Bankwell Financial Group, Inc.
Annual Report 2015

Plain-text annual report

B A N K W E L L F I N A N C I A L G R O U P 2 0 1 5 A N N U A L R E P O R T Living up to our name with every customer in every community at every opportunity, every day. Living up to our name with every customer in every community at every opportunity, every day. 220 Elm Street, New Canaan, CT 06840 2 0 1 5 A N N U A L R E P O R T Bankwell is a member of the FDIC and an Equal Housing Lender. This statement has not been reviewed for accuracy or relevance by the Federal Deposit Insurance Corporation. 2 0 1 5 A N N U A L R E P O R T B A N K S M A R T . B A N K L O C A L . B A N K W E L L . B A N K S M A R T . B A N K L O C A L . B A N K W E L L . C O R P O R A T E I N F O R M A T I O N C O R P O R A T E I N F O R M A T I O N Living up to our name. We call ourselves Living up to our name. We call ourselves Bankwell for a reason. It’s more than Bankwell for a reason. It’s more than just our name, it’s our mission and just our name, it’s our mission and our brand promise. By raising the our brand promise. By raising the quality of every interaction with quality of every interaction with every customer every day, we raise every customer every day, we raise the expectations of our customers, the expectations of our customers, communities and the banking communities and the banking industry. Setting a higher customer industry. Setting a higher customer experience standard sets us apart experience standard sets us apart from other banks, large and small, from other banks, large and small, and from the status quo. By helping and from the status quo. By helping others do well, Bankwell in turn does others do well, Bankwell in turn does well. And while we’re at it, we’re giving well. And while we’re at it, we’re giving banking a better name. Every day. banking a better name. Every day. B A N K W E L L T H R O U G H T H E Y E A R S B A N K W E L L T H R O U G H T H E Y E A R S ASSETS ASSETS $1,330,372 $1,330,372 $1,099,531 $1,099,531 $779,618 $779,618 $190,906 $190,906 $247,041 $247,041 $395,708 $395,708 S D N A S U O H T N I S R A L L O D S D N A S U O H T N I S R A L L O D $0 $0 2002 2002 2007 2007 2008 2008 2010 2010 2013 2013 2014 2014 2015 2015 For help in transferring ownership, address changes, or lost or stolen stock certificates, please contact: For help in transferring ownership, address changes, or lost or stolen stock certificates, please contact: Shareholders Shareholders Computershare Computershare 480 Washington Blvd. 29th Floor 480 Washington Blvd. 29th Floor Jersey City, NJ 07310 Jersey City, NJ 07310 (800) 368-5948 (800) 368-5948 www.computershare.com www.computershare.com Stock Symbols Stock Symbols BWFG – Common Stock BWFG – Common Stock Stock Quotes Stock Quotes www.nasdaq.com www.nasdaq.com Shareholder Contact Shareholder Contact Bankwell Financial Group, Inc. Bankwell Financial Group, Inc. Mr. Christopher R. Gruseke or Mr. Ernest J. Verrico, Sr. Mr. Christopher R. Gruseke or Mr. Ernest J. Verrico, Sr. 220 Elm Street 220 Elm Street New Canaan, CT 06840 New Canaan, CT 06840 (203) 652-0166 (203) 652-0166 Auditors Auditors Whittlesey & Hadley, P.C. Whittlesey & Hadley, P.C. 280 Trumbull Street, 24th Floor, Hartford, CT 06103 280 Trumbull Street, 24th Floor, Hartford, CT 06103 Corporate Counsel Corporate Counsel Hinkley, Allen & Snyder, LLP Hinkley, Allen & Snyder, LLP 20 Church Street, Hartford, CT 06103 20 Church Street, Hartford, CT 06103 Locations Locations Elm Street Branch Elm Street Branch Cherry Street Branch Cherry Street Branch Stamford Branch Stamford Branch 208 Elm Street 208 Elm Street 156 Cherry Street 156 Cherry Street New Canaan, CT 06840 New Canaan, CT 06840 New Canaan, CT 06840 New Canaan, CT 06840 (203) 972-3838 (203) 972-3838 (203) 966-7080 (203) 966-7080 612 Bedford Street 612 Bedford Street Stamford, CT 06901 Stamford, CT 06901 (203) 391-5777 (203) 391-5777 Sasco Hill Branch Sasco Hill Branch One Sasco Hill One Sasco Hill Black Rock Branch Black Rock Branch Wilton Branch Wilton Branch 2220 Black Rock Turnpike 2220 Black Rock Turnpike 47 Old Ridgefield Road 47 Old Ridgefield Road Fairfield, CT 06824 Fairfield, CT 06824 Fairfield, CT 06825 Fairfield, CT 06825 (203) 659-7600 (203) 659-7600 (203) 659-7610 (203) 659-7610 Wilton, CT 06897 Wilton, CT 06897 (203) 762-2265 (203) 762-2265 Norwalk Branch Norwalk Branch Hamden Branch Hamden Branch North Haven Branch North Haven Branch 370 Westport Avenue 370 Westport Avenue 2704 Dixwell Avenue 2704 Dixwell Avenue 24 Washington Avenue 24 Washington Avenue Norwalk, CT 06851 Norwalk, CT 06851 Hamden, CT 06518 Hamden, CT 06518 North Haven, CT 06473 North Haven, CT 06473 (203) 663-0480 (203) 663-0480 (203) 407-0756 (203) 407-0756 (475) 238-6807 (475) 238-6807 Executive Office Executive Office 220 Elm Street 220 Elm Street Loan Production Office Loan Production Office 855 Main Street, Suite 700 855 Main Street, Suite 700 New Canaan, CT 06840 New Canaan, CT 06840 Bridgeport, CT 06604 Bridgeport, CT 06604 (203) 652-0166 (203) 652-0166 (203) 683-6363 (203) 683-6363 This annual report may include forward-looking statements by the Company that are within the protection of the Private Securities Litigation Reform Act of 1995. Such state- This annual report may include forward-looking statements by the Company that are within the protection of the Private Securities Litigation Reform Act of 1995. Such state- ments are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties that could cause our actual results to differ ments are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties that could cause our actual results to differ materially from those set forth in such forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current materially from those set forth in such forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may” are intended to identify forward-looking statements but are not the only means to identify these statements. Factors that could cause differences in “should,” “could” or “may” are intended to identify forward-looking statements but are not the only means to identify these statements. Factors that could cause differences in actual results may be beyond our control —Any forward-looking statements made by or on behalf of us in this report speak only as of its date, and we do not undertake to update actual results may be beyond our control —Any forward-looking statements made by or on behalf of us in this report speak only as of its date, and we do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after that date. forward-looking statements to reflect the impact of circumstances or events that arise after that date. Founded third bank, The Bank of Stamford, a division of The Bank of New Canaan Founded third bank, The Bank of Stamford, a division of The Bank of New Canaan The Banks merge into “Bankwell” Bankwell acquires The Wilton Bank The Banks merge into “Bankwell” Bankwell acquires The Wilton Bank Bankwell acquires Quinnipiac Bank & Trust Company Bankwell acquires Quinnipiac Bank & Trust Company Holding company formed (BNC Financial Group) Holding company formed (BNC Financial Group) Founded second bank, The Bank of Fairfield Founded second bank, The Bank of Fairfield Founded The Bank of New Canaan Founded The Bank of New Canaan Norwalk de novo branch opened Norwalk de novo branch opened T O O U R C L I E N T S & S H A R E H O L D E R S T he Bankwell team delivered another strong performance in 2015 as our dedicated staff and directors worked hard to earn your confidence by growing our franchise and focusing on our core earnings, which reached a record $9.0 million at year end. In virtually all aspects of our busi- ness, our Organization evidenced solid returns, steady growth and consistent performance. We believe this reflects the strength of our community banking model and our continued abili- ty to provide needed financial ser- vices to the communities we serve. We continued to generate strong In virtually all aspects of our business, our Organization evidenced solid returns, steady growth and consistent performance. dividend. Looking to 2016, we are enthu- siastic about the opportunities to build on our performance and to continue to deliver outstanding value to our share- holders, customers, employees and the communities we serve. 2015 has been an especially chal- lenging year, with historically low in- terest rates and net interest margin compression, but thanks to a strong vision, a clear strategy, ambitious finan- cial targets and a commitment to our community bank model, I believe our market presence will continue to grow. Our strategy is to continually enhance our relationship-based model, take ad- loan growth in 2015, resulting in $1.1 billion in loans vantage of our strong position in areas that have high outstanding for the year, a 23% increase over 2014. growth potential and focus on improving our opera- Deposits reached $1.0 billion at year end, and total tional efficiency, while maintaining consistent vigilance assets reached $1.3 billion. This growth, in combination about risk control. We have been able to attract and with continued improvement in our operating efficiency, retain some of the best talent in the industry, which helps resulted in a core earnings increase of 57% year over year. us maintain our success as a “high touch, high tech” com- As a result, at the end of our second year as a public com- munity bank that combines the best possible personal pany, our shareholders have realized a return on average service with the technology we need to compete with larg- tangible common equity of 6.83%, resulting in a tangible book value per common share of $17.43. er institutions. As always, we are thankful to our customers, our share- On the lending side, our dedicated team continues to holders and the communities we serve for their continued generate high quality assets for the bank, and our standard confidence and support. I look forward to seeing you at our for credit quality is second to none. At 0.38%, our non-per- annual meeting in May. forming asset ratio is a testament to our disciplined growth strategy, as is our improved efficiency ratio of 62.7% for Sincerely, the year compared to 69.1% in 2014. This year, as part of our capital management strategy, which included the issuance of $25.5 million in subordinat- ed notes, Bankwell’s Board approved and paid our first cash Christopher R. Gruseke President & CEO Ernest J. Verrico, Michele A. Johnson, Benjamin W. Fetterman, Christine Chivily, Christopher R. Gruseke, John Adams, Heidi S. DeWyngaert, and Diane Knetzger Bankwell Financial Group E X E C U T I V E M A N A G E M E N T T E A M Christopher R. Gruseke President & Chief Executive Officer Ernest J. Verrico, Sr. Executive Vice President, Chief Financial Officer, Assistant Corporate Secretary Heidi S. DeWyngaert Executive Vice President, Chief Lending Officer Christine Chivily Executive Vice President, Chief Credit Officer B O A R D O F D I R E C T O R S Blake Drexler Chairman Partner Five Mile Ventures Rowayton, CT James Fieber Vice Chairman Managing Member Fieber Group, LLC; Managing Partner FIEBRO Acquisitions, LLC New Canaan, CT Frederick Afragola Chairman Emeritus Founder Frame Advisors New Canaan, CT George Bauer Chairman & CEO GPB Group, Ltd. Wilton, CT Michael Brandt Senior Vice President & Chief Financial Officer Prudential Retirement Hartford, CT Richard Castiglioni Partner Diserio Martin O’Connor and Castiglioni, LLP Stamford, CT Eric Dale Chief Legal Officer Nielsen Holdings PLC Wilton, CT John Adams Senior Vice President, Chief Information Officer Benjamin W. Fetterman Senior Vice President, Director of Retail Banking Michele A. Johnson Senior Vice President, Chief Risk Officer Diane Knetzger Senior Vice President, Director of Marketing William J. Fitzpatrick, III Member Fitzpatrick, Fray & Bologna, LLC Fairfield, CT Christopher R. Gruseke President & Chief Executive Officer Bankwell Financial Group New Canaan, CT Daniel S. Jones President NewsBank, Inc. New Canaan, CT Todd H. Lampert Managing Member Lampert, Toohey & Rucci, LLC; Managing Member Main Street Group, LLC New Canaan, CT Victor Liss Retired Stratford, CT Ray Palumbo President & CEO Underwater Construction Company Essex, CT Carl M. Porto Principal Parrett, Porto, Parese & Colwell, P.C. Hamden, CT B A N K W E L L F I N A N C I A L G R O U P F I N A N C I A L H I G H L I G H T S (dollars in 000’s except per share data) STATEMENT OF CONDITION Total assets Gross portfolio loans Investment securities Deposits FHLB Borrowings Subordinated debt Total equity STATEMENT OF INCOME AND EXPENSE Interest income Interest expense Net interest income Provision for loan losses Noninterest income Noninterest expense Income before income tax Net income Basic earnings per share Diluted earnings per share FINANCIAL RATIOS Tier 1 capital to average assets1 Bankwell Bank The Bank of New Canaan The Bank of Fairfield Tier 1 capital to risk-weighted assets1 Bankwell Bank The Bank of New Canaan The Bank of Fairfield Total capital to risk-weighted assets1 Bankwell Bank The Bank of New Canaan The Bank of Fairfield Net interest margin Return on average assets Return on average shareholders’ equity Allowance for loan losses to total loans Nonperforming assets to total assets 1,147,513 50,807 1,046,942 120,000 25,000 131,769 $50,754 7,966 42,788 3,230 3,484 29,171 13,871 9,030 1.23 1.21 December 31, 2015 2014 2013 2012 2011 $1,330,372 $1,099,531 $779,618 $610,016 $477,355 929,762 76,463 835,439 129,000 – 129,210 632,012 42,413 661,545 44,000 – 69,485 530,050 46,412 462,081 91,000 – 51,534 369,294 94,972 367,115 58,000 – 49,188 $35,589 $28,092 $24,397 $20,587 3,929 31,660 2,152 3,041 25,812 6,737 4,568 0.78 0.78 2,765 25,327 585 4,723 22,120 7,345 5,161 1.46 1.44 10.84% 11.12 % 7.91% – – – – – – 12.18% 12.47% 9.49% – – – – – – 13.39% 13.55% 10.74% – – 3.77% 0.75% 6.76% 1.23% 0.38% – – 3.84% 0.52% 4.66% 1.17% 0.39% – – 3.94% 0.77% 8.17% 1.33% 0.23% 3,192 21,205 1,821 345 17,858 1,871 1,214 0.39 0.38 – 7.88% 8.39% – 9.09% 10.80% – 10.34% 12.05% 4.11% 0.22% 2.40% 1.50% 0.81% 2,870 17,717 1,049 1,134 14,601 3,201 2,204 0.72 0.71 – 8.71 % 11.30% – 11.07% 13.66% – 12.33% 14.91% 4.27% 0.50% 5.03% 1.74% 0.78% 1Represents bank ratios. During 2013, The Bank of New Canaan and The Bank of Fairfield were merged into Bankwell Bank. NPA/TOTAL A SSE TS 0.51% 0.38% NET INTEREST MARGIN 3.77% 3.19% Regional Peer Group* Bankwell Regional Peer Group* Bankwell *Regional peer group includes Banks in CT, MA, NY, NJ with assets between $1 billion and $3 billion. A bounty of benefits “Bankwell has been a valued business and community partner for us for more than a decade. We’re glad to be affiliated with a financial institution that shares our strong values of giving back to the community.” A L E X S T E W A R T , W A L T E R S T E W A R T S M A R K E T, N E W C A N A A N, C T Douglas (left) and Alex Stewart O V E R V I E W 2 0 1 5 Financial Highlights Bankwell Financial Group had another excellent year in 2015. We continued our successful earnings trend with record core net income of $9.0 million at year end, a 57% increase over 2014. Additionally, the Company reached record asset levels at $1.3 billion, up 21% over assets of $1.1 billion in 2014, reflecting strong organic loan growth and capital raised as a result of the issuance of $25.5 million in subordinated notes in the third quarter. Revenues at year-end were $46.3 million, a 33% increase was $14.2 million, representing 1.33% of total loans, exclud- over 2014, and net interest income was $42.8 million, a 35% ing acquired loans. increase over 2014, a result of record earning asset growth. On the deposit side, Bankwell increased market share in Reflecting our ongoing commitment to local businesses each of its markets, as reported in the annual FDIC Depos- across Connecticut, total gross loans grew to $1.1 billion in it Market Share Report. Deposits overall increased to $1.0 2015, up 23% year over year. We saw a significant increase in our Commercial & Industrial portfolio, and Bankwell ranked second in Connecticut for dollar volume of SBA loans during 2015. SBA lending benefits small businesses because it pro- vides access to more affordable credit due to backing from the Small Business Administration. For Bankwell, it is an attractive source of loan growth that We continued our successful earnings trend with record core net income of $9.0 million at year end, a 57% increase over 2014. billion, up 25% year over year, with core deposits (total deposits less time depos- its) showing an increase of 16% over 2014 to $610.2 million. In 2015 we continued to strengthen our consumer banking strategy by focusing on improving the customer experience through a highly trained and motivated staff, innovative products, new services and technology. diversifies our portfolio, produces fee revenue and increas- es our value to local businesses and economies. Capital Growth Shareholders’ equity continued to remain strong at $131.8 We continue to hold ourselves to the highest credit qual- million as of December 31, 2015, an increase of $2.6 million ity standards, and our non-performing asset ratio of 0.38% over 2014, primarily a result of net income and capital raised is a testament to our disciplined growth strategy, as is our improved efficiency ratio of 62.7% for the year compared to from the exercise of warrants in the fourth quarter of 2015 of $3.8 million, offset by the redemption of the SBLF preferred 69.1% a year ago. The allowance for loan losses at year end stock of $11.0 million. As of December 31, 2015, the tangible Continued> ASS ET GROW TH LOAN GROWTH DEPOSIT GROWTH $1,330,372 47.11% $1,047 $1,099,531 S D N A S U O H T N I S R A L L O D $779,618 19.24% 23.42% $835 $662 S N O I L L I M N I S R A L L O D 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 3 Checking 2 0 1 4 Savings Money Market 2 0 1 5 Time Deposit common equity ratio and tangible book value were 9.68% and $17.43, respectively. In the fourth quarter, the Board of Directors declared the Company’s first cash dividend, demonstrating Bankwell’s fi- nancial strength and commitment to shareholders. The Com- pany views a regular dividend to be an important component of the Company’s overall capital management strategy. Living up to our name People and Capabilities Every day, with every interaction, we do everything we can to elevate the quality of our customers’ financial lives and provide an unrivaled and rewarding banking experi- ence. Whether it’s in person, by phone, at one of our ATMs, online or through a mobile device, our focus is to deliver exceptional service every time. An important part of our strategy to provide unparalleled service has been to at- tract and retain some of the best talent available. Our well trained staff is committed to delivering the highest stan- dard of excellence to our customers and the communities we serve. We know that outstanding customer experiences lead to expanded and new opportunities. We’re proud of the outstanding team we’ve built at Bankwell, which has resulted in a network of highly expe- rienced and respected local leaders across our franchise. In 2015, we hired a new Director of Retail Services, Ben Fetterman, to further strengthen our commitment to driv- ing deposit growth, and in particular, core deposits. These deposits (checking, money market, savings) serve as the foundation that supports our loan growth and represent the real relationship banking that our team engages in Continued> Vice President Charles Demers (left) with Controller Joe Barraco “Bankwell is a partner that always has you covered. Whether it’s financing our environmental clean up vehicles and equipment or managing our business accounts, we know they’re always looking out for our best interests.” C H A R L E S D E M E R S M C V A C E N V I R O N M E N T A L N E W H A V E N , C T CORE E ARNINGS $9,031 S D N A S U O H T N I S R A L L O D $5,757 $4,000 S D N A S U O H T N I S R A L L O D REVENUE EFFICIENCY RATIO $46,272 69.1% 75.7% 62.7% $34,701 $30,050 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 3 2 0 1 4 2 0 1 5 2 0 1 3 2 0 1 4 2 0 1 5 Net Interest Income Noninterest Income Jeannette Archer-Simons, Executive Director, with Board President Curt Stewart Serving the community “We switched to Bankwell because we wanted a local banking relation- ship. From food and clothing drives and volunteering in our kitchen to helping us manage our day-to-day finances, they have demonstrated what being a business partner truly means.” J E A N N E T T E A R C H E R - S I M O N S , T H E O P E N D O O R S H E L T E R , N O R W A L K, C T every day. We further realigned and enhanced our man- As part of our plan for continued organic growth, we agement team by promoting Christine Chivily, our Chief opened our ninth branch in Norwalk during 2015. Norwalk Credit Officer, to Executive Vice President, and John Ad- is a market that is contiguous to our footprint, and one in ams to SVP, Chief Information Officer. We continue to which we believe there are significant opportunities. build a strong corporate culture that is committed to the highest level of service to our customers and our company, and one where employees are recognized and rewarded for their outstanding performance. “Bankwell delivers excellent personal service and provides all the online tools that a fast-paced business needs. They far surpass any banking relationship I’ve experienced in the past.” S H A W N A B A S P O R , C E O V I T E S S E W O R L D W I D E S T A M F O R D , C T High touch and high tech, in perfect sync It’s up to us to live up to our name every day at every touchpoint with every customer, and to truly redefine the experience, products and services that we offer our clients. By offering a higher level of personalized service, the best financial products and the power and convenience of deci- sions made across the street instead of across the country, we strive daily to deliver a banking experience that other banks simply cannot. In a world of omni-channel banking, the rapid develop- ment of new technologies is critical to serve our tech savvy customers. As a result, we are constantly upgrading our online and mobile capabilities to set us apart. On the busi- ness side, we recently launched a new business online plat- form, and expanded our suite of cash management services to include new products and enhanced automation. We also introduced the Bankwell Business Mobile app. On the consumer side, we added a “fingerprint” security login fea- ture to our state of the art online banking system, launched new features including Purchase Rewards on our personal mobile app and made that app “Smartwatch accessible.” Our commitment has always been to put the customer first, and we are committed to providing the tools and services to support it. It’s not about keeping up with technology, but staying ahead of it. Building the Bankwell brand Since launching the Bankwell brand in 2013, we have been educating customers about not just banking, but banking “well,” and our tag line, Bank Smart. Bank Local. Bank Well, sums up what we believe sets Bankwell apart. To bring the Bankwell difference to life, in 2015 we launched two new television commercials as part of our comprehensive me- dia mix. The spots feature customers and landmarks in our market areas and reinforce our founding premise that we will do everything we can to help our customers bank well. The commercials aired over the course of several months on a variety of cable networks, including local news and Continued> Service connection “Bankwell has demonstrated a commitment to Touchpoint’s success and growth by providing hometown banking service and large financial capabilities. Personal and professional service and invaluable support have been a cornerstone of our long-term partnership.” K A R E N K L U G E R, C E O, T O U C H P O I N T I N T E G R A T E D C O M M U N I C A T I O N S, D A R I E N , C T Peggy Reed and “Bentley” One of a kind experience “I chose Bankwell because the bank does so much to support local businesses. I’ve never experienced a bank that makes the customer such a priority. We can count on cheerful and courteous service, and we know that peace of mind is only a phone call away.” P E G G Y R E E D , C A N I N E T R A I N I N G A N D B E H A V I O R A L S E R V I C E S, W I L T O N, C T lifestyle channels, as well as Monday Night Football. Since then, we’ve also launched a new, responsive website and added the Bankwell brand to billboards in both Fairfield and New Haven counties, the most recent appearing on Interstate 95, which serves as a thoroughfare to connect virtually all of our market areas. Community The size, scale and relationship of a bank to its community really matters. At Bankwell, we put our resources and our ideas to work by providing local decision-making, friendly service, and a strong and tangible commitment to our com- munities. In addition to being strong lenders, our communi- ties trust us to be accountable and generous in supporting local development and social programs that can enhance the quality of life in each of our neighborhoods. To this end, we support more than 120 not-for-profit organizations across all of our markets with mentoring, volunteering and donations that help support local soup kitchens and shel- ters, children and families at risk and early childhood and adult development programs, to name a few. We believe that we are well-positioned to be the “bank of choice” in our markets — an organization where custom- ers enjoy their banking experience and where employees enjoy coming to work. We’re motivated every day to be the best business and community partner we can be — so that all our neighbors know they can rely on a strong and dependable community neighbor to help our communities thrive. First Selectman Mike Tetreau (seated) with CFO Bob Mayer “The Bottom Line: The Bankwell Business Bankers are a service oriented team who work hard to optimize the return on operating balances and minimize fees.” M I K E T E T R E A U F I R S T S E L E C T M A N T O W N O F F A I R F I E L D F A I R F I E L D , C T A sound alliance “Our strategic alliance with Bankwell has been critical to the success of the Fairfield Theatre Company. Their support, both as a financial consultant and a season sponsor, has helped to make us a stronger organization and better able to serve our community.” J O H N R E I D, F A I R F I E L D T H E A T R E C O M P A N Y, F A I R F I E L D , C T Joe Rog, Director of Development (left) with John Reid, Executive Director UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) ☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2015 ☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _________to________ Commission File Number: 001-36448 Bankwell Financial Group, Inc. (Exact Name of Registrant as specified in its Charter) Connecticut (State or other jurisdiction of Incorporation or organization) 20-8251355 (I.R.S. Employer Identification No.) 220 Elm Street New Canaan, Connecticut 06840 (203) 652-0166 (Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. ☐ Yes ☑ No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☐ Yes ☑ No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☑ Yes ☐ No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☑ Yes ☐ No Indicate by check mark if disclosure of delinquent filers pursuant to item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐ Non-accelerated filer ☐ (Do not check if smaller reporting company) Accelerated filer ☑ Smaller reporting company ☐ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☑ No Aggregate market value of the voting stock held by non-affiliates of the registrant as of June 30, 2015 based on the closing price of the common stock as reported on the NASDAQ Global Market: $97,941,281 As of February 29, 2016, there were 7,529,191 shares of the registrant’s common stock outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant’s definitive proxy statement for its Annual Meeting of Stockholders, expected to be filed pursuant to Regulation 14A within 120 days after the end of the 2015 fiscal year, are incorporated by reference into Part III of this report on Form 10-K Bankwell Financial Group, Inc. Form 10-K Table of Contents PART I Item 1. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1A. Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 1B. Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 2. Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 4. Mine Safety Disclosures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9A. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9B. Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Item 10. Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions, and Director Independence . . . . . . Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 21 33 33 33 33 34 35 39 70 74 127 127 127 128 128 128 128 128 129 130 i BANKWELL FINANCIAL GROUP, INC. FORM 10-K PART 1 Item 1. Business Cautionary Note Regarding Forward-Looking Statements This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 or the Securities Act, and Section 21E of the Exchange Act. These statements are often, but not always, made with the words or phrases such as “may,” “should,” “believe,” “likely result in,” “expect,” “would,” “intend,” “could,” “predict,” “potential,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “plan,” “projection,” and “outlook” or the negative version of those words or other similar words of a forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, uncertainties and other factors that could cause the actual results to differ materially from those contemplated by these forward-looking statements. Important factors that may cause actual results to differ from those contemplated by these forward-looking statements include, but are not limited to, those disclosed under “Risk Factors” in Part I Item 1A as well as the following factors: • • • • • • • • • • • • • • local, regional and national business or economic conditions may differ from those expected; we are subject to credit risk and could incur losses in our loan portfolio; our allowance for loan losses may not be adequate to absorb loan losses; changes in real estate values could also increase our credit risk; we could experience changes in our key management personnel; we may not be able to successfully execute our management team’s strategic initiatives; our ability to successfully execute our growth initiatives such as branch openings and acquisitions; volatility and direction of market interest rates; increased competition within our market area may limit our growth and profitability; economic, market, operational, liquidity, credit and interest rate risks associated with our business; the effects of and changes in trade, monetary and fiscal policies and laws, including the Federal Reserve Board’s interest rate policies; changes in accounting policies and practices, as may be adopted by regulatory agencies, the Public Accounting Oversight Board or the Financial Accounting Standards Board; changes in law and regulatory requirements (including those concerning taxes, banking, securities and insurance); and further governmental intervention in the U.S. financial system. The foregoing factors should not be construed as exhaustive. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether as a result of new information, future developments or otherwise. New factors emerge from time to time, and it is not possible for us to predict which will arise. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. 1 General Bankwell Financial Group, Inc. (the Company, we, our, us) is a bank holding company, headquartered in New Canaan, Connecticut and offers a broad range of financial services through our banking subsidiary, Bankwell Bank (the Bank), a Connecticut state non-member bank founded in 2002. Our primary market is the greater Fairfield and New Haven County, Connecticut area, which we serve from our main banking office located in New Canaan, Connecticut and eight other branch offices located throughout the Fairfield and New Haven County area. As of December 31, 2015, on a consolidated basis, we had total assets of approximately $1.3 billion, net loans of approximately $1.1 billion, total deposits of approximately $1.0 billion, and shareholders’ equity of approximately $131.8 million. We are committed to being the premier “Hometown” bank in Fairfield and New Haven Counties and surrounding areas. We believe that our market exhibits highly attractive demographic attributes and presents favorable competitive dynamics, thereby offering long-term opportunities for growth. We have a history of building long-term customer relationships and attracting new customers through what we believe is our superior customer service and our ability to deliver a diverse product offering. In addition, we believe that our strong capital position and extensive local ownership, coupled with a highly respected and experienced executive management team and board of directors, give us credibility with our customers and potential customers in our market. Our focus is on building a franchise with meaningful market share and consistent revenue growth complemented by operational efficiencies that we believe will produce attractive risk-adjusted returns for our shareholders. On May 15, 2014, Bankwell Financial Group, Inc. priced 2,702,703 common shares in its IPO at $18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock Market. The net proceeds from the IPO were approximately $44.7 million, after deducting the underwriting discount of approximately $2.5 million and approximately $1.3 million of expenses. Our History and Growth Bankwell Bank was originally chartered as two separate banks, The Bank of New Canaan (including a separate division, Stamford First Bank) and The Bank of Fairfield, which were subsequently merged and rebranded as “Bankwell Bank.” It was chartered with a commitment to building the premier community bank in the market we serve. We began operations in April 2002 with an initial capitalization of $8.6 million. On November 5, 2013, we acquired The Wilton Bank, and it was merged into Bankwell Bank. On October 1, 2014, we acquired Quinnipiac Bank and Trust Company and it was merged into Bankwell Bank. With the efforts of our strong management team, we continued our growth and maintained a strong track record of performance. From December 31, 2010 through December 31, 2015, our total assets grew from $395.7 million to approximately $1.3 billion; our loans outstanding grew from $282.6 million to approximately $1.1 billion and our noninterest bearing deposits grew from $50.2 million to approximately $164.6 million. We believe this growth was driven by our ability to provide superior service to our customers and our financial stability. This loan growth was achieved while maintaining our focus on our strong underwriting standards, which has been reflected in our low net charge-off levels. Business Strategy We are focused on being the “Hometown” bank and banking provider of choice in our highly attractive market areas through: • Responsive, Customer-Centric Products and Services and a Community Focus. We offer a broad array of products and services which we customize to allow us to focus on building long-term relationships with our customers through high-quality, responsive and personal customer service. By focusing on the entire customer relationship, we build the trust of our customers which leads to long-term relationships and generates our organic growth. In addition, we are committed to meeting the needs of the communities that we serve. Our employees are involved in many civic and community organizations which we support through sponsorships. As a result, customers and potential customers within our market know about us and frequently interact with our employees which allows us to develop long-term customer relationships without extensive advertising. 2 • • • Strategic Acquisitions. To complement our organic growth, we focus on strategic acquisitions in or around our existing markets that further our objectives. We believe there are banking institutions that continue to face credit challenges, capital constraints and liquidity issues and that lack the scale and management expertise to manage the increasing regulatory burden and will likely need to partner with an institution like ours. As we evaluate potential acquisitions, we will continue to seek acquisitions that provide meaningful financial benefits, long-term organic growth opportunities and expense reductions, without compromising our risk profile. Utilization of Efficient and Scalable Infrastructure. We employ a systematic and calculated approach to increasing our profitability and improving our efficiencies. We continually upgrade our operating infrastructure particularly in the areas of technology, data processing, compliance and personnel. We believe that our scalable infrastructure provides us with an efficient operating platform from which to grow in the near term, and without incurring significant incremental noninterest expenses, while continuing to deliver our high-quality, responsive customer service, which will enhance our ability to grow and increase our returns. Disciplined Focus on Risk Management. Effective risk management is a key component of our strong corporate culture. We use our strong risk management process to monitor our existing loan and investment securities portfolios, support operational decision-making and improve our ability to generate earning assets with strong credit quality. To maintain our strong credit quality, we use a comprehensive underwriting process and we seek to maintain a diversified loan portfolio and a conservative investment securities portfolio. Board-approved policies contain approval authorities, as appropriate, and are reviewed at least annually. We have a Risk Management Steering Committee comprised of executive officers who oversee new business initiatives and other activities that warrant oversight of risk and related mitigants. Internal review procedures are performed regarding anti-money laundering and consumer compliance requirements. Our Chief Risk Officer reports directly to the Chair of our Audit Committee. Our Competitive Strengths We believe that we are especially well-positioned to create value for our shareholders as a result of the following competitive strengths: • • • Our Market. Our current market is defined as the greater Fairfield and New Haven County area. The Stamford market area includes numerous affluent suburban communities of professionals who work and commute into New York City, approximately 50 miles from our headquarters, and many small to mid-sized businesses which support these communities. Fairfield County is the wealthiest county in Connecticut, with a 2010 – 2014 median household income of $83,163 according to estimates from United States Census Bureau. We believe that this market has economic and competitive dynamics that are favorable to executing our growth strategy. Experienced and Respected Management Team with a Proven and Successful Track Record. Our executive management team, is comprised of seasoned professionals with significant banking experience, a history of high performance at local financial institutions and success in identifying, team includes institutions. Our acquiring and integrating financial Christopher R. Gruseke, Chief Executive Officer (one year with us), Heidi S. DeWyngaert, Executive Vice President, Chief Lending Officer (eleven years with us), Ernest J. Verrico, Sr., Executive Vice President, Chief Financial Officer (six years with us), Christine A. Chivily, Executive Vice President, Chief Credit Officer (three years with us), and Michele Johnson, Senior Vice President, Chief Risk Officer (seven years with us). senior management Dedicated Board of Directors with Strong Community Involvement. Our board of directors is comprised of a group of local business leaders who understand the need for strong community their customers. One of our directors, banks that focus on serving the financial needs of Frederick R. Afragola, was instrumental in our organization and growth. Mr. Afragola was the Chief Executive Officer and President of Bankwell from its opening in 2002 until his retirement in 2008 and played an integral role in building our foundation and guiding our growth. The interests of our executive management team and directors are aligned with those of our shareholders 3 through common stock ownership. By capitalizing on the close community ties and business relationships of our executive management team and directors, we are positioned to continue taking advantage of the market opportunity present in our primary market. • • Strong Capital Position. At December 31, 2015, we had a 9.68% tangible common equity ratio, and the Bank had a 10.84% tier 1 leverage ratio and a 12.18% tier 1 risk-based ratio. We believe that our ability to attract capital has facilitated our growth and is an integral component to the execution of our business plan. Scalable Operating Platform. We provide banking technology, including remote deposit capture, internet banking and mobile banking, to provide our customers with maximum flexibility and create a scalable platform to accommodate our future growth aspirations. We believe that our advanced technology combined with responsive and personal service provides our customers with a superior banking experience. Employees At December 31, 2015, we had a total of 123 full-time employees, 2 part-time employees and no temporary employees. None of our employees is subject to a collective bargaining agreement. Company Website and Availability of Securities and Exchange Commission Filings Information regarding the Company is available tab at www.mybankwell.com. The Company’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports filed pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 are available free of charge at www.sec.gov and at www.mybankwell.com under the Investor Relations tab. Information on the website is not incorporated by reference and is not a part of this annual report on Form 10-K. Investor Relations through the Competition The financial services industry in our market and the surrounding area is highly competitive. We compete with commercial banks, savings banks, savings associations, money market funds, mortgage brokers, finance companies, credit unions, insurance companies, investment firms and private lenders in various segments of our business. Many of these competitors have more assets, capital and higher lending limits, and more resources than we do and may be able to conduct more intensive and broader-based promotional efforts to reach both commercial and individual customers. Competition for deposit products can depend heavily on pricing because of the ease with which customers can transfer deposits from one institution to another. We focus our marketing efforts on small to medium-sized businesses, professionals and individuals and their employees. This focus includes retail, service, wholesale distribution, manufacturing and international businesses. We attract these customers based on relationships and contacts that our management and our board of directors have within and beyond the market area. We do not expect to compete with large institutions for the primary banking relationships of large corporations. Rather, we compete for niches in this business segment and for the consumer business of employees of such entities. Many of our larger commercial bank competitors have greater name recognition and offer certain services that we do not. However, we believe that our presence in our primary market area and focus on providing superior service to professionals at small to medium sized businesses and individual employees of such businesses are instrumental to our success. We emphasize personalized banking services and the advantage of local decision-making in our banking businesses, and this emphasis has been well received by the public in our market area. We derive a majority of our business from our local market area which includes its primary market area of Fairfield and New Haven Counties. Lending Activities General. Our primary lending focus is to serve commercial and middle-market businesses and their executives, high net worth individuals, not-for-profit organizations and consumers with a variety of 4 financial products and services, while maintaining strong and disciplined credit policies and procedures. We offer a full array of commercial and retail lending products to serve the needs of our customers. Commercial lending products include owner-occupied commercial real estate loans, commercial real estate investment loans, commercial loans (such as business term loans, equipment financing and lines of credit) to small and mid-sized businesses and real estate construction and development loans. Retail lending products include residential mortgage loans, home equity lines of credit and consumer installment loans. Our retail lending products are offered to the community in general and as an accommodation to our commercial customers, and their executives and employees. We focus our lending activities on loans that we originate from borrowers located in our market. We have established an informal, internal lending limit to one borrower/relationship subject to the statutory maximum of 15% of our unimpaired capital and reserves for loan loss and up to 40% for commercial real estate secured loans. We market our lending products and services to qualified borrowers through conveniently located banking offices, relationship networks and high touch personal service. We target our business development and marketing strategy primarily on small to medium businesses with between $5 million and $50 million in annual revenue. Our relationship managers actively solicit the business of companies entering our market areas as well as long-standing businesses operating in the communities we serve. We seek to attract new lending customers through professional service, relationship networks, competitive pricing and innovative structure, including the utilization of federal and state tax incentives. We pride ourselves on smart, efficient underwriting and timely decision making for new loan requests due to our leaner approval structure and local decision-making. We believe this gives us a competitive advantage over larger institutions that are not as nimble. Total loans before deferred loan fees and the allowance for loan losses were $1.1 billion at December 31, 2015. Since December 31, 2011, total loans have increased $778.2 million from $369.3 million, reflecting expansion of our branch network, including $87.4 million of acquired loans from The Wilton Bank and Quinnipiac Bank and Trust Company. The following table summarizes the composition of our loan portfolio for the dates indicated. 2015 At December 31, 2014 2013 Percent of Loan Portfolio Amount Percent of Loan Portfolio Amount Percent of Loan Portfolio Amount (In thousands) Real estate loans: . . . . . . . . . . . . . . . . . Residential . . . . . . . . . . . . . . . . Commercial Construction . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . $ 177,184 697,542 82,273 15,926 972,925 Commercial business . . . . . . . . . . . . 172,853 Consumer . . . . . . . . . . . . . . . . . . . 1,735 15.44% $175,031 521,181 60.79 63,229 7.17 18.83% $155,874 316,533 56.06 51,545 6.80 1.39 84.79 15.06 0.15 18,166 777,607 149,259 2,896 1.95 83.64 16.05 0.31 13,892 537,844 93,566 602 24.66% 50.08 8.16 2.20 85.10 14.80 0.10 Total loans . . . . . . . . . . . . . . . . . $1,147,513 100.00% $929,762 100.00% $632,012 100.00% 5 At December 31, 2012 2011 Percent of Loan Portfolio Amount Percent of Loan Portfolio Amount (In thousands) Real estate loans: Residential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $144,288 27.22% $104,754 28.37% Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 284,763 53.72 173,951 Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33,148 11,030 6.26 2.08 40,422 14,815 473,229 89.28 333,942 Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56,764 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57 10.71 0.01 35,041 311 47.10 10.95 4.01 90.43 9.49 0.08 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $530,050 100.00% $369,294 100.00% loans, Commercial loans. We offer a wide range of commercial including business term loans, equipment financing and lines of credit to small and midsized businesses. Our target commercial loan market is retail and professional establishments and small to medium sized businesses. The terms of these loans primarily are loans vary by purpose and by type of underlying collateral. The commercial underwritten on the basis of the borrower’s ability to service the loan from cash flow. We make equipment loans with conservative margins generally for a term of ten years or less, supported by the useful life of the equipment, at fixed or variable rates, with the loan fully amortizing over the term. Loans to support working capital typically have terms not exceeding one year and usually are secured by accounts receivable, inventory and personal guarantees of the principals of the business and at times by the commercial real estate of the borrower. For loans secured by accounts receivable or inventory, principal typically is repaid as the assets securing the loan are converted into cash, and for loans secured with other types of collateral, principal is typically due at maturity. The quality of the commercial borrower’s management and its ability both to properly evaluate changes in the supply and demand characteristics affecting its markets for products and services and to effectively respond to such changes are significant factors in a commercial borrower’s creditworthiness. Risks associated with our commercial loan portfolio include those related to the strength of the borrower’s business, which may be affected not only by local, regional and national market conditions, but also changes in the borrower’s management and other factors beyond the borrower’s control; those related to fluctuations in value of any collateral securing the loan; and those related to terms of the commercial loan, which may include balloon payments that must be refinanced or paid off at the end of the term of the loan. Our commercial loan portfolio presents a higher risk than our consumer real estate and consumer loan portfolios. Commercial real estate loans. We offer real estate loans for commercial property that is owner occupied as well as commercial property owned by real estate investors. Commercial loans that are secured by owner-occupied commercial real estate and primarily collateralized by operating cash flows are also included in this category of loan. Commercial real estate loan terms generally are limited to ten years or less, although payments may be structured on a longer amortization basis of 20 to 30 years. The interest rates on our commercial real estate loans may be fixed or adjustable, although rates typically are not fixed for a period exceeding five to ten years. We generally charge an origination fee for our services. We typically require personal guarantees from the principal owners of the business or real estate supported by a review of the principal owners’ personal financial statements. Risks associated with commercial real estate loans include fluctuations in the value of real estate, the overall strength of the economy, new job creation trends, tenant vacancy rates, environmental contamination, and the quality of the borrower’s management. We make efforts to limit our risk by analyzing borrowers’ cash flow and collateral value as well as all of the sponsors’ investment activities. The real estate securing our existing commercial real estate loans includes a 6 wide variety of property types, such as owner-occupied offices/warehouses/production facilities, office buildings, industrial, mixed-use residential/commercial, retail centers and multifamily properties. Our commercial real estate loan portfolio presents a higher risk than our consumer real estate and consumer loan portfolios. Construction loans. Our construction portfolio includes loans to small and midsized businesses to construct owner-user properties, loans to developers of commercial real estate investment properties and residential developments and, to a lesser extent, loans to individual clients for construction of single family homes in our market. Construction and development loans are generally made with a term of one to two years and interest is paid monthly. The ratio of the loan principal to the value of the collateral, as established by independent appraisal, typically will not exceed industry standards. Loan proceeds are disbursed based on the percentage of completion and only after the project has been inspected by an experienced construction lender or third-party inspector. Risks associated with construction loans include fluctuations in the value of real estate, project completion risk and change in market trends. We are also exposed to risk based on the ability of the construction loan borrower to refinance the debt or sell the property upon completion of the project, which may be affected by changes in market trends since the time that we funded the construction loan. Consumer real estate loans. We offer first lien one-to-four family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences. We also originate for resale one-to-four family mortgage loans, which are classified as loans held for sale until sold to investors. Although our consumer real estate loan portfolio presents lower levels of risk than our commercial, commercial real estate and construction loan portfolios, we are exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship. Consumer loans. We offer consumer loans as an accommodation to our existing customers, but do not market consumer loans to persons who do not have a pre-existing relationship with us. As of December 31, 2015, our consumer loans represented less than 1% of our total loan portfolio. We do not expect our consumer loans to become a material component of our loan portfolio at any time in the foreseeable future. Although we do not engage in any material amount of consumer lending, our consumer loans, which are underwritten primarily based on the borrower’s financial condition and, in many cases, are unsecured credits, subject us to risk based on changes in the borrower’s financial condition, which could be affected by numerous factors, including those discussed above. Credit Policy and Procedures General. We adhere to what we believe are disciplined underwriting standards, but also remain cognizant of the need to serve the credit needs of customers in our primary market areas by offering flexible loan solutions in a responsive and timely manner. We also seek to maintain a broadly diversified loan portfolio across customer, product and industry types. However, our lending policies do not provide for any loans that are highly speculative, subprime, or that have high loan-to-value ratios. These components, together with active credit management, are the foundation of our credit culture, which we believe is critical to enhancing the long term value of our organization to our customers, employees, shareholders and communities. We have a service-driven, relationship-based, business-focused credit culture, than a price-driven, transaction-based culture. Accordingly, substantially all of our loans are made to borrowers located or operating in our primary market with whom we have ongoing relationships across various product lines. The limited number of loans secured by properties located in out-of-market areas that we have made are generally to borrowers who are well-known to us. These borrowers typically have strong deposit relationships with the Bank. rather Credit concentrations. In connection with the management of our credit portfolio, we actively manage the composition of our loan portfolio, including credit concentrations. We monitor borrower and loan product concentrations on at least a quarterly basis. Loan product concentrations are reviewed annually in conjunction with the portfolio’s credit quality and the business plan for the coming year. All concentrations are monitored by our Chief Credit Officer and our Loan Committee. We have also established an informal, 7 internal lending limit to one borrower/relationship subject to the statutory maximum of 15% of our unimpaired capital and reserves for loan loss and up to 40% for commercial real estate-secured loans. Our top 20 borrowing relationships range in exposure from $9.6 million to $51.0 million and are monitored on an on-going basis. Loan approval process. We seek to achieve an appropriate balance between prudent, disciplined underwriting, on the one hand, and flexibility in our decision-making and responsiveness to our