What changed in this filing

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Item 1. Business

2021-02-24 compared with 2020-02-27 · 168 added, 140 removed, 380 unchanged (45% of the section changed)

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(together with all of its subsidiaries, collectively referred to as the “Corporation,” “FBFS,” “we,” “us,” or “our”) is a registered bank holding company originally incorporated in 1986 under the laws of the State of Wisconsin and is engaged in the commercial banking business through its wholly-owned bank subsidiary, First Business Bank (“FBB” or the “Bank”), headquartered in Madison, Wisconsin.

All of our operations are conducted through the Bank and certain subsidiaries of FBB.

All of our operations are conducted through FBB and First Business Specialty Finance, LLC (“FBSF”), a wholly-owned subsidiary of FBB formerly known as First Business Equipment Finance, LLC (“FBEF”).

The Bank operates as a business bank, delivering a full line of commercial banking products and services tailored to meet the specific needs of small and medium-sized businesses, business owners, executives, professionals, and high net worth individuals.

Our products and services include those for business banking, private wealth, and bank consulting.

Within business banking, we offer commercial lending, consumer and other lending, asset-based lending, accounts receivable financing, equipment financing, vendor financing, Small Business Administration (“SBA”) lending and servicing, treasury management services, and company retirement plans.

Our private wealth services for executives and individuals include trust and estate administration, financial planning, investment management, and private banking.

For other banks, our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation.

Within business banking, we offer commercial lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, vendor financing, Small Business Administration (“SBA”) lending and servicing, treasury management services, and company retirement plans.

Our private wealth services include trust and estate administration, financial planning, investment management, consumer lending and private banking for executives and owners of our business banking clients and others.

Our bank consulting experts provide investment portfolio administrative services, asset liability management services, and asset liability management process validation for other financial institutions.

We do not utilize a branch network to attract retail clients.

Our operating philosophy is predicated on deep client relationships fostered by local banking partners and specialized business lines where we provide skilled expertise, combined with the efficiency of centralized administrative functions, such as information technology, loan and deposit operations, finance and accounting, credit administration, compliance, marketing, and human resources.

Our operating philosophy is predicated on deep client relationships within our commercial bank markets and skilled expertise within our nationwide specialty finance business lines, combined with the efficiency of centralized administrative functions, such as information technology, loan and deposit operations, finance and accounting, credit administration, compliance, marketing, and human resources.

Our focused model allows experienced staff to provide the level of financial expertise needed to develop and maintain long-term relationships with our clients.

We conduct our business operations through one operating segment.

The Corporation previously owned three separate bank charters:

Alterra Bank (“Alterra”), Leawood, Kansas, First Business Bank-Milwaukee (“FBB-Milwaukee”), Brookfield, Wisconsin, and FBB, Madison, Wisconsin.

Effective June 1, 2017, Alterra and FBB-Milwaukee were merged with and into FBB.

The Corporation’s existing management structure remains unchanged, with the current roles and decision making authority retained by local banking leaders, as well as the heads of our private wealth management and specialty finance businesses.

As of December 31, 2020, on a consolidated basis, we had total assets of $2.568 billion, total gross loans and leases of $2.151 billion, total deposits of $1.856 billion, and total stockholders’ equity of $206.2 million.

Business Lines

Commercial Banking Business Lines

Commercial Lending

We strive to meet the specific commercial lending needs of small- to medium-sized companies in our primary markets in Wisconsin, Kansas, and Missouri, predominantly through lines of credit and term loans to businesses with annual sales of up to $75 million.

Through FBB, we service the greater Madison area, Southeast Wisconsin, Northeast Wisconsin, and the greater Kansas City Metro.

Through FBB, we service the South Central Wisconsin, Southeast Wisconsin, Northeast Wisconsin, and the greater Kansas City Metro.

Our commercial loans are typically secured by various types of business assets, including inventory, receivables, and equipment.

We also originate loans secured by commercial real estate, including owner-occupied commercial facilities, multi-family housing, office buildings, retail centers, and, to a lesser extent, commercial real estate construction loans.

We also originate loans secured by commercial real estate, including owner-occupied and non owner-occupied commercial facilities.

In very limited cases, we may originate loans on an unsecured basis.

As of December 31, 2019 , our commercial real estate and commercial loans – excluding asset-based lending, equipment financing, and SBA lending described below – represented approximately 80% of our total gross loans and leases receivable.

As of December 31, 2020, our conventional commercial real estate and commercial loans – excluding consumer lending, asset-based lending, accounts receivable financing, equipment financing, floorplan financing, and SBA lending described below – represented approximately 84% of our total gross loans and leases receivable.

Consumer and Other Lending

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Asset-Based Lending

First Business Capital Corp.

(“FBCC”), a wholly-owned subsidiary of FBB, provides asset-based lending to small- to medium-sized companies.

With its sales offices located in several states, FBCC serves clients nationwide.

FBCC primarily provides revolving lines of credit and term loans for financial and strategic acquisitions, capital expenditures, working capital to support rapid growth, bank debt refinancing, debt restructuring, corporate turnaround strategies, and debtor-in-possession financing in the course of bankruptcy proceedings or the exit therefrom.

As a bank-owned, asset-based lender with strong underwriting standards, FBCC is positioned to provide cost-effective financing solutions to companies who do not have the established, stable cash flows necessary to qualify for traditional commercial lending products.

First Business Bank, through its wholly-owned subsidiary FBSF, provides asset-based lending to small- to medium-sized companies.

With sales offices located in several states, our asset-based lending team serves clients nationwide.

