Courtney Sacchetti: Chris Gruseke, Bankwell's Chief Executive Officer.
Chris Gruseke: Thanks, Courtney. Welcome, and thank you to everyone for joining Bankwell's quarterly earnings call. This morning, in addition to Courtney, we're joined by Matt McNeill, our President and Chief Banking Officer. Q3 was one of real progress for Bankwell. Margin expansion continued. We resolved our largest legacy problem credit. Our SBA platform had its best quarter yet, and we announced our core conversion, an important step in strengthening the infrastructure and technology that will support our future growth. For Q3, we reported record GAAP net income of $12.7 million, or $1.58 per share, compared to $12.4 million, or $1.52 per share in Q2. It is important to note that these record results include $3 million of pre-tax expenses tied to our core conversion. These expenses are primarily attributable to the termination of our existing core provider contracts.
Chris Gruseke: Courtney will address those items in a couple of minutes. Excluding those charges, operating net income was $15 million or $1.86 per share. Our earnings momentum is strong and continues to grow. Looking ahead, the core conversion will expand our capabilities and improve efficiency and scalability across the organization. We anticipate completing the conversion in H2 of 2027, and we will keep you updated as the project progresses. Lending activity was healthy. We originated approximately $222 million of loans in the quarter, including $30 million of SBA originations, resulting in net loan growth of $23 million. Year to date, loans have grown by $143 million, or 5%. We remain selective in the credits we originate and retain, supporting both margin and credit quality. Core deposits were down less than 1% from Q2, but remain well above prior year levels.
Chris Gruseke: Compared with a year ago, core deposits have increased by $340 million or 18%, and now represent 76% of total deposits, up from 69% a year ago. Net interest margin increased 13 basis points to 3.71%, marking the third consecutive quarter of expansion. The improvements reflect higher earning asset yields, the cumulative benefit of deposit repricing in prior quarters, and a more favorable funding mix. Funding costs were essentially stable compared with Q2. Non-interest income increased by 21% this quarter to $4 million, primarily attributable to a record $2.8 million of SBA gain on sale income during the quarter. Year to date, SBA gains totaled $7.6 million compared to $2.9 million generated through the same period of 2025. Credit metrics improved meaningfully during the quarter. We sold the COVID era retail commercial real estate loan in Westchester County, New York, which had been our largest non-performing asset.
Chris Gruseke: The sale resulted in a $2.5 million recovery of amounts previously charged off and contributed to net recoveries of $1.4 million for the quarter. Non-performing loans declined to $7.1 million while non-performing assets fell 26 basis points to just 20 basis points of total assets. Tangible book value per share increased to $41.59, up $1.34 during the quarter and $3.75 since the beginning of the year. We understand and emphasize every day that growing tangible book value on a consistent and safe manner is our primary responsibility to our shareholders. Now I will turn the call over to Courtney to cover the financials in greater detail.
Courtney Sacchetti: Thanks, Chris. I will begin with this quarter's return. On a reported basis, return on average assets was 1.45%, and return on average tangible common equity was 15.28%. Excluding conversion costs, return on average assets was 1.71%, and return on average tangible common equity was 18.02%. Pre-provision net revenue was $15.5 million as reported, or 1.76% of average assets. On an operating basis, PPNR was $18.5 million, or 2.11% of average assets. Net interest income reached $31.4 million, up from $29.5 million last quarter. Earning asset yields rose eight basis points to 6.34%, while loan yields increased six basis points to 6.72%. New loan pricing remains attractive, with our 2026 origination yields running approximately 90 basis points above the yields on loans running off. Total deposit costs were essentially flat at 2.92% as the benefit from time deposit repricing moderated.
Courtney Sacchetti: Approximately $1.3 billion or 44% of our loans are now floating rate. At the same time deposits represent a shrinking share of our funding, while non-interest-bearing and low-cost NOW balances now represent 19% of total deposits, up from 15% at the end of 2024. Together, these changes on both sides of the balance sheet have reduced our earning sensitivity to movements in short-term rates. While the future path of rates remains uncertain, our earnings are less dependent on that path than they have been historically. Non-interest income was $4 million, including $2.8 million of SBA gains on sale. Service charges and fees also increased to $951,000. Non-interest income represented just over 11% of total revenue, reflecting continued progress in broadening our revenue mix. Non-interest expense was $19.8 million compared to $15.3 million in Q2.