customers, on the other hand. Our credit approval policies have a tiered approval process, with larger exposures referred to the Bank’s internal loan committee and the Directors’ Loan Committee, as appropriate, based on the size of the loan. Smaller exposures are approved under a three-signature system. Loans with policy exceptions require the next higher level of approval authority, the highest of which is the Directors’ Loan Committee, depending on dollar amount. These authorities are periodically reviewed and updated by our board of directors. We believe that our credit approval process provides for thorough underwriting and efficient decision making. Credit risk management. Credit risk management involves a partnership between our relationship managers and our credit approval, credit administration and collections personnel. Portfolio monitoring and early problem recognition are an important aspect of maintaining our high credit quality standards. Past due reports are reviewed on an ongoing basis and insurance and tax payment monitoring is in place. Our evaluation and compensation program for our relationship managers includes significant goals that we believe motivate the relationship managers to focus on high quality credit consistent with our strategic focus on asset quality. It is our policy to review all non-amortizing commercial loans in excess of $50 thousand and amortizing commercial loans in excess of $750 thousand on an annual basis, or more frequently through the receipt of interim and annual financial statements and borrowing base certificates depending on loan structure and covenants. Our policies require rapid notification of delinquency and prompt initiation of collection actions. Relationship managers, credit administration personnel and senior management proactively support collection activities in order to maximize accountability and efficiency. As part of these annual review procedures, we analyze recent financial statements of the collateral property, business and/or borrower to determine the current level of occupancy, revenues and expenses and to investigate any deterioration in the value of the real estate collateral or in the borrower’s or Company’s financial condition. Upon completion, we update or confirm the risk rating assigned to each loan. Relationship managers are encouraged to bring potential credit issues to the attention of our Chief Credit Officer immediately upon any sign of deterioration in the performance of the borrower. We maintain a list of loans that receive additional attention if we believe there may be a potential credit risk via our Watch List report. Loans that are upgraded or downgraded are reviewed by our Chief Credit Officer, while classified loans undergo a detailed quarterly analysis prepared by the lending officer and reviewed by management, our Internal Loan Committee and Directors’ Loan Committee. This review includes an evaluation of the market conditions, the property’s or company’s trends, the borrower and guarantor status, the level of reserves required and loan accrual status. Additionally, we have an independent, third-party loan review performed which includes loan grades and our credit administration functions each year. Finally, we perform an annual stress test of our commercial real estate portfolio, in which we evaluate the impact on the portfolio of declining economic conditions, including lower values and decline in net operating income which may result from lower rental rates, lower occupancy rates and higher interest rates. Management reviews these reports and presents them to our Loan Committees. These asset review procedures provide management with additional information for assessing our asset quality. Investment Activities We manage our investment portfolio primarily for liquidity purposes, with a secondary focus on returns through the use of a liquidity portfolio and an earnings portfolio. Our liquidity portfolio’s primary purpose is to provide adequate liquidity necessary to meet any reasonable decline in deposits and any anticipated increase in the loan portfolio. The majority of these securities are classified as available for sale. Our earnings portfolio’s primary purpose is to generate earnings adequate to provide and contribute to 8 stable income and to generate a profitable return while minimizing risk. Additionally, our investment portfolio is used to provide adequate collateral for various regulatory or statutory requirements and to manage our interest rate risk. We invest in a variety of high-grade securities, including government agency securities, government guaranteed mortgage backed securities, highly rated corporate bonds and municipal securities. We regularly evaluate the composition of our portfolio as changes occur with respect to the interest rate yield curve. Although we may sell investment securities from time to time to take advantage of changes in interest rate spreads, it is our policy not to sell investment securities unless we can reinvest the proceeds at a similar or higher spread, so as not to take gains to the detriment of future income. The investment policy is reviewed annually by our board of directors. Overall investment goals are established by our board of directors, Chief Financial Officer and our asset/liability management committee, or ALCO. Our board of directors has delegated the responsibility of monitoring our investment activities to ALCO. Day-to-day activities pertaining to the investment portfolio are conducted within our accounting department under the supervision of our Chief Financial Officer. Deposits Deposits are our primary source of funds to support our earning assets. We offer traditional depository products, including checking, savings, money market and certificates of deposit with a variety of rates. Deposits at the Bank are insured by the FDIC up to statutory limits. We price our deposit products with a view to maximizing our share of each customer’s financial services business, and our loan pricing gives value to deposits from our loan customers. We have built out a network of nine deposit-taking branch offices and attracted significant transaction account business through our relationship-based approach. As a result of our significant deposit growth in transaction accounts, which we define as demand, NOW and money market deposits, we have achieved a favorable deposit mix between transaction accounts and certificates of deposit. Borrowed Funds The Bank is a member of the Federal Home Loan Bank of Boston (FHLBB), which is part of a twelve district Federal Home Loan Bank System. Members are required to own capital stock of the FHLBB, and borrowings are collateralized by qualifying assets not otherwise pledged (principally single family residential mortgage loans and securities). The maximum amount of credit that the FHLBB will extend varies from time to time, depending on its policies and the amount of qualifying collateral the member can pledge. We utilize advances from the FHLBB as part of our overall funding strategy and to meet short-term liquidity needs On August 19, 2015 the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early redemption date. The Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. The Company will use the net proceeds from the sales of the Notes for general corporate purposes, including the redemption of the $11.0 million outstanding of its Senior Noncumulative Perpetual Preferred Stock issued in 2011 to the U.S. Treasury under the Small Business Lending Fund Program on November 20, 2015. The Notes were assigned an investment grade rating of BBB by Kroll Bond Rating Agency. Small Business Lending Fund Program Starting in 2011, we participated in the Small Business Lending Fund program, or SBLF, offered by the United States Department of the Treasury, a dedicated investment fund designed to encourage lending to small businesses by providing capital to qualified community banks and community development loan funds with assets of less than $10 billion. In connection with SBLF, the Treasury purchased shares of our preferred stock on August 4, 2011 for an aggregate purchase price of approximately $11.0 million. We used the proceeds from the SBLF funding to repurchase the preferred stock issued by us to the Treasury in 9 connection with its Capital Purchase Program, as well as to provide additional capital to the Bank, allowing the Bank to expand its small business lending programs. As a result of our success in making loans through the program, we were allowed to pay dividends at a 1% interest rate. The company repaid the SBLF funds in full on November 20, 2015. Enterprise Risk Management We place significant emphasis on risk mitigation as an integral component of our organizational culture. We believe that our emphasis on risk management is manifested in our solid asset quality statistics. Risk management with respect to our lending philosophy focuses, among other things, on structuring credits to provide for multiple sources of repayment, coupled with strong underwriting undertaken by experienced bank officers and credit policy personnel. We perform quarterly loan impairment analyses on criticized loans and criticized asset action plans for those borrowers who display deteriorating financial conditions in order to monitor those relationships and implement corrective measures on a timely basis to minimize losses. In addition, we perform an annual stress test of our commercial real estate portfolio, in which we evaluate the impact on the portfolio of declining property values and lower net operating incomes as a result of economic conditions, including lower rental rates and lower occupancy rates. The stress test focuses only on the cash flow and valuation of the properties and ignores the liquidity, net worth and cash flow of any guarantors related to the credits. We also focus on risk management in other areas throughout our organization. The Chief Risk Officer oversees the Risk Management function and chairs a Risk Management Steering Committee. We currently outsource our asset/liability management process to a reputable third party, and on a quarterly basis, we run the full interest rate risk model. Results of the model are reviewed and validated by our ALCO. Supervision and Regulation General The Bank, a Connecticut state-chartered commercial bank, is subject to extensive regulation by the Connecticut Department of Banking, as its chartering agency, and by the FDIC, as its deposit insurer. The Bank’s deposits are insured up to applicable limits by the FDIC through the Deposit Insurance Fund. The Bank is required to file reports with, and is periodically examined by, the FDIC and the Connecticut Department of Banking concerning its activities and financial condition and must obtain regulatory approvals prior to entering into certain transactions, such as mergers with, or acquisitions of, other financial institutions. The primary goals of the bank regulatory scheme are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. This scheme is intended primarily for the protection of the Deposit Insurance Fund and bank depositors, rather than our shareholders and creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the authority, among other things, to enjoin “unsafe or unsound” practices, require affirmative action to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil money penalties, remove officers and directors, and, with respect to banks, terminate deposit insurance or place the bank into conservatorship or receivership. In general, these enforcement actions may be initiated for violations of laws and regulations or unsafe or unsound practices. The following discussion is a summary of the material laws and regulations applicable to our operations, but does not purport to be a complete summary of all applicable laws, rules and regulations. These laws and regulations may change from time to time and the regulatory agencies often have broad discretion in interpreting them. Any change in such laws or regulations, whether by the Connecticut Department of Banking, the FDIC or the Federal Reserve Board could have a material adverse impact on the financial markets in general, and our operations and activities, financial condition, results of operations, growth plans and future prospects specifically. Dodd-Frank Wall Street Reform and Consumer Protection Act The Dodd-Frank Act has significantly changed the current bank regulatory structure and will affect into the immediate future the lending and investment activities and general operations of depository institutions and their holding companies. 10 The Dodd-Frank Act also created a new Consumer Financial Protection Bureau with extensive powers to implement and enforce consumer protection laws. The Consumer Financial Protection Bureau has broad rulemaking authority for a wide range of consumer protection laws that apply to all banks and savings associations including, among other things, the authority to prohibit “unfair, deceptive or abusive” acts and practices. The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings associations with more than $10 billion in assets. Banks and savings associations with $10 billion or less in assets will continue to be examined for compliance with federal consumer protection and fair lending laws by their applicable primary federal bank regulators. The Dodd-Frank Act also weakens the federal preemption available for national banks and federal savings associations and gives state attorneys general certain authority to enforce applicable federal consumer protection laws. The Dodd-Frank Act made many other changes to banking regulations including authorizing depository institutions, for the first time, to pay interest on business checking accounts, requiring originators of securitized loans to retain a percentage of the risk for transferred loans, establishing regulatory rate-setting for certain debit card interchange fees, establishing a number of reforms for mortgage originations, requiring bank holding companies and banks to be “well capitalized” and “well managed” in order to acquire banks located outside of their home state, requiring any bank holding company electing to be treated as a financial holding company to be “well capitalized” and “well managed” and authorizing national and state banks to establish de novo branches in any state that would permit a bank chartered in that state to open a branch at that location. The Dodd-Frank Act also broadened the base for the FDIC insurance assessments. The FDIC was required to promulgate rules revising its assessment system so that insurance assessments are based on the average consolidated total assets less tangible equity capital of an insured depository institution instead of deposits. That rule took effect April 1, 2011. The Dodd-Frank Act also permanently increased the maximum amount of deposit insurance for banks, savings institutions and credit unions to $250,000 per depositor, retroactive to January 1, 2008. The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the SEC to promulgate rules that would allow shareholders to nominate and solicit votes for their own candidates using a company’s proxy materials. Many of the provisions of the Dodd-Frank Act require various federal agencies to promulgate numerous and extensive implementing regulations over the next several years. It is therefore challenging to predict at this time the full impact the Dodd-Frank Act and implementing regulations will have on community banks and their holding companies. It is expected that the legislation and implementing regulations, particularly those provisions relating to the Consumer Financial Protection Bureau, has and will increase our operating and compliance costs. Connecticut Banking Laws and Supervision Connecticut Department of Banking. The Connecticut Department of Banking regulates internal organization as well as the deposit, lending and investment activities of state-chartered banks, including the Bank. The approval of the Connecticut Department of Banking is required for, among other things, the establishment of branch offices and business combination transactions. The Connecticut Department of Banking conducts periodic examinations of Connecticut chartered banks. The FDIC also regulates many of the areas regulated by the Connecticut Department of Banking, and federal law may limit some of the authority provided to Connecticut chartered banks by Connecticut law. Lending Activities. Connecticut banking laws grant banks broad lending authority. With certain limited exceptions, fully secured and unsecured loans of any one obligor under this statutory authority may not exceed 10% and 15%, respectively, of a bank’s equity capital and allowance for loan losses. Dividends. The Bank may pay cash dividends out of its net profits. For purposes of this restriction, “net profits” represents the remainder of all earnings from current operations. Further, the total amount of all dividends declared by a bank in any year may not exceed the sum of a bank’s net profits for the year in question combined with its retained net profits from the preceding two years. Federal law also prevents an institution from paying dividends or making other capital distributions that, if by doing so, would cause it 11 to become “undercapitalized”. Beginning January 1, 2016, the Basel III Capital Rules limit the amount of dividends the Bank can pay if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules. The capital conservation buffer is being phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) will be effective. The capital conservation buffer is composed entirely of common equity tier 1 capital and is in addition to the minimum risk-based capital requirement. The FDIC may further limit a bank’s ability to pay dividends. Moreover, the federal agencies have issued policy statements that provide that insured banks should generally only pay dividends out of current operating earnings. Powers. Connecticut law permits Connecticut banks to sell insurance and fixed and variable rate annuities if licensed to do so by the Connecticut Insurance Department. With the prior approval of the Connecticut Department of Banking, Connecticut banks are also authorized to engage in a broad range of activities related to the business of banking, or that are financial in nature or that are permitted under the Bank Holding Company Act or the Home Owners’ Loan Act, both federal statutes, or the regulations promulgated as a result of these statutes. Connecticut banks are also authorized to engage in any activity permitted for a national bank or a federal savings association upon filing notice with the Connecticut Department of Banking unless the Connecticut Department of Banking disapproves the activity. Assessments. Connecticut banks are required to pay annual assessments to the Connecticut Department of Banking to fund the Connecticut Department of Banking’s operations. The general assessments are paid pro-rata based upon a bank’s asset size. Enforcement. Under Connecticut the Connecticut Department of Banking has extensive enforcement authority over Connecticut banks and, under certain circumstances, affiliated parties, insiders, and agents. The Connecticut Department of Banking’s enforcement authority includes cease and desist orders, fines, receivership, conservatorship, removal of officers and directors, emergency closures, dissolution and liquidation. law, Federal Bank Holding Company Regulation General. As a bank holding company, we are subject to comprehensive regulation and regular examinations by the Federal Reserve Board. The Federal Reserve Board also has extensive enforcement authority over bank holding companies, including, among other things, the ability to assess civil money penalties, to issue cease and desist or removal orders and to require that a bank holding company divest subsidiaries (including its bank subsidiaries). In general, enforcement actions may be initiated for violations of law and regulations and unsafe or unsound practices. Under Federal Reserve Board policy which has been codified by the Dodd-Frank Act, a bank holding company must serve as a source of strength for its subsidiary bank. Under this policy, the Federal Reserve Board may require, and has required in the past, a bank holding company to contribute additional capital to an undercapitalized subsidiary bank. A bank holding company must obtain Federal Reserve Board approval before: (1) acquiring, directly or indirectly, ownership or control of any voting securities of another bank or bank holding company if, after such acquisition, it would own or control more than 5% of such securities (unless it already owns or controls the majority of such securities); (2) acquiring all or substantially all of the assets of another bank or bank holding company; or (3) merging or consolidating with another bank holding company. Under Connecticut banking law, no person may acquire beneficial ownership of more than 10% of any class of voting securities of a Connecticut chartered bank, or any bank holding company of such a bank, without prior notification of, and lack of disapproval by, the Connecticut Department of Banking. The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank or bank holding company, or from engaging directly or indirectly in activities other than those of banking, managing or controlling banks, or providing services for its subsidiaries. The principal exceptions to these prohibitions involve certain non-bank activities which, by statute or by Federal Reserve Board regulation or order, have been identified as activities closely related to the business of banking or managing or controlling banks. The list of activities permitted by the Federal Reserve Board includes, among other things: (1) operating a savings institution, mortgage company, finance company, 12 credit card company or factoring company; (2) performing certain data processing operations; (3) providing certain investment and financial advice; (4) underwriting and acting as an insurance agent for certain types of credit-related insurance; (5) leasing property on a full-payout, non-operating basis; (6) selling money orders, travelers’ checks and United States savings bonds; (7) real estate and personal property appraising; (8) providing tax planning and preparation services; (9) financing and investing in certain community development activities; and (10) subject to certain limitations, providing securities brokerage services for customers. Dividends. The Federal Reserve Board has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve Board’s view that a bank holding company should pay cash dividends only to the extent that the Bank Holding Company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earnings retention that is consistent with the Bank Holding Company’s capital needs, asset quality and overall financial condition. The Federal Reserve Board also indicated that it would be inappropriate for a bank holding company experiencing serious financial problems to borrow funds to pay dividends. Substantially all of our income is derived from, and the principal source of our liquidity is, dividends from the Bank. The ability of the Bank to pay dividends to us is also restricted by federal and state laws, regulations and policies. The Bank may pay cash dividends out of its net profits. For purposes of this restriction, “net profits” represents the remainder of all earnings from current operations. Further, the total amount of all dividends declared by a bank in any year may not exceed the sum of a bank’s net profits for the past two fiscal years, plus the portion of the year in which the dividend is paid. Under federal law, the Bank may not pay any dividend to us if the Bank is undercapitalized or the payment of the dividend would cause it to become undercapitalized. Beginning January 1, 2016, the Basel III Capital Rules limit the amount of dividends the Bank can pay to us if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules. The capital conservation buffer is being phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) will be effective. The capital conservation buffer is composed entirely of common equity tier 1 capital and is in addition to the minimum risk-based capital requirement. The FDIC may further restrict the payment of dividends by requiring the Bank to maintain a higher level of capital than would otherwise be required for it to be adequately capitalized for regulatory purposes. Moreover, if, in the opinion of the FDIC, the Bank is engaged in an unsafe or unsound practice (which could include the payment of dividends), the FDIC may require, generally after notice and hearing, it to cease such practice. The FDIC has indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe banking practice. The FDIC has also issued policy statements providing that insured depository institutions generally should pay dividends only out of current operating earnings. Redemption. Bank holding companies are required to give the Federal Reserve Board prior written notice of any purchase or redemption of its outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the consolidated net worth of the Bank Holding Company. The Federal Reserve Board may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe or unsound practice or would violate any law, regulation, Federal Reserve Board order or any condition imposed by, or written agreement with, the Federal Reserve Board. This notification requirement does not apply to any bank holding company that meets the well capitalized standard for commercial banks, is “well managed” within the meaning of the Federal Reserve Board regulations and is not subject to any unresolved supervisory issues. Federal Bank Regulation Safety and Soundness. The federal banking agencies, including the FDIC, have implemented rules and guidelines concerning standards for safety and soundness required pursuant to Section 39 of the Federal Deposit Insurance Corporation Improvement Act, or FDICIA. In general, the standards relate to (1) operational and managerial matters; (2) asset quality and earnings; and (3) compensation. The operational and managerial standards cover (a) internal controls and information systems, (b) internal audit systems, (c) loan documentation, (d) credit underwriting, (e) interest rate exposure, (f) asset growth, and 13 (g) compensation, fees and benefits. Under the asset quality and earnings standards, the Bank is required to establish and maintain systems to (i) identify problem assets and prevent deterioration in those assets, and (ii) evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital reserves. Finally, the compensation standard states that compensation will be considered excessive if it is unreasonable or disproportionate to the services actually performed by the individual being compensated. If an insured state-chartered bank fails to meet any of the standards promulgated by regulation, then such institution will be required to submit a plan within 30 days to the FDIC specifying the steps it will take to correct the deficiency. In the event that an insured state-chartered bank fails to submit or fails in any material respect to implement a compliance plan within the time allowed by the federal banking agency, Section 39 of the FDICIA provides that the FDIC must order the institution to correct the deficiency and may (1) restrict asset growth; (2) require the bank to increase its ratio of tangible equity to assets; (3) restrict the rates of interest that the bank may pay; or (4) take any other action that would better carry out the purpose of prompt corrective action. We believe that the Bank has been and will continue to be in compliance with each of the standards as they have been adopted by the FDICIA. Capital Requirements. The Federal Reserve Board monitors our capital adequacy, on a consolidated basis, and the FDIC and Connecticut Department of Banking monitor the capital adequacy of the Bank. The Federal Reserve, the FDIC and the other federal and state bank regulatory agencies establish regulatory capital guidelines for U.S. banking organizations. As of January 1, 2015, the Company and the Bank became subject to new capital rules set forth by the Federal Reserve, the FDIC and the other federal and state bank regulatory agencies. The new capital rules revise the banking agencies’ leverage and risk-based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the Basel III Capital Rules). The Basel III Capital Rules establish a new minimum common equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4% to 6%; and retained the minimum total capital to risk weighted assets requirement at 8.0%. A “well-capitalized” institution must generally maintain capital ratios 200 basis points higher than the minimum guidelines. The Basel III Capital Rules also change the risk weights assigned to certain assets. The Basel III Capital Rules assigned a higher risk weight (150%) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Basel III Capital Rules also alter the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300%. The Basel III Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and will exclude the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss) from regulatory capital. The Basel III Capital Rules limit a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The “capital conservation buffer” is being phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Liquidity. We are required to maintain a sufficient amount of liquid assets to ensure our safe and sound operation. The final Basel III framework also requires banks and bank holding companies to measure their liquidity against specific liquidity tests. Although similar in some respects to liquidity measures historically applied by banks and banking agencies for management and supervisory purposes, the Basel III framework would require specific liquidity tests by rule. 14 Transactions with Affiliates. Under current federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act, or FRA, and the Federal Reserve Board’s Regulation W. In a holding company context, at a minimum, the parent holding company of a bank and any companies which are controlled by such parent holding company is an affiliate of the bank. Generally, Section 23A limits the extent to which the bank or its subsidiaries may engage in “covered transactions” with any one affiliate to 10% of such bank’s capital stock and surplus, and contains an aggregate limit on all such transactions with all affiliates to 20% of capital stock and surplus. The term “covered transaction” includes, among other things, the making of loans or other extensions of credit to an affiliate and the purchase of assets from an affiliate. Section 23A also establishes specific collateral requirements for loans or extensions of credit to, or guarantees, acceptances on letters of credit issued on behalf of an affiliate. Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially the same, or no less favorable, to the bank or its subsidiary as similar transactions with non-affiliates. The Dodd-Frank Act has expanded the definition of covered transactions the collateral requirements associated with covered and increased the timing and other aspects of transactions, including an expansion of the covered transactions to include credit exposures related to derivatives, repurchase agreements and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied. Loans to Insiders. Further, Section 22(h) of the FRA restricts a depository institution with respect to loans to directors, executive officers, and principal shareholders (or insiders). Under Section 22(h), loans to insiders and their related interests may not exceed, together with all other outstanding loans to such persons and affiliated entities, the depository institution’s total unimpaired capital and unimpaired surplus. Loans to insiders above specified amounts must receive the prior approval of the board of directors. Further, under Section 22(h), loans to directors, executive officers and principal shareholders must be made on terms substantially the same as offered in comparable transactions to other persons, except that such insiders may receive preferential loans made under a benefit or compensation program that is widely available to the depository institution’s employees and does not give preference to the insider over the employees. Section 22(g) of the FRA places additional limitations on loans to executive officers. In addition to enhancing restrictions on insider transactions, the Dodd-Frank Act increases the types of transactions with insiders subject to restrictions, including certain asset sales with insiders. Enforcement. The FDIC has extensive enforcement authority over insured banks, including the Bank. This enforcement authority includes, among other things, the ability to assess civil money penalties, issue cease and desist orders and remove directors and officers. In general, these enforcement actions may be initiated in response to violations of laws and regulations and unsafe or unsound practices. The FDIC has authority under federal law to appoint a conservator or receiver for an insured bank under limited circumstances. The FDIC is required, with certain exceptions, to appoint a receiver or conservator for an insured state nonmember bank if that bank was “critically undercapitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically undercapitalized.” The FDIC may also appoint itself as conservator or receiver for an insured state non-member institution under specific circumstances on the basis of the institution’s financial condition or upon the occurrence of other events, including: (1) insolvency; (2) substantial dissipation of assets or earnings through violations of law or unsafe or unsound practices; (3) existence of an unsafe or unsound condition to transact business; and (4) insufficient capital, or the incurring of losses that will deplete substantially all of the institution’s capital with no reasonable prospect of replenishment without federal assistance. Insurance of Deposit Accounts. Deposit accounts at the Bank are insured by the Deposit Insurance Fund, generally up to a maximum of $250,000 per separately insured depositor, pursuant to changes made permanent by the Dodd-Frank Act. The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund. No institution may pay a dividend if its deposit insurance assessment. in default of Under the FDIC’s risk-based assessment system, insured depository institutions are assigned to a risk category based on supervisory evaluations, regulatory capital levels and other factors. A depository institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by the FDIC, with less risky institutions paying lower assessments. 15 On February 7, 2011, as required by the Dodd-Frank Act, the FDIC published a final rule to revise the deposit insurance assessment system. The rule, which took effect April 1, 2011, changed the assessment base used for calculating deposit insurance assessments from deposits to average consolidated total assets less average tangible equity capital. Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry. The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base. The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for funding, and shift more of the burden for supporting the Deposit Insurance Fund to larger financial institutions, which are thought to have greater access to nondeposit funding. The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. The FDIC must seek to achieve the 1.35% ratio by September 30, 2020. In setting the assessments necessary to achieve the 1.35% ratio, the FDIC is supposed to offset the effect of the increased ratio on insured institutions with assets of less than $10 billion. The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC. The FDIC has exercised that discretion by establishing a long range fund ratio of 2%. A material increase in insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what insurance assessment rates will be in the future. Insurance of deposits may be terminated by the FDIC upon a finding that a depository institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC. We do not know of any practice, condition or violation that might lead to termination of the Bank’s deposit insurance. Deposit Operations. In addition to the regulations above, the Bank’s deposit operations are subject to other federal laws applicable to depository accounts, such as the: • • • • Truth-In-Savings Act, requiring certain disclosures for consumer deposit accounts; Right to Financial Privacy Act, which imposes a duty to maintain confidentiality of consumer financial records and prescribes procedures for complying with administrative subpoenas of financial records; Electronic Funds Transfer Act and Regulation E issued by the Federal Reserve to implement that act, which govern automatic deposits to and withdrawals from deposit accounts and customers’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and Rules and regulations of the various federal banking agencies charged with the responsibility of implementing these federal laws. Federal Reserve System. The Federal Reserve Board regulations require depository institutions to maintain noninterest earning reserves against their transaction accounts (primarily NOW and regular checking accounts). The Federal Reserve Board regulations generally require that reserves be maintained against aggregate transaction accounts. We are in compliance with these requirements. Federal Home Loan Bank of Boston (FHLBB). The Bank is a member of the FHLBB, which is one of the regional Federal Home Loan Banks composing the Federal Home Loan Bank System. Each Federal Home Loan Bank serves as a central credit facility primarily for its member institutions. The Bank, as a member of the FHLBB, is required to acquire and hold shares of capital stock in the FHLBB. Community Reinvestment Act (CRA). Under the CRA, as amended by FDIC regulations, a bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of its entire community, including low and moderate income neighborhoods. The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community. The CRA does require the FDIC, in connection with its examination of a bank, to 16 assess the bank’s record of meeting the credit needs of its community and to take such record into account in its evaluation of certain applications by such bank, including applications to acquire branches and other financial institutions. The CRA requires the FDIC to provide a written evaluation of a bank’s CRA performance utilizing a four-tiered descriptive rating system. In particular, the system focuses on three tests: • • • A lending test, to evaluate the bank’s record of making loans in its assessment areas; An investment test, to evaluate the bank’s record of investing in community development projects, affordable housing, and programs benefiting low or moderate income individuals and businesses; and A service test, to evaluate the bank’s delivery of services through its branches, ATMs, and other offices. Connecticut has its own statutory counterpart to the CRA which is applicable to the Bank. The Connecticut version is generally similar to the CRA but utilizes a five-tiered descriptive rating system. Connecticut law requires the Connecticut Department of Banking to consider, but not be limited to, a bank’s record of performance under Connecticut law in considering any application by the Bank to establish a branch or other deposit-taking facility, to relocate an office or to merge or consolidate with or acquire the assets and assume the liabilities of any other banking institution. In our most recent evaluation under Connecticut law Bankwell received a CRA rating of “satisfactory”. Consumer Protection and Fair Lending Regulations. We are subject to a variety of federal and Connecticut statutes and regulations that are intended to protect consumers and prohibit discrimination in the granting of credit. These statutes and regulations provide for a range of sanctions for non-compliance with their terms, including imposition of administrative fines and remedial orders, and referral to the Attorney General for prosecution of a civil action for actual and punitive damages and injunctive relief. Certain of these statutes authorize private individual and class action lawsuits and the award of actual, statutory and punitive damages and attorneys’ fees for certain types of violations. At the federal level, these laws include, among others, the following: • • • • • • • • Federal Truth-In-Lending Act, governing disclosures of credit terms to consumer borrowers; Home Mortgage Disclosure Act of 1975, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the community it serves; Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, creed, or other prohibited factors in extending credit; Fair Credit Reporting Act of 1978, governing the use of consumer credit reports and the provision of information to credit reporting agencies; Fair Debt Collection Act, governing the manner in which consumer debts may be collected by collection agencies; Real Estate Settlement Procedures Act, governing closing costs and settlement procedures and disclosures to consumers related thereto; Service members Civil Relief Act of 2004, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service; and Rules and regulations of implementing these federal laws. the various federal agencies charged with the responsibility of Additional Considerations Regulatory Enforcement Authority. Federal banking agencies have substantial enforcement authority over the financial institutions that they regulate including, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions 17 may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Except under certain circumstances, federal law requires public disclosure of final enforcement actions by the federal banking agencies. Incentive Compensation Guidance. The federal banking agencies have released comprehensive guidance on incentive compensation policies focused on ensuring that financial institutions’ incentive compensation policies do not undermine the safety and soundness of those institutions by encouraging excessive risk taking. The incentive compensation guidance sets expectations for financial institutions concerning their incentive compensation arrangements and related risk management, control and governance processes. All employees that have the ability to materially affect the risk profile of a financial institution, either individually or as part of a group, are covered by the guidance. The guidance is based upon three core concepts: (1) balanced risk-taking incentives; (2) effective controls and risk management compatibility; and (3) strong corporate governance. Deficiencies in compensation practices that are identified may be incorporated into the institution’s supervisory ratings, which can affect the organization’s ability to take certain actions, including the ability to make acquisitions or take other actions. Enforcement actions by the institution’s primary federal banking agency may be initiated if the institution’s incentive compensation programs pose a risk to the safety and soundness of the organization. In addition, beginning January 1, 2016, the Basel III Capital Rules limit discretionary bonus payments to the Bank’s executive officers if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules. The capital conservation buffer is being phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) will be effective. The capital conservation buffer is composed entirely of common equity tier 1 capital and is in addition to the minimum risk-based capital requirement. Sarbanes-Oxley Act of 2002. The Sarbanes-Oxley Act of 2002 generally established a comprehensive framework to modernize and reform the oversight of public company auditing, improve the quality and transparency of financial reporting by those companies and strengthen the independence of auditors. Among other things, the legislation (1) created the Public Company Accounting Oversight Board, which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review; (2) strengthened auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients; (3) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies; (4) adopted a number of provisions to deter wrongdoing by corporate management; (5) imposed a number of new corporate disclosure requirements; (6) adopted provisions which generally seek to limit and expose to public view possible conflicts of interest affecting securities analysts; and (7) imposed a range of new criminal penalties for fraud and other wrongful acts, as well as extended the period during which certain types of lawsuits can be brought against a company or its insiders. The Sarbanes-Oxley Act applies generally to all companies that file or are required to file periodic reports with the SEC under the Exchange Act. Financial Modernization. The Gramm-Leach-Bliley Act, or the GLB Act, permits greater affiliation among banks, securities firms, insurance companies, and other companies under a type of financial services company known as a “financial holding company”. A financial holding company essentially is a bank holding company with significantly expanded powers. Financial holding companies are authorized by statute to engage in a number of financial activities previously impermissible for bank holding companies, including securities underwriting, dealing and market making; sponsoring mutual funds and investment companies; insurance underwriting and agency; and merchant banking activities. The GLB Act also permits the Federal Reserve Board and the Treasury Department to authorize additional activities for financial holding companies if they are “financial in nature” or “incidental” to financial activities. A bank holding company may become a financial holding company if each of its subsidiary banks is well capitalized, well managed, and has at least a “satisfactory” CRA rating. A financial holding company must provide notice to the Federal Reserve Board within 30 days after commencing activities previously determined by statute or by the Federal Reserve Board and Department of the Treasury to be permissible. 18 We have not submitted notice to the Federal Reserve Board of our intent to be deemed a financial holding company. However, we are not precluded from submitting a notice in the future should we wish to engage in activities only permitted to financial holding companies. Privacy Requirements. Under the Gramm-Leach-Bliley Act, or the GLB Act, all financial institutions are required to establish policies and procedures to restrict the sharing of non-public customer data with non-affiliated parties and to protect customer data from unauthorized access. In addition, the Fair Credit Reporting Act of 1970, or FCRA, includes many provisions concerning national credit reporting standards and permits consumers, including customers of the Bank, to opt out of information-sharing for marketing purposes among affiliated companies. The Fair and Accurate Credit Transactions Act of 2004 amended certain provisions of the FCRA and requires banks and other financial institutions to notify their customers if they report negative information about them to a credit bureau or if they are granted credit on terms less favorable than those generally available. The Bank currently has a privacy protection policy in place and believes such policy is in compliance with the regulations. The Bank Secrecy Act and Related Anti-Money Laundering and Anti-Terrorist Financing Legislation. The Bank Secrecy Act, or the BSA, provides, in part, for the facilitation of information sharing among governmental entities and financial institutions for the purpose of combating terrorism and money laundering by enhancing anti-money laundering and financial transparency laws, as well as enhanced information collection tools and enforcement mechanics for the U.S. government, including: (1) requiring standards for verifying customer identification at account opening; (2) rules to promote cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering; (3) reports by nonfinancial trades and businesses filed with the Treasury Department’s Financial Crimes Enforcement Network for transactions exceeding $10,000; (4) filing suspicious activities reports by brokers and dealers if they believe a customer may be violating U.S. laws and regulations; and (5) requiring enhanced due diligence requirements for financial institutions that administer, maintain, or manage private bank accounts or correspondent accounts for non-U.S. persons. Title III of the USA PATRIOT Act of 2001 amended the BSA and incorporates anti-terrorist financing provisions into the requirements of the BSA and its implementing regulations. Among other things, the USA PATRIOT Act requires all financial institutions, including us, to institute and maintain a risk-based anti-money laundering compliance program that includes a customer identification program, provides for information sharing with law enforcement and between certain financial institutions by means of an exemption from the privacy provisions of the GLB Act, prohibits U.S. banks and broker-dealers from maintaining accounts with foreign “shell” banks, establishes due diligence and enhanced due diligence requirements for certain foreign correspondent banking and foreign private banking accounts and imposes additional record keeping requirements for certain correspondent banking arrangements. The USA PATRIOT Act also grants broad authority to the Secretary of the Treasury to take actions to combat money laundering, and federal bank regulators are required to evaluate the effectiveness of an applicant in combating money laundering in determining whether to approve any application submitted by a financial institution. The Office of Foreign Assets Control, or OFAC, which is a division of the Treasury Department, is responsible for helping to ensure that U.S. entities do not engage in transactions with “enemies” of the United States, as defined by various Executive Orders and Acts of Congress. OFAC has sent, and will send, our banking regulatory agencies lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts. If the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the Bank must freeze such account, file a suspicious activity report and notify OFAC. We have established policies and procedures to ensure compliance with the federal anti-laundering provisions. Proposed Legislation and Regulatory Action. New statutes, regulations and guidance are regularly proposed that contain wide-ranging potential changes to the statutes, regulations and competitive relationships of financial institutions operating and doing business in the United States. We cannot predict whether or in what form any proposed regulation or statute will be adopted or the extent to which our business may be affected by any new regulation or statute. Effect of Governmental Monetary Policies. Our earnings will be affected by domestic economic conditions and the monetary and fiscal policies of the U.S. government and its agencies. The Federal 19 Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession. The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of U.S. government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject. We cannot predict the nature or impact of future changes in monetary and fiscal policies. Taxation Federal Taxation General: We are subject to federal income taxation in the same general manner as other corporations, with limited exceptions. The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to us. Method of Accounting: For Federal income tax purposes, we report income and expenses on the accrual method of accounting and use tax year ending December 31 for filing federal income tax returns. Alternative Minimum Tax: The Internal Revenue Code of 1986, as amended (the “Code”), imposes an alternative minimum tax (“AMT”) at a rate of 20.0% on a base of regular taxable income plus certain tax preferences which we refer to as “alternative minimum taxable income.” The AMT is payable to the extent such alternative minimum taxable income is in excess of an exemption amount and the AMT exceeds the regular income tax. Net operating losses can offset no more than 90.0% of alternative minimum taxable income. Certain AMT payments may be used as credits against regular tax liabilities in future years. We have not been subject to the AMT and have no such amounts available as credits for carryover. Net Operating Loss Carryovers: A corporation may carry back net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. At December 31, 2015, we had $3.3 million of net operating loss carryforwards for federal income tax purposes. The carryovers were transferred to the Company upon the merger with The Wilton Bank and Quinnipiac Bank & Trust. Corporate Dividends-Received Deduction: The Company may exclude from its income 100.0% of dividends received from the Bank as a member of the same affiliated group of corporations. The corporate dividends received deduction is 80.0% in the case of dividends received from corporations with which a corporate recipient does not file a consolidated tax return, and corporations which own less than 20.0% of the stock of a corporation distributing a dividend may deduct only 70.0% of dividends received or accrued on their behalf. The Company and the Bank are not currently under audit with respect to their federal tax returns. State Taxation Connecticut We are subject to the Connecticut corporation business tax. The Connecticut corporation business tax is based on the federal taxable income before net operating loss and special deductions and makes certain modifications to federal taxable income to arrive at Connecticut taxable income. Connecticut taxable income is multiplied by the state tax rate (7.5% for the fiscal years ending December 31, 2015 and 2014) to arrive at Connecticut income tax. On October 8, 2015, the Bank formed a passive investment company, Bankwell Loan Servicing Group, Inc., in accordance with Connecticut tax laws, which permit transfers of real estate collateralized loans to such subsidiaries. The related earnings of the subsidiary, and any dividends it pays to the parent, are not subject to Connecticut income tax. The formation of the passive investment company will reduce state income taxes in the future. The Company and the Bank are not currently under audit with respect to their state tax returns. 20 Item 1A. Risk Factors Risks Relating to Our Business As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions. Our businesses and operations, which primarily consist of lending money to customers in the form of loans, borrowing money from customers in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States. If the U.S. economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium and long term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and investors in the United States. In addition, economic conditions in foreign countries, including uncertainty over the stability of the euro currency, could affect the stability of global financial markets, which could hinder U.S. economic growth. Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. The current economic environment is also characterized by interest rates at historically low levels, which impacts our ability to attract deposits and to generate attractive earnings through our investment portfolio. All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable. Our business is also significantly affected by monetary and related policies of the U.S. federal government and its agencies. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control. Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and prospects. liquidity and/or depressed prices in the secondary market for mortgage loans, We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses. The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions. Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. Finally, many of our loans are made to middle market businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers. A failure to effectively measure and limit the credit risk associated with our loan portfolio could have a material adverse effect on our business, financial condition, results of operations and future prospects. Our allowance for loan losses may not be adequate to absorb losses inherent in our loan portfolio, which could have a material adverse effect on our financial condition and results of operations. We maintain an allowance for loan losses to provide for nonperforming loans. Maintaining an adequate allowance for loan losses is critical to our financial results and condition. The level of our allowance for loan losses reflects management’s continuing evaluation of general economic conditions, diversification and seasoning of the loan portfolio, historic loss experience, identified credit problems, delinquency levels and adequacy of collateral. The determination of the appropriate level of the allowance for loan losses is inherently highly subjective and requires us to make significant estimates of and assumptions regarding current credit risks and future trends, all of which may undergo material changes. Inaccurate management assumptions, continuing deterioration of economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require us to increase our allowance for loan losses. In addition, our regulators, as an integral part of their examination process, review our loans and the adequacy of our allowance for loan losses and may direct us to make additions to our allowance for loan losses based on 21 their judgments about information available to them at the time of their examination. Further, if actual charge-offs in future periods exceed the amounts allocated to our allowance for loan losses, we may need additional provision for loan losses to restore the adequacy of our allowance for loan losses. If we are required to materially increase our level of allowance for loan losses for any reason, such increase could have a material adverse effect on our business, financial condition, results of operations and future prospects. At December 31, 2015, our allowance for loan losses as a percentage of total loans was 1.23% and as a percentage of total non-accrual loans was 373.76%. Although we believe that our allowance for loan losses is adequate to cover known and probable incurred losses included in the portfolio, we cannot assure you that we will not further increase our allowance for loan losses or that our regulators will not require us to increase it. Either of these occurrences could adversely affect our earnings. If delinquencies and defaults increase, we could experience an increase in delinquencies and charge-offs and we may be required to increase our allowance for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and prospects. Our concentration of large loans to certain borrowers may increase our credit risk. Our growth over the last several years has been partially attributable to our ability to originate and retain loans. Many of these loans have been made to a small number of borrowers, resulting in a high concentration of large loans to certain borrowers. We have established an informal, internal lending limit to one borrower/relationship subject to the statutory maximum of 15% of our unimpaired capital and reserves for loan loss and up to 40% for commercial real estate-secured loans. However, we may, under certain circumstances, consider going above this internal limit in situations where we are confident that (1) the loan to value ratio, other characteristics or the structure of the loan is such that it is a lower risk than standard, (2) we will be able to sell to another institution some portion of the relationship debt as either a whole loan or participation, (3) there is sufficient diversification in the ownership structure of the proposed borrowing entity that the involvement of one party to whom we have extended other debt will not significantly negatively impact the proposed loan’s performance in a downturn or (4) the proposed loan is secured by particularly strong collateral, for example, a commercial real estate loan secured by strong tenants with the borrowing entity. As of long-term leases, December 31, 2015, our five largest relationships ranged from approximately $22.3 million to $51.0 million, and comprised in the aggregate, approximately 14.3% of our loan portfolio. In addition to other typical risks related to any loan, such as deterioration of the collateral securing the loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay their loan obligations for any reason, our nonperforming loans and our allowance for loan losses could increase significantly, which could adversely and materially affect our business, financial condition and results of operations. thereby reducing the reliance on the principals of Our commercial real estate loan, commercial loan and construction loan portfolios expose us to risks that may be greater than the risks related to our other mortgage loans. Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties. These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service. Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful development of their properties, in addition to the factors affecting residential real estate borrowers. These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity. A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner. These loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate. If we foreclose on these loans, our holding period for the collateral typically is longer than for a 1 – 4 family the collateral. Additionally, residential property because there are fewer potential purchasers of 22 non-owner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers. Accordingly, charge-offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios. Commercial loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses. These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself. In addition, the assets securing the loans have the following characteristics: (a) they depreciate over time, (b) they are difficult to appraise and liquidate, and (c) they fluctuate in value based on the success of the business. Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest), the availability of permanent takeout financing and the builder’s ability to ultimately sell the property. During the construction phase, a number of factors can result in delays and cost overruns. If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by seizure of collateral. Our underwriting, review and monitoring cannot eliminate all of the risks related to these loans. Unexpected deterioration in the credit quality of our commercial real estate loan, commercial loan or construction loan portfolios would require us to increase our provision for loan losses, which would reduce our profitability and could have a material adverse effect on our business, financial condition, results of operations and future prospects. Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future. As a result of our growth over the past recent years, a large portion of loans in our loan portfolio and of our lending relationships are of relatively recent origin. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning”. As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned and may not serve as a reliable basis for predicting the health and nature of our loan portfolio, including net charge-offs and the ratio of nonperforming assets in the future. Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability. As a result, it may be difficult to predict the future performance of our loan portfolio. If delinquencies and defaults increase, we could experience an increase in delinquencies and charge-offs and we may be required to increase our allowance for loan losses, which could have a material adverse effect on our business, financial condition, results of operations and prospects. A prolonged downturn in the real estate market could result in losses and adversely affect our profitability. As of December 31, 2015, approximately 85% of our loan portfolio was composed of commercial and consumer real estate loans. The real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended. A decline in real estate values could impair the value of our collateral and our ability to sell the collateral upon any foreclosure, which would likely require us to increase our provision for loan losses. In the event of a default with respect to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan. If we are required to re-value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our allowance for loan losses, our profitability could be adversely affected, which could have a material adverse effect on our business, financial condition, results of operations and prospects. We are subject to interest rate risk that could negatively impact our profitability. Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between our interest income on interest earning assets, such as loans and investment securities, and our interest expense on interest-bearing liabilities, such as deposits and 23 borrowings. Our interest rate sensitivity profile was liability sensitive as of December 31, 2015, meaning that we estimate our net interest income would decrease from rising interest rates than from falling interest rates. Interest rates are highly sensitive to many factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies and, in particular, the U.S. Federal Reserve Board, or the Federal Reserve, or the Federal Reserve Board. Changes in monetary policy, including changes in interest rates, could influence not only the interest we receive on loans and securities and the interest we pay on deposits and borrowings, but such changes could also affect our ability to originate loans and obtain deposits, the fair value of our financial assets and liabilities, and the average duration of our assets. If the interest rates paid on deposits and other borrowings increase at a faster rate than the interest rates received on loans and other investments, our net interest income, and therefore net income, could be adversely affected. A continuation of the current levels of historically low interest rates could cause the spread between our loan yields and our deposit rates paid to compress our net interest margin and our net income could be adversely affected. Further, any substantial, unexpected, prolonged change in market interest rates could have a material adverse effect on our business, financial condition, results of operations and future prospects. In addition, an increase in interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations. These circumstances could not only result in increased loan defaults, foreclosures and charge-offs, but also necessitate further increases to our allowance for loan losses, each of which could have a material adverse effect on our business, results of operations, financial condition and future prospects. Our business is concentrated in Fairfield and New Haven Counties, Connecticut, and we are more sensitive than our more geographically diversified competitors to adverse changes in the local economy. We conduct substantially all of our operations in Fairfield and New Haven Counties, Connecticut. Substantially all of the real estate loans in our loan portfolio are secured by properties located in Fairfield County and a smaller number in New Haven County and the New York metropolitan area. In addition, as of December 31, 2015, the vast majority of the loans in our loan portfolio (measured by dollar amount) were made to borrowers who live or conduct business in the New York metropolitan area. We compete against a number of financial institutions who maintain significant operations located outside of the New York metropolitan area and outside the State of Connecticut. Accordingly, any regional or local economic downturn, or natural or man-made disaster, that affects Connecticut or the New York metropolitan area or existing or prospective property or borrowers in Connecticut or the New York metropolitan area may affect us and our profitability more significantly and more adversely than our more geographically diversified competitors, which could cause a material adverse effect on our business, financial condition, results of operations and prospects. Strong competition within our market area could reduce our profits and slow growth. Competition in the financial services industry in our market and the surrounding area is strong. Numerous commercial banks, savings banks and savings associations maintain offices or are headquartered in or near our primary market area. Commercial banks, savings banks, savings associations, money market funds, mortgage brokers, finance companies, credit unions, insurance companies, investment firms and private lenders compete with us for various segments of our business. These competitors often have far greater resources than we do and are able to conduct more intensive and broader based promotional efforts to reach both commercial and individual customers. Our ability to compete successfully will depend on a number of factors, including, among other things: • • • • Our ability to build and maintain long-term customer relationships while ensuring high ethical standards and safe and sound banking practices; The scope, relevance and pricing of products and services that we offer; Customer satisfaction with our products and personalized services; Industry and general economic trends; and 24 • Our ability to keep pace with technological advances and to invest in new technology. Increased competition could require us to increase the rates we pay on deposits or lower the rates we offer on loans, which could reduce our profitability. We derive a majority of our business from our primary market area, of Fairfield and New Haven Counties, Connecticut. Our failure to compete effectively in our primary market could cause us to lose market share and could have a material adverse effect on our business, financial condition, results of operations and future prospects. We are a community bank and our ability to maintain our reputation is critical to the success of our business. We are a community bank, and our reputation is one of the most valuable components of our business. In September 2013, following the merger of The Bank of Fairfield into The Bank of New Canaan, we combined these brands as well as Stamford First Bank under one single name, Bankwell Bank. Although we believe that operating under a single name will help us to achieve operational efficiencies, strengthen our brand and grow our institution, there can be no assurance that this brand change will be successful or that integration of the banks will not compromise customer confidence or provide marketing opportunities for our competitors. We strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results may be materially adversely affected. We may not be able to execute our management team’s growth strategy. As part of our management team’s growth strategy, we pursue a business plan focused on the development and growth of our franchise in our existing market and surrounding areas. In addition to pursuing organic growth, a significant element of our management team’s strategy will be to acquire other branches, whole financial institutions or related lines of business. We intend to actively seek potential acquisition opportunities. There are numerous risks that may make it difficult for us to execute this growth strategy and we cannot assure you that we will be successful in executing any part of our management team’s strategy or that we will be able to maintain our historical rate of growth. Challenges we will face include obtaining regulatory approvals with respect to acquisitions, assuring that we will not become subject to regulatory actions in the future that could restrict our growth, identifying appropriate targets for acquisitions, negotiating acquisitions on terms that are acceptable to us, and encountering competition for acquisitions from financial institutions and other entities with similar business strategies that have greater financial resources, relevant experience and more personnel than us. Accordingly, there can be no assurance that we will be successful in completing future acquisitions at all or on terms that are acceptable to us. Our ability to grow will be limited if we are unable to successfully make acquisitions in the future. Some institutions we may acquire may have distressed assets and there can be no assurance that we would be able to realize the value we predict from these assets or that we would make sufficient provision for future losses in the value of, or accurately estimate the future write downs taken in respect of, these assets. The decline in home prices in many markets across the United States and weakening general economic conditions may result in increases in delinquencies and losses in the loan portfolios and other assets of financial institutions that we may acquire in amounts that exceed our initial forecasts developed during the due diligence investigation prior to acquiring those institutions. In addition, the allowance for loan losses of institutions we may acquire may prove inadequate or be negatively affected, and asset values may be impaired, in the future due to factors we cannot predict, including significant deterioration in economic conditions and further declines in collateral values and credit quality indicators. Any of these events could adversely affect the financial condition, liquidity, capital position and value of any institutions that we acquire and of the Bank as a whole. We may not be able to overcome the integration and other risks associated with acquisitions, which could adversely affect our growth and profitability. We may from time to time consider acquisition opportunities that we believe complement our activities and have the ability to enhance our profitability. In addition to The Wilton Bank and Quinnipiac transactions completed in 2013 and 2014, our acquisition activities could be material to our business and involve a number of risks, including the following: 25 • • • • • • • • • • • Incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business; Using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets; Intense competition from other banking organizations and other inquirers for acquisitions; Potential exposure to unknown or contingent liabilities of banks and businesses we acquire; The time and expense required to integrate the operations and personnel of the combined businesses; Experiencing higher operating expenses relative to operating income from the new operations; Creating an adverse short-term effect on our results of operations; Losing key employees and customers as a result of an acquisition that is poorly received; Significant problems relating to the conversion of the financial and customer data of the entity; Inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated benefits of the acquisition; or Risks of impairment to goodwill or other than temporary impairment. Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization, may continue to have such effects over a longer period. We may not be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions, and any acquisition we may consider will be subject to prior regulatory approval. Our inability to overcome these risks could have an adverse effect on our profitability, return on equity and return on assets, our ability to implement our business strategy and enhance shareholder value, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and prospects. Further, if we experience difficulties with the integration process, the anticipated benefits of the investment or acquisition transaction may not be realized fully or at all or may take longer to realize than expected. As a result of an investment or acquisition transaction, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition and results of operations, which could cause you to lose some or all of your investment. We must conduct due diligence investigations of target institutions we intend to acquire. Intensive due diligence is time consuming and expensive due to the operations, accounting, finance and legal professionals who must be involved in the due diligence process. Even if we conduct extensive due diligence on a target institution with which we combine, this diligence may not reveal all material issues that may affect a particular target institution, and factors outside the control of the target institution and outside of our control may later arise. If, during our diligence process, we fail to identify issues specific to a target institution or the environment in which the target institution operates, we may be forced to later write down or write off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses. These charges may also occur if we are not successful in integrating and managing the operations of the target institution with which we combine. In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming preexisting debt held by a target institution or by virtue of our obtaining debt financing. Resources could be expended in considering or evaluating potential acquisitions that are not consummated, which could materially and adversely affect subsequent attempts to locate and acquire or merge with another business. We anticipate that the process of identifying and investigating institutions for potential acquisitions and the negotiation, drafting and execution of relevant agreements, disclosure documents and other 26 instruments will require substantial management time and attention and substantial costs for accountants, attorneys and others. If a decision is made not to complete a specific acquisition transaction, the costs incurred up to that point for the proposed transaction likely would not be recoverable. Furthermore, even if an agreement is reached relating to a specific target institution, we may fail to consummate the transaction for any number of reasons, including those beyond our control. Any such event will result in a loss to us of the related costs incurred, which could materially and adversely affect subsequent attempts to locate and acquire or merge with another institution. Our lending limit may restrict our growth and prevent us from effectively implementing our business strategy. We are limited in the amount we can loan to a single borrower by the amount of our capital. Under Connecticut banking law, the total direct or indirect liabilities of any one obligor that are not fully secured, however incurred, to any Connecticut bank, exclusive of such bank’s investment in the investment securities of such obligor, shall not exceed at the time incurred 15% of the equity capital and reserves for loan and lease losses of such bank. The total direct or indirect liabilities of any one obligor that are fully secured, however incurred, to any Connecticut bank, exclusive of such bank’s investment in the investment securities of such obligor, shall not exceed at the time incurred 10% of the equity capital and reserves for loan and lease losses of such bank, provided this limitation shall be separate from and in addition to the limitation on liabilities that are not fully secured. We have also established an informal, internal lending limit to one borrower/relationship subject to the statutory maximum of 15% of our unimpaired capital and reserves for loan loss and up to 40% for commercial real estate-secured loans. Based upon our current capital levels and our informal, internal limit on loans, the amount we may lend both in the aggregate and to any one borrower is significantly less than that of many of our competitors and may discourage potential borrowers who have credit needs in excess of our lending limit from doing business with us. We accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy may not always be available. If we are unable to compete effectively for loans from our target customers, we may not be able to effectively implement our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and future prospects. We are dependent on our executive management team and other key employees and we could be adversely affected by the unexpected loss of their services. We are led by an experienced core management team with substantial experience in the market that we serve, and our operating strategy focuses on providing products and services through long-term relationship managers. Accordingly, our success depends in large part on the performance of our key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management. Competition for employees is intense, and the process of locating key personnel with the combination of skills and attributes required to execute our business plan may be lengthy. In particular, we believe that retaining the services and skills of our management team, including Mr. Gruseke, Ms. DeWyngaert, Ms. Chivily and Mr. Verrico is important to our success. The unexpected loss of services of any of these or other key personnel could have an adverse impact on us because of their skills, knowledge of our market, years of industry experience and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, which could cause a material adverse effect on our business, financial condition, results of operations and prospects. The fair value of our investment securities can fluctuate due to factors outside of our control. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. These factors include, but are not limited to, rating agency actions in respect of the securities, defaults by the issuer or with respect to the underlying securities, and changes in market interest rates and continued instability in the capital markets. Any of these factors, among others, could cause other-than-temporary impairments and realized and/or unrealized losses in future periods and declines in other comprehensive income, which could materially and adversely affect our business, results of operations, financial condition and prospects. The process for determining whether impairment of a security is other-than-temporary usually requires complex, subjective judgments about the future financial performance and liquidity of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. 27 We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition. When mortgage loans are sold, whether as whole loans or pursuant to a securitization, we are required to make customary representations and warranties to purchasers, guarantors and insurers, including government-sponsored entities, about the mortgage loans and the manner in which they were originated. Whole loan sale agreements require us to repurchase or substitute mortgage loans, or indemnify buyers against losses, in the event we breach these representations or warranties. In addition, we may be required to repurchase mortgage loans as a result of early payment default of the borrower on a mortgage loan. If repurchase and indemnity demands increase and such demands are valid claims and are in excess of our provision for potential losses, our liquidity, results of operations and financial condition may be adversely affected. Our financial results depend on management’s selection of accounting methods and certain assumptions and estimates. Our financial condition and results of operations are based on our consolidated financial statements, which have been prepared in accordance with Accounting Principles Generally Accepted in the United States, or GAAP, and with general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of certain assets and liabilities, disclosure of contingent assets and liabilities and the reported amount of related revenues and expenses. Certain accounting policies inherently are based to a greater extent on estimates, assumptions and judgments of management and, as such, have a greater possibility of producing results that could be materially different than originally reported. They require management to make subjective or complex judgments, estimates or assumptions, and changes in those estimates or assumptions could have a significant impact on our consolidated financial statements. These critical accounting policies include the fair value of acquired assets, the allowance for loan losses, stock-based compensation and derivative instrument valuation. Because of the uncertainty of estimates involved in these matters, we may be required to significantly increase the allowance for loan losses or sustain loan losses that are significantly higher than the reserve provided or otherwise incur charges that could have a material adverse effect on our business, financial condition, results of operations and future prospects. We may be adversely affected by the soundness of other financial institutions. Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including broker-dealers, commercial banks, investment banks, and other financial intermediaries. Further, our private banking channel relies on relationships with a number of other financial institutions for referrals. As a result, declines in the financial condition of, or even rumors or questions about, one or more financial institutions, financial service companies or the financial services industry generally, may lead to market-wide liquidity, asset quality or other problems and could lead to losses or defaults by us or by other institutions. These problems, losses or defaults could have a material adverse effect on our business, financial condition, results of operations and future prospects. We rely on third parties to provide key components of our business infrastructure, and failure of these parties to perform for any reason could disrupt our operations. Our business depends on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party servicers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and subject us to additional regulatory scrutiny and 28 possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and prospects. We face various technological risks that could adversely affect our business. We rely on communication and information systems to conduct business. Potential failures, interruptions or breaches in system security could result in disruptions or failures in our key systems, such as general ledger, deposit or loan systems. The risk of electronic fraudulent activity within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting bank accounts and other customer information is on the rise. We have developed policies and procedures aimed at preventing and limiting the effect of failure, interruption or security breaches, including cyber-attacks of information systems; however, there can be no assurance that these incidences will not occur, or if they do occur, that they will be appropriately addressed. The occurrence of any failures, interruptions or security breaches, including cyber-attacks of our information systems could damage our reputation, result in the loss of business, subject us to increased regulatory scrutiny or subject us to civil litigation and possible financial liability, any of which could have an adverse effect on our results of operation and financial condition. We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, our borrowers, other vendors and our employees. When we originate loans, we rely heavily upon information supplied by third parties, including the information contained in the loan application, property appraisal, title information and employment and income documentation. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected. Whether a misrepresentation is made by the loan applicant, the borrower, another third party or one of our employees, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unsaleable or subject to repurchase if it is sold prior to detection of the misrepresentation, and the persons and entities involved are often difficult to locate and it is often difficult to collect any monetary losses that we have suffered from them. We have controls and processes designed to help us identify misrepresented information in our loan origination operations. We cannot assure you, however, that we have detected or will detect all misrepresented information in our loan originations. Unauthorized access, cyber-crime and other threats to data security may require significant resources, harm our reputation, and adversely affect our business. We necessarily collect, use and hold personal and financial information concerning individuals and businesses with which we have a banking relationship. Threats to data security, including unauthorized access and cyber-attacks rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with customer expectations, statutory and regulatory privacy and other requirements. It is difficult or impossible to defend against every risk being posed by changing technologies, as well as criminal intent on committing cyber-crime. Increasing sophistication of cyber-criminals and terrorists make keeping up with new threats difficult and could result in a breach. Controls employed by our information technology department and our other employees and vendors could prove inadequate. We could also experience a breach due to intentional or negligent conduct on the part of employees or other internal sources, software bugs or other technical malfunctions, or other causes. As a result of any of these threats, our customer accounts may become vulnerable to account takeover schemes or cyber-fraud. Our systems and those of our third-party vendors may also become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware. A breach of our security that results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, and reputational damage, any of which could have a material adverse effect on our business, results of operations, financial condition and future prospects. 29 We are subject to environmental liability risk associated with our lending activities. In the course of our business, we may purchase real estate, or we may foreclose on and take title to real estate. As a result, we could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination or may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. Any liabilities could cause a material adverse effect on our business, financial significant environmental condition, results of operations and future prospects. We may incur impairment to goodwill. We test our goodwill for impairment at least annually. Significant negative industry or economic trends, reduced estimates of future cash flows or disruptions to our business, could indicate that goodwill might be impaired. Our valuation methodology for assessing impairment requires management to make judgments and assumptions based on historical experience and to rely on projections of future operating performance. future operating results and cash flows may vary significantly from actual results. Projections of Additionally, if our analysis results in impairment to our goodwill, we would be required to record a non-cash charge to earnings in our financial statements during the period in which such impairment is determined to exist. Any such charge could have a material adverse effect on our results of operations. Risks Applicable to the Regulation of our Industry We operate in a highly regulated environment, which could have a material and adverse impact on our operations and activities, financial condition, results of operations, growth plans and future prospects. Banking is highly regulated under federal and state law. We are subject to extensive regulation and supervision that governs almost all aspects of our operations. As a registered bank holding company, we are subject to supervision, regulation and examination by the Federal Reserve. As a commercial bank chartered under the laws of Connecticut, the Bank is subject to supervision, regulation and examination by the State of Connecticut Department of Banking and the FDIC. The primary goals of the bank regulatory system are to maintain a safe and sound banking system and to facilitate the conduct of sound monetary policy. This system is intended primarily for the protection of the FDIC’s Deposit Insurance Fund and bank depositors, rather than our shareholders and creditors. The banking agencies have broad enforcement power over bank holding companies and banks, including the authority, among other things, to enjoin “unsafe or unsound” practices, require affirmative action to correct any violation or practice, issue administrative orders that can be judicially enforced, direct increases in capital, direct the sale of subsidiaries or other assets, limit dividends and distributions, restrict growth, assess civil monetary penalties, remove officers and directors, and, with respect to banks, terminate our charter, terminate our deposit insurance or place the Bank into conservatorship or receivership. In general, these enforcement actions may be initiated for violations of laws and regulations or unsafe or unsound practices. Compliance with the myriad laws and regulations applicable to our organization can be difficult and costly. In addition, these laws, regulations and policies are subject to continual review by governmental authorities, and changes to these laws, regulations and policies, including changes in interpretation or implementation of these laws, regulations and policies, could affect us in substantial and unpredictable ways and often impose additional compliance costs. Further, any new laws, rules and regulations, such as the Dodd-Frank Act, could make compliance more difficult or expensive. All of these laws and regulations, and the supervisory framework applicable to our industry, could have a material adverse impact on our operations and activities, financial condition, results of operations, growth plans and future prospects. Federal and state regulators periodically examine our business and we may be required to remediate adverse examination findings. The Federal Reserve, the FDIC and the Connecticut Department of Banking periodically examine our business, including our compliance with laws and regulations. If, as a result of an examination, a regulatory 30 agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. These actions include the power to enjoin “unsafe or unsound” practices, to require affirmative action to correct any conditions resulting from any violation or practice, to issue an administrative order that can be judicially enforced, to direct an increase in our capital, to restrict our growth, to assess civil monetary penalties against our officers or directors, to remove officers and directors and, if it is concluded that such conditions cannot be corrected or there is an imminent risk of loss to depositors, to terminate our deposit insurance and place us into receivership or conservatorship. Any regulatory action against us could have a material adverse effect on our business, results of operations, financial condition and future prospects. The Bank’s FDIC deposit insurance premiums and assessments may increase. The deposits of the Bank are insured by the FDIC up to legal limits and, consequently, subject it to the payment of FDIC deposit insurance assessments. The Bank’s regular assessments are determined by its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses. The Deposit Insurance Fund has been put under significant pressure as a result of the financial crisis that began in 2008. The FDIC increased deposit insurance assessment rates and charged a special assessment to all FDIC-insured financial institutions, in order to maintain a strong funding position and restore the reserve ratios of the Deposit Insurance Fund. Any future special assessments, increases in assessment rates or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could materially and adversely affect our business, financial condition, results of operations and prospects. New capital rules that were issued in 2015 generally require insured depository institutions and their holding companies to hold more capital. The impact of the new rules on our financial condition and operations is uncertain but could be materially adverse. On July 2, 2013, the Federal Reserve adopted a final rule for the Basel III capital framework and, on July 9, 2013, the OCC also adopted a final rule and the FDIC adopted the same provisions in the form of an “interim final rule”. These rules substantially amend the regulatory risk-based capital rules applicable to us. The rules phase in over time and began in 2015 and will become fully effective in 2019. The rules apply to the Company as well as the Bank. See “Supervision and Regulation” under Item I Business for further details. The federal banking agencies have proposed new liquidity standards that could result in our having to lengthen the term of our funding, restructure our business lines by forcing us to seek new sources of liquidity for them, and/or increase our holdings of liquid assets. As part of the Basel III capital process, the Basel Committee on Banking Supervision has finalized a new liquidity standard, a liquidity coverage ratio, which requires a banking organization to hold sufficient “high quality liquid assets” to meet liquidity needs for a 30 calendar day liquidity stress scenario. A net stable funding ratio, which imposes a similar requirement over a one-year period, is under consideration. The U.S. banking regulators have proposed a liquidity coverage ratio for systemically important banks. Although the proposal would not apply directly to us, the substance of the proposal may impact the regulators’ assessment of our liquidity. We could be required to reduce our holdings of illiquid assets, which may adversely affect our results and financial condition. The Bank is subject to further reporting requirements under FDIC regulations. We are subject to further reporting requirements under the rules of the FDIC for the year ended December 31, 2015 as the Bank’s total assets exceed $1.0 billion, including a requirement for management to prepare a report that contains an assessment by management of the Bank’s effectiveness of internal control structure and procedures for financial reporting as of the end of such fiscal year. In addition, we are required to obtain an independent public accountant’s attestation report concerning its internal control structure over financial reporting. The rules for management to assess the Bank’s internal controls over financial reporting are complex, and require significant documentation, testing and possible remediation. 31 The effort to comply with regulatory requirements relating to internal controls will likely cause us to incur increased expenses and will cause a diversion of management’s time and other internal resources. If the Bank cannot favorably assess the effectiveness of its internal controls over financial reporting, or if its independent registered public accounting firm is unable to provide an unqualified attestation report on the Bank’s internal controls, the price of our common stock as well as investor confidence could be adversely affected and we may be subject to additional regulatory scrutiny. We are subject to numerous laws designed to protect consumers, including the Community Reinvestment Act, or CRA, and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions. Various laws impose nondiscriminatory lending requirements on financial institutions, including the CRA, the Equal Credit Opportunity Act and the Fair Housing Act. A successful regulatory challenge to an institution’s performance under the CRA or fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and prospects. We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations. Financial institutions are required to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate under The Bank Secrecy Act, The USA PATRIOT ACT of 2001 and certain other laws and regulations. Significant civil penalties can be assessed by a variety of regulators and governmental agencies for violations of these laws and regulations. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could materially and adversely affect our business, financial condition, results of operations and prospects. 32 Item 1B. Unresolved Staff Comments None. Item 2. Properties The Bank’s main office is located at 208 Elm Street in New Canaan, Connecticut. The property is leased by us until 2016, with three remaining five-year renewal options. In July 2012, we leased additional space adjacent to 208 Elm Street at 220 Elm Street primarily for our executive management offices. The initial term expires in 2018, with one five-year renewal option. We also lease office space for each of our branch offices in New Canaan, Stamford, Norwalk, Fairfield and North Haven Connecticut, and our loan production office in Bridgeport. The leases for our facilities have terms expiring at dates ranging from 2016 to 2028, although certain of the leases contain options to extend beyond these dates. We own the Wilton and Hamden branch offices. We believe that our current facilities are adequate for our current level of operations. Each lease is at market rate based on similar properties in the applicable market area. We believe that we have the necessary infrastructure in place to support our projected growth. Our branch offices are located as follows: Branch Elm Street Cherry Street Stamford Sasco Hill Black Rock Wilton Norwalk Hamden North Haven Address 208 Elm Street New Canaan, CT 06840 156 Cherry Street New Canaan, CT 06840 612 Bedford Street Stamford, CT 06901 One Sasco Hill Road Fairfield, CT 06824 2220 Black Rock Turnpike Fairfield, CT 06825 47 Old Ridgefield Road Wilton, CT 06897 370 Westport Avenue Norwalk, CT 06851 2704 Dixwell Avenue Hamden, CT 06518 24 Washington Avenue North Haven, CT 06473 Owned or Leased Lease (expires 2016) Lease (expires 2016) Lease (expires 2020) Lease (expires 2023) Lease (expires 2023) Own Lease (expires 2028) Own Lease (expires 2016) Item 3. Legal Proceedings From time to time we are a party to various litigation matters incidental to the conduct of our business. We are not presently party to any legal proceedings the resolution of which we believe would have a material adverse effect on our business, future prospects, financial condition, liquidity, results of operation, cash flows or capital levels. Item 4. Mine Safety Disclosures Not applicable. 33 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities The Company’s Common Stock has traded on the NASDAQ Global Market under the Symbol “BWFG” since the completion of its initial public offering on May 15, 2014. Prior to the initial public offering, our common stock was quoted on the OTC Bulletin Board, or OTCBB, under the symbol “BWFG”. High and low bid prices reported on the OTCBB reflect inter-dealer quotations without retail markup, markdown or commissions, and may not necessarily represent actual transactions. The following table sets forth the high and low sales price and the dividends per share of the Company’s Common Stock for the last two fiscal years for each quarter as reported on the NASDAQ Global Market subsequent to the initial public offering and on the OTCBB based upon information provided by OTCBBB or other reliable sources prior to the initial public offering. 2015 2014 Sales Price High Low Cash Dividends Declared Sales Price High Low Cash Dividends Declared Quarter Ended March 31 . . . . . . . . . . . . . . . . . . . . . . . . . . June 30 . . . . . . . . . . . . . . . . . . . . . . . . . . . September 30 . . . . . . . . . . . . . . . . . . . . . . . December 31 . . . . . . . . . . . . . . . . . . . . . . . $19.50 18.29 18.39 19.92 $19.26 17.83 18.28 19.66 $ — $22.00 17.40 18.99 21.00 — — 0.05 $18.80 16.55 18.75 20.60 $— — — — There were approximately 329 shareholders of record of BWFG Common Stock as of December 31, 2015. This number does not reflect the number of persons or entities holding stock in nominee name through banks, brokerage firms or other nominees. The Company’s shareholders are entitled to dividends when and if declared by the board of directors, out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required for the Bank to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. Common Stock Performance Graph The performance graph below compares the Company’s cumulative shareholder return on its common stock since May 15, 2014, the IPO date to the cumulative return of the NASDAQ Composite Index and the NASDAQ Bank Index. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100. There can be no assurance that our stock performance in the future will continue with the same or similar trend depicted in the graph below. We will not make or endorse any predictions as to future stock performance. 34 Bankwell Financial Group, Inc. Total Return Performance Bankwell Financial Group, Inc. Nasdaq Composite Index Nasdaq Bank Index e u l a V x e d n I 125.00 120.00 115.00 110.00 105.00 100.00 95.00 90.00 05/15/14 06/30/14 09/30/14 12/31/14 03/31/15 06/30/15 09/30/15 12/31/15 Index 05/15/14 06/30/14 09/30/14 12/31/14 03/31/15 06/30/15 09/30/15 12/31/15 Bankwell Financial Group, Inc. . . 100.00 Nasdaq Composite Index . . . . . 100.00 Nasdaq Bank Index . . . . . . . . . 100.00 94.44 108.33 107.01 105.39 110.42 101.91 116.67 116.39 109.89 107.00 120.44 110.06 99.03 122.55 118.39 101.56 113.54 113.76 110.28 123.05 117.17 In accordance with the rules of the SEC, this section captioned “Common Stock Performance Graph”, shall not be incorporated by reference into any of our future filings made under the Securities Exchange Act of 1934 or the Securities Act of 1933. The Common Stock Performance Graph, including its accompanying table and footnotes, is not deemed to be soliciting material or to be filed under the Exchange Act or the Securities Act. Item 6. Selected Financial Data The following table sets forth selected consolidated financial data as of the dates and for the periods presented. The selected consolidated statement of financial condition data as of December 31, 2015 and 2014 and the selected consolidated statement of income data for the years ended December 31, 2015, 2014 and 2013 have been derived mainly from our audited consolidated financial statements and related notes that we have included elsewhere in this Annual Report. The selected consolidated statement of financial condition data as of December 31, 2013, 2012 and 2011 and the selected consolidated statement of income data for the year ended December 31, 2012 and 2011 have been derived mainly from audited consolidated financial statements that are not presented in this Annual Report. The selected historical consolidated financial data as of any date and for any period are not necessarily indicative of the results that may be achieved as of any future date or for any future period. You should read the following selected statistical and financial data in conjunction with the more detailed information contained in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and the related notes that we have presented elsewhere in this Annual Report. 35 Selected Financial Data At or For the Years Ended December 31, Statements of Income: Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . Net interest income after provision for loan losses . . . . . . . . Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to common shareholders Per Share Data: Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . Book value per share (end of period)(a) . . . . . . . . . . . . . . . Tangible book value per share (end of period)(a)(b) . . . . . . . . Shares outstanding (end of period)(a) . . . . . . . . . . . . . . . . Weighted average shares outstanding – basic . . . . . . . . . . . . Weighted average shares outstanding – diluted . . . . . . . . . . Performance Ratios: Return on average assets(c) . . . . . . . . . . . . . . . . . . . . . . . Return on average common shareholders’ equity . . . . . . . . . Return on average shareholders’ equity(c) . . . . . . . . . . . . . . Average shareholders’ equity to average assets . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio(b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Asset Quality Ratios: Total past due loans to total loans(d) . . . . . . . . . . . . . . . . . Nonperforming loans to total loans(d) . . . . . . . . . . . . . . . . Nonperforming assets to total assets(e) . . . . . . . . . . . . . . . Allowance for loan losses to nonperforming loans . . . . . . . . Allowance for loan losses to total loans(d) . . . . . . . . . . . . . Net (recoveries) charge-offs to average loans(d) . . . . . . . . . . Statements of Financial Condition: Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross portfolio loans(d) . . . . . . . . . . . . . . . . . . . . . . . . . Investment securities . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital Ratios: Tier 1 capital to average assets(f) . . . . . . . . . . . . . . . . . . . Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Bank of New Canaan . . . . . . . . . . . . . . . . . . . . . The Bank of Fairfield . . . . . . . . . . . . . . . . . . . . . . . . Tier 1 capital to risk-weighted assets(f) . . . . . . . . . . . . . . . . Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Bank of New Canaan . . . . . . . . . . . . . . . . . . . . . The Bank of Fairfield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bankwell Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . The Bank of New Canaan . . . . . . . . . . . . . . . . . . . . . The Bank of Fairfield . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity to total assets . . . . . . . . . . . . . . Tangible common equity ratio(b) . . . . . . . . . . . . . . . . . . . Total capital to risk-weighted assets(f) $ $ $ 2015 50,754 7,966 42,788 3,230 39,558 3,484 29,171 13,871 4,841 9,030 8,905 1.23 1.21 17.87 17.43 7,372,968 7,071,550 7,140,558 2014 2013 (Dollars in thousands, except per share data) 2012 $ $ $ 35,589 3,929 31,660 2,152 29,508 3,041 25,812 6,737 2,169 4,568 4,458 0.78 0.78 16.84 16.35 7,019,620 5,577,942 5,605,512 $ $ $ 28,092 2,765 25,327 585 24,742 4,723 22,120 7,345 2,184 5,161 5,050 1.46 1.44 15.58 15.46 3,754,253 3,395,779 3,451,393 $ $ $ 24,397 3,192 21,205 1,821 19,384 345 17,858 1,871 657 1,214 1,082 0.39 0.38 14.50 14.50 2,797,200 2,767,850 2,864,700 $ $ $ 2011 20,587 2,870 17,717 1,049 16,668 1,134 14,601 3,201 997 2,204 1,998 0.72 0.71 13.85 13.85 2,758,200 2,757,000 2,811,000 0.75% 6.67% 6.76% 11.08% 3.77% 62.68% 0.52% 5.13% 4.66% 11.14% 3.84% 69.09% 0.51% 0.33% 0.38% 373.76% 1.23% (0.01)% 0.86% 0.36% 0.39% 323.02% 1.17% (0.05)% 0.77% 9.68% 8.17% 9.32% 3.94% 75.71% 0.73% 0.16% 0.23% 835.69% 1.33% 0.03% 0.22% 2.73% 2.40% 9.34% 4.11% 82.76% 0.75% 0.75% 0.81% 200.84% 1.50% 0.07% 0.50% 6.70% 5.03% 10.01% 4.27% 78.50% 1.01% 1.01% 0.78% 171.88% 1.74% 0.02% $1,330,372 1,147,513 50,807 1,046,942 120,000 25,000 131,769 $1,099,531 929,762 76,463 835,439 129,000 — 129,210 $ 779,618 632,012 42,413 661,545 44,000 — 69,485 $ 610,016 530,050 46,412 462,081 91,000 — 51,534 $ 477,355 369,294 94,972 367,115 58,000 — 49,188 10.84% —% —% 12.18% —% —% 13.39% —% —% 9.90% 9.68% 11.12% —% —% 12.47% —% —% 13.55% —% —% 11.75% 10.47% 7.91% —% —% 9.49% —% —% 10.74% —% —% 8.91% 7.45% —% 7.88% 8.39% —% 9.09% 10.80% —% 10.34% 12.05% 8.45% 6.65% —% 8.71% 11.30% —% 11.07% 13.66% —% 12.33% 14.91% 10.30% 8.00% 36 (a) Excludes preferred stock and unvested restricted stock awards (b) This measure is not a measure recognized under GAAP and is therefore considered to be a non-GAAP financial measure. See “Non-GAAP Financial Measures” for a description of this measure and a reconciliation of this measure to its most directly comparable GAAP measure. (c) Calculated based on net income before preferred stock dividends (d) Calculated using the principal amounts outstanding on loans (e) Nonperforming assets consist of nonperforming loans and other real estate owned (f) Represents bank ratios. During 2013, The Bank of New Canaan and The Bank of Fairfield were merged into Bankwell Bank. NON-GAAP FINANCIAL MEASURES We identify “efficiency ratio”, “tangible common equity ratio”, “tangible book value per share”, “total revenue” and “return on average common shareholders’ equity” as “non-GAAP financial measures.” In accordance with the SEC’s rules, we classify a financial measure as being a non-GAAP financial measure if that financial measure excludes or includes amounts, or is subject to adjustments that have the effect of excluding or including amounts, that are included or excluded, as the case may be, in the most directly comparable measure calculated and presented in accordance with generally accepted accounting principles as in effect from time to time in the United States in our statements of income, balance sheet or statements of cash flows. Non-GAAP financial measures do not include operating and other statistical measures or ratios or statistical measures calculated using exclusively either financial measures calculated in accordance with GAAP, operating measures or other measures that are not non-GAAP financial measures or both. The non-GAAP financial measures that we discuss in this annual report should not be considered in isolation or as a substitute for the most directly comparable or other financial measures calculated in accordance with GAAP. Moreover, the manner in which we calculate the non-GAAP financial measures that we discuss in this annual report may differ from that of other companies reporting measures with similar names. You should understand how such other banking organizations calculate their financial measures similar or with names similar to the non-GAAP financial measures we have discussed in this annual report when comparing such non-GAAP financial measures. Efficiency ratio is defined as non-interest expenses, less merger and acquisition related expenses and other real estate owned expenses, divided by our operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities, gains and losses on other real estate owned and gain on bargain purchase. 