We primarily provide revolving lines of credit and term loans for financial and strategic acquisitions, capital expenditures, working capital to support rapid growth, bank debt refinancing, debt restructuring, corporate turnaround strategies, and debtor-in-possession financing in the course of bankruptcy proceedings or the exit therefrom.

As a bank-owned, asset-based lender with strong underwriting standards, our team is positioned to provide cost-effective financing solutions to companies which do not

have the established, stable cash flows necessary to qualify for traditional commercial lending products.

These borrowing relationships generally range between $2 million and $16 million with terms of 24 to 60 months.

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This line of business complements our traditional commercial loan portfolio and provides us with more diverse income opportunities.

As of December 31, 2019 , FBCC – excluding accounts receivable financing described below – represented approximately 8% of our total gross loans and leases receivable.

First Business Growth Funding (“FBGF”), formerly known as First Business Factors, a division of FBCC, provides funding to clients by purchasing accounts receivable primarily on a full recourse basis.

FBGF provides competitive rates to clients seeking growth and needing cash flow support, or who are experiencing financial issues.

As of December 31, 2020, asset-based lending – excluding accounts receivable financing described below – represented approximately 5% of our total gross loans and leases receivable.

Accounts Receivable Financing

FBB, through its wholly-owned subsidiary FBSF, provides funding to clients by purchasing accounts receivable primarily on a full recourse basis.

With sales offices located in several states, our accounts receivable financing team serves clients nationwide.

Our accounts receivable financing team provides competitive rates to clients needing cash flow to support their growth, or who are experiencing financial issues.

Accounts receivable financing typically generates higher yields than traditional commercial lending and complements our traditional commercial portfolio.

FBGF is headquartered in Chicago, Illinois, and with its sales offices located in several states, is able to serve clients nationwide.

As of December 31, 2019 , FBGF represented approximately 1% of our total gross loans and leases receivable.

As of December 31, 2020, accounts receivable financing represented approximately 2% of our total gross loans and leases receivable.

Equipment Financing

First Business Equipment Finance, LLC (“FBEF”), a wholly-owned subsidiary of FBB, delivers a broad range of equipment finance products, including loans and leases, to address the financing needs of commercial clients in a variety of industries.

FBEF’s focus includes manufacturing equipment, industrial assets, construction and transportation equipment, and a wide variety of other commercial equipment.

FBB, through its wholly-owned subsidiary FBSF, delivers a broad range of equipment finance products, including loans and leases, to address the financing needs of commercial clients in a variety of industries.

Our focus in this financing vertical includes manufacturing equipment, industrial assets, construction and transportation equipment, and a wide variety of other commercial equipment.

These financings generally range between $250,000 and $5 million with terms of 36 to 84 months.

As of December 31, 2019 , FBEF – excluding small ticket vendor equipment financing described below – represented approximately 2% of our total gross loans and leases receivable.

FBEF also delivers small ticket vendor equipment financing through its proprietary, online, application-only credit decision architecture.

Through this nationwide distribution channel, FBEF provides financing solutions for equipment vendors and their end users.

FBSF also delivers small ticket vendor equipment financing through its proprietary, online, application-only credit decision architecture.

Through this nationwide distribution channel, FBSF provides financing solutions for equipment vendors and their end users.

These equipment vendors specialize primarily in healthcare, manufacturing, and technology equipment, as well as specialty vehicles.

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Small ticket vendor equipment financing typically generates higher yields than traditional commercial lending.

As of December 31, 2019 , our small ticket vendor equipment financing business line represented approximately 3% of our total gross loans and leases receivable.

As of December 31, 2020, equipment financing represented approximately 4% of our total gross loans and leases receivable.

Floorplan Financing

In June 2020, FBB, through its wholly-owned subsidiary FBSF, began offering floorplan financing for independent car dealerships nationwide.

Floorplan financing allows car dealers the flexibility to finance their acquisition of used cars, preserving cash flow and allowing dealers to purchase inventory.

Floorplan financing is the latest expansion of First Business Bank’s specialty finance solutions, offering floorplanning programs from $500,000 to $10 million for larger, well-established independent car dealers.

As of December 31, 2020, floorplan financing represented approximately 1% of our total gross loans and leases receivable.

SBA Lending and Servicing

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Under this program, the SBA delegates the final credit decision and most servicing and liquidation authority and responsibility to PLP lenders.

We leverage this expertise and capacity to package, underwrite, process, service, and liquidate, if necessary, SBA loans nationwide.

Our SBA loans fall into three categories:

We leverage this program authority and capacity to package, underwrite, process, service, and liquidate, if necessary, SBA loans nationwide.

Excluding PPP loans, which are discussed in further detail in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations , our SBA loans fall into three categories:

loans originated under the SBA’s 7(a) term loan program;

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This program typically provides a guaranty of 75% of principal and interest.

In the event of default on the loan, the lender may request that the SBA purchase the guaranteed portion of the loan for an amount equal to outstanding principal plus accrued interest permissible under SBA guidelines.

In addition, the SBA will share on a pro-rata basis in certain costs of collection, subject to SBA rules and limits, as well as the proceeds of liquidation.

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We also obtain funding and service fee income by gathering deposits from these clients.

In addition, our SBA strategy generates non-interest income from two primary sources.

First, we typically sell the

guaranteed portions of the SBA loans to aggregators who securitize the assets for sale in the secondary market.

Our SBA strategy generates non-interest income from two primary sources.

First, we typically sell the guaranteed portions of the SBA loans to aggregators who securitize the assets for sale in the secondary market.

We receive a premium on each loan sold, resulting in the recognition of a gain in the period of sale.

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Treasury Management Services

The Bank provides comprehensive services for commercial clients to manage their cash and liquidity, including lockbox, accounts receivable collection services, electronic payment solutions, fraud detection and protection, information reporting, reconciliation, and data integration solutions.

