Bankwell Financial Group, Inc. (BWFG)

Executive Summary / Key Takeaways

• Margin Expansion in Motion: Bankwell's liability-sensitive balance sheet is driving a powerful net interest margin inflection, with NIM expanding 74 basis points from Q4 2024 to 3.34% in Q3 2025. This isn't a one-time benefit—$1.25 billion in time deposits will reprice 27 basis points lower over the next 12 months, providing a structural tailwind that larger, asset-sensitive competitors lack.

• Credit Quality Turnaround Complete: Management has aggressively resolved pandemic-era problem assets, slashing nonperforming assets from a peak of $65 million (2.07% of assets) in Q3 2024 to just 56 basis points by Q3 2025. The sale of a $27.1 million multifamily loan at par and an $8.3 million OREO property at book value demonstrates both the conservatism of marks and management's willingness to take decisive action.

• SBA Division as a Fee Income Engine: The newly launched SBA lending division has already generated $2.89 million in gains on loan sales through Q3 2025, more than five times 2024's full-year total. With $44 million in originations year-to-date and management targeting $50 million annually, this represents a material diversification from traditional spread income toward higher-multiple fee revenue.

• Strategic Investments Positioning for 2026: The addition of five private client teams in the New York Metro area and the hiring of a Chief Technology Officer in Q1 2025 signal a deliberate pivot toward relationship-driven core deposit growth and technological modernization. These investments are weighing on near-term expenses but building a foundation for sustainable growth.

• Valuation Discount Despite Superior Capital Efficiency: Trading at 13.35 times earnings and 1.28 times book value, BWFG generates a 10.35% return on equity that exceeds larger regional peers like Webster (WBS) (9.91%) and M&T (MTB) (9.63%). The market appears to be pricing the stock as a traditional community bank while ignoring the emerging fee income stream and margin expansion story.

Setting the Scene: A Community Bank Reinventing Itself

Bankwell Financial Group, founded in 2002 and headquartered in Connecticut, operates as the holding company for Bankwell Bank, a state-chartered commercial bank serving small and medium-sized businesses and retail clients in Connecticut and the New York metro area. Unlike super-regional giants with hundreds of branches, Bankwell runs a tight network of eight locations in affluent markets like New Canaan, Stamford, and Westport. This geographic concentration is both a constraint and a strategic advantage—it limits scale but enables the deep, relationship-driven banking that larger competitors struggle to replicate.

The company's business model is straightforward: generate net interest income from a $2.68 billion loan portfolio while funding it through a $2.76 billion deposit base, supplemented by fee-based revenues. Historically, this has been a traditional community bank story, heavily weighted toward commercial real estate lending. At year-end 2022, CRE exposure reached 425% of total risk-based capital—a concentration that raised regulatory eyebrows and investor concerns. Management has since made reducing this concentration a strategic priority, bringing it down to 349% by Q2 2025, the lowest level in a decade.

What makes the current investment case compelling is that Bankwell is no longer simply a spread lender cleaning up its balance sheet. It is simultaneously engineering a margin inflection through liability repricing, building a new SBA fee engine, and investing in talent and technology to capture core deposits that larger banks take for granted. This three-pronged transformation is occurring while the bank maintains pristine capital ratios (CET1 at 10.39% in Q3 2025) and returns capital through share repurchases (250,000 shares authorized in October 2024).

Technology, Products, and Strategic Differentiation

The SBA Lending Platform: From Zero to $50 Million in Under a Year

Bankwell's most significant strategic pivot is the December 2024 launch of its SBA lending division. In less than a year, this unit has originated $44 million in loans through Q3 2025, approaching the full-year target of $50 million. The division is led by Michael Johnston, recruited from ReadyCap (RC), which was the fourth-largest SBA producer nationally. This isn't a token diversification effort—it's a full-scale buildout of a fee-generating business that management believes can "further scale the business beyond $50 million in production."

The economic impact is already visible. Gains and fees from loan sales jumped to $1.37 million in Q3 2025 from just $0.13 million in the prior-year period. For the nine months ended September 2025, this revenue line reached $2.89 million, up from $0.50 million in 2024. More importantly, SBA gain-on-sale income represented 8.8% of total revenue in Q3 2025, up from 4.6% in Q4 2024. This shift matters because fee income is less rate-sensitive and commands higher valuation multiples than spread income. While traditional community banks are beholden to the yield curve, Bankwell is building a business that can grow through cycles.

