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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. [Operator Instructions]

I would now like to turn the call over to Courtney Sacchetti, Executive Vice President and Chief Financial Officer. Please go ahead.

Thank you. Good morning, everyone. Welcome to Bankwell's fourth 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.mybankwell.com and go to the Events and Presentations tab for supporting materials. Our fourth 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. Thank you.

And now I will turn the call over to Chris Gruseke, Bankwell's Chief Executive Officer.

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. 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.

We appreciate your interest in our performance and this opportunity to discuss our results with you. On today's call, we will 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. 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.

Our financial results in the fourth quarter included GAAP fully diluted earnings per share of $0.32, which were impacted by $3 million of net charge-offs. The charge-offs primarily consisted of 2 non-performing assets. First, we fully disposed of a non-performing C&I loan with a book balance of $1.7 million. The initial write-down on this credit was announced in an 8-K filing in July 2024. The $700,000 charge-off on this loan and the sale of certain assets finalizes the disposition of this non-performing asset.

Second, we took possession of a non-performing construction loan during the fourth quarter, transferred the property to OREO and charged off $1.2 million, which resulted in a carrying value of $8.3 million. 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. Subsequent to December 31, 2024, we signed a purchase and sale agreement for this OREO asset for the full $8.3 million book value. The impact of this sale will reduce the non-performing asset ratio by 25 basis points.

Also subsequent to December 31, 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. Both sales should have a neutral impact to future net income. Further details regarding NPAs can be found on Slide 11 of our investor presentation.

Regarding commercial real estate, we continue to reduce our CRE concentration, 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. 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.

We had another productive quarter of growth within our Bankwell Direct product, which grew by $39 million over the third quarter, bringing total outstanding balances to $136 million, while broker deposits fell another $78 million on a linked quarter basis. Overall, core deposits grew by $169 million in the fourth quarter, while simultaneously reducing our total deposit costs by 9 basis points compared to the third quarter. With a liability-sensitive balance sheet, we remain well positioned for a normalized yield curve.

Now to discuss our financial results in greater detail, I'll turn it over to our Chief Financial Officer, Courtney Sacchetti.

Thank you, Chris. Our pre-provision net revenue of $7.9 million was down quarter-over-quarter, representing 98 basis points of PPNR return on average assets. 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.

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. 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 5 basis point drag on NIM had that cash been otherwise deployed.

As Chris mentioned, we had a 9 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. More specifically, we have $1.3 billion of time deposits maturing in the next 12 months, $714 million of retail CDs repricing at an average of 22 basis points lower and $560 million of brokered CDs repricing at an average of 49 basis points lower, both based on current rates.

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 pick-up in earnings per share and about 14 basis points of margin expansion. 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. Also, we anticipate $0.5 billion in loans to reprice or mature over the same period, which could further benefit margin by an additional 15 basis points to 20 basis points on an annualized basis.

Non-interest income of $964,000 was down compared to the linked quarter mainly due to a reduction in SBA gain on sale fees. 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.

We remain 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. The fourth quarter's provision expense was $4.5 million compared to $6.3 million in the prior quarter. 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. 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.

I'll now hand it back to Chris for his closing remarks.

Thank you, Courtney. 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. We've made excellent progress on several initiatives that lay the groundwork for improved financial performance in 2025 and beyond.

First, we've significantly reduced our exposure to brokered deposits, which decreased by $247 million year-over-year. Approximately half of this decrease is due to the successful launch of Bankwell Direct. Second, while we've made significant investments in human capital, especially in the important areas of technology and risk management, 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. Third, 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, we anticipate modest loan growth of 3% to 5% with net interest income growing to the range of $93 million to $95 million. Additionally, we expect 2025 non-interest income to grow to $7 million to $8 million, roughly doubling 2024's performance as a result of our growing SBA lending division. We estimate total non-interest expense of approximately $56 million to $57 million in the coming year, inclusive of a healthy degree of ongoing investment in previously discussed growth initiatives. Overall, we are quite optimistic for improved financial performance at Bankwell in 2025.

To close, I'd like to thank all of our teammates here at Bankwell whose outstanding effort and dedication have made the evolution of our company possible.

This concludes our prepared remarks. Operator, will you please begin the question-and-answer session?

[Operator Instructions] Your first question comes from the line of Chris O'Connell of KBW.

Congratulations, Matt, on the promotion. So I 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.

So Chris, we price everything off of 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. And then as far as the growth that you guys are seeing in the portfolio and the demand near-term, I know you guys are kind of moderating to a flattish low growth environment right now until the CRE concentration ratio comes down. Is that still the case as we get into the back half of '25 do you think?

This is Chris, Chris. So I would say, because of the mix, which is increasingly more C&I than CRE, that kind of takes 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 CET1 ratio. So that's -- our goal is to get that up towards 11%, 11% over some time in '27 and moving towards there. So it's not about CRE, it's really just working to grow the CET1 ratio.

