Bankwell Financial Group, Inc.
Annual Report 2020

Plain-text annual report

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, 2020 or ☐ 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) Securities registered pursuant to Section 12(b) of the Act: Title of Each Class Common Stock, no par value per share Trading Symbol(s) BWFG Name of Each Exchange on Which Registered NASDAQ Global Market Securities registered pursuant to Section 12(g) of the Act: None 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 every Interactive Data File required to be submitted 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 such files). ☒ Yes ¨ No Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ¨ Non-accelerated filer ☒ Emerging growth company ☐ Accelerated filer ¨ Smaller reporting company ☒ If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐ Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐ 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, 2020 based on the closing price of the common stock as reported on the NASDAQ Global Market: $104,257,842. As of February 28, 2021, there were 7,974,381 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 2020 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 Business Risk Factors Unresolved Staff Comments Properties Legal Proceedings Mine Safety Disclosures Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Selected Financial Data Management’s Discussion and Analysis of Financial Condition and Results of Operations Quantitative and Qualitative Disclosures About Market Risk Financial Statements and Supplementary Data Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Controls and Procedures Other Information Directors, Executive Officers and Corporate Governance Executive Compensation Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Certain Relationships and Related Transactions, and Director Independence Principal Accountant Fees and Services Exhibits, Financial Statement Schedules Form 10-K Summary Signatures PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. PART II Item 5. Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. PART III Item 10. Item 11. Item 12. Item 13. Item 14. PART IV Item 15. Item 16. 1 18 28 29 29 29 30 30 35 58 61 116 116 117 118 118 118 118 118 119 120 121 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 Securities Exchange Act of 1934, or 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 materially 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: • • • • • • • • • • • • • • • The length, severity, magnitude, and duration of the COVID-19 pandemic and the direct and indirect impact of such pandemic, including its impact on the Company’s financial condition and business operations; Local, regional and national business or economic conditions may differ from those expected; Credit risk and resulting 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; Changes in our key management personnel; Inability 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 which 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 Company 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 "Parent Corporation") is a bank holding company, headquartered in New Canaan, Connecticut and offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, "we", "our", "us", or the "Company"), a Connecticut state chartered non-member bank founded in 2002. Our primary market is the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut, which we serve from our main banking office located in New Canaan, Connecticut and ten other branch offices located throughout the Fairfield and New Haven Counties area. As of December 31, 2020, on a consolidated basis, we had total assets of approximately $2.3 billion, net loans of approximately $1.6 billion, total deposits of approximately $1.8 billion, and shareholders’ equity of approximately $176.6 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 attractive demographic attributes and presents 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. 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 markets 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, which was merged into Bankwell Bank. On October 1, 2014, we acquired Quinnipiac Bank and Trust Company, which 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, 2016 through December 31, 2020, our total assets grew from $1.6 billion to approximately $2.3 billion; our gross loans outstanding grew from $1.4 billion to $1.6 billion and our deposits grew from $1.3 billion to approximately $1.8 billion. We believe this growth was driven by our ability to provide superior service to our customers and our financial stability. 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. 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, 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, 2 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 and other members of management. This committee reviews risks associated with new initiatives and programs as well as assesses risks and mitigants throughout areas of the Bank on an ongoing basis. Internal review procedures are performed regarding anti-money laundering and consumer compliance requirements. 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 New York metropolitan area, including Fairfield and New Haven Counties, Connecticut. This 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 based on median household income according to estimates from the 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 financial institutions and success in identifying, acquiring and integrating financial institutions. Our executive management team includes Christopher R. Gruseke, President and Chief Executive Officer (since 2015), Christine A. Chivily, Executive Vice President, Chief Risk and Credit Officer (since 2013), Penko Ivanov, Executive Vice President, Chief Financial Officer (since 2016), Laura Waitz, Executive Vice President, Chief of Staff (since 2017), and Matthew McNeill, Executive Vice President, Chief Banking Officer (since 2020). 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 banks that focus on serving the financial needs of their customers. The interests of our executive management team and directors are aligned with those of our shareholders 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 take advantage of the market opportunity present in our primary market. Strong Capital Position. At December 31, 2020, we had a 7.73% tangible common equity ratio, and the Bank had a 8.44% tier 1 leverage ratio, an 11.06% tier 1 risk-based ratio, and a 12.28% total capital to risk-weighted assets ratio. We believe that our ability to attract and generate 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 offer our customers maximum flexibility and to 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. Human Capital Resources We are committed to investing in our employees. Our significant accomplishments are a direct result of the collaboration, determination, initiative, and integrity of our team of dedicated professionals. Our employees embrace our values to exceed expectations. Our performance management program recognizes and rewards superior performance based on objective and consistent measurements. Employees At December 31, 2020, we had a total of 125 full-time equivalent employees. None of our employees are subject to a collective bargaining agreement. Company Website and Availability of Securities and Exchange Commission Filings Information regarding the Company is available through the Investor Relations link 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 link. Information on the website is not incorporated by reference and is not a part of this annual report on Form 10-K. 3 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 and professionals. This focus includes retail, service, wholesale distribution and manufacturing 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. 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 our primary market area of the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut. Lending Activities General. Our primary lending focus is to serve commercial and middle-market businesses and not-for-profit organizations with a variety of financial products and services, while maintaining strong and disciplined credit policies and procedures. We offer a wide array of commercial 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 medium-sized businesses and real estate construction and development loans. We focus our lending activities on loans that we originate to borrowers located in our market. We have established an informal, internal lending limit to one relationship of up to 40% of unimpaired capital and allowance for loan losses, if secured by commercial real estate. A relationship in this instance is defined as loans made to different entities but with a shared borrower principal(s). For individual loans, limits are set so as not to exceed the statutory maximum of 15% of unimpaired capital and allowance for loan losses. 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-sized businesses. 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, proficient underwriting and timely decision making for new loan requests due to our efficient 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 $1.6 billion at December 31, 2020. The following table summarizes the composition of our loan portfolio for the dates indicated. Real estate loans: Residential Commercial Construction Commercial business Consumer Total loans 2020 2019 At December 31, 2018 (In thousands) 2017 2016 $ $ 113,557 $ 147,109 $ 178,079 $ 1,148,383 87,007 1,348,947 276,601 79 1,128,614 98,583 1,374,306 230,028 150 1,094,066 73,191 1,345,336 258,978 412 1,625,627 $ 1,604,484 $ 1,604,726 $ 193,524 $ 987,242 101,636 1,282,402 259,995 619 1,543,016 $ 195,729 845,322 107,441 1,148,492 215,914 1,533 1,365,939 4 Real estate loans: Residential Commercial Construction Commercial business Consumer Total loans 2020 2019 At December 31, Percent of Loan Portfolio 2018 2017 2016 6.99 % 70.64 5.35 82.98 17.02 — 100.00 % 9.17 % 70.34 6.14 85.65 14.34 0.01 100.00 % 11.10 % 68.18 4.56 83.84 16.14 0.02 100.00 % 12.54 % 63.98 6.59 83.11 16.85 0.04 100.00 % 14.33 % 61.89 7.86 84.08 15.81 0.11 100.00 % Residential real estate loans. In the fourth quarter of 2017, management made the strategic decision to no longer originate residential mortgage loans. As of the beginning of the third quarter of 2019, the Company no longer offered home equity loans or lines of credit. Prior to these decisions we offered 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 originated for sale 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. Commercial real estate loans. We offer real estate loans for owner-occupied commercial properties 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 throughout this document. Commercial real estate loan terms generally are limited to ten years or less, although payments may be structured on a longer amortization basis of twenty to thirty 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 these loans. We often require personal guarantees from the principal owner of the business or real estate supported by a review of the principal owner's 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, property use trends, business sector changes, environmental contamination, and the quality of the borrower’s management. We make efforts to limit our risk by analyzing the borrower's 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 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 medium-sized businesses to construct owner-used 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, leasing 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. Commercial Business loans. We offer a wide range of commercial loans, including business term loans, equipment financing and lines of credit. Our target commercial loan market is small to medium-sized businesses, including retail and professional establishments. The terms of these loans vary by purpose and by type of underlying collateral. The commercial loans primarily are underwritten on the basis of the borrower’s ability to service the loan from cash flow. We make loans 5 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 fully or partially amortized during the loan term with any balloon amount 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. From time-to-time, we also 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 two years and usually are secured by accounts receivable, inventory and/or personal guarantees of the principals of the business and at times by the commercial real estate of the borrower. This segment also includes Paycheck Protection Program ("PPP") loans made under the Coronavirus Aid, Relief and Economic Security Act ("CARES") Act to small businesses impacted by COVID- 19, to cover payroll and other operating expenses. Loans extended under the PPP are fully guaranteed by the U.S. Small Business Administration ("SBA"). 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. Consumer loans. As of December 31, 2020, our consumer loans represented less than 1% of our total loan portfolio. While consumer loans may not remain below 1% of our portfolio, we do not expect our consumer loans to become a material component of our loan portfolio at any time in the near 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 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, rather 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. 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 Risk and Credit Officer and our Directors' Loan Committee. We have also established an informal, internal lending limit to one relationship of up to 40% of unimpaired capital and allowance for loan losses, if secured by commercial real estate. A relationship in this instance is defined as loans made to different entities but with a shared borrower principal(s). For individual loans, limits are set so as not to exceed the statutory maximum of 15% of unimpaired capital and allowance for loan losses. Our top 20 borrowing relationships range in exposure from $16.4 million to $92.0 million and are monitored on an on-going basis. Loan approval process. We seek to achieve an appropriate balance between prudent and 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, portfolio management 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 6 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. For 2020, it was our policy to review amortizing commercial loans in excess of $1 million 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, portfolio 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, confirm or change the risk rating assigned to each loan. Relationship managers and portfolio managers are encouraged to bring potential credit issues to the attention of our Chief Risk and 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 Risk and Credit Officer, while Watch List loans undergo a detailed quarterly analysis prepared by the relationship manager or portfolio manager and reviewed by management. 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 semi-annually, which includes the accuracy of our loan risk ratings and our credit administration functions. Finally, we perform an annual stress test of our commercial loan 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 Our investment 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. The portfolio’s secondary purpose is to generate adequate earnings to provide and contribute to stable income and to generate a profitable return while minimizing risk. Additionally, our investment portfolio may be 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 income-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 have built a network of deposit- taking branch offices and attracted significant transaction account business through our relationship-based approach. Borrowed Funds The Bank is a member of the Federal Home Loan Bank of Boston (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. 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. We utilize advances from the FHLB as part of our overall funding strategy to meet short-term liquidity needs and, to a lesser degree, manage interest rate risk arising from the difference in asset and liability maturities. 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. The Notes 7 became callable, in part or in whole, beginning August 2020. The Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. 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 and our working capital needs. 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 historically 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 by experienced relationship managers, lending and credit management. We perform quarterly reviews of 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 loan 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 or businesses 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 and Credit Officer oversees the Risk Management function and chairs a Risk Management Steering Committee. We currently outsource our asset/liability calculations to a reputable third party, and on a quarterly basis, that third party runs the full interest rate risk model. Results of the model are reviewed and validated by our ALCO. Supervision and Regulation General The 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 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 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, rules and regulations applicable to our operations, but does not purport to be a complete summary of all applicable laws, rules and regulations. These laws, rules and regulations may change from time to time and the regulatory agencies often have broad discretion in interpreting them. Any change in such laws, rules 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 continues to affect the lending and investment activities and general operations of depository institutions and their holding companies. The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”), which was enacted in May 2018, repealed or modified several provisions of the Dodd-Frank Act. Certain key provisions of the Economic Growth Act and its implementing regulations are discussed below. The Dodd-Frank Act created the 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 8 fair lending laws by their applicable primary federal bank regulators. The Dodd-Frank Act also 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. Much of the rulemaking under the Dodd-Frank Act has been completed. Digesting and implementing that rulemaking has inevitably resulted in increases in our operating and compliance costs. The rulemaking that remains may also have a similar impact. In addition, many aspects of the regulatory changes made by the Dodd Frank Act continue to generate debate in political circles as well as within the regulatory agencies that oversee the banking systems and financial markets. While the exact scope, nature and timing of any legislative and/or regulatory changes cannot necessarily be predicted, it is likely that changes will continue to occur. And it is possible that the changes could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business, financial condition and results of operations. Economic Growth Act The Economic Growth Act provides community banks with relief from certain regulatory requirements, including some imposed by the Dodd-Frank Act. Among other things, Section 201 of the Economic Growth Act required the federal banking agencies to develop regulations establishing a “community bank leverage ratio” for banks and holding companies with less than $10 billion in consolidated assets and a qualifying risk profile. The final rule, which became effective on January 1, 2020, provides certain qualifying institutions with an optional, simpler method to measure capital adequacy. Under the rule, banks and bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, will be eligible to opt into the community bank leverage ratio ("CBLR") framework. Qualifying organizations that elect to use the CBLR framework, and that maintain a leverage ratio greater than 9 percent, will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the banking agencies' capital rules. Qualifying organizations will also be deemed to have met the "well capitalized" ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act. The Economic Growth Act provides insured depository institutions and their affiliates with less than $10 billion in total consolidated assets and limited trading activities with an exemption from the Dodd-Frank Act’s “Volcker Rule” (which generally restricts certain banking entities such as the Company and the Bank from engaging in proprietary trading activities and entering into certain relationships with hedge funds and private-equity funds). The FDIC, along with several other banking agencies, adopted final rules to implement the exemption contemplated by the Economic Growth Act. The Economic Growth Act increased the consolidated assets limit for bank holding companies covered by the Federal Reserve Board’s “Small Bank Holding Company Policy Statement” (the Policy) from $1 billion to $3 billion. In addition to the consolidated assets limit, a covered bank holding company may not be engaged in significant non-banking and off-balance sheet activities and may not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC. The Federal Reserve Board retains the authority to exclude any bank holding company from the Policy if such action is warranted for supervisory purposes. The Policy allows covered bank holding companies to operate with higher levels of debt than would normally be permitted. Under the Policy, a covered bank holding company is prohibited from paying dividends if its debt-to-equity ratio exceeds 1:1. In addition, the Federal Reserve Board expects that bank holding companies will retire all debt within 25 years of being incurred and reduce their debt to equity ratio to 30:1 or less within 12 years of incurring the debt. The Policy also directs that each depository institution subsidiary of a covered 9 bank holding company remain well-capitalized. On August 28, 2018, the Federal Reserve Board issued an interim final rule regarding revisions to the Policy prompted by the Economic Growth Act. The Economic Growth Act increased the consolidated assets threshold from $1 billion to $3 billion for insured depository institutions that qualify for an 18- month on-site exam cycle. Consistent with this statutory amendment, in August of 2018, the federal banking agencies issued an interim final rule to increase, from $1 billion to $3 billion, the total asset threshold under which an agency may apply an 18-month examination cycle for qualified institutions that have an "outstanding" or "good" composite rating. The Economic Growth Act required the federal banking agencies to promulgate regulations permitting insured depository institutions that have less than $5 billion in total consolidated assets (and satisfy other conditions) to use short-form reports of condition (i.e. call reports) for the first and third quarters of each year. On June 17, 2019, the federal banking agencies issued final rules to implement those streamlined reporting requirements. The CARES Act and Initiatives Related to COVID-19 In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 to provide national emergency economic relief measures. Many of the CARES Act’s programs are dependent upon the direct involvement of U.S. financial institutions, such as Bankwell Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S. Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over Bankwell Bank. Furthermore, as the ongoing COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19. It is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act. The Company continues to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic. Paycheck Protection Program ("PPP"). Section 1102 of the CARES Act created the PPP, a program administered by the U.S. Small Business Administration (“SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic. Bankwell Bank has participated in the PPP as a lender. These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA. Additionally, loan payments will also be deferred for an initial period of time, the precise length of which depends upon when the borrower submits a forgiveness application to the SBA. Payment of a PPP loan would only be required if the SBA denies forgiveness in whole or in part or if the borrower fails to file a forgiveness application within the required timeframe. The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020. No collateral or personal guarantees were required. On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the “Consolidated Appropriations Act” (the “CAA”) that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB Act”). Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion in PPP loan funding for new first-time borrowers and for existing PPP borrowers who qualify for a so-called “second draw” loan. The SBA and U.S. Department of Treasury have issued numerous regulations, procedures and guidelines to help implement the PPP, and they are likely to continue to do so as the program evolves and matures into the forgiveness and repayment phase. Lending under the program is currently scheduled to end on March 31, 2021. However, participating lenders, including Bankwell Bank, will continue to be active in helping borrowers to process forgiveness applications and in servicing loans that are not forgiven in whole or in part. As a participating lender in the PPP, Bankwell Bank continues to monitor legislative, regulatory, and supervisory developments related thereto, including the most recent changes implemented by the HHSB Act. Guidance on Non-TDR Loan Modifications due to COVID-19. On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19. Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates. Section 541 of the CAA extends this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date. The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations. Main Street Lending Program. The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities. On April 9, 10 2020, the Federal Reserve proposed the creation of the Main Street Lending Program to implement certain of these recommendations. The Federal Reserve ceased purchasing loans under the program as of January 8, 2021. Connecticut Banking Laws and Supervision Connecticut Department of Banking. The Connecticut Department of Banking regulates the 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, loans to any one obligor under this statutory authority may not exceed 15% and fully secured loans may not exceed an additional 10% 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 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 full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) became effective as of January 1, 2019. The capital conservation buffer 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 banking law authorizes Connecticut chartered banks to transact a "general banking business" and "all such incidental powers as are necessary thereto". With the prior approval of the Connecticut Department of Banking, Connecticut banks are also authorized to engage in activities that are closely related to the business of banking, are convenient and useful to the business of banking, are reasonably related to the operation of a Connecticut bank, 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 those federal statutes. Connecticut banks are also authorized to engage in any activity permitted for certain federally chartered institutions, as well as for certain out-of-state institutions, upon filing a 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 law, 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. 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. 11 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, 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. As discussed above, the Federal Reserve Board’s Small Bank Holding Company Policy Statement includes provisions regulating the payment of dividends by companies subject to that policy statement. 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. The Basel III Capital Rules limit the amount of dividends the Bank can pay to us if its capital ratios are below the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets). The capital conservation buffer 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 (i) meets the well capitalized standard for commercial banks, (ii) is “well managed” within the meaning of the Federal Reserve Board regulations and (iii) is not subject to any unresolved supervisory issues. As discussed above, the Federal Reserve Board’s Small Bank Holding Company Policy Statement includes provisions regulating stock redemptions by companies subject to that policy statement, including when such notice requirements apply. 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 (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 12 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” of 2.5% in addition to the minimum risk based capital requirement. 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. As discussed above, the Economic Growth Act provided simplified capital measurement rules for qualified community banks and holding companies with less than $10 billion in total consolidated assets and with limited trading activities. The federal banking agencies have issued final regulations to implement this optional, simplified framework for institutions that satisfy certain qualifying criteria, including a "community bank leverage ratio" of greater than 9 percent. 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 requires specific liquidity tests by rule. Transactions with Affiliates. Under 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 are considered 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 places an aggregate limit on all such transactions with all affiliates at 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 an affiliate, or the issuance of a guarantees, acceptance, or letter of credit 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 13 covered transactions and increased the timing and other aspects of the collateral requirements associated with covered 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, the FRA places restrictions on extensions of credit that can be made by a depository institution to its directors, executive officers, and principal shareholders (or insiders) and to the insiders of its affiliates. Many of those restrictions also apply to the "related interests" of those insiders. For example, a bank is generally not permitted to extend credit to any insider of the bank, or insider of an affiliate, if the extension, when aggregated with all other outstanding extensions of credit to those insiders and their related interests, exceeds the bank's total unimpaired capital and unimpaired surplus. Extensions of credit to those insiders, and their related interests, that exceed certain specified amounts must receive the prior approval of the board of directors. Further, extensions of credit to insiders and their related interests must be made on terms substantially the same as offered in comparable transactions to other non-insiders, subject to an exception of extensions of credit made under a benefit or compensation program that is widely available to the depository institution’s employees that does not give preference to the insider over the employees. The FRA places additional limitations on extensions of credit to executive officers. In addition to enhancing restrictions on insider transactions, the Dodd-Frank Act increased 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 non-member 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. The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund. No institution may pay a dividend if in default of its deposit insurance assessment. 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. 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. Subject to certain adjustments, the range of assessment rates is now between 1.5 to 30 basis points of the assessment base. The Dodd-Frank Act increased the minimum Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits. Currently, the fund ratio stands at a point where it exceeds that minimum threshold. There is no maximum cap on the fund ratio and the FDIC has been given the discretion to establish, on an annual basis, a long-range target ratio for the fund, to better ensure that the fund is not significantly stressed by future economic downturns. For both 2020 and 2021, the FDIC has exercised that discretion by establishing a 2% fund reserve ratio as a long-range minimum target for setting assessment rates. Effective June 26, 2020, the FDIC adopted a rule to mitigate the effects on deposit insurance assessments resulting from a bank’s participation in the PPP and certain other relief programs administered by the Federal Reserve Board. A material increase in FDIC insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank. Management cannot predict what FDIC 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, 14 rule, order or condition imposed by the FDIC. We are not aware of any current 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 Fund Transfer Act and Regulation E issued by the Consumer Financial Protection Bureau to implement that act, which govern electronic 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. The Bank is in compliance with these requirements. Federal Home Loan Bank of Boston (FHLB). The Bank is a member of the FHLB, 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 FHLB, is required to acquire and hold shares of capital stock in the FHLB. Community Reinvestment Act (CRA). Under the CRA, as implemented 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 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 of CRA is generally similar to the federal version, 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 the Connecticut CRA 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 the Bank 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 (Connecticut chartered banks are generally exempt from the Federal Truth-in-Lending Act, but are otherwise subject to a substantially similar state Truth-in-Lending Act administered and enforced by the Connecticut Department of Banking); 15 • • • • • • • 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, color, religion 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 Practices 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 the various federal agencies charged with the responsibility of implementing these federal laws. 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 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, 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 of 2.5% (as a percentage of risk-weighted assets) established by the rules. The capital conservation buffer 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 GLBA, permits greater affiliation among banks, securities firms, insurance companies, and other companies under a type of financial services company known as a “financial 16 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 GLBA 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. We have not submitted notice to the Federal Reserve Board of 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 GLBA, 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 information 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 filed with the Treasury Department’s Financial Crimes Enforcement Network of transactions exceeding $10,000 in currency; (4) filing suspicious activities reports by financial institutions regarding suspected customer money laundering, terrorism financing, or other violations of 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 GLBA, 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 maintains lists of names of persons and organizations suspected of aiding, harboring or engaging in money laundering, terrorist acts, and other crimes. 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 and combating terrorism 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 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 17 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: For the years ended 2018 and prior a corporation may carry back generated net operating losses to the preceding two taxable years and forward to the succeeding 20 taxable years. For net operating losses arising in tax years after 2018, a corporation may not carryback the net operating loss but may carryforward such losses indefinitely, however the net operating loss deduction in a given year is limited to 80% of taxable income. At December 31, 2020, we had $2.1 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. 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 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, 2020 and 2019) to arrive at Connecticut income tax. We are also subject to state income tax in other states as a result of loan originations made in other states. 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 determined in accordance with the statutory requirements for a passive investment company and the 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. State taxes are being recognized for income taxes on income earned in other states. The Company and the Bank are not currently under audit with respect to their state tax returns. 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 and to a lesser degree secondary effects of global geopolitical events. If the U.S. economy 18 weakens, our growth and profitability from our lending, deposit and investment operations could be constrained. Uncertainty about the federal fiscal policymaking process, the medium-term 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 liquidity and/or depressed prices in the secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity. 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. 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 losses inherent in our loan portfolio. 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 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. Our concentration of large loans to certain borrowers may increase our credit risk. A good number of our 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 relationship of up to 40% of unimpaired capital and allowance for loan losses, if secured by commercial real estate. A relationship in this instance is defined as loans made to different entities but with a shared borrower principal(s). For individual loans, limits are set so as not to exceed the statutory maximum of 15% of unimpaired capital and allowance for loan losses. However, we may, under certain circumstances, consider going above our 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 real estate that has strong tenants with long-term leases, thereby reducing the reliance on the principals of the borrowing entity. As of December 31, 2020, our five largest relationships ranged in exposure from approximately $39.8 million to $92.0 million. 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 a loan obligation(s) for any reason, our 19 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. 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 leasing 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. 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, the completion of the project and/or the builder’s ability to ultimately lease or 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 sale 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 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, 2020, the majority of our loan portfolio was composed of commercial real estate loans. The sale of 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. 20 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 borrowings. 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. 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 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 the surrounding areas, and we are more sensitive than our more geographically diversified competitors to adverse changes in the local economy. We conduct a majority of our operations in the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut. A majority of the real estate loans in our loan portfolio are secured by properties located in the New York metropolitan area, including Fairfield and New Haven Counties. In addition, as of December 31, 2020, the 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 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, the New York metropolitan area, including 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. 21 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. 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, another 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. 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. 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. 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. 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. Declines in home prices and/or weak 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, asset values may be impaired, 22 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. Acquisition activities could be material to our business and involve a number of risks, including the following: • • • • • • • • • • • 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. 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 allowance for loan 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 23 securities of such obligor, shall not exceed at the time incurred 10% of the equity capital and allowance for loan 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 relationship of up to 40% of unimpaired capital and allowance for loan losses, if secured by commercial real estate. A relationship in this instance is defined as loans made to different entities but with a shared borrower principal(s). For individual loans, limits are set so as not to exceed the statutory maximum of 15% of unimpaired capital and allowance for loan losses. 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. We believe that retaining the services and skills of our management team is important to our success. The unexpected loss of services of any of our 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 with respect to individual 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. 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. 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. 24 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 significant environmental liabilities could cause a material adverse effect on our business, financial condition, results of operations and future prospects. Uncertainty about the future of LIBOR may adversely affect our business. LIBOR is used extensively in the United States as a benchmark for various commercial and financial contracts, including adjustable rate mortgages, corporate debt, interest rate swaps and other derivatives. LIBOR is set based on interest rate information reported by certain banks. There is no definitive information regarding the future utilization of LIBOR or of any particular replacement rate. Other rates or benchmarks may perform differently than LIBOR. It is also uncertain what will happen with instruments that rely on LIBOR for future interest rate adjustments and which remain outstanding if LIBOR ceases to exist. We have derivative contracts and limited loan exposure tied to LIBOR. Although we are not yet able to assess what the ultimate impact of the transition from LIBOR will be, failure to adequately manage the transition could have a material adverse effect on our business, financial condition and results of operations. The Coronavirus (COVID-19) pandemic is adversely affecting us and our customers, and these adverse impacts on our business, financial position, results of operations, and prospects could be significant. In March 2020, the World Health Organization declared novel coronavirus disease 2019 ("COVID-19") as a global pandemic. The COVID-19 pandemic has negatively impacted the global and U.S. economies. Many businesses in the U.S., including those in the markets we serve, were required to close, causing a significant increase in unemployment and loss of revenue for those businesses. These developments have impacted the macroeconomic environment, leading to lower interest rates, depressed equity market valuations, heightened financial market volatility, and significant disruption in banking and other financial activities. In response to the economic impact of COVID-19, the U.S. Government and related regulatory authorities provided fiscal and monetary stimuli. In March 2020, the U.S. Government enacted a $2 trillion stimulus bill referred to as the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"). The CARES Act included, among other things, direct payments to individuals and families, a loan program for small businesses, expansion of unemployment benefits and monetary support to state and local governments. There can be no assurance that these actions taken will stimulate the economy or prevent recessionary conditions. The COVID-19 pandemic has resulted in, and is likely to continue to result in, significant economic disruption affecting our business and the clients we serve. However, we are unable to estimate the full impact of COVID-19 on our business and operations at this time, including the ability of our employees and our third- party vendors to work effectively during the course of the pandemic. The pandemic could cause us to experience an increase in the number of loan delinquencies, defaults and charge-offs, additional provisions for credit losses, adverse asset values of the collateral securing loans and an overall material adverse effect on the quality of the loan portfolio of the Company, impairment of our goodwill, reduced demand for our products and services, or other negative impacts on our financial position, results of operations, and prospects. