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Item 7. Management’s Discussion and Analysis

2023-03-08 compared with 2022-03-08 · 284 added, 123 removed, 651 unchanged (38% of the section changed)

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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 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.

The following discussion and analysis presents our results of operations and financial condition on a consolidated basis.

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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.

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, 2022 and 2021 and the selected consolidated statement of income data for the years ended December 31, 2022 and 2021 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, 2020, 2019, and 2018 and the selected consolidated statement of income data for the years ended December 31, 2020, 2019, and 2018 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.

Selected Financial Data

At or For the Years Ended December 31,

2022 2021 2020 (g)

(Dollars in thousands, except per share data)

Statements of Income:

Interest income $ 117,945 $ 81,376 $ 77,487 $ 82,948 $ 80,064

Interest expense 23,202 13,490 22,652 29,187 23,738

Net interest income 94,743 67,886 54,835 53,761 56,326

Provision (credit) for loan losses 5,437 (57) 7,605 437 3,440

Net interest income after provision for loan losses 89,306 67,943 47,230 53,324 52,886

Noninterest income 3,040 5,657 2,884 5,244 3,900

Noninterest expense 44,363 39,739 42,813 35,626 35,633

Income before income tax 47,983 33,861 7,301 22,942 21,153

Income tax expense 10,554 7,275 1,397 4,726 3,720

Net income 37,429 26,586 5,904 18,216 17,433

Per Share Data:

Basic earnings per share $ 4.84 $ 3.38 $ 0.75 $ 2.32 $ 2.23

Diluted earnings per share $ 4.79 $ 3.36 $ 0.75 $ 2.31 $ 2.21

Book value per share (end of period) (a)

31.73 26.53 22.77 23.51 22.43

Tangible book value per share (end of period) (a)(b)

31.39 26.19 22.43 23.15 22.06

Dividend payout ratio (f)

16.70 % 19.05 % 74.67 % 22.51 % 21.72 %

Shares outstanding (end of period) (a)

7,516,699 7,612,807 7,755,909 7,757,828 7,764,647

Weighted average shares outstanding–basic 7,563,363 7,706,407 7,728,328 7,757,355 7,722,175

Weighted average shares outstanding–diluted 7,640,218 7,761,811 7,748,453 7,784,631 7,775,480

Performance Ratios:

Return on average assets (c)

1.44 % 1.17 % 0.28 % 0.97 % 0.94 %

Return on average common shareholders’ equity (b)

16.72 % 13.86 % 3.35 % 10.20 % 10.19 %

Average shareholders’ equity to average assets 8.61 % 8.46 % 8.36 % 9.53 % 9.24 %

Net interest margin 3.78 % 3.17 % 2.77 % 3.03 % 3.18 %

Efficiency ratio (b)

45.4 % 53.9 % 73.9 % 60.2 % 59.2 %

Asset Quality Ratios:

Total past due loans to total loans (d)

0.60 % 1.72 % 0.93 % 0.77 % 0.78 %

Nonperforming loans to total loans (d)

0.61 % 0.88 % 2.06 % 0.66 % 0.88 %

Nonperforming assets to total assets (e)

0.51 % 0.68 % 1.48 % 0.56 % 0.75 %

Allowance for loan losses to nonperforming loans 136.43 % 101.90 % 62.87 % 127.59 % 109.80 %

Allowance for loan losses to total loans (d)

0.84 % 0.89 % 1.29 % 0.84 % 0.96 %

Net charge-offs (recoveries) to average loans (d)

— % 0.23 % 0.01 % 0.15 % 0.44 %

Statements of Financial Condition:

Total assets $ 3,252,449 $ 2,456,264 $ 2,253,747 $ 1,882,182 $ 1,873,665

Gross portfolio loans (d)

2,675,448 1,894,881 1,625,627 1,604,484 1,604,726

Investment securities 121,634 108,409 106,890 100,865 116,584

Deposits 2,800,818 2,123,998 1,827,316 1,491,903 1,502,244

FHLB borrowings 90,000 50,000 175,000 150,000 160,000

Subordinated debt 68,959 34,441 25,258 25,207 25,155

Total equity 238,469 201,987 176,602 182,397 174,196

Capital Ratios:

Tier 1 capital to average assets

Bankwell Bank 9.88 % 9.94 % 8.44 % 10.99 % 10.14 %

Tier 1 capital to risk-weighted assets

Bankwell Bank 10.28 % 11.18 % 11.06 % 12.53 % 11.56 %

Total capital to risk-weighted assets

Bankwell Bank 11.07 % 12.00 % 12.28 % 13.35 % 12.50 %

Total shareholders’ equity to total assets 7.33 % 8.22 % 7.84 % 9.69 % 9.30 %

Tangible common equity ratio (b)

7.26 % 8.13 % 7.73 % 9.56 % 9.16 %

(a) Excludes 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.

