Independent Bank (IBCP) 10-K 2021 FY Annual report

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Performance Graph	10
Selected Consolidated Financial Data	11
Management’s Discussion and Analysis of Financial Condition and Results of Operations	12
Management’s Annual Report on Internal Control Over Financial Reporting (PCAOB ID 173)	36
Report of Independent Registered Public Accounting Firm	37
Consolidated Financial Statements	39
Notes to Consolidated Financial Statements	44
Quarterly Data	110

9

PERFORMANCE GRAPH

The graph below compares the total returns (assuming reinvestment of dividends) of Independent Bank Corporation common stock, the NASDAQ Composite Index and the NASDAQ Bank Stock Index. The graph assumes $100 invested in Independent Bank Corporation common stock (returns based on stock prices per the NASDAQ) and each of the indices on December 31, 2016, and the reinvestment of all dividends during the periods presented. The performance shown on the graph is not necessarily indicative of future performance.

Independent Bank Corporation

 

	Period Ending
Index	12/31/16		12/31/17		12/31/18		12/31/19		12/31/20		12/31/21
Independent Bank Corporation	$	100.00	$	105.03	$	101.29	$	112.84	$	96.72	$	129.79
NASDAQ Composite		100.00		129.64		125.96		172.17		249.51		304.85
NASDAQ Bank		100.00		118.39		98.98		135.78		118.40		162.58

10

SELECTED CONSOLIDATED FINANCIAL DATA

​	Year Ended December 31,
​	2021			2020			2019			2018			2017
​	(Dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income	$	138,080		$	139,829		$	148,928		$	130,773		$	98,309
Interest expense		8,315			16,217			26,347			17,491			9,123
Net interest income		129,765			123,612			122,581			113,282			89,186
Provision for credit losses(1)		(1,928	)		12,463			824			1,503			1,199
Net gains on securities available for sale		1,411			267			307			138			260
Other non-interest income		75,232			80,478			47,429			44,677			42,273
Non-interest expense		131,023			122,413			111,733			107,461			92,082
Income before income tax		77,313			69,481			57,760			49,133			38,438
Income tax expense		14,418			13,329			11,325			9,294			17,963
Net income	$	62,895		$	56,152		$	46,435		$	39,839		$	20,475
PER COMMON SHARE DATA
Net income per common share
Basic	$	2.91		$	2.56		$	2.03		$	1.70		$	0.96
Diluted		2.88			2.53			2.00			1.68			0.95
Cash dividends declared and paid		0.84			0.80			0.72			0.60			0.42
Book value		18.82			17.82			15.58			14.38			12.42
SELECTED BALANCES
Assets	$	4,704,740		$	4,204,013		$	3,564,694		$	3,353,281		$	2,789,355
Loans		2,905,045			2,733,678			2,725,023			2,582,520			2,018,817
Allowance for credit losses(1)		47,252			35,429			26,148			24,888			22,587
Deposits		4,117,090			3,637,355			3,036,727			2,913,428			2,400,534
Shareholders’ equity		398,484			389,522			350,169			338,994			264,933
Other borrowings		30,009			30,012			88,646			25,700			54,600
Subordinated debt		39,357			39,281			—			—			—
Subordinated debentures		39,592			39,524			39,456			39,388			35,569
SELECTED RATIOS
Net interest income to average interest earning assets		3.10	%		3.34	%		3.80	%		3.88	%		3.65	%
Net income to
Average shareholders' equity		16.13			15.68			13.63			12.38			7.82
Average assets		1.41			1.43			1.35			1.27			0.77
Average shareholders’ equity to average assets		8.73			9.10			9.90			10.27			9.88
Tier 1 capital to average assets		8.79			9.15			10.11			10.47			10.57
Non-performing loans to Portfolio Loans		0.18			0.29			0.35			0.33			0.39

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

11

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclaimer Regarding Forward-Looking Statements. Statements in this report that are not statements of historical fact, including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; statements about our business and growth strategies; and expectations about economic and market conditions and trends. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals. They are based on assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect. Actual results could differ materially from those discussed in the forward-looking statements for a variety of reasons, including:

• economic, market, operational, liquidity, credit, and interest rate risks associated with our business including the impact of the ongoing COVID-19 pandemic on each of these items;

• economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our bank operates including the economic impact of the ongoing COVID-19 pandemic in each of these areas;

• the failure of assumptions underlying the establishment of, and provisions made to, our allowance for credit losses;

• increased competition in the financial services industry, either nationally or regionally;

• our ability to achieve loan and deposit growth;

• volatility and direction of market interest rates;

• the continued services of our management team; and

• implementation of new legislation, which may have significant effects on us and the financial services industry.

This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all-inclusive. The risk factors disclosed in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2021, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include the primary risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks are not the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us, that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.

Introduction. The following section presents additional information to assess the financial condition and results of operations of Independent Bank Corporation (“IBCP”), its wholly-owned bank, Independent Bank (the “Bank”), and their subsidiaries. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this annual report. We also encourage you to read our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”). That report includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.

Overview. We provide banking services to customers located primarily in Michigan’s Lower Peninsula and also have two loan production offices in Ohio (Columbus and Fairlawn). As a result, our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula.

12

Significant Developments. The COVID-19 pandemic and the related government mandates, restrictions, and guidance have created and may continue to create and contribute to significant economic uncertainty and market disruptions. Throughout 2020 and 2021, the volatility created by the pandemic and responses to the pandemic impacted our performance, customers, and the markets we serve.

Federal and state government responses have also created uncertainty. On November 4, 2021, the U.S. Department of Labor implemented an emergency temporary standard (ETS) mandating that all employers with 100 workers or more must require their employees to be fully vaccinated or submit to weekly testing. The ETS has been met with many subsequent legal challenges. On January 13, 2022, the U.S. Supreme Court stayed the ETS, sending the case back to the U.S. Court of Appeals for the Sixth Circuit for a decision on the merits. The timeline for such a decision is undetermined, and the outcomes remain unpredictable. In Michigan, the Department of Health and Human Services announced its intent to update quarantine and isolation periods to align with the Centers for Disease Control and Prevention’s newly shortened guidelines. These impending mandates and guidelines may have significant effects on the U.S. and Michigan economies, the banking sector generally, and our business specifically, the scope of which cannot be foreseen.

Based on this uncertainty, it is difficult to predict the extent to which the pandemic will continue to adversely impact our business, results of operations, financial condition, and customers. The potential impacts may include, but are not limited to:

• difficulties encountered by our business customers in addressing the effects of the pandemic may cause increases in loan delinquencies, foreclosures and defaults;

• increases in our allowance for credit losses may be necessary;

• declines in collateral values may occur;

• third party disruptions may occur, including outages at network providers, on-line banking vendors and other suppliers;

• there is increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;

• we may experience operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions; and/or

• our production and efficiency may suffer due to employee illnesses and/or employees having to work remotely.

Given the ongoing uncertainty with respect to the pandemic and potential government responses, these risk factors may continue to some degree for a significant period of time.

The extent to which the COVID-19 pandemic may impact our business, results of operations, asset valuations, financial condition, and customers will depend on future developments, which continue to be highly uncertain and difficult to predict. Those developments and factors are expected to include the evolution of the virus and new and emerging virus variants, vaccination rates and subsequent vaccine-“boosters,” actions taken by governmental authorities to address the foregoing, and the enforcement thereof, and how quickly and to what extent normal economic and operating conditions stabilize. Potential developments also include market factors such as interest rates, supply chain disruptions, inflation, consumer-welfare, and employment rates. We do not know the full extent of the potential impact. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale, loans, capitalized mortgage loan servicing rights or deferred tax assets.

It is against this backdrop that we discuss our results of operations and financial condition in 2021 as compared to earlier periods.

RESULTS OF OPERATIONS

Summary. We recorded net income of $62.9 million, or $2.88 per diluted share, in 2021, net income of $56.2 million, or $2.53 per diluted share, in 2020, and net income of $46.4 million, or $2.00 per diluted share, in 2019.

13

KEY PERFORMANCE RATIOS

	Year Ended December 31,
	2021			2020			2019
Net income to
Average shareholders' equity		16.13	%		15.68	%		13.63	%
Average assets		1.41			1.43			1.35
Net income per common share
Basic	$	2.91		$	2.56		$	2.03
Diluted		2.88			2.53			2.00

Net interest income. Net interest income is the most important source of our earnings and thus is critical in evaluating our results of operations. Changes in our net interest income are primarily influenced by our level of interest-earning assets and the income or yield that we earn on those assets and the manner and cost of funding our interest-earning assets. Certain macro-economic factors can also influence our net interest income such as the level and direction of interest rates, the difference between short-term and long-term interest rates (the steepness of the yield curve) and the general strength of the economies in which we are doing business. Finally, risk management plays an important role in our level of net interest income. The ineffective management of credit risk and interest-rate risk in particular can adversely impact our net interest income.

Net interest income totaled $129.8 million during 2021, compared to $123.6 million and $122.6 million during 2020 and 2019, respectively. The increase in net interest income in 2021 compared to 2020 primarily reflects a $529.9 million increase in average interest-earning assets that was partially offset by a 24 basis point decrease in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”).

The increase in net interest income in 2020 compared to 2019 primarily reflects a $483.8 million increase in average interest-earning assets that was partially offset by a 46 basis point decrease in our net interest margin.

The increase in average interest-earning assets during 2021 primarily reflects an increase in securities available for sale and interest bearing cash deposits. The significant increases in these balances is primarily due to the deployment of funds from a substantial increase in deposits.

The decrease in the net interest margin during 2021 as compared to 2020 primarily reflects a change in the mix of earning assets as well as the origination of new loans and the purchase of securities available for sale at lower rates than those same instruments that have matured or paid off. These decreases were partially offset by the impact of Payroll Protection Program (“PPP”) loans and accelerated amortization of certain deferred losses on derivative financial instruments that were de-designated.

Due to the economic impact of COVID-19, the Federal Reserve Bank has taken a variety of actions to stimulate the economy, including lowering short-term interest rates. These actions, along with lower long-term interest rates, have placed pressure on our net interest margin.

Interest and fees on loans in 2021 include $8.9 million of accretion of net loan fees on PPP loans compared to $5.6 million in 2020. No such accretion is included in 2019.

Interest expense in 2020 included $1.6 million of accelerated amortization of deferred loss on certain derivative financial instruments that were de-designated. No such amortization is included in 2021 or 2019. See note #16 to the Consolidated Financial Statements for discussion regarding these derivative financial instruments.

The increase in average interest-earning assets during 2020 primarily reflects an increase in securities available for sale and interest bearing cash deposits. The significant increases in these balances is primarily due to the deployment of funds from a substantial increase in deposits. The decrease in the net interest margin during 2020 as compared to 2019 primarily reflects reductions in short-term interest rates during that year as well as a flattening of the yield curve.

2021, 2020 and 2019 interest income on loans includes $0.8 million, $1.1 million and $1.5 million, respectively, of accretion of the discount recorded on loans acquired in connection with our acquisition of Traverse City State Bank (“TCSB”) in 2018.

Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled $6.2 million, $11.2 million and $8.1 million in 2021, 2020 and 2019, respectively.

14

AVERAGE BALANCES AND RATES

​	2021							2020							2019
​	Average Balance		Interest		Rate			Average Balance		Interest		Rate			Average Balance		Interest		Rate
​	(Dollars in thousands)
ASSETS
Taxable loans	$	2,881,950	$	116,358		4.04	%	$	2,863,846	$	122,875		4.29	%	$	2,713,690	$	133,574		4.92	%
Tax-exempt loans(1)		7,240		362		5.00			7,145		360		5.04			7,937		391		4.93
Taxable securities		915,701		14,488		1.58			635,914		12,655		1.99			397,598		11,842		2.98
Tax-exempt securities(1)		348,346		7,892		2.27			137,330		3,673		2.67			52,324		1,683		3.22
Interest bearing cash		79,915		112		0.14			59,056		184		0.31			48,023		818		1.70
Other investments		18,427		734		3.98			18,410		905		4.92			18,359		1,043		5.68
Interest earning assets		4,251,579		139,946		3.30			3,721,701		140,652		3.78			3,237,931		149,351		4.61
Cash and due from banks		56,474							49,886							37,575
Other assets, net		157,524							162,068							164,726
Total assets	$	4,465,577						$	3,933,655						$	3,440,232
LIABILITIES
Savings and interest-bearing checking	$	2,282,607		2,693		0.12		$	1,821,115		3,882		0.21		$	1,453,061		10,228		0.70
Time deposits		326,081		1,772		0.54			516,306		8,784		1.70			655,718		13,197		2.01
Other borrowings		108,884		3,850		3.54			117,904		3,551		3.01			77,254		2,922		3.78
Interest bearing liabilities		2,717,572		8,315		0.31			2,455,325		16,217		0.66			2,186,033		26,347		1.21
Non-interest bearing deposits		1,288,276							1,054,230							867,314
Other liabilities		69,694							65,943							46,153
Shareholders’ equity		390,035							358,157							340,732
Total liabilities and shareholders’ equity	$	4,465,577						$	3,933,655						$	3,440,232
Net interest income			$	131,631						$	124,435						$	123,004
Net interest income as a percent of average interest earning assets						3.10	%						3.34	%						3.80	%

(1) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%.

15

RECONCILIATION OF NET INTEREST MARGIN, FULLY TAXABLE EQUIVALENT ("FTE")

	Year Ended December 31,
	2021			2020			2019
	(Dollars in thousands)
Net interest income	$	129,765		$	123,612		$	122,581
Add: taxable equivalent adjustment		1,866			823			423
Net interest income - taxable equivalent	$	131,631		$	124,435		$	123,004
Net interest margin (GAAP)		3.05	%		3.32	%		3.79	%
Net interest margin (FTE)		3.10	%		3.34	%		3.80	%

CHANGE IN NET INTEREST INCOME

	2021 compared to 2020									2020 compared to 2019
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Increase (decrease) in interest income(1)
Taxable loans	$	772		$	(7,289	)	$	(6,517	)	$	7,105		$	(17,804	)	$	(10,699	)
Tax-exempt loans(2)		5			(3	)		2			(40	)		9			(31	)
Taxable securities		4,789			(2,956	)		1,833			5,582			(4,769	)		813
Tax-exempt securities(2)		4,859			(640	)		4,219			2,318			(328	)		1,990
Interest bearing cash		51			(123	)		(72	)		154			(788	)		(634	)
Other investments		1			(172	)		(171	)		3			(141	)		(138	)
Total interest income		10,477			(11,183	)		(706	)		15,122			(23,821	)		(8,699	)
Increase (decrease) in interest expense(1)
Savings and interest bearing checking		825			(2,014	)		(1,189	)		2,109			(8,455	)		(6,346	)
Time deposits		(2,463	)		(4,549	)		(7,012	)		(2,555	)		(1,858	)		(4,413	)
Other borrowings		(286	)		585			299			1,311			(682	)		629
Total interest expense		(1,924	)		(5,978	)		(7,902	)		865			(10,995	)		(10,130	)
Net interest income	$	12,401		$	(5,205	)	$	7,196		$	14,257		$	(12,826	)	$	1,431

(1) The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.

(2) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%.

COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES

	Year Ended December 31,
	2021			2020			2019
As a percent of average interest earning assets
Loans		68.0	%		77.1	%		84.1	%
Other interest earning assets		32.0			22.9			15.9
Average interest earning assets		100.0	%		100.0	%		100.0	%
Savings and interest-bearing checking		53.7	%		48.9	%		44.9	%
Time deposits		7.7			13.9			20.3
Other borrowings		2.6			3.2			2.3
Average interest bearing liabilities		64.0	%		66.0	%		67.5	%
Earning asset ratio		95.2	%		94.6	%		94.1	%
Free-funds ratio(1)		36.1			34.0			32.5

(1) Average interest earning assets less average interest bearing liabilities.

16

Provision for credit losses. We adopted Financial Accounting Standards Board Accounting Standards Update 2016-13, Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments (“CECL”) on January 1, 2021. See note #1 to the Consolidated Financial Statements included within this report for our discussion on CECL implementation.

The provision for credit losses was a credit of $1.9 million in 2021 and an expense of $12.5 million and $0.8 million in 2020 and 2019, respectively. The provision reflects our assessment of the allowance for credit losses (the “ACL”) taking into consideration factors such as loan growth, loan mix, levels of non-performing and classified loans, economic conditions and loan net charge-offs. While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors. The decrease in the provision for credit losses in 2021 compared to 2020 was primarily the result of a decline in the adjustment to allocations based on subjective factors and specific allocations as well as an increase in recoveries of loans previously charged off. In particular, the higher provision for credit losses in 2020 relative to 2021 and 2019 included an $11.2 million (or 128.2%) increase in the qualitative/subjective portion of the allowance for credit losses. That increase principally reflected the unique challenges and economic uncertainty resulting from the COVID-19 pandemic during the first half of 2020 and the potential impact on the loan portfolio. See “Portfolio Loans and asset quality” for a discussion of the various components of the ACL and their impact on the provision for credit losses in 2021 and note #19 to the Consolidated Financial Statements included within this report for a discussion on industry concentrations.

Non-interest income. Non-interest income is a significant element in assessing our results of operations. Non-interest income totaled $76.6 million during 2021 compared to $80.7 million and $47.7 million during 2020 and 2019, respectively.

NON-INTEREST INCOME

	Year Ended December 31,
	2021		2020			2019
	(In thousands)
Interchange income	$	14,045	$	11,230		$	10,297
Service charges on deposit accounts		10,170		8,517			11,208
Net gains on assets
Mortgage loans		35,880		62,560			19,978
Securities available for sale		1,411		267			307
Mortgage loan servicing, net		5,745		(9,350	)		(3,336	)
Investment and insurance commissions		2,603		1,971			1,658
Bank owned life insurance		567		910			1,111
Other		6,222		4,640			6,513
Total non-interest income	$	76,643	$	80,745		$	47,736

Interchange income totaled $14.0 million in 2021 compared to $11.2 million in 2020 and $10.3 million in 2019. The increase in interchange income in 2021 compared to 2020 is primarily due to growth in debit card transaction volume (2020 was adversely impacted by COVID-19 pandemic related shut-downs of businesses and stay at home mandates), a new switch contract that was initially effective in the fourth quarter of 2020 that increased revenues, and our joining a surcharge free ATM network in April 2020 that increased both interchange income and interchange expense. The increase in interchange income in 2020 compared to 2019 is primarily due to an increase in transaction volume.

Service charges on deposit accounts totaled $10.2 million in 2021, as compared to $8.5 million in 2020 and $11.2 million during 2019. The increase in 2021 compared to 2020 was primarily due to an increase in non-sufficient funds occurrences (and related fees). The decrease in 2020 compared to 2019 primarily reflect declines in non-sufficient funds fees. During 2020, non-sufficient funds fees were impacted by contracted consumer spending and government stimulus payments related to COVID-19.

17

We realized net gains of $35.9 million on mortgage loans during 2021, compared to $62.6 million and $20.0 million during 2020 and 2019 respectively. Mortgage loan activity is summarized as follows:

MORTGAGE LOAN ACTIVITY

	Year Ended December 31,
	2021			2020			2019
​	(Dollars in thousands)
Mortgage loans originated	$	1,861,060		$	1,820,697		$	1,011,141
Mortgage loans sold(1)		1,254,638			1,447,031			738,910
Net gains on mortgage loans		35,880			62,560			19,978
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)		2.86	%		4.32	%		2.70	%
Fair value adjustments included in the Loan Sales Margin		(0.52	)		0.47			0.22

(1) 2021 includes the sale of $9.6 million of portfolio residential fixed rate mortgage loans. 2020 includes the securitization of $26.3 million of portfolio residential fixed rate loans and the sale of $2.4 million of portfolio residential fixed rate mortgage loans. 2019 includes the sale of $50.5 million of portfolio residential fixed and adjustable rate mortgage loans to other institutions and securitization of $65.1 million of portfolio residential fixed rate loans.

The increase in mortgage loan originations in 2021 as compared to 2020 is due primarily to an increase in purchase money mortgages reflecting strong home sales in many of our markets. Mortgage loans sold decreased in 2021 compared to 2020 due to a lower mix of salable loans in our origination volumes. Net gains on mortgage loans decreased in 2021 as compared to 2020 due to the decline in loan sale volume, a decrease in the Loan Sales Margin and fair value adjustments as discussed below.

The increase in mortgage loan originations, sales and net gains in 2020 as compared to 2019 is due primarily to lower interest rates in 2020 that spurred a significant increase in refinance volumes. Mortgage loans sold also increased in 2020 compared to 2019 due to a higher mix of salable loans in our origination volumes. Net gains on mortgage loans also increased in 2020 as compared to 2019 due to fair value adjustments as discussed below.

The volume of loans sold is dependent upon our ability to originate mortgage loans as well as the demand for fixed-rate obligations and other loans that we choose to not put into portfolio because of our established interest-rate risk parameters. (See “Portfolio Loans and asset quality.”) Net gains on mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates and thus can often be a volatile part of our overall revenues.

Our Loan Sales Margin is impacted by several factors including competition and the manner in which the loan is sold. Net gains on mortgage loans are also impacted by recording fair value accounting adjustments. Excluding these fair value accounting adjustments, the Loan Sales Margin would have been 3.38% in 2021, 3.85% in 2020 and 2.48% in 2019. The decrease in the Loan Sales Margin (excluding fair value adjustments) in 2021 was generally due to a tightening of primary-to-secondary market pricing spreads as market interest rates increased during 2021. The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale during each year as well as a lower Loan Sales Margin in 2021.

We generated net gains on securities of $1.41 million, $0.27 million and $0.31 million in 2021, 2020 and 2019, respectively. These net gains were due to the sales of securities and changes in the fair value of equity/trading securities as outlined in the table below. We recorded no credit related charges in 2021, 2020 or 2019 for securities available for sale.

GAINS AND LOSSES ON SECURITIES

	Year Ended December 31,
	Proceeds		Gains(1)		Losses		Net
	(In thousands)
2021	$	85,371	$	1,475	$	64	$	1,411
2020		38,095		271		4		267
2019		68,716		415		108		307

(1) Gains in 2019 include $0.166 million related to equity securities at fair value.

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Mortgage loan servicing, net, generated a gain of $5.7 million in 2021 compared to losses of $9.4 million and $3.3 million in 2020 and 2019 respectively. The significant variances in mortgage loan servicing, net are primarily due to changes in the fair value of capitalized mortgage loan servicing rights associated with changes in mortgage loan interest rates and expected future prepayment levels. Mortgage loan servicing, net activity is summarized in the following table:

MORTGAGE LOAN SERVICING ACTIVITY

	2021			2020			2019
	(In thousands)
Mortgage loan servicing:
Revenue, net	$	7,853		$	6,874		$	6,196
Fair value change due to price		3,380			(10,833	)		(6,408	)
Fair value change due to pay-downs		(5,488	)		(5,391	)		(3,124	)
Total	$	5,745		$	(9,350	)	$	(3,336	)

Activity related to capitalized mortgage loan servicing rights is as follows:

CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS

	2021			2020			2019
	(In thousands)
Balance at January 1,	$	16,904		$	19,171		$	21,400
Originated servicing rights capitalized		11,436			13,957			7,303
Change in fair value		(2,108	)		(16,224	)		(9,532	)
Balance at December 31,	$	26,232		$	16,904		$	19,171

At December 31, 2021, we were servicing approximately $3.3 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 3.46% and a weighted average service fee of approximately 25.6 basis points. Remaining capitalized mortgage loan servicing rights at December 31, 2021 totaled $26.2 million, representing approximately 78.9 basis points on the related amount of mortgage loans serviced for others.

Investment and insurance commissions totaled $2.6 million in 2021 as compared to $2.0 million and $1.7 million in 2020 and 2019. The increase in revenue in 2021 as compared to 2020 and 2019 was primarily due to higher sales volume and an increase in fee based revenue.

We earned $0.6 million, $0.9 million and $1.1 million in 2021, 2020 and 2019, respectively, on our separate account bank owned life insurance principally as a result of increases in the cash surrender value. Our separate account is primarily invested in agency mortgage-backed securities and managed by a fixed income investment manager. The crediting rate (on which the earnings are based) reflects the performance of the separate account. The total cash surrender value of our bank owned life insurance was $55.3 million and $55.2 million at December 31, 2021 and 2020, respectively. The decrease in earnings in each year is due to a decrease in the crediting rate.

Other non-interest income totaled $6.2 million, $4.6 million and $6.5 million in 2021, 2020 and 2019, respectively. Other non-interest income increased in 2021 as compared to 2020 due primarily to increases in credit card and merchant processing revenue, higher commercial loan swap fee income and a one-time fee reimbursement from our core data processing vendor for conversion related loss of revenues. The decrease in 2020 as compared to 2019 is due to the impact of the COVID-19 pandemic on transaction volumes, including ATM fees. In addition, we elected to suspend certain electronic banking fees because of the COVID-19 pandemic and the increased need for our customers to access these channels. Fees related to interest rate swaps for commercial loan customers were also lower in 2020 as customers did not feel the need to execute such transactions given the low interest rate environment.

Non-interest expense. Non-interest expense is an important component of our results of operations. We strive to efficiently manage our cost structure.

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Non-interest expense totaled $131.0 million in 2021, $122.4 million in 2020, and $111.7 million in 2019. Increases in compensation and employee benefits, data processing, interchange expense, costs related to unfunded lending commitments and other expenses are primarily responsible for the increase in 2021 compared to 2020. Performance based compensation and expense related to the core data processing conversion are primarily responsible for the increase in 2020 compared to 2019. The components of non-interest expense are as follows:

NON-INTEREST EXPENSE

	Year ended December 31,
	2021			2020		2019
​	(In thousands)
Compensation	$	44,226		$	41,517	$	41,719
Performance-based compensation		19,800			19,725		12,066
Payroll taxes and employee benefits		15,943			13,539		13,716
Compensation and employee benefits		79,969			74,781		67,501
Data processing		10,823			8,534		8,905
Occupancy, net		8,794			8,938		9,013
Interchange expense		4,434			3,342		3,215
Furniture, fixtures and equipment		4,172			4,089		4,113
Loan and collection		3,172			3,037		2,685
Communications		3,080			3,194		2,947
Legal and professional		2,068			2,027		1,814
Advertising		1,918			2,230		2,450
Conversion related expenses		1,827			2,586		—
FDIC deposit insurance		1,396			1,596		685
Costs related to unfunded lending commitments		1,207			263		246
Amortization of intangible assets		970			1,020		1,089
Supplies		611			680		638
Correspondent bank service fees		382			395		411
Provision for loss reimbursement on sold loans		133			200		229
Branch closure costs		—			417		—
Net (gains) losses on other real estate and repossessed assets		(230	)		64		(90	)
Other		6,297			5,020		5,882
Total non-interest expense	$	131,023		$	122,413	$	111,733

Compensation expense, which is primarily salaries, totaled $44.2 million, $41.5 million and $41.7 million in 2021, 2020 and 2019, respectively. The comparative increase in 2021 to 2020 is primarily due to an increase in lending personnel, higher overtime levels and salary increases that were predominantly effective on January 1, 2021. The comparative decrease in 2020 to 2019 is primarily due to an increased level of compensation that was deferred as direct loan origination costs (due to higher loan origination volumes) that was partially offset by salary increases that were predominantly effective on January 1, 2020.