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated and what further actions may be taken by governmental authorities in response to the pandemic. The length of the pandemic and the efficacy of the extraordinary measures being put in place to address it are unknown. To the extent COVID-19 continues to adversely impact the economy, it may also increase the likelihood and/or magnitude of other risk factors described herein. 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 25 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 of 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, 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 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. 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. 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, 2020 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 our 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. The effort to comply with regulatory requirements relating to internal controls cause us to incur increased expenses and 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 26 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. General Risk Factors 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 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. 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 possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and 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. Projections of future operating results and cash flows may vary significantly from actual results. Additionally, if our analysis results in impairment to our goodwill, we would be required to record a non- 27 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. Item 1B. Unresolved Staff Comments Not applicable. 28 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 the end of 2021. In July 2012, we initially leased additional space adjacent to 208 Elm Street at 220 Elm Street primarily for our executive management offices. The property located at 220 Elm Street was purchased by the Bank in December of 2016. Recently, the Bank entered into a 10-year lease for its future headquarters building located at 258 Elm Street in New Canaan, Connecticut. The Bank plans to relocate many of its non-branch employees to 258 Elm Street and, as a result, the Bank will sub-lease or sell some of its facilities that previously housed these employees. We also lease office space for each of our branch offices in New Canaan, Stamford, Norwalk, Fairfield, Darien, and Westport, Connecticut. The leases for our facilities have terms expiring at dates ranging from 2021 to 2030, 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. Management continually evaluates its branch and other office locations for opportunities to maximize cost savings while meeting our growth needs and the needs of our customers. Our branch office locations are as follows: Branch Elm Street Cherry Street Bedford High Ridge Black Rock Sasco Hill Wilton Norwalk Hamden Westport Darien Address 208 Elm Street New Canaan, CT 06840 156 Cherry Street New Canaan, CT 06840 612 Bedford Street Stamford, CT 06901 1095 High Ridge Road Stamford, CT 06905 2220 Black Rock Turnpike Fairfield, CT 06825 One Sasco Hill Road Fairfield, CT 06824 47 Old Ridgefield Road Wilton, CT 06897 370 Westport Avenue Norwalk, CT 06851 2704 Dixwell Avenue Hamden, CT 06518 100 Post Road East Westport, CT 06880 1065 Post Road Darien, CT 06820 Owned or Leased Lease (expires 2021) Lease (expires 2021) Lease (expired 2020 - currently month-to- month) Lease (expires 2028) Lease (expires 2024) Lease (expires 2024) Own Lease (expires 2030) Own Lease (expires 2028) Lease (expires 2028) 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. 29 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. There were approximately 266 shareholders of record of BWFG Common Stock as of December 31, 2020. 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. Issuer Purchases of Equity Securities The following table includes information with respect to repurchases of the Company’s Common Stock during the three‑month period ended December 31, 2020 under the Company’s share repurchase program. Period October 1, 2020 - October 31, 2020 November 1, 2020 - November 30, 2020 December 1, 2020 - December 31, 2020 Total Issuer Purchases of Equity Securities Total Number of Shares (or Units) Purchased — — — — Average Price Paid per Share (or Unit) — $ — — — $ Total Number of Shares (or Units) Purchased as Part of Publicly Announced Plans or Programs Maximum Number (or Approximate Dollar Value) of Shares (or Units) that May Yet Be Purchased Under the Plans or Programs (1) — — — — 307,333 307,333 307,333 307,333 (1) On December 19, 2018, the Company’s Board of Directors authorized a share repurchase program of up to 400,000 shares of the Company’s Common Stock. The Company may repurchase shares in open market transactions or by other means, such as privately negotiated transactions. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The share repurchase plan does not obligate the Company to acquire any particular amount of Common Stock, and it may be modified or suspended at any time at the Company's discretion. 30 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 balance sheet data as of December 31, 2020 and 2019 and the selected consolidated statement of income data for the years ended December 31, 2020, 2019 and 2018 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 balance sheet data as of December 31, 2018, 2017 and 2016 and the selected consolidated statement of income data for the years ended December 31, 2017 and 2016 has 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. Performance ratios for the year ended December 31, 2020 were negatively impacted by incremental COVID-19 pandemic related loan loss reserves and a $3.9 million one-time charge related to office consolidation, vendor contract termination and employee severance costs recognized in the fourth quarter of 2020. 31 Selected Financial Data (a) (a) (a)(b) 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 Per Share Data: Basic earnings per share Diluted earnings per share Book value per share (end of period) Tangible book value per share (end of period) Dividend payout ratio (f) Shares outstanding (end of period) Weighted average shares outstanding–basic Weighted average shares outstanding–diluted Performance Ratios: Return on average assets Return on average common shareholders’ equity Average shareholders’ equity to average assets Net interest margin Efficiency ratio Asset Quality Ratios: Total past due loans to total loans Nonperforming loans to total loans Nonperforming assets to total assets Allowance for loan losses to nonperforming loans Allowance for loan losses to total loans Net charge-offs (recoveries) to average loans Statements of Financial Condition: Total assets Gross portfolio loans Investment securities Deposits FHLB borrowings Subordinated debt Total equity Capital Ratios: Tier 1 capital to average assets (d) (b) (d) (d) (d) (d) (c) (e) $ $ $ $ $ $ $ $ 2020 77,487 22,652 54,835 7,605 47,230 2,884 42,813 7,301 1,397 5,904 0.75 0.75 22.77 22.43 74.67 % 7,755,909 7,728,328 7,748,453 0.28 % 3.35 % 8.36 % 2.77 % 73.9 % 0.93 % 2.06 % 1.48 % 62.87 % 1.29 % 0.01 % 2,253,747 1,625,627 106,890 1,827,316 175,000 25,258 176,602 2019 At or For the Years Ended December 31, 2018 (Dollars in thousands, except per share data) 2017 $ $ $ $ 82,948 29,187 53,761 437 53,324 5,244 35,626 22,942 4,726 18,216 2.32 2.31 23.51 23.15 22.51 % 7,757,828 7,757,355 7,784,631 0.97 % 10.20 % 9.53 % 3.03 % 60.2 % 0.77 % 0.66 % 0.56 % 127.59 % 0.84 % 0.15 % 1,882,182 1,604,484 100,865 1,491,903 150,000 25,207 182,397 $ $ $ $ 80,064 23,738 56,326 3,440 52,886 3,900 35,633 21,153 3,720 17,433 2.23 2.21 22.43 22.06 21.72 % 7,764,647 7,722,175 7,775,480 0.94 % 10.19 % 9.24 % 3.18 % 59.2 % 0.78 % 0.88 % 0.75 % 109.80 % 0.96 % 0.44 % 1,873,665 1,604,726 116,584 1,502,244 160,000 25,155 174,196 $ $ $ $ 71,201 16,837 54,364 1,341 53,023 4,629 32,523 25,129 11,299 13,830 1.80 1.78 20.98 20.59 15.73 % 7,676,238 7,572,409 7,670,413 0.80 % 8.93 % 8.97 % 3.30 % 54.9 % 1.67 % 0.36 % 0.31 % 344.90 % 1.23 % 0.03 % 1,796,607 1,543,016 113,767 1,398,405 199,000 25,103 161,027 2016 60,990 11,898 49,092 3,914 45,178 2,676 29,544 18,310 5,960 12,350 1.64 1.62 19.39 18.98 13.58 % 7,524,069 7,396,019 7,491,052 0.85 % 8.94 % 9.47 % 3.54 % 56.5 % 0.47 % 0.22 % 0.20 % 612.26 % 1.32 % 0.01 % 1,628,919 1,365,939 104,610 1,289,037 160,000 25,051 145,895 Bankwell Bank Tier 1 capital to risk-weighted assets Bankwell Bank Total capital to risk-weighted assets Bankwell Bank Total shareholders’ equity to total assets Tangible common equity ratio (b) 8.44 % 10.99 % 10.14 % 9.61 % 10.10 % 11.06 % 12.53 % 11.56 % 10.99 % 11.59 % 12.28 % 7.84 % 7.73 % 13.35 % 9.69 % 9.56 % 12.50 % 9.30 % 9.16 % 12.19 % 8.96 % 8.81 % 12.85 % 8.96 % 8.78 % 32 (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 dividend. (d) Calculated using the principal amounts outstanding on loans. (e) Nonperforming assets consist of nonperforming loans and other real estate owned. (f) The dividend payout ratio is the dividends per share divided by diluted earnings per share. 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, other real estate owned expenses and amortization of intangible assets, divided by our operating revenue, which is equal to net interest income plus non-interest income excluding gains and losses on sales of securities and gains and losses on other real estate owned. In our judgment, the adjustments made to operating revenue allow investors and analysts to better assess our operating expenses in relation to our core operating revenue by removing the volatility that is associated with certain one-time items and other discrete items that are unrelated to our core business. 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. 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, if any. The information provided below presents a reconciliation of each of our non-GAAP financial measures to the most directly comparable GAAP financial measure. 33 Efficiency Ratio Noninterest expense Less: other real estate owned expenses Less: Amortization of intangibles Adjusted noninterest expense (numerator) Net interest income Noninterest income Adjustments for: gains/(losses) on sales of securities Adjustments for: gains (losses) on sale of other real estate owned Adjusted operating revenue (denominator) Efficiency ratio 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 Tangible common shareholders’ equity to tangible assets 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 Book value per share Less: effects of intangible assets Tangible Book Value per Common Share Total Revenue Net interest income Add: noninterest income Total Revenue Noninterest income as a percentage of total revenue Return on Average Common Shareholders’ Equity Net Income Attributable to Common Shareholders Total average shareholders’ equity Less: average preferred stock Average Common Shareholders’ Equity Return on Average Common Shareholders’ Equity 2020 42,813 6 138 42,669 54,835 2,884 — 19 57,700 73.9 % 176,602 — 176,602 2,665 173,937 2,253,747 2,665 2,251,082 7.73 % 176,602 — 176,602 2,665 173,937 7,919,278 163,369 7,755,909 22.77 0.34 22.43 54,835 2,884 57,719 5.00 % 5,904 176,489 — 176,489 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ Years Ended December 31, 2019 2018 (Dollars in thousands, except per share data) 2017 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 35,626 37 75 35,514 53,761 5,244 76 (102) 59,031 60.2 % 182,397 — 182,397 2,803 179,594 1,882,182 2,803 1,879,379 9.56 % 182,397 — 182,397 2,803 179,594 7,868,803 110,975 7,757,828 23.51 0.36 23.15 53,761 5,244 59,005 8.89 % 18,216 178,510 — 178,510 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 35,633 — 92 35,541 56,326 3,900 222 — 60,004 59.2 % 174,196 — 174,196 2,879 171,317 1,873,665 2,879 1,870,786 9.16 % 174,196 — 174,196 2,879 171,317 7,842,271 77,624 7,764,647 22.43 0.37 22.06 56,326 3,900 60,226 6.48 % 17,433 171,024 — 171,024 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 32,523 70 118 32,335 54,364 4,629 165 (78) 58,906 54.9 % 161,027 — 161,027 2,971 158,056 1,796,607 2,971 1,793,636 8.81 % 161,027 — 161,027 2,971 158,056 7,751,424 75,186 7,676,238 20.98 0.39 20.59 54,364 4,629 58,993 7.85 % 13,830 154,929 — 154,929 2016 29,544 157 151 29,236 49,092 2,676 (115) 128 51,755 56.5 % 145,895 — 145,895 3,090 142,805 1,628,919 3,090 1,625,829 8.78 % 145,895 — 145,895 3,090 142,805 7,620,663 96,594 7,524,069 19.39 0.41 18.98 49,092 2,676 51,768 5.17 % 12,350 138,131 — 138,131 3.35 % 10.20 % 10.19 % 8.93 % 8.94 % 34 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. (the "Parent Corporation") is a bank holding company headquartered in New Canaan, Connecticut. The Parent Corporation offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, "we", "our", "us", or the "Company"). 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 New York metropolitan area and throughout Connecticut, with the majority of the Company's loans in Fairfield and New Haven Counties, Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, and Hamden, Connecticut. 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. 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 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; Organic growth and strategic acquisitions when market opportunities present themselves; Utilization of efficient and scalable infrastructure; and Disciplined focus on risk management. Impact of COVID-19 The COVID-19 pandemic has resulted in, and is likely to continue to result in, significant economic disruption affecting our business and the clients we serve. A significant degree of uncertainty still exists concerning the duration and magnitude of the COVID-19 pandemic. Given the ongoing and dynamic nature of the circumstances, it is difficult to predict the full impact of the COVID-19 pandemic on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when the coronavirus can be controlled and abated. For the year ended December 31, 2020, we increased the provision for loan losses and added liquidity to the balance sheet due to the impact of COVID-19, both of which adversely impacted our earnings and performance metrics. 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. 35 Key Financial Measures Selected balance sheet measures: Total assets Gross portfolio loans Deposits FHLB borrowings Subordinated debt Total equity Selected statement of income measures: Total revenue Net interest income before provision for loan losses Income before income tax expense Net income Basic earnings per share Diluted earnings per share (c) (c) Other financial measures and ratios: Return on average assets Return on average common shareholders’ equity Net interest margin Efficiency ratio Tangible book value per share (end of period) Net charge-offs to average loans Nonperforming assets to total assets Allowance for loan losses to nonperforming loans Allowance for loan losses to total loans (c)(d) (b) (b) (e) (c) (a) Key Financial Measures At or For the Years Ended December 31, 2019 (Dollars in thousands, except per share data) 2018 2020 $ $ $ 2,253,747 $ 1,625,627 1,827,316 175,000 25,258 176,602 57,719 54,835 7,301 5,904 0.75 $ 0.75 $ 1,882,182 $ 1,604,484 1,491,903 150,000 25,207 182,397 59,005 53,761 22,942 18,216 2.32 $ 2.31 $ 1,873,665 1,604,726 1,502,244 160,000 25,155 174,196 60,226 56,326 21,153 17,433 2.23 2.21 Key Financial Measures At or For the Years Ended December 31, 2019 (a) 2018 2020 0.28 % 3.35 % 2.77 % 73.9 % $ 22.43 $ 0.01 % 1.48 % 62.87 % 1.29 % 0.97 % 10.20 % 3.03 % 60.2 % 23.15 0.15 % 0.56 % 127.59 % 0.84 % $ 0.94 % 10.19 % 3.18 % 59.2 % 22.06 0.44 % 0.75 % 109.80 % 0.96 % (a) We derived the selected balance sheet measures as of December 31, 2020 and 2019 and the selected statement of income measures for the years ended December 31, 2020, 2019 and 2018 from our audited consolidated financial statements included elsewhere 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) Excludes unvested restricted stock awards. (e) Nonperforming assets consist of nonperforming loans and other real estate owned. 36 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. 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. We believe that accounting estimates related to the measurement of the allowance for loan losses, the valuation of derivative instruments, investment securities and deferred income taxes, and the evaluation of investment securities for other than temporary impairment are particularly critical and susceptible to significant near-term change. 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 elements for specific reserves on impaired loans and loss allocations for non-impaired loans. 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 nonaccrual 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. 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. Loss allocations for non-impaired loans are determined by portfolio segment and are based on the Bank’s and peer banks’ historical loss experiences over an economic cycle adjusted for qualitative factors. Qualitative factors include, but are not limited to, lending policies and procedures, nature and volume of the portfolio, concentrations of credit, lending management and staff, volume and severity of problem loans, quality of review and rating systems, value of underlying collateral, current economic conditions, and competitive and regulatory issues. 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. Loss allocations for non-impaired loans are based on 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 5 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 the age of the portfolio and the Bank’s experience with a particular loan product. We periodically reassess and adjust the loss allocation factors used in the assignment of loss 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 to appropriately reflect our analysis of migratory loss experience. Because the methodology is partly based upon peer bank data and trends, current economic data as well as management’s judgment, factors may arise that result 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, 2020, management believes that the allowance is adequate and consistent with asset quality and delinquency indicators. 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 assesses 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. 37 The Company has characterized all of its interest rate swaps that qualify under ASC 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 fluctuations in the contractually specified interest rates, 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. The Company also has derivatives not designated as hedges. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. Investment Securities Valuation Fair values of the Company’s investment securities 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 Company’s private placement municipal housing authority bonds, classified as held to maturity, have no available quoted market price. The fair value for these securities is estimated using a discounted cash flow model. Due to the judgments and uncertainties involved in the estimation process, the estimates could result in materially different results under different assumptions and conditions. Evaluation of Investment Securities for Other Than Temporary Impairment The Company evaluates investment securities within the Company’s available for sale and held to maturity portfolios for other-than-temporary impairment (“OTTI”), at least quarterly. If the fair value of a debt security is below the amortized cost basis of the security, OTTI is required to be recognized if any of the following are met: (1) the Company intends to sell the security; (2) it is “more likely than not” that the Company will be required to sell the security before recovery of its amortized cost basis; or (3) for debt securities, the present value of expected cash flows is not sufficient to recover the entire amortized cost basis. For all impaired debt securities that are intended for sale, or more likely than not will be required to sell, the full amount of the loss is recognized as OTTI through earnings. Credit related OTTI for all other impaired debt securities is recognized through earnings. Non-credit related OTTI for such debt securities is recognized in other comprehensive income, net of applicable taxes. Should actual factors and conditions differ materially from those expected by management, the actual realization of gains or losses on investment securities could differ materially from the amounts recorded in the financial statements. Deferred Income Taxes In accordance with ASC Topic 740, “Income Taxes,” certain aspects of accounting for income taxes require significant management judgment, including assessing the realizability of Deferred Tax Assets (DTAs). Such judgments are subjective and involve estimates and assumptions about matters that are inherently uncertain. Should actual factors and conditions differ materially from those used by management, the actual realization of DTAs could differ materially from the amounts recorded in the Consolidated Financial Statements and the accompanying Notes thereto. DTAs generally represent items for which a benefit has been recognized for financial accounting purposes that cannot be realized for tax purposes until a future period. The realization of DTAs depends upon future sources of taxable income. Valuation allowances are established for those DTAs determined not likely to be realized based on management’s judgment. Earnings and Performance Overview 2020 Earnings Overview Our net income for the year ended December 31, 2020 was $5.9 million, a decrease of $12.3 million, or 67.6%, compared to the year ended December 31, 2019. Diluted earnings per share was $0.75 for the year ended December 31, 2020, compared to diluted earnings per share of $2.31 for the year ended December 31, 2019. Our returns on average shareholders' equity and average assets for the year ended December 31, 2020, were 3.35% and 0.28%, respectively, compared to 10.20% and 0.97%, respectively for the year ended December 31, 2019. The decrease in net income for 2020 compared to 2019 was impacted by a $3.9 million one-time charge for office consolidation, vendor contract termination and employee severance costs recognized in the fourth quarter of 2020. In addition, the decrease in net income was also due to an increase in the provision for loan losses due to the COVID-19 pandemic. The 38 provision for loan losses totaled $7.6 million for the year ended December 31, 2020, consisting of COVID-19 related reserves of $9.0 million, partially offset due to changes in portfolio mix and growth. Net interest income for the year ended December 31, 2020 was $54.8 million, an increase of $1.1 million compared to the year ended December 31, 2019. Our net interest margin decreased 26 basis points to 2.77% for the year ended December 31, 2020 compared to the year ended December 31, 2019 reflecting excess liquidity resulting from successful commercial core deposit gathering efforts as well as a temporary increase in other deposits to expand on-balance sheet liquidity during the COVID-19 pandemic. 2019 Earnings Overview Reference the 2019 Form 10-K for discussion regarding financial performance and results for the year ended December 31, 2019 compared to the year ended December 31, 2018. 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. 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, 2020 compared to year ended December 31, 2019 FTE net interest income for the years ended December 31, 2020 and 2019 was $55.0 million and $54.0 million, respectively. Net interest income increased due to lower rates on interest bearing deposits. FTE basis interest income for the year ended December 31, 2020 decreased $5.5 million, or 7%, to $77.7 million compared to FTE basis interest income for the year ended December 31, 2019 due primarily to lower loan yields as loans were re-priced in the current low interest rate environment. Average interest earning assets were $2.0 billion for the year ended December 31, 2020, increasing by $206.4 million, or 11.6%, from the year ended December 31, 2019 due to an increase in cash and cash equivalents in part to maintain a higher level of liquidity during the COVID-19 pandemic. The average balance of total loans increased $43.7 million, or 2.8%. The total average balance of securities for the year ended December 31, 2020 decreased by $13.4 million, or 12%, from the year ended December 31, 2019. The total yield in earnings assets decreased to 3.85% at December 31, 2020, compared to 4.61% at December 31, 2019. The decrease in yield was primarily driven by a significant increase in cash and cash equivalents and lower yields on cash and cash equivalents and loans. Interest expense for the year ended December 31, 2020 decreased by $6.5 million, or 22%, compared to interest expense for 2019 due to a decrease in rates on interest bearing deposits. The weighted average cost of borrowed money decreased by 22 basis points to 2.31%. Average interest bearing liabilities for the year ended December 31, 2020 increased by $177.3 million, or 12%, from the year ended December 31, 2019, primarily due to higher average balances in money market and time deposits. 39 Distribution of Assets, Liabilities and Stockholders’ Equity; Interest Rates and Interest Differential The following table below presents the average balances and yields earned on interest-earning assets and average balances and weighted average rates paid on our funding liabilities for the years ended December 31, 2020, 2019 and 2018. Assets: Cash and fed funds sold Securities (1) Loans: Commercial real estate Residential real estate Construction Commercial business Consumer (2) Total loans Federal Home Loan Bank stock Total earning assets Other assets Total assets Liabilities and shareholders’ equity: Interest bearing liabilities: NOW Money market Savings Time Total interest bearing deposits Borrowed money Total interest bearing liabilities Noninterest bearing deposits Other liabilities Total liabilities Shareholders’ equity Total liabilities and shareholders’ equity (3) Net interest income Interest rate spread Net interest margin (4) Average Balance 2020 Interest Yield/ Rate (5) Years Ended December 31, 2019 Average Balance Interest (Dollars in thousands) Yield/ Rate (5) Average Balance 2018 Interest Yield/ Rate (5) $ 261,689 98,938 $ 585 3,103 0.22 % $ 3.14 85,678 112,336 $ 1,859 3,526 2.17 % $ 3.14 77,923 118,311 $ 1,428 3,686 51,218 4,645 4,262 13,530 10 73,665 346 77,699 141 4,071 1,368 12,600 18,180 4,472 22,652 $ $ $ 1,095,367 129,585 97,230 295,662 121 1,617,965 7,625 1,986,217 125,261 $ 2,111,478 $ 80,805 516,527 169,763 712,461 1,479,556 190,463 1,670,019 215,073 49,897 1,934,989 176,489 $ 2,111,478 50,818 6,367 4,538 15,599 17 77,339 473 83,197 128 7,139 2,968 14,463 24,698 4,489 29,187 $ $ $ 4.60 3.58 4.31 4.50 8.00 4.48 4.53 3.85 % $ 0.17 % $ 0.79 0.81 1.77 1.23 2.31 1.36 % $ 1,067,290 165,384 85,591 255,779 258 1,574,302 7,502 1,779,818 92,663 1,872,481 62,254 439,867 177,854 637,515 1,317,490 175,267 1,492,757 172,192 29,022 1,693,971 178,510 1,872,481 47,967 7,016 4,667 15,037 28 74,715 517 80,346 157 6,431 1,649 10,714 18,951 4,787 23,738 4.70 3.85 5.23 6.01 6.70 4.85 6.31 4.61 % $ 0.21 % $ 1.62 1.67 2.27 1.87 2.53 1.96 % $ 1,014,255 189,121 90,773 282,425 481 1,577,055 9,177 1,782,466 68,002 1,850,468 60,410 482,886 124,214 619,448 1,286,958 213,546 1,500,504 166,566 12,374 1,679,444 171,024 1,850,468 $ $ $ $ 55,047 $ 54,010 $ 56,608 2.49 % 2.77 % 2.65 % 3.03 % 1.84 % 3.12 4.66 3.71 5.07 5.25 5.88 4.67 5.63 4.45 % 0.26 % 1.33 1.33 1.73 1.47 2.21 1.58 % 2.87 % 3.18 % (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 $212 thousand, $249 thousand and $282 thousand, respectively, for the years ended December 31, 2020, 2019 and 2018. Tax exempt income was converted to a fully taxable equivalent basis at a 20 percent tax rate for 2020, 2019 and 2018. (4) Net interest income as a percentage of total earning assets. (5) Yields are calculated using the contractual day count convention for each respective product type. 40 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. Interest and dividend income: Cash and fed funds sold Securities Loans: Commercial real estate Residential real estate Construction Commercial business Consumer Total loans Federal Home Loan Bank stock Total change in interest and dividend income Interest expense: Deposits: NOW Money market Savings Time Total deposits Borrowed money Total change in interest expense Change in net interest income Provision for Loan Losses Year Ended December 31, 2020 vs 2019 Increase (Decrease) Rate Volume Total Year Ended December 31, 2019 vs 2018 Increase (Decrease) Rate Volume Total (In thousands) $ 1,435 $ (420) (2,709) $ (3) (1,274) $ (423) 152 $ (187) 279 $ 27 1,321 (1,306) 570 2,201 (10) 2,776 8 3,799 $ (921) (416) (846) (4,270) 3 (6,450) (135) (9,297) $ 34 $ (21) $ 1,082 (130) 1,570 2,556 373 2,929 (4,150) (1,470) (3,433) (9,074) (390) (9,464) $ $ $ 870 $ 167 $ 400 (1,722) (276) (2,069) (7) (3,674) (127) (5,498) $ 13 $ (3,068) (1,600) (1,863) (6,518) (17) (6,535) 1,037 $ 2,523 (906) (272) (1,498) (15) (168) (101) (304) $ 5 $ (609) 827 321 544 (925) (381) 77 $ 328 257 143 2,060 4 2,792 57 3,155 $ (34) $ 1,317 492 3,428 5,203 627 5,830 (2,675) $ 431 (160) 2,851 (649) (129) 562 (11) 2,624 (44) 2,851 (29) 708 1,319 3,749 5,747 (298) 5,449 (2,598) 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. The provision for loan losses for the year ended December 31, 2020 was $7.6 million compared to a $0.4 million provision for loan losses for the year ended December 31, 2019. The increase in the provision for loan losses was primarily due to incremental loan loss reserves for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic. 41 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, 2020, 2019 and 2018. Bank owned life insurance Service charges and fees Gains and fees from sales of loans Gain (loss) on sale of other real estate owned, net Net gain on sale of available for sale securities Other Total noninterest income Years Ended December 31, 2019 2020 2020/2019 Change 2019/2018 Change 2018 $ % $ % $ $ 967 $ 788 43 19 — 1,067 2,884 $ 1,008 $ 1,023 1,791 (102) 76 1,448 5,244 $ (Dollars in thousands) (41) (235) (1,748) 121 (76) (381) (2,360) 1,057 $ 1,090 984 — 222 547 3,900 $ (4)% $ (23) (98) (119) (100) (26) (45)% $ (49) (67) 807 (102) (146) 901 1,344 (5)% (6) 82 N/A (66) 165 34 % Year ended December 31, 2020 compared to year ended December 31, 2019 Noninterest income decreased by $2.4 million to $2.9 million for the year ended December 31, 2020, compared to the year ended December 31, 2019. The decrease in noninterest income was primarily a result of the absence of gains and fees from SBA loan sales for the year ended December 31, 2020, when compared to the same period in 2019. In addition, for the year ended December 31, 2020, the decrease in noninterest income was also driven by certain waived service charges and fees on depository accounts as a courtesy to customers during the COVID-19 pandemic. The decrease in other noninterest income for the year ended December 31, 2020 was primarily a result of a decline in loan related interest rate swap fees in 2020, when compared to the same period in 2019. Noninterest Expense The following table compares noninterest expense for the years ended December 31, 2020, 2019 and 2018. Salaries and employee benefits Occupancy and equipment Data processing Professional services Director fees FDIC insurance Marketing Other Total noninterest expense Years Ended December 31, 2019 2020 2020/2019 Change 2019/2018 Change 2018 $ % $ % $ $ 21,355 $ 10,926 3,216 2,110 1,214 791 630 2,571 42,813 $ 19,434 $ 7,594 2,067 1,857 863 74 971 2,766 35,626 $ (Dollars in thousands) 1,921 3,332 1,149 253 351 717 (341) (195) 7,187 18,973 $ 6,790 2,033 2,103 1,044 779 1,587 2,324 35,633 $ 10 % $ 44 56 14 41 969 (35) (7) 20 % $ 461 804 34 (246) (181) (705) (616) 442 (7) 2 % 12 2 (12) (17) (91) (39) 19 — % Year ended December 31, 2020 compared to year ended December 31, 2019 Noninterest expense increased by $7.2 million, or 20%, to $42.8 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The increase in noninterest expense was primarily driven by $3.9 million in one-time charges recognized during the fourth quarter of 2020. These one-time charges impacted salaries and employee benefits, occupancy and equipment expense and data processing expense. 42 Salaries and employee benefits totaled $21.4 million for the year ended December 31, 2020, an increase of $1.9 million when compared to the same period in 2019. The increase in salaries and employee benefits was primarily driven by a $0.8 million expense for the Voluntary Early Retirement Incentive Plan offered to eligible employees and additional severance charges recognized during the fourth quarter of 2020. The increase in salaries and employee benefits was also driven by normal annual salary increases and key hires in support of growth initiatives, partially offset by a reduction in overall headcount. Occupancy and equipment expense totaled $10.9 million for the year ended December 31, 2020, an increase of $3.3 million when compared to the same period in 2019. The increase in occupancy and equipment expense was primarily due to a $2.0 million one-time expense related to office and branch consolidation recognized during the fourth quarter of 2020. The $2.0 million one-time expense included a charge of $1.7 million recognized upon the transfer of a bank owned property to held for sale. The asset transferred to held for sale was written down to its fair market value, less cost to sell. In addition, the $2.0 million one-time expense included a $0.3 million impairment charge on a leased asset. In addition, the increase in occupancy and equipment expense was due to additional cleaning costs associated with precautions taken to prevent the spread of COVID-19. Data processing expense totaled $3.2 million for the year ended December 31, 2020, an increase of $1.1 million when compared to the same period in 2019. The increase in data processing expense was primarily driven by a $1.1 million one-time charge related to early termination fees payable to a legacy technology vendor. Income Taxes Income tax expense for the years ended December 31, 2020, 2019 and 2018 totaled $1.4 million, $4.7 million and $3.7 million, respectively. The effective tax rates for the years ended December 31, 2020, 2019 and 2018, were 19.1%, 20.6% and 17.6%, respectively. Our net deferred tax asset at December 31, 2020 was $11.3 million, compared to $5.8 million at December 31, 2019. The increase in the deferred tax asset at December 31, 2020 when compared to the same period in 2019 was primarily a result of an increase in the allowance for loan losses and unrealized losses on derivatives. On October 8, 2015, the Bank established a 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 Assets totaled $2.3 billion at December 31, 2020, compared to assets of $1.9 billion at December 31, 2019. The increase in assets is primarily due to an increase in cash and cash equivalents in part to maintain a higher level of liquidity during the COVID-19 pandemic. Gross loans totaled $1.6 billion at December 31, 2020, an increase of $21.1 million compared to December 31, 2019. Excluding Paycheck Protection Program ("PPP") loans, gross loans decreased by $13.7 million at December 31, 2020 when compared to December 31, 2019. Deposits totaled $1.8 billion at December 31, 2020, compared to deposits of $1.5 billion at December 31, 2019. The increase in deposits was a result of successful commercial core deposit gathering efforts and a temporary increase in deposits to expand on-balance sheet liquidity during the COVID-19 pandemic. Shareholders’ equity totaled $176.6 million as of December 31, 2020, a decrease of $5.8 million compared to December 31, 2019, primarily a result of an $8.1 million unfavorable impact to accumulated other comprehensive loss driven by fair value marks related to hedge positions involving interest rate swaps, as well as dividends paid of $4.4 million and common stock repurchases of $1.0 million. The decrease was partially offset by net income for the year ended December 31, 2020 of $5.9 million. The marks on the interest rate swaps are driven by lower long term market interest rates in 2020 when compared to 2019. The Company's interest rate swaps are used to hedge interest rate risk. The Company's current interest rate swap positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. 43 Loan Portfolio We originate commercial real estate loans, construction loans, commercial business loans and other consumer loans. Lending activities are conducted principally in the New York metropolitan area and throughout Connecticut, with the majority in Fairfield and New Haven Counties of Connecticut. Our loan portfolio is the largest category of our earnings assets. The following table compares the composition of our loan portfolio for the dates indicated: Real estate loans: Residential Commercial Construction Commercial business Consumer Total loans Primary loan categories 2020 Total % 2019 Total (Dollars in thousands) % Change Total $ $ 113,557 1,148,383 87,007 1,348,947 276,601 79 1,625,627 6.99 % $ 70.64 5.35 82.98 17.02 — 100.00 % $ 147,109 1,128,614 98,583 1,374,306 230,028 150 1,604,484 9.17 % $ 70.34 6.14 85.65 14.34 0.01 100.00 % $ (33,552) 19,769 (11,576) (25,359) 46,573 (71) 21,143 Residential real estate. Residential real estate loans decreased by $33.6 million, or 22.8%, at December 31, 2020 compared to December 31, 2019 and amounted to $113.6 million, representing 7% of total loans at December 31, 2020. In the fourth quarter of 2017, management made the strategic decision to no longer originate residential mortgage loans. Commercial real estate. Commercial real estate loans were $1.1 billion and represented 71% of our total loan portfolio at December 31, 2020, a net increase of $19.8 million, or 1.75%, from December 31, 2019. Commercial real estate loan growth during this period largely reflects strong production from experienced relationship managers in the marketplace and their ability to source quality opportunities, and enhanced lending to existing customers. Commercial real estate loans are secured by a variety of property types, including office buildings, retail facilities, commercial mixed use and multi-family dwellings. Construction. Construction loans were $87.0 million at December 31 2020, down $11.6 million from December 31, 2019. Construction loans totaled $98.6 million at December 31, 2019. Commercial construction loans consist of commercial development projects, such as apartment buildings and condominiums, as well as office buildings, retail and other income producing properties and land loans. Commercial business. Commercial business loans were $276.6 million and represented 17% of our total loan portfolio at December 31, 2020, a net increase of $46.6 million, or 20.2%, from December 31, 2019. The December 31, 2020 balance includes $34.8 million of PPP loans made under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"). 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. 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. 44 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, 2020. Amounts due: One year or less After one year: One to five years Over five years Total due after one year Total Commercial Real Estate Commercial Construction Commercial Business Total December 31, 2020 (In thousands) $ $ 82,657 $ 26,364 $ 16,847 $ 125,868 655,541 410,185 1,065,726 1,148,383 $ 38,118 22,525 60,643 87,007 $ 144,136 115,618 259,754 276,601 $ 837,795 548,328 1,386,123 1,511,991 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, 2020. Commercial real estate Commercial construction Commercial business Total loans due after one year Asset Quality Adjustable Interest Rate December 31, 2020 Fixed Interest Rate (In thousands) $ $ 314,197 $ 26,371 133,162 473,730 $ 751,529 $ 34,272 126,592 912,393 $ Total 1,065,726 60,643 259,754 1,386,123 We actively manage asset quality through our underwriting practices and collection operations. Our Board of Directors monitors credit risk management through two committees, the Directors' Loan Committee ("DLC") and the Audit Committee. The DLC 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 procedures to monitor the credit quality of our loan portfolio and the loan review program. 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 periodic basis. While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences as a result of general economic weakness, such as a prolonged downturn in the housing market on a regional or 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 extends credit of up to 80% of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. 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 for commercial loans, to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017 management made the strategic decision to no longer originate residential mortgage loans. At the beginning of the third quarter of 2019, the Company no longer offered home equity loans or lines of credit. The Company’s policy for residential lending generally required that the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may have exceeded 80% 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, or a religious or civic organization. Credit risk management involves a partnership between our relationship managers and our credit approval, portfolio management, 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. 45 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. 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 loans' 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. Nonperforming Assets. Nonperforming assets include nonaccrual loans and property acquired through foreclosures or repossession. The following table presents nonperforming assets and additional asset quality data for the dates indicated: Nonaccrual loans: Real estate loans: Residential Commercial Commercial business Construction Consumer Total nonaccrual loans Property acquired through foreclosure or repossession, net Total nonperforming assets Nonperforming assets to total assets Nonperforming loans to total loans Total past due loans to total loans 2020 2019 At December 31, 2018 (Dollars in thousands) 2017 2016 $ $ $ $ 1,492 21,093 1,834 8,997 — 33,416 — 33,416 1.48 % 2.06 % 0.93 % $ $ 1,560 5,222 3,806 — — 10,588 — 10,588 0.56 % 0.66 % 0.77 % $ $ 3,812 5,950 4,320 — — 14,082 — 14,082 0.75 % 0.88 % 0.78 % $ $ 1,590 3,371 520 — — 5,481 — 5,481 0.31 % 0.36 % 1.67 % 1,612 446 538 — 341 2,937 272 3,209 0.20 % 0.22 % 0.47 % Total nonaccrual loans were $33.4 million as of December 31, 2020, of which $2.6 million are guaranteed by the Small Business Administration ("SBA"). The Company individually analyzed all existing COVID-19 deferrals and COVID-19 impacted loans for collectability as of December 31, 2020, resulting in a $25.6 million increase to the nonperforming loan population which are adequately reserved. Nonperforming assets as a percentage of total assets was 1.48% at December 31, 2020, up from 0.56% at December 31, 2019. The allowance for loan losses at December 31, 2020 was $21.0 million, representing 1.29% of total loans. The $7.5 million increase in the allowance for loan losses at December 31, 2020 when compared to December 31, 2019 was primarily due to incremental loan loss reserves for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic. Nonaccrual Loans. Loans greater than 90 days past due are generally 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 a 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. At December 31, 2020 and 2019, there were no commitments to lend additional funds to any borrower on nonaccrual status. Past Due Loans. When a loan is 15 days past due, the Company sends the borrower a late notice. The Company attempts to 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, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact 46 the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, after the 90th day of delinquency, the Company may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company periodically. Loans greater than 90 days past due are generally put on nonaccrual status. 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. A loan is considered to be no longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms. Loans that are granted payment deferrals under the CARES Act are not required to be reported as past due or placed on non-accrual status if the criteria under section 4013 of the CARES Act are met. The following table presents past due loans as of December 31, 2020 and 2019: As of December 31, 2020 Residential real estate Commercial real estate Construction Commercial business Total loans As of December 31, 2019 Residential real estate Commercial real estate Construction Commercial business Total loans 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due (In thousands) $ $ $ $ 245 $ 1,305 8,997 45 10,592 $ — $ 355 1,357 — 1,712 $ — $ 193 — 55 248 $ 943 $ — — — 943 $ 177 $ 2,541 — 1,526 4,244 $ 281 $ 5,935 — 3,455 9,671 $ 422 4,039 8,997 1,626 15,084 1,224 6,290 1,357 3,455 12,326 Troubled Debt Restructurings (TDR). Loans are considered restructured in a troubled debt restructuring when the borrower is experiencing financial difficulties and the Bank has 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. Section 4013 of the CARES Act provides relief from certain requirements under GAAP and permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of January 1, 2022, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs. As of December 31, 2020, the Company had active COVID-19 related deferrals totaling $29.4 million (excluding SBA loans, which are paid for 6 months by the SBA on behalf of borrowers). The Company granted initial three month payment deferral periods and, in some instances, extended the initial payment deferral period. This excludes SBA loans, which are mandated to receive an automatic six month deferral. These deferrals are not considered troubled debt restructurings based on Section 4013 of the CARES Act and interagency guidance issued in March of 2020. Restructured loans are classified as accruing or nonaccruing 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. At December 31, 2020 and December 31, 2019 there were three nonaccrual loans identified as TDRs totaling $1.4 million and three nonaccrual loans identified as TDRs totaling $1.6 million, respectively. 