What changed in this filing

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Item 1. Business

2021-03-15 compared with 2020-03-12 · 233 added, 192 removed, 144 unchanged (75% of the section changed)

First Internet Bancorp is a bank holding company that conducts its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank.

First Internet Bank of Indiana was the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999.

First Internet Bancorp was incorporated under the laws of the State of Indiana on September 15, 2005.

On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank.

When we refer to “First Internet Bancorp,” the “Company,” “we,” “us” and “our” in the remainder of this annual report on Form 10-K, we mean First Internet Bancorp and its consolidated subsidiaries, unless the context indicates otherwise.

References to “First Internet Bank” or the “Bank” refer to First Internet Bank of Indiana, an Indiana chartered bank and wholly-owned subsidiary of the Company.

First Internet Bancorp is a bank holding company with $4.2 billion in total assets as of December 31, 2020, that conducts its primary business activities through its wholly-owned subsidiary, First Internet Bank of Indiana, an Indiana chartered bank.

First Internet Bank of Indiana is the first state-chartered, Federal Deposit Insurance Corporation (“FDIC”) insured Internet bank and commenced banking operations in 1999.

First Internet Bancorp is incorporated under the laws of the State of Indiana on September 15, 2005.

On March 21, 2006, we consummated a plan of exchange by which we acquired all of the outstanding shares of the Bank.

The Bank has three wholly-owned subsidiaries:

First Internet Public Finance Corp., which provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities issued by state and local governments and other municipalities;

JKH Realty Services, LLC, which manages other real estate owned properties as needed;

and SPF15 Inc., which was established to acquire and hold real estate.

We offer a wide range of commercial, small business, consumer and municipal banking products and services.

We conduct our consumer and small business deposit operations primarily through online channels on a nationwide basis and have no traditional branch offices.

Our residential mortgage products are offered nationwide primarily through an online direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending.

Our consumer lending products are primarily originated on a nationwide basis over the Internet as well as through relationships with dealerships and financing partners.

We conduct our consumer and small business deposit operations primarily through digital channels on a nationwide basis and have no traditional branch offices.

Our residential mortgage products are offered nationwide primarily through a digital direct-to-consumer platform and are supplemented with Central Indiana-based mortgage and construction lending.

Our consumer lending products are primarily originated on a nationwide basis through relationships with dealerships and financing partners.

Our commercial banking products and services are delivered through a relationship banking model and include commercial real estate (“CRE”) banking, commercial and industrial (“C&I”) banking, public finance, healthcare finance, small business lending and commercial deposits and treasury management.

Through our CRE team, we offer single tenant lease financing on a nationwide basis in addition to traditional investor CRE and construction loans primarily within Central Indiana and adjacent markets.

To meet the needs of commercial borrowers and depositors located primarily in Central Indiana, Phoenix, Arizona and adjacent markets, our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards.

Our C&I banking team provides credit solutions such as lines of credit, term loans, owner-occupied CRE loans and corporate credit cards to commercial borrowers located primarily in Central Indiana, Phoenix, Arizona and adjacent markets.

Our public finance team provides a range of public and municipal lending and leasing products to government entities on a nationwide basis.

Our healthcare finance team was established in conjunction with our strategic partnership with Lendeavor, Inc., a San Francisco-based technology-enabled lender to healthcare practices, and provides lending for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases.

This portfolio segment is generally concentrated in the Western and Southwestern regions of the United States with plans to continue expanding nationwide.

Our healthcare finance team was established in conjunction with our strategic partnership with Provide, Inc.

(formerly known as Lendeavor, Inc.), a San Francisco-based technology-enabled lender to healthcare practices, and provides lending on a nationwide basis for healthcare practice finance or acquisition, acquisition or refinancing of owner-occupied CRE and equipment purchases.

Our commercial deposits and treasury management team works with the other commercial teams to provide deposit products and treasury management services to our commercial and municipal lending customers as well as pursues commercial deposit opportunities in business segments where we have no credit relationships.

In 2018, we identified small business as an area for potential growth in loans, revenue and deposits.

We believe that we can differentiate ourselves from larger financial institutions through providing a full suite of services to emerging small businesses and entrepreneurs.

We have begun adding experienced personnel to build out our capabilities in small business lending and U.S.

government guaranteed lending programs, including loans originated under the Small Business Administration (“SBA”) guidelines.

To accelerate our efforts in this area, on November 1, 2019, we acquired a loan portfolio, a servicing portfolio and a team of experienced small business lending servicing professionals from First Colorado National Bank.

As of December 31, 2019, the principal balance of loans acquired was approximately $32.6 million and was comprised primarily of SBA 7(a) loans while the principal balance of the servicing portfolio acquired was approximately $94.8 million and consisted of guaranteed SBA 7(a) loans sold in the secondary market.

We expect to continue adding personnel to build out a nationwide small business platform.

As of December 31, 2019 , we had total assets of $4.1 billion , total liabilities of $3.8 billion , and shareholders’ equity of $304.9 million .

Our principal executive offices are located at 11201 USA Parkway, Fishers, Indiana 46037, and our telephone number is (317) 532-7900.

The Bank has three wholly-owned subsidiaries:

First Internet Public Finance Corp., which provides a range of public and municipal finance lending and leasing products to governmental entities throughout the United States and acquires securities

issued by state and local governments and other municipalities;

JKH Realty Services, LLC, which manages other real estate owned properties as needed;

and SPF15 Inc., which was established to acquire and hold real estate.

Balance Sheet Growth.

Total assets have increased 222.9% from $1.3 billion at December 31, 2015 to $4.1 billion at December 31, 2019 .

This increase was driven primarily by strong organic growth.

During the same time period, loans increased from $1.0 billion to $3.0 billion and deposits increased from $1.0 billion to $3.2 billion , increases of 210.7% and 229.9% , respectively.

Our sustained growth profile has been the result of our flexible and highly scalable Internet banking platform that allows us to target a broad reach of customers across all 50 states.

Additionally, key strategic commercial banking hires have enabled us to further expand our product offerings on both a local and national basis.

At December 31, 2019 , commercial loans comprised 77.2% of loans compared to 61.1% at December 31, 2015 .

