Bankwell Financial Group, Inc.

Thank you for standing by and welcome to the Bankwell Financial Group first quarter 2025 earnings call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during that time, press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star followed by the number one. I will now hand today's call over to Courtney Sucetti, Chief Financial Officer. You may begin. Thank you.

Good morning everyone. Welcome to Bankwell's first 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 .mybankwell.com and go to the events and presentations tab for supporting materials. Our first 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. Thank you. And now I will turn the call over to Chris Grisecki, Bankwell's Chief Executive Officer.

Thanks Courtney. Welcome and thanks to everyone for joining Bankwell's first quarter earnings call. This morning I'm joined by Courtney Sucetti, our Chief Financial Officer, and Matt McNeil, our President and Chief Banking Officer. We appreciate your interest in our performance in this opportunity to discuss our results with you. On today's call, we'll provide updates about our financial and operating performance for the first quarter. Our financial results for the quarter include GAAP fully diluted earnings per share of 87 cents, which were up 135% relative to the fourth quarter and 81% versus the first quarter of 2024. Earnings benefited from a lower, more normalized provision expense, an expanding net interest margin, an increased contribution from SBA gain on sale, and some modest share buyback activity. We were pleased with the progress made this quarter on several strategic initiatives which we've been discussing with shareholders since the third quarter of 2024. In late January, we successfully disposed of two previously identified non-performing credits, an $8.3 million Oreo asset which was sold at book value and a $27.1 million multifamily loan which was sold at par. Collectively, these dispositions drove non-performing assets as a percentage of total assets 105 basis points lower sequentially, finishing the quarter at 83 basis points. Further details regarding NPAs can be found on slide 11 of our investor presentation. Regarding loan growth, elevated payoff activity of $200 million offset strong origination activity of $130 million funded during the first quarter, resulting in a modest reduction in net balances versus year-round 24. SBA originations grew during the first quarter to $10 million and gain on sale margins were just over 10%. We remain optimistic about SBA gain on sale activity accelerating throughout 2025. Commercial loan pipelines, including SBA activity, continue to be active and despite a slower first quarter, we still expect low single-digit loan growth for the full year. On the liability side of the balance sheet, we had another positive quarter of paying down broker deposits which declined $81 million relative to the fourth quarter while core deposits grew $43 million including $28 million of growth in non-interest bearing deposits. Over the last 12 months, we've now reduced broker deposits by $207 million while growing core deposits by $244 million. Our balance sheet remains liability sensitive with additional margin expansion expected in 2025 as maturing term deposits reprice to lower current rates. Now to discuss our financial results in greater detail, I'll turn it back to Courtney.

Thank you, Chris. Our first quarter pre-provisioned net revenue of $9.4 million or $1.22 per share increased 11% relative to the fourth quarter with the PP&R return on average assets increasing to 118 basis points versus 105 basis points in the fourth quarter. Reported net interest margin for the quarter of 281 basis points represents a 21 basis point increase relative to the length quarter which includes a one-time net nine basis point benefit resulting from the collection of accrued interest on a disposition of one of our large non-performing loans which was partially offset by accelerated fees on called brokerage CD. Core net interest margin expansion of 12 basis points primarily benefited from a continued decrease in our total cost of funds which fell another 12 basis points versus the length quarter to 3.60%. That length quarter reduction follows a nine basis point reduction in the fourth quarter. As we know in the earnings release, our March 2025 cost of funds was $3.52 reflecting incremental benefit from recent cost reductions on market rate deposits. We expect impact from these updates to carry into the second quarter. On slide eight, we continue to highlight our term deposit maturity schedule which shows $1.2 billion of time deposits maturing in the next 12 months. $719 million of retail CDs repricing at an average of 22 basis points lower and $495 million of broker CDs repricing at an average of 53 basis points lower both based on current rates. Also, we anticipate more than half a billion dollars in loans to reprice their mature over the same time period which could further benefit margin by an additional 15 to 20 basis points on an annualized basis. Considering the various inputs to margin, we expect continued expansion over the balance of 2025 and can reaffirm our net interest income guidance for full year 2025 of 93 to $95 million. This guidance assumes no further action by the Fed for the balance of this year. Noninterest income of $1.5 million increased 56% versus the length quarter largely driven by $424,000 of SBA gain on sale income. As Chris stated earlier, we expect SBA volume to continue to build in 2025 with a full year estimate of approximately $50 million of originations. The length quarter increase in total noninterest expense to $14.1 million was primarily driven by higher salaries and benefits partially attributable to timing events related to incentive in both periods as well as increased headcounts. Additionally, we saw an increase in initiative-related costs and professional service fees. These increases are partly offset by a reduction to expense incurred at the end of 2024. Our efficiency ratio for the quarter was .9% and increased over the prior quarter. As our net interest margin continues to expand and noninterest income grows, we anticipate this ratio to improve.