47 The following table presents information on troubled debt restructured loans: Accruing troubled debt restructured loans: Residential real estate Commercial real estate Commercial business Accruing troubled debt restructured loans Nonaccrual troubled debt restructured loans: Residential real estate Commercial real estate Commercial business Nonaccrual troubled debt restructured loans Total troubled debt restructured loans 2020 2019 At December 31, 2018 (In thousands) 2017 2016 $ $ $ 2,399 $ 4,929 328 7,656 872 $ — 571 1,443 9,099 $ 2,460 $ 4,952 524 7,936 943 $ — 680 1,623 9,559 $ 2,722 $ 37 923 3,682 3,008 $ 334 217 3,559 7,241 $ 2,957 $ 51 1,346 4,354 — $ 334 219 553 4,907 $ 69 402 893 1,364 — — 66 66 1,430 As of December 31, 2020 and 2019, loans classified as troubled debt restructurings totaled $9.1 million and $9.6 million, respectively. 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 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. 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. Potential problem loans are assessed for loss exposure using the methods described in Note 5 to our Consolidated Financial Statements under the caption “Credit Quality Indicators”. We expect the levels of nonperforming 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. 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, the Bank’s and peer banks’ historical loss experience, 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 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. 48 The following table presents the activity in our allowance for loan losses and related ratios for the dates indicated: Balance at beginning of period Charge-offs: Residential real estate Commercial real estate Construction Commercial business Consumer Total charge-offs Recoveries: Residential real estate Commercial real estate Consumer Commercial Business Total recoveries Net charge-offs Provision charged to earnings Balance at end of period Net charge-offs (recoveries) to average loans Allowance for loan losses to total loans 2020 2019 At December 31, 2018 (Dollars in thousands) 2017 2016 $ 13,509 $ 15,462 $ 18,904 $ 17,982 $ 14,169 — — — (83) (40) (123) — 15 3 — 18 (105) 7,605 21,009 $ (875) (594) — (897) (75) (2,441) — — 32 19 51 (2,390) 437 13,509 $ (420) (5,614) — (815) (77) (6,926) — 18 7 19 44 (6,882) 3,440 15,462 $ — — — (521) (51) (572) 146 — 3 4 153 (419) 1,341 18,904 $ — — (7) (69) (35) (111) — — 10 — 10 (101) 3,914 17,982 0.01 % 1.29 % 0.15 % 0.84 % 0.44 % 0.96 % 0.03 % 1.23 % 0.01 % 1.32 % $ At December 31, 2020, our allowance for loan losses was $21.0 million and represented 1.29% of total loans, compared to $13.5 million and 0.84% of total loans at December 31, 2019. The increase in the ratio of allowance for loan losses to total loans is driven by incremental loan loss reserves for increased credit risk relating to economic disruption and uncertainty caused by the COVID-19 pandemic. The Company individually analyzed all existing COVID-19 deferrals and COVID-19 impacted loans for collectability as of December 31, 2020. For the years ended December 31, 2020, 2019 and 2018, the provision for loan losses charged to earnings totaled $7.6 million, $0.4 million and $3.4 million, respectively. Net charge-offs for the year ended December 31, 2020 were $0.1 million and represented 0.01% of average loans. For the year ended December 31, 2019, net charge-offs were $2.4 million and represented 0.15% of average loans. The carrying amount of total impaired loans at December 31, 2020 was $47.7 million. This compares to a carrying amount of $22.6 million for total impaired loans at December 31, 2019. The amount of allowance for loan losses related to impaired loans was $5.0 million and $0.5 million, respectively, at December 31, 2020 and 2019. 49 The following table presents the allocation of the allowance for loan losses and the percentage of the related loan segments to total loans: 2020 2019 Amount Percent of Loan Portfolio Amount Percent of Loan Portfolio At December 31, 2018 Percent of Loan Portfolio (Dollars in thousands) Amount 2017 2016 Amount Percent of Loan Portfolio Amount Percent of Loan Portfolio Residential real estate Commercial real estate Construction Commercial business Consumer Total allowance for loan losses $ 610 6.99 % $ 730 9.17 % $ 857 11.10 % $ 1,721 12.54 % $ 1,802 14.33 % 16,425 221 3,753 — 70.64 5.35 17.02 — 10,551 324 1,903 1 70.34 6.14 14.34 0.01 11,562 140 2,902 1 68.18 4.56 16.14 0.02 12,777 907 3,498 1 63.98 6.59 16.85 0.04 9,415 2,105 4,283 377 61.89 7.86 15.81 0.11 $ 21,009 100.00 % $ 13,509 100.00 % $ 15,462 100.00 % $ 18,904 100.00 % $ 17,982 100.00 % The allocation of the allowance for loan losses at December 31, 2020 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, 2020 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. Investments are designated as either marketable equity, available for sale, held to maturity or trading securities 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. Marketable equity securities are reported at fair value, with any changes in fair value recognized in earnings. The amortized cost and fair value of investment securities as of the dates indicated are presented in the following table: Marketable equity securities Securities available for sale: U.S. Government and agency obligations State agency and municipal obligations Corporate bonds Total securities available for sale Securities held to maturity: State agency and municipal obligations Corporate bonds Government mortgage-backed securities Total securities held to maturity 2020 At December 31, 2019 2018 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value 2,083 $ 2,207 $ (In thousands) 2,047 $ 2,118 $ 2,003 $ 2,009 73,574 — 11,500 85,074 $ 16,018 $ — 60 16,078 $ 76,878 — 11,727 88,605 $ 19,962 $ — 70 20,032 $ 81,263 — — 81,263 $ 16,231 $ — 77 16,308 $ 82,439 — — 82,439 $ 18,222 $ — 85 18,307 $ 83,815 4,023 7,061 94,899 $ 20,328 $ 1,000 93 21,421 $ 82,136 4,007 7,011 93,154 20,890 1,000 98 21,988 $ $ $ $ 50 At December 31, 2020, the carrying value of our investment securities portfolio totaled $106.9 million and represented 5% of total assets, compared to $100.9 million and 5% of total assets at December 31, 2019. The increase of $6.0 million primarily reflects purchases of corporate bonds and increases in unrealized gains. We purchase investment grade securities with a focus on liquidity, earnings and duration exposure. The net unrealized gain position on our investment portfolio at December 31, 2020 was $7.5 million and did not include any gross unrealized losses. The net unrealized gain position on our investment portfolio at December 31, 2019 was $3.2 million and included gross unrealized losses of $2.0 thousand. All of our investment securities are rated investment grade or deemed to be of investment grade quality. The following tables summarize the amortized cost and weighted average yield of securities in our investment securities portfolio as of December 31, 2020 and 2019, 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, 2020 Marketable equity securities Securities available for sale: U.S. Government and agency obligations Corporate bonds Total securities available for sale Securities held to maturity: $ $ State agency and municipal obligations $ Government mortgage-backed securities Total securities held to maturity $ Due Within 1 Year Due 1–5 Years Due 5–10 Years Due After 10 Years or No Contractual Maturity Amortized Cost Yield Amortized Cost Amortized Yield Cost (Dollars in thousands) Yield Amortized Cost Yield — — % $ — — % $ — — % $ 2,083 2.20 % 9,976 — 9,976 — — — 2.02 — 2.02 % $ — 4,000 4,000 — 4.09 4.09 % $ 8,038 6,000 14,038 2.88 4.65 3.63 % $ 55,560 1,500 57,060 — % $ — — % $ — — — — % $ — — % $ — — — — % $ 16,018 — — % $ 60 16,078 2.49 4.50 2.54 % 5.01 % 5.35 5.01 % At December 31, 2019 Amortized Cost Yield Amortized Cost Amortized Yield Cost (Dollars in thousands) Yield Amortized Cost Yield Due Within 1 Year Due 1–5 Years Due 5–10 Years Due After 10 Years or No Contractual Maturity — — % $ — — % $ — — % $ 2,047 2.20 % Marketable equity securities Securities available for sale: U.S. Government and agency obligations Total securities available for sale Securities held to maturity: $ $ 2,100 2,100 1.59 1.59 % $ 9,950 9,950 2.02 2.02 % $ 8,311 8,311 2.87 2.87 % $ 60,902 60,902 State agency and municipal obligations $ Government mortgage-backed securities Total securities held to maturity $ — — — — % $ — — % $ — % $ — — % $ — — — — % $ 16,231 — —% $ 77 16,308 — — — 51 2.61 2.61 % 5.05 % 5.35 5.05 % Bank Owned Life Insurance ("BOLI") BOLI amounted to $42.7 million as of December 31, 2020. 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. 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 81% of our total assets at December 31, 2020. While scheduled loan and securities repayments are a relatively stable sources 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 management team 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 ("CDARS") and Insured Cash Sweep Service ("ICS") programs. We use CDARS and ICS to place customer funds into certificate of deposit accounts and money market accounts, respectively, into 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 and ICS deposits, except for reciprocal deposits, are considered to be brokered deposits for bank regulatory purposes. 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: Noninterest-bearing demand NOW Money market Savings Time Total deposits 2020 2019 At December 31, Amount Percent Weighted Average Rate Amount Percent Weighted Average Rate $ $ 270,235 101,737 669,364 158,750 627,230 1,827,316 14.79 % 5.57 36.63 8.69 34.32 100.00 % (Dollars in thousands) — % $ 0.17 0.79 0.81 1.77 1.23 % $ 191,518 70,020 419,495 183,729 627,141 1,491,903 12.84 % 4.69 28.12 12.31 42.04 100.00 % — % 0.21 1.62 1.67 2.27 1.87 % Total deposits were $1.8 billion at December 31, 2020, an increase of $335.4 million, or 22%, from December 31, 2019, reflecting successful commercial core deposit gathering efforts, as well as a temporary increase in deposits to expand on-balance sheet liquidity during the COVID-19 pandemic. Brokered certificates of deposits ("Brokered CDs") totaled $238.9 million and $179.8 million at December 31, 2020 and December 31, 2019, respectively. Certificates of deposits from national listing services totaled $18.4 million at December 31, 2020 and $21.3 million at December 31, 2019. Brokered money market accounts totaled $13.5 million and $39.9 million at December 31, 2020 and 2019, respectively. Brokered deposits represent brokered certificates of deposit, brokered money 52 market accounts, one way buy CDARS, and one way buy Insured Cash Sweep ("ICS"). Brokered deposits are utilized as an additional source of funding. At December 31, 2020 and 2019, time deposits, including CDARS and brokered certificates of deposit, with a denomination of $100 thousand or more totaled $519.8 million and $502.8 million, respectively, maturing during the periods indicated in the table below: Maturing: Within 3 months After 3 but within 6 months After 6 months but within 1 year After 1 year Total At December 31, 2020 2019 (In thousands) $ $ 141,784 $ 67,064 118,880 192,051 519,779 $ 114,636 139,852 104,355 143,907 502,750 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. 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, 2020. We utilize advances from the FHLB as part of our overall funding strategy, to meet short-term liquidity needs and to manage interest rate risk arising from the difference in asset and liability maturities. Total FHLB advances were $175.0 million at December 31, 2020 compared to $150.0 million at December 31, 2019. The increase of $25.0 million reflects normal fluctuations in our borrowings. Advances from 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: Average amount outstanding during the period Amount outstanding at end of period Highest month end balance during the period Weighted average interest rate at end of period (1) $ 2020 165,232 175,000 175,000 1.84 % Year Ended December 31, 2019 (Dollars in thousands) 145,921 150,000 150,000 $ $ 1.93 % 2018 163,419 135,000 174,000 2.55 % (1) The Company's FHLB borrowings are subject to longer term swap agreements and the weighted average rate reflects the all in swap rate under these long term swap agreements. 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. The Notes became callable, in part or in whole, beginning August 2020. Derivative Instruments The Company uses interest rate swap instruments to fix the interest rate on short-term FHLB borrowings or Brokered CDs, all of which are designated as cash flow hedges. The hedge strategy converts the rate of interest on short-term rolling FHLB advances or Brokered CDs to long-term fixed interest rates, thereby protecting the Bank from interest rate variability in the contractually specified interest rates. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 53 Information about derivative instruments at December 31, 2020 and 2019 was as follows: December 31, 2020: Original Notional Amount Original Maturity Maturity Date Received Paid (Dollars in thousands) Derivatives designated as hedging instruments: Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap (1) Derivatives not designated as hedging instruments: Interest rate swap Interest rate swap Interest rate swap Interest rate swap Total Derivatives $ $ $ $ $ 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 225,000 18,500 18,500 20,000 20,000 77,000 302,000 5.0 years 3.0 years 7.0 years 7.0 years 5.0 years 5.0 years 15.0 years 15.0 years 15.0 years 10.0 years 10.0 years 20.0 years 20.0 years July 1, 2021 December 23, 2022 August 25, 2024 August 25, 2024 April 9, 2025 April 23, 2025 January 1, 2034 January 1, 2035 August 26, 2035 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR March 10, 2030 March 10, 2030 March 10, 2039 March 10, 2039 1-month LIBOR 1-month LIBOR 1-month LIBOR 1-month LIBOR 1.22% 1.28% 2.04% 2.04% 0.55% 0.54% 3.01% 3.03% 3.05% 3.15% 3.15% 5.00% 5.00% Fair Value Asset (Liability) $ $ $ $ $ (128) (541) (1,622) (1,618) (224) (212) (6,086) (6,445) (6,691) (23,567) (648) 648 (3,796) 3,796 — (23,567) (1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party. 54 December 31, 2019: Derivatives designated as hedging instruments: Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Forward-starting interest rate swap Forward-starting interest rate swap (1) (1) Derivatives not designated as hedging instruments: (2) Interest rate swap Interest rate swap Total Derivatives Original Notional Amount Original Maturity Maturity Date Received Paid (Dollars in thousands) $ $ $ $ $ 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 225,000 5.0 years 5.0 years 5.0 years 7.0 years 7.0 years 15.0 years 3.0 years 15.0 years 15.0 years January 1, 2020 August 26, 2020 July 1, 2021 August 25, 2024 August 25, 2024 January 1, 2034 December 23, 2022 January 1, 2035 August 26, 2035 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR 3-month LIBOR March 20, 2039 March 20, 2039 1-month USD LIBOR 1-month USD LIBOR 20,000 20.0 years 20.0 years 20,000 40,000 265,000 1.83% 1.48% 1.22% 2.04% 2.04% 3.01% 1.28% 3.03% 3.05% 5.00% 5.00% Fair Value Asset (Liability) $ $ $ $ $ — 51 174 (396) (402) (3,328) 279 (3,557) (3,512) (10,691) (1,762) 1,762 — (10,691) (1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2020 and August 26, 2020, respectively. (2) Represents an interest rate swap with a commercial banking customer, which is offset by a derivative with a third party. 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 sales, 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 Bank’s liquidity position is 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 Atlantic Community Bankers Bank (ACBB) (formerly Bankers’ Bank 55 Northeast), Zion’s Bank and Texas Capital Bank and also maintains additional collateralized borrowing capacity with the FHLB in excess of levels used in the ordinary course of business. Our sources of liquidity include cash, unpledged investment securities, borrowings from the FHLB, lines of credit from ACBB, Zion's Bank and Texas Capital Bank, the brokered deposit market and national CD listing services. Capital Resources Shareholders’ equity totaled $176.6 million as of December 31, 2020, a decrease of $5.8 million compared to December 31, 2019, primarily a result of an $8.1 million unfavorable impact to accumulated other comprehensive loss driven by fair value marks related to hedge positions involving interest rate swaps, as well as dividends paid of $4.4 million and common stock repurchases of $1.0 million. The decrease was partially offset by net income for the year ended December 31, 2020 of $5.9 million. The marks on the interest rate swaps are driven by lower long term market interest rates in 2020 when compared to 2019. The Company's interest rate swaps are used to hedge interest rate risk. The Company's current interest rate swap positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. As of December 31, 2020, the tangible common equity ratio and tangible book value per share were 7.73% and $22.43, 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. At December 31, 2020, 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. At December 31, 2020, the Bank’s ratio of total common equity tier 1 capital to risk- weighted assets was 11.06%, total capital to risk-weighted assets was 12.28%, Tier 1 capital to risk-weighted assets was 11.06% and Tier 1 capital to average assets was 8.44%. As of January 1, 2015, the Parent Corporation 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 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 minimum Common Equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4.0% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4.0% to 6.0%; and retained the minimum total capital to risk weighted assets requirement at 8.0%. A “well capitalized” institution must generally maintain capital ratios 100 to 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 excludes 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” of 2.5% in addition to the minimum risk based capital requirement. The “capital conservation buffer” was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer became 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. Contractual Obligations The following table summarizes our contractual obligations to make future payments as of December 31, 2020. Payments for borrowings do not include interest. Payments related to leases are based on actual payments specified in the underlying contracts. 56 Contractual Obligations: FHLB advances Subordinated debt Operating lease agreements Time deposits with stated maturity dates Total contractual obligations Off-Balance Sheet Arrangements Total Less Than 1 Year Payments Due by Period 1–3 Years (in thousands) 4–5 Years After 5 Years $ $ 175,000 $ 25,500 22,929 627,230 850,659 $ 175,000 $ — 1,826 418,117 594,943 $ — $ — 2,389 178,920 181,309 $ — $ 25,500 1,488 30,193 57,181 $ — — 17,226 — 17,226 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 $237.1 million and $189.7 million, respectively at December 31, 2020 and 2019. 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. In addition, borrowers may be required to meet certain performance requirements to continue to draw on these commitments. We manage our 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. 57 As of December 31, 2020 Other Commitments: Loan commitments Undisbursed construction loans Unused home equity lines of credit Total other commitments As of December 31, 2019 Other Commitments: Loan commitments Undisbursed construction loans Unused home equity lines of credit Total other commitments Recently Issued Accounting Pronouncements Total Amount of Commitment Expiration per Period 1–3 Less Than Years 1 Year (in thousands) 4–5 Years After 5 Years 114,574 $ 117,457 5,029 237,060 $ 70,958 $ 9,862 250 81,070 $ 18,447 $ 40,635 210 59,292 $ 17,030 $ 14,599 — 31,629 $ 8,139 52,361 4,569 65,069 Total Amount of Commitment Expiration per Period 1–3 Less Than Years 1 Year (in thousands) 4–5 Years After 5 Years 102,986 $ 80,472 6,284 189,742 $ 56,483 $ 1,715 368 58,566 $ 12,628 $ 26,281 200 39,109 $ 15,166 $ 15,340 10 30,516 $ 18,709 37,136 5,706 61,551 $ $ $ $ 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 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 strategies are formulated and implemented. We model 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 the Company. Because both baseline 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. The simulation analyses are updated quarterly. We use a net interest income at risk simulation to measure the sensitivity of net interest income to changes in market rates. 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) prepayment projections for loans and securities that are projected under each interest rate scenario using internal and external mortgage analytics; (ii) new business loan rates that are based on recent new business origination experience; and (iii) deposit pricing assumptions for non-maturity deposits reflecting the Bank’s limited history, management judgment and core deposit studies. 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 Parallel Ramp Scenarios, 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 58 shift. Per Company policy, the Bank should not be outside these limits for twelve consecutive months unless the Bank's forecasted capital ratios are considered to be "well capitalized". As of December 31, 2020, the Bank has met all minimum regulatory capital requirements to be considered "well capitalized". The following tables set forth the estimated percentage change in our net interest income at risk over one-year simulation periods beginning December 31, 2020 and 2019: Parallel Ramp Rate Changes (basis points) (100) 200 Parallel Shock Rate Changes (basis points) (100) 100 200 300 Estimated Percent Change in Net Interest Income At December 31, 2020 2019 0.20 % (1.40) 3.00 % (6.80) Estimated Percent Change in Net Interest Income At December 31, 2020 2019 (0.30)% (1.00) (1.70) (2.00) 5.00 % (6.20) (12.90) (19.50) The net interest income at risk simulation results indicate that, as of December 31, 2020, 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. We conduct an 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 one of the income simulations. 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. 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. Internal policy for economic value of equity at risk simulations should not decline more than 10% for a 100 basis point shift; 20% for a 200 basis point shift; and 30% for a 300 basis point shift. Per Company policy, the Bank should not be outside these limits unless the Banks forecasted capital ratios are considered to be "well capitalized". 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, 2020 2019 (47.30)% 9.30 13.80 18.40 (2.00)% (6.50) (17.20) (25.50) 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 59 and the composition of our balance sheet may change to a different degree than estimated. ALCO recognizes that deposit balances could shift into higher yielding alternatives as market rates change. ALCO has modeled increased costs of deposits in the rising rate simulation scenarios presented above. In the minus 100 scenario above, the change in EVE of (47.3)% is outside of policy parameters. However, because the Bank continues to be well-capitalized, the downward rate scenarios is extremely unlikely in the current economic and interest rate environment. The result of this simulation was discussed with the ALCO committee and the Company has decided to not take any further action at this time. 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 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. 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. 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 fluctuate accordingly. Unlike the assets and liabilities of 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. 60 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, 2020 and 2019 Consolidated Statements of Income for the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Comprehensive (Loss) Income for the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Shareholders’ Equity for the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Cash Flows for the years ended December 31, 2020, 2019 and 2018 Notes to Consolidated Financial Statements 61 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Bankwell Financial Group, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Bankwell Financial Group, Inc. and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of income, comprehensive income, shareholders’ equity and cash flows for each of the three years in the period ended December 31, 2020, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting 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. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Qualitative Factor Adjustments to the Allowance for Loan Losses As described in Notes 1 and 5 to the consolidated financial statements, the Company’s allowance for loan losses totaled $21.0 million as of December 31, 2020, which consists of a general reserve of $16.0 million and a specific reserve of $5.0 million. Management estimates the allowance based on loan losses believed to be inherent in the Company’s loan portfolio, segmented by product type and risk classification, at the balance sheet date. The Company’s allowance for loan losses consists of a general reserve, which management develops based on historical loss ratios from its data and, where appropriate, its peers’ data adjusted for qualitative factors not reflected in the historical loss experience as well as a specific reserve based on management’s identification of impaired loans. Management considers several qualitative factors, both internal and external to the Company, including valuation of underlying collateral; macro and local economic factors; nature and volume of loan portfolio; concentration of credit risk; net charge-off trends and non-accrual trends, and past due and classified loan trends when determining the general reserve. The adjustment for qualitative factors requires a significant amount of judgment by management and involves a high degree of estimation uncertainty. We identified the qualitative factor component of the allowance for loan losses as a critical audit matter as auditing the underlying qualitative factors required significant auditor judgment as amounts determined by management rely on analysis that is highly subjective and includes significant estimation uncertainty. 62 Our audit procedures related to the qualitative factor component of the allowance for loan losses include the following, among others: • We obtained an understanding of the relevant controls related to management’s qualitative factor adjustments to the allowance for loan losses and tested such controls for design and operating effectiveness including controls related to management’s establishment, review and approval of the qualitative factors and the completeness and accuracy of data used in determining the qualitative factors. • We tested the completeness and accuracy of data used by management in determining qualitative factor adjustments by agreeing them to internal and external source data. • We assessed the reasonableness of management’s qualitative factor adjustments, including macro and local economic factors, nature and volume of loan portfolio, concentration of credit risk, net charge-off trends and non-accrual trends, and past due and classified loan trends by agreeing them to internal and external source data, evaluating the magnitude and directional consistency of such adjustments with prior periods and data points, and evaluating the consistency of such changes in accordance with the Company’s loan policy. • We tested management’s conclusions regarding the appropriateness of the qualitative factor adjustments and agreed the impact to the allowance for loan losses calculation. /s/ RSM US LLP We have served as the Company’s auditor since 2017. New Haven, Connecticut March 10, 2021 63 Bankwell Financial Group, Inc. Consolidated Balance Sheets (In thousands, except share data) December 31, 2020 2019 ASSETS Cash and due from banks Federal funds sold Cash and cash equivalents Investment securities Marketable equity securities, at fair value Available for sale investment securities, at fair value Held to maturity investment securities, at amortized cost (fair values of $20,032 and $18,307 at December 31, 2020 and 2019, respectively) Total investment securities Loans receivable (net of allowance for loan losses of $21,009 and $13,509 at December 31, 2020 and 2019, respectively) 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 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits Noninterest bearing deposits Interest bearing deposits Total deposits Advances from the Federal Home Loan Bank Subordinated debentures ($25,500 face, less unamortized debt issuance costs of $242 and $293 at December 31, 2020 and 2019, respectively) Accrued expenses and other liabilities Total liabilities Commitments and contingencies (Note 12) Shareholders’ equity Common stock, no par value; 10,000,000 shares authorized, 7,919,278 and 7,868,803 shares issued and outstanding at December 31, 2020 and 2019, respectively Retained earnings Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity $ $ $ 405,340 $ 4,258 409,598 2,207 88,605 16,078 106,890 1,601,672 6,579 7,860 21,762 42,651 2,589 76 11,300 42,770 2,253,747 $ 270,235 $ 1,557,081 1,827,316 175,000 25,258 49,571 2,077,145 121,338 70,839 (15,575) 176,602 78,051 — 78,051 2,118 82,439 16,308 100,865 1,588,840 5,959 7,475 28,522 41,683 2,589 214 5,788 22,196 1,882,182 191,518 1,300,385 1,491,903 150,000 25,207 32,675 1,699,785 120,589 69,324 (7,516) 182,397 $ 2,253,747 $ 1,882,182 See Notes to Consolidated Financial Statements 64 Interest and dividend income Interest and fees on loans Interest and dividends on securities Interest on cash and cash equivalents Total interest and dividend income Interest expense Interest expense on deposits Interest expense on borrowings Total interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Noninterest income Bank owned life insurance Service charges and fees Gains and fees from sales of loans Gain (loss) on sale of other real estate owned, net Net gain on sale of available for sale securities Other Total noninterest income Noninterest expense Salaries and employee benefits Occupancy and equipment Data processing Professional services Director fees FDIC insurance Marketing Other Total noninterest expense Income before income tax expense Income tax expense Net income Earnings Per Common Share: Basic Diluted Weighted Average Common Shares Outstanding: Basic Diluted Dividends per common share Bankwell Financial Group, Inc. Consolidated Statements of Income (In thousands, except share data) 2020 Year Ended December 31, 2019 2018 73,665 $ 3,237 585 77,487 77,339 $ 3,750 1,859 82,948 18,180 4,472 22,652 54,835 7,605 47,230 967 788 43 19 — 1,067 2,884 21,355 10,926 3,216 2,110 1,214 791 630 2,571 42,813 7,301 1,397 5,904 $ 0.75 $ 0.75 $ 24,698 4,489 29,187 53,761 437 53,324 1,008 1,023 1,791 (102) 76 1,448 5,244 19,434 7,594 2,067 1,857 863 74 971 2,766 35,626 22,942 4,726 18,216 $ 2.32 $ 2.31 $ 74,715 3,921 1,428 80,064 18,951 4,787 23,738 56,326 3,440 52,886 1,057 1,090 984 — 222 547 3,900 18,973 6,790 2,033 2,103 1,044 779 1,587 2,324 35,633 21,153 3,720 17,433 2.23 2.21 7,728,328 7,748,453 7,757,355 7,784,631 0.56 $ 0.52 $ 7,722,175 7,775,480 0.48 $ $ $ $ $ See Notes to Consolidated Financial Statements 65 Bankwell Financial Group, Inc. Consolidated Statements of Comprehensive (Loss) Income (In thousands) Net income Other comprehensive (loss) income: Unrealized gains (losses) on securities: Unrealized holding gains (losses) on available for sale securities Reclassification adjustment for gains realized in net income Net change in unrealized gains (losses) Income tax (expense) benefit Unrealized gains (losses) on securities, net of tax Unrealized losses on interest rate swaps: Unrealized losses on interest rate swaps Income tax benefit Unrealized losses on interest rate swaps, net of tax Total other comprehensive loss, net of tax Comprehensive (loss) income 2020 Year Ended December 31, 2019 2018 $ 5,904 $ 18,216 $ 17,433 2,355 — 2,355 (539) 1,816 (12,876) 3,001 (9,875) (8,059) (2,155) $ 2,997 (76) 2,921 (614) 2,307 (11,121) 2,335 (8,786) (6,479) 11,737 $ (1,632) (222) (1,854) 390 (1,464) (1,604) 337 (1,267) (2,731) 14,702 $ See Notes to Consolidated Financial Statements 66 Bankwell Financial Group, Inc. Consolidated Statements of Shareholders’ Equity (In thousands, except share data) Number of Outstanding Shares Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total 7,751,424 $ — — — — 22,400 44,300 (3,873) 28,020 7,842,271 — — — — 64,150 (5,800) 2,350 (34,168) — 7,868,803 — — — — 109,199 (1,725) 1,500 (58,499) 7,919,278 $ 118,301 $ — — — 1,290 400 — — 536 120,527 — — — 1,020 — — 30 (988) — 120,589 — — — 1,770 — — 16 (1,037) 121,338 $ 41,032 $ 17,433 — (3,759) — — — — — 54,706 18,216 — (4,079) — — — — — 481 69,324 5,904 — (4,389) — — — — — 70,839 $ 1,694 $ — (2,731) — — — — — — (1,037) — (6,479) — — — — — — — (7,516) — (8,059) — — — — — — (15,575) $ 161,027 17,433 (2,731) (3,759) 1,290 400 — — 536 174,196 18,216 (6,479) (4,079) 1,020 — — 30 (988) 481 182,397 5,904 (8,059) (4,389) 1,770 — — 16 (1,037) 176,602 Balance at January 1, 2018 Net income Other comprehensive loss, net of tax Cash dividends declared ($0.48 per share) Stock-based compensation expense Warrants exercised Issuance of restricted stock Forfeitures of restricted stock Stock options exercised Balance at December 31, 2018 Net income Other comprehensive loss, net of tax Cash dividends declared ($0.52 per share) Stock-based compensation expense Issuance of restricted stock Forfeitures of restricted stock Stock options exercised Repurchase of common stock ASU 2016-12 transition adjustment, net of tax Balance at December 31, 2019 Net income Other comprehensive loss, net of tax Cash dividends declared ($0.56 per share) Stock-based compensation expense Issuance of restricted stock Forfeitures of restricted stock Stock options exercised Repurchase of common stock Balance at December 31, 2020 See Notes to Consolidated Financial Statements 67 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 (used in) provided by operating activities: Net amortization (accretion) of premiums and discounts on investment securities Provision for loan losses (Credit) provision for deferred income taxes Net gain on sales of available for sale securities Change in fair value of marketable equity securities Depreciation and amortization Impairment of right-of-use asset Amortization of debt issuance costs Increase in cash surrender value of bank-owned life insurance Gains and fees from sales of loans Stock-based compensation Net amortization of purchase accounting adjustments Loss on sale of premises and equipment (Gain) loss on sale and write-downs of other real estate owned, net Write down of assets held for sale Net change in: Deferred loan fees Accrued interest receivable Other assets Accrued expenses and other liabilities Net cash (used in) 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 Purchases of marketable equity securities Net increase in loans Loan principal sold from loans not originated for sale Proceeds from sales of loans not originated for sale Disposals (purchases) of premises and equipment, net (Purchase) reduction of Federal Home Loan Bank stock Proceeds from sale of other real estate owned Net cash (used in) provided by investing activities Year Ended December 31, 2019 2018 2020 $ 5,904 $ 18,216 $ 17,433 95 7,605 (3,516) — (54) 3,276 280 52 (967) (43) 1,770 138 35 (19) 1,652 809 (620) (19,582) 1,673 (1,512) 14,522 238 2,200 — (20,636) (35) (21,426) (2,265) 2,307 3,337 (385) 199 (21,944) (368) 437 276 (76) (66) 3,377 — 52 (1,008) (1,791) 1,020 76 10 102 — (360) 416 (12,883) (799) 6,631 9,881 226 16,455 4,900 (12,270) (43) (3,359) (25,510) 27,301 (645) 635 1,115 18,686 (54) 3,440 1,284 (222) — 1,732 — 52 (1,057) (984) 1,290 239 44 — — (745) (465) (1,008) (1,002) 19,977 9,430 180 12,377 — (24,379) (2,003) (68,923) (8,980) 9,964 (3,351) 1,073 — (74,612) See Notes to Consolidated Financial Statements 68 Bankwell Financial Group, Inc. Consolidated Statements of Cash Flows - Continued (In thousands) Cash flows from financing activities Net change in time certificates of deposit Net change in other deposits Net change in FHLB advances Proceeds from exercise of warrants Proceeds from exercise of options Dividends paid on common stock Repurchase of common stock Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents: Beginning of year End of period Supplemental disclosures of cash flows information: Cash paid for: Interest Income taxes Noncash investing and financing activities Loans transferred to other real estate owned Premises and equipment transferred to held for sale Net change in unrealized losses or gains on available-for-sale securities Net change in unrealized losses or gains on interest rate swaps Establishment of right-of-use-asset and lease liability ASU 2016-02 transition adjustment, net of tax 89 335,324 25,000 — 16 (4,389) (1,037) 355,003 331,547 12,419 (22,760) (10,000) — 30 (4,079) (988) (25,378) (61) 78,051 409,598 $ 78,112 78,051 $ 23,044 $ 4,030 23,937 $ 2,893 180 4,265 2,355 (12,876) 169 — 1,217 — 2,921 (11,121) 11,493 481 (16,541) 120,380 (39,000) 400 536 (3,759) — 62,016 7,381 70,731 78,112 18,662 3,685 — — (1,854) (1,604) — — $ $ See Notes to Consolidated Financial Statements 69 1. Nature of Operations and Summary of Significant Accounting Policies Bankwell Financial Group, Inc. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Bankwell Financial Group, Inc. (the "Parent Corporation") is a bank holding company headquartered in New Canaan, Connecticut. The Parent Corporation offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, "we", "our", "us", or the "Company"). In November 2013, the Bank acquired The Wilton Bank and in October 2014, the Bank acquired Quinnipiac Bank and Trust Company. 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 New York metropolitan area and throughout Connecticut, with the majority of the Company's loans in Fairfield and New Haven Counties, Connecticut, with branch locations in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, and Hamden, Connecticut. Many of the Company’s activities are with customers located in the New York Metropolitan area and throughout 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. The Company does not have any significant concentrations in any one industry or customer. Principles of consolidation The consolidated financial statements include the accounts of the Company and the Bank, including its wholly owned passive investment company subsidiary. 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 preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosures of contingent assets and liabilities as of the date of the consolidated 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 allowance for loan losses, derivative instrument valuation, investment securities valuation, evaluation of investment securities for other than temporary impairment and deferred income taxes 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 Company as one segment or unit. Basis of consolidated financial statement presentation The consolidated financial statements have been prepared in accordance with GAAP and general practices within the banking industry. Such policies have been followed on a consistent basis. 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 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 investments are categorized as marketable equity, available for sale or held to maturity securities. 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. Marketable equity securities are carried at fair value, with any changes in fair value reported in earnings. 70 Investment securities in the available for sale and held-to-maturity portfolios are reviewed quarterly for other-than-temporary impairment ("OTTI"). If the fair value of a debt security is below amortized cost, 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. 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. Transfers of debt securities into the held to maturity classification from the available for sale classification are made at fair value on the date of transfer. The unrealized holding gain or loss on the date of transfer is retained in accumulated other comprehensive income and in the carrying value of the held to maturity securities. Such amounts are amortized over the remaining contractual lives of the securities. When transfers of debt securities into the available for sale classification from the held to maturity classification occur, any unrealized holding gains or losses on the transfer date are recognized in other comprehensive income. 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 by a valuation allowance through a charge to noninterest income. Realized gains and losses on the sale of loans are recognized on the trade 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. Transfers of financial assets are accounted for as sales when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, put presumptively beyond the reach of the transferor and its creditors, even in bankruptcy or other receivership, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the transferor does not maintain effective control over the transferred assets through either (a) an agreement that both entitles and obligates the transferor to repurchase or redeem the assets before maturity or (b) the ability to unilaterally cause the holder to return specific assets, other than through a cleanup call. 71 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. Impaired loans also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. 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 a 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. 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 may not 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 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. 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. Section 4013 of the CARES Act permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of January 1, 2022, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs. 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. 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 may be 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 acquired 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 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. 72 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. Allowance For Loan Losses (ALLL) 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, including appropriate peer data, adjusted for qualitative factors. Management considers several qualitative factors, both internal and external to the Company, including valuation of underlying collateral; macro and local economic factors; nature and volume of loan portfolio; concentration of credit risk; net charge-off trends and non-accrual trends, and past due and classified loan trends when determining the general reserve. 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. Reserve for Unfunded Commitments The reserve for unfunded commitments provides for probable losses inherent with funding the unused portion of legal commitments to lend. The unfunded reserve calculation includes factors that are consistent with the ALLL methodology for our loan portfolio as well as a draw down factor applied to the various commitments. The reserve for unfunded commitments is included within other liabilities in the accompanying Consolidated Balance Sheets, and changes in the reserve are reported as a component of other expense in the accompanying Consolidated Statements of Income. See Note 12: Commitments and Contingencies for further information. 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. 73 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. 