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Item 1A. Risk Factors

2026-03-04 compared with 2025-03-05 · 142 added, 134 removed, 145 unchanged (66% of the section changed)

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As a business operating in the financial services industry, our business and operations may be adversely affected in numerous and complex ways by weak economic conditions.

Our businesses and operations, which primarily consist of lending money to clients in the form of loans, borrowing money from clients in the form of deposits and investing in securities, are sensitive to general business and economic conditions in the United States and to a lesser degree secondary effects of global geopolitical events.

economy weakens, our growth and profitability from our lending, deposit and investment operations could be constrained.

Uncertainty about the federal fiscal policymaking process, the medium-term and long-term fiscal outlook of the federal government, and future tax rates is a concern for businesses, consumers and investors in the United States.

In addition, economic conditions in foreign countries could affect the stability of global financial markets, which could hinder U.S.

Our business, which primarily consist of extending credit to clients through loans, borrowing money from clients in the form of deposits and investing in securities, is sensitive to general business and economic conditions in the United States and, to a lesser extent, to secondary effects of global geopolitical events.

A weakening of the U.S.

economy could constrain our growth and profitability across our lending, deposit and investment activities.

Businesses, consumers, and investors in the United States face ongoing uncertainty related to federal fiscal policymaking, the medium- and long-term fiscal outlook of the federal government, the impact of tariffs, and future tax rates.

In addition, adverse economic conditions in foreign countries could disrupt global financial markets and negatively affect U.S.

economic growth.

Weak economic conditions are characterized by deflation, fluctuations in debt and equity capital markets, a lack of liquidity and/or depressed prices in the

secondary market for mortgage loans, increased delinquencies on mortgage, consumer and commercial loans, residential and commercial real estate price declines and lower home sales and commercial activity.

All of these factors are detrimental to our business, and the interplay between these factors can be complex and unpredictable.

Weak economic conditions may be characterized by deflationary pressures;

volatility in in debt and equity markets;

reduced liquidity;

depressed prices in the secondary market for mortgage loans;

increased delinquencies on mortgage, consumer and commercial loans;

declines in residential and commercial real estate values;

and lower levels of home sales and commercial activity.

These factors, individually or in combination, could adversely affect our business, and their interaction may be complex and difficult to predict.

Our business is also significantly affected by monetary and related policies of the U.S.

federal government and its agencies.

Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control.

Adverse economic conditions and government policy responses to such conditions could have a material adverse effect on our business, financial condition, results of operations and prospects.

Changes in any of these policies are influenced by macroeconomic conditions and other factors beyond our control.

Adverse economic conditions, together with government policy responses to those conditions, could have a material adverse effect on our business, financial condition, results of operations and prospects.

We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.

The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure.

These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions.

Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administrators, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting clients and the quality of the loan portfolio.

Finally, many of our loans are made to middle-market businesses that may be less able to withstand competitive, economic and financial pressures than larger borrowers.

A failure to effectively measure and limit the credit risk associated with our loan portfolio could have a material adverse effect on our business, financial condition, results of operations and future prospects.

Lending activities are inherently subject to credit risk, including the risk that borrowers may be unable or unwilling to repay principal or interest when due, or that collateral securing a loan may be insufficient to cover our exposure.

These risks may be influenced by conditions affecting borrowers’ industries and by local, regional, and national economic trends.

While we employ various risk management practices, including credit approval standards and ongoing monitoring of industry and portfolio concentrations, these measures may not be effective in mitigating credit risk under all circumstances.

Our credit policies, procedures and administration may not fully adapt to changes in economic conditions or other factors affecting borrower creditworthiness and overall portfolio quality.

Finally, many of our loans are made to middle-market businesses, which may be more vulnerable to competitive, economic and financial pressures than larger borrowers.

A failure to effectively identify, measure and manage credit risk within our loan portfolio could have a material adverse effect on our business, financial condition, results of operations and future prospects.

Our ACL-Loans may not be adequate to absorb losses inherent in our loan portfolio, which could have a material adverse effect on our financial condition and results of operations.

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Our concentration of large loans to certain borrowers may increase our credit risk.

As of December 31, 2024, our five largest relationships ranged in exposure from approximat ely $80.0 million to $94.0 million.

As of December 31, 2025, our five largest relationships ranged in exposure from approximately $91.9 million to $111.5 million.

In addition to other typical risks related to any loan, such as deterioration of the collateral securing the loans, this high concentration of borrowers presents a risk to our lending operations.

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Our commercial real estate loan, commercial loan and construction loan portfolios expose us to potentially elevated risks.

Our loan portfolio includes non-owner-occupied commercial real estate loans for individuals and businesses for various purposes, which are secured by commercial properties.