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. Tangible common equity is defined as total shareholders’ equity, excluding preferred stock, less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in changes from period to period in common shareholders’ equity exclusive of changes in intangible assets. Goodwill, an intangible asset that is recorded in a purchase business combination, has the effect of increasing both common equity and assets while not increasing our tangible common equity or tangible assets. Tangible common equity ratio is defined as the ratio of tangible common equity divided by total assets less goodwill and other intangible assets. We believe that this measure is important to many investors in the marketplace who are interested in relative changes from period to period in common equity and total assets, each exclusive of changes in intangible assets. We believe that the most directly comparable GAAP financial measure is total shareholders’ equity to total assets. Tangible book value per share is defined as book value, excluding the impact of goodwill and other intangible assets, if any, divided by shares of our common stock outstanding. 37 Total revenue is defined as the sum of net interest income before provision of loan losses and noninterest income. Return on average common shareholders’ equity is defined as net income attributable to common shareholders divided by total average shareholders’ equity less average preferred stock. The information provided below presents a reconciliation of each of our non-GAAP financial measures to the most directly comparable GAAP financial measure. Efficiency Ratio Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: foreclosed real estate expenses . . . . . . . . . . . . . . . . . . . . . . Less: merger and acquisition expenses . . . . . . . . . . . . . . . . . . . . Adjusted noninterest expense (numerator) . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: gains (losses) on sales of securities . . . . . . . . . . . . . . . . . . . Less: gains on sale of foreclosed real estate . . . . . . . . . . . . . . . . . Less: gain on bargain purchase . . . . . . . . . . . . . . . . . . . . . . . . . Adjusted operating revenue (denominator) . . . . . . . . . . . . . . . . . . Years Ended December 31, 2015 2014 2013 $ $ $ $ 29,171 168 2 29,001 42,788 3,484 — — — 46,272 $ $ $ $ 25,812 36 1,801 23,975 31,660 3,041 — — — 34,701 $ $ $ $ 22,120 8 908 21,204 25,327 4,723 648 64 1,333 28,005 Efficiency ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 62.68% 69.09% 75.71% Tangible Common Equity and Tangible Common Equity/Tangible Assets Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 131,769 — 131,769 3,241 $ 128,528 $1,330,372 3,241 $1,327,131 $ 129,210 10,980 118,230 3,437 $ 114,793 $1,099,531 3,437 $1,096,094 $ $ 69,485 10,980 58,505 481 58,024 $ 779,618 481 $ 779,137 Tangible common shareholders’ equity to tangible assets . . . . . . . . . 9.68% 10.47% 7.45% Tangible Book Value per Share Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . Common shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: shares of unvested restricted stock . . . . . . . . . . . . . . . . . . . Common shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 131,769 — 131,769 3,241 $ 128,528 7,516,291 143,323 7,372,968 $ 129,210 10,980 118,230 3,437 $ 114,793 7,185,482 165,862 7,019,620 $ $ 69,485 10,980 58,505 481 58,024 3,876,393 122,140 3,754,253 Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: effects of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . Tangible Book Value per Common Share . . . . . . . . . . . . . . . . . . . $ $ 17.87 0.44 17.43 $ $ 16.84 0.49 16.35 $ $ 15.58 0.12 15.46 38 Years Ended December 31, 2015 2014 2013 Total Revenue Net Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,788 3,484 $ 46,272 $31,660 3,041 $34,701 $25,327 4,723 $30,050 Noninterest income as a percentage of total revenue . . . . . . . . . . . . 7.53% 8.76% 15.72% Return on Average Common Shareholders’ Equity Net Income Attributable to Common Shareholders . . . . . . . . . . . Total average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . Less: average preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Average common shareholders’ equity . . . . . . . . . . . . . . . . . . . . . $ 8,905 $133,553 — $133,553 $ 4,458 $97,921 10,980 $86,941 $ 5,050 $63,142 10,980 $52,162 Return on Average Common Shareholders’ Equity . . . . . . . . . . . . . 6.67% 5.13% 9.68% Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations This section presents management’s perspective on our financial condition and results of operations. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes contained elsewhere in this annual report. To the extent that this discussion describes prior performance, the descriptions relate only to the periods listed, which may not be indicative of future financial outcomes. In addition to historical information, this discussion contains forward looking statements that involve risks, uncertainties and assumptions that could cause results to differ materially from management’s expectations. Factors that could cause such differences are discussed in the sections titled “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors”. We assume no obligation to update any of these forward-looking statements. General Bankwell Financial Group, Inc. is a bank holding company headquartered in New Canaan, Connecticut. Through our wholly owned subsidiary, Bankwell Bank, or the Bank, we serve small and medium-sized businesses and retail customers in greater Fairfield and New Haven Counties, Connecticut. We have a history of building long-term customer relationships and attracting new customers through what we believe is our strong customer service and our ability to deliver a diverse product offering. The following discussion and analysis presents our results of operations and financial condition on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relates to activities primarily conducted at the Bank. As a bank holding company, we generate most of our revenue from interest on loans and investments and fee-based revenues. Our primary source of funding for our loans is deposits. Our largest expenses are interest on these deposits and salaries and related employee benefits. We measure our performance primarily through our net interest margin, efficiency ratio, ratio of allowance for loan losses to total loans, return on average assets and return on average equity, among other metrics, while maintaining appropriate regulatory leverage and risk-based capital ratios. Executive Overview We are focused on being the “Hometown” bank and the banking provider of choice in our highly attractive market area, and to serve as a locally based alternative to our larger competitors. We aim to do this through: • • • Responsive, customer-centric products and services and a community focus; Strategic acquisitions; Utilization of efficient and scalable infrastructure; 39 • • Disciplined focus on risk management; and Organic growth. On November 5, 2013 we completed the merger of Wilton Bank into Bankwell Bank. The Wilton Bank had one branch located in Wilton, Connecticut. On May 15, 2014, Bankwell Financial Group, Inc. priced 2,702,703 common shares in its IPO at $18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock Market. The net proceeds from the IPO were approximately $44.7 million, after deducting the underwriting discount of approximately $2.5 million and approximately $1.3 million of expenses. We used the net proceeds for general corporate purposes, which included maintaining liquidity at the holding company, providing equity capital to the Bank to fund balance sheet growth, our working capital needs, and funding acquisitions of branches and whole financial institutions in or around our existing market that furthered our objectives. On October 1, 2014 we completed the merger of Quinnipiac Bank and Trust Company into Bankwell Bank. Quinnipiac had one branch located in Hamden, Connecticut and a second branch located in the neighboring town of North Haven, Connecticut. On August 19, 2015 the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early redemption date. On October 29, 2015 the Company’s Board of Directors declared a $0.05 per share cash dividend, payable December 21, 2015 to shareholders of record on December 11, 2015. This marked the Company’s first cash dividend on its outstanding common stock. On November 20, 2015 the Company redeemed $10.98 million (10,980 shares) of preferred stock issued pursuant to the United States Department of Treasury (“Treasury’’) under the Small Business Lending Fund Program (the “SBLF”). The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends through November 20, 2015. The redemption was approved by the Company’s primary federal regulator and was funded with the Company’s surplus capital. With this redemption, the Company has redeemed all of its outstanding SBLF stock. The primary measures we use to evaluate and manage our financial results are set forth in the table below. Although we believe these measures are meaningful in evaluating our results and financial condition, they may not be directly comparable to similar measures used by other financial services companies and may not provide an appropriate basis to compare our results or financial condition to the results or financial condition of our competitors. The following table sets forth the key financial measures we use to evaluate the success of our business and our financial position and operating performance. 40 Key Financial Measures Selected balance sheet measures: Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,330,372 $1,099,531 $779,618 Key Financial Measures(a) At or For the Years Ended December 31, 2015 2014 2013 (Dollars in thousands, except per share data) Gross portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,147,513 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,046,942 FHLB borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected statement of income measures: Total revenue(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income before provision for loan losses . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other financial measures and ratios: Return on average assets(d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Return on average common shareholders’ equity(c)(d) . . . . . . . . . . . Net interest margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Efficiency ratio(c) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tangible book value per share (end of period)(c)(e). . . . . . . . . . . . . . Net (recoveries) charge-offs to average loans(b) . . . . . . . . . . . . . . . . Nonperforming assets to total assets(f) . . . . . . . . . . . . . . . . . . . . . Allowance for loan losses to nonperforming loans . . . . . . . . . . . . . Allowance for loan losses to total loans(b) . . . . . . . . . . . . . . . . . . . 929,762 835,439 129,000 — 632,012 661,545 44,000 — 129,210 69,485 34,701 31,660 6,737 4,568 0.78 0.78 30,050 25,327 7,345 5,161 1.46 1.44 120,000 25,000 131,769 46,272 42,788 13,871 9,030 1.23 1.21 0.75% 6.67% 3.77% 0.52% 5.13% 3.84% 0.77% 9.68% 3.94% 62.68% 69.09% 75.71% $ 17.43 $ 16.35 $ 15.46 (0.01)% (0.05)% 0.03% 0.38% 373.76% 1.23% 0.39% 0.23% 323.02% 835.69% 1.33% 1.17% (a) We have derived the selected balance sheet measures as of December 31, 2015 and 2014 and the selected statement of income measures for the years ended December 31, 2015, 2014 and 2013 from our audited consolidated financial statements included elsewhere in this annual report. We have derived the selected balance sheet measures as of December 31, 2013 from our audited consolidated statement of financial condition not included in this annual report. Average balances have been computed using daily averages. Our historical results may not be indicative of our results for any future period. (b) Calculated using the principal amounts outstanding on loans. (c) This measure is not a measure recognized under GAAP and is therefore considered to be a non-GAAP financial measure. See “Non-GAAP Financial Measures” for a description of this measure and a reconciliation of this measure to its most directly comparable GAAP measure. (d) Calculated based on net income before preferred stock dividends. (e) Excludes preferred stock and unvested restricted stock awards. (f) Nonperforming assets consist of nonperforming loans and other real estate owned. The Wilton Bank Acquisition On November 5, 2013, we acquired all of the outstanding common shares of The Wilton Bank. The Wilton Bank was a state chartered commercial bank located in Wilton, Connecticut, which operated as one 41 branch. As a result of the transaction, The Wilton Bank merged into the Bank. This business combination expanded our presence in Fairfield County and enhanced opportunities for businesses, customer relationships, employees and the communities we serve. On the acquisition date, The Wilton Bank had shareholders’ equity of $6.3 million, with a book value per share of $17.00. As part of the acquisition, The Wilton Bank shareholders received $13.50 per share resulting in an aggregate deal value of $5.0 million. In accordance with applicable accounting guidance, the amount paid was allocated to the fair value of the net assets acquired, with any excess amounts recorded as goodwill. If the fair value of the net assets is greater than the amount paid, the excess amount is recorded to noninterest income as a gain on the purchase. We recorded a gain of $1.3 million in conjunction with the acquisition, representing the amount that the net assets exceeded the amount paid. Fair values of certain balance sheet items were cash of $35.9 million, loans of $25.1 million and deposits of $64.2 million. The results of The Wilton Bank’s operations have been included in our Consolidated Statement of Income from the acquisition date. Quinnipiac Acquisition On October 1, 2014, the Company acquired all of the outstanding common shares of Quinnipiac Bank & Trust Company (“Quinnipiac”). Quinnipiac had one branch located in Hamden, Connecticut, and a second branch in the neighboring town of North Haven. Both towns are in New Haven County, Connecticut, which represented a new market for us. Quinnipiac shareholders received 510,122 shares of the Company common stock and $3.6 million in cash. As of September 30, 2014, Quinnipiac had assets with a carrying value of approximately $117.8 million, including loans outstanding with a carrying value of approximately $97.1 million, as well as deposits with a carrying value of approximately $100.4 million and a book value of $10.1 million. The results of Quinnipiac’s operations are included in the Company’s Consolidated Statement of Income from the date of acquisition. The Company incurred $1.7 million of merger and acquisition expenses related to the Quinnipiac merger for the year ended December 31, 2014. As a result of the merger the Company recorded $2.6 million of goodwill. Critical Accounting Policies and Estimates The discussion and analysis of our results of operations and financial condition are based on our consolidated financial statements, which have been prepared in accordance with GAAP and with general practices within the financial services industry. The preparation of financial statements in conformity with GAAP requires us to make significant estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses. Actual results could differ from our current estimates, as a result of changing conditions and future events. The current economic environment has increased the degree of uncertainty inherent in these significant estimates. We believe that accounting estimates for the fair value of acquired assets, the allowance for loan losses, stock-based compensation and derivative instrument valuation are particularly critical and susceptible to significant near-term change. Fair Value of Acquired Assets Loans that the Company acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. For loans which meet the criteria stipulated in Accounting Standards Codification (“ASC”) 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company recognizes an accretable yield, which is defined as the excess of all cash flows expected at acquisition over the initial fair value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss accrual, or a valuation allowance. After the initial acquisition, the Company continues to evaluate whether 42 the timing and the amount of cash to be collected are reasonably estimated. Subsequent significant increases in cash flows the Company expects to collect will first reduce any previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in expected cash flows may result in the loan being considered impaired. Interest income is not recognized to the extent that the net investment in the loan would increase to an amount greater than the estimated payoff amount. For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan by loan basis, according to the anticipated collection plan of these loans. Prepayments result in the recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may change the amount of interest income and principal expected to be collected. The expected prepayments used to determine the accretable yield are consistent between the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference. For loans that do not meet the ASC 310-30 criteria, the Company records interest income on a level yield basis using the contractually required cash flows. The Company subjects loans that do not meet the ASC 310-30 criteria to ASC Topic 450, “Contingencies”, by collectively evaluating these loans for an allowance for loan loss, using the same methodology as loans originated by the Company. Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if the Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield. The Company has determined that it can reasonably estimate future cash flows on the Company’s current portfolio of acquired loans that are past due 90 days or more, and on which the Company is accruing interest and the Company expects to fully collect the carrying value of the loans. In accordance with applicable accounting guidance, the amount paid for acquired assets is allocated to the fair value of the net assets acquired, with any excess amounts recorded as goodwill. If the fair value of the net assets is greater than the amount paid, the excess amount is recorded to noninterest income as a gain on the purchase. Goodwill and identifiable intangible assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows. This type of analysis contains uncertainties because it requires management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material. Allowance for Loan Losses Determining an appropriate level of allowance for loan losses involves a high degree of judgment. We use a methodology to systematically measure the amount of estimated loan loss exposure inherent in the loan portfolio for purposes of establishing a sufficient allowance for loan losses. The methodology includes three elements: (1) Loss allocations are identified for individual loans deemed to be impaired in accordance with GAAP. Impaired loans are loans for which it is probable that the Bank will not be able to collect all amounts due according to the contractual terms of the loan agreements, including non-accrual loans and all loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller-balance homogeneous loans that are collectively evaluated for impairment, which consist of most residential mortgage loans and consumer loans. Impairment is measured on a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or if the loan is collateral dependent, at the fair value of the collateral less costs to sell. For collateral dependent loans, management may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from its knowledge of circumstances associated with the property. 43 (2) Loss allocations for non-impaired loans are based on peer bank data, historical loss experience, credit, grade, delinquency factors and other similar credit quality indicators, adjusted for qualitative factors. Qualitative factors include, but are not limited to, the value of underlying collateral, concentrations of credit, current economic conditions, the state of the business cycle and competitive and regulatory issues. Individual commercial loans and commercial mortgage loans not deemed to be impaired are evaluated using an internal rating system and the application of loss allocation factors. The loan rating system is described under the caption “Credit quality indicators” in Note 7 of the Notes to Consolidated Financial Statements. The loan rating system and the related loss allocation factors take into consideration parameters including the borrower’s financial condition, the borrower’s performance with respect to loan terms, and the adequacy of collateral. The loss allocation factors also take into account general and regional economic statistics, trends, and portfolio characteristics such as age of portfolio and the Bank’s experience with a particular loan product. We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of migrational loss experience. Portfolios of more homogeneous populations of loans, including the various categories of residential mortgages and consumer loans are analyzed as groups taking into account delinquency ratios and other indicators and our historical loss experience for each type of credit product. We analyze historical loss experience over periods deemed to be relevant to the inherent risk of loss in loan portfolios as of the balance sheet date. We periodically update these analyses and adjust the loss allocations for various factors that we believe are not adequately presented in historical loss experience including trends in real estate values, changes in unemployment levels and increases in delinquency levels. These factors are also evaluated taking into account the geographic location of the underlying loans. (3) An unallocated allowance may or may not be required and is for measurement imprecision attributable to uncertainty in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. factors may arise that result Because the methodology is based upon peer bank data and trends, current economic data as well as management’s judgment, in different estimations. Adversely different conditions or assumptions could lead to increases in the allowance. In addition, various regulatory agencies periodically review the allowance for loans losses. Such agencies may require additions to the allowance based on their judgments about information available to them at the time of their examination. As of December 31, 2015, management believes that the allowance is adequate and consistent with asset quality and delinquency indicators. Stock-based Compensation The Company measures and recognizes compensation cost relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued. The fair value of time-based restricted stock is recorded based on the grant date fair value of the Company’s common stock. The fair value of market-based restricted stock is based on values derived using a Monte Carlo based pricing model. The fair value of stock options is determined using the Black-Sholes Option Pricing model. Stock-based compensation costs are recognized over the requisite service period for the awards. Compensation expense reflects the number of awards expected to vest and is adjusted based on awards that ultimately vest. Derivative Instrument Valuation The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy. Management applies the hedge accounting provisions of Accounting Standards Codification (“ASC”) Topic 815, and formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the various hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception and for each reporting period thereafter, to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value of the derivative in earnings after termination of the hedge relationship. 44 The Company has characterized all of its interest rate swaps that qualify under Topic 815 hedge accounting as cash flow hedges. Cash flow hedges are used to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by interest rate fluctuations, and are recorded at fair value in other assets within the consolidated balance sheet. Changes in the fair value of these cash flow hedges are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any hedge ineffectiveness assessed as part of the Company’s quarterly analysis is recorded directly to earnings. Emerging Growth Company The JOBS Act permits us, as an “emerging growth company”, to take advantage of an extended transition period to comply with new or revised accounting standards and not commence complying with new or revised accounting standards until private companies must do so. Under the JOBS Act, we may make an irrevocable election to “opt out” of that extended transition period and comply with new or revised accounting standards when public companies that are not emerging growth companies must commence complying with those standards. We have elected to “opt out” of the extended transition period. Earnings Overview 2015 Earnings Overview Our net income for the year ended December 31, 2015 was $9.0 million, an increase of $4.5 million, or 97.68%, compared to the year ended December 31, 2014. Our returns on average equity and average assets for the year ended December 31, 2015, were 6.76% and 0.75%, respectively, compared to 4.66% and 0.52%, respectively for the year ended December 31, 2014. Net income available to common shareholders for the year ended December 31, 2015, was $8.9 million, or $1.21 per diluted share, compared to net income available to common shareholders of $4.5 million, or $0.78 per diluted share, for the year ended December 31, 2014. The increase in net income for 2015 compared to 2014 was primarily due to an increase of interest and fees on loans as a result of strong organic loan growth. Net interest income for the year ended December 31, 2015 was $42.8 million, an increase of $11.1 million compared to the year ended December 31, 2014. Our net interest margin decreased 7 basis points to 3.77% for the year ended December 31, 2015 compared to the year ended December 31, 2014 reflecting an increase in rates on interest bearing deposits driven by promotional rate increases to remain competitive in the market place and to attract additional deposits and the addition of $25.5 million of 5.75% fixed rate subordinated debentures in the third quarter of 2015. The increase in noninterest expense was mainly due to higher salaries and employee benefits, reflecting key staffing additions and higher incentive accruals. Our efficiency ratio was 62.68% for the year ended December 31, 2015 compared to 69.09% for the year ended December 31, 2014. The improvement in our efficiency ratio was attributable to our focus on expense control and achieving economies of scale. 2014 Earnings Overview Our net income for the year ended December 31, 2014 was $4.6 million, a decrease of $0.6 million, or 11.49%, compared to the year ended December 31, 2013. Our returns on average equity and average assets for the year ended December 31, 2014, were 4.66% and 0.52%, respectively, compared to 8.17% and 0.77%, respectively for the year ended December 31, 2013. Net income available to common shareholders for the year ended December 31, 2014, was $4.5 million, or $0.78 per diluted share, compared to net income available to common shareholders of $5.1 million, or $1.44 per diluted share, for the year ended December 31, 2013. The decline in net income for 2014 compared to 2013 was primarily due to merger and acquisition related expenses of $1.8 million primarily associated with the acquisition of Quinnipiac Bank and Trust Company. Net interest income for the year ended December 31, 2014 was $31.7 million, an increase of $6.3 million compared to the year ended December 31, 2013 due to strong loan growth. Our net interest margin decreased 10 basis points to 3.84% for the year ended December 31, 2014 compared to the year ended 45 December 31, 2013 reflecting the current interest rate environment in which market yields on new loan growth were below the average yield of the existing portfolio. The increase in noninterest expenses was mainly due to higher salaries and employee benefits, reflecting staffing additions and higher incentive accruals and merger and acquisition related expenses, attributable to the acquisition of Quinnipiac Bank and Trust Company. Our efficiency ratio was 69.09% for the year ended December 31, 2014 compared to 75.71% for the year ended December 31, 2013. The improvement in our efficiency ratio was attributable to our focus on expense control and achieving economies of scale. Results of Operations Net Interest Income Net interest income is the difference between interest earned on loans and securities and interest paid on deposits and other borrowings, and is the primary source of our operating income. Net interest income is affected by the level of interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Included in interest income are certain loan fees, such as deferred origination fees and late charges. The following tables and discussion present net interest income on a fully taxable equivalent, or FTE basis, by adjusting income and yields on tax-exempt loans and securities to be comparable to taxable loans and securities. We convert tax-exempt income to a FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. The average balances are principally daily averages. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments. Premium amortization and discount accretion are included in the respective interest income and interest expense amounts. Year ended December 31, 2015 compared to year ended December 31, 2014 FTE net interest income for the years ended December 31, 2015 and 2014 was $43.2 million and $32.1 million, respectively. Net interest income increased due to increases in earning assets offset by increases in rates on interest bearing deposits driven by promotional rate increases to remain competitive in the market place and to attract additional deposits and the addition of $25.5 million of 5.75% fixed rate subordinated debentures in the third quarter of 2015. FTE basis interest income for the year ended December 31, 2015 increased by $15.2 million to $51.2 million, or 42%, compared to FTE basis interest income for the year ended December 31, 2014 due primarily to growth in interest earning assets, specifically, loan growth in our commercial real estate and commercial business portfolios. Average interest earning assets were $1.1 billion for the year ended December 31, 2015 up by $310.3 million, or 37%, from the year ended December 31, 2014. The average balance of total loans increased $320.6 million, or 45%, contributing $15.3 million to the increase in interest income. The total average balance of securities for the year ended December 31, 2015 decreased by $2.4 million, or 4%, from the year ended December 31, 2014, as a result of maturities and calls. The total yield in earnings assets increased to 4.41% at December 31, 2015 compared to 4.25% at December 31, 2014. The increase in yield was driven by a shift in the loan portfolio to higher yielding commercial real estate loans as well as increased rates on commercial business loans. Interest expense for the year ended December 31, 2015, increased by $4.0 million, or 103%, compared to interest expense for 2014 due to increases in rates on interest bearing deposits driven by promotional rate increases to remain competitive in the market place and to attract additional deposits and the addition of $25.5 million of 5.75% fixed rate subordinated debentures in the third quarter of 2015. The weighted average cost of deposits increased 15 basis points to 0.73% due to an increase in rates to attract additional deposits. The weighted average cost of borrowed money increased by 81 basis points to 1.77%, due to the addition of the subordinated debt in the third quarter of 2015. Average funding liabilities for the year ended December 31, 2015, increased by $297.8 million, or 39%, from the year ended December 31, 2014, primarily due to higher average balances of $126.5 million in time deposits, $81.2 million in money market accounts and $63.4 million in borrowed money. 46 Year ended December 31, 2014 compared to year ended December 31, 2013 FTE net interest income for the years ended December 31, 2014 and 2013 was $32.1 million and $25.7 million, respectively. Net interest income increased due to increases in earning assets offset by our net interest margin declining 10 basis points to 3.84% for the year ended December 31, 2014, compared to the year ended December 31, 2013 due primarily to the effects of the low interest rate environment. While we have experienced significant growth in average earning assets, in the current low interest rate environment, market yields are below the average yield of our existing assets. FTE basis interest income for the year ended December 31, 2014 increased by $7.6 million to $36.0 million, or 27%, compared to FTE basis interest income for the year ended December 31, 2013 due primarily to loan growth in our commercial real estate and commercial business portfolios partially offset by lower yields. Average interest earning assets were $835.4 million for the year ended December 31, 2014, up by $183.7 million from the year ended December 31, 2013. The average balance of total loans increased $149.2 million, or 26%, contributing $6.8 million to the increase in interest income. Commercial real estate loan average balances grew by $79.2 million due to strong origination activity reflecting our ability to source quality opportunities and continued economic improvement in our market. The total average balance of securities for the year ended December 31, 2014 increased by $20.5 million, or 50%, from the year ended December 31, 2013, reflecting purchases outpacing maturities. Interest expense for the year ended December 31, 2014, increased by $1.2 million, or 42%, compared to interest expense for 2013 due to an increase in time deposits and higher funding costs. The weighted average cost of deposits increased 15 basis points to 0.58% due to a slight increase in rates and shifting of deposits to higher costing time deposits. The weighted average cost of borrowed money increased by 23 basis points to 0.96%, due to interest expense on FHLB borrowings we swapped for a higher fixed rate to hedge against rising interest rates. Average funding liabilities for the year ended December 31, 2014, increased by $169.0 million, or 28%, from the year ended December 31, 2013, primarily due to higher average balances of $79.7 million in time deposits, $66.4 million in money market accounts and $40.7 million in noninterest bearing deposits. Average balance sheet, FTE basis interest income, interest expense, average yields earned and rates paid The following table presents average balance sheet information, FTE basis interest income, interest expense and the corresponding average yields earned and rates paid for the years ended December 31, 2015, 2014 and 2013. Tax-exempt income is converted to a FTE basis using the statutory federal income tax rate adjusted for applicable state income taxes net of the related federal tax benefit. The average balances are principally daily averages. Interest income on loans includes the effect of deferred loan fees and costs accounted for as yield adjustments. Premium amortization and discount accretion are included in the respective interest income and interest expense amounts. 47 2015 2014 2013 Years Ended December 31, Average Balance Interest Yield / Rate Average Balance (Dollars in thousands) Interest Yield / Rate Average Balance Yield / Rate Assets: Cash and fed funds sold . . . . . . . . . $ Securities(1) . . . . . . . . . . . . . . . . . Loans: 39,632 $ 59,009 97 2,243 0.25% $ 49,152 $ 3.80 61,398 127 2,424 0.26% $ 35,599 $ 3.95 40,932 84 0.24% 1,766 4.31 Commercial real estate . . . . . . . . . Residential real estate . . . . . . . . . Construction(2) . . . . . . . . . . . . . Commercial business . . . . . . . . . . Home equity . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . Acquired loans (net of mark) . . . . . Total loans . . . . . . . . . . . . . . Federal Home Loan Bank stock . . . . . . . . . . . . . . . Total earning assets 611,289 174,527 76,292 156,039 17,163 2,350 2,672 1,040,332 6,715 29,835 6,282 3,505 8,089 649 115 225 48,700 168 1,145,688 $51,208 378,345 164,598 49,212 109,121 14,529 1,270 2,707 719,782 5,078 4.81 3.60 4.53 5.11 3.78 4.88 8.42 33,412 4.62 2.50 73 4.41% 835,410 $36,036 4.83 18,515 3.59 5,911 4.61 2,300 4.97 5,496 3.88 564 6.35 81 545 20.14 4.59 1.45 4.25% 651,715 $28,471 4.37% 15,124 5.06 5,577 3.66 1,763 4.63 3,699 5.34 423 3.74 18 5.98 — — 26,604 4.66 17 0.36 299,142 152,498 38,073 69,252 11,287 308 — 570,560 4,624 Other assets . . . . . . . . . . . . . . . . . 60,191 . . . . . . . . . . . . . . . $1,205,879 Total assets 43,535 $878,945 17,782 $669,497 Liabilities and shareholders’ equity: Interest-bearing liabilities: NOW . . . . . . . . . . . . . . . . . . . $ Money market . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . Total interest-bearing deposits . . Borrowed money . . . . . . . . . . . . . . Total interest-bearing liabilities . . . . 62 55,696 $ 1,411 263,900 693 96,841 3,515 365,179 5,681 781,616 129,390 2,285 911,006 $ 7,966 58 0.11% $ 53,041 $ 836 182,676 0.53 302 91,058 0.72 2,099 238,710 0.96 3,295 565,485 0.73 1.77 634 65,953 0.87% 631,438 $ 3,929 . . . . . . Noninterest-bearing deposits Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . Total liabilities and shareholders’ Total liabilities 154,950 6,370 1,072,326 133,553 equity . . . . . . . . . . . . . . . . . $1,205,879 136,748 12,838 781,024 97,921 $878,945 49 0.12% 0.11% $ 40,554 $ 0.46 0.33 0.88 0.58 0.96 0.62% 503,173 $ 2,765 0.47% 498 0.45 543 0.46 1,143 0.72 2,233 0.43 532 0.73 116,323 117,388 158,996 433,261 69,912 96,009 7,173 606,355 63,142 $669,497 Net interest income(3) . . . . . . . . . $43,242 $32,107 $25,706 Interest rate spread . . . . . . . . . . . . Net interest margin(4) . . . . . . . . . . . 3.54% 3.77% 3.63% 3.84% 3.90% 3.94% (1) Average balances and yields for securities are based on amortized cost. (2) Includes commercial and residential real estate construction loans. (3) The adjustment for securities and loans taxable equivalency was $454 thousand, $447 thousand and $379 thousand, respectively, for the years ended December 31, 2015, 2014 and 2013. (4) Net interest income as a percentage of total earning assets. Effect of changes in interest rates and volume of average earning assets and average interest-bearing liabilities The following table shows the extent to which changes in interest rates and changes in the volume of average earning assets and average interest-bearing liabilities have affected net interest income. For each category of earning assets and interest-bearing liabilities, information is provided relating to: changes in volume (changes in average balances multiplied by the prior year’s average interest rates); changes in rates (changes in average interest rates multiplied by the prior year’s average balances); and the total change. Changes attributable to both volume and rate have been allocated proportionately based on the relationship of the absolute dollar amount of change in each. 48 Year Ended December 31, 2015 vs 2014 Increase (Decrease) Year Ended December 31, 2014 vs 2013 Increase (Decrease) Volume Rate Total Volume Rate Total (In thousands) Interest and dividend income: Cash and fed funds sold . . . . . . . . . . . . . . $ (24) $ (6) $ (30) $ 35 $ 9 $ Securities . . . . . . . . . . . . . . . . . . . . . . . . . (93) (88) (181) 818 (161) 44 657 Loans: Commercial real estate . . . . . . . . . . . . . . 11,369 (49) 11,320 3,904 Residential real estate . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . Acquired loans (net of mark) . . . . . . . . . 358 1,245 2,427 100 56 (7) Total loans . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank stock . . . . . . . . . 15,548 29 Total change in interest and dividend 13 (40) 166 (15) (22) (313) (260) 66 371 1,205 2,593 85 34 (320) 15,288 95 (513) (102) 17 3,391 334 537 436 520 2,026 (229) 1,797 125 61 545 7,617 2 16 1 — 141 62 545 (810) 55 6,807 57 income . . . . . . . . . . . . . . . . . . . . . . . 15,460 (288) 15,172 8,472 (907) 7,565 Interest expense: Deposits: NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market Savings . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . Borrowed money . . . . . . . . . . . . . . . . . . . Total change in interest expense . . . . . . . 3 417 20 1,201 1,641 883 2,524 1 158 371 215 745 768 1,513 4 575 391 1,416 2,386 1,651 4,037 14 303 (106) 662 873 (30) 843 (5) 35 (135) 294 189 132 321 9 338 (241) 956 1,062 102 1,164 Change in net interest income . . . . . . . . . . $12,936 $(1,801) $11,135 $7,629 $(1,228) $6,401 Provision for Loan Losses The provision for loan losses is based on management’s periodic assessment of the adequacy of our allowance for loan losses which, in turn, is based on such interrelated factors as the composition of our loan portfolio and its inherent risk characteristics, the level of nonperforming loans and net charge-offs, both current and historic, local economic and credit conditions, the direction of real estate values, and regulatory guidelines. The provision for loan losses is charged against earnings in order to maintain our allowance for loan losses and reflects management’s best estimate of probable losses inherent in our loan portfolio at the balance sheet date. Under accounting standards for business combinations, acquired loans are recorded at fair value with no loan loss allowance on the date of acquisition. A provision for loan losses will be recorded for the emergence of new probable and estimable losses on acquired loans which were not impaired as of the acquisition date. As of and for the year ended December 31, 2015, there was a $41 thousand provision or allowance for loan losses related to the loan portfolio that we acquired. 49 The provision for loan losses for the year ended December 31, 2015 was $3.2 million compared to a $2.2 million provision for loan losses for the year ended December 31, 2014. The higher 2015 provision for loan losses is attributable to significant growth in our loan portfolio. The 2014 provision for loan losses reflected a low level of net charge-offs, nonperforming and past due loans and an overall improvement in our credit quality compared to 2013. The provision charged to earnings in 2013 was $585 thousand. Noninterest Income Noninterest income is a component of our revenue and is comprised primarily of fees generated from loan and deposit relationships with our customers, fees generated from sales and referrals of loans, income earned on bank-owned life insurance and gains on sales of investment securities. The following table compares noninterest income for the years ended December 31, 2015, 2014 and 2013. Years Ended December 31, 2015/2014 Change 2014/2013 Change 2015 2014 2013 $ % $ % (Dollars in thousands) Gains and fees from sales of loans . . . . . . . $1,113 $1,313 $2,020 $(200) (15)% $ (707) (35)% Service charges and fees . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . Net gain on sale of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . Gain on sale of foreclosed real estate, net . . Gain on bargain purchase . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 933 727 — — — 711 643 497 416 31 290 230 45 46 227 466 55 1,503 — 648 — 64 — 1,333 211 588 — — — — — — 21 123 (648) (64) (1,333) 377 (100) (100) (100) 179 Total noninterest income . . . . . . . . . . . $3,484 $3,041 $4,723 $ 443 15% $(1,682) (36)% Year ended December 31, 2015 compared to year ended December 31, 2014 Noninterest income totaled $3.5 million for the year ended December 31, 2015, compared to $3.0 million for the year ended December 31, 2014. This increase was primarily due to increases in service charges and fees, and income earned from bank owned life insurance. Gains and fees from sales and referrals of loans. Loan sales are dependent on origination volume and are sensitive to interest rates, housing and market conditions. During the year ended December 31, 2015, the Company recorded $1.1 million in gains on the sale of $31.0 million of loans. For the year ended December 31, 2014, gains and fees from sales of loans totaled $1.3 million on the sale of $26.8 million of loans. Service charges and fees. We earn fees from our customers for deposit-related services. For the year ended December 31, 2015, service charges and fees totaled $933 thousand. The increase of $290 thousand, or 45%, over the year ended December 31, 2014 was primarily due to increases in ATM fees, debit card fees and non-sufficient fund charges, as well as higher volume levels. Bank Owned Life Insurance. In the third quarter of 2014 the Company purchased an additional $12.5 million in bank-owned life insurance coverage. Income earned on bank-owned life insurance increased $230 thousand, or 46%, from December 31, 2014 compared to December 31, 2015 due to the full year effect of the purchase executed in the third quarter of 2014. Other. We recorded other income of $711 thousand during the year ended December 31, 2015, an increase of $123 thousand compared to the year ended December 31, 2014. The increase is primarily due to income recognized on the early pay-off of purchased credit impaired loans. Year ended December 31, 2014 compared to year ended December 31, 2013 Noninterest income totaled $3.0 million for the year ended December 31, 2014, compared to $4.7 million for the year ended December 31, 2013. This decrease was primarily due to the gain on bargain purchase from The Wilton Bank acquisition and the net gain on sale of available for sale securities recognized in 2013. 50 Gains and fees from sales and referrals of loans. Loan sales are dependent on origination volume and are sensitive to interest rates, housing and market conditions. During the year ended December 31, 2014, the Company recorded $61 thousand in gains on the sale of $4.5 million of residential real estate loans, $413 thousand of gains on the sale of $14.9 million of commercial real estate loans and $839 thousand of gains on sales of $7.4 million of SBA loans. For the year ended December 31, 2014, gains and fees from sales of loans totaled $1.3 million, a decrease of $0.7 million compared to the year ended December 31, 2013 due to a decline in the volume of loan sales. Service charges and fees. We earn fees from our customers for deposit-related services. For the year ended December 31, 2014, service charges and fees totaled $643 thousand. The increase of $227 thousand, or 55%, over the year ended December 31, 2013 was primarily due to increases in ATM and debit card fees and non-sufficient fund charges, as well as higher volume levels. Bank owned life insurance. In the fourth quarter of 2013 the Company purchased $10.0 million in bank owned life insurance coverage and in the third quarter of 2014 the Company purchased an additional $12.5 million in bank-owned life insurance coverage and the cash surrender value increased by $466 thousand for the year ended December 31, 2014 compared to the year ended December 31, 2013. Prior to the fourth quarter of 2013, the Company did not own bank owned life insurance. Other. We recorded other income of $588 thousand during the year ended December 31, 2014, an increase of $377 thousand compared to the year ended December 31, 2013. The increase is primarily due to increases in investment services income, servicing fees and rental income. Noninterest Expense The following table compares noninterest expense for the years ended December 31, 2015, 2014 and 2013. Years Ended December 31, 2015/2014 Change 2014/2013 Change 2015 2014 2013 $ % $ % Salaries and employee benefits . . . . . . Occupancy and equipment . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . Professional services . . . . . . . . . . . . . . Marketing . . . . . . . . . . . . . . . . . . . . FDIC insurance . . . . . . . . . . . . . . . . Director fees . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . Merger and acquisition related expenses $16,065 5,341 1,523 1,447 985 672 622 196 168 2 Other . . . . . . . . . . . . . . . . . . . . . . . . 2,150 $13,534 4,422 1,289 1,194 674 488 650 133 36 1,801 1,591 (Dollars in thousands) $11,578 3,420 1,349 1,595 927 333 330 18 $ 2,531 919 234 253 311 184 (28) 63 19% $1,956 1,002 21 (60) 18 (401) 21 (253) 46 155 38 320 (4) 115 47 17% 29 (4) (25) (27) 47 97 639 8 132 367 908 (1,799) (100) 1,654 559 35 28 350 893 (63) 98 (4) Total noninterest expense . . . . . . . . $29,171 $25,812 $22,120 $ 3,359 13% $3,692 17% Year ended December 31, 2015 compared to year ended December 31, 2014 Noninterest expense was $29.2 million for the year ended December 31, 2015, compared to $25.8 million for the year ended December 31, 2014. The increase of $3.4 million, or 13%, largely reflects higher salaries and employee benefits, reflecting key staffing additions and higher incentive accruals; and higher occupancy and equipment expense, reflecting higher depreciation as a result of the properties acquired from The Quinnipiac Bank acquisition and depreciation on leasehold improvements from our Norwalk branch that opened in the first quarter of 2015. Salaries and employee benefits. Salaries and employee benefit costs are the largest component of noninterest expense and include employee payroll expense, equity and non-equity incentive compensation, 51 health insurance, benefit plans and payroll taxes. Salaries and employee benefits increased by $2.5 million, or 19%, for the year ended December 31, 2015 compared to the year ended December 31, 2014, largely reflecting a full year of salary expense recognized from the former Quinnipiac employees who had joined the Bank in the fourth quarter of 2014, key staffing additions, increases in stock-based compensation expense and higher incentive accruals. Average full time equivalent employees totaled 127 at December 31, 2015 and 110 at December 31, 2014. Occupancy and equipment. Rent, depreciation and maintenance costs comprise the majority of occupancy and equipment expenses, which increased by $919 thousand, or 21%, for the year ended December 31, 2015, compared to the year ended December 31, 2014. The increase primarily related to depreciation associated with the properties acquired from The Quinnipiac Bank, depreciation on leasehold improvements from our Norwalk branch that opened in the first quarter of 2015 and higher rent expense due mainly to the Norwalk Branch. Professional services. Professional services include legal, audit and professional fees paid to external parties. For the year ended December 31, 2015 professional services increased by $253 thousand, or 21%, compared to the year ended December 31, 2014. The increase in the 2015 expense is primarily driven by increased internal audit fees. Marketing. Marketing expenses for the years ended December 31, 2015 and 2014 totaled $985 thousand and $674 thousand, respectively. The increase of $311 thousand, or 46%, reflects costs associated with increased advertising. FDIC insurance. We are subject to risked-based assessment fees by the FDIC for deposit insurance. For the years ended December 31, 2015 and 2014, FDIC insurance expense was $672 thousand and $488 thousand, respectively. The increase in FDIC insurance expense is driven by increased assessments as a result of increases in our asset base and deposits. Amortization of intangibles. Amortization of intangibles for the years ended December 31, 2015 and 2014 totaled $196 thousand and $133 thousand, respectively. The increase in amortization of intangibles largely reflects amortization of the Quinnipiac acquisition. the core deposit intangible recorded as a result of Merger and acquisition related expenses. Merger and acquisition expenses for the years ended December 31, 2015 and 2014 totaled $2 thousand and $1.8 million, respectively. The decrease of $1.8 million reflects legal, consulting, system conversion, severance and marketing expenses incurred as a result of the Quinnipiac acquisition in 2014. Other expenses. Other expenses for the years ended December 31, 2015 and 2014 totaled $2.2 million and $1.6 million, respectively. The increase of $559 thousand reflects increases in operating expenses and insurance. Year ended December 31, 2014 compared to year ended December 31, 2013 Noninterest expense was $25.8 million for the year ended December 31, 2014, compared to $22.1 million for the year ended December 31, 2013. The increase of $3.7 million, or 17%, largely reflects higher salaries and employee benefits, reflecting staffing additions and higher incentive accruals and higher merger and acquisition related expenses, attributable to the acquisition of Quinnipiac Bank and Trust Company. Salaries and employee benefits. Salaries and employee benefit costs are the largest component of noninterest expense and include employee payroll expense, equity and non-equity incentive compensation, health insurance, benefit plans and payroll taxes. Salaries and employee benefits increased by $2.0 million, or 17%, for the year ended December 31, 2014 compared to the year ended December 31, 2013, largely reflecting higher staffing levels and incentive accruals. Staffing increased to 123 full time employees at December 31, 2014 from 106 full time employees at December 31, 2013. Occupancy and equipment. Rent, depreciation and maintenance costs comprise the majority of occupancy and equipment expenses, which increased by $1.0 million, or 29%, for the year ended December 31, 2014, compared to the year ended December 31, 2013. The increase primarily related to costs associated with the two branches added as a result of the Quinnipiac Bank acquisition and investments related to technology and other equipment. 52 Professional services. Professional services include legal, audit and professional fees paid to external parties. For the year ended December 31, 2014 professional services decreased by $401 thousand, or 25%, compared to the year ended December 31, 2013. The decrease in the 2014 expense is primarily driven by a reduction in fees paid to consultants. Data processing. Data processing expense for our core systems totaled $1.3 million for the year ended December 31, 2014 and 2013. Marketing. Marketing expenses for the years ended December 31, 2014 and 2013 totaled $674 thousand and $927 thousand, respectively. The decrease of $253 thousand, or 27%, reflects costs associated with consolidating and rebranding the Bank of New Canaan and the Bank of Fairfield under a single entity with the Bankwell name and BNC Financial Group was also rebranded as Bankwell Financial Group in 2013. FDIC insurance. We are subject to risked-based assessment fees by the FDIC for deposit insurance. For the years ended December 31, 2014 and 2013, FDIC insurance expense was $488 thousand and $333 thousand, respectively. The increase in FDIC insurance expense is driven by increased assessments as a result of increases in our asset base and deposits largely driven by mergers and acquisitions. Director fees. Director fees totaled $650 thousand for the year ended December 31, 2014 and $330 thousand for the year ended December 31, 2013, representing fees paid to Board members to attend meetings. The increase in Director fees is a result of an increase in the number of meetings and increased number of directors. Amortization of intangibles. Amortization of intangibles for the years ended December 31, 2014 and 2013 totaled $133 thousand and $18 thousand, respectively. The increase in amortization of intangibles largely reflects amortization of the core deposit intangible recorded as a result of The Wilton and Quinnipiac acquisitions. Merger and acquisition related expenses. Merger and acquisition related expenses primarily relate to legal, consulting, system conversion, severance and marketing expenses incurred as a result of our Quinnipiac acquisition. For the year ended December 31, 2014, these expenses totaled $1.8 million. The increase in merger and acquisition expenses is driven by costs associated with the acquisition of Quinnipiac Bank being higher than such costs incurred in 2013 related to The Wilton acquisition. Income Taxes Income tax expense for the years ended December 31, 2015, 2014 and 2013 totaled $4.8 million, $2.2 million and $2.2 million, respectively. The effective tax rates for the years ended December 31, 2015, 2014 and 2013, were 34.9%, 32.2% and 29.7%, respectively. The increase in the effective tax rate for the year ended December 31, 2015 is primarily due to the formation of the Passive Investment Company “PIC” (see below) and the increase in our federal statutory rate from 34% to 35%. The increase in the effective tax rate for the year ended December 31, 2014 is due to the gain on bargain purchase recognized in 2013. Our net deferred tax asset at December 31, 2015, was $8.3 million, compared to $7.2 million, at December 31, 2014. The increase in the deferred tax asset at December 31, 2015 is primarily related to increases in deferred tax assets associated with the allowance for loan losses and deferred expenses. At December 31, 2015, there were federal net operating loss carry forwards of approximately $3.3 million for which there is no valuation allowance. On October 8, 2015, the Bank established a new wholly-owned subsidiary, Bankwell Loan Servicing Group, Inc. (a Passive Investment Company “PIC”). The PIC was organized in accordance with Connecticut statutes to hold and manage certain loans that are collateralized by real estate. Income earned by the PIC is exempt from Connecticut income tax and any dividends paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes. See Note 13 to our Consolidated Financial Statements for further information regarding income taxes. Financial Condition Summary Total assets at December 31, 2015 were $1.3 billion, an increase of $230.8 million, or 21%, from the December 31, 2014 balance of $1.1 billion. This increase was primarily due to strong organic loan growth. 