Earnings Growth.

Net income has increased 182.7% from $8.9 million for the twelve months ended December 31, 2015 to $25.2 million for the twelve months ended December 31, 2019 .

Diluted earnings per share have increased 28.1% from $1.96 for the twelve months ended December 31, 2015 to $2.51 for the twelve months ended December 31, 2019 .

Asset Quality.

We have maintained a high-quality loan portfolio due to our emphasis on a strong credit culture, conservative underwriting standards, disciplined risk management processes, and a diverse national and local customer base.

At December 31, 2019 , our nonperforming assets to total assets was 0.22% , our nonperforming loans to total loans was 0.23% and our allowance for loan losses to total loans was 0.74% .

Strategic Focus

We operate on a national basis through our scalable Internet banking platform to gather deposits and offer residential mortgage and consumer lending products rather than relying on a conventional brick and mortar branch system.

We also offer commercial banking services, including CRE and C&I, single tenant lease financing, public finance, healthcare finance and small business lending.

Our overriding strategic focus is enhancing franchise and shareholder value while maintaining strong risk management policies and procedures.

We believe the continued creation of franchise and shareholder value will be driven by profitable growth in commercial and consumer banking, effective underwriting, strong asset quality and efficient technology-driven operations.

National Focus on Deposit and Consumer Banking Growth.

Our first product offerings were basic deposit accounts, certificates of deposit, electronic bill pay and credit cards.

Within 90 days of opening, we had accounts with consumers in all 50 states.

Over the years, we added consumer loans, lines of credit, home equity loans and single-family mortgages.

Our footprint for deposit gathering and these consumer lending activities is the entire nation.

With the use of our Internet-based technology platform, we do not face geographic boundaries that traditional banks must overcome for customer acquisition.

Armed with smart phones, tablets and computers, our customers can access our online banking system, bill pay, and remote deposit capture 24 hours a day, seven days a week, on a real-time basis.

In addition, we have dedicated banking specialists who can service customer needs via telephone, email or online chat.

We intend to continue to expand our deposit base by leveraging technology and through targeted marketing efforts.

Commercial Banking Growth.

We have diversified our operations by adding commercial banking, public finance, healthcare finance and small business lending to complement our consumer platform.

We offer traditional CRE loans, single tenant lease financing, C&I loans, healthcare finance loans, small business lending loans, corporate credit cards, treasury management services and public and municipal finance loans and leases.

Our commercial lending teams consist of seasoned commercial bankers, many of whom have had extensive careers with larger money center, super-regional or regional banks.

These lenders leverage deep market knowledge and experience to serve commercial borrowers with a relationship-based approach.

We intend to continue expanding our commercial banking platform by hiring additional seasoned loan officers and relationship managers with specialized market or product expertise.

Our management team and our Board of Directors are integral to our success.

Our management team and Board of Directors are led by David B.

Becker, the founder of First Internet Bank of Indiana.

Becker is a seasoned business executive and entrepreneur with over three decades of management experience in the financial services and financial technology space, and has served as Chief Executive Officer since 2005.

Becker has been the recipient of numerous business awards, including Ernst & Young Entrepreneur of the Year in 2001, and was inducted into the Central Indiana Business Hall of Fame in 2008.

The senior management team consists of individuals with backgrounds in both regional and community banking and financial technology services.

The senior management team is overseen by a dedicated Board of Directors with a wide range of experience from careers in financial services, legal and regulatory services, and industrial services.

Increased Efficiency Through Technology.

We have built a scalable banking platform based upon technology as opposed to a traditional branch network.

We intend to continue leveraging this infrastructure as well as investing in and utilizing new technologies to compete more effectively as we grow in the future.

Through our online account access services, augmented by our team of dedicated banking specialists, we can satisfy the needs of our retail and commercial customers in an efficient manner.

We believe that our business model and digital banking processes are capable of supporting continued growth and producing a greater level of operational efficiency, which should drive increasing profitability.

Expand Asset Generation and Revenue Channels.

Our geographic and credit product diversity have produced balance sheet and earnings growth.

We expect to continue exploring additional asset and revenue generation capabilities that complement our commercial and consumer banking platforms.

These efforts may include adding personnel or teams with product, industry or geographic expertise or through strategic acquisitions.

Lending Activities

We earn interest income on loans as well as fee income from the origination of loans.

Lending activities include loans to individuals, which primarily consist of residential real estate loans, home equity loans and lines of credit, and consumer loans, and loans to commercial customers, which include C&I loans, CRE loans, municipal loans and leases, lines of credit, letters of credit, single tenant lease financing, loans to healthcare providers and small business lending loans.

Residential real estate loans are either retained in our loan portfolio or sold to secondary investors, with gains or losses from the sales being recognized within noninterest income.

Refer to Note 4 to the Company's consolidated financial statements for further discussion of each loan portfolio segment as of December 31, 2019 .

Deposit Activities and Other Sources of Funds

We obtain deposits through the ACH network (direct deposit as well as customer-directed transfers of funds from outside financial institutions), remote and mobile deposit capture, mailed checks, wire transfers and a deposit-taking ATM network.

Additionally, we had approximately $538.4 million in brokered deposits at December 31, 2019 , which includes deposits originated through broker/dealer relationships, as well as certain public fund deposits originated through a relationship with an asset manager that manages the short-term liquidity needs of municipalities and other governmental bodies.

The Bank does not own or operate any ATMs.

Through network participation, the Bank’s customers are able to use nearly any ATM worldwide to withdraw cash.

The Bank currently rebates up to $10.00 per customer per month for surcharges our customers incur when using an ATM owned by another institution.

Management believes this program is more cost effective for the Bank, and more convenient for our customers, than it would be to build and maintain a proprietary nationwide ATM network.

By providing robust online capabilities, quality customer service and competitive pricing for the products and services offered, we have been able to develop relationships with our customers and build brand loyalty.

As a result, we are not dependent upon costly account acquisition campaigns to attract new customers on a continual basis.

The markets in which we compete to make loans and attract deposits are highly competitive.

For retail banking activities, we compete with other banks that use the Internet as a primary service channel, including Ally Bank, Discover Bank, TIAA Bank, Synchrony Bank, Goldman Sachs Bank USA and Axos Bank.

