Operator
Hello, everyone. Thank you for joining us and welcome to the Bankwell Financial Group third quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. I will now hand the conference over to Courtney Cicchetti, 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 8K, 10Q, and 10K, 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 Grisecki, 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. The third quarter was one of real progress for Bankwell. Margin expansion continued. We resolved our largest legacy problem. Our SBA platform had its best quarter yet, and we announced our core conversion, an important step in strengthening the infrastructure and technology. For the third quarter, we reported record gap 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 pre-tax 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 will keep you 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 remain well above prior. 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, cumulative benefit of deposit repricing in prior quarters, and a more favorable funding mix. Funding costs were essentially stable. Non-interest 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 $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 non-performing 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. Not-performing loans declined to $7.1 million, while not-performing assets fell 26 basis points to just 20 basis points. A tangible book value per share increased to $41.59, up $1.34 during the quarter, and $3.75 since the beginning of the year. And an emphasized tangible book value on a consistent and safe manner is our primary response. And now we'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-provisioned net revenue PPNR 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 non-interest-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. Non-interest income was $4 million, including $2.8 million of SBA gains on sale. Service charges and fees also increased to $951,000. Non-interest income represented just over 11% of total revenue, reflecting continued progress in broadening our revenue mix. Non-interest 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 four quarters as implementation activities progress. We expect these costs to primarily reflect third-party Importantly, the elevated expense this quarter was largely driven by one-time 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 and talent to support our growth as well as higher performance-based compensation. The The reported efficiency ratio for the quarter was 56.1% and 53.1% year-to-date. Utilizing our operating non-interest 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 non-performing 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. Given our year-to-date performance, I'd like to make some minor updates. We are increasing our full-year net interest income outlook to $119 to $121 million compared to our prior range of $115 to $117 million. Given the strength, we're raising our non-interest income guidance to $14 to $15 million. We continue to expect full-year loan growth of 5% to 7% and, excluding core conversion costs, full-year non-interest expense outlook remains stable. It's $65 to $67 million. Before ending our prepared remarks, I'd like to thank our incredible team. None of these results were easy to achieve and a singular focus on our clients. Success demonstrates what is possible when a talented team works together on an intentionally designed plan, the 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. We are ready to open the lines for questions.
Operator
We will now begin the question and answer session. If you would like to ask a question, please press star one to raise your hand. To withdraw your question, press star one again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Fetty Strickland with Hovde. Fetty, your line is now open.
Hey, good morning, everyone. 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? 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 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 higher in the years to come. It's proven that that was the right call, so if it's healthy to make up that backfill, it's reduced slightly, but it's still healthy payoffs.
All right, great. Thanks for the color there. And just on the deposit side, you know, I saw in the period DDAs were a little lower this quarter, seemed like 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 in-the-quarter moves that drove the differences there?
You know, we think that the DDA balance is, you know, we're not losing customers and shrinking DDA balances. We think that these are seasonal changes. You know, we expect to continue to grow DDA balances. Really, really just normal ebbs and flows.
Yeah, it's important, Fetty. This is Chris. Hi. 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.
And just one question on the margin, was there any one-time 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?
Fetty, there was nothing in there related to that.
I'll step back. Thanks for taking my question. Thanks, Fetty.
Operator
Your next question comes from the line of Mark Shutley with KBW. Mark, your line is now open.
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 bits higher, and we have 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?
Yeah, perspectively, just how should we think about the deposit beta through the cycle, you know, with, yeah, assuming FedHag. Great, thanks. Sure.
We have just recently increased our CD rates, our retail CD rates, actually affected 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 four 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 rate. 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, you know, FHLB borrowings are rolling into higher market rates as well. We do have some index 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. You know, a basis point or two each quarter. And I think on our interest-bearing non-maturity deposits, you know, we're probably looking, you know, north of a 50 percent beta, you know, somewhere 60 to 70 percent, and that's on, you know, 1.1 billion of deposits that aren't indexed.
Right, that sounds right, based on history, and then back to what Courtney said. Mark, we feel that will be more than offset by the repricing of fixed rate loans that are coming due.
Yeah, and so we have a page in our investor deck that covers, we have a few pages, but I think page 16 covers our loan maturity yields, but then we also have a page that covers our asset and liability shifts since 2024, and we've really, you know, materially increased.
Great. Thank you for all that color. That was really helpful. And then maybe just one on the SBA. You know, the SBA was really strong in the quarter and, you know, already at $90 million of your $100 million origination target. So maybe just talk about any visibility into that pipeline and how we should think about the SBA business into 2027. Thanks.
