What changed in this filing

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Item 1. Business

2023-03-08 compared with 2022-03-08 · 143 added, 146 removed, 508 unchanged (36% of the section changed)

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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 (including the outbreak of COVID-19 variants) and the direct and indirect impact of such pandemic, including its impact on the Company’s financial condition and business operations;

• Disruptions to economic conditions, the financial and labor markets and workplace operating environments;

• Local, regional and national business or economic conditions may differ from those expected;

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• 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;

• Changes in our executive management team;

• Inability to successfully execute our executive 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;

• Increased competition within our market which may limit our growth and profitability;

• Economic, market, operational, liquidity, credit and interest rate risks associated with our business;

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• Changes in law and regulatory requirements (including those concerning taxes, banking, securities and insurance);

• Further governmental intervention in the U.S.

• Further government intervention in the U.S.

financial system.

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(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.

The Bank provides a wide range of services to customers in our primary market, an area encompassing approximately a 100 mile radius around our branch network.

In addition, the Bank pursues certain types of commercial lending opportunities outside our primary market, particularly where we have strong relationships.

The Bank operates branches in New Canaan, Stamford, Fairfield, Wilton, Westport, Darien, Norwalk, and Hamden, Connecticut.

The Bank provides a wide range of services to clients in our market, an area encompassing approximately a 100 mile radius around our branch network.

In addition, the Bank pursues certain types of commercial lending opportunities outside our market, particularly where we have strong relationships.

The Bank operates branches in New Canaan, Stamford, Fairfield, Westport, Darien, Norwalk, and Hamden, Connecticut.

As of December 31, 2022, on a consolidated basis, we had total assets of approximately $3.3 billion, net loans of approximately $2.6 billion, total deposits of approximately $2.8 billion, and shareholders’ equity of approximately $238.5 million.

We are focused on being the banking provider of choice and to serve as an alternative to our larger competitors.

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.

We have a history of building long-term client relationships and attracting new clients through what we believe is our superior service and our ability to deliver a diverse product offering.

In addition, we believe that our strong capital position and extensive ownership, coupled with a highly respected and experienced executive management team and board of directors, give us credibility with our clients and potential clients.

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.

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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, 2017 through December 31, 2021, our total assets grew from $1.8 billion to approximately $2.5 billion;

our gross loans outstanding grew from $1.5 billion to $1.9 billion and our deposits grew from $1.4 billion to approximately $2.1 billion.

We believe this growth was driven by our ability to provide superior service to our customers and our financial stability.

With the efforts of our strong executive management team, we continued our growth and maintained a strong track record of performance.

From December 31, 2018 through December 31, 2022, our total assets grew from $1.9 billion to $3.3 billion;

our gross loans outstanding grew from $1.6 billion to $2.7 billion and our deposits grew from $1.5 billion to $2.8 billion.

We believe this growth was driven by our ability to provide exceptional service to our client s and our financial stability.

Business Strategy

We are focused on being the 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.

• Responsive, Client-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 clients through high-quality, responsive and personal service.

By focusing on the entire client relationship, we build the trust of our clients, 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.

Our employees are involved in many civic and community organizations, which we support through volunteerism and sponsorships.

As a result, clients and potential clients within our market know about us and frequently interact with our employees which allows us to develop long-term client relationships without extensive advertising.

• Strategic Acquisitions.

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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.

We continually upgrade our operating infrastructure, particularly in the areas of technology, data processing, and compliance.

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 service, which will enhance our ability to grow and increase our returns.

• Disciplined Focus on Risk Management.

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We use our strong risk management process to monitor our existing loan and investment securities portfolios, support operational decision-making and improve our ability to generate earning assets with strong credit quality.

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.

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.

We have a Risk Management Steering Committee comprised of

executive officers and other members of management.

This committee reviews and 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.

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• Our Market.

Our current market is defined as an area encompassing approximately a 100 mile radius around our branch network.

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.

The Bank provides a wide range of services to client s in our market, an area encompassing approximately a 100 mile radius around our branch network.

In addition, the Bank pursues certain types of commercial lending opportunities outside our market, particularly where we have strong business relationships.

Our goal is to support our clients as they grow, and with advances in technology, we are able to service and maintain business relationships beyond our market.

• Experienced and Respected Executive 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 institutio ns 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 Operating Officer (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.

Chivily, Executive Vice President, Chief Credit Officer (since 2013), Matthew McNeill, Executive Vice President, Chief Banking Officer (since 2020), Courtney E.

Sacchetti, Executive Vice President, Chief Financial Officer (since January 1, 2023), and Laura J.

Waitz, Executive Vice President, Chief Operating Officer (since 2017).

• Dedicated Board of Directors with Close Community Ties.

Our Board of Directors is comprised of a group of business leaders who understand the need for banks that focus on serving the financial needs of their client s.

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.