The Bank provides comprehensive cash management services for commercial banking and specialty finance clients to manage their cash and liquidity, including lockbox, accounts receivable collection services, electronic payment solutions, fraud detection and protection, information reporting, reconciliation, and data integration solutions.

For our clients involved in international trade, the Bank offers international payment services, foreign exchange, and trade letters of credit.

The Bank also offers a variety of deposit accounts and balance optimization solutions.

Company Retirement Plan Services

First Business Bank acts as fiduciary and investment manager for corporate clients, creating and executing asset allocation strategies tailored to each corporation’s unique situation.

FBB acts as a discretionary trustee and investment fiduciary, sharing responsibility for monitoring assets to match the client’s specifications.

Offering only non-proprietary funds removes conflict of interest while designing cost-effective company retirement plans which provide a competitive return.

As of December 31, 2020, FBB had $401.3 million of company retirement plan assets under management and administration.

Private Wealth Management

FBB, through its First Business Trust & Investments (“FBTI”) division, acts as fiduciary and investment manager for individual and corporate clients, creating and executing asset allocation strategies tailored to each client’s unique situation.

FBTI has full fiduciary powers and offers trust and estate administration, financial planning, and investment management, acting in a trustee or agent capacity, as well as company retirement plan services.

FBTI also provides brokerage and custody-only services, for which it administers and safeguards assets, but does not provide investment advice.

As of December 31, 2019 , FBTI had $1.892 billion of assets under management and administration.

First Business Bank acts as fiduciary and investment manager for individual clients, creating and executing asset allocation strategies tailored to each client’s unique situation.

FBB has full fiduciary powers and offers trust and estate administration, financial planning, and investment management, acting in a trustee or agent capacity.

FBB also provides brokerage and custody-only services, for which we administer and safeguard assets, but do not provide investment advice.

As of December 31, 2020, FBB had $1.848 billion of private wealth assets under management and administration.

Bank Consulting Services

FBB, through its newly created First Business Consulting Services (“FBCS”) division, provides outsourced treasury services to assist banks and other financial institutions with balance sheet management.

These services include investment portfolio administrative services, asset liability management services, and asset liability process validations required by regulators.

FBB provides outsourced treasury services to assist banks and other financial institutions with balance sheet management.

These services include investment portfolio management and administrative services, asset liability management services, and asset liability process validations required by regulators.

The Bank encounters strong competition across all of our lines of business.

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The Bank also competes with regional and national financial institutions, many of which have greater liquidity, higher lending limits, greater access to capital, more established market recognition, and more resources than the Bank.

We believe the experience, expertise, and responsiveness of our banking professionals, and our focus on fostering long-lasting relationships sets us apart from our competitors.

At December 31, 2019 , we had 301 employees equating to approximately 288 full-time equivalent employees (“FTE”).

We believe the experience, expertise, and responsiveness of our banking professionals as well as our focus on fostering long-lasting relationships sets us apart from our competitors.

Human Capital Management

At December 31, 2020, we had 301 employees which equated to approximately 288 full-time equivalent employees (“FTE”).

None of our employees are represented by a union or subject to a collective bargaining agreement.

Information with respect to Human Capital Management included in the definitive Proxy Statement for the Annual Meeting of the Shareholders to be held on April 30, 2021 under the captions “Human Capital Management” is incorporated herein by reference.

First Business Bank

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In 1990, FBB relocated its home office to Madison, Wisconsin, and began focusing on providing high-quality banking services to small- to medium-sized businesses located in Madison and the surrounding area.

FBB’s business lines include commercial loans, commercial real estate loans, equipment loans and leases, commercial deposit accounts, and treasury management services.

FBB’s business lines include commercial loans, commercial real estate loans, asset-based loans, accounts receivable financing, SBA lending and servicing, floorplan financing, equipment loans and leases, commercial deposit accounts, company retirement solutions, and treasury management services.

FBB offers a variety of deposit accounts and personal loans to business owners, executives, professionals, and high net worth individuals.

FBB also offers private wealth management services through FBTI and bank consulting services through FBCS, both divisions of FBB.

FBB also offers private wealth management services and bank consulting services.

FBB has four full-service banking locations in Madison, Brookfield, and Appleton, Wisconsin, and Leawood, Kansas.

FBB has nine wholly-owned subsidiaries.

Refer to Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-bank Consolidated Subsidiaries for additional information on FBB’s

subsidiaries.

FBB has eight wholly-owned subsidiaries.

Refer to Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations - Non-bank Consolidated Subsidiaries for additional information on FBB’s subsidiaries.

As of December 31, 2020, FBB had total gross loans and leases receivable of $2.151 billion, total deposits of $1.859 billion, and total stockholders’ equity of $232.6 million.

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Our principal executive offices are located at 401 Charmany Drive, Madison, Wisconsin 53719 and our telephone number is (608) 238-8008.

We maintain an Internet website at www.firstbusiness.com.

We maintain an Internet website at www.firstbusiness.bank.

This Form 10-K and all of our other filings under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are available free of charge through that website, including copies of our proxy statement, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports, as soon as reasonably practicable after we file those materials with, or furnish them to, the Securities and Exchange Commission (“SEC”).

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Although certain of our business lines are marketed throughout the Midwest and beyond, our primary markets lie in Wisconsin, Kansas, and Missouri.

Specifically, our three markets in Wisconsin consist of the greater Madison area, Southeast Wisconsin, and Northeast Wisconsin.

Specifically, our three markets in Wisconsin consist of the South Central Wisconsin, Southeast Wisconsin, and Northeast Wisconsin.