The SBA division also serves a strategic purpose in deposit gathering. SBA borrowers typically bring operating accounts and treasury management relationships, generating low-cost core deposits that reduce reliance on brokered funding. This creates a virtuous cycle: SBA originations generate fee income, attract core deposits, and improve the overall deposit mix, which in turn expands net interest margin.

Bankwell Direct and Private Client Teams: Attacking the Deposit Challenge

Recognizing that funding costs are the primary driver of community bank profitability, management has launched two strategic initiatives to transform the deposit base. The "Bankwell Direct" product, a digital deposit platform, has contributed to a reduction in brokered deposits by over $400 million from their peak. Brokered CDs stood at $555 million at Q3 2025, down from $651.5 million at year-end 2024. More importantly, average balances of low-cost deposits (noninterest-bearing and NOW accounts at rates of 50 basis points or lower) grew by $64 million, or 16%, since Q4 2024.

The second initiative is the aggressive hiring of private client teams. Between April and July 2025, Bankwell added five teams in the New York Metro area, targeting high-net-worth individuals and business owners who value relationship banking. These teams are expected to bring "multiple tens of millions of business, hundreds of million dollars in their books of business" from prior organizations, with a focus on noninterest-bearing deposits. Management has implemented same-day/next-day account opening processes to ensure these relationships translate quickly to the balance sheet.

The impact of these teams is not yet fully reflected in the numbers. Noninterest-bearing deposits increased to $397.4 million at Q3 2025 from $321.9 million at year-end 2024, but management emphasizes this is just the beginning. As these teams ramp in 2026, they should drive further margin expansion in a liability-sensitive balance sheet where every dollar of low-cost funding flows directly to pre-tax income.

Technology Modernization: The CTO Hire

In Q1 2025, Bankwell hired Brian Merritt as Chief Technology Officer, bringing experience in banking technology, product development, and system architecture. While community banks are not typically thought of as technology innovators, this hire signals management's recognition that digital capabilities are table stakes for attracting and retaining core deposits. The ability to open accounts same-day/next-day, a capability that has been a "stumbling block in some organizations," is now operational.

The technology investment is also defensive. Larger regional competitors like Webster and M&T are investing heavily in digital platforms that can process loans and onboard customers more efficiently. Bankwell's smaller scale means it cannot match their absolute technology spend, but it can be more nimble in implementation. The CTO's mandate is likely to focus on high-impact, customer-facing capabilities rather than back-office infrastructure, maximizing ROI on limited resources.

Financial Performance & Segment Dynamics: Evidence of Strategy Working

The Margin Inflection Story

Bankwell's Q3 2025 results provide compelling evidence that the strategic initiatives are translating to financial performance. Net interest margin expanded to 3.34%, up 24 basis points from the prior quarter and 74 basis points from Q4 2024. This improvement is not driven by one-time items but by structural shifts in both asset yields and funding costs.

On the asset side, loan yields increased as the bank "recycled" its portfolio. Year-to-date originations yielded approximately 7.86%, or 136 basis points higher than the runoff yield. This 41 basis point increase in portfolio yield from Q4 2024 reflects management's discipline in exiting less attractive credits and originating new loans at market rates. The increase in variable-rate loans from just over 20% to 35% of the portfolio also positions the bank to benefit from future rate cuts, with management estimating a 5 basis point NIM improvement per 25 basis point Fed cut.

On the liability side, deposit costs improved by 10 basis points to 3.30% in Q3 2025, down 37 basis points from Q4 2024. The $1.25 billion in time deposits repricing over the next 12 months will benefit by approximately 27 basis points, generating an annualized savings of $3.4 million. This repricing power is the direct result of replacing brokered deposits with core relationships through Bankwell Direct and the new private client teams.

The flow-through to profitability is dramatic. Pre-provision net revenue (PPNR) return on assets hit 1.7% in Q3 2025, up 27 basis points sequentially. The efficiency ratio improved to 51.4% from 56.1% in the prior quarter, driven by 10% revenue growth against just 1% expense growth. This positive operating leverage demonstrates that strategic investments are generating returns faster than they are adding costs.

Credit Quality: From Overhang to Asset

Perhaps the most important development for risk/reward is the resolution of pandemic-era credit issues. Nonperforming assets peaked at $65 million (2.07% of assets) in Q3 2024. By Q3 2025, they had fallen to just 56 basis points of total assets. The coverage ratio of nonperforming loans increased to 177%, and special mention loan balances decreased by $30 million in Q3 alone.

