Bankwell Financial (BWFG) Q3 2025 Earnings Call Transcript

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DATE

Thursday, Oct. 23, 2025, at 11 a.m. ET

CALL PARTICIPANTS

• Chief Executive Officer — Christopher R. Gruseke
• Chief Financial Officer — Courtney E. Sacchetti
• President & Chief Banking Officer — Matthew J. McNeill

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RISKS

• CEO Gruseke said, "There is a temporary freeze to the SBA income," noting that the impact depends on the duration of the government shutdown.
• CFO Sacchetti stated, "we are revising our low single-digit loan growth guidance to flat for the year" due to high loan payoffs.

TAKEAWAYS

• GAAP net income -- $10.1 million, or $1.27 per share, up from $9.1 million, or $1.15 per share, in the prior quarter (fiscal Q3 2025 vs. Q2 2025; period ended September 30, 2025).
• Pre-provision net revenue -- $13.9 million, or $1.77 per share, representing a 21% increase from the prior quarter.
• Net interest margin (NIM) -- Expanded to 3.34%, up 24 basis points over the prior quarter, driven by higher loan yields and lower deposit costs.
• Interest income -- $26 million for the quarter.
• Noninterest income -- $2.5 million, up 24% sequentially, with $1.4 million from SBA sales gains.
• Loan fundings -- $220 million funded in the quarter, bringing year-to-date fundings to just over $500 million.
• Average loan origination yield -- Year-to-date originations at a weighted average rate of 7.86% as of September 30, 2025.
• Deposits -- Low-cost deposit balances grew $20 million over the prior quarter and $64 million, or 16%, since 2024.
• Time deposit repricing -- $1.25 billion in time deposits expected to reprice favorably over the next twelve months, providing an annualized incremental benefit of approximately $3.4 million.
• SBA origination volume -- $22 million in the quarter, $44 million year-to-date, reaching nearly 90% of the full-year goal of $50 million.
• Nonperforming assets (NPA) -- 56 basis points of total assets, down from 78 basis points last quarter and 207 basis points a year ago.
• Special mention loans -- Balances decreased by $30 million during the quarter.
• Efficiency ratio -- Improved to 51.4% from 56.1% last quarter, as noninterest expense rose 1% while total revenue increased 10% sequentially.
• Allowance for credit losses -- 110 basis points of total loans, with nonperforming loan coverage at 177%.
• Capital and book value -- Consolidated common equity Tier one ratio increased to 10.39% from 10.18% last quarter; tangible book value reached $36.84.
• Guidance -- Noninterest income guidance affirmed at $7 million-$8 million for the year; net interest income guidance at $97 million-$98 million; noninterest expense guidance at $58 million-$59 million.
• Interest rate sensitivity -- For a future 25 basis point Fed cut, management anticipates a modest 5 basis point annualized increase in net interest margin.
• Loan portfolio structure -- Proportion of variable-rate loans increased from just over 20% to 35% since the start of 2024, reducing future rate sensitivity.
• Deposit beta -- CFO Sacchetti noted an "effectively 50% beta on a billion dollars of deposits" in response to the September Fed rate cut.

SUMMARY

Bankwell Financial Group (NASDAQ:BWFG) reported higher net income and improved operational leverage for fiscal Q3 2025, driven by expanded net interest margin, disciplined loan origination, and strategic deposit repricing. Management revised loan growth guidance to flat for the year due to elevated payoffs but reaffirmed annual targets for noninterest and net interest income. The company expects margin to remain flat in the fourth quarter, with improvement anticipated as deposit repricing aligns with asset yields.

• CEO Gruseke stated, "Nonperforming assets now stand at 56 basis points of total assets versus 207 basis points a year ago."
• Management expects the annualized benefit from time deposit repricing to reach $3.4 million over the next twelve months.
• Recent deposit team hires are "already starting to produce and add deposits," according to management, but full production from these additions is not anticipated until 2026.
• The company’s balance sheet remains well-capitalized and liquid, with total assets of $3.2 billion and an increased consolidated common equity Tier one ratio.

INDUSTRY GLOSSARY

• SBA: Refers to the Small Business Administration loan segment, including government-guaranteed loans originated and sold for gain.
• Special mention loans: Loans that have potential weaknesses which deserve management’s close attention but are not considered impaired.
• Deposit beta: The sensitivity of deposit costs to changes in benchmark interest rates, indicating how quickly and fully deposit rates adjust.

Full Conference Call Transcript

Christopher R. Gruseke: Thank you, Courtney. Welcome, and thank you to everyone for joining Bankwell Financial Group, Inc.'s quarterly earnings call. This morning, I am joined by Courtney E. Sacchetti, our Chief Financial Officer, and Matthew J. McNeill, our President and Chief Banking Officer. Appreciate your interest in our performance and this opportunity to discuss our results with you. Bankwell Financial Group, Inc. 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%, 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 noninterest income generated by our SBA division. We have also made further progress in reducing our nonperforming asset balance 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 noninterest-bearing deposits as well as NOW accounts at rates of 50 basis points or lower.

These accounts' average balances collectively grew $20 million over the prior quarter and $64 million or 16% since 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 the 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, noninterest income, including SBA gains on sale, totaled $6 million. Credit trends in the portfolio continue to improve. Nonperforming 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 will ask Courtney to provide a more detailed review of our financial results.

Courtney E. Sacchetti: 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. Interest income reached $26 million, while noninterest 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 3.3%.

Improvement in both deposit costs and loan yields have contributed materially to our NIM expansion this year, up 74 basis points from 2024. Interest-bearing deposit costs are down 37 basis points from 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 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 $500 million of non-maturity deposits.

