Bankwell Financial Group Inc 2026 Q3 Earnings Call

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. 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 are joined by Matt McNeill, 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 is 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 we will 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 remain 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, a cumulative benefit of deposit repricing in prior quarters, and a more favorable funding mix. Funding costs were essentially stable compared with the second quarter. 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 $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 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. Non-performing loans declined to $7.1 million while non-performing 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 on a consistent and safe manner is our primary responsibility to our shareholders. 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 returns. 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 eight basis points to 6.34%, while loan yields increased six 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 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-$500,000 per quarter over the next four 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 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 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 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've 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 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-$121 million, compared to our prior range of $115 million-$117 million. Given the strength of our SBA division, we're raising our non-interest income guidance to $14 million-$15 million from a prior range of $12 million-$13 million. We continue to expect full-year loan growth of 5%-7%, and excluding core conversion costs, full-year non-interest expense outlook remains stable at $65 million-$67 million. Before ending our prepared remarks, I'd like to thank our incredible team.

None of these results were easy to achieve. It 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.