(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.

(g) 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.

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.

Years Ended December 31,

2022 2021 2020 2019 2018

(Dollars in thousands, except per share data)

Efficiency Ratio

Noninterest expense $ 44,363 $ 39,739 $ 42,813 $ 35,626 $ 35,633

other real estate owned expenses — — 6 37 —

Amortization of intangibles — 76 138 75 92

Adjusted noninterest expense (numerator) $ 44,363 $ 39,663 $ 42,669 $ 35,514 $ 35,541

Net interest income $ 94,743 $ 67,886 $ 54,835 $ 53,761 $ 56,326

Noninterest income 3,040 5,657 2,884 5,244 3,900

Adjustments for:

gains/(losses) on sales of securities — — — 76 222

Adjustments for:

gains/(losses) on sale of other real estate owned — — 19 (102) —

Adjusted operating revenue (denominator) $ 97,783 $ 73,543 $ 57,700 $ 59,031 $ 60,004

Efficiency ratio 45.4 % 53.9 % 73.9 % 60.2 % 59.2 %

Tangible Common Equity and

Tangible Common Equity/Tangible Assets

Total shareholders’ equity $ 238,469 $ 201,987 $ 176,602 $ 182,397 $ 174,196

preferred stock — — — — —

Common shareholders’ equity 238,469 201,987 176,602 182,397 174,196

Intangible assets 2,589 2,589 2,665 2,803 2,879

Tangible Common shareholders’ equity $ 235,880 $ 199,398 $ 173,937 $ 179,594 $ 171,317

Total assets $ 3,252,449 $ 2,456,264 $ 2,253,747 $ 1,882,182 $ 1,873,665

Intangible assets 2,589 2,589 2,665 2,803 2,879

Tangible assets $ 3,249,860 $ 2,453,675 $ 2,251,082 $ 1,879,379 $ 1,870,786

Tangible common shareholders’ equity to tangible assets 7.26 % 8.13 % 7.73 % 9.56 % 9.16 %

Tangible Book Value per Share

Total shareholders’ equity $ 238,469 $ 201,987 $ 176,602 $ 182,397 $ 174,196

preferred stock — — — — —

Common shareholders’ equity 238,469 201,987 176,602 182,397 174,196

Intangible assets 2,589 2,589 2,665 2,803 2,879

Tangible common shareholders’ equity $ 235,880 $ 199,398 $ 173,937 $ 179,594 $ 171,317

Common shares issued 7,730,699 7,803,166 7,919,278 7,868,803 7,842,271

shares of unvested restricted stock 214,000 190,359 163,369 110,975 77,624

Common shares outstanding 7,516,699 7,612,807 7,755,909 7,757,828 7,764,647

Book value per share $ 31.73 $ 26.53 $ 22.77 $ 23.51 $ 22.43

effects of intangible assets 0.34 0.34 0.34 0.36 0.37

Tangible Book Value per Common Share $ 31.39 $ 26.19 $ 22.43 $ 23.15 $ 22.06

Total Revenue

Net interest income $ 94,743 $ 67,886 $ 54,835 $ 53,761 $ 56,326

noninterest income 3,040 5,657 2,884 5,244 3,900

Total Revenue $ 97,783 $ 73,543 $ 57,719 $ 59,005 $ 60,226

Noninterest income as a percentage of total revenue 3.11 % 7.69 % 5.00 % 8.89 % 6.48 %

Return on Average Common Shareholders’ Equity

Net Income Attributable to Common Shareholders $ 37,429 $ 26,586 $ 5,904 $ 18,216 $ 17,433

Total average shareholders’ equity $ 223,874 $ 191,808 $ 176,489 $ 178,510 $ 171,024

average preferred stock — — — — —

Average Common Shareholders’ Equity 223,874 191,808 176,489 178,510 171,024

Return on Average Common Shareholders’ Equity 16.72 % 13.86 % 3.35 % 10.20 % 10.19 %

Executive Overview

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We aim to do this through:

• Responsive, customer-centric products and services and a community focus;

• Responsive, client-centric products and services and a community focus;

• Organic growth and strategic acquisitions when market opportunities present themselves;

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• Disciplined focus on risk management.

Impact of COVID-19

The COVID-19 pandemic has resulted in significant economic disruption affecting our business and the clients we serve.

As vaccination efforts continue, restrictions on businesses have been lifted and a return to more normal economic activity has begun.

However, a significant degree of uncertainty still exists concerning the ultimate duration and magnitude of the COVID-19 pandemic and subsequent outbreaks, including whether restrictions that have been lifted will need to be imposed again or tightened in the future.

