Bankwell Financial Group, Inc. (BWFG) Q1 2026 Earnings Report, Transcript and Summary

Thank you for standing by. My name is Tina, and I will be your conference operator today. At this time, I would like to welcome everyone to the Bankwell Financial Group, Inc. First Quarter 2026 Earnings Call. [Operator Instructions] It is now my pleasure to turn the call over to Courtney Sacchetti, Executive Vice President and Chief Financial Officer. You may begin.

Thank you. Good morning, everyone. Welcome to Bankwell's First 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 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 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 Chris Gruseke, Bankwell's Chief Executive Officer.

Thanks, Courtney. Welcome, and thank you to everyone for joining Bankwell's quarterly earnings call. This morning, I'm joined by Courtney Sacchetti, our Chief Financial Officer; and Matt McNeill, our President and Chief Banking Officer. We appreciate your interest in our performance, and I'm excited by this opportunity to discuss our results with you. We've delivered a solid start to 2026 with strong earnings, continued balance sheet improvement and continued progress on our strategic priorities. For the first quarter, we reported GAAP net income of $11.3 million or $1.41 per share. These results were supported by solid loan production, strong fee income from our SBA platform, lower funding costs, meaningful core deposit growth and ongoing balance sheet optimization, including reduced reliance on wholesale funding and continued progress on building a more interest rate neutral balance sheet. Loan growth remained positive during the quarter with $190 million of originations, including $34 million of SBA production, resulting in net loan growth of $27 million. On an annualized basis, this level of growth is consistent with our previously communicated guidance of 4% to 5% for the full year, and our pipeline remains strong. Importantly, this growth is supported by strong core deposit inflows. Core deposits increased by $113 million sequentially with $39 million coming from low-cost deposits. Included in that $39 million is $24 million of growth in annualized checking balances for an 8% increase on the quarter. In addition to funding our loan growth, we've also reduced broker deposit balances and Federal Home Loan Bank borrowings by a combined $95 million, further improving our funding mix. Since our peak at the end of 2022, we've successfully reduced our broker deposits by $513 million for a 50% decline. The net interest margin was 328 basis points, reflecting modest pressure from asset repricing as floating rate loans reset lower and an unfavorable day count impact relative to the prior quarter. These factors were partially offset by continued improvement in deposit costs, which declined 5 basis points sequentially to 310 basis points. Noninterest income remained a meaningful contributor to results totaling $3.3 million, which includes $2.4 million of SBA gain on sale income. Our SBA division continues to be an important part of our diversified revenue strategy and a meaningful source of recurring fee income. Credit quality remains healthy with expectations of further improvement. While nonperforming assets increased modestly to 56 basis points of total assets, we have visibility into the resolution of several credits over the coming quarters. Overall asset quality metrics remain well within our internal expectations and reserve coverage levels remain appropriate. Finally, we are excited to have opened our first full-service branch in New York during the quarter located in Bay Ridge, Brooklyn. The branch is home to an experienced private client banking team that joined Bankwell in 2025. And the addition of this location enables the team to deliver Bankwell's full suite of commercial and private client banking services on the ground in New York. I'll now turn the call back to Courtney to walk through the financial results in more detail.