Performance-based compensation expense totaled $19.8 million, $19.7 million and $12.1 million in 2021, 2020 and 2019, respectively. The increase in 2020 as compared to 2019 was due to actual performance relative to the established incentive plan targets as well as $0.4 million in bonuses paid during the second quarter of 2020 to front-line personnel due to their extraordinary efforts during the COVID-19 pandemic.

We maintain performance-based compensation plans. In addition to commissions and cash incentive awards, such plans include an ESOP and a long-term equity based incentive plan. The amount of expense recognized in 2021, 2020 and 2019 for share-based awards under our long-term equity based incentive plan was $1.6 million in each respective year. In each of those three years, we granted both restricted stock and performance share awards under the plan.

Payroll taxes and employee benefits expense totaled $15.9 million, $13.5 million and $13.7 million in 2021, 2020 and 2019, respectively. The increase in 2021 compared to 2020 is primarily due to increases in payroll taxes (reflecting higher compensation costs), our 401(k) plan match and health care costs (due to increased claims in 2021).

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The decrease in 2020 compared to 2019 is due primarily to a decline in health care costs (due to decreased claims in 2020) as well as a $0.3 million prescription drug rebate received and recorded in the second quarter of 2020 that related to our 2019 plan year. The decrease in 2020 health care claims is due in part to the COVID-19 pandemic that resulted in the closing of many medical and dental facilities except for emergency care during Michigan’s “stay home, stay safe” period.

Data processing expenses totaled $10.8 million, $8.5 million, and $8.9 million in 2021, 2020 and 2019, respectively. The increase in 2021 compared to 2020 is primarily due to the 2020 cost savings agreement discussed below that expired during the first quarter of 2021. The remainder of the increased costs in 2021 principally relate to new software and technology product and service additions. The decrease in 2020 compared to 2019 is primarily due to a cost savings agreement related to core data processing services that was executed in the second quarter of 2020. This expense reduction was partially offset by new software product additions and increased mobile banking costs.

Interchange expense, which totaled $4.4 million, $3.3 million, and $3.2 million in 2021, 2020 and 2019, respectively, primarily represents fees paid to our core information systems processor and debit card licensor related to debit card and ATM transactions. The increase in 2021 compared to 2020 was primarily due to increased debit card transaction volume and transaction channel mix. Increased debit card transaction volumes in 2020 compared to 2019 contributed to the rise in this expense from 2019 to 2020.

Loan and collection expenses reflect costs related to new lending activity as well as the management and collection of non-performing loans and other problem credits. These expenses totaled $3.2 million, $3.0 million and $2.7 million in 2021, 2020 and 2019, respectively. These costs increased in 2021 and 2020 due primarily to higher loan origination activity.

Communications expense totaled $3.1 million, $3.2 million and $2.9 million in 2021, 2020 and 2019, respectively. These costs were relatively unchanged in 2021 while the increase in 2020 relative to 2019 was primarily due to mailing costs related to the issuance of new contactless debit cards.

 Legal and professional fees totaled $2.1 million, $2.0 million, and $1.8 million in 2021, 2020 and 2019, respectively. These costs were relatively unchanged in 2021 while the increase in 2020 was due primarily to an increase in title search fees and bank examination fees (due to an increase in our asset size).

Advertising expense totaled $1.9 million, $2.2 million, and $2.5 million in 2021, 2020 and 2019, respectively. The decrease in 2021 compared to 2020 is due primarily due to the receipt of a $0.3 million reimbursement from our debit card provider for certain eligible marketing costs that we incurred as well as reduced levels of advertising in certain channels. The decrease in 2020 compared to 2019 was due primarily to the receipt of a $0.2 million reimbursement from our debit card provider for certain eligible marketing costs that we incurred.

Conversion related expenses totaled $1.8 million and $2.6 million in 2021 and 2020, respectively. We began a process to convert our core data processing system to a new system hosted by a different vendor in early 2020 and completed this conversion in May 2021. These expenses represent costs incurred for assistance from our existing vendor and fees from consultants who assisted us in this conversion.

FDIC deposit insurance expense totaled $1.4 million, $1.6 million, and $0.7 million in 2021, 2020 and 2019, respectively. FDIC deposit insurance expense decreased in 2021 compared to 2020 due primarily to a lower assessment rate. FDIC deposit insurance expense increased in 2020 compared to 2019 due primarily to the use of our FDIC Small Bank Assessment Credit in 2019 as well as an increase in our assessment rate and growth in our total assets.

The changes in costs related to unfunded lending commitments are primarily impacted by changes in the amounts of such commitments to originate Portfolio Loans as well as (for commercial loan commitments) the grade (pursuant to our loan rating system) of such commitments. Costs related to unfunded lending commitments totaled $1.2 million, $0.3 million, and $0.2 million in 2021, 2020 and 2019, respectively. The increase in 2021 compared to 2020 and 2019 is due primarily to an increase in the amount of unfunded lending commitments.

The amortization of intangible assets primarily relates to our acquisition of TSCB and certain branch acquisitions and the related amortization of the deposit customer relationship value, including core deposit value,

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which was acquired in connection with those transactions. We had remaining unamortized intangible assets of $3.3 million and $4.3 million at December 31, 2021 and 2020 respectively. See note #7 to the Consolidated Financial Statements for a schedule of future amortization of intangible assets.

Branch closure costs totaled $0.4 million for 2020. We closed eight Bank branches in 2020 (two on June 26, 2020 and six on July 31, 2020). These costs primarily represent write-downs of fixed assets (buildings, furniture and equipment) and lease assets.

Net (gains) losses on other real estate and repossessed assets represent the gain or loss on the sale or additional write downs on these assets subsequent to the transfer of the asset from our loan portfolio. This transfer occurs at the time we acquire the collateral that secured the loan. At the time of acquisition, the other real estate or repossessed asset is valued at fair value, less estimated costs to sell, which becomes the new basis for the asset. Any write-downs at the time of acquisition are charged to the allowance for credit losses. Net gain was $0.2 million in 2021 compared to net loss of $0.1 million and a net gain of $0.1 million in 2020 and 2019 respectively.

Other non-interest expenses totaled $6.3 million, $5.0 million, and $5.9 million in 2021, 2020 and 2019, respectively. The increase in other expense in 2021 compared to 2020 primarily represents increases in travel and entertainment related expenses due to the lifting of COVID-19 travel restrictions, an increase in deposit customer account fraud related costs, an increase in Michigan Corporate Income Tax expense as the result of a change in how the tax base is calculated, a branch write-down and certain one-time contract termination costs. The decrease in 2020 was primarily due to a decline in travel and entertainment costs due to COVID-19 pandemic related travel restrictions as well as a reduction in deposit customer account and customer debit card related fraud costs.

Income tax expense. We recorded an income tax expense of $14.4 million, $13.3 million and $11.3 million in 2021, 2020 and 2019, respectively. The 2021 increase in tax expense compared to 2020 and 2019 is due to higher taxable income.

Our actual federal income tax expense is different than the amount computed by applying our statutory federal income tax rate to our pre-tax income primarily due to tax-exempt interest income, share based compensation and tax-exempt income from the increase in the cash surrender value on life insurance.

We assess whether a valuation allowance should be established against our deferred tax asset, net (“DTA”) based on the consideration of all available evidence using a “more likely than not” standard. The ultimate realization of this asset is primarily based on generating future income. We concluded at December 31, 2021 and 2020 that the realization of substantially all of our DTA continues to be more likely than not. See note #13 to the Consolidated Financial Statements included within this report for more information.

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FINANCIAL CONDITION

Summary. Our total assets increased to $4.70 billion at December 31, 2021, compared to $4.20 billion at December 31, 2020, primarily due to growth in securities available for sale as well as mortgage and installment loans. Loans, excluding loans held for sale (“Portfolio Loans”), totaled $2.91 billion and $2.73 billion at December 31, 2021 and December 31, 2020. Growth in mortgage loans of $123.7 million and installment loans of $86.5 million were partially offset by a decline in commercial loans of $38.8 million.

Deposits totaled $4.12 billion at December 31, 2021, compared to $3.64 billion at December 31, 2020. The $479.7 million increase in deposits is primarily due to growth in non-interest bearing deposits, savings and interest bearing checking deposits, reciprocal deposits and time deposits that were partially offset by a decline in brokered time deposits.

The decrease in commercial loans in 2021 is due primarily to forgiveness of loans extended under the PPP administered by the U.S. Small Business Administration (“SBA”). The increase in deposits is due in part to the significant liquidity that has been injected into the economy through government programs, such as the PPP, as well as by monetary actions by the Federal Reserve Bank, all in response to the COVID-19 pandemic.

It is unclear how the termination of these various government stimulus programs will impact the levels of portfolio loans and deposits. However, our liquidity and funding contingency plans take into account the possibility of significant reductions in commercial loans and deposits during 2022.

Securities. We maintain diversified securities portfolios, which include obligations of U.S. government- sponsored agencies, securities issued by states and political subdivisions, residential and commercial mortgage- backed securities, asset-backed securities, corporate securities, trust preferred securities and foreign government securities (that are denominated in U.S. dollars). We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. Except as discussed below, we believe that the unrealized losses on securities available for sale are temporary in nature and are expected to be recovered within a reasonable time period. We believe that we have the ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse. (See “Asset/liability management.”) Securities available for sale increased by $340.7 million during 2021, reflecting the deployment of a portion of the funds generated from the growth in deposits.

Securities available for sale in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities available for sale in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, adverse conditions specifically related to the security and the issuer and the impact of changes in market interest rates on the market value of the security, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes. No ACL for securities available for sale was needed at December 31, 2021.

SECURITIES

	Amortized		Unrealized				Fair
	Cost		Gains		Losses		Value
	(In thousands)
Securities available for sale
December 31, 2021	$	1,404,858	$	16,594	$	8,622	$	1,412,830
December 31, 2020		1,052,147		21,416		1,404		1,072,159

Portfolio Loans and asset quality. In addition to the communities served by our Bank branch and loan production office network, our principal lending markets also include nearby communities and metropolitan areas.

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Subject to established underwriting criteria, we also may participate in commercial lending transactions with certain non-affiliated banks and make whole loan purchases from other financial institutions.

The senior management and board of directors of our Bank retain authority and responsibility for credit decisions and we have adopted uniform underwriting standards. Our loan committee structure and the loan review process attempt to provide requisite controls and promote compliance with such established underwriting standards. However, there can be no assurance that our lending procedures and the use of uniform underwriting standards will prevent us from incurring significant credit losses in our lending activities.

We generally retain loans that may be profitably funded within established risk parameters. (See “Asset/liability management.”) As a result, we may hold adjustable-rate conventional and fixed rate jumbo mortgage loans as Portfolio Loans, while 15- and 30-year fixed-rate non-jumbo mortgage loans are generally sold to mitigate exposure to changes in interest rates. (See “Non-interest income.”) Due primarily to the expansion of our mortgage-banking activities and a change in mix in our mortgage loan originations, we are now originating and putting into Portfolio Loans more fixed rate mortgage loans compared to past periods. These fixed rate mortgage loans generally have terms from 15 to 30 years, do not have prepayment penalties and expose us to more interest rate risk. (See “Asset/liability management”).

LOAN PORTFOLIO SEGMENTS

The following table summarizes each loan portfolio segment by (1) scheduled repayments and (2) predetermined (fixed) interest rate and/or adjustable (variable) interest rate at December 31, 2021:

	Commercial		Mortgage		Installment		Total
​	(In thousands)
Due in one year or less	$	117,497	$	840	$	2,033	$	120,370
Due after one but within five years		293,483		2,610		49,500		345,593
Due after five but within 15 years		774,772		114,703		454,134		1,343,609
Due after 15 years		17,829		1,021,506		56,138		1,095,473
​	$	1,203,581	$	1,139,659	$	561,805	$	2,905,045
Fixed rate	$	626,148	$	736,515	$	558,069	$	1,920,732
Variable rate		577,433		403,144		3,736		984,313
​	$	1,203,581	$	1,139,659	$	561,805	$	2,905,045

In the fourth quarter of 2021 we reclassified $34.8 million (fair value of $34.8 million) of portfolio mortgage loans to held for sale. These loans were sold to other financial institutions on a servicing retained basis during the first quarter of 2022. In 2020 we sold or securitized $28.7 million of fixed and adjustable rate portfolio mortgage loans. In 2019, we sold or securitized $75.0 million of fixed and adjustable rate portfolio mortgage loans. All of these loan sales/securitizations were non-recourse (other than standard representations and warranties) and were executed primarily for asset/liability management purposes.

The PPP is a short-term, forgivable loan program primarily intended to help businesses impacted by COVID-19 to continue paying their employees. A short summary of the PPP is as follows:

• Terms of two years (five years for loans originated after June 5, 2020) with payments automatically deferred to the date the SBA remits the borrower’s loan forgiveness amount to the lender (or, if the borrower does not apply for loan forgiveness, 10 months after the end of the borrower’s loan forgiveness covered period);

• One percent interest rate;

• No collateral or personal guarantees required;

• No fees paid by the borrower, rather lenders are paid a fee through the SBA according to a set schedule based on loan size;

• Loans are forgivable if at least 60% of the loan proceeds are used for payroll with the remainder being used for rent, mortgage interest and/or utilities; and

• Streamlined forgiveness application process for PPP loans of $50,000 or less.

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PAYCHECK PROTECTION PROGRAM

A summary of our participation in the PPP follows:

	December 31,
	2021				2020
	Amount (#)		Amount ($)		Amount (#)		Amount ($)
	(Dollars in thousands)
Closed and outstanding - Round 1 loans		6	$	197		1,483	$	169,782
Closed and outstanding - Round 2 loans		180		26,167		—		—
Total closed and outstanding		186	$	26,364		1,483	$	169,782
Unaccreted net fees remaining at period end			$	806			$	3,216

Congress and the major bank regulatory agencies encouraged banks to work with their borrowers to provide short-term loan payment relief during the COVID-19 national emergency. On March 22, 2020, an interagency statement was released by the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Consumer Financial Protection Bureau, the Conference of State Bank Supervisors, and the National Credit Union Administration that contained guidance regarding loan modifications made in response to the pandemic. In general, in order for a loan modification made in response to the pandemic to avoid being classified as a troubled debt restructuring (“TDR”):

• The modified loan must be current when the modification is made;

• The modification must be short term in nature (up to six months); and

• Modifications may include payment deferrals, fee waivers, extensions of repayment terms or other delays in payment that are insignificant.

In addition, Section 4013 of the federal CARES Act provides temporary relief from the accounting and reporting requirements for TDRs regarding certain loan modifications for our customers. Section 4013 specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The provisions of Section 4013 were extended to the earlier of 60 days after the termination of the national emergency that was previously declared on March 13, 2020 or January 1, 2022 by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act which was signed into law on December 27, 2020.

In response to our customers’ needs during this time of economic uncertainty, we have initiated forbearance programs for our retail (mortgage and installment loans) and our commercial customers. We also have similar programs for mortgage loans that we service for others. Commercial loan accommodations have typically been a three month interest-only period while retail loan (mortgage and installment) forbearances have primarily been payment suspensions for three months. To date, there have not been a significant number of requests for additional modifications. See note #4 to the Consolidated Financial Statements included within this report.

COMMERCIAL AND RETAIL LOAN COVID-19 ACCOMMODATIONS

A summary of accommodations as of December 31, 2021 follows:

	Covid-19 Accommodations				Total		% of Total
Loan Category	Amount (#)		Amount ($)		Loans		Loans
	(Dollars in thousands)
Commercial		—	$	—	$	1,203,581		0.0	%
Mortgage		22		2,278		1,139,659		0.2	%
Installment		1		55		561,805		0.0	%
Total		23	$	2,333	$	2,905,045		0.1	%
Mortgage loans serviced for others(1)		46	$	5,163	$	3,323,521		0.2	%

(1) We have delegated authority from all investors to grant these deferrals on their behalf.

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Certain industries (such as hotels and restaurants) have been more adversely impacted by the COVID-19 pandemic and related periodic shut downs of our economy. We believe that the following concentrations within our commercial loan portfolio represent greater potential risk in the current economic environment. The balances below are as of December 31, 2021.

COMMERCIAL LOAN SEGMENT

	Amount		% of Total Loans
	(Dollars in millions)
Commercial and industrial:
Retail	$	70		2.4	%
Food service		49		1.7
Hotel		40		1.4
​		159		5.5
Commercial real estate:
Retail		109		3.8
Office		72		2.5
Multifamily		55		1.9
​		236		8.1
Total	$	395		13.6	%

We are closely monitoring these industry concentrations and at present do not foresee any significant losses relative to this portion of our loan portfolio given the current economic conditions in Michigan and the fact that businesses have reopened. However, a high degree of uncertainty still exists with respect to the impact of the COVID-19 pandemic and the related economic disruptions on the future performance of our loan portfolio, including these concentrations.

LOAN PORTFOLIO COMPOSITION

	December 31,
	2021		2020
	(In thousands)
Real estate(1)
Residential first mortgages	$	870,169	$	792,762
Residential home equity and other junior mortgages		128,801		138,128
Construction and land development		278,992		232,693
Other(2)		726,224		669,150
Consumer		339,785		468,090
Commercial		555,696		429,011
Agricultural		5,378		3,844
Total loans	$	2,905,045	$	2,733,678

(1) Includes both residential and non-residential commercial loans secured by real estate.

(2) Includes loans secured by multi-family residential and non-farm, non-residential property.

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NON-PERFORMING ASSETS⁽¹⁾

	December 31,
	2021			2020			2019
	(Dollars in thousands)
Non-accrual loans	$	5,545		$	8,312		$	10,178
Loans 90 days or more past due and still accruing interest		—			—			—
Sub total		5,545			8,312			10,178
Less: Government guaranteed loans		435			439			646
Total non-performing loans		5,110			7,873			9,532
Other real estate and repossessed assets		245			766			1,865
Total non-performing assets	$	5,355		$	8,639		$	11,397
As a percent of Portfolio Loans
Non-accrual loans		0.19	%		0.30	%		0.37	%
Non-performing loans		0.18			0.29			0.35
ACL(2)		1.63			1.30			0.96
Non-performing assets to total assets		0.11			0.21			0.32
ACL as a percent of non-accrual loans(2)		852.16			426.24			256.91
ACL as a percent of non-performing loans(2)		924.70			450.01			274.32

(1) Excludes loans classified as “troubled debt restructured” that are performing.

(2) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

TROUBLED DEBT RESTRUCTURINGS

	December 31, 2021
	Commercial		Retail(1)			Total
	(In thousands)
Performing TDRs	$	4,481	$	31,589		$	36,070
Non-performing TDRs(2)		—		1,016	(3)		1,016
Total	$	4,481	$	32,605		$	37,086
	December 31, 2020
​	Commercial		Retail(1)			Total
​	(In thousands)
Performing TDRs	$	7,956	$	36,385		$	44,341
Non-performing TDRs(2)		1,148		1,584	(3)		2,732
Total	$	9,104	$	37,969		$	47,073

(1) Retail loans include mortgage and installment loan portfolio segments.

(2) Included in non-performing loans table above.

(3) Also includes loans on non-accrual at the time of modification until six payments are received on a timely basis.

Non-performing loans totaled $5.1 million, $7.9 million and $9.5 million at December 31, 2021, 2020 and 2019, respectively. The decrease in 2021 compared to 2020 was primarily due to a $1.4 million decrease in the residential mortgage loan portfolio segment and a $1.4 million decrease in the commercial loan segment which were primarily attributed to loan payoffs and pay downs. Our collection and resolution efforts have generally resulted in a stable trend in non-performing loans. The decrease in non-performing loans in 2020 as compared to 2019 was primarily due to a $1.5 million decrease in the residential mortgage loan portfolio segment.

Non-performing loans exclude performing loans that are classified as troubled debt restructurings (“TDRs”). Performing TDRs totaled $36.1 million, or 1.2% of total Portfolio Loans, and $44.3 million, or 1.6% of total Portfolio

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Loans, at December 31, 2021 and 2020, respectively. The decrease in the amount of performing TDRs during 2021 reflects declines in both commercial and mortgage loan TDRs due primarily to payoffs and paydowns.

Other real estate (“ORE”) and repossessed assets totaled $0.2 million at December 31, 2021, compared to $0.8 million at December 31, 2020. The decrease in ORE during 2021 reflects the sale of retail properties.

The ACL as a percent of non-accrual and non-performing loans increased during 2021 due primarily to an increase in the ACL resulting from the adoption of CECL on January 1, 2021 while the increase in 2020 was due primarily to an increase in the balance of the subjective factor component of our ACL (see further discussion below).

We will place a loan that is 90 days or more past due on non-accrual, unless we believe the loan is both well secured and in the process of collection. Accordingly, we have determined that the collection of the accrued and unpaid interest on any loans that are 90 days or more past due and still accruing interest is probable.

ALLOCATION OF THE ALLOWANCE FOR CREDIT LOSSES⁽¹⁾

	December 31, 2021		January 1, 2021
	(In thousands)
Specific allocations	$	1,130	$	2,452
Pooled analysis allocations		33,359		30,796
Additional allocations based on subjective factors		12,763		13,889
Total	$	47,252	$	47,137

(1) January 1, 2021 includes impact of the adoption of CECL.

Beginning January 1, 2021, we calculated the ACL using the current expected credit losses methodology. As of January 1, 2021, we increased the ACL for loans by $11.7 million and increased the ACL for unfunded loan commitments by $1.5 million.

Some loans will not be repaid in full. Therefore, an ACL is maintained at a level which represents our best estimate of expected credit losses. Our ACL is comprised of three principal elements: (i) specific analysis of individual loans identified during the review of the loan portfolio, (ii) pooled analysis of loans with similar risk characteristics based on historical experience, adjusted for current conditions, reasonable and supportable forecasts, and expected prepayments, and (iii) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolios. See notes #1 and #4 to the Consolidated Financial Statements included within this report for further discussion on the ACL.

While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.

The ACL increased $0.1 million to $47.3 million at December 31, 2021 from $47.1 million at January 1, 2021 (CECL adoption date) and was equal to 1.63% of total Portfolio Loans at December 31, 2021.

Two of the three components of the ACL outlined above decreased since our CECL adoption date. The ACL related to specific loans decreased $1.3 million due primarily to a $6.7 million decrease in the amount of such loans. The ACL related to subjective factors decreased $1.1 million due primarily to slightly lower reserve allocations reflecting an improvement in economic forecasts (particularly for lower unemployment levels) that was partially offset by loan growth in 2021. The ACL related to pooled analysis of loans increased $2.6 million due primarily loan growth in 2021.

During 2020 the ACL related to specific loans decreased $0.6 million as compared to 2019 due primarily to a $5.3 million decline in the amount such loans. The ACL related to other adversely rated commercial loans (used prior to the adoption of CECL) decreased $0.8 million in 2020 as compared to 2019, primarily due to a decrease in the balance of such loans included in this component to $37.6 million from $54.4 million at December 31, 2019. The ACL related to historical losses (used prior to the adoption of CECL) decreased $0.6 million in 2020 as compared to 2019 primarily due to a decrease in the balance of such loans included in this component. The ACL related to subjective factors increased $11.2 million in 2020 as compared to 2019. The significant increase in the ACL related to subjective factors is due principally to the economic shock of COVID-19 and various executive orders suspending

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or restricting certain businesses and operations, the significant increase in unemployment claims, especially in the State of Michigan, and elevated requests for payment relief from our borrowers.

ALLOWANCE FOR CREDIT LOSSES ON LOANS AND UNFUNDED COMMITMENTS

	2021					2020						2019
	ACL			Unfunded Commitments		ACL			Unfunded Commitments			ACL			Unfunded Commitments
	(In thousands)
Balance at beginning of year	$	35,429		$	1,805	$	26,148		$	1,542		$	24,888		$	1,296
Additions (deductions)
Impact of adoption of CECL		11,574			1,469		—			—			—			—
Provision for credit losses(1)		(1,928	)		—		12,463			—			824			—
Initial allowance on loans purchased with credit deterioration		134
Recoveries credited to the ACL		4,477			—		3,069			—			3,961			—
Loans charged against the ACL		(2,434	)		—		(6,251	)		—	��		(3,525	)		—
Additions included in non-interest expense		—			1,207		—			263			—			246
Balance at end of year	$	47,252		$	4,481	$	35,429		$	1,805		$	26,148		$	1,542

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

RATIO OF NET CHARGE-OFFS TO AVERAGE LOANS OUTSTANDING

	Commercial			Mortgage			Installment			Total
​	(Dollars in thousands)
2021
Loans charged against (recoveries credited to) the ACL	$	(2,607	)	$	(471	)	$	1,035		$	(2,043	)
Average Portfolio Loans		1,241,961			1,056,245			521,089			2,819,295
Net loans charged off against (credited to) the ACL to average Portfolio Loans		(0.21	)%		(0.04	)%		0.20	%		(0.07	)%
2020
Loans charged against (recoveries credited to) the ACL	$	2,272		$	303		$	607		$	3,182
Average Portfolio Loans		1,294,217			1,020,507			472,210			2,786,934
Net loans charged off against (credited to) the ACL to average Portfolio Loans		0.18	%		0.03	%		0.13	%		0.11	%
2019
Loans charged against (recoveries credited to) the ACL	$	(1,483	)	$	288		$	759		$	(436	)
Average Portfolio Loans		1,167,518			1,060,643			426,730			2,654,891
Net loans charged off against (credited to) the ACL to average Portfolio Loans		(0.13	)%		0.03	%		0.18	%		(0.02	)%

In 2021, we recorded loan net recoveries of $2.0 million compared to loan net charge offs of $3.2 million in 2020 and loan net recoveries of $0.4 million in 2019. The net recoveries in 2021 primarily reflect reduced levels of non-performing loans, improvement in collateral liquidation values and ongoing collection efforts on previously charged-off loans. The increase in net charge-offs in 2020 was attributed to a $4.0 million charge down of one specific commercial loan relationship whose balance was zero at December 31, 2020. The net recoveries in 2019 primarily reflect reduced levels of non-performing loans, improvement in collateral liquidation values and ongoing collection efforts on previously charged-off loans.

Deposits and borrowings. Historically, the loyalty of our customer base has allowed us to price deposits competitively, contributing to a net interest margin that compares favorably to our peers. However, we still face a

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significant amount of competition for deposits within many of the markets served by our branch network, which limits our ability to materially increase deposits without adversely impacting the weighted-average cost of core deposits.

To attract new core deposits, we have implemented various account acquisition strategies as well as branch staff sales training. Account acquisition initiatives have historically generated increases in customer relationships. Over the past several years, we have also expanded our treasury management products and services for commercial businesses and municipalities or other governmental units and have also increased our sales calling efforts in order to attract additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective. Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as short-term borrowings. (See “Liquidity and capital resources.”)

Deposits totaled $4.12 billion and $3.64 billion at December 31, 2021 and 2020, respectively. The $479.7 million increase in deposits during 2021 is due to growth in non-interest bearing deposits, savings and interest bearing checking deposits, time deposits and reciprocal deposits. Reciprocal deposits totaled $586.6 million and $556.2 million at December 31, 2021 and 2020, respectively. These deposits represent demand, money market and time deposits from our customers that have been placed through the IntraFi Network (formerly Promontory Interfinancial Network’s Insured Cash Sweep® service and Certificate of Deposit Account Registry Service®). This service allows our customers to access multi-million dollar FDIC deposit insurance on deposit balances greater than the standard FDIC insurance maximum. The increase in reciprocal deposits is due in part to sales efforts of our treasury management team.

We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits that are uninsured may be susceptible to outflow. At December 31, 2021, we had an estimated $1.03 billion of uninsured deposits. A reduction in core deposits would likely increase our need to rely on wholesale funding sources.

