Bankwell Financial Group Reports Strong Operating Results on Record Loan Growth for the Third Quarter; Declares Fourth Quarter Dividend

Bankwell Financial Group, Inc. (NASDAQ:BWFG) reported GAAP net income of $9.2 million, or $1.18 per share, for the third quarter of 2022, versus $6.9 million, or $0.87 per share, for the same period in 2021. During the quarter ended September 30, 2022 the Company experienced another quarter of elevated loan prepayments that positively impacted reported earnings. Adjusting for this, operating earnings per share totaled $1.08 for the third quarter of 2022. Please reference the table below for a reconciliation of reported earnings per share to operating earnings per share.

The Company's Board of Directors declared a $0.20 per share cash dividend, payable November 21, 2022 to shareholders of record on November 11, 2022.

We recommend reading this earnings release in conjunction with the Third Quarter 2022 Investor Presentation, located at http://investor.mybankwell.com/Presentations and included as an exhibit to our October 26, 2022 Current Report on Form 8-K.

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

"The Company had another very strong quarter, growing loans by $230 million. This represents an 11% increase over the prior quarter, and a year to date increase of 21%. Profitability remains strong, with a 1.47% Return on Average Assets and a 15.73% Return on Average Equity.

"The Company's growth in 2021 and 2022 has created an exceptionally strong foundation to grow top line Interest Income in the coming year. We anticipate Interest Income to increase by more than 25% in 2023. The current cycle of tightening by the Federal Reserve will increase our cost of deposits in the quarters ahead. Based on forward market pricing we could expect Net Interest Income to decrease by 10% in 2023 versus 2022.

"We continue to build Book Value for our shareholders. Fully Diluted Book Value per share has increased by 3.2% this quarter and by 16.2% year to date. Importantly, all credit metrics remain benign.

"We thank our employees and clients who have made our success possible, and are confident that we have a great team in place to perform in an increasingly volatile economic environment."

"The Company had another very strong quarter, growing loans by $230 million. This represents an 11% increase over the prior quarter, and a year to date increase of 21%. Profitability remains strong, with a 1.47% Return on Average Assets and a 15.73% Return on Average Equity.

"The Company's growth in 2021 and 2022 has created an exceptionally strong foundation to grow top line Interest Income in the coming year. We anticipate Interest Income to increase by more than 25% in 2023. The current cycle of tightening by the Federal Reserve will increase our cost of deposits in the quarters ahead. Based on forward market pricing we could expect Net Interest Income to decrease by 10% in 2023 versus 2022.

"We continue to build Book Value for our shareholders. Fully Diluted Book Value per share has increased by 3.2% this quarter and by 16.2% year to date. Importantly, all credit metrics remain benign.

"We thank our employees and clients who have made our success possible, and are confident that we have a great team in place to perform in an increasingly volatile economic environment."

Third Quarter 2022 Highlights (performance metrics are impacted by certain one-time items - please refer to the table following the below highlights for adjusted performance metrics):

• Return on average assets was 1.47% and return on average equity was 15.73% for the quarter ended September 30, 2022.
• The net interest margin was 4.12% for the quarter ended September 30, 2022.
• The efficiency ratio was 44.1% for the quarter ended September 30, 2022.
• Total gross loans were $2.3 billion, growing $391.9 million, or 20.7%, compared to December 31, 2021.
• Average yield on 2022 funded loans was 5.36%.
• Investment securities totaled $113.1 million and represent 4.2% of total assets.
• Fully diluted tangible book value per share rose to $29.68 compared to $25.55 at December 31, 2021.
• The Wilton branch closed, effective October 7, 2022.
• Shares issued and outstanding were 7,711,843, reflecting repurchases of 53,546 shares of common stock at a weighted average price of $31.81 during the quarter ended September 30, 2022.
• The Company issued 6.00% fixed-to-floating rate subordinated notes due 2032 in the principal amount of $35.0 million.

Earnings and Performance

Revenues (net interest income plus noninterest income) for the quarter ended September 30, 2022 were $25.0 million, versus $19.2 million for the quarter ended September 30, 2021. Revenues for the nine months ended September 30, 2022 were $70.4 million, versus $53.8 million for the nine months ended September 30, 2021. The increase in revenues was primarily attributable to an increase in interest and fees on loans due to loan growth and higher overall loan yields. The increase in loan yields was aided by elevated loan prepayment fees, which totaled $1.3 million for the quarter ended September 30, 2022, compared to $0.1 million for the quarter ended September 30, 2021. The increase in revenues was partially offset by a decrease in noninterest income driven by a decrease in loans sales and the absence of rental income recognized during the quarter and nine months ended September 30, 2021, as a result of the disposition of the Company's former headquarters building. In addition, the increase in revenues for the nine months ended September 30, 2022 was muted as a result of a one-time federal payroll tax credit for COVID-19 of $0.9 million recognized in the quarter ended March 31, 2021. Finally, the increase in revenues for the quarter ended September 30, 2022 was also partially offset by an increase in interest expense on deposits, resulting from an increase in rates necessary to remain competitive in the current economic environment.

Net income for the quarter ended September 30, 2022 was $9.2 million, versus $6.9 million for the quarter ended September 30, 2021. Net income for the nine months ended September 30, 2022 was $29.4 million, versus $18.8 million for the nine months ended September 30, 2021. The increase in net income was primarily impacted by the aforementioned increases in revenues. In addition, the increase in net income was partially offset by an increase in the provision for loan losses primarily driven by loan growth and an increase in noninterest expense for the quarter and nine months ended September 30, 2022.