Courtney Sacchetti: The increase was primarily driven by $3 million of core conversion costs, including $2.7 million related to contract termination costs. Looking ahead, we currently anticipate conversion-related expense of approximately $400,000 to $500,000 per quarter over the next four quarters as implementation activities progress. We expect these costs to primarily reflect third-party consulting support, temporary resources, and other costs associated with the implementation. Importantly, the elevated expense this quarter was largely driven by one-time termination costs. As the project progresses, we will continue to refine our estimates and update our expectations accordingly. Additionally, salaries and employee benefits increased, reflecting targeted investments in talent to support our growth, as well as higher performance-based compensation. The reported efficiency ratio for the quarter was 56.1% and 53.1% year to date. Utilizing our operating non-interest expense of $16.8 million, our operating efficiency ratio was 47.5% for the quarter and 50% year to date.
Courtney Sacchetti: Credit performance resulted in a $1.3 million benefit to earnings, driven by net recoveries during the quarter. NPAs stand at 20 bips of assets, or $7.1 million. The primary remaining component is our suburban New Jersey office participation, which has a carrying value of $4.3 million, following a $0.6 million charge-off this quarter. We have now charged off approximately 64% of the original balance. The allowance held steady at 1.03% of total loans, and coverage of non-performing loans increased to 431%. Our capital position continues to strengthen. Total assets were $3.6 billion, deposits were $3 billion, and shareholders' equity increased to $334.1 million. Tangible common equity to tangible assets rose to 9.33%. The company's consolidated common equity Tier 1 ratio was 10.8%, while the bank's total capital, common equity Tier 1, and leverage ratios were 12.67%, 11.64%, and 10.25%, respectively. These levels provide meaningful capacity to support our continued growth.
Courtney Sacchetti: With that, I will hand it back to Chris.
Chris Gruseke: Thanks, Courtney. This quarter, we took an important step towards strengthening the platform that will support Bankwell's next phase of growth while continuing to deliver strong core results. Absorbing the conversion costs while reporting record earnings demonstrates the underlying momentum in our business. Given our year-to-date performance, I would like to make some minor updates to prior guidance we have given. We are increasing our full-year net interest income outlook to $119 to $121 million, compared to our prior range of $115 to $117 million. Given the strength of our SBA division, we are raising our non-interest income guidance to $14 to $15 million from a prior range of $12 to $13 million. We continue to expect full-year loan growth of 5% to 7%. Excluding core conversion costs, full-year non-interest expense outlook remains stable at $65 to $67 million. Before ending our prepared remarks, I would like to thank our incredible team.
Chris Gruseke: None of these results were easy to achieve. It required hard work and a singular focus on our clients. Our success demonstrates what is possible when a talented team works together on an intentionally designed plan. I also want to thank our clients and shareholders for giving us their confidence. We look forward to a strong finish to this year and to delivering even better results in the year ahead. Operator, we are ready to open the lines for questions.
Operator: 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. To 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 Feddie Strickland with Hovde. Feddie, your line is now open.
Feddie Strickland: Hey, good morning, everyone. Just wanted to go ahead and start off on loans. It sounds like you are still pretty optimistic here on loan growth. Are slowing paydowns at all a part of that story? Are you starting to see payoffs and paydowns slow a little bit as you get into Q4? Have they been relatively consistent?
Matt McNeill: We have seen them slow down a bit from last year. We still have healthy payoffs coming. We are having to backfill. The pipeline has been strong, and so payoffs have not been. We updated our assumption a couple of years ago and just assumed that the payoff number was going to be higher in the years to come. It has proven that that was the right call. So the pipeline is healthy to make up that backfill. It has reduced slightly, but it is still healthy payoffs.