However, we also compete with other banks, savings banks, credit unions, investment banks, insurance companies, securities brokerages and other financial institutions, as nearly all have some form of Internet delivery for their services.

For residential mortgage lending, competitors that use the Internet as a primary service channel include Quicken Loans and loanDepot.

We also compete with money center and superregional banks in residential mortgage lending, including Bank of America, Chase and Wells Fargo.

For our traditional commercial lending activities, we compete with larger financial institutions operating in the Midwest and Central Indiana regions, including KeyBank, PNC Bank, Chase, BMO Harris Bank, Huntington National Bank and First Financial Bank.

In the Southwest, competitors include Wells Fargo, Chase, Bank of America, U.S.

Bank, Mid First Bank and BOK Financial.

For retail banking activities, we compete with other digital banks but we also compete with traditional banks, savings banks, credit unions, investment banks, insurance companies, securities brokerages and other financial institutions, as nearly all have some form of digital delivery for their retail banking services.

For residential mortgage lending, we compete with other digital lenders but also compete with money center and superregional banks.

For our C&I lending activities, we compete with larger financial institutions operating in the Midwest and Southwest.

For our single tenant lease financing activities, we compete nationally with regional banks, local banks and credit unions, as well as life insurance companies and commercial mortgage-backed securities lenders.

Examples of these competitors include Wells Fargo, First Savings Bank, CapStar Bank, TIAA Bank and StanCorp.

For our public finance activities, we compete nationally with superregional and regional banks, such as Huntington National Bank, KeyBank, Capital One, Sterling National Bank, JP Morgan and Chase Co.

and Bank of America.

For our healthcare finance activities, we compete nationally with superregional and regional banks, such as TD Bank, PNC Bank, Wintrust Financial Corporation and Columbia Bank.

competitors may have significantly greater financial resources and higher lending limits than we do and may also offer specialized products and services that we do not.

For our small business lending activities, we compete on a national footprint with other participating SBA-approved lenders.

Those lenders could be smaller or larger than us and could include non-bank entities.

Examples of these competitors include Wells Fargo, Byline Bank, Live Oak Bank, Huntington, and Newtek, as well as a large number of regional or community banks.

For our public finance and healthcare finance activities, we compete nationally with superregional and regional banks.

These competitors may have significantly greater financial resources and higher lending limits than we do and may also offer specialized products and services that we do

For our small business lending activities, we compete on a national footprint with other participating SBA-approved lenders, including a large number of regional or community banks.

These competitors have resources and/or lending limits that differ greatly from one another.

In the United States, banking has continued to experience consolidation leading to the emergence of several large nationwide banking institutions.

These competitors have significantly greater financial resources as well as offer a wider range of services than we do.

We have attempted to offset some of the advantages of the larger competitors by leveraging technology to deliver product solutions and better compete in targeted segments.

We have positioned ourselves as an alternative to these institutions for consumers who do not wish to subsidize the cost of large branch networks through high fees and unfavorable interest rates.

We anticipate that consolidation will continue in the financial services industry and perhaps accelerate as a result of intensified competition for the same customer segments as well as significantly increased regulatory burdens and rules that are expected to increase expenses and put pressure on earnings.

Human Capital Resources

As of December 31, 2020, we had 257 total employees, of which 255 were full-time employees.

Throughout our history, team members have been our most valuable assets, helping to create a strong workplace culture that recognizes the unique contributions and perspectives each individual brings to the organization.

At First Internet Bank, we encourage our employees to “Imagine More”.

We seek the game-changers, innovators and dreamers – those who are driven to find a better way of doing things for customers and each other.

We encourage community involvement and opportunities that support team members, both inside and outside the office.

We may be a digital bank, but we strongly believe in the power of personal connection and collaboration.

We strive to foster an entrepreneurial spirit that creates an environment where all our colleagues thrive.

We encourage innovation, collaboration and diversity among team members, partners and in the communities we serve.

But as recent social events have demonstrated, we recognize the need to continually challenge ourselves to improve.

To that end, First Internet Bank has engaged an outside firm to further enhance our Diversity, Equity and Inclusion efforts with regards to product offerings, as well as the recruitment, retention and promotion of our team members.

An important part of our culture has always been to encourage outreach.

This year, team members again demonstrated their commitment to giving back to their communities, with volunteer efforts totaling thousands of hours serving on non-profit boards, distributing food to those in need and donating time to other charitable causes.

Supporting and developing our people is a foundational tenet.

Our ability to attract the best talent from a diverse range of sources allows us to effectively serve the needs of our business and customers.

Employees are empowered to grow professionally and personally through training opportunities and internal development programs that can lead to career advancement, with increased job satisfaction and engagement.

This focus on employees is evident in the number of “best workplace” awards we have been honored with over the years.

The COVID-19 pandemic presented unforeseen challenges.

We were proactive in responding by implementing our business continuity plan and new initiatives to maintain operations at the highest level, while serving our customers and supporting our employees.

Our response team introduced a number of initiatives, including new workplace safety guidelines, adjusting our banking center hours, reducing our onsite workforce and encouraging team members to work remotely if possible.

Ongoing internal communications provided access to the latest COVID-19 information from the Centers for Disease Control, World Health Organization, as well as local, state and federal agencies.

We continue to monitor and adjust our plans to optimize support for the organization.

Fortunately, as a digital bank without branch locations to maintain, our business model has supported online, contactless transactions since our inception.

At First Internet Bank, we create new ideas.

We explore new paths.

Ultimately, we get better, individually and collectively.

Regulation and Supervision

The Company and the Bank are extensively regulated under federal and state law.

The Company is a registered bank holding company under the Bank Holding Company Act of 1956 (the “BHCA”) and, as such, is subject to regulation, supervision and examination by the Board of Governors of the Federal Reserve System (the “Federal Reserve”).

The Company is required to file reports with the Federal Reserve on a quarterly basis.

The Bank is an Indiana-chartered bank formed pursuant to the Indiana Financial Institutions Act (the “IFIA”).

As such, the Bank is regularly examined by and subject to regulations promulgated by the Indiana Department of Financial Institutions (the “DFI”) and the FDIC as its primary federal bank regulator.