We have also implemented strategies that incorporate using federal funds purchased, other borrowings and Brokered CDs to fund a portion of our interest-earning assets. The use of such alternate sources of funds supplements our core deposits and is also a part of our asset/liability management efforts. Other borrowings, comprised primarily of federal funds purchased and advances from the Federal Home Loan Bank (the “FHLB”), totaled $30.0 million at December 31, 2021 and 2020.

As described above, we utilize wholesale funding, including federal funds purchased, FHLB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. At December 31, 2021, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $619.6 million, or 14.9% of total funding (deposits and total borrowings, excluding subordinated debt and debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is not certain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. Our financial performance could also be affected if we are unable to maintain our access to funding sources or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations could be adversely affected.

We have historically employed derivative financial instruments to manage our exposure to changes in interest rates. During 2021, 2020 and 2019, we entered into $79.0 million, $16.7 million and $74.5 million (original aggregate notional amounts), respectively, of interest rate swaps with commercial loan customers, which were offset with interest rate swaps that the Bank entered into with a broker-dealer. We recorded $0.81 million, $0.26 million and $0.94 million of fee income related to these transactions during 2021, 2020 and 2019, respectively. In 2021 we entered into $106.9 million (notional amount) of pay fixed interest rate swaps to hedge the fair value of municipal bond securities. In 2020 we entered into $42.0 million (notional amount) of pay fixed interest rate swaps to hedge the fair value of municipal bond securities. In 2019 we entered into a $7.1 million (notional amount) pay fixed interest rate swap to hedge the fair value of a fixed rate commercial loan.

Liquidity and capital resources. Liquidity risk is the risk of being unable to timely meet obligations as they come due at a reasonable funding cost or without incurring unacceptable losses. Our liquidity management involves the measurement and monitoring of a variety of sources and uses of funds. Our Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity

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management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain securities available for sale) as well as developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for purchasing securities available for sale or originating Portfolio Loans as well as to be able to respond to unforeseen liquidity needs.

Our primary sources of funds include our deposit base, secured advances from the FHLB, federal funds purchased borrowing facilities with other commercial banks, and access to the capital markets (for Brokered CDs).

TIME DEPOSITS⁽¹⁾

The following table summarizes time deposits in amounts less than $250,000 and in amounts of $250,000 or more, by time remaining until maturity at December 31, 2021:

	Less than $250,000		Greater than $250,000		Total
​	(In thousands)
Three months or less	$	74,671	$	18,870	$	93,541
Over three through six months		53,328		13,582		66,910
Over six months through one year		57,565		51,051		108,616
Over one year		57,155		9,570		66,725
Total	$	242,719	$	93,073	$	335,792

(1) Includes time deposits, brokered time deposits and reciprocal time deposits

At December 31, 2021, we had $269.1 million of time deposits (see note #8 to the Consolidated Financial Statements) that mature in the next 12 months. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally, $3.81 billion of our deposits at December 31, 2021, were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally grown or have been stable over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or stability in deposits will continue in the future.

We have developed contingency funding plans that stress test our liquidity needs that may arise from certain events such as an adverse change in our financial metrics (for example, credit quality or regulatory capital ratios). Our liquidity management also includes periodic monitoring that measures quick assets (defined generally as highly liquid or short-term assets) to total assets, short-term liability dependence and basic surplus (defined as quick assets less volatile liabilities to total assets). Policy limits have been established for our various liquidity measurements and are monitored on a quarterly basis. In addition, we also prepare cash flow forecasts that include a variety of different scenarios.

We believe that we currently have adequate liquidity at our Bank because of our cash and cash equivalents, our portfolio of securities available for sale, our access to secured advances from the FHLB, and our ability to issue Brokered CDs.

We also believe that the available cash on hand at the parent company (including time deposits) of approximately $46.1 million as of December 31, 2021, provides sufficient liquidity resources at the parent company to meet operating expenses, to make interest payments on our subordinated debt and debentures and to pay a cash dividend on our common stock for the foreseeable future.

In the normal course of business we enter into certain contractual obligations. Such obligations include requirements to make future payments on debt and lease arrangements, contractual commitments for capital expenditures, and service contracts.

Effective management of capital resources is critical to our mission to create value for our shareholders. In addition to common stock, our capital structure also currently includes subordinated debt and cumulative trust preferred securities.

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CAPITALIZATION

	December 31,
	2021			2020
​	(In thousands)
Subordinated debt	$	39,357		$	39,281
Subordinated debentures		39,592			39,524
Amount not qualifying as regulatory capital		(581	)		(505	)
Amount qualifying as regulatory capital		78,368			78,300
Shareholders’ equity
Common stock		323,401			339,353
Retained earnings		74,582			40,145
Accumulated other comprehensive income		501			10,024
Total shareholders’ equity		398,484			389,522
Total capitalization	$	476,852		$	467,822

In May 2020, we issued $40.0 million of fixed to floating subordinated notes with a ten year maturity and a five year call option. The initial coupon rate is 5.95% fixed for five years and then floats at the Secured Overnight Financing Rate (“SOFR”) plus 5.825%. These notes are presented in the Consolidated Statement of Financial Condition under the caption “Subordinated debt” and the December 31, 2021 and 2020 balances of $39.4 million and $39.3 million, respectively, is net of remaining unamortized deferred issuance costs that are being amortized through the maturity date into interest expense on other borrowings and subordinated debt and debentures in our Consolidated Statement of Operations.

We currently have four special purpose entities with $39.5 million of outstanding cumulative trust preferred securities. These special purpose entities issued common securities and provided cash to our parent company that in turn issued subordinated debentures to these special purpose entities equal to the trust preferred securities and common securities. The subordinated debentures represent the sole asset of the special purpose entities. The common securities and subordinated debentures are included in our Consolidated Statements of Financial Condition.

The FRB has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities (and certain other capital elements) is limited to 25% of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject to restrictions. Although the Dodd-Frank Act further limited Tier 1 treatment for trust preferred securities, those new limits did not apply to our outstanding trust preferred securities. Further, the capital rules allow for the treatment of our trust preferred securities as qualifying regulatory capital.

Common shareholders’ equity increased to $398.5 million at December 31, 2021 from $389.5 million at December 31, 2020, due primarily to our net income which was partially offset by the change in our accumulated other comprehensive income , share repurchases and dividends that we paid. Our tangible common equity (“TCE”) totaled $366.8 million and $356.9 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 7.85% and 8.56% at December 31, 2021 and 2020, respectively. TCE and the ratio of TCE to tangible assets are non-GAAP measures. TCE represents total common equity less intangible assets.

In December 2021, our Board of Directors authorized the 2022 share repurchase plan. Under the terms of the 2022 share repurchase plan, we are authorized to buy back up to 1,100,000 shares, or approximately 5%, of our outstanding common stock. This repurchase plan commenced on January 1, 2022, and is expected to last through December 31, 2022.

In December 2020, our Board of Directors authorized the 2021 share repurchase plan. Under the original terms of the share repurchase plan, we were authorized to buy back 1,100,000 shares, or approximately 5% of our outstanding common stock. The share repurchase plan expired on December 31, 2021. We repurchased 814,910 shares during 2021 at an average cost of $21.19 per share.

In December 2019, our Board of Directors authorized a 2020 share repurchase plan. Under the terms of the 2020 share repurchase plan, we were authorized to buy back 1,120,000 shares, or approximately 5%, of our outstanding

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common stock. During the first three months of 2020, we repurchased 678,929 shares at a weighted average purchase price of $20.30 per share. Due primarily to the economic uncertainty brought on by the COVID-19 pandemic, we suspended share repurchase activity on March 16, 2020. However, primarily as a result our strong financial performance and improved economic conditions, we reactivated the share repurchase plan in the fourth quarter of 2020 and acquired 30,027 shares at a weighted average price of $14.90. We repurchased a total of 708,956 shares at a weighted average price of $20.07 in 2020.

We currently pay a quarterly cash dividend on our common stock. The annual total dividends paid were $0.84, $0.80 and $0.72 per share for 2021, 2020 and 2019, respectively. We currently favor a dividend payout ratio between 30% and 50% of net income.

As of December 31, 2021 and 2020, our Bank (and holding company) continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards (also see note #20 to the Consolidated Financial Statements).

Asset/liability management. Interest-rate risk is created by differences in the cash flow characteristics of our assets and liabilities. Options embedded in certain financial instruments, including caps on adjustable-rate loans as well as borrowers’ rights to prepay fixed-rate loans, also create interest-rate risk.

Our asset/liability management efforts identify and evaluate opportunities to structure our statement of financial condition in a manner that is consistent with our mission to maintain profitable financial leverage within established risk parameters. We evaluate various opportunities and alternate asset/liability management strategies carefully and consider the likely impact on our risk profile as well as the anticipated contribution to earnings. The marginal cost of funds is a principal consideration in the implementation of our asset/liability management strategies, but such evaluations further consider interest-rate and liquidity risk as well as other pertinent factors. We have established parameters for interest-rate risk. We regularly monitor our interest-rate risk and report at least quarterly to our board of directors.

We employ simulation analyses to monitor our interest-rate risk profile and evaluate potential changes in our net interest income and market value of portfolio equity that result from changes in interest rates. The purpose of these simulations is to identify sources of interest-rate risk inherent in our Consolidated Statements of Financial Condition. The simulations do not anticipate any actions that we might initiate in response to changes in interest rates and, accordingly, the simulations do not provide a reliable forecast of anticipated results. The simulations are predicated on immediate, permanent and parallel shifts in interest rates and generally assume that current loan and deposit pricing relationships remain constant. The simulations further incorporate assumptions relating to changes in customer behavior, including changes in prepayment rates on certain assets and liabilities. During 2021, our interest rate risk profile as measured by our short term earnings simulation has not changed significantly while our longer term interest rate risk measure based on changes in economic value now indicates modest exposure to rising rates. The shift is primarily due to an increase in asset duration. The increase in asset duration is attributed to growth and mix changes in the investment portfolio and portfolio mortgage loans. However, we are carefully monitoring this change in the composition of our earning assets and the impact of potential future changes in interest rates on our changes in market value of portfolio equity and changes in net interest income. As a result, we may add some longer-term borrowings, may utilize derivatives (interest rate swaps and interest rate caps) to manage interest rate risk and may continue to sell some fixed rate jumbo and other portfolio mortgage loans in the future.

CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY AND NET INTEREST INCOME

Change in Interest Rates	Market Value of Portfolio Equity(1)		Percent Change			Net Interest Income(2)		Percent Change
	(Dollars in thousands)
December 31, 2021
200 basis point rise	$	514,200		(5.86	)%	$	137,800		3.30	%
100 basis point rise		550,900		0.86			136,800		2.55
Base-rate scenario		546,200		—			133,400		—
100 basis point decline		473,000		(13.40	)		126,700		(5.02	)

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Change in Interest Rates	Market Value of Portfolio Equity(1)		Percent Change			Net Interest Income(2)		Percent Change
	(Dollars in thousands)
December 31, 2020
200 basis point rise	$	494,600		15.02	%	$	125,200		4.16	%
100 basis point rise		483,200		12.37			123,700		2.91
Base-rate scenario		430,000		—			120,200		—
100 basis point decline		395,500		(8.02	)		114,900		(4.41	)

(1) Simulation analyses calculate the change in the net present value of our assets and liabilities, including debt and related financial derivative instruments, under parallel shifts in interest rates by discounting the estimated future cash flows using a market-based discount rate. Cash flow estimates incorporate anticipated changes in prepayment speeds and other embedded options.

(2) Simulation analyses calculate the change in net interest income under immediate parallel shifts in interest rates over the next twelve months, based upon a static Consolidated Statement of Financial Condition, which includes debt and related financial derivative instruments, and do not consider loan fees.

Accounting Standards Update. See note #1 to the Consolidated Financial Statements included elsewhere in this report for details on recently issued accounting pronouncements and their impact on our consolidated financial statements.

FAIR VALUATION OF FINANCIAL INSTRUMENTS

Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) topic 820 - “Fair Value Measurements and Disclosures” (“FASB ASC topic 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

We utilize fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. FASB ASC topic 820 differentiates between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). Securities available for sale, loans held for sale, derivatives and capitalized mortgage loan servicing rights are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis, such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or fair value accounting or write-downs of individual assets. See note #21 to the Consolidated Financial Statements for a complete discussion on our use of fair valuation of financial instruments and the related measurement techniques.

LITIGATION MATTERS

We are involved in various litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our consolidated financial position or results of operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued. At this time, we estimate the maximum amount of additional losses that are reasonably possible is insignificant. However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages, this maximum amount may change in the future.

The litigation matters described in the preceding paragraph primarily include claims that have been brought against us for damages, but do not include litigation matters where we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans). These excluded, collection-related matters may involve claims or counterclaims by the opposing party or parties, however we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote.

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CRITICAL ACCOUNTING POLICIES

Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the ACL and capitalized mortgage loan servicing rights are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those that we have used could result in material changes in our financial position or results of operations.

Our methodology for determining the ACL and related provision for credit losses is described above in “Portfolio Loans and asset quality.” In particular, this area of accounting requires a significant amount of judgment because a multitude of factors can influence the ultimate collection of a loan or other type of credit. It is extremely difficult to precisely measure the amount of expected credit losses in our loan portfolio. We use a rigorous process to attempt to accurately quantify the necessary ACL and related provision for credit losses, but there can be no assurance that our modeling process will successfully identify all of the expected credit losses in our loan portfolio. As a result, we could record future provisions for credit losses that may be significantly different than the levels that we recorded in prior periods. We adopted CECL on January 1, 2021 which changed the way we calculate our ACL. See also notes #1 and #4 to the Consolidated Financial Statements included within this report for further discussion on CECL.

At December 31, 2021 and 2020, we had approximately $26.2 million and $16.9 million, respectively, of mortgage loan servicing rights capitalized on our Consolidated Statements of Financial Condition. There are several critical assumptions involved in establishing the value of this asset including estimated future prepayment speeds on the underlying mortgage loans, the interest rate used to discount the net cash flows from the mortgage loan servicing, the estimated amount of ancillary income that will be received in the future (such as late fees) and the estimated cost to service the mortgage loans. We believe the assumptions that we utilize in our valuation are reasonable based upon accepted industry practices for valuing mortgage loan servicing rights and represent neither the most conservative or aggressive assumptions.

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MANAGEMENT’S ANNUAL REPORT ON INTERNAL CONTROL OVER

FINANCIAL REPORTING

The management of Independent Bank Corporation is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control system was designed to provide reasonable assurance to us and the board of directors regarding the preparation and fair presentation of published financial statements.

All internal control systems, no matter how well designed, have inherent limitations. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation.

We assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making this assessment, we used the criteria established in the 2013 Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on our assessment, management has concluded that as of December 31, 2021, the Company’s internal control over financial reporting was effective to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.

There were no changes in our internal control over financial reporting during the quarter ended December 31, 2021, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Our independent registered public accounting firm has issued an audit report on the effectiveness of the Company’s internal control over financial reporting as of December 31, 2021. Their report immediately follows our report.

William B. Kessel	Gavin A. Mohr
President and Chief Executive Officer	Executive Vice President and Chief Financial Officer
Independent Bank Corporation March 4, 2022

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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

Shareholders and the Board of Directors of Independent Bank Corporation

Grand Rapids, Michigan

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated statements of financial condition of Independent Bank Corporation (the “Corporation”) as of December 31, 2021 and 2020, the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2021, and the related notes (collectively referred to as the “financial statements”). We also have audited the Corporation’s internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Corporation as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2021 in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control – Integrated Framework: (2013) issued by COSO.

Change in Accounting Principle

       As discussed in Note 1 to the financial statements, the Corporation has changed its method of accounting for credit losses effective January 1, 2021 due to the adoption of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification No. 326, Financial Instruments - Credit Losses (“ASC 326”). The Corporation adopted the new credit loss standard using the modified retrospective method such that prior period amounts are not adjusted and continue to be reported in accordance with previously applicable generally accepted accounting principles. Certain aspects of the application of the new credit loss standard are communicated as a critical audit matter below.

Basis for Opinions

The Corporation’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation’s financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Corporation in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

Definition and Limitations of Internal Control Over Financial Reporting

        A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

37

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Allowance for Credit Losses (ACL) for loans – Subjective Factors

Refer to Notes 1 and 4 to the Consolidated Financial Statements.

On January 1, 2021 (“adoption date”), the Corporation adopted ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) under a modified retrospective approach, which required the Corporation to estimate expected credit losses for its financial assets carried at amortized cost utilizing the current expected credit loss (“CECL”) methodology. As of the adoption date, the Corporation reported a $47.1 million allowance for credit losses (“ACL”) under the CECL methodology on its $2.7 billion of loans carried at amortized cost. Upon adoption of the new standard, the Corporation recorded an $11.7 million increase to the ACL for loans. After considering other impacts of adoption, a $10.3 million decrease was recorded in retained earnings through a cumulative-effect adjustment. See change in accounting principle explanatory paragraph above.

The ACL under the CECL methodology is a significant estimate recorded within the Corporation’s financial statements with a reported balance for loans of $47.1 million and $47.3 million as of the adoption date and December 31, 2021, respectively. The ACL model for loans consists of three components: 1) the specific analysis of individually evaluated loans; 2) pooled analysis of loans with similar risk characteristics based on historical experience using a discounted cash flow model, adjusted for current conditions, reasonable and supportable forecasts and expected prepayments; and 3) additional allowances based on subjective factors.

The subjective factors include consideration of the following: local and general economic business factors and trends, portfolio concentrations and changes in the size, and/or the general terms of the overall loan portfolio. Due to the significant judgment applied by management to determine the effect of the subjective factors, we identified the effect of the subjective factors on the ACL for loans as a critical audit matter as it involved a high degree of auditor judgment and required significant audit effort, including the need to involve more experienced audit personnel.

The primary procedures we performed to address this critical audit matter included:

•	Testing the effectiveness of controls over the subjective factors used in the ACL calculation including controls addressing:
	○	Management’s review of the reasonableness of the significant assumptions applied in the development of the subjective factors and the relevance to the loan segment to which they are applied.
	○	Mathematical accuracy of the subjective factors applied to the loan segments in the ACL calculation.

•	Substantively testing management’s determination of the subjective factors used in the ACL estimate, including:
	○	Testing management’s process for developing the subjective factors, which included assessing the relevance and reliability of data used to develop the subjective factors, including evaluating their judgments and assumptions for reasonableness. Among other procedures, our evaluation considered evidence from internal and external sources.
	○	Analytically evaluating the subjective factors for directional consistency, testing for reasonableness, and obtaining evidence for significant changes.
	○	Testing the mathematical accuracy of the subjective factors applied to the loan segments in the ACL calculation.

 

Crowe LLP

We have served as the Corporation’s auditor since 2005.

South Bend, Indiana

March 4, 2022

38

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

	December 31,
	2021			2020
	(In thousands, except share amounts)
Assets
Cash and due from banks	$	51,069		$	56,006
Interest bearing deposits		58,404			62,699
Cash and Cash Equivalents		109,473			118,705
Securities available for sale		1,412,830			1,072,159
Federal Home Loan Bank and Federal Reserve Bank stock, at cost		18,427			18,427
Loans held for sale, carried at fair value		55,470			92,434
Loans held for sale, carried at lower of cost or fair value		34,811			0
Loans
Commercial		1,203,581			1,242,415
Mortgage		1,139,659			1,015,926
Installment		561,805			475,337
Total Loans		2,905,045			2,733,678
Allowance for credit losses (1)		(47,252	)		(35,429	)
Net Loans		2,857,793			2,698,249
Other real estate and repossessed assets, net		245			766
Property and equipment, net		36,404			36,127
Bank-owned life insurance		55,279			55,180
Capitalized mortgage loan servicing rights, carried at fair value		26,232			16,904
Other intangibles		3,336			4,306
Goodwill		28,300			28,300
Accrued income and other assets		66,140			62,456
Total Assets	$	4,704,740		$	4,204,013
Liabilities and Shareholders’ Equity
Deposits
Non-interest bearing	$	1,321,601		$	1,153,473
Savings and interest-bearing checking		1,897,487			1,526,465
Reciprocal		586,626			556,185
Time		308,438			287,402
Brokered time		2,938			113,830
Total Deposits		4,117,090			3,637,355
Other borrowings		30,009			30,012
Subordinated debt		39,357			39,281
Subordinated debentures		39,592			39,524
Accrued expenses and other liabilities		80,208			68,319
Total Liabilities		4,306,256			3,814,491
Commitments and contingent liabilities		0			0
Shareholders’ Equity
Preferred stock, 0 par value, 200,000 shares authorized;  NaN issued or outstanding		0			0
Common stock, 0 par value, 500,000,000 shares authorized; issued and outstanding: 21,171,036 shares at December 31, 2021 and 21,853,800 shares at December 31, 2020		323,401			339,353
Retained earnings		74,582			40,145
Accumulated other comprehensive income		501			10,024
Total Shareholders’ Equity		398,484			389,522
Total Liabilities and Shareholders’ Equity	$	4,704,740		$	4,204,013

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

See accompanying notes to consolidated financial statements

39

CONSOLIDATED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2021			2020			2019
	(In thousands, except per share amounts)
INTEREST INCOME
Interest and fees on loans	$	116,644		$	123,159		$	133,883
Interest on securities available for sale
Taxable		14,488			12,655			11,842
Tax-exempt		6,102			2,926			1,342
Other investments		846			1,089			1,861
Total Interest Income		138,080			139,829			148,928
INTEREST EXPENSE
Deposits		4,465			12,666			23,425
Other borrowings and subordinated debt and debentures		3,850			3,551			2,922
Total Interest Expense		8,315			16,217			26,347
Net Interest Income		129,765			123,612			122,581
Provision for credit losses (1)		(1,928	)		12,463			824
Net Interest Income After Provision for Credit Losses		131,693			111,149			121,757
NON-INTEREST INCOME
Interchange income		14,045			11,230			10,297
Service charges on deposit accounts		10,170			8,517			11,208
Net gains on assets
Mortgage loans		35,880			62,560			19,978
Securities available for sale		1,411			267			307
Mortgage loan servicing, net		5,745			(9,350	)		(3,336	)
Other		9,392			7,521			9,282
Total Non-interest Income		76,643			80,745			47,736
NON-INTEREST EXPENSE
Compensation and employee benefits		79,969			74,781			67,501
Data processing		10,823			8,534			8,905
Occupancy, net		8,794			8,938			9,013
Interchange expense		4,434			3,342			3,215
Furniture, fixtures and equipment		4,172			4,089			4,113
Loan and collection		3,172			3,037			2,685
Communications		3,080			3,194			2,947
Legal and professional		2,068			2,027			1,814
Advertising		1,918			2,230			2,450
Conversion related expense		1,827			2,586			0
FDIC deposit insurance		1,396			1,596			685
Costs related to unfunded lending commitments		1,207			263			246
Other		8,163			7,796			8,159
Total Non-interest Expense		131,023			122,413			111,733
Income Before Income Tax		77,313			69,481			57,760
Income tax expense		14,418			13,329			11,325
Net Income	$	62,895		$	56,152		$	46,435
Net income per common share
Basic	$	2.91		$	2.56		$	2.03
Diluted	$	2.88		$	2.53		$	2.00

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

See accompanying notes to consolidated financial statements

40

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

	Year Ended December 31,
	2021			2020			2019
	(In thousands)
Net income	$	62,895		$	56,152		$	46,435
Other comprehensive income (loss)
Securities available for sale
Unrealized gain (loss) arising during period		(10,644	)		15,611			10,235
Change in unrealized gains and losses for which a portion of other than temporary impairment has been recognized in earnings		0			(49	)		(65	)
Reclassification adjustments for gains included in earnings		(1,411	)		(267	)		(140	)
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale		(12,055	)		15,295			10,030
Income tax expense (benefit)		(2,532	)		3,212			2,106
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale, net of tax		(9,523	)		12,083			7,924
Derivative instruments
Unrealized losses arising during period		0			(354	)		(1,603	)
Reclassification adjustment for (income) expense recognized in earnings		0			2,539			(425	)
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments		0			2,185			(2,028	)
Income tax expense (benefit)		0			458			(426	)
Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments, net of tax		0			1,727			(1,602	)
Other comprehensive income (loss)		(9,523	)		13,810			6,322
Comprehensive income	$	53,372		$	69,962		$	52,757

See accompanying notes to consolidated financial statements

41

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

	Common Stock			Retained Earnings (Accumulated Deficit)			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
	(Dollars in thousands, except per share amounts)
Balances at January 1, 2019	$	377,372		$	(28,270	)	$	(10,108	)	$	338,994
Net income for 2019		0			46,435			0			46,435
Cash dividends declared, $0.72 per share		0			(16,554	)		0			(16,554	)
Repurchase of 1,204,688 shares of common stock		(26,284	)		0			0			(26,284	)
Issuance of 71,799 shares of common stock		284			0			0			284
Share based compensation (issuance of 92,275 shares of common stock)		1,854			0			0			1,854
Share based compensation withholding obligation (withholding of 57,468 shares of common stock)		(882	)		0			0			(882	)
Other comprehensive income		0			0			6,322			6,322
Balances at December 31, 2019		352,344			1,611			(3,786	)		350,169
Net income for 2020		0			56,152			0			56,152
Cash dividends declared, $0.80 per share		0			(17,618	)		0			(17,618	)
Repurchase of 708,956 shares of common stock		(14,231	)		0			0			(14,231	)
Issuance of 17,317 shares of common stock		15			0			0			15
Share based compensation (issuance of 103,429 shares of common stock)		1,980			0			0			1,980
Share based compensation withholding obligation (withholding of 39,633 shares of common stock)		(755	)		0			0			(755	)
Other comprehensive income		0			0			13,810			13,810
Balances at December 31, 2020		339,353			40,145			10,024			389,522
Adoption of ASU 2016-13		0			(10,303	)		0			(10,303	)
Balances at December 31, 2020, as adjusted		339,353			29,842			10,024			379,219
Net income for 2021		0			62,895			0			62,895
Cash dividends declared, $0.84 per share		0			(18,155	)		0			(18,155	)
Repurchase of 814,910 shares of common stock		(17,269	)		0			0			(17,269	)
Issuance of 40,350 shares of common stock		61			0			0			61
Share based compensation (issuance of 128,018 shares of common stock)		1,947			0			0			1,947
Share based compensation withholding obligation (withholding of 36,222 shares of common stock)		(691	)		0			0			(691	)
Other comprehensive loss		0			0			(9,523	)		(9,523	)
Balances at December 31, 2021	$	323,401		$	74,582		$	501		$	398,484

See accompanying notes to consolidated financial statements

42

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2021			2020			2019
	(In thousands)
Net Income	$	62,895		$	56,152		$	46,435
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Proceeds from the sale of equity securities at fair value		0			0			560
Proceeds from sales of loans held for sale		1,283,741			1,478,908			642,537
Disbursements for loans held for sale		(1,210,897	)		(1,438,982	)		(647,606	)
Provision for credit losses (1)		(1,928	)		12,463			824
Deferred income tax (benefit) expense		1,912			(2,130	)		1,088
Net deferred loan fees (costs)		(7,857	)		1,686			(2,936	)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time		12,130			9,161			6,059
Net gains on mortgage loans		(35,880	)		(62,560	)		(19,978	)
Net gains on securities available for sale		(1,411	)		(267	)		(307	)
Share based compensation		1,947			1,980			1,854
Increase in accrued income and other assets		(11,669	)		(7,966	)		(6,061	)
Increase in accrued expenses and other liabilities		17,171			10,239			12,023
Total Adjustments		47,259			2,532			(11,943	)
Net Cash From Operating Activities		110,154			58,684			34,492
CASH FLOW USED IN INVESTING ACTIVITIES
Proceeds from the sale of securities available for sale		85,371			38,095			68,716
Proceeds from maturities, prepayments and calls of securities available for sale		375,723			306,691			153,938
Purchases of securities available for sale		(824,348	)		(859,068	)		(237,672	)
Proceeds from the maturity of interest bearing deposits - time		0			350			250
Purchase of Federal Home Loan Bank stock		0			(68	)		0
Net increase in portfolio loans (loans originated, net of principal payments)		(205,539	)		(41,861	)		(215,276	)
Proceeds from the sale of portfolio loans		10,032			2,395			50,516
Proceeds from the sale of other real estate and repossessed assets		1,004			1,367			1,766
Proceeds from bank-owned life insurance		467			1,441			470
Proceeds from the sale of property and equipment		63			1,133			74
Capital expenditures		(5,837	)		(4,383	)		(4,936	)
Net Cash Used in Investing Activities		(563,064	)		(553,908	)		(182,154	)
CASH FLOW FROM FINANCING ACTIVITIES
Net increase in total deposits		479,735			600,628			123,299
Net increase (decrease) in other borrowings		(3	)		(24,994	)		25,002
Proceeds from Federal Home Loan Bank advances		100,000			239,254			111,000
Payments of Federal Home Loan Bank advances		(100,000	)		(272,910	)		(73,143	)
Proceeds from issuance of subordinated debt, net of issuance costs		0			39,236			0
Dividends paid		(18,155	)		(17,618	)		(16,554	)
Proceeds from issuance of common stock		61			15			284
Repurchase of common stock		(17,269	)		(14,231	)		(26,284	)
Share based compensation withholding obligation		(691	)		(755	)		(882	)
Net Cash From Financing Activities		443,678			548,625			142,722
Net Increase (Decrease) in Cash and Cash Equivalents		(9,232	)		53,401			(4,940	)
Cash and Cash Equivalents at Beginning of Year		118,705			65,304			70,244
Cash and Cash Equivalents at End of Year	$	109,473		$	118,705		$	65,304
Cash paid during the year for
Interest	$	8,419		$	16,912		$	26,697
Income taxes		14,059			15,500			9,534
Transfers to other real estate and repossessed assets		253			332			2,242
Transfer of mortgage loans to held for sale		34,811			0			36,622
Securitization of portfolio loans		0			26,324			65,070
Right of use assets obtained in exchange for lease obligations		283			1,587			9,906
Purchase of securities available for sale not yet settled		0			1,000			0

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

See accompanying notes to consolidated financial statements

43

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 – ACCOUNTING POLICIES

The accounting and reporting policies and practices of Independent Bank Corporation and subsidiaries (‘‘IBCP’’) conform to accounting principles generally accepted in the United States of America and prevailing practices within the banking industry. Our critical accounting policies include the determination of the allowance for credit losses and the valuation of capitalized mortgage loan servicing rights. We are required to make material estimates and assumptions that are particularly susceptible to changes in the near term as we prepare the consolidated financial statements and report amounts for each of these items. Actual results may vary from these estimates.