These loans typically involve repayment dependent upon income generated, or expected to be generated, by the property securing the loan in amounts sufficient to cover operating expenses and debt service.

Commercial real estate loans may be affected to a greater extent than residential loans by adverse conditions in real estate markets or the economy because commercial real estate borrowers’ ability to repay their loans depends on successful leasing of their properties, in addition to the factors affecting residential real estate borrowers.

These loans also involve greater risk because they generally are not fully amortizing over the loan period, but have a balloon payment due at maturity.

A borrower’s ability to make a balloon payment typically will depend on being able to either refinance the loan or sell the underlying property in a timely manner.

These loans expose a lender to greater credit risk than loans secured by residential real estate because the collateral securing these loans typically cannot be liquidated as easily as residential real estate.

Non-owner-occupied commercial real estate loans generally involve relatively large balances to single borrowers or related groups of borrowers.

Accordingly, charge-

offs on non-owner occupied commercial real estate loans may be larger on a per loan basis than those incurred with our residential or consumer loan portfolios.

Commercial loans are typically based on the borrowers’ ability to repay the loans from the cash flow of their businesses.

These loans may involve greater risk because the availability of funds to repay each loan depends substantially on the success of the business itself.

In addition, the assets securing the loans have the following characteristics:

Our loan portfolio includes non-owner-occupied commercial real estate loans to individuals and businesses for various purposes, secured by commercial properties.

Repayment of these loans typically depends on the income generated, or expected to be generated, by the underlying property in amounts sufficient to cover operating expenses and debt service.

As a result, these loans may be more adversely affected by downturns in real estate markets or broader economic conditions than residential real estate loans, as these borrowers’ ability to repay their loans depends on successful leasing of their properties, in addition to the factors affecting residential real estate borrowers.

These loans also involve greater risk because they generally are not fully amortizing over the loan term and typically require a balloon payment at maturity.

A borrower’s ability to make a balloon payment typically is dependent on the ability to refinance the loan or sell the underlying property in a timely manner, which may be constrained by adverse market or credit conditions.

These loans expose a lender to increased credit risk because the collateral securing them is generally less liquid than residential real estate.

Non-owner-occupied commercial real estate loans generally involve larger balances to individual borrowers or related groups of borrowers, which may result in higher charge-offs on a per loan basis compared to residential or consumer loan portfolios.

The repayment of our commercial loans is primarily dependent on the cash flows generated by borrowers’ business operations.

Accordingly, repayment is substantially influenced by the financial performance and ongoing viability of those businesses.

The assets securing the loans have the following characteristics:

(a) they depreciate over time, (b) they are difficult to appraise and liquidate, and (c) they fluctuate in value based on the success of the business.

Risk of loss on a construction loan depends largely upon whether our initial estimate of the property’s value at completion of construction equals or exceeds the cost of the property construction (including interest), the availability of permanent takeout financing, the completion of the project and/or the builder’s ability to ultimately lease or sell the property.

During the construction phase, a number of factors can result in delays and cost overruns.

If estimates of value are inaccurate or if actual construction costs exceed estimates, the value of the property securing the loan may be insufficient to ensure full repayment when completed through a permanent loan or by sale of collateral.

Our underwriting, review and monitoring cannot eliminate all of the risks related to these loans.

Unexpected deterioration in the credit quality of our commercial real estate loan, commercial loan or construction loan portfolios would require us to increase our provision for credit losses, which would reduce our profitability and could have a material adverse effect on our business, financial condition, results of operations and future prospects.

The risk of loss associated with construction loans depends in large part on the accuracy of our initial estimates of a project’s value upon completion, the successful and timely completion of construction, the availability of permanent takeout financing, and the borrower’s ability to lease or sell the property.

Construction projects are subject to delays, cost overruns, and other risks beyond the borrower’s or our control.

If actual costs exceed estimates or projected values are not realized, the value of the property securing the loan may be insufficient to ensure full repayment through refinancing or sale of the property.

Although we employ underwriting standards, credit review processes, and ongoing monitoring, these practices cannot eliminate all risks associated with commercial real estate, commercial, and construction lending.

Unexpected deterioration in the credit quality of these loan portfolios could require increased provisions for credit losses, reduce profitability, and have a material adverse effect on our business, financial condition, results of operations and future prospects.

Lack of seasoning of our loan portfolio could increase risk of credit defaults in the future.

As a result of our growth in recent years, a large portion of loans in our loan portfolio and of our lending relationships are of relatively recent origin.

In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio.

Because a large portion of our portfolio is relatively new, the current level of delinquencies and defaults may not represent the level that may prevail as the portfolio becomes more seasoned and may not serve as a reliable basis for predicting the health and nature of our loan portfolio, including net charge-offs and the ratio of nonperforming assets in the future.

