What changed in this filing

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Item 1. Business

2021-03-10 compared with 2020-02-28 · 138 added, 89 removed, 529 unchanged (30% of the section changed)

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Important factors that may cause actual results to differ materially from those contemplated by these forward-looking statements include, but are not limited to, those disclosed under “Risk Factors” in Part I Item 1A as well as the following factors:

• The length, severity, magnitude, and duration of the COVID-19 pandemic and the direct and indirect impact of such pandemic, including its impact on the Company’s financial condition and business operations;

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

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Bankwell Financial Group, Inc.

is a bank holding company, headquartered in New Canaan, Connecticut and offers a broad range of financial services through its banking subsidiary, Bankwell Bank (collectively, we, our, us, the Company or the Bank), a Connecticut state chartered non-member bank founded in 2002.

Our primary market is the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut, which we serve from our main banking office located in New Canaan, Connecticut and eleven other branch offices located throughout the Fairfield and New Haven Counties area.

(the "Parent Corporation") is a bank holding company, headquartered in New Canaan, Connecticut and offers a broad range of financial services through its banking subsidiary, Bankwell Bank (the "Bank" and, collectively with the Parent Corporation and the Parent Corporation's subsidiaries, "we", "our", "us", or the "Company"), a Connecticut state chartered non-member bank founded in 2002.

Our primary market is the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut, which we serve from our main banking office located in New Canaan, Connecticut and ten other branch offices located throughout the Fairfield and New Haven Counties area.

As of December 31, 2020, on a consolidated basis, we had total assets of approximately $2.3 billion, net loans of approximately $1.6 billion, total deposits of approximately $1.8 billion, and shareholders’ equity of approximately $176.6 million.

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Effective risk management is a key component of our strong corporate culture.

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

We use our strong risk management process to monitor our existing loan and investment securities portfolios,

support operational decision-making and improve our ability to generate earning assets with strong credit quality.

To maintain our strong credit quality, we use a comprehensive underwriting process and we seek to maintain a diversified loan portfolio and a conservative investment securities portfolio.

Board-approved policies contain approval authorities, as appropriate, and are reviewed at least annually.

We have a Risk Management Steering Committee comprised of executive officers

and other members of management.

We have a Risk Management Steering Committee comprised of executive officers and other members of management.

This committee reviews risks associated with new initiatives and programs as well as assesses risks and mitigants throughout areas of the Bank on an ongoing basis.

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We believe that we are especially well-positioned to create value for our shareholders as a result of the following competitive strengths:

• Our Market.

Our current market is defined as the New York metropolitan area, including Fairfield and New Haven Counties, Connecticut.

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• Experienced and Respected Management Team with a Proven and Successful Track Record.

Our executive management team is comprised of seasoned professionals with significant banking experience, a history of high performance at local financial institutions and success in identifying, acquiring and integrating financial institutions.

Our executive management team is comprised of seasoned professionals with significant banking experience, a history of high performance at financial institutions and success in identifying, acquiring and integrating financial institutions.

Our executive management team includes Christopher R.

Gruseke, President and Chief Executive Officer (since 2015), Penko Ivanov, Executive Vice President, Chief Financial Officer (since 2016), Christine A.

Chivily, Executive Vice President, Chief Risk and Credit Officer (since 2013), and Laura Waitz, Executive Vice President, Chief of Staff (since 2017).

Gruseke, President and Chief Executive Officer (since 2015), Christine A.

Chivily, Executive Vice President, Chief Risk and Credit Officer (since 2013), Penko Ivanov, Executive Vice President, Chief Financial Officer (since 2016), Laura Waitz, Executive Vice President, Chief of Staff (since 2017), and Matthew McNeill, Executive Vice President, Chief Banking Officer (since 2020).

• Dedicated Board of Directors with Strong Community Involvement.

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• Strong Capital Position.

At December 31, 2019, we had a 9.56% tangible common equity ratio, and the Bank had a 10.99% tier 1 leverage ratio and a 12.53% tier 1 risk-based ratio.

At December 31, 2020, we had a 7.73% tangible common equity ratio, and the Bank had a 8.44% tier 1 leverage ratio, an 11.06% tier 1 risk-based ratio, and a 12.28% total capital to risk-weighted assets ratio.