Our subsidiary, Independent Bank (‘‘Bank’’), transacts business in the single industry of commercial banking. Our Bank’s activities cover traditional phases of commercial banking, including checking and savings accounts, commercial lending, direct and indirect consumer financing and mortgage lending. Our principal markets are the rural and suburban communities across Lower Michigan that are served by our Bank’s branches and loan production offices as well as two loan productions offices we have in Ohio. At December 31, 2021, 69.0% of our Bank’s loan portfolio was secured by real estate.

PRINCIPLES OF CONSOLIDATION — The consolidated financial statements include the accounts of Independent Bank Corporation and its subsidiaries. The income, expenses, assets and liabilities of the subsidiaries are included in the respective accounts of the consolidated financial statements, after elimination of all intercompany accounts and transactions.

STATEMENTS OF CASH FLOWS — For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing deposits and federal funds sold. Generally, federal funds are sold for one-day periods. We report net cash flows for customer loan and deposit transactions and for short-term borrowings.

INTEREST BEARING DEPOSITS — Interest bearing deposits consist of overnight deposits with the Federal Reserve Bank.

LOANS HELD FOR SALE — Mortgage loans originated and intended for sale in the secondary market are carried at fair value. Fair value adjustments, as well as realized gains and losses, are recorded in current earnings. Certain portfolio loans were reclassified to held for sale as of December 31, 2021, were carried at the lower of cost or fair value on an aggregate loan basis and were sold during the first quarter of 2022.

OPERATING SEGMENTS — While chief decision-makers monitor the revenue streams of our various products and services, operations are managed and financial performance is evaluated as 1 single unit. Discrete financial information is not available other than on a consolidated basis for material lines of business.

CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS — We account for our capitalized mortgage loan servicing rights under the fair value method of accounting. We recognize as separate assets the rights to service mortgage loans for others. The fair value of capitalized mortgage loan servicing rights has been determined based upon fair value indications for similar servicing. Under the fair value method we measure capitalized mortgage loan servicing rights at fair value at each reporting date and report changes in fair value of capitalized mortgage loan servicing rights in earnings in the period in which the changes occur and are included in mortgage loan servicing, net in the Consolidated Statements of Operations. The fair value of capitalized mortgage loan servicing rights are subject to significant fluctuations as a result of changes in estimated and actual prepayment speeds and default rates and losses.

Mortgage loan servicing income is recorded for fees earned for servicing loans previously sold. The fees are generally based on a contractual percentage of the outstanding principal and are recorded as income when earned. Mortgage loan servicing fees, excluding fair value changes of capitalized mortgage loan servicing rights, totaled $7.9 million, $6.9 million and $6.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. Late fees and ancillary fees related to loan servicing are not material.

TRANSFERS OF FINANCIAL ASSETS — Transfers of financial assets are accounted for as sales when control over the assets has been relinquished. Control over transferred assets is deemed to be surrendered when the assets have been isolated from us, the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and we do not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

44

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

SECURITIES — We classify our securities as equity, trading, held to maturity or available for sale. Equity securities are investments in certain equity stocks and are reported at fair value with realized and unrealized gains and losses included in earnings. Trading securities are bought and held principally for the purpose of selling them in the near term and are reported at fair value with realized and unrealized gains and losses included in earnings. Securities held to maturity represent those securities for which we have the positive intent and ability to hold until maturity and are reported at cost, adjusted for amortization of premiums and accretion of discounts computed on the level-yield method. We did not have any equity securities, trading securities or securities held to maturity at December 31, 2021 and 2020. Securities available for sale represent those securities not classified as equity, trading or held to maturity and are reported at fair value with unrealized gains and losses, net of applicable income taxes reported in other comprehensive income (loss).

Securities available for sale in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities available for sale in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, adverse conditions specifically related to the security and the issuer and the impact of changes in market interest rates on the market value of the security, among other factors.  If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes.

Gains and losses realized on the sale of securities available for sale are determined using the specific identification method and are recognized on a trade-date basis.

FEDERAL HOME LOAN BANK (‘‘FHLB’’) STOCK — Our Bank subsidiary is a member of the FHLB system. Members are required to own a certain amount of stock based on the level of borrowings and other factors, and may invest in additional amounts. FHLB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income in interest income-other investments on the Consolidated Statements of Operations.

FEDERAL RESERVE BANK (‘‘FRB’’) STOCK — Our Bank subsidiary is a member of its regional Federal Reserve Bank. FRB stock is carried at cost, classified as a restricted security, and periodically evaluated for impairment based on ultimate recovery of par value. Both cash and stock dividends are reported as income in interest income-other investments on the Consolidated Statements of Operations.

LOAN REVENUE RECOGNITION — Interest on loans is accrued based on the principal amounts outstanding. In general, the accrual of interest income is discontinued when a loan becomes 90 days past due for commercial loans and installment loans and when a loan misses 4 consecutive payments for mortgage loans and the borrower’s capacity to repay the loan and collateral values appear insufficient for each loan class. However, loans may be placed on non-accrual status regardless of whether or not such loans are considered past due if, in management’s opinion, the borrower is unable to meet payment obligations as they become due or as required by regulatory provisions. All interest accrued but not received for all loans placed on non-accrual is reversed from interest income. Payments on such loans are generally applied to the principal balance until qualifying to be returned to accrual status. A non-accrual loan may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible. Delinquency status for all classes in the commercial and installment loan portfolio segments is based on the actual number of days past due as required by the contractual terms of the loan agreement while delinquency status for mortgage loan portfolio segment classes is based on the number of payments past due.

Certain loan fees and direct loan origination costs are deferred and recognized as an adjustment of yield generally over the contractual life of the related loan. Fees received in connection with loan commitments are deferred until the loan is advanced and are then recognized generally over the contractual life of the loan as an adjustment of yield. Fees on commitments that expire unused are recognized at expiration. Fees received for letters of credit are recognized as revenue over the life of the commitment.

45

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

ALLOWANCE FOR CREDIT LOSSES (“ACL”) — Our loan portfolio is disaggregated into segments for purposes of determining the ACL which include commercial, mortgage and installment loans. These segments are further disaggregated into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. Classes within the commercial loan segment include (i) commercial and industrial and (ii) commercial real estate. Classes within the mortgage loan segment include (i) 1-4 family owner occupied - jumbo, (ii) 1-4 family owner occupied - non-jumbo, (iii) 1-4 family non-owner occupied (iv) 1-4 family - 2nd lien and (v) resort lending. Classes within the installment loan segment include  (i) boat lending, (ii) recreational vehicle lending, and (iii) other. Commercial loans are subject to adverse market conditions which may impact the borrower’s ability to make repayment on the loan or could cause a decline in the value of the collateral that secures the loan. Mortgage and installment loans are subject to adverse employment conditions in the local economy which could increase default rates. In addition, mortgage loans and real estate based installment loans are subject to adverse market conditions which could cause a decline in the value of collateral that secures the loan. For an analysis of the ACL by portfolio segment and credit quality information by class, see note #4.

We estimate the ACL based on relevant available information from both internal and external sources, including historical loss trends, current conditions and forecasts, specific analysis of individual loans, and other relevant and appropriate factors. The allowance process is designed to provide for expected future losses based on our reasonable and supportable (“R&S”) forecast as of the reporting date. Our ACL process is administered by our Risk Management group utilizing a third party software solution, with significant input and ultimate approval from our Executive Enterprise Risk Committee. Further, we have established a current expected credit loss (“CECL”) Forecast Committee, which includes a cross discipline structure with membership from Executive Management, Risk Management, and Accounting, which approves ACL model assumptions each quarter. Our ACL is comprised of three principal elements: (i) specific analysis of individual loans identified during the review of the loan portfolio, (ii) pooled analysis of loans with similar risk characteristics based on historical experience, adjusted for current conditions, R&S forecasts, and expected prepayments, and (iii) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolio.

The first ACL element (specific allocations) includes loans that do not share similar risk characteristics and are evaluated on an individual basis. We will typically evaluate on an individual basis loans that are on nonaccrual; commercial loans that have been modified resulting in a concession, for which the borrower is experiencing financial difficulties, and which are considered troubled debt restructurings (“TDR”); and severely delinquent mortgage and installment loans. A loan can be removed from TDR status if it is subsequently restructured, the borrower is no longer experiencing financial difficulties, and the newly restructured agreement does not contain any concessions to the borrower. The new agreement must specify market terms, including a contractual interest rate not less than a market interest rate for a new loan with similar credit risk characteristics, and other terms no less favorable to us than those we would offer for a similar new loan.

For loans that we evaluate on an individual basis and we determine that foreclosure is probable or when repayment is expected to be provided substantially through the operation or sale of underlying collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for estimated selling costs. For loans evaluated on an individual basis that are not determined to be collateral dependent, a discounted cash flow analysis is performed to determine expected credit losses.

The second ACL element (pooled analysis) includes loans with similar risk characteristics, which are broken down by segment, class, and risk metric. The Bank’s primary segments of commercial, mortgage, and installment loans are further classified by other relevant attributes, such as collateral type, lien position, occupancy status, amortization method, and balance size. Commercial classes are additionally segmented by risk rating, and mortgage and installment loan classes by credit score tier, which are updated at least semi-annually.

46

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

We utilize a discounted cash flow (“DCF”) model to estimate expected future losses for pooled loans. Expected future cash flows are developed from payment schedules over the contractual term, adjusted for forecasted default (probability of default), loss, and prepayment assumptions. We are not required to develop forecasts over the full contractual term of the financial asset or group of financial assets. Rather, for periods beyond which we are able to make or obtain R&S forecasts of expected credit losses, we revert to the long term average on a straight line or immediate basis, as determined by our CECL Forecast Committee, and which may vary depending on the economic outlook and uncertainty.

The DCF model for the mortgage and installment pooled loan segments includes using probability of default (“PD”) assumptions that are derived through regression analysis with forecasted US unemployment levels by credit score tier. We review a composite forecast of approximately 50 analysts as well as the Federal Open Market Committee (“FOMC”) projections in setting the unemployment forecast for the R&S period. The current ACL utilizes a one year R&S forecast followed by immediate reversion to the 30 year average unemployment rate. PD assumptions for the remaining segments are based primarily on historical rates by risk metric as defaults were not strongly correlated with any economic indicator. Loss given default (“LGD”) assumptions for the mortgage loan segment are based on a two year forecast followed by a two year straight line reversion period to the longer term average, while LGD rates for the remaining segments are the historical average for the entire period. Prepayment assumptions represent average rates per segment for a period determined by the CECL Forecast Committee and as calculated through the Bank’s Asset and Liability Management program.

Pooled reserves for the commercial loan segment are calculated using the DCF model with assumptions generally based on historical averages by class and risk rating. Effective risk rating practices allow for strong predictability of defaults and losses over the portfolio’s expected shorter duration, relative to mortgage and installment loans. Our rating system is similar to those employed by state and federal banking regulators.

The third ACL element (additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit or loan category and reflects our attempt to ensure that the overall ACL appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We adjust our quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and R&S forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The qualitative framework reflects changes related to relevant data, such as changes in asset quality trends, portfolio growth and composition, national and local economic factors, credit policy and administration and other factors not considered in the base quantitative model. We utilize a survey completed by business unit management throughout the Bank, as well as discussion with the CECL Forecast Committee to establish reserves under the qualitative framework. The current period’s ACL further recognizes inherent risk related to the ongoing COVID-19 pandemic; specifically to commercial loans in high risk industries and mortgage and installment borrowers with occupations in those high risk industries. Identified high risk industries include: food service, hospitality, entertainment, retail, investment real estate, assisted living, and non-owner occupied office.

Prior to January 1, 2021, the calculation of the allowance was based on the probable incurred loss methodology.

Increases in the ACL are recorded by a provision for credit losses charged to expense. Although we periodically allocate portions of the ACL to specific loans and loan portfolios, the entire ACL is available for losses.

We generally charge-off commercial, homogenous residential mortgage and installment loans when they are deemed uncollectible or reach a predetermined number of days past due based on loan product, industry practice and other factors. Collection efforts may continue and recoveries may occur after a loan is charged against the ACL.

While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.

47

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Section 4013 of the Coronavirus Aid, Relief, and Economic Security (“CARES Act”) provides temporary relief from the accounting and reporting requirements for troubled debt restructurings (“TDR”) regarding certain loan modifications for our customers. Section 4013 specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The provisions of Section 4013 were extended to the earlier of 60 days after the termination of the national emergency that was previously declared on March 13, 2020 or January 1, 2022 by the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act which was signed into law on December 27, 2020. Loans not covered under these provisions, which have been modified resulting in a concession, and which the borrower is experiencing financial difficulties, are considered to be TDRs. We measure our investment in a TDR loan using one of three methods: the loan’s observable market price, the fair value of the collateral or the present value of expected future cash flows discounted at the loan’s effective interest rate. Large groups of smaller balance homogeneous loans, such as those loans included in each installment and mortgage loan class, are collectively evaluated and accordingly, they are not separately identified for disclosure. TDR loans are measured at the present value of estimated future cash flows using the loan’s effective interest rate at inception of the loan. If a TDR is considered to be a collateral dependent loan, the loan is reported net, at the fair value of collateral. A loan can be removed from TDR status if it is subsequently restructured and the borrower is no longer experiencing financial difficulties and the newly restructured agreement does not contain any concessions to the borrower. The new agreement must specify market terms, including a contractual interest rate not less than a market interest rate for a new loan with similar credit risk characteristics, and other terms no less favorable to us than those we would offer for a similar new loan.

PROPERTY AND EQUIPMENT — Property and equipment is stated at cost less accumulated depreciation and amortization. Depreciation and amortization is computed using the straight-line method over the estimated useful lives of the related assets. Buildings are generally depreciated over a period not exceeding 39 years and equipment  is generally depreciated over periods not exceeding 7 years. Leasehold improvements are depreciated over the shorter of their estimated useful life or lease period.

BANK OWNED LIFE INSURANCE — We have purchased a group flexible premium non-participating variable life insurance contract on approximately 260 lives (who were salaried employees at the time we purchased the contract) in order to recover the cost of providing certain employee benefits. Bank owned life insurance is recorded at its cash surrender value or the amount that can be currently realized.

OTHER REAL ESTATE AND REPOSSESSED ASSETS — Other real estate at the time of acquisition is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Fair value is typically determined by a third party appraisal of the property. Any write-downs at date of acquisition are charged to the ACL. Expense incurred in maintaining other real estate and subsequent write-downs to reflect declines in value and gains or losses on the sale of other real estate are recorded in non-interest expense in the Consolidated Statements of Operations. Non-real estate repossessed assets are treated in a similar manner.

OTHER INTANGIBLES — Other intangible assets consist of core deposits. They are initially measured at fair value and then are amortized on both straight-line and accelerated methods over their estimated useful lives, which range from 10 to 15 years.

GOODWILL — Goodwill arises from business combinations and is generally determined as the excess of the fair value of the consideration transferred over the fair value of the net assets acquired and liabilities assumed as of the acquisition date. Goodwill acquired in a purchase business combination and determined to have an indefinite useful life is not amortized, but tested for impairment at least annually or more frequently if events and circumstances exists that indicate that a goodwill impairment test should be performed. We have selected December 31 as the date to perform the annual impairment test. Goodwill is the only intangible asset with an indefinite life on our Consolidated Statements of Financial Condition.

INCOME TAXES — We employ the asset and liability method of accounting for income taxes. This method establishes deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities at tax rates expected to be in effect when such amounts are realized or settled. Under this method, the effect of a change in tax rates is recognized in the period that includes the enactment date. The deferred tax asset is subject to a valuation allowance for that portion of the asset for which it is more likely than not that it will not be realized.

A tax position is recognized as a benefit only if it is ‘‘more likely than not’’ that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount recognized is the largest amount of tax benefit that is greater than 50% likely of being realized on examination.

We recognize interest and/or penalties related to income tax matters in income tax expense in the Consolidated Statements of Operations.

We file a consolidated federal income tax return. Intercompany tax liabilities are settled as if each subsidiary filed a separate return.

48

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

COMMITMENTS TO EXTEND CREDIT AND RELATED FINANCIAL INSTRUMENTS — Financial instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve varying degrees of credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of Financial Condition. Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan commitments to extend credit and letters of credit is represented by the contractual amounts of those instruments. In general, we use a similar methodology to estimate our liability for these off-balance sheet credit exposures as we do for our ACL. For commercial related commitments, we estimate liability using our loan rating system and for mortgage and installment commitments we estimate liability principally upon historical loss experience. Our estimated liability for off balance sheet commitments is included in accrued expenses and other liabilities in our Consolidated Statements of Financial Condition and any charge or recovery is recorded in non-interest expense – costs related to unfunded lending commitments in our Consolidated Statements of Operations.

DERIVATIVE FINANCIAL INSTRUMENTS — We record derivatives on our Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

At the inception of the derivative we designate the derivative as one of three types based on our intention and belief as to likely effectiveness as a hedge. These three types are (1) a hedge of the fair value of a recognized asset  or liability or of an unrecognized firm commitment (‘‘Fair Value Hedge’’), (2) a hedge of a forecasted transaction or the variability of cash flows to be received or paid related to a recognized asset or liability (‘‘Cash Flow Hedge’’), or (3) an instrument with no hedging designation. For a Fair Value Hedge, the gain or loss on the derivative, as well as the offsetting loss or gain on the hedged item, are recognized in interest income in our Consolidated Statements of Operations. For a Cash Flow Hedge, the gain or loss on the derivative is reported in other comprehensive income (loss) and is reclassified into earnings in the same periods during which the hedged transaction affects earnings. For instruments with no hedging designation, the gain or loss on the derivative is reported in earnings. These free standing instruments currently consist of (i) mortgage banking related derivatives and include rate-lock loan commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and mandatory forward commitments for the future delivery of these mortgage loans, (ii) certain pay-fixed and pay-variable interest rate swap agreements related to commercial loan customers, (iii) certain purchased and written options related to a time deposit product and (iv) swaption agreement related to certain construction loans held for sale. The fair value of rate-lock mortgage loan commitments is based on agency cash window loan pricing for comparable assets and the fair value of mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets. We enter into mandatory forward commitments for the future delivery of mortgage loans generally when interest rate locks are entered into in order to hedge the change in interest rates resulting from our commitments to fund the loans. Changes in the fair values of these derivatives are included in net gains on mortgage loans in the Consolidated Statements of Operations. Fair values of the pay-fixed and pay-variable interest rate swap agreements are derived from proprietary models which utilize current market data and are included in net interest income in the Consolidated Statements of Operations. Fair values of the purchased and written options are based on prices of financial instruments with similar characteristics and are included in net interest income in the Consolidated Statements of Operations. Fair values of swaption agreements are derived from proprietary models which utilize current market data and are included in net gains on mortgage loans in the Consolidated Statements of Operations.

Net cash settlements on derivatives that qualify for hedge accounting are recorded in interest expense in the Consolidated Statements of Operations. Net cash settlements on derivatives that do not qualify for hedge accounting are reported in non-interest income (mortgage banking related derivatives) or net interest income (interest rate swap agreements and options) in the Consolidated Statements of Operations. Cash flows on hedges are classified in the cash flow statement the same as the cash flows of the items being hedged.

We formally document the relationship between derivatives and hedged items, as well as the risk- management objective and the strategy for undertaking hedge transactions, at the inception of the hedging relationship. This documentation includes linking Fair Value or Cash Flow Hedges to specific assets and liabilities on the Consolidated Statements of Financial Condition or to specific firm commitments or forecasted transactions. We discontinue hedge accounting when it is determined that the derivative is no longer effective in offsetting changes in the fair value or cash flows of the hedged item, the derivative is settled or terminates, a hedged forecasted transaction is no longer probable, a hedged firm commitment is no longer firm, or treatment of the derivative as a hedge is no longer appropriate or intended.

49

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

When hedge accounting is discontinued, subsequent changes in fair value of the derivative are recorded in earnings. When a Fair Value  Hedge is discontinued, the hedged asset or liability is no longer adjusted for changes  in fair value and the existing basis adjustment is amortized or accreted over the remaining life of the asset or liability. When a Cash Flow Hedge is discontinued but the hedged cash flows or forecasted transactions are still expected to occur, gains or losses that were accumulated in other comprehensive income (loss) are amortized into earnings over the same periods which the hedged transactions will affect earnings.

COMPREHENSIVE INCOME — Comprehensive income consists of net income and unrealized gains and losses, net of tax, on securities available for sale and derivative instruments classified as cash flow hedges.

NET INCOME PER COMMON SHARE — Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding during the period and participating share awards. All outstanding unvested share-based payment awards that contain rights to nonforfeitable dividends are considered participating securities for this calculation. For diluted net income per common share, net income is divided by the weighted average number of common shares outstanding during the period plus the assumed exercise of stock options, restricted stock units, performance share units and stock units for a deferred compensation plan for non-employee directors.

SHARE BASED COMPENSATION — Cost is recognized for non-vested share awards issued to employees based on the fair value of these awards at the date of grant. A simulation analysis which considers potential outcomes for a large number of independent scenarios is utilized to estimate the fair value of performance share units and the market price of our common stock at the date of grant is used for other non-vested share awards. Cost is recognized over the required service period, generally defined as the vesting period. Forfeitures are recognized as they occur. Cost is also recognized for stock issued to non-employee directors. These shares vest immediately and cost is recognized during the period they are issued.

COMMON STOCK — At December 31, 2021, 0.1 million shares of common stock were reserved for issuance under the dividend reinvestment plan and 0.8 million shares of common stock were reserved for issuance under our long-term incentive plans.

RECLASSIFICATION — Certain amounts in the 2020 and 2019 consolidated financial statements have been reclassified to conform to the 2021 presentation.

ADOPTION OF NEW ACCOUNTING STANDARDS — In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, ‘‘Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments’’. This ASU significantly changes how entities will measure credit losses for most financial assets and certain other instruments that are not measured at fair value through net income. This ASU:

• Replaces the existing incurred loss impairment guidance and establishes a single allowance framework for financial assets carried at amortized cost, which will reflect our estimate of credit losses over the full remaining expected life of the financial assets and will consider expected future changes in macroeconomic conditions.

• Eliminates existing guidance for purchase credit impaired (‘‘PCI’’) loans, and requires recognition of the nonaccretable difference as an increase to the allowance for expected credit losses on financial assets purchased with more than insignificant credit deterioration since origination, which will be offset by an increase in the recorded investment of the related loans.

• Requires inclusion of expected recoveries, limited to the cumulative amount of prior write-offs, when estimating the ACL for in scope financial assets (including collateral dependent assets).

• Amends existing impairment guidance for securities available for sale to incorporate an allowance, which will allow for reversals of credit impairments in the event that the credit of an issuer improves. Credit losses on securities available for sale are limited to the amount of the decline in fair value regardless of what the credit loss model would show for impairment.

• Generally requires a cumulative-effect adjustment to retained earnings as of the beginning of the reporting period of adoption.

We were originally required to adopt this ASU on January 1, 2020 but section 4014 of the CARES Act allowed for temporary relief from applying this ASU.  Under the amended CARES Act we were allowed to delay the adoption of this ASU until the earlier of the termination of the national emergency that was declared on March 13, 2020, or January 1, 2022.  Early adoption was also allowed on either January 1, 2020 or January 1, 2021. As such, we chose to delay the adoption of this ASU during 2020 and adopted this ASU on January 1, 2021.  Results for the reporting periods after January 1, 2021 are presented under this new ASU while prior period amounts continue to be reported in accordance with previously applicable accounting guidance.

50

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

We adopted this ASU using the modified retrospective method for all financial assets measured at amortized cost and unfunded lending commitments.  As of January 1, 2021 we increased the ACL by $11.7 million which was primarily driven by the longer contractual maturities of our mortgage and installment loan portfolio segments. In addition, we increased the allowance for losses related to unfunded loan commitments by $1.5 million. As of January 1, 2021, we recorded a cumulative-effect adjustment, net of tax, of $10.3 million to decrease retained earnings.

Based on our evaluation of securities available for sale, we did not record an ACL on these securities under this ASU.