We serve the greater Kansas City Metro through our Leawood, Kansas office, which is located in the Kansas City metropolitan statistical area.

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A brief description of each of our primary markets is as follows:

Greater Madison Area

South Central Wisconsin

As the capital of Wisconsin and home of the University of Wisconsin-Madison, the greater Madison area, specifically Dane County, offers an appealing economic environment populated by a highly educated workforce.

While the economy of the greater Madison area is driven in large part by the government and education sectors, there is also a diverse array of industries outside of these segments.

The greater Madison area is also home to technology and research and development related companies, which benefit from the area’s strong governmental and academic ties, as well as several major health care systems and hospitals, which provides healthcare services to South Central Wisconsin.

While the economy of the South Central Wisconsin is driven in large part by the government and education sectors, there is also a diverse array of industries outside of these segments.

South Central Wisconsin is also home to technology and research and development related companies, which benefit from the area’s strong governmental and academic ties, as well as several major health care systems and hospitals, which provides healthcare services to South Central Wisconsin.

Southeast Wisconsin

Our Milwaukee market, the primary commercial and industrial hub for Southeast Wisconsin, provides a diverse economic base, with both a highly skilled labor force and significant manufacturing base.

Our Southeast Wisconsin market, the primary commercial and industrial hub for Southeast Wisconsin, provides a diverse economic base, with both a highly skilled labor force and significant manufacturing base.

The most prominent economic sectors in the Milwaukee market include manufacturing, financial services, health care, diversified service companies, and education.

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Northeast Wisconsin

The cities of Appleton, Green Bay, Oshkosh, and Manitowoc, Wisconsin serve as the primary population centers in our Northeast Wisconsin market and provide an attractive market to a variety of industries, including transportation, utilities, packaging, and diversified services, with the most significant economic drivers being the manufacturing, packaging, and paper goods industries.

The cities of Appleton, Green Bay, and Oshkosh, Wisconsin serve as the primary population centers in our Northeast Wisconsin market and provide an attractive market to a variety of industries, including transportation, utilities, packaging, and diversified services, with the most significant economic drivers being the manufacturing, packaging, and paper goods industries.

Kansas City Metro

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He served as Chief Executive Officer of FBB from July 1999 to September 2006 and as President of FBB from July 1999 to February 2005.

He also currently serves as a director of our subsidiary FMIC.

Chambas has over 35 years of commercial banking experience.

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in Wheeling, West Virginia from 2006 to 2008, as Senior Vice President and Controller from 1998 to 2006 and in various other capacities from 1989 to 1998.

Losenegger, age 62 , has served as Chief Credit Officer of FBFS since May 2011.

Losenegger also serves as the Chief Credit Officer of the Bank.

He also currently serves as a director for our subsidiaries FBCC and FBEF.

Prior to being appointed Chief Credit Officer, Mr.

Losenegger served as FBFS’s Chief Operating Officer from September 2006 to May 2011.

Losenegger joined FBFS in 2003 and has held various positions with FBB, including Chief Executive Officer, Chief Operating Officer and Senior Vice President of Business Development.

Losenegger has over 30 years of experience in commercial lending.

Prior to joining FBFS, Mr.

Losenegger was Senior Vice President of Lending at M&I Bank, now known as BMO Harris Bank, in Madison, Wisconsin.

Conley, age 67 , has served as FBFS’s General Counsel since June 2008.

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Meloy joined FBFS in 2000 and has held various positions including Executive Vice President of FBB and President and Chief Executive Officer of FBB-Milwaukee.

He currently serves as CEO of FBEF.

He also currently serves as a director of our subsidiaries FBB, FBCC and FBEF.

He also currently serves as a director of our subsidiaries FBB and FBSF.

Meloy has over 30 years of commercial lending experience.

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Seiler, age 56 , has served as Chief Operating Officer of FBFS since April 2016.

He also currently serves as a director for our subsidiary FBCC.

He also currently serves as a director for our subsidiary FBSF.

Seiler has over 25 years of financial services experience including his previous position as Managing Director (formerly Senior Vice President/Manager) of the Correspondent Banking Division with BMO Harris Bank in Milwaukee, Wisconsin which he held from 2007 to 2016.

Prior to that, he held the position of Senior Vice President/Team Leader, Correspondent Real Estate Division from 2005 to 2007 and Vice President, Relationship Manager, Commercial Real Estate from 2002 to 2005.

Quade, age 55 , has served as Chief Credit Officer of FBFS since April 2020.

Quade had been serving as the Company’s Deputy Chief Credit Officer since October 2019.

He also currently serves as a director for our subsidiary FBSF.

Quade has over 30 years of experience in banking at publicly traded and privately-owned institutions and has led successful lending teams in commercial banking, investment real estate, equipment leasing, and treasury management.

Prior to joining FBFS, Mr.

Quade held the position of Senior Vice President with Johnson Bank in Milwaukee, Wisconsin which he held from 2008 to 2019.

Quade holds a bachelor’s degree in Accounting and Finance from the University of Wisconsin-Milwaukee and is a Certified Public Accountant.

SUPERVISION AND REGULATION

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The effect of these statutes, regulations, regulatory policies, and accounting rules are significant to our operations and results.

Federal and state banking laws impose a comprehensive system of supervision, regulation, and enforcement on the operations of FDIC-insured institutions, their holding companies, and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than stockholders.

These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments the Corporation and the Bank may make, reserve requirements, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Corporation’s and the Bank’s insiders and affiliates, and payment of dividends.

In reaction to the global financial crisis and particularly following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), we experienced heightened regulatory requirements and scrutiny.