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. Other Real Estate Owned 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 three to thirty-nine years. Gains and losses on dispositions are recognized upon realization. Maintenance and repairs are expensed as incurred and improvements are capitalized. Assets Held for Sale Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. Depreciation is not recognized on any assets that are classified as held for sale. Leases The Company recognizes and measures it leases in accordance with ASC 842, "Leases". The Company leases real estate for its branch offices under various operating lease agreements. In addition, the Company's headquarter building is on land leased from the local municipality. The Company determines if an arrangement is a lease, or contains a lease, at inception of a contract and when the terms of an existing contract are changed. The Company recognizes a lease liability and right-of-use-asset (ROUA) at the commencement date of the lease. The lease liability is initially and subsequently recognized based on the present value of its future lease payments. The discount rate is the implicit rate if it's readily determinable or otherwise the Company uses its incremental borrowing rate. The implicit rates of our leases are not readily determinable and accordingly, we use our incremental borrowing rate based on the information available at the commencement date for all leases. The ROUA is subsequently measured throughout the lease term at the amount of the remeasured lease liability (i.e., present value of the remaining lease payments), plus any unamortized initial direct costs, plus (minus) any prepaid (accrued) lease payments, less the unamortized balance of any lease incentives received, and any impairment recognized. Lease cost for lease payments is recognized on a straight-line basis over the lease term. The ROUA is included in premises and equipment, net and the lease liability is included in accrued expenses and other liabilities on the consolidated balance sheets. Impairment of Long-Lived Assets Long-lived assets, including premises and equipment, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. If impairment is indicated by that review, the asset is written down to its estimated fair value through a charge to noninterest expense. 74 Servicing Rights When loans are sold on a servicing retained basis, servicing rights are initially recorded at fair value with the income statement effect recorded in noninterest income. All classes of servicing assets are subsequently measured using the amortization method, which requires servicing rights to be amortized into noninterest income in proportion to, and over the period of, the life of the underlying loans. Servicing rights are evaluated for impairment based upon the fair value of the rights as compared to the carrying amount. Any impairment is reported as a valuation allowance, to the extent that fair value is less than the carrying amount. If the Company later determines that all or a portion of the impairment no longer exists, a reduction of the allowance may be recorded as an increase to income. Changes in the valuation allowance are reported with service charges and fees income on the consolidated statements of income. The fair values of servicing rights are subject to fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses. Loans serviced for others are not included in the accompanying consolidated balance sheets. Servicing fee income, which is included in service charges and fees on the income statement, is recorded for fees earned for servicing loans. Fees earned for servicing loans are based on a contractual percentage of the outstanding principal amount of the loan and are recorded as income when earned. The amortization of servicing rights is recorded in noninterest income. Income Taxes The Company recognizes income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that all or some portion of the deferred tax assets will not be realized. In the ordinary course of business there is inherent uncertainty in quantifying the Company’s income tax positions. Income tax positions and recorded 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. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company has $394 thousand and $269 thousand of liabilities for uncertain tax positions at December 31, 2020 and 2019, respectively. 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. Advertising costs Advertising costs are expensed as incurred. 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. For performance based grants, the Company records an expense over the vesting period based on (a) the probability that the performance metric will be met and (b) the fair market value of the Company’s stock at the date of the grant. The fair value of stock options is determined using the Black-Scholes 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. The Company recognizes forfeitures as they occur. Earnings Per Share Unvested restricted stock awards that contain non-forfeitable rights to dividends, are participating securities, and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted stock awards qualify as participating securities. 75 Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating unvested restricted stock awards. Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. 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 unrealized 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, 2020, 2019 and 2018 is reported in the Consolidated Statements of Comprehensive Income. Fair Values of Financial Instruments The Company uses fair value measurements to record fair value adjustments to certain assets and to determine fair value disclosures. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is best determined based upon quoted market prices. However, in certain instances, there are no quoted market prices for certain assets or liabilities. 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 rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the asset or liability. Fair value measurements focus on exit prices in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. If there has been a significant decrease in the volume and level of activity for the asset or liability, a change in valuation technique or the use of multiple valuation techniques may be appropriate. In such instances, determining the price at which willing market participants would transact at the measurement date under current market conditions depends on the facts and circumstances and requires the use of significant judgment. Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, 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 at either December 31, 2020 or December 31, 2019. 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. Derivative Instruments 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 interest rate swap assets are presented in other assets and the interest rate swap liabilities are presented in accrued expenses and other liabilities in the consolidated balance sheets. The hedge strategy converts the contractually specified interest rate on short-term rolling FHLB advances or Brokered CDs to long-term fixed interest rates, thereby protecting the Bank from interest rate variability. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes. The Company also has derivatives not designated as hedges. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. 76 Related Party Transactions Directors and officers of the Company and their affiliates have been customers of and have had transactions with the Company, 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, on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other customers who are not directors or officers. In the opinion of management, the transactions with related parties did not involve more than normal risks of collectability, nor favored treatment or terms, nor present other unfavorable features. Note 22 contains details regarding related party transactions. Common Share Repurchases The Company is incorporated in the state of Connecticut. Connecticut law does not provide for treasury shares, rather shares repurchased by the Company constitute authorized, but unissued shares. GAAP states that accounting for treasury stock shall conform to state law. Therefore, the cost of shares repurchased by the Company has been allocated to common stock balances. Reclassification Certain prior period amounts have been reclassified to conform to the 2020 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. Recently issued accounting pronouncements not yet adopted ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): “Measurement of Credit Losses on Financial Instruments.” This ASU changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and can result in the earlier recognition of credit losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. On July 17, 2019, the FASB proposed deferring the effective date of ASC 326 for smaller reporting companies as defined by the SEC. The FASB proposed a three-year deferral for smaller reporting companies, with an effective date of January 1, 2023. On October 16, 2019, the FASB voted in favor of finalizing its proposal to defer the effective date of this standard. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. Management continues to evaluate the impact of its future adoption of this guidance on the Company’s financial statements. ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): “Simplifying the Test for Goodwill Impairment.” This ASU simplifies the test for goodwill impairment by eliminating Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity was required to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of assets acquired and liabilities assumed in a business combination. Instead, under the amendments in this update, an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, this ASU also eliminated the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. Therefore, the same impairment assessment applies to all reporting units. An entity is required to disclose the amount of goodwill allocated to each reporting unit with a zero or negative carrying amount of net assets. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. On October 16, 2019, the FASB voted in favor of a proposal to defer the effective date of this standard in the same manner it is deferring the effective date of ASC 326. The FASB issued ASU No. 2019-10, which officially delayed the adoption of this standard for smaller reporting companies until fiscal years beginning after December 15, 2022. The Company does qualify to defer the adoption of this standard and has not yet adopted this standard. The Company does not expect the application of this guidance to have a material impact on the Company’s financial statements. 77 Recently adopted accounting pronouncements ASU No. 2018-13, Fair Value Measurement (Topic 820): “Changes to the Disclosure Requirements for Fair Value Measurement.” The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820, Fair Value Measurement. The following disclosure requirements were removed from topic 820 for public entities: (1) the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy; (2) the policy for timing of transfers between levels; and (3) the valuation processes for Level 3 fair value measurements. This update also modified and added disclosure requirements to Topic 820, including adding (1) the changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and (2) the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. For certain unobservable inputs, an entity may disclose other quantitative information (such as the median or arithmetic average) in lieu of the weighted average if the entity determines that other quantitative information would be a more reasonable and rational method to reflect the distribution of unobservable inputs used to develop Level 3 fair value measurements. The guidance was effective for the Company on January 1, 2020. The application of this guidance did not have a material impact on the Company's financial statements. ASU No. 2020-04, Reference Rate Reform (Topic 848): "Facilitation of the Effects of Reference Rate Reform on Financial Reporting." This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this update apply only to contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued because of reference rate reform. The amendments in this update are effective for all entities as of March 12, 2020 through December 31, 2022. Optional expedients include that modifications of contracts should be accounted for by prospectively adjusting the effective interest rate and modifications of leases should be accounted for as a continuation of the existing contract with no reassessments of lease classification and discount rate or remeasurements of lease payments. This ASU also provides many practical expedients for derivative accounting. In addition, an entity may elect to sell and/or transfer held to maturity securities that reference a rate affected by the reference rate reform classified as held to maturity prior to January 1, 2020. In particular, the Company made the following elections as it relates to hedging relationships; (1) Option to not reassess a previous accounting determination (paragraph 848-20-35- 2); (2) Option to not dedesignate a hedging relationship due to a change in critical term (paragraph 848-20-35-3); (3) Option to change the contractual terms of a hedging instrument, hedged item, or forecasted transaction and to not dedesignate a hedging relationship (paragraph 848-30-25-5); (4) Adopt expedient ASC 848- 50-25-2 to assert probability of the hedged interest regardless of any expected modification in terms related to reference rate reform; and (5) To continue the method of assessing effectiveness as documented in the original hedge documentation and apply the expedient in ASC 848-50-35-17 so that the reference rate on the hypothetical derivative matches the reference rate on the hedging instrument. For new hedging relationships designated subsequent to December 31, 2020, the Company elects to apply the expedient in ASC 848-50-25-11 to assume that the reference rate will not be replaced for the remainder of the hedging relationship. The application of this guidance did not have a material impact on the Company's financial statements. 2. Shareholders’ Equity Common Stock The Company has 10,000,000 shares authorized and 7,919,278 shares issued and outstanding at December 31, 2020 and 10,000,000 shares authorized and 7,868,803 shares issued and outstanding at December 31, 2019. The Company's stock is traded on the NASDAQ stock market under the ticker symbol BWFG. Warrants In connection with a 2014 acquisition and the associated merger agreement, the Company had issued warrants convertible to shares of common stock at a pre- determined price and exchange ratio. The Company does not have any warrants outstanding as of December 31, 2020. 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. Issuer Purchases of Equity Securities On December 19, 2018, the Company's Board of Directors authorized a share repurchase program of up to 400,000 shares of the Company's Common Stock. The Company intends to accomplish the share repurchases through open market 78 transactions, though the Company could accomplish repurchases through other means, such as privately negotiated transactions. The timing, price and volume of repurchases will be based on market conditions, relevant securities laws and other factors. The share repurchase plan does not obligate the Company to acquire any particular amount of Common Stock, and it may be modified or suspended at any time at the Company's discretion. During the year ended December 31, 2020, the Company purchased 58,499 shares of its Common Stock at a weighted average price of $17.69 per share. During the year ended December 31, 2019, the Company purchased 34,168 shares of its Common Stock at a weighted average price of $28.87 per share. 3. Goodwill and other intangible assets Information on goodwill for the years ended December 31, 2020, 2019 and 2018 is as follows: Balance, beginning of the period Impairment Balance, end of the period Year Ended December 31, 2020 Year Ended December 31, 2019 (In thousands) Year Ended December 31, 2018 $ $ 2,589 — 2,589 $ $ 2,589 — 2,589 $ $ 2,589 — 2,589 The Company tests for goodwill impairment annually as of June 30 . No impairment was required to be recorded on goodwill in 2020, 2019 or 2018. th The table below provides information regarding the carrying amounts and accumulated amortization of amortized intangible assets as of the dates set forth below. The remaining net intangible asset as of December 31, 2020 will be amortized over a period of approximately 2 years. December 31, 2020 Core deposit intangible December 31, 2019 Core deposit intangible Gross Intangible Asset Accumulated Amortization (In thousands) Net Intangible Asset $ $ 1,029 $ 953 $ 1,029 $ 815 $ 76 214 79 4. 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, 2020 were as follows: Amortized Cost December 31, 2020 Gross Unrealized Gains Losses Fair Value (In thousands) Available for sale securities: U.S. Government and agency obligations Less than one year Due from five through ten years Due after ten years Total U.S. Government and agency obligations Corporate bonds Due from one through five years Due from five through ten years Due after ten years Total Corporate bonds Total available for sale securities Held to maturity securities: State agency and municipal obligations Due after ten years Government-sponsored mortgage backed securities No contractual maturity Total held to maturity securities 9,976 $ 8,038 55,560 73,574 4,000 6,000 1,500 11,500 172 $ 848 2,284 3,304 57 163 7 227 — $ — — — — — — — 10,148 8,886 57,844 76,878 4,057 6,163 1,507 11,727 85,074 $ 3,531 $ — $ 88,605 16,018 $ 3,944 $ — $ 19,962 60 16,078 $ 10 3,954 $ — — $ 70 20,032 $ $ $ $ 80 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, 2019 were as follows: Available for sale securities: U.S. Government and agency obligations Less than one year Due from one through five years Due from five through ten years Due after ten years Total available for sale securities Held to maturity securities: State agency and municipal obligations Due after ten years Government-sponsored mortgage backed securities No contractual maturity Total held to maturity securities Amortized Cost December 31, 2019 Gross Unrealized Gains Losses Fair Value (In thousands) 2,100 $ 9,950 8,311 60,902 81,263 $ — $ 81 218 879 1,178 $ (1) $ — (1) — (2) $ 2,099 10,031 8,528 61,781 82,439 16,231 $ 1,991 $ — $ 18,222 77 16,308 $ 8 1,999 $ — — $ 85 18,307 $ $ $ $ There were no sales of investment securities during the year ended December 31, 2020. The gross realized gains on the sales of investment securities totaled $0.1 million for the year ended December 31, 2019. The gross realized losses on the sales of investment securities totaled $17.0 thousand for the year ended December 31, 2019. At December 31, 2020 and December 31, 2019, none of the Company's securities were pledged as collateral with the Federal Home Loan Bank ("FHLB") or any other institution. As of December 31, 2020, the actual duration of the Company's available for sale securities were significantly shorter than the notional maturities. At December 31, 2020, the Company held marketable equity securities with a fair value of $2.2 million and an amortized cost of $2.1 million. At December 31, 2019, the Company held marketable equity securities with a fair value of $2.1 million and an amortized cost of $2.0 million. These securities represent an investment in mutual funds that have a primary objective to make investments for CRA purposes. There were two investment securities as of December 31, 2019, in which the fair value of the security was less than the amortized cost of the security. There were no such investment securities as of December 31, 2020. The following table provides information regarding investment securities with unrealized losses, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at December 31, 2019: Length of Time in Continuous Unrealized Loss Position Less Than 12 Months 12 Months or More Total Fair Value Unrealized Loss Percent Decline from Amortized Cost Fair Value Unrealized Loss Percent Decline from Amortized Cost Fair Value Unrealized Loss Percent Decline from Amortized Cost (Dollars in thousands) December 31, 2019 U.S. Government and agency obligations Total investment securities $ $ 99 99 $ $ (1) (1) 1.01 % $ 1.01 % $ 998 998 $ $ (1) (1) 0.13 % $ 1,097 0.13 % $ 1,097 $ $ (2) (2) 0.21 % 0.21 % 81 5. Loans Receivable and Allowance for Loan Losses The following table sets forth a summary of the loan portfolio at December 31, 2020 and December 31, 2019: Real estate loans: Residential Commercial Construction Commercial business Consumer (1) Total loans Allowance for loan losses Deferred loan origination fees, net Unamortized loan premiums Loans receivable, net December 31, 2020 December 31, 2019 (In thousands) 113,557 $ 1,148,383 87,007 1,348,947 276,601 79 1,625,627 (21,009) (2,946) — 1,601,672 $ 147,109 1,128,614 98,583 1,374,306 230,028 150 1,604,484 (13,509) (2,137) 2 1,588,840 $ $ (1) The December 31, 2020 balance includes $34.8 million of PPP loans made under the CARES Act. Lending activities are conducted principally in the New York metropolitan area and throughout Connecticut, with the majority in Fairfield and New Haven Counties of Connecticut, and consist of commercial real estate loans, commercial business loans and, to a lesser degree, a variety of consumer loans. Loans may also be granted for the construction of commercial properties. The majority of commercial mortgage loans are collateralized by first or second mortgages on real estate. 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 extends credit of up to 80% of the market value of the collateral, depending on the borrower's creditworthiness and the type of collateral. The borrower’s ability to service the debt is monitored on an ongoing basis. 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 for commercial loans, to be based on the borrower’s ability to generate continuing cash flows. In the fourth quarter of 2017 management made the strategic decision to no longer originate residential mortgage loans. As of the beginning of the third quarter of 2019, the Company no longer offered home equity loans or lines of credit. The Company’s policy for residential lending generally required that the amount of the loan may not exceed 80% of the original appraised value of the property. In certain situations, the amount may have exceeded 80% 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, or a religious or civic organization. Credit quality of loans and the allowance for loan losses Management segregates the loan portfolio into defined segments, which are used to develop and document 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 first mortgage loans secured by one-to-four family owner occupied residential properties for personal use located in the Company's market area. This segment also includes home equity loans and home equity lines of credit secured by owner occupied one- to-four family residential properties. Loans of this type were written at a combined maximum of 80% of the appraised value of the property and the Company requires a first or second lien position on the property. These loans can be affected by economic conditions and the values of the underlying properties. Commercial Real Estate: This portfolio segment includes loans secured by commercial real estate, multi-family dwellings and investor-owned one-to-four family dwellings. Loans secured by commercial real estate generally have larger loan balances and more credit risk than owner occupied one-to-four family mortgage loans. 82 Construction: This portfolio segment includes commercial construction loans for commercial development projects, including apartment buildings and condominiums, as well as office buildings, retail and other income producing properties and land loans, which are loans made with land as collateral. Construction and land development financing generally involves greater credit risk than long-term financing on improved, owner-occupied or leased 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 through sale or refinance. 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 paying debt service, which exposes the Company to greater risk of non-payment and loss. 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 have 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. This segment also includes PPP loans made under the CARES Act to small businesses impacted by COVID-19, to cover payroll and other operating expenses. Loans extended under the PPP are fully guaranteed by the U.S. Small Business Administration ("SBA"). Consumer: This portfolio segment includes loans secured by savings or certificate accounts, 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. Allowance for loan losses During the fourth quarter of 2018, the Company recognized a charge-off totaling $6.2 million attributable to one lending relationship, affecting the commercial real estate and commercial business segments. The following tables set forth the activity in the Company’s allowance for loan losses for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, by portfolio segment: For the Year Ended December 31, 2020 Beginning balance Charge-offs Recoveries (Credits) Provisions Ending balance For the Year Ended December 31, 2019 Beginning balance Charge-offs Recoveries Provisions (Credits) Ending balance $ $ $ $ Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total 730 — — (120) 610 $ $ 10,551 $ — 15 5,859 16,425 $ (In thousands) 324 $ — — (103) 221 $ 1,903 $ (83) — 1,933 3,753 $ 1 $ (40) 3 36 — $ 13,509 (123) 18 7,605 21,009 Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total 857 (875) — 748 730 $ $ 11,562 $ (594) — (417) 10,551 $ (In thousands) 140 $ — — 184 324 $ 2,902 $ (897) 19 (121) 1,903 $ 1 (75) 32 43 1 $ $ 15,462 (2,441) 51 437 13,509 83 Residential Real Estate Commercial Real Estate Construction Commercial Business Consumer Total For the Year Ended December 31, 2018 Beginning balance Charge-offs Recoveries (Credits) provisions Ending balance $ $ 1,721 $ (420) — (444) 857 $ 12,777 $ (5,614) 18 4,381 11,562 $ (In thousands) 907 $ — — (767) 140 $ 3,498 $ (815) 19 200 2,902 $ 1 (77) 7 70 1 $ $ 18,904 (6,926) 44 3,440 15,462 Loans evaluated for impairment and the related allowance for loan losses as of December 31, 2020 and December 31, 2019 were as follows: December 31, 2020 Loans individually evaluated for impairment: Residential real estate Commercial real estate Construction Commercial business Subtotal Loans collectively evaluated for impairment: Residential real estate Commercial real estate Construction Commercial business Consumer Subtotal Total Portfolio Allowance (In thousands) $ $ 4,604 $ 37,579 8,997 6,507 57,687 108,953 1,110,804 78,010 270,094 79 1,567,940 1,625,627 $ — 4,960 — 85 5,045 610 11,465 221 3,668 — 15,964 21,009 As of December 31, 2020, of the $57.7 million of loans individually evaluated for impairment a total of $10.0 million of these loans were determined to not be impaired. 84 December 31, 2019 Loans individually evaluated for impairment: Residential real estate Commercial real estate Commercial business Subtotal Loans collectively evaluated for impairment: Residential real estate Commercial real estate Construction Commercial business Consumer Subtotal Total Credit quality indicators Portfolio Allowance (In thousands) $ $ 4,020 $ 14,203 4,330 22,553 143,089 1,114,411 98,583 225,698 150 1,581,931 1,604,484 $ — 372 134 506 730 10,179 324 1,769 1 13,003 13,509 To measure credit risk for the loan portfolios, the Company employs a credit risk rating system. This risk rating represents an assessed level of the loan’s risk based on the character and creditworthiness of the borrower/guarantor, the capacity of the borrower to adequately service the debt, any credit enhancements or additional sources of repayment, and the quality, value and coverage of the collateral, if any. The objectives of the Company’s risk rating system are to provide the Board of Directors and senior management with an objective assessment of the overall quality of the loan portfolio, to promptly and accurately identify loans with well-defined credit weaknesses so that timely action can be taken to minimize a potential credit loss, to identify relevant trends affecting the collectability of the loan portfolio, to isolate potential problem areas and to provide essential information for determining the adequacy of the allowance for loan losses. The Company’s credit risk rating system has nine grades, with each grade corresponding to a progressively greater risk of default. Risk ratings of (1) through (5) are "pass" categories and risk ratings of (6) through (9) are criticized asset categories as defined by the regulatory agencies. A “special mention” (6) credit has a potential weakness which, if uncorrected, may result in a deterioration of the repayment prospects or inadequately protect the Company’s credit position at some time in the future. “Substandard” (7) loans are credits that have a well-defined weakness or weaknesses that jeopardize the full repayment of the debt. An asset rated “doubtful” (8) has all the weaknesses inherent in a substandard asset and which, in addition, make collection or liquidation in full highly questionable and improbable, when considering existing facts, conditions, and values. Loans classified as “loss” (9) are considered uncollectible and of such little value that their continuance as bankable assets is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value; rather, it is not practical or desirable to defer writing-off this asset even though partial recovery may be made in the future. Risk ratings are assigned as necessary to differentiate risk within the portfolio. They are reviewed on an ongoing basis through the annual loan review process performed by Company personnel, normal renewal activity and the quarterly Watch List and watched asset report process. They are revised to reflect changes in the borrower's financial condition and outlook, debt service coverage capability, repayment performance, collateral value and coverage as well as other considerations. In addition to internal review at multiple points, outsourced loan review opines on risk ratings with regard to the sample of loans their review covers. 85 The following tables present credit risk ratings by loan segment as of December 31, 2020 and December 31, 2019: December 31, 2020 December 31, 2019 Commercial Credit Quality Indicators Commercial Real Estate Construction Commercial Business Total Commercial Real Estate Construction Commercial Business Total $ 1,105,825 12,560 29,998 — — $ 78,010 — 8,997 — — $ 269,728 2,055 3,247 1,571 — (In thousands) $ 1,453,563 14,615 42,242 1,571 — $ 1,104,164 10,247 14,203 — — $ 98,583 — — — — $ 208,932 16,766 854 3,476 — 1,148,383 $ 87,007 $ 276,601 $ 1,511,991 $ 1,128,614 $ 98,583 $ 230,028 $ $ $ 1,411,679 27,013 15,057 3,476 — 1,457,225 December 31, 2020 December 31, 2019 Residential and Consumer Credit Quality Indicators Residential Real Estate Consumer Total Residential Real Estate Consumer Total $ $ $ 108,953 713 3,714 177 — 113,557 $ 79 — — — — 79 $ $ $ (In thousands) 109,032 713 3,714 177 — $ 143,089 — 3,832 188 — 113,636 $ 147,109 $ 150 — — — — 150 $ $ 143,239 — 3,832 188 — 147,259 Pass Special mention Substandard Doubtful Loss Total loans Pass Special mention Substandard Doubtful Loss Total loans Loan portfolio aging analysis When a loan is 15 days past due, the Company sends the borrower a late notice. The Company attempts to 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, the Company mails the borrower a letter reminding the borrower of the delinquency, and attempts to contact the borrower personally to determine the reason for the delinquency and ensure the borrower understands the terms of the loan. If necessary, after the 90th day of delinquency, the Company may take other appropriate legal action. A summary report of all loans 30 days or more past due is provided to the Board of Directors of the Company periodically. Loans greater than 90 days past due are generally put on nonaccrual status. 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. A loan is considered to be no longer delinquent when timely payments are made for a period of at least six months (one year for loans providing for quarterly or semi-annual payments) by the borrower in accordance with the contractual terms. Loans that are granted payment deferrals under the CARES Act are not required to be reported as past due or placed on non-accrual status if the criteria under section 4013 of the CARES Act are met. The following tables set forth certain information with respect to the Company's loan portfolio delinquencies by portfolio segment as of December 31, 2020 and December 31, 2019: Real estate loans: Residential real estate Commercial real estate Construction Commercial business Consumer Total loans 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Loans December 31, 2020 (In thousands) 177 $ 2,541 — 1,526 — 4,244 $ 422 $ 4,039 8,997 1,626 — 15,084 $ 113,135 $ 1,144,344 78,010 274,975 79 1,610,543 $ 113,557 1,148,383 87,007 276,601 79 1,625,627 $ $ 245 $ 1,305 8,997 45 — 10,592 $ — $ 193 — 55 — 248 $ 86 Real estate loans: Residential real estate Commercial real estate Construction Commercial business Consumer Total loans 30–59 Days Past Due 60–89 Days Past Due 90 Days or Greater Past Due Total Past Due Current Total Loans December 31, 2019 $ $ — $ 355 1,357 — — 1,712 $ 943 $ — — — — 943 $ (In thousands) 281 $ 5,935 — 3,455 — 9,671 $ 1,224 $ 6,290 1,357 3,455 — 12,326 $ 145,885 $ 1,122,324 97,226 226,573 150 1,592,158 $ 147,109 1,128,614 98,583 230,028 150 1,604,484 There were no loans delinquent greater than 90 days and still accruing interest as of December 31, 2020 or December 31, 2019. Loans on nonaccrual status The following is a summary of nonaccrual loans by portfolio segment as of December 31, 2020 and December 31, 2019: Residential real estate Commercial real estate Commercial business Construction Total December 31, 2020 2019 (In thousands) 1,492 $ 21,093 1,834 8,997 33,416 $ 1,560 5,222 3,806 — 10,588 $ $ Interest income on loans 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, 2020, 2019 and 2018 was $0.8 million, $0.7 million and $1.1 million, respectively. There was no interest income recognized on these loans for the year ended December 31, 2020. There was $44 thousand and $11 thousand of interest income recognized for these loans for the years ended December 31, 2019 and 2018, respectively. At December 31, 2020 and December 31, 2019, there were no commitments to lend additional funds to borrowers on nonaccrual status. Nonaccrual loans with no specific reserve totaled $17.5 million and $9.6 million at December 31, 2020 and December 31, 2019, respectively. Impaired loans An impaired loan is generally one for which it is probable, based on current information, that the Company will not collect all the amounts due in accordance with the contractual terms of the loan. Impaired loans are individually evaluated for impairment. When the Company classifies a problem loan as impaired, it evaluates whether a specific valuation allowance is required for that portion of the loan that is estimated to be impaired. The following tables summarize impaired loans by portfolio segment and the average carrying amount and interest income recognized on impaired loans by portfolio segment as of December 31, 2020, December 31, 2019 and December 31, 2018: 87 Impaired loans without a valuation allowance: Residential real estate Commercial real estate Construction Commercial business Total impaired loans without a valuation allowance Impaired loans with a valuation allowance: Commercial real estate Commercial business Total impaired loans with a valuation allowance Total impaired loans Impaired loans without a valuation allowance: Residential real estate Commercial real estate Commercial business Total impaired loans without a valuation allowance Impaired loans with a valuation allowance: Commercial real estate Commercial business Total impaired loans with a valuation allowance Total impaired loans Impaired loans without a valuation allowance: Residential real estate Commercial real estate Commercial business Consumer Total impaired loans without a valuation allowance Impaired loans with a valuation allowance: Residential real estate Commercial real estate Total impaired loans with a valuation allowance Total impaired loans Carrying Amount As of and for the Year Ended December 31, 2020 Average Unpaid Carrying Principal Amount Balance Associated Allowance (In thousands) Interest Income Recognized 3,891 $ 8,964 8,997 1,899 23,751 21,035 2,920 23,955 47,706 $ 4,108 $ 9,282 8,997 2,512 24,899 21,049 2,922 23,971 48,870 $ — $ — — — — 4,960 85 5,045 5,045 $ 3,985 $ 9,246 8,997 1,971 24,199 20,852 2,965 23,817 48,016 $ 89 149 — 19 257 283 — 283 540 Carrying Amount As of and for the Year Ended December 31, 2019 Average Unpaid Carrying Principal Amount Balance Associated Allowance (In thousands) Interest Income Recognized 4,020 $ 8,571 3,915 16,506 5,632 415 6,047 22,553 $ 4,144 $ 8,859 5,126 18,129 5,647 417 6,064 24,193 $ — — — — 372 134 506 506 $ $ 4,094 $ 8,250 3,887 16,231 5,682 441 6,123 22,354 $ 123 203 25 351 25 9 34 385 Carrying Amount As of and for the Year Ended December 31, 2018 Average Unpaid Carrying Principal Amount Balance Associated Allowance (In thousands) Interest Income Recognized 4,613 $ 12,191 6,051 3 22,858 2,054 945 2,999 25,857 $ — — — — — 233 133 366 366 $ $ 4,906 $ 11,713 4,945 4 21,568 2,049 684 2,733 24,301 $ 106 20 297 — 423 — 25 25 448 4,520 $ 6,383 5,212 3 16,118 2,014 943 2,957 19,075 $ 88 $ $ $ $ $ $ Troubled debt restructurings ("TDRs") Modifications to a loan are considered to be a troubled debt restructuring when both of the following conditions are met: 1) the borrower is experiencing financial difficulties and 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. Loans classified as TDRs totaled $9.1 million at December 31, 2020 and $9.6 million at December 31, 2019. The following table provides information on loans that were modified as TDRs during the periods presented: Years ended December 31, Commercial real estate Residential real estate Commercial business Total Number of Loans 2019 2020 2018 2020 Pre-Modification 2019 (Dollars in thousands) 2018 2020 Post-Modification 2019 2018 Outstanding Recorded Investment — — — — 1 1 2 4 1 3 1 5 $ $ — $ — — — $ 4,898 $ 34 465 5,397 $ 37 $ 3,394 608 4,039 $ — $ — — — $ 4,676 $ 34 465 5,175 $ 29 3,390 608 4,027 At December 31, 2020 and December 31, 2019, there were three nonaccrual loans identified as TDRs totaling $1.4 million and three nonaccrual loans identified as TDRs totaling $1.6 million, respectively. There were no loans modified in a troubled debt restructuring that re-defaulted during the year ended December 31, 2020. Two loans previously modified as a TDR, in the amount of $1.3 million, re-defaulted during the year ended December 31, 2019. The following table provides information on how loans were modified as a TDR for the years ended December 31, 2020, December 31, 2019 and 2018. Maturity Concession Maturity and payment concession Maturity and rate concession Payment concession Rate and payment concession Total 2020 December 31, 2019 (In thousands) 2018 — $ — — — — — $ 125 $ — — 4,676 374 5,175 $ — 750 608 2,669 — 4,027 $ $ Section 4013 of the CARES Act provides relief from certain requirements under GAAP and permits a financial institution to elect to suspend troubled debt restructuring accounting, in certain circumstances, beginning March 1, 2020 and ending on the earlier of January 1, 2022, or sixty days after the national emergency concerning COVID-19 terminates. All short term loan modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any request for relief are not considered TDRs. As of December 31, 2020, the Company had active COVID-19 related deferrals totaling $29.4 million (excluding SBA loans, which are paid for 6 months by the SBA on behalf of borrowers). The Company granted initial three month payment deferral periods and, in some instances, extended the initial payment deferral period. This excludes SBA loans, which are mandated to receive an automatic six month deferral. These deferrals are not considered troubled debt restructurings based on Section 4013 of the CARES Act and interagency guidance issued in March of 2020. 89 6. Premises and Equipment At December 31, 2020 and December 31, 2019, premises and equipment consisted of the following: Land Building Right-of-use asset Leasehold improvements Furniture and fixtures Equipment Automobiles Premises and equipment, gross Accumulated depreciation and amortization Premises and equipment, net December 31, 2020 2019 (In thousands) 850 $ 9,866 8,591 5,418 2,954 3,581 67 31,327 (9,565) 21,762 $ 2,300 14,169 10,084 5,339 2,505 3,337 67 37,801 (9,279) 28,522 $ $ For the years ended December 31, 2020, December 31, 2019 and December 31, 2018, depreciation and amortization expense related to premises and equipment totaled $3.3 million, $3.4 million and $1.7 million, respectively. For the years ended December 31, 2020 and December 31, 2019, depreciation and amortization expense includes amortization of the right-of-use-asset, totaling $1.4 million for each year. For the year ended December 31, 2020, the right-of-use asset, totaling $8.6 million, includes an impairment charge of $0.3 million related to a one-time expense for office and branch consolidation recognized during the fourth quarter of 2020. The impairment charge is included in occupancy and equipment expense on the consolidated statements of income. For the year ended December 31, 2020, property totaling $4.3 million was transferred to assets held for sale. Reference Note 8 for more detail. 7. Leases Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2020, the Company leases real estate for nine branch offices under various operating lease agreements. The branch leases have maturities ranging from 2021 to 2030, some of which include options to extend the lease term. The Company is not reasonably certain to exercise these renewal options, and as a result, these optional periods are not included in determining the lease term. The weighted average remaining life of the lease term for these leases was 6.2 years as of December 31, 2020. In addition, the Company’s headquarter building (included in premises and equipment) is on land that is leased from the local municipality. As of December 31, 2020, the land lease has a remaining life of 79.7 years. The Company utilized a weighted average discount rate of 6.0% in determining the lease liability for its branch locations and a discount rate of 5.5% for its land lease. The total fixed operating lease costs were $2.3 million and $2.0 million for the years ended December 31, 2020 and December 31, 2019, respectively. The total variable operating lease costs were $0.1 million for each of the years ended December 31, 2020 and December 31, 2019. The right-of-use-asset, included in premises and equipment, net was $8.6 million as of December 31, 2020 and the corresponding lease liability, included in accrued expenses and other liabilities was $9.0 million as of December 31, 2020. 90 Future minimum lease payments as of December 31, 2020 are as follows: 2021 2022 2023 2024 2025 Thereafter Total December 31, 2020 (In thousands) 1,826 1,200 1,189 773 715 17,226 22,929 $ $ A reconciliation of the undiscounted cash flows in the maturity table above and the lease liability recognized in the consolidated balance sheet as of December 31, 2020, is shown below: Undiscounted cash flows Discount effect of cash flows Lease liability 8. Other Assets The components of other assets as of December 31, 2020 and December 31, 2019 are summarized below: Deferred compensation Servicing assets, net of valuation allowance Derivative assets Collateral posted related to interest rate swaps Assets held for sale Other Total Other Assets Deferred compensation December 31, 2020 (In thousands) 22,929 (13,956) 8,973 $ $ December 31, 2020 December 31, 2019 $ $ (In thousands) 2,121 $ 628 4,444 28,205 2,613 4,759 42,770 $ 2,763 978 2,266 13,450 — 2,739 22,196 The Company has a non-qualified deferred compensation plan for the Board of Directors that allows for the deferral of fees earned related to services rendered for the Company. The deferred compensation balance decreased $0.6 million for the year ended December 31, 2020 compared to the year ended December 31, 2019. The decrease was primarily driven by contributions being more than offset by a decline in fair market value and withdrawals. Loan servicing The Bank sells loans in the secondary market and retains the right to service many of these loans. The Bank earns fees for the servicing provided. Loans serviced for others are not included in the accompanying consolidated balance sheets. The balance of loans serviced for others was $109.4 million and $128.3 million at December 31, 2020 and December 31, 2019, respectively. The risks inherent in servicing assets relate primarily to changes in the timing of prepayments that result from shifts in interest rates. The significant assumptions used in the valuation at December 31, 2020 for servicing assets included a discount rate of 10% and prepayment speed assumptions ranging from 3% to 16%. The significant assumptions used in the valuation at December 31, 2019 for servicing assets included a discount rate ranging from 10% to 11% and prepayment speed assumptions ranging from 3% to 19%. The carrying value of loan servicing rights was $0.6 million and $1.0 million as of December 31, 2020 and December 31, 2019, respectively. 91 The following table presents the changes in carrying value for loan servicing assets: Loan servicing rights: Balance at beginning of year Servicing rights capitalized Servicing rights amortized Servicing rights disposed Change in valuation allowance Balance at end of year December 31, 2020 December 31, 2019 (In thousands) $ $ 978 $ 16 (128) (338) 100 628 $ 870 440 (141) (153) (38) 978 Included in accrued expenses and other liabilities as of December 31, 2020 and December 31, 2019, respectively, are $21 thousand and $63 thousand for loan servicing liabilities related to loans serviced for others for which the Company does not receive a servicing fee. Assets held for sale For the year ended December 31, 2020, the assets held for sale balance of $2.6 million consists of a Bank owned property that is currently being marketed for sale. Upon the transfer to held for sale, the asset was written down to its fair market value, less costs to sell, and a charge of $1.7 million was recognized for the year ended December 31, 2020. The impairment charge is included in occupancy and equipment expense on the consolidated statements of income. The asset held for sale is included in other assets on the consolidated balance sheets. 