Given the ongoing and dynamic nature of the circumstances, it is still difficult to predict the full impact of the COVID-19 pandemic on our business.

The extent of such impact will depend on future developments, including but not limited to the continued roll-out of vaccinations, which play an important role as to when the coronavirus can be controlled and abated.

Key Financial Measures

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.

Key Financial Measures

The following tables set forth the key financial measures we use to evaluate the success of our business and our financial position and operating performance.

Key Financial Measures (a)

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Net charge-offs to average loans (b)

0.23 % 0.01 %

Nonperforming assets to total assets (e)

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As of December 31, 2022, management believes that the allowance is adequate and consistent with asset quality and delinquency indicators.

The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard, CECL, effective for the Company as of January 1, 2023.

CECL will require the Bank to determine periodic estimates of lifetime expected credit losses on loans, other financial instruments and other commitments to extend credit and provide for the expected credit losses as allowances for credit losses.

This will change our current method of providing allowance for loan losses and require us to record an allowance for credit losses as of January 1, 2023 materially in excess of our existing allowance for loan losses.

CECL will also greatly increase the data we will need to collect and review to determine the appropriate level of the allowance for credit losses and will likely require larger allowances for credit losses going forward than our current methodology.

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.

Management applies the hedge accounting provisions of Accounting Standards Codification (“ASC”) Topic 815, "Hedge Accounting , 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.

The Company has characterized all of its interest rate swaps that qualify under ASC Topic 815, "Hedge Accounting," as cash flow hedges.

The Company has characterized all of its interest rate swaps that qualify under ASC Topic 815, 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.

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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.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan clients.

The Company executes interest rate swaps with commercial banking clients 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.

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 client derivatives and the offsetting derivatives are recognized directly in earnings.

Investment Securities Valuation

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Our returns on average shareholders' equity and average assets for the year ended December 31, 2022, were 16.72% and 1.44%, respectively, compared to 13.86% and 1.17%, respectively for the year ended December 31, 2021.

The increase in net income for 2021 compared to 2020 was primarily impacted by lower interest expense on deposits, an increase in interest and fees on loans due to loan growth, the resumption of loan sales, a decrease in noninterest expense, and a

decrease in the provision for loan losses resulting from lower loan loss reserves in 2021 when compared to 2020, which saw a large increase in reserves due to the COVID-19 pandemic.

The increase in net income for 2022 compared to 2021 was primarily attributable to an increase in interest and fees on loans due to record loan growth and higher overall loan yields in 2022.

The increase in revenues was partially offset by the following:

an increase in interest expense;

a decrease in noninterest income driven by a reduction in loans sales and the absence of rental income in 2022 due to the disposition of the Company's former headquarter building in the fourth quarter of 2021.

Revenues in 2021 also included a one-time federal payroll tax credit for COVID-19 of $0.9 million recognized in the quarter ended March 31, 2021 which did not repeat in 2022.

In addition, the increase in net income was partially offset by an increase in the provision for loan losses due to loan growth and an increase in noninterest expense for the year ended December 31, 2022.

Net interest income for the year ended December 31, 2022 was $94.7 million, an increase of $26.9 million compared to the year ended December 31, 2021.

Our net interest margin increased 40 basis points to 3.17% for the year ended December 31, 2021 compared to the year ended December 31, 2020 reflecting lower interest expense from a decrease in rates on interest bearing deposits, as well as growing noninterest bearing deposits as a percentage of total deposits.

Our net interest margin increased 61 basis points to 3.78% for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase in the net interest margin was due to an increase in overall loan yields, aided in part by elevated loan prepayment fees, partially offset by an increase in funding costs.

Results of Operations

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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.

We convert tax-exempt income to a Fully Taxed Equivalent (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.

Premium amortization and discount accretion are included in the res pective interest income and interest expense amounts.

FTE net interest income for the years ended December 31, 2022 and 2021 was $94.9 million and $68.1 million, respectively.

Net interest income increased primarily due to lower rates on interest bearing deposits, and to a lesser extent, an increase in loan volume.

FTE net interest income increased primarily due to loan growth and higher overall loan yields.

The increase in FTE net interest income was partially offset by an increase in interest expense.

FTE basis interest income for the year ended December 31, 2022 increased $36.6 million, or 44.8%, to $118.1 million compared to FTE basis interest income for the year ended December 31, 2021 due primarily to an increase in commercial real estate loans and commercial business loans.

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The total average balance of securities for the year ended December 31, 2022 increased by $15.0 million, or 14.5%, from the year ended December 31, 2021.