We believe that our ability to attract and generate capital has facilitated our growth and is an integral component to the execution of our business plan.

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We believe that our advanced technology combined with responsive and personal service provides our customers with a superior banking experience.

Human Capital Resources

We are committed to investing in our employees.

Our significant accomplishments are a direct result of the collaboration, determination, initiative, and integrity of our team of dedicated professionals.

Our employees embrace our values to exceed expectations.

Our performance management program recognizes and rewards superior performance based on objective and consistent measurements.

At December 31, 2020, we had a total of 125 full-time equivalent employees.

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Many of our larger commercial bank competitors have greater name recognition and offer certain services that we do not;

however, we believe that our presence in our primary market area and focus

on providing superior service to professionals at small to medium-sized businesses and individual employees of such businesses are instrumental to our success.

however, we believe that our presence in our primary market area and focus on providing superior service to professionals at small to medium-sized businesses and individual employees of such businesses are instrumental to our success.

We emphasize personalized banking services and the advantage of local decision-making in our banking businesses, and this emphasis has been well received by the public in our market area.

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Total loans before deferred loan fees and the allowance for loan losses were $1.6 billion at December 31, 2020.

Since December 31, 2015, total loans have increased $0.5 billion from $1.1 billion , reflecting strong organic loan growth.

The following table summarizes the composition of our loan portfolio for the dates indicated.

At December 31,

2020 2019 2018 2017 2016

(In thousands)

Real estate loans:

Residential $ 113,557 $ 147,109 $ 178,079 $ 193,524 $ 195,729

Commercial 1,148,383 1,128,614 1,094,066 987,242 845,322

Construction 87,007 98,583 73,191 101,636 107,441

1,348,947 1,374,306 1,345,336 1,282,402 1,148,492

Commercial business 276,601 230,028 258,978 259,995 215,914

Consumer 79 150 412 619 1,533

Total loans $ 1,625,627 $ 1,604,484 $ 1,604,726 $ 1,543,016 $ 1,365,939

At December 31,

Percent of Loan Portfolio

2020 2019 2018 2017 2016

Real estate loans:

Residential 6.99 % 9.17 % 11.10 % 12.54 % 14.33 %

Commercial 70.64 70.34 68.18 63.98 61.89

Construction 5.35 6.14 4.56 6.59 7.86

82.98 85.65 83.84 83.11 84.08

Commercial business 17.02 14.34 16.14 16.85 15.81

Commercial loans.

We offer a wide range of commercial loans, including business term loans, equipment financing and lines of credit.

Our target commercial loan market is small to medium-sized businesses, including retail and professional establishments.

The terms of these loans vary by purpose and by type of underlying collateral.

The commercial loans primarily are underwritten on the basis of the borrower’s ability to service the loan from cash flow.

We make equipment loans with conservative margins generally for a term of ten years or less, supported by the useful life of the equipment, at fixed or variable rates, with the loan fully amortizing over the term.

Loans to support working capital typically have terms not exceeding two years and usually are secured by accounts receivable, inventory and/or personal guarantees of the principals of the business and at times by the commercial real estate of the borrower.

For loans secured by accounts receivable or inventory, principal typically is repaid as the assets securing the loan are converted into cash, and for loans secured with other types of collateral, principal is fully or partially amortized during the loan term with any balloon amount due at maturity.

The quality of the commercial borrower’s management and its ability both to properly evaluate changes in the supply and demand characteristics affecting its markets for products and services and to effectively respond to such changes are significant factors in a commercial borrower’s creditworthiness.

Risks associated with our commercial loan portfolio include those related to the strength of the borrower’s business, which may be affected not only by local, regional and national market conditions, but also changes in the borrower’s management and other factors beyond the borrower’s control;

those related to fluctuations in value of any collateral securing the loan;

and those related to terms of the commercial loan, which may include balloon payments that must be refinanced or paid off at the end of the term of the loan.

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

Consumer — 0.01 0.02 0.04 0.11

Total loans 100.00 % 100.00 % 100.00 % 100.00 % 100.00 %

Residential real estate loans.

In the fourth quarter of 2017, management made the strategic decision to no longer originate residential mortgage loans.

As of the beginning of the third quarter of 2019, the Company no longer offered home equity loans or lines of credit.

Prior to these decisions we offered first lien one-to-four family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences.