By capitalizing on the business relationships and c lose community ties of our executive management team and directors, we are positioned to take advantage of opportunities present in our market.

• Strong Capital Position.

At December 31, 2021, we had a 8.13% tangible common equity ratio, and the Bank had a 9.94% tier 1 leverage ratio, an 11.18% tier 1 risk-based ratio, and a 12.00% total capital to risk-weighted assets ratio.

At December 31, 2022, we had a 7.26% tangible common equity ratio, and the Bank had a 9.88% tier 1 leverage ratio, a 10.28% tier 1 risk-based ratio, and an 11.07% 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.

We provide banking technology, including remote deposit capture, Internet banking and mobile banking, to offer our clients 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 clients with an exceptional banking experience.

Human Capital Resources

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It is through our team, and their ties to the communities, that we are able to dutifully support the communities we serve.

Working within, and giving back to, our local partners is the hallmark of a true community bank, and we believe that the strength and commitment of our workforce to our communities is what sets us apart from other banks.

Working within, and giving back to, our local partners is the hallmark of who we are, and we believe that the strength and commitment of our workforce to our communities is what sets us apart from other banks.

We have long been committed to comprehensive and competitive compensation and benefits programs as we recognize that we operate in intensely competitive environments for talent.

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Our employees’ desire for active community involvement enables us to sponsor numerous local community events and initiatives.

The Company is committed to the overall well-being of our team members.

In the COVID-19 pandemic, we worked to implement state and local directives regarding public health.

We provided for remote working where possible.

We continue to

monitor the COVID-19 pandemic including both federal and state guidance, making adjustments as necessary to support employees and our clients.

The Company is committed to the overall well-being of our team members, offering competitive health and welfare benefits.

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.

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.

The financial services industry in our market and the surrounding area is highly competitive.

The financial services industry 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.

Competition for deposit products can depend heavily on pricing because of the ease with which clients 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 attract these clients 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.

however, we believe that our presence in our 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.

Lending Activities

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.

We offer a wide array of commercial lending products to serve the needs of our clients.

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.

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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 seek to attract new lending clients 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.

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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.

Prior to these decisions having been made, 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.

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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.

Risks associated with commercial real estate loans include increases in interest rates, 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.

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, healthcare 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.

lesser extent, loans to individual clients for construction of single family homes in our market.

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.

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We make loans secured by accounts receivable or inventory, principal typically is repaid as the assets securing the loan are converted into cash, and for loans secured with other types of collateral, principal is 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.

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.

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 or mid-term interest rate resets, possi bly at increased interest rates.

Our commercial loan portfolio presents a higher risk than our consumer real estate and consumer loan portfolios.

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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 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, contain both secured and 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

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.

Although we do not engage in any material amount of consumer lending, our cons umer loans, which are underwritten primarily based on the borrower’s financial condition and, contain both secured and 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.

Rising interest rates may also impact the risk profile of this segment of the portfolio.

Credit Policy an d Procedures

We adhere to what we believe are disciplined underwriting standards, but also remain cognizant of the need to serve the credit needs of our clients by offering flexible loan solutions in a responsive and timely manner.

We also seek to maintain a diversified loan portfolio across client, 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.

Accordingly, substantially all of our loans are made to borrowers located or operating in our market with whom we have ongoing relationships across various product lines.

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 as well.

Credit concentrations.

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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.

All concentrations are monitored by our Chief 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 and loans dependent on the operation of a business, 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 $19.8 million to $93.3 million and are monitored on an on-going basis.

For individual loans and loans dependent on the operation of a business, 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 $49.0 million to $127.5 million an d 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.

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 clients on the other hand.

Our credit approval policies have a tiered approval process, with larger exposures referred to different levels of management and the Directors’ Loan Committee, as appropriate, based on the size and type 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.

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Credit risk management.

Credit risk management involves a partnership between our relationship managers and our credit approval, credit administration, portfolio management and collections personnel.

Credit risk management involves a partnership between our relationship managers and our credit approval, credit administration, portfolio management and collections departments.

Portfolio monitoring and early problem recognition are an important aspect of maintaining our high credit quality standards.

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Our evaluation and compensation program for our relationship managers includes significant goals that we believe motivate the relationship managers to focus on high quality credit consistent with our strategic focus on asset quality.

It is our policy to review 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.

Relationship managers, portfolio managers, credit administrators 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 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.

Relationship managers and portfolio managers are encouraged to bring potential credit issues to the attention of our Chief Credit Officer immediately upon any sign of deterioration in the performance of the borrower.

We maintain a list of loans that receive additional attention if we believe there may be a potential credit risk via our Watch List report.

Loans that are upgraded or downgraded are reviewed by our Chief 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.

Loans that are upgraded or downgraded are reviewed by our Chief 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.

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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 “2015 Notes”) to certain institutional investors.