Our limited experience with these loans does not provide us with a significant payment history pattern with which to judge future collectability.

As a result of our growth in recent years, a large portion of our loan portfolio and lending relationships are of relatively recent origin.

Loans generally do not exhibit signs of credit deterioration or default until they have been outstanding for a period of time, a process commonly referred to as “seasoning.” Accordingly, a more seasoned loan portfolio of older loans will usually behave more predictably than a newer portfolio.

Because a large portion of our portfolio is relatively new, current delinquency and default levels may not be indicative of future credit performance as the portfolio becomes more seasoned.

As a result, these metrics may not provide a reliable basis for predicting future trends in asset quality, including net charge-offs and nonperforming assets.

In addition, our limited operating history with our portfolio reduces the availability of historical payment patterns on which to assess future collectability.

As a result, it may be difficult to predict the future performance of our loan portfolio.

If defaults increase, we could experience an increase in delinquencies and charge-offs and we may be required to increase our ACL-Loans, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

If credit performance deteriorates as the portfolio seasons, we could experience higher delinquencies and charge-offs and may be required to increase our ACL-Loans, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

Our lending limit may restrict our growth and prevent us from effectively implementing our business strategy.

We are limited in the amount we can loan to a single borrower by the amount of our capital.

Based upon our current capital levels and our internal limit on loans, the amount we may lend both in the aggregate and to any one borrower is significantly less than that of many of our competitors and may discourage potential borrowers who have credit needs in excess of our lending limit from doing business with us.

We accommodate larger loans by selling participations in those loans to other financial institutions, but this strategy may not always be available.

If we are unable to compete effectively for loans from our target clients, we may not be able to effectively implement our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

Our lending capacity is constrained by our capital levels and applicable lending limits, which restrict the amount we may lend both in the aggregate and to any single borrower.

As a result, the maximum loan amounts we can offer may be significantly lower than those available from many of our competitors.

These limitations may discourage potential borrowers with credit needs that exceed our lending limits from doing business with us.

We seek to accommodate larger credit needs by selling participations in loans to other financial institutions;

however, this strategy may not be available or feasible in all circumstances.

If we are unable to compete effectively for loans among our target clients due to these constraints, we may be unable to successfully execute our business strategy, which could have a material adverse effect on our business, financial condition, results of operations and future prospects.

A prolonged downturn in the real estate market could result in losses and adversely affect our profitability.

A high percentage ou r loan portfolio is comprised of commercial real estate loans.

The sale of real estate collateral in each case provides an alternate source of repayment in the event of default by the borrower and may deteriorate in value during the time the credit is extended.

A decline in real estate values c ould impair the value of our collateral and our ability to sell the collateral upon any foreclosure, which would likely require us to increase our ACL-Loans.

In the event of a default with respect to any of these loans, the amounts we receive upon sale of the collateral may be insufficient to recover the outstanding principal and interest on the loan.

If we are required to re-value the collateral securing a loan to satisfy the debt during a period of reduced real estate values or to increase our ACL-Loans, our profitability could be adversely affected, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

A significant portion of our loan portfolio consists of commercial real estate loans.

While the underlying real estate collateral may provide an alternative source of repayment in the event of borrower default, the value of such collateral may decline during the term of the loan.

A deterioration in real estate values could impair the value of our collateral and our ability to recover outstanding balances through foreclosure or sale.

In the event of default, proceeds from the sale of the collateral may be insufficient to fully recover the outstanding principal and accrued interest on these loans.

In addition, if declining real estate values require us to re-evaluate collateral values or increase our ACL-Loans, our profitability could be adversely affected.

Any such impact could have a material adverse effect on our business, financial condition, results of operations and prospects.

We are subject to interest rate risk that could negatively impact our profitability.

Our profitability, like that of most financial institutions, depends to a large extent on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest bearing liabilities, such as deposits and borrowings.

Interest rates are highly sensitive to numerous factors that are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, most notably the FRB through the Federal Open Market Committee.

Beginning in 2022, the FRB initiated an aggressive monetary tightening cycle to combat rising inflation, resulting in a significant and rapid increase in the federal funds rate.

This tightening cycle culminated in the target federal funds rate

range reaching a high of 5.25%-5.50%.

While the FRB subsequently decreased the target range by 100 basis points in 2024, citing factors such as moderating inflationary pressures and continued job and wage growth, the cumulative effect of the prior increases continued to shape the interest rate environment.

Changes in monetary policy, particularly changes in interest rates, influence the interest we earn on loans and securities, the interest we pay on deposits and borrowings, and our ability to originate loans and attract deposits.