53 Loans were $1.1 billion at December 31, 2015, up by $213.8 million from December 31, 2014. Cash balances increased by $40.0 million during 2015, reflecting capital raised as a result of the issuance of subordinated debt and from the exercise of warrants. Total liabilities at December 31, 2015 were $1.2 billion, an increase of $228.3 million from the December 31, 2014 balance of $970.3 million. This increase was primarily due to an increase in deposits and the issuance of subordinated debt. Shareholders’ equity totaled $131.8 million at December 31, 2015, an increase of $2.6 million from December 31, 2014, largely due to net income of $9.0 million and capital raised from the exercise of warrants, offset by the redemption of the SBLF preferred stock. The Bank exceeded the regulatory minimum capital levels to be considered well-capitalized with total risk-based capital of 13.39% at December 31, 2015. The Bank also had Tier 1 risk-based capital of 12.18% and Tier 1 capital to average assets ratio of 10.84% at December 31, 2015. Loan Portfolio The following table compares the composition of our loan portfolio for the dates indicated: 2015 2014 Change Total % Total % (In thousands) Real estate loans: . . . . . . . . . . . . . . . . . . Residential . . . . . . . . . . . . . . . . . Commercial Construction . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . $ 177,184 697,542 82,273 15,926 15.44% $175,031 521,181 60.79 63,229 7.17 18,166 1.39 18.83% $ 56.06 6.80 1.95 2,153 176,361 19,044 (2,240) 972,925 172,853 1,735 84.79 15.06 0.15 777,607 149,259 2,896 83.64 16.05 0.31 195,318 23,594 (1,161) Total loans . . . . . . . . . . . . . . . . $1,147,513 100.00% $929,762 100.00% $217,751 Primary loan categories Residential real estate. Residential real estate loans increased by $2.2 million, or 1% at December 31, 2015 compared to December 31, 2014 and amounted to $177.2 million, representing 15% of total loans at December 31, 2015. We originate residential real estate mortgages for our loan portfolio and for sale in the secondary market. Loans may be sold with servicing retained or released. The mix and volume of residential mortgage loan originations vary in response to changes in market interest rates and customer preferences. During the years ended December 31, 2015 and 2014, the majority of our mortgage originations were comprised of adjustable-rate loans for our loan portfolio. Interest only adjustable-rate mortgage loans comprise 34% of residential real estate loans and 5% of total loans. These loans are underwritten to the same standards as amortizing residential mortgage loans and generally have the same risk profile. We do not believe that these loans present any special risk due, in part, to borrower demographics (geographic location and per capita income), the high percentage of current appraisal values and our performance of stress testing prior to converting to an amortizing loan. Commercial real estate. Commercial real estate loans were $697.5 million and represented 61% of our total loan portfolio, at December 31, 2015, a net increase of $176.4 million, or 34%, from December 31, 2014. Partially offsetting strong origination activity was the sale of $12.9 million of commercial real estate loans during 2015. We executed these sales to reduce our ratio of commercial real estate loans to total risk-based capital and to take advantage of favorable market conditions. Commercial real estate loan growth during these periods largely reflects experienced lenders in the marketplace and the ability to source quality opportunities, enhanced lending to existing customers and continued economic improvement in our market. Commercial real estate loans are secured by a variety of property types, including office buildings, retail facilities, commercial mixed use and multi-family dwellings. 54 Commercial business. Commercial business loans were $172.9 million and represented 15% of our total loan portfolio at December 31, 2015, compared to $149.3 million and 16%, of the total portfolio at December 31, 2014. Growth in our commercial business loans has been significant, largely reflecting our commitment to this segment, including small business lending. Commercial business loans primarily provide working capital, equipment financing, financing for leasehold improvements and financing for expansion and are generally secured by assignments of corporate assets, real estate and personal guarantees of the business owners. Construction. Construction loans were $82.3 million at December 31 2015, up by $19.0 million from December 31, 2014, with $70.2 million attributable to commercial construction and $12.1 million attributable to residential construction. Construction loans totaled $63.2 million at December 31, 2014, of which $48.9 million were commercial construction and $14.3 million were residential construction. Commercial construction loans consist of commercial development projects, such as condominiums, apartment building and single-family subdivisions as well as office buildings, retail and other income producing properties and land loans, while residential construction loans are to individuals to finance the construction of residential dwellings for personal use. Home equity. Home equity loans decreased by $2.2 million, or 12%, during the year ended December 31, 2015 and totaled $15.9 million at December 31, 2015. The decrease from the December 31, 2014 balance of $18.2 million primarily reflects maturities and payoffs outpacing originations. Total home equity loans consist of home equity lines of credit, which are secured by owner-occupied one-to-four family residential properties. Consumer. Consumer loans totaled $1.7 million at December 31, 2015 compared to $2.9 million at December 31, 2014. Consumer loans are secured by passbook or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. We evaluate the appropriateness of our underwriting standards in response to changes in national and regional economic conditions, including such matters as market interest rates, energy prices, trends in real estate values, and employment levels. Based on our assessment of these matters, underwriting standards and credit monitoring activities are enhanced from time to time in response to changes in these conditions. The following table presents an analysis of the maturity of our commercial real estate, commercial construction and commercial business loan portfolios as of December 31, 2015. December 31, 2015 Commercial Real Estate Commercial Construction Commercial Business Total (In thousands) Amounts due: One year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,415 $25,799 $ 29,080 $ 67,294 After one year: One to five years . . . . . . . . . . . . . . . . . . . . . . . . Over five years . . . . . . . . . . . . . . . . . . . . . . . . . Total due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total 99,259 585,868 685,127 $697,542 14,471 29,949 44,420 $70,219 64,062 79,711 143,773 $172,853 177,792 695,528 873,320 $940,614 The following table presents an analysis of the interest rate sensitivity of our commercial real estate, commercial construction and commercial business loan portfolios due after one year as of December 31, 2015. Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans due after one year . . . . . . . . . . . . . . . . . . . . . . . . . . $255,247 9,717 55,628 $320,592 Adjustable Interest Rate December 31, 2015 Fixed Interest Rate (In thousands) $429,880 34,703 88,145 $552,728 Total $685,127 44,420 143,773 $873,320 55 Asset Quality We actively manage asset quality through our underwriting practices and collection operations. Our board of directors monitors credit risk management through two committees, the loan committee and the audit committee. The loan committee has primary oversight responsibility for the credit granting function including approval authority for credit granting policies, review of management’s credit granting activities and approval of large exposure credit requests. The audit committee oversees management’s systems and procedures to monitor the credit quality of our loan portfolio, conduct a loan review program, maintain the integrity of the loan rating system and determine the adequacy of the allowance for loan losses. These committees report the results of their respective oversight functions to our board of directors. In addition, our board of directors receives information concerning asset quality measurements and trends on a monthly basis. While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences arising as a result of general economic weakness such as, a prolonged downturn in the housing market on a national scale. Decreases in real estate values could adversely affect the value of property used as collateral for loans. In addition, adverse changes in the economy could have a negative effect on the ability of borrowers to make scheduled loan payments, which would likely have an adverse impact on earnings. The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and, in most cases, extends credit of up to 80% of the market value of the collateral, depending on the borrowers’ creditworthiness and the type of collateral. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrower’s ability to generate continuing cash flows. The Company’s policy for residential lending allows that, generally, the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may be up to 90-95% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, a religious or civic organization. Private mortgage insurance is required for that portion of the residential first mortgage loan in excess of 80% of the appraised value of the property. Credit risk management involves a partnership between our relationship managers and our credit approval, credit administration and collections personnel. Disciplined underwriting, portfolio monitoring and early problem recognition are important aspects of maintaining our high credit quality standards and low levels of nonperforming assets since our inception in 2002. Acquired Loans. Loans acquired in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. Acquired loans that have evidence of deterioration in credit quality since origination and for which it is probable, at acquisition, that all contractually required payments will not be collected are initially recorded at fair value without recording an allowance for loan losses. Determining the fair value of the loans is determined using market participant assumptions in estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. Under the accounting model for acquired loans, the excess of cash flows expected to be collected over the carrying amount of the loans, referred to as the “accretable yield”, is accreted into interest income over the life of the loans using the effective yield method. Accordingly, acquired loans are not subject to classification as nonaccrual in the same manner as originated loans. Rather, acquired loans are considered to be accruing loans because their interest income relates to the accretable yield recognized and not to contractual interest payments. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference. As such, charge-offs on acquired loans are first applied to the nonaccretable difference and then to any allowance for loan losses recognized subsequent to the acquisition. A decrease in expected cash flows in subsequent periods may indicate that the loan pool is impaired, which would require the establishment of an allowance for loan losses by a charge to the provision for loan losses. 56 Nonperforming Assets. Nonperforming assets include nonaccrual loans and property acquired through foreclosures or repossession. The following tables present nonperforming assets and additional asset quality data for the dates indicated: 2015 2014 At December 31, 2013 (In thousands) 2012 2011 Nonaccrual loans: Real estate loans: . . . . . . . . . . . . . . . . . . . . . . . . . . Residential Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non accrual loans . . . . . . . . . . . . . . . . Property acquired through foreclosure or $ 970 1,264 — 395 1,160 2 3,791 3,220 — — 142 3,362 $ — $1,003 $2,137 — 1,817 — — $2,166 307 — 1,175 90 — — 1,003 — 3,954 — 3,738 repossession, net . . . . . . . . . . . . . . . . . . . . . . Total nonperforming assets . . . . . . . . . . . . . 1,248 $5,039 950 $4,312 829 $1,832 962 $4,916 — $3,738 Nonperforming assets to total assets . . . . . . . . . . Nonaccrual loans to total loans . . . . . . . . . . . . . . Total past due loans to total loans . . . . . . . . . . . . 0.38% 0.39% 0.23% 0.81% 0.78% 0.33% 0.36% 0.16% 0.75% 1.01% 0.51% 0.86% 0.73% 0.75% 1.01% Accruing loans 90 days or more past due . . . . . . . $1,105 $1,998 $3,620 $ — $ — Non-performing assets exclude acquired loans that are accounted for as purchased credit impaired loans, which totaled $1.1 million at December 31, 2015. Such loans otherwise meet our definition of a nonperforming loan but are excluded because the loans are included in loan pools that are considered performing. These loans are, however, 90 days or more past due and reflected as such in the table. The discounts arising from recording these loans at fair value were due, in part, to credit quality. The acquired loans are accounted for on either a pool or individual basis and the accretable yield is being recognized as interest income over the life of the loans based on expected cash flows. Nonperforming assets totaled $5.0 million and represented 0.38% of total assets at December 31, 2015, compared to $4.3 million and 0.39% of total assets at December 31, 2014. Nonaccrual loans totaled $3.8 million at December 31, 2015, an increase of $0.4 million from December 31, 2014, a direct result of significant growth in our loan portfolio. Foreclosed real estate was $1.2 million at December 31, 2015, an increase of $298 thousand compared to December 31, 2014, reflecting an increase in foreclosed real estate from loans acquired from The Wilton Bank. Nonaccrual Loans. Loans greater than 90 days past due are put on nonaccrual status (excluding certain acquired credit impaired loans). Loans are also placed on nonaccrual status when, in the opinion of management, full collection of principal and interest is doubtful. Interest previously accrued, but uncollected, is reversed against current period income. subsequent payments are recognized on the cash basis or principal recapture basis depending on a number of factors including probability of collection and if impairment is identified. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. Total nonaccrual loans were $3.8 million at December 31, 2015, consisting of one residential loan, three commercial real estate loans, two home equity loans, six commercial business loans and one consumer loan. At December 31, 2015 and 2014, there were $169 thousand and no commitments to lend additional funds to any borrower on nonaccrual status, respectively. 57 Interest income that would have been recognized if loans on nonaccrual status had been current in accordance with their original terms for the years ended December 31, 2015, 2014 and 2013 was $25 thousand, $8 thousand and $23 thousand, respectively. The amount of actual interest income recognized on these loans was $43 thousand, $190 thousand and $8 thousand for the years ended December 31, 2015, 2014 and 2013, respectively. Past Due Loans. When a loan is 15 days past due, we send the borrower a late notice. We also contact the borrower by phone if the delinquency is not corrected promptly after the notice has been sent. When the loan is 30 days past due, we mail the borrower a letter reminding the borrower of the delinquency, and attempt to contact the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, subsequent delinquency notices are issued and the account will be monitored on a regular basis thereafter. By the 90th day of delinquency, we will send the borrower a final demand for payment and may recommend foreclosure. A summary report of all loans 30 days or more past due is provided to our board of directors each month. Generally, loans greater than 90 days past due are put on nonaccrual status. The delinquency status of acquired loans accounted for as purchased credit impaired loans are determined in accordance with their contractual repayment terms. At December 31, 2015, accruing purchased credit impaired loans greater than 90 days past due totaled $1.1 million. The following table presents past due loans as of December 31, 2015 and 2014: 31 – 60 Days Past Due 61 – 90 Days Past Due Greater Than 90 Days Total Past Due (In thousands) As of December 31, 2015 Originated Loans Residential real estate . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total originated loans Acquired Loans Commercial real estate . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . Total acquired loans . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . As of December 31, 2014 Originated Loans Residential real estate . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total originated loans Acquired Loans Residential real estate . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . Total acquired loans . . . . . . . . . . . . . . . . Total loans . . . . . . . . . . . . . . . . . . . . . . $ — — 198 1,078 1,276 333 — 100 262 17 712 $1,988 $ — — — — — 339 685 — — 178 3 1,205 $1,205 58 $ — 311 — 100 411 — — 162 71 — 233 $ 644 $ — — — — — — 677 — 40 386 — 1,103 $1,103 $ 969 — — 343 1,312 762 801 191 101 — 1,855 $3,167 $ — 3,436 — — 3,436 294 836 835 — 305 — 2,270 $5,706 $ 969 311 198 1,521 2,999 1,095 801 453 434 17 2,800 $5,799 $ — 3,436 — — 3,436 633 2,198 835 40 869 3 4,578 $8,014 At December 31, 2015, total past due loans totaled $5.8 million and consisted of six originated commercial business loans, one commercial real estate loans, one residential real estate loan, one home equity loan and 19 acquired loans. At December 31, 2014, total past due loans totaled $8.0 million and consisted of two originated commercial mortgage loans and 35 acquired loans. Troubled Debt Restructurings. Loans are considered restructured in a troubled debt restructuring when we have granted concessions to a borrower due to the borrower’s financial condition that we otherwise would not have considered. These concessions may include modifications of the terms of the debt such as reduction of the stated interest rate other than normal market rate adjustments, extension of maturity dates, or reduction of principal balance or accrued interest. The decision to restructure a loan, rather than aggressively enforcing the collection of the loan, may benefit us by increasing the ultimate probability of collection. Restructured loans are classified as accruing or non-accruing based on management’s assessment of the collectability of the loan. Loans which are already on nonaccrual status at the time of the restructuring generally remain on nonaccrual status for approximately six months before management considers such loans for return to accruing status. Accruing restructured loans are placed into nonaccrual status if and when the borrower fails to comply with the restructured terms and management deems it unlikely that the borrower will return to a status of compliance in the near term. Except for two non-accrual loans totaling $1.1 million, all TDRs at December 31, 2015 were performing in compliance under their modified terms and therefore, were on accrual status. Troubled debt restructurings are reported as such for at least one year from the date of the restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring did not involve a below market rate concession and the loan is not deemed to be impaired based on the terms specified in the restructuring agreement. As of December 31, 2015 there was a $169 thousand commitment to lend additional funds to a borrower whose loans had been restructured. The following table presents information on troubled debt restructured loans: December 31, 2015 2014 2013 2012 2011 (In thousands) Accruing troubled debt restructured loans: Residential real estate . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . $ 864 4,518 — 80 779 $1,965 216 — 92 1,338 $ 864 — — 97 642 $ 864 194 — — 794 Accruing troubled debt restructured loans . . . . 6,241 3,611 1,603 1,852 Nonaccrual troubled debt restructured loans: Commercial real estate . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . 970 90 Nonaccrual troubled debt restructured loans . . 1,060 — — — — — — — — — $ — 203 — — 57 260 — — — Total troubled debt restructured loans . . . . . $7,301 $3,611 $1,603 $1,852 $260 As of December 31, 2015 and 2014, loans classified as troubled debt restructurings totaled $7.3 million and $3.6 million, respectively. The $7.3 million balance at December 31, 2015 consists of 12 loans. The TDR additions for 2015 consisted of 3 commercial real estate loans and 1 commercial business loan. The $3.6 million balance at December 31, 2014 consists of 9 loans. The TDR additions for 2014 consisted of 2 commercial real estate loans and 4 commercial business loans. Potential Problem Loans. We classify certain loans as “special mention”, “substandard”, or “doubtful”, based on criteria consistent with guidelines provided by our banking regulators. Potential problem loans represent loans that are currently performing, but for which known information about 59 possible credit problems of the related borrowers causes management to have doubts as to the ability of such borrowers to comply with the present loan repayment terms and which may result in disclosure of such loans as nonperforming at some time in the future. These loans are not included in the amounts of nonaccrual or restructured loans presented above. We cannot predict the extent to which economic conditions or other factors may impact borrowers and the potential problem loans. Accordingly, there can be no assurance that other loans will not become 90 days or more past due, be placed on nonaccrual, become restructured, or require increased allowance coverage and provision for loan losses. We have identified approximately $2.5 million in potential problem loans at December 31, 2015. Potential problem loans are assessed for loss exposure using the methods described in Note 7 to our Consolidated Financial Statements under the caption “Credit Quality Indicators”. We expect the levels of non-performing assets and potential problem loans to fluctuate in response to changing economic and market conditions, and the relative sizes of the respective loan portfolios, along with our degree of success in resolving problem assets. We take a proactive approach with respect to the identification and resolution of problem loans. However, given the current state of the U.S. economy and, more specifically, the real estate market, the level of non-performing assets may increase in future periods. Allowance for Loan Losses Establishing an appropriate level of allowance for loan losses, involves a high degree of judgment. We use a methodology to systematically measure the amount of estimated loan loss exposure inherent in our loan portfolio for purposes of establishing a sufficient allowance for loan losses. We evaluate the adequacy of the allowance at least quarterly, and in determining our allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of our allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates and subsequent recoveries, changes in the nature of the loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, current economic factors and the estimated impact of current economic conditions on certain historical loan loss rates. See additional discussion regarding our allowance for loan losses under the caption “— Critical Accounting Policies and Estimates.” Our allowance for loan losses is our best estimate of the probable loan losses inherent in our loan portfolio as of the balance sheet date. The allowance is increased by provisions charged to earnings and by recoveries of amounts previously charged off, and is reduced by charge-offs on loans. Our general practice is to identify problem credits early and recognize full or partial charge-offs as promptly as practicable when it is determined that it is probable that the loan will not be repaid according to its original contractual terms, including principal and interest. Full or partial charge-offs on collateral dependent impaired loans are recognized when the collateral is deemed to be insufficient to support the carrying value of the loan. We do not recognize a recovery when an updated appraisal indicates a subsequent increase in value of the collateral. Our charge-off policies, which comply with standards established by our banking regulators, are consistently applied from period to period. Charge-offs are recorded on a monthly basis, as incurred. Partially charged-off loans continue to be evaluated on a monthly basis and additional charge-offs or loan loss provisions may be recorded on the remaining loan balance based on the same criteria. The estimation of loan loss exposure inherent in our loan portfolio includes, among other procedures, identification of loss allocations for individual loans deemed to be impaired in accordance with GAAP, and loss allocation factors for non-impaired loans based on peer bank data, historical loss experience, credit grade, delinquency factors and other similar credit quality indicators, adjusted for qualitative factors. We periodically reassess and revise the loss allocation factors used in the assignment of loss exposure to appropriately reflect our analysis of migrational loss experience. We analyze historical loss experience in the various portfolios over periods deemed to be relevant to the inherent risk of loss in the respective portfolios as of the balance sheet date. Revisions to loss allocation factors are not retroactively applied. The methodology we use to measure the amount of estimated loan loss exposure includes an analysis of individual loans deemed to be impaired. Impaired loans are loans for which it is probable that we will not be able to collect all amounts due according to the contractual terms of the loan agreements and all loans restructured in a troubled debt restructuring. Impaired loans do not include large groups of smaller 60 balance homogeneous loans that are collectively evaluated for impairment, which consist of primarily residential mortgage loans and consumer loans. Impairment is measured on a discounted cash flow method based upon the loan’s contractual effective interest rate, or at the loan’s observable market price, or if the loan is collateral dependent, at the fair value of the collateral less costs to sell. For collateral dependent loans, we may adjust appraised values to reflect estimated market value declines or apply other discounts to appraised values for unobservable factors resulting from our knowledge of circumstances associated with the property. The following table presents the activity in our allowance for loan losses and related ratios: Balance at beginning of period . . . . . . . $10,860 $ 8,382 $7,941 $6,425 $5,440 December 31, 2015 2014 2013 2012 2011 (Dollars in thousands) Charge-offs: Residential real estate . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . Total charge-offs . . . . . . . . . . . . . . Recoveries: Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Business Total recoveries . . . . . . . . . . . . . . . Net (recoveries) charge-offs . . . . . . . . . . Provision charged to earnings . . . . . . . . — — — — (15) (15) (30) 9 100 109 (79) 3,230 — — (100) — — (3) (103) 425 4 429 (326) 2,152 — (166) — — — (4) (261) — (60) — — (5) (170) (326) 26 — 26 144 585 21 — 21 305 1,821 64 1,049 — — (84) — — — (84) 20 — 20 Balance at end of period . . . . . . . . . . . . $14,169 $10,860 $8,382 $7,941 $6,425 Net (recoveries) charge-offs to average loans . . . . . . . . . . . . . . . . . . . . . . . . (0.01%) (0.05%) 0.03% Allowance for loan losses to total loans . . 1.23% 1.17% 1.33% 0.07% 1.50% 0.02% 1.74% At December 31, 2015, our allowance for loan losses was $14.2 million and represented 1.23% of total loans, compared to $10.9 million and 1.17% of total loans, at December 31, 2014. The increase in the ratio of allowance for loan losses to total loans is driven by a shift in the loan portfolio to a higher percentage of commercial loans. For the years ended December 31, 2015, 2014 and 2013, the provision for loan losses charged to earnings totaled $3.2 million, $2.2 million and $585 thousand, respectively. Net recoveries for the year ended December 31, 2015 were $79 thousand and represented 0.01% of average loans, primarily reflecting a recovery on a commercial business loan. For the year ended December 31, 2014, net recoveries were $326 thousand and represented 0.05% of average loans, primarily reflecting a recovery on a consumer loan. The carrying amount of total impaired loans at December 31, 2015 was $10.9 million and consisted of 15 commercial business loans, eight commercial real estate loans, two residential real estate loans, four home equity loans and two consumer loans. This compares to a carrying amount of $8.3 million for total impaired loans at December 31, 2014. The amount of allowance for loan losses related to impaired loans was $111 thousand and $33 thousand, respectively, at December 31, 2015 and 2014. 61 The following tables present the allocation of the allowance for loan losses and the percentage of these loans to total loans. The allocation below is neither indicative of the specific amounts or the loan categories in which future charge-offs may occur, nor is it an indicator of any future loss trends. The allocation of the allowance to each category does not restrict the use of the allowance to absorb any losses in any category. At December 31, 2015 2014 2013 Percent of Loan Portfolio Amount Percent of Loan Portfolio Amount Percent of Loan Portfolio Amount (Dollars in thousands) Residential real estate . . . . . . . . . . . . . . . . $ 1,444 15.44% $ 1,431 18.83% $1,310 24.66% Commercial real estate . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . 7,705 1,504 174 3,334 8 60.79 7.17 1.39 15.06 0.15 5,480 1,102 205 2,638 4 56.06 6.80 1.95 16.05 0.31 3,616 1,032 190 2,225 9 49.96 8.15 2.14 14.96 0.13 Total allowance for loan losses . . . . . . . . $14,169 100.00% $10,860 100.00% $8,382 100.00% Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . At December 31, 2012 2011 Percent of Loan Portfolio Amount Percent of Loan Portfolio (Dollars in thousands) 27.22% $1,290 2,519 53.73 1,007 6.25 274 2.08 1,317 10.71 11 0.01 7 — 28.37% 47.10 10.95 4.01 9.49 0.08 — Amount $1,230 3,842 929 220 1,718 2 — Total allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . $7,941 100.00% $6,425 100.00% The allocation of the allowance for loan losses at December 31, 2015 reflects our assessment of credit risk and probable loss within each portfolio. We believe that the level of the allowance for loan losses at December 31, 2015 is appropriate to cover probable losses. Investment Securities We manage our investment securities portfolio to provide a readily available source of liquidity for balance sheet management, to generate interest income and to implement interest rate risk management strategies. Investment securities are designated as either available for sale, held to maturity or trading at the time of purchase. We do not currently maintain a portfolio of trading securities. Investment securities available for sale may be sold in response to changes in market conditions, prepayment risk, rate fluctuations, liquidity, or capital requirements. Investment securities available for sale are reported at fair value, with any unrealized gains and losses excluded from earnings and reported as a separate component of shareholders’ equity, net of tax, until realized. Investment securities held to maturity are reported at amortized cost. 62 The amortized cost and fair value of investment securities as of the dates indicated are presented in the following table: 2015 December 31, 2014 2013 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value (In thousands) Securities available for sale: U.S. Government and agency obligations . . . . . . . . . . . . . . . . . . . $ 7,239 $ 7,143 $24,554 $24,418 $ 5,997 $ 5,688 State agency, U.S. Territories and municipal obligations . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . Government mortgage-backed 17,060 11,256 17,504 11,437 17,797 16,035 18,584 16,325 11,605 12,132 9,166 9,566 securities . . . . . . . . . . . . . . . . . . . . 4,400 4,497 5,567 5,682 1,133 1,211 Total securities available for sale . . . . $39,955 $40,581 $63,953 $65,009 $27,901 $28,597 Securities held to maturity: U.S. Government and agency obligations . . . . . . . . . . . . . . . . . . . $ — $ — $ 1,010 $ 1,010 $ 1,021 $ 1,019 State agency, U.S. Territories and municipal obligations . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . Government mortgage-backed 9,026 1,000 9,026 981 9,179 1,000 9,179 985 11,461 1,000 11,461 973 securities . . . . . . . . . . . . . . . . . . . . 200 221 265 296 334 362 Total securities held to maturity . . . . $10,226 $10,228 $11,454 $11,470 $13,816 $13,815 At December 31, 2015, the carrying value of our investment securities portfolio totaled $50.8 million and represented 4% of total assets, compared to $76.5 million and 7% of total assets at December 31, 2014. This decrease of $25.7 million, or 34%, primarily reflects maturities and calls. There were no sales of available for sale securities during the year ended December 31, 2015. The net unrealized gain position on our investment portfolio at December 31, 2015 and 2014 was $628 thousand and $1.1 million, respectively and included gross unrealized losses of $461 thousand and $290 thousand, respectively, as of December 31, 2015 and 2014. The gross unrealized losses at December 31, 2015 and 2014 were concentrated in U.S. Government and agency obligations and state agency, U.S. Territories and municipal obligations reflecting interest rate fluctuation. At December 31, 2015, we determined that there had been no deterioration in credit quality subsequent to purchase and believe that all unrealized losses are temporary. All of our investment securities are investment grade except for one U.S. Territory bond (a Commonwealth of Puerto Rico senior lien sales tax financing corporate bond or “COFINA” bond) with a face value of $1.0 million that is rated two notches below investment grade. The Company has determined that the unrealized loss on this U.S. Territory bond is not other than temporarily impaired because payments are backed by a senior lien position on cash receipts from sales tax revenue with a strong debt service coverage. As such, management believes there will be enough sales tax revenue in the future to continue to receive all principal and interest payments. In February 2016, the Commonwealth of Puerto Rico proposed a voluntary debt restructuring of all of its outstanding debt. The restructuring proposal could impact the valuation of the bond. The voluntary restructuring proposal has been rejected by creditors and represents one event in the expected multi-year process in working out the Commonwealth of Puerto Rico’s financial problems. 63 The following tables summarize the amortized cost and weighted average yield of debt securities in our investment securities portfolio as of December 31, 2015 and 2014, based on remaining period to contractual maturity. Information for mortgage-backed securities is based on the final contractual maturity dates without considering repayments and prepayments. At December 31, 2015 Securities available for sale: U.S. Government and agency obligations . . . . . . . . . . . . . . State agency, U.S. Territories and municipal obligations . . . . . . . . . . . . . . . . . . Corporate bonds Government mortgage-backed securities . . . . . . . . . . . . . . . Total securities available for Due Within 1 Year Amortized Cost Yield Due 1 – 5 Years Amortized Cost Due 5 – 10 Years Amortized Cost Yield Due After 10 Years Amortized Cost Yield Yield (In thousands) $ — —% $ 6,198 1.49% $ 394 2.30% $ 647 2.91% — 1,010 — 4.27 520 9,233 3.00 3.05 9,762 1,013 3.38 2.60 6,778 3.79 — — — — 68 3.36 240 2.62 4,092 2.60 sale . . . . . . . . . . . . . . . . . . $1,010 4.27% $16,019 2.44% $11,409 3.20% $11,517 3.32% Securities held to maturity: U.S. Government and agency obligations . . . . . . . . . . . . . . $ — —% $ — —% $ — —% $ — —% State agency and municipal obligations . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds Government mortgage-backed securities . . . . . . . . . . . . . . . Total securities held to — — — — — — — — 2.14 1,000 — — — — 9,026 4.65 — — — — — — 200 5.24 maturity . . . . . . . . . . . . . . $ — —% $ 1,000 2.14% $ — —% $ 9,226 4.89% At December 31, 2014 Securities available for sale: U.S. Government and agency obligations . . . . . . . . . . . . . . State agency, U.S. Territories and municipal obligations . . . . . . . . . . . . . . . . . . Corporate bonds Government mortgage-backed securities . . . . . . . . . . . . . . . Total securities available for Due Within 1 Year Amortized Cost Yield Due 1 – 5 Years Amortized Cost Due 5 – 10 Years Amortized Cost Yield Due After 10 Years Amortized Cost Yield Yield (In thousands) $ 497 2.24% $3,998 1.43% $17,055 2.50% $ 3,004 2.56% — 5,764 — 1.77 — 4,150 — 4.26 9,297 6,121 3.13 2.38 8,500 3.83 — — — — 99 2.64 — — 5,468 2.36 sale . . . . . . . . . . . . . . . . . . $6,261 1.81% $8,247 2.87% $32,473 2.66% $16,972 3.13% Securities held to maturity: U.S. Government and agency obligations . . . . . . . . . . . . . . $1,010 0.27% $ — —% $ — —% $ — —% State agency and municipal obligations . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds Government mortgage-backed securities . . . . . . . . . . . . . . . Total securities held to — — — — — — — — — — — — — — 2.69 1,000 9,179 4.50 — — — — 265 5.06 maturity . . . . . . . . . . . . . . $1,010 0.27% $ — —% $ 1,000 2.69% $ 9,444 4.52% 64 Bank Owned Life Insurance or BOLI BOLI amounted to $23.8 million as of December 31, 2015, reflecting our purchase of $10.0 million and $12.5 million in life insurance coverage in the fourth quarter of 2013 and the third quarter of 2014, respectively. The purchase of life insurance policies results in an income-earning asset on our consolidated balance sheet that provides monthly tax-free income to us and also provides a means to mitigate increasing employee benefit costs. We expect to benefit from the BOLI contracts as a result of the tax-free growth in cash surrender value and death benefits that are expected to be generated over time. BOLI is included in our Consolidated Balance Sheets at its cash surrender value. Increases in the cash surrender value are reported as a component of noninterest income in our Consolidated Statements of Income. Deposit Activities and Other Sources of Funds Our sources of funds include deposits, brokered certificates of deposit, FHLB borrowings, subordinated debt and proceeds from the sales, maturities and payments of loans and investment securities. Total deposits represented 79% of our total assets at December 31, 2015. While scheduled loan and securities repayments are a relatively stable source of funds, loan and investment security prepayments and deposit inflows are influenced by prevailing interest rates and local economic conditions and are inherently uncertain. Deposits We offer a wide variety of deposit products and rates to consumer and business customers consistent with FDIC regulations. Our pricing committee meets regularly to determine pricing and marketing initiatives. In addition to being an important source of funding for us, deposits also provide an ongoing stream of fee revenue. We participate in the Certificate of Deposit Account Registry Service, or CDARS, program. We use CDARS to place customer funds into certificate of deposit accounts issued by other participating banks. These transactions occur in amounts that are less than FDIC insurance limits to ensure that deposit customers are eligible for FDIC insurance on the full amount of their deposits. Reciprocal amounts of deposits are received from other participating banks that do the same with their customer deposits, and, we also execute one-way buy transactions. CDARS deposits are considered to be brokered deposits for bank regulatory purposes. We consider the reciprocal deposit balances to be in-market deposits as distinguished from traditional out-of-market brokered deposits. Time deposits may also be generated through the use of a listing service. We subscribe to a listing service, accessible to financial institutions, in which we may advertise our time deposit rates in exchange for a set subscription fee. Interested financial institutions then contact us directly to acquire a time certificate of deposit. There is no third party brokerage service involved in this transaction. The following table sets forth the composition of our deposits for the dates indicated: At December 31, 2015 2014 Amount Percent Weighted Average Rate Amount Percent Weighted Average Rate (Dollars in thousands) Noninterest-bearing demand . . . $ 164,553 15.72% —% $166,030 19.87% —% NOW . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . 51,008 296,838 97,846 436,697 4.87 28.35 9.35 41.71 0.11 0.53 0.72 0.96 60,321 216,180 84,457 308,451 7.22 25.88 10.11 36.92 0.11 0.46 0.33 0.88 Total deposits . . . . . . . . . . . . $1,046,942 100.00% 0.73% $835,439 100.00% 0.58% 65 At December 31, 2013 Amount Percent Weighted Average Rate (Dollars in thousands) Noninterest-bearing demand . . . . . . . . . . . . . . . . . . . . . . . . . . $118,618 17.93% —% NOW . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,652 164,579 107,692 197,004 11.13 24.88 16.28 29.78 0.12 0.45 0.46 0.72 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $661,545 100.00% 0.43% Total deposits were $1.0 billion at December 31, 2015, an increase of $211.5 million, or 25%, from the year ended December 31, 2014. Time deposits, excluding CDARS, increased by $148.7 million, or 64%, from year-end 2014, reflecting increased volume driven by promotional rates. Time deposits, excluding CDARS were $381.1 million at December 31, 2015 compared to the December 31, 2014 balance of $232.4 million and CDARS deposits were $55.6 million at December 31, 2015 compared to $76.1 million at December 31, 2014. Reciprocal customer deposits comprised $26.6 million, or 48%, of our total CDARS balance at December 31, 2015. During 2015, money market accounts increased $80.7 million, or 37%, reflecting promotions for our premium money market accounts. Noninterest bearing demand deposits decreased by $1.5 million, or 1%, and NOW accounts decreased $9.3 million, or 15% due to customer withdrawals outpacing new deposits. Savings accounts were $97.8 million at December 31, 2015, up by $13.4 million, or 16%, from December 31, 2014. At December 31, 2015 and 2014, time deposits, with a denomination of $100 thousand or more totaled $363.3 million and $239.8 million, respectively, maturing during the periods indicated in the table below: December 31, 2015 2014 (Dollars in thousands) Maturing: Within 3 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After 3 but within 6 months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . After 6 months but within 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 60,630 56,647 85,390 $ 47,918 49,511 92,502 After 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 160,672 49,885 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $363,339 $239,816 The Bank is a member of the FHLB, which is part of a twelve district Federal Home Loan Bank System. Members are required to own capital stock of the FHLB, and borrowings are collateralized by qualifying assets not otherwise pledged (principally single-family residential mortgage loans and securities). The maximum amount of credit that the FHLB will extend varies from time to time, depending on its policies and the amount of qualifying collateral the member can pledge. The Bank had satisfied its collateral requirement at December 31, 2015. We utilize advances from the FHLB as part of our overall funding strategy and to meet short-term liquidity needs. Total FHLB advances were $120.0 million at December 31, 2015 compared to $129.0 million at December 31, 2014. The decrease of $9.0 million reflects normal fluctuations in our borrowings. 66 Advances payable to the FHLB include short-term advances with original maturity dates of one year or less. The following table sets forth certain information concerning short-term FHLB advances as of and for the periods indicated in the following table: Year Ended December 31, 2015 2014 2013 (Dollars in thousands) As of and for the period ending: Average amount outstanding during the period . . . . . . . . . . $ 80,248 $ 37,129 $39,167 Amount outstanding at end of period . . . . . . . . . . . . . . . . . 75,000 Highest month end balance during the period . . . . . . . . . . . 101,000 107,000 107,000 12,000 60,000 Weighted average interest rate at end of period . . . . . . . . . . Weighted average interest rate during the period . . . . . . . . . . 0.46% 0.34% 0.26% 0.23% 0.41% 0.28% On August 19, 2015 the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early redemption date. Derivative Instruments The Company uses interest rate swap instruments to fix the interest rate on certain FHLB borrowings, all of which are designated as cash flow hedges. The hedge strategy converts the floating rate of interest on certain FHLB advances to fixed interest rates, thereby protecting the Bank from floating interest rate variability. At December 31, 2015, the Company held derivative financial instruments with a total notional amount of $75 million. Information about derivative instruments at December 31, 2015 and 2014 was as follows: December 31, 2015: Notional Amount Original Maturity Received Paid (Dollars in thousands) Fair Value Asset (Liability) Cash flow hedge: Interest rate swap on FHLB advance . . . . . . . . Interest rate swap on FHLB advance . . . . . . . . $25,000 $25,000 4.7 years 5.0 years 0.61% 1.62% $(181) 0.61% 1.83% (276) Interest rate swap on FHLB advance . . . . . . . . $25,000 5.0 years 0.61% 1.48% 181 December 31, 2014: $(276) Fair Value Asset (Liability) Notional Amount Original Maturity Received Paid (Dollars in thousands) Cash flow hedge: Interest rate swap on FHLB advance . . . . . . . . Interest rate swap on forward-starting FHLB $25,000 4.7 years 0.26% 1.62% $ (73) advance . . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 5.0 years 0.26% 1.83% (113) $(186) 67 Liquidity and Capital Resources Liquidity Management Liquidity is defined as the ability to generate sufficient cash flows to meet all present and future funding requirements at reasonable costs. Our primary source of liquidity is deposits. While our generally preferred funding strategy is to attract and retain low cost deposits, our ability to do so is affected by competitive interest rates and terms in the marketplace. Other sources of funding include discretionary use of purchased liabilities (e.g., FHLB term advances and other borrowings), cash flows from our investment securities portfolios, loan repayments and earnings. Investment securities designated as available for sale may also be sold in response to short-term or long-term liquidity needs. The Company’s liquidity positions are monitored daily by management. The Asset Liability Committee or ALCO establishes guidelines to ensure maintenance of prudent levels of liquidity. ALCO reports to the Company’s board of directors. The Bank has a detailed liquidity funding policy and a contingency funding plan that provide for the prompt and comprehensive response to unexpected demands for liquidity. We employ a stress testing methodology to estimate needs for contingent funding that could result from unexpected outflows of funds in excess of “business as usual” cash flows. The Bank has established unsecured borrowing capacity with the Bankers’ Bank Northeast and also maintains additional collateralized borrowing capacity with the FHLBB in excess of levels used in the ordinary course of business. Our sources of liquidity include cash, unpledged investment securities, borrowings from the FHLBB and the brokered deposit market. At December 31, 2015, our liquidity sources totaled $697.0 million and represented 52% of total assets, compared to $578.7 million and 53% of total assets at December 31, 2014 and $424.1 million and 54% of total assets at December 31, 2013. Capital Resources Total shareholders’ equity was $131.8 million at December 31, 2015, compared to $129.2 million at December 31, 2014. The $2.6 million, or 2%, increase is primarily a result of net income for the year ended December 31, 2015 of $9.0 million and capital raised from the exercise of warrants in the fourth quarter of 2015 of $3.8 million, offset by the redemption of the SBLF preferred stock of $11.0 million. The ratio of total equity to total assets was 9.90% at December 31, 2015, which compares to 11.75% at December 31, 2014. Tangible book value per common share at December 31, 2015 and 2014 was $17.43 and $16.35, respectively. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the assets, liabilities, and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios of total and Tier 1 capital to risk weighted assets and of Tier 1 capital to average assets, as defined by regulation. At December 31, 2015, the Bank met all capital adequacy requirements to which it was subject and exceeded the regulatory minimum capital levels to be considered well-capitalized under the regulatory framework for prompt corrective action. At December 31, 2015, the Bank’s ratio of common equity tier 1 capital to risk-weighted assets was 12.18%, total capital to risk-weighted assets was 13.39%, Tier 1 capital to risk weighted assets was 12.18% and Tier 1 capital to average assets was 10.84%. In 2011, we elected to participate in the Treasury’s Small Business Lending Fund Program, or SBLF. The SBLF is a $30 billion fund established under the Small Business Jobs Act of 2010 to encourage lending to small businesses by providing Tier 1 Capital to qualified community banks with assets of less than $10 billion. The SBLF funding expanded our ability to lend to small businesses, which will in turn help stimulate the economy and promote job growth. 68 On August 4, 2011, the Treasury approved our request to repay the Treasury’s preferred stock investment through participation in the SBLF. We sold 10,980 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, no par value, or Series C Preferred Stock, having a liquidation preference of $1,000 per preferred share, to the Treasury and simultaneously repurchased all of the Series A Preferred Stock and Series B Preferred Stock sold to the Treasury in 2009. The transaction resulted in net capital proceeds to us of $5.9 million, of which at least 90% was invested in the Banks as Tier 1 Capital. On November 20, 2015 the Company redeemed $10.98 million (10,980 shares) of preferred stock issued pursuant to the United States Department of Treasury (“Treasury’’) under the Small Business Lending Fund Program (the “SBLF’’). The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends through November 20, 2015. The redemption was approved by the Company’s primary federal regulator and was funded with the Company’s surplus capital. With this redemption, the Company has redeemed all of its outstanding SBLF stock. Our shareholders are entitled to dividends when and if declared by our board of directors out of funds legally available. Connecticut law prohibits us from paying cash dividends except from our net profits, which are defined by state statutes. In the years ended December 31, 2015, 2014 and 2013, we paid cash dividends on our Series C Preferred Stock of $125 thousand, $110 thousand and $111 thousand, respectively. On October 29, 2015 The Company’s Board of Directors declared a $0.05 per share cash dividend, that was paid on December 21, 2015 to shareholders of record on December 11, 2015. We did not repurchase any of our common stock during the years ended December 31, 2015, 2014 or 2013. Contractual Obligations The following table summarizes our contractual obligations to make future payments as of December 31, 2015. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. Payments Due by Period Total Less Than 1 Year 1 – 3 Years 4 – 5 Years After 5 Years (in thousands) Contractual Obligations: FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . Operating lease agreements . . . . . . . . . . . . . . . . . . . . . . Time deposits with stated maturity dates $120,000 8,196 436,697 $ 75,000 1,796 238,673 $ 20,000 2,002 187,868 $25,000 1,526 10,156 $ — 2,872 — Total contractual obligations . . . . . . . . . . . . . $564,893 $315,469 $209,870 $36,682 $2,872 Off-Balance Sheet Instruments In the normal course of business, we are a party to financial instruments with off-balance sheet risk to meet the financing needs of our customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement we have in particular classes of financial instruments. We enter into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Substantially all of the Bank’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. The Bank minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures. Commitments to extend credit totaled $153.4 million and $156.4 million, respectively at December 31, 2015 and 2014. The following table summarizes our commitments to extend credit as of the dates indicated. Since commitments associated with letters of credit and commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. We manage our 69 liquidity in light of the aggregate amounts of commitments to extend credit and outstanding standby letters of credit in effect from time to time to ensure that we will have adequate sources of liquidity to fund such commitments and honor drafts under such letters of credit. As of December 31, 2015 Other Commitments: Amount of Commitment Expiration per Period Total Less Than 1 Year 1 – 3 Years 4 – 5 Years After 5 Years (in thousands) Loan commitments . . . . . . . . . . . . . . . . . . . . . . . $ 77,181 $44,148 $10,778 $1,110 $21,145 Undisbursed construction loans . . . . . . . . . . . . . . 66,974 12,110 34,628 2,638 17,598 Unused home equity lines of credit . . . . . . . . . . . . 