In reaction to the global financial crisis beginning in 2008 (the “global financial crisis”) and particularly following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), we experienced heightened regulatory requirements and scrutiny.

Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase.

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While the Regulatory Relief Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion, like us, and for large banks with assets of more than $50 billion that were considered systemically important under the Dodd-Frank Act solely because of size.

Many of these changes are intended to result in meaningful regulatory relief for community banks and their holding companies, including new rules that may make the capital requirements less complex.

Many of these changes were intended to result in meaningful regulatory relief for community banks and their holding companies, including new rules that may make the capital requirements less complex.

For a discussion of capital requirements, see The Role of Capital below.

It also eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving the Bank of any requirement to engage in mandatory stress tests, name a risk committee, or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds.

It also eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving

the Bank of any requirement to engage in mandatory stress tests, name a risk committee, or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds.

The Corporation believes these reforms are generally favorable to its operations.

The supervisory framework for U.S.

banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business.

banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and can impact the conduct and growth of their business.

These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors.

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The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Corporation and the Bank, beginning with a discussion of the continuing regulatory emphasis on our capital levels.

describe all of the statutes, regulations, and regulatory policies that apply, nor does it restate all of the requirements of those that are described.

It does not describe all of the statutes, regulations, and regulatory policies that apply, nor does it restate all of the requirements of those that are described.

The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

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Because we have assets of less than $15 billion, we are able to maintain our trust preferred proceeds as capital but we have to comply with new capital mandates in other respects and will not be able to raise capital in the future through the issuance of trust preferred securities.

The Basel International Capital Accords.

The risk-based capital guidelines for U.S.

banks since 1989 were based upon the 1988 capital accord known as “Basel I” adopted by the international Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S.

bank regulatory agencies on an interagency basis.

The accord recognized that bank assets for the purpose of the capital ratio calculations needed to be assigned risk weights (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations.

Basel I had a very simple formula for assigning risk weights to bank assets from 0% to 100% based on four categories.

In 2008, the banking agencies collaboratively began to phase-in capital standards based on a second capital accord, referred to as “Basel II,” for large or “core” international banks (generally defined for U.S.

purposes as having total assets of $250 billion or more, or consolidated foreign exposures of $10 billion or more) known as “advanced approaches” banks.

The primary focus of Basel II was on the calculation of risk weights based on complex models developed by each advanced approaches bank.

Because most banks were not subject to Basel II, the U.S.

bank regulators worked to improve the risk sensitivity of Basel I standards without imposing the complexities of Basel II.

This “standardized approach” increased the number of risk-weight categories and recognized risks well above the original 100% risk weight.

It is institutionalized by the Dodd-Frank Act for all banking organizations, even for the advanced approaches banks, as a floor.

On September 12, 2010, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.

The Basel III Rule .

In July 2013, the U.S.

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The Basel III Rule increased the required quantity and quality of capital and, for nearly every class of assets, it requires a more complex, detailed and calibrated assessment of risk and calculation of risk-weight amounts.

Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments.

of treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments.

The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations).

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As of December 31, 2020:

(i) the Bank is not subject to a directive from the WDFI or the FDIC to increase its capital and (ii) the Bank was well-capitalized, as defined by FDIC regulations.

(i) the Bank is not subject to a directive from the WDFI or the FDIC to increase its capital;

and (ii) the Bank was well-capitalized, as defined by FDIC regulations.

Additionally, the Corporation had regulatory capital in excess of the Federal Reserve’s requirements as of December 31, 2020.

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(vii) requiring that senior executive officers or directors be dismissed;

(viii) prohibiting the institution from accepting deposits from correspondent banks;

(viii) prohibiting the institution from

accepting deposits from correspondent banks;

(ix) requiring the institution to divest certain subsidiaries;

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By opting into the framework, qualifying banks and bank holding companies maintaining a CBLR greater than 9% will be considered to have satisfied the generally applicable risk-based and leverage capital requirements in the agencies’ capital rules and, if applicable, will be considered to have met the well-capitalized ratio requirements for purposes of section 38 of the Federal Deposit Insurance Act.

In addition to the consolidated assets and CBLR requirements described above, a qualifying bank or bank holding company must also have (i) total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancelable commitments) of 25% or less of total consolidated assets, and (ii) the sum of total trading assets and trading liabilities of 5% or less of total consolidated assets.

The Corporation and the Bank are in the process of considering the final rule and will make a determination as to whether each qualifies for and wishes to opt into the CBLR framework in conjunction with its preparation of first quarter financial reports.

As the sole stockholder of the Bank, we are a bank holding company.

In addition to the consolidated assets and CBLR requirements described above, a qualifying bank or bank holding company must also have (i) total off-balance sheet exposures (excluding derivatives other than sold credit derivatives and unconditionally cancellable commitments) of 25% or less of total consolidated assets, and (ii) the sum of total trading assets and trading liabilities of 5% or less of total consolidated assets.

The Corporation and the Bank opted out of the CBLR framework for each reporting period in 2020 and has the option to opt into the framework for future reporting periods.

The decision to opt into or out of the CBLR framework is monitored on an ongoing basis.

As the sole shareholder of the Bank, we are a bank holding company.

As a bank holding company, we are registered with, and subject to regulation, supervision, and enforcement by, the Federal Reserve under the Bank Holding Company Act of 1956, as amended (“BHCA”).

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Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions.

For a discussion of the capital requirements, see T he Role of Capital above.

For a discussion of the capital requirements, see The Role of Capital above.

The BHCA generally prohibits the Corporation from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries.

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The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

activities, including securities and insurance underwriting and sales, merchant banking, and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking, and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity

and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally.

The Corporation has not elected to operate as a financial holding company.