The total yield in earnings assets decreased to 3.75% at December 31, 2021, compared to 3.85% at December 31, 2020.

The decrease in yield was primarily driven by marginally lower yields on loans, as well as lower yields on our cash and investment balances as a result of the overall low rate environment for 2021.

Interest expense for the year ended December 31, 2021 decreased by $9.2 million, or 40.4%, compared to interest expense for 2020 due to a decrease in rates on interest bearing deposits.

Average interest bearing liabilities for the year ended December 31, 2021 increased by $34.4 million, or 2.1%, from the year ended December 31, 2020, primarily due to an increase in interest bearing liabilities, partially offset by a reduction in wholesale funding.

The total yield in earnings assets increased to 4.64% at December 31, 2022, compared to 3.75% at December 31, 2021.

The increase in yield was primarily driven by higher yields on loans, as well as higher yields on our cash balances as a result of the overall increased rate environment for 2022.

Interest expense for the year ended December 31, 2022 increased by $9.7 million, or 72.0%, compared to interest expense for 2021 due to an increase in rates on interest bearing deposits.

Distribution of Assets, Liabilities and Stockholders’ Equity;

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Tax exempt income was converted to a fully taxable equivalent basis at a 20 percent tax rate for 2022 and 2021.

(3) Net interest income as a percentage of total earning assets.

(3) Net interest inco me as a percentage of total earning assets.

(4) Yields are calculated using the contractual day count convention for each respective product type.

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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 credit for loan losses for the year ended December 31, 2021 was $0.1 million compared to a $7.6 million provision for loan losses for the year ended December 31, 2020.

The decrease in the provision for loan losses was primarily due to improving economic trends for the year ended December 31, 2021 and lower COVID-19 related reserves when compared to 2020.

The provision for loan losses for the year ended December 31, 2022 was $5.4 million compared to a $0.1 million credit for loan losses for the year ended December 31, 2021.

The increase i n the provision for loan losses was due to loan growth.

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.

Noninterest income is a component of our revenue and is comprised primarily of fees generated from loan and deposit relationships with our clients, 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, 2022 and 2021.

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Service charges and fees 1,072 872 200 23

Gain on sale of other real estate owned, net — 19 (19) (100)

Other (337) 1,070 (1,407) (131)

Total noninterest income $ 3,040 $ 5,657 $ (2,617) (46) %

Noninterest income increased by $2.8 million to $5.7 million for the year ended December 31, 2021, compared to the year ended December 31, 2020.

The increase in noninterest income was primarily a result of resumed loan sales, totaling $2.7 million for the year ended December 31, 2021.

The increase for the year was also impacted by a one-time federal payroll tax credit for COVID-19 of $0.9 million, partially offset by a $0.2 million loss on the sale of the Company's former headquarters building.

In addition, in 2020 the Company recognized a $0.4 million benefit of nonrecurring swap fees related to interest rate swaps with commercial banking customers.

Noninterest income decreased by $2.6 million to $3.0 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The decrease in noninterest income was driven by a reduction in loan sales in 2022 compared to 2021.

Noninterest income also declined due to a one-time federal payroll tax credit for COVID-19 of $0.9 million recognized in the quarter ended March 31, 2021.

Lastly, a decrease in noninterest income was due to the absence of rental income of $0.7 million which was recognized in 2021 as a result of the disposition of the Company's former headquarter building.

Noninterest Expense

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Total noninterest expense $ 44,363 $ 39,739 $ 4,624 12 %

Noninterest expense decreased by $3.1 million, or 7%, to $39.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The decrease in noninterest expense was primarily driven by a decrease in salaries and employee benefits expense and data processing expense.

Salaries and employee benefits totaled $18.3 million for the year ended December 31, 2021, a decrease of $3.0 million when compared to the same period in 2020.

The decrease in salaries and employee benefits was primarily driven by a decrease in full time equivalent employees as a direct result of the Voluntary Early Retirement Incentive Plan offered to eligible employees and other employee actions taken during the fourth quarter of 2020.

Average full time equivalent employees totaled 126 for the year ended December 31, 2021 compared to 146 for the same period in 2020.

In addition, salaries and employee benefits expense also benefited by one-time deferrals of $0.9 million for the year ended December 31, 2021 related to costs

associated with the implementation of a new online banking and other systems.

Salaries and employee benefits were also favorably impacted as higher loan originations enabled the Bank to defer a greater amount of expenses.

Data processing expense totaled $2.4 million for the year ended December 31, 2021, a decrease of $0.8 million when compared to the same period in 2020.

The decrease in data processing expense was primarily due to a $1.1 million one-time charge related to early termination fees payable to a legacy technology vendor recognized during the fourth quarter of 2020.

