Bankwell Financial Group Reports Record Loan Growth for the Fourth Quarter and Full Year 2022; Declares First Quarter Dividend

Bankwell Financial Group, Inc. (NASDAQ:BWFG) reported GAAP net income of $8.0 million, or $1.04 per share for the fourth quarter of 2022, versus $7.8 million, or $0.99 per share, for the same period in 2021. For the year ended 2022, net income totaled $37.4 million, or $4.79 per share, versus $26.6 million, or $3.36 per share, for the same period in 2021.

The Company's Board of Directors declared a $0.20 per share cash dividend, payable February 23, 2023 to shareholders of record on February 13, 2023.

We recommend reading this earnings release in conjunction with the Fourth Quarter 2022 Investor Presentation, located at http://investor.mybankwell.com/Presentations and included as an exhibit to our January 25, 2023 Current Report on Form 8-K.

Notes Bankwell Financial Group President and CEO, Christopher R. Gruseke:

"I commend my colleagues at Bankwell for truly exceptional performance in 2022. Our Company posted record results, generating a 16.7% Return on Average Equity and a 1.44% Return on Average Assets. Loan balances grew by over 40%, and we continue to diversify our lending book and bring new commercial relationships to the Bank.

"This year's growth has positioned the Company well for the expected continued tightening actions by the Federal Reserve. The average yield of loans originated during 2022 was 6.24% while the average yield on fourth quarter originations was 7.23%.

"The historic actions of the Federal Reserve this year are yet to be played out, but based on a peak Federal Funds rate implied by financial markets, and our planning for no Fed rate cuts in 2023, we re-affirm our expectations for 2023's net interest income to decline by approximately 10% versus 2022.

"Tangible Book Value growth is imperative for value creation to accrue to our shareholders. We are pleased to acknowledge that the Company's Tangible Book Value per share has compounded at a rate of almost 18% since December 31, 2020.

We are proud of the work we have accomplished in transforming our Bank's business model in recent years, and thank our customers and clients who have made this success possible."

Fourth Quarter 2022 Highlights:

• Total gross loans were $2.7 billion, growing $780.6 million, or 41.2%, compared to December 31, 2021.
• Average yield on 2022 funded loans was 6.24% compared to 4.56% for 2021.
• Return on average assets was 1.07% for the quarter ended December 31, 2022 and 1.44% for the year ended December 31, 2022.
• Return on average shareholders' equity was 13.38% for the quarter ended December 31, 2022 and 16.72% for the year ended December 31, 2022.
• The net interest margin was 3.70% for the quarter ended December 31, 2022 and 3.78% for the year ended December 31, 2022.
• The efficiency ratio was 45.6% for the quarter ended December 31, 2022 and 45.4% for the year ended December 31, 2022.
• Investment securities totaled $121.6 million and represent 3.7% of total assets.
• Fully diluted tangible book value per share rose to $30.51 compared to $25.55 at December 31, 2021.

Earnings and Performance

Revenues (net interest income plus noninterest income) for the quarter ended December 31, 2022 were $27.3 million, versus $19.8 million for the quarter ended December 31, 2021. Revenues for the year ended December 31, 2022 were $97.8 million, versus $73.5 million for the year ended December 31, 2021. The increase in revenues was primarily attributable to an increase in interest and fees on loans due to record loan growth and higher overall loan yields¹ for the quarter and year ended December 31, 2022. The increase in revenues was partially offset by the following: an increase in interest expense; a decrease in noninterest income driven by a reduction in loans sales and the absence of rental income in 2022 due to the disposition of the Company's former headquarters building in the fourth quarter of 2021. Revenues in 2021 also included a one-time federal payroll tax credit for COVID-19 of $0.9 million recognized in the quarter ended March 31, 2021 which did not repeat in 2022.

Net income for the quarter ended December 31, 2022 was $8.0 million, versus $7.8 million for the quarter ended December 31, 2021. Net income for the year ended December 31, 2022 was $37.4 million, versus $26.6 million for the year ended December 31, 2021. The increase in net income was a direct result of the aforementioned increases in revenues. In addition, the increase in net income was partially offset by an increase in the provision for loan losses due to loan growth and an increase in noninterest expense for the quarter and year ended December 31, 2022.

Basic and diluted earnings per share were $1.04 and $1.04, respectively, for the quarter ended December 31, 2022 compared to basic and diluted earnings per share of $1.00 and $0.99, respectively, for the quarter ended December 31, 2021. Basic and diluted earnings per share were $4.84 and $4.79, respectively, for the year ended December 31, 2022 compared to basic and diluted earnings per share of $3.38 and $3.36, respectively, for the year ended December 31, 2021.

