Earnings Call Transcript - BWFG Q2 2025

Operator, Operator

Hello, and thank you for being here. My name is Tiffany, and I will be your conference operator today. I would like to welcome everyone to the Bankwell Financial Group, Inc. Second Quarter 2025 Earnings Call. I will now turn the call over to Bankwell's Chief Financial Officer, Courtney Sacchetti. Courtney, please proceed.

Courtney E. Sacchetti, CFO

Thank you. Good morning, everyone. Welcome to Bankwell's Second 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 Presentation tab for supporting materials. Our second 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 now I will turn the call over to Christopher Gruseke, Bankwell's Chief Executive Officer.

Christopher R. Gruseke, CEO

Thanks, Courtney. Welcome, and thanks to everyone for joining our second quarter earnings call. This morning, I'm joined by Courtney Sacchetti, our Chief Financial Officer; and Matt McNeill, our President and Chief Banking Officer. I'm happy to announce our second quarter results, which demonstrate improved performance trends in virtually every aspect of our business as our investments in people and technology have continued to bear fruit. The company's net interest margin continues to expand. Our SBA business is on pace to deliver material growth to noninterest income, and credit trends continue to improve with further improvement expected in the quarters ahead. Additionally, with our first quarter results, we have previously announced the addition of two deposit teams in the New York City metro area. We've added two more teams during the second quarter and another team in July, bringing our growth in private client teams to five during this fiscal year. We look forward to the potential improvements to our deposit base as we welcome these talented professionals to the Bankwell team. Our financial results for the second quarter include GAAP fully diluted earnings of $1.15 per share, which were up 32% relative to the first quarter, a result of significant net interest margin expansion and increased contributions from SBA loan sales. Bankwell had another robust quarter of originations, funding $170 million in new loans, resulting in $24 million in linked quarter growth. Loan payoffs were $150 million during the second quarter, down from the first quarter's $200 million, but still elevated to where we'd expect them to be on a normalized basis. We funded $12 million in SBA loans during the quarter, bringing our year-to-date SBA originations to $22 million. Our pipeline for both commercial and SBA loans remained strong. And although total loan balances were down slightly compared to year-end 2024, we reiterate our original guidance of low single-digit loan growth for the full year. The bank's funding profile continues to improve as we've grown our noninterest-bearing deposits and repriced our time deposits meaningfully lower. Noninterest-bearing deposits grew by $48 million during the quarter for a year-to-date increase of $75 million or 23% since year-end. It's noteworthy that this increase in noninterest-bearing balances does not yet reflect the impact of our new team's expected contributions as they begin to open accounts on behalf of new customers. As these teams bring in low- and no-cost deposits and our balance sheet remains liability sensitive, we anticipate continued margin expansion into 2026. We are constructive on the direction of credit. Positive migration trends continue, and we expect continued progress toward reduction in nonperforming assets in the quarters ahead. Further details regarding nonperforming assets can be found on Slide 21 of our investor presentation. Now to discuss our financial results in greater detail, I'll turn it over to Courtney, our Chief Financial Officer.

Courtney E. Sacchetti, CFO

Thank you, Chris. Our second quarter pre-provision net revenue of $11.4 million or $1.46 per share increased 21% relative to the first quarter, with the PPNR return on average assets increasing to 143 basis points versus 118 basis points in the first quarter. We had strong improvement in our net interest margin with the second quarter reported net interest margin of 310 basis points, a 29 basis point increase relative to the linked quarter. Our net interest margin expansion is a result of our decrease in funding costs, which fell another 20 basis points versus the linked quarter to 3.46%. This is down 41 basis points from our high of 3.87% in the third quarter of 2024. In addition to realizing lower rates on rolling time deposits, we have reduced pricing by approximately 23 basis points on $1 billion of non-maturity interest-bearing deposits since the end of 2024. We've achieved this by lowering rates on key money market and savings products and adjusting exception pricing, a trend that continues as our June exit rate on deposit costs was 3.28%. We continue to see our earning asset yields expand as well, with the average loan portfolio yield increasing 4 basis points to 6.58% in the second quarter when compared to the first quarter. Our new loan originations continued to yield over 8%, benefiting from a more diversified loan mix, including commercial and industrial loans and SBA loans. Given the strong results in the first half of the year and our anticipated margin expansion over the balance of 2025, we will update our net interest income guidance for full year 2025 to a range of $97 million to $98 million. This guidance assumes no further actions by the Fed for the balance of this year. Noninterest income of $2 million increased 34% versus the linked quarter, largely driven by $1.1 million of SBA gain-on-sale income, an increase of $0.6 million over the last quarter. We reiterate our full year 2025 guidance for noninterest income of $7 million to $8 million and as Chris mentioned, expect SBA gain-on-sale activity to continue to accelerate over the balance of 2025. On a linked quarter basis, our total noninterest expense is up modestly from $14.1 million to $14.5 million, primarily due to increased salaries and employee benefits. This increase reflects our continued investment in growing our banking teams, SBA platform and supporting risk functions, all aimed at generating revenue and improving efficiency. Despite the $0.4 million increase, our efficiency ratio fell to 56.1% in the second quarter compared to 59.9% last quarter, a result of our expanding net interest margin and growth in noninterest income. Given the incremental investments made and associated costs beyond our initial guidance, we are increasing our full year 2025 guidance for noninterest expense to $58 million to $59 million. Importantly, despite the higher expense guidance, our long-term view of driving operating leverage remains unchanged. We expect our efficiency ratio to continue improving over the coming quarters as our profitability continues to expand. We anticipate moderation in our noninterest expense to total asset ratio as our balance sheet grows. Switching to credit, second quarter trends were positive with a small net recovery, a decrease in criticized and classified loan balances and a $1.2 million reduction in nonperforming assets. We had a release of our loan provision in the second quarter of $411,000. This is mainly attributable to our qualitative factors related to loan composition. 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 ratio during the second quarter, with our consolidated common equity Tier 1 ratio now at 10.17% versus 10.04% in the prior quarter. We repurchased 14,626 shares at a weighted average price of $28.86 per share during the quarter ended June 30, 2025, and have 205,000 shares remaining on our authorization. I'd like to now turn it back over to Chris for his closing remarks.