Noninterest expense increased by $4.6 million, or 12%, to $44.4 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increase in noninterest expense was primarily driven by an increase in salaries and employee benefits expense, professional services expense, FDIC Insurance, and losses related to deposit accounts.

These increases were partially offset by a decrease in occupancy and equipment expense.

Salaries and employee benefits expense totaled $22.2 million for the year ended December 31, 2022, an increase of $3.9 million when compared to th e same period in 2021 .

The increase in salaries and employee benefits expense was driven by an increase in full time equivalent employees, as well as an increase in variable compensation as a result of the Bank's overall growth and improved performance.

Full time equivalent employees totaled 136 at December 31, 2022 compared to 126 for the same period in 2021 .

The increase in salaries and employee benefits expense was partially offset by higher loan originations, which enabled the Bank to defer a greater amount of expenses.

Professional services expense totaled $3.9 million for the year ended December 31, 2022 , an increase of $1.6 million when compared to the same period in 2021 .

The increase in professional services expense was primarily driven by consulting fees associated with various projects, including our core system conversion.

FDIC insurance expense totaled $1.6 million for the year ended December 31, 2022 , an increase of $0.4 million when compared to the same period in 2021 .

The higher FDIC insurance expense is attributed to the overall balance sheet growth and increased use of brokered deposits.

Other expense totaled $3.9 million for the year ended December 31, 2022 , an increase of $0.8 million .

The increase was mainly attributable to $0.6 million of deposit account losses, of which $0.3 million were two discreet events of identity theft perpetrated against the Bank's client s where the Bank reimbursed the impacted client s.

Occupancy and equipment expense totaled $8.3 million for the year ended December 31, 2022 , a decrease of $2.4 million when compared to the same period in 2021.

The decrease in occupancy and equipment expense was primarily driven by the curtailment of additional cleaning costs associated with precautions taken to prevent the spread of COVID-19 during the year ended December 31, 2021 .

In addition, the decrease in occupancy and equipment expense was impacted by a reduction in lease expense as a result of the branch closure in New Canaan, which occurred during the third quarter of 2021.

Income tax expense for the years ended December 31, 2022 and 2021 totaled $10.6 million and $7.3 million, respectively.

The effective tax rates for the years ended December 31, 2022 and 2021, were 22.0% and 21.5%, respectively.

Our net deferred tax asset at December 31, 2021 was $7.6 million, compared to $11.3 million at December 31, 2020.

The decrease in the deferred tax asset at December 31, 2021 when compared to the same period in 2020 was primarily a result of fair value marks related to hedge positions involving interest rate swaps and a decrease in the allowance for loan losses.

O ur net deferred tax asset at December 31, 2022 was $7.4 million, compared to $7.6 million at December 31, 2021.

On October 8, 2015, the Bank established a wholly-owned subsidiary, Bankwell Loan Servicing Group, Inc.

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Assets totaled $3.3 billion at December 31, 2022, compared to assets of $2.5 billion at December 31, 2021.

The increase in assets is primarily due to loan growth, partially offset by a decrease in excess liquidity.

Gross loans totaled $1.9 billion at December 31, 2021, an increase of $269.3 million compared to December 31, 2020.

Excluding Paycheck Protection Program ("PPP") loans, gross loans increased by $303.9 million at December 31, 2021 when compared to December 31, 2020.

The increase in assets was primarily due to loan growth.

Gross loans totaled $2.7 billion at December 31, 2022, an increase of $780.6 million or 41.2% compared to December 31, 2021.

Deposits totaled $2.8 billion at December 31, 2022, compared to deposits of $2.1 billion at December 31, 2021.

The increase in deposits was a result of successful commercial core deposit gathering efforts.

Shareholders’ equity totaled $202.0 million as of December 31, 2021, an increase of $25.4 million compared to December 31, 2020, primarily a result of (i) net income of $26.6 million for the year ended December 31, 2021 and (ii) a $7.0 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swaps.

Shareholders’ equity totaled $238.5 million as of December 31, 2022, an increase of $36.5 million com pared to December 31, 2021, primarily a result of (i) net income of $37.4 million for the year ended December 31, 2022 and (ii) an $8.4 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate sw aps of $16.8 million, partially offset by fair value marks on the Company's investment portfolio of $8.4 million.

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.

The increase in Shareholders’ equity was partially offset by dividends paid of $6.2 million and common stock repurchases of $5.5 million .

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.

We originate commercial real estate loans, construction loans, commercial business loans and consumer loans in our market.

We also pursue certain types of commercial lending opportunities outside our market, particularly where we have strong business relationships.

Our loan portfolio is the largest category of our earnings assets.