The Bank is not a member of the Federal Reserve System.

The regulatory environment affecting the Company has been and continues to be altered by the enactment of new statutes and the adoption of new regulations as well as by revisions to, and evolving interpretations of, existing regulations.

State and federal banking agencies have significant discretion in the conduct of their supervisory and enforcement activities and their examination policies.

Any change in such practices and policies could have a material impact on the Company’s results of operations and financial condition.

The following discussion is intended to be a summary of the material statutes, regulations and regulatory directives that are currently applicable to us.

It does not purport to be comprehensive or complete and it is expressly subject to and modified by reference to the text of the applicable statutes, regulations and directives.

The Dodd-Frank Act

The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) comprehensively reformed the regulation of financial institutions and the products and services they offer.

Certain provisions of the Dodd-Frank Act noted in this section are also discussed in other sections.

The Dodd-Frank Act permanently raised deposit insurance levels to $250,000.

Deposit insurance assessments are calculated based on an insured depository institution’s assets rather than its insured deposits, and the minimum reserve ratio of the FDIC’s Deposit Insurance Fund (the “DIF”) is 1.35%.

The payment of interest on business demand deposit accounts is permitted by the Dodd-Frank Act.

The Dodd-Frank Act authorized the Federal Reserve to regulate interchange fees for debit card transactions and established minimum mortgage underwriting standards for residential mortgages.

Further, the Dodd-Frank Act bars certain banking organizations from engaging in proprietary trading and from sponsoring and investing in hedge funds and private equity funds, except as permitted under certain limited circumstances.

The Dodd-Frank Act also established the Consumer Financial Protection Bureau (the “CFPB”) as an independent agency within the Board of Governors of the Federal Reserve System.

The CFPB has the exclusive authority to administer, enforce, and otherwise implement federal consumer financial laws, which includes the power to make rules, issue orders, and issue guidance governing the provision of consumer financial products and services.

The CFPB has exclusive federal consumer law supervisory authority and primary enforcement authority over insured depository institutions with assets totaling over $10 billion.

Authority for institutions with $10 billion or less rests with the prudential regulator, and in the case of the Bank lies with the FDIC.

FDIC-insured institutions, like the Bank, as well as their holding companies and affiliates, are extensively regulated under federal and state law.

As a result, the Company’s growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Indiana Department of Financial Institutions (the “DFI”), the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the FDIC and the Consumer Financial Protection Bureau (“CFPB”).

Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the Financial Accounting Standards Board (“FASB”), securities laws administered by the Securities and Exchange Commission (“SEC”) and state securities authorities, and anti-money laundering laws enforced by the U.S.

Department of the Treasury have an impact on the Company’s business.

The effect of these statutes, regulations, regulatory policies and accounting rules are significant to the Company’s operations and financial condition.

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 shareholders.

These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of the Company’s business;

the kinds and amounts of investments the Company and Bank may make;

required capital levels relative to assets;

the nature and amount of collateral for loans;

the ability to merge, consolidate, and acquire;

dealings with the Company’s and Bank’s insiders and affiliates;

and the Company’s payment of dividends.

In reaction to the global financial crisis, and particularly following the passage of Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) in 2010, the Company experienced heightened regulatory requirements and scrutiny.

Although the reforms primarily targeted systemically important financial service providers (at the time, those with assets of $50.0 billion and greater), certain provisions of the law triggered at $10.0 billion in assets and the influence of other provisions filtered down in varying degrees to community banks over time, causing the Company’s compliance and risk management processes, and the costs thereof, to increase.

Then, in May 2018, the Economic Growth, Regulatory Relief, and Consumer Protection Act was enacted to provide meaningful relief for banks and their holding companies that were not considered systemically important (defined by amendment to be those with assets under $100.0 billion).

The Company believes that such reforms are 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.

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.

Regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law, or are otherwise inconsistent with laws and regulations.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and Bank, beginning with a discussion of the impact of the COVID-19 pandemic on the banking industry.

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.

COVID-19 Pandemic

Federal bank regulatory agencies, along with their state counterparts, have issued a steady stream of guidance responding to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact.

These include, without limitation:

requiring banks to focus on business continuity and pandemic planning;

adding pandemic scenarios to stress testing;

encouraging bank use of capital buffers and reserves in lending programs;

permitting certain regulatory reporting extensions;

reducing margin requirements on swaps;

permitting certain otherwise prohibited investments in investment funds;

issuing guidance to encourage banks to work with customers affected by the pandemic and encouraging loan workouts;

and providing credit under the Community Reinvestment Act (the “CRA”) for certain pandemic-related loans, investments, and public services.

Because of the need for social distancing measures, the

agencies revamped the manner in which they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews.

Moreover, the Federal Reserve issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities.

The FDIC also has acted to mitigate the deposit insurance assessment effects of participating in the Paycheck Protection Program and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

Reference is made to “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Impact of the COVID-19 Pandemic,” “- Non-TDR Loan Modifications due to COVID-19,” and “- U.S.

Small Business Administration Paycheck Protection Program” for information on the CARES Act, the PPP and for discussions of the economic impact of the COVID-19 pandemic.

In addition, information as to selected topics, such as the impact on capital requirements, dividend payments, reserves, and CRA, is contained in the relevant sections of this Regulation and Supervision discussion.

Regulatory Capital

Regulatory capital represents the net assets of a banking organization available to absorb losses.

Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects the Company’s earnings capabilities.

While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress.

Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously.

Capital Levels.

Banks have been required to hold minimum levels of capital based on guidelines established by bank regulatory agencies since 1983.

The minimums have been expressed in terms of ratios of “capital” divided by “total assets.” The capital guidelines for U.S.

banks beginning in 1989 have been based upon international capital accords, known as “Basel” rules, adopted by the Basel Committee on Banking Supervision (the “BCBS”), 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 accords recognized that bank assets for the purpose of the capital ratio calculations needed to be weighted (the theory being that riskier assets should require more capital) and that off-balance-sheet credit exposures needed to be factored in the calculations.

Following the global financial crisis, the Group of Governors and Heads of Supervision, the oversight body of the BCBS, 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.

federal banking agencies approved implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”).