Christopher R. Gruseke, CEO

Thanks, Courtney. To wrap things up, the last several quarters have been a time of material progress at the company. I want to emphasize how gratified we are to see the results of careful planning translate into excellent performance. We continue to execute on key strategic initiatives, including building out our SBA platform, attracting talented deposit teams and making the necessary investments in our risk and technology platforms to ensure that the company is prepared for an era of technological evolution and innovation. None of these achievements would have been possible without the dedication and commitment of so many team members. On behalf of our Board of Directors and our shareholders, I'd like to commend the team on a job well done. To reiterate some of the milestones we've achieved, we have meaningfully improved our asset quality with nonperforming loans dropping from a peak of $65 million in the third quarter of 2024 to just under $24 million this quarter or 89 basis points of total loans. Concurrently, we've reduced our CRE exposure as a percentage of total risk-based capital to 349%, down from 382% at the midpoint of 2024. This represents our lowest concentration in 10 years. We've reduced our broker deposits by over $400 million from their peak and have replaced them with lower-cost core deposits. Our growing SBA platform has shown considerable progress in the first six months of this year, and recent additions to our private client groups are expected to further improve our deposit portfolio. Finally, our performance has continued to improve with our net interest margin now reaching 310 basis points and our return on average assets hitting 114 basis points. As much as we've accomplished over the past year, we remain excited about the bank's future and expect continued improvement in our profitability moving forward. This concludes our prepared remarks. Operator, will you please begin the question-and-answer session?

Operator, Operator

Your first question comes from Feddie Strickland with Hovde Group.

Feddie Justin Strickland, Analyst

Great to see the DDA growth in the quarter, and it sounds like you have some more stuff in the pipeline. Do you have a longer-term target in terms of DDAs to deposits? I think you're at about 14% today.

Christopher R. Gruseke, CEO

Thanks for the question. We don't have a hard target in mind. We clearly are looking to expand that percentage. We want to make sure that we bring the wholesale funding ratio down. We probably watch that, we just certainly watch that closely. But I think it's safe to say that given the investments we're making, people we're bringing on, the way we've restructured our own teams internally over the past year, the platform that we put in place that we're looking to meaningfully expand it. I'd be hesitant to put a number on it, and we're going to be reporting on it regularly. But it's the reason that we're making these plans on these investments.

Feddie Justin Strickland, Analyst

Got it. And then just should we expect the level of broker deposits to continue grinding lower in the future quarters? Or do you think maybe we see that level off, just depending on the attractiveness of the rates of the broker versus retail?

Christopher R. Gruseke, CEO

I think it really depends. We've made significant progress, reducing it by about half. Going forward, it will depend on what we receive. We certainly want to resume growing the loan portfolio. As deposits come in, the challenge will be that it won't be an equal exchange; I anticipate paying down broker deposits with new funds, and then it will be a balancing act of how much loan growth we achieve relative to market rates. Since we've already reduced them by half, we don't expect dramatic changes; it will depend on market opportunities. However, the number will decrease over time, primarily based on how successful we are in attracting deposits.

Feddie Justin Strickland, Analyst

Got it. And just if I could squeeze in one more for Matt. If you could just give a little bit of an update on what you're hearing from your health care customers, anything incrementally different?

Matthew J. McNeill, President and Chief Banking Officer

No, there is some concern around new legislation with a big focus on Medicaid cuts. From the research that we've done and some third parties, it appears that our borrowers are not really impacted by the new legislation. So in the near term, we're feeling really good with the health care book and continue to see the book to be a profitable source of business here at Bank, I think, will not only on the loan side, but the fee and the deposit side.