Furthermore, such changes affect the fair value of our financial assets and liabilities, as well as the average duration of our assets.

If interest rates paid on deposits and other borrowings increase faster than the interest rates we receive on loans and other investments, our net interest income, and consequently our net income, could be adversely affected.

Periods of market volatility and instability may increase our funding costs and negatively affect our market risk mitigation strategies.

Any substantial, unexpected, or prolonged change in market interest rates could have a material adverse effect on our business, financial condition, results of operations, and future prospects.

Our profitability, like that of most financial institutions, depends primarily on our net interest income, which is the difference between our interest income on interest-earning assets, such as loans and investment securities, and our interest expense on interest bearing liabilities, such as deposits and borrowings.

Changes in interest rates and in the monetary policy actions of the FRB may materially and adversely affect our net interest income, profitability, and overall financial condition.

Interest rates are influenced by a broad range of factors beyond our control, including general economic conditions, inflationary trends, fiscal policy, and actions taken by the FRB through the Federal Open Market Committee (FOMC).

Following the significant monetary tightening cycle that began in 2022, the FRB raised the federal funds rate to a peak range of 5.25%–5.50%.

In response to moderating inflation and a softening labor market, the FRB subsequently reduced the target range throughout 2024 and 2025, ending 2025 at 3.50%–3.75%.

These changes, including both prior rate increases and subsequent rate cuts, continue to influence market interest rates, funding costs, loan demand, and the yields available on interest‑earning assets.

Fluctuations in interest rates directly influence the rates we earn on loans and securities, the rates we pay on deposits and borrowings, and the fair value and duration of our financial assets and liabilities.

If interest rates on deposits and other funding sources rise faster than the rates we earn on loans and investments, our net interest income and overall earnings could decline.

Periods of heightened rate volatility or instability may also increase funding costs, pressure our net interest margin, and negatively impact asset‑liability management strategies.

Any substantial, unexpected, or prolonged shift in interest rates could have a material adverse effect on our business, financial condition, results of operations, and future prospects.

In addition, increased interest rates could also have a negative impact on our results of operations by reducing the ability of borrowers to repay their current loan obligations.

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We may not be able to execute our strategic plan.

As part of our strategic plan, we pursue initiatives focused on the organic development and growth of our franchise.

Our initiatives focus on delivering superior service to our clients, coupling technology with our deep client relationships.

Our ability to execute these initiatives requires investment in resources as well as hiring and retaining skilled employees.

Our success will depend on the ability of our management team to manage multiple, concurrent initiatives designed to improve our operational systems and expand our product offerings.

Our inability to execute on these initiatives may negatively impact our ability to attract new client relationships, maintain existing client relationships and may adversely impact our operating results.

Our strategic plan includes initiatives designed to support the organic development and growth of our franchise.

These initiatives focus on delivering superior service to our clients, coupling technology with our deep client relationships.

Execution of this strategy requires investment in resources, systems and human capital.

Our success depends on management’s ability to effectively manage and execute multiple, concurrent initiatives intended to enhance operational capabilities and expand our product offerings.

Any inability to successfully execute these initiatives could negatively impact client acquisition and retention and may adversely impact our operating results.

Failure or disruption of the operating systems and technologies we use, including those of third parties, could adversely affect our business.

We rely on communication and information systems to conduct business, many of which are provided by third-party providers.

Potential failures, interruptions or breaches in system security could result in disruptions or failures in our key systems, such as general ledger, deposit or loan systems as well as online banking, including our online account opening channel, Bankwell Direct.

The risk of electronic fraudulent activity within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting bank accounts and other client information is on the rise.

We have developed policies and procedures aimed at preventing and limiting the effect of failure, interruption or security breaches, including cyber-attacks of information systems;

however, there can be no assurance that these incidences will not occur, or if they do occur, that they will be appropriately addressed.

Furthermore, we may not be able to ensure all our third-party providers have appropriate controls in place to protect themselves and our information in the event of a cyber-attack.

The occurrence of any failures, interruptions, or security breaches, including cyber-attacks of our information systems and those of our third-party providers could damage our reputation, result in the loss of business, subject us to increased regulatory scrutiny or to civil litigation and possible financial liability, any of which could have an adverse effect on our results of operation and financial condition.

We rely on communication and information systems, many of which are provided by third-party providers, to conduct our business.

Failures, interruptions or security breaches involving these systems could disrupt critical operations, including our general ledger, deposit and loan systems, and digital banking platforms, including our online account opening channel, Bankwell Direct.

The risk of electronic fraudulent activity within the financial services industry, particularly in the commercial banking sector, continues to increase as cyber criminals target bank systems and client information.