Thanks, Chris. Starting with the income statement. Net interest income totaled $26.9 million for the first quarter and was largely unchanged compared to the prior quarter. Net interest margin declined modestly to 328 basis points, driven primarily by the repricing of floating rate loans in a lower rate environment and an unfavorable day count impact. On a day count normalized basis, the sequential NIM variance would have been approximately 5 basis points. These headwinds were partially offset by continued improvement in deposit costs. Total deposit costs declined to 310 basis points, down 5 basis points from the fourth quarter, and the bank exited March with a deposit cost exit rate of approximately 298 basis points. During the first quarter, we successfully repriced approximately $300 million of time deposits, 44 basis points lower, generating an expected annualized benefit of $1.2 million. In addition, over the next 12 months, approximately $1.1 billion of time deposits are expected to reprice favorably with an average rate reduction of 14 basis points. This repricing is anticipated to deliver an incremental annualized benefit of roughly $1.6 million or about 5 basis points of net interest margin. With respect to rate-sensitive assets, we've strategically increased the proportion of variable rate loans from just over 20% at the start of 2025 to approximately 42% at quarter end. Additional detail on asset and liability repricing as well as rate sensitivity is provided on Page 8 of the investor presentation. Profitability remained solid in the quarter with return on average assets of 1.35% and a return on average tangible common equity of 15%. As deposit repricing continues to flow through the balance sheet and interest rate sensitivity moderates, we expect incremental margin improvement over the balance of 2026, affirming our full year net interest income guidance of $111 million to $112 million. Noninterest income totaled $3.3 million for the quarter, reflecting $2.4 million of gains on SBA loan sales and continued growth in service fee income driven by an expanding commercial client base. Based on our first quarter results, we are raising our full year noninterest income guidance to $12 million to $13 million. Our pre-provision net revenue for the quarter was $13.3 million or 1.6% of average assets compared to 1.8% in the prior quarter. Our PPNR was impacted by approximately $1 million in annual noninterest expense typically incurred in the first quarter, elevating total noninterest expense to $16.9 million for the quarter. These annual costs are primarily related to employee compensation and certain professional services. Despite these seasonal expenses, our underlying noninterest expense run rate remains consistent with our prior guidance of $64 million to $65 million. The efficiency ratio for the quarter was 55.8%, which reflects the seasonality of first quarter expenses. Our provision for credit losses was a release of $1 million for the quarter, driven by the net impact of loan growth and economic factors embedded in our CECL model. The allowance for credit losses ended the quarter at 1.03% of total loans with coverage of nonperforming loans at approximately 155%. From a capital and liquidity standpoint, the balance sheet remains strong. Total assets ended the quarter at $3.4 billion, deposits totaled $2.9 billion, and both the bank and holding company remain well capitalized. Tangible common equity was 9.17%, and our consolidated common equity Tier 1 ratio was approximately 10.58%. We repurchased 3,317 shares during the quarter at an average price of $45.32 per share. Now I'll turn the call back to Chris for closing remarks.

Thanks, Courtney. In 2024, we laid out a plan to improve our funding mix, continue to grow our loan book in a disciplined manner, maintain strong credit quality and build diversified sources of revenue. We've also committed to continue to invest in our tech-forward platform while managing expenses. We are truly gratified by the results achieved through the planning and hard work done by our team, and we thank them for their dedication. We will continue to execute on our strategic goals and look forward to sharing the results of our continuous growth and evolution with all of our stakeholders in the quarters ahead. We thank our long-time customers for their continued support and welcome the many new customers who have helped us to grow our business. We also appreciate the continued support and interest from our shareholders and the investment community. Now operator, we're ready to open the line for questions.

[Operator Instructions] And from KBW, our first question comes from the line of Mark Shutley.

I appreciate the detail on the CDs and how much of that's coming due. I think you said that's a 5 basis point benefit to the margin. So I was just curious in this current rate environment now that it's seemingly more flat. Are you seeing more competition on the deposit side? I'm just trying to get a sense for how much the overall interest-bearing deposit costs can be worked down.

First of all, the first part of that answer is the numbers that we put in that's expected to roll CDs is based on market on the day that -- as of today's market. So it implies no further cuts or any term deposits as they roll to current, that's what the impact would be. That was the first part of your question.

This is Matt. As far as deposit competition, it's very competitive out there for deposits. We're focused on bringing in low-cost deposits to bring down our funding costs, which is probably the most competitive area. However, we're finding success and have been able to substantially grow core deposits in the quarter.

Right. So obviously, it's competitive. And loan growth -- net loan growth was approximately 2% quarter-over-quarter, but core loan growth was substantially higher. And with the -- so it was something like 7%, Courtney?

Core deposit growth of $113 million.

$113 million, about $30 million of that was annualized or noninterest-bearing or low cost. So almost 30% -- 25%, 30% of what we brought in this quarter. And with the balance that didn't result in growth, we paid down more expensive borrowings. So we're happy with the deposit result despite the competitive environment.

Improved mix in our deposits...

Yes.

Okay. Appreciate it. And then maybe switching gears really quick. So SBA was strong in the quarter, and it looks like originations are tracking higher than -- I think you previously talked about $100 million in originations for the quarter. So I'm just trying to get a sense of where you think if there's any change to that and where SBA fits into the overall fee guidance.