9,258 562 364 376 7,956 Total other commitments . . . . . . . . . . . . . . . . . $153,413 $56,820 $45,770 $4,124 $46,699 As of December 31, 2014 Amount of Commitment Expiration per Period Total Less Than 1 Year 1 – 3 Years 4 – 5 Years After 5 Years (in thousands) Other Commitments: Loan commitments . . . . . . . . . . . . . . . . . . . . . . . Undisbursed construction loans . . . . . . . . . . . . . . Unused home equity lines of credit . . . . . . . . . . . . $ 83,013 61,095 12,340 $52,370 9,218 138 $14,791 11,104 799 $2,556 $13,296 — 40,773 10,622 781 Total other commitments . . . . . . . . . . . . . . . . . $156,448 $61,726 $26,694 $3,337 $64,691 Recently Issued Accounting Pronouncements See Note 1 to our Consolidated Financial Statements for details of recently issued accounting pronouncements and their expected impact on our financial statements. Item 7a. Quantitative and Qualitative Disclosures About Market Risk Asset/Liability Management and Interest Rate Risk An effective asset/liability management process must balance the risks and rewards from both short and long-term interest rate risks in determining management strategy and action. Our ALCO facilitates and manages this process with the primary goal of maximizing net income and net economic value over time in changing interest rate environments, subject to board of director approved risk limits. ALCO regularly reviews various earnings at risk scenarios for changes in rates, as well as longer-term earnings at risk greater than five years. The principal strategies we use to manage interest rate risk include (i) emphasizing the origination, purchase and retention of adjustable rate loans, and the origination and purchase of loans with maturities matched with those of the deposits and borrowings funding the loans, (ii) investing in debt securities with relatively short maturities and/or average lives and (iii) classifying a significant portion of its investment portfolio as available for sale so as to provide sufficient flexibility in liquidity management. By our strategy of limiting the Bank’s risk to rising interest rates, we are also limiting the benefit of falling interest rates. We measure interest rate risk using simulation analysis to calculate earnings and equity at risk. These risk measures are quantified using simulation software from one of the leading firms in the field of asset/ liability modeling. Key assumptions relate to the behavior of interest rates and spreads, prepayment speeds and the run-off of deposits. From such simulations, interest rate risk, or IRR, is quantified and appropriate 70 strategies are formulated and implemented. We manage IRR by using two primary risk measurement techniques: simulation of net interest income and simulation of economic value of equity. These two measurements are complementary and provide both short-term and long-term risk profiles for us. Because income simulations assume that our balance sheet will remain static over the simulation horizon, the results do not reflect adjustments in strategy that ALCO could implement in response to rate shifts. We use net interest income at risk simulation to measure the sensitivity of net interest income to changes in market rates over a forward twelve-month period. This simulation captures underlying product behaviors, such as asset and liability repricing dates, balloon dates, interest rate indices and spreads, rate caps and floors, as well as other behavioral attributes. The simulation of net interest income also requires a number of key assumptions such as: (i) future balance sheet volume and mix assumptions that are management judgments based on estimates and historical experience; (ii) prepayment projections for loans and securities that are projected under each interest rate scenario using internal and external mortgage analytics; (iii) new business loan rates that are based on recent new business origination experience; and (iv) deposit pricing assumptions that are based on Office of the Comptroller of the Currency, or OCC, guidelines for non-maturity deposits reflecting the Bank’s limited history and management judgment. Combined, these assumptions can be inherently uncertain, and as a result, actual results may differ from simulation forecasts due to the timing, magnitude and frequency of interest rate changes, future business conditions, as well as unanticipated changes in management strategies. We use two sets of standard scenarios to measure net interest income at risk. For the “core” scenario, rate changes are ramped over a twelve-month horizon based upon a parallel yield curve shift and then maintained at those levels over the remainder of the simulation horizon. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Simulation analysis involves projecting a future balance sheet structure and interest income and expense under the various rate scenarios. Internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net interest income at risk for the subsequent one-year period should not decline by more than: 6% for a 100 basis point shift; 12% for a 200 basis point shift; and 18% for a 300 basis point shift. The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning December 31, 2015 and 2014: Parallel Ramp Rate Changes (basis points) Estimated Percent Change in Net Interest Income At December 31, 2015 2014 -100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.49)% (0.95)% +200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.49) (4.00) Parallel Shock Rate Changes (basis points) Estimated Percent Change in Net Interest Income At December 31, 2015 2014 -100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (3.47)% (3.26)% +100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.36) (4.94) (8.65) (3.07) (5.61) (9.00) The net interest income at risk simulation results indicate that as of December 31, 2015, we remain liability sensitive. The liability sensitivity is due to the fact that there are more liabilities than assets subject to repricing as market rates change. 71 We conduct economic value of equity at risk simulation in tandem with net interest income simulations, to ascertain a longer term view of our interest rate risk position by capturing longer-term re-pricing risk and options risk embedded in the balance sheet. It measures the sensitivity of economic value of equity to changes in interest rates. Economic value of equity at risk simulation values only the current balance sheet and does not incorporate the growth assumptions used in income simulation. As with the net interest income simulation, this simulation captures product characteristics such as loan resets, repricing terms, maturity dates, rate caps and floors. Key assumptions include loan prepayment speeds, deposit pricing elasticity and non-maturity deposit attrition rates. These assumptions can have significant impacts on valuation results as the assumptions remain in effect for the entire life of each asset and liability. We conduct non-maturity deposit behavior studies on a periodic basis to support deposit assumptions used in the valuation process. All key assumptions are subject to a periodic review. Base case economic value of equity at risk is calculated by estimating the net present value of all future cash flows from existing assets and liabilities using current interest rates. The base case scenario assumes that future interest rates remain unchanged. The following table sets forth the estimated percentage change in our economic value of equity at risk, assuming various shifts in interest rates: Parallel Shock Rate Changes (basis points) -100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +100 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +200 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . +300 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Estimated Percent Change in Economic Value of Equity At December 31, 2015 2014 (3.80)% (7.80) (17.20) (25.40) (0.50)% (8.50) (18.20) (26.90) While ALCO reviews and updates simulation assumptions and also periodically back-tests the simulation results to ensure that the assumptions are reasonable and current, income simulation may not always prove to be an accurate indicator of interest rate risk or future net interest margin. Over time, the repricing, maturity and prepayment characteristics of financial instruments and the composition of our balance sheet may change to a different degree than estimated. Simulation modeling assumes a static balance sheet, with the exception of certain modeled deposit mix shifts from low-cost core savings deposits to higher-cost time deposits in rising rate scenarios as noted above. Due to the low current level of market interest rates, the banking industry has experienced relatively strong growth in low-cost FDIC insured core savings deposits over the past several years. ALCO recognizes that a portion of these increased levels of low-cost balances could shift into higher yielding alternatives in the future, particularly if interest rates rise and as confidence in financial markets strengthens, and has modeled increased amounts of deposit shifts out of these low-cost categories into higher-cost alternatives in the rising rate simulation scenarios presented above. It should be noted that the static balance sheet assumption does not necessarily reflect our expectation for future balance sheet growth, which is a function of the business environment and customer behavior. Another significant simulation assumption is the sensitivity of core savings deposits to fluctuations in interest rates. Income simulation results assume that changes in both core savings deposit rates and balances are related to changes in short-term interest rates. The assumed relationship between short-term interest rate changes and core deposit rate and balance changes used in income simulation may differ from ALCO’s estimates. Lastly, mortgage-backed securities and mortgage loans involve a level of risk that unforeseen changes in prepayment speeds may cause related cash flows to vary significantly in differing rate environments. Such changes could affect the level of reinvestment risk associated with cash flow from these instruments, as well as their market value. Changes in prepayment speeds could also increase or decrease the amortization of premium or accretion of discounts related to such instruments, thereby affecting interest income. 72 Impact of Inflation Our financial statements and related data contained in this annual report have been prepared in accordance with GAAP, which require the measure of financial position and operating results in terms of historic dollars, without considering changes in the relative purchasing power of money over time due to inflation. Inflation generally increases the costs of funds and operating overhead, and to the extent loans and other assets bear variable rates, the yields on such assets. Unlike most industrial companies, virtually all of the assets and liabilities of a financial institution are monetary in nature. As a result, interest rates generally have a more significant effect on the performance of a financial institution than the effects of general levels of inflation. In addition, inflation affects a financial institution’s cost of goods and services purchased, the cost of salaries and benefits, occupancy expense and similar items. Inflation and related increases in interest rates generally decrease the market value of investments and loans held and may adversely affect liquidity, earnings and shareholders’ equity. 73 Item 8. Financial Statements and Supplementary Data The financial statements and supplementary data required by this item are presented in the order shown below: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets as of December 31, 2015 and 2014 Consolidated Statements of Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2015, 2014 and 2013 Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013 Notes to Consolidated Financial Statements 74 Report of Independent Registered Public Accounting Firm To the Board of Directors and Shareholders Bankwell Financial Group, Inc. and Subsidiaries New Canaan, Connecticut We have audited the accompanying consolidated balance sheets of Bankwell Financial Group, Inc. and Subsidiaries (the “Company”) as of December 31, 2015 and 2014, and the related consolidated statements of income, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three year period ended December 31, 2015. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Bankwell Financial Group, Inc. and Subsidiaries as of December 31, 2015 and 2014, and the consolidated results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with accounting principles generally accepted in the United States of America. /s/ Whittlesey & Hadley, P.C. Hartford, Connecticut March 8, 2016 75 Bankwell Financial Group, Inc. Consolidated Balance Sheets (Dollars in thousands, except share data) ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal funds sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Held to maturity investment securities, at amortized cost . . . . . . . . . . . . . . . Available for sale investment securities, at fair value . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans receivable (net of allowance for loan losses of $14,169 and $10,860 at December 31, 2015 2014 $ 49,562 39,035 88,597 10,226 40,581 — 48,559 — 48,559 11,454 65,009 586 December 31, 2015 and 2014, respectively) . . . . . . . . . . . . . . . . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank stock, at cost . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total assets 1,129,748 1,248 4,071 6,554 11,163 23,755 2,589 652 8,337 2,851 $1,330,372 915,981 950 3,323 6,109 11,910 23,028 2,589 848 7,156 2,029 $1,099,531 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits Noninterest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 164,553 882,389 1,046,942 $ 166,030 669,409 835,439 Advances from the Federal Home Loan Bank . . . . . . . . . . . . . . . . . . . . . Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120,000 25,000 6,661 1,198,603 129,000 — 5,882 970,321 Commitments and contingencies (Note 12) . . . . . . . . . . . . . . . . . . . . . . . . . . — — Shareholders’ equity Preferred stock, senior noncumulative perpetual, Series C, no par; 10,980 shares issued at December 31, 2014, liquidation value of $1,000 per share . . . . . . . . Common stock, no par value; 10,000,000 shares authorized, 7,516,291 and 7,185,482 shares issued at December 31, 2015 and 2014, respectively . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 10,980 112,579 18,963 227 131,769 107,265 10,434 531 129,210 Total liabilities and shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . $1,330,372 $1,099,531 See Notes to Consolidated Financial Statements 76 Bankwell Financial Group, Inc. Consolidated Statements of Income (Dollars in thousands, except per share amounts) Interest and dividend income Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest and dividends on securities . . . . . . . . . . . . . . . . . . . . . . Interest on cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Interest expense Interest expense on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income after provision for loan losses . . . . . . . . . . . . . Noninterest income Gains and fees from sales of loans . . . . . . . . . . . . . . . . . . . . . . . Service charges and fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gain on bargain purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sale of available for sale securities . . . . . . . . . . . . . . . Gain on sale of foreclosed real estate, net . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . Salaries and employee benefits Occupancy and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Professional services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Marketing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Director fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Merger and acquisition related expenses . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax expense . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to common shareholders . . . . . . . . . . . . . Earnings Per Common Share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted Average Common Shares Outstanding: $ $ $ $ Year Ended December 31, 2014 2013 2015 48,698 1,958 98 50,754 5,681 2,285 7,966 42,788 3,230 39,558 1,113 933 727 — — — 711 3,484 16,065 5,341 1,523 1,447 985 672 622 196 168 2 2,150 29,171 13,871 4,841 9,030 8,905 1.23 1.21 $ $ $ $ $ 33,409 2,052 128 35,589 3,295 634 3,929 31,660 2,152 29,508 1,313 643 497 — — — 588 3,041 13,534 4,422 1,289 1,194 674 488 650 133 36 1,801 1,591 25,812 6,737 2,169 4,568 4,458 0.78 0.78 $ $ $ $ $ 26,599 1,409 84 28,092 2,233 532 2,765 25,327 585 24,742 2,020 416 31 1,333 648 64 211 4,723 11,578 3,420 1,349 1,595 927 333 330 18 8 908 1,654 22,120 7,345 2,184 5,161 5,050 1.46 1.44 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . . 7,071,550 7,140,558 0.05 $ 5,577,942 5,605,512 $ — $ 3,395,779 3,451,393 — See Notes to Consolidated Financial Statements 77 Bankwell Financial Group, Inc. Consolidated Statements of Comprehensive Income (In thousands) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $9,030 $4,568 $ 5,161 Year Ended December 31, 2015 2014 2013 Other comprehensive income (loss): Unrealized (losses) gains on securities: Unrealized holding (losses) gains on available for sale securities . . . . . . . . (431) Reclassification adjustment for loss realized in net income . . . . . . . . . . . Net change in unrealized (loss) gain . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect – benefit (expense) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized (losses) gains on securities, net of tax . . . . . . . . . . . . . . . . Unrealized losses on interest rate swap: Unrealized losses on interest rate swaps designated as cash flow hedge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax effect – benefit Unrealized losses on interest rate swap, net of tax . . . . . . . . . . . . . . . . — (431) 192 (239) (89) 24 (65) 361 — 361 (1,129) (648) (1,777) (141) 690 220 (1,087) (186) 73 (113) — — — Total other comprehensive (loss) income . . . . . . . . . . . . . . . . . . . . . . . . . (304) 107 (1,087) Comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,726 $4,675 $ 4,074 See Notes to Consolidated Financial Statements 78 Bankwell Financial Group, Inc. Consolidated Statements of Shareholders’ Equity (In thousands, except share data) Number of Outstanding Shares Preferred Stock Common Stock Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) $ Balance at January 1, 2013 . . . . . . . . . . . . . . 2,846,700 $ 10,980 $ 38,117 — — Net income . . . . . . . . . . . . . . . . . . . . . . . . — — Other comprehensive loss, net of tax . . . . . . . . — — Preferred stock cash dividends . . . . . . . . . . . . — 343 Stock-based compensation expense . . . . . . . . . 467 — Capital from exercise of stock options . . . . . . . — 13,178 Capital from private placement . . . . . . . . . . . — — Issuance of restricted stock . . . . . . . . . . . . . . — — Forfeitures of restricted stock . . . . . . . . . . . . — — Stock options exercised . . . . . . . . . . . . . . . . — — Stock issuance from private placement . . . . . . . — — — — — — 87,456 (1,916) 46,640 897,513 Balance at December 31, 2013 . . . . . . . . . . . . 3,876,393 — Net income . . . . . . . . . . . . . . . . . . . . . . . . — Other comprehensive income, net of tax . . . . . . — Preferred stock cash dividends . . . . . . . . . . . . — Stock-based compensation expense . . . . . . . . . — Capital from exercise of stock options . . . . . . . Issuance of 2,702,703 shares, net of expenses . . . 2,702,703 127,610 Issuance of restricted stock . . . . . . . . . . . . . . (51,651) Forfeitures of restricted stock . . . . . . . . . . . . 20,305 Stock options exercised . . . . . . . . . . . . . . . . Stock issuance from acquisition of Quinnipiac . . Bank and Trust Company . . . . . . . . . . . . . . . 510,122 52,105 10,980 — — — — — — 573 — 207 — — 44,704 — — — — — — 926 5,161 — (111) — — — — — — — 5,976 4,568 — (110) — — — — — — $ 1,511 — (1,087) — — — — — — — — 424 — 107 — — — — — — — Total $ 51,534 5,161 (1,087) (111) 343 467 13,178 — — — — 69,485 4,568 107 (110) 573 207 44,704 — — — — 9,676 — — 9,676 10,980 Balance at December 31, 2014 . . . . . . . . . . . . 7,185,482 — — Net income . . . . . . . . . . . . . . . . . . . . . . . . — — Other comprehensive loss, net of tax . . . . . . . . — — Cash dividends declared ($0.05 per share) . . . . . — — Preferred stock cash dividends . . . . . . . . . . . . — (10,980) Redemption of SBLF preferred stock . . . . . . . — — Stock-based compensation expense . . . . . . . . . — 269,992 Warrants exercised . . . . . . . . . . . . . . . . . . . — 51,800 Issuance of restricted stock . . . . . . . . . . . . . . — (25,573) Forfeitures of restricted stock . . . . . . . . . . . . — 34,590 Stock options exercised . . . . . . . . . . . . . . . . 107,265 — — — — — 1,033 3,780 — — 501 10,434 9,030 — (376) (125) — — — — — — 531 — (304) — — — — — — — — 129,210 9,030 (304) (376) (125) (10,980) 1,033 3,780 — — 501 Balance at December 31, 2015 . . . . . . . . . . . . 7,516,291 $ — $112,579 $18,963 $ 227 $131,769 See Notes to Consolidated Financial Statements 79 Bankwell Financial Group, Inc. Consolidated Statements of Cash Flows (In thousands) Cash flows from operating activities Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by operating activities: Net amortization of premiums and discounts on investment securities. . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sales of available for sale securities . . . . . . . . . . . . . . . . . . . Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in cash surrender value of bank-owned life insurance . . . . . . . . . Loan principal sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gain on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (accretion) amortization of purchase accounting adjustments . . . . . . . Loss (gain) on sale and write-downs of foreclosed real estate . . . . . . . . . . Gain on bargain purchase . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in: Deferred loan fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by operating activities . . . . . . . . . . . . . . . . . . . . Cash flows from investing activities . . . . . . . . Proceeds from principal repayments on available for sale securities . . . . . . . . Proceeds from principal repayments on held to maturity securities . . . . . . . . . . Net proceeds from sales and calls of available for sale securities Net proceeds from sales and calls of held to maturity securities . . . . . . . . . . Purchases of available for sale securities . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of held to maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . Acquisition, net of cash paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . Proceeds from sale of foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . . Net cash used by investing activities . . . . . . . . . . . . . . . . . . . . . . . Cash flows from financing activities Net change in time certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . Net change in other deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net change in FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from exercise of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Redemption of SBLF preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends paid on preferred stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in cash and cash equivalents . . . . . . . . . . . . . Cash and cash equivalents: Year Ended December 31, 2014 2015 2013 $ 9,030 $ 4,568 $ 5,161 99 3,230 (966) — 1,685 (727) (30,309) 32,008 (1,113) 1,033 (104) 184 — 668 (748) (519) 779 14,230 1,877 220 22,030 1,000 — — — — (218,772) (938) (445) 400 (194,628) 128,379 83,257 (9,000) 3,780 501 25,000 (10,980) (376) (125) 220,436 40,038 124 2,152 (696) — 1,239 (497) (27,282) 28,109 (1,313) 573 656 — — 1,120 (619) 58 978 9,170 10,189 2,353 15,920 — (53,772) — (12,500) 2,546 (200,118) (2,042) (1,275) — (238,699) 111,247 (37,973) 78,000 44,704 207 — — — (110) 196,075 (33,454) 97 585 (357) (648) 666 — (72,589) 74,509 (2,020) 343 (80) (64) (1,333) 479 (185) (501) (1,114) 2,949 723 180 10,514 — — (7,623) (10,031) 30,883 (77,004) (908) (134) 1,693 (51,707) 66,538 68,772 (47,000) 13,178 467 — — — (111) 101,844 53,086 Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . End of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 48,559 $ 88,597 82,013 $ 48,559 28,927 $ 82,013 Supplemental disclosures of cash flows information: Cash paid for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,544 6,136 $ 3,985 2,222 $ 2,527 2,872 Acquisition of noncash assets and liabilities: Assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 112,498 — (107,958) 34,869 (64,446) Noncash investing and financing activities Loans transferred to foreclosed real estate . . . . . . . . . . . . . . . . . . . . . . 883 — 52 See Notes to Consolidated Financial Statements 80 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. Nature of Operations and Summary of Significant Accounting Policies Bankwell Financial Group, Inc. (the “Company” or “Bankwell”) is a bank holding company headquartered in New Canaan, Connecticut. The Company offers a broad range of financial services through its banking subsidiary, Bankwell Bank, (the “Bank”). In November 2013, the Bank acquired The Wilton Bank (“Wilton”), which added one branch and approximately $25.1 million in loans and $64.2 million in deposits. In addition, in October 2014, the Bank acquired Quinnipiac Bank and Trust Company (Quinnipiac) which added two branches and approximately $97.8 million in loans and $100.6 million in deposits. The Bank is a Connecticut state chartered commercial bank, founded in 2002, whose deposits are insured under the Deposit Insurance Fund administered by the Federal Deposit Insurance Corporation (“FDIC”). The Bank provides a full range of banking services to commercial and consumer customers, primarily concentrated in the Fairfield and New Haven Counties region of Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Norwalk, Hamden and North Haven Connecticut. Principles of consolidation The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of estimates The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”) and general practices within the banking industry. In is required to make estimates and preparing the consolidated financial statements, management assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the balance sheet and revenue and expenses for the period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the fair value of acquired assets, the allowance for loan losses, stock-based compensation and derivative instrument valuation. Segments The Company has one reportable segment. All of the Company’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Company supports the others. For example, lending is dependent upon the ability of the Company to fund itself with deposits and borrowings while managing the interest rate and credit risk. Accordingly, all significant operating decisions are based upon analysis of the Bank as one segment or unit. Basis of consolidated financial statement presentation The consolidated financial statements as of December 31, 2015 and 2014 and for the years ending December 31, 2015, 2014 and 2013 have been prepared in accordance with GAAP and general practices within the banking industry. Such policies have been followed on a consistent basis. Significant concentrations of credit risk Most of the Company’s activities are with customers located within Fairfield and New Haven Counties and the surrounding region of Connecticut, and declines in property values in these areas could significantly impact the Company. The Company has significant concentrations in commercial real estate loans. Management does not believe they present any special risk. The Company does not have any significant concentrations in any one industry or customer. Cash and Cash Equivalents and Statement of Cash Flows Cash and due from banks and federal funds sold are recognized as cash equivalents in the consolidated statements of cash flows. Federal funds sold generally mature in one day. For purposes of reporting cash 81 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) flows, all highly liquid debt instruments purchased with an original maturity of three months or less are considered to be cash equivalents. Cash flows from loans and deposits are reported net. The balances of cash and due from banks and federal funds sold, at times, may exceed federally insured limits. The Company has not experienced any losses from such concentrations. Investment Securities Management determines the appropriate classifications of investment securities at the date individual investment securities are acquired, and the appropriateness of such classifications is reaffirmed at each balance sheet date. The Company’s investment securities are categorized as either available for sale or held to maturity. Held to maturity investments are carried at amortized cost; available for sale securities are carried at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income (loss) as a separate component of capital, net of estimated income taxes. If debt (OTTI). impairment Investment securities in the available for sale and held-to-maturity portfolios are reviewed quarterly for other-than-temporary cost, a other-than-temporary impairment is deemed to exist if the present value of the expected future cash flows is less than the amortized cost basis of the security. OTTI is required to be recognized regardless of the credit loss component if the Company intends to sell the security or if it is “more-likely-than-not” that the Company will be required to sell the security before recovery of its amortized cost basis. The credit loss component of an other-than-temporary impairment write-down is recorded in earnings, while the remaining portion of the impairment loss is recognized in other comprehensive income (loss), provided the Company does not intend to sell the underlying debt security and it is more-likely-than-not that the Company will not be required to sell the debt security prior to recovery. below amortized security is In determining whether a credit loss exists and the period over which the fair value of the debt security is expected to recover, management considers the following factors: the length of time and extent that fair value has been less than cost, the financial condition and near term prospects of the issuer, any external credit ratings, the level of excess cash flows generated from the underlying collateral supporting the principal and interest payments of the debt securities and the level of credit enhancement provided by the structure. The sale of a held to maturity security within three months of its maturity date or after collection of at least 85% of the principal outstanding at the time the security was acquired is considered a maturity for purposes of classification and disclosure. Purchase premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains or losses on the sales of securities are recognized at trade date utilizing the specific identification method. Bank Owned Life Insurance The investment in bank owned life insurance (“BOLI”) represents the cash surrender value of life insurance policies on the lives of certain Bank employees who have provided positive consent allowing the Bank to be the beneficiary of such policies. Increases in the cash value of the policies, as well as insurance proceeds received, are recorded in noninterest income, and are not subject to income taxes. The financial strength of the insurance carrier is reviewed prior to the purchase of BOLI and annually thereafter. Federal Home Loan Bank Stock Federal Home Loan Bank of Boston (“FHLB”) stock is a non-marketable equity security that is carried at cost. There are no quoted market prices for this security and the security is not liquid. The Company can sell these securities back to the FHLB at par. Loans Held For Sale Loans held for sale are those loans which management has the intent to sell in the foreseeable future, and are carried at the lower of aggregate cost or market value. Net unrealized losses, if any, are recognized 82 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) by a valuation allowance through a charge to noninterest income. Realized gains and losses on the sale of loans are recognized on the settlement date and are determined by the difference between the sale proceeds and the carrying value of the loans. Loans may be sold with servicing rights released or retained. At the time of the sale, management records a servicing asset for the value of any retained servicing rights, which represents the present value of the differential between the contractual servicing fee and adequate compensation, defined as the fee a sub-servicer would require to assume the role of servicer, after considering the estimated effects of prepayments. Loans Receivable Loans receivable that management has the ability and intent to hold for the foreseeable future or until maturity or payoff are stated at their current unpaid principal balances, net of the allowance for loan losses, charge-offs, recoveries, net deferred loan origination fees and unamortized loan premiums. Past due or delinquency status for all loans is based on the number of days past due in accordance with its contractual payment terms. A loan is considered impaired when it is probable that all contractual principal or interest payments due will not be collected in accordance with the terms of the loan agreement. Impaired loans are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate or, as a practical expedient, at the loan’s observable market price or the fair value of the collateral, if the loan is collateral dependent. The amount of impairment, if any, and any subsequent changes are recorded as adjustments to the allowance for loan losses. Management reviews all nonaccrual loans, other loans past due 90 days or more, and restructured loans for impairment. In most cases, loan payments that are past due less than 90 days are considered minor collection delays and the related loans are not considered to be impaired. Consumer installment loans are considered to be pools of small balance homogeneous loans, which are collectively evaluated for impairment. Modifications to a loan are considered to be a troubled debt restructuring (“TDR”) when two conditions are met: 1) the borrower is experiencing financial difficulties and 2) the modification constitutes a concession. Modified terms are dependent upon the financial position and needs of the individual borrower. Debt may be bifurcated with separate terms for each tranche of the restructured debt. The decision to restructure a loan, versus aggressively enforcing the collection of the loan, may benefit the Company by increasing the ultimate probability of collection. If a performing loan is restructured into a TDR it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Initially, all TDRs are reported as impaired. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months. TDR’s are reported as such for at least one year from the date of restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring and the loan is not deemed to be impaired based on the modified terms. Acquired Loans Loans that the Company acquires in acquisitions are initially recorded at fair value with no carryover of the related allowance for credit losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows initially expected to be collected on the loans and discounting those cash flows at an appropriate market rate of interest. For loans which meet the criteria stipulated in Accounting Standards Codification (“ASC”) 310-30, “Loans and Debt Securities Acquired with Deteriorated Credit Quality”, the Company recognizes an accretable yield, which is defined as the excess of all cash flows expected at acquisition over the initial fair 83 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) value of the loan, as interest income on a level-yield basis over the expected remaining life of the loan. The excess of the loan’s contractually required payments over the cash flows expected to be collected is the nonaccretable difference. The nonaccretable difference is not recognized as an adjustment of yield, a loss accrual, or a valuation allowance. After the initial acquisition, the Company continues to evaluate whether the timing and the amount of cash to be collected are reasonably estimated. Subsequent significant increases in cash flows the Company expects to collect will first reduce previously recognized valuation allowance and then be reflected prospectively as an increase to the level yield. Subsequent decreases in expected cash flows may result in the loan being considered impaired. Interest income is not recognized to the extent that the net investment in the loan would increase to an amount greater than the estimated payoff amount. For ASC 310-30 loans, the expected cash flows reflect anticipated prepayments, determined on a loan by loan basis, according to the anticipated collection plan of these loans. Prepayments result in the recognition of the nonaccretable balance as current period yield. Changes in prepayment assumptions may change the amount of interest income and principal expected to be collected. The expected prepayments used to determine the accretable yield are consistent between the cash flows expected to be collected and projections of contractual cash flows so as to not affect the nonaccretable difference. For loans that do not meet the ASC 310-30 criteria, the Company records interest income on a level yield basis using the contractually required cash flows. The Company subjects loans that do not meet the ASC 310-30 criteria to ASC Topic 450, “Contingencies”, by collectively evaluating these loans for an allowance for loan loss, using the same methodology as loans originated by the Company. Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition are considered if the performing upon acquisition, regardless of whether the customer is contractually delinquent, Company can reasonably estimate the timing and amount of the expected cash flows on such loans and if the Company expects to fully collect the new carrying value of the loans. As such, the Company may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable yield. The Company has determined that it can reasonably estimate future cash flows on the Company’s current portfolio of acquired loans that are past due 90 days or more, and on which the Company is accruing interest and the Company expects to fully collect the carrying value of the loans. Allowance For Loan Losses The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to earnings. Loan losses are charged against the allowance for loan losses when management believes the non-collectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance for loan losses. The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective, as it requires estimates that are susceptible to significant revision as more information becomes available. The allowance for loan losses consists of specific and general components. The specific component relates to impaired loans that are classified as doubtful, substandard or special mention. For these loans, an allowance is established when the discounted cash flows, collateral value or observable market price of the impaired loan is lower than the carrying value of that loan. The general component covers non classified loans and is based on historical loss experience adjusted for qualitative factors, and includes unallocated components maintained to cover uncertainties that could affect management’s estimation of probable losses, and reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio. 84 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Management believes the allowance for loan losses is adequate. While management uses available information to recognize losses on loans, future additions to the allowance may be necessary based on changes in economic conditions. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the allowance for loan losses. Such agencies have the authority to require additions to the allowance or charge-offs based on the agencies’ judgments about information available to them at the time of their examination. Goodwill and Intangibles Goodwill represents the excess of the purchase price over the fair value of the net assets acquired in a business combination. Intangible assets are assets acquired in a business combination that lack physical substance but can be distinguished from goodwill because the intangible asset is capable of being sold or exchanged on its own or in combination with related contracts, assets or liabilities. Intangible assets are amortized on a straight-line or accelerated basis over estimated lives. Goodwill is not amortized. Goodwill and identifiable intangible assets are evaluated for impairment annually or whenever events or changes in circumstances indicate the carrying value of these assets may not be recoverable. When these assets are evaluated for impairment, if the carrying amount exceeds fair value, an impairment charge is recorded to income. The fair value is based on observable market prices, when practicable. Other valuation techniques may be used when market prices are unavailable, including estimated discounted cash flows. This type of analysis contains uncertainties because it requires management to make assumptions and to apply judgment to estimate industry economic factors and the profitability of future business strategies. In the event of future changes in fair value, the Company may be exposed to an impairment charge that could be material. Interest and Fees on Loans Interest on loans is accrued and included in income based on contractual rates applied to principal amounts outstanding. Accrual of interest is discontinued when loan payments are 90 days or more past due, based on contractual terms, or when, in the judgment of management, collectability of the loan or loan interest becomes uncertain. When interest accrual is discontinued, all unpaid accrued interest is reversed against interest income. Subsequent recognition of income occurs only to the extent payment is received subject to management’s assessment of the collectability of the remaining interest and principal. A nonaccrual loan is restored to accrual status when it is no longer delinquent and collectability of interest and principal is no longer in doubt. Loan origination fees, net of direct loan origination costs, are deferred and amortized as an adjustment to the loan’s yield generally over the contractual life of the loan, utilizing the interest method. Foreclosed Real Estate Assets acquired through deed in lieu or loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. These assets are subsequently accounted for at lower of cost or fair value less estimated costs to sell. If fair value declines subsequent to foreclosure, a valuation allowance is recorded through expense. Operating costs after acquisition are expensed. Premises and Equipment Premises and equipment are stated at cost, net of accumulated depreciation and amortization. Leasehold improvements are capitalized and amortized over the shorter of the terms of the related leases or the estimated economic lives of the improvements. Depreciation and amortization is charged to operations using the straight-line method over the estimated useful lives of the related assets which range from 3 to 39 years. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized. Income Taxes Deferred income taxes are recognized for the tax consequences of temporary differences by applying enacted statutory tax rates applicable for future years to differences between financial statement and tax 85 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) bases of existing assets and liabilities. The effect of tax rate changes on deferred taxes is recognized in the income tax provision in the period that includes the enactment date. A tax valuation allowance is established, as needed, to reduce net deferred tax assets to the amount expected to be realized. In the event it becomes more-likely-than-not that some or all of the deferred tax asset allowances will not be needed, the valuation allowance will be adjusted. In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax positions. Income tax positions and record tax benefits assessed for all years are subject to examination based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more-likely-than-not that a tax benefit will be sustained, we have determined the amount of the tax benefit to be recognized by estimating the largest amount of tax benefit that has a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more-likely-than-not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements. Where applicable, associated interest and penalties have also been recognized. We recognize accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. Related Party Transactions The Company’s Directors, Officers and their affiliates have been customers of and have had transactions with the Bank, and it is expected that such persons will continue to have such transactions in the future. Management believes that all deposit accounts, loans, services and commitments comprising such transactions were made in the ordinary course of business, and on substantially the same terms, including interest rates, as those prevailing at the time for comparable transactions with other customers who are not Directors or Officers. Stock Compensation The Company measures and recognizes compensation cost relating to share-based payment transactions based on the grant-date fair value of the equity instruments issued. The fair value of time-based restricted stock is recorded based on the grant date fair value of the Company’s common stock. The fair value of market-based restricted stock is based on values derived using a Monte Carlo based pricing model. The fair value of stock options is determined using the Black-Sholes Option Pricing model. Stock-based compensation costs are recognized over the requisite service period for the awards. Compensation expense reflects the number of awards expected to vest and is adjusted based on awards that ultimately vest. Earnings Per Share Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if dilutive stock options and restricted stock awards were exercised and resulted in the issuance of common stock. Unvested share-based payment awards, that include the right to receive non forfeitable dividends, are considered participating securities and therefore considered to be outstanding in the computation of earnings per share. EPS is calculated using the two class method, under which calculations (1) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (2) exclude from the denominator the dilutive impact of the participating securities. Comprehensive Income Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and cash flow hedge transactions, are reported as a separate component of the stockholders’ equity section of the balance sheets, such items, along with net income, are components of comprehensive income. 86 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Fair Values of Financial Instruments The Company is required to disclose the fair value for all financial instruments. The following methods and assumptions were used by management in estimating the fair value of its financial instruments: Cash and due from banks, federal funds sold, accrued interest receivable and mortgagors’ escrow accounts: The carrying amount is a reasonable estimate of fair value. Investment securities: Fair values are based on quoted market prices or dealer quotes, if available. If a quoted market price is not available, fair value is estimated using quoted market prices for similar securities. The fair value of securities is further classified in accordance with the framework specified in GAAP as discussed in Note 20, Fair Value Measurements. FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent redemption provisions of the FHLB. Loans held for sale: The fair value is based upon prevailing market prices. Loans receivable: For variable rate loans which reprice frequently and have no significant change in credit risk, fair values are based on carrying values. The fair value of fixed rate loans are estimated by discounting the future cash flows using the year end rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Derivative asset (liability): The valuation of the Company’s interest rate swaps is obtained from a third party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. Deposits: The fair value of demand deposits, regular savings and certain money market deposits is the amount payable on demand at the reporting date. The fair value of certificates of deposit and other time deposits is estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities to a schedule of aggregated expected maturities on such deposits. Borrowings and Subordinated Debentures: The fair value of the Company’s borrowings and subordinated debentures is estimated using a discounted cash flow calculation that applies discount rates currently offered based on similar maturities. Derivative Instruments The Company enters into interest rate swap agreements as part of the Company’s interest rate risk management strategy. Management applies the hedge accounting provisions of Accounting Standards Codification (“ASC”) Topic 815, and formally documents at inception all relationships between hedging instruments and hedged items, as well as its risk management objectives and strategies for undertaking the various hedges. Additionally, the Company uses dollar offset or regression analysis at the hedge’s inception and for each reporting period thereafter, to assess whether the derivative used in its hedging transaction is expected to be and has been highly effective in offsetting changes in the fair value or cash flows of the hedged item. The Company discontinues hedge accounting when it is determined that a derivative is not expected to be or has ceased to be highly effective as a hedge, and then reflects changes in fair value of the derivative in earnings after termination of the hedge relationship. The Company has characterized all of its interest rate swaps that qualify under Topic 815 hedge accounting as cash flow hedges. Cash flow hedges are used to minimize the variability in cash flows of assets or liabilities, or forecasted transactions caused by interest rate fluctuations, and are recorded at fair value in other assets within the consolidated balance sheet. Changes in the fair value of these cash flow 87 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) hedges are initially recorded in accumulated other comprehensive income and subsequently reclassified into earnings when the forecasted transaction affects earnings. Any hedge ineffectiveness assessed as part of the Company’s quarterly analysis is recorded directly to earnings. Reclassification Certain prior period amounts have been reclassified to conform to the 2015 financial statement presentation. These reclassifications only changed the reporting categories and did not affect the results of operations or consolidated financial position. Recent accounting pronouncements The following section includes changes in accounting principles and potential effects of new accounting guidance and pronouncements. ASU No. 2014-04, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) — “Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The ASU clarifies that an in-substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (i) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (ii) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar agreement. In addition, the amendments require disclosure of both the amount of foreclosed residential real estate property held by the creditor and the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure in accordance with local requirements of the applicable jurisdiction. An entity can elect to adopt the amendments using either a modified retrospective method or a prospective transition method. The amendments were effective for the Company as of January 1, 2015. This ASU did not impact the Company’s financial statements and the Company does not expect the application of this guidance will have a material impact on the Company’s financial statements in the future. (ii) ASU No. 2014-09 — Revenue from Contracts with Customers (Topic 606). The ASU establishes a single comprehensive model for an entity to recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled, and will supersede nearly all existing revenue recognition guidance, to clarify and converge revenue recognition principles under US GAAP and IFRS. The update outlines five steps to recognizing revenue: (i) identify the contracts with the customer; identify the separate performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the separate performance obligations; (v) recognize revenue when each performance obligation is satisfied. The update requires more comprehensive disclosures, relating to quantitative and qualitative information for amounts, timing, the nature and uncertainty of revenue, and cash flows arising from contracts with customers, which will mainly impact construction and high-tech industries. The most significant potential impact to banking entities relates to less prescriptive derecognition requirements on the sale of OREO property. In August 2015, the FASB issued ASU No. 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. The amendments in ASU 2015-14 defer the effective date of ASU 2014-09 for all entities by one year. Accordingly, the amendments are effective for annual and interim periods beginning after December 15, 2017. Early adoption is permitted for annual and interim reporting periods beginning after December 15, 2016. An entity may elect either a full retrospective or a modified retrospective application. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements. ASU No. 2014-12, Compensation — Stock Compensation (Topic 718) — “Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could Be Achieved after the The ASU provides Requisite Service Period (a consensus of the FASB Emerging Issues Task Force).” explicit guidance to account for a performance target that could be achieved after the requisite service 88 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) period as a performance condition. For awards within the scope of this Update, the Task Force decided that an entity should apply existing guidance in Topic 718 as it relates to share-based payments with performance conditions that affect vesting. Consistent with that guidance, performance conditions that affect vesting should not be reflected in estimating the fair value of an award at the grant date. Compensation cost should be recognized when it is probable that the performance target will be achieved and should represent the compensation cost attributable to the period for which the requisite service has already been rendered. If the performance target becomes probable of being achieved before the end of the requisite service period, the remaining unrecognized compensation cost should be recognized prospectively over the remaining requisite service period. The total amount of compensation cost recognized during and after the requisite service period should reflect the number of awards that are expected to vest and should be adjusted to reflect those awards that ultimately vest. The amendments are effective for annual and interim periods beginning after December 15, 2015. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements. ASU No. 2014-14, Receivables — Troubled Debt Restructurings by Creditors (Subtopic 310-40) — “Classification of Certain Government-Guaranteed Residential Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force).” The ASU has been issued to reduce diversity in practice in the classification of foreclosed residential mortgage loans held by creditors that are fully guaranteed under certain government programs, including the Federal Housing Administration guarantees. A residential mortgage loan would be derecognized and a separate other receivable would be recognized upon foreclosure if the loan has both of the following characteristics: (i) the loan has a government guarantee that is not separable from the loan before foreclosure entitling the creditor to the full unpaid principal balance of the loan; and (ii) at the time of foreclosure, the creditor has the intent to make a claim on the guarantee and the ability to recover the full unpaid principal balance of the loan through the guarantee. Notably, upon foreclosure, the separate other receivable would be measured based on the current amount of the loan balance expected to be recovered under the guarantee. The amendments were effective for the Company as of January 1, 2015. This ASU did not impact the Company’s financial statements and impact on the the Company does not expect the application of this guidance will have a material Company’s financial statements in the future. ASU No. 2014-17, Business Combinations (Topic 805) — “Pushdown Accounting (a consensus of the FASB Emerging Issues Task Force).” Current generally accepted accounting principles (GAAP) offer limited guidance for determining whether and at what threshold an acquiree (acquired entity) can reflect the acquirer’s accounting and reporting basis (pushdown accounting) in its separate financial statements. The objective of this ASU is to provide guidance on whether and at what threshold an acquired entity that is a business or nonprofit activity can apply pushdown accounting in its separate financial statements. The amendments in this Update provide an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. The amendments in this ASU were effective for the Company on November 18, 2014. After the effective date, an acquired entity can make an election to apply the guidance to future change in control events or to its most recent change-in-control event. This ASU did not impact the Company’s financial statements and the Company does not expect the application of this guidance will have a material impact on the Company’s financial statements in the future. ASU No. 2015-01, Income Statement — Extraordinary and Unusual Items (Subtopic 225-20) — “Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items.” Under the existing guidance, an entity is required to separately disclose extraordinary items, net of tax, in the income statement after income from continuing operations if an event or transaction is of an unusual nature and occurs infrequently. Under this ASU, separate, net-of-tax presentation (and corresponding earnings per share impact) will no longer be allowed. The existing requirement to separately present items that are of an unusual nature or occur infrequently on a pre-tax basis within income from continuing operations has been retained. The new guidance also requires similar separate presentation of items that are both unusual and infrequent. The standard is effective for both public and private companies for periods beginning after December 15, 2015. Early adoption is permitted, but only as of the beginning of the fiscal 89 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) year of adoption. Upon adoption, a reporting entity may elect prospective or retrospective application. If adopted prospectively, both the nature and amount of any subsequent adjustments to previously reported extraordinary items must be disclosed. The Company does not expect the application of this guidance will have a material impact on the Company’s financial statements. ASU No. 2015-03, Interest — Imputation of Interest (Subtopic 835-20) — “Simplifying the Presentation of Debt Issuance Costs.” The amendments in this ASU require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. The amendments are effective for annual and interim periods beginning after December 15, 2015, with early adoption permitted. The Company elected to early adopt the provisions of ASU 2015-03 upon issuance of its subordinated debentures on August 19, 2015 and record $0.5 million of debt issuance costs incurred as a direct deduction from the debt liability. ASU No. 2015-16, Business Combinations (Topic 805) — “Simplifying the Accounting for Measurement Period Adjustments.” This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, including the cumulative effect of the change in provisional amount as if the accounting had been completed at the acquisition date. The adjustments related to previous reporting periods since the acquisition date must be disclosed by income statement line item either on the face of the income statement or in the notes. For public business entities, the amendments are effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. For all other entities, the amendments in this update are effective for fiscal years beginning after December 15, 2016, and interim periods within fiscal years beginning after December 15, 2017. The amendments should be applied prospectively to adjustments to provisional amounts that occur after the effective date with earlier application permitted for financial statements that have not been issued. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements. (Subtopic ASU No. 2016-01, Financial Instruments — Overall 825-10) — “Recognition and Measurement of Financial Assets and Financial Liabilities.” The ASU has been issued to improve the recognition and measurement of financial instruments by requiring 1) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; 2) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements; 3) the use of the exit price notion when measuring fair value of financial instruments for disclosure purposes; and 4) separate presentation by the reporting organization in other comprehensive income the portion of the total change in the fair value of a liability resulting from the change in the instrument-specific credit risk (also referred to as “own credit”) when the organization has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. The standard is effective for the Company beginning on January 1, 2018. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements. 2. Shareholders’ Equity Preferred stock In 2011, the Company elected to participate in Treasury’s Small Business Lending Fund Program (“SBLF”). The Company sold 10,980 shares of Senior Non-Cumulative Perpetual Preferred Stock, Series C, no par (the “Series C Preferred Stock”), having a liquidation preference of $1,000 per preferred share, to the Treasury. The transaction resulted in net capital proceeds to the Company of $5.9 million, of which at least 90% was invested in the Bank as Tier 1 Capital. 90 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The Series C Preferred stock paid noncumulative dividends. The Company paid dividends at a rate of 1.0% since issuance. On November 20, 2015 the Company redeemed the $10.98 million (10,980 shares) of preferred stock. The shares were redeemed at their liquidation value of $1,000 per share plus accrued dividends through November 20, 2015. The redemption was approved by the Company’s primary federal regulator and was funded with the Company’s surplus capital. With this redemption, the Company has redeemed all of its outstanding SBLF stock. Common stock On May 15, 2014, the Company priced 2,702,703 common shares in its initial public offering (“IPO”) at $18.00 per share, and on May 15, 2014, Bankwell common shares began trading on the Nasdaq Stock Market. The Company issued a total of 2,702,703 common shares in its IPO, which closed on May 20, 2014. The net proceeds from the IPO were approximately $44.7 million, after deducting the underwriting discount of approximately $2.5 million and approximately $1.3 million of expenses. Prior to the public offering, the Company issued shares in various offerings. On October 1, 2014, the Company acquired all of the outstanding common shares of Quinnipiac Bank & Trust Company (“Quinnipiac”). Quinnipiac shareholders received 510,122 shares of the Company common stock and $3.6 million in cash. Dividends The Company’s shareholders are entitled to dividends when and if declared by the board of directors, out of funds legally available. The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. For the years ended December 31, 2015, 2014 and 2013, the Company paid cash dividends on preferred stock of $125 thousand, $110 thousand, and $111 thousand, respectively. On October 29, 2015 The Company’s Board of Directors declared a $0.05 per share cash dividend, payable December 21, 2015 to shareholders of record on December 11, 2015. This marked the Company’s first cash dividend on its outstanding common stock. The Company did not repurchase any of its common stock during 2015, 2014 or 2013. Warrants BNC’s October 26, 2006 Stock Offering and the July 10, 2007 Private Placement (the “Offerings”) call for the issuance of Units. Each Unit issued pursuant to the Offerings represented one share of common stock and one nontransferable warrant. The warrants were exercisable at any time from and including October 1, 2009 and prior to or on November 30, 2009, unless extended or accelerated by the board of directors in their discretion. The board of directors extended the exercise period to October 5, 2015 through December 5, 2015. Each warrant allowed a holder to purchase .3221 shares of common stock at an exercise price of $14.00 per share. 945,789 Warrants were available to purchase up to 304,639 shares of common stock at $14.00 per share for a maximum offering of $4,264,946. As a result of the offering, 838,369 Warrants were exercised for 269,992 shares of common stock for total gross proceeds of $3,779,888. There are no longer any outstanding Warrants following the close of this offering. As a result of the acquisition of Quinnipiac on October 1, 2014 the Company issued 68,600 warrants to former Quinnipiac warrant holders in accordance with the merger agreement. Each warrant was automatically converted into a warrant to purchase 0.56 shares of the Company’s common stock for an exercise price of $17.86. None of the warrants have been exercised as of December 31, 2015. The warrants expire on March 6, 2018. 91 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 3. Restrictions on Cash and Due from Banks The Bank is required to maintain $125 thousand in the Federal Reserve Bank for clearing purposes. 4. Mergers and Acquisitions On October 1, 2014, the Company acquired all of the outstanding common shares of Quinnipiac Bank & Trust Company (“Quinnipiac”). Quinnipiac had two banking offices primarily serving south-central Connecticut and has merged with and into Bankwell Bank. Quinnipiac shareholders received 510,122 shares of the Company common stock and $3.6 million in cash. As of September 30, 2014, Quinnipiac had assets with a carrying value of approximately $117.8 million, including loans outstanding with a carrying value of approximately $97.1 million, as well as deposits with a carrying value of approximately $100.4 million and a book value of $10.1 million. The results of Quinnipiac’s operations are included in the Company’s Consolidated Statement of Income from the date of acquisition. The assets and liabilities in the Quinnipiac acquisition were recorded at their fair value based on management’s best estimate using information available at the date of acquisition. Consideration paid and fair values of Quinnipiac’s assets acquired and liabilities assumed are summarized in the following tables: Consideration paid: Cash consideration paid to Quinnipiac shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity consideration paid to Quinnipiac shareholders Total Consideration paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount (In thousands) $ 3,648 9,676 $13,324 As Acquired Fair Value Adjustments (In thousands) As Recorded at Acquisition Recognized amounts of identifiable assets acquired and (liabilities) assumed: Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Available for sale investments securities . . . . . . . . . . . Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Premises and equipment Other real estate owned . . . . . . . . . . . . . . . . . . . . . . Core deposit intangibles . . . . . . . . . . . . . . . . . . . . . Deferred tax assets, net . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB advances . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total identifiable net assets . . . . . . . . . . . . . . . . . . $ 6,195 8,533 97,103 4,046 129 — 1,070 756 (100,391) (7,000) (315) $ 10,126 Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — (29)(a) 748(b) — 530(c) (388)(d) — (252)(e) — $ 609 $ 6,195 8,504 97,851 4,046 129 530 682 756 (100,643) (7,000) (315) 10,735 $ 2,589 Explanation of certain fair value adjustments: a) The adjustment represents the mark to market adjustment on available for sale investment securities. 92 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) b) The adjustment represents the adjustment of the book value of loans to their estimated fair value based on current interest rates and expected cash flows, which includes an estimate of expected loan loss inherent in the portfolio. c) Represents the economic value of the acquired core deposit base (total deposits less jumbo time deposits). The core deposit intangible will be amortized over an estimated life of 8.8 years based on the double declining balance method of amortization. d) Represents net deferred tax assets resulting from the fair value adjustments related to the acquired assets and liabilities, identifiable intangibles and other purchase accounting adjustments. e) The adjustment represents the fair value of time deposits, which were valued at a premium of 0.57% as they bore somewhat higher rates than the prevailing market. Except for collateral dependent loans with deteriorated credit quality, the fair values for loans acquired from Quinnipiac were estimated using cash flow projections based on the remaining maturity and repricing terms. Cash flows were adjusted by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. For collateral dependent loans with deteriorated credit quality, to estimate the fair value, the Company analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. Those values were discounted using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of the Quinnipiac allowance for credit losses associated with the loans that were acquired as the loans were initially recorded at fair value. Information about the acquired loan portfolio subject to purchased credit impaired accounting guidance (ASC 310-30) as of October 1, 2014 was as follows: Contractually required principal and interest at acquisition . . . . . . . . . . . . . . . . . Contractual cash flows not expected to be collected (nonaccretable discount) . . . . Expected cash flows at acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest component of expected cash flows (accretable discount) . . . . . . . . . . . . . October 1, 2014 (In thousands) $1,729 (6) 1,723 (478) Fair value of acquired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,245 5. Goodwill and Other Intangible Assets The Company completed one acquisition in 2014 and there were no acquisitions in 2015. Information on goodwill for the year ended December 31, 2015 and 2014 is as follows: Year Ended December 31, 2015 Year Ended December 31, 2014 (In thousands) Balance, beginning of the period . . . . . . . . . . . . . . . . . . . . . Goodwill acquired: Quinnipiac Bank and Trust Company . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment Balance, end of the period . . . . . . . . . . . . . . . . . . . . . . . . . $2,589 — — $2,589 $ — 2,589 — $2,589 The Company tests for goodwill impairment annually as of June 30th. No impairment was recorded on goodwill for 2015 or 2014. 93 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below. December 31, 2015 Core deposit intangible . . . . . . . . . . . . . . . . . . . . . December 31, 2014 Core deposit intangible . . . . . . . . . . . . . . . . . . . . . Gross Intangible Asset Accumulated Amortization (In thousands) Net Intangible Asset $1,029 $377 $652 $1,029 $181 $848 6. Investment Securities The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities segregated by contractual maturity at December 31, 2015 were as follows: Available for sale securities: U.S. Government and agency obligations Due from one through five years . . . . . . . . . . Due from five through ten years . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . State agency, U.S. Territories and municipal obligations Due from one through five years . . . . . . . . . . Due from five through ten years . . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . Corporate bonds Due in less than one year . . . . . . . . . . . . . . . Due from one through five years . . . . . . . . . . Due from five through ten years . . . . . . . . . . Government-sponsored mortgage backed securities No contractual maturity . . . . . . . . . . . . . . . . Total available for sale securities . . . . . . . . . Held to maturity securities: State agency, U.S. Territories and municipal obligations Due after ten years . . . . . . . . . . . . . . . . . . . . Corporate bonds Amortized Cost $ 6,198 394 647 7,239 520 9,762 6,778 17,060 1,010 9,233 1,013 11,256 December 31, 2015 Gross Unrealized Gains Losses (In thousands) $ — 4 — 4 39 361 367 767 22 156 12 190 $ (77) (2) (21) (100) — (322) (1) (323) — (9) — (9) Fair Value $ 6,121 396 626 7,143 559 9,801 7,144 17,504 1,032 9,380 1,025 11,437 4,400 4,400 $39,955 107 107 $1,068 (10) (10) $(442) 4,497 4,497 $40,581 $ 9,026 $ — $ — $ 9,026 Due from one through five years . . . . . . . . . . 1,000 Government-sponsored mortgage backed securities No contractual maturity . . . . . . . . . . . . . . . . Total held to maturity securities . . . . . . . . . 200 $10,226 $ — 21 21 (19) 981 — $ (19) 221 $10,228 94 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The amortized cost, gross unrealized gains and losses and fair values of available for sale and held to maturity securities segregated by contractual maturity at December 31, 2014 were as follows: Amortized Cost December 31, 2014 Gross Unrealized Gains Losses (In thousands) Fair Value Available for sale securities: U.S. Government and agency obligations Due in less than one year . . . . . . . . . . . . . . . $ 497 $ Due from one through five years . . . . . . . . . . Due from five through ten years . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . State agency, U.S. Territories and municipal obligations Due from five through ten years . . . . . . . . . . Due after ten years . . . . . . . . . . . . . . . . . . . . Corporate bonds Due in less than one year . . . . . . . . . . . . . . . Due from one through five years . . . . . . . . . . Due from five through ten years . . . . . . . . . . Government-sponsored mortgage backed securities No contractual maturity . . . . . . . . . . . . . . . . 3,998 17,055 3,004 24,554 9,297 8,500 17,797 5,764 4,150 6,121 16,035 5,567 5,567 9 — 27 4 40 295 544 839 44 268 8 320 132 132 $ — $ 506 (69) (79) (28) (176) (48) (4) (52) (6) — (24) (30) (17) (17) 3,929 17,003 2,980 24,418 9,544 9,040 18,584 5,802 4,418 6,105 16,325 5,682 5,682 Total available for sale securities . . . . . . . . . $63,953 $1,331 $(275) $65,009 Held to maturity securities: U.S. Government and agency obligations Due in less than one year . . . . . . . . . . . . . . . $ 1,010 $ — $ — $ 1,010 State agency, U.S. Territories and municipal obligations Due after ten years . . . . . . . . . . . . . . . . . . . . 9,179 Corporate bonds Due from five through ten years . . . . . . . . . . 1,000 Government-sponsored mortgage backed securities No contractual maturity . . . . . . . . . . . . . . . . 265 Total held to maturity securities . . . . . . . . . $11,454 $ — — 31 31 — (15) 9,179 985 — $ (15) 296 $11,470 There were no sales of, or realized gains or losses on, investment securities for the year ended December 31, 2015 and 2014. For the year ended December 31, 2013, the Company realized gross gains of $648 thousand from the sales of investment securities. 95 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 2015 and 2014, securities with approximate fair values of $5.9 million were pledged as collateral for public deposits. The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities had been in a continuous unrealized loss position at December 31, 2015 and 2014: Length of Time in Continuous Unrealized Loss Position Less Than 12 Months Fair Value Unrealized Loss 12 Months or More Fair Value (In thousands) Unrealized Loss Total Fair Value Unrealized Loss $ 5,486 $ (60) $1,259 $ (40) $ 6,745 $(100) 126 1,970 (1) (28) 665 — (322) — 791 1,970 (323) (28) December 31, 2015 U.S. Government and agency obligations . . State agency, U.S. Territories and municipal obligations . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . Government-sponsored mortgage backed securities . . . . . . . . . . . . . . . . . Total investment securities . . . . . . . . . . . 768 $ 8,350 (4) $ (93) 413 $2,337 (6) $(368) 1,181 $10,687 (10) $(461) December 31, 2014 U.S. Government and agency obligations . . State agency, U.S. Territories and municipal obligations . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . Government-sponsored mortgage $ 4,515 $ (56) $5,878 $(120) $10,393 $(176) 1,771 6,783 (52) (40) — 995 — (5) 1,771 7,778 (52) (45) backed securities . . . . . . . . . . . . . . . . . Total investment securities . . . . . . . . . . . 1,406 $14,475 (17) $(165) — $6,873 — $(125) 1,406 $21,348 (17) $(290) There were 29 and 42 individual investment securities, respectively, in which the fair value of the security was less than the amortized cost of the security at December 31, 2015 and December 31, 2014. The U.S. Government and agency obligations owned are either direct obligations of the U.S. Government or are issued by one of the shareholder-owned corporations chartered by the U.S. Government and therefore the contractual cash flows are guaranteed and as a result the unrealized losses in this portfolio are not considered other than temporarily impaired. The Company continually monitors its state agency, U.S. Territories, municipal and corporate bond portfolios and at this time these portfolios have minimal default risk because state agency, U.S. Territories, municipal and corporate bonds are all rated above investment grade except for one U.S. Territory bond (a Commonwealth of Puerto Rico senior lien sales tax financing corporate bond or “COFINA” bond) with a face value of $1.0 million that is rated two notches below investment grade. The Company has determined that all unrealized losses on all securities that are investment grade are not other than temporarily impaired. The Company has determined that the unrealized loss on this U.S. Territory bond is not other than temporarily impaired because payments are current and payments are backed by a senior lien position on cash receipts from sales tax revenue with a strong debt service coverage. As such, management believes there will be enough sales tax revenue in the future to continue to receive all principal and interest payments. In February 2016, the Commonwealth of Puerto Rico proposed a voluntary debt restructuring of all of its outstanding debt. The restructuring proposal could impact the valuation of the bond. The voluntary restructuring proposal has been rejected by creditors and represents one event in the expected multi-year process in working out the Commonwealth of Puerto Rico’s financial problems. Government-sponsored mortgage backed securities are fully guaranteed by U.S. Government agencies and as a result the unrealized losses in this portfolio are not considered other than temporarily impaired. 96 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 7. Loans Receivable and Allowance for Loan Losses Loans acquired in connection with The Wilton acquisition in November 2013 and The Quinnipiac acquisition in October 2014 are referred to as “acquired” loans as a result of the manner in which they are accounted for. All other loans are referred to as “originated” loans. Accordingly, selected credit quality disclosures that follow are presented separately for the originated loan portfolio and the acquired loan portfolio. The following table sets forth a summary of the loan portfolio at December 31, 2015 and 2014: December 31, 2015 December 31, 2014 Originated Acquired Total Originated Acquired Total (In thousands) Real estate loans: Residential . . . . . . . . . . . . . . . . . . . . $ 174,311 $ 2,873 $ 177,184 $169,833 $ 5,198 $175,031 Commercial . . . . . . . . . . . . . . . . . . . 643,524 54,018 697,542 458,506 62,675 521,181 Construction. . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . 81,242 9,146 908,223 150,479 1,361 Total loans . . . . . . . . . . . . . . . . . . Allowance for loan losses . . . . . . . . . . . . Deferred loan origination fees, net . . . . . Unamortized loan premiums . . . . . . . . . 1,060,063 (14,128) (3,605) 9 1,031 6,780 64,702 22,374 374 87,450 (41) — — 82,273 15,926 972,925 172,853 1,735 1,147,513 (14,169) (3,605) 9 62,258 10,226 700,823 120,360 243 821,426 (10,860) (2,937) 16 971 7,940 76,784 28,899 2,653 63,229 18,166 777,607 149,259 2,896 108,336 929,762 — (10,860) — (2,937) 16 — Loans receivable, net . . . . . . . . . . $1,042,339 $87,409 $1,129,748 $807,645 $108,336 $915,981 Lending activities are conducted principally in the Fairfield and New Haven County region of Connecticut, and consist of residential and commercial real estate loans, commercial business loans and a variety of consumer loans. Loans may also be granted for the construction of residential homes and commercial properties. All residential and commercial mortgage loans are collateralized by first or second mortgages on real estate. The following table summarizes activity in the accretable yields for the acquired loan portfolio for the years ended December 31, 2015 and 2014: Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . . . . . . . $1,382 $1,418 Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (157) (354) 478 (136) (378) $ 871 $1,382 2015 2014 (In thousands) (a) Represents changes in cash flows expected to be collected due to loan sales or payoffs. Risk management The Company has established credit policies applicable to each type of lending activity in which it engages. The Company evaluates the creditworthiness of each customer and, in most cases, extends credit of up to 80% of the market value of the collateral, depending on the borrowers’ creditworthiness and the type 97 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) of collateral. The market value of collateral is monitored on an ongoing basis and additional collateral is obtained when warranted. Real estate is the primary form of collateral. Other important forms of collateral are business assets, time deposits and marketable securities. While collateral provides assurance as a secondary source of repayment, the Company ordinarily requires the primary source of repayment to be based on the borrower’s ability to generate continuing cash flows. The Company’s policy for residential lending allows that, generally, the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may be up to 90-95% LTV either with private mortgage insurance being required for that portion of the residential loan in excess of 80% of the appraised value of the property or where secondary financing is provided by a housing authority program second mortgage, a community’s low/moderate income housing program, a religious or civic organization. Private mortgage insurance is required for that portion of the residential first mortgage loan in excess of 80% of the appraised value of the property. Credit quality of loans and the allowance for loan losses Management segregates the loan portfolio into portfolio segments which is defined as the level at which the Company develops and documents a systematic method for determining its allowance for loan losses. The portfolio segments are segregated based on loan types and the underlying risk factors present in each loan type. Such risk factors are periodically reviewed by management and revised as deemed appropriate. The Company’s loan portfolio is segregated into the following portfolio segments: Residential Real Estate: This portfolio segment consists of the origination of first mortgage loans secured by one-to-four family owner occupied residential properties and residential construction loans to individuals to finance the construction of residential dwellings for personal use located in our market area. Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, non-owner occupied one-to-four family and multi-family dwellings for property owners and businesses in our market area. Loans secured by commercial real estate generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans. Construction: This portfolio segment includes commercial construction loans for commercial development projects, including condominiums, apartment buildings, and single family subdivisions as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as security. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied real estate. Risk of loss on a construction loan depends largely upon the accuracy of the initial estimate of the value of the property at completion of construction compared to the estimated cost (including interest) of construction and other assumptions. If the estimate of construction cost proves to be inaccurate, the Company may be required to advance additional funds beyond the amount originally committed in order to protect the value of the property. Moreover, if the estimated value of the completed project proves to be inaccurate, the borrower may hold a property with a value that is insufficient to assure full repayment. Construction loans also expose the Company to the risks that improvements will not be completed on time in accordance with specifications and projected costs and that repayment will depend on the successful operation or sale of the properties, which may cause some borrowers to be unable to continue with debt service which exposes the Company to greater risk of non-payment and loss. Home Equity: This portfolio segment primarily includes home equity loans and home equity lines of credit secured by owner occupied one-to-four family residential properties. Loans of this type are written at a maximum of 80% of the appraised value of the property and the Company requires a second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties. 98 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Commercial Business: This portfolio segment includes commercial business loans secured by assignments of corporate assets and personal guarantees of the business owners. Commercial business loans generally have higher interest rates and shorter terms than other loans, but they also may involve higher average balances, increased difficulty of loan monitoring and a higher risk of default since their repayment generally depends on the successful operation of the borrower’s business. Consumer: This portfolio segment includes loans secured by savings or certificate accounts, or automobiles, as well as unsecured personal loans and overdraft lines of credit. This type of loan entails greater risk than residential mortgage loans, particularly in the case of loans that are unsecured or secured by assets that depreciate rapidly. An unallocated component is maintained, when needed, to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance, if any, reflects the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating allocated and general reserves in the portfolio. The unallocated allowance is used to provide for an unidentified loss that may exist in emerging problem loans that cannot be fully quantified or may be affected by conditions not fully understood as of the balance sheet date. There was no unallocated allowance at December 31, 2015 and December 31, 2014, respectively. Allowance for loan losses The following tables set forth the activity in the Company’s allowance for loan losses for the years ended December 31, 2015, 2014 and 2013, by portfolio segment: Residential Real Estate Commercial Real Estate Construction Home Equity Commercial Business Consumer Total (In thousands) December 31, 2015 Originated Beginning balance . . . . . Charge-offs . . . . . . . . Recoveries . . . . . . . . . Provisions . . . . . . . . . $1,431 — — 13 Ending balance . . . . . . . $1,444 $5,480 — — 2,213 $7,693 $1,102 — — 402 $1,504 $205 — — (31) $174 $2,638 — — 672 $3,310 $ 4 (6) 7 (2) $ 3 $10,860 (6) 7 3,267 $14,128 Acquired Beginning balance . . . . . Charge-offs . . . . . . . . Recoveries . . . . . . . . . Provisions . . . . . . . . . Ending balance . . . . . . . $ — $ $ — $ — $ — $ — $ — $ — $ — — — — — — 12 12 — — — — — — (15) 100 (61) (9) 2 12 (24) 102 (37) $ — $ — $ 24 $ 5 $ 41 Total Beginning balance . . . . . Charge-offs . . . . . . . . Recoveries . . . . . . . . . Provisions . . . . . . . . . $1,431 $5,480 $1,102 $205 $2,638 $ 4 $10,860 — — 13 — — 2,225 — — 402 — — (31) (15) 100 611 (15) 9 10 (30) 109 3,230 Ending balance . . . . . . . $1,444 $7,705 $1,504 $174 $3,334 $ 8 $14,169 99 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Residential Real Estate Commercial Real Estate Construction Home Equity Commercial Business Consumer Total (In thousands) December 31, 2014 Originated Beginning balance . . . . . . . Charge-offs . . . . . . . . . . Recoveries . . . . . . . . . . . Provisions . . . . . . . . . . . Ending balance . . . . . . . . . Acquired Beginning balance . . . . . . . Charge-offs . . . . . . . . . . Recoveries . . . . . . . . . . . Provisions . . . . . . . . . . . Ending balance . . . . . . . . . Total Beginning balance . . . . . . . Charge-offs . . . . . . . . . . Recoveries . . . . . . . . . . . Provisions . . . . . . . . . . . Ending balance . . . . . . . . . $1,310 — — 121 $1,431 $ — — — — $ — $1,310 — — 121 $1,431 $3,616 — — 1,864 $5,480 $ — — — — $ — $3,616 — — 1,864 $5,480 $1,032 — — 70 $1,102 $ — (100) — 100 $ — $1,032 (100) — 170 $1,102 $190 — — 15 $205 $ — — — — $ — $190 — — 15 $205 $2,225 — 4 409 $2,638 $ — — — — $ — $2,225 — 4 409 $2,638 $ 9 (3) 425 (427) 4 $ $ 8,382 (3) 429 2,052 $10,860 $ — $ — (100) — 100 $ — $ — — — — $ 9 (3) 425 (427) 4 $ $ 8,382 (103) 429 2,152 $10,860 Residential Real Estate Commercial Real Estate Construction Home Equity Commercial Business Consumer Total (In thousands) December 31, 2013 Originated Beginning balance . . . . . . . . Charge-offs . . . . . . . . . . . Recoveries . . . . . . . . . . . . Provisions . . . . . . . . . . . . Ending balance . . . . . . . . . . Acquired Beginning balance . . . . . . . . Charge-offs . . . . . . . . . . . Recoveries . . . . . . . . . . . . Provisions . . . . . . . . . . . . Ending balance . . . . . . . . . . Total Beginning balance . . . . . . . . Charge-offs . . . . . . . . . . . Recoveries . . . . . . . . . . . Provisions . . . . . . . . . . . . Ending balance . . . . . . . . . . $1,230 — — 80 $1,310 $ — — — — $ — $1,230 — — 80 $1,310 $220 — — (30) $190 $ — — — — $ — $220 — — (30) $190 $1,718 — — 507 $2,225 $ — — — — $ — $1,718 — — 507 $2,225 $ 2 (4) 26 (15) $ 9 $7,941 (170) 26 585 $8,382 $ — $ — — — — $ — $ — — — — $ 2 (4) 26 (15) $ 9 $7,941 (170) 26 585 $8,382 $3,842 (166) — (60) $3,616 $ — — — — $ — $3,842 (166) — (60) $3,616 $ 929 — — 103 $1,032 $ — — — — $ — $ 929 — — 103 $1,032 100 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) With respect to the originated portfolio, the allocation to each portfolio segment is not necessarily indicative of future losses in any particular portfolio segment and does not restrict the use of the allowance to absorb losses in other portfolio segments. Loans evaluated for impairment as of December 31, 2015 and 2014 were as follows: Originated Loans Acquired Loans Total Portfolio Allowance Portfolio Allowance Portfolio Allowance (In thousands) 12 — — 21 5 38 — — — — 3 — 3 41 December 31, 2015 Loans individually evaluated for impairment: Residential real estate . . . . . . . . . . . Commercial real estate . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . Commercial business. . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . Loans collectively evaluated for impairment: $ $ 1,833 4,291 — 422 1,977 — 8,523 2 — — — 71 — 73 762 — 197 1,433 7 2,399 $ — $ — $ 1,833 5,053 — 619 3,410 7 10,922 $ 2 12 — — 92 5 111 Residential real estate . . . . . . . . . . . Commercial real estate . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . Commercial business. . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . Subtotal . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . 172,478 639,233 81,242 8,724 148,502 1,361 1,051,540 $1,060,063 1,442 7,692 1,504 174 3,239 4 14,055 $14,128 2,873 53,256 1,031 6,583 20,941 367 85,051 $87,450 $ 175,351 692,489 82,273 15,307 169,443 1,728 1,136,591 $1,147,513 1,442 7,692 1,504 174 3,242 4 14,058 $14,169 Originated Loans Acquired Loans Total Portfolio Allowance Portfolio Allowance Portfolio Allowance (In thousands) December 31, 2014 Loans individually evaluated for impairment: Residential real estate . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal Loans collectively evaluated for impairment: $ 864 4,996 — 91 1,701 — 7,652 $ — $ 23 — — 10 — 33 — $ — $ — — — 629 — 629 — — — — — — 864 4,996 — 91 2,330 — 8,281 Residential real estate . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . Construction . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subtotal Total 168,969 453,510 62,258 10,135 118,659 243 813,774 $821,426 1,431 5,457 1,102 205 2,628 4 10,827 $10,860 5,198 62,675 971 7,940 28,270 2,653 107,707 $108,336 — — — — — — — 174,167 516,185 63,229 18,075 146,929 2,896 921,481 $ — $929,762 $ — 23 — — 10 — 33 1,431 5,457 1,102 205 2,628 4 10,827 $10,860 101 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Credit quality indicators The Company’s policies provide for the classification of loans into the following categories: pass, special mention, substandard, doubtful and loss. Consistent with regulatory guidelines, loans that are considered to be of lesser quality are classified as substandard, doubtful, or loss assets. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Substandard loans include those loans characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions and values, highly questionable and improbable. Loans classified as loss are those considered uncollectible and of such little value that their continuance as loans is not warranted. Loans that do not expose the Company to risk sufficient to warrant classification in one of the aforementioned categories, but which possess potential weaknesses that deserve close attention, are designated as special mention. Loans that are considered to be impaired are analyzed to determine whether a loss is possible and if so, a calculation is performed to determine the possible loss amount. If it is determined that the loss amount is $0, no reserve is held against the asset. If a loss is calculated, then a specific reserve for that asset is determined. The following tables are a summary of the loan portfolio quality indicators by portfolio segment at December 31, 2015 and 2014: Commercial Credit Quality Indicators At December 31, 2015 At December 31, 2014 Commercial Real Estate Construction Commercial Business Commercial Real Estate Construction Commercial Business (In thousands) Originated loans: Pass . . . . . . . . . . . . . . . . . . Special mention . . . . . . . . . . Substandard . . . . . . . . . . . . Doubtful. . . . . . . . . . . . . . . Loss . . . . . . . . . . . . . . . . . . $638,709 1,595 3,220 — — Total originated loans . . . . 643,524 $81,242 — — — — 81,242 $148,748 1,118 549 — 64 $452,974 2,096 3,436 — — 150,479 458,506 $62,258 — — — — 62,258 $115,323 5,037 — — — 120,360 Acquired loans: Pass . . . . . . . . . . . . . . . . . . 52,427 Special mention . . . . . . . . . . Substandard . . . . . . . . . . . . Doubtful . . . . . . . . . . . . . . Loss . . . . . . . . . . . . . . . . . — 1,591 — — 230 — 801 — — 20,794 61,017 598 982 — — — 1,658 — — Total acquired loans . . . . . 54,018 1,031 22,374 62,675 136 — 835 — — 971 27,074 659 1,166 — — 28,899 Total . . . . . . . . . . . . . . . $697,542 $82,273 $172,853 $521,181 $63,229 $149,259 102 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Residential and Consumer Credit Quality Indicators At December 31, 2015 At December 31, 2014 Residential Real Estate Home Equity Consumer Residential Real Estate Home Equity Consumer Originated loans: Pass. . . . . . . . . . . . . . . . . . . . . Special mention . . . . . . . . . . . . Substandard. . . . . . . . . . . . . . . Doubtful . . . . . . . . . . . . . . . . . Loss . . . . . . . . . . . . . . . . . . . . Total originated loans. . . . . . . Acquired loans: Pass. . . . . . . . . . . . . . . . . . . . . Special mention . . . . . . . . . . . . Substandard. . . . . . . . . . . . . . . Doubtful . . . . . . . . . . . . . . . . . Loss . . . . . . . . . . . . . . . . . . . . Total acquired loans. . . . . . . . Total . . . . . . . . . . . . . . . . . . $172,478 864 969 — — 174,311 2,873 — — — — 2,873 $177,184 $ 8,725 80 341 — — 9,146 6,545 — 235 — — 6,780 $15,926 Loan portfolio aging analysis (In thousands) $1,361 — — — — 1,361 295 — 79 — — 374 $1,735 $168,969 864 — — — 169,833 5,022 — 176 — — 5,198 $175,031 $10,135 91 — — — 10,226 7,925 — 15 — — 7,940 $18,166 $ 243 — — — — 243 2,653 — — — — 2,653 $2,896 The following tables set forth certain information with respect to our loan portfolio delinquencies by portfolio segment and amount as of December 31, 2015 and December 31, 2014: As of December 31, 2015 31 – 60 Days Past Due 61 – 90 Days Past Due Greater Than 90 Days Total Past Due Current (In thousands) Carrying Amount > 90 Days and Accruing Originated Loans Real estate loans: Residential real estate. . . . . Commercial real estate . . . . Construction . . . . . . . . . . Home equity. . . . . . . . . . . Commercial business. . . . . . . Consumer . . . . . . . . . . . . . . Total originated loans . . . Acquired Loans Real estate loans: Residential real estate. . . . . Commercial real estate . . . . Construction . . . . . . . . . . Home equity . . . . . . . . . . Commercial business . . . . . . Consumer . . . . . . . . . . . . . . Total acquired loans . . . . Total loans . . . . . . . . . . $ — — — 198 1,078 — 1,276 — 333 — 100 262 17 712 $1,988 $ 969 — — — 343 — 1,312 — 762 801 191 101 — 1,855 $3,167 $ 969 311 — 198 1,521 — 2,999 — 1,095 801 453 434 17 2,800 $5,799 $ 173,342 643,213 81,242 8,948 148,958 1,361 1,057,064 2,873 52,923 230 6,327 21,940 357 84,650 $1,141,714 $ — — — — — — — — 218 801 — 86 — 1,105 $1,105 $ — 311 — — 100 — 411 — — — 162 71 — 233 $644 103 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of December 31, 2014 31 – 60 Days Past Due 61 – 90 Days Past Due Greater Than 90 Days Total Past Due Current (In thousands) Carrying Amount > 90 Days and Accruing Originated Loans Real estate loans: Residential real estate . . . . . Commercial real estate . . . . . Construction . . . . . . . . . . . Home equity . . . . . . . . . . . Commercial business . . . . . . . Consumer . . . . . . . . . . . . . . . Total originated loans . . . . Acquired Loans Real estate loans: Residential real estate . . . . . . Commercial real estate . . . . . Construction . . . . . . . . . . . . Home equity . . . . . . . . . . . . Commercial business . . . . . . . . Consumer . . . . . . . . . . . . . . . Total acquired loans . . . . . Total loans . . . . . . . . . . . . Loans on nonaccrual status $ — — — — — — — 339 685 — — 178 3 1,205 $1,205 $ — — — — — — — — 677 — 40 386 — 1,103 $1,103 $ — 3,436 — — — — 3,436 294 836 835 — 305 — 2,270 $5,706 $ — $169,833 455,070 62,258 10,226 120,360 243 817,990 3,436 — — — — 3,436 633 2,198 835 40 869 3 4,578 $8,014 4,565 60,477 136 7,900 28,030 2,650 103,758 $921,748 $ — 216 — — — — 216 176 466 835 — 305 — 1,782 $1,998 The following is a summary of nonaccrual loans by portfolio segment as of December 31, 2015 and 2014: December 31, 2015 2014 (In thousands) Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 970 1,264 395 1,160 2 $ — 3,220 — 142 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,791 $3,362 The amount of income that was contractually due but not recognized on originated nonaccrual loans totaled $25 thousand, $8 thousand and $23 thousand for the years ended December 31, 2015, 2014 and 2013, respectively. The amount of actual interest income recognized on these loans was $43 thousand, $190 thousand and $8 thousand for the years ended December 31, 2015, 2014 and 2013, respectively. At December 31, 2015 and 2014, there were $169 thousand and no commitments to lend additional funds to any borrower on nonaccrual status, respectively. 104 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The preceding table excludes acquired loans that are accounted for as purchased credit impaired loans totaling $1.1 million and $1.9 million, respectively at December 31, 2015 and 2014. Such loans otherwise meet the Company’s definition of a nonperforming loan but are excluded because the loans are included in loan pools that are considered performing. The discounts arising from recording these loans at fair value were due, in part, to credit quality. The acquired loans are accounted for on either a pool or individual basis and the accretable yield is being recognized as interest income over the life of the loans based on expected cash flows. Impaired loans An impaired loan generally is one for which it is probable, based on current information, the Company will not collect all the amounts due under the contractual terms of the loan. Loans are individually evaluated for impairment. When the Company classifies a problem loan as impaired, it provides a specific valuation allowance for that portion of the asset that is deemed uncollectible. The following table summarizes impaired loans by portfolio segment and the average carrying amount and interest income recognized on impaired loans by portfolio segment as of December 31, 2015 and 2014: As of and for the Year Ended December 31, 2015 Carrying Amount Unpaid Principal Balance Average Carrying Amount Associated Allowance (In thousands) Interest Income Recognized Originated Impaired loans without a valuation allowance: Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . Total impaired loans without a valuation allowance. . . . $ 969 4,291 422 1,351 $7,033 $ 969 4,291 424 1,372 $7,056 $ — $ 973 4,308 429 1,374 $ — $7,084 — — — Impaired loans with a valuation allowance: Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . Total impaired loans with a valuation allowance . . . . . . Total originated impaired loans . . . . . . . . . . . . . . . . $ 864 626 1,490 $8,523 $ 864 690 1,554 $8,610 $ $ 2 71 73 73 $ 864 673 1,537 $8,621 Acquired Impaired loans without a valuation allowance: Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . Home Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Business . . . . . . . . . . . . . . . . . . . . . . . . . . Total impaired loans without a valuation allowance . . . Impaired loans with a valuation allowance: Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer Total impaired loans with a valuation allowance . . . . . . Total acquired impaired loans . . . . . . . . . . . . . . . . . $ 611 197 963 $1,771 $ 678 200 963 $1,841 $ — $ 602 198 999 $ — $1,799 — — $ 151 470 7 628 $2,399 $ 151 480 7 638 $2,479 $ $ 12 21 5 38 38 $ 151 506 7 664 $2,463 $ 27 124 10 49 $210 $ 28 34 62 $272 $ 6 2 54 $ 62 $ 3 14 1 18 $ 80 105 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) As of and for the Year Ended December 31, 2014 Carrying Amount Unpaid Principal Balance Associated Allowance Average Carrying Amount Interest Income Recognized (In thousands) Originated Impaired loans without a valuation allowance: Residential real estate . . . . . . . . . . . . . . . . . . . . . . . . . . $ 864 $ 864 $ — $ 864 Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . 4,543 4,544 Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 91 91 Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . 1,145 1,153 — — — 4,034 95 1,226 $ 28 223 3 52 Total impaired loans without a valuation allowance. . . . $6,643 $6,652 $ — $6,219 $306 Impaired loans with a valuation allowance: Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . $ 453 556 $ 453 556 Total impaired loans with a valuation allowance . . . . . . $1,009 $1,009 Total originated impaired loans . . . . . . . . . . . . . . . . $7,652 $7,661 $ $ $ 23 10 33 33 $ 457 596 $1,053 $7,272 Acquired Impaired loans without a valuation allowance: Commercial business . . . . . . . . . . . . . . . . . . . . . . . . . . $ 629 $ 629 $ — $ 607 Total impaired loans without a valuation allowance. . . . $ 629 $ 629 $ — $ 607 $ 29 32 $ 61 $367 $ 28 $ 28 Impaired loans with a valuation allowance: Total impaired loans with a valuation allowance . . . . . . $ — $ — $ — $ — $ — Total acquired impaired loans . . . . . . . . . . . . . . . . . $ 629 $ 629 $ — $ 607 $ 28 Troubled debt restructurings (TDRs) Modifications to a loan are considered to be a troubled debt restructuring when one or both of the following conditions is met: 1) the borrower is experiencing financial difficulties and/or 2) the modification constitutes a concession that is not in line with market rates and/or terms. Modified terms are dependent upon the financial position and needs of the individual borrower. Troubled debt restructurings are classified as impaired loans. If a performing loan is restructured into a TDR it remains in performing status. If a nonperforming loan is restructured into a TDR, it continues to be carried in nonaccrual status. Nonaccrual classification may be removed if the borrower demonstrates compliance with the modified terms for a minimum of six months. Troubled debt restructured loans are reported as such for at least one year from the date of restructuring. In years after the restructuring, troubled debt restructured loans are removed from this classification if the restructuring agreement specifies a market rate of interest equal to that which would be provided to a borrower with similar credit at the time of restructuring and the loan is not deemed to be impaired based on the modified terms. The recorded investment in TDRs was $7.3 million at December 31, 2015 and $3.6 million at December 31, 2014. 106 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The following table presents loans whose terms were modified as TDRs during the periods presented: Outstanding Recorded Investment Number of Loans Pre-Modification Post-Modification 2015 2014 2015 2014 2015 2014 (Dollars in thousands) Years ended December 31, Commercial real estate . . . . . . . . . . . . . Commercial business. . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . 3 1 4 2 4 6 $4,044 $1,317 $4,044 $1,317 39 782 39 782 $4,083 $2,099 $4,083 $2,099 Except for two non-accrual loans totaling $1.1 million, all TDRs at December 31, 2015 were performing in compliance under their modified terms and therefore, were on accrual status. All TDRs at December 31, 2014 were performing in compliance under their modified terms and therefore, were on accrual status. The following table provides information on how loans were modified as a TDR for the years ended December 31, 2015 and 2014. December 31, 2015 2014 (In thousands) Maturity/amortization concession . . . . . . . . . . . . . . . . . . . . . . . . Maturity and payment concession . . . . . . . . . . . . . . . . . . . . . . . . Payment concession . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 825 3,258 — $4,083 $ 946 — 1,153 $2,099 There was no loans modified in a troubled debt restructuring, for which there was a payment default during the years ended December 31, 2015 and 2014, respectively. 8. Premises and Equipment At December 31, 2015 and 2014, premises and equipment consisted of the following: December 31, 2015 2014 (In thousands) Land. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,300 $ 2,300 Building . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture and fixtures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization . . . . . . . . . . . . . . . . 6,384 4,544 1,964 3,734 18,926 (7,763) 6,346 4,280 1,842 3,221 17,989 (6,079) Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . $11,163 $11,910 For the years ended December 31, 2015, 2014 and 2013, depreciation and amortization expense related to premises and equipment totaled $1.7 million, $1.2 million and $666 thousand, respectively. 107 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 9. Deposits At December 31, 2015 and 2014, deposits consisted of the following: December 31, 2015 2014 (In thousands) Noninterest bearing demand deposit accounts . . . . . . . . . . . . . . . $ 164,553 $166,030 Interest bearing accounts: NOW and money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time certificates of deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest bearing accounts . . . . . . . . . . . . . . . . . . . . . . . 347,846 97,846 436,697 882,389 276,501 84,457 308,451 669,409 Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,046,942 $835,439 Contractual maturities of time certificates of deposit as of December 31, 2015 and 2014 are summarized below: December 31, 2015 2014 (In thousands) 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 244,674 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 238,673 152,682 35,186 9,810 346 29,462 14,657 9,968 9,690 — $436,697 $308,451 Time certificates of deposit in denominations of $100,000 or more were approximately $363.3 million, and $239.8 million at December 31, 2015 and 2014, respectively. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), signed into law on July 21, 2010, permanently raised the maximum deposit insurance amount to $250,000, retroactive to January 1, 2008. The aggregate amount of individual certificate accounts with balances of $250,000 or more were approximately $70.7 million and $61.7 million at December 31, 2015 and 2014, respectively. The following table summarizes interest expense by account type for the years ended December 31, 2015, 2014 and 2013: Years Ended December 31, 2015 2014 2013 (In thousands) NOW and money market . . . . . . . . . . . . . . . . . . . . $1,473 Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time certificates of deposit . . . . . . . . . . . . . . . . . . . 693 3,515 Total interest expense on deposits . . . . . . . . . . . . . . $5,681 $ 894 302 2,099 $3,295 $ 547 543 1,143 $2,233 108 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 10. Federal Loan Bank Advances and Other Borrowings The following is a summary of FHLB advances with maturity dates and weighted average rates at December 31, 2015 and 2014: December 31, 2015 2014 Amount Due Weighted Average Rate Amount Due (Dollars in thousands) Weighted Average Rate Year of Maturity: 2015 . . . . . . . . . . . . . . . . . . . . $ — —% $109,000 0.31% 2016 . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . 75,000 20,000 25,000 0.46 0.99 1.99 — 20,000 — — 0.99 — Total advances . . . . . . . . . . . . . . . . $120,000 0.87% $129,000 0.42% $75.0 million of the above mentioned FHLB advances are subject to interest rate swap transactions. The Bank has additional borrowing capacity at the FHLB, in excess of outstanding advances, up to a certain percentage of the value of qualified collateral, as defined in the FHLB Statement of Products Policy, at the time of the borrowing. In accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. As of December 31, 2015 the Company has immediate availability to borrow $183.3 million based on qualified collateral. Additionally, the Bank has access to a pre-approved secured line of credit of $450 thousand with the FHLB, none of which was outstanding at December 31, 2015 and 2014. The Bank has an unsecured line of credit with Bankers’ Bank Northeast of $7.5 million at December 31, 2015 and 2014, none of which was outstanding at December 31, 2015 and 2014. Federal Home Loan Bank Stock As a member of the FHLB, the Bank is required to maintain investments in their capital stock. The Bank owned 65,536 and 61,086 shares at December 31, 2015 and 2014, respectively. There is no ready market or quoted market values for the stock. The shares have a par value of $100 and are carried on the consolidated balance sheets at cost, as the stock is only redeemable at par subject to the redemption practices of the FHLB. 11. Subordinated Debentures On August 19, 2015 the Company completed a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “Notes”) to certain institutional investors. The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early redemption date. The Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. The Company will use the net proceeds from the sales of the Notes for general corporate purposes. The Notes were assigned an investment grade rating of BBB by Kroll Bond Rating Agency. 12. Commitments and Contingencies Leases The Company leases its corporate office space, as well as all but two branch locations, plus certain equipment under operating lease agreements, which expire at various dates through 2028. In addition to 109 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) rental payments, the leases require payment of property taxes and certain common area maintenance fees. At December 31, 2015 and 2014, future minimum rental commitments under the terms of these leases by year were as follows: Period Ending December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2016 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2017 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2018 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2015 2014 (In thousands) $ — 1,796 1,166 836 807 3,591 $8,196 $1,788 1,767 1,159 829 807 2,936 $9,286 Total rental expense approximated $1.8 million, $1.6 million and $1.5 million for the years ended December 31, 2015, 2014 and 2013, respectively. Legal matters The Company is involved in various legal proceedings which have arisen in the normal course of business. Management believes that resolution of these matters will not have a material effect on the Company’s financial condition or results of operations. Off-balance sheet instruments In the normal course of business, the Company is a party to financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include commitments to extend credit and involve, to varying degrees, elements of credit and interest rate risk in excess of the amounts recognized in the financial statements. The contractual amounts of these instruments reflect the extent of involvement the Company has in particular classes of financial instruments. The contractual amounts of commitments to extend credit represents the amounts of potential accounting loss should the contract be fully drawn upon, the customer’s default, and the value of any existing collateral becomes worthless. Management uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments and evaluates each customer’s creditworthiness on a case-by-case basis. Management believes that they control the credit risk of these financial instruments through credit approvals, credit limits, monitoring procedures and the receipt of collateral as deemed necessary. Financial instruments whose contract amounts represented credit risk at December 31, 2015 and 2014 were as follows: Commitments to extend credit: Loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Undisbursed construction loans . . . . . . . . . . . . . . . . . . . . . . . Unused home equity lines of credit . . . . . . . . . . . . . . . . . . . . . 