We also originated for sale one-to-four family mortgage loans, which are classified as loans held for sale until sold to investors.

Although our consumer real estate loan portfolio presents lower levels of risk than our commercial, commercial real estate and construction loan portfolios, we are exposed to risk based on fluctuations in the value of the real estate collateral securing the loan, as well as changes in the borrower’s financial condition, which could be affected by numerous factors, including divorce, job loss, illness or other personal hardship.

Commercial real estate loans.

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We are also exposed to risk based on the ability of the construction loan borrower to refinance the debt or sell the property upon completion of the project, which may be affected by changes in market trends since the time that we funded the construction loan.

Consumer real estate loans.

In the fourth quarter of 2017, management made the strategic decision to no longer originate residential mortgage loans.

As of the beginning of the third quarter of 2019, the Company no longer offered home equity loans or lines of credit.

Prior to these decisions we offered first lien one-to-four family mortgage loans, as well as home equity lines of credit, in each case primarily on owner-occupied primary residences.

We also originated for sale one-to-four family mortgage loans, which are classified as loans held for sale until sold to investors.

Commercial Business loans.

We offer a wide range of commercial loans, including business term loans, equipment financing and lines of credit.

Our target commercial loan market is small to medium-sized businesses, including retail and professional establishments.

The terms of these loans vary by purpose and by type of underlying collateral.

The commercial loans primarily are underwritten on the basis of the borrower’s ability to service the loan from cash flow.

We make loans

secured by accounts receivable or inventory, principal typically is repaid as the assets securing the loan are converted into cash, and for loans secured with other types of collateral, principal is fully or partially amortized during the loan term with any balloon amount due at maturity.

From time-to-time, we also make equipment loans with conservative margins, generally for a term of ten years or less, supported by the useful life of the equipment, at fixed or variable rates, with the loan fully amortizing over the term.

This segment also includes Paycheck Protection Program ("PPP") loans made under the Coronavirus Aid, Relief and Economic Security Act ("CARES") Act to small businesses impacted by COVID-19, to cover payroll and other operating expenses.

Loans extended under the PPP are fully guaranteed by the U.S.

Small Business Administration ("SBA").

those related to fluctuations in value of any collateral securing the loan;

and those related to terms of the commercial loan, which may include balloon payments that must be refinanced or paid off at the end of the term of the loan.

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

Consumer loans.

We may offer consumer loans as an accommodation to our existing customers, but do not market consumer loans to persons who do not have a pre-existing relationship with us.

As of December 31, 2020, our consumer loans represented less than 1% of our total loan portfolio.

While consumer loans may not remain below 1% of our portfolio, we do not expect our consumer loans to become a material component of our loan portfolio at any time in the foreseeable future.

While consumer loans may not remain below 1% of our portfolio, we do not expect our consumer loans to become a material component of our loan portfolio at any time in the near future.

Although we do not engage in any material amount of consumer lending, our consumer loans, which are underwritten primarily based on the borrower’s financial condition and, in many cases, are unsecured credits, subject us to risk based on changes in the borrower’s financial condition, which could be affected by numerous factors, including those discussed above.

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Past due reports are reviewed on an ongoing basis and insurance and tax payment monitoring is in place.

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

Our evaluation and compensation program for our

relationship managers includes significant goals that we believe motivate the relationship managers to focus on high quality credit consistent with our strategic focus on asset quality.

For 2020, it was our policy to review amortizing commercial loans in excess of $1 million on an annual basis, or more frequently through the receipt of interim and annual financial statements and borrowing base certificates depending on loan structure and covenants.

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Investment Activities

We manage our investment portfolio primarily for liquidity purposes.

Our investment portfolio’s primary purpose is to provide adequate liquidity necessary to meet any reasonable decline in deposits and any anticipated increase in the loan portfolio.

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Deposits at the Bank are insured by the FDIC up to statutory limits.

We have built a network of twelve deposit-taking branch offices and attracted significant transaction account business through our relationship-based approach.

We have built a network of deposit-taking branch offices and attracted significant transaction account business through our relationship-based approach.

Borrowed Funds

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

The Notes are non-callable for five years, have a stated maturity of August 15, 2025, and bear interest at a quarterly pay fixed rate of 5.75% per annum to the maturity date or the early redemption date (August 2020 and annually thereafter).