9. Deposits At December 31, 2020 and December 31, 2019, deposits consisted of the following: Noninterest bearing demand deposit accounts Interest bearing accounts: NOW Money market Savings Time certificates of deposit Total interest bearing accounts Total deposits Maturities of time certificates of deposit as of December 31, 2020 and December 31, 2019 are summarized below: 2020 2021 2022 2023 2024 2025 Total 92 December 31, 2020 2019 (In thousands) $ 270,235 $ 191,518 101,737 669,364 158,750 627,230 1,557,081 1,827,316 $ 70,020 419,495 183,729 627,141 1,300,385 1,491,903 December 31, 2020 2019 (In thousands) — $ 418,117 50,425 128,495 30,160 33 627,230 $ 430,361 167,933 28,515 239 93 — 627,141 $ $ $ The aggregate amount of individual certificate accounts, including brokered deposits with balances of $250,000 or more, were approximately $353.7 million and $307.1 million at December 31, 2020 and December 31, 2019, respectively. Brokered certificate of deposits totaled $238.9 million and $179.8 million at December 31, 2020 and December 31, 2019, respectively. Certificates of deposits from national listing services totaled $18.4 million at December 31, 2020 and $21.3 million at December 31, 2019. Brokered money market accounts totaled $13.5 million and $39.9 million at December 31, 2020 and 2019, respectively. The following table summarizes interest expense by account type for the years ended December 31, 2020, 2019 and 2018: NOW Money market Savings Time certificates of deposit Total interest expense on deposits 2020 Years Ended December 31, 2019 (In thousands) 2018 $ $ 141 $ 4,071 1,368 12,600 18,180 $ 128 $ 7,139 2,968 14,463 24,698 $ 157 6,431 1,649 10,714 18,951 10. Federal Home Loan Bank Advances and Other Borrowings The following is a summary of FHLB advances with maturity dates and weighted average rates at December 31, 2020 and December 31, 2019: Year of Maturity: 2020 2021 Total advances December 31, 2020 December 31, 2019 December 31, Amount Due Weighted Average Rate (1) Amount Due (Dollars in thousands) Weighted Average Rate (1) $ $ — 175,000 175,000 — % $ 1.84 1.84 % $ 150,000 — 150,000 1.93 % — 1.93 % (1) The Company's FHLB borrowings are subject to longer term swap agreements and the weighted average rate reflects the all in swap rate under these long term swap agreements. $175 million of the above mentioned FHLB advances as of December 31, 2020 were subject to interest rate swap transactions and $125 million of the above mentioned FHLB advances as of December 31, 2019 were subject to interest rate swap transactions, see Note 18. Interest expense on FHLB advances, excluding related interest on swaps, totaled $1.3 million, $3.6 million and $3.9 million for the years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively. The Bank has additional borrowing capacity at the FHLB up to a certain percentage of the value of qualified collateral. In accordance with agreements with the FHLB, the qualified collateral must be free and clear of liens, pledges and encumbrances. At December 31, 2020, the Company had pledged eligible loans with a book value of $847.0 million as collateral to support borrowing capacity at the FHLB of Boston. As of December 31, 2020, the Company has immediate availability to borrow an additional $347.9 million based on qualified collateral. At December 31, 2020, the Bank had a secured letter of credit with the FHLB and unsecured lines of credit with Atlantic Community Bankers Bank, Zions Bank and Texas Capital Bank. The total letter or line of credit and the amount outstanding at December 31, 2020 is summarized below: 93 FHLB Atlantic Community Bankers Bank Zions Bank Texas Capital Bank Total Federal Home Loan Bank Stock Total Letter or Line of Credit Total Outstanding December 31, 2020 $ $ (In thousands) 20,000 $ 12,000 25,000 5,000 62,000 $ — — — — — As a member of the FHLB, the Bank is required to maintain investments in their capital stock. The Bank owned 78,596 shares and 74,744 shares at December 31, 2020 and December 31, 2019, respectively. There is no ready market or quoted market values for the stock and as such is classified as restricted stock. The shares have a par value of $100 and are carried on the consolidated balance sheets at cost, and evaluated for impairment, as the stock is only redeemable at par subject to the redemption practices of the FHLB. The determination of whether the par value will ultimately be recovered is influenced by criteria such as the following: (a) the significance of the decline in net assets of the Federal Home Loan Bank as compared to the capital stock amount and the length of time this situation has persisted; (b) commitments by the Federal Home Loan Bank to make payments required by law or regulation and the level of such payments in relation to the operating performance; (c) the impact of legislative and regulatory changes on the customer base of the Federal Home Loan Bank; and (d) the liquidity position of the Federal Home Loan Bank. Management evaluated the stock and concluded that the stock was not impaired as of December 31, 2020 or December 31, 2019. 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. The Notes became callable, in part or in whole, beginning August 2020. The Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines. 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 and the Company's working capital needs. In the third quarter of 2020, the Notes were assigned an investment grade rating of BBB- by Kroll Bond Rating Agency. The Company recognized $1.5 million in interest expense related to its subordinated debt for each of the years ended December 31, 2020, 2019, and 2018. 12. Commitments and Contingencies Leases Effective January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842). As of December 31, 2020, the Company leases real estate for nine branch offices under various operating lease agreements. The branch leases have maturities ranging from 2021 to 2030, some of which include options to extend the lease term. In addition, the Company’s headquarter building is on land that is leased from the local municipality. Reference Note 7 for further detail. 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. 94 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 represent the amounts of potential accounting loss should the contract be fully drawn upon, the customers 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, 2020 and December 31, 2019 were as follows: Commitments to extend credit: Loan commitments Undisbursed construction loans Unused home equity lines of credit December 31, 2020 2019 (In thousands) $ $ 114,574 $ 117,457 5,029 237,060 $ 102,986 80,472 6,284 189,742 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 or certain milestones in the case of construction loans or otherwise required collateral under borrowing base limits are met. 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. These commitments subject the Company to potential exposure in excess of amounts recorded in the financial statements, and therefore, management maintains a specific reserve for unfunded credit commitments. This reserve is reported as a component of accrued expenses and other liabilities in the accompanying Consolidated Balance Sheets. The reserve for unfunded commitments totaled $90 thousand at December 31, 2020 and $120 thousand at December 31, 2019. As of December 31, 2020, the Bank had a remaining capital commitment of $2.8 million to a Small Business Investment Company ("SBIC"). This lending fund represents a related party business entity associated with one of the Company's Directors. Contributions to this fund represent an equity investment for the Company. In addition, as of December 31, 2020, the Bank had a commitment of $0.1 million, payable evenly over three years, to a non-profit business. 95 13. Income Taxes The components of income tax expense for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 consisted of: Current provision: Federal State Total current Deferred (credit) provision: Federal State Total deferred Total income tax expense 2020 December 31, 2019 (In thousands) 2018 $ 4,295 $ 618 4,913 4,137 $ 313 4,450 (3,071) (445) (3,516) 276 — 276 $ 1,397 $ 4,726 $ 2,251 185 2,436 1,284 — 1,284 3,720 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 determined in accordance with the statutory requirements for a passive investment company and the 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 is currently not subject to Connecticut income taxes. State taxes are being recognized for income taxes on income earned in other states. A reconciliation of the anticipated income tax expense, computed by applying the statutory federal income tax rate of 21% for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 to the income before income taxes, to the amount reported in the consolidated statements of income for the years ended December 31, 2020, December 31, 2019, and December 31, 2018 was as follows: Income tax expense at statutory federal rate State tax expense, net of federal tax effect Income exempt from tax Stock compensation Deferred director fees Other items, net Income tax expense 96 2020 December 31, 2019 (In thousands) 2018 $ $ 1,533 $ 174 (345) 101 2 (68) 1,397 $ 4,818 $ 223 (368) (3) (14) 70 4,726 $ 4,442 99 (403) (68) (100) (250) 3,720 At December 31, 2020 and December 31, 2019, the components of deferred tax assets and liabilities were as follows: Deferred tax assets: Allowance for loan losses Net operating loss carryforwards Deferred fees Deferred director fees Start-up costs Unrealized loss on derivatives Lease liabilities Other Gross deferred tax assets Deferred tax liabilities: Deferred expenses Servicing rights Core deposit intangible Depreciation Unrealized gain on available for sale securities Right-of-use-assets Other Gross deferred tax liabilities Net deferred tax asset December 31, 2020 2019 (In thousands) $ $ 4,724 $ 444 1,433 341 70 5,246 2,009 1,311 15,578 774 136 17 309 786 1,986 270 4,278 11,300 $ 2,862 481 1,120 174 91 2,245 2,132 302 9,407 671 192 45 210 247 2,117 137 3,619 5,788 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. Management evaluated its remaining deferred tax assets and believes no valuation allowances are needed at December 31, 2020. At December 31, 2020, the Company had federal net operating loss carryovers of $2.1 million. The carryovers were transferred to the Company upon the merger with The Wilton Bank. The losses will expire after 2032 and are subject to certain annual limitations which amount to $176 thousand per annum. Management regularly analyzes their tax positions and at December 31, 2020 management has established a reserve for uncertain tax positions in conjunction with the Company's out of state lending activity. The total reserve for uncertain tax positions totaled $394 thousand as of December 31, 2020. The tax years 2017 and subsequent are subject to examination by federal and state taxing authorities. The statute of limitations has expired on the years before 2017. No examinations are currently in process. The following table reflects a reconciliation of the beginning and ending balances of the Company’s uncertain tax positions: Balance, beginning of year Net additions (reductions) relating to potential liability with taxing authorities Balance, end of year 2020 At December 31, 2019 (In thousands) 2018 $ $ 269 $ 125 394 $ 193 $ 76 269 $ 393 (200) 193 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 at least 21 years of age. 97 Under the terms of the 401k Plan, participants can contribute up to a certain percentage of their compensation, subject to federal limitations. The Company matches eligible 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 expensed $297 thousand, $252 thousand and $265 thousand related to the 401k Plan during the years ended December 31, 2020, December 31, 2019 and December 31, 2018, respectively. 15. Earnings Per Share ("EPS") Unvested restricted stock awards that contain non-forfeitable rights to dividends are participating securities and are included in the computation of EPS pursuant to the two-class method. The two-class method is an earnings allocation formula that determines EPS for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. The Company’s unvested restricted stock awards qualify as participating securities. Net income is allocated between the common stock and participating securities pursuant to the two-class method. Basic EPS is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period, excluding participating unvested restricted stock awards. Diluted EPS is computed in a similar manner, except that the denominator includes the number of additional common shares that would have been outstanding if potentially dilutive common shares were issued using the treasury stock method. 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: Net income Dividends to participating securities Undistributed earnings allocated to participating securities (1) (1) Net income for earnings per share calculation Weighted average shares outstanding, basic Effect of dilutive equity-based awards Weighted average shares outstanding, diluted Net earnings per common share: (2) Basic earnings per common share Diluted earnings per common share $ $ $ $ 2020 For the Years Ended December 31, 2019 (In thousands, except per share data) 5,904 $ (70) (23) 5,811 $ 18,216 $ (46) (166) 18,004 $ 7,728 20 7,748 7,757 28 7,785 0.75 $ 0.75 $ 2.32 $ 2.31 $ 2018 17,433 (51) (178) 17,204 7,722 53 7,775 2.23 2.21 (1) Represents dividends paid and undistributed earnings allocated to unvested stock-based awards that contain non-forfeitable rights to dividends. (2) Represents the effect of the assumed exercise of stock options and warrants and the vesting of restricted shares, as applicable, utilizing the treasury stock method. 16. Stock Based Compensation Equity award plans The Company has stock options or unvested restricted stock outstanding under three 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,” as amended from time-to-time. 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 stock options or restricted stock. At December 31, 2020, there were 610,250 shares reserved for future issuance under the 2012 Plan. Stock options: The Company accounts for stock options based on the fair value at the date of grant and records an expense over the vesting period of such awards on a straight line basis. There were no options granted during the years ended December 31, 2020, December 31, 2019 or December 31, 2018. 98 A summary of the status of outstanding stock options at December 31, 2020 is presented below: Options outstanding at beginning of period Exercised Options outstanding at end of period Options exercisable at end of period December 31, 2020 Number of Shares Weighted Average Exercise Price 16,680 $ (1,500) 15,180 15,180 16.30 11.00 16.82 16.82 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 stock options exercised during the years ended December 31, 2020, December 31, 2019 and December 31, 2018 was $27.0 thousand, $40.0 thousand and $0.4 million, respectively. The range of exercise prices for the 15,180 options exercisable at December 31, 2020 was $15.00 to $17.86 per share. The weighted average remaining contractual life for these options was 1.7 years at December 31, 2020. At December 31, 2020, all awarded options have vested, all of the outstanding options are exercisable, and the aggregate intrinsic value of these options was $41 thousand. 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, 2020: Unvested at beginning of period Granted Vested Forfeited Unvested at end of period (1) Includes 21,750 shares of performance based restricted stock. (2) Includes 16,000 shares of performance based restricted stock. (3) Includes 22,651 shares of performance based restricted stock. December 31, 2020 Number of Shares $ (1) (2) (3) 110,975 109,199 (55,080) (1,725) 163,369 Weighted Average Grant Date Fair Value 30.88 23.75 30.55 31.37 26.22 The total fair value of restricted stock awards vested during the year ended December 31, 2020 was $1.2 million. The Company’s restricted stock expense for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 was $1.8 million, $1.0 million and $1.3 million, respectively. At December 31, 2020, there was $3.3 million of unrecognized stock compensation expense for restricted stock, expected to be recognized over a weighted average period of 1.9 years. Performance based restricted stock: The Company has 15,099 shares of performance based restricted stock outstanding as of December 31, 2020 pursuant to the Company’s 2012 Stock Plan. The awards vest over a three year service period, provided certain performance metrics are met. The share quantity that ultimately vests can range between 0% and 200% for the 5,499 shares of performance based restricted stock granted prior to December 31, 2019, which is dependent on the degree to which the performance metrics are met. The Company records an expense over the vesting period based on (a) the probability that the performance metric will be met and (b) the fair market value of the Company’s stock at the date of the grant. 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 unrealized gains or losses on derivatives. The Company's derivative instruments are utilized to manage economic risks, including interest rate risk. Changes in fair value of the Company's derivatives are primarily driven by changes in interest rates and recognized in other comprehensive income. The 99 Company's current derivative positions will cause a decrease to other comprehensive income in a falling interest rate environment and an increase in a rising interest rate environment. The Company’s total comprehensive income or loss for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 is reported in the Consolidated Statements of Comprehensive Income. The following tables present the changes in accumulated other comprehensive (loss) income by component, net of tax for the years ended December 31, 2020, December 31, 2019 and December 31, 2018: Balance at December 31, 2019 Other comprehensive income (loss) before reclassifications, net of tax Amounts reclassified from accumulated other comprehensive income, net of tax Net other comprehensive income (loss) Balance at December 31, 2020 Balance at December 31, 2018 Other comprehensive income (loss) before reclassifications, net of tax Amounts reclassified from accumulated other comprehensive income, net of tax Net other comprehensive income ( loss) Balance at December 31, 2019 Balance at December 31, 2017 Other comprehensive loss before reclassifications, net of tax Amounts reclassified from accumulated other comprehensive income, net of tax Net other comprehensive loss Balance at December 31, 2018 100 Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps (In thousands) $ $ 928 $ 1,816 — 1,816 2,744 $ (8,444) $ (11,481) 1,606 (9,875) (18,319) $ Total (7,516) (9,665) 1,606 (8,059) (15,575) Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps (In thousands) Total $ $ (1,379) $ 2,367 (60) 2,307 928 $ 342 $ (8,186) (600) (8,786) (8,444) $ (1,037) (5,819) (660) (6,479) (7,516) Net Unrealized Gain (Loss) on Available for Sale Securities Net Unrealized Gain (Loss) on Interest Rate Swaps (In thousands) Total $ $ 85 $ (1,289) (175) (1,464) (1,379) $ 1,609 $ (722) (545) (1,267) 342 $ 1,694 (2,011) (720) (2,731) (1,037) The following table provides information for the items reclassified from accumulated other comprehensive income or loss: Accumulated Other Comprehensive Income (Loss) Components For the Years Ended December 31, 2019 2018 2020 (In thousands) Associated Line Item in the Consolidated Statements Of Income Available-for-sale securities: Unrealized gains on investments Tax expense Net of tax Derivatives: Unrealized (losses) gains on derivatives Tax benefit (expense) Net of tax 18. Derivative Instruments $ $ $ $ — $ — — $ 76 $ (16) 60 $ 222 Net gain on sale of available for sale securities (47) 175 Income tax expense (2,094) $ 488 (1,606) $ 760 $ (160) 600 $ 690 (145) 545 Interest expense on borrowings Income tax expense The Company manages economic risks, including interest rate, liquidity, and credit risk by managing the amount, sources, and duration of its funding along with the use of interest rate derivative financial instruments, namely interest rate swaps. The Company does not use derivatives for speculative purposes. As of December 31, 2020, the Company was a party to nine interest rate swaps, designated as hedging instruments, to add stability to interest expense and to manage its exposure to the variability of the future cash flows attributable to the contractually specified interest rates. The notional amount for each swap is $25 million and in each case, the Company has entered into pay-fixed interest rate swaps to convert rolling 90 days Federal Home Loan Bank advances or brokered deposits. As of December 31, 2020, the Company is party to four interest rate swaps not designated as hedging instruments, to minimize interest rate risk exposure with loans to customers. The Company accounts for all non-borrower related interest rate swaps as effective cash flow hedges. None of the interest rate swap agreements contain any credit risk related contingent features. A hedging instrument is expected at inception to be highly effective at offsetting changes in the hedged transactions attributable to the changes in the hedged risk. Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan customers. The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. Those interest rate swaps are simultaneously hedged by offsetting derivatives that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions. As the interest rate derivatives associated with this program do not meet the strict hedge accounting requirements, changes in the fair value of both the customer derivatives and the offsetting derivatives are recognized directly in earnings. Interest rate swaps with a positive fair value are recorded as other assets and interest rate swaps with a negative fair value are recorded as other liabilities on the Consolidated Balance Sheets. 101 Information about derivative instruments for the years ended December 31, 2020 and December 31, 2019 were as follows: December 31, 2020: Derivatives designated as hedging instruments: Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Derivatives not designated as hedging instruments: (1) Interest rate swap Interest rate swap Interest rate swap Interest rate swap Total Derivatives Original Notional Amount Original Maturity Maturity Date Received Paid (Dollars in thousands) Fair Value Asset (Liability) July 1, 2021 December 23, 2022 August 25, 2024 August 25, 2024 April 9, 2025 April 23, 2025 January 1, 2034 January 1, 2035 August 26, 2035 March 10, 2030 March 10, 2030 March 10, 2039 March 10, 2039 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 1-month USD LIBOR 1-month USD LIBOR 1-month USD LIBOR 1-month USD LIBOR $ 25,000 5.0 years 25,000 3.0 years 25,000 7.0 years 25,000 7.0 years 25,000 5.0 years 25,000 5.0 years 25,000 15.0 years 25,000 15.0 years 25,000 225,000 15.0 years 18,500 10.0 years 18,500 10.0 years 20,000 20.0 years 20.0 years 20,000 77,000 302,000 $ $ $ $ 1.22 % $ (128) 1.28 % (541) 2.04 % (1,622) 2.04 % (1,618) 0.55 % 0.54 % (224) (212) 3.01 % (6,086) 3.03 % (6,445) 3.05 % (6,691) (23,567) $ 3.15 % $ (648) 3.15 % 648 5.00 % (3,796) 5.00 % 3,796 — (23,567) $ $ (1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party. Accrued interest payable related to interest rate swaps as of December 31, 2020 totaled $0.6 million and is excluded from the fair value presented in the table above. The fair value of interest rate swaps in a net liability position, including accrued interest, totaled $24.2 million as of December 31, 2020. 102 December 31, 2019: Derivatives designated as hedging instruments: Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Interest rate swap Original Notional Amount Original Maturity Maturity Date Received Paid (Dollars in thousands) Fair Value Asset (Liability) $ 25,000 5.0 years 25,000 5.0 years 25,000 5.0 years 25,000 7.0 years 25,000 7.0 years 25,000 15.0 years 25,000 3.0 years January 1, 2020 August 26, 2020 July 1, 2021 August 25, 2024 August 25, 2024 January 1, 2034 December 23, 2022 January 1, 2035 August 26, 2035 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR 3-month USD LIBOR Forward-starting interest rate swap (1) 25,000 15.0 years Forward-starting interest rate swap (1) 25,000 15.0 years $ 225,000 Derivatives not designated as hedging instruments: (2) Interest rate swap Interest rate swap Total Derivatives $ $ $ 20,000 20.0 years 20.0 years 20,000 40,000 265,000 March 20, 2039 March 20, 2039 1-month USD LIBOR 1-month USD LIBOR 5.00% 5.00% (1) The effective date of the forward-starting interest rate swaps listed above are January 2, 2020 and August 26, 2020, respectively. (2) Represents an interest rate swap with a commercial banking customer, which is offset by a derivative with a third party. Accrued interest receivable related to interest rate swaps as of December 31, 2019 totaled $21.6 thousand and is excluded from the fair value presented in the table above. The fair value of interest rate swaps including accrued interest totaled $10.7 million as of December 31, 2019. Changes in the fair value of derivatives designated and that qualify as cash flow hedges is recorded in accumulated other comprehensive income and is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Amounts reported in accumulated other comprehensive income related to derivatives will be reclassified to interest expense as interest payments are made on the Company’s variable-rate debt. The Company expects to recognize $3.7 million in interest expense related to interest rate swap agreements included in other comprehensive income during the next 12 months. The Company 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 interest rate swap assets are presented in other assets and the interest rate swap liabilities are presented in accrued expenses and other liabilities in the Consolidated Balance Sheets. The Company does not offset derivative assets and derivative liabilities for financial statement presentation purposes. 103 1.83 % $ 1.48 % 1.22 % 2.04 % 2.04 % — 51 174 (396) (402) 3.01 % (3,328) 1.28 % 279 3.03 % (3,557) 3.05 % (3,512) (10,691) (1,762) 1,762 — (10,691) $ $ $ $ The Company's cash flow hedge positions consist of interest rate swap transactions as detailed in the table below: Notional Amount $25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 25,000 $225,000 Effective Date of Hedging Relationship July 1, 2016 August 25, 2017 August 25, 2017 January 2, 2019 December 27, 2019 January 2, 2020 April 15, 2020 April 29, 2020 August 26, 2020 Duration of Interest Rate Swap Counterparty (Dollars in thousands) 5.0 years 7.0 years 7.0 years 15.0 years 3.0 years 15.0 years 5.0 years 5.0 years 15.0 years Bank of Montreal Bank of Montreal FHN Financial Capital Markets Bank of Montreal Bank of Montreal Bank of Montreal Goldman Sachs Bank USA Goldman Sachs Bank USA FHN Financial Capital Markets This hedge strategy converts the rate of interest on short-term rolling FHLB advances or brokered deposits to long-term fixed interest rates, thereby protecting the Company from interest rate variability. Changes in the consolidated statements of comprehensive income (loss) related to interest rate derivatives designated as hedges of cash flows were as follows for the years ended December 31, 2020, December 31, 2019 and 2018: December 31, 2020 December 31, 2019 (In thousands) December 31, 2018 Interest rate swaps designated as cash flow hedges: Unrealized loss recognized in accumulated other comprehensive (loss) income before reclassifications $ Amounts reclassified from accumulated other comprehensive income Income tax benefit on items recognized in accumulated other comprehensive (loss) income Other comprehensive loss $ (14,970) $ 2,094 3,001 (9,875) $ (10,361) $ (760) 2,335 (8,786) $ (914) (690) 337 (1,267) The above unrealized gains and losses are reflective of market interest rates as of the respective balance sheet dates. Generally, a lower interest rate environment will result in a negative impact to comprehensive income whereas a higher interest rate environment will result in a positive impact to comprehensive income. The following tables summarize gross and net information about derivative instruments that are offset in the Consolidated Balance Sheets at December 31, 2020 and December 31, 2019: December 31, 2020 (In thousands) Gross Amounts Not Offset in the Consolidated Balance Sheets Derivative Assets Gross Amounts of Recognized Assets(1) $ 4,484 $ (1) Includes accrued interest receivable totaling $40.0 thousand. Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position 4,484 $ Financial Instruments — Cash Collateral Received Net Amount $ — $ 4,484 — $ 104 Gross Amounts of Recognized Liabilities(1) Gross Amounts Offset in the Statement of Financial Position Net Amounts of Liabilities presented in the Statement of Financial Position Derivative Liabilities $ 28,673 $ — $ 28,673 $ (1) Includes accrued interest payable totaling $662.0 thousand. Gross Amounts Not Offset in the Consolidated Balance Sheets Financial Instruments — $ Cash Collateral Posted(2) Net Amount 28,205 $ 468 December 31, 2020 (In thousands) December 31, 2019 (In thousands) Gross Amounts Not Offset in the Consolidated Balance Sheets Derivative Assets — $ Gross Amounts of Recognized Assets(1) $ 2,363 $ 2,363 $ Financial Instruments 591 Cash Collateral Received Net Amount $ — $ 1,772 Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position (1) Includes accrued interest receivable totaling $97.1 thousand Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Gross Amounts Not Offset in the Consolidated Balance Sheets Derivative Liabilities $ 13,032 $ — $ 13,032 $ 591 $ 12,441 $ — (1) Includes accrued interest payable totaling $75.5 thousand. (2) Actual cash collateral posted totaled $13.5 million, total cash collateral posted in the above table represents the total value to net the derivative liabilities to $0. December 31, 2019 (In thousands) 105 19. Fair Value of Financial Instruments GAAP requires disclosure of fair value information about financial instruments, whether or not recognized in the Consolidated Balance Sheets, 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 the Company’s financial instruments; however, there are inherent limitations in any estimation technique. Therefore, 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. The Company assumes interest rate risk (the risk that general interest rate levels will change) as a result of its normal operations. As a result, the fair values of the Company’s financial instruments will change when interest rate levels change and that change may be either favorable or unfavorable to the Company. Management attempts to match maturities of assets and liabilities to the extent believed necessary to minimize interest rate risk. However, borrowers with fixed rate obligations are less likely to prepay in a rising rate environment and more likely to prepay in a falling rate environment. Conversely, depositors who are receiving fixed rates are more likely to withdraw funds before maturity in a rising rate environment and less likely to do so in a falling rate environment. Management monitors rates and maturities of assets and liabilities and attempts to minimize interest rate risk. The carrying values, fair values and placement in the fair value hierarchy of the Company’s financial instruments at December 31, 2020 and December 31, 2019 were as follows: Financial assets: Cash and due from banks Federal funds sold Marketable equity securities Available for sale securities Held to maturity securities Loans receivable, net Accrued interest receivable FHLB stock Servicing asset, net of valuation allowance Derivative asset Assets held for sale Financial liabilities: Noninterest bearing deposits NOW and money market Savings Time deposits Accrued interest payable Advances from the FHLB Subordinated debentures Servicing liability Derivative liability Carrying Value Fair Value December 31, 2020 Level 1 (In thousands) Level 2 Level 3 405,340 $ 4,258 2,207 88,605 20,032 1,605,402 6,579 7,860 628 4,444 2,613 270,235 $ 771,101 158,750 631,891 1,750 174,997 25,447 21 28,011 405,340 $ 4,258 2,207 10,148 — — — — — — — — $ — — — — — — — — — $ — — 78,457 70 — 6,579 7,860 — 4,444 — 270,235 $ 771,101 158,750 — 1,750 — — — 28,011 — — — — 19,962 1,605,402 — — 628 — 2,613 — — — 631,891 — 174,997 25,447 21 — $ $ 405,340 $ 4,258 2,207 88,605 16,078 1,601,672 6,579 7,860 628 4,444 2,613 270,235 $ 771,101 158,750 627,230 1,750 175,000 25,258 21 28,011 106 Financial assets: Cash and due from banks Marketable equity securities Available for sale securities Held to maturity securities Loans receivable, net Accrued interest receivable FHLB stock Servicing asset, net of valuation allowance Derivative asset Financial liabilities: Noninterest bearing deposits NOW and money market Savings Time deposits Accrued interest payable Advances from the FHLB Subordinated debentures Servicing liability Derivative liability Carrying Value Fair Value December 31, 2019 Level 1 (In thousands) Level 2 Level 3 $ $ 78,051 $ 2,118 82,439 16,308 1,588,840 5,959 7,475 978 2,266 191,518 $ 489,515 183,729 627,141 2,142 150,000 25,207 63 12,957 78,051 $ 2,118 82,439 18,307 1,589,732 5,959 7,475 978 2,266 191,518 $ 489,515 183,729 632,436 2,142 150,006 25,530 63 12,957 78,051 $ 2,118 10,031 — — — — — — — $ — — — — — — — — — $ — 72,408 85 — 5,959 7,475 — 2,266 191,518 $ 489,515 183,729 — 2,142 — — — 12,957 — — — 18,222 1,589,732 — — 978 — — — — 632,436 — 150,006 25,530 63 — 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 accrued interest payable: The carrying amount is a reasonable estimate of fair value. Marketable equity securities, available for sale securities and held to maturity 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 majority of the available for sale securities are considered to be Level 2 as other observable inputs are utilized, such as quoted prices for similar securities. Level 1 investment securities include investments in a U.S. treasury note and in marketable equity securities for which a quoted price is readily available in the market. Level 3 held to maturity securities represent private placement municipal housing authority bonds for which no quoted market price is available. The fair value for these securities is estimated using a discounted cash flow model, using discount rates ranging from 2.9% to 3.3% as of December 31, 2020 and 3.8% to 4.1% as of December 31, 2019. These securities are CRA eligible investments. FHLB stock: The carrying value of FHLB stock approximates fair value based on the most recent redemption provisions of the FHLB. 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 rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. The fair value methodology includes prepayment, default and loss severity assumptions applied by type of loan. The fair value estimate of the loans includes an expected credit loss. 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. The Company also considers the creditworthiness of each counterparty for assets and the creditworthiness of the Company for liabilities. 107 Assets held for sale: Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. The fair value represents the price that would be received to sell the asset (the exit price). Servicing asset (liability): Servicing assets and liabilities do not trade in an active, open market with readily observable prices. The Company estimates the fair value of servicing assets and liabilities using discounted cash flow models, incorporating numerous assumptions from the perspective of a market participant, including market discount rates. 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. The Company also considers its own creditworthiness in determining the fair value of its borrowings and subordinated debt. Contractual cash flows for the subordinated debt are reduced based on the estimated rates of default, the severity of losses to be incurred on a default, and the rates at which the subordinated debt is expected to prepay after the call date. Off-balance-sheet instruments: Loan commitments on which the committed interest rate is less than the current market rate are insignificant at December 31, 2020 and December 31, 2019. 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. Financial instruments measured at fair value on a recurring basis The following table details the financial instruments carried at fair value on a recurring basis at December 31, 2020 and December 31, 2019, 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, 2020 and December 31, 2019. 108 December 31, 2020 Marketable equity securities Available for sale investment securities: U.S. Government and agency obligations Corporate bonds Derivative asset Derivative liability December 31, 2019 Marketable equity securities Available for sale investment securities: U.S. Government and agency obligations Derivative asset Derivative liability Level 1 Fair Value Level 2 (In thousands) Level 3 $ 2,207 $ — $ 10,148 — — — 66,730 11,727 4,444 28,011 $ 2,118 $ — $ 10,031 — — 72,408 2,266 12,957 — — — — — — — — — Marketable equity securities and available for sale securities: The fair value of the Company’s investment securities is estimated by using pricing models or quoted prices of securities with similar characteristics (i.e. matrix pricing) and is classified within Level 1 or Level 2 of the valuation hierarchy. The pricing is primarily sourced from third party pricing services, overseen by management. Derivative assets and liabilities: The Company’s derivative assets and 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 also considers the creditworthiness of each counterparty for assets and the creditworthiness of the Company for liabilities. 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 GAAP. 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 measured at fair value on a nonrecurring basis at December 31, 2020 and December 31, 2019, and indicates the fair value hierarchy of the valuation techniques utilized by the Company to determine the fair value: December 31, 2020 Impaired loans Servicing asset, net Assets held for sale December 31, 2019 Impaired loans Servicing asset, net Level 1 Fair Value Level 2 (In thousands) Level 3 $ $ — $ — — — $ — — $ — — — $ — 42,661 607 2,613 22,047 915 109 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, 2020 and December 31, 2019: December 31, 2020 Impaired loans Servicing asset, net Assets held for sale December 31, 2019 Impaired loans Servicing asset, net Fair Value Valuation Methodology Unobservable Input Range (Dollars in thousands) 20,703 Appraisals 21,958 Discounted cash flows 42,661 Discount to appraised value Discount rate 8.00–33.00% 3.00–12.00% 607 Discounted cash flows Discount rate Prepayment rate 10.00% 3.00-16.00% (1) 2,613 Sale & Income Approach Adjustment to valuation and cost to sell N/A 12,300 Appraisals 9,747 Discounted cash flows 22,047 Discount to appraised value Discount rate 8.00–28.00% 3.60–7.00% 915 Discounted cash flows Discount rate Prepayment rate 10.00-11.00% 3.00-19.00% (2) $ $ $ $ $ $ $ (1) Servicing liabilities totaling $21 thousand were valued using a discount rate of 0.2%. (2) Servicing liabilities totaling $63 thousand were valued using a discount rate of 1.6%. Impaired loans: Loans are generally not recorded at fair value on a recurring basis. Periodically, the Company records nonrecurring adjustments to the carrying value of loans based on fair value measurements for partial charge-offs of the uncollectible portions of those loans. Nonrecurring 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. Servicing assets and liabilities: When loans are sold, on a servicing retained basis, servicing rights are initially recorded at fair value. All classes of servicing assets are subsequently measured using the amortization method which requires servicing rights to be amortized. The fair value of servicing assets and liabilities are not measured on an ongoing basis but are subject to fair value adjustments when and if the assets or liabilities are deemed to be impaired. Assets held for sale: Assets held for sale (excluding loans) consist of real estate properties that are expected to sell within a year. The assets are reported at the lower of the carrying amount or fair value less costs to sell. The fair value represents the price that would be received to sell the asset (the exit price). 110 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 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 minimum Common Equity Tier 1 capital requirement of 4.5% of risk-weighted assets; set the minimum leverage ratio at 4.0% of total assets; increased the minimum Tier 1 capital to risk-weighted assets requirement from 4.0% to 6.0%; and retained the minimum total capital to risk weighted assets requirement at 8.0%. A “well-capitalized” institution must generally maintain capital ratios 100 to 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 excludes 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” of 2.5% in addition to the minimum risk based capital requirement. The “capital conservation buffer” was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer became 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. As of December 31, 2020, the Bank and Company met 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, 2020 were as follows: Bankwell Bank December 31, 2020 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 Bankwell Financial Group, Inc. December 31, 2020 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 Actual Capital Amount Ratio Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer Amount Ratio (Dollars in thousands) Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 191,579 212,588 191,579 191,579 11.06 % $ 12.28 % 11.06 % 8.44 % 121,216 181,825 147,191 90,836 7.00 % $ 10.50 % 8.50 % 4.00 % 112,558 173,166 138,533 113,545 189,529 230,696 189,529 189,529 10.93 % 13.30 % 10.93 % 8.34 % 121,408 182,111 147,423 90,916 7.00 % 10.50 % 8.50 % 4.00 % N/A N/A N/A N/A 6.50 % 10.00 % 8.00 % 5.00 % N/A N/A N/A N/A 111 The capital amounts and ratios for the Bank and Company at December 31, 2019 were as follows: Bankwell Bank December 31, 2019 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 Bankwell Financial Group, Inc. December 31, 2019 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 Regulatory restrictions on dividends Actual Capital Amount Ratio Minimum Regulatory Capital Required for Capital Adequacy plus Capital Conservation Buffer Amount Ratio (Dollars in thousands) Minimum Regulatory Capital to be Well Capitalized Under Prompt Corrective Action Provisions Amount Ratio $ 205,856 219,365 205,856 205,856 12.53 % $ 13.35 % 12.53 % 10.99 % 115,040 172,560 139,691 74,951 7.00 % $ 10.50 % 8.50 % 4.00 % 106,823 164,343 131,474 93,689 187,155 225,871 187,155 187,155 11.37 % 13.72 % 11.37 % 9.97 % 115,253 172,880 139,950 75,067 7.00 % 10.50 % 8.50 % 4.00 % N/A N/A N/A N/A 6.50 % 10.00 % 8.00 % 5.00 % N/A N/A N/A N/A 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. Reserve requirements on cash The Bank was not required to maintain a minimum reserve balance in the Federal Reserve Bank (FRB) at December 31, 2020 as the FRB has waived this requirement due to the COVID-19 pandemic. The Bank was required to maintain a minimum reserve balance of $14.1 million in the Federal Reserve Bank at December 31, 2019. This balance is maintained for clearing purposes in the ordinary course of business and does not represent restricted cash. 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, 2020 and December 31, 2019 were as follows: Balance, beginning of year Additional loans Repayments Effect of changes in related parties Balance, end of year December 31, 2020 2019 (In thousands) 66 $ 30,529 (3) — 30,592 $ 8,673 — (3,573) (5,034) 66 $ $ Related party deposits aggregated approximately $17.4 million and $45.9 million at December 31, 2020 and December 31, 2019, respectively. During the years ended December 31, 2020 and December 31, 2019, the Company paid approximately $16 thousand and $26 thousand, respectively, to related parties for services provided to the Company. The payments were primarily for consulting and legal services. 112 As of December 31, 2020, the Bank had a $0.2 million investment in a SBIC. This SBIC represents a related party business entity associated with one of the Company's Directors. Contributions to this fund represent an equity investment for the Company. 