We adopted this ASU using the prospective transition approach for financial assets purchased with credit deterioration (“PCD”) that were previously classified as PCI and accounted for under accounting standards codification (“ASC”) 310-30. In accordance with this ASU, we did not reassess whether PCI assets met the definition of PCD assets as of the date of adoption. On January 1, 2021, the amortized cost basis of the PCD assets were adjusted to reflect the addition of $0.13 million to the ACL for loans. The remaining noncredit discount in the amount of $0.34 million (based on the adjusted amortized cost basis) will be accreted into interest income at the effective interest rate as of January 1, 2021.

The impact of the adoption of this ASU follows:

	As Reported Under ASU 2016-13			Pre-ASU 2016-13 Adoption			Impact of ASU 2016-13
				(In thousands)
Assets
Loans
Commercial	$	1,242,510		$	1,242,415		$	95
Mortgage		1,015,944			1,015,926			18
Installment		475,358			475,337			21
Total loans		2,733,812			2,733,678			134
Allowance for credit losses		(47,137	)		(35,429	)		(11,708	)
Net loans	$	2,686,675		$	2,698,249		$	(11,574	)
Deferred tax assets (1)	$	3,015		$	275		$	2,740
Total Assets	$	4,195,179		$	4,204,013		$	(8,834	)
Liabilities and shareholders’ equity
Allowance for credit losses on unfunded lending commitments (2)	$	3,274		$	1,805		$	1,469
Total liabilities	$	3,815,960		$	3,814,491		$	1,469
Retained earnings	$	29,842		$	40,145		$	(10,303	)
Total shareholders’ equity	$	379,219		$	389,522		$	(10,303	)
Total liabilities and shareholders’ equity	$	4,195,179		$	4,204,013		$	(8,834	)

(1) Included in Accrued income and other assets in our Consolidated Statements of Financial Condition.

(2) Included in Accrued expenses and other liabilities in our Consolidated Statements of Financial Condition.

In March 2020, the FASB issued ASU 2020-04, ‘‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting’’. This new ASU provides temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. Entities that make such elections would not have to remeasure contracts at the modification date or reassess a previous accounting determination.  Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met.

51

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

We have formed a cross-functional project team to lead this transition from LIBOR to a planned adoption of reference rates which could include Secured Overnight Financing Rate (“SOFR”), amongst others. We are utilizing the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period.  We have discontinued the use of new LIBOR-based loans and interest rate derivatives as of December 31, 2021, according to regulatory guidelines.  The amended guidance under Topic 848 and our ability to elect its temporary optional expedients and exceptions are effective for us through December 31, 2022.  We expect to adopt the LIBOR transition relief allowed under this standard.

NOTE 2 – RESTRICTIONS ON CASH AND DUE FROM BANKS

During March 2020 the FRB, in response to the COVID-19 pandemic, reduced our Bank’s reserve balance requirements to 0. Prior to that time our Bank was required to maintain reserve balances in the form of vault cash and balances with the FRB. The average reserve balances to be maintained during 2021 and 2020 were 0 and $9.2 million, respectively. We do not maintain compensating balances with correspondent banks. We may also be required to maintain reserve balances related to certain mortgage banking related derivatives not classified as hedges. These balances are held at unrelated financial institutions and totaled 0 and $0.74 million at December 31, 2021 and 2020, respectively.

NOTE 3 – SECURITIES

Securities available for sale consist of the following at December 31:

	Amortized		Unrealized
	Cost		Gains		Losses		Fair Value
	(In thousands)
2021
U.S. agency	$	34,634	$	152	$	112	$	34,674
U.S. agency residential mortgage-backed		309,907		1,952		3,874		307,985
U.S. agency commercial mortgage-backed		23,066		84		224		22,926
Private label mortgage-backed		102,480		807		672		102,615
Other asset backed		215,235		1,204		269		216,170
Obligations of states and political subdivisions		568,355		9,942		2,221		576,076
Corporate		148,707		2,446		1,194		149,959
Trust preferred		1,975		0		56		1,919
Foreign government		499		7		0		506
Total	$	1,404,858	$	16,594	$	8,622	$	1,412,830

2020
U.S. agency	$	10,456	$	305	$	13	$	10,748
U.S. agency residential mortgage-backed		340,224		4,951		593		344,582
U.S. agency commercial mortgage-backed		6,869		326		0		7,195
Private label mortgage-backed		41,429		1,539		139		42,829
Other asset backed		252,596		1,796		211		254,181
Obligations of states and political subdivisions		315,780		8,691		178		324,293
Corporate		82,307		3,807		97		86,017
Trust preferred		1,971		0		173		1,798
Foreign government		500		16		0		516
Total	$	1,052,132	$	21,431	$	1,404	$	1,072,159

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Our investments’ gross unrealized losses and fair values aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position, at December 31 follows:

	Less Than Twelve Months				Twelve Months or More				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
2021
U.S. agency	$	11,986	$	109	$	1,286	$	3	$	13,272	$	112
U.S. agency residential mortgage-backed		171,398		3,555		19,024		319		190,422		3,874
U.S. agency commercial mortgage-backed		19,900		224		0		0		19,900		224
Private label mortgage-backed		64,408		640		2,180		32		66,588		672
Other asset backed		86,581		248		978		21		87,559		269
Obligations of states and political subdivisions		178,484		2,151		7,093		70		185,577		2,221
Corporate		75,166		1,150		1,050		44		76,216		1,194
Trust preferred		0		0		1,919		56		1,919		56
Total	$	607,923	$	8,077	$	33,530	$	545	$	641,453	$	8,622

2020
U.S. agency	$	1,469	$	3	$	2,329	$	10	$	3,798	$	13
U.S. agency residential mortgage-backed		96,839		592		83		1		96,922		593
Private label mortgage-backed		11,838		95		2,050		44		13,888		139
Other asset backed		7,142		25		21,197		186		28,339		211
Obligations of states and political subdivisions		28,957		177		800		1		29,757		178
Corporate		1,924		97		0		0		1,924		97
Trust preferred		0		0		1,798		173		1,798		173
Total	$	148,169	$	989	$	28,257	$	415	$	176,426	$	1,404

Securities available for sale in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities available for sale in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell, the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities available for sale that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, adverse conditions specifically related to the security and the issuer and the impact of changes in market interest rates on the market value of the security, among other factors.  If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes. NaN ACL for securities available for sale was needed at December 31, 2021.  Accrued interest receivable on securities available for sale totaled $6.0 million at December 31, 2021, is excluded from the estimate of credit losses and is included in accrued income and other assets in the Consolidated Statements of Financial Condition.

53

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

U.S. agency, U.S. agency residential mortgage-backed and U.S. agency commercial mortgage backed securities — at December 31, 2021, we had 19 U.S. agency, 67 U.S. agency residential mortgage-backed and 23 U.S. agency commercial mortgage-backed securities whose fair value is less than amortized cost. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses.  The unrealized losses are largely attributed to widening spreads to Treasury bonds and/or an increase in interest rates since acquisition.

Private label mortgage backed, other asset backed and corporate securities — at December 31, 2021, we had 49 private label mortgage backed, 51 other asset backed and 57 corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and/or an increase in interest rates since acquisition.

Obligations of states and political subdivisions — at December 31, 2021, we had 281 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to an increase in interest rates since acquisition.

Trust preferred securities — at December 31, 2021, we had 2 trust preferred securities whose fair value is less than amortized cost. Both of our trust preferred securities are single issue securities issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities has suffered from credit spread widening. NaN of the securities is rated by a major rating agency as investment grade while the other 1 is non-rated. The non-rated issue is a relatively small bank and was never rated. The issuer of this non-rated trust preferred security, which had a total amortized cost of $1.0 million and total fair value of $0.96 million as of December 31, 2021, continues to have satisfactory credit metrics and make interest payments.

At December 31, 2021 management does not intend to liquidate any of the securities discussed above and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses.

We recorded 0 credit related charges in our Consolidated Statements of Operations related to securities available for sale during 2021, 2020, and 2019.

The amortized cost and fair value of securities available for sale at December 31, 2021, by contractual maturity, follow:

	Amortized Cost		Fair Value
	(In thousands)
Maturing within one year	$	13,874	$	13,991
Maturing after one year but within five years		133,681		134,901
Maturing after five years but within ten years		266,057		266,282
Maturing after ten years		340,558		347,960
		754,170		763,134
U.S. agency residential mortgage-backed		309,907		307,985
U.S. agency commercial mortgage-backed		23,066		22,926
Private label mortgage-backed		102,480		102,615
Other asset backed		215,235		216,170
Total	$	1,404,858	$	1,412,830

The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

A summary of proceeds from the sale of securities available for sale and gains and losses for the years ended December 31 follow:

			Realized
	Proceeds		Gains		Losses
	(In thousands)
2021	$	85,371	$	1,475	$	64
2020		38,095		271		4
2019		68,716		248		108

54

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Certain preferred stocks which were sold during 2019 had been classified as equity securities at fair value in our Consolidated Statement of Financial Condition. During 2019 we recognized gains on these preferred stocks of $0.17 million that are included in net gains on securities in the Consolidated Statements of Operations.

Securities available for sale with a book value of $10.5 million and $14.0 million at December 31, 2021 and 2020, respectively, were pledged to secure borrowings, derivatives, public deposits and for other purposes as required by law. There were no investment obligations of state and political subdivisions that were payable from or secured by the same source of revenue or taxing authority that exceeded 10% of consolidated total shareholders’ equity  at  December 31, 2021 or 2020.

NOTE 4 – LOANS

Our loan portfolios at December 31 follow:

	2021		2020
	(In thousands)
Real estate (1)
Residential first mortgages	$	870,169	$	792,762
Residential home equity and other junior mortgages		128,801		138,128
Construction and land development		278,992		232,693
Other (2)		726,224		669,150
Consumer		339,785		468,090
Commercial		555,696		429,011
Agricultural		5,378		3,844
Total loans	$	2,905,045	$	2,733,678

(1) Includes both residential and non-residential commercial loans secured by real estate.

(2) Includes loans secured by multi-family residential and non-farm, non-residential property.

Loans include net deferred loan costs of $22.4 million and $14.6 million at December 31, 2021 and 2020, respectively.

During 2021, we sold $9.6 million of portfolio residential fixed rate mortgage loans servicing retained into the secondary market and recognized a gain on sale of $0.45 million. During 2020, we securitized $26.3 million of portfolio residential fixed rate mortgage loans servicing retained with Freddie Mac and recognized a gain on sale of $0.72 million.  We also sold $2.4 million of portfolio residential fixed rate mortgage loans servicing retained into the secondary market and recognized a gain on sale of $0.07 million. During 2019, we sold $40.6 million of residential adjustable rate mortgage loans servicing released to another financial institution and recognized a gain on sale of $0.01 million. We also securitized $65.1 million of portfolio residential fixed rate mortgage loans servicing retained with Freddie Mac and recognized a gain on sale of $1.7 million. In addition, we sold $9.9 million of residential fixed and adjustable rate portfolio mortgage loans servicing retained to another financial institution and recognized a gain on sale of $0.07 million. These loan sale transactions were done primarily for asset/liability management purposes.

55

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

An analysis of the ACL by portfolio segment for the years ended December 31 follows:

	Commercial			Mortgage			Installment			Subjective Allocation			Total
	(In thousands)
2021			��
Balance at beginning of period	$	7,401		$	6,998		$	1,112		$	19,918		$	35,429
Additions (deductions)
Impact of adoption of CECL		2,551			12,000			3,052			(6,029	)		11,574
Provision for credit losses		(1,135	)		(266	)		599			(1,126	)		(1,928	)
Initial allowance on loans purchased with credit deterioration		95			18			21			0			134
Recoveries credited to  allowance		2,607			846			1,024			0			4,477
Loans charged against  the allowance		0			(375	)		(2,059	)		0			(2,434	)
Balance at end of period	$	11,519		$	19,221		$	3,749		$	12,763		$	47,252

2020
Balance at beginning of period	$	7,922		$	8,216		$	1,283		$	8,727	$	26,148
Additions (deductions)
Provision for credit losses (1)		1,751			(915	)		436			11,191		12,463
Recoveries credited to  allowance		1,804			513			752			0		3,069
Loans charged against  the allowance		(4,076	)		(816	)		(1,359	)		0		(6,251	)
Balance at end of period	$	7,401		$	6,998		$	1,112		$	19,918	$	35,429

2019
Balance at beginning of period	$	7,090		$	7,978		$	895		$	8,925		$	24,888
Additions (deductions)
Provision for credit losses (1)		(651	)		526			1,147			(198	)		824
Recoveries credited to  allowance		2,165			933			863			0			3,961
Loans charged against  the allowance		(682	)		(1,221	)		(1,622	)		0			(3,525	)
Balance at end of period	$	7,922		$	8,216		$	1,283		$	8,727		$	26,148

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

The allocation of the ACL by portfolio segment at December 31 follows:

	2021					2020
	Allowance for Credit Losses Amount		Percent of Loans to Total Portfolio Loans			Allowance for Credit Losses Amount (1)		Percent of Loans to Total Portfolio Loans
	(Dollars in thousands)
Commercial	$	11,519		41.5	%	$	7,401		45.4	%
Mortgage		19,221		39.2			6,998		37.2
Installment		3,749		19.3			1,112		17.4
Subjective allocation		12,763		0			19,918		0
Total	$	47,252		100.0	%	$	35,429		100.0	%

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

ACL and recorded investment in loans by portfolio segment at December 31, 2020 follows (1):

	Commercial		Mortgage		Installment		Subjective Allocation		Total
	(In thousands)
December 31, 2020
ACL:
Individually evaluated for impairment	$	1,266	$	4,124	$	191	$	0	$	5,581
Collectively evaluated for impairment		6,135		2,874		921		19,918		29,848
Loans acquired with deteriorated credit quality		0		0		0		0		0
Total ending ACL	$	7,401	$	6,998	$	1,112	$	19,918	$	35,429
Loans
Individually evaluated for impairment	$	9,431	$	39,245	$	1,996			$	50,672
Collectively evaluated for impairment		1,236,052		980,449		474,379				2,690,880
Loans acquired with deteriorated credit quality		468		410		147				1,025
Total loans recorded investment		1,245,951		1,020,104		476,522				2,742,577
Accrued interest included in recorded investment		3,536		4,178		1,185				8,899
Total loans	$	1,242,415	$	1,015,926	$	475,337			$	2,733,678

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Loans on non-accrual status and past due more than 90 days (‘‘Non-performing Loans’’) at December 31 follow:

	December 31, 2021
	Non- Accrual with no Allowance for Credit Loss		Non- Accrual with an Allowance for Credit Loss		Total Non- Accrual		90+ and Still Accruing		Total Non- Performing Loans		December 31, 2020 Total Non- Performing Loans (1)
	(In thousands)
Commercial
Commercial and industrial (2)	$	0	$	15	$	15	$	0	$	15	$	1,387
Commercial real estate		0		0		0		0		0		0
Mortgage
1-4 family owner occupied - jumbo		607		0		607		0		607		623
1-4 family owner occupied - non-jumbo (3)		137		1,815		1,952		0		1,952		2,281
1-4 family non-owner occupied		275		592		867		0		867		1,112
1-4 family - 2nd lien		182		681		863		0		863		1,344
Resort lending		118		119		237		0		237		607
Installment
Boat lending		0		210		210		0		210		52
Recreational vehicle lending		0		177		177		0		177		74
Other		0		182		182		0		182		393
Total	$	1,319	$	3,791	$	5,110	$	0	$	5,110	$	7,873
Accrued interest excluded from total	$	-	$	-	$	-	$	0	$	0	$	0

(1) Non-performing loans exclude purchase credit impaired loans.

(2) Non-performing commercial and industrial loans exclude $0.047 million and $0.053 million of government guaranteed loans at December 31, 2021 and 2020, respectively.

(3) Non-performing 1-4 family owner occupied – non jumbo loans exclude $0.388 million and $0.386 million of government guaranteed loans at December 31, 2021 and 2020, respectively.

If non-performing loans had continued to accrue interest in accordance with their original terms, approximately $0.2 million, $0.5 million and $0.4 million of interest income would have been recognized in each of the years ended 2021, 2020 and 2019, respectively. Interest income recorded on these loans was approximately 0 during each of the years ended 2021, 2020 and 2019.

58

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The following table provides collateral information by class of loan for collateral-dependent loans with a specific reserve. A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral.

The amortized cost of collateral-dependent loans by class follows:

	Collateral Type				Allowance
	Real				for
	Estate		Other		Credit Losses
	(In thousands)
December 31, 2021
Commercial
Commercial and industrial	$	80	$	245	$	51
Commercial real estate		84		0		19
Mortgage
1-4 family owner occupied - jumbo		607		0		0
1-4 family owner occupied - non-jumbo		940		0		286
1-4 family non-owner occupied		477		0		72
1-4 family - 2nd lien		370		0		67
Resort lending		237		0		42
Installment
Boat lending		0		80		29
Recreational vehicle lending		0		121		44
Other		0		70		25
Total	$	2,795	$	516	$	635
Accrued interest excluded from total	$	0	$	1

59

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

An aging analysis of loans by class at December 31 follows:

	Loans Past Due								Loans not		Total
	30-59 days		60-89 days		90+ days		Total		Past Due		Loans
	(In thousands)
2021
Commercial
Commercial and industrial	$	0	$	2	$	62	$	64	$	593,048	$	593,112
Commercial real estate		0		0		0		0		610,469		610,469
Mortgage
1-4 family owner occupied - jumbo		0		0		607		607		540,416		541,023
1-4 family owner occupied - non-jumbo		774		408		657		1,839		264,571		266,410
1-4 family non-owner occupied		87		26		462		575		194,277		194,852
1-4 family - 2nd lien		422		60		289		771		87,958		88,729
Resort lending		0		0		237		237		48,408		48,645
Installment
Boat lending		438		28		52		518		227,622		228,140
Recreational vehicle lending		377		65		120		562		234,183		234,745
Other		252		57		49		358		98,562		98,920
Total	$	2,350	$	646	$	2,535	$	5,531	$	2,899,514	$	2,905,045
Accrued interest excluded from total	$	25	$	9	$	0	$	34	$	6,802	$	6,836
2020
Commercial
Commercial and industrial	$	5,003	$	131	$	70	$	5,204	$	671,115	$	676,319
Commercial real estate		2,600		0		0		2,600		567,032		569,632
Mortgage
1-4 family owner occupied - jumbo		761		0		623		1,384		438,794		440,178
1-4 family owner occupied - non-jumbo		1,888		453		502		2,843		264,730		267,573
1-4 family non-owner occupied		1,184		139		476		1,799		157,977		159,776
1-4 family - 2nd lien		710		228		732		1,670		92,860		94,530
Resort lending		32		195		358		585		57,462		58,047
Installment
Boat lending		95		101		0		196		207,317		207,513
Recreational vehicle lending		207		37		48		292		169,282		169,574
Other		337		162		199		698		98,737		99,435
Total recorded investment	$	12,817	$	1,446	$	3,008	$	17,271	$	2,725,306	$	2,742,577
Accrued interest included in recorded investment	$	147	$	22	$	0	$	169	$	8,730	$	8,899

60

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Impaired loans at December 31, 2020 are as follows (1):

	2020
	(In thousands)
Impaired loans with no allocated ACL
TDR	$	93
Non - TDR		1,367
Impaired loans with an allocated ACL
TDR - allowance based on collateral		9,027
TDR - allowance based on present value cash flow		37,953
Non - TDR - allowance based on collateral		1,873
Total impaired loans	$	50,313
Amount of ACL allocated (1)
TDR - allowance based on collateral	$	1,058
TDR - allowance based on present value cash flow		3,755
Non - TDR - allowance based on collateral		768
Total amount of ACL allocated	$	5,581

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

61

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Impaired loans by class as of December 31, 2020 are as follows (1):

	2020
	Recorded Investment		Unpaid Principal Balance		Related ACL (1)
	(In thousands)
With no related ACL recorded:
Commercial
Commercial and industrial	$	77	$	80	$	0
Commercial real estate		0		0		0
Mortgage
1-4 family owner occupied - jumbo		623		629		0
1-4 family owner occupied - non-jumbo		0		0		0
1-4 family non-owner occupied		305		473		0
1-4 family - 2nd lien		301		304		0
Resort lending		154		379		0
Installment
Boat lending		0		0		0
Recreational vehicle lending		0		0		0
Other		0		0		0
		1,460		1,865		0

With an ACL recorded:
Commercial
Commercial and industrial		2,227		2,370		756
Commercial real estate		7,127		7,096		510
Mortgage
1-4 family owner occupied - jumbo		506		880		50
1-4 family owner occupied - non-jumbo		21,655		22,311		2,300
1-4 family non-owner occupied		4,335		4,704		495
1-4 family - 2nd lien		811		829		200
Resort lending		10,555		10,764		1,079
Installment
Boat lending		7		11		2
Recreational vehicle lending		87		100		19
Other		1,902		2,040		170
		49,212		51,105		5,581
Total
Commercial
Commercial and industrial		2,304		2,450		756
Commercial real estate		7,127		7,096		510
Mortgage
1-4 family owner occupied - jumbo		1,129		1,509		50
1-4 family owner occupied - non-jumbo		21,655		22,311		2,300
1-4 family non-owner occupied		4,640		5,177		495
1-4 family - 2nd lien		1,112		1,133		200
Resort lending		10,709		11,143		1,079
Installment
Boat lending		7		11		2
Recreational vehicle lending		87		100		19
Other		1,902		2,040		170
Total	$	50,672	$	52,970	$	5,581
Accrued interest included in recorded investment	$	359

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Average recorded investment in and interest income earned (of which the majority of these amounts were received in cash and related primarily to performing TDR’s) on impaired loans by class for the years ended December 31, 2020 and 2019 follows (1):

	2020				2019
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(In thousands)
With no related ACL recorded:
Commercial
Commercial and industrial	$	125	$	9	$	51	$	0
Commercial real estate		159		0		278		5
Mortgage
1-4 family owner occupied - jumbo		408		0		0		0
1-4 family owner occupied - non-jumbo		252		4		201		0
1-4 family non-owner occupied		308		10		123		0
1-4 family - 2nd lien		380		0		136		7
Resort lending		92		0		0		0
Installment
Boat lending		0		0		0		0
Recreational vehicle lending		0		0		0		0
Other		0		0		0		1
		1,724		23		789		13
With an a ACL recorded:
Commercial
Commercial and industrial		2,230		242		2,256		72
Commercial real estate		10,751		1,043		5,778		315
Mortgage
1-4 family owner occupied - jumbo		1,083		84		995		39
1-4 family owner occupied - non-jumbo		19,624		2,033		15,183		594
1-4 family non-owner occupied		4,664		375		2,874		291
1-4 family - 2nd lien		3,376		22		13,383		809
Resort lending		11,316		799		11,697		669
Installment
Boat lending		59		1		54		0
Recreational vehicle lending		81		4		22		0
Other		2,416		225		3,186		189
		55,600		4,828		55,428		2,978
Total
Commercial
Commercial and industrial		2,355		251		2,307		72
Commercial real estate		10,910		1,043		6,056		320
Mortgage
1-4 family owner occupied - jumbo		1,491		84		995		39
1-4 family owner occupied - non-jumbo		19,876		2,037		15,384		594
1-4 family non-owner occupied		4,972		385		2,997		291
1-4 family - 2nd lien		3,756		22		13,519		816
Resort lending		11,408		799		11,697		669
Installment
Boat lending		59		1		54		0
Recreational vehicle lending		81		4		22		0
Other		2,416		225		3,186		190
Total	$	57,324	$	4,851	$	56,217	$	2,991

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

63

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Troubled debt restructurings at December 31 follow:

	2021
	Commercial		Retail (1)			Total
	(In thousands)
Performing TDR’s	$	4,481	$	31,589		$	36,070
Non-performing TDR’s (2)		0		1,016	(3)		1,016
Total	$	4,481	$	32,605		$	37,086

	2020
	Commercial		Retail (1)			Total
	(In thousands)
Performing TDR’s	$	7,956	$	36,385		$	44,341
Non-performing TDR’s (2)		1,148		1,584	(3)		2,732
Total	$	9,104	$	37,969		$	47,073

(1) Retail loans include mortgage and installment loan portfolio segments.

(2) Included in non-performing loans table above.

(3) Also includes loans on non-accrual at the time of modification until 6 payments are received on a timely basis.

We have allocated $3.6 million and $4.8 million of reserves to customers whose loan terms have been modified in troubled debt restructurings as of December 31, 2021 and 2020, respectively. We have committed to lend additional amounts totaling up to $0.04 million and $0.07 million at December 31, 2021 and 2020, respectively, to customers with outstanding loans that are classified as troubled debt restructurings.

The terms of certain loans have been modified as troubled debt restructurings and generally included one or a combination of the following: a reduction of the stated interest rate of the loan; an extension of the maturity date at  a stated rate of interest lower than the current market rate for a new loan with similar risk; or a permanent reduction  of the recorded investment in the loan.

Modifications involving a reduction of the stated interest rate of the loan have generally been for periods ranging from 9 months to 36 months but have extended to as much as 480 months in certain circumstances. Modifications involving an extension of the maturity date have generally been for periods ranging from 1 month to 60 months but have extended to as much as 230 months in certain circumstances.

64

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Loans that have been classified as troubled debt restructurings during the years ended December 31 follow (1):

	Number of Contracts		Pre-modification Recorded Balance		Post-modification Recorded Balance
2020
Commercial
Commercial and industrial		7	$	1,207	$	1,207
Commercial real estate		4		7,012		7,012
Mortgage
1-4 family owner occupied - jumbo		0		0		0
1-4 family owner occupied - non-jumbo		5		357		374
1-4 family non-owner occupied		2		111		116
1-4 family - 2nd lien		2		44		46
Resort lending		0		0		0
Installment
Boat lending		0		0		0
Recreational vehicle lending		0		0		0
Other		4		91		93
Total		24	$	8,822	$	8,848

	Number of Contracts		Pre-modification Recorded Balance		Post-modification Recorded Balance
	(Dollars in thousands)
2019
Commercial
Commercial and industrial		8	$	1,609	$	1,609
Commercial real estate		3		1,479		1,479
Mortgage
1-4 family owner occupied - jumbo		0		0		0
1-4 family owner occupied - non-jumbo		2		478		483
1-4 family non-owner occupied		1		507		505
1-4 family - 2nd lien		3		75		75
Resort lending		0		0		0
Installment
Boat lending		0		0		0
Recreational vehicle lending		0		0		0
Other		7		188		191
Total		24	$	4,336	$	4,342

(1) There were 0 TDR modifications during the year ended December 31, 2021. The loan modifications during 2020 in the table above did not qualify for relief from TDR accounting under the CARES Act.

The troubled debt restructurings described above increased the ACL by $0.04 million and $0.50 million during the years ended December 31, 2020 and 2019, respectively and resulted in charge offs of 0 during each of the years ended December 31, 2020 and 2019, respectively.

A loan is generally considered to be in payment default once it is 90 days contractually past due under the modified terms for commercial loans and installment loans and when 4 consecutive payments are missed for mortgage loans.

There were 0 troubled debt restructurings that subsequently defaulted within twelve months following modification during 2021 and 2020.  During 2019 we had one commercial and industrial loan with a recorded balance of $0.019 million and one 1-4 family owner occupied – non-jumbo loan with a recorded balance of $0.012 million that subsequently defaulted within twelve months following modification.  These loans did not impact the ACL during 2019 and resulted in 0 charge offs during 2019.

The terms of certain other loans were modified during the years ending December 31, 2021, 2020 and 2019 that did not meet the definition of a troubled debt restructuring. The modification of these loans could have included modification of the terms of a loan to borrowers who were not experiencing financial difficulties or a delay in a payment that was considered to be insignificant.