On a consolidated basis.

Yes, yes, holdco. Right.

Okay. Got it. And I guess on that front, how do you guys kind of stack rank your prioritization in terms of getting to that ratio versus opportunistically using the buyback over the course of '25?

So it's more art than science. It depends on the trade-off of how profitable the growth is versus a stock buyback and where the stock is trading. So it's the mix of all of those variables. I would expect to see stock buybacks on the magnitude of what we had this year, Courtney?

Maybe 6,000 shares we've repurchased.

Right. But the impact of...

Sure. $1 million of buybacks of capital is about 3.5 basis points on our capital ratio. So it's not really a significant impact to buy back 100,000 shares at $30 a share.

Yes, that's 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 the holdco CET1 [Technical Difficulty] and then it's a function of what is the stock price and how wider yields and what's the right time to do it, but I think we'll see both.

Okay. And then, I guess, on the fee outlook, I mean, obviously, very strong, doubling year-over-year, more or less. Is -- can you talk about, I guess, the pace of the ramp that you expect on the SBA side?

Yes, 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're using technology to enable smaller loans and we have first put in the right infrastructure for technology and risk. And there was a Q4 announcement when we announced a Head of SBA Lending Division, Michael Johnson. And we're ready and have actually started originating loans in the SBA division, and Matt can talk about how targets and flow.

So over time, Chris, 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 [Technical Difficulty] loan sales in the first quarter. And the implied number there in our fees is about $50 million of originations over the whole of '25. So I wouldn't be surprised to see 3 quarters of that coming in the second half.

Okay. That's helpful. And then on the NII guidance and kind of the overall margin here, I guess, I was surprised to see the margin down quarter-over-quarter. And I know that there was -- it sounds like some impact on the loan fees. But I guess, I thought that the deposit costs would be coming down a little bit more aggressively here. But certainly, the NII guide with not too much balance sheet growth implies kind of a ramp pretty well above 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? And kind of what you guys are seeing and having in terms of customer conversations around the cost there?

Yes. Chris, let me just start off. So regarding the decrease, yes, Courtney has said, we can put finer points on it, the word decreased fees. But part of the drop is the timing -- part of the anticipated decrease in cost of funds is the timing of when the CDs are rolling over. So we have a roll schedule in the investor presentation, and Courtney has gone through in pretty much detail and we'll continue to put a number on that. I know you want other parts as well. So I'm just starting off by saying that 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, do you want to add to that? And then maybe, Matt, you can talk about the [Technical Difficulty]

Yes. And I think, Chris, you hit it on the head. Our 2.60% NIM for the quarter, I would not use that as my launching off point to figure out my first quarter NIM in 2025. A more normalized NIM accounting for fees and a more efficient deployment of cash in that low 2.70s, I can see our NIM expanding to the higher 2.70s in the first quarter. You can see we have our highest retail CDs maturing at a rate of 5.20% and almost like, call it, 1/3 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.

Okay. Yes, that is very helpful. And then I guess just [Technical Difficulty] if you have the December margin?

Actually, Chris, I'll have to follow back up with you. I don't know that I have that readily available.

Okay. But regardless, it sounds like starting off with like a 2.70% handle, give or take, and kind of moving up from there is appropriate?

Yes, that's what I would expect. Yes. So for the full year, again, as the function of our time deposits reprice and our loans reprice, I would expect that NIM to approach closer. And I think you probably are backing into this number closer to a 3% NIM for the year in the 2.90s range.

And Chris, I want to add to that, that number that Courtney just gave, that assumes no further action by the Fed. That's just what's built into the system for us.

Great. Yes, super helpful. I guess, just on that front, maybe if you guys could talk about what each 25 basis point Fed move might do to the margin. I know that there's -- the immediate quarterly impact is a little bit dependent on what's maturing from a CD or borrowing standpoint that quarter, but maybe over the course of a 12-month period?

So over the course of the year, we'd have to break it down. Obviously, the term deposits are going to reprice when they're going to reprice, but now at a lower rate. So I would anticipate the 25 basis point move on term deposits just would be [Technical Difficulty] lower 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 pretty significant beta on those as well for every 25 basis points. We're probably going to drop some rates just in the upcoming weeks. So I don't know that we have a breakout of what percentage of those are actually tied to deposits, Courtney, to...

On our maturity deposits?

Yes. That will come down precisely 25 basis points.

If I say I have about $1 billion of non-maturity deposits, I would say, 20% of that is tied.

25% would get the full beta?

Yes, yes. And then the others are -- we have exception pricing that we may adjust here and there, but our offered rates would be on the balance of that.

Right. So for 25 basis points on the deposits that aren't specifically tied to funds, the beta will be greater than 50%. I mean, do you have a better number than that, Matt?

Yes. I think we've reached a point now with falling rates and our particular construction of our -- not the time deposits [Technical Difficulty] will be in the probably 50% to 75% [Technical Difficulty] beta if -- that's probably closer to 75%.