23. Parent Company Only Financial Statements Bankwell Financial Group, Inc., the Parent Company, operates its wholly-owned subsidiary, Bankwell Bank. The earnings of this subsidiary are recognized by the Parent Company using the equity method of accounting. Accordingly, earnings are recorded as increases in the Parent Company’s investment in the subsidiary and dividends paid reduce the investment in the subsidiary. Condensed financial statements of the Parent Company only are as follows: Condensed Statements of Financial Condition ASSETS Cash and due from banks Investment in subsidiary Premises and equipment, net Deferred income taxes, net Other assets Total assets LIABILITIES AND SHAREHOLDERS’ EQUITY Subordinated debentures Accrued expenses and other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Condensed Statements of Income Interest income Dividend income from subsidiary Total income Expenses Income before equity in undistributed earnings of subsidiaries Equity in undistributed earnings of subsidiaries Net Income 113 At December 31, 2020 2019 (In Thousands) 22,780 $ 178,651 3 205 2,525 204,164 $ 25,258 $ 2,304 176,602 204,164 $ 6,418 201,097 7 187 2,853 210,562 25,207 2,958 182,397 210,562 $ $ $ $ 2020 Year Ended December 31, 2019 (In Thousands) 2018 $ $ 16 $ 24,600 24,616 4,325 20,291 (14,387) 5,904 $ 17 $ 7,500 7,517 3,488 4,029 14,187 18,216 $ 15 4,000 4,015 3,444 571 16,862 17,433 Condensed Statements of Cash Flows Cash flows from operating activities Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed earnings Decrease in other assets Increase in deferred income taxes, net Decrease in other liabilities Stock-based compensation Amortization of debt issuance costs Net cash provided by operating activities Cash flows from investing activities Decrease in premises and equipment, net Net cash provided by investing activities Cash flows from financing activities Proceeds from exercise of options & warrants Dividends paid on common stock Repurchase of common stock Net cash used in financing activities Net increase in cash and cash equivalents Cash and cash equivalents: Beginning of year End of year Supplemental disclosures of cash flows information: Cash paid for: Interest Income taxes 114 2020 For the Years Ended December 31, 2019 (In Thousands) 2018 $ 5,904 $ 18,216 $ 17,433 14,387 327 (18) (654) 1,770 52 21,768 4 4 16 (4,389) (1,037) (5,410) 16,362 (14,187) 84 (57) (26) 1,020 52 5,102 4 4 30 (4,079) (988) (5,037) 69 6,418 22,780 $ $ 6,349 6,418 $ (16,862) 6,131 (76) (1,296) 1,290 52 6,672 6 6 936 (3,759) — (2,823) 3,855 2,494 6,349 — — — — — — 24. Quarterly Financial Information of Bankwell Financial Group, Inc. (Unaudited) The following tables present selected quarterly financial information (unaudited): 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter December 31, 2020 Total interest and dividend income Total interest expense Net interest income Provision for loan losses Total noninterest income Total noninterest expense Income before income tax expense Income tax expense Net income Earnings per common share: Basic Diluted $ $ $ $ (Dollars in thousands, except per share amounts) 19,323 $ 5,686 13,637 2,999 577 9,722 1,493 279 1,214 $ 18,922 $ 5,314 13,608 712 614 9,729 3,781 790 2,991 $ 19,146 $ 4,842 14,304 709 621 13,703 513 177 336 $ 0.04 $ 0.04 $ 0.38 $ 0.38 $ 0.16 $ 0.16 $ 20,096 6,810 13,286 3,185 1,072 9,659 1,514 151 1,363 0.17 0.17 In the fourth quarter of 2020, the Company recognized a $3.9 million one-time charge recorded in noninterest expense for office consolidation, vendor contract termination and employee severance costs. The office consolidation costs, which totaled $2.0 million as of December 31, 2020 primarily related to a $1.7 million write down of a Bank owned property that is currently being marketed for sale and an impairment charge of $0.3 million relating to a right of use asset on a leased property. The Company expects the office consolidation process to be substantially complete by the end of the second quarter of 2021. The vendor contract termination cost, which totaled $1.1 million as of December 31, 2020 was due to the retirement of a legacy online banking application, which will be replaced with an application to drive commercial deposit growth. The vendor contract termination cost is expected to be paid prior to the end of the second quarter of 2021. The vendor contract termination cost is included in data processing expense on the consolidated statements of income. The employee severance costs, which totaled $0.8 million related to a Voluntary Early Retirement Incentive Plan offered to eligible employees and additional severance charges recognized during the fourth quarter of 2020. A total of $24 thousand of employee severance costs has been paid as of December 31, 2020 and the remainder is expected to be paid prior to the end of the first quarter of 2021. The employee severance costs are included in salaries and employee benefits expense on the consolidated statements of income. 115 Total interest and dividend income Total interest expense Net interest income Provision (credit) for loan losses Total noninterest income Total noninterest expense Income before income tax expense Income tax expense Net income Earnings per common share: Basic Diluted $ $ $ $ 4th Quarter 3rd Quarter 2nd Quarter 1st Quarter December 31, 2019 (Dollars in thousands, except per share amounts) 21,046 $ 7,451 13,595 (841) 1,336 8,755 7,017 1,441 5,576 $ 20,493 $ 7,482 13,011 773 1,552 8,672 5,118 1,030 4,088 $ 19,933 $ 7,051 12,882 310 1,048 9,224 4,396 924 3,472 $ 0.44 $ 0.44 $ 0.52 $ 0.52 $ 0.71 $ 0.71 $ 21,476 7,203 14,273 195 1,308 8,975 6,411 1,331 5,080 0.65 0.65 Note: Due to rounding, quarterly earnings per share may not sum to reported annual earnings per share. 25. Subsequent Events The Company's Board of Directors declared a $0.14 per share cash dividend, payable February 25, 2021 to shareholders of record on February 15, 2021. Subsequent to the year ended December 31, 2020, as of February 28, 2021, the Company purchased 65,626 shares of its Common Stock at a weighted average price of $21.66 per share. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9A. Controls and Procedures Disclosure Controls and Procedures Under the supervision and with the participation of the Company’s management, including the Chief Executive Officer and Chief Financial Officer, the Company has evaluated the effectiveness of the design and operation of Bankwell’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d- 15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based upon that evaluation, management, including the Chief Executive Officer and Chief Financial Officer, concluded that Bankwell’s disclosure controls and procedures were effective as of the end of the period covered by this report. Internal Control over Financial Reporting Bankwell’s management has issued a report on its assessment of the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020. As of December 31, 2020, senior management concluded that Bankwell maintained effective internal control over financial reporting. There were no changes made in the Company's internal control over financial reporting that occurred during the fiscal quarter ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. The report of the Company's management follows. Management’s Report on Internal Control over Financial Reporting The management of Bankwell Financial Group and its Subsidiaries is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is a process designed under the supervision of its Chief Executive Officer and Chief Financial Officer 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. 116 Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2020 based on criteria established in Internal Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on management’s assessment, management concluded that, as of December 31, 2020, the Company’s internal control over financial reporting was effective based on criteria established in Internal Control-Integrated Framework (2013) issued by COSO. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of the effectiveness to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate. In accordance with the rules and regulations of the SEC, management’s report on the design and effectiveness of Bankwell’s system of internal control over financial reporting is not subject to attestation by Bankwell’s independent registered public accounting firm. The SEC rules and regulations applicable to Bankwell only require a report by management. Accordingly, this annual report filed on Form 10-K for the year ended December 31, 2020 does not include an opinion by Bankwell’s independent registered public accounting firm regarding management’s system of internal control over financial reporting. Item 9B. Other Information None. 117 Item 10. Directors, Executive Officers and Corporate Governance PART III 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 2021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2021. 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 2021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2021. 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 2021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2021. 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 2021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2021. Item 14. Principal Accountant 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 2021 Annual Meeting of Stockholders, to be filed with the Commission no later than April 30, 2021. 118 Item 15. Exhibits, Financial Statement Schedules (A)(1) FINANCIAL STATEMENTS PART IV The following consolidated financial statements of the Company are included in Item 8 of this report: Report of Independent Registered Public Accounting Firm Consolidated Balance Sheets - As of December 31, 2020 and 2019 Consolidated Statements of Income - For the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Comprehensive (Loss) Income - For the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Shareholders' Equity - For the years ended December 31, 2020, 2019 and 2018 Consolidated Statements of Cash Flows - For the years ended December 31, 2020, 2019 and 2018 Notes to Consolidated Financial Statements (A)(2) FINANCIAL STATEMENT SCHEDULES Certain schedules to the consolidated financial statements have been omitted if they were not required by Article 9 of Regulation S-X or if, under the related instructions, they were inapplicable, or the information was contained elsewhere herein. (A)(3) EXHIBITS The exhibits listed in the Exhibit Index in this Form 10-K are filed herewith or are incorporated herein by reference to other SEC filings. 119 Number Exhibit 3.1 Exhibit 3.2 Exhibit 4.1 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 10.14† Exhibit 10.15† Exhibit 21.1 Exhibit 23.1 Exhibit 31.1 Exhibit 31.2 Exhibit 32 101 104 Exhibit Index (1) (1) (1) (1) (1) (1) (1) (5) (1) (3) Description Certificate of Incorporation as amended to date Amended and Restated Bylaws Description of the Registrant's Common Stock Employment Agreement of Christopher R. Gruseke dated December 29, 2016 2002 Bank Management, Director and Founder Stock Option Plan 2006 Bank of New Canaan Stock Option Plan 2007 Bank of New Canaan Stock Option and Equity Award Plan 2011 BNC Financial Group, Inc. Stock Option and Equity Award Plan 2012 BNC Financial Group, Inc. Stock Plan Amendment to the 2012 BNC Financial Group, Inc. Stock Plan BNC Financial Group, Inc. and Affiliates Deferred Compensation Plan for Directors, January 23, 2008 Employment Agreement of Penko Ivanov Form of Director Indemnification Agreement Form of Executive Officer Indemnification Agreement Employment Agreement of Christine Chivily Agreement dated February 5, 2020 between Lawrence B. Seidman and Bankwell Financial Group, Inc. Employment Agreement of Matthew McNeill 2018 Bankwell Financial Group, Inc. Long-Term Incentive Plan (1) Subsidiaries of the Registrant Consent of RSM US LLP Certification of Christopher R. Gruseke Pursuant to Rule 13a-14(a) Certification of Penko Ivanov 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, 2020, formatted in Inline eXtensible Business Reporting Language (XBRL): (i) Consolidated Balance Sheets; (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. Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) (1) (2) (2) (4) (4) (5) † 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 on May 5, 2014. (3) Filed as part of the Registrant’s December 31, 2016 Form 10-K. (4) Filed as part of the Registrant's June 30, 2018 Form 10-Q. (5) Filed as part of the Registrant's December 31, 2019 Form 10-K Item 16. Form 10-K Summary None. 120 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 Dated: March 10, 2021 Pursuant to the requirements of the Securities Exchange 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, Chief Executive Officer and a Director (principal executive officer) /s/ Penko Ivanov Penko Ivanov Executive Vice President & Chief Financial Officer (principal financial and accounting officer) /s/ George P. Bauer George P. Bauer Director /s/ Gail Brathwaite Gail Brathwaite 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 M. Garnett James M. Garnett Director /s/ Daniel S. Jones Daniel S. Jones Director /s/ Todd Lampert Todd Lampert Director /s/ Victor S. Liss Victor S. Liss Director /s/ Carl M. Porto Carl M. Porto Director /s/ Lawrence B. Seidman Lawrence B. Seidman Director 121 Date March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 March 10, 2021 EMPLOYMENT AGREEMENT This Employment Agreement (the "Agreement") is made and entered into as of February_, 2020 effective March 30, 2020 by and among MATTHEW MCNEILL (the "Executive") on the one side, and BANKWELL FINANCIAL GROUP, INC., a Connecticut bank holding company (the "Company") and its wholly-owned bank subsidiary, Bankwell Bank (the "Bank") on the other. Unless a distinction is appropriate, the term "Company" in this Agreement shall include the Bank. WHEREAS Company desires to employ the Executive on the terms and conditions set forth herein; and WHEREAS, the Executive desires to be employed by the Company on such terms and conditions. NOW, THEREFORE, in consideration of the mutual covenants, promises and obligations set forth herein, the parties agree as follows: 1. Term. The Executive's employment shall be effective as of March 30, 2020 (the "Effective Date") and shall continue until December 31, 2021, unless terminated earlier pursuant to Section 5 of this Agreement. The period during which the Executive is employed by the Company hereunder including any renewal term is hereinafter referred to as the "Employment Term." The Company shall notify the Executive no later than October 1, 2020 if it wishes to extend the Employment Term for an additional one-year term and on an annual basis thereafter by providing such written notice no later than October 1 in that year. If the Company does not provide such written notice by October 1 in the applicable year, the Employment Term shall expire on December 31, 2021 or the then current December 31 termination date. If the Employment Term is extended as provided herein, the Employment Term shall expire on December 31, 2022 or the then current December 31 termination date, and all of the provisions of this Agreement shall remain in effect during the period of such extension unless otherwise agreed in writing. If the Employment Term is not extended by the Company for an additional one-year term following the initial term expiration date of December 31, 2021 or subsequent anniversary dates, the Executive's employment shall terminate as of the 31'' of December in the then current year, and the Company shall pay to Executive a severance payment as provided in Section 5.1(a) below. 2. Position and Duties. a. Position. The Executive will serve as Executive Vice President, Chief Banking Officer of the Bank, having such power, authority and responsibility and performing such duties as are prescribed by or under the Bylaws of the Company and as are customarily associated with such position as reasonably determined by the Company's Chief Executive Officer. The Executive shall, if requested, also serve as a member of the board of directors of Bank affiliates or as an officer or director of any affiliate of the Company for no additional compensation. I a. Reporting/Flexibility. The Executive shall report directly to the Chief Executive Officer of the Company. The Company's Chief Executive Officer may, during the Employment Term below, alter Executive's job, position and/or reporting responsibilities as he deems appropriate to the effective management of the Company. b. Effort and Exclusivity. The Executive shall devote substantially all of his business time and attention (other than during weekends, holidays, vacation periods, and periods of illness or leaves of absence) to the performance of the Executive's duties hereunder and will not engage in any other business, profession or occupation for compensation or otherwise which could conflict or interfere with the performance of such services either directly or indirectly without the prior written consent of the Chairperson of the Compensation Committee. Notwithstanding the foregoing, the Executive will be permitted to: i.with the prior written consent of the Company's Chairperson of the Compensation Committee act or serve as a director, trustee, committee member or principal of any type of business, civic or charitable organization; and ii. with the prior written consent of the Company's Chairperson of the Compensation Committee purchase or own less than two percent (2%) of the securities or ownership interests of any corporation, partnership or limited liability company; provided that, such ownership represents a passive investment and that the Executive is not a controlling person of, or a member of a group that controls, such corporation, partnership or limited liability company; provided further that, the activities described in clauses (a) and (b) do not materially interfere with the performance of the Executive's duties and responsibilities to the Company as provided hereunder. Attached as Schedule A to the Agreement is a list of pre-approved outside engagements of the Executive. 1. Place of Performance. The principal place of the Executive's employment shall be the Company's executive office currently located in New Canaan, Connecticut; provided that, the Executive will be required to travel on Company business during the Employment Term as his responsibilities require. 2. Compensation. a. Base Salary. The Company shall pay the Executive an annual rate of base salary of $425,000.00 in periodic installments in accordance with the Company's customary payroll practices, but no less frequently than monthly. The Executive's annual base salary may be increased from time to time by the Compensation Committee, but may not be decreased without the Executive's written consent. The Executive's annual base salary, as in effect from time to time, is hereinafter referred to as "Base Salary". 2 a. Annual Incentive Plan or Program. The Executive shall be eligible to participate in the annual incentive compensation plan or program ("Annual Incentive") available to other similarly situated executives of the Company, with customized targets and incentives as determined by the Company. The target cash incentive is 40% of Base Salary. For calendar year 2020, the Executive will receive a minimum guarantee of $170,000 less all applicable withholdings and deductions. b. Long Term Incentive Plan. The Executive shall be eligible to participate in any long- term incentive compensation plan or program available to other similarly situated executives of the Company, with customized targets and incentives as determined by the Company. The target long-term incentive is 40% of Base Salary. For calendar year 2020, you will receive a minimum guarantee of 40% of base salary ($170,000) in the Long Term Incentive Plan. The long-term plan may be incorporated into or overlap with the Equity Awards program. c. Equity Awards. During the Employment Term, the Executive shall be eligible to participate in equity awards under the 2012 Bankwell Financial Group, Inc. Stock Plan ("BWFG"), as amended, or any successor plan ("Equity Awards") as available to other similarly situated executives of the Company, with customized targets and incentives as determined by the Company. In addition, upon presentation of supporting documentation relating to Executive's forfeiture of approximately 14,000 shares of restricted stock from his former employer, the Metropolitan Bank ("MCB"), the Company will make an equity award of replacement shares of approximately 24,000 shares of BWFG restricted stock which will mirror the existing vesting schedule at MCB; shares will be calculated using closing share prices on March, _, 2020. This restricted stock and any future grants are granted pursuant to a separate Restricted Stock Agreement. d. Employee Benefits. During the Employment Term, the Executive shall be entitled to participate in all general employee benefit plans, practices and programs maintained by the Company, as in effect from time to time (collectively, "Employee Benefit Plans"), on a basis which is no less favorable than is provided to other similarly situated executives of the Company, to the extent consistent with applicable law and the terms of the applicable Employee Benefit Plans. The Company reserves the right to amend or cancel any Employee Benefit Plan at any time in its sole discretion, subject to the terms of such Employee Benefit Plan and applicable law. e. Business Expenses. Upon submission of appropriate invoices or vouchers, the Company shall pay or reimburse the Executive for all reasonable expenses incurred by him in the performance of his duties under this Agreement in furthering the business, and in keeping with the policies, of the Company. f. Relocation and Housing Allowance. Upon submission of appropriate invoices the Company agrees to reimburse Executive for reasonable actual incurred expenses associated with the costs of relocation up to $7,500. The Company also agrees to reimburse 3 Executive for the actual costs associated with temporary housing up to $7,500 per month for a period of six (6) months commencing on March 30, 2020. a. Vacation. The Executive is entitled to paid time-off ("PTO") as outlined in the Company's personnel policy. b. Clawback Provisions. Notwithstanding any other provisions in this Agreement to the contrary, any incentive- based compensation, or any other compensation, paid to the Executive pursuant to this Agreement or any other agreement or arrangement with the Company which is subject to recovery under any law, government regulation or stock exchange listing requirement, will be subject to such deductions and clawback as may be required to be made pursuant to such law, government regulation or stock exchange listing requirement (or any policy adopted by the Company pursuant to any such law, government regulation or stock exchange listing requirement). c. Required Regulatory Provisions. Notwithstanding anything herein contained to the contrary, any payments to the Executive by the Company, whether pursuant to this Agreement or otherwise, are subject to and conditioned upon their compliance with Section 18(k) of the Federal Deposit Insurance Act, 12 U.S.C. Section 1828(k), and the regulations promulgated thereunder in 12 C.F.R. Part 359. d. Standard Deductions. All payments made under this Agreement shall be subject to any and all applicable taxes and withholdings and to the Company's standard payroll practices. 1. Termination of Employment. The Employment Term and the Executive's employment hereunder may be terminated by the Company at any time and for any reason. The Executive may resign his employment at any time subject to the terms hereof. Upon termination of the Executive's employment during the Employment Term, the Executive shall be entitled to the compensation and benefits described in this Section 5 and shall have no further rights to any compensation or any other benefits from the Company, the Bank or any of their affiliates. a. Non-Extension of the Term, Termination Without Cause or Resignation for Good Reason. i.The Executive's employment hereunder may be terminated upon the expiration of the Employment Term without extension by the Company in accordance with Section 1, or terminated by the Company at any time without Cause (as defined below) or by the Employee's resignation for Good Reason (as defined below). If the Executive's employment is so terminated, the Executive shall be entitled to receive: Any unpaid Base Salary and Annual Incentive earned prior to the Termination Date (as defined in 1. Section 5.7 below) in accordance with the Company's customary payroll procedures; 4 1. A payment equal to 1x (one times) the annual Base Salary; 2. A payment equal to the product of (i) the target annual Incentive that the Executive could have earned under any incentive compensation or incentive plan or program (the "Target Incentive") for the full calendar year in which the Date of Termination occurs and (ii) a fraction, the numerator of which is the number of days the Executive was employed by the Company during the year of termination and the denominator of which is the number of days in such year. This amount shall be paid no later than March 15th of the year following the year in which the Termination Date occurs; 3. If the Executive timely and properly elects continuation coverage under the Consolidated Omnibus Reconciliation Act of 1985 ("COBRA"), the Company shall reimburse the Executive for the difference between the monthly COBRA premium paid by the Executive for himself and his dependents and the monthly premium amount paid by similarly situated active executives. Such reimbursement shall be paid to the Executive on or before the fifteenth (15th) day of the month immediately following the month in which the Executive timely remits the premium payment. The Executive shall be eligible to receive such reimbursement until the earliest of: (i) the expiration of the twelve (12) month period beginning on the Termination Date (the "Severance Period"); (ii) the date the Executive is no longer eligible to receive COBRA continuation coverage; and (iii) the date on which the Executive receives/becomes eligible to receive substantially similar coverage from another employer; 4. The treatment of any outstanding equity awards shall be determined in accordance with the terms of the relevant plan and the applicable award agreements; and 5. Reimbursement for unreimbursed business expenses properly incurred by the Executive, which shall be subject to and paid in accordance with the Company's expense reimbursement policy. Items 5.1(a)(i) through 5.1(a)(iv) are referred to herein collectively as the "Accrued Amounts". a. Termination for Cause or Resignation Without Good Reason. i.The Executive's employment hereunder may be terminated during the Employment Term by the Company for Cause or by the Executive 5 without Good Reason. i. For purposes of this Agreement, "Cause" shall mean: the Executive's conviction of any crime involving fraud, embezzlement, theft or dishonesty, moral 1. turpitude or any similar issue that in the reasonable opinion of the Board of Directors of the Company would materially and negatively impact the reputation of the Company, the Bank or any of their affiliates or the Executive's ability to perform his duties hereunder; 2. serious willful misconduct by the Executive, including a material violation of the Company's Code of Conduct or the Executive's material personal dishonesty in connection with the business or customers of the Company or the material breach of fiduciary duty to the Company, the Bank or their customers for personal profit; 3. any material breach by the Executive of this Agreement; any willful failure by the Executive to follow a reasonable and lawful directive of the Company 4. as described in Sections 2.1 and 2.2 above, other than any failure resulting from the Executive's incapacity due to physical or mental injury or illness; any willful failure to keep Confidential Information of the Company, Bank or their affiliates 5. confidential in violation of the terms of this Agreement; the Executive's arrest for any crime involving fraud, embezzlement, theft or dishonesty that in the 6. reasonable opinion of a majority of the full membership of the Board of Directors of the Company excluding the Executive which, as direct result of such arrest, has caused a material negative impact on the reputation of the Company or the Bank or prevents the Executive from substantially performing his duties hereunder; or if the regulatory authorities of the Company or the Bank issue an order removing the Executive 7. from his positions at the Company or the Bank, or if such regulatory authorities inform the Board of Directors that the continuation of the Executive in his officer positions at the Company or the Bank would constitute an unsafe and unsound banking practice. For purposes of this Agreement, no act or failure to act on the part of the Executive shall be considered "willful" unless it is done, or omitted to be done, by the Executive in bad faith or 6 without reasonable belief that the Executive's action or omission was in the best interests of the Company and the Bank. Any act or failure to act based upon authority given pursuant to a resolution duly adopted by the Board of Directors of the Company or either of the Bank or based upon the written advice of counsel for the Company or the Bank shall be conclusively presumed to be done, or omitted to be done, by the Executive in good faith and in the best interests of the Company and the Bank. The Executive's termination of employment shall not be deemed to be for Cause unless and until there shall have been delivered to the Executive a copy of a resolution duly adopted by the affirmative vote of the majority of the Board of Directors of the Company called and held for such purpose (after reasonable notice is provided to the Executive and the Executive is given an opportunity, together with counsel, to be heard before the Board of Directors) finding that, in the good faith opinion of the Board of Directors, the Executive is guilty of any of the conduct described above, and specifying the particulars thereof in detail. To the extent that the Board of Directors wishes to terminate the Executive for Cause and the action or actions giving rise to Cause may be cured by the Executive, the Board of Directors will provide the Executive a thirty (30) day period within which he may cure such action or actions. In the event that the Executive is terminated for Cause based on Section 5.2(b)(i) or (vi) above and, after the case is fully adjudicated (including all appeals), the Executive is subsequently found innocent of these charges on the merits of the case by any court of competent jurisdiction or the appropriate administrative agency, then the Executive will be entitled to receive at that time the amounts payable due to a termination without Cause. Such amounts will be paid no later than the end of the calendar year in which the Executive is fully adjudicated to be innocent of the charges. i.For purposes of this Agreement, "Good Reason" shall mean the occurrence of any of the following, in each case during the Employment Term without the Executive's written consent: 1. a reduction in the Executive's Base Salary; a material reduction in the Executive's target annual incentive opportunity under any annual incentive 2. compensation or incentive plan or program; 3. any breach by the Company of any material provision of this Agreement; the Company's failure to obtain an agreement from any successor to the Company to assume and agree to 4. perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no succession had taken place, except where such assumption occurs by operation of law; a material, adverse change in the Executive's title, authority, duties or responsibilities (other than a 5. temporary change while the Executive is physically or mentally incapacitated or as required by applicable law); or 7 relocation of Executive's principal place of business more than 50 miles from the Company's executive 1. office currently located in New Canaan, Connecticut, without Executive's agreement. The Executive cannot terminate his employment for Good Reason unless he has provided written notice to the Company of the existence of the circumstances providing grounds for termination for Good Reason within thirty (30) days of Executive's knowledge of the initial existence of such grounds and the Company has had thirty (30) days from the date on which such notice is provided to cure such circumstances. If the Company remedies the condition within such thirty (30) day cure period, then no Good Reason shall be deemed to exist with respect to such condition. If the Company does not remedy the condition within such thirty (30) day cure period, then the Executive may deliver a notice of termination for Good Reason at any time within sixty (60) days following the expiration of such cure period. If the Executive does not terminate his employment for Good Reason within sixty (60) days following the expiration of the cure period, then the Executive will be deemed to have waived his right to terminate for Good Reason with respect to such grounds. a. Without Cause or for Good Reason. The Employment Term and the Executive's employment hereunder may be terminated by the Executive by resignation for Good Reason or by the Company without Cause. In the event of such termination (unless Section 5.5 below is applicable), the Executive shall be entitled to receive the amounts described in Section 5.l(a)(i)-(vi), subject to the Executive's compliance with Section 6, Section 7 and Section 8 of this Agreement. b. Death or Disability. i.The Executive's employment hereunder shall terminate automatically upon the Executive's death during the Employment Term, and the Company may terminate the Executive's employment on account of the Executive's Disability. ii.If the Executive's employment is terminated during the Employment Term on account of the Executive's death or Disability, the Executive (or the Executive's estate and/or beneficiaries, as the case may be) shall be entitled to receive the following: 1. the Accrued Amounts; and the treatment of any outstanding equity awards shall be determined in accordance with the terms of 2. applicable plan and the applicable award agreements. iii. For purposes of this Agreement, Disability shall mean that the Executive is entitled to receive long- term disability benefits under the Company's long-term disability plan, or if there is no such plan, the 8 Executive's inability, due to physical or mental incapacity, after Company compliance with any federal or state leave rights or reasonable accommodation rules to substantially perform his duties and responsibilities under this Agreement for ninety (90) days out of any three hundred sixty-five (365) day period; provided however, in the event the Company temporarily replaces the Executive, or transfers the Executive's duties or responsibilities to another individual on account of the Executive's inability to perform such duties due to a mental or physical incapacity which is, or is reasonably expected to become, a Disability, then the Executive shall not be able to resign with Good Reason as a result thereof. Any question as to the existence of the Executive's Disability as to which the Executive and the Company cannot agree shall be determined in writing by a qualified independent physician mutually acceptable to the Executive and the Company. If the Executive and the Company cannot agree as to a qualified independent physician, each shall appoint such a physician and those two physicians shall select a third who shall make such determination in writing. The determination of Disability made in writing to the Company and the Executive shall be final and conclusive for all purposes of this Agreement. a. Change in Control Termination. i.Notwithstanding any other provision contained herein, if the Executive's employment hereunder is terminated by the Executive for Good Reason or by the Company without Cause (other than on account of the Executive's death or Disability), in each case either concurrently with or within twenty-four (24) months following a Change in Control, the Executive shall be entitled to receive the Accrued Amounts and, subject to the Executive's compliance with Section 6, Section 7 and Section 8 of this Agreement for which the Company assigns significant value in agreeing to this Section 5.5, the Executive shall be entitled to receive the following: 1. a lump sum payment equal to two (2) times the sum of the Executive's Base Salary and Target Incentive for the year in which the Termination Date occurs, which shall be paid within thirty (30) business days following the expiration of the Release Execution Period; a payment equal to the product of (i) the Target Incentive for the full calendar year in which the 2. Date of Termination occurs and (ii) a fraction, the numerator of which is the number of days the Executive was employed by the Company during the year of termination and the denominator of which is the number of days in such year. This amount shall be paid no later than the later of the end of the Release Execution period or March 15th of the year 9 following the year in which the Termination Date occurs; If the Executive timely and properly elects continuation coverage under COBRA, the Company 1. shall reimburse the Executive for the difference between the monthly COBRA premium paid by the Executive for himself and his dependents and the monthly premium amount paid by similarly situated active executives. Such reimbursement shall be paid to the Executive on the fifteenth (15th) day of the month immediately following the month in which the Executive timely remits the premium payment. The Executive shall be eligible to receive such reimbursement until the earliest of: (A) the two-year anniversary of the termination date; (B) the date the Executive is no longer eligible to receive COBRA continuation coverage; and (C) the date on which the Executive receives or becomes eligible to receive substantially similar coverage from another employer; and The terms of any equity incentive plan or award agreements will determine to what extent, if any, 2. such awards are accelerated for vesting and/or exercise periods. i.For purposes of this Agreement, "Change in Control" shall mean the occurrence of any of the following: 1. one person (or more than one person acting as a group) acquires ownership of stock of the Company that, together with the stock held by such person or group, constitutes more than fifty percent (50%) of the total fair market value or total voting power of the stock of the Company; provided that, a Change in Control shall not occur if any person (or more than one person acting as a group) owns more than fifty percent (50%) of the total fair market value or total voting power of the Company's stock and acquires additional stock; or a majority of the members of the Board of Directors of the surviving Company following the 2. Change in Control were not Directors of the Company before the Change in Control. For purposes of this Agreement, the terms "person" and "acting as a group" shall have the meanings specified in the Internal Revenue Code and the regulations thereunder. In no event, however, shall a Change in Control be deemed to have occurred as a result of any acquisition of securities or assets of the Company, the Bank, or a subsidiary of either of them, by the Company, the Bank, or any subsidiary of either of them, or by any employee benefit plan maintained by any of them. The defined circumstances herein are intended to be read to be consistent with the provisions of Section 409A of the Code and the regulations thereunder. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and except as provided with respect to COBRA reimbursements, any amounts payable pursuant to this Agreement shall not be reduced by compensation the Executive earns on account of employment with another employer. a. Notice of Termination. Any termination of the Executive's employment hereunder by the Company or by the Executive during the Employment Term (other than termination pursuant to Section 5.4(a) on account of the Executive's death) shall be communicated by a written notice of termination ("Notice of Termination") to the other party hereto in accordance with Section 24. The Notice of Termination shall specify: i. The termination provision of this Agreement relied upon; ii.To the extent applicable, the facts and circumstances claimed to provide a basis for termination of the Executive's employment under the provision so indicated; and iii. The applicable Termination Date. b. Termination Date. The Executive's Termination Date shall be: i.If the Executive's employment hereunder terminates on account of the Executive's death, the date of the Executive's death; ii.If the Executive's employment hereunder is terminated on account of the Executive's Disability, the date that Executive satisfies the definition of Disability; iii.If the Company terminates the Executive's employment hereunder for Cause, the date the Notice of Termination is delivered to the Executive (subject to any applicable cure period herein); iv.If the Company terminates the Executive's employment hereunder without Cause, the date specified in the Notice of Termination, which shall be no less than thirty (30) days following the date on which the Notice of Termination is delivered; provided that, the Company shall have the option to provide the Executive with a lump sum payment equal to thirty (30) days' Base Salary in lieu of such notice, which shall be paid in a lump sum on the Executive's Termination Date and for all purposes of this Agreement, the Executive's Termination Date shall be the date on which such Notice of Termination is delivered; v.If the Executive terminates his employment hereunder with or without Good Reason, the date specified in the Executive's Notice of 11 Termination, which shall be no less than thirty (30) days following the date on which the Notice of Termination is delivered; provided that, the Company may waive all or any part of the thirty (30) day notice period for no consideration by giving written notice to the Executive and for all purposes of this Agreement, the Executive's Termination Date shall be the date determined by the Company; and i.If the Executive's employment hereunder terminates because the Company provides notice of non-renewal pursuant to Section 1, the end of the Employment Term. Notwithstanding anything contained herein, the Termination Date shall not occur until the date on which the Executive incurs a "separation from service" within the meaning of Section 409A. a. Mitigation. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and except as provided with respect to COBRA reimbursements, any amounts payable pursuant to this Section 5 shall not be reduced by compensation the Executive earns on account of employment with another employer. b. Resignation of All Other Positions. Upon termination of the Executive's employment hereunder for any reason, the Executive agrees to resign, effective on the Termination Date and shall be deemed to have resigned from all positions that the Executive holds as an officer or member of the Board of Directors (or a committee thereof) of the Company, the Bank or any of their affiliates. c. Section 280G. If any of the payments or benefits received or to be received by the Executive (including, without limitation, i. any payment or benefits received in connection with a Change in Control or the Executive's termination of employment, whether pursuant to the terms of this Agreement or any other plan, arrangement or agreement, or otherwise) (all such payments collectively referred to herein as the "280G Payments") constitute "parachute payments" within the meaning of Section 280G of the Internal Revenue Code of 1986, as amended (the "Code") and will be subject to the excise tax imposed under Section 4999 of the Code (the "Excise Tax"), the Executive shall receive the greatest of the following, whichever gives the Executive the highest net after-tax amount (after taking into account federal, state, local and social security taxes): (1) the 280G Payments or (2) one dollar less than the amount of the Payments that would subject the Executive to the Excise Tax (the "Safe Harbor 12 Amount"). If a reduction in the 280G Payments is necessary so that the 280G Payments equal the Safe Harbor Amount and none of the 280G Payments constitute a deferral of compensation within the meaning of and subject to Section 409A ("Nonqualified Deferred Compensation"), then the reduction shall occur in the manner the Executive elects in writing prior to the date of payment. If any 280G Payments constitute Nonqualified Deferred Compensation or if the Executive fails to elect an order, then the 280G Payments to be reduced will be determined in a manner which has the least economic cost to the Executive and, to the extent the economic cost is equivalent, will be reduced in the inverse order of when payment would have been made to you, until the reduction is achieved. All calculations and determinations under this Section 5.9 shall be made by an independent accounting 1. firm or independent tax counsel appointed by the Company (the "Tax Counsel") whose determinations shall be conclusive and binding on the Company and the Executive for all purposes. For purposes of making the calculations and determinations required by this Section 5.9, the Tax Counsel may rely on reasonable, good faith assumptions and approximations concerning the application of Section 280G and Section 4999 of the Code. The Company and the Executive shall furnish the Tax Counsel with such information and documents as the Tax Counsel may reasonably request in order to make its determinations under this Section 5.9. The Company shall bear all costs the Tax Counsel may reasonably incur in connection with its services. 2. The Executive hereby agrees with the Company and any successor thereto to in good faith consider and take steps commonly used to minimize or eliminate any "parachute payments" within the meaning of Section 280G of the Code if requested to do so by the Company or any successor thereto; provided, however, that the foregoing language shall neither require the Executive to take or not take any specific action in furtherance thereof nor contravene, limit or remove any right or privilege provided to the Executive under this Agreement. 