On August 19, 2015, the Company co mpleted a private placement of $25.5 million in aggregate principal amount of fixed rate subordinated notes (the “2015 Notes”) to certain institutional investors.

The 2015 Notes were non-callable for five years, had a stated maturity of August 15, 2025, and bore interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date.

The 2015 Notes became callable, in part or in whole, beginning August 2020.

On May 15, 2021, the Company retired $10.0 million of the 2015 Notes and redeemed the remaining $15.5 million of the 2015 Notes on November 15, 2021.

On October 14, 2021, the Company issued and sold to an institutional accredited investor a fixed-to-floating rate subordinated note (the “Note”) in the principal amount of $35.0 million.

The note is structured to qualify for the Company as Tier 2 capital under regulatory guidelines.

The Company used the net proceeds from the sale of the Note for general corporate purposes, including, but not limited to, the repayment of $15.5 million of the 2015 Notes.

The Note will bear interest at a fixed rate of 3.25% per year, from and including October 14, 2021 to, but excluding, October 15, 2026.

From and including October 15, 2026 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR (as defined in the Note) plus 233 basis points.

The Note provides that the interest rate during the applicable floating rate period may be determined based on a rate other than the three-month term SOFR under certain circumstances.

The Note has a stated maturity of October 15, 2031.

Prior to October 15, 2026, the Company may redeem the Note only under certain limited circumstances.

On or after October 15, 2026, the Company may redeem the Note, in whole or in part, at its option, on any interest payment date.

The Note is not subject to redemption at the option of the holder.

The Note is not subject to any sinking fund and is not convertible into or exchangeable for any other securities or assets of the Company or any of its subsidiaries.

Enterprise Risk Management

On May 15, 2021, the Company repaid $10.0 million of the 2015 Notes and on November 15, 2021, the Company repaid the remaining $15.5 million of the 2015 Notes.

On October 14, 2021, the Company completed a private placement of a $35.0 million fixed-to-floating rate subordinated note (the “2021 Note”) to an institutional accredited investor.

The Company used the net proceeds to repay the 2015 Notes and intends to use the remaining proceeds for general corporate purposes.

The 2021 Note bears interest at a fixed rate of 3.25% per year until October 14, 2026.

Thereafter, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 233 basis points.

The 2021 Note has a stated maturity of October 15, 2031 and is non-callable for five years.

Beginning October 15, 2026, the Company may redeem the 2021 Note, in whole or in part, at its option.

The 2021 Note is not redeemable at the option of the holder.

The 2021 Note has been structured to qualify for the Company as Tier 2 capital under regulatory guidelines.

On August 19, 2022, the Company entered into a Subordinated Note Purchase Agreement with certain qualified institutional buyers, pursuant to which the Company issued and sold 6.0% fixed-to-floating rate subordinated notes due 2032 (the “2022 Notes”) in the aggregate principal amount of $35.0 million.

The Company intends to use the net proceeds from the sale of the 2022 Notes for general corporate purposes.

The 2022 Notes bear interest at a fixed rate of 6.0% per year, from and including August 19, 2022 to, but excluding, September 1, 2027.

From and including September 1, 2027 to, but excluding the maturity date or early redemption date, the interest rate will reset quarterly at a variable rate equal to the then current three-month term SOFR plus 326 basis points.

The 2022 Notes have a stated maturity of September 1, 2032 and are non-callable for five years.

The Company may redeem the 2022 Notes, in whole or in part, at its option, on the fifth anniversary of the issue date or on any interest payment date thereafter.

Any redemption by the Company would be at a redemption price equal to 100% of the principal amount of the 2022 Notes being redeemed, together with any accrued and unpaid interest on the 2022 Notes being redeemed to but excluding the date of redemption.

The 2022 Notes are not subject to redemption at the option of the holder.

The 2022 Notes have been structured to qualify for the Company as Tier 2 capital under regulatory guidelines.

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.

The Company’s existing governance and organizational structure incorporates a substantial risk management component through the following:

• The retention of an independent accounting firm (separate from the Company’s auditors) that performs internal audit reviews;

• The utilization of a Directors Loan Committee and ALCO, both comprised of directors of the Company;

• Outsourcing of our asset/liability calculations to a reputable third party, including a quarterly assessment of interest rate risk, reviewed and validated by ALCO;

• A Risk Management Steering Committee which is chaired by our Chief Risk Officer.

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.

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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

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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 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.

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.

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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.

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, off-balance sheet exposures of 25% or less of total consolidated assets and trading assets plus trading liabilities of 5% or less of total consolidated assets, are eligible to opt into the community bank leverage ratio ("CBLR") framework.

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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 final rules include a two-quarter grace period during which a qualifying community banking organization that temporarily fails to meet any of the qualifying criteria, including the greater-than-9% leverage capital ratio requirement, is generally still deemed "well capitalized" so long as the banking organization maintains a leverage capital ratio greater than 8%.

