Q4 2024 Bankwell Financial Group Inc Earnings Call
Christopher Gruseke, Courtney Sacchetti, Matthew McNeill, Ryan Hildebrand, Bankwell Financial Group Inc
The
Kelvin: Good morning, ladies and gentlemen, and thank you for standing by. My name is Kelvin and I will be your conference operator today. At this time, I would like to welcome everyone to the Bankwell Financial Group fourth quarter 2024 earnings call. All lines have been placed on mute to prevent any background noise.
Kelvin: After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad.
Speaker Change: If you would like to withdraw your question, press star 1 again. Thank you. I would now like to turn the call over to Courtney Sacchetti, Executive Vice President and Chief Financial Officer. Please go ahead.
Courtney Sacchetti: Thank you. Good morning, everyone. Welcome to BankVault's 4th Quarter 2024 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.mybankvault.com and go to the Events and Presentations tab for supporting materials.
Speaker Change: Our fourth quarter earnings release is also available on our website.
Speaker Change: Our remarks today may contain forward-looking statements and may refer to non-GAAP financial measures.
Speaker Change: 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.
Speaker Change: Thank you. And now I will turn the call over to Chris Grusecke, Bankwell's Chief Executive Officer.
Chris Grusecke: Thanks, Courtney. Welcome, and thanks to everyone for joining BankWell's fourth quarter earnings call. This morning, I'm joined by Courtney Sacchetti, our Chief Financial Officer, and Matt McNeill, our President and Chief Banking Officer.
Speaker Change: On behalf of our Board of Directors, I'd like to congratulate Matt on his recent promotion to President of Bankwell Financial Group and its subsidiary, Bankwell Bank.
Speaker Change: We appreciate your interest in our performance and this opportunity to discuss our results with you. On today's call, we'll provide updates about our financial and operating performance for the fourth quarter, including the status of several non-performing loans we've previously disclosed over the course of 2024 and 2023.
Speaker Change: It's important to note that during the quarter we saw no credit deterioration and we continue to be optimistic regarding the performance of our loan portfolio in 2025.
Speaker Change: Our financial results in the fourth quarter included GAAP fully diluted earnings per share of 32 cents, which were impacted by three million dollars of net charge-offs.
The charge-offs primarily consisted of two non-performing assets.
Speaker Change: First, we fully disposed of a non-performing C&I loan with a book balance of 1.7 million dollars.
Speaker Change: The initial write-down on this credit was announced in an 8K filing in July 2024.
Speaker Change: The $700,000 charge-off on this loan and the sale of certain assets finalizes the disposition of this non-performing asset.
second
Speaker Change: transferred the property to Oreo and charged off 1.2 million dollars which resulted in a carrying value of 8.3 million dollars.
Speaker Change: This loan went into non-accrual status in the early days of the COVID pandemic and has been working its way through the legal system.
Speaker Change: Subsequent to December 31st, 2024, we signed a purchase and sale agreement for this Oreo asset for the full $8.3 million book value.
Speaker Change: The impact of this sale will reduce the non-performing asset ratio by 25 basis points.
Speaker Change: Also subsequent to December 31st, 2024, we signed a purchase and sale agreement for our largest non-performing loan of $27.1 million at par value, which upon sale will further reduce the non-performing asset ratio by 83 basis points.
Speaker Change: Both sales should have a neutral impact to future net income.
Speaker Change: Further details regarding MPAs can be found on slide 11 of our investor presentation.
Speaker Change: Regarding commercial real estate, we continue to reduce our CRE concentration.
Speaker Change: which stands at 375% of total risk-based capital at year-end 2024 versus 397% at year-end 2023 and 425% at year-end 2022.
Speaker Change: On the liability side of the balance sheet, I'm pleased with the continued strides the bank has made to improve the quality and diversity of the deposit base.
Speaker Change: We had another productive quarter of growth within our BankWell Direct product, which grew by $39 million over the third quarter, bringing total upstanding balances to $136 million.
Speaker Change: while broker deposits fell another $78 million on a linked quarter basis.
Speaker Change: Overall, core deposits grew by $169 million in the fourth quarter, while simultaneously reducing our total deposit costs by nine basis points compared to the third quarter.