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

became callable, in part or in whole, beginning August 2020.

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

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The Dodd-Frank Act has significantly changed the current bank regulatory structure and continues to affect the lending and investment activities and general operations of depository institutions and their holding companies.

The current United States government administration had announced that it intends to slow down the adoption of new Dodd-Frank Act regulations and to consider proposing changes to the legislation.

The following summary assumes no changes to the Dodd-Frank Act and regulations adopted to date, other than as noted below in our discussion of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Economic Growth Act”), which was enacted in May 2018, repealed or modified several provisions of the Dodd-Frank Act.

Certain key provisions of the Economic Growth Act and its implementing regulations are discussed below.

The Dodd-Frank Act created the Consumer Financial Protection Bureau with extensive powers to implement and enforce consumer protection laws.

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The Consumer Financial Protection Bureau has examination and enforcement authority over all banks and savings associations with more than $10 billion in assets.

Banks and savings associations with $10 billion or less in assets will continue to be examined for compliance with federal consumer protection and fair lending laws by their applicable primary federal bank regulators.

Banks and savings associations with $10 billion or less in assets will continue to be examined for compliance with federal consumer protection and

fair lending laws by their applicable primary federal bank regulators.

The Dodd-Frank Act also gives state attorneys general certain authority to enforce applicable federal consumer protection laws.

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The rulemaking that remains may also have a similar impact.

On January 30, 2020, the federal banking agencies issued proposed revisions to the Dodd-Frank Act which would provide certain exceptions to the Dodd-Frank Act’s “Volcker Rule” (which generally restricts certain banking entities such as the Company and the Bank from engaging in proprietary trading activities and entering into certain relationships with hedge funds and private-equity funds).

The effect of this proposed change, and any further rules or regulations, are and could be complex and far-reaching, and the change and any future laws or regulations or changes thereto could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business, financial condition and results of operations.

Economic Growth, Regulatory Relief, and Consumer Protection Act

The Economic Growth, Regulatory Relief, and Consumer Protection Act (the EGRRCPA) became law on May 24, 2018.

The EGRRCPA keeps in place fundamental aspects of the current bank regulatory structure, but provides community banks with relief from certain regulatory requirements, including some imposed by the Dodd-Frank Act.

Among other things, Section 201 of the EGRRCPA required the federal banking agencies to develop regulations establishing a “community bank leverage ratio” for banks and holding companies with less than $10 billion in consolidated assets and a qualifying risk profile.

In 2019, the federal banking agencies jointly issued a final rule to implement Section 201.

The rule, which became effective on January 1, 2020, provides certain qualifying institutions with an optional, simpler method to measure capital adequacy.

In addition, many aspects of the regulatory changes made by the Dodd Frank Act continue to generate debate in political circles as well as within the regulatory agencies that oversee the banking systems and financial markets.

While the exact scope, nature and timing of any legislative and/or regulatory changes cannot necessarily be predicted, it is likely that changes will continue to occur.

And it is possible that the changes could negatively impact our operations, cash flows or financial condition, impose additional costs on us, intensify the regulatory supervision of us or otherwise adversely affect our business, financial condition and results of operations.

Economic Growth Act

The Economic Growth Act provides community banks with relief from certain regulatory requirements, including some imposed by the Dodd-Frank Act.

Among other things, Section 201 of the Economic Growth Act required the federal banking agencies to develop regulations establishing a “community bank leverage ratio” for banks and holding companies with less than $10 billion in consolidated assets and a qualifying risk profile.

The final rule, which became effective on January 1, 2020, provides certain qualifying institutions with an optional, simpler method to measure capital adequacy.

Under the rule, banks and bank holding companies that have less than $10 billion in total consolidated assets and meet other qualifying criteria, including a leverage ratio (equal to tier 1 capital divided by average total consolidated assets) of greater than 9 percent, will be eligible to opt into the community bank leverage ratio ("CBLR") framework.

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Qualifying organizations will also be deemed to have met the "well capitalized" ratio requirements for purposes of Section 38 of the Federal Deposit Insurance Act.

The EGRRCPA provides insured depository institutions and their affiliates with less than $10 billion in total consolidated assets and limited trading activities with an exemption from the Dodd-Frank Act’s “Volcker Rule” (which generally restricts certain banking entities such as the Company and the Bank from engaging in proprietary trading activities and entering into certain relationships with hedge funds and private-equity funds).