1. Cooperation. The parties agree that certain matters in which the Executive will be involved during the Employment Term may necessitate the Executive's reasonable cooperation post termination of employment. Accordingly, following the termination of the Executive's employment for any reason, to the extent reasonably requested by the Board and subject to the Executive's reasonable availability due to his commitment to a new employer or business, the Executive shall cooperate with the Company in connection with matters arising out of the Executive's service to the Company; provided that, the Company shall make reasonable efforts to minimize disruption of the Executive's other activities. The Company shall reimburse the Executive for reasonable expenses incurred in connection with such cooperation and, to the extent that the Executive is required to spend substantial time on such matters, the Company shall compensate the Executive at an hourly rate based on the Executive's Base Salary on the 13 Termination Date. 1. Confidential Information. The Executive understands and acknowledges that during the Employment Term, he will have access to and learn about Confidential Information, as defined below. a. Confidential Information Defined. 1. Definition. For purposes of this Agreement, "Confidential Information" includes, but is not limited to, all information not generally known to the public, in spoken, printed, electronic or any other form or medium, relating directly or indirectly to the Company, the Bank or their affiliates, or of any other person or entity that has entrusted information to the Company in confidence. The Executive understands and agrees that Confidential Information includes information developed by him in the course of his employment by the Company as if the Company furnished the same Confidential Information to the Executive in the first instance. Confidential Information shall not include information that is generally available to and known by the public at the time of disclosure to the Executive or later; provided that, such disclosure is through no direct or indirect fault of the Executive or person(s) acting on the Executive's behalf. 2. Disclosure and Use Restrictions. The Executive agrees and covenants: (i) to treat all Confidential Information as strictly confidential; (ii) not to directly or indirectly disclose, publish, communicate or make available Confidential Information, or allow it to be disclosed, published, communicated or made available, in whole or part, to any entity or person whatsoever except as required in the performance of the Executive's authorized employment duties to the Company; and (iii) not to access or use any Confidential Information, and not to copy any documents, records, files, media or other resources containing any Confidential Information, or remove any such documents, records, files, media or other resources from the premises or control of the Company, except as required in the performance of the Executive's authorized employment duties to the Company and the Bank. Nothing herein shall be construed to prevent disclosure of Confidential Information as may be required by applicable law or regulation, or pursuant to the valid order of a court of competent jurisdiction or an authorized government agency, provided that the disclosure does not exceed the extent of disclosure required by such law, regulation or order. 14 The Executive understands and acknowledges that his obligations under this Agreement with regard to any particular Confidential Information shall commence immediately upon the Executive first having access to such Confidential Information (whether before or after he begins employment by the Company) and shall continue during and after his employment by the Company until such time as such Confidential Information has become public knowledge other than as a result of the Executive's breach of this Agreement or breach by those acting in concert with the Executive or on the Executive's behalf. Nothing herein shall prevent the Executive from disclosing Contract Information to his personal attorneys, accountants and other advisors, as necessary for the performance of their duties and on a confidential basis. Additionally, nothing herein shall prohibit the Executive from retaining, at any time, his personal correspondence and documents related to his own personal benefits, entitlements and obligations. 1. Restrictive Covenants. a. Acknowledgment. The Executive understands that the nature of the Executive's position may give him access to and knowledge of Confidential Information and places him in a position of trust and confidence with the Company. The Executive understands and acknowledges that the intellectual services he provides to the Company are unique, special or extraordinary. The Executive further understands and acknowledges that the Company's ability to reserve these services for the exclusive knowledge and use of the Company is of great competitive importance and commercial value to the Company, and that improper use or disclosure by the Executive is likely to result in unfair or unlawful competitive activity. b. Non-competition. Because of the Company's legitimate business interest as described herein and the good and valuable consideration offered to the Executive, during the Employment Term and for the term of six (6) months, beginning on the last day of the Executive's employment with the Company, for any reason or no reason and whether employment is terminated at the option of the Executive or the Company (provided that these restrictions shall NOT apply if Executive's termination occurs because Executive is terminated for CAUSE), the Executive agrees and covenants not to engage in Prohibited Activity within Fairfield or New Haven Counties or any other county in which the Company, the Bank or any of their affiliates maintains as of the Termination Date a branch, loan production office, or mortgage production office and from which the Company does a significant portion of its business. For the purposes of this Agreement, "significant portion of its business" shall mean ten percent (10%) or more of the Company's total interest income for the most recent full twelve month period preceding termination is attributable to the office(s) in such county- (the "Restricted Area"). Without otherwise limiting the foregoing, the Restricted Area shall not include New York County (Manhattan), New York. Notwithstanding the foregoing and for the avoidance of doubt, nothing herein shall prevent Executive from engaging in any activity with, 15 or holding any financial interest in, a non-competitive affiliate or division of an entity engaged in a business that may engage in a Prohibited Activity, provided, that none of Executive's activities or financial interests in respect of such non-competitive affiliate or division would be a Prohibited Activity under this Agreement in respect of the entity engaged in a business that competes with Company. For purposes of this Section 8.2: "Prohibited Activity" is activity in which the Executive, directly or indirectly, solely or jointly with any 1. person or persons, as an employee, consultant, or advisor (whether or not engaged in business for profit), or as an individual proprietor, partner, shareholder, director, officer, joint venturer, investor or lender, or in any other capacity: (i) becomes affiliated with any bank or commercial lender headquartered or with branches in the counties in which the Company has branches at the time of employment termination; or (ii) becomes affiliated with a different Community Banking Institution in the Restricted Area; 2. "become affiliated" shall mean, without limitation, engaging, participating, or being involved in any respect in the business of banking (other than as a depositor, borrower or other customer), or furnishing any aid, assistance or service of any kind to any person in connection with the business of the Company, the Bank and any of their affiliates, and shall include without limitation being employed by any Community Banking Institution which has a branch or other place of business in the Restricted Area; and "Community Banking Institution" shall mean a bank with assets equal to or less than five billion 3. dollars. Nothing herein shall prohibit the Executive from purchasing or owning less than five percent (5%) of the securities or ownership interests of any corporation, partnership or limited liability company, provided that such ownership represents a passive investment and that the Executive is not a controlling person of, or a member of a group that controls, such corporation, partnership or limited liability company. Notwithstanding the foregoing, the provisions of this Section 8.2 shall not apply in the event the Executive is employed by the Company for the entire Employment Term and the Company determines not to renew or extend this Agreement on substantially similar terms. This Section 8 does not, in any way, restrict or impede the Executive from exercising protected rights to the extent that such rights cannot be waived by agreement or from complying with any applicable law or regulation or a valid order of a court of competent jurisdiction or an authorized government agency, provided that such compliance does not exceed that required by the law, regulation or order. The Executive shall promptly provide written notice of any such order to the Board of Directors. 16 a. Non-solicitation of Employees. The Executive agrees and covenants not to directly or indirectly solicit, hire, recruit, attempt to hire or recruit, or induce the termination of employment of any employee of the Company, the Bank or any of their Affiliates for the term of one (1) year, beginning on the last day of the Executive's employment with the Company, provided that a general, broad-based solicitation or advertisement not intentionally directed at such employees shall not be deemed to be a violation of this provision. b. Non-solicitation of Clients. The Executive understands and acknowledges that because of the Executive's experience with and relationship to the Company, he will have access to and learn about much or all of the clients, prospective clients and referral sources of the Company, the Bank and their affiliates. The Executive understands and acknowledges that loss of these client and referral relationships and/or goodwill will cause significant and irreparable harm. The Executive agrees and covenants, for a period of one (1) year, beginning on the last day of the Executive's employment with the Company, not to directly or indirectly (a) solicit (for services that are competitive with the Company, the Bank or its Affiliates) any actual or prospective client or client-referral source who had a direct or indirect business relationship with the Company, the Bank or any of their Affiliates during the period of time in which the Executive was employed by the Company, it being expressly agreed that soliciting a referral from a prospective client or client-referral source is included within this prohibition; or (b) encourage any such client or client-referral source to turn down, terminate or materially reduce a business relationship with the Company, the Bank or any of their affiliates. c. Non-disparagement. The Executive agrees and covenants that he will not at any time make, publish or communicate to any person or entity or in any public forum any defamatory or disparaging remarks, comments or statements concerning the Company, the Bank, any of their affiliates or their respective businesses, or any of their employees, officers, and existing and prospective clients, and the Company and the Bank will not, and shall cause their Board of Directors and their senior executives not to, at any time make, publish or communicate to any person or entity or in any public forum any defamatory or disparaging remarks, comments or statements concerning the Executive, provided, however, nothing herein shall prevent a party from (i) responding publicly to incorrect, disparaging or derogatory public statements to the extent reasonably necessary to correct or refute such public statement or (ii) making any truthful statements in response to legal or bank regulatory examination process, required governmental testimony or filings, or administrative or arbitral proceedings. d. Non-Interference Covenant. For a period of one (1) year, beginning on the last day of the Executive's employment with the Company, the Executive covenants and agrees that he will not, directly or indirectly and for whatever reason, whether for his own account or for the account of any other person, firm, corporation or other organization: solicit, employ, or otherwise materially interfere with any of the contracts or relationships of the 1. Company, the Bank or any of their affiliates with any employee, officer, director or any independent contractor who is employed by or associated with the Company, the Bank or any of their affiliates as of the Termination Date; or 17 actively solicit or cause to be solicited, or otherwise actively and materially interfere with, any of the 1. contracts or relationships of the Company, the Bank or any of their affiliates with any independent contractor, customer, client or supplier of the Company, the Bank or any of their affiliates. a. Business Materials and Property Disclosure. All written materials, records, and documents made by the Executive or coming into his possession concerning the business or affairs of the Company, the Bank or any of their affiliates shall be the sole property of the Company. Upon termination of his employment with the Company, the Executive shall deliver the same to the Company and shall retain no copies, including but not limited to copies in paper, electronic, digital or any other format. The Executive shall also return to the Company all other property in his possession owned by the Company upon the termination of his employment. The Executive may retain the Executive's rolodex and similar address books provided that such items only include contact information. If a court or arbitration panel concludes that the time period of the restriction set forth in this Section 8 is not enforceable or that a specific geographical scope must be stated herein, then the parties agree that such court or arbitration panel may rewrite the time period of this restriction and/or prescribe a geographical restriction to the maximum enforceable time period and geographical area permitted by law. 1. Acknowledgement. The Executive acknowledges and agrees that the services to be rendered by him to the Company are of a special and unique character; that the Executive will obtain knowledge and skill relevant to the Company's industry, methods of doing business and marketing strategies by virtue of the Executive's employment; and that the restrictive covenants and other terms and conditions of this Agreement are reasonable and reasonably necessary to protect the legitimate business interest of the Company. The Executive further acknowledges that the amount of his compensation reflects, in part, his obligations and the Company's rights under Section 7 and Section 8 of this Agreement; that he has no expectation of any additional compensation, royalties or other payment of any kind not otherwise referenced herein in connection herewith; and that he will not be subject to undue hardship by reason of his full compliance with the terms and conditions of Section 7 and Section 8 of this Agreement or the Company's enforcement thereof. 2. Remedies. In the event of a breach or threatened breach by the Executive of Section 7 or Section 8 of this Agreement, the Executive hereby consents and agrees that the Company shall be entitled to seek, in addition to other available remedies, a temporary or permanent injunction or other equitable relief against such breach or threatened breach from any court of competent jurisdiction, without the necessity of showing any actual damages or that money damages would not afford an adequate remedy, and without the necessity of posting any bond or other security. The aforementioned equitable relief shall be in addition to, not in lieu of, legal remedies, monetary damages or other available forms of relief. 18 1. Arbitration. Any dispute whatsoever relating to the Executive's employment by the Company, or any other dispute arising out of this Agreement which cannot be resolved by any party upon thirty (30) days' written notice to the other party, shall be settled by binding arbitration at a mutually agreed location in Fairfield County, Connecticut in accordance with the then prevailing Employment Dispute Resolution Rules of the American Arbitration Association. The judgment upon the award rendered by the arbitrators may be entered in any court of competent jurisdiction. It is the purpose of this Agreement, and the intent of the parties hereto, to make the submission to arbitration of any dispute or controversy arising out of this Agreement, as set forth hereinabove, binding upon all parties hereto. This Section 11 shall not in any way restrict the right of the Company to obtain injunctive relief from a court of competent jurisdiction. All arbitration costs and all other costs, including but not limited to reasonable attorneys' fees, incurred by the Executive in an arbitration proceeding shall be paid by the Company in the event the Executive materially or substantively prevails in such arbitration proceeding. All arbitration costs and all other costs, including but not limited to reasonable attorneys' fees, incurred by the Company in an arbitration proceeding shall be paid by the Executive in the event the Company materially or substantively prevails in such arbitration proceeding. As part of the judgment rendered by the arbitrators in an arbitration proceeding, the arbitrators shall determine which party (if any) has materially or substantively prevailed in such arbitration proceeding. 2. Governing Law: Jurisdiction and Venue. This Agreement, for all purposes, shall be construed in accordance with the laws of Connecticut without regard to conflicts of law principles. Any action or proceeding by either of the parties to enforce this Agreement that is not covered by the Arbitration provision of Section 11 above shall be brought only in a state or federal court located in the state of Connecticut, county of Fairfield. The parties hereby irrevocably submit to the non-exclusive jurisdiction of such courts and waive the defense of inconvenient forum to the maintenance of any such action or proceeding in such venue. 3. Source of Payments: No Duplication of Payments. All payments provided in this Agreement shall be timely paid in cash or check from the general funds of the Company or the Bank. Payments pursuant to this Agreement shall be allocated between the Company and the Bank in proportion to the approximate level of activity and the time expended on such activities by the Executive as determined by the Company and the Bank on a quarterly basis, unless the applicable provision of this Agreement specifies that the payment shall be made by either the Company or the Bank. In no event shall the Executive receive duplicate payments or benefits from the Company and the Bank. 4. Entire Agreement. Unless specifically provided herein, this Agreement contains all of the understandings and representations between the Executive and the Company pertaining to the subject matter hereof and supersedes all prior and contemporaneous understandings, agreements, representations and warranties, both written and oral, with respect to such subject matter. The parties mutually agree that the Agreement can be specifically enforced in court and can be cited as evidence in legal proceedings alleging breach of the Agreement. 5. Modification and Waiver. No provision of this Agreement may be amended or 19 modified unless such amendment or modification is agreed to in writing and signed by the Executive and by Chairperson of the Board of Directors of the Company. No waiver by either of the parties of any breach by the other party hereto of any condition or provision of this Agreement to be performed by the other party hereto shall be deemed a waiver of any similar or dissimilar provision or condition at the same or any prior or subsequent time, nor shall the failure of or delay by either of the parties in exercising any right, power or privilege hereunder operate as a waiver thereof to preclude any other or further exercise thereof or the exercise of any other such right, power or privilege. 1. Severability. Should any provision of this Agreement be held by a court of competent jurisdiction to be enforceable only if modified, or if any portion of this Agreement shall be held as unenforceable and thus stricken, such holding shall not affect the validity of the remainder of this Agreement, the balance of which shall continue to be binding upon the parties with any such modification to become a part hereof and treated as though originally set forth in this Agreement. The parties further agree that any such court is expressly authorized to modify any such unenforceable provision of this Agreement in lieu of severing such unenforceable provision from this Agreement in its entirety, whether by rewriting the offending provision, deleting any or all of the offending provision, adding additional language to this Agreement or by making such other modifications as it deems warranted to carry out the intent and agreement of the parties as embodied herein to the maximum extent permitted by law. The parties expressly agree that this Agreement as so modified by the court shall be binding upon and enforceable against each of them. In any event, should one or more of the provisions of this Agreement be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provisions hereof, and if such provision or provisions are not modified as provided above, this Agreement shall be construed as if such invalid, illegal or unenforceable provisions had not been set forth herein. 2. Captions. Captions and headings of the sections and paragraphs of this Agreement are intended solely for convenience and no provision of this Agreement is to be construed by reference to the caption or heading of any section or paragraph. 3. Counterparts. This Agreement may be executed in separate counterparts, each of which shall be deemed an original, but all of which taken together shall constitute one and the same instrument. 4. Tolling. Should the Executive violate any of the terms of the restrictive covenant obligations articulated herein, the obligation at issue will run from the first date on which the Executive ceases to be in violation of such obligation. 5. Section 409A. This Agreement is intended to comply with Section 409A or an exemption thereunder and shall be construed and administered in accordance with Section 409A. Notwithstanding any other provision of this Agreement, payments provided under this Agreement may only be made upon an event and in a manner that complies with Section 409A or 20 an applicable exemption. Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service or as a short term deferral shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, each installment payment provided under this Agreement shall be treated as a separate payment. Notwithstanding any other provision of this Agreement, in the event any payment is to be made during a specified time period following the expiration of the Release Execution Period and the time period for such payment begins in one calendar year and ends in a second calendar year, then such amount shall be payable in the second calendar year. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall the Company be liable for all or any portion of any taxes, penalties, interest or other expenses that may be incurred by the Executive on account of non-compliance with Section 409A. Notwithstanding any other provision of this Agreement, if any payment or benefit provided to the Executive in connection with his termination of employment is determined to constitute "nonqualified deferred compensation" within the meaning of Section 409A and the Executive is determined to be a "specified employee" as defined in Section 409A(a)(2)(b)(i), then such payment or benefit shall not be paid until the first payroll date to occur following the six-month anniversary of the Termination Date (the "Specified Employee Payment Date"), unless the payment otherwise satisfies the short-term deferral exemption or another exemption under Section 409A of the Code. The aggregate of any payments that would otherwise have been paid before the Specified Employee Payment Date shall be paid to the Executive in a lump sum on the Specified Employee Payment Date and thereafter, any remaining payments shall be paid without delay in accordance with their original schedule. 1. Successors and Assigns. This Agreement is personal to the Executive and shall not be assigned by the Executive. Any purported assignment by the Executive shall be null and void from the initial date of the purported assignment. The Company may assign this Agreement to any successor or assign (whether direct or indirect, by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company. This Agreement shall inure to the benefit of the Company and permitted successors and assigns. 2. Indemnification. In the event that the Executive is made a party or threatened to be made a party to any action, suit, or proceeding, (a) whether civil, criminal, administrative or investigative (a "Proceeding"), other than any Proceeding initiated by the Executive or the Company related to any contest or dispute between the Executive and the Company or any of its affiliates with respect to this Agreement or the Executive's employment hereunder, by reason of the fact that the Executive is or was a director or officer of the Company, or any affiliate of the Company, or is or was serving at the request of the Company as a director, officer, member, employee or agent of another corporation or a partnership, joint venture, trust or other enterprise, the Executive shall be indemnified and held harmless by the Company to the fullest extent permitted by applicable law from and against any liabilities, costs, claims and expenses, including all costs and expenses incurred in 21 defense of any Proceeding (including attorneys' fees). During the Employment Term and for a period of six (6) years thereafter, the Company or any successor to the a. Company shall purchase and maintain, at its own expense, directors' and officers' liability insurance providing coverage to the Executive on terms that are no less favorable than the coverage provided to other directors and senior officers of the Company. 1. Notice. Notices and all other communications provided for in this Agreement shall be in writing and shall be delivered personally or sent by registered or certified mail, return receipt requested, or by overnight carrier to the parties at the addresses set forth below (or such other addresses as specified by the parties by like notice): If to the Company: Chairperson Compensation Committee Bankwell Financial Group, Inc. 220 Elm Street New Canaan, CT 06840 If to the Executive: Matthew McNeill th 30 E. 85 Street, Apt. SE New York, NY 1 0028 2. Representations of the Executive. The Executive represents and warrants to the Company that: a. The Executive's acceptance of employment with the Company and the performance of his duties hereunder will not conflict with or result in a violation of, a breach of, or a default under any contract, agreement or understanding to which he is a party or is otherwise bound. b. The Executive's acceptance of employment with the Company and the performance of his duties hereunder will not violate any non-solicitation, non-competition or other similar covenant or agreement of a prior employer. 3. Withholding. The Company shall have the right to withhold from any amount payable hereunder any Federal, state and local taxes in order for the Company to satisfy any withholding tax obligation it may have under any applicable law or regulation. 4. Survival. Upon the expiration or other termination of this Agreement, the 22 respective rights and obligations of the parties hereto shall survive such expiration or other termination to the extent necessary to carry out the intentions of the parties under this Agreement. 1. Release. No severance payment (or similar payment triggered by termination of employment) shall be due to Executive unless and until his execution of a release of claims in favor of the Company, the Bank and their affiliates and their respective officers and directors in a commercially reasonable form provided by the Company (a "Release") and such Release becoming effective as provided therein ("Release Execution Period"). 2. Acknowledgment of Full Understanding. THE EXECUTIVE ACKNOWLEDGES AND AGREES THAT HE HAS FULLY READ, UNDERSTANDS AND VOLUNTARILY ENTERS INTO THE AGREEMENT. THE EXECUTIVE ACKNOWLEDGES AND AGREES THAT HE HAS HAD AN OPPORTUNITY TO ASK QUESTIONS AND CONSULT WITH AN ATTORNEY OF HIS CHOICE BEFORE SIGNING THE AGREEMENT. [SIGNATURE PAGE FOLLOWS] 23 IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above. BANKWELL FINANCIAL GROUP, INC. By /s/ Christopher Gruseke Name: Christopher Gruseke Title: President and Chief Executive Officer BANKWELL BANK By /s/ Christopher Gruseke Name: Christopher Gruseke Title: President and Chief Executive Officer 24 EXECUTIVE /s/ Matthew McNeill Name: Matthew McNeill The Executive's involvement in the following outside activities is approved: SCHEDULE A Boards Memberships 2018 BWFG, INC. LONG-TERM INCENTIVE PLAN 1. Purpose. This 2018 BWFG, Inc. Long-Term Incentive Plan is an administrative addendum to the 2012 BNC Financial Group, Inc. Stock Plan (the “Plan”), which was approved by the shareholders of the Company on or about September 19, 2012 (the “Effective Date”). This addendum sets forth the terms and conditions applicable to Restricted Awards granted under the Plan to eligible employees. It does not (a) increase the types of awards that may be granted under the Plan, (b) increase the maximum aggregate number of shares of Common Stock that may be issued under the Plan (except as provided in Section 11 hereof), (c) change the class of persons eligible for awards under the Plan or (d) extend the duration of the Plan. The rights of any Employee in any awards granted under the Plan prior to January 1, 2018 shall be governed by the terms of the Plan as in effect immediately prior to the adoption by the Board of this addendum. The purpose of the Plan is to advance the interests of BWFG, Inc., a Connecticut corporation (the “Company”), and its Affiliates and stockholders by providing an incentive to attract, retain and reward Employees providing services to the Company and its Affiliates and by motivating them to contribute to the growth and profitability of the Company and its Affiliates. Awards that may be granted under the Plan are Restricted Stock Awards, Performance Share Awards, and Performance Compensation Awards. 2. Definitions. “Affiliate” means a corporation or other entity that, directly or through one or more intermediaries, controls, is controlled by or is under common control with, the Company within the meaning of Rule 405 of Regulation C under the Securities Act, including, without limitation, any subsidiary of such entity. “Applicable Laws” means the requirements related to or implicated by the administration of the Plan under applicable state corporate law, United States federal and state securities laws, the Code, and any stock exchange or quotation system on which the shares of Common Stock are listed or quoted. “Award” means any Restricted Award granted under the Plan. “Award Agreement” means a written agreement, contract, certificate or other instrument or document evidencing the terms and conditions of an Award granted under the Plan which may, in the discretion of the Company, be transmitted electronically to any Participant. Each Award Agreement shall be subject to the terms and conditions of the Plan. “Board” means the Board of Directors of the Company. “Cause” means, unless the applicable Award Agreement states otherwise: (i) (ii) If the Employee is a party to an employment agreement with the Company or its Affiliates and such agreement provides for a definition of Cause, the definition contained therein; or If no such agreement exists, or if such agreement does not define Cause: (i) engaging in any act or acts of dishonesty or morally reprehensible conduct or committing any act or acts that constitute a felony or a crime involving moral turpitude or the commission of any other act involving willful malfeasance or material fiduciary breach, whether or not relating to the Company or any Affiliate; (ii) attempting to obtain personal gain, profit or enrichment at the expense of the Company or an Affiliate, or from any transaction in which Participant has an interest which is adverse to the interest of the Company or an Affiliate, unless Participant shall have obtained the prior written consent of the Chairman of the Board; (iii) willful and continued failure to perform the reasonable duties assigned to Participant within the scope of Participant’s responsibilities under any employment agreement he may be a party to, the reasonable policies, standards or regulations of the Company or any Affiliate as the same shall from time to time exist, provided Participant shall have received at least one written notice in writing from the Company or an 1 Affiliate of such failure and such failure shall continue or recur ten or more days after such notice; (iv) acting in a manner that Participant intends, believes or reasonably should foresee to be materially detrimental or damaging to the Company’s or an Affiliate’s reputation, business operations or relations with their employees, suppliers or customers; (v) material violation of state or federal securities laws, or (vi) committing any material breach of any employment agreement to which he/she may be a party or any other written agreement between Participant and either the Company or an Affiliate. The Committee, in its absolute discretion, shall determine the effect of all matters and questions relating to whether a Participant has been discharged for Cause. “Change in Control” means any of the following: 1. 2. 3. the closing of the sale of all or substantially all of the assets of the Company on a consolidated basis to an unrelated person or entity; the closing of the sale of all of the Company’s Common Stock to an unrelated person or entity; the consummation of any merger, reorganization, consolidation or share exchange unless the persons who were the beneficial owners of the outstanding shares of Common Stock immediately before the consummation of such transaction beneficially own more than fifty percent of the outstanding shares of the common stock of the successor or survivor entity in such transaction immediately following the consummation of such transaction. For purposes of this subsection, the percentage of the beneficially owned shares of the successor or survivor entity (“Successor”) described above shall be determined exclusively by reference to the shares of the Successor which result from the beneficial ownership of shares of Common Stock by the persons described above immediately before the consummation of such transaction; or 4. the complete dissolution or liquidation of the Company. A "Change in Control" shall be deemed not to have occurred if such event is mandated or directed by a regulatory body having jurisdiction over the Company’s operations (or operations of any Affiliate). Code” means the Internal Revenue Code of 1986, as it may be amended from time to time. Any reference to a section of the Code shall be deemed to include a reference to any regulations promulgated thereunder. “Committee” means the Board's Compensation Committee or any similar committee or sub-committee designated by the Board to administer the Plan and having such powers as shall be specified by the Board. If, at any time, there is no committee of the Board then authorized or properly constituted to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein. “Common Stock” means the common stock, no par value per share, of the Company, or such other securities of the Company as may be designated by the Committee from time to time in substitution thereof. “Company” means BWFG, Inc., a Connecticut corporation, and any successor thereto. “Continuous Service” means that the Participant’s service with the Company or an Affiliate is not interrupted or terminated. The Participant’s Continuous Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders service to the Company or an Affiliate or a change in the entity for which the Participant renders such service, provided that there is no interruption or termination of the Participant’s Continuous Service; provided further that if any Award is 2 subject to Section 409A of the Code, this sentence shall only be given effect to the extent consistent with Section 409A of the Code. The Committee or its delegate, in its sole discretion, may determine whether Continuous Service shall be considered interrupted in the case of any leave of absence approved by that party, including sick leave, military leave or any other personal or family leave of absence. The Committee, in its sole discretion, may determine whether a Company transaction, such as a sale or spin-off of a division or subsidiary that employs a Participant, shall be deemed to result in a termination of Continuous Service for purposes of affected Awards, and such decision shall be final, conclusive and binding. “Covered Employee” has the same meaning as set forth in Section 162(m)(3) of the Code. “Director” means a member of the Board. “Disability” shall have the meaning set forth in Section 409A of the Code, as may be amended from time to time. “Employee” means any person employed by the Company or an Affiliate and treated as such in such Company’s payroll records. “Exchange Act” means the Securities Exchange Act of 1934, as amended. “Fair Market Value” and “FMV” mean, as of any date, the value of the Common Stock as determined below. If the Common Stock is listed on any established stock exchange or a national market system, including without limitation, the New York Stock Exchange or the NASDAQ Stock Market, the FMV shall be the closing price of a share of Common Stock (or if no sales were reported the closing price on the date immediately preceding such date) as quoted on such exchange or system on the day of determination, as reported in the Eastern Edition of the Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Common Stock has traded on such securities exchange or market system, the date on which the FMV shall be established shall be the last day on which the Common Stock was so traded prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion. In the absence of an established market for the Common Stock, the FMV shall be determined in good faith by the Committee and such determination shall be conclusive and binding on all persons. “Fiscal Year” means the Company’s fiscal year, which is a calendar year. “Good Reason” means, unless the applicable Award Agreement states otherwise: 1. 2. If an Employee is a party to an employment agreement with the Company or its Affiliates and such agreement provides for a definition of Good Reason, the definition contained therein; or If no such agreement exists or if such agreement does not define Good Reason, the occurrence of one or more of the following without the Participant’s express written consent, which circumstances are not remedied by the Company within 30 days of its receipt of a written notice from the Participant describing the applicable circumstances (which notice must be provided by the Participant within 90 days of the Participant’s knowledge of the applicable circumstances): (i) any material, adverse change in the Participant’s duties, responsibilities, authority, title, status or reporting structure; (ii) a material reduction in the Participant’s base salary or bonus opportunity; or (iii) a geographical relocation of the Participant’s principal office location by more than 50 miles. 3 “Grant Date” means the date on which the Committee adopts a resolution, or takes other appropriate action, expressly granting an Award to a Participant that specifies the key terms and conditions of the Award or, if a later date is set forth in such resolution, then such date as is set forth in such resolution. “Negative Discretion” means the discretion authorized by the Plan to be applied by the Committee to eliminate or reduce the size of a Performance Compensation Award in accordance with Section 8.3 of the Plan; provided, that, the exercise of such discretion would not cause the Performance Compensation Award to fail to qualify as “performance-based compensation” under Section 162(m) of the Code. “Non-Employee Director” means a Director who is a “non-employee director” within the meaning of Rule 16b-3. “Officer” means a person who is an officer of the Company within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. “Outside Director” means a Director who is an “outside director” within the meaning of Section 162(m) of the Code and Treasury Regulations Section 1.162- 27(e)(3) or any successor to such statute and regulation. “Participant” means an eligible person to whom an Award is granted pursuant to the Plan or, if applicable, such other person who holds an outstanding Award. “Performance Compensation Award” means any Award designated by the Committee as a Performance Compensation Award pursuant to Section 8 of the Plan. “Performance Criteria” means the criterion or criteria that the Committee shall select for purposes of establishing the Performance Goal(s) for a Performance Period with respect to any Performance Compensation Award or Performance Share Award. The Performance Criteria that will be used to establish the Performance Goal(s) shall be based on the attainment of specific levels of performance of the Company (or Affiliate, division, business unit or operational unit of the Company) based on any one or more of the following criteria: (a) earnings or earnings per share; (b) return on equity; (c) return on assets or return on average assets; (d) revenues; (e) expenses or reductions in cost; (f) one or more operating ratios; (g) stock price; (h) shareholder return; (i) market share; (j) asset growth; (k) loan growth; (l) deposit growth and/or core deposit growth; (m) non-interest income; (n) charge-offs; (o) credit quality; (p) reductions in non- performing assets; (q) economic value added models or equivalent metrics; (r) productivity ratios; (s) customer satisfaction measures and/or (t) the accomplishment of mergers, acquisitions, dispositions or similar extraordinary business transactions. Any one or more of the Performance Criteria may be used on an absolute or relative basis to measure the performance of the Company and/or an Affiliate as a whole or any division, business unit or operational unit of the Company and/or an Affiliate or any combination thereof, as the Committee may deem appropriate, or as compared to the performance of a group of comparable companies, or published or special index that the Committee, in its sole discretion, deems appropriate, or the Committee may select Performance Criterion (g) above as compared to various stock market indices. The Committee has the authority to provide for accelerated vesting of any Award based on the achievement of Performance Goals pursuant to the Performance Criteria specified in this paragraph. To the extent required under Section 162(m) of the Code, the Committee shall, within the first 90 days of a Performance Period (or, if longer or shorter, within the maximum period allowed under Section 162(m) of the Code), define in an objective fashion the manner of calculating the Performance Criteria it selects to use for such Performance Period. “Performance Formula” means, for a Performance Period, the one or more objective formulas applied against the relevant Performance Goal to determine, with regard to the Performance Compensation Award or Performance Share Award of a particular Participant, whether all, some portion, or none of the Performance Compensation Award has been earned for the Performance Period. “Performance Goals” means, for a Performance Period, the one or more goals established by the Committee for the Performance Period based upon the Performance Criteria. The Committee is authorized at any time during the first 90 days of a Performance Period (or, if longer or shorter, within the maximum period allowed under Section 162(m) of the Code to the extent applicable to an Award), or at any time thereafter (but only to the extent the exercise of such authority after such period would not cause the Performance Compensation Awards granted to any Participant for the Performance Period to fail to qualify as “performance-based 4 compensation” under Section 162(m) of the Code), in its sole and absolute discretion, to adjust or modify the calculation of a Performance Goal for such Performance Period in order to prevent the dilution or enlargement of the rights of Participants based on the following events: (a) litigation or claim judgments or settlements; (b) the effect of changes in tax laws, accounting principles, or other laws or provisions affecting reported results; (c) any reorganization and restructuring programs; (d) extraordinary nonrecurring items as described under generally accepted accounting principles and/or in management’s discussion and analysis of financial condition and results of operations appearing in the Company’s annual report to shareholders for the applicable year; and (e) acquisitions or divestitures, provided, however that with respect to Performance Compensation Awards, such discretion shall be exercised in a manner consistent with Section 162(m) of the Code. “Performance Period” means the one or more periods of time, as the Committee may select, over which the attainment of one or more Performance Goals will be measured for the purpose of determining a Participant’s right to and the payment of a Performance Compensation Award or Performance Share Award. “Performance Share” means the grant of a right to receive a number of actual shares of Common Stock or share units based upon the performance of the Company during a Performance Period, as determined by the Committee. “Performance Share Award” means any Award granted pursuant to Section 7. “Restricted Award” means any Award granted pursuant to Section 6. “Restricted Period” has the meaning set forth in Section 6. “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor to Rule 16b-3, as in effect from time to time. “Securities Act” means the Securities Act of 1933, as amended. 