The net interest margin (fully taxable equivalent basis) for the quarters ended December 31, 2022 and December 31, 2021 was 3.70% and 3.43%, respectively. The net interest margin (fully taxable equivalent basis) for the year ended December 31, 2022 and December 31, 2021 was 3.78% and 3.17%, respectively. The increase in the net interest margin was due to an increase in overall loan yields, aided in part by elevated loan prepayment fees, partially offset by an increase in funding costs.

Provision for Loan Losses

Provision for loan losses was $4.3 million and $5.4 million for the quarter and year ended December 31, 2022, respectively, bringing the total allowance for loan losses to $22.4 million as of December 31, 2022. Provision for loan losses was $0.1 million for the quarter ended December 31, 2021 and a credit for loan losses of $0.1 million for the year ended December 31, 2021. The increase in the Provision for loan losses for both the quarter and year ended December 31, 2022 was attributable to loan growth.

On January 1, 2023, the Company adopted ASC 326 Financial Instruments - Credit Losses ("CECL"). Upon adoption of CECL, the Company will record a one-time cumulative effect, pre-tax adjustment range of $3.4 million to $4.2 million to the Allowance for loan losses and a corresponding net of tax adjustment to beginning retained earnings. This impact will be reflected in the Company's first quarter 2023 financial statements.

Financial Condition

Assets totaled $3.25 billion at December 31, 2022, compared to assets of $2.46 billion at December 31, 2021. The increase in assets was primarily due to loan growth. Gross loans totaled $2.7 billion at December 31, 2022, an increase of $780.6 million or 41.2% compared to December 31, 2021. Deposits totaled $2.8 billion at December 31, 2022, compared to deposits of $2.1 billion at December 31, 2021.

Capital

Shareholders' equity totaled $238.5 million as of December 31, 2022, an increase of $36.5 million compared to December 31, 2021, primarily a result of (i) net income of $37.4 million for the year ended December 31, 2022 and (ii) an $8.4 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps of $16.8 million, partially offset by fair value marks on the Company's investment portfolio of $8.4 million. The Company's interest rate swaps are used to hedge interest rate risk. The increase in Shareholders' equity was partially offset by dividends paid of $6.2 million and common stock repurchases of $5.5 million.

About Bankwell Financial Group

Bankwell is a commercial bank that serves the banking needs of residents and businesses throughout Fairfield and New Haven Counties, Connecticut. For more information about this press release, interested parties may contact Christopher R. Gruseke, President and Chief Executive Officer or Courtney E. Sacchetti, Executive Vice President and Chief Financial Officer of Bankwell Financial Group at (203) 652-0166.

For more information, visit www.mybankwell.com.

This press release may contain certain forward-looking statements about the Company. Forward-looking statements include statements regarding anticipated future events and can be identified by the fact that they do not relate strictly to historical or current facts. They often include words such as "believe," "expect," "anticipate," "estimate," and "intend" or future or conditional verbs such as "will," "would," "should," "could," or "may." Forward-looking statements, by their nature, are subject to risks and uncertainties. Certain factors that could cause actual results to differ materially from expected results include increased competitive pressures, changes in the interest rate environment, general economic conditions or conditions within the securities markets, and legislative and regulatory changes that could adversely affect the business in which the Company and its subsidiaries are engaged. The COVID-19 pandemic continues to affect Bankwell Financial Group, its customers, counterparties, employees, and third party service providers, and the ultimate extent of the impacts on its business, financial position, results of operations, liquidity, and prospects is unknown.

Non-GAAP Financial Measures

In addition to evaluating the Company's financial performance in accordance with U.S. generally accepted accounting principles ("GAAP"), management may evaluate certain non-GAAP financial measures, such as the efficiency ratio. A computation and reconciliation of certain non-GAAP financial measures used for these purposes is contained in the accompanying Reconciliation of GAAP to Non-GAAP Measures tables. We believe that providing certain non-GAAP financial measures provides investors with information useful in understanding our financial performance, our performance trends and financial position. For example, the Company believes that the efficiency ratio is useful in the assessment of financial performance, including noninterest expense control. The Company believes that tangible common equity, tangible assets, tangible common equity to tangible assets, tangible common shareholders' equity, fully diluted tangible book value per common share, adjusted non interest expense, operating revenue, efficiency ratio, average tangible common equity, annualized return on average tangible common equity, return on average assets, return on average shareholders' equity, and the dividend payout ratio are useful to evaluate the relative strength of the Company's performance and capital position. We utilize these measures for internal planning and forecasting purposes. These non-GAAP financial measures should not be considered a substitute for GAAP basis measures and results, and we strongly encourage investors to review our consolidated financial statements in their entirety and not to rely on any single financial measure.