Operator, Operator

Your next question comes from the line of Steve Moss with Raymond James.

Christopher R. Gruseke, CEO

Is this actually Steve?

Stephen M. Moss, Analyst

It is.

Christopher R. Gruseke, CEO

Well, how are you?

Stephen M. Moss, Analyst

I'm doing pretty good. Just following up on the deposit side regarding the five new teams you’ve hired. I'm curious if you can provide an estimate of the book of business and how we might assess its total potential over the next 12 to 24 months.

Matthew J. McNeill, President and Chief Banking Officer

You mentioned the word potential, and I believe that captures how we should view the teams. They are largely new to the company, which means that the actual production isn’t the primary factor behind the growth we’ve observed in core deposits. Those deposits reflect efforts we've been making over the last few years. However, speaking with the members of these teams, we found that each has significant books of business from their previous organizations, often worth multiple tens of millions to hundreds of millions of dollars. Now, our goal is to convert that potential into actual deposits on our balance sheet. This has been on our minds for some time. We have seen success, particularly in our ability to open new relationships and accounts on the same day or the next day, which has been a challenge for some organizations. We believe our planning will lead to an increase in new deposits. Yet, since these individuals are very new to the organization, we are still waiting to see those results materialize.

Christopher R. Gruseke, CEO

And Steve, that one-day account opening is very important for us, and keeping our reputation with new customers and with new team members is important. So any additions that we make going forward, we will absolutely have in mind what's the right pace because we want everybody to have the right experience. And once again, I mean, as Matt said, there are hundreds of millions of dollars from former organizations. I don't know that we're going to feel comfortable putting a number on what comes over and what that translates to at this point because it's so early in the game. But certainly, we would not be making these investments if we were not expecting significant numbers, and we'll be reporting on it regularly. So more data as the quarters unfold, but we're very constructive on it. And the experience we've had, we feel like we've hired the right people, and we're getting incoming calls, I should say that, too.

Stephen M. Moss, Analyst

Okay. Appreciate that color there. And then on credit here, just wondering, you kind of hinted, Chris, at resolution stuff over time here. Just curious, what that timeline could look like? The third or fourth quarter or might some of the stuff stretch into 2026?

Christopher R. Gruseke, CEO

Are you specifically talking about the couple of nonperformers we got left?

Stephen M. Moss, Analyst

Correct. Especially the two bigger ones, yes.

Christopher R. Gruseke, CEO

Yes. Yes, we have those, too. So we've got one side of a page. And I'll hand it over to you, Matt.

Matthew J. McNeill, President and Chief Banking Officer

Sure. Page 21 has some detail there. Loan 1, which is a retail building in suburban Westchester, we feel pretty good about that one. We think it could refinance away from us in a relatively short amount of time, two quarters. That's going to depend on execution on other banks. So I can't be certain of timing there, but we feel like that one is going away from us in the next several months. Loan 2, not as hopeful that, that will be resolved anytime soon. That's a multi-bank participation. There's a common sponsor that has more trouble other than this one loan. So I think that one is going to take a little bit longer to unfold.

Stephen M. Moss, Analyst

I appreciate that. I'm curious about your thoughts on how a 25 basis point cut by the Fed would impact your margins, considering you are liability-sensitive.

Christopher R. Gruseke, CEO

At this point, I won't answer the question, but Courtney will. The margin event will occur in 2026. If it happens this early in the year, we will feel its impact later. Courtney?

Courtney E. Sacchetti, CFO

Yes. We were very successful in repricing our CDs during the first half of the year, achieving about $750 million on average at 80 basis points lower. There's still more room to reduce with the remaining brokered deposits rolling off. Even without an additional rate cut at this moment, I anticipate a further increase of 5 to 10 basis points in net interest margin based on current rates. We expect to reduce our time deposits further with our variable rate loans potentially adding another 10 basis points. Overall, we are quite optimistic about the net interest margin we will achieve by the end of this year, considering the repricing potential in our existing portfolio without needing rate cuts.

Operator, Operator

Your final question comes from the line of David Konrad with KBW.

David Joseph Konrad, Analyst

It was a good quarter. Most of my questions have been asked and answered, so thank you for that. I do have one question regarding expenses. I believe the guidance suggests around $30 million for the second half of the year. Given the teams that have recently been hired, do you expect expenses to increase to about $15 million per quarter, or will it gradually build throughout the year?

Courtney E. Sacchetti, CFO

It should stay relatively flat. I mean, I think that's a fair assumption, the $15 million. We've done some investment in the first half of this year. And we've added teams in the second quarter, and we're starting to adjust for our compensation structure as those teams have come on. So we anticipate it to level off in the back half.

Operator, Operator

Ladies and gentlemen, this will conclude today's call. We thank you all for joining. You may now disconnect.