While we have implemented policies and procedures designed to prevent and mitigate the effects of system failures, interruptions, and security breaches, including cyber-attacks, there can be no assurance that such events will not occur or that, if they do occur, they will be effectively addressed.

In addition, we may not be able to ensure that all third-party service providers maintain adequate controls to protect their systems and our information in the event of a cyber-attack.

Any failure, interruption, or security breach involving our systems or those of our third-party providers could harm our reputation, result in the loss of business, increase regulatory scrutiny, or expose us to civil litigation or financial liability, any of which could have an adverse effect on our results of operation and financial condition.

Unauthorized access, cyber-crime, and other threats to data security, including those posed by artificial intelligence, may require significant resources, harm our reputation, and adversely affect our business.

We necessarily collect, use and hold personal and financial information concerning individuals and businesses with which we have a banking relationship.

Threats to data security, including unauthorized access and cyber-attacks, rapidly emerge and change, exposing us to additional costs for protection or remediation and competing time constraints to secure our data in accordance with client expectations and statutory and regulatory privacy and other requirements.

It is difficult or impossible to defend against every risk being posed by changing technologies, including the deployment of artificial intelligence ("AI") as well as criminals intent on committing cyber-crime.

The increasing sophistication of cyber-criminals and terrorists make keeping pace with new threats difficult and could result in a breach.

Controls employed by our information technology department and our other employees and third-party providers could prove inadequate.

We could also experience a breach due to intentional or negligent conduct on the part of employees or other internal sources, software bugs or other technical malfunctions, or other causes.

As a result of any of these threats, our client accounts may become vulnerable to account takeover schemes or cyber-fraud.

Our systems and those of our third-party providers may also become vulnerable to damage or disruption due to circumstances beyond our or their control, such as from catastrophic events, power anomalies or outages, natural disasters, network failures, and viruses and malware.

A breach of our security, or that of any of our third-party providers, which results in unauthorized access to our data could expose us to a disruption or challenges relating to our daily operations as well as to data loss, litigation, damages, fines and penalties, significant increases in compliance costs, and reputational damage, any of which could have a material adverse effect on our business, results of operations, financial condition and future prospects.

We collect, use, and maintain personal and financial information relating to individuals and businesses with whom we have banking relationships.

Threats to data security, such as unauthorized access, cyber-attacks, and other evolving risks, are rapidly changing and may expose us to increased costs for prevention, detection, and remediation, as well as competing demands on our resources to protect data in accordance with client expectations and applicable statutory and regulatory requirements.

It is difficult, and in some cases impossible, to anticipate or defend against every risk arising from advancing technologies, including the use of artificial intelligence ("AI"), and from increasingly sophisticated cyber-criminals and other

malicious actors.

The complexity and frequency of cyber threats make it challenging to keep pace with new attack methods and may result in a security breach.

The controls implemented by our information technology systems, employees, and third-party service providers may be insufficient or fail.

We may also experience security incidents resulting from intentional or negligent acts by employees or other internal parties, software defects or technical failures, or other unforeseen causes.

As a result, client accounts could become vulnerable to account takeover schemes, cyber-fraud, or other unauthorized activity.

In addition, our systems and those of our third-party providers may be subject to damage or disruption from events beyond our or their control, including natural disasters, power interruptions, network failures, catastrophic events, or the introduction of viruses or malware.

A breach of our security, or that of any of our third-party providers, resulting in unauthorized access to data could disrupt our operations and lead to data loss, litigation, regulatory enforcement actions, fines and penalties, increased compliance costs, and reputational harm.

Any of these consequences could have a material adverse effect on our business, results of operations, financial condition and future prospects.

We are subject to losses due to fraudulent and negligent acts on the part of loan applicants, our clients, vendors, bad actors, and/or our employees.

When we originate loans, we rely heavily upon information supplied by third parties, including the information contained in the loan application, property appraisal, title information and employment and income documentation.

Additionally, the current and potential future utilization of AI by the Company in support of loan origination could create additional risk for misrepresented information.

If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected.

Whether a misrepresentation is made by the loan applicant, our clients, vendors, bad actors, and/or one of our employees, we generally bear the risk of loss associated with the misrepresentation.

A loan subject to a material misrepresentation is typically unsaleable or subject to repurchase if it is sold prior to detection of the misrepresentation, and the persons and entities involved are often difficult to locate and it is often difficult to collect any monetary losses that we have suffered from them.

We cannot provide assurance that we have detected or will detect all misrepresented information in our loan originations, however, we have controls and processes designed to help us identify misrepresented information in our loan origination operations, including human oversight of AI activity.

As a financial institution, we are inherently exposed to risk in the form of theft and other fraudulent activities by clients, vendors, bad actors, and/or employees targeting the Bank or our clients.