65

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

In order to determine whether a borrower is experiencing financial difficulty, we perform an evaluation of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy.

Non-TDR Loan Modifications and Paycheck Protection Program (“PPP”) due to COVID-19 - On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”.  This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19.  The guidance goes on to explain that in consultation with the Financial Accounting Standards Board staff that the federal banking agencies conclude that short-term modifications (e.g. six months or less) made on a good faith basis to borrowers who were current (less than 30 days past due) as of the implementation date of a relief program are not TDRs.  In addition, on March 27, 2020, the CARES Act was signed into law.  Section 4013 of the CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current (less than 30 days past due) as of December 31, 2019 are not TDRs.  We are assisting both commercial and retail (mortgage and installment) borrowers with reduced or suspended payments. Commercial loan accommodations are typically a three month interest-only period while retail loan (mortgage and installment) forbearances have primarily been payment suspensions for three months. For loans subject to these forbearance agreements each borrower is required to resume making regularly scheduled loan payments at the end of the forbearance period.  The deferred principal and interest will be repaid based upon individualized agreements.  Options for repayment include separate repayment plans, extending the term of the loan or re-amortizing the loan based upon the affordability of the payment in relationship to a reduced income.  While some borrowers may elect to make a lump sum payment, we anticipate the majority will require some type of repayment plan.  During the forbearance period, the loan will not be reported as past due in keeping with the guidance discussed previously.

A summary of COVID-19 accommodations that had been entered into under this guidance as of December 31, 2021 follows:

	COVID-19 Accomodations					Total		% of Total
Loan Category		Amounts (#)		Amounts ($)		Loans		Loans
	(Dollars in thousands)
Commercial			0	$	0	$	1,203,581		0.0	%
Mortgage			22		2,278		1,139,659		0.2	%
Installment			1		55		561,805		0.0	%
Total			23	$	2,333	$	2,905,045		0.1	%
Mortgage loans serviced for others(1)			46	$	5,163	$	3,323,521		0.2	%

1) We have delegated authority from all investors to grant these deferrals on their behalf.

Information on subsequent COVID-19 accommodation extensions for portfolio loans follows (1):

Loan Category	Amount (#)		Amount ($)
	(Dollars in thousands)
Commercial		0	$	0
Mortgage		19		2,194
Installment		0		0
Total		19	$	2,194

(1) Subsequent accommodations are extensions of the original accommodations that were given as summarized in the paragraph above.

66

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The CARES Act also included an initial $349 billion loan program administered through the U.S. Small Business Administration (‘‘SBA’’) referred to as the PPP. Under the PPP, small businesses and other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enrolled in the program, subject to numerous limitations and eligibility criteria. We are participating as a lender in the PPP. The PPP opened on April 3, 2020 intending to provide American small businesses with eight weeks of cash-flow assistance through 100% federally guaranteed loans through the SBA. In late April 2020 the Paycheck Protection Program and Health Care Enhancement Act, added another $310 billion in funding while the Paycheck Protection Program Flexibility Act made certain changes to the program, by allowing for more time to spend the funds, and making it easier to get a loan fully forgiven. The PPP initially closed on August 8, 2020 (“Round 1”). On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act (‘‘Economic Aid Act’’) was signed into law which allocated an additional $284 billion in funding for the PPP (“Round 2”). The Economic Aid Act reopened the PPP through March 31, 2021 with generally the same terms and conditions as originally enacted under the CARES Act while clarifying eligibility and ineligibility for certain entities and expanding the permitted uses of PPP funds. In addition, the Economic Aid Act simplified the loan forgiveness process for PPP loans of $150,000 or less. The Economic Aid Act also established second draw loans for entities that had already used the initial PPP funds, subject to numerous limitations and eligibility criteria. PPP Round 2 loans are eligible for forgiveness similar to Round 1 PPP loans, subject to limitations set forth in the Economic Aid Act.  Round 2 closed on May 31, 2021.

PPP loans outstanding at December 31 follows:

	2021				2020
	Amount (#)		Amount ($)		Amount (#)		Amount ($)
	(Dollars in thousands)
Closed and outstanding - Round 1 loans		6	$	197		1,483	$	169,782
Closed and outstanding - Round 2 loans		180		26,167		0		0
Total closed and outstanding		186	$	26,364		1,483	$	169,782
Unaccreted net fees remaining at period end			$	806			$	3,216

PPP loans are included in the commercial and industrial class of the commercial loan portfolio segment. As these loans are 100% guaranteed through the SBA the allowance for credit losses recorded on these loans is 0.  PPP loans funded totaled $135.5 million, $261.1 million and 0 during the years ended December 31, 2021, 2020 and 2019, respectively. Interest and fees on loans in our consolidated statement of operations includes $8.9 million, $5.6 million and 0 during the years ended December 31, 2021, 2020 and 2019, respectively related to the accretion of net loan fees on PPP loans.

Credit Quality Indicators – As part of our on-going monitoring of the credit quality of our loan portfolios, we track certain credit quality indicators including (a) risk grade of commercial loans, (b) the level of classified commercial loans, (c) credit scores of mortgage and installment loan borrowers, and (d) delinquency history and non-performing loans.

For commercial loans, we use a loan rating system that is similar to those employed by state and federal banking regulators. Loans are graded on a scale of 1 to 12. A description of the general characteristics of the ratings follows:

Rating 1 through 6: These loans are generally referred to as our ‘‘non-watch’’ commercial credits that include very high or exceptional credit fundamentals through acceptable credit fundamentals.

Rating 7 and 8: These loans are generally referred to as our ‘‘watch’’ commercial credits. These ratings include loans to borrowers that exhibit potential credit weakness or downward trends. If not checked or cured these trends could weaken our asset or credit position. While potentially weak, no loss of principal or interest is envisioned with these ratings.

Rating 9: These loans are generally referred to as our ‘‘substandard accruing’’ commercial credits. This rating includes loans to borrowers that exhibit a well-defined weakness where payment default is probable and loss is possible if deficiencies are not corrected. Generally, loans with this rating are considered collectible as to both principal and interest primarily due to collateral coverage.

Rating 10 and 11: These loans are generally referred to as our ‘‘substandard - non-accrual’’ and ‘��doubtful’’ commercial credits. These ratings include loans to borrowers with weaknesses that make collection of debt in full, on the basis of current facts, conditions and values at best questionable and at worst improbable. All of these loans are placed in non-accrual.

67

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Rating 12: These loans are generally referred to as our ‘‘loss’’ commercial credits. This rating includes loans to borrowers that are deemed incapable of repayment and are charged-off.

The following table summarizes loan ratings by loan class for our commercial loan portfolio segment at December 31, 2021:

	Commercial
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized
	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
	(In thousands)
December 31, 2021
Commercial and industrial
Non-watch (1-6)	$	121,917	$	69,856	$	56,984	$	44,827	$	38,307	$	96,261	$	144,579	$	572,731
Watch (7-8)		81		0		532		1,294		362		6,274		476		9,019
Substandard Accrual (9)		1,569		2		1,159		247		0		1,530		6,793		11,300
Non-Accrual (10-11)		0		0		0		0		0		62		0		62
Total	$	123,567	$	69,858	$	58,675	$	46,368	$	38,669	$	104,127	$	151,848	$	593,112
Accrued interest excluded from total	$	314	$	153	$	105	$	229	$	90	$	240	$	242	$	1,373
Commercial real estate
Non-watch (1-6)	$	123,330	$	55,479	$	108,056	$	75,828	$	39,123	$	160,199	$	31,551	$	593,566
Watch (7-8)		0		324		3,028		7,678		1,708		1,423		0		14,161
Substandard Accrual (9)		441		0		0		1,193		1,108		0		0		2,742
Non-Accrual (10-11)		0		0		0		0		0		0		0		0
Total	$	123,771	$	55,803	$	111,084	$	84,699	$	41,939	$	161,622	$	31,551	$	610,469
Accrued interest excluded from total	$	182	$	81	$	233	$	203	$	94	$	325	$	47	$	1,165
Total Commercial
Non-watch (1-6)	$	245,247	$	125,335	$	165,040	$	120,655	$	77,430	$	256,460	$	176,130	$	1,166,297
Watch (7-8)		81		324		3,560		8,972		2,070		7,697		476		23,180
Substandard Accrual (9)		2,010		2		1,159		1,440		1,108		1,530		6,793		14,042
Non-Accrual (10-11)		0		0		0		0		0		62		0		62
Total	$	247,338	$	125,661	$	169,759	$	131,067	$	80,608	$	265,749	$	183,399	$	1,203,581
Accrued interest excluded from total	$	496	$	234	$	338	$	432	$	184	$	565	$	289	$	2,538

The following table summarizes loan ratings by loan class for our commercial portfolio loan segment at December 31, 2020:

	Commercial
	Non-watch 1-6		Watch 7-8		Substandard Accrual 9		Non- Accrual 10-11		Total
					(In thousands)
December 31, 2020
Commercial and industrial	$	637,826	$	32,765	$	4,341	$	1,387	$	676,319
Commercial real estate		561,382		5,978		2,272		0		569,632
Total	$	1,199,208	$	38,743	$	6,613	$	1,387	$	1,245,951
Accrued interest included in total	$	3,408	$	105	$	23	$	0	$	3,536

68

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

For each of our mortgage and installment portfolio segment classes we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated semi-annually. The following tables summarize credit scores by loan class for our mortgage and installment loan portfolio segments at December 31, 2021:

	Mortgage (1)
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized
	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
	(In thousands)
December 31, 2021
1-4 family owner occupied - jumbo
800 and above	$	31,137	$	17,652	$	8,491	$	2,565	$	7,516	$	527	$	0	$	67,888
750-799		135,292		92,590		30,072		7,118		9,469		5,043		2,371		281,955
700-749		67,255		34,665		13,765		4,421		7,748		4,856		0		132,710
650-699		19,367		10,313		5,447		5,285		6,080		690		0		47,182
600-649		2,050		2,638		506		1,013		837		976		0		8,020
550-599		0		469		0		0		781		0		0		1,250
500-549		0		1,411		0		0		0		0		0		1,411
Under 500		0		0		0		0		607		0		0		607
Unknown		0		0		0		0		0		0		0		0
Total	$	255,101	$	159,738	$	58,281	$	20,402	$	33,038	$	12,092	$	2,371	$	541,023
Accrued interest excluded from total	$	557	$	370	$	163	$	77	$	87	$	33	$	3	$	1,290
1-4 family owner occupied - non-jumbo
800 and above	$	6,185	$	5,534	$	3,756	$	2,514	$	3,566	$	4,569	$	4,026	$	30,150
750-799		33,227		20,300		9,688		5,664		8,887		12,498		8,341		98,605
700-749		19,317		10,572		4,813		4,035		5,008		21,806		5,637		71,188
650-699		6,593		4,233		3,217		2,010		3,135		12,423		2,812		34,423
600-649		2,119		1,082		1,051		1,549		1,660		8,663		89		16,213
550-599		0		295		1,076		758		1,023		5,802		147		9,101
500-549		0		57		421		327		510		3,169		18		4,502
Under 500		0		616		284		394		250		684		0		2,228
Unknown		0		0		0		0		0		0		0		0
Total	$	67,441	$	42,689	$	24,306	$	17,251	$	24,039	$	69,614	$	21,070	$	266,410
Accrued interest excluded from total	$	208	$	97	$	84	$	58	$	68	$	226	$	57	$	798
1-4 family non-owner occupied
800 and above	$	15,406	$	1,786	$	2,857	$	1,459	$	2,627	$	5,058	$	1,639	$	30,832
750-799		44,201		21,885		10,517		3,667		6,956		10,004		5,117		102,347
700-749		16,486		7,807		2,764		1,878		966		6,095		2,756		38,752
650-699		6,617		3,095		257		299		248		6,019		955		17,490
600-649		125		57		108		282		174		2,051		381		3,178
550-599		0		25		0		192		0		1,121		0		1,338
500-549		0		0		0		55		0		638		50		743
Under 500		0		0		0		0		0		172		0		172
Unknown		0		0		0		0		0		0		0		0
Total	$	82,835	$	34,655	$	16,503	$	7,832	$	10,971	$	31,158	$	10,898	$	194,852
Accrued interest excluded from total	$	171	$	95	$	46	$	23	$	33	$	107	$	38	$	513
1-4 family - 2nd lien
800 and above	$	415	$	964	$	426	$	95	$	266	$	353	$	8,465	$	10,984
750-799		2,161		2,413		714		1,332		1,859		2,415		30,106		41,000
700-749		1,307		1,049		771		561		1,374		2,365		16,316		23,743
650-699		122		309		460		405		140		1,639		5,286		8,361
600-649		0		177		72		106		92		1,143		1,370		2,960
550-599		0		0		61		0		0		476		228		765
500-549		0		0		99		0		89		190		155		533
Under 500		0		0		54		3		60		16		250		383
Unknown		0		0		0		0		0		0		0		0
Total	$	4,005	$	4,912	$	2,657	$	2,502	$	3,880	$	8,597	$	62,176	$	88,729
Accrued interest excluded from total	$	7	$	9	$	9	$	5	$	8	$	34	$	211	$	283

69

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

	Mortgage - continued (1)
	Term Loans Amortized Cost Basis by Origination Year												Revolving Loans Amortized
	2021		2020		2019		2018		2017		Prior		Cost Basis		Total
	(In thousands)
December 31, 2021
Resort lending
800 and above	$	0	$	0	$	0	$	274	$	0	$	7,347	$	0	$	7,621
750-799		600		1,246		250		511		63		19,630		0		22,300
700-749		0		174		0		301		67		9,052		0		9,594
650-699		951		0		0		0		0		6,057		0		7,008
600-649		0		0		0		0		0		1,841		0		1,841
550-599		0		0		0		0		0		80		0		80
500-549		0		0		0		0		0		201		0		201
Under 500		0		0		0		0		0		0		0		0
Unknown		0		0		0		0		0		0		0		0
Total	$	1,551	$	1,420	$	250	$	1,086	$	130	$	44,208	$	0	$	48,645
Accrued interest excluded from total	$	2	$	3	$	0	$	3	$	0	$	106	$	0	$	114
Total Mortgage
800 and above	$	53,143	$	25,936	$	15,530	$	6,907	$	13,975	$	17,854	$	14,130	$	147,475
750-799		215,481		138,434		51,241		18,292		27,234		49,590		45,935		546,207
700-749		104,365		54,267		22,113		11,196		15,163		44,174		24,709		275,987
650-699		33,650		17,950		9,381		7,999		9,603		26,828		9,053		114,464
600-649		4,294		3,954		1,737		2,950		2,763		14,674		1,840		32,212
550-599		0		789		1,137		950		1,804		7,479		375		12,534
500-549		0		1,468		520		382		599		4,198		223		7,390
Under 500		0		616		338		397		917		872		250		3,390
Unknown		0		0		0		0		0		0		0		0
Total	$	410,933	$	243,414	$	101,997	$	49,073	$	72,058	$	165,669	$	96,515	$	1,139,659
Accrued interest excluded from total	$	945	$	574	$	302	$	166	$	196	$	506	$	309	$	2,998

(1) Credit scores have been updated within the last twelve months.

70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

	Installment (1)
	Term Loans Amortized Cost Basis by Origination Year
	2021		2020		2019		2018		2017		Prior		Total
	(In thousands)
December 31, 2021
Boat lending
800 and above	$	7,513	$	5,786	$	6,015	$	4,906	$	2,968	$	4,433	$	31,621
750-799		47,434		24,968		21,052		15,681		9,797		10,971		129,903
700-749		19,180		9,724		8,263		6,467		3,109		4,953		51,696
650-699		3,845		1,679		2,301		1,223		1,166		1,378		11,592
600-649		373		419		209		327		185		604		2,117
550-599		237		81		91		113		115		191		828
500-549		0		49		0		85		0		67		201
Under 500		0		0		0		10		168		4		182
Unknown		0		0		0		0		0		0		0
Total	$	78,582	$	42,706	$	37,931	$	28,812	$	17,508	$	22,601	$	228,140
Accrued interest excluded from total	$	169	$	102	$	106	$	69	$	44	$	47	$	537
Recreational vehicle lending
800 and above	$	8,475	$	5,121	$	5,837	$	4,627	$	2,456	$	3,594	$	30,110
750-799		66,834		22,707		17,173		11,973		5,281		6,794		130,762
700-749		32,702		9,500		6,169		3,768		1,657		2,343		56,139
650-699		7,390		2,423		1,842		948		649		905		14,157
600-649		990		408		291		333		152		111		2,285
550-599		271		100		163		318		6		72		930
500-549		39		21		105		62		26		91		344
Under 500		0		0		11		0		0		7		18
Unknown		0		0		0		0		0		0		0
Total	$	116,701	$	40,280	$	31,591	$	22,029	$	10,227	$	13,917	$	234,745
Accrued interest excluded from total	$	265	$	93	$	78	$	56	$	26	$	28	$	546
Other
800 and above	$	2,328	$	1,424	$	1,493	$	882	$	357	$	695	$	7,179
750-799		13,923		9,093		6,074		3,175		2,183		2,731		37,179
700-749		10,791		5,426		3,301		1,899		906		2,194		24,517
650-699		20,167		1,715		1,249		657		561		1,332		25,681
600-649		761		368		272		190		284		357		2,232
550-599		159		42		127		167		46		154		695
500-549		8		53		56		55		38		98		308
Under 500		6		62		42		14		12		18		154
Unknown		975		0		0		0		0		0		975
Total	$	49,118	$	18,183	$	12,614	$	7,039	$	4,387	$	7,579	$	98,920
Accrued interest excluded from total	$	73	$	40	$	36	$	19	$	11	$	38	$	217
Total installment
800 and above	$	18,316	$	12,331	$	13,345	$	10,415	$	5,781	$	8,722	$	68,910
750-799		128,191		56,768		44,299		30,829		17,261		20,496		297,844
700-749		62,673		24,650		17,733		12,134		5,672		9,490		132,352
650-699		31,402		5,817		5,392		2,828		2,376		3,615		51,430
600-649		2,124		1,195		772		850		621		1,072		6,634
550-599		667		223		381		598		167		417		2,453
500-549		47		123		161		202		64		256		853
Under 500		6		62		53		24		180		29		354
Unknown		975		0		0		0		0		0		975
Total	$	244,401	$	101,169	$	82,136	$	57,880	$	32,122	$	44,097	$	561,805
Accrued interest excluded from total	$	507	$	235	$	220	$	144	$	81	$	113	$	1,300

(1) Credit scores have been updated within the last twelve months.

71

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The following tables summarize credit scores by loan class for our mortgage and installment loan portfolio segments at December 31, 2020:

	Mortgage
	1-4 Family Owner Occupied - Jumbo		1-4 Family Owner Occupied - Non-jumbo		1-4 Family Non-owner Occupied		1-4 Family 2nd Lien		Resort Lending		Total
	(In thousands)
December 31, 2020
800 and above	$	61,077	$	40,187	$	25,468	$	12,490	$	9,546	$	148,768
_750-799		223,177		70,642		82,124		42,138		27,530		445,611
_700-749		101,086		75,489		30,326		22,962		11,726		241,589
_650-699		40,296		44,344		13,182		11,269		6,393		115,484
_600-649		11,146		18,519		4,303		2,703		1,670		38,341
_550-599		0		11,021		2,388		1,608		917		15,934
_500-549		3,396		5,129		1,580		1,012		192		11,309
Under 500		0		2,242		405		348		73		3,068
Total	$	440,178	$	267,573	$	159,776	$	94,530	$	58,047	$	1,020,104
Accrued interest included in total	$	1,301	$	1,641	$	587	$	373	$	276	$	4,178

	Installment
	Boat Lending		Recreational Vehicle Lending		Other		Total
	(In thousands)
December 31, 2020
800 and above	$	32,231	$	29,223	$	9,154	$	70,608
_750-799		123,689		95,890		37,512		257,091
_700-749		38,223		33,476		25,262		96,961
_650-699		10,189		8,794		21,138		40,121
_600-649		2,083		1,305		3,730		7,118
_550-599		661		551		1,299		2,511
_500-549		342		283		767		1,392
Under 500		95		52		63		210
Unknown		0		0		510		510
Total	$	207,513	$	169,574	$	99,435	$	476,522
Accrued interest included in total	$	572	$	457	$	156	$	1,185

72

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Mortgage loans serviced for others are not reported as assets on the Consolidated Statements of Financial Condition. The principal balances of these loans at December 31 follow:

	2021		2020
	(In thousands)
Mortgage loans serviced for :
Fannie Mae	$	1,753,255	$	1,656,060
Freddie Mac		1,344,675		1,095,877
Ginnie Mae		170,983		181,615
FHLB		49,581		39,294
Other		5,027		11,242
Total	$	3,323,521	$	2,984,088

Custodial deposit accounts maintained in connection with mortgage loans serviced for others totaled $39.4 million and $40.5 million, at December 31, 2021 and 2020, respectively.

If we do not remain well capitalized for regulatory purposes (see note #20), meet certain minimum capital levels or certain profitability requirements or if we incur a rapid decline in net worth, we could lose our ability to sell and/or service loans to these investors. This could impact our ability to generate net gains on mortgage loans and generate servicing income. A forced liquidation of our servicing portfolio could also impact the value that could be recovered on this asset. Fannie Mae has the most stringent eligibility requirements covering capital levels, profitability and decline in net worth. Fannie Mae requires seller/servicers to be well capitalized for regulatory purposes. For the profitability requirement, we cannot record 4 or more consecutive quarterly losses and experience a 30% decline in net worth over the same period. Our net worth cannot decline by more than 25% in one quarter or more than 40% over two consecutive quarters. The highest level of capital we are required to maintain is at least $2.5 million plus 0.25% of all loans serviced for others.

An analysis of capitalized mortgage loan servicing rights for the years ended December 31 follows:

	2021			2020			2019
	(In thousands)
Balance at beginning of period	$	16,904		$	19,171		$	21,400
Originated servicing rights capitalized		11,436			13,957			7,303
Change in fair value due to price		3,380			(10,833	)		(6,408	)
Change in fair value due to pay downs		(5,488	)		(5,391	)		(3,124	)
Balance at end of year	$	26,232		$	16,904		$	19,171
Loans sold and serviced that have had servicing rights capitalized	$	3,323,521		$	2,982,833		$	2,580,705

Fair value of capitalized mortgage loan servicing rights was determined using an average coupon rate of 3.46%, average servicing fee of 0.256%, average discount rate of 10.07% and an average Public Securities Association (‘‘PSA’’) prepayment rate of 232 for December 31, 2021; and average coupon rate of 3.77%, average servicing fee of 0.257%, average discount rate of 10.09% and an average PSA prepayment rate of 348 for December 31, 2020.

73

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

NOTE 5 – OTHER REAL ESTATE

A summary of other real estate activity for the years ended December 31 follows ⁽¹⁾:

	2021			2020			2019
	(In thousands)
Balance at beginning of year, net of valuation allowance	$	738		$	1,715		$	1,178
Loans transferred to other real estate		253			332			2,242
Sales of other real estate		(745	)		(1,161	)		(1,438	)
Additions to valuation allowance charged to expense		(11	)		(148	)		(267	)
Balance at end of year, net of valuation allowance	$	235		$	738		$	1,715

(1) Table excludes other repossessed assets totaling $0.01 million and $0.03 million at December 31, 2021 and 2020, respectively.

We periodically review our real estate properties and establish valuation allowances on these properties if values have declined since the date of acquisition. An analysis of our valuation allowance for other real estate follows:

	2021			2020			2019
	(In thousands)
Balance at beginning of year	$	90		$	92		$	144
Additions charged to expense		11			148			267
Direct write-downs upon sale		(70	)		(150	)		(319	)
Balance at end of year	$	31		$	90		$	92

At December 31, 2021 and 2020, the balance of other real estate includes $0.2 million and $0.7 million, respectively of foreclosed residential real estate properties. Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $0.6 million and $0.3 million at December 31, 2021 and 2020, respectively.

Other real estate and repossessed assets totaling $0.2 million and $0.8 million at December 31, 2021 and 2020, respectively, are presented net of the valuation allowance on the Consolidated Statements of Financial Condition.

NOTE 6 – PROPERTY AND EQUIPMENT

A summary of property and equipment at December 31 follows:

	2021			2020
	(In thousands)
Land and land improvements	$	17,296		$	17,083
Buildings		58,870			57,208
Equipment		74,844			72,542
		151,010			146,833
Accumulated depreciation and amortization		(114,606	)		(110,706	)
Property and equipment, net	$	36,404		$	36,127

Depreciation expense was $5.4 million, $5.3 million and $5.2 million in 2021, 2020 and 2019, respectively.

74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

NOTE 7 – GOODWILL AND OTHER INTANGIBLES

Intangible assets, net of amortization, at December 31 follows:

	2021				2020
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization
	(In thousands)
Amortized intangible assets - core deposits	$	11,916	$	8,580	$	11,916	$	7,610
Unamortized intangible assets - goodwill	$	28,300			$	28,300

At December 31, 2021, the Bank (our reporting unit) had positive equity and elected to perform a qualitative assessment to determine if it was more likely than not that the fair value of the Bank exceeds its carrying value, including goodwill. The qualitative assessment indicated that it was more likely than not that the fair value of the Bank exceeded its carrying value, resulting in no impairment.

Intangible amortization expense was $1.0 million, $1.0 million and $1.1 million during the years ended 2021, 2020 and 2019, respectively.

A summary of estimated core deposit intangible amortization at December 31, 2021, follows:

	(In thousands)
2022	$	785
2023		547
2024		516
2025		487
2026		460
2027 and thereafter		541
Total	$	3,336

NOTE 8 – DEPOSITS

A summary of interest expense on deposits for the years ended December 31 follows:

	2021		2020		2019
	(In thousands)
Savings and interest-bearing checking	$	2,101	$	2,264	$	5,371
Reciprocal		764		2,158		6,024
Time		1,507		7,073		7,148
Brokered time		93		1,171		4,882
Total	$	4,465	$	12,666	$	23,425

Aggregate time deposits in denominations of $0.25 million or more amounted to $93.1 million and $50.0 million at December 31, 2021 and 2020, respectively.

75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

A summary of the maturity of time deposits at December 31, 2021, follows (1):

	(In thousands)
2022	$	269,067
2023		43,692
2024		10,067
2025		5,834
2026		6,794
2027 and thereafter		338
Total	$	335,792

(1) Includes time deposits, brokered time deposits and reciprocal time deposits

Reciprocal deposits represent demand, money market and time deposits from our customers that have been placed through IntraFi Network. This service allows our customers to access multi-million dollar FDIC deposit insurance on deposit balances greater than the standard FDIC insurance maximum.

A summary of reciprocal deposits at December 31 follows:

	2021		2020
	(In thousands)
Demand	$	559,664	$	515,092
Money market		2,546		3,308
Time		24,416		37,785
Total	$	586,626	$	556,185

NOTE 9 – OTHER BORROWINGS

A summary of other borrowings at December 31 follows:

	2021		2020
	(In thousands)
Advances from the FHLB	$	30,000	$	30,000
Other		9		12
Total	$	30,009	$	30,012

Advances from the FHLB are secured by unencumbered qualifying mortgage and home equity loans with a market value equal to at least 132% to 165%, respectively, of outstanding advances. Advances are also secured by FHLB stock that we own, which totaled $8.6 million at December 31, 2021. Unused borrowing capacity with the FHLB (subject to the FHLB’s credit requirements and policies) was $798.4 million at December 31, 2021. Interest expense on advances amounted to $0.2 million, $0.5 million and $0.7 million for the years ended December 31, 2021, 2020 and 2019, respectively. NaN FHLB advances were prepaid during 2021, 2020 or 2019.