In July of 2019, the FDIC, along with several other banking agencies, adopted a final rule to implement the exemption contemplated by the EGRRCPA.

The EGRRCPA increased the consolidated assets limit for bank holding companies covered by the Federal Reserve Board’s “Small Bank Holding Company Policy Statement” (the Policy) from $1 billion to $3 billion.

The Economic Growth Act provides insured depository institutions and their affiliates with less than $10 billion in total consolidated assets and limited trading activities with an exemption from the Dodd-Frank Act’s “Volcker Rule” (which generally restricts certain banking entities such as the Company and the Bank from engaging in proprietary trading activities and entering into certain relationships with hedge funds and private-equity funds).

The FDIC, along with several other banking agencies, adopted final rules to implement the exemption contemplated by the Economic Growth Act.

The Economic Growth Act increased the consolidated assets limit for bank holding companies covered by the Federal Reserve Board’s “Small Bank Holding Company Policy Statement” (the Policy) from $1 billion to $3 billion.

In addition to the consolidated assets limit, a covered bank holding company may not be engaged in significant non-banking and off-balance sheet activities and may not have a material amount of debt or equity securities outstanding (other than trust preferred securities) that are registered with the SEC.

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In addition, the Federal Reserve Board expects that bank holding companies will retire all debt within 25 years of being incurred and reduce their debt to equity ratio to 30:1 or less within 12 years of incurring the debt.

also directs that each depository institution subsidiary of a covered bank holding company remain well-capitalized.

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

The EGRRCPA increased the consolidated assets threshold from $1 billion to $3 billion for insured depository institutions that qualify for an 18-month on-site exam cycle.

The Policy also directs that each depository institution subsidiary of a covered

bank holding company remain well-capitalized.

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

The Economic Growth Act increased the consolidated assets threshold from $1 billion to $3 billion for insured depository institutions that qualify for an 18-month on-site exam cycle.

Consistent with this statutory amendment, in August of 2018, the federal banking agencies issued an interim final rule to increase, from $1 billion to $3 billion, the total asset threshold under which an agency may apply an 18-month examination cycle for qualified institutions that have an "outstanding" or "good" composite rating.

The EGRRCPA required the federal banking agencies to promulgate regulations permitting insured depository institutions that have less than $5 billion in total consolidated assets (and satisfy other conditions) to use short-form reports of condition (i.e.

The Economic Growth Act required the federal banking agencies to promulgate regulations permitting insured depository institutions that have less than $5 billion in total consolidated assets (and satisfy other conditions) to use short-form reports of condition (i.e.

call reports) for the first and third quarters of each year.

On June 17, 2019, the federal banking agencies issued final rules to implement those streamlined reporting requirements.

The CARES Act and Initiatives Related to COVID-19

In response to the COVID-19 pandemic, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was signed into law on March 27, 2020 to provide national emergency economic relief measures.

Many of the CARES Act’s programs are dependent upon the direct involvement of U.S.

financial institutions, such as Bankwell Bank, and have been implemented through rules and guidance adopted by federal departments and agencies, including the U.S.

Department of Treasury, the Federal Reserve and other federal banking agencies, including those with direct supervisory jurisdiction over Bankwell Bank.

Furthermore, as the ongoing COVID-19 pandemic evolves, federal regulatory authorities continue to issue additional guidance with respect to the implementation, lifecycle, and eligibility requirements for the various CARES Act programs as well as industry-specific recovery procedures for COVID-19.

It is possible that Congress will enact supplementary COVID-19 response legislation, including amendments to the CARES Act or new bills comparable in scope to the CARES Act.

The Company continues to assess the impact of the CARES Act and other statutes, regulations and supervisory guidance related to the COVID-19 pandemic.

Paycheck Protection Program ("PPP").

Section 1102 of the CARES Act created the PPP, a program administered by the U.S.

Small Business Administration (“SBA”) to provide loans to small businesses for payroll and other basic expenses during the COVID-19 pandemic.

Bankwell Bank has participated in the PPP as a lender.

These loans are eligible to be forgiven if certain conditions are satisfied and are fully guaranteed by the SBA.

Additionally, loan payments will also be deferred for an initial period of time, the precise length of which depends upon when the borrower submits a forgiveness application to the SBA.