We reiterate

our full year 2025 guidance for both noninterest income and noninterest expense of $7 to $8 million and $56 to $57 million, respectively. The first quarter's provision expense was $463,000 compared to $4.5 million in the prior quarter. First quarter credit trends were benign. Finally, a few thoughts on our financial condition. Our balance sheet remains well capitalized and liquid with total assets of $3.2 billion down slightly versus the length quarter. We repurchased 29,924 shares at a weighted average price of $30.46 per share during the quarter ended March 31st and have 220,000 shares remaining on our authorization. I'd like to now turn it back over to Chris for his closing remarks.

Thanks, Courtney. Before we conclude today's call, I'd like to comment on our continued ability to attract talented professionals to our organization. In April, we added two deposit teams in the New York metro area. These teams with seven FTEs have already begun the process of onboarding new customers. With continued disruption in the market for experienced talent, we'll continue to selectively add professionals who can help us achieve our strategic goals. We believe that our strong balance sheet, an experienced and nimble management team, and our customer-first business model make Bankwell an attractive platform for additional deposit teams. During the first quarter, we also hired a new Chief Technology Officer, Brian Merritt. Brian's considerable experience in banking technology, product development, and system architecture will enable us to lean into the rapidly evolving technology landscape. As we conclude, I want to thank the entire Bankwell team. Their excellent effort and dedication have been instrumental to the evolution of this company. This concludes our prepared remarks, operator. Will you please begin the question and answer session?

At this time, if you'd like to ask a question, press star followed by the number one on your telephone keypad. If you'd like to withdraw your question, press star followed by the number one. We'll pause for just a moment to compile the Q&A roster. Your first question is from the line of Chris O'Connell with KBW.

Hey, good morning. Good morning, Chris. I was just hoping to start off on the new teams and maybe whether there'll be more deposit or loan focused or some mix of both and then just maybe growth contribution, thoughts around growth contribution over time or how big their prior bucks were.

Sure. Hey, Chris, it's Matt. I think that we're in the first couple of weeks of them joining the bank. The focus is definitely on deposits. Certainly, there'll be some loans mixed in, more deposits than loans. The books of business were quite large for both teams, both books of business over 100 million, lots of -interest-bearing. We're hopeful that those will translate into a lot of migration to bank wealth. But as I said, we're in the early days of them onboarding with the bank, so more to come.

Got it. Thanks, Matt. I apologize if I missed any items in the prepared remarks. Signed down a little late. I was just hoping to get an update on the loan pipeline, what you guys are seeing from here. I think last quarter, the 2025 growth is 3% to 5%. It's a slower start to the year. Eat into that at all. Any interesting update on the growth outlook?

Somewhere in the remarks, Chris, I definitely had mentioned we still think we'll get low single digits, and it's a matter of timing. You want to ask the pipeline?

Okay, sorry. I'll just add, Chris, that there were some lumpy payoffs in the first quarter that weren't originally budgeted, so there was no way to scramble and increase the pipeline to make up for those. We don't anticipate that that's going to be the case going forward. The pipeline robust, and we had plenty of closings and fundings in the first quarter. Just the amount of unanticipated payoffs were so much higher than our fundings.

Great. Where is the pipeline yield at?

It's holding strong. It's in that high sixes, low sevens, depending on the asset.

Matt, I'll just add to that our 1Q25 vintage is the yield average was 817.

Great. Yeah, very great. Just because I know that there is a non-accrual interest recovery within the loans this quarter, do you have an exit loan portfolio yield or march? I don't know when the recovery is realized, but either a march yield or an exit yield or a core loan yield for the quarter.

Chris, that would be about 640. I know it's a 654 in our release, so excluding that, it would be 640, which is about a 10-bit expansion over the fourth quarter.

Great. Thanks. Continuing on the margin, I guess I was a little surprised while the margin expansion was great. Given the amount of CDs that were maturing in the first quarter, that the interest-bearing cost didn't come down a bit more. Any thoughts around that? I don't know if the CDs were maturing late in the quarter, if it was timing? I guess anything on the progress on the interest-bearing costs?

I'd say a little bit of timing. I will note that we did have some, we called the last of our callable broker CDs in the first quarter and had to accelerate fees, pull them forward when we called those. That was a little bit of a one-time drag. It was a two-bit impact on our cost of deposits. We were able to reprice our time. Everything that was maturing in the first quarter, our CD balances remained relatively flat quarter over quarter and 95 basis points lower than what it was coming off at. We felt pretty good about that. I think maybe just a little bit of timing and a little bit of one-time expense.

Okay, got it. Chris, I'd add to that, that in terms of what the numbers will be, when we talked about net interest income, we were factoring zero Fed cuts into that guidance.

Okay, great. Super helpful. Okay. Did you guys give us a spot margin for March here? Or do you have it?

I did not give a spot margin for March. We did give the spot deposit cost of $352.

Okay, got it. The NIAI guide unchanged. I don't think it was quite official guidance, but the full year NIM hanging around in that .90% to 3% range still feels good absent any rate cuts?