The resolution was not passive. In Q1 2025, management sold a $27.1 million multifamily commercial real estate loan that had been on nonperforming status at par value. An $8.3 million OREO property was sold at book value. These transactions demonstrate that previous charge-offs were conservative and that buyers in the market are willing to pay full value for well-underwritten New York metro real estate, even when cash flows have been disrupted.

CEO Christopher Grusek's commentary on the remaining problem loans provides further comfort. A COVID-impacted construction loan that entered non-accrual in early 2020 has had $4.5 million in charges taken and now has leases in place, with the borrower expected to refinance away from Bankwell at maturity. A multi-bank participation office loan has a receiver in place, and management believes the carrying value is appropriate with potential for recovery. The key takeaway is that the remaining NPAs are well-understood and reserved, with no new problem credits emerging.

Segment Dynamics: SBA as the Growth Engine

While the bank operates as a single reportable segment, the SBA division's performance warrants separate analysis. Year-to-date originations of $44 million have already surpassed full-year 2023 and 2024 totals. The division contributed $1.4 million in gain-on-sale income in Q3, a $0.3 million increase over Q2. Management notes that SBA activity is "very strong" and that pricing is favorable.

The strategic importance extends beyond the fee income. SBA lending diversifies the loan mix away from CRE, which remains elevated at 349% of risk-based capital. While this is down from 425% at year-end 2022, it still exceeds regulatory comfort levels. SBA loans carry government guarantees, reducing credit risk, and typically generate cross-sell opportunities for treasury management and deposit relationships.

The risk is that SBA activity is vulnerable to government shutdowns, which suspend processing of new applications. Management acknowledges this could "temporarily impact SBA results for the remainder of 2025" but notes the exposure is limited and the division has "operating leverage able to further scale the business beyond $50 million in production."

Outlook, Management Guidance, and Execution Risk

Guidance Revisions: Flat Growth as a Positive Signal

Management's decision to revise 2025 loan growth guidance from "low single-digit" to "flat for the year" initially appears disappointing. However, the context reveals a strategic choice rather than a demand problem. Loan originations remain "very strong" at $220 million in Q3 and over $500 million year-to-date, exceeding full-year 2023 and 2024 totals. The issue is elevated payoff activity, which management is "encouraging...to exit less attractive credits."

This "recycling of the loan book" is a sign of good health. The bank is letting lower-yielding loans run off while originating new loans at spreads that are 136 basis points higher. While this limits net growth in the short term, it improves the quality and profitability of the portfolio. The revised guidance should be viewed as management prioritizing margin over volume, a trade-off that benefits long-term value creation.

2026: The Year of Deposit Team Impact

Management has been clear that the five new private client teams will not materially impact 2025 results. Their full production is expected in 2026. This creates a potential inflection point for deposit growth and mix improvement. If these teams deliver on their potential to bring "hundreds of million dollars" in core deposits, Bankwell could see a step-function improvement in its funding costs and margin.

The hiring of Brian Merritt as CTO in Q1 2025 also positions the bank for 2026 technology initiatives. While 2025 expenses have increased to $58-59 million (up from initial guidance of $56-57 million) due to these investments, management maintains that "our long-term view of driving operating leverage remains unchanged." The efficiency ratio should continue improving as revenue scales faster than expenses.

Interest Rate Sensitivity: A Modest Tailwind

Bankwell's balance sheet remains liability-sensitive, meaning falling rates benefit margins. Management estimates a 5 basis point annualized NIM improvement from a 25 basis point Fed cut. With $800 million in prime-based loans repricing at the end of Q3 2025 and continued deposit repricing, the bank is positioned for modest margin expansion even without rate cuts. CFO Michael J. Zangari notes that "even without a rate cut right now, probably another 5 to 10 basis points on NIM just on where rates are today."

Risks and Asymmetries: What Could Break the Thesis

Government Shutdown Risk to SBA

The most immediate risk is a U.S. government shutdown, which would suspend SBA processing of new applications and loan disbursements. While management views this as a temporary impact, the timing could be problematic given the division's momentum. The SBA division represents 8.8% of total revenue and is growing at triple-digit rates. A prolonged shutdown could not only impact 2025 results but also cause Bankwell to miss its $50 million origination target, affecting credibility.

However, the exposure is limited. Management notes that the bank's exposure to federally-funded programs like Section 8 housing vouchers is "very limited." The SBA division is a supplement to, not a replacement for, the core banking franchise. The risk is manageable but worth monitoring.