Speaker Change: With a liability-sensitive balance sheet, we remain well-positioned for a normalized yield curve.
Speaker Change: Now, to discuss our financial results in greater detail, I'll turn it over to our Chief Financial Officer, Courtney Sacchetti.
Courtney Sacchetti: Thank you, Chris. Our pre-provisioned net revenue of $7.9 million was down quarter over quarter, representing 98 basis points of PPNR return on average assets.
Courtney Sacchetti: Reported net interest margin for the fourth quarter was 260 basis points, a 12 basis point reduction relative to the linked quarter. Approximately 10 basis points of that linked quarter reduction was a function of lower loan fees, which were $1 million relative to the $1.8 million in the third quarter.
Courtney Sacchetti: While this quarter's loan fees were lower than average for us, we would note that loan fees can vary from quarter to quarter. Our full-year 2024 loan fees of $6 million compares to $5.9 million in 2023, with a quarterly average of approximately $1.5 million.
Courtney Sacchetti: Also contributing to our lower NIM was our elevated cash position during the quarter. Our average cash balances were approximately $60 million higher than the prior quarter, which contributed to a five basis point drag on NIM had that cash been otherwise deployed.
Courtney Sacchetti: As Chris mentioned, we had a nine basis point improvement on our deposit costs compared to last quarter, as we're having favorable movement with our time and money market pricing. And despite the fourth quarter results, we expect margin to expand in 2025 as our term deposits continue to reprice.
Courtney Sacchetti: More specifically, we have $1.3 billion of time deposits maturing in the next 12 months.
Courtney Sacchetti: $714 million of retail CDs repricing at an average of 22 basis points lower, and $560 million of brokered CDs repricing at an average 49 basis points lower, both based on current rates.
Courtney Sacchetti: All else equal, we expect to save a total of $4.4 million on an annualized basis from this repricing activity, which equates to an approximate $0.44 pickup in earnings per share and about 14 basis points of margin expansion.
Courtney Sacchetti: This assumes no benefit to non-maturity deposits or any additional cuts in Fed funds, even though we expect to modestly lower our current rates further in the first quarter of 2025.
Courtney Sacchetti: Also, we anticipate half a billion dollars in loans to reprice or mature over the same period, which could further benefit margin by an additional 15 to 20 basis points on an annualized basis.
Courtney Sacchetti: Non-interest income of $964,000 was down compared to the linked quarter, mainly due to a reduction in SBA gain on sale fees.
Courtney Sacchetti: The linked quarter increase in total non-interest expense to $13.2 million included one-time OREO expenses of approximately $700,000, but also was impacted by elevated occupancy costs, data processing, and professional services, partly offset by a reduction in salaries and employee benefits.
Courtney Sacchetti: We've remained steadfast in our goal to maintain a stable non-interest expense to total asset ratio, which continues to operate at approximately 170 basis points or better.
Courtney Sacchetti: The fourth quarter's expense included $3 million of net charge-offs previously discussed by Chris. Fourth quarter credit trends were benign and include no credit deterioration.
Finally, a few thoughts on our financial condition.
Courtney Sacchetti: Our balance sheet remains well-capitalized and liquid, with total assets of $3.3 billion, up modestly versus the linked quarter. We did not repurchase any shares during the fourth quarter, but have 250,000 shares remaining on our authorization as of year-end 2024.
Chris Grusecke: I'll now hand it back to Chris for his closing remarks.
Thank you, Courtney.
Chris Grusecke: Before we conclude today's call, I'd like to comment on some of Bankwell's 2024 achievements, as well as our expectations for 2025.
Despite the disappointing financial performance due to credit.
2024 was a productive year for the company.
Chris Grusecke: We've made excellent progress on several initiatives that lay the groundwork for improved financial performance in 2025 and beyond.
first.
Chris Grusecke: We've significantly reduced our exposure to broker deposits, which decreased by $247 million year-over-year.
Chris Grusecke: Approximately half of this decrease is due to the successful launch of Bankwell Direct.
Second.
Chris Grusecke: While we've made significant investments in human capital, especially in the important areas of technology and risk management,
Chris Grusecke: We've maintained an efficient platform, holding the non-interest expense to asset ratio at 162 basis points for 2024 versus 155 basis points in 2023.