3. Administration. a. Authority of Committee. The Plan shall be administered by the Committee or, in the Board’s sole discretion, by the Board. All questions of interpretation of the Plan, any Award Agreement or any other form of agreement or other document employed by the Company in the administration of the Plan shall be determined by the Committee, and such determinations shall be final, binding and conclusive upon all persons having an interest in the Plan or such Award, unless fraudulent or made in bad faith. All expenses incurred in connection with the administration of the Plan shall be paid by the Company. b. Powers of the Committee. Subject to the terms of the Plan, the Committee shall have the authority to: (a) promulgate, amend, and rescind rules and regulations relating to the administration of the Plan; (b) authorize any person to execute, on behalf of the Company, any instrument required to carry out the purposes of the Plan; (c) determine the persons to whom, and the time or times at which, Awards are to be granted; (d) determine the number of shares of Common Stock to be made subject to each Award; (e) prescribe the terms and conditions of each Award; (f) determine the target number of Performance Shares to be granted pursuant to a Performance Share Award, the performance measures that will be used to establish the Performance Goals, the Performance Period and the number of Performance Shares earned by a Participant; (g) designate an Award as a Performance Compensation Award and to select the Performance Criteria that will be used to establish the Performance Goals; (h) amend, modify, extend , cancel or renew any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired pursuant thereto; provided, however, that if any such amendment impairs a Participant’s rights or increases a Participant’s obligations under an Award or creates or increases a Participant’s federal income tax liability with respect to an Award, such amendment shall also be subject to the Participant’s consent; (i) make decisions with respect to outstanding Awards that may become necessary upon a change in corporate control or an event that triggers anti-dilution adjustments; (j) interpret, administer, reconcile any inconsistency in, correct any defect in and/or supply any omission in the Plan and any instrument or agreement relating to an Award; (k) provide for a “claw-back” of an Award pursuant to Section 14 below; and (l) exercise discretion to make any and all determinations which it determines to be necessary or 5 advisable for the administration of the Plan. The Committee's consideration of Awards to be made to Employees may be made in consultation with the Chief Executive Officer of the Company. Delegation. The Committee may delegate to a subcommittee or individual any of the administrative powers the Committee is authorized to exercise c. (and references in the Plan to the Board or the Committee shall thereafter be to the committee, subcommittee or individual). The members of the Committee shall be appointed by and serve at the pleasure of the Board. From time to time, the Board may increase or decrease the size of the Committee, add additional members to, remove members from, appoint new members in substitution therefor, and fill vacancies in the Committee. The Committee shall act pursuant to a vote of the majority of its members or by the written consent of the majority of its members and minutes shall be kept of its meetings and copies thereof shall be provided to the Board. d. Committee Composition. Except as otherwise determined by the Board, the Committee shall consist solely of two or more Non-Employee Directors who are also Outside Directors. The Board shall have discretion to determine whether it intends to comply with the exemption requirements of Rule 16b-3 and/or Section 162(m) of the Code. However, if the Board intends to satisfy such exemption requirements, with respect to Awards to any Covered Employee and with respect to any insider subject to Section 16 of the Exchange Act, the Committee shall be a compensation committee of the Board that at all times consists solely of two or more Non-Employee Directors who are also Outside Directors. Indemnification. In addition to such other rights of indemnification as they may have as Directors or members of the Committee, and to the extent e. allowed by Applicable Laws, the Committee shall be indemnified by the Company against the reasonable expenses, including attorney’s fees, actually incurred in connection with any action, suit or proceeding or in connection with any appeal therein, to which the Committee may be party by reason of any action taken or failure to act under or in connection with the Plan or any Award granted under the Plan, and against all amounts paid by the Committee in settlement thereof (provided, however, that the settlement has been approved by the Company, which approval shall not be unreasonably withheld) or paid by the Committee in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such Committee did not act in good faith and in a manner which such person reasonably believed to be in the best interests of the Company, or in the case of a criminal proceeding, had no reason to believe that the conduct complained of was unlawful; provided, however, that within 60 days after the institution of any such action, suit or proceeding, such Committee shall, in writing, offer the Company the opportunity at its own expense to handle and defend such action, suit or proceeding. 4. Shares Subject to the Plan. Subject to adjustment in accordance with Section 11, the aggregate number of shares of Common Stock reserved and available for issuance in a. connection with Awards (“Total Share Reserve”) shall be equal to 65,000 Shares, with the following adjustments: 3. 4. As of January 12, 2013, the number of Shares reserved and available for issuance under the Plan shall be automatically increased by ten percent (10%) of the number of Shares issued on January 11, 2013 or such lesser number of Shares as determined by the Committee. Notwithstanding the foregoing, the increase will be capped so that following such increase, the overall Overhang (defined below) does not exceed 12%. Commencing on January 1, 2014, on January 1 of each year, the number of Shares reserved and available for issuance shall automatically increase by up to that number of Shares that would result in the Company’s Overhang equaling 12%, computed on the basis of the number of Shares issued as of December 31 of the preceding year, unless a lesser amount is designated by the Board. st st 6 5. 6. “Overhang” means the aggregate number of Shares subject to Awards (i.e., incentive stock options, non-qualified stock options, Restricted Stock, RSUs, stock appreciation rights, Performance Shares, PRSUs and other equity awards granted under the Plan) outstanding but unexercised (in the case of options or stock appreciation rights) or unvested (in the case of other Awards) and the Other Plans, plus the number of Shares available to be granted under the Plan, divided by the total Shares outstanding on December 31 of the preceding calendar year. “Other Plans” means the following Company plans: 2002 Bank Management, Director and Founder Stock Option Plan; 2006 Stock Option Plan; 2007 Stock and Equity Award Plan; and 2011 Stock Option and Equity Award Plan. Accordingly, the number of Shares reserved and available for issuance may increase from year to year based on exercises of options and stock appreciation rights, vesting of other Awards, and increases in the total Shares outstanding as of December 31 of the prior year. b. Shares covered by an Award shall be counted as used as of the effective date of the Award. Any Shares that are subject to Awards shall be counted against the limit set forth in Section 4.1 as one share subject to an Award. If any Shares covered by an Award are not earned or purchased or are forfeited or expire, or if an Award otherwise terminates without delivery of any Common Stock subject thereto or is settled in cash in lieu of shares, then the number of Shares counted against the aggregate number of Shares available under the Plan with respect to such Award shall, to the extent of any such forfeiture, termination or expiration, again be available for purposes of the Plan in addition to the number of Shares that are otherwise available for Awards. The number of Shares available for issuance under the Plan shall not be increased by (i) any Shares tendered or withheld or Grant surrendered in connection with the purchase of Shares upon exercise of an option or (ii) any Shares deducted or delivered from a Grant payment in connection with the Company’s tax withholding obligations as described in Section 10.5. Shares issued hereunder may consist, in whole or in part, of authorized and unissued shares of treasury shares. 5. Eligibility. Awards may be granted only to Employees designated by the Committee, in its discretion, as eligible to receive such Awards. Restricted Awards. A Restricted Award is an Award of shares of Common Stock (“Restricted Stock”) or Common Stock units (“Restricted Stock 6. Units” or “RSUs”) which are rights to receive on a future date or occurrence of a future event an identical number of shares of Common Stock that provide that such Restricted Award may not be sold, assigned, transferred or otherwise disposed of, pledged or hypothecated as collateral for a loan or as security for the performance of any obligation or for any other purpose for such period (the “Restricted Period”) as the Committee shall determine. Each Restricted Award granted under the Plan shall be evidenced by an Award Agreement. Each Award of Restricted Stock and RSUs so granted shall be subject to such conditions as the Committee shall establish, including the (i) completion of a period of service in the case of Awards of time-vested Restricted Stock and time-vested RSUs (“TRSUs”) and (ii) the attainment of Performance Goals in the case of Awards of performance-based Restricted Stock (“Performance Shares”) and performance- based RSUs (“Performance Share Units” or “PRSUs”), and to such other conditions not inconsistent with the Plan. a. Restricted Stock. Each Participant granted Restricted Stock shall execute and deliver to the Company an Award Agreement with respect to the Restricted Stock setting forth the restrictions and other terms and conditions applicable to such Restricted Stock. If the Committee determines that the Restricted Stock shall be held by the Company or in escrow rather than delivered to the Participant pending the release of the applicable restrictions, the Committee may require the Participant to execute and deliver to the Company (A) an escrow agreement satisfactory to the Committee, if applicable and (B) the appropriate blank stock power with respect to the Restricted Stock covered by such agreement. If a Participant fails to execute an agreement evidencing an Award of Restricted Stock and, if applicable, an escrow agreement and stock power, the Award shall be null and void. 7 Restricted Stock Units. No shares of Common Stock shall be issued at the time a RSU is granted, and the Company will not be required to set aside b. funds for the payment of any such Award. A Participant shall have no voting rights with respect to any RSUs granted hereunder. c. Restrictions. 7. 8. 9. Restricted Stock awarded to a Participant shall be subject to the following restrictions until the expiration of the Restricted Period, and to such other terms and conditions as may be set forth in the applicable Award Agreement: (A) if an escrow arrangement is used, the Participant shall not be entitled to delivery of the stock certificate; (B) the shares shall be subject to forfeiture and restrictions on transferability as set forth in the applicable Award Agreement; and (C) to the extent such shares are forfeited, the stock certificates shall be returned to the Company, and all rights of the Participant to such shares and as a shareholder with respect to such shares shall terminate without further obligation on the part of the Company. RSUs awarded to any Participant shall be subject to (A) forfeiture until the expiration of the Restricted Period, and satisfaction of any applicable Performance Goals during such period, to the extent provided in the applicable Award Agreement, and to the extent such RSUs are forfeited, all rights of the Participant to such RSUs shall terminate without further obligation on the part of the Company. The Committee shall have the authority to remove any or all of the restrictions on the Restricted Stock and RSUs whenever it may determine that, by reason of changes in Applicable Laws or other changes in circumstances arising after the date the Restricted Stock or RSUs are granted, such action is appropriate. Restricted Period. With respect to Restricted Awards, the Restricted Period shall commence on the Grant Date and end at the time or times set forth d. on a schedule established by the Committee in the applicable Award Agreement. No Restricted Award may be granted or settled for a fraction of a share of Common Stock. The Committee may, in its sole discretion, provide for an acceleration of vesting in the terms of any Award Agreement upon the occurrence of a specified event. e. Delivery of Restricted Stock and Settlement of Restricted Stock Units. Upon the expiration of the Restricted Period with respect to any shares of Restricted Stock, the restrictions set forth in Section 6.3 and the applicable Award Agreement shall be of no further force or effect with respect to such shares, except as set forth in the applicable Award Agreement. If an escrow arrangement is used, upon such expiration, the Company shall deliver to the Participant, or his beneficiary, without charge, the stock certificate evidencing the shares of Restricted Stock which have not then been forfeited and with respect to which the Restricted Period has expired (to the nearest full share) and any dividends credited to the Participant’s account with respect to such Restricted Stock and the interest thereon, if any. Upon the expiration of the Restricted Period with respect to any outstanding RSUs, the Company shall deliver to the Participant, or his beneficiary, without charge, one share of Common Stock for each such outstanding vested RSU and, if applicable, any Dividend Equivalents under the terms and conditions specified in the Award Agreement. f. Stock Restrictions. The Committee may determine that the Company will issue certificates for shares of Restricted Stock, in which case each certificate for a share of Restricted Stock shall contain a legend giving appropriate notice of the restrictions in the Award. The Participant shall be entitled to have the legend removed from the share certificate covering the shares subject to restrictions when all restrictions on such shares have lapsed. The Committee may determine that the Company will not issue certificates for shares of Restricted Stock until all restrictions on such shares have lapsed, or that the Company will retain possession of certificates for shares of Restricted Stock until all restrictions on such shares have lapsed. 8 g. Dividends and Distributions; Voting Rights. If the Company declares a dividend on the shares of Common Stock, on the payment date of the dividend the account of each respective Participant shall be credited with an amount equal to the dividends paid on one share of Common Stock for each share of Common Stock represented by an outstanding Award of time-vested Restricted Stock and TRSUs granted to each such Participant (“Dividend Equivalents”). An amount equal to any such Dividend Equivalents shall be paid to the respective Participant as of the date of payment of such cash dividends on shares of Company Stock. Dividend Equivalents will not be paid with respect to Performance Shares or PRSUs. During any period in which shares acquired pursuant to an Award of Restricted Stock remain subject to vesting conditions, the Participant shall have the right to vote such shares. Participants shall have no voting rights with respect to shares represented by RSUs. 7. Performance Share Awards. a. Grant. Each Performance Share Award shall be subject to the conditions set forth in this Section 7.1, and to such other conditions not inconsistent with the Plan as may be reflected in the applicable Award Agreement. The Committee shall have the discretion to determine: (i) the number of shares of Common Stock or stock-denominated units subject to an Award of Performance Share Units granted to any Participant; (ii) the Performance Period applicable to any Award; (iii) the conditions that must be satisfied for a Participant to earn an Award; and (iv) the other terms, conditions and restrictions of the Award. b. Earning Performance Share Awards. The number of Performance Shares earned by a Participant will depend on the extent to which the applicable Performance Goals are attained within the applicable Performance Period, as determined by the Committee. No payout shall be made with respect to any Performance Share Award except upon written certification by the Committee that the minimum threshold Performance Goal(s) have been achieved. 8. Performance Compensation Awards Under Section 162(m). General. The Committee shall have the authority, at the time of grant of any Performance Share Award, to designate any such Award as a a. Performance Compensation Award in order to qualify such Award as “performance-based compensation” under Section 162(m) of the Code. Each Award Agreement evidencing a Performance Compensation Award shall specify the number of Performance Shares or PRSUs subject thereto, the Performance Award Formula, the Performance Goals and Performance Period applicable to the Award, and the other terms and conditions of the Award. Eligibility. The Committee will, in its sole discretion, designate within the first 90 days of a Performance Period (or, if longer or shorter, within the b. maximum period allowed under Section 162(m) of the Code) which Participants will be eligible to receive Performance Compensation Awards in respect of such Performance Period. Designation of a Participant eligible to receive an Award hereunder for a Performance Period shall not in any manner entitle the Participant to receive payment in respect of any Performance Compensation Award for such Performance Period. The determination as to whether such Participant becomes entitled to payment in respect of any Performance Compensation Award shall be decided solely in accordance with this Section 8 and the Award Agreement. Discretion of Committee with Respect to Performance Compensation Awards. With regard to a particular Performance Period, the Committee shall c. have full discretion to select the length of such Performance Period (provided any such Performance Period shall be not less than one fiscal quarter in duration), the types of Performance Compensation Awards to be issued, the Performance Criteria that will be used to establish the Performance Goals, the kinds and/or levels of the Performance Goals that are to apply to the Company and the Performance Formula. Within the first 90 days of a Performance Period (or, if longer or shorter, within the maximum period allowed under Section 162(m) of the Code), the Committee shall, with regard to the Performance Compensation Awards to be issued for such Performance Period, exercise its discretion with respect to each of the matters enumerated in the immediately preceding sentence of this Section and record the same in writing. 9 d. Payment of Performance Compensation Awards. 10. 11. 12. 13. Condition to Receipt of Payment. Unless otherwise provided in the Award Agreement, a Participant must be employed by the Company on the last day of a Performance Period to be eligible for payment in respect of a Performance Compensation Award for such Performance Period. A Participant shall be eligible to receive payment in respect of a Performance Compensation Award only to the extent that: (A) the Performance Goals for such period are achieved; and (B) the Performance Formula as applied against such Performance Goals determines that all or some portion of such Performance Compensation Award has been earned for the Performance Period. Certification. Following the completion of a Performance Period, the Committee shall review and certify in writing whether, and to what extent, the Performance Goals for the Performance Period have been achieved and, if so, calculate and certify in writing the amount of the Performance Compensation Awards earned for the period based upon the Performance Formula. In determining the actual size of an individual Performance Compensation Award for a Performance Period, the Committee may reduce or eliminate the amount of the Performance Compensation Award earned under the Performance Formula in the Performance Period through the use of Negative Discretion if, in its sole judgment, such reduction or elimination is appropriate. The Committee shall not have the discretion to (A) grant or provide payment in respect of Performance Compensation Awards for a Performance Period if the Performance Goals for such Performance Period have not been attained or (B) increase a Performance Compensation Award above the maximum amount payable under Section 8.4. Timing of Award Payments. Performance Compensation Awards shall be paid to Participants as soon as administratively practicable following completion of the certifications required by this Section 8.4, but in no event later than 2½ months following the end of the Fiscal Year during which the Participant vests in the Award. Maximum Award Payable. Subject to adjustment in accordance with Section 11 hereof, and notwithstanding any provision contained in the Plan to the contrary, no Participant shall be granted within any Fiscal Year Awards, which in the aggregate are for more than twenty-five percent (25%) of the aggregate number of shares of Common Stock authorized for issuance under the Plan shares of Common Stock. Securities Law Compliance. Each Award Agreement shall provide that no shares of Common Stock shall be purchased or sold thereunder unless and until 9. (a) any then applicable requirements of state or federal laws and regulatory agencies or any Company Insider Trading Policy have been fully complied with to the satisfaction of the Company and its counsel and (b) if required to do so by the Company, the Participant has executed and delivered to the Company a letter of investment intent in such form and containing such provisions as the Committee may require. The Company shall use reasonable efforts to seek to obtain from each regulatory commission or agency having jurisdiction over the Plan such authority as may be required to grant Awards and to issue and sell shares of Common Stock upon vesting of the Awards; provided, however, that this undertaking shall not require the Company to register under the Securities Act the Plan, any Award or any Common Stock issued or issuable pursuant to any such Award. If, after reasonable efforts, the Company is unable to obtain from any such regulatory commission or agency the authority which counsel for the Company deems necessary for the lawful issuance and sale of Common Stock under the Plan, the Company shall be relieved from any liability for failure to issue and sell Common Stock upon vesting of such Awards unless and until such authority is obtained. 10. Miscellaneous. Acceleration of Vesting. The Committee shall have the power to accelerate the time during which an Award or any part thereof will vest in a. accordance with the Plan. 10 b. Shareholder Rights. Except as provided in the Plan or an Award Agreement, no Participant shall be deemed to be the holder of, or to have any of the rights of a holder with respect to, any shares of Common Stock subject to such Award unless and until such Participant has satisfied all requirements for vesting of the Award pursuant to its terms and no adjustment shall be made for dividends or distributions of other rights for which the record date is prior to the date such Common Stock certificate is issued, except as provided in Section 11 hereof. No Employment or Other Service Rights. Nothing in the Plan or any instrument executed or Award granted pursuant thereto shall confer upon any c. Participant any right to continue to serve the Company or an Affiliate in the capacity in effect at the time the Award was granted or shall affect the right of the Company or an Affiliate to terminate the employment of an Employee with or without notice and with or without Cause. Transfer; Approved Leave of Absence. For purposes of the Plan, no termination of employment by an Employee shall be deemed to result from d. either (a) a transfer of employment to the Company from an Affiliate or from the Company to an Affiliate, or from one Affiliate to another, or (b) an approved leave of absence for military service or sickness, or for any other purpose approved by the Company, if the Employee’s right to reemployment is guaranteed either by a statute or by contract or under the policy pursuant to which the leave of absence was granted or if the Committee otherwise so provides in writing, in either case, except to the extent inconsistent with Section 409A of the Code if the applicable Award is subject thereto. e. Withholding Obligations. To the extent provided by the terms of an Award Agreement and subject to the discretion of the Committee, the Participant may satisfy any federal, state or local tax withholding obligation relating to the acquisition of Common Stock under an Award by any of the following means (in addition to the Company’s right to withhold from any compensation paid to the Participant by the Company) or by a combination of such means: (a) tendering a cash payment; (b) authorizing the Company to withhold shares of Common Stock from the shares of Common Stock otherwise issuable to the Participant, provided, however, that no shares of Common Stock are withheld with a value exceeding the minimum amount of tax required to be withheld by law; or (c) delivering to the Company previously owned and unencumbered shares of Common Stock of the Company. Adjustments Upon Changes in Stock. In the event of changes in the outstanding Common Stock or in the capital structure of the Company by reason of 11. any stock or extraordinary cash dividend, stock split, reverse stock split, an extraordinary corporate transaction such as any recapitalization, reorganization, merger, consolidation, combination, exchange, or other relevant change in capitalization occurring after the Grant Date of any Award, Awards granted under the Plan and any Award Agreements, the maximum number of shares of Common Stock subject to all Awards stated in Section 4 and the maximum number of shares of Common Stock with respect to which any one person may be granted Awards during any period stated in Section 4 and Section 8.4 will be equitably adjusted or substituted, as to the number, price or kind of a share of Common Stock or other consideration subject to such Awards to the extent necessary to preserve the economic intent of such Award. Any adjustments made under this Section 11 shall be made in a manner which does not adversely affect the exemption provided pursuant to Rule 16b-3 under the Exchange Act. Further, with respect to Awards intended to qualify as “performance-based compensation” under Section 162(m) of the Code, any adjustments or substitutions will not cause the Company to be denied a tax deduction on account of Section 162(m) of the Code. The Company shall give each Participant notice of an adjustment hereunder and, upon notice, such adjustment shall be conclusive and binding for all purposes. 12. Effect of Change in Control. Vesting. The Committee may provide in an Award Agreement the effect, if any, a Change in Control shall have on the vesting of any applicable a. Award which may include, but not be limited to, the following: 11 14. 15. Restricted Stock and Restricted Stock Units. In the event of a Change in Control, the Restricted Period shall expire immediately with respect to 100% of the outstanding shares of Restricted Stock or Restricted Stock Units unless such Awards are assumed by the Successor. If a Successor assumes Awards in connection with a Change in Control and a Participant is terminated without Cause or for Good Reason, in either case, during the 12-month period following a Change in Control, the Restricted Period shall expire immediately with respect to 100% of the outstanding shares of Restricted Stock or Restricted Stock Units as of the date of the Participant's termination of Continuous Service. Performance Compensation Awards. In the event of a Change in Control, all Performance Goals or other vesting criteria will be deemed achieved at 100% of target levels and all other terms and conditions will be deemed met unless such Awards are assumed by the Successor. In the event a Successor assumes Awards in connection with a Change in Control and a Participant is terminated without Cause or for Good Reason, in either case, during the 12-month period following a Change in Control, all Performance Goals or other vesting criteria will be deemed achieved at 100% of target levels and all other terms and conditions will be deemed met as of the date of the Participant's termination of Continuous Service. To the extent practicable, any actions taken by the Committee under the immediately preceding clauses (a) and (b) shall occur in a manner and at a time which allows affected Participants the ability to participate in the Change in Control with respect to the shares of Common Stock subject to their Awards. Cash-Out Option. In the event of a Change in Control, the Committee may in its discretion and upon at least 10 days' advance notice to the affected b. persons, cancel any outstanding Awards and pay to the holders thereof, in cash or stock, or any combination thereof, the value of such Awards based upon the price per share of Common Stock received or to be received by other shareholders of the Company in connection with such Change in Control. 13. Amendment of the Plan and Awards. Amendment or Termination of Plan. The Board at any time, and from time to time, may amend or terminate the Plan. However, except as provided a. in Sections 11 and 13.2, no amendment shall be effective unless it is approved by the shareholders of the Company to the extent shareholder approval is necessary to satisfy any Applicable Laws. At the time of any such amendment, the Board shall determine, upon advice from counsel, whether such amendment will be contingent on shareholder approval. Rights under any Award granted before an amendment of the Plan shall not be impaired by any such amendment unless (a) the Company requests the consent of the Participant and (b) the Participant consents in writing. Shareholder Approval. The Board may, in its sole discretion, submit any other amendment to the Plan for shareholder approval, including, but not b. limited to, amendments intended to satisfy the requirements of Section 162(m) of the Code and the regulations thereunder. However, without the approval of the Company’s shareholders, there shall no (a) increase in the types of awards that may be granted under the Plan, (b) increase in the maximum aggregate number of shares of Common Stock that may be issued under the Plan (except as provided in Section 11), (c) change in the class of persons eligible for Awards, (d) extensions of the duration of the Plan and (e) other amendments to the Plan that would require approval of the Company’s shareholders under Applicable Laws. No amendment, suspension or termination of the Plan may have a materially adverse effect on any then outstanding Award without the consent of the Participant, provided, however, that the Board may, in its sole and absolute discretion and without the consent of any Participant, amend the Plan or any Award Agreement, to take effect retroactively or otherwise, as it deems necessary or advisable for the purpose of conforming the Plan or such Award Agreement to Applicable Laws. 12 c. Amendment of Awards. The Committee at any time, and from time to time, may amend the terms of any one or more outstanding Awards; provided, however, that the Committee may not affect any amendment which would otherwise constitute an impairment of the rights under any Award unless (a) the Company requests the consent of the Participant and (b) the Participant consents in writing. 14. General Provisions. Forfeiture Events. The Committee may specify in an Award Agreement that the Participant’s rights, payments and benefits with respect to an a. Award shall be subject to reduction, cancellation, forfeiture or recoupment upon the occurrence of certain events, in addition to applicable vesting conditions of an Award. Such events may include, without limitation, breach of non-competition, non-solicitation, confidentiality, or other restrictive covenants that are contained in the Award Agreement or otherwise applicable to the Participant, a termination of the Participant’s Continuous Service for Cause, or other conduct by the Participant that is detrimental to the business or reputation of the Company and/or its Affiliates. b. Claw-back. Notwithstanding any provision in this Plan to the contrary, any “incentive-based compensation” within the meaning of Section 10D of the Exchange Act will be subject to claw-back by the Company in the manner required by Section 10D(b)(2) of the Exchange Act, as determined by the applicable rules and regulations promulgated thereunder from time to time by the U.S. Securities and Exchange Commission. Sub-plans. The Committee may from time to time establish sub-plans under the Plan for purposes of satisfying blue sky, securities, or other laws of c. various jurisdictions in which the Company intends to grant Awards. Any sub-plans shall contain such limitations and other terms and conditions as the Committee determines are necessary or desirable. Deferral of Awards. The Committee may establish one or more programs under the Plan to permit selected Participants the opportunity to elect to d. defer receipt of consideration upon vesting of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Participant to payment or receipt of shares of Common Stock or other consideration under an Award. Unfunded Plan. The Plan shall be unfunded. Neither the Company, the Board nor the Committee shall be required to establish a separate fund or to e. segregate any assets to assure the performance of its obligations under the Plan. Delivery. Upon vesting of a right granted under this Plan, the Company shall issue Common Stock or pay any amounts due within a reasonable f. period of time thereafter. Subject to any statutory or regulatory obligations the Company may otherwise have, for purposes of this Plan, 30 days shall be considered a reasonable period of time. No Fractional Shares. No fractional shares of Common Stock shall be issued or delivered pursuant to the Plan. The Committee shall determine g. whether (i) cash, additional Awards or other securities or property shall be issued or paid in lieu of fractional shares of Common Stock or (ii) any fractional shares should be rounded, forfeited or otherwise eliminated. h. Section 409A. The Plan is intended to comply with Section 409A of the Code (“Section 409A”) to the extent subject thereto, and, to the maximum extent permitted, the Plan shall be interpreted and administered to be in compliance therewith. Any payments described in the Plan that are due within the “short-term deferral period” as defined in Section 409A shall not be treated as deferred compensation unless Applicable Laws require otherwise. Notwithstanding anything to the contrary in the Plan, to the extent required to avoid accelerated taxation and tax penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Plan during the six month period immediately following the Participant’s termination of Continuous Service shall instead be 13 paid on the first payroll date after the six-month anniversary of the Participant’s separation from service (or the Participant’s death, if earlier). Notwithstanding the foregoing, neither the Company nor the Committee shall have any obligation to take any action to prevent the assessment of any excise tax or penalty on any Participant under Section 409A and neither the Company nor the Committee will have any liability to any Participant for such tax or penalty. Section 16. It is the intent of the Company that the Plan satisfy, and be interpreted in a manner that satisfies, the applicable requirements of Rule i. 16b-3 as promulgated under Section 16 of the Exchange Act so that Participants will be entitled to the benefit of Rule 16b-3, or any other rule promulgated under Section 16 of the Exchange Act, and will not be subject to short-swing liability under Section 16 of the Exchange Act. Accordingly, if the operation of any provision of the Plan would conflict with the intent expressed in this Section 14.9, such provision to the extent possible shall be interpreted and/or deemed amended so as to avoid such conflict. j. Section 162(m). To the extent the Committee issues any Award that is intended to be exempt from the deduction limitation of Section 162(m) of the Code, the Committee may, without shareholder or grantee approval, amend the Plan or the relevant Award Agreement retroactively or prospectively to the extent it determines necessary in order to comply with any subsequent clarification of Section 162(m) of the Code required to preserve the Company’s federal income tax deduction for compensation paid pursuant to any such Award. Beneficiary Designation. Each Participant may file with the Company a written designation of a beneficiary who is to receive any benefit under this k. Plan to which the Participant is entitled in the event of such Participant’s death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation shall be subject to the written consent of the Participant’s spouse. If a Participant dies without an effective designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining unpaid benefits to the Participant’s legal representative. l. Severability. If any of the provisions of the Plan or any Award Agreement is held to be invalid, illegal or unenforceable, whether in whole or in part, such provision shall be deemed modified to the extent, but only to the extent, of such invalidity, illegality or unenforceability and the remaining provisions shall not be affected thereby. Plan Headings. The headings in the Plan are for purposes of convenience only and are not intended to define or limit the construction of the m. provisions hereof. n. Non-Uniform Treatment. The Committee’s determinations under the Plan need not be uniform and may be made by it selectively among persons who are eligible to receive, or actually receive, Awards. Without limiting the generality of the foregoing, the Committee shall be entitled to make non- uniform and selective determinations, amendments and adjustments, and to enter into non-uniform and selective Award Agreements. 15. Parachute Payments. Notwithstanding any other provision of this Plan or of any other agreement, contract, or understanding heretofore or hereafter entered into by a Participant with the Company or Affiliate, except an agreement, contract, or understanding that expressly addresses Section 280G or Section 4999 of the Code (an “Other Agreement”), and notwithstanding any formal or informal plan or other arrangement for the direct or indirect provision of compensation to the Participant (including groups or classes of Participants or beneficiaries of which the Participant is a member), whether or not such compensation is deferred, in cash, or in the form of a benefit to or for the Participant (a “Benefit Arrangement”), if the Participant is a “disqualified individual,” as defined in Section 280G(c) of the Code, any Restricted Award, Performance Share Award or Performance Compensation Award held by that Participant and any right to receive any payment or other benefit under this Plan shall not 14 become vested (a) to the extent that such right to vesting, payment, or benefit, taking into account all other rights, payments, or benefits to or for the Participant under this Plan, all Other Agreements, and all Benefit Arrangements, would cause any payment or benefit to the Participant under this Plan to be considered a “parachute payment” within the meaning of Section 280G(b)(2) of the Code as then in effect (a “Parachute Payment”) and (b) if, as a result of receiving a Parachute Payment, the aggregate after-tax amounts received by the Participant from the Company under this Plan, all Other Agreements, and all Benefit Arrangements would be less than the maximum after-tax amount that could be received by the Participant without causing any such payment or benefit to be considered a Parachute Payment. In the event that the receipt of any such right to vesting, payment, or benefit under this Plan, in conjunction with all other rights, payments, or benefits to or for the Participant under any Other Agreement or any Benefit Arrangement would cause the Participant to be considered to have received a Parachute Payment under this Plan that would have the effect of decreasing the after-tax amount received by the Participant as described in clause (b) of the preceding sentence, then the Participant shall have the right to designate those rights, payments, or benefits under this Plan, any Other Agreements, and any Benefit Arrangements that should be reduced or eliminated so as to avoid having the payment or benefit to the Participant under this Plan be deemed to be a Parachute Payment; provided, however, that in order to comply with Code Section 409A, the reduction or elimination will be performed in the order in which each dollar of value subject to an award reduces the Parachute Payment to the greatest extent. An Other Agreement may modify or negate the provisions of this Section 15. 16. Effective Date of Plan. The Plan is effective as of the Effective Date. 17. Termination or Suspension of the Plan. The Plan shall terminate automatically on the tenth anniversary of the Effective Date. No Award shall be granted after such date, but Awards theretofore granted may extend beyond that date. The Board may suspend or terminate the Plan at any earlier date pursuant to Section 13.1 hereof. No Awards may be granted under the Plan while the Plan is suspended or after it is terminated. Unless the Company determines to submit Section 8 and the definition of “Performance Goal” and “Performance Criteria” to the Company’s shareholders at the first shareholder meeting that occurs in the fifth year following the year in which the Plan was last approved by shareholders (or any earlier meeting designated by the Board), in accordance with the requirements of Section 162(m) of the Code, and such shareholder approval is obtained, then no further Performance Compensation Awards shall be made to Covered Employees under Section 8 after the date of such annual meeting, but the Plan may continue in effect for Awards to Participants not in accordance with Section 162(m) of the Code. 18. without regard to such state’s conflict of law rules. Choice of Law. The laws of the State of Connecticut shall govern all questions concerning the construction, validity and interpretation of this Plan, As adopted by the Board of Directors of BWFG, Inc. on December 15, 2020. 15 Consent of Independent Registered Public Accounting Firm We consent to the incorporation by reference in the Registration Statements (Nos. 333-197040 and 333-199104) on Form S-8 and (No. 333-205922) on Form S-3 of Bankwell Financial Group, Inc. of our report dated March 10, 2021, relating to the consolidated financial statements of Bankwell Financial Group, Inc., appearing in this Annual Report on Form 10-K of Bankwell Financial Group, Inc. for the year ended December 31, 2020. Exhibit 23.1 /s/ RSM US LLP New Haven, Connecticut March 10, 2021 I, Christopher R. Gruseke, certify that: CERTIFICATIONS 1. I have reviewed this annual report on Form 10-K of Bankwell Financial Group, Inc. Exhibit 31.1 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) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and 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 10, 2021 /s/ Christopher R. Gruseke Christopher R. Gruseke President and Chief Executive Officer I, Penko Ivanov, certify that: CERTIFICATIONS 1. I have reviewed this annual report on Form 10-K of Bankwell Financial Group, Inc. Exhibit 31.2 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) evaluated the effectiveness of the Registrant’s disclosure controls and procedures and 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 10, 2021 /s/ Penko Ivanov Penko Ivanov Executive Vice President and Chief Financial Officer CERTIFICATION PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 Exhibit 32 The undersigned, Christopher R. Gruseke and Penko Ivanov 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, 2020 (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 10, 2021 /s/ Penko Ivanov Penko Ivanov Executive Vice President and Chief Financial Officer Date: March 10, 2021 

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