Bankwell Financial Group Reports Operating Results for the Second Quarter, Continued Reserve Build and Maintains Quarterly Dividend

Bankwell Financial Group, Inc. (NASDAQ:BWFG) reported GAAP net income of $1.2 million, or $0.16 per share, for the second quarter of 2020, versus $5.6 million, or $0.71 per share, for the same period in 2019. The decline in net income was largely driven by an increase in the loan loss provision due to increased credit risk relating to economic disruption and uncertainty caused by the Coronavirus (COVID-19) pandemic.

The Company's Board of Directors declared a $0.14 per share cash dividend, payable August 24, 2020 to shareholders of record on August 14, 2020.

We recommend reading this earnings release in conjunction with the Second Quarter 2020 Investor Presentation, located at http://investor.mybankwell.com/Presentations and included as an exhibit to our July 28, 2020 Current Report on Form 8-K, for further details regarding the impact of the COVID-19 pandemic on our operations and financial results.

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

"I am thankful for our employees’ exemplary performance during this pandemic. We have performed our role as an essential service provider with the utmost sense of purpose, and have continued to assist our customers and our communities in a meaningful way. Our performance metrics, after adjusting for various COVID-19 related items, highlight a solid foundation for profitability and growth. On the credit side, our loan deferral population stood at approximately 22% as of June 30th. Although the course of our national crisis will be uncertain, I am happy to note that loans on deferral are expected to drop to below 10% during the third quarter."

Second Quarter 2020 Highlights:

• Second quarter provision for loan losses totaled $3.0 million, which included an additional reserve build of $4.9 million related to increased risk due to the COVID-19 pandemic. The increase was partially offset by changes in the loan portfolio composition and growth.
• The allowance for loan losses was $19.7 million and represents 1.22% of total loans as of June 30, 2020, compared to an allowance for loan losses of $13.5 million, representing 0.84% of total loans as of December 31, 2019.
• Funded 381 Paycheck Protection Program (“PPP”) loans for a total of $60.4 million.
• Granted COVID-19 related deferrals on loans (excluding SBA loans which are paid for 6 months by the SBA on behalf of borrowers) totaling $339.9 million. Further detail regarding COVID-19 related loan deferrals is included in the Second Quarter 2020 Investor Presentation.
• Total deposits were $1.6 billion at June 30, 2020 compared to $1.5 billion at December 31, 2019, primarily reflecting a temporary increase in short term time deposits to expand on-balance sheet liquidity.
• Noninterest bearing deposits increased 12% at June 30, 2020 compared to December 31, 2019.
• The loan-to-deposit ratio for the Bank was 99.2% at June 30, 2020, reflecting the above-mentioned increase in deposits.
• Total gross loans were $1.6 billion at June 30, 2020, increasing slightly when compared to December 31, 2019.
• Investment securities totaled $100.6 million and represent 5% of total assets.
• Total noninterest income was $0.6 million for the quarter ended June 30, 2020, or 4% of total revenue.
• The tangible common equity ratio and tangible book value per share, as of June 30, 2020, were 8.21% and $21.70, respectively.

Earnings and Performance

Revenues (net interest income plus noninterest income) for the quarter ended June 30, 2020 were $14.2 million, versus $14.9 million for the quarter ended June 30, 2019. Revenues for the six months ended June 30, 2020 were $28.6 million, versus $30.5 million for the six months ended June 30, 2019. The decrease in revenues was attributable to a decline in income from loan prepayments and the absence of loan sales during the quarter and six month periods ended June 30, 2020 when compared to the same periods in 2019. The decrease in revenues was also driven by lower loan yields as loans are re-priced in the current low interest rate environment. The decrease in revenues was partially offset by a decline in interest expense, driven by lower interest rates on deposits when compared to the same periods in 2019.

Net income for the quarter ended June 30, 2020 was $1.2 million, versus $5.6 million for the quarter ended June 30, 2019. Net income for the six months ended June 30, 2020 was $2.6 million, versus $10.7 million for the six months ended June 30, 2019. The decrease in net income for the quarter and six month periods ended June 30, 2020 when compared to the same periods in 2019 was largely driven by an increase in the provision for loan losses due to COVID-19 related loan loss reserves, an increase in noninterest expense and the aforementioned decline in revenues. The provision for loan losses related to COVID-19 totaled $4.9 million and $7.9 million for the quarter and six months ended June 30, 2020, respectively.

Basic and diluted earnings per share were each $0.16 for the quarter ended June 30, 2020 compared to basic and diluted earnings per share of $0.71 each for the quarter ended June 30, 2019. Basic and diluted earnings per share were each $0.33 for the six months ended June 30, 2020 compared to basic and diluted earnings per share of $1.36 and $1.35, respectively, for the six months ended June 30, 2019.