The final rules include a two-quarter grace period during which a qualifying community banking organization that

temporarily fails to meet any of the qualifying criteria, including the greater-than-9% leverage capital ratio requirement, is generally still deemed "well capitalized" so long as the banking organization maintains a leverage capital ratio greater than 8%.

A banking organization that fails to maintain a leverage capital ratio greater than 8% is not permitted to use the grace period and must comply with the generally applicable requirements under the Basel III rules and file the appropriate regulatory reports.

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On August 28, 2018, the Federal Reserve Board issued an interim final rule regarding revisions to the Policy prompted by the Economic Growth Act.

As a result of its growth, as of December 31, 2022, the Company is no longer a ‘covered bank holding company” under the Policy.

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.

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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.

The CARES Act had several provisions relevant to financial institutions, including:

• Allowing institutions not to characterize loan modifications relating to the COVID-19 pandemic as a troubled debt restructuring and also allowing them to suspend the corresponding impairment determination for accounting purposes;

• Temporarily reducing the community bank leverage ratio alternative available to institutions of less than $10 billion of assets to 8%;

• The establishment of the Paycheck Protection Program (“PPP”), a specialized low-interest forgivable loan program funded by the U.S.

Treasury Department and administered through the SBA’s 7(a) loan guaranty program to support businesses affected by the COVID-19 pandemic;

• The ability of a borrower of a federally-backed mortgage loan (VA, FHA, USDA, Freddie Mac and Fannie Mae) experiencing financial hardship due, directly or indirectly, to the COVID-19 pandemic, to request forbearance from

paying their mortgage by submitting a request to the borrower’s servicer affirming their financial hardship during the COVID-19 emergency.

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.

It is possible that Congress may enact additional legislation to address the social and economic disruptions caused by the pandemic.

The Company continues to monitor any statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

On January 30, 2023, the Biden Administration announced its intent to end the national emergency and public health emergency declarations on May 11, 2023.

Connecticut Banking Laws and Supervision

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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.

Federal law also prevents an institution from paying dividends or making other capital distributions that, if by doing so, would cause it to become “under-capitalized”.

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.

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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.

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 under-capitalized 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);

(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;

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(9) financing and investing in certain community development activities;

and (10) subject to certain limitations, providing securities brokerage services for customers.

and (10) subject to certain limitations, providing securities brokerage services for clients.

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.

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.

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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.

Under federal law, the Bank may not pay any dividend to us if the Bank is under-capitalized or the payment of the dividend would cause it to become under-capitalized.

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).

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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.

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 23A also establishes specific collateral requirements for loans or extensions of credit to an affiliate, or the issuance of 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.

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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:

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 under-capitalized” on average during the calendar quarter beginning 270 days after the date on which the institution became “critically under-capitalized.” 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;

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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.

Subject to certain adjustments, the range of assessment rates is now between 1.5 to 30 basis points of the assessment base.

A depository institution’s assessment rate depends upon the category to which it is assigned and certain adjustments specified by the F DIC, with less risky institutions paying lower assessments.

Subject to certain adjustments, the range of assessment rates is now between 1.5 to 30 ba sis 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.

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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,

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.

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• 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;

• 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 clients’ rights and liabilities arising from the use of automated teller machines and other electronic banking services;

• Rules and regulations of the various federal banking agencies charged with the responsibility of implementing these federal laws.

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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.

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.

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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”.

In our most recent evaluation, the Bank received a CRA rating of “satisfactory”.

Consumer Protection and Fair Lending Regulations.

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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.

not submitted notice to the Federal Reserve Board of intent to be deemed a financial holding company.

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.

Under the GLBA, all financial institutions are required to establish policies and procedures to restrict the sharing of non-public client data with non-affiliated parties and to protect client 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 clients 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 clients 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.

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government, including:

(1) requiring standards for verifying customer identification information at account opening;

(1) requiring standards for verifying client 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.

(4) filing suspicious activities reports by financial institutions regarding suspected client money laundering, terrorism financing, or other violations of U.S.

laws and regulations;

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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.

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 client 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.

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.

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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.

Excise Tax on Stock Repurchases, The Inflation Reduction Act of 2022 (“IRA”) imposes a 1% excise tax on the aggregate fair market value of stock repurchased by certain corporations during the taxable year, subject to adjustments.

The new excise tax is effective as of January 1, 2023 and generally applies to any US corporation whose stock is traded on an established securities market and that repurchases more than $1 million of stock over the course of a tax year.

The Company and the Bank are not currently under audit with respect to their federal tax returns.

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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, 2021 and 2020) to arrive at Connecticut income tax.

Connecticut taxable income is multiplied by the state tax rate (7.5% f or the fiscal years ending December 31, 2022 and 2021) 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.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business