Payment of a PPP loan would only be required if the SBA denies forgiveness in whole or in part or if the borrower fails to file a forgiveness application within the required timeframe.

The PPP commenced on April 3, 2020 and was available to qualified borrowers through August 8, 2020.

No collateral or personal guarantees were required.

On December 27, 2020, the President signed into law omnibus federal spending and economic stimulus legislation titled the “Consolidated Appropriations Act” (the “CAA”) that included the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (the “HHSB Act”).

Among other things, the HHSB Act renewed the PPP, allocating $284.45 billion in PPP loan funding for new first-time borrowers and for existing PPP borrowers who qualify for a so-called “second draw” loan.

The SBA and U.S.

Department of Treasury have issued numerous regulations, procedures and guidelines to help implement the PPP, and they are likely to continue to do so as the program evolves and matures into the forgiveness and repayment phase.

Lending under the program is currently scheduled to end on March 31, 2021.

However, participating lenders, including Bankwell Bank, will continue to be active in helping borrowers to process forgiveness applications and in servicing loans that are not forgiven in whole or in part.

As a participating lender in the PPP, Bankwell Bank continues to monitor legislative, regulatory, and supervisory developments related thereto, including the most recent changes implemented by the HHSB Act.

Guidance on Non-TDR Loan Modifications due to COVID-19 .

On March 22, 2020, a statement was issued by our banking regulators and titled the “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus” (the “Interagency Statement”) that encourages financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations due to the effects of COVID-19.

Additionally, Section 4013 of the CARES Act further provides that a qualified loan modification is exempt by law from classification as a TDR as defined by GAAP, from the period beginning March 1, 2020 until the earlier of December 31, 2020 or the date that is 60 days after the date on which the national emergency concerning the COVID-19 outbreak declared by the President of the United States under the National Emergencies Act terminates.

Section 541 of the CAA extends this relief to the earlier of January 1, 2022 or 60 days after the national emergency termination date.

The Interagency Statement was subsequently revised in April 2020 to clarify the interaction of the original guidance with Section 4013 of the CARES Act, as well as setting forth the banking regulators’ views on consumer protection considerations.

Main Street Lending Program .

The CARES Act encouraged the Federal Reserve, in coordination with the Secretary of the Treasury, to establish or implement various programs to help midsize businesses, nonprofits, and municipalities.

2020, the Federal Reserve proposed the creation of the Main Street Lending Program to implement certain of these recommendations.

The Federal Reserve ceased purchasing loans under the program as of January 8, 2021.

Connecticut Banking Laws and Supervision

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Beginning January 1, 2016, the Basel III Capital Rules limit the amount of dividends the Bank can pay if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules.

The capital conservation buffer was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) became effective.

The full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) became effective as of January 1, 2019.

The capital conservation buffer is in addition to the minimum risk-based capital requirement.

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Under Federal Reserve Board policy which has been codified by the Dodd-Frank Act, a bank holding company must serve as a source of strength for its subsidiary bank.

Under this policy, the Federal Reserve Board may require, and has required in the

past, a bank holding company to contribute additional capital to an undercapitalized subsidiary bank.

Under this policy, the Federal Reserve Board may require, and has required in the past, a bank holding company to contribute additional capital to an undercapitalized subsidiary bank.

A bank holding company must obtain Federal Reserve Board approval before:

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

Beginning January 1, 2016, the Basel III Capital Rules limit the amount of dividends the Bank can pay to us if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules.

The capital conservation buffer was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) became effective.

The Basel III Capital Rules limit the amount of dividends the Bank can pay to us if its capital ratios are below the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets).

The capital conservation buffer is in addition to the minimum risk-based capital requirement.

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Under the asset quality and earnings standards, the Bank is required to establish and maintain systems to (i) identify problem assets and prevent deterioration in those assets, and (ii) evaluate and monitor earnings and ensure that earnings are sufficient to maintain adequate capital reserves.

Finally, the compensation standard states that compensation will be considered excessive if it is unreasonable or disproportionate to the services actually performed by the individual being compensated.

Finally, the compensation standard states that compensation will be considered excessive if it is unreasonable or disproportionate to the services actually performed by the

individual being compensated.