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Commercial real estate loans were $1.9 billion and represented 72% of our total loan portfolio at December 31, 2022 , a net increase of $564.5 million, or 41.6%, from December 31, 2021.

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.

Commercial real estate loans are secured by a variety of property types, including healthcare facilities, office buildings, retail facilities, commercial mixed use and multi-family dwellings.

Construction.

Construction loans were $98.3 million at December 31 2021, up $11.3 million from December 31, 2020.

Construction loans were $155.2 million at December 31 2022 , up $56.9 million, or 57.8%, from December 31, 2021.

Construction loans totaled $98.3 million at December 31, 2021.

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Commercial business loans were $520.4 million and represented 19% of our total loan portfolio at December 31, 2022 , a net increase of $169.5 million, or 48.3%, from December 31, 2021.

The increase in commercial business loans is a direct result of the Bank’s commitment in growing this portfolio.

The December 31, 2021 and December 31, 2020 balance includes $0.2 million and $34.8 million of PPP loans made under the Coronavirus Aid, Relief and Economic Security Act ("CARES Act"), respectively.

The increase in commercial business loans is a direct result of the Bank’s commitment to growing this portfolio.

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.

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Our Board of Directors monitors credit risk management.

The Directors Loan Committee ("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, as well as loan review and problem loan management and resolution.

The Directors Loan Committee ("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, as well as loan review and problem loan management and resolution.

The committee reports the results of its respective oversight functions to our Board of Directors.

In addition, our Board of Directors receives information concerning asset quality measurements and trends on a monthly basis.

While we continue to adhere to prudent underwriting standards, our loan portfolio is not immune to potential negative consequences as a result of general economic weakness, such as a prolonged downturn in the housing market on a national scale.

Decreases in real estate values could adversely affect the value of property used as collateral for loans.

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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 Company evaluates the creditworthiness of each client and extends credit o f 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.

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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.

Commencing with the third quarter of 2019, the Company no longer offers 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.

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 ap praised 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 departments.

Disciplined underwriting, portfolio monitoring and early

problem recognition are important aspects of maintaining our high credit quality standards and low levels of nonperforming assets since our inception in 2002.

Acquired Loans .

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Total nonaccrual loans were $16.4 million as of December 31, 2022 .

Nonperforming assets as a percentage of total assets was 0.68% at December 31, 2021, down from 1.48% at December 31, 2020.

The allowance for loan losses at December 31, 2021 was $16.9 million, representing 0.89% of total loans.

The $4.1 million decrease in the allowance for loan losses at December 31, 2021 when compared to December 31, 2020 was primarily due to improving economic trends and lower COVID-19 related reserves when compared to 2020.

Nonperforming assets as a percentage of total assets was 0.51% at December 31, 2022 , do wn from 0.68% a t December 31, 2021.

The allowance for loan losses at December 31, 2022 w as $22.4 million, representing 0.84% of total loans.

The $5.5 million increase in the allowance for loan losses at December 31, 2022 when compared to December 31, 2021 was primarily due to an increase in loan growth when compared to 2021.

Nonaccrual Loans .

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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.

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.

As of December 31, 2021, no loans remained on active deferral under the CARES Act.

The following table presents past due loans as of December 31, 2022 and 2021:

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Commercial business 1,995 1,483 1,469 4,947

Consumer — 3 — 3

Total loans $ 5,054 $ 11,986 $ 15,588 $ 32,628

Total past due loans totaled $32.6 million and represented 1.72% of total loans as of December 31, 2021, increasing $17.5 million from December 31, 2020.

The increase in past due loans primarily relates to one commercial real estate loan totaling $10.5 million for which a loan extension is currently in progress.

In addition, a total of $4.9 million of past due loans as of December 31, 2021 have since been brought current as of January 31, 2022.

Total past due loans totaled $16.1 million and represented 0.60% of total loans as of December 31, 2022, decreasing $16.6 million from De cember 31, 2021.

Th e decrease in past due loans primarily relates past due loans that have been since brought current as of December 31, 2022.

Troubled Debt Restructurings (TDR) .

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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.

Restructured loans are classified as accruing or nonaccruing based on management’s assessment of the collectability of the loan.

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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, 2021 and December 31, 2020 there were five nonaccrual loans identified as TDRs totaling $2.0 million and three nonaccrual loans identified as TDRs totaling $1.4 million, respectively.

At December 31, 2022 and December 31, 2021, there were seven nonaccrual loans identified as TDRs totaling $2.5 million and five nonaccrual loans identified as TDRs totaling $2.0 million, respectively.