Sharon
Chris Grusecke: We've successfully laid the foundation for an SBA lending division, having started originating SBA loans in December of 2024.
Looking ahead to our outlook for 2025.
Chris Grusecke: We anticipate modest loan growth of three to five percent with net interest income growing to the range of 93 to 95 million dollars.
Chris Grusecke: Additionally, we expect 2025's non-interest income to grow to $7 to $8 million, roughly doubling 2024's performance as a result of our growing SBA lending division.
Chris Grusecke: We estimate total non-interest expense of approximately $56 to $57 million in the coming year, inclusive of a healthy degree of ongoing investment in previously discussed growth initiatives.
Chris Grusecke: Overall, we are quite optimistic for improved financial performance at BankWell in 2025.
Chris Grusecke: To close, I'd like to thank all of our teammates here at Bankwell.
Chris Grusecke: whose outstanding effort and dedication have made the evolution of our company possible.
Chris Grusecke: This concludes our prepared remarks. Operator, will you please begin the question-and-answer session.
Chris Grusecke: Ladies and gentlemen, we will now begin the question and answer session. At this time, I would like to remind everyone that in order to ask a question, press star then the number one on your telephone keypad.
Speaker Change: We will pause just for a moment to compile the Q&A roster. One moment, please, for your first question. The first question comes from the line of Chris O'Connell of KBW. Please go ahead.
Hey, good morning.
Good morning, Chris. And congratulations, Matt, on the promotion.
Speaker Change: So, just wanted to start off, I guess, with what you guys are seeing on the loan side in terms of the pipeline and kind of what the new origination yields are coming on at. I guess, start there, please.
Speaker Change: So Chris, we price everything off of, you know, whatever kind of the duration of either a treasury or short-term indices. Things are kind of flat right now. We're seeing most originations right around 7%, maybe a little bit higher.
Okay, got it.
Speaker Change: in the portfolio, in the demand near-term, and I know you guys are kind of moderating to a flattish low.
Speaker Change: or growth environment right now until, you know, the CRE concentration ratio comes down. Is that, you know, still the case as we get into the back half of 25, do you think?
This is Chris. Chris.
Speaker Change: So, I would say, because of the mix, which is increasingly more CNI than CRE, that kind of takes...
Speaker Change: care of itself over time, and you can see the steady decline we've had in CRE concentration. The growth number really is an estimate, is a function of our CEG-1 ratio.
Speaker Change: So that's, you know, our goal is to get that up towards 11, 11 over, you know, sometime at 27, and moving towards there. So it's not about CRE, it's really just working to grow the CET1 ratio.
and a consolidated basis. Yeah, yeah, yeah, HODCO, right.
Speaker Change: Okay, got it. And, you know, I guess on that front...
Speaker Change: How do you stack rank your prioritization in terms of getting to that ratio versus opportunistically using a buyback over the course of 25?
Speaker Change: So it's more it's more art than science and depends on the trade-off of how Profitable the growth is versus a stock buyback and where the stock is trading So it's a it's the you know, it's the mix of all of those variables. I would expect to see stock back stock buybacks
on the magnitude of what we had this year.
86,000 shares, we've...
Speaker Change: You got us 10 basis points, for instance, on capital. So we have the ability to do both, but with the longer-term goal and knowledge that it's appropriate to think the whole COSE CET1.
Speaker Change: And then it's a function of what is the stock price and how wide are your yields and what's the right time to do it, but I think we'll see both.
Okay, thank you.
Speaker Change: You know, and then I guess on the fee outlook, I mean, obviously, you know, very strong, you know, doubling, you know, year over year, more or less is
Speaker Change: Can you talk about, I guess, the pace of the ramp that you expect, you know, on the SBA side?
Speaker Change: Yeah, absolutely. So we spent a lot of time this year preparing for the actual originations. We needed to get the infrastructure in place. I mean, we had done SBA historically here, but larger loans and smaller volume. And so now we've, you know, we're using technology to enable smaller loans and we have first put in the right infrastructure for technology and risk.
Speaker Change: and there was a Q4 announcement when we announced the head of SBA Lending Division, Michael Johnson.