Basic and diluted earnings per share were $1.19 and $1.18, respectively, for the quarter ended September 30, 2022 compared to basic and diluted earnings per share of $0.88 and $0.87, respectively, for the quarter ended September 30, 2021. Basic and diluted earnings per share were $3.80 and $3.75, respectively, for the nine months ended September 30, 2022 compared to basic and diluted earnings per share of $2.38 and $2.37, respectively, for the nine months ended September 30, 2021.

The net interest margin (fully taxable equivalent basis) for the quarters ended September 30, 2022 and September 30, 2021 was 4.12% and 3.39%, respectively. The net interest margin (fully taxable equivalent basis) for the nine months ended September 30, 2022 and September 30, 2021 was 3.81% and 3.08%, respectively. The increase in the net interest margin was due to elevated loan prepayment fees and an increase in overall loan yields.

Financial Condition

Assets totaled $2.72 billion at September 30, 2022, compared to assets of $2.46 billion at December 31, 2021. The increase in assets was primarily due to loan growth and a corresponding increase in deposits and borrowings. Gross loans totaled $2.3 billion at September 30, 2022, an increase of $391.9 million compared to December 31, 2021. Deposits totaled $2.3 billion at September 30, 2022, compared to deposits of $2.1 billion at December 31, 2021.

Capital

Shareholders' equity totaled $231.5 million as of September 30, 2022, an increase of $29.5 million compared to December 31, 2021, primarily a result of (i) net income of $29.4 million for the nine months ended September 30, 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, partially offset by fair value marks on the Company's investment portfolio. 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 $4.7 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 Penko Ivanov, 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, but are not limited to, increased competitive pressures, changes in the interest rate environment, general economic conditions or conditions within the securities markets, uncertain impacts of, or additional changes in, monetary, fiscal or tax policy to address the impact of COVID-19, which could further exacerbate the effects on the Company's business and results of operations, and legislative and regulatory changes that could adversely affect the business in which the Company and its subsidiaries are engaged.

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 book value per share, and return on average tangible common equity 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.

(1) Efficiency ratio is defined as noninterest expense, less other real estate owned expenses and amortization of intangible assets, divided by our operating revenue, which is equal to net interest income plus noninterest income excluding gains and losses on sales of securities and gains and losses on other real estate owned. In our judgment, the adjustments made to operating revenue allow investors and analysts to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business.

(2) The dividend payout ratio is calculated by dividing dividends per share by earnings per share.

(1) Represents Bank ratios. Current period capital ratios are preliminary subject to finalization of the FDIC Call Report.

Total nonaccrual loans increased $0.2 million to $16.8 million as of September 30, 2022 when compared to December 31, 2021. Nonperforming assets as a percentage of total assets decreased to 0.62% at September 30, 2022, down from 0.68% at December 31, 2021. The allowance for loan losses at September 30, 2022 was $18.2 million, representing 0.79% of total loans.

Past due loans decreased to $17.8 million, or 0.78% of total loans, as of September 30, 2022, compared to $32.6 million, or 1.72% of total loans, as of December 31, 2021.

Gross loans totaled $2.3 billion at September 30, 2022, an increase of $391.9 million compared to December 31, 2021.

Total deposits were $2.3 billion at September 30, 2022, compared to $2.1 billion at December 31, 2021, an increase of $162.7 million, or 7.7%. The increase in deposits is primarily a result of an increase in brokered time deposits to fund the significant loan growth during the third quarter of 2022, increasing $338.1 million compared to December 31, 2021.

Noninterest income decreased by $1.0 million to $0.4 million for the quarter ended September 30, 2022 compared to the quarter ended September 30, 2021. Noninterest income decreased by $2.3 million to $2.5 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021.

The decrease in noninterest income was driven by a reduction in loan sales for the quarter and nine months ended September 30, 2022 when compared to the same periods in 2021. Loan sales decreased $0.9 million and $1.0 million for the quarter and nine months ended September 30, 2022, respectively. In addition, noninterest income declined due to the absence of rental income recognized during the quarter and nine months ended September 30, 2021, as a result of the disposition of the Company's former headquarters building. Noninterest income also declined for the nine months ended September 30, 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.

Noninterest expense increased by $0.7 million to $11.0 million for the quarter ended September 30, 2022 compared to the quarter ended September 30, 2021. Noninterest expense increased by $1.8 million to $31.9 million for the nine months ended September 30, 2022 compared to the nine months ended September 30, 2021. The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits expense and professional services expense, partially offset by a decrease in occupancy and equipment expense.

Salaries and employee benefits expense totaled $5.9 million for the quarter ended September 30, 2022, an increase of $1.1 million when compared to the same period in 2021. Salaries and employee benefits expense totaled $16.2 million for the nine months ended September 30, 2022, an increase of $2.7 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 140 at September 30, 2022 compared to 134 for the same period in 2021. Average full time equivalent employees totaled 131 for the nine months ended September 30, 2022 compared to 127 for the same period in 2021. The increase in salaries and employee benefits expense was partially offset by higher loan originations, which enabled the bank to defer a greater amount of expenses.

Professional services expense totaled $1.0 million for the quarter ended September 30, 2022, an increase of $0.5 million when compared to the same period in 2021. Professional services expense totaled $3.0 million for the nine months ended September 30, 2022, an increase of $1.3 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.

Occupancy and equipment expense totaled $2.0 million for the quarter ended September 30, 2022, a decrease of $0.6 million when compared to the same period in 2021. Occupancy and equipment expense totaled $6.4 million for the nine months ended September 30, 2022, a decrease of $1.9 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 nine months ended September 30, 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.