Bankwell Financial Group, Inc. (BWFG) Earnings Call Transcript & Summary

Thank you. Hello everyone. Thank you for joining us and welcome to the Bankwell Financial Group second quarter 2026 earnings call. After today's prepared remarks, we will host a question and answer session. If you would like to ask a question, please press star 1 to raise your hand. To withdraw your question, press star 1 again. I will now hand the conference over to Courtney Cicchetti, Executive Vice President and Chief Financial Officer.

Courtney, please go ahead. Thank you. Good morning, everyone. Welcome to Bankwell's second 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 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 Chris Grisecki, Banquoil'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 Cicchetti, our CFO, and Matt McNeil, our President and Chief Banking Officer. Thank you for your continued interest in Bankwell and for the chance to share our second quarter results with you. Second quarter marked another period of strong execution with meaningful margin expansion, robust core deposit and loan growth, and continued progress on our strategic priorities, including the continued success of our SBA division. For the second quarter, we reported gap net income of $12.4 million, or $1.52 per share, compared to $11.3 million, or $1.41 per share for Q1. Long growth accelerated this quarter with balances growing by $93 million or by 3.2% sequentially. Gross loans stood at $3 billion a quarter end as new originations continue to outpace portfolio runoff. Core deposits increased by $128 million during the quarter. Importantly, this includes $72 million of growth in noninterest bearing and now accounts. Growth in non-interest-bearing deposits included approximately $44 million in increased analyzed checking balances. On a year-to-date basis, analyzed checking has grown by approximately $68 million, or roughly 17%. In addition to funding loan growth, our strong performance in growing core deposits has enabled us to reduce wholesale funding by $44 million this quarter. Since its peak at the end of 2022, we've now reduced broker balances by $520 million or by roughly 51%. This continued progress is a result of strong execution across the entire franchise as we continue to strengthen our funding base and deepen client relationships. Compared to the same quarter in the prior year, core deposits have grown by $356 million or by 19%. The net interest margin was 358 basis points, an expansion of 30 basis points from the prior quarter, driven by favorable repricing dynamics on both sides of the balance sheet. Courtney will walk through those details in a couple of minutes. Noninterest income remained a meaningful contributor to our results, totaling $3.3 million for the quarter. This was led by our SBA division, which contributed $2.4 million of gain on sale income. First half of this year, SBA loan sale gains were $4.8 million compared to $1.5 million in the first half of 2025. This business remains an important and growing part of diversifying our revenue stream. Credit quality continues to improve. Total non-performing loans decreased by $3.2 million to $15.9 million, and non-performing assets as a percentage of total assets declined by 10 basis points to 46 basis points. reserve coverage of non-performing loans strengthened to approximately 193%. As stewards of our shareholders' capital, our primary focus has always been to maximize tangible book value per share while balancing the risks of running our business. WE'VE ADDED $2.41 TO TANGIBLE BOOK VALUE FOR SHARE IN THE FIRST HALF OF 2026 TO REACH $40.25 FOR SHARE. now turn the call back to Courtney to walk through the financial results in more detail. Courtney Fingar- Thanks, Chris.

Profitability for the quarter was outstanding. Return on average assets was 1.46 percent and return on average tangible common equity was 15.61 percent. Pre-provisioned net revenue rose 31.4% to $17.5 million, or 2.07% of average assets, up from $13.3 million last quarter, driven by higher net interest income and improved efficiency. Net interest income totaled $29.5 million, up from $26.9 million in the prior quarter. interest margin expanded 30 basis points to 3.58%, driven by favorable repricing. Deposit costs improved 16 basis points to 2.94%, while our earning asset yields rose 11 basis points to 6.26%, as new loan production at an average rate of 7.16% continued to outpace runoff. Non-interest income totaled $3.3 million for the quarter, including $2.4 million of gains on SBA loan sales. Non-interest expense fell to $15.3 million from $16.9 million, primarily on lower salaries and benefits, as the first quarter carried seasonal compensation costs. Operating leverage continued to build, as evidenced by this quarter's 47.5% efficiency ratio, in the year-to-date ratio to 51.4%. Provision for credit losses was $1.2 million driven by loan growth. The allowance ended the quarter at 1.03% of total loans with non-performing loan coverage of approximately 193%. The balance sheet remains strong. Total assets ended the quarter at $3.5 billion and deposits at $3 billion. Shareholders' equity grew to $323.5 million. And as Chris commented, our fully diluted tangible book value per share rose to $40.25. Both the bank and the holding company remain well capitalized, with the bank's total capital ratio of 12.7%, common equity tier one ratio of 11.66%, and a leverage ratio of 10.36%. Finally, we repriced $0.6 billion of time deposits in the first half of the year at a 36 basis point improvement, representing an annualized benefit of $2.3 million. Looking ahead, that benefit will diminish as much of our higher cost time deposits have already been repriced and the remaining maturities carry rates closer to current market levels. As that benefit moderates, we are increasingly positioned towards a more rate neutral balance sheet. Approximately 43% or $1.3 billion of our loans are now floating rate, nearly double the 23% we carried at the end of 2024. This increase in floating rate assets provides a more balanced sensitivity across a range of rate scenarios. in the immediate term were modestly asset sensitive, roughly $1.6 billion of loans and cash repriced right away, while $250 million of Fed funds index deposits move with them. Over the following 12 months, that gap narrows towards neutral as $1.1 billion of time deposits mature and reprice and our core non-maturity deposits gradually adjust. That's the financial picture for the quarter. I'll turn it back to Chris for closing remarks.