Yes.

Great. On the fee income side, great start on the SBA gain on sale and originations there. How's the pipeline? Have you guys started better than you expected? How do you see the cadence moving on throughout the year?

Yeah, originations were better than we had predicted. We had kind of backed into a number and it builds over time. We expect our best quarter to be in the fourth quarter. We still expect fourth quarter originations to be the strongest quarter as we're continuing to build in the SBA division itself. We've only added one BDO so far. Plan is to add two before the end of the year. We expect the originations to continue to build.

Got it. Given the strong start, do you put a decent probability on the chance that you can see

the change? I think the other side of that probability is there are a lot of changes happening at the SBA right now. There's been a couple of rule changes just since the start of the year. We're looking at that with, we're tempering our expectations on some sort of material out performance just because there seem to be changes that are undergoing at the SBA and we're not sure how that's going to affect us in the future. Right now the changes that have been implemented and announced are not going to hamper our growth in the SBA but just thinking about what may come as things are changing, evolving rapidly at the SBA.

It's not so much that things are changing rapidly in the SBA as it thinks in general are changing with any kind of policy. We're not going to stand here and predict what can happen in Washington for the next six months given the last four weeks.

Yeah, understood. Then on the expense side, I get the guidance unchanged. Over the course of the year, do you think that the professional fees that have come up over the past couple of quarters, that that eventually shifts into the compensation line or elsewhere within the expense base? Or is that kind of, is this more or less kind of where you guys think you'll be for the next few quarters?

I do think we did reference on the call if you heard that it's related to our initiative. In our professional services line, we've got legal expense, non-deal related legal expense, consulting costs, recruiting costs. Yes, some of those costs are one-time investments that will shift into the employee expense line, be it through recruiting key talent or implementing new technology that may be software related or other expense-related items. Yes, we don't anticipate it to continue to remain on an elevated level, but again, there will be potential lumpiness as we explore different initiatives.

But we are referring to the $57 million number.

Yeah.

Great.

Obviously, great job in the credit piece quarter. Loan and Oreo sales and getting everything off the books and keeping charge off super low. Now that you guys have offloaded a good portion of the MPAs that you had on, how do you feel about the remaining two loans that you highlight, making up kind of the majority of the remainder here? Any updates on either of those?

No material updates. The retail property that's highlighted there will probably have an update on our next call. That one should undergo some sort of either re-tenanting or refinance at some the next 90 days. We should have an update then. Then the office building in New Jersey, we broke down about two-thirds of the loan already. It's in receivership. We're now in control of the cash flows as a bank group and litigation against the guarantor is proceeding. But no real material update, just marching forward with a little bit more control over the cash flow, which is good for us. We'll see how things progress in the next couple of quarters.

This is Chris. In those 88 basis points of MPAs, there's about 17 basis points, correct me if that's not right, Courtney, of fully guaranteed portions of SBA loans.

Yes, it's 83 of ours is the total and 17 is guaranteed.

Oh, thank you, 83.

Perfect. I saw that there's a little bit of movement, I guess, in the risk ratings this quarter. Some things are coming down, a little bit of uptake and special mention. I guess, you know, this is the migration between the two or any other around movement.

Yeah, go ahead. We're cracking up a little bit. I think, Chris, you were asking about the increase in special mention, basically?

Yeah, any of that kind of migration in the risk ratings would be great.

Yeah, so the risk rating migration primarily happened from pass credit to special mention. We did put a footnote there. We're confident in these loans. These are primarily healthcare loans that did not hit their pro formas and they're backed by ultra high net worth sponsors with plenty of liquidity. They're also performing loans. They're current and we feel good that they'll return to a pass status over the next couple of quarters.

Got it. And then lastly, how are you guys thinking about the share rate purchases? A little better than what I was expecting this quarter. Do you expect to keep kind of plugging along on the plan here through, you know, especially kind of given, you know, what the market's

done? Yeah, given where we are, you know, as I've said in the past, it's more an art form than it is a science. Obviously, at these levels, frankly, we'd like to buy back more, right? But the fact of the matter is we also need to build consolidated CET1. So, you know, we'll participate as we're able to, but we are seeking to grow consolidated CET1 to 11% or north over a couple of years. So we have to balance that at the same time.

Got it. Thanks, Chris. Okay, great. That's all I have. Appreciate the time. Thanks for taking my questions.

Great. Thanks so much, Chris.

Thanks, Chris. As a reminder to ask a question, press star one on your telephone keypad. At this time, there are no further audio questions. I will now hand the call back over to the presenters for closing remarks.

Okay, thanks so much for participating in the call today. We executed according to what we said we would do in the last couple of quarters. Things looked cleaner and more straightforward on the credit side. The two assets we've been talking about have been removed. The SMB, the SBA business, is up and running. The margin continues to expand. We are confident in the path going forward. Thanks for taking the time to listen.