These activities can manifest in many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering, and other dishonest acts.

The increasing sophistication of fraudulent activity could damage our reputation, result in the loss of business, subject us to increased regulatory scrutiny or to civil litigation and possible financial liability.

When originating loans, we rely extensively on information provided by third parties, including the loan applications, property appraisals, title reports and income documentation.

In addition, our current and potential future use of AI to support loan origination processes may introduce additional risk of inaccurate, incomplete, or misrepresented information.

If such information is intentionally or negligently misrepresented and the misstatement is not identified prior to loan funding, the value of the loan may be materially less than anticipated.

Regardless of whether a misrepresentation is made by a loan applicant, client, vendor, third-party service provider, bad actor, or employee, we generally bear the associated risk of loss.

Loans subject to material misrepresentations are typically unsalable or may be subject to repurchase obligations if sold prior to the discovery of the misrepresentation.

In addition, the individuals or entities responsible for such misrepresentations are often difficult to locate, and recovery of resulting losses may be limited or unsuccessful.

While we maintain controls and processes designed to identify misrepresented information in our loan origination activities, including human oversight of AI-supported processes, we cannot provide assurance that all misrepresentations will be detected.

As a financial institution, we are also inherently exposed to risks associated with theft, fraud and other dishonest or illegal activities by clients, vendors, bad actors, and/or employees targeting the Bank or our clients.

These activities may take many forms, including check fraud, electronic and wire fraud, phishing, social engineering, and other schemes.

The increasing sophistication and frequency of fraudulent activity could result in financial losses, reputational harm, loss of business, heightened regulatory scrutiny, civil litigation, or other liabilities.

Any of these outcomes could have an adverse effect on our results of operation and financial condition.

To mitigate these risks, we maintain effective policies and internal controls, leverage technology, and provide ongoing employee training focused on identifying and preventing such incidents.

To mitigate these risks, we maintain policies and internal controls, utilize technology-based monitoring tools, and provide ongoing employee training designed to identify, prevent, and respond to fraudulent activity;

however, these measures may not be effective in preventing all losses.

We may be unsuccessful in identifying and completing the acquisition of whole financial institutions or related lines of business.

In addition to pursuing organic growth, we may consider the acquisition of whole financial institutions or related lines of business to achieve desired growth.

There are numerous execution risks with acquisitions, and we cannot assure you that we will be successful in such pursuits.

We may consider acquisition opportunities that we believe complement our activities and can enhance our profitability.

Acquisition activities could be material to our business and involve a number of risks and challenges, including but not limited to:

• Incurring time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in our attention being diverted from the operation of our existing business;

• Encountering competition for acquisitions from financial institutions and other entities with similar business strategies that have greater financial resources, relevant experience and more employees;

• Obtaining regulatory approvals with respect to acquisitions, and ensuring that we will not become subject to regulatory actions in the future that could restrict our growth;

• Using inaccurate estimates and judgments to evaluate credit, operations, management and market risks with respect to the target institution or assets;

• Potential exposure to unknown or contingent liabilities of banks and businesses we acquire;

• The time and expense required to integrate the operations and employees of the combined businesses;

• Inconsistencies in standards, controls, procedures and policies that adversely affect our ability to maintain relationships with clients, depositors and employees or to achieve the anticipated benefits of the acquisition;

• Risks of impairment to goodwill or other than temporary impairment.

Depending on the condition of any institution or assets or liabilities that we may acquire, that acquisition may, at least in the near term, adversely affect our capital and earnings and, if not successfully integrated with our organization, may continue to have such effects over a longer period.

We may not be successful in overcoming these risks or any other problems encountered in connection with pending or potential acquisitions, and any acquisition we may consider will be subject to prior regulatory approval.

Our inability to overcome these risks could have an adverse effect on our profitability, return on equity and return on assets, our ability to grow and enhance shareholder value, which, in turn, could have a material adverse effect on our business, financial condition, results of operations and prospects.

Further, if we experience difficulties with the integration process, the anticipated benefits of the investment or acquisition transaction may not be realized fully or at all or may take longer to realize than expected.

In addition to organic growth, we may pursue acquisitions of financial institutions or related businesses to support our strategic objectives.

Acquisitions involve significant execution risk, and we cannot assure that we will identify suitable opportunities or successfully complete or integrate any transaction.

Acquisition activities may require substantial management time and expense, divert attention from our existing operations, and subject us to competitive pressures, regulatory approvals, and potential regulatory actions.

Acquisitions also involve risks related to valuation, due diligence, integration, and the assumption of unknown or contingent liabilities.

Difficulties integrating operations, systems, personnel, and controls, or inconsistencies in policies and procedures, could adversely affect client relationships and limit our ability to achieve anticipated benefits.