In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of binding regulations by each of the regulatory agencies.

The Basel III Rule increased the required quantity and quality of capital and required more detailed categories of risk weighting of riskier, more opaque assets.

For nearly every class of assets, the Basel III Rule requires a more complex, detailed, and calibrated assessment of risk in the calculation of risk weightings.

The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to most bank and savings and loan holding companies.

The Company and Bank are each subject to the Basel III Rule as described below.

Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but in requiring that forms of capital be of higher quality to absorb loss, it also introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus, retained e arnings, 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).

The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and required deductions from Common Equity Tier 1 Capital in the event that such assets exceeded a percentage of a banking institution’s Common Equity Tier 1 Capital.

The Basel III Rule requires minimum capital ratios as follows:

• A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;

• A ratio of minimum Tier 1 Capital equal to 6% of risk-weighted assets;

• A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets;

• A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer.

The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress.

Factoring in the conservation buffer increases the minimum ratios depicted above to 7.0% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital.

Federal bank regulators released a joint statement in response to the COVID-19 pandemic reminding the industry that capital and liquidity buffers were meant to give banks the means to support the economy in adverse situations, and that the agencies would support banks that use the buffers for that purpose if undertaken in a safe and sound manner.

Well-Capitalized Requirements.

The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements.

For example, a banking organization that is well capitalized may:

(i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities;

(ii) qualify for expedited processing of other required notices or applications;

and (iii) accept, rollover or renew brokered deposits.

Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations.

For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities, or securities trading activities.

Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Under the capital regulations of the FDIC and Federal Reserve, in order to be well capitalized, a banking organization must maintain:

• A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;

• A ratio of Tier 1 Capital to total risk-weighted assets of 8.0% or more;

• A ratio of Total Capital to total risk-weighted assets of 10.0% or more;

• A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5.0% or greater.

It is possible under the Basel III Rule to be well capitalized while remaining out of compliance with the capital conservation buffer discussed above.

As of December 31, 2020, the Bank was not subject to a directive from the FDIC to increase its capital and was well capitalized, as defined by FDIC regulations.

As of December 31, 2020, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the requirements to be well capitalized.

The Company is also in compliance with the capital conservation buffer.

Prompt Corrective Action.

The concept of an institution being “well capitalized” is part of a regulatory enforcement regime that provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of depository institutions based on the capital level of each particular institution.

The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized,” in each case as defined by regulation.

Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include:

(i) requiring the institution to submit a capital restoration plan;

(ii) limiting the institution’s asset growth and restricting its activities;

(iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself;

(iv) restricting transactions between the institution and its affiliates;

(v) restricting the interest rate that the institution may pay on deposits;

(vi) ordering a new election of directors of the institution;

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

(viii) prohibiting the institution from accepting deposits

from correspondent banks;

(ix) requiring the institution to divest certain subsidiaries;

(x) prohibiting the payment of principal or interest on subordinated debt;

and (xi) ultimately, appointing a receiver for the institution.

Holding Company Regulation

We are subject to supervision and examination as a bank holding company by the Federal Reserve under the BHCA.

Under the BHCA, the Company is required to file with the Federal Reserve periodic reports of its operations and such additional information regarding the Company and Bank as the Federal Reserve may require.

In addition, the Federal Reserve has the authority to issue orders to bank holding companies to cease and desist from unsafe or unsound banking practices and from violations of conditions imposed by, or violations of agreements with, the Federal Reserve.

The Federal Reserve is also empowered, among other things, to assess civil money penalties against companies or individuals who violate Federal Reserve orders or regulations, to order termination of nonbanking activities of bank holding companies and to order termination of ownership and control of a nonbanking subsidiary by a bank holding company.

Federal Reserve approval is also required in connection with bank holding companies’ acquisitions of more than 5% of the voting shares of any class of a depository institution or its holding company and, among other things, in connection with the bank holding company’s engaging in new activities.

Under the BHCA, our activities are limited to businesses so closely related to banking, managing or controlling banks as to be a proper incident thereto.

The BHCA also requires a bank holding company to obtain approval from the Federal Reserve before (1) acquiring or holding more than a 5% voting interest in any bank or bank holding company, (2) acquiring all or substantially all of the assets of another bank or bank holding company or (3) merging or consolidating with another bank holding company.

We have not filed an election with the Federal Reserve to be treated as a “financial holding company,” a type of holding company that can engage in certain insurance and securities-related activities that are not permitted for a bank holding company.

Activities and Acquisitions.

Under the BHCA, our activities are limited to businesses so closely related to banking or managing or controlling banks as to be a proper incident thereto, as determined by the Federal Reserve.

The BHCA also requires a bank holding company to obtain approval from the Federal Reserve before (i) acquiring or holding more than a 5% voting interest in any bank or bank holding company, (ii) acquiring all or substantially all of the assets of another bank or bank holding company or (iii) merging or consolidating with another bank holding company.

We have not filed an election with the Federal Reserve to be treated as a “financial holding company,” a type of holding company that can engage in a wider range of nonbanking activities, such as certain insurance and securities-related activities, that are not permitted for a bank holding company.

Source of Strength .

Under the Dodd-Frank Act, we are required to serve as a source of financial and managerial strength for the Bank in the event of the financial distress of the Bank.

This provision codifies the longstanding policy of the Federal Reserve.

Under the Dodd-Frank Act, we are required to serve as a source of financial and managerial strength for the Bank and to commit resources to support it in circumstances where we might not otherwise do so, in the event of the financial distress of the Bank.

This provision codified the longstanding policy of the Federal Reserve.

In addition, any capital loans by a bank holding company to any of its depository subsidiaries are subordinate to the payment of deposits and to certain other indebtedness.

In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulatory agency to maintain the capital of a depository subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Regulatory Capital .

The Federal Reserve sets risk-based capital ratio and leverage ratio guidelines for bank holding companies.

Under the guidelines and related policies, bank holding companies must maintain capital sufficient to meet both a risk-based asset ratio test and a leverage ratio test on a consolidated basis.