As a member of the FHLB, we must own FHLB stock equal to the greater of 0.10% of the unpaid principal balance of residential mortgage assets or 4.5% of our outstanding advances. At December 31, 2021, we were in compliance with the FHLB stock ownership requirements.

The maturity dates, weighted average interest rates and contractually required repayments of FHLB advances at December 31 follow:

	2021					2020
	Amount		Rate			Amount		Rate
	(Dollars in thousands)
Fixed-rate advances - 2027 and thereafter	$	30,000		0.74	%	$	30,000		0.74	%

76

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Borrowings with the FRB at December 31, 2021 and 2020 were 0. Average borrowings with the FRB during the years ended December 31, 2021, 2020 and 2019 totaled 0, $1.546 million and $0.305 million, respectively. We had unused borrowing capacity with the FRB (subject to the FRB’s credit requirements and policies) of $383.4 million at December 31, 2021. Collateral for FRB borrowings are certain commercial and installment loans.

Interest expense on federal funds purchased totaled 0, $0.01 million and $0.08 million for the years ended December 31, 2021, 2020 and 2019, respectively.

Assets, consisting of FHLB stock and loans, pledged to secure other borrowings and unused borrowing capacity totaled $1.9 billion at December 31, 2021.

NOTE 10 – SUBORDINATED DEBT AND DEBENTURES

Subordinated Debt

In May 2020, we issued $40.0 million of fixed to floating subordinated notes with a ten year maturity (May 31, 2030 maturity date) and a five year call option.  The initial coupon rate is 5.95% fixed for five years and then floats at the Secured Overnight Financing Rate (“SOFR”) plus 5.825%.  These notes are presented in the Consolidated Statement of Financial Condition under the caption “Subordinated debt” and the balances of $39.4 million and $39.3 million at December 31, 2021 and 2020, respectively are net of remaining unamortized deferred issuance costs of approximately $0.6 million and $0.7 million, respectively that are being amortized through the maturity date into interest expense on other borrowings and subordinated debt and debentures in our Consolidated Statement of Operations. We may redeem the notes, in whole or in part, on or after May 31, 2025, and redeem the notes at any time in whole upon certain other events. Any redemption of the notes will be subject to prior regulatory approval to the extent required.

Subordinated Debentures

We have formed various special purpose entities (the ‘‘trusts’’) for the purpose of issuing trust preferred securities in either public or pooled offerings or in private placements. Independent Bank Corporation owns all of the common stock of each trust and has issued subordinated debentures to each trust in exchange for all of the proceeds from  the  issuance  of  the common stock and the trust preferred securities. Trust preferred securities totaling $38.4 million and $38.3 million at December 31, 2021 and 2020, respectively qualified as Tier 1 regulatory capital.

These trusts are not consolidated with Independent Bank Corporation and accordingly, we report the common securities of the trusts held by us in accrued income and other assets and the subordinated debentures that we have issued to the trusts in the liability section of our Consolidated Statements of Financial Condition.

As the result of a previous acquisition we acquired TCSB Statutory Trust I as summarized in the tables below at a discount. The discount at acquisition totaled $1.4 million and is being amortized through its maturity date and is included in interest expense – other borrowings and subordinated debt and debentures in the Consolidated Statements of Operations.

77

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Summary information regarding subordinated debentures as of December 31 follows:

		2021
Entity Name	Issue Date
		Subordinated Debentures			Trust Preferred Securities Issued			Common Stock Issued
		(In thousands)
IBC Capital Finance III	May 2007	$	12,372		$	12,000		$	372
IBC Capital Finance IV	September 2007		15,465			15,000			465
Midwest Guaranty Trust I	November 2002		7,732			7,500			232
TCSB Statutory Trust I	March 2005		5,155			5,000			155
Discount on TCSB Statutory Trust I			(1,132	)		(1,132	)		0
		$	39,592		$	38,368		$	1,224

		2020
Entity Name	Issue Date
		Subordinated Debentures			Trust Preferred Securities Issued			Common Stock Issued
		(In thousands)
IBC Capital Finance III	May 2007	$	12,372		$	12,000		$	372
IBC Capital Finance IV	September 2007		15,465			15,000			465
Midwest Guaranty Trust I	November 2002		7,732			7,500			232
TCSB Statutory Trust I	March 2005		5,155			5,000			155
Discount on TCSB Statutory Trust I			(1,200	)		(1,200	)		0
		$	39,524		$	38,300		$	1,224

Other key terms for the subordinated debentures and trust preferred securities that were outstanding at December 31, 2021 and 2020 follow:

Entity Name	Maturity Date	Interest Rate	First Permitted Redemption Date
IBC Capital Finance III	July 30, 2037	3 month LIBOR plus 1.60%	July 30, 2012
IBC Capital Finance IV	September 15, 2037	3 month LIBOR plus 2.85%	September 15, 2012
Midwest Guaranty Trust I	November 7, 2032	3 month LIBOR plus 3.45%	November 7, 2007
TCSB Statutory Trust I	March 17, 2035	3 month LIBOR plus 2.20%	March 17, 2010

The subordinated debentures and trust preferred securities are cumulative and have a feature that permits us to defer distributions (payment of interest) from time to time for a period not to exceed 20 consecutive quarters. Interest is payable quarterly on each of the subordinated debentures and trust preferred securities and no distributions were deferred at December 31, 2021 and 2020.

We have the right to redeem the subordinated debentures and trust preferred securities (at par) in whole or in part from time to time on or after the first permitted redemption date specified above or upon the occurrence of specific events defined within the trust indenture agreements.

Distributions (payment of interest) on the trust preferred securities are included in interest expense – other borrowings and subordinated debt and debentures in the Consolidated Statements of Operations.

78

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

NOTE 11 – COMMITMENTS AND CONTINGENT LIABILITIES

In the normal course of business, we enter into financial instruments with off-balance sheet risk to meet the financing needs of customers or to reduce exposure to fluctuations in interest rates. These financial instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve varying degrees of credit and interest-rate risk in excess of amounts reflected in the Consolidated Statements of Financial Condition. Exposure to credit risk in the event of non-performance by the counterparties to the financial instruments for loan commitments to extend credit and standby letters of credit is represented by the contractual amounts of those instruments.

A summary of financial instruments with off-balance sheet risk at December 31 follows:

	2021		2020
	(In thousands)
Financial instruments whose risk is represented by contract amounts
Commitments to extend credit	$	672,693	$	644,815
Standby letters of credit		9,208		9,361

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. Since commitments may expire without being drawn upon, the commitment amounts do not represent future cash requirements. Commitments are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities.

Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in such transactions is essentially the same as that involved in extending loan facilities and, accordingly, standby letters of credit are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities. The majority of the standby  letters of credit are on-demand with no stated maturity date and have variable rates that range from 2.50% to 12.00%.

COVID-19 Pandemic

The COVID-19 pandemic and the related government mandates, restrictions, and guidance have created and may continue to create and contribute to significant economic uncertainty and market disruptions. Throughout 2020 and 2021, the volatility created by the pandemic and responses to the pandemic impacted our performance, customers, and the markets we serve.

Federal and state government responses have also created uncertainty. On November 4, 2021, the U.S. Department of Labor implemented an emergency temporary standard (ETS) mandating that all employers with 100 workers or more must require their employees to be fully vaccinated or submit to weekly testing. The ETS has been met with many subsequent legal challenges. On January 13, 2022, the U.S. Supreme Court stayed the ETS, sending the case back to the U.S. Court of Appeals for the Sixth Circuit for a decision on the merits. The timeline for such a decision is undetermined, and the outcomes remain unpredictable. In Michigan, the Department of Health and Human Services announced its intent to update quarantine and isolation periods to align with the Centers for Disease Control and Prevention’s newly shortened guidelines. These impending mandates and guidelines may have significant effects on the U.S. and Michigan economies, the banking sector generally, and our business specifically, the scope of which cannot be foreseen.

Based on this uncertainty, it is difficult to predict the extent to which the pandemic will continue to adversely impact our business, results of operations, financial condition, and customers. The potential impacts may include, but are not limited to:

• difficulties encountered by our business customers in addressing the effects of the pandemic may cause increases in loan delinquencies, foreclosures and defaults;

• increases in our allowance for credit losses may be necessary;

• declines in collateral values may occur;

• third party disruptions may occur, including outages at network providers, on-line banking vendors and other suppliers;

• there is increased cyber and payment fraud risk, as cybercriminals attempt to profit from the disruption, given increased online and remote activity;

• we may experience operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions; and/or

• our production and efficiency may suffer due to employee illnesses and/or employees having to work remotely.

79

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Given the ongoing uncertainty with respect to the pandemic and potential government responses, these risk factors may continue to some degree for a significant period of time.

The extent to which the COVID-19 pandemic may impact our business, results of operations, asset valuations, financial condition, and customers will depend on future developments, which continue to be highly uncertain and difficult to predict. Those developments and factors are expected to include the evolution of the virus and new and emerging virus variants, vaccination rates and subsequent vaccine-“boosters,” actions taken by governmental authorities to address the foregoing, and the enforcement thereof, and how quickly and to what extent normal economic and operating conditions stabilize. Potential developments also include market factors, such as interest rates, supply chain disruptions, inflation, consumer-welfare, and employment rates. We do not know the full extent of the potential impact. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale, loans, capitalized mortgage loan servicing rights or deferred tax assets.

Certain consumer-driven industries (including restaurants, hotels, retail, fitness, and other industries) have experienced increased stress and have been more adversely impacted by the COVID-19 pandemic and related consumer trends, labor shortages and supply chain disruptions. We believe that the following concentrations within our commercial loan portfolio represent greater potential risk in the current economic environment. The balances below are as of December 31, 2021.

			% of
			Total
	Amount		Loans
	(Dollars in millions)
Commercial and industrial:
Retail	$	70		2.4	%
Food service		49		1.7
Hotel		40		1.4
		159		5.5
Commercial real estate:
Retail		109		3.8
Office		72		2.5
Multifamily		55		1.9
		236		8.1
Total	$	395		13.6	%

At December 31, 2021, we had 0 commercial loans in forbearance.  However, we continue to closely monitor these industry concentrations and at present do not foresee any significant losses relative to this portion of our loan portfolio given the current economic conditions in Michigan and the fact that many businesses are reporting increased spending.  However, a high degree of uncertainty still exists with respect to the impact of the COVID-19 pandemic and the related economic disruptions on the future performance of our loan portfolio, including these concentrations.

Litigation

We are involved in various litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our consolidated financial position or results of operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued. At this time, we estimate the maximum amount of additional losses that are reasonably possible is insignificant. However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages, this maximum amount may change in the future.

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The litigation matters described in the preceding paragraph primarily include claims that have been brought against us for damages, but do not include litigation matters where we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans). These excluded, collection-related matters may involve claims or counterclaims by the opposing party or parties, but we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote.

Visa Stock

We own 12,566 shares of VISA Class B common stock. At the present time, these shares can only be sold to other Class B shareholders. As a result, there has generally been limited transfer activity in private transactions between buyers and sellers. Given the limited activity that we have become aware of  and the continuing uncertainty regarding the likelihood, ultimate timing and eventual exchange rate for Class B shares into Class A shares, we continue to carry these shares at zero, representing cost basis less impairment. However, given the current conversion ratio of 1.6181 Class A shares for every 1 Class B share and the closing price of VISA Class A shares on February 25, 2022 of $219.27 per share, our 12,566 Class B shares would have a current “value” of approximately $4.5 million. We continue to monitor Class B trading activity and the status of the resolution of certain litigation matters at VISA that would trigger the conversion of Class B common shares into Class A common shares, which would not have any trading restrictions.

NOTE 12 – SHAREHOLDERS’ EQUITY AND NET INCOME PER COMMON SHARE

Our Board of Directors authorized share repurchase plans to buy back up to 5% of our outstanding common stock during 2021, 2020 and 2019. In addition, in June, 2019 our Board of Directors authorized a 300,000 share expansion of the 2019 repurchase plan. During 2021, 2020 and 2019 repurchases were made through open market and negotiated transactions and totaled 814,910, 708,956 and 1,204,688 shares of common stock, respectively for an aggregate purchase price of $17.3 million, $14.2 million and $26.3 million, respectively.

A reconciliation of basic and diluted net income per common share for the years ended December 31 follows:

	2021		2020		2019
	(In thousands, except per share amounts)
Net income	$	62,895	$	56,152	$	46,435
Weighted average shares outstanding (1)		21,585		21,977		22,894
Stock units for deferred compensation plan for non-employee directors		121		121		132
Effect of stock options		69		90		115
Performance share units		32		33		42
Weighted average shares outstanding for calculation of diluted earnings per share		21,807		22,221		23,183
Net income per common share
Basic (1)	$	2.91	$	2.56	$	2.03
Diluted	$	2.88	$	2.53	$	2.00

(1) Basic net income per common share includes weighted average common shares outstanding during the period and participating share awards.

Weighted average stock options outstanding that were not considered in computing diluted net income per common share because they were anti-dilutive were 0 for each year ended 2021, 2020 and 2019, respectively.

81

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

NOTE 13 – INCOME TAX

The composition of income tax expense for the years ended December 31 follows:

	2021		2020			2019
	(In thousands)
Current expense	$	12,506	$	15,459		$	10,237
Deferred expense (benefit)		1,912		(2,130	)		1,088
Income tax expense	$	14,418	$	13,329		$	11,325

The deferred income tax expense of $1.9 million in 2021 can be primarily attributed to the increase in capitalized mortgage servicing rights while the deferred income tax benefit of $2.1 million during 2020 can be primarily attributed to the increase in our allowance for credit losses while the deferred income tax expense of $1.1 million during 2019 can be primarily attributed to the utilization of our net operating loss (“NOL”) carryfoward and alternative minimum tax credit carryforward.

A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate of 21% for 2021, 2020 and 2019 to the income before income tax for the years ended December 31 follows:

	2021			2020			2019
	(In thousands)
Statutory rate applied to income before income tax	$	16,236		$	14,591		$	12,130
Tax-exempt income		(1,487	)		(690	)		(375	)
Share-based compensation		(184	)		(204	)		(204	)
Bank owned life insurance		(119	)		(196	)		(233	)
Unrecognized tax benefit		(11	)		(206	)		(134	)
Non-deductible meals, entertainment and memberships		32			57			86
Other, net		(49	)		(23	)		55
Income tax expense	$	14,418		$	13,329		$	11,325

82

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31 follow:

	2021		2020
	(In thousands)
Deferred tax assets
Allowance for credit losses (1)	$	9,923	$	7,363
Property and equipment		1,405		1,047
Lease liabilities		1,386		1,652
Reserve for unfunded lending commitments		941		379
Share-based compensation		734		742
Deferred compensation		390		321
Loss reimbursement on sold loans reserve		242		214
Non accrual loan interest income		194		203
Other than temporary impairment charge on securities available for sale		144		144
Other		276		0
Gross deferred tax assets		15,635		12,065
Deferred tax liabilities
Capitalized mortgage loan servicing rights		5,509		3,550
Deferred loan fees		2,011		1,901
Unrealized gain on securities available for sale		1,674		4,206
Lease right of use asset		1,361		1,606
Purchase premiums, net		735		509
Other		0		18
Gross deferred tax liabilities		11,290		11,790
Deferred tax assets, net (2)	$	4,345	$	275

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

(2) Included in accrued income and other assets on the Consolidated Statements of Financial Position.

We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a ‘‘more likely than not’’ standard. The ultimate realization of this asset is primarily based on generating future income. We concluded at both December 31, 2021 and 2020, that the realization of substantially all of our deferred tax assets continues to be more likely than not.

Changes in unrecognized tax benefits for the years ended December 31 follow:

	2021			2020			2019
	(In thousands)
Balance at beginning of year	$	180		$	438		$	588
Additions based on tax positions related to the current year		11			15			20
Reductions due to the statute of limitations		(11	)		(273	)		(170	)
Reductions due to settlements		0			0			0
Balance at end of year	$	180		$	180		$	438

83

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

If recognized, the entire amount of unrecognized tax benefits, net of $0.04 million of federal tax on state benefits, would affect our effective tax rate. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease in the next twelve months. NaN amounts were expensed for interest and penalties for the years ended December 31, 2021, 2020 and 2019. NaN amounts were accrued for interest and penalties at December 31, 2021, 2020 and 2019. At December 31, 2021, U.S. Federal tax years 2018 through the present remain open to examination.

NOTE 14 – SHARE BASED COMPENSATION AND BENEFIT PLANS

We maintain share based payment plans that include a non-employee director stock purchase plan and a long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.7 million shares of common stock as of December 31, 2021. The non-employee director stock purchase plan permits the grant of additional share based payments for up to 0.1 million shares of common stock as of December 31, 2021. Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.

During 2021, 2020 and 2019 pursuant to our long-term incentive plan, we granted 0.09 million, 0.06 million and 0.06 million shares, respectively of restricted stock and 0.02 million during each year of performance stock units (‘‘PSUs’’), to certain officers. Except for 0.010 million shares of restricted stock issued in 2019 that vest ratably over three years, all shares of restricted stock and PSUs cliff vest after a period of three years.  The performance feature of the PSUs is based on a comparison of our total shareholder return over the vesting period starting on the grant date to the total shareholder return over that period for a banking index of our peers.  We have not issued stock options in the previous three years.

Our directors may elect to receive all or a portion of their cash retainer fees in the form of common stock (either on a current basis or on a deferred basis) pursuant to the non-employee director stock purchase plan referenced above. Shares equal in value to that portion of each director’s fees that he or she has elected to receive   in stock on a current basis are issued each quarter and vest immediately. Shares issued on a deferred basis are credited at the rate of 90% of the current fair value of our common stock and vest immediately. We issued 0.02 million, 0.02 million and 0.01 million shares to directors pursuant to this plan during the years ending 2021, 2020 and 2019, respectively and expensed their value during those same periods.

Total compensation expense recognized for grants pursuant to our long-term incentive plan was $1.6 million in 2021, 2020 and 2019. The corresponding tax benefit relating to this expense was $0.3 million during each year. Total expense recognized for non-employee director share based payments was $0.4 million, $0.4 million and $0.3 million in 2021, 2020 and 2019, respectively. The corresponding tax benefit relating to this expense was $0.08 million, $0.07 million and $0.05 million in 2021, 2020 and 2019, respectively.

84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

At December 31, 2021, the total expected compensation cost related to non-vested restricted stock and PSUs not yet recognized was $2.1 million. The weighted-average period over which this amount will be recognized is 1.8 years.

A summary of outstanding stock option grants and related transactions follows:

	Number of Shares			Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregated Intrinsic Value
								(In thousands)
Outstanding at January 1,2021		121,189		$	4.81
Granted		0
Exercised		(40,350	)		2.90
Forfeited		0
Expired		0
Outstanding at December 31, 2021		80,839		$	5.76		1.6	$	1,464
Vested and expected to vest at December 31, 2021		80,839		$	5.76		1.6	$	1,464
Exercisable at December 31, 2021		80,839		$	5.76		1.6	$	1,464

A summary of outstanding non-vested stock and related transactions follows:

	Number of Shares			Weighted- Average Grant Date Fair Value
Outstanding at January 1, 2021		207,117		$	22.70
Granted		114,565			20.45
Vested		(73,081	)		22.82
Forfeited		(14,375	)		21.89
Outstanding at December 31, 2021		234,226		$	21.64

Certain information regarding options exercised during the periods ending December 31 follows:

	2021		2020		2019
	(In thousands)
Intrinsic value	$	752	$	293	$	897
Cash proceeds received	$	117	$	57	$	706
Tax benefit realized	$	158	$	61	$	188

We maintain 401(k) and employee stock ownership plans covering substantially all of our full-time employees. We matched 50% of employee contributions to the 401(k) plan up to a maximum of 8% of participating employees’ eligible wages for 2021, 2020 and 2019. Contributions to the employee stock ownership plan are determined annually and require approval of our Board of Directors. The maximum contribution is 6% of employees’ eligible wages. Contributions to the employee stock ownership plan were 2% for 2021, 2020 and 2019. Amounts expensed for these retirement plans were $3.3 million, $3.2 million and $2.6 million in 2021, 2020 and 2019, respectively.

Our employees participate in various performance-based compensation plans. Amounts expensed for all incentive plans totaled $15.6 million, $15.7 million and $9.5 million in 2021, 2020 and 2019, respectively.

We also provide certain health care and life insurance programs to substantially all full-time employees. Amounts expensed for these programs totaled $6.1 million, $4.8 million and $5.7 million in 2021, 2020 and 2019 respectively.

 These insurance programs are also available to retired employees at their own expense.

85

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

NOTE 15 – OTHER NON-INTEREST INCOME

Other non-interest income for the years ended December 31 follows:

	2021		2020		2019
	(In thousands)
Investment and insurance commissions	$	2,603	$	1,971	$	1,658
ATM fees		1,133		1,197		1,403
Bank owned life insurance		567		910		1,111
Other		5,089		3,443		5,110
Total other non-interest income	$	9,392	$	7,521	$	9,282

NOTE 16 – DERIVATIVE FINANCIAL INSTRUMENTS

We are required to record derivatives on our Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.

86

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Our derivative financial instruments according to the type of hedge in which they are designated at December 31 follow:

	2021
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
Fair value hedge designation
Pay-fixed interest rate swap agreements - commercial	$	6,753		7.4	$	(384	)
Pay-fixed interest rate swap agreements - securities available for sale		148,895		5.8		4,413
Total	$	155,648		5.9	$	4,029
No hedge designation
Rate-lock mortgage loan commitments	$	129,846		0.1	$	2,140
Mandatory commitments to sell mortgage loans		97,737		0.1		(68	)
Interest rate swaption agreement		10,000		0.2		186
Pay-fixed interest rate swap agreements - commercial		207,080		5.7		(5,179	)
Pay-variable interest rate swap agreements - commercial		207,080		5.7		5,179
Interest rate cap agreements		90,000		1.3		35
Total	$	741,743		3.4	$	2,293

	2020
	Notional Amount		Average Maturity (years)		Fair Value
	(Dollars in thousands)
Fair value hedge designation
Pay-fixed interest rate swap agreements - commercial	$	7,088		8.4	$	(776	)
Pay-fixed interest rate swap agreements - securities available for sale		41,950		7.1		15
Total	$	49,038		7.3	$	(761	)
No hedge designation
Rate-lock mortgage loan commitments	$	168,816		0.1	$	7,020
Mandatory commitments to sell mortgage loans		186,092		0.1		(941	)
Pay-fixed interest rate swap agreements - commercial		147,456		4.5		(9,700	)
Pay-variable interest rate swap agreements - commercial		147,456		4.5		9,700
Pay-fixed interest rate swap agreements		25,000		0.6		(295	)
Interest rate cap agreements		135,000		1.8		5
Purchased options		2,908		0.5		42
Written options		2,848		0.5		(42	)
Total	$	815,576		2.0	$	5,789

We have established management objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. We monitor our interest rate risk position via simulation modeling reports. The goal of our asset/liability management efforts is to maintain profitable financial leverage within established risk parameters.

87

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

To meet our asset/liability management objectives, we may periodically enter into derivative financial instruments to mitigate exposure to fluctuations in cash flows resulting from changes in interest rates (‘‘Cash Flow Hedges’’). Cash Flow Hedges had included certain pay-fixed interest rate swap and interest rate cap agreements.  Pay-fixed interest rate swap agreements convert the variable-rate cash flows on debt obligations to fixed-rates.  Under interest-rate cap agreements, we will receive cash if interest rates rise above a predetermined level. As a result, we effectively have variable-rate debt with an established maximum rate. We paid an upfront premium on interest rate caps which was recognized in earnings in the same period in which the hedged item affected earnings.  During the first and third quarters of 2020 we transferred all of our Cash Flow Hedge interest rate cap and pay-fixed interest rate swap agreements, respectively to a no hedge designation. The $2.0 million and $0.5 million unrealized loss on our Cash Flow Hedge interest rate cap and pay-fixed interest rate swap agreements, respectively, which were included as a component of accumulated other comprehensive income at the time of the transfers, were being reclassified into earnings over the remaining life of the interest rate cap agreements and pay-fixed interest rate swap agreements.  In the fourth quarter of 2020 it became probable that the forecasted transactions being hedged by these interest rate cap and pay-fixed interest rate swap agreements would not occur by the end of the originally specified time period. As a result, all remaining unrealized losses included as a component of accumulated other comprehensive income were reclassified into earnings at that time. The no hedge designation pay-fixed interest rate swap agreements, which all matured in 2021, as well as the no hedge designation interest rate cap agreements in the tables above were classified as a no hedge designation during 2020 and any changes in fair value since the transfers to the no hedge designation are recorded in earnings.

We have entered into a pay-fixed interest rate swap to protect a portion of the fair value of a certain fixed rate commercial loan (‘‘Fair Value Hedge – Commercial Loan’’). As a result, changes in the fair value of the pay-fixed interest rate swap is expected to offset changes in the fair value of the fixed rate commercial loan due to fluctuations in interest rates. We record the fair value of Fair Value Hedge – Commercial Loan in accrued income and other assets and accrued expenses and other liabilities on our Consolidated Statements of Financial Condition. The hedged item (fixed rate commercial loan) is also recorded at fair value which offsets the adjustment to the Fair Value Hedge – Commercial Loan. On an ongoing basis, we adjust our Consolidated Statements of Financial Condition to reflect the then current fair value of both the Fair Value Hedge – Commercial Loan and the hedged item. The related gains or losses are reported in interest income – interest and fees on loans in our Consolidated Statements of Operations.

We have entered into pay-fixed interest rate swaps to protect a portion of the fair value of certain securities available for sale (‘‘Fair Value Hedge – AFS Securities’’). As a result, the change in the fair value of the pay-fixed interest rate swaps is expected to offset a portion of the change in the fair value of the fixed rate securities available for sale due to fluctuations in interest rates. We record the fair value of Fair Value Hedge – AFS Securities in accrued income and other assets and accrued expenses and other liabilities on our Consolidated Statements of Financial Condition. The hedged items (fixed rate securities available for sale) are also recorded at fair value which offsets the adjustment to the Fair Value Hedge – AFS Securities. On an ongoing basis, we adjust our Consolidated Statements of Financial Condition to reflect the then current fair value of both the Fair Value Hedge – AFS Securities and the hedged item. The related gains or losses are reported in interest income – interest on securities available for sale – tax-exempt in our Consolidated Statements of Operations.

Certain derivative financial instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Consolidated Statements of Financial Condition and is adjusted on an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments not designated as hedges are recognized in earnings.

In the ordinary course of business, we enter into rate-lock mortgage loan commitments with customers (‘‘Rate-Lock Commitments’’). These commitments expose us to interest rate risk. We also enter into mandatory commitments to sell mortgage loans (‘‘Mandatory Commitments’’) to reduce the impact of price fluctuations of mortgage loans held for sale and Rate-Lock Commitments. Mandatory Commitments help protect our loan sale profit margin from fluctuations in interest rates. The changes in the fair value of Rate Lock Commitments and Mandatory Commitments are recognized currently as part of net gains on mortgage loans in the Consolidated Statements of Operations. We obtain market prices on Mandatory Commitments and Rate-Lock Commitments. Net gains on mortgage loans, as well as net income, may be more volatile as a result of these derivative instruments, which are not designated as hedges.