The following table presents information on troubled debt restructured loans:

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Total recoveries 114 43

Net charge-offs (4,050) (105)

(Credit) provision charged to earnings (57) 7,605

Net recoveries (charge-offs) 92 (4,050)

Provision (credit) charged to earnings 5,437 (57)

Balance at end of period $ 22,431 $ 16,902

Net charge-offs to average loans 0.23 % 0.01 %

Net recoveries or charge-offs to average loans — % 0.23 %

Allowance for loan losses to total loans 0.84 % 0.89 %

At December 31, 2022, our allowance for loan losses was $22.4 million and represented 0.84% of total loans, compared to $16.9 million and 0.89% of total loans at December 31, 2021.

The decrease in the ratio of allowance for loan losses to total loans is driven by a reduction in loan loss reserves as a result of improving economic trends and charge-offs taken against previously established loan loss reserves.

The decrease in the ratio of allowance for loan losses to total loans is due to charge-offs taken in the prior year against previously established loan loss reserves as a result of improving economic trends partially offset by an increase in loan growth.

For t he year ended December 31, 2022, the provision for loan losses totaled $5.4 million.

For the year ended December 31, 2021 the credit for loan losses totaled $0.1 million.

For the year ended December 31, 2020 the provision for loan losses totaled $7.6 million.

Net charge-offs for the year ended December 31, 2021 were $4.1 million and represented 0.23% of average loans.

Net recoveries for the year ended December 31, 2022 were $0.1 million and represented 0.00% of average loans.

For the year ended December 31, 2021, net charge-offs were $4.1 million and represented 0.23% of average loans.

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Total securities held to maturity $ 15,983 $ 15,435 $ 16,043 $ 18,445

At December 31, 2021, the carrying value of our investment securities portfolio totaled $108.4 million and represented 4% of total assets, compared to $106.9 million and 5% of total assets at December 31, 2020.

At December 31, 2022, the carrying value of our investment securities portfolio totaled $121.6 million and represented 4% of total asse ts, compared to $108.4 million and 4% of total assets at December 31, 2021.

The increase of $13.2 million primarily reflects purchases of corporate bonds.

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, 2021 was $4.5 million and included gross unrealized losses of $0.5 million.

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.

T he net unrealized losses on our investment portfolio at December 31, 2022 was $9.2 million and included $0.3 million of gross unrealized gains.

The net unrealized gain position on our investment portfolio at December 31, 2021 was $4.5 million and included $0.5 million of gross unrealized losses.

All of our investment securities are rated investment grade or deemed to be of investment grade quality.

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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.

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.

We offer a wide variety of deposit products and rates to consumer and business clients consistent with FDIC regulations.

Our executive 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.

We use CDARS and ICS to place client 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 clients 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 client deposits, and, we also execute one-way buy transactions.

With the exception of reciprocal deposits, CDARS and ICS One-Way buy transactions are considered to be brokered deposits for bank regulatory purposes.

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Total deposits $ 2,800,818 100.00 % 1.07 % $ 2,123,998 100.00 % 0.65 %

Total deposits were $2.1 billion at December 31, 2021, an increase of $296.7 million, or 16%, from December 31, 2020, reflecting successful commercial core deposit gathering efforts.

Total deposits were $2.8 billion at December 31, 2022, an increase of $676.8 million, or 32%, from December 31, 2021.

Brokered certificates of deposits ("Brokered CDs") totaled $976.5 million and $249.4 million at December 31, 2022 and December 31, 2021, respectively.

There were no certificates of deposits from national listing services at December 31, 2021.

Certificates of deposits from national listing services totaled $18.4 million at December 31, 2020.

The increase in Brokered CDs was used to fund the significant loan growth during the second half of 2022, increasing $727.1 million compared to December 31, 2021.

There were no certificates of deposits from national listing services at December 31, 2022 or December 31, 2021.

Brokered money market accounts totaled $50.1 million and $104.0 million at December 31, 2022 and 2021, respectively.

Brokered deposits represent brokered certificates of deposit, brokered money market accounts, one-way buy Certificate of Deposit Account Registry Service ("CDARS"), and one way buy Insured Cash Sweep ("ICS").

The increase in these brokered deposits is a result of replacing FHLB advances with more cost effective brokered deposits.

At December 31, 2021 and 2020, time deposits, including CDARS and brokered certificates of deposit, with a denomination of $100 thousand or more totaled $391.2 million and $519.8 million, respectively, maturing during the periods indicated in the table below:

At December 31, 2022 and 2021, time deposits, including CDARS and brokered certificates of deposit, with a denomination of $100 thousand or more totaled $1.2 billion and $0.4 billion, respectively, maturing during the periods indicated in the table below:

At December 31,

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Total $ 1,157,239 $ 391,193

Federal Home Loan Bank Advances and Other Borrowings

The Bank is a member of the FHLB, which is part of a twelve district Federal Home Loan Bank System.