If an insured state-chartered bank fails to meet any of the standards promulgated by regulation, then such institution will be required to submit a plan within 30 days to the FDIC specifying the steps it will take to correct the deficiency.

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The Basel III Capital Rules limit a banking organization’s capital distributions and certain discretionary bonus payments to executive officers if the banking organization does not hold a “capital conservation buffer” of 2.5% in addition to the minimum risk based capital requirement.

The “capital conservation buffer” was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer became effective.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated financial statements.

As discussed above, the Economic Growth, Regulatory Relief, and Consumer Protection Act provided simplified capital measurement rules for qualified community banks and holding companies with less than $10 billion in total consolidated assets and with limited trading activities.

As discussed above, the Economic Growth Act provided simplified capital measurement rules for qualified community banks and holding companies with less than $10 billion in total consolidated assets and with limited trading activities.

The federal banking agencies have issued final regulations to implement this optional, simplified framework for institutions that satisfy certain qualifying criteria, including a "community bank leverage ratio" of greater than 9 percent.

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The final Basel III framework also requires banks and bank holding companies to measure their liquidity against specific liquidity tests.

Although similar in some respects to liquidity measures historically applied by banks and banking agencies for management and supervisory purposes, the Basel III framework would require specific liquidity tests by rule.

Although similar in some respects to liquidity measures historically applied by banks and banking agencies for management and supervisory purposes, the Basel III framework requires specific liquidity tests by rule.

Transactions with Affiliates.

Under current federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act, or FRA, and the Federal Reserve Board’s Regulation W.

Under federal law, transactions between depository institutions and their affiliates are governed by Sections 23A and 23B of the Federal Reserve Act, or FRA, and the Federal Reserve Board’s Regulation W.

In a holding company context, at a minimum, the parent holding company of a bank and any companies which are controlled by such parent holding company are considered an affiliate of the bank.

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Section 23B requires that covered transactions and a broad list of other specified transactions be on terms substantially the same, or no less favorable, to the bank or its subsidiary as similar transactions with non-affiliates.

The Dodd-Frank Act has expanded the definition of covered transactions and increased the timing and other aspects of the collateral requirements associated with covered transactions, including an expansion of the covered transactions to include credit exposures related to derivatives, repurchase agreements and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied.

The Dodd-Frank Act has expanded the definition of

covered transactions and increased the timing and other aspects of the collateral requirements associated with covered transactions, including an expansion of the covered transactions to include credit exposures related to derivatives, repurchase agreements and securities lending arrangements and an increase in the amount of time for which collateral requirements regarding covered transactions must be satisfied.

Loans to Insiders.

Further, the FRA places restrictions on extensions of credit that can by made by a depository institution to its directors, executive officers, and principal shareholders (or insiders) and to the insiders of its affiliates.

Further, the FRA places restrictions on extensions of credit that can be made by a depository institution to its directors, executive officers, and principal shareholders (or insiders) and to the insiders of its affiliates.

Many of those restrictions also apply to the "related interests" of those insiders.

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Insurance of Deposit Accounts.

Deposit accounts at the Bank are insured by the Deposit Insurance Fund, generally up to a maximum of $250,000 per separately insured depositor, pursuant to changes made permanent by the Dodd-Frank Act.

Deposit accounts at the Bank are insured by the Deposit Insurance Fund, generally up to a maximum of $250,000 per separately insured depositor.

The FDIC assesses insured depository institutions to maintain the Deposit Insurance Fund.

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Since the new base is larger than the previous base, the FDIC also lowered assessment rates so that the rule would not significantly alter the total amount of revenue collected from the industry.

The range of adjusted assessment rates is now 2.5 to 45 basis points of the new assessment base.

The rule is expected to benefit smaller financial institutions, which typically rely more on deposits for funding, and shift

more of the burden for supporting the Deposit Insurance Fund to larger financial institutions, which are thought to have greater access to nondeposit funding.

The Dodd-Frank Act increased the minimum target Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits.

The FDIC must seek to achieve the 1.35% ratio by September 30, 2020.

In setting the assessments necessary to achieve the 1.35% ratio, the FDIC is supposed to offset the effect of the increased ratio on insured institutions with assets of less than $10 billion.

The Dodd-Frank Act eliminated the 1.5% maximum fund ratio, instead leaving it to the discretion of the FDIC.

