Bankwell Financial Group, Inc. Q2 FY2025 earnings call

• Net interest margin continued to expand. - SBA business on pace to contribute to noninterest income growth. - Credit trends improved with further improvement expected. - Added 5 private client teams in the fiscal year, with more deposit teams added in the second quarter and July. - Second quarter GAAP fully diluted earnings were $1.15 per share, up 32% from the first quarter. - Funded $170 million in new loans, with $12 million in SBA loans during the quarter. - Noninterest-bearing deposits grew by $48 million, and noninterest expense efficiency ratio fell to 56.1% in the second quarter.

The company's net interest margin continued to expand, with the second quarter reported NIM at 310 basis points, a 29 basis point increase from the linked quarter. Noninterest income for the second quarter was $2 million, up 34% relative to the linked quarter, largely driven by $1.1 million of SBA gain-on-sale income. Credit trends improved with a $1.2 million reduction in nonperforming assets during the second quarter. Noninterest-bearing deposits grew by $48 million during the quarter, with a year-to-date increase of $75 million or 23% since year-end.

• Updated net interest income guidance for full year 2025 to $97 million to $98 million. - Reiterated full year 2025 noninterest income guidance of $7 million to $8 million. - Increased full year 2025 noninterest expense guidance to $58 million to $59 million.

• Concerns around new Medicaid legislation impacting healthcare customers, though borrowers not significantly impacted. - Potential impact of Fed rate cuts on net interest margin. - Uncertainty around resolution timeline for certain nonperforming loans, with some taking longer than others.

Q: Great to see the DDA growth in the quarter, and it sounds like you have some more stuff in the pipeline. Do you have a longer-term target in terms of DDAs to deposits? I think you're at about 14% today.

A: We don't have a hard target in mind. We clearly are looking to expand that percentage. We want to make sure that we bring the wholesale funding ratio down. We probably watch that, we just certainly watch that closely. But it's the reason that we're making these plans on these investments. We're going to be reporting on it regularly.

Q: And then just should we expect the level of broker deposits to continue grinding lower in the future quarters? Or do you think maybe we see that level off, just depending on the attractiveness of the rates of the broker versus retail?

A: I think it really depends. We've made a very meaningful dent in it. We brought it down by about half. And from hereon in, it's a function of what comes in the door. We certainly want to be back in the mode of growing the loan book. And as deposits come in, then the question becomes, is -- it certainly won't be dollar for dollar, I would expect pay down broker with new money, and then it becomes an art form of how much loan growth and what are market rates. But since we've taken them down by half, we're not looking to be as dramatic, I'd say, and it depends on the market opportunities. But the number will get lower over time. It's really a function of the performance we're going to get in our deposit gathering efforts.

Q: If you could just give a little bit of an update on what you're hearing from your health care customers, anything incrementally different?

A: No, there is some concern around new legislation with a big focus on Medicaid cuts. From the research that we've done and some third parties, it appears that our borrowers are not really impacted by the new legislation. So in the near term, we're feeling really good with the health care book and continue to see the book to be a profitable source of business here at Bank, I think, will not only on the loan side, but the fee and the deposit side.

Q: Just wondering, you kind of hinted, Chris, at resolution stuff over time here. Just curious, what that timeline could look like? The third or fourth quarter or might some of the stuff stretch into 2026?

A: Yes. Yes, we have those, too. So we've got one side of a page. And I'll hand it over to you, Matt. Loan 1 which is a retail building in suburban Westchester, we feel pretty good about that one. We think it could refinance away from us in a relatively short amount of time, 2 quarters. That's going to depend on execution on other banks. So I can't be certain of timing there, but we feel like that one is going to go away from us in the next several months. Loan 2, not as hopeful that, that will be resolved anytime soon. That's a multi-bank participation. There's a common sponsor that has more trouble other than this one loan. So I think that one is going to take a little bit longer to unfold.

Q: Just kind of curious, what you guys think the 25 basis point cut by the Fed would imply for -- would do to your margin?

A: At this point, I wouldn't -- I'll let Courtney answer the question, but that will be a 2026 event in terms of margin. And if it happens at this point in the year, we feel its impact later. Courtney: Yes. So I still -- we were very successful with repricing our CDs in the first half of the year, about $750 million on average 80 basis points lower. We still have more room to go with the remainder of our rolling off brokered in time. But a further rate cut, I would say, even without a rate cut right now, probably another 5 to 10 basis points on NIM just on where rates are today; so us being able to reprice our time deposits down even further, offset by our variable rate loans, probably another 10 basis points on top of that. But yes, we are very optimistic as far as where we think our NIM will end up at the end of this year, just given what we have to reprice in our existing book without rate cuts.

Q: Most of my questions, if not all, have been asked and answered, so I appreciate that. But just maybe one on expenses. I think the guidance implies maybe $30 million in the back half. With all the teams kind of just hired, does the progression maybe go up to $15 million a quarter flat? Or should -- will it build kind of throughout the year?

A: It should stay relatively flat. I mean, I think that's a fair assumption, the $15 million. We've done some investment in the first half of this year. And we've added teams in the second quarter, and we're starting to adjust for our compensation structure as those teams have come on. So we anticipate it to level off in the back half.