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Total FHLB advances were $90.0 million at December 31, 2022 compared to $50.0 million at December 31, 2021.

The decrease of $125.0 million primarily reflects the substitution of lower cost brokered deposits in lieu of FHLB advances and a permanent reduction in wholesale funding.

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, 2022, the Bank had pledged $941.9 million of eligible loans as collateral to support borrowing capacity at the FHLB of Boston.

As of December 31, 2022, the Bank had immediate availability to borrow an addition al $402.2 million based on qualified collateral.

Advances from the FHLB include short-term advances with original maturity dates of one year or less.

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2.29 % 1.81 %

(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.

(1) $50 million of the Company's FHLB borrowings are subject to longer term interest rate swap agreements and the weighted average rate reflects the "all-in" swap rate under these long interest rate 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 “2015 Notes”) to certain institutional investors.

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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 Company used the net proceeds to repay the 2015 Notes and for general corporate purposes.

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

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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.

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.

Derivative Instruments

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The 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 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.

Derivatives not designated as hedges are not speculative and result from a service the Company provides to certain loan clients.

The Company executes interest rate swaps with commercial banking clients to facilitate their respective risk management strategies.

Information about derivative instruments at December 31, 2022 and 2021 was as follows:

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$ 38,500 Other assets $ 4,207 $ 38,500 Accrued expenses and other liabilities $ (4,207)

(1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party.

(1) Represents interest rate swaps with commercial banking clients, which are offset by derivatives with a third party.

As of December 31, 2021

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$ 38,500 Other assets $ 2,585 $ 38,500 Accrued expenses and other liabilities $ (2,585)

(1) Represents interest rate swaps with commercial banking customers, which are offset by derivatives with a third party.

(1) Represents interest rate swaps with commercial banking clients, which are offset by derivatives with a third party.

Liquidity and Capital Resources

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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.

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.

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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 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.

The Bank has established unsecured borrowing capacity with the Atlantic Community Bankers Bank (ACBB) (formerly Bankers’ Bank Northeast), Zion’s Bank and Texas Capital Bank and also maintains additional collateralized borrowing capacity with the FRB and 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 FRB, 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 $238.5 million as of December 31, 2022, an increase of $36.5 million compared to December 31, 2021, primarily a result of (i) net income of $37.4 million for the year ended December 31, 2022 and (ii) an $8.4 million favorable impact to accumulated other comprehensive income driven by fair value marks related to hedge positions involving interest rate swap s of $16.8 million, partially offset b y fair value marks on the Company's investment portfolio of $8.4 million.

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.

The increase in Shareholders’ equity was partially offset by dividends paid of $6.2 million and common stock repurchases of $5.5 million.

As of December 31, 2022, the tangible common equity ratio and tangible book value per share were 7.26% and $31.39, respectively.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

The Bank is subject to various regulatory capital requirements administered by the fed eral 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, 2022, 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, 2021, the Bank’s ratio of total common equity tier 1 capital to risk-weighted assets was 11.18%, total capital to risk-weighted assets was 12.00%, Tier 1 capital to risk-weighted assets was 11.18% and Tier 1 capital to average assets was 9.94%.

At December 31, 2022, the Bank’s ratio of total common equity

tier 1 capital to risk-weighted asse ts was 10.28%, total capital to risk-weighted assets was 11.07%, Tier 1 capital to risk-weighted assets was 10.28% and Tier 1 capital to average assets was 9.88%.

Under the current guidelines, banking organizations must have a minimum total risk-based capital ratio of 8.0%, a minimum Tier 1 risk-based capital ratio of 6.0%, a minimum common equity Tier 1 risk-based capital ratio of 4.5%, and a minimum leverage ratio of 4.0% in order to be "adequately capitalized." In addition to these requirements, banking organizations must maintain a capital conservation buffer consisting of common Tier 1 equity in an amount above the minimum risk-based capital requirements for “adequately capitalized” institutions equal to 2.5% of total risk-weighted assets, resulting in a requirement for the Company and the Bank to effectively maintain common equity Tier 1, Tier 1 and total capital ratios of 7.0%, 8.5% and 10.5%, respectively.

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Off-Balance Sheet Arrangements

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.

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 clients.

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.

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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.

Substantially all of the Bank’s commitments to extend credit are contingent upon clients 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 $396.9 million and $237.1 million, respectively at December 31, 2021 and 2020.

The following table summarizes our commitments to extend credit as of the dates indicated.

Commitments to extend credit t otaled $561.0 million and $396.9 million, respectively at December 31, 2022 and 2021.

The following table summarizes our commitments to e xtend 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.

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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 7. Management’s Discussion and Analysis