Prepared remarks
Thank you for your patience. My name is Jordan, and I will be your conference operator today. I would like to welcome everyone to the Bankwell Financial Group Third Quarter 2025 Earnings Call. I will now turn the call over to Courtney Sacchetti, Executive Vice President and Chief Financial Officer. Please proceed.
Thank you. Good morning, everyone. Welcome to Bankwell's Third 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 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. And now I'll turn the call over to Chris Gruseke, Bankwell's Chief Executive Officer.
Thank you, 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 this opportunity to discuss our results with you. Bankwell 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% for the quarter, 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've also made further progress in reducing our nonperforming asset balances during the quarter 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 by $20 million over the prior quarter and $64 million or 16% since the fourth quarter of 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 3 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 3 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'll ask Courtney to provide a more detailed review of our financial results.
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. Net 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 3 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 3.30%. Improvement in both deposit costs and loan yields have contributed materially to our NIM expansion this year, up 74 basis points from the fourth quarter of 2024. Interest-bearing deposit costs are down 37 basis points from the fourth quarter of 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 the fourth quarter of 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 $0.5 billion of non-maturity deposits. We expect $1.25 billion in time deposits to reprice favorably over the next 12 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 maturity schedule. Although we expect to realize the benefit of lower cost time deposits over the next 12 months, we also have approximately $800 million in loans tied to prime that repriced at the end of 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 approximately 5 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 $0.3 million 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 the fourth quarter of 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're pleased with this progress and expect further improvement in our efficiency ratio as profitability expands. Turning to credit, third quarter results reflect continued positive trends. We 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 1 ratio now at 10.39% versus 10.18% in the prior quarter. Our tangible book value also increased, reaching $36.84. I'll now turn it over to Matt to provide an update on loan originations.
Good morning. As Chris mentioned, loan fundings in the first 3 quarters remained strong. The bank has funded $500 million in new loans as of 9/30. 2025 year-to-date loan fundings have already outpaced full year 2023 and 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, where 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.
Thanks, Matt. Due to our increased payoffs, we are updating our low single-digit loan growth guidance to flat for the year. We confirm our noninterest income guidance of $7 million to $8 million for the full year, and the restart of the SBA program will contribute to that total. We also confirm our net interest income guidance of $97 million to $98 million, along with our noninterest expense guidance of $58 million to $59 million. With our fourth-quarter earnings in January, we will provide further guidance on our 2026 outlook. I'll now turn the call back to Chris.
Thank you, Courtney. We've 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 the team committed to constant improvement. Importantly, we've made significant strides on 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, and we look forward to further improvement in the quarters ahead. Thanks to everyone on the Bankwell team, whose commitment to excellence has enabled these results. This concludes our prepared remarks. Operator, will you please begin the question-and-answer session?
Questions and answers
Our first question comes from the line of Steve Moss from Raymond James.
Chris, maybe just starting with the good originations this quarter, I think Courtney gave a loan yield number, but I'm sorry, I missed those, I was kind of hopping on the call a little late here. Just kind of curious, where is loan pricing these days? And do we continue to see elevated payoffs maybe carrying over into 2026?
Yes. So Steve, it's Courtney. On Page 10 of our investor presentation, we provide additional detail. Year-to-date, our originations have a weighted average rate of 7.86%. This is based on approximately $0.5 billion of originations, and that's the rate as of September 30, reflecting any impact from repricing or related factors. Matt?
Loan demand is currently very strong, as evidenced by the pricing, allowing us to selectively determine our next steps. The year-over-year stagnation in loan growth is primarily due to the timing and speed of payoffs. We are experiencing our highest rate of payoffs. It usually takes a few months for the loan pipeline to adjust and replenish those numbers, which we managed to accomplish this quarter. We expect similarly strong payoffs in the fourth quarter, and we aim to maintain our position, as Courtney mentioned earlier. Although loan demand remains robust, it's the timing of payoffs and the need to strengthen our pipeline that affects our response.
Stephen, regarding next year, we are experiencing demand that necessitates originating a higher volume than we currently have. It's a matter of lead time, so we will plan to stay proactive. We can manage this through pricing.
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?
So the teams, the first teams were hired in April, and we've hired some subsequent teams since then, including in the third quarter. We're bullish on the teams. They're already starting to produce and add deposits to the balance sheet. We don't 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 business accounts, which take longer to move than a high interest-bearing account where it's just money sitting around that's not being utilized in a business. So they're well within our time threshold for how they're performing, and we're excited for the full impact.
Okay. As my last question, I'm interested in the timing of lower cuts. I understand that you're repricing CDs with a 100% beta. I'm curious about how you are approaching deposit beta for nonmaturity deposits with the Federal Reserve.
Right. So the most recent rate cut at the end of September, we have just rough numbers, approximately $1 billion of non-maturity interest-bearing deposits. About $250 million, $260 million of that we have indexed to Fed funds. So that will move 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, 100% beta down. So we were able to achieve effectively 50% beta on $1 billion of deposits.
The final question comes from the line of Feddie Strickland from Hovde Group.
This is Feddie's associate Anira on for him. 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?
I believe the answer to the second question is it really depends on the duration of the shutdown right now. So Bankwell is a preferred lender. We're able to continue to underwrite SBA credits. We are not able to get in-place guarantees, and we are not able to proceed with our guaranteed loans previously originated. There is a temporary freeze to the SBA income. If the government opens up in a relatively short amount of time, it may not have a large impact on the business. We may be able to fluidly flow through it, but it's 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 the SBA division does have operating leverage to further scale the business beyond $50 million in production, and we'll talk about that in the fourth quarter.
And we'll just need the government to be open to do that.
Correct.
This is Chris. I'll continue a little bit on that answer and say that we did note that in the 3 quarters' worth of activity, we pretty much hit our original goal of almost $50 million. So we've got almost a full year's worth of original expectations in the results. So the government opens, as Courtney had mentioned, there's potential for us to scale up.
There are no further questions. This concludes today's meeting. You may now disconnect.