Income Taxes

12 Months Ended

Dec. 31, 2020

Income Tax Disclosure [Abstract]

Income Taxes

Income Taxes

The components of income tax expense for the years ended December 31, 2020, December 31, 2019 and December 31, 2018 consisted of:

	December 31,
	2020		2019		2018
	(In thousands)
Current provision:
Federal	$	4,295	$	4,137	$	2,251
State	618		313		185
Total current	4,913		4,450		2,436
Deferred (credit) provision:
Federal	(3,071)		276		1,284
State	(445)		—		—
Total deferred	(3,516)		276		1,284
Total income tax expense	$	1,397	$	4,726	$	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:

	December 31,
	2020		2019		2018
	(In thousands)
Income tax expense at statutory federal rate	$	1,533	$	4,818	$	4,442
State tax expense, net of federal tax effect	174		223		99
Income exempt from tax	(345)		(368)		(403)
Stock compensation	101		(3)		(68)
Deferred director fees	2		(14)		(100)
Other items, net	(68)		70		(250)
Income tax expense	$	1,397	$	4,726	$	3,720

At December 31, 2020 and December 31, 2019, the components of deferred tax assets and liabilities were as follows:

	December 31,
	2020		2019
	(In thousands)
Deferred tax assets:
Allowance for loan losses	$	4,724	$	2,862
Net operating loss carryforwards	444		481
Deferred fees	1,433		1,120
Deferred director fees	341		174
Start-up costs	70		91
Unrealized loss on derivatives	5,246		2,245
Lease liabilities	2,009		2,132
Other	1,311		302
Gross deferred tax assets	15,578		9,407
Deferred tax liabilities:
Deferred expenses	774		671
Servicing rights	136		192
Core deposit intangible	17		45
Depreciation	309		210
Unrealized gain on available for sale securities	786		247
Right-of-use-assets	1,986		2,117
Other	270		137
Gross deferred tax liabilities	4,278		3,619
Net deferred tax asset	$	11,300	$	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:

	At December 31,
	2020		2019		2018
	(In thousands)
Balance, beginning of year	$	269	$	193	$	393
Net additions (reductions) relating to potential liability with taxing authorities	125		76		(200)
Balance, end of year	$	394	$	269	$	193