Depending on the condition of the acquired institution or assets, an acquisition may adversely affect our capital, earnings, or goodwill and could result in impairment charges.

If we are unable to successfully manage these risks or realize the expected benefits of an acquisition in a timely manner, our profitability, growth, and shareholder value could be adversely affected, which could have a material adverse effect on our business, financial condition, results of operations, and prospects.

Some institutions we may acquire may have distressed assets and there can be no assurance that we would be able to realize the value we predict from these assets or that we would make sufficient provision for future losses in the value of, or accurately estimate the future write downs taken in respect of, these assets.

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As a result of an investment or acquisition transaction, we may be required to take write-downs or write-offs, restructuring and impairment or other charges that could have a significant negative effect on our financial condition and results of operations, which could cause you to lose some or all of your investment.

We must conduct due diligence investigations of target institutions we intend to acquire.

Intensive due diligence is time consuming and expensive due to the operations, accounting, finance and legal professionals who must be involved.

Even if we conduct extensive due diligence on a target institution, this diligence may not reveal all material issues that may affect a particular target institution, and factors outside the control of the target institution and outside of our control may later arise.

If, during our diligence process, we fail to identify issues specific to a target institution or the environment in which the target institution operates, we may be forced to later write down or write off assets, restructure our operations, or incur impairment or other charges that could result in our reporting losses.

These charges may also occur if we are not successful in integrating and managing the operations of the target institution with which we combine.

In addition, charges of this nature may cause us to violate net worth or other covenants to which we may be subject as a result of assuming preexisting debt held by a target institution or by virtue of our obtaining debt financing.

We conduct due diligence investigations of institutions we may acquire;

however, these reviews are time‑consuming, costly, and may not identify all material risks.

Despite extensive due diligence, issues related to a target institution, its operations, or its operating environment may not be discovered or may arise after completion of an acquisition.

If such issues are identified after an acquisition, or if we are unable to successfully integrate and manage the acquired operations, we may be required to write down or write off assets, restructure operations, or record impairment or other charges, which could result in reported losses.

In addition, such charges or integration challenges could adversely affect our capital or cause us to violate financial covenants associated with assumed or newly incurred debt.

Any of these outcomes could adversely affect our financial condition and results of operations.

We may be required to repurchase mortgage loans or indemnify buyers against losses in some circumstances, which could harm liquidity, results of operations and financial condition.

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Climate change and related legislative and regulatory initiatives may materially affect the Company’s business and results of operations.

The effects of climate change continue to create an alarming level of concern for the state of the global environment.

As a result, the global business community has increased its political and social awareness surrounding the issue.

Further, U.S.

Congress, state legislatures and federal and state regulatory agencies continue to propose numerous initiatives to supplement the global effort to combat climate change.

The lack of empirical data surrounding the credit and other financial risks posed by climate change render it impossible to predict how specifically climate change may impact our financial condition and results of operations;

however, the physical effects of climate change may also directly impact us.

Specifically, unpredictable and more frequent weather disasters may adversely impact the value of real property securing the loans in our portfolios.

Additionally, if insurance obtained by our borrowers is insufficient to cover any losses sustained to the collateral, or if insurance coverage is otherwise unavailable to our borrowers, the collateral securing our loans may be negatively impacted by climate change, which could impact our financial condition and results of operations.

Further, the effects of climate change may negatively impact regional and local economic activity, which could lead to an adverse effect on our clients and impact the communities in which we operate.

Overall, climate change, its effects and the resulting, unknown impact could have a material adverse effect on our financial condition and results of operations.

Climate change and related regulatory, political, and market responses may present risks to our business, financial condition, and results of operations.

The lack of reliable historical data makes it difficult to predict the extent to which climate‑related risks may affect us;

however, the physical effects of climate change, including more frequent or severe weather

events, may adversely impact the value of real property securing loans in our portfolio.

If borrower insurance coverage is insufficient or unavailable to cover climate‑related losses, the value of our collateral may be reduced.

In addition, climate change may negatively affect regional and local economic conditions, which could adversely impact our clients and the communities we serve.

Collectively, these factors could have a material adverse effect on our financial condition and results of operations.

Adverse developments affecting the financial services industry, such as bank failures, may adversely affect the Bank’s results of operations and financial condition, including capital and liquidity.

Bank failures may have a profound impact on the national, regional, and local business environment in which the Bank operates.

Although we were not directly affected by the bank failures which occurred in 2023, the speed and ability of depositors to withdraw their funds from these and other financial institutions contributed to the broader volatility in the banking sector observed during the year.