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“Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

On January 30, 2020, the Federal Reserve issued a final rule, effective April 1, 2020, clarifying and expanding upon the Federal Reserve’s position on determinations of whether a company has the ability to exercise a controlling influence over another company.

On January 30, 2020, the Federal Reserve issued a final rule clarifying and expanding upon the Federal Reserve’s position on determinations of whether a company has the ability to exercise a controlling influence over another company.

In particular, the final rule is intended to provide a better understanding of the facts and circumstances that the Federal Reserve considers most relevant when assessing whether control exists.

On March 31, 2020, the final rule’s original effective date was delayed and became effective on September 30, 2020.

Capital Requirements.

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Dividend Payments.

Our ability to pay dividends to our stockholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.

As a Wisconsin corporation, we are subject to the limitations of Wisconsin law, which allows it to pay dividends unless, after giving it effect, any of the following would occur:

(i) we would not be able to pay our debts as they become due in the usual course of business or (ii) the total assets would be less than the sum of its total liabilities plus any amount that would be needed if we were to be dissolved at the time of the dividend payment, to satisfy the preferential rights upon dissolution of stockholders whose rights are superior to the rights of the stockholders receiving the distribution.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer, or significantly reduce dividends to stockholders if:

(i) the company’s net income available to stockholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

Our ability to pay dividends to our shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies.

As a Wisconsin corporation, we are subject to the limitations of Wisconsin law, which allows us to pay dividends unless, after giving effect to a dividend, any of the following would occur:

(i) we would not be able to pay our debts as they become due in the usual course of business or (ii) the total assets would be less than the sum of its total liabilities plus any amount that would be needed if we were to be dissolved at the time of the dividend payment, to satisfy the preferential rights upon dissolution of shareholders whose rights are superior to the rights of the shareholders receiving the distribution.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer, or significantly reduce dividends to shareholders if:

(i) the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends;

(ii) the prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition;

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Corporate Governance .

The Dodd-Frank Act addressed many investor protection, corporate governance, and executive compensation matters that will affect most U.S.

The Dodd-Frank Act addressed many investor protection, corporate governance, and executive compensation matters that affect most U.S.

publicly traded companies.

The Dodd-Frank Act increased

stockholder influence over boards of directors by requiring companies to give stockholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the SEC to promulgate rules that would allow stockholders to nominate and solicit voters for their own candidates using a company’s proxy materials.

The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and by authorizing the SEC to promulgate rules that would allow shareholders to

nominate and solicit voters for their own candidates using a company’s proxy materials.

The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

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At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking.

The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF has been calculated since effectiveness of the Dodd-Frank Act based on its average consolidated total assets less its average tangible equity.

The assessment base against which an FDIC-insured institution’s deposit insurance premiums paid to the DIF has been calculated since effectiveness of the Dodd-Frank Act is based on its average consolidated total assets less its average tangible equity.

This method shifted the burden of deposit insurance premiums toward those large depository institutions that rely on funding sources other than U.S.

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Accordingly, pursuant to rules adopted by the FDIC, in January 2019 the FDIC provided notice of assessment credits awarded to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%.

The FDIC will apply the credits each quarter (beginning with the September 2019 assessment invoice for the second quarter of 2019) that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with credits.

The FDIC applies the credits each quarter (beginning with the September 2019 assessment invoice for the second quarter of 2019) that the reserve ratio is at least 1.38% to offset the regular deposit insurance assessments of institutions with credits.

As of June 30, 2020, the most recent available date, the reserve ratio was 1.30%.

Effective June 26, 2020, the FDIC adopted a final rule to mitigate the effect on deposit insurance assessments when an insured institution participates in the Paycheck Protection Program (“PPP”), the Paycheck Protection Program Liquidity Facility (“PPPLF”), and Money Market Mutual Fund Liquidity Facility (“MMLF”).

Under the rule, the FDIC provides adjustments to the risk based premium formula and certain of its risk ratios, and provides an offset to an insured institution’s total assessment amount due for the increase to its assessment base attributable to participation in the PPP and MMLF.

FICO Assessments .

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Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests.

One test, referred to as the Liquidity Coverage Ratio (“LCR”), is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario.

One test, referred to as the Liquidity Coverage Ratio (“LCR”), is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality

liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario.

The other test, known as the Net Stable Funding Ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of FDIC-insured institutions over a one-year horizon.

These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt

as a component of assets, increase the use of long-term debt as a funding source, and rely on stable funding like core deposits (in lieu of brokered deposits).

In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the NSFR.

While these rules do not apply to the Bank, it continues to review its liquidity risk management policies.

These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source, and rely on stable funding like core deposits (in lieu of brokered deposits).

Dividend Payments.

The primary source of funds for the Corporation is dividends from the Bank.

Under Wisconsin law, the board of directors of a bank may declare and pay a dividend from its undivided profits in an amount they consider expedient.

Under Wisconsin law, the board of directors of a bank may declare and pay a dividend from its undivided profits in an amount it considers expedient.

The board of directors must provide for the payment of all expenses, losses, required reserves, taxes, and interest accrued or due from the bank before the declaration of dividends from undivided profits.

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The FDIC and the WDFI may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice.

In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5 percent in Common Equity Tier 1 Capital attributable to the capital conservation buffer.

In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends will have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer.

See The Role of Capital above.

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The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Corporation and its subsidiaries, to principal stockholders of the Corporation, and to “related interests” of such directors, officers, and principal stockholders.

In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Corporation or the Bank, or a principal stockholder of the Corporation, may obtain credit from banks with which the Bank maintains a correspondent relationship.

Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Corporation and its subsidiaries, to principal shareholders of the Corporation, and to “related interests” of such directors, officers, and principal shareholders.

In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Corporation or the Bank, or a principal shareholder of the Corporation, may obtain credit from banks with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards/Risk Management.

The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions.

The standards apply to internal controls, information systems, internal audit systems, risk mitigation, deposit and loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality, and earnings.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals.

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Noncompliance with safety and soundness may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise.

During the past several years, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they

Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets.

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Transaction Account Reserves.

Federal Reserve regulations require FDIC-insured institutions to maintain reserves against their transaction accounts (primarily negotiable order of withdrawal and regular checking accounts).

For 2020, the first $16.9 million of otherwise reservable balances are exempt from reserves and have a zero percent reserve requirement;

for transaction accounts aggregating between $16.9 million to $127.5 million, the reserve requirement is 3% of those transaction account balances;

and for net transaction accounts in excess of $127.5 million, the reserve requirement is 10% of the aggregate amount of total transaction account balances in excess of $127.5 million.

As announced on March 15, 2020, the Federal Reserve reduced reserve requirement ratios to zero percent effective March 26, 2020.

This action eliminated reserve requirements for all depository institutions.

The Federal Reserve Act authorizes the Federal Reserve to establish reserve requirements within specified ranges for purposes of implementing monetary policy on certain types of deposits and other liabilities of depository institutions and impose reserve requirements on transaction accounts, nonpersonal time deposits, and Eurocurrency liabilities.

The dollar amount of a depository institution's reserve requirement is determined by applying the reserve requirement ratios specified in the Federal Reserve's Regulation D (Reserve Requirements of Depository Institutions, 12 CFR Part 204) to an institution's reservable liabilities.

Prior to the change effective March 26, 2020, reserve requirement ratios on net transaction accounts differed based on the amount of net transactions accounts at the depository institution.

A certain amount of net transaction accounts, known as the "reserve requirement exemption amount," was subject to a reserve requirement ratio of zero percent.

Net transaction account balances above the reserve requirement exemption amount and up to a specified amount, known as the "low reserve tranche," were subject to a reserve requirement ratio of 3%.

Net transaction account balances above the low reserve tranche were subject to a reserve requirement ratio of 10%.

For 2021, the low reserve tranche amounts and exemption amounts were increased to $182.9 million and $21.1 million, respectively, compared to $127.5 million and $16.9 million, respectively, for 2020.

These reserve requirements are subject to annual adjustment by the Federal Reserve.

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Institutions that are not both well-capitalized and well-rated may also exclude reciprocal deposits from their brokered deposits under certain circumstances.

On December 12, 2019, the FDIC issued a proposed rule on brokered deposits.

The proposed rule aims to clarify and modernize the FDIC’s existing regulatory framework for brokered deposits.

Among other things, the proposed rule would establish a new framework for analyzing whether deposits placed through deposit placement arrangements qualify as brokered deposits.

These include arrangements between insured depository institutions and third parties, such as financial technology companies.

On December 15, 2020, the FDIC issued a final rule on brokered deposits.

The rule aims to clarify and modernize the FDIC’s existing regulatory framework for brokered deposits.

Among other things, the rule establishes bright-line standards for determining whether an entity meets the definition of a “deposit broker,” and identifies a number of business relationships (or “designated exceptions”) that automatically meet the “primary purpose” exception.

The rule also establishes a transparent application process for entities that seek a “primary purpose” exception but do not meet one of the “designated exceptions.” The new rule also reflects technological changes across the banking industry and removes regulatory disincentives that limit banks’ ability to serve their customers.

Community Reinvestment Act (“CRA”) Requirements.

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An unsatisfactory rating may be used as a basis for denial of such an application.

On December 12, 2019, the FDIC issued a proposed rule to modernize its regulations under the CRA.

The proposed rule would (i) clarify which activities qualify for CRA credit and (ii) require banks to identify an additional assessment area based on where they receive a significant portion of their domestic retail products, thus creating two assessment areas:

On December 12, 2019, the FDIC and the Office of the Comptroller of the Currency (“OCC”) issued a proposed rule to modernize their respective regulations under the CRA.

On June 5, 2020, the OCC issued a final rule implementing the proposed rule.

The final rule (i) clarifies which activities qualify for CRA credit and (ii) requires banks to identify an additional assessment area based on where they receive a significant portion of their domestic retail products, thus creating two assessment areas:

a deposit-based assessment area and a facility-based assessment area.

The Federal Reserve chose not to participate in the current proposed rulemaking which causes uncertainty as to the content and timing of the final rule.

Citing the burden being faced by banks in light of the COVID pandemic, he FDIC opted not to join in the issuance of the final rule, meaning that the FDIC’s CRA regulations remain unchanged.

Anti-Money Laundering.

The Corporation is subject to several federal laws that are designed to combat money laundering and terrorist financing, and to restrict transactions with persons, companies, or foreign governments sanctioned by United States authorities.

This category of laws includes the Bank Secrecy Act (the “BSA”), the Money Laundering Control

Act, the USA PATRIOT Act (collectively, “AML laws”) and implementing regulations as administered by the United States Treasury Department’s Office of Foreign Assets Control (“sanctions laws”).

This category of laws includes the Bank Secrecy Act (the “BSA”), the Money Laundering Control Act, the USA PATRIOT Act (collectively, “AML laws”) and implementing regulations as administered by the United States Treasury Department’s Office of Foreign Assets Control (“sanctions laws”).

As implemented by federal banking and securities regulators and the Department of the Treasury, AML laws obligate depository institutions to verify their customers’ identity, conduct customer due diligence, report on suspicious activity, file reports of transactions in currency, and conduct enhanced due diligence on certain accounts.