Total nonaccrual loans decreased $0.1 million to $16.4 million as of December 31, 2022 when compared to December 31, 2021. Nonperforming assets as a percentage of total assets decreased to 0.51% at December 31, 2022, down from 0.68% at December 31, 2021. The allowance for loan losses at December 31, 2022 was $22.4 million, representing 0.84% of total loans.

Past due loans decreased to $16.1 million, or 0.60% of total loans, as of December 31, 2022, compared to $32.6 million, or 1.72% of total loans, as of December 31, 2021.

Gross loans totaled $2.7 billion at December 31, 2022, an increase of $780.6 million or 41.2% compared to December 31, 2021.

Total deposits were $2.8 billion at December 31, 2022, compared to $2.1 billion at December 31, 2021, an increase of $676.8 million, or 31.9%. The increase in deposits is primarily a result of an increase in brokered time deposits to fund the significant loan growth during the second half of 2022, increasing by $727.1 million compared to December 31, 2021.

Noninterest income decreased by $0.3 million to $0.5 million for the quarter ended December 31, 2022 compared to the quarter ended December 31, 2021. Noninterest income decreased by $2.6 million to $3.0 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The decrease in noninterest income was driven by a reduction in loan sales for the quarter and year ended December 31, 2022 compared to the same periods in 2021. Noninterest income also declined for the year ended December 31, 2022 due to a one-time federal payroll tax credit for COVID-19 of $0.9 million recognized in the quarter ended March 31, 2021. The decrease in noninterest income was also due to the absence of $0.7 million of rental income in 2022 due to the disposition of the Company's former headquarters building in the fourth quarter of 2021.

Noninterest expense increased by $2.8 million to $12.5 million for the quarter ended December 31, 2022 compared to the quarter ended December 31, 2021. Noninterest expense increased by $4.6 million to $44.4 million for the year ended December 31, 2022 compared to the year ended December 31, 2021. The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits expense, professional services expense, FDIC insurance, and customer fraud reimbursement and deposit account fraud within Other. These increases were partially offset by a decrease in occupancy and equipment expense.

Salaries and employee benefits expense totaled $6.0 million for the quarter ended December 31, 2022, an increase of $1.2 million when compared to the same period in 2021. Salaries and employee benefits expense totaled $22.2 million for the year ended December 31, 2022, an increase of $3.9 million when compared to the same period in 2021. The increase in salaries and employee benefits expense was driven by an increase in full time equivalent employees, as well as an increase in variable compensation as a result of the Bank's overall growth and improved performance. Full time equivalent employees totaled 136 at December 31, 2022 compared to 126 for the same period in 2021. The increase in salaries and employee benefits expense was partially offset by an increase in deferred loan costs due to higher loan originations.

Professional services expense totaled $0.9 million for the quarter ended December 31, 2022, an increase of $0.3 million when compared to the same period in 2021. Professional services expense totaled $3.9 million for the year ended December 31, 2022, an increase of $1.6 million when compared to the same period in 2021. The increase in professional services expense was primarily driven by consulting fees associated with various projects, including our core system conversion.

FDIC insurance expense totaled $0.9 million for the quarter ended December 31, 2022, an increase of $0.7 million when compared to the same period in 2021. FDIC insurance expense totaled $1.6 million for the year ended December 31, 2022, an increase of $0.4 million when compared to the same period in 2021. The higher FDIC insurance expense is attributed to the overall balance sheet growth and increased use of brokered deposits.

Other expense totaled $1.6 million for the quarter ended December 31, 2022, an increase of $0.9 million when compared to the same period in 2021. Other expense totaled $3.9 million for the year ended December 31, 2022, an increase of $0.8 million. The increase was mainly attributable to four events of customer reimbursed fraud and deposit account fraud recognized in the quarter ended December 31 2022, the largest of which was a $189 thousand customer reimbursement.

Occupancy and equipment expense totaled $1.9 million for the quarter ended December 31, 2022, a decrease of $0.5 million when compared to the same period in 2021. Occupancy and equipment expense totaled $8.3 million for the year ended December 31, 2022, a decrease of $2.4 million when compared to the same period in 2021. The decrease in occupancy and equipment expense was primarily driven by the curtailment of additional cleaning costs associated with precautions taken to prevent the spread of COVID-19 during the year ended December 31, 2021. In addition, the decrease in occupancy and equipment expense was impacted by a reduction in lease expense as a result of the branch closure in New Canaan, which occurred during the third quarter of 2021.