Thanks, Courtney. Our second quarter results demonstrate the earnings power of the franchise we've been building deliberately over time. In our investor presentation for Q3 of 2024, we laid out plans to invest in our deposit franchise, pay down wholesale funding, increase non-interest income, and grow our consolidated tier one capital ratio. We committed to invest in the people and technologies necessary for the company's ongoing success and to ensure that the company's to do so in a manner which would increase our operating leverage. Halfway through 2026, we're excited to have seen so many of our aspirations realized. Given our first half performance and the momentum we're carrying into the second half of the We're pleased to increase our full year guidance across several measures. We now expect loan growth of 5% to 7%, and we are raising our full year net interest income outlook to a range of $115 to $117 million. we affirm our previous full-year guidance of $12 to $13 million for non-interest income. Given our momentum this year, we are making targeted investments in talent and infrastructure to support continued growth. and to compensate appropriately our teams for the strong performance they've delivered. Accordingly, we're raising our full year non-interest expense guide to $65 to $67 million. With our updated revenue guidance, we expect no negative impact to our efficiency ratio from our increased expense guide. None of the progress we've achieved can happen without the people behind it. I especially want to recognize our team whose dedication and efforts are what turn our strategy into results. customers who place their trust in us, and the shareholders who share our long-term vision. We're grateful to all of you and remain focused on delivering pure leading results in the quarters to come. Now, operator, we are ready to open the line for questions. We will now begin the question and answer session.

If you would like to ask a question, please press star 1 to raise your hand. withdraw your question, press star 1 again. We ask that you pick up your handset when asking a question to allow for optimum sound quality. If you are muted locally, please remember to unmute your device. Please stand by while we compile the Q&A roster. Your first question comes from the line of Freddie Strickland with Hovde Group. Freddie, your line is open. Please go ahead. Hey. Good morning, everybody. Just wanted to start off really.

on the loan growth here. I was just wondering if you could talk a little bit about what's changed to drive the higher loan growth, and is that future growth still predominantly CNI-driven like this quarter?.

Good morning, Freddie. Hi. Can I hand that to Matt?.

Really, the loan growth is a function of us raising our projections on assumptions on runoff we had you know a lot of loans refinance away from us or leave the bank last year if you know impacted you know our ability to grow the loan book early in the year we looked at those assumptions and raised them we've kept them raised through the first half of this year and that's that's really been the change Just originating more loans to fill the expected runoff.

Is any of that, you know, is that driven by, you know, increased activity from existing customers or reaching out to new customers? I guess I'm just trying to get a sense for, maybe whether sentiment improved or anything else just as the originations increase.

We're very relationship driven. We don't bring on large quantities of new customers. We're really focused on deepening relationships with existing customers and rinse and repeat asset classes. You know, it's really driven by, you know, deepening relationships with our existing customers. That's across all the healthcare. you know, goes into InvestorKorea, CNI, all the places we originate.

So, it's more art than science. It's managing the flows. And when you have a feel for what the prepayments should be, and then we look forward to the next quarter, we can prime the pump and price and speak accordingly to manage the flows.

All right, great. That's super helpful. Thank you. And switching to the other side of the balance sheet, you made really good progress in reducing the brokerage funding over the past couple quarters. I think we're down to about 17% or so. of deposits, how should we think about that brokered number over time, over the next year or so? Do you think you could get that sub-10 in the next 12 months, or is it just kind of too hard to tell at this point?.

It's not too hard to tell. I think sub 10 would be, that would sound aggressive. I think it'll come down naturally over time. because we are still trying to build consolidated capital at the Holdco. So while we're on this kind of trajectory, and the way it's gone the last several quarters, it feels just like organically we're generating more deposits than we and the amount of loans that we would want to book while still growing capital. So I expect to see it kind of drift down over time as that plays out. We don't have a target in mind.

And last quick question for me, just should we expect it to slide higher in the margin if the yield curve stays where it is, just getting above portfolio yields and new production Maybe it sounds like flattish deposit costs with some of the time deposits tailwind going away.

Hey, Fetty, it's Courtney. Yes, I would expect our margin to expand a little bit more into the third quarter. We still have some room left in our time deposits in the third quarter. It's really fourth quarter and beyond where we start to see the runoff kind of matching current market rates. So we do expect margin expansion, given no other changes.

Understood. I appreciate it, Chris, Courtney, Matt, and impressive quarter. I'll step back.

Thanks, Betty. Your next question comes from the line of Mark Shetley with KBW.

Mark, your line is open. Thanks. Good morning. Good morning, Mark.

Hey, so I was surprised to see the expense guide move up after expense control. control was really strong in the quarter. I know you talked about, you know, compensation drifting higher. I just wondered if you could talk through any other puts and takes there. Thanks.

Yes, so, you know, without specifics of what comprises it, in the earnings release, I think as well just now, we said that despite increasing the guide, you know, if you have numbers worked up based on our revenue guidance prior and now current, we would not expect that to impact the efficiency ratio in a negative manner. So we're talking about – we're really talking about scale. And as you have a year that's going well and doing better, you know, we're pretty – we run a meritocratic incentive plan. people do better we want them to get paid so that's I mean that's a good part of the increase as well you You know, we have been investing in technology and processes and bringing on additional people, but the scale is working for us. We wouldn't, I think early in the year we talked about expenses and said if we're adding expenses it's because we're making more money and we're going to return the expense.

And Chris, I will just add to that is that our guidance from the last time we gave guidance, if you did a rough calculation of what that efficiency ratio would be, it was a range of 52.8% to 51.2%. that high end it's exactly 52.8 and lowers the the best case scenario to 50% so it is in line with from an efficiency ratio perspective it actually is improved.

Okay, great. That's helpful. And then maybe shifting over to credit, you know, MPAs improve again. Again, I was wondering if you could update us on sort of that remaining non-performer bucket and then should we expect reserves to be relatively stable from here through the year? Thank you.