Speaker Change: We're ready and have actually started originating loans in the SBA division and Matt can talk about you know how targets and flow.
Speaker Change: So over time, Chris, you know, we definitely expect more originations in the fourth quarter than the first. There will be originations in the first quarter. Those have already happened.
We expect to see
VA loan sales in the first quarter and you know
Speaker Change: The implied number there in our fees is about 50 million dollars of originations over the over the whole of 25 so I wouldn't be surprised to see you know three-quarters of that coming in the second half.
Okay, that's helpful.
and then
Speaker Change: On the NII guidance and kind of the overall margin here, I guess I was surprised to see the margin down.
Speaker Change: You know, quarter over quarter, and I know, you know, that there was, you know, the sounds like some impact on the loan fees, but.
Thank you. Bye.
I guess I thought that the, you know, deposit costs.
would be coming down a little bit more aggressively here.
You know, they're not too much balance sheet growth.
you know, implies.
Speaker Change: you know, kind of a ramp, you know, pretty, you know, well above.
Speaker Change: just the 14 basis points that you guys are getting from the CD portfolio. So can you talk about the rest of the portfolio outside of those CDs?
Speaker Change: and kind of what you guys are seeing and having, you know, in terms of customer conversations around the cost there.
Yeah, Chris, let me just start off.
Courtney Sacchetti: So, regarding the decrease, as Courtney has said, and we can...
Courtney Sacchetti: put finer points on it. There were decreased fees, but part of the
The
Drop is the timing part part of the
Courtney Sacchetti: Anticipated decrease in cost of funds is the timing of when the CDs are rolling over.
Courtney Sacchetti: We have a roll schedule in the investor presentation, and Courtney has gone through in pretty much detail and will continue to put a number on that. I know you want other parts as well. So I'm just starting off by saying that
Speaker Change: It's not only the fees, it's what was maturing in that quarter and what's maturing ahead. And the quarter ahead, we can see with great granularity what's maturing and what the market price is. So those are real numbers. And, Courtney, you want to add to that? And maybe Matt, you can talk about this.
Courtney Sacchetti: Yeah, and I think, Chris, you know, you hit it on the head a little, you know, our 260 NIM for the quarter, I would not use that as my launching off point to figure out my first quarter NIM in 2025, you know, a more normalized NIM.
Speaker Change: accounting for fees and more efficient deployment of cash in that low 270s, I can see our
You know name expanding
Speaker Change: to the higher 270s in the first quarter, you know, you can see we have our highest retail CDs maturing at a rate of 520.
Speaker Change: and almost a third, at least, maturing in the first quarter that we'll be able to reprice down. And we alluded to a little bit more on some modest price cuts, and so the $4.60 is our current rate on our CD offering today, but we anticipate to have that lower in the first quarter.
Speaker Change: Okay, yeah, that is very helpful. And then I guess just.
You know, if you have the December margin.
Chris Grusecke: Actually, Chris, I'll have to follow back up with you. I don't know that I have that readily available.
Speaker Change: Okay, but regardless, it sounds like starting off with a 270 handle, give or take, and kind of moving up from there is appropriate.
Yes, that's what I would expect.
Speaker Change: Yep. So for the full year, again, as a function of our time deposits repriced and our loans repriced, I would expect that NIM to approach closer. And I think you probably are backing into this number closer to a three NIM for the year in the 290s range.
Chris Grusecke: And Chris, I want to add to that that that number that Courtney just gave.
Speaker Change: That assumes no further action by the FED. That's just what's built into the system for us.
Great. Yep.
Super helpful.
Speaker Change: I guess just, you know, on that front, you know, maybe if you guys can talk about, you know, what each 25 basis point, you know, that move might do to the margin, you know, I know that there's, you know, the immediate quarterly impact, you know, is a little bit dependent on, you know,
Speaker Change: What's maturing from a CD or borrowing standpoint that quarter, but maybe over the course of a 12-month period.
Speaker Change: So, over the course of the year, we have to break it down. Obviously, the term deposits are going to
Speaker Change: reprice at when they're going to reprice but now at a lower rate so we I would anticipate the 25 basis point move on term deposits just would be
Speaker Change: lower yeah when they actually mature and then we have a number of deposits that are tied to certain levels that would automatically move with Fed and then of course non-maturity deposits would expect
Speaker Change: pretty significant beta on those as well for every 25 bases.