Feddie Strickland: All right, great. Thanks for the color there. On the deposit side, I saw end-of-period DDAs were a little lower this quarter, seemed like they kind of maybe spiked up in Q2. But the average balances were pretty stable. Can you talk through some of the dynamics there, whether there is anything seasonal or end-of-quarter moves that drove the differences there?
Matt McNeill: We think that the DDA balances. We are not losing customers and shrinking DDA balances. We think that these are seasonal changes. We expect to continue to grow DDA balances. Really just normal ebbs and flows.
Chris Gruseke: Yeah. It is important, Feddie. This is Chris. Hi. What is important is that we just keep signing up new customers, and that continues to happen. The flows of the business are the flows of the business.
Feddie Strickland: Got it. Just one question on the margin. Was there any one-time benefit this quarter on the interest income side from the loan recovery that we should think about as we look forward on the margin, or was there not anything in there related to that?
Courtney Sacchetti: Feddie, there was nothing in there related to that.
Feddie Strickland: Got it. I will step back. Thanks for taking my questions.
Chris Gruseke: Thanks, Feddie.
Operator: Your next question comes from the line of Mark Shutley with KBW. Mark, your line is now open.
Mark Shutley: Hey, good morning.
Matt McNeill: Good morning, Mark.
Mark Shutley: Maybe just to follow up on the NIM. How should we think about the deposit beta for this cycle? I saw that the exit rate on deposits were maybe a couple bips higher, and we had maybe a little bit of remix going on as well. So just how should we think about that?
Matt McNeill: Mark, are you talking about prior results, or are you asking about how we should look prospectively at another Fed hike?
Mark Shutley: Yeah. Prospectively just how should we think about the deposit beta through the cycle, with assuming Fed hike.
Matt McNeill: Great. Thanks.
Courtney Sacchetti: Sure. We have just recently increased our CD rates, our retail CD rates, actually effective today. We are starting to reprice some of our deposits up already. For another 25 basis point increase, we do expect to be relatively neutral over the next four quarters. We have $1.6 billion of assets that would reprice immediately, plus we have $600 million of our existing loan book rolling off at a rate of approximately 580 basis points. That should reprice materially higher based on today's rates. Those are our fixed-rate loans maturing and repricing. That benefit is going to be offset by higher funding costs, again, the increase in the retail CD rates. We have $600 million of retail CDs that are now repricing roughly 50 basis points higher than their current rates.
Courtney Sacchetti: Our brokered CDs and FHLB borrowings are rolling into higher market rates as well. We do have some indexed deposits to Fed funds, approximately $300 million. Overall, we view the puts and takes on both sides of the balance sheet to really be a net neutral position, a basis point or two each quarter. I think on our interest-bearing non-maturity deposits, we are probably looking north of a 50% beta, somewhere 60% to 70%. That is on $1.1 billion of deposits that are not indexed.
Matt McNeill: Right. That sounds right based on history. Then back to what Courtney said, Mark, we feel that will be more than offset by the repricing of fixed-rate loans that are coming due.
Courtney Sacchetti: Yeah. We have a page in our investor deck that covers. We have a few pages, but I think page 16 covers our loan maturity yields, but we also have a page that covers our asset and liability shifts in 2024, and we have really materially increased our floating rate loan book to help make us a bit more neutral for any sort of rate changes.
Mark Shutley: Great. Thank you for all that color. That was really helpful. Maybe just one on the SBA. The SBA was really strong in the quarter and already at $90 million of your $100 million origination target. Maybe just talk about any visibility into that pipeline and how we should think about the SBA business into 2027. Thanks.
Matt McNeill: SBA team is doing a great job. Pipeline is very robust. We are having a lot of success with the SBA program. We expect to continue that into 2027. As I said, pipeline is strong. We have visibility into a few more months, and we think we will continue origin-
Chris Gruseke: Yeah, Mark. We have been at this now. We have been a preferred provider for a long time, but these last couple of years, we have grown it, and we have always talked about growth there as slow and steady. We are not trying to go and do 2x and 3x. It is just modest growth every year and keep improving what we do.
Mark Shutley: Great. Thank you for taking my questions.
