with a team committed to constant improvement. Importantly, we've made significant strides on closing out some pandemic-era credits with no further losses. Non-performing assets now stand at 56 basis points of total assets versus 207 basis points a year ago, and we look forward to further improvement in the quarters ahead. Thanks to everyone on the Bankwell team whose commitment to excellence has enabled these results. This concludes our prepared remarks. Operator, will you please begin the question and answer session?
Operator (participant)
Just as a reminder, for the question and answer session, press star and one on your telephone keypad to ask a question. Our first question comes from the line of Steve Moss from Raymond James. Your line is live.
Steve Moss (Analyst)
Good morning. Next quarter here.
Chris Gruseke (CEO)
Good morning, Steve.
Steve Moss (Analyst)
Hey Chris, maybe just starting with the good originations of the quarter. I think Courtney gave a low yield number, but I'm sorry, I missed it. I was kind of hopping on the call a little late here. Just kind of curious, where is loan pricing these days? Do we continue to see elevated payoffs maybe carrying over into 2026?
Courtney Sacchetti (SVP and CFO)
Steve, it's Courtney. Good morning. On page 10 of our investor presentation, we do give a little bit more detail. Year-to-date, our originations are a weighted average rate of 7.86%. That's on about $500 million of originations, and that's the rate as of 09/30. As you know, an impact from any repricing or anything there.
Chris Gruseke (CEO)
Yeah. Loan demand is very strong. You know, that's reflected in that pricing. We pick and choose kind of where we want to move forward. The lack of material loan growth year-over-year is really related to the timing and the velocity of the payoffs. This is the strongest year of payoffs that we've experienced. It takes a couple of months to get the loan pipeline to respond to, you know, be able to backfill those numbers, which we successfully did this quarter. We anticipate the fourth quarter to have some similarly strong payoffs. We think we'll be able to meet. You know, Courtney had said earlier that we're going to stay flat, and that's how we're looking at it. The loan demand is still there. It's just the timing of payoffs and trying to get the pipeline robust enough to respond to that.
Matt McNeill (President and Chief Banking Officer)
Steven, with regard to next year, we have demand to originate a higher volume than we have. It's a matter of lead time. We'll just plan to be out in front of it.
Steve Moss (Analyst)
Okay, appreciate that.
Matt McNeill (President and Chief Banking Officer)
We can control it with pricing.
Steve Moss (Analyst)
Yes, hear you there. In terms of an update on your core deposit initiative with the teams you brought over, just kind of curious, how is that developing and if you have any update on that front?
Chris Gruseke (CEO)
The first teams were hired in April, and we've hired some subsequent teams since then, including in the third quarter. We're bullish on the teams. They're already starting to produce and add deposits to the balance sheet. We don't think that we will have their full production in place until sometime in 2026. We did very carefully target teams that had large portfolios of non-interest-bearing deposits. Those are primarily general accounts, which take longer to move over than a high interest-bearing account where it's just money sitting around that's not being utilized in a business. They're well within our time threshold for how they're performing, and we're full impact.
Steve Moss (Analyst)
Okay. Maybe just last one for me here in terms of just thinking about the cadence of lower cuts. I hear you guys on CDs getting repriced 100% beta. Kind of curious on the non-maturity deposits, how you're thinking about deposit beta there with [audio distortion].
Courtney Sacchetti (SVP and CFO)
All right. The most recent rate cut at the end of September, we have just rough numbers, approximately $1 billion of non-maturity interest-bearing deposits. About $250 million, $260 million of that we have indexed to Fed funds. That will move, you know, that's part of the relationship that we have. With this recent round, we did another $250 million or so of our exception rate pricing, 100% beta down. We were able to achieve effectively 50% beta on $1 billion of deposits.
Steve Moss (Analyst)
Okay. Great. That's helpful. I'll step back into the queue. Thank you very much.
Chris Gruseke (CEO)
Thanks, Steve.
Operator (participant)
The final question comes from the line of Feddie Strickland from Hovde Group. Your line is live.
Good morning. This is Feddie's associate Anira on for him.
Courtney Sacchetti (SVP and CFO)
Good morning, Anira.
Chris Gruseke (CEO)
Good morning, Anira.
Morning. The first question, we saw some strong SBA contributions in the quarter, and we wanted to know how much more do you feel you can ramp up that side of the business? In your opening remarks, you did mention that there may be short-term government shutdown effects. Will that affect the ramp-up or anything to do with that side of the business?
I believe the answer to the second question is it really depends on the duration of the shutdown. Right now, Bankwell is a preferred lender. We're able to continue to underwrite SBA credits. We are not able to get in-place guarantees, and we are not able to sell our guaranteed portion previously originated. There is a temporary freeze to the SBA income. If the government opens up in a relatively short amount of time, it may not have a large or it may not have an impact on the business. We may be able to fluidly flow through it, but it's really going to depend on the duration of the shutdown. As far as the ramp, we hired Michael Johnston from Ready Cap, which was the fourth largest producer of SBA loans in the country in previous years.
We believe that the SBA division does have operating leverage to be able to further scale the business beyond $50 million in production. We'll talk about that in the fourth quarter.
Matt McNeill (President and Chief Banking Officer)
We just need the government to be open to do that.
Chris Gruseke (CEO)
Correct.
Perfect.
This is Chris. I'll continue a little bit on that answer and say that we did note that in the three quarters' worth of activity, we pretty much hit our original goal of almost. We've got almost a full year's worth of original expectations in the results. If the government opens, you know, as Courtney had mentioned, it'll be out of the [audio distortion]. It's up to when the government is [audio distortion].
Perfect. Thank you.
Operator (participant)
There are no further questions. This concludes today's meeting. You may now.