The net interest margin (fully taxable equivalent basis) for the quarters ended June 30, 2020 and June 30, 2019 was 2.81% and 3.07%, respectively. The net interest margin for the six months ended June 30, 2020 and June 30, 2019 was 2.89% and 3.13%, respectively. The decrease in net interest margin for the quarter and six month periods ended June 30, 2020, when compared to the same periods in 2019, was primarily due to excess cash held at low interest rates to maintain a higher level of liquidity during the COVID-19 pandemic. Excluding the impact of additional liquidity and PPP loans, the net interest margin would increase approximately 21 basis points for the six months ended June 30, 2020.

Financial Condition

Assets totaled $2.0 billion at June 30, 2020, compared to assets of $1.9 billion at December 31, 2019. The increase in assets is primarily driven by an increase in cash and cash equivalents in order to maintain a higher level of liquidity during the COVID-19 pandemic. Gross loans totaled $1.6 billion at June 30, 2020, an increase of $10.2 million compared to December 31, 2019. Deposits totaled $1.6 billion at June 30, 2020, compared to deposits of $1.5 billion at December 31, 2019. The increase in deposits was a result of a temporary increase in short term time deposits to expand on-balance sheet liquidity as well as an increase in noninterest bearing deposits as a result of our ongoing treasury management efforts.

Capital

Shareholders’ equity totaled $170.4 million as of June 30, 2020, a decrease of $12.0 million compared to December 31, 2019, primarily a result of a $12.2 million unfavorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps, as well as dividends paid of $2.2 million and common stock repurchases of $1.0 million. The decrease was partially offset by net income for the six months ended June 30, 2020 of $2.6 million. The marks on the interest rate swaps are driven by lower long term market interest rates in 2020 when compared to 2019. The Company's interest rate swaps are primarily used to hedge interest rate risk. The Company's current interest rate swap positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. As of June 30, 2020, the tangible common equity ratio and tangible book value per share were 8.21% and $21.70, respectively.

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, prolonged measures to contain the spread of COVID-19 or premature easing of such containment measures, either of 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 and tangible book value per share are useful to evaluate the relative strength of the Company's 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) June 30, 2020 and March 31, 2020 performance ratios are negatively impacted by incremental COVID-19 related loan loss reserves totaling approximately $4.9 million and $3.0 million, respectively. Please refer to the Second and First Quarter 2020 Investor Presentations for more detailed information on the impact of the incremental loan COVID-19 related loss reserve on the Company’s performance ratios.

(2) 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.

(3) 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.

(2) Excludes unvested restricted shares of 165,708, 154,012, 110,975, and 94,598 as of June 30, 2020, March 31, 2020, December 31, 2019, and June 30, 2019, respectively.

Total nonaccrual loans were $10.6 million as of June 30, 2020, of which $4.6 million are guaranteed by the Small Business Administration (SBA). Nonperforming assets as a percentage of total assets was 0.53% at June 30, 2020, down from 0.56% at December 31, 2019. The allowance for loan losses at June 30, 2020 was $19.7 million, representing 1.22% of total loans. The $6.2 million increase in the allowance for loan losses at June 30, 2020 when compared to December 31, 2019 was primarily due to incremental loan loss reserves for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic.

Total deposits were $1.6 billion at June 30, 2020 compared to $1.5 billion at December 31, 2019, an increase of $0.1 billion, or 8.6%. The increase in total deposits was primarily a result of a temporary increase in short term time deposits to expand on-balance sheet liquidity as well as an increase in noninterest bearing deposits as a result of our ongoing treasury management efforts.

Noninterest income decreased by $0.8 million, or 57%, to $0.6 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019. Noninterest income decreased by $1.0 million, or 38%, to $1.6 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.

The decrease in noninterest income was primarily a result of the absence of gains and fees from the sales of loans for the quarter and six months ended June 30, 2020 compared to the same periods in 2019. In addition, the decrease in noninterest income was also driven by certain waived service charges and fees on depository accounts as a courtesy to customers during the COVID-19 pandemic.

Noninterest expense increased by $1.0 million, or 11%, to $9.7 million for the quarter ended June 30, 2020 compared to the quarter ended June 30, 2019. Noninterest expense increased by $1.7 million, or 9.3%, to $19.4 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits and occupancy and equipment expense.

Salaries and employee benefits totaled $5.2 million for the quarter ended June 30, 2020, an increase of $0.7 million when compared to the same period in 2019. Salaries and employee benefits totaled $10.6 million for the six months ended June 30, 2020, an increase of $1.2 million when compared to the same period in 2019. The increase in salaries and employee benefits was primarily driven by an increase in full time equivalent employees. Full time equivalent employees totaled 152 at June 30, 2020 compared to 144 for the same period in 2019. Average full time equivalent employees totaled 154 for the six months ended June 30, 2020 compared to 141 for the same period in 2019.

Occupancy and equipment expense totaled $2.2 million for the quarter ended June 30, 2020, an increase of $0.4 million when compared to the same period in 2019. Occupancy and equipment expense totaled $4.1 million for the six months ended June 30, 2020, an increase of $0.4 million when compared to the same period in 2019. The increase in occupancy and equipment expense was primarily due to additional cleaning costs associated with precautions taken to prevent the spread of COVID-19.