CRE Concentration: Progress Made, But Elevated

While CRE exposure has declined to 349% of risk-based capital, this remains well above regulatory guidance and peer averages. The New York metro office market, in particular, faces structural headwinds from remote work. Bankwell has $160 million in office loans, with $90 million maturing in 2025. Management states that "the remaining 13 loans are cash flow positive and pass rated," but a broad-based decline in office values could create new problem credits.

The bank's strategy of stopping office lending after 2020 is prudent, but the legacy portfolio remains a risk. The good news is that the bank has demonstrated an ability to work through problem credits without material losses, as evidenced by the par sale of the multifamily loan and book-value sale of OREO.

Execution Risk on Strategic Initiatives

The SBA division, private client teams, and technology investments all require execution excellence. The SBA division must scale beyond $50 million in production while maintaining credit quality. The private client teams must deliver on their promised deposit growth. The CTO must modernize systems without disrupting operations or incurring excessive costs.

Management's track record provides some comfort. The bank has successfully reduced brokered deposits by over $400 million while growing core deposits by $244 million over the last twelve months. The credit cleanup has been decisive and well-timed. However, the simultaneous pursuit of multiple initiatives strains management bandwidth and could lead to missteps.

Competition from Scale Players

Webster Financial ($75 billion in assets), M&T Bank ($200+ billion), and Citizens Financial (CFG) ($220 billion) all have significant Connecticut footprints and are investing heavily in digital capabilities. Their scale allows them to offer lower loan rates and higher deposit rates, pressuring Bankwell's market share. While Bankwell's relationship-based model provides differentiation, younger demographics increasingly prefer digital-first banking experiences that the larger players can deliver more effectively.

The private client team strategy is a direct response to this threat, leveraging relationships that mega-banks cannot replicate. However, if these teams fail to deliver, Bankwell could find itself squeezed between larger competitors on price and fintechs on technology.

Valuation Context: Discounted Transformation Story

At $48.85 per share, Bankwell trades at 13.35 times trailing earnings and 1.28 times book value. This valuation appears conservative for a bank undergoing a strategic transformation while generating a 10.35% return on equity.

Relative Valuation: Superior Capital Efficiency at a Discount

Compared to direct competitors, Bankwell's ROE of 10.35% exceeds Webster's 9.91% and M&T's 9.63%, despite being a fraction of their size. The price-to-book ratio of 1.28 is in line with Webster's 1.15 and M&T's 1.20, but Bankwell is growing its book value faster through a combination of retained earnings and strategic initiatives.

The price-to-free-cash-flow ratio of 11.28 and price-to-operating-cash-flow of 10.98 are attractive for a profitable, growing bank. The dividend yield of 1.64% with a payout ratio of just 21.86% provides income while retaining capital for growth.

The SBA Division: Not Valued

The market appears to be valuing Bankwell as a traditional community bank, ignoring the SBA division's growth trajectory. If the division hits its $50 million origination target and generates $3-4 million in annual fee income, it could be worth 10-12 times revenue as a standalone business—$30-48 million of value that is currently embedded in the overall bank valuation without recognition.

Balance Sheet Strength: Optionality Value

With CET1 at 10.39% and heading toward management's 11% target, Bankwell has excess capital to fund growth or return to shareholders. The 250,000 share repurchase authorization from October 2024 provides a floor for the stock, while the ability to grow loans and investments provides upside optionality. The bank's liquidity position is strong, with $312.5 million in additional FHLB borrowing capacity and reduced reliance on brokered funding.

Conclusion: A Bank at an Inflection Point

Bankwell Financial Group is not the same bank that struggled with pandemic-era credit issues and a CRE-concentrated portfolio two years ago. Management has executed a three-pronged transformation: cleaning up credit, engineering a margin inflection through liability repricing, and building new fee income engines and deposit franchises. The results are visible in the financials—NIM expansion, efficiency ratio improvement, and a 177% coverage ratio on remaining NPAs.

The investment thesis hinges on two variables: the scaling of the SBA division and the deposit contributions from new private client teams in 2026. If SBA originations exceed $50 million and the private client teams deliver on their promised deposit growth, Bankwell could see a step-function improvement in its funding costs and fee income mix, justifying a re-rating toward higher-multiple peers.

The primary risks—government shutdown impact on SBA, remaining CRE concentration, and execution on strategic initiatives—are manageable and well-disclosed. The valuation discount to peers despite superior capital efficiency provides a margin of safety while the transformation plays out.

For investors willing to look beyond the traditional community bank label, Bankwell offers a compelling combination of margin expansion, credit quality improvement, and strategic optionality that is not reflected in its current multiple. The story is shifting from "show me" to "growth," and the market has not yet adjusted.