Okay. Very helpful. And then on the expense guidance, obviously, a bit of a pick-up or ramp from 2024 as you guys are putting in a bunch of kind of initiatives and have the SBA ramp. How should we think about the cadence? Is that coming up to a pretty good starting run rate right at the beginning of the year or is it going to ramp over the course of 2025 as you guys are inputting these initiatives and having some of these departments or SBA kind of ramping up over the course of the year as well?

So at a high level, Chris, the numbers that we're increasing include a host of positions. So when we show that number ticking up next year, that's with a steady dose of investment in primarily people. And that's still getting around that 170 basis points of asset run rate as expense. And that's a number of people, which we can go through the sort of people for you, and that 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. But we're pretty excited that we've been able to maintain the expenses we have, adding a lot of talent. And 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. So this isn't going to be a $2 million to $3 million 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 the type of positions and numbers and to get to that increase?

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 function folks, some commercial deposit gatherer people. So there's a good number of heads that are budgeted that aren't here today that we will be building up over time.

I will also note, Chris, as you know, our first quarter expenses historically are higher than our other quarters just given 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. Yes, understood. And then on the credit side, obviously, a lot of clean-up here in the fourth quarter, and I guess, trending into the beginning of 2025, but seems to be yielding a bit of a cleaner run rate after that. Can you talk about the timing of the 2 pending non-performing/OREO sales? I mean, I guess, I had thought that the one had got 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?

There was a slight change in the circumstance. The buyer of that credit [Technical Difficulty] some support actually and brought in a partner. They have since signed a purchase [Technical Difficulty] that if all things are go off as planned, would close in the coming weeks. We're feeling good about that [Technical Difficulty] sale happening...

Matt, can I interrupt you for a second? The signature in prior quarter was not a definitive purchase and sale.

No, it was an LOI.

Letter of intent at the time, Chris. So the situation [Technical Difficulty]

Okay, okay. And the second -- I guess, the timing on the second one?

The timing on the second one is perhaps even sooner next week maybe. So we're pretty [Technical Difficulty] we have earnest money transactions that [Technical Difficulty] signaling to us that we're going to -- these transactions are going to go forward [Technical Difficulty] we're pretty confident that they're [Technical Difficulty]

And Chris, the second one is the loan that 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 chapters here.

Okay. Got it. And...

So the good news from our standpoint is we feel like we're putting this stuff to bed, 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 '24.

Yes. And as I understand it based on some of the commentary in the release or the deck that you don't expect any additional charge-offs related to these credits with the pending sales? And is there any potential chance of recoveries with the one at par? I can't remember if there -- if it had any specific against it.

We never reserved against it or took any charges against that asset. Plus -- the par amount, correct. And then we can talk a little bit about the construction loan.

Still pending in the court.

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.

Great. And then just on the -- that obviously cleans up the vast majority of the non-performers here. But the 2 other notable ones remaining, if you could just provide an update on those? I think in the deck, labeled under Loan 2 and Loan 3 with one of them set to mature next quarter.

Sure. So Loan 2 was a COVID-impacted loan. They had a tenant move out on the first day of their lease, which coincided with March of 2020. It's been vacant 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 [Technical Difficulty] that is the request to the borrower now. So I think that that one gets cleaned up. We believe that there's still value there for the sponsors to protect. And it looks as they have the opportunity to fully lease out the building here right as [Technical Difficulty]

And those write-downs occurred along the way.

Correct. The majority of that was taken in the first or second quarter of 2020 when the tenant moved down. Loan 3, this is $84 million club deal with some various regional banks. The 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. We're hopeful that not only that this value, this balance that we have remaining is the correct carrying value, but we're -- there may be a chance for a recovery at some point [Technical Difficulty] able to see positive cash flow on the property.

Okay. Got it. So 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 -- yes, it's obviously more complicated with several banks in the work out.

And Chris, that loan has already had over $8 million in charges taken against it.

Yes, understood. Got it. Okay, great. And then more generally, as you guys are looking ahead towards 2025, I think you guys don't have a very large office portfolio, but obviously, an area of focus. And there's about -- I think it's 56% or $90 million of it matures next year. Have you guys have come into the year and reviewed the portfolio? And how do you guys feel about those upcoming maturities?

Yes. I think you're probably -- you're referring to Page 12 of the investor presentation. There's a chart on that. 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 [Technical Difficulty] the remaining $13 million 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 2 extension on their previously matured loan. They've come up to a market rate and they're still cash flowing. So we're feeling pretty positive about our remaining office balance.

And Chris, I'd note that there's the $90 million of the $160 million is maturing in 2025 in office, and that's because we essentially stopped doing office after 2020. We made some exceptions, but the balances then drop off because there's not going to be any left [Technical Difficulty]

Yes. Got it. Okay, great. And then I guess just last one for me is what's a good tax rate going forward?

Yes. 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 the 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%.

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.