We expect $1.25 billion in time deposits to reprice favorably over the next twelve 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 maturities schedule. Although we expect to realize the benefit of lower-cost time deposits over the next twelve months, we also have approximately $800 million in loans tied to Prime that repriced in 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 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. Noninterest 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 $300,000 over the last quarter.

As you can see on page 14 of our investor presentation, noninterest income now represents 8.8% of total revenue, compared to 4.6% in 2024. Total revenue grew 10% compared to the prior quarter, while noninterest expense increased just 1%, resulting in positive operating leverage. While our noninterest expense to average assets was 180 basis points, our efficiency ratio improved to 51.4% for the quarter. We are pleased with this progress and expect further improvement in our efficiency ratio as profitability expands. Turning to credit, quarter results reflect continued positive trends. We have reduced our nonperforming 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 nonperforming 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 will now turn it over to Matt to provide an update on loan originations.

Matthew J. McNeill: 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 September 2023 and February 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 as 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 yields. Now I will hand it back to Courtney to summarize our guidance for the remainder of the year.

Courtney E. Sacchetti: 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 noninterest income guidance of $7 million to $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 to $98 million along with our guidance on noninterest expense of $58 million to $59 million. In our fourth quarter earnings in January, we will provide additional guidance on our 2026 outlook. I will now turn the call back to Chris for closing remarks.

Christopher R. Gruseke: Thank you, Courtney. We have 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 have made significant strides in closing out some pandemic-era credits with no further losses. Nonperforming assets now stand at 56 basis points of total assets versus 207 basis points a year ago. We look forward to further improvement in the quarters ahead. Thanks to everyone on the Bankwell Financial Group, Inc. 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: 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 Stephen M. Moss from Raymond James. Your line is live.

Stephen M. Moss: Good morning. That is Corey here.

Courtney E. Sacchetti: Good morning, Steve.

Stephen M. Moss: Hey, Chris. Maybe just starting with the good originations this quarter. I think Courtney gave a loan yield number, but I am sorry I missed this, kind of hopping on the call a little late here. Just kind of curious. Where is loan pricing these days and can we continue to see elevated payoffs maybe carrying over into 2026?

Courtney E. Sacchetti: Yeah. So it is 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 is about a half a billion dollars of originations, and that is the rate as of September 30. So as you know, it impacts from any repricing or anything there. Matt?

Matthew J. McNeill: Loan demand is very strong. That is reflected in that pricing. So 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 have experienced, and it takes a couple of months to get the loan pipe to respond to 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 will be able to meet and, you know, Courtney had said earlier that we are going to stay flat, and that is how we are looking at it. The loan demand is still there. It is just the timing of payoffs and trying to get the pipeline robust enough to respond to that. With regard to next year, we have demands to originate higher volume than we have. So it is a matter of lead time. So we will just plan to be out in front of it.

Stephen M. Moss: Okay. Appreciate that. Control we can control it with pricing.

Matthew J. McNeill: Yes. I hear you there. And then 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.

Matthew J. McNeill: So the first teams were hired in April, and we have hired some subsequent teams since then, including in the third quarter. We are bullish on the teams. They are already starting to produce and add deposits to the balance sheet. We do not 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 noninterest-bearing deposits. So those are primarily general accounts, which take longer to move or that, you know, a high-interest-bearing account where it is just money sitting around that is not being utilized in a business.

So they are well within our time threshold for how they are performing, and we are full impact.

Stephen M. Moss: Okay. And just kind of 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 nonmaturity deposits. How you are thinking about deposit beta there with the Fed?

Courtney E. Sacchetti: Right. So the most recent rate cut in September, we have just rough numbers, approximately $1 billion of nonmaturity interest-bearing deposits. About $250 to $260 million of that, we have indexed to Fed funds, so that will move, you know, that part of the relationship that we have. And then with this recent round, we did another $250 million or so of our exception rate pricing, a 100% beta down. So we were able to achieve effectively 50% beta on a billion dollars of deposits.

Stephen M. Moss: Okay. Great. That is helpful. I will back into the queue. Thank you very much.

Courtney E. Sacchetti: Thanks, Steve. Your final question comes from the line of Feddie Justin Strickland from Hovaday Group. Your line is live.

Feddie Justin Strickland: Good morning. This is Feddie's associate, Anira, on for him. Good morning, dear.

Courtney E. Sacchetti: Good morning.

Feddie Justin Strickland: 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. And 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?

Christopher R. Gruseke: I believe the answer to the second question is it really depends on the duration of the shutdown. Right now, Bankwell Financial Group, Inc. is a preferred lender. We are able to continue to underwrite SBA credits. We are not able to get in place guarantees, and we are not our guarantee port previously origin. There is a temporary freeze to the SBA income. If the government, you know, opens up in a relatively short amount of time, it may not have a large or may not have an impact on the business. We may be able to fluidly flow through it, but it is really going to depend on the duration of the shutdown.

As far as the ramp, we hired Michael Johnston from ReadyCap, which was the fourth largest producer of SBA loans in the country in previous years. And we believe that, you know, the SBA division does have operating leverage able to further scale the business beyond $50 million. Production and we will talk about that in the fourth quarter. And we will just need the government to be open to do that.

Courtney E. Sacchetti: Correct. So Anira, this is Courtney. I will 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 a full year's worth of original expectations in the results. So if the government opens, you know, as Courtney had mentioned, that there is it will be out of the it is up to when the government.

Feddie Justin Strickland: Perfect. Thank you.

Operator: There are no further questions. This concludes today's meeting. You may now disconnect.

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