Yes, we are having success with the SBA. We have a really strong team. We could definitely originate more SBA loans. We're choosing to keep the volume kind of level where it's at. We're not increasing our $100 million that we put out as how we are thinking about fee income, although other fees are coming in higher as well. So that is the reason for the increase in the fee guidance.

So if we wanted to do more, we could is the answer. Similarly, as we're 2 years into this, we're going in a measured.

Operator, we are ready for the next question.

Our next question is from the line of [Technical Difficulty].

Sorry, are you there?

Yes, sorry, I didn't hear the name. So my apologies on that.

Yes, no...

Courtney, there is...

You are on, Feddie.

All right. Perfect. No worries. It's all good. I just wanted to start by asking about the Brooklyn office. Just does that sort of serve as the [indiscernible] or some of the deposit gathering teams that are in the city. And I was just curious how much lending do you think you will do out of that office?

I think we'll do a modest amount of lending out of the office, Feddie. It wasn't the primary reason to open the office. It was definitely a deposit play, which has already taken off and been robust, just in the 10 months leading up to the branch opening, the team was very active, and we've had good success there. Lending isn't a part of the strategy there. However, we do think that some loans will come out of it, but we've been lending in and around NYC for the -- since the existence of the bank. So it really shouldn't change a whole lot as far as like the geography where we're lending.

And Feddie, I think we've said this before, this is Chris. It's -- we don't have a plan to go and try to find branches in particular markets or make sure we have more branches. We hired the people first. This is a very experienced private client group that's been together for years has already had material and significant impact on our organization. And if what they needed is a branch to assist in their platform, then we can build a branch. It wasn't -- we happen to love Brooklyn. I was born there, but we weren't going out of our way to enter that market. We were following our deposit team and their needs.

Got it. That's helpful. And then just switching gears to CRE concentration, given the current trend line, is it possible we could see that dip below 300% by year-end or maybe early next year just based on what's currently in the pipeline and capital build and what have you? Or do you feel like you're kind of in a range where you're pretty comfortable and you're not as worried about crossing that 300% threshold?

I'm sorry, was that the CRE concentration question?

Yes.

We don't have 300 as a target. We're seeing a more diversified loan mix. It's conceivable, but it's not the plan. So you can look at the trend. Over the last year, we've come down 10 -- no, more, 375, 40 basis points. Yes, we are happy where it is. I guess we can live with it, but I suspect over time, we'll get down there. It's -- whether it's year-end or not, I don't know, but it's been a consistent trend for a while, and we're seeing a better flow of C&I deals and we haven't done much office, et cetera. So I think it will naturally kind of get there, but it's not particularly our goal. I wouldn't be surprised if it came down another 10, 20 basis points over the course of the year.

Got it. And then just on the credit side, it looked like the modest increase in nonaccruals there was CRE driven. I apologize if I missed it in the opening remarks. But can you speak a little bit more on maybe what drove the increase there and what you might expect on resolution of those?

Yes. The increase was just a tenant left the building. Sponsors not able to make the payment. There's equity in the deal. We think that we'll be able to work with them to dispose of the real estate and be paid there. As in Chris' comments, you heard that there is some visibility into resolution to several of the credits that are on our NPAs, and we expect those to happen in the next couple of quarters and have some meaningful resolution in a much lower NPA number.

From Raymond James, your next question comes from the line of Steve Moss.

It's Chase on for Steve. On loan pricing, can you tell me where new origination yields are coming on at these days?

For the first quarter, our average rate was 7.5%.

I appreciate that. And just one more for me. I thought you guys nibbled at buybacks this quarter. Can you tell us what would bring you more into that market?

I'm sorry, can you repeat that? I heard buybacks and that cut out.

Yes. I saw you nibbled at buybacks. Could you tell us what would bring you more into that market?

We look at the price quarterly or daily when we're not in blackout. We had a plan in place. I expect the number will grow over the course of the year, but you have to look at our consolidated CET1 ratio. And we are still trying to grow that. At the levels we have gotten to the last couple of days and the amount of stock that we issued, that wouldn't be surprised to see us over the course of the year, nibble some back. But we still need to -- our goal is still to get to 11%, not necessarily by year-end in the CET1 ratio at the hold co...

And with no further questions, this does conclude today's conference call. You may now disconnect.