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Non–compliance with sanctions laws and/or AML laws or failure to maintain an adequate BSA/AML compliance program can lead to significant monetary penalties and reputational damage, and federal regulators evaluate the effectiveness of an applicant in combating money laundering when determining whether to approve a proposed bank merger, acquisition, restructuring, or other expansionary activity.

On January 1, 2021, the National Defense Authorization Act was enacted by Congress.

The new law establishes the most significant overhaul of BSA and AML since the USA PATRIOT Act of 2001, including:

(i) new beneficial ownership reporting requirements;

(ii) whistleblower and penalty enhancements;

(iii) improvements to existing information sharing provisions that permit financial institutions to share information relating to suspicious activity reports for purposes of combating illicit finance risks;

and (iv) provisions emphasizing the importance of risk-based approaches to AML program requirements.

Privacy and Cybersecurity.

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These security and privacy policies and procedures, for the protection of personal and confidential information, are in effect across the Bank and its subsidiaries.

Moreover, given the increased focus on privacy and data security in the United States and internationally, laws and regulations related to the same are evolving.

Multiple states and Congress are considering additional laws or regulations that could create or alter individual privacy rights and impose additional obligations on banks and related financial services companies in possession of or with access to personal data.

For example, on December 18, 2020, the FDIC, along with the other federal financial regulatory agencies, announced a proposal that would require supervised banking organizations to promptly notify their primary federal regulator in the event of a computer security incident.

Concentrations in Commercial Real Estate .

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The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations.

On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards.

On December 18, 2015,

the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards.

The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending.

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The measurement of expected credit losses is to be based on information about past events, including historical experience, current conditions, and reasonable and supportable forecasts that affect the collectability of the reported amount.

On December 21, 2018, the federal banking agencies approved a final rule modifying their regulatory capital rules and providing an option to phase in over a period of three years the day-one regulatory capital effects of the CECL model.

The final rule also revises the agencies’ other rules to reflect the update to the accounting standards.

The final rule took effect April 1, 2019.

In October 2019, four federal banking agencies issued a request for comment on a proposed interagency policy statement on the new CECL methodology.

The policy statement proposes to harmonize the agencies' policies on allowance for credit losses with the FASB’s new accounting standards.

Pursuant to an additional FASB accounting standard update, “Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” issued in November 2019, the effective date of CECL was delayed from January 2020 to January 2023 for certain entities, including smaller reporting companies like the Corporation.

On May 8, 2020, four federal banking agencies issued an interagency policy statement on the new CECL methodology.

The policy statement harmonizes the agencies' policies on allowance for credit losses with the FASB’s new accounting standards.

Specifically, the statement (i) updates concepts and practices from prior policy statements issued in December 2006 and July 2001 and specifies which prior guidance documents are no longer relevant;

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and (iii) describes how to estimate an ACL for an impaired available-for-sale debt security in line with Topic 326.

The proposed policy statement would be effective at the time that each institution adopts the new standards required by the FASB.

The policy statement is effective at the time that each institution adopts the new standards required by the FASB.

Legislation and Regulation Addressing the COVID-19 Pandemic

The COVID-19 pandemic has created unprecedented health and economic uncertainty in the United States and internationally and has prompted federal, state, and local legislative and regulatory action designed to address the pandemic’s challenges.

On March 22, 2020, the federal bank regulatory agencies issued the Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus , which publicly encouraged regulated depository institutions to work with borrowers experiencing financial hardship due to COVID-19.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), a $2.2 trillion economic stimulus law, was enacted.

The CARES Act and various regulations promulgated thereunder contain many provisions that impact financial institutions, including, among others, the following:

• Forbearance, Foreclosure, and Evictions .

The CARES Act provides forbearance protections for borrowers with federally-backed one-to-four family mortgage loans and federally-backed multifamily mortgage loans experiencing financial hardship due to COVID-19, and eviction protections for tenants in multifamily properties that are taking

advantage of forbearance protections.

In addition, the CARES Act provides a prohibition on the initiation of foreclosure actions by servicers of federally-backed mortgage loans.

• Troubled Debt Restructurings .

The CARES Act provides banks with relief from characterizing loan modifications related to the COVID-19 pandemic as “troubled debt restructurings”, including impairment accounting for such modifications.

• Paycheck Protection Program .

The CARES Act also establishes the PPP, initially a $349 billion fund available in the form of Small Business Administration (“SBA”) 7(a) loans made by financial institutions to eligible borrowers.

The SBA opened the PPP on April 3, 2020, and the initial available funds were exhausted as of April 16, 2020.

PPP loans are federally-guaranteed carrying an annual interest rate of 1% and may be forgiven if borrowers meet certain statutorily mandated conditions relating to, for example, employee retention and permissible uses of loan proceeds.

After the initial fund for PPP loans was exhausted, the program was extended multiple times until expiring on August 8, 2020.

In January 2021, the SBA reopened PPP for eligible borrowers that did not receive a PPP loan during the initial PPP phase, as well as for a certain subset of borrowers who had received an initial PPP loan previously.

To further support the financing and liquidity necessitated by the various economic programs designed to alleviate the impact of COVID-19, the Federal Reserve, in cooperation with the Department of the Treasury, established several financing and liquidity facilities, including, for example, the Main Street Lending Program, the MMLF, and the PPPLF.

In particular, the PPPLF is designed to provide an adequate liquidity source to financial institutions for purposes of funding PPP loans.

The federal bank regulatory agencies issued multiple rules throughout 2020 that were designed to provide relief to financial institutions from any adverse regulatory capital or liquidity impacts resulting from the Federal Reserve’s liquidity facilities.

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