110 December 31, 2015 2014 (In thousands) $ 77,181 66,974 9,258 $153,413 $ 83,013 61,095 12,340 $156,448 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments to extend credit generally have fixed expiration dates or other termination clauses and may require payment of a fee by the borrower. Since these commitments could expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the counter party. Collateral held varies, but may include residential and commercial property, deposits and securities. 13. Income Taxes Income tax expense for the years ended December 31, 2015, 2014 and 2013 consisted of: 2015 2014 2013 (In thousands) Current provision: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total current . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,113 694 5,807 $2,147 718 2,865 $1,944 597 2,541 Deferred provision: . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal State . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred . . . . . . . . . . . . . . . . . . . . . . . . . (1,749) 783 (966) (557) (139) (696) (385) 28 (357) Total income tax expense . . . . . . . . . . . . . . . . $ 4,841 $2,169 $2,184 In October, 2015, the Company created Bankwell Loan Servicing Group, Inc., a Passive Investment Company (“PIC”) organized for state income tax purposes. The PIC is a wholly-owned subsidiary of the Bank operating in accordance with Connecticut statutes. The PIC’s activities are limited in scope to holding and managing loans that are collateralized by real estate. Income earned by a PIC is exempt from Connecticut income tax. In addition, any dividends paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes. As a result of the formation of the PIC, the Bank no longer expects to be subject to Connecticut income taxes. A reconciliation of the anticipated income tax expense, computed by applying the statutory federal income tax rate of 35% to the income before income taxes, to the amount reported in the consolidated statements of income for the years ended December 31, 2015, 2014 and 2013 was as follows: Income tax expense at statutory federal rate . . . . . . . State tax expense, net of federal tax effect . . . . . . . . . Statutory rate reductions . . . . . . . . . . . . . . . . . . . . Gain from bargain purchase . . . . . . . . . . . . . . . . . . Income exempt from tax . . . . . . . . . . . . . . . . . . . . . Other items, net . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense before change in valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in valuation allowance . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . 2015 $4,855 566 811 — (627) 42 5,647 (806) $4,841 December 31, 2014 (In thousands) $2,291 259 — — (523) 19 2,046 123 $2,169 2013 $2,497 239 — (453) (294) 21 2,010 174 $2,184 111 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) At December 31, 2015 and 2014, the components of deferred tax assets and liabilities were as follows: December 31, 2015 2014 (In thousands) Deferred tax assets: Allowance for loan losses . . . . . . . . . . . . . . . . . . . . . . . . . . . Net operating loss carryforwards . . . . . . . . . . . . . . . . . . . . . . Purchase accounting adjustments . . . . . . . . . . . . . . . . . . . . . . Deferred fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Start-up costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized loss on derivatives . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred tax receivable, net of valuation allowance . . . . . . . . Deferred tax liabilities: Tax bad debt reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on available for sale securities . . . . . . . . . . . . . Gross deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . $5,086 1,162 228 1,262 767 317 96 82 201 9,201 — 9,201 645 — 219 864 Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . $8,337 $4,314 1,539 504 1,144 916 346 73 — 647 9,483 (806) 8,677 740 370 411 1,521 $7,156 A valuation allowance against deferred tax assets is required if, based on the weight of available evidence, it is more-likely-than-not that some or all of the deferred tax assets will not be realized. At December 31, 2014, management recorded a valuation allowance against the deferred tax benefits of the state net operating loss carry forwards and other state deferred tax assets for the Bank Holding Company. During 2015, the Company derecognized its state deferred tax assets, and reversed the related valuation allowances. Management has evaluated its remaining deferred tax assets and believes no valuation allowances are needed at December 31, 2015. At December 31, 2015, the Company had federal net operating loss carryovers of $3.3 million. The carryovers were transferred to the Company upon the mergers with The Wilton Bank and Quinnipiac Bank & Trust. The losses will expire after 2032 and are subject to certain annual limitations which amount to $584 thousand per annum. Management regularly analyzes their tax positions and at December 31, 2015, does not believe that the Company has taken any tax positions where future deductibility is not certain. The tax years 2012 and subsequent, are subject to examination by federal and state taxing authorities. The statute of limitations has expired on the years before 2012. No examinations are currently in process. 14. 401(k) Profit Sharing Plan The Company’s employees are eligible to participate in The Bankwell Financial Group, Inc. and its Subsidiaries and Affiliates 401(k) Plan (the “401k Plan”). The 401k Plan covers substantially all employees who are 21 years of age. Under the terms of the 401k Plan, participants can contribute up to a certain limitations. The Company matches eligible to federal percentage of their compensation, subject 112 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) contributions and may make discretionary matching and/or profit sharing contributions. Participants are immediately vested in their contributions and become fully vested in the Company’s contributions after completing five years of service. The Company contributed $173 thousand, $151 thousand and $127 thousand to the 401k Plan during the years ended December 31, 2015, 2014 and 2013, respectively. 15. Earnings per Share Basic earnings per share (“EPS”) is computed by dividing income available to common shareholders by the weighted-average number of shares of common stock outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock (such as stock options) were exercised or converted into common stock or resulted in the issuance of common stock that then shared in earnings. Restricted stock awards include the right to receive non forfeitable dividends, and are therefore, considered to participate with common stock in undistributed earnings for purposes of computing EPS. The Company’s unvested restricted stock awards are participating securities, and therefore, are included in the computation of both basic and diluted earnings per common share. EPS is calculated using the two class method, under which calculations (1) exclude from the numerator any dividends paid or owed on participating securities and any undistributed earnings considered to be attributable to participating securities and (2) exclude from the denominator the dilutive impact of the participating securities. The following is a reconciliation of earnings available to common shareholders and basic weighted average common shares outstanding to diluted weighted average common shares outstanding, reflecting the application of the two-class method: For the Years Ended December 31, 2015 2014 2013 (In thousands, except per share data) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Preferred stock dividends and net accretion . . . . . . . Dividends to participating securities . . . . . . . . . . . . Undistributed earnings allocated to participating $9,030 (125) (5) $4,568 (110) — securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (226) (81) Net income for earnings per share calculation . . . . . . $8,674 $4,377 Weighted average shares outstanding, basic . . . . . . . . Effect of dilutive equity-based awards . . . . . . . . . . . Weighted average shares outstanding, diluted . . . . . . 7,072 69 7,141 Net earnings per common share: Basic earnings per common share . . . . . . . . . . . . . $ 1.23 Diluted earnings per common share . . . . . . . . . . . 1.21 5,578 28 5,606 $ 0.78 0.78 $5,161 (111) — (89) $4,961 3,395 56 3,451 $ 1.46 1.44 16. Stock Based Compensation Plans Equity award plans The Company has five equity award plans, which are collectively referred to as the “Plan.” The current plan under which any future issuances of equity awards will be made is the 2012 BNC Financial Group, Inc. Stock Plan, or the “2012 Plan,” amended on June 26, 2013. All equity awards made under the 2012 Plan are made by means of an award agreement, which contains the specific terms and conditions of the grant. To date, all equity awards have been in the form of share options or restricted stock. At December 31, 2015, there were 488,532 shares reserved for future issuance under the 2012 Plan. 113 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Stock Options: The Company accounts for stock options based on the fair value at the date of grant and records expense over the vesting period of such awards on a straight line basis. Options vest over periods up to 5 years. For the years ended December 31, 2015, 2014, and 2013, the Company recorded expense related to options granted under the various plans of approximately $14 thousand, $32 thousand, and $41 thousand, respectively. There were no options granted during the years ended December 31, 2015, 2014 and 2013. A summary of the status of outstanding stock options at December 31, 2015 and changes during the periods then ended, were as follows: Options outstanding at beginning of period . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Options outstanding at end of period . . . . . . . . . . . . . . . . . . . . . . Options exercisable at end of period . . . . . . . . . . . . . . . . . . . . . . . December 31, 2015 Number of Shares 204,793 (300) (34,590) (11,495) 158,408 153,908 Weighted Average Exercise Price $17.42 15.00 14.47 16.79 18.12 18.21 Total intrinsic value is the amount by which the fair value of the underlying stock exceeds the exercise price of an option on the exercise date. The total intrinsic value of share options exercised during the years ended December 31, 2015, 2014 and 2013 was $170 thousand, $214 thousand and $544, respectively. Restricted Stock: Restricted stock provides grantees with rights to shares of common stock upon completion of a service period. Shares of unvested restricted stock are considered participating securities. Restricted stock awards generally vest over one to five years. The following table presents the activity for restricted stock for the year ended December 31, 2015: December 31, 2015 Unvested at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Shares 165,862 51,800 (48,766) (25,573) Unvested at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 143,323 Weighted Average Grant Date Fair Value $15.51 18.73 18.09 14.77 15.92 The Company’s restricted stock expense for the years ended December 31, 2015, 2014 and 2013 was $1.0 million, $542 thousand and $268 thousand, respectively. Market Conditions Restricted Stock: On December 9, 2014 the Company issued restricted stock with market and service conditions pursuant to the Company’s 2012 Stock Plan. The maximum number of shares that can vest is 49,400. The actual number of shares to be vested is based on market criteria over a five-year period ending on December 1, 2019 based on the Company’s stock price being at or above $25.00, $27.00 and $29.00 per share over a 60-day consecutive period. These shares may vest over a period from December 1, 2017 to December 1, 2019 based on meeting the price targets. In addition, the grantees must 114 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) be employed with the Company on the vesting date to receive the shares. The Company determined the fair value of these market condition awards in accordance with ASC 718 — Stock Compensation using the Monte Carlo simulation model deemed appropriate for this type of grant. The grant date fair value for these grants was $11.63 for the awards that vest at the $25 stock price, $10.30 for the awards that vest at the $27 stock price and $9.10 for the awards that vest at the $29 stock price. The grant date fair value for the Company’s stock was $18.99 per share. The Company recognized $134 thousand and $14 thousand in stock compensation expense for the years ended December 31, 2015 and 2014, respectively, for these restricted stock awards. 17. Comprehensive Income Comprehensive income represents the sum of net income and items of other comprehensive income or loss, including net unrealized gains or losses on securities available for sale and net gains or losses on derivatives accounted for as cash flow hedges. The Company’s total comprehensive income or loss for the years ended December 31, 2015, 2014 and 2013 is reported in the Consolidated Statements of Comprehensive Income. The following tables present the changes in accumulated other comprehensive income (loss) by component, net of tax for the years ended December 31, 2015, 2014 and 2013: Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swap (In thousands) Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss before reclassifications Amounts reclassified from accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . Balance at December 31, 2015 . . . . . . . . . . . . . . . . . . . . . . $ 644 (239) — (239) $ 405 $(113) (65) — (65) $(178) Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swap (In thousands) Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) before reclassifications . . . Amounts reclassified from accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net other comprehensive income (loss) . . . . . . . . . . . . . . . . Balance at December 31, 2014 . . . . . . . . . . . . . . . . . . . . . . $424 220 — 220 $644 $ — (113) — (113) $(113) Net Unrealized Gain (Loss) on Available for Sale Securities (In thousands) Total $ 531 (304) — (304) $ 227 Total $424 107 — 107 $531 Balance at December 31, 2012 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,511 Other comprehensive loss before reclassifications . . . . . . . . . . . . . . . . . . . . . . Amounts reclassified from accumulated other comprehensive income . . . . . . . Net other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1,087) — (1,087) Balance at December 31, 2013 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 424 115 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 18. Derivative Instruments Information about derivative instruments for the years ended December 31, 2015 and 2014 were as follows: December 31, 2015: Notional Amount Maturity Received Paid (Dollars in thousands) Cash flow hedge: Interest rate swap on FHLB advance . . . . . . . $25,000 Interest rate swap on FHLB advance . . . . . . . $25,000 Interest rate swap on FHLB advance . . . . . . . $25,000 4.7 years 5.0 years 5.0 years 0.61% 0.61% 0.61% 1.62% 1.83% 1.48% December 31, 2014: Notional Amount Maturity Received Paid (Dollars in thousands) Fair Value $(181) (276) 181 $(276) Fair Value Cash flow hedge: Interest rate swap on FHLB advance . . . . . . . Interest rate swap on forward-starting FHLB $25,000 4.7 years 0.26% 1.62% $ (73) advance . . . . . . . . . . . . . . . . . . . . . . . . . $25,000 5.0 years 0.26% 1.83% (113) $(186) The effective portion of unrealized changes in the fair value of derivatives accounted for as cash flow hedges is reported in other comprehensive income and subsequently reclassified to earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The Bank assesses the effectiveness of each hedging relationship by comparing the changes in cash flows of the derivative hedging instrument with the changes in cash flows of the designated hedged item or transaction. The ineffective portion of changes in the fair value of the derivatives is recognized directly in earnings. The Bank’s cash flow hedge positions are all forward starting interest rate swap transactions. The Bank entered into the following forward starting interest rate swap transactions: Notional Amount Effective Date of Hedged Borrowing Duration of Borrowing Counterparty (Dollars in thousands) Type of borrowing: FHLB 90-day advance . . . . . . . . . . . FHLB 90-day advance . . . . . . . . . . . FHLB 90-day advance . . . . . . . . . . . $25,000 $25,000 $25,000 April 1, 2014 4.7 years Bank of Montreal January 2, 2015 5.0 years Bank of Montreal August 26, 2015 5.0 years Bank of Montreal This hedge strategy converts the floating rate of interest on certain FHLB advances to fixed interest rates, thereby protecting the Bank from floating interest rate variability. 116 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Changes in the consolidated statements of comprehensive income related to interest rate derivatives designated as hedges of cash flows were as follows for the years ended December 31, 2015 and 2014: December 31, 2015 December 31, 2014 (In thousands) Interest rate swap on FHLB advance: Unrealized loss recognized in accumulated other comprehensive income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (89) $(186) Income tax benefit on items recognized in accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense recognized on hedged FHLB advance . . . . . . . . . . 24 $ (65) $828 73 $(113) $ 264 19. Fair Value of Financial Instruments GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the statements of condition, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rates and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparisons to independent markets and, in many cases, could not be realized in immediate settlement of the instrument. Management uses its best judgment in estimating the fair value of there are inherent weaknesses in any estimation technique. Therefore, the Company’s financial instruments; however, for substantially all financial instruments, the fair value estimates presented herein are not necessarily indicative of the amounts the Company could have realized in a sales transaction. The estimated fair value amounts have been measured as of the respective period-ends, and have not been reevaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different than the amounts reported at each period-end. 117 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) The carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments at December 31, 2015 and 2014 were as follows: Carrying Value Fair Value December 31, 2015 Level 1 Level 2 Level 3 (In thousands) Financial Assets: Cash and due from banks . . . . . $ 49,562 $ 49,562 $49,562 $ — $ Federal funds sold . . . . . . . . . . Available for sale securities. . . . . 39,035 40,581 39,035 40,581 Held to maturity securities. . . . . Loans receivable, net . . . . . . . . . 10,226 1,129,748 10,228 1,135,227 Accrued interest receivable. . . . . FHLB stock . . . . . . . . . . . . . . 4,071 6,554 4,071 6,554 Financial Liabilities: Demand deposits . . . . . . . . . . . NOW and money market . . . . . Savings . . . . . . . . . . . . . . . . . . Time deposits. . . . . . . . . . . . . . Advances from the FHLB . . . . . Subordinated debentures . . . . . . Derivative liability . . . . . . . . . . $ 164,553 347,846 97,846 436,697 120,000 25,000 276 $ 164,553 347,846 97,846 438,214 120,025 24,505 276 39,035 — — — — — $ — — — — — — — — 40,581 10,228 — — — $ — — — — — — 276 — — — — 1,135,227 4,071 6,554 $ 164,553 347,846 97,846 438,214 120,025 24,505 — Carrying Value Fair Value December 31, 2014 Level 1 Level 2 Level 3 (In thousands) Financial Assets: Cash and due from banks . . . . . Available for sale securities. . . . . Held to maturity securities. . . . . $ 48,559 65,009 11,454 Loans held for sale . . . . . . . . . . 586 $ 48,559 65,009 11,470 586 Loans receivable, net . . . . . . . . . 915,981 920,031 Accrued interest receivable. . . . . FHLB stock . . . . . . . . . . . . . . 3,323 6,109 3,323 6,109 Financial Liabilities: $48,559 — — $ — 65,009 11,470 $ — — — — 586 — — — — — — — 920,031 3,323 6,109 Demand deposits . . . . . . . . . . . $166,030 $166,030 $ — $ — $166,030 NOW and money market . . . . . Savings . . . . . . . . . . . . . . . . . . Time deposits. . . . . . . . . . . . . . Advances from the FHLB . . . . . Derivative liability . . . . . . . . . . 276,501 84,457 308,451 129,000 186 276,501 84,457 310,165 128,961 186 — — — — — — — — — 186 276,501 84,457 310,165 128,961 — 118 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 20. Fair Value Measurements The Company is required to account for certain assets at fair value on a recurring or non-recurring basis. As discussed in Note 1, the Company determines fair value in accordance with GAAP, which defines fair value and establishes a framework for measuring fair value. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. GAAP establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair values: Level 1 — Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date. Level 2 — Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data. Level 3 — Significant unobservable inputs that reflect a company’s own assumptions about the assumptions that market participants would use in pricing an asset or liability. Valuation techniques based on unobservable inputs are highly subjective and require judgments regarding significant matters such as the amount and timing of future cash flows and the selection of discount rates that may appropriately reflect market and credit risks. Changes in these judgments often have a material impact on the fair value estimates. In addition, since these estimates are as of a specific point in time they are susceptible to material near-term changes. Assets and Liabilities measured at fair value on a recurring basis The following tables detail the financial instruments carried at fair value on a recurring basis at December 31, 2015 and 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value. The Company had no transfers into or out of Levels 1, 2 or 3 during the years ended December 31, 2015 and 2014. December 31, 2015: Available for sale investment securities: U.S. Government and agency obligations . . . . . . State agency, U.S. territories and municipal obligations. . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . Mortgage backed securities . . . . . . . . . . . . . . . . Derivative Liability . . . . . . . . . . . . . . . . . . . . . . . December 31, 2014: Available for sale investment securities: U.S. Government and agency obligations . . . . . . State agency, U.S. territories and municipal obligations. . . . . . . . . . . . . . . . . . . . . . . . . . Corporate bonds . . . . . . . . . . . . . . . . . . . . . . . Mortgage backed securities . . . . . . . . . . . . . . . . Derivative Liability . . . . . . . . . . . . . . . . . . . . . . . 119 Level 1 Fair Value Level 2 (In thousands) Level 3 $ — $ 7,143 $ — — — — — 17,504 11,437 4,497 (276) — — — — $ — $24,418 $ — — — — — 18,584 16,325 5,682 (186) — — — — BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Available for sale investment securities: The fair value of the Company’s investment securities are estimated by using pricing models or quoted prices of securities with similar characteristics (i.e. matrix pricing) and are classified within Level 2 of the valuation hierarchy. Derivative liabilities: The Company’s derivative liabilities consist of transactions as part of management’s strategy to manage interest rate risk. The valuation of the Company’s interest rate swaps is obtained from a third-party pricing service and is determined using a discounted cash flow analysis on the expected cash flows of each derivative. The pricing analysis is based on observable inputs for the contractual terms of the derivatives, including the period to maturity and interest rate curves. The Company has determined that the majority of the inputs used to value its interest rate derivatives fall within Level 2 of the fair value hierarchy. Financial instruments measured at fair value on a nonrecurring basis Certain assets and liabilities are measured at fair value on a non-recurring basis in accordance with generally accepted accounting principles. These include assets that are measured at the-lower-of-cost-or market that were recognized at fair value below cost at the end of the period as well as assets that are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The following table details the financial instruments carried at fair value on a nonrecurring basis at December 31, 2015 and 2014, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value: Level 1 Fair Value Level 2 (In thousands) December 31, 2015: Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . $ — — December 31, 2014: Impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . Foreclosed real estate . . . . . . . . . . . . . . . . . . . . . $ — — $ — — $ — — Level 3 $10,922 1,248 $ 8,281 950 The following table presents information about quantitative inputs and assumptions for Level 3 financial instruments carried at fair value on a nonrecurring basis at December 31, 2015 and 2014: Fair Value Valuation Methodology Unobservable Input Range (Weighted Average) (Dollars in thousands) December 31, 2015: Impaired loans . . . . . $10,922 Appraisals Discount for dated appraisals 8.00% to 10.00% Discounted cash flows Discount rate 3.25% to 7.00% Foreclosed real estate . . . . . . . . . . $ 1,248 Appraisals Discount for dated appraisals 10.0% to 25.0% December 31, 2014: Impaired loans . . . . . $ 8,281 Appraisals Discount for dated appraisals Discounted cash flows Discount rate — 3.25% to 8.25% Foreclosed real estate . . . . . . . . . . $ 950 Appraisals Discount for dated appraisals 7.34% to 66.6% 120 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Impaired loans: Loans are generally not recorded at fair value on a recurring basis. Periodically, the loans based on fair value Company records nonrecurring adjustments to the carrying value of those loans. Nonrecurring the uncollectible portions of measurements for partial charge-offs of adjustments also include certain impairment amounts for collateral-dependent loans calculated in accordance with ASC 310-10 when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. Collateral is typically valued using appraisals or other indications of value based on recent comparable sales of similar properties or other assumptions. Estimates of fair value based on collateral are generally based on assumptions not observable in the marketplace and therefore such valuations have been classified as Level 3. For those loans where the primary source of repayment is cash flow from operations, adjustments include impairment amounts calculated based on the perceived collectability of interest payments on the basis of a discounted cash flow analysis utilizing a discount rate equivalent to the original note rate. Foreclosed real estate: The Company classifies property acquired through foreclosure or acceptance of deed-in-lieu of foreclosure as foreclosed real estate and repossessed assets in its financial statements. Upon foreclosure, the property securing the loan is written down to fair value less selling costs. The write-down is based upon differences between the appraised value and the book value. Appraisals are based on observable market data such as comparable sales, however assumptions made in determining comparability are unobservable and therefore these assets are classified as Level 3 within the valuation hierarchy. 21. Regulatory Matters The Federal Reserve, the FDIC and the other federal and state bank regulatory agencies establish regulatory capital guidelines for U.S. banking organizations. As of January 1, 2015, the Company and the Bank became subject to new capital rules set forth by the Federal Reserve, the FDIC and the other federal and state bank regulatory agencies. The new capital rules revise the banking agencies’ leverage and risk-based capital requirements and the method for calculating risk weighted assets to make them consistent with agreements that were reached by the Basel Committee on Banking Supervision and certain provisions of the Dodd-Frank Act (the Basel III Capital Rules). The Basel III Capital Rules establish a new minimum common equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4% to 6%; and retained the minimum total capital to risk weighted assets requirement at 8.0%. A “well-capitalized” institution must generally maintain capital ratios 200 basis points higher than the minimum guidelines. The Basel III Capital Rules also change the risk weights assigned to certain assets. The Basel III Capital Rules assigned a higher risk weight (150%) to loans that are more than 90 days past due or are on nonaccrual status and to certain commercial real estate facilities that finance the acquisition, development or construction of real property. The Basel III Capital Rules also alter the risk weighting for other assets, including marketable equity securities that are risk weighted generally at 300%. The Basel III Capital Rules require certain components of accumulated other comprehensive income (loss) to be included for purposes of calculating regulatory capital requirements unless a one-time opt-out is exercised. The Bank did exercise its opt-out option and will exclude the unrealized gain (loss) on investment securities component of accumulated other comprehensive income (loss) from regulatory capital. The Basel III Capital Rules limit a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” consisting of 2.5% of common equity Tier 1 capital to risk-weighted assets in addition to the amount necessary to meet its minimum risk-based capital requirements. The “capital conservation buffer” is being phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer will be effective. 121 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements. Management believes, as of December 31, 2015, the Bank and Company meet all capital adequacy requirements to which they are subject. There are no conditions or events since then that management believes have changed this conclusion. The capital amounts and ratios for the Bank and the Company at December 31, 2015 were as follows: Actual Capital Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in thousands) To be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio Bankwell Bank December 31, 2015 Common Equity Tier 1 Capital to Risk-Weighted Assets . . . . . . . . . . . . . . . . Total Capital to Risk-Weighted Assets . . . . . . Tier I Capital to Risk-Weighted Assets . . . . . . Tier I Capital to Average Assets . . . . . . . . . . . $142,651 156,820 142,651 142,651 12.18% $52,709 13.39% 93,705 12.18% 70,279 10.84% 52,620 4.50% $ 76,135 8.00% 117,131 6.00% 93,705 4.00% 65,775 6.50% 10.00% 8.00% 5.00% Bankwell Financial Group, Inc. December 31, 2015 Common Equity Tier 1 Capital to Risk-Weighted Assets . . . . . . . . . . . . . . . . Total Capital to Risk-Weighted Assets . . . . . . Tier I Capital to Risk-Weighted Assets . . . . . . Tier I Capital to Average Assets . . . . . . . . . . . $128,692 167,867 128,692 128,692 10.92% $53,052 14.24% 94,315 10.92% 70,736 9.75% 52,819 4.50% 8.00% 6.00% 4.00% N/A N/A N/A N/A N/A N/A N/A N/A As of December 31, 2014, the Bank and Company were subject to different regulatory capital requirements administered by federal and state banking agencies. Quantitative measures established by regulation to ensure capital adequacy required the Bank and Company to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets and of Tier I capital to average assets, as defined by regulation. The capital amounts and ratios for the Bank and Company at December 31, 2014, were as follows: To be Well Capitalized Under Prompt Corrective Action Provisions Ratio Amount Actual Capital Amount Ratio For Capital Adequacy Purposes Ratio Amount (Dollars in thousands) Bankwell Bank December 31, 2014 Total Capital to Risk-Weighted Assets . . . . . . . Tier I Capital to Risk-Weighted Assets . . . . . . . Tier I Capital to Average Assets . . . . . . . . . . . . Bankwell Financial Group, Inc. December 31, 2014 Total Capital to Risk-Weighted Assets . . . . . . . Tier I Capital to Risk-Weighted Assets . . . . . . . . . . . . . . . . . . Tier I Capital to Average Assets $125,339 115,359 115,359 13.55% $74,003 12.47% 37,001 11.12% 41,485 8.00% $92,503 4.00% 55,502 4.00% 51,856 10.00% 6.00% 5.00% $135,223 125,243 125,243 14.59% $74,136 13.51% 37,068 11.78% 42,516 8.00% 4.00% 4.00% N/A N/A N/A N/A N/A N/A 122 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Regulatory Restrictions on dividends The ability of the Company to pay dividends depends, in part, on the ability of the Bank to pay dividends to the Company. In accordance with Connecticut statutes, regulatory approval is required to pay dividends in excess of the Bank’s profits retained in the current year plus retained profits from the previous two years. The Bank is also prohibited from paying dividends that would reduce its capital ratios below minimum regulatory requirements. 22. Related Party Transactions In the normal course of business, the Company may grant loans to executive officers, directors and members of their immediate families, as defined, and to entities in which these individuals have more than a 10% equity ownership. Such loans are transacted at terms including interest rates, similar to those available to unrelated customers. Changes in loans outstanding to such related parties during the years ending December 31, 2015 and 2014 were as follows: December 31, 2015 2014 (In thousands) Balance, beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,509 5,476 Repayments and changes in status . . . . . . . . . . . . . . . . . . . . . . . . (94) Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,891 $ 7,346 6,606 (6,443) $ 7,509 Related party deposits aggregated approximately $23.1 million and $34.5 million at December 31, 2015 and 2014, respectively. During the years ended December 31, 2015 and 2014, the Company paid approximately $66 thousand and $62 thousand, respectively, to related parties for services provided to the Company. The payments were primarily for consulting and legal services. 23. Parent Corporation Only Financial Statements The Parent Company operates its wholly-owned subsidiary, Bankwell Bank. The earnings of this subsidiary are recognized by the Company using the equity method of accounting. Accordingly, earnings are recorded as increases in the Company’s investment in the subsidiary and dividends paid reduce the investment in the subsidiary. 123 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Condensed financial statements of the Parent Company only are as follows: Condensed Statements of Financial Condition December 31, 2015 2014 (Dollars in Thousands) ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,692 Investment in subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 145,729 Premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes, net Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 120 5,448 2,060 $ 6,640 119,326 204 3,256 1,644 Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $159,049 $131,070 LIABILITIES AND SHAREHOLDERS’ EQUITY Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . Stockholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,000 2,280 131,769 Total liabilities and stockholders' equity . . . . . . . . . . . . . . . . . . $159,049 $ — 1,860 129,210 $131,070 Condensed Statements of Income Year Ended December 31, 2015 2014 2013 (Dollars in Thousands) Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 38 — 38 2,714 $ 45 — 45 1,728 $ 26 4,167 4,193 5,711 Loss before equity in undistributed earnings of subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equity in undistributed earnings of subsidiaries . . . . . (2,676) 11,706 (1,683) 6,251 (1,518) 6,679 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,030 $ 4,568 $ 5,161 124 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) Condensed Statements of Cash Flows For the Years Ended December 31, 2015 2014 2013 (Dollars in Thousands) Cash flows from operating activities Net income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,030 $ 4,568 $ 5,161 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings . . . . . . . . . . . . (11,706) Increase in other assets . . . . . . . . . . . . . . . . . . (418) (6,251) (1,245) (6,679) (97) Decrease (increase) in premises and equipment, net . . . . . . . . . . . . . . . . . . . . . . 84 Increase in deferred income taxes, net . . . . . . . . (2,192) Increase in other liabilities . . . . . . . . . . . . . . . . Stock-based compensation . . . . . . . . . . . . . . . . 421 1,033 85 (846) 641 573 6 (452) 491 259 Net cash used by operating activities . . . . . . . . (3,748) (2,475) (1,311) Cash flows from investing activities Cash paid for acquisitions . . . . . . . . . . . . . . . . . . Capital contribution to Bankwell Bank . . . . . . . . . Net cash used by investing activities . . . . . . . . . Cash flows from financing activities Proceeds from issuance of subordinated debt . . . . . Redemption of SBLF Preferred Stock . . . . . . . . . Proceeds from exercise of options . . . . . . . . . . . . . Dividends paid on common stock . . . . . . . . . . . . Dividends paid on preferred stock . . . . . . . . . . . . Proceeds from stock offering . . . . . . . . . . . . . . . . Net cash provided by financing activities . . . . . Net (decrease) increase in cash and cash — (15,000) (15,000) 25,000 (10,980) 501 (376) (125) 3,780 17,800 (3,648) (40,000) (43,648) — — 207 — (110) 44,704 44,801 (5,035) — (5,035) — — 467 — (111) 13,178 13,534 equivalents . . . . . . . . . . . . . . . . . . . . . . (948) (1,322) 7,188 Cash and cash equivalents: Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . 6,640 7,962 774 End of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,692 $ 6,640 $ 7,962 Supplemental disclosures of cash flows information: Cash paid for: Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . — — $ — — $ — — 125 BANKWELL FINANCIAL GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) 24. Quarterly Financial Information of Bankwell Financial Group, Inc. (Unaudited) The following table presents selected quarterly financial information (unaudited): 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter 2015 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . $13,907 $13,186 $12,388 $11,273 Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . Provision from income taxes . . . . . . . . . . . . . . . . . . . . . 2,671 11,236 354 820 7,661 4,041 1,423 2,269 10,917 1,489 1,211 7,158 3,481 1,228 1,647 10,741 654 854 7,380 3,561 1,275 1,379 9,894 733 599 6,972 2,788 915 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,618 $ 2,253 $ 2,286 $ 1,873 Net income attributable to common stockholders . . . . . . . $ 2,574 $ 2,226 $ 2,259 $ 1,846 Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 0.35 0.35 $ $ 0.31 0.31 $ $ 0.31 0.31 $ $ 0.26 0.26 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter 2014 Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . $11,016 1,245 $8,668 1,073 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loan losses . . . . . . . . . . . . . . . . . . . . . . . . Non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income taxes . . . . . . . . . . . . . . . . . . . . Provision from income taxes. . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income attributable to common stockholders . . . . . . . Earnings per share: Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 9,771 1,305 833 8,344 955 228 727 698 7,595 566 757 5,530 2,256 765 $1,491 $1,464 $8,044 896 7,148 70 682 5,897 1,863 636 $1,227 $1,200 $7,861 715 7,146 211 769 6,041 1,663 540 $1,123 $1,096 0.10 0.10 $ 0.22 $ 0.22 $ 0.23 $ 0.23 $ 0.28 $ 0.28 Note: Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share. 126 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9a. Controls and Procedures Evaluation of disclosure controls and procedures. As of the end of the period covered by this Annual Report on Form 10-K, the Company carried out an evaluation, under the supervision and with the participation of its management, including its Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of its disclosure controls and procedures. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management was required to apply judgment in evaluating its controls and procedures. Based on this evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, were effective as of the end of the period covered by this report. Changes in internal control over financial reporting. There were no changes in the Company’s internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the year ended December 31, 2015, that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. This Annual Report on Form 10-K does not include a report on management’s assessment regarding internal control over financial reporting or an attestation report of the Company’s registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies. Item 9b. Other Information None. 127 PART III Item 10. Directors, Executive Officers and Corporate Governance The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2016. Item 11. Executive Compensation The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2016. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2016. Item 13. Certain Relationships and Related Transactions, and Director Independence The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2016. Item 14. Principal Accounting Fees and Services The Company responds to this item by incorporating herein by reference the material responsive to such item in the Company’s definitive proxy statement for its 2016 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2016. 128 Item 15. Exhibits, Financial Statement Schedules PART IV Number Exhibit 3.1 Exhibit 3.2 Exhibit 10.1† Exhibit 10.2† Exhibit 10.3† Exhibit 10.4† Exhibit 10.5† Exhibit 10.6† Exhibit 10.7† Exhibit 10.8† Exhibit 10.9† Exhibit 10.10† Exhibit 10.11 Exhibit 10.12 Exhibit 10.13 Exhibit 21.1 Exhibit 23.2 Exhibit 31.1 Exhibit 31.2 Exhibit 32 101 Exhibit Index Description Certificate of Incorporation as amended to date(1) Amended and Restated Bylaws(1) Employment Agreement of Christopher R. Gruseke dated February 25, 2015(3) Employment Agreement of Ernest J. Verrico, Sr. dated April 23, 2013(1) Employment Agreement of Heidi S. DeWyngaert dated January 30, 2013(1) 2002 Bank Management, Director and Founder Stock Option Plan(1) 2006 Bank of New Canaan Stock Option Plan(1) 2007 Bank of New Canaan Stock Option and Equity Award Plan(1) 2011 BNC Financial Group, Inc. Stock Option and Equity Award Plan(1) 2012 BNC Financial Group, Inc. Stock Plan(1) Amendment to the 2012 BNC Financial Group, Inc. Stock Plan(1) BNC Financial Group, Inc. and Affiliates Deferred Compensation Plan for Directors, January 23, 2008(1) Securities Purchase Agreement dated September 30, 2013(1) Form of Director Indemnification Agreement(2) Form of Executive Officer Indemnification Agreement(2) Subsidiaries of the Registrant(1) Consent of Whittlesey & Hadley, P.C. Certification of Christopher R. Gruseke Pursuant to Rule 13a-14(a) Certification of Ernest J. Verrico, Sr. pursuant to Rule 13a-14(a) Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 The following materials from Bankwell Financial Group, Inc.’s Annual Report on Form 10-K for the period ended December 31, 2015, formatted in eXtensible Business Reporting Language (XBRL): (i) Consolidated Statements of Financial Condition; (ii) Consolidated Statements of Income; (iii) Consolidated statements of Comprehensive Income; (iv) Consolidated Statements of Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to Consolidated Financial Statements. † Management contract or compensatory plan or arrangement (1) Filed as part of the Registrant’s Registration Statement on Form S-1 filed on April 4, 2014. (2) Filed as part of the Registrant’s Amendment No. 1 to Registration Statement on Form S-1 filed of May 5, 2014. (3) Filed as part of the Registrant’s December 31, 2014 Form 10-K 129 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES BANKWELL FINANCIAL GROUP, INC. By: /s/ Christopher R. Gruseke Christopher R. Gruseke President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature & Title /s/ Christopher R. Gruseke Christopher R. Gruseke President and Chief Executive Officer /s/ Ernest J. Verrico, Sr. Ernest J. Verrico, Sr. Executive Vice President & Chief Financial Officer (principal financial and accounting officer) /s/ Frederick R. Afragola Frederick R. Afragola Director /s/ George P. Bauer George P. Bauer Director /s/ Michael Brandt Michael Brandt Director /s/ Richard Castiglioni Richard Castiglioni Director /s/ Eric J. Dale Eric J. Dale Director /s/ Blake S. Drexler Blake S. Drexler Director /s/ James A. Fieber James A. Fieber Director /s/ William J. Fitzpatrick III William J. Fitzpatrick III Director 130 Date March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 Signature & Title /s/ Daniel S. Jones Daniel S. Jones Director /s/ Todd Lampert Todd Lampert Director /s/ Victor S. Liss Victor S. Liss Director /s/ Raymond W. Palumbo Raymond W. Palumbo Director /s/ Carl M. Porto Carl M. Porto Director Date March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 March 15, 2016 131 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Nos. 333-197040, and 333-199104) ) and S-3 (No. 333-205922) of Bankwell Financial Group, Inc. of our report dated March 8, 2016, relating to the financial statements of Bankwell Financial Group, Inc. which appears in this Form 10-K. Exhibit 23.2 /s/ Whittlesey & Hadley, P.C. Hartford, Connecticut March 14, 2016 I, Christopher R. Gruseke certify that: CERTIFICATIONS Exhibit 31.1 1. I have reviewed this annual report on Form 10-K of Bankwell Financial Group, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d 15(f)) for the Registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) the Registrant’s disclosure controls and procedures and evaluated the effectiveness of presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. 5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: March 15, 2016 /s/ Christopher R. Gruseke Christopher R. Gruseke President and Chief Executive Officer I, Ernest J. Verrico, Sr. certify that: CERTIFICATIONS Exhibit 31.2 1. I have reviewed this annual report on Form 10-K of Bankwell Financial Group, Inc. 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report; 4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d 15(f)) for the Registrant and have: (a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; (c) the Registrant’s disclosure controls and procedures and evaluated the effectiveness of presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (d) disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting. 5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors (or persons performing the equivalent functions): (a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and (b) any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting. Date: March 15, 2016 /s/ Ernest J. Verrico, Sr. Ernest J. Verrico, Sr. Executive Vice President and Chief Financial Officer Exhibit 32 CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 The undersigned, Christopher R. Gruseke and Ernest J. Verrico, Sr. hereby jointly certify as follows: They are the Chief Executive Officer and the Chief Financial Officer, respectively, of Bankwell Financial Group, Inc. (the “Company”); To the best of their knowledge, the Company’s Annual Report on Form 10-K for the year ended December 31, 2015 (the “Report”) complies in all material respects with the requirements of Section 13(a) of the Securities Exchange Act of 1934, as amended; and To the best of their knowledge, based upon a review of the Report, the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Christopher R. Gruseke Christopher R. Gruseke President and Chief Executive Officer Date: March 15, 2016 /s/ Ernest J. Verrico, Sr. Ernest J. Verrico, Sr. Executive Vice President and Chief Financial Officer Date: March 15, 2016 [This Page Intentionally Left Blank] [This Page Intentionally Left Blank] [This Page Intentionally Left Blank] B A N K S M A R T . B A N K L O C A L . B A N K W E L L . B A N K S M A R T . B A N K L O C A L . B A N K W E L L . C O R P O R A T E I N F O R M A T I O N C O R P O R A T E I N F O R M A T I O N Living up to our name. We call ourselves Living up to our name. We call ourselves Bankwell for a reason. It’s more than Bankwell for a reason. It’s more than just our name, it’s our mission and just our name, it’s our mission and our brand promise. By raising the our brand promise. By raising the quality of every interaction with quality of every interaction with every customer every day, we raise every customer every day, we raise the expectations of our customers, the expectations of our customers, communities and the banking communities and the banking industry. Setting a higher customer industry. Setting a higher customer experience standard sets us apart experience standard sets us apart from other banks, large and small, from other banks, large and small, and from the status quo. By helping and from the status quo. By helping others do well, Bankwell in turn does others do well, Bankwell in turn does well. And while we’re at it, we’re giving well. And while we’re at it, we’re giving banking a better name. Every day. banking a better name. Every day. B A N K W E L L T H R O U G H T H E Y E A R S B A N K W E L L T H R O U G H T H E Y E A R S ASSETS ASSETS $1,330,372 $1,330,372 $1,099,531 $1,099,531 $779,618 $779,618 S D N A S U O H T N I S R A L L O D S D N A S U O H T N I S R A L L O D $0 $0 $190,906 $190,906 $247,041 $247,041 $395,708 $395,708 2002 2002 2007 2007 2008 2008 2010 2010 201 3 2013 2014 2014 2015 2015 Founded Founded Holding company Holding company Founded second Founded second Founded third bank, Founded third bank, The Banks merge The Banks merge Bankwell acquires Bankwell acquires Norwalk de novo Norwalk de novo The Bank of The Bank of formed (BNC formed (BNC bank, The Bank bank, The Bank The Bank of Stamford, The Bank of Stamford, into “Bankwell” into “Bankwell” Quinnipiac Bank & Quinnipiac Bank & branch opened branch opened New Canaan New Canaan Financial Group) Financial Group) of Fairfield of Fairfield a division of The Bank a division of The Bank Bankwell acquires Bankwell acquires Trust Company Trust Company of New Canaan of New Canaan The Wilton Bank The Wilton Bank Shareholders Shareholders For help in transferring ownership, address changes, or lost or stolen stock certificates, please contact: For help in transferring ownership, address changes, or lost or stolen stock certificates, please contact: Computershare Computershare 480 Washington Blvd. 29th Floor 480 Washington Blvd. 29th Floor Jersey City, NJ 07310 Jersey City, NJ 07310 (800) 368-5948 (800) 368-5948 www.computershare.com www.computershare.com St ock Symbols BWFG – Common Stock St ock Symbols BWFG – Common Stock St ock Q uot e s St ock Q uot e s www.nasdaq.com www.nasdaq.com Sh areholder Con tact Bankwell Financial Group, Inc. Mr. Christopher R. Gruseke or Mr. Ernest J. Verrico, Sr. 220 Elm Street New Canaan, CT 06840 Shareholder Con tact Bankwell Financial Group, Inc. Mr. Christopher R. Gruseke or Mr. Ernest J. Verrico, Sr. 220 Elm Street New Canaan, CT 06840 (203) 652-0166 (203) 652-0166 Auditor s Auditor s Whittlesey & Hadley, P.C. Whittlesey & Hadley, P.C. 280 Trumbull Street, 24th Floor, Hartford, CT 06103 280 Trumbull Street, 24th Floor, Hartford, CT 06103 Co rporat e Coun sel Hinkley, Allen & Snyder, LLP 20 Church Street, Hartford, CT 06103 Corpo rate Counsel Hinkley, Allen & Snyder, LLP 20 Church Street, Hartford, CT 06103 Locat ions Locat ions Elm Street Branch Elm Street Branch 208 Elm Street 208 Elm Street New Canaan, CT 06840 New Canaan, CT 06840 (203) 972-3838 (203) 972-3838 Cherry Street Branch 156 Cherry Street New Canaan, CT 06840 (203) 966-7080 Cherry Street Branch 156 Cherry Street New Canaan, CT 06840 (203) 966-7080 Sasco Hill Branch Sasco Hill Branch One Sasco Hill One Sasco Hill Fairfield, CT 06824 Fairfield, CT 06824 (203) 659-7600 (203) 659-7600 Black Rock Branch Black Rock Branch 2220 Black Rock Turnpike 2220 Black Rock Turnpike Fairfield, CT 06825 Fairfield, CT 06825 (203) 659-7610 (203) 659-7610 Stamford Branch 612 Bedford Street Stamford, CT 06901 (203) 391-5777 Stamford Branch 612 Bedford Street Stamford, CT 06901 (203) 391-5777 Wilton Branch Wilton Branch 47 Old Ridgefield Road 47 Old Ridgefield Road Wilton, CT 06897 Wilton, CT 06897 (203) 762-2265 (203) 762-2265 Norwalk Branch Norwalk Branch 370 Westport Avenue 370 Westport Avenue Norwalk, CT 06851 Norwalk, CT 06851 (203) 663-0480 (203) 663-0480 Hamden Branch Hamden Branch 2704 Dixwell Avenue 2704 Dixwell Avenue Hamden, CT 06518 Hamden, CT 06518 (203) 407-0756 (203) 407-0756 North Haven Branch 24 Washington Avenue North Haven, CT 06473 (475) 238-6807 North Haven Branch 24 Washington Avenue North Haven, CT 06473 (475) 238-6807 Executive Office Executive Office 220 Elm Street 220 Elm Street New Canaan, CT 06840 New Canaan, CT 06840 (203) 652-0166 (203) 652-0166 Loan Production Office Loan Production Office 855 Main Street, Suite 700 855 Main Street, Suite 700 Bridgeport, CT 06604 Bridgeport, CT 06604 (203) 683-6363 (203) 683-6363 This annual report may include forward-looking statements by the Company that are within the protection of the Private Securities Litigation Reform Act of 1995. Such state- ments are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties that could cause our actual results to differ materially from those set forth in such forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may” are intended to identify forward-looking statements but are not the only means to identify these statements. Factors that could cause differences in actual results may be beyond our control —Any forward-looking statements made by or on behalf of us in this report speak only as of its date, and we do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after that date. This annual report may include forward-looking statements by the Company that are within the protection of the Private Securities Litigation Reform Act of 1995. Such state- ments are based upon the current beliefs and expectations of our management and are subject to significant risks and uncertainties that could cause our actual results to differ materially from those set forth in such forward-looking statements. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. Words such as “believes,” “anticipates,” “expects,” “intends,” “plans,” “estimates,” “targeted” and similar expressions, and future or conditional verbs, such as “will,” “would,” “should,” “could” or “may” are intended to identify forward-looking statements but are not the only means to identify these statements. Factors that could cause differences in actual results may be beyond our control —Any forward-looking statements made by or on behalf of us in this report speak only as of its date, and we do not undertake to update forward-looking statements to reflect the impact of circumstances or events that arise after that date. B A N K W E L L F I N A N C I A L G R O U P 2 0 1 5 A N N U A L R E P O R T Living up to our name with every customer in every community at every opportunity, every day. Living up to our name with every customer in every community at every opportunity, every day. 220 Elm Street, New Canaan, CT 06840 2 0 1 5 A N N U A L R E P O R T Bankwell is a member of the FDIC and an Equal Housing Lender. This statement has not been reviewed for accuracy or relevance by the Federal Deposit Insurance Corporation. 2 0 1 5 A N N U A L R E P O R T 

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