Matt McNeill: Thank you.
Operator: Our last question comes from the line of Steve Moss with Raymond James. Steve, your line is now open.
Steve Moss: Good morning. Nice quarter here.
Chris Gruseke: Good morning, Steve. Thank you.
Steve Moss: Morning, Chris, Courtney. Maybe just following up on loans here and just thinking about, I know you guys mentioned new loans 90 basis points above the roll-off yield. Just kind of curious what you guys are seeing for competition. Obviously, Treasury rates are higher, but feels like spreads are tighter. Just how you guys think about that going forward a little bit in that dynamic.
Matt McNeill: We are seeing competition tighten spreads. It does impact us as far as trying to negotiate new loans. We are satisfied at where we are able to originate new business currently. I do not think that is going to change. We have a very large roster of relationships that we continue to lend to, and that tends to keep us out of the broker CRE market competing with folks on the lowest cost capital.
Chris Gruseke: Yeah, we will never compete on price, Steve. We have said that before, and we reiterate that. If we have to compete on price, we are doing something wrong.
Steve Moss: Right. Okay. Appreciate that color there. And then maybe just in terms of systems conversion here, kind of curious, what are maybe some of the things you guys are looking forward to benefiting the franchise? Also, just maybe kind of as we think about the investments and the cost saves, how to think about expenses into 2027 there.
Chris Gruseke: Courtney went through some of the additional charges that we have. To begin with, the charges that we just took this quarter were the breakage fees. The big part is done. Then for the next few quarters, I think Courtney said $400,000 to $500,000 maybe for the next three or four quarters. That is things like consultants and temporary workers. But we got a big data project in the back, and once you have data organized and we own the data, we can work with that.
Chris Gruseke: We will have further products that enable us to add APIs to the system and build things that we want to build right now, and this is not a knock on any one particular provider. Right now, the lead time, if we want to add a feature or build something, you got to get in the queue and wait a few months. We will be in far better shape to be flexible and adapt as technology rolls out on our new platform.
Steve Moss: Yeah. And I hear you on the charges. Just more curious, do you see any cost saves coming from this conversion? Or maybe there is just with the conversion, you have new investments or talents you might want to bring on in 2027.
Chris Gruseke: I think that there's several layers to that. First, apples to apples, if we took exactly what we had before and added the new technology, we would save money there. So there would be a cost save on the platform as is, but what we'll end up doing is adding new features. Our data will. I'm sorry, data processing, not the data. So what we're spending on core and payments and things like that will probably end up pretty flat because we'll then add some new features and things that we can do. Then, as I said, what it really does is give us flexibility to add new features, and if there's a line of business or an API we want to install, we'll be able to do it quickly.
Steve Moss: Okay.
Chris Gruseke: I don't see a material impact to our OpEx next year, Steve. Sorry to talk over you. There won't be a material impact to our OpEx run rate as a result of this. The impact is still.
Steve Moss: Okay, great.
Chris Gruseke: in the staffing for the conversion. Then go down further, we will be able to be more efficient going forward once we have our data and we can use the systems in a way that enable us to scale. So we do see a payoff there as well.
Steve Moss: Okay, great. No, that is really helpful. Then maybe just kind of curious, you guys have had a really good run here in terms of business development. Kind of curious maybe just any additional business lines you guys may want to add, talents you guys may be recruiting, any potential or early thoughts on that for next year?
Matt McNeill: We have already done a lot of recruiting. People are already here getting more seasoned in the business. We expect that our business development efforts will continue to be. The hiring has really already happened. Now just getting people in stride on their business development. So we feel pretty good. As far as new business lines, we are always thinking about where safety and economics lie and where we could take advantage of those things. So we are open to new business lines. We always have a couple that are in development. They do not always pull through. If they pan out, then we the maturity. So we are always thinking about new ways to diversify the balance sheet and expand our capabilities.
Steve Moss: Okay, great. I will leave it there. Really appreciate the color in next quarter.
Chris Gruseke: Thanks, Steve.
Operator: There are no further questions at this time. This concludes today's call. Thank you for attending. You may now disconnect.