Speaker Change: we're probably going to drop some rates just in the upcoming weeks.
Courtney Sacchetti: So, I don't know that we have a breakout of what percentage of those are actually tied to deposits, Courtney.
Courtney Sacchetti: I have about a billion of non-maturity deposits. I would say 20% of that is tied. 25% would get the full data. Yes, yes, yes. And then the others are, you know...
Speaker Change: Right, so 425 basis points on the on the on the deposits that aren't
specifically tied to funds.
Thank you.
Speaker Change: The beta would be greater than 50%. I mean, do you have a better number than that, Matt?
Speaker Change: Yeah, I think we've reached a point now with with falling rates and our, you know, particular construction of our non, you know, not the time to pop will be in the probably 50 to 75 range.
beta if that that's probably closer to 75, 75.
Okay, very helpful.
Speaker Change: And then on the expense, you know, guidance, obviously, you know, a bit of a pickup or ramp, you know, from 2024, as you guys are, you know,
Speaker Change: putting in, you know, a bunch of kind of initiatives and have the SBA ramp. How should we think about, you know, the cadence? Is that, you know, coming up?
Speaker Change: to a pretty good starting run rate right at the beginning of the year, or is it gonna ramp over the course of 2025 as you guys are inputting these initiatives and having some of these...
Speaker Change: departments or SBA kind of you know ramping up over the course of the year as well.
Speaker Change: So at a high level, Chris, the numbers that we're increasing include a host of positions. So when we when we show that number ticking up next year, that's with
But, a steady
dose of investment in primarily people.
Speaker Change: and that's still getting around that 170 base point of asset running at its expense.
Speaker Change: And that's a number of people, which we can go through the sort of people for you. And it's a function of when the right people come, but it's over the course of the year. We can speak to some of the positions, give you an idea.
Speaker Change: But we're pretty excited that we've been able to maintain the expenses we have,
Speaker Change: anything above and beyond that. I mean the amount we're spending that we've guided to sets us up very well for the future.
Speaker Change: So this isn't going to be a, you know, two to three million dollar increase every year. We're making investments that we think get us to scale and greater efficiency, but can we put some more meat on the bones as to type of positions and numbers and to get that increase?
Speaker Change: Sure, we've been adding heads, obviously we've been talking a lot about the SBA platform, so in our estimates for the year we're adding new originators and support staff for those folks from a credit and risk perspective.
more risk
Speaker Change: Some one-time annual costs that we have related to our audit expenses for the year and some true-ups on our taxes on our incentive plan. So 1Q always has a couple of anomalies.
Great. Yep. Understood.
Speaker Change: And then on the credit side, you know, obviously a lot of cleanup, you know, here in the fourth quarter and I guess
Speaker Change: non-performing slash, you know, Oreo sales. I mean, I guess I had thought that the one I had got
Speaker Change: signed towards the tail end of October the larger $27 million credit. Did that just get pushed a little bit in terms of timing or was there any change in circumstance?
Speaker Change: There was a slight change in the circumstance. The the buyer of that credit some support actually and brought in a partner. They have since
Signed a purchase
Speaker Change: that if all things are, you know, go off as planned, would close in the coming weeks.
We're feeling good about that.
Speaker Change: Matt, can I interrupt you for a second? The signature in prior quarter was not a definitive purchase and sale.
Matt McNeill: No, it was a LOI. I've never been tapped at the time, Chris, so the situation...
Rest.
Okay, great.
Speaker Change: And then, sorry Matt. In the second, I guess this is timing on the second one.
The timing on the second one is perhaps even sooner.
next week maybe, so we're pretty
You know, we have, you know, earnest money transactions that...
Speaker Change: signaling to us that these transactions are going to go forward.
I'm pretty confident that they're
Speaker Change: And Chris, the second one is the loan that you know began its journey in the very very beginning. This is a construction loan that began in the beginning of COVID and it's just playing out its final chapter here.
Okay, got it.
Speaker Change: So the good news from our standpoint is we feel like we're putting this stuff to bed.