The guidelines provide a systematic analytical framework that makes regulatory capital requirements sensitive to differences in risk profiles among banking organizations, takes off-balance sheet exposures expressly into account in evaluating capital adequacy and minimizes disincentives to holding assets considered by regulatory agencies to be liquid and low risk.

The risk-based ratio is determined by allocating assets and specified off-balance sheet commitments into risk-weighted categories, with higher weighting assigned to categories perceived as representing greater risk.

The risk-based ratio represents total capital divided by total risk-weighted assets.

The leverage ratio is Tier 1 capital divided by total average assets adjusted as specified in the guidelines.

The Bank, supervised by the FDIC and DFI, is subject to substantially similar capital requirements.

Our applicable capital ratios as of December 31, 2019 and 2018 are summarized in Note 14 to the financial statements.

In 2013, the Federal Reserve published final rules (the “Basel III Capital Rules”) establishing a comprehensive capital framework for U.S.

bank holding companies.

The FDIC adopted substantially identical standards for institutions, like the Bank, subject to its jurisdiction in an interim final rule.

Among other things, the Basel III Capital Rules (i) introduced a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specified that Tier 1 Capital consists of CET1 and “Additional Tier 1 Capital” instruments meeting specified requirements, (iii) applied most deductions/adjustments to regulatory capital measures to CET1 and not to the other components of capital, thus potentially requiring higher levels of CET1 in order to meet minimum ratios, and (iv) expanded the scope of the deductions/adjustments from capital in comparison to prior regulations.

Under Basel III Capital Rules, the minimum capital ratios are:

4.5% CET1 to risk-weighted assets, 6.0% Tier 1 capital to risk-weighted assets, 8.0% Total Capital (Tier 1 Capital plus Tier 2 Capital) to risk-weighted assets and 4.0% Leverage Ratio.

In addition, a capital conservation buffer of 2.5% above each level applicable to the CET1, Tier 1, and Total Capital ratios is required for banking institutions like the Company and the Bank to avoid restrictions on their ability to make capital distributions, including dividends, and pay certain discretionary bonus payments to executive officers.

The capital conservation buffer was phased in with annual increases through January 1, 2019.

The following are the Basel III regulatory capital levels, inclusive of the capital conservation buffer, that the Company and the Bank must satisfy to avoid limitations on capital distributions, including dividends, and discretionary bonus payments during the applicable phase-in period from January 1, 2015, until January 1, 2019:

Basel III Regulatory Capital Levels

Common equity tier 1 capital to risk-weighted assets

Tier 1 capital to risk-weighted assets

Total capital to risk-weighted assets

The Basel III Capital Rules revised the prompt corrective action framework by (i) introducing a CET1 ratio requirement at each capital level, with a required CET1 ratio of 6.5% to remain well-capitalized, (ii) increasing the minimum Tier 1 Capital ratio requirement for each category, with the minimum Tier 1 Capital ratio for well-capitalized status being increased to 8% and (iii) transitioning to a Leverage Ratio of 4% in order to qualify as adequately capitalized and a Leverage Ratio of 5% to be well capitalized.

As of December 31, 2019 , the Company and the Bank met all capital adequacy requirements under the Basel III Capital Rules.

Change in Control.

Federal law also prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator.

“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.

Employee Incentive Compensation.

Under regulatory guidance applying to all banking organizations, incentive compensation policies must be consistent with safety and soundness principles.

Under this guidance, banking organizations must review their compensation programs to ensure that they:

(i) provide employees with incentives that appropriately balance risk and reward and that do not encourage imprudent risk, (ii) are compatible with effective controls and risk management, and (iii) are supported by strong corporate governance, including active and effective oversight by the banking organization's board of directors.

Monitoring methods and processes used by a banking organization should be commensurate with the size and complexity of the organization and its use of incentive compensation.

During 2016, as required by the Dodd-Frank Act, the federal bank regulatory agencies and the SEC proposed revised rules on incentive-based payment arrangements at specified regulated entities having at least $1 billion of total assets (including the Company and the Bank).

These proposed rules have not been finalized.

Regulation of Banks

The Bank is an Indiana-chartered bank formed pursuant to the Indiana Financial Institutions Act (the “IFIA”).

As such, the Bank is regularly examined by and subject to regulations promulgated by the DFI and the FDIC as its primary federal bank regulator.

The Bank is not a member of the Federal Reserve System.

Business Activities .

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Community Reinvestment Act .

Under the Community Reinvestment Act (the “CRA”), as implemented by FDIC regulations, the Bank has a continuing and affirmative obligation, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate-income neighborhoods.

Under the CRA, as implemented by FDIC regulations, the Bank has a continuing and affirmative obligation, consistent with safe and sound banking practices, to help meet the credit needs of its entire community, including low and moderate-income neighborhoods.

The CRA does not establish specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop the types of products and services that it believes are best suited to its particular community, consistent with the CRA.

The CRA requires the FDIC, in connection with its examinations of the Bank, to assess the Bank’s record of meeting the credit needs of its entire community and to take that record into account in evaluating certain applications for regulatory approvals that we may file with the FDIC.

Due to its Internet-driven model and nationwide consumer banking platform, the Bank has opted to operate under a CRA Strategic Plan, which was submitted to and approved by the FDIC and sets forth certain guidelines the Bank must meet.

The current Strategic Plan expires December 31, 2020.

Due to its online-driven model and nationwide banking platform, the Bank has opted to operate under a CRA Strategic Plan, which sets forth certain guidelines the Bank must meet.

The Strategic Plan submitted is expected to expire on December 31, 2023.

The Bank received a “Satisfactory” CRA rating in its most recent CRA examination.

Failure of an institution to receive at least a “Satisfactory” rating could inhibit such institution or its holding company from engaging in certain activities or pursuing acquisitions of other financial institutions.

In a joint statement responding to the COVID-19 pandemic, bank regulatory agencies announced favorable CRA consideration for banks providing retail banking services and lending activities in their assessment areas, consistent with safe and sound banking practices, that are responsive to the needs of low- and moderate-income individuals, small businesses, and small farms affected by the pandemic.

Those activities include waiving certain fees, easing restrictions on out-of-state and non-customer checks, expanding credit products, increasing credit limits for creditworthy borrowers, providing alternative service options, and offering prudent payment accommodations.