SBA team's doing a great job. Pipeline's very robust. You know, we're having a lot of success with the SBA program, and, you know, we expect to continue that into 27. As you said, Pipestrong, you know, we have visibility into, you know, a few more months, and, you know, we think we'll continue.
Yeah, Mark, we've been at this now. We've been a preferred provider for a long time, but these last couple of years, we've grown it, and we've always talked about growth there is slow and steady. We're not trying to go and do 2x and 3x. It's just modest, moderate growth every year and keep improving what we do.
Great. Thank you for taking my questions. Thank you.
Operator
Our last question comes from the line of Steve Moss with Raymond James. Steve, your line is now open.
Good morning. And the next quarter here. Good morning, Steve.
Good morning, Chris, Courtney. And maybe just following up on loans here and just thinking about, you know, I know you guys mentioned new loans, 90 base points above the roll-off yield. I'm just kind of curious what you guys are seeing for competition. Obviously, Treasury rates were higher, but it feels like spreads are tighter. And so just kind of how you guys think about that going forward a little bit in that dynamic?
We are seeing competition tighten spreads. It does impact us as far as trying to negotiate new loans. We're satisfied at where we're able to originate new business currently. I don't think that's going to change. You know, we have a very large roster of relationships that we continue to lend to, and, you know, that tends to keep us out of the brokered Cree market, you know, competing with folks on, you know, the lowest cost capital.
Yeah, we will never compete on price, Steve. You know, we said that before, and we reiterate that. If we have to compete on price, you know, we're doing something wrong.
Right. Okay. Appreciate that color there. And then maybe just, you know, in terms of the systems conversion here, you know, kind of curious, you know, what are maybe some of the things you guys are looking forward to, to benefiting the franchise? And also just maybe kind of as, you know, we think about the investments and the cost saves, you know, how to think about expenses into 27 there.
Courtney went through some of the additional charges that we have. So to begin with, the charges that we just took this quarter were the breakage fees, so the big part is done, and then for the next few quarters, I think Courtney said $400,000 to $500,000, maybe for the next three or four quarters, and that's things like consultants and temporary workers. But we've got a big data project in the back, and once you have data organized and we own the data, we can work with that. We'll have further products that enable us to add APIs to the system and build things that we want to build. Right now, and this is not a knock on any one particular provider, right now the lead time, if we want to add a feature or build something, you've got to get in the queue and wait a few months. So we'll be in far better shape to be flexible and adapt, you know, as technology rolls out on our new platform.
Yeah, and I hear you on the charges. Just more curious, like, do you see any cost phase coming from this conversion? Or maybe there's just, you know, with the conversion, you have new investments or accounts you might want to bring on in 27.
So I think that, well, there's several layers to that. So, first, apples to apples, if we took exactly what we had before and added the new technology, we would save money there. So, there would be a cost save on the platform as is, but what we'll end up doing is adding new features, and so our data, well, I'm sorry, data processing, not the data processing. So what we're spending on core and payments and things like that will probably end up pretty flat because we'll then add some new features and things that we can do. And then, as I said, what it really does is give us flexibility to add new features. And if there's a line of business or an API we want to install, we'll be able to do it quickly. I don't see a material impact to our OPEX next year, Steve. Sorry to talk over you. We don't, there won't be a material impact to our OpEx run rate as a result of this. The impact is felt in the staffing for the conversion. And then, you know, go down further, you know, we'll be able to be more efficient going forward once we have our data and we can use the systems in a way that enable us to scale. So we do see a payoff there as well.
Okay, great. Now, that's really helpful. And then, you know, maybe just kind of curious, you guys have, you know, had a really good run here in terms of business development. You know, kind of curious maybe just how do we, you know, any additional business lines you guys may want to add, talent you guys may be recruiting, kind of, you know, any potential or early thoughts on that for next year?
We've already done a lot of recruiting. People are already here, you know, getting more seasoned in the business. We expect that, you know, our business development efforts will continue to be the hiring is really ready happens, you know, now just getting people in stride on their business development. So we feel pretty good. As far as new business lines, we're always thinking about, you know, where, you know, safety and economics lie and, you know, where we could take advantage of those things. So we're open to new business lines. We always have a couple that are in development. They don't always pull through. And, you know, if they, you know, pan out, then we'll get to maturity. So, we're always thinking about new ways to diversify the balance sheet and expand our capabilities.
Okay, great. I will leave it there. I really appreciate the caller in the next quarter.
Operator
There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