Speaker Change: starting the year with a clean slate, eventually get NPAs down by over 100 basis points just on these couple of loans, and with a good outlook for 2024.
Speaker Change: And as I understand it, based on some of the commentary in the release of the deck, that you don't expect any additional charge-offs related to these credits with the pending sales. And is there any...
Speaker Change: potential chance of recoveries with the one at par. I can't remember if there, you know, if it had any specific against it.
Speaker Change: we never we never reserved against it or took any charges against that asset
Speaker Change: Okay, I got it, the bolts should come off then? The part mount, correct. And then we can talk a little bit about the construction level.
Still pending in the courts.
Speaker Change: Correct, so we acquired the collateral for the construction loan that became the Oreo through the bankruptcy of the borrower. We still have an action against personal guarantors in Connecticut.
now that bankruptcy is charged and so we're moving forward.
just on their, you know,
That obviously cleans up the vast majority.
Speaker Change: Notable ones remaining, if you could just provide an update on those, I think, in the deck.
Speaker Change: labeled under, you know, Loan 2 and Loan 3, with one of them, you know, set to mature next quarter.
March of 2020. It's it's been vacant.
Speaker Change: for a period of time, all of the time up until now, they do have leases here. We have taken various charge-offs, about $4.5 million, and we think that at maturity they'll be able to refinance away from us.
Go ahead.
Speaker Change: It looks as though they have the opportunity to fully lease out the building here, right as this one was built.
Speaker Change: And those write-downs occurred along the way. Correct. The majority of that was taken in, you know, the...
Speaker Change: first or second quarter of 2020 when the tenant moved down.
Okay, great.
Yeah, Loan 3, this is a, you know.
Speaker Change: So the $84 million club deal with some various regional banks.
Speaker Change: Sponsor hasn't been cooperative to this point. We do have a receiver in place so now we can see all of the cash that's coming through the property. It's quite a large property.
Speaker Change: We're hopeful that, you know, not only that this value, this balance that we have remaining is the correct carrying value, but we're, you know, there may be a chance for a recovery at some point.
able to see cash flow on the property.
Speaker Change: Okay, got it. So it's safe to say that probably is going to be more of like a multi-quarter issue to work out.
I would believe so there's there's there's
Speaker Change: Yeah, it's obviously more complicated with, you know, several banks in the workout.
Chris: And Chris, that loan has already had over $8 million in charges taken against it.
Yep, understood. Got it.
Okay, great. And then, you know,
Chris: More generally, as you guys are looking ahead towards, you know, 2025, I think
Chris: You know, you guys don't have a very large office portfolio, but, you know, obviously, you know, an area of focus, and there's about, you know, I think it's 56% or 90 million of it, you know, matures next year, you know, if you guys have
Chris: come into the year and, you know, reviewed the portfolio. How do you guys feel about, you know, those upcoming maturities?
Chris: Yeah, I think you're probably referring to page 12 of the investor presentation. There's a chart on that.
Chris: So, other than the New Jersey club deal that we just talked about...
The remaining 13, you'll see there's 13 loans in that.
Chris: The remaining 13 are cash flow positive and pass rated. So we're feeling good about those. Some of those have already had a rise in interest rate. If we've given them a year or two extension on their previously matured loan, they've come up to a market rate and they're still cash flowing. So you know, we're feeling pretty positive about our remaining office balance.
Thank you. Thank you. Thank you.
Chris: stopped doing office after 2020. We made some exceptions but the balances then drop off because there's not going to be any left.
Yep, got it.
Chris: Okay, great. And then I guess just last one for me is what's a good tax rate going forward?
Chris: Yeah, so obviously our tax rate was a little elevated in the fourth quarter. We had an adjustment based on our 2023 taxes that we pushed through. So we're confident, comfortable with a 24.5-25% tax rate. If you push that adjustment back into our 23 numbers, our 24 tax rate I think comes out to exactly 24.5 or 24.6.
Great.
Thanks for taking all my questions. Appreciate the time.
Thank you, Chris.
Speaker Change: There are no further questions at this time. With that, ladies and gentlemen, that concludes your conference call. We thank you for participating and ask that you please disconnect your lines.