The joint statement also provided favorable CRA consideration for certain pandemic-related community development activities.

Transactions with Affiliates .

The authority of the Bank, like other FDIC-insured banks, to engage in transactions with its “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W.

The authority of the Bank, like other FDIC-insured institutions, to engage in transactions with its “affiliates” is limited by Sections 23A and 23B of the Federal Reserve Act and the Federal Reserve’s Regulation W.

An “affiliate” for this purpose is defined generally as any company that owns or controls the Bank or is under common ownership or control with the Bank, but excludes a company controlled by a bank.

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We believe we are in compliance with the safety and soundness guidelines.

The ability of the Bank to pay dividends is limited by state and federal laws and regulations that require the Bank to obtain the prior approval of the DFI before paying a dividend that, together with other dividends it has paid during a calendar year, would exceed the sum of its net income for the year to date combined with its retained net income for the previous two years.

The amount of dividends the Bank could pay may also be affected or limited by other factors, such as the requirements to maintain adequate capital.

Capital Distributions .

The FDIC may disapprove of a notice or application to make a capital distribution if:

the Bank would be undercapitalized following the distribution;

the proposed capital distribution raises safety and soundness concerns;

the capital distribution would violate a prohibition contained in any statute, regulation or agreement applicable to the Bank.

The ability of the Company to make capital distributions, including paying dividends and repurchasing shares, depends upon our receipt of dividends from the Bank.

The ability of the Bank to pay dividends is limited by state and federal laws and regulations, including the requirement for the Bank to obtain the prior approval of the DFI before paying a dividend that, together with other dividends it has paid during a calendar year, would exceed the sum of its net income for the year to date combined with its retained net income for the previous two years.

The ability of the Bank to pay dividends is further affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and it is generally prohibited from paying any dividends if, following payment thereof, it would be undercapitalized.

Notwithstanding the availability of funds for dividends, the FDIC and the DFI 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 have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer.

Insurance of Deposit Accounts .

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The FDIA, as amended by the Federal Deposit Insurance Reform Act and the Dodd-Frank Act, requires the FDIC to set a ratio of deposit insurance reserves to estimated insured deposits.

In March 2016, the FDIC issued a final rule to increase the statutory minimum designated reserve ratio (the “DRR”) to 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.

The FDIC’s rules reduced assessment rates on all FDIC-insured financial institutions but imposed a surcharge on banks with assets of $10 billion or more until the DRR reaches 1.35% and provide assessment credits to banks with assets of less than $10 billion for the portion of their assessments that contribute to the increase of the DRR to 1.35%.

The rules also changed the methodology used to determine risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk.

In March 2016, the FDIC issued a final rule to increase the statutory minimum designated reserve ratio (the “DRR”) from 1.15% to 1.35% by September 30, 2020, the deadline imposed by the Dodd-Frank Act.

The FDIC’s rules reduced assessment rates on all FDIC-insured financial institutions but imposed a surcharge on banks with assets of $10 billion or more until the DRR reached 1.35% and provided assessment credits to banks with assets of less than $10 billion for the portion of their assessments that contribute to the increase of the DRR to 1.35%.

The DRR reached 1.36% as of September 30, 2018, exceeding the statutory required minimum DRR of 1.35%.

As a result, the FDIC provided assessment credits to banks, 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 DRR between 1.15% and 1.35%.

The FDIC applied the small bank credits for quarterly assessment periods beginning July 1, 2019.

However, the DRR then fell to 1.30% in 2020 as a result of extraordinary insured deposit growth caused by an unprecedented inflow of more than $1 trillion in estimated insured deposits in the first half of 2020, primarily resulting from the COVID-19 pandemic.

Notwithstanding the decrease in the DRR to 1.30%, the FDIC determined not to cease the small bank credits and waived the requirement that the DRR be at least 1.35% for full remittance of the remaining assessment credits.

The FDIC refunded all small bank credits as of September 30, 2020.

The FDIC’s rules also changed the methodology used to determine risk-based assessment rates for established banks with less than $10 billion in assets to better ensure that banks taking on greater risks pay more for deposit insurance than banks that take on less risk.

FDIC insurance expense, including assessments relating to Financing Corporation (FICO) bonds, totaled $1.8 million for 2020, which included a $0.6 million small bank assessment credit.

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While the required percentage of stock ownership is subject to change by the FHLB, the Bank is in compliance with this requirement with an investment in FHLB stock at December 31, 2020 of $25.7 million.

Any advances from the FHLB must be secured by specified types of collateral, and long-term advances may be used for the purpose of providing funds to make residential mortgage or commercial loans and to purchase investments.

Any advances from the FHLB must be secured by specified types of collateral, and long-term advances may be used for the purpose of providing funds to

make residential mortgage or commercial loans and to purchase investments.

Long-term advances may also be used to help alleviate interest rate risk for asset and liability management purposes.

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Currently, reserves must be maintained against transaction accounts.

As of January 16, 2020, the Federal Reserve’s regulations required reserves equal to 3% on transaction account balances over $16.9 million and up to and including $127.5 million, plus 10% on the excess over $127.5 million.

These requirements are subject to adjustment annually by the Federal Reserve.

The Bank is in compliance with the foregoing reserve requirements.

The balances maintained to meet the reserve requirements imposed by the Federal Reserve may be used to satisfy liquidity requirements imposed by the FDIC.

Reserve requirements are subject to annual adjustment by the Federal Reserve and, for 2020, the Federal Reserve had determined that reserves would be required in amounts equal to 3% on transaction account balances over $16.9 million and up to and including $127.5 million, plus 10% on the excess over $127.5 million.

However, in March 2020, the Federal Reserve announced that the banking system had ample reserves and, as reserve requirements no longer played a significant role in this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the reserve maintenance requirement.

This action permits the Bank to loan or invest funds that were previously unavailable.

The Federal Reserve has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.

Anti-Money Laundering and the Bank Secrecy Act .

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The USA PATRIOT Act, in conjunction with the implementation of various federal regulatory agency regulations, has caused financial institutions, such as the Bank, to adopt and implement additional policies or amend existing policies and procedures with respect to, among other things, anti-money laundering compliance, suspicious activity, currency transaction reporting, customer identity verification and customer risk analysis.