The FDIC has exercised that discretion by establishing a long range fund ratio of 2%.

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

The Dodd-Frank Act increased the minimum Deposit Insurance Fund ratio from 1.15% of estimated insured deposits to 1.35% of estimated insured deposits.

Currently, the fund ratio stands at a point where it exceeds that minimum threshold.

There is no maximum cap on the fund ratio and the FDIC has been given the discretion to establish, on an annual basis, a long-range target ratio for the fund, to better ensure that the fund is not significantly stressed by future economic downturns.

For both 2020 and 2021, the FDIC has exercised that discretion by establishing a 2% fund reserve ratio as a long-range minimum target for setting assessment rates.

Effective June 26, 2020, the FDIC adopted a rule to mitigate the effects on deposit insurance assessments resulting from a bank’s participation in the PPP and certain other relief programs administered by the Federal Reserve Board.

A material increase in FDIC insurance premiums would likely have an adverse effect on the operating expenses and results of operations of the Bank.

Management cannot predict what FDIC insurance assessment rates will be in the future.

Insurance of deposits may be terminated by the FDIC upon a finding that a depository institution has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

rule, order or condition imposed by the FDIC.

We are not aware of any current practice, condition or violation that might lead to termination of the Bank’s deposit insurance.

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Enforcement actions by the institution’s primary federal banking agency may be initiated if the institution’s incentive compensation programs pose a risk to the safety and soundness of the organization.

In addition, beginning January 1, 2016, the Basel III Capital Rules limit discretionary bonus payments to the Bank’s executive officers if its capital ratios are below the threshold levels of the capital conservation buffer established by the rules.

The capital conservation buffer was phased in from January 1, 2016 to January 1, 2019, when the full capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) became effective.

In addition, the Basel III Capital Rules limit discretionary bonus payments to the Bank’s executive officers if its capital ratios are below the threshold levels of the capital conservation buffer of 2.5% (as a percentage of risk-weighted assets) established by the rules.

The capital conservation buffer is in addition to the minimum risk-based capital requirement.

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Among other things, the legislation (1) created the Public Company Accounting Oversight Board, which is empowered to set auditing, quality control and ethics standards, to inspect registered public accounting firms, to conduct investigations and to take disciplinary actions, subject to SEC oversight and review;

(2) strengthened

auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients;

(2) strengthened auditor independence from corporate management by, among other things, limiting the scope of consulting services that auditors can offer their public company audit clients;

(3) heightened the responsibility of public company directors and senior managers for the quality of the financial reporting and disclosure made by their companies;

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Financial Modernization.

The Gramm-Leach-Bliley Act, or the GLBA, permits greater affiliation among banks, securities firms, insurance companies, and other companies under a type of financial services company known as a “financial holding company”.

holding company”.

A financial holding company essentially is a bank holding company with significantly expanded powers.

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The Federal Reserve Board’s monetary policies have had, and are likely to continue to have, an important impact on the operating results of commercial banks through its power to implement national monetary policy in order, among other things, to curb inflation or combat a recession.

The monetary policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of U.S.

policies of the Federal Reserve Board affect the levels of bank loans, investments and deposits through its control over the issuance of U.S.

government securities, its regulation of the discount rate applicable to member banks and its influence over reserve requirements to which member banks are subject.

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The following discussion of federal taxation is intended only to summarize certain pertinent federal income tax matters and is not a comprehensive description of the tax rules applicable to us.

On December 22, 2017 the Tax Cuts and Jobs Act of 2017 was signed into law.

As a result, the corporate tax rate was reduced from 35% to 21%.

Companies are required to recognize the effect of tax law changes in the period of enactment in accordance with GAAP.

As result of the tax law changes the Company recognized a write-down of its deferred tax asset position in the amount of $3.3 million for the year ended December 31, 2017.

Method of Accounting:

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Income earned by a PIC is determined in accordance with the statutory requirements for a passive investment company and the dividends paid by the PIC to the Bank are not taxable income for Connecticut income tax purposes.

As a result of the formation of the PIC,

the Bank no longer expects to be subject to Connecticut income taxes.

As a result of the formation of the PIC, the Bank no longer expects to be subject to Connecticut income taxes.

State taxes are being recognized for income taxes on income earned in other states.

1 unchanged sentence

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

What changed 10-K

Item 1. Business