In response to these failures and the resulting market reaction, various agencies of the U.S.

government took steps to protect depositors and bolster banks’ liquidity, but it is uncertain that these or any other potential future actions will be sufficient to reduce the risk of future bank failures or significant depositor withdrawals.

Any future bank failure events may adversely impact the Bank’s future operating results and financial condition, including capital and liquidity.

Bank failures may adversely affect the national, regional, and local business environment in which the Bank operates.

Although we were not directly impacted by the bank failures that occurred in 2023, the speed and ability of depositors to withdraw their funds from these and other financial institutions contributed to the broader volatility across the banking sector.

government agencies took actions to support depositor confidence and bank liquidity, it is uncertain whether these or any future measures will be sufficient to prevent future bank failures or significant deposit outflows.

Any future bank failures or related market disruptions may adversely impact the Bank’s future operating results and financial condition, including capital and liquidity.

Risks Applicable to the Regulation of our Industry

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We are subject to extensive regulation and supervision that governs almost all aspects of our operations.

As a registered bank holding company, we are subject to supervision, regulation and examination by the Federal Reserve.

As a commercial bank chartered under the laws of Connecticut, the Bank is subject to supervision, regulation and examination by the State of Connecticut Department of Banking and the FDIC.

As a registered bank holding company, we are subject to supervision, regulation and examination by the FRB.

As a commercial bank chartered under the laws of Connecticut, the Bank is subject to supervision, regulation and examination by the CT DOB and the FDIC.

The Bank is also subject to regulation by the NY DFS in connection with its New York operations.

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.

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Federal and state regulators periodically examine our business and we may be required to remediate adverse examination findings.

The Federal Reserve, the FDIC and the Connecticut Department of Banking periodically examine our business, including our compliance with laws and regulations.

The FRB, the FDIC and the CT DOB periodically examine our business, including our compliance with laws and regulations.

If, as a result of an examination, a regulatory agency were to determine that our financial condition, capital resources, asset quality, earnings prospects, management, liquidity or other aspects of any of our operations had become unsatisfactory, or that we were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate.

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Any of these results could materially and adversely affect our business, financial condition, results of operations and prospects.

We face a risk of disruptions and may be impacted by U.S.

Government shutdowns.

government shutdown may materially disrupt our operations that rely on programs administered by the U.S.

Small Business Administration (“SBA”).

During such shutdowns, the SBA suspends non-essential activities, including the administrative support associated with our origination of new 7(a) loans.

Even lenders with delegated authority are unable to process new applications or finalize disbursements during this period.

These disruptions may adversely affect our ability to originate, service, and sell SBA-guaranteed loans, and may also impact the processing of guarantee payment requests.

Furthermore, upon the resumption of government operations, the SBA will likely experience a backlog of applications, which could be significant and may lead to extended processing times and further delays.

These delays could impair our financial performance, increase credit risk exposure, and negatively affect our relationships with borrowers and lending partners.

Additionally, suspension of other federally-funded programs, such as Section 8 housing vouchers and contracts, may have an impact on borrower cash flows, which could, in turn, affect the Company's loan payments.

The Company's exposure to such programs is very limited.

General Risk Factors

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Any such charge could have a material adverse effect on our results of operations.

Increasing scrutiny and evolving expectations from clients, regulators, investors, and other stakeholders with respect to our environmental, social and governance practices may impose additional costs on us or expose us to new or additional risks.

Companies are facing increasing scrutiny from clients, regulators, investors, and other stakeholders related to their environmental, social and governance (“ESG”) practices and disclosure.

Investor advocacy groups, investment funds and influential investors are also increasingly focused on these practices, especially as they relate to the environment, health and safety, diversity, labor conditions and human rights.

Increased ESG related compliance costs could result in increases to our overall operational costs.

Failure to adapt to or comply with regulatory requirements or investor or stakeholder expectations and standards could negatively impact our reputation, ability to do business with certain partners, and our stock price.

New government regulations could also result in new or more stringent forms of ESG oversight and expanding mandatory and voluntary reporting, diligence, and disclosure.

The evolving and often conflicting political and regulatory landscape related to environmental, social, and governance (“ESG”) practices creates uncertainty and compliance challenges that may increase our costs and expose us to new or additional risks.

Companies face divergent and changing federal, state, and local regulatory approaches towards ESG, further affected by shifts in governmental priorities, which create uncertainty regarding enforcement priorities and compliance expectations.

This dynamic and sometimes conflicting landscape complicates compliance, strategic planning, and operational decision‑making, and may increase legal, compliance, and operational costs, divert management attention, and heighten the risk of non‑compliance.

In addition, heightened scrutiny from investors and other stakeholders regarding ESG matters creates reputational risk regardless of our approach, which could adversely affect our business, financial condition, and results of operations.

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 1A. Risk Factors