In January 2021, the Anti-Money Laundering Act of 2020 (the “AMLA”), which amends the BSA, was enacted.

The AMLA is intended to comprehensively reform and modernize U.S.

anti-money laundering laws.

Among other things, the AMLA codifies a risk-based approach to anti-money laundering compliance for financial institutions;

requires the development of standards by the Treasury for evaluating technology and internal processes for BSA compliance;

and expands enforcement- and investigation-related authority, including a significant expansion in the available sanctions for certain BSA violations.

Many of the statutory provisions in the AMLA will require additional rulemakings, reports and other measures, and the impact of the AMLA will depend on, among other things, rulemaking and implementation guidance.

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others.

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These laws and regulations mandate certain disclosure requirements and regulate the manner in which financial institutions must interact with customers when taking deposits, making loans, collecting loans and providing other services.

Further, the Dodd-Frank Act established the CFPB, which has the responsibility for making and amending rules and regulations under the federal consumer protection laws relating to financial products and services.

Further, the Dodd-Frank Act established the CFPB as an independent agency within the Board of Governors of the Federal Reserve System.

The CFPB also has a broad mandate to prohibit unfair or deceptive acts and practices and is specifically empowered to require certain disclosures to consumers and draft model disclosure forms.

Failure to comply with consumer protection laws and regulations can subject financial institutions to enforcement actions, fines and other penalties.

The FDIC enforces applicable CFPB rules with respect to the Bank.

Failure to comply with consumer protection laws

and regulations can subject financial institutions to enforcement actions, fines and other penalties.

The CFPB has exclusive federal consumer law supervisory authority and primary enforcement authority over insured depository institutions with assets totaling over $10 billion.

Authority for institutions with $10 billion or less rests with the prudential regulator, and in the case of the Bank lies with the FDIC.

Mortgage Reform.

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The federal banking regulators have issued guidance for banks on response programs for unauthorized access to customer information.

This guidance, among other things, requires notice to be sent to customers whose “sensitive information” has been compromised if unauthorized use of this information is “reasonably possible.”

This guidance, among other things, requires notice to be sent to customers whose “sensitive information” has been compromised if misuse of this information is “reasonably possible.”

Identity Theft Red Flags .

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We cannot predict whether such legislation will be enacted, or what impact, if any, such legislation may have on our business, financial condition or results of operations.

The California Consumer Privacy Act of 2018 (the “CCPA”) grants all California residents the right to know what information a business has collected from them and the sourcing and sharing of that information, as well as a right to have a business delete their personal information (with some exceptions).

Its definition of “personal information” is more expansive than those found in other privacy laws applicable to us in the United States.

Failure to comply with the CCPA risks regulatory fines and the law grants a private right of action for any unauthorized disclosure of personal information as a result of failure to maintain reasonable security procedures.

The CCPA became effective on January 1, 2020, but California's Attorney General cannot bring an enforcement action under the CCPA until July 1, 2020.

A number of U.S.

states have also enacted data privacy and security laws and regulations that govern the collection, use, disclosure, transfer, storage, disposal and protection of personal information, such as social security numbers, financial information and other information.

These laws and regulations may be more restrictive and not preempted by U.S.

federal laws.

For example, several U.S.

territories and all 50 states now have data breach laws that require timely notification to individuals, and at times regulators, the media or credit reporting agencies, if a company has experienced the unauthorized access or acquisition of personal information.

Other state laws include the California Consumer Privacy Act (“CCPA”), which was signed into law on June 28, 2018 and took effect on January 1, 2020.

The CCPA, among other things, contains new disclosure obligations for businesses that collect personal information about California residents and affords those individuals numerous rights relating to their personal information that may affect our ability to use personal information or share it with our business partners.

A second law called the California

Privacy Rights Act (“CPRA”) passed via a ballot referendum in November 2020.

The CPRA expands the scope of the CCPA, imposes new restrictions on behavioral advertising and establishes a new California Privacy Protection Agency which will enforce the law and issue regulations.

Other states have considered and/or enacted similar privacy laws.

We will continue to monitor and assess the impact of these state laws, which may impose substantial penalties for violations, impose significant costs for investigation and compliance, allow private class-action litigation and carry significant potential liability for our business.

Cybersecurity .

In 2015, federal regulators issued two related statements regarding cybersecurity.

One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing Internet-based services of the financial institution.

One statement indicates that financial institutions should design multiple layers of security controls to establish lines of defense and ensure that their risk management processes also address the risk posed by compromised customer credentials, including security measures to reliably authenticate customers accessing digital-based services of the financial institution.

The other statement indicates that a financial institution’s management is expected to maintain sufficient business continuity planning processes to ensure the rapid recovery, resumption, and maintenance of the institution’s operations after a cyber-attack involving destructive malware.

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These SEC guidelines, and any other regulatory guidance, are in addition to notification and disclosure requirements under state and federal banking law and regulations.

In support of our Internet banking platform, we rely heavily on electronic communications and information systems to conduct our operations and store sensitive data.

In support of our digital banking platform, we rely heavily on electronic communications and information systems to conduct our operations and store sensitive data.

We employ an in-depth approach that leverages people, processes, and technology to manage and maintain cybersecurity controls.

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We regularly conduct cybersecurity risk assessments, regularly engage with the Board or appropriate committees on cybersecurity matters, routinely update our incident response plans based on emerging threats, periodically practice implementation of incident response plans across applicable departments and train officers and employees to detect and report suspicious activity.

Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, our systems and those of our customers and third-party service providers are under constant threat, and it is possible that we could experience a significant event in the future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet and mobile banking and other technology-based products and services, by us and our consumers.

At December 31, 2019 , we had 231 total employees, of which 227 were full-time employees.

Although to date we have not experienced any material losses relating to cyber-attacks or other information security breaches, our systems and those of our customers and third-party service providers are under constant threat, and it is possible that we could experience a significant event in the future due to the rapidly evolving nature and sophistication of these threats, as well as due to the expanding use of Internet and digital banking and other technology-based products and services, by us and our consumers.

Available Information

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

What changed 10-K

Item 1. Business