We have purchased a swaption agreement, whereby we have the right but not the obligation to pay fixed on an interest rate swap at a future date, in an attempt to reduce the impact of price fluctuations of certain mortgage construction loans held for sale. The changes in the fair value of the swaption agreement is recognized currently as part of net gains on mortgage loans in our Consolidated Statements of Operations.

88

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

In prior periods we offered to our deposit customers an equity linked time deposit product (‘‘Altitude CD’’). The Altitude CD was a time deposit that provided the customer a guaranteed return of principal at maturity plus a potential equity return (a written option), while we receive a like stream of funds based on the equity return (a purchased option). The written and purchased options will generally move in opposite directions resulting in little or no net impact on our Consolidated Statements of Operations. The written and purchased options in the table above relate to this Altitude CD product and matured during the fourth quarter of 2021.

We have a program that allows commercial loan customers to lock in a fixed rate for a longer period of time than we would normally offer for interest rate risk reasons. We will enter into a variable rate commercial loan and  an interest rate swap agreement with a customer and then enter into an offsetting interest rate swap agreement with an unrelated party. The interest rate swap agreement fair values will generally move in opposite directions resulting in little or no net impact on our Consolidated Statements of Operations. All of the interest rate swap agreements-commercial with no hedge designation in the table above relate to this program.

The following table illustrate the impact that the derivative financial instruments discussed above have on individual line items in the Consolidated Statements of Financial Condition for the periods presented:

Fair Values of Derivative Instruments

	Asset Derivatives								Liability Derivatives
	December 31,								December 31,
	2021				2020				2021				2020
	Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value		Balance Sheet Location		Fair Value
	(In thousands)
Derivatives designated as hedging instruments		-				-				-				-
Pay-fixed interest rate swap agreements	Other assets		$	4,413	Other assets		$	15	Other liabilities		$	384	Other liabilities		$	776
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitments	Other assets		$	2,140	Other assets		$	7,020	Other liabilities		$	0	Other liabilities		$	0
Mandatory commitments to sell mortgage loans	Other assets			0	Other assets			0	Other liabilities			68	Other liabilities			941
Interest rate swaption agreement	Other assets			186	Other assets			0	Other liabilities			0	Other liabilities			0
Pay-fixed interest rate swap agreements - commercial	Other assets			165	Other assets			0	Other liabilities			5,344	Other liabilities			9,700
Pay-variable interest rate swap agreements - commercial	Other assets			5,344	Other assets			9,700	Other liabilities			165	Other liabilities			0
Pay-fixed interest rate swap agreements	Other assets			0	Other assets			0	Other liabilities			0	Other liabilities			295
Interest rate cap agreements	Other assets			35	Other assets			5	Other liabilities			0	Other liabilities			0
Purchased options	Other assets			0	Other assets			42	Other liabilities			0	Other liabilities			0
Written options	Other assets			0	Other assets			0	Other liabilities			0	Other liabilities			42
				7,870				16,767				5,577				10,978
Total derivatives			$	12,283			$	16,782			$	5,961			$	11,754

89

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The effect of derivative financial instruments on the Consolidated Statements of Operations follows:

Year Ended December 31,
	Gain (loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion)								Location of  Gain (Loss)  Reclassified  from  Accumulated  Other  Comprehensive Income  into Income  (Effective  Portion)	Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion)							Location of  Gain (Loss) Recognized  in Income	Gain (Loss) Recognized in Income
	2021		2020			2019				2021		2020			2019			2021			2020			2019
	(In thousands)
Fair Value Hedges
Pay-fixed interest rate swap agreement - commercial																	Interest and fees on loans	$	392		$	(534	)	$	(242	)
Pay-fixed interest rate swap agreement - securities available for sale																	Interest on securities available for sale - tax-exempt		4,398			15			0
Total																		$	4,790		$	(519	)	$	(242	)
Cash Flow Hedges
Interest rate cap agreements	$	0	$	125		$	(1,211	)	Interest expense	$	0	$	(1,885	)	$	363
Pay-fixed interest rate swap agreements		0		(479	)		(392	)	Interest expense		0		(654	)		62
Total	$	0	$	(354	)	$	(1,603	)		$	0	$	(2,539	)	$	425
No hedge designation
Rate-lock mortgage loan commitments																	Net gains on mortgage loans	$	(4,880	)	$	5,608		$	725
Mandatory commitments to sell mortgage loans																	Net gains on mortgage loans		873			(791	)		233
Interest rate swaption agreement																	Net gains on mortgage loans		(2	)		0			-
Pay-fixed interest rate swap agreements - commercial																	Interest income		4,521			(6,059	)		(4,046	)
Pay-variable interest rate swap agreements -commercial																	Interest income		(4,521	)		6,059			4,046
Pay-fixed interest rate swap agreements																	Interest expense		295			231			0
Interest rate cap agreements																	Interest expense		30			(57	)		0
Purchased options																	Interest expense		(42	)		(99	)		25
Written options																	Interest expense		42			97			(23	)
Total																		$	(3,684	)	$	4,989		$	960

90

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

NOTE 17 – RELATED PARTY TRANSACTIONS

Certain directors and executive officers, including companies in which they are officers or have significant ownership, were loan and deposit customers during 2021 and 2020.

A summary of loans to our directors and executive officers (which includes loans to entities in which the individual owns a 10% or more voting interest) for the years ended December 31 follows:

	2021			2020
	(In thousands)
Balance at beginning of year	$	2,416		$	13,077
New loans and advances		5,722			417
Repayments		(1,259	)		(11,078	)
Balance at end of year	$	6,879		$	2,416

We had $1.9 million and $1.74 million in loan commitments to directors and executive officers at December 31, 2021 and 2020, respectively. Of these, commitments of $0.02 million and $0.04 million were outstanding at December 31, 2021 and 2020, respectively, and included in the table above.

Deposits held by us for directors and executive officers totaled $3.4 million and $2.0 million at December 31, 2021 and 2020, respectively.

NOTE 18 – LEASES

We have entered into leases in the normal course of business primarily for office facilities, some of which include renewal options and escalation clauses. Certain leases also include both lease components (fixed payments including rent, taxes and insurance costs) and non-lease components (common area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components together for all leases. We have also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on our Consolidated Statements of Financial Condition. Most of our leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion and are included in our right of use (“ROU”) assets and lease liabilities if they are reasonably certain of exercise.

Leases are classified as operating or finance leases at the lease commencement date (we did not have any finance leases as of December 31, 2021). Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. The ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payment over the lease term.

As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.

The cost components of our operating leases follows:

	2021		2020		2019
	(In thousands)
Operating lease cost	$	1,672	$	1,780	$	2,217
Variable lease cost		63		69		142
Short-term lease cost		64		36		19
Total	$	1,799	$	1,885	$	2,378

Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities.

91

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Supplemental balance sheet information related to our operating leases follows:

	2021			2020
	(In thousands)
Lease right of use asset (1)	$	6,481		$	7,646
Lease liabilities (2)	$	6,602		$	7,868
Weighted average remaining lease term (years)		6.50			7.12
Weighted average discount rate		2.3	%		2.4	%

(1) Included in Accrued income and other assets in our Consolidated Statements of Financial Condition.

(2) Included in Accrued expenses and other liabilities in our Consolidated Statements of  Financial Condition.

Maturity analysis of our lease liabilities at December 31, 2021 based on required contractual payments follows:

	(In thousands)
2022	$	1,619
2023		1,311
2024		816
2025		809
2026		744
2027 and thereafter		1,795
Total lease payments		7,094
Less imputed interest		(492	)
Total	$	6,602

NOTE 19 – CONCENTRATIONS OF CREDIT RISK

Credit risk is the risk to earnings and capital arising from an obligor’s failure to meet the terms of any contract with our organization or otherwise failing to perform as agreed. Credit risk can occur outside of our traditional lending activities and can exist in any activity where success depends on counterparty, issuer or borrower performance. Concentrations of credit risk (whether on- or off-balance sheet) arising from financial instruments can exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries or certain geographic regions. Credit risk associated with these concentrations could arise when a significant amount of loans or other financial instruments, related by similar characteristics, are simultaneously impacted by changes in economic or other conditions that cause their probability of repayment or other type of settlement to be adversely affected. Our major concentrations of credit risk arise by collateral type and by industry. The significant concentrations by collateral type at December 31, 2021, include $999.0 million of loans secured by residential real estate and $279.0 million of construction and land development loans.

Additionally, within our commercial real estate and commercial loan portfolio, we had significant standard industry classification concentrations in the following categories as of December 31, 2021: Lessors of Nonresidential Real Estate ($358.6 million); Construction ($126.8 million); Lessors of Residential Real Estate ($100.2 million); Health Care and Social Assistance ($92.0 million); Accommodation and Food Services ($90.1 million) and  Manufacturing ($73.4 million). A geographic concentration arises because we primarily conduct our lending activities in the State of Michigan.

92

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

NOTE 20 – REGULATORY MATTERS

Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank’s current year net profits, combined with the retained net profits of the preceding two years. Further, the Bank cannot pay a dividend at any time that it has negative undivided profits. As of December 31, 2021, the Bank had positive undivided profits of $100.1 million. It is not our intent to have dividends paid in amounts that would reduce the capital of our Bank to levels below those which we consider prudent or that would not be in accordance with guidelines of regulatory authorities.

We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can result in certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our consolidated financial statements. In addition, capital adequacy rules include a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized institutions plus the buffer. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of December 31, 2021 and 2020, categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation (‘‘FDIC’’) categorization.

93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Our actual capital amounts and ratios at December 31 follow⁽¹⁾:

	Actual					Minimum for Adequately Capitalized Institutions					Minimum for Well-Capitalized Institutions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
2021
Total capital to risk-weighted assets
Consolidated	$	488,495		14.53	%	$	268,991		8.00	%	NA		NA
Independent Bank		438,352		13.05			268,808		8.00		$	336,011		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	406,645		12.09	%	$	201,743		6.00	%	NA		NA
Independent Bank		396,351		11.80			201,606		6.00		$	268,808		8.00	%
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	368,277		10.95	%	$	151,307		4.50	%	NA		NA
Independent Bank		396,351		11.80			151,205		4.50		$	218,407		6.50	%
Tier 1 capital to average assets
Consolidated	$	406,645		8.79	%	$	185,034		4.00	%	NA		NA
Independent Bank		396,351		8.57			185,077		4.00		$	231,347		5.00	%
2020
Total capital to risk-weighted assets
Consolidated	$	455,072		15.95	%	$	228,214		8.00	%	NA		NA
Independent Bank		401,005		14.06			228,111		8.00		$	285,139		10.00	%
Tier 1 capital to risk-weighted assets
Consolidated	$	379,395		13.30	%	$	171,161		6.00	%	NA		NA
Independent Bank		365,343		12.81			171,083		6.00		$	228,111		8.00	%
Common equity tier 1 capital to risk-weighted assets
Consolidated	$	341,095		11.96	%	$	128,370		4.50	%	NA		NA
Independent Bank		365,343		12.81			128,312		4.50		$	185,340		6.50	%
Tier 1 capital to average assets
Consolidated	$	379,395		9.15	%	$	165,825		4.00	%	NA		NA
Independent Bank		365,343		8.81			165,828		4.00		$	207,285		5.00	%

(1) These ratios do not reflect a capital conservation buffer of 2.50% at December 31, 2021 and 2020.

NA - Not applicable

94

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The components of our regulatory capital are as follows:

	Consolidated						Independent Bank
	December 31,						December 31,
	2021			2020			2021			2020
	(In thousands)
Total shareholders’ equity	$	398,484		$	389,522		$	426,558		$	413,770
Add (deduct)
Accumulated other comprehensive loss for regulatory purposes		(6,298	)		(15,821	)		(6,298	)		(15,821	)
Goodwill and other intangibles		(31,636	)		(32,606	)		(31,636	)		(32,606	)
CECL (1)		7,727			0			7,727			0
Common equity tier 1 capital		368,277			341,095			396,351			365,343
Qualifying trust preferred securities		38,368			38,300			0			0
Tier 1 capital		406,645			379,395			396,351			365,343
Subordinated debt		40,000			40,000			0			0
Allowance for credit losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets (2)		41,850			35,677			42,001			35,662
Total risk-based capital	$	488,495		$	455,072		$	438,352		$	401,005

(1) We elected the three year CECL transition method for regulatory purposes.

(2) Beginning January 1, 2021, calculation of allowances are based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

NOTE 21 – FAIR VALUE DISCLOSURES

FASB ASC topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.

Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 instruments include securities traded in less active dealer or broker markets.

Level 3: Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.

We used the following methods and significant assumptions to estimate fair value:

Securities: Where quoted market prices are available in an active market, securities available for sale are classified as Level 1 of the valuation hierarchy. We currently do not have any Level 1 securities. If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and primarily include agency securities, private label mortgage-backed securities, other asset backed securities, obligations of states and political subdivisions, trust preferred securities, corporate securities and foreign government securities.

95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Loans held for sale: The fair value of mortgage loans held for sale, carried at fair value is based on agency cash window loan pricing for comparable assets (recurring Level 2).

Collateral dependent loans with specific loss allocations based on collateral value: From time to time, certain collateral dependent loans will have an ACL established. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the collateral dependent loan as nonrecurring Level 3.  These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.

Other real estate: At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in net (gains) losses on other real estate and repossessed assets which is included other non-interest expense in the Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.

Appraisals for both collateral-dependent loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once received, an independent third party, or a member of our Collateral Evaluation Department (for commercial properties), or a member of our Special Assets/ORE Group (for residential properties) reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. We compare the actual selling price of collateral that has been sold to the most recent appraised value of our properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. For commercial and residential properties we typically discount an appraisal to account for various factors that the appraisal excludes in its assumptions. These additional discounts generally do not result in material adjustments to the appraised value.

Capitalized mortgage loan servicing rights: The fair value of capitalized mortgage loan servicing rights is based on a valuation model used by an independent third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Certain model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as Level 3. Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.

Derivatives: The fair value of rate-lock mortgage loan commitments is based on agency cash window loan pricing for comparable assets and the fair value of mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets (recurring Level 2). The fair value of interest rate swap, interest rate cap and swaption agreements are derived from proprietary models which utilize current market data. The significant fair value inputs can generally be observed in the market place and do not typically involve judgment by management (recurring Level 2). The fair value of purchased and written options is based on prices of financial instruments with similar characteristics and do not typically involve judgment by management (recurring Level 2).

96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:

			Fair Value Measurements Using
	Fair Value Measure- ments		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
December 31, 2021:
Measured at Fair Value on a Recurring Basis
Assets
Securities available for sale
U.S. agency	$	34,674	$	0	$	34,674	$	0
U.S. agency residential mortgage-backed		307,985		0		307,985		0
U.S. agency commercial mortgage-backed		22,926		0		22,926		0
Private label mortgage-backed		102,615		0		102,615		0
Other asset backed		216,170		0		216,170		0
Obligations of states and political subdivisions		576,076		0		576,076		0
Corporate		149,959		0		149,959		0
Trust preferred		1,919		0		1,919		0
Foreign government		506		0		506		0
Loans held for sale, carried at fair value		55,470		0		55,470		0
Capitalized mortgage loan servicing rights		26,232		0		0		26,232
Derivatives (1)		12,283		0		12,283		0
Liabilities
Derivatives (2)		5,961		0		5,961		0
Measured at Fair Value on a Non-recurring Basis:
Assets
Collateral dependent loans (3)
Commercial
Commercial and industrial		274		0		0		274
Commercial real estate		65		0		0		65
Mortgage
1-4 family owner occupied - non-jumbo		516		0		0		516
1-4 family non-owner occupied		130		0		0		130
1-4 family - 2nd lien		121		0		0		121
Resort lending		77		0		0		77
Installment
Boat lending		51		0		0		51
Recreational vehicle lending		77		0		0		77
Other		45		0		0		45

(1) Included in accrued income and other assets in the Consolidated Statements of Financial Condition.

(2) Included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.

(3) Only includes individually evaluated loans with specific loss allocations based on collateral value.

97

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

			Fair Value Measurements Using
	Fair Value Measure- ments		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
December 31, 2020:
Measured at Fair Value on a Recurring Basis
Assets
Securities available for sale
U.S. agency	$	10,748	$	0	$	10,748	$	0
U.S. agency residential mortgage-backed		344,582		0		344,582		0
U.S. agency commercial mortgage-backed		7,195		0		7,195		0
Private label mortgage-backed		42,829		0		42,829		0
Other asset backed		254,181		0		254,181		0
Obligations of states and political subdivisions		324,293		0		324,293		0
Corporate		86,017		0		86,017		0
Trust preferred		1,798		0		1,798		0
Foreign government		516		0		516		0
Loans held for sale, carried at fair value		92,434		0		92,434		0
Capitalized mortgage loan servicing rights		16,904		0		0		16,904
Derivatives (1)		16,782		0		16,782		0
Liabilities
Derivatives (2)		11,754		0		11,754		0
Measured at Fair Value on a Non-recurring Basis:
Assets
Impaired loans (3)
Commercial
Commercial and industrial		1,468		0		0		1,468
Commercial real estate		6,586		0		0		6,586
Mortgage
1-4 family owner occupied - jumbo		0		0		0		0
1-4 family owner occupied - non-jumbo		321		0		0		321
1-4 family non-owner occupied		155		0		0		155
1-4 family - 2nd lien		324		0		0		324
Resort lending		61		0		0		61
Installment
Boat lending		4		0		0		4
Recreational vehicle lending		31		0		0		31
Other		124		0		0		124
Other real estate (4)
1-4 family owner occupied - non-jumbo		102		0		0		102

(1) Included in accrued income and other assets in the Consolidated Statements of Financial Condition.

(2) Included in accrued expenses and other liabilities in the Consolidated Statements of Financial Condition.

(3) Only includes impaired loans with specific loss allocations based on collateral value.

(4) Only includes other real estate with subsequent write downs to fair value.

98

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Changes in fair values of financial assets for which we have elected the fair value option for the years ended December 31 were as follows:

	Net Gains (Losses) on Assets							Total Change in Fair Values Included
	Securities Available For Sale		Mortgage Loans		Mortgage Loan Servicing, net			in Current Period Earnings
	(In thousands)
2021
Loans held for sale	$	-	$	(2,805)	$	-		$	(2,805)
Capitalized mortgage loan servicing rights		-		-		(2,108	)		(2,108	)
2020
Loans held for sale		-		1,962		-			1,962
Capitalized mortgage loan servicing rights		-		-		(16,224	)		(16,224	)
2019
Equity securities at fair value		167		-		-			167
Loans held for sale		-		637		-			637
Capitalized mortgage loan servicing rights		-		-		(9,532	)		(9,532	)

For those items measured at fair value pursuant to our election of the fair value option, interest income is recorded within the Consolidated Statements of Operations based on the contractual amount of interest income earned on these financial assets and dividend income is recorded based on cash dividends received.

The following represent impairment charges recognized during the years ended December 31, 2021, 2020 and 2019 relating to assets measured at fair value on a non-recurring basis:

• Loans that are individually evaluated using the fair value of collateral for collateral dependent loans had a carrying amount of $1.4 million, which is net of a valuation allowance of  $0.6 million  at December 31, 2021, and had a carrying amount of $9.1 million, which is net of a valuation allowance of  $1.8 million at December 31, 2020. An additional provision for credit losses relating to these collateral dependent loans of $0.3 million, $0.7 million and $1.3 million was included in our results of operations for the years ending December 31, 2021, 2020 and 2019, respectively.

• Other real estate, which is measured using the fair value of the property, had a carrying amount of 0 which is net of a valuation allowance of $0.03 million at December 31, 2021, and a carrying amount of $0.10 million which is net of a valuation allowance of $0.09 million, at December 31, 2020. An additional charge relating to other real estate measured at fair value of 0, $0.03 million and $0.03 million was included in our results of operations during the years ended December 31, 2021, 2020 and 2019, respectively.

99

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

A reconciliation for all assets and (liabilities) measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31 follows:

	Capitalized Mortgage Loan Servicing Rights
	2021			2020			2019
	(In thousands)
Beginning balance	$	16,904		$	19,171		$	21,400
Total losses realized and unrealized:
Included in results of operations		(2,108	)		(16,224	)		(9,532	)
Included in other comprehensive income (loss)		0			0			0
Purchases, issuances, settlements, maturities and calls		11,436			13,957			7,303
Transfers in and/or out of Level 3		0			0			0
Ending balance	$	26,232		$	16,904		$	19,171
Amount of total losses for the period included in earnings attributable to the change in unrealized losses relating to assets and liabilities still held at December 31	$	(2,108	)	$	(16,224	)	$	(9,532	)

The fair value of our capitalized mortgage loan servicing rights has been determined based on a valuation model used by an independent third party as discussed above. The significant unobservable inputs used in the fair value measurement of the capitalized mortgage loan servicing rights are discount rate, cost to service, ancillary income, float rate and prepayment rate. Significant changes in all five of these assumptions in isolation would result in significant changes to the value of our capitalized mortgage loan servicing rights. Quantitative information about our Level 3 fair value measurements measured on a recurring basis follows:

	Asset Fair Value		Valuation Technique		Unobservable Inputs		Range			Weighted Average
	(In thousands)			-		-		-			-
2021
Capitalized mortgage loan servicing rights	$	26,232	Present value of net		Discount rate			10.00% to 13.00	%		10.07	%
			servicing revenue		Cost to service		$	67 to $281		$	78
					Ancillary income		20 to 30				21
					Float rate			1.36	%		1.36	%
					Prepayment rate			7.02% to 44.21	%		13.92	%
2020
Capitalized mortgage loan servicing rights	$	16,904	Present value of net		Discount rate			10.00% to 13.00	%		10.09	%
			servicing revenue		Cost to service		$	69 to $289		$	79
					Ancillary income		20 to 37				22
					Float rate			0.43	%		0.43	%
					Prepayment rate			7.92% to 64.70	%		20.85	%

100

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Quantitative information about Level 3 fair value measurements measured on a non-recurring basis follows:

Asset Fair Value

Valuation Technique

Unobservable Inputs

Range

Weighted Average

(In thousands)

-

-

-

-

2021

Collateral dependent loans

Commercial

$

339

Sales comparison

Adjustment for differences

approach

between comparable sales

(12.5)% to 12.0

%

1.5

%

Mortgage and Installment (1)

1,017

Sales comparison

Adjustment for differences

approach

between comparable sales

(30.1) to 29.3

0.2

Other real estate

2020

Impaired loans

Commercial

$

8,054

Sales comparison

Adjustment for differences

approach

between comparable sales

(40.0)% to 75.0

%

3.8

%

Mortgage and Installment (1)

1,020

Sales comparison

Adjustment for differences

approach

between comparable sales

(73.3) to 104.6

(1.5

)

Other real estate

Mortgage

102

Sales comparison

Adjustment for differences

approach

between comparable sales

(13.1) to 2.4

(3.6

)

(1) In addition to the valuation techniques and unobservable inputs discussed above, at December 31, 2021 and 2020 certain collateral dependent installment loans totaling approximately $0.17 million and $0.16 million are secured by collateral other than real estate.  For the majority of these loans, we apply internal discount rates to industry valuation guides.

The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected at December 31:

	Aggregate Fair Value		Difference		Contractual Principal
	(In thousands)
Loans held for sale
2021	$	55,470	$	1,051	$	54,419
2020		92,434		3,856		88,578
2019		69,800		1,894		67,906

NOTE 22 – FAIR VALUES OF FINANCIAL INSTRUMENTS

Most of our assets and liabilities are considered financial instruments. Many of these financial instruments lack an available trading market and it is our general practice and intent to hold the majority of our financial instruments to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments. These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values may not be a precise estimate. Changes in assumptions could significantly affect the estimates.

Estimated fair values have been determined using available data and methodologies that are considered suitable for each category of financial instrument. For instruments with adjustable interest rates which reprice frequently and without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances.

101

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The estimated recorded book balances and fair values at December 31 follow:

					Fair Value Using
	Recorded Book Balance		Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Un- observable Inputs (Level 3)
	(In thousands)
2021
Assets
Cash and due from banks	$	51,069	$	51,069	$	51,069	$	0	$	0
Interest bearing deposits		58,404		58,404		58,404		0		0
Securities available for sale		1,412,830		1,412,830		0		1,412,830		0
Federal Home Loan Bank and Federal Reserve Bank Stock		18,427	NA		NA		NA		NA
Net loans and loans held for sale		2,948,074		2,931,079		35,233		55,470		2,840,376
Accrued interest receivable		12,865		12,865		1		6,028		6,836
Derivative financial instruments		12,283		12,283		0		12,283		0
Liabilities
Deposits with no stated maturity (1)	$	3,781,298	$	3,781,298	$	3,781,298	$	0	$	0
Deposits with stated maturity (1)		335,792		336,006		0		336,006		0
Other borrowings		30,009		30,155		0		30,155		0
Subordinated debt		39,357		44,999		0		44,999		0
Subordinated debentures		39,592		33,866		0		33,866		0
Accrued interest payable		497		497		67		430		0
Derivative financial instruments		5,961		5,961		0		5,961		0
2020
Assets
Cash and due from banks	$	56,006	$	56,006	$	56,006	$	0	$	0
Interest bearing deposits		62,699		62,699		62,699		0		0
Securities available for sale		1,072,159		1,072,159		0		1,072,159		0
Federal Home Loan Bank and Federal Reserve Bank Stock		18,427	NA		NA		NA		NA
Net loans and loans held for sale		2,790,683		2,794,058		0		92,434		2,701,624
Accrued interest receivable		12,315		12,315		3		3,414		8,898
Derivative financial instruments		16,782		16,782		0		16,782		0
Liabilities
Deposits with no stated maturity (1)	$	3,198,338	$	3,198,338	$	3,198,338	$	0	$	0
Deposits with stated maturity (1)		439,017		441,457		0		441,457		0
Other borrowings		30,012		30,844		0		30,844		0
Subordinated debt		39,281		41,417		0		41,417		0
Subordinated debentures		39,524		30,265		0		30,265		0
Accrued interest payable		601		601		59		542		0
Derivative financial instruments		11,754		11,754		0		11,754		0

NA – Not applicable

(1) Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $562.210 million and $518.400 million at December 31, 2021 and 2020, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $24.416 million and $37.785 million at December 31, 2021 and 2020, respectively.

102

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance, which is nominal, and therefore are not disclosed.

Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the entire holdings of a particular financial instrument.

Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, the value of future earnings attributable to off-balance sheet activities and the value of assets and liabilities that are not considered financial instruments.

Fair value estimates for deposit accounts do not include the value of the core deposit intangible asset resulting from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.

NOTE 23 – ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

A summary of changes in accumulated other comprehensive income (loss) (‘‘AOCIL’’), net of tax during the years ended December 31 follows:

	Unrealized Gains (Losses) on Securities Available for Sale			Dispropor- tionate Tax Effects from Securities Available for Sale			Unrealized Losses on Cash Flow Hedges			Total
	(In thousands)
2021
Balances at beginning of period	$	15,822		$	(5,798	)	$	0		$	10,024
Other comprehensive loss before reclassifications		(8,408	)		0			0			(8,408	)
Amounts reclassified from AOCIL		(1,115	)		0			0			(1,115	)
Net current period other comprehensive loss		(9,523	)		0			0			(9,523	)
Balances at end of period	$	6,299		$	(5,798	)	$	0		$	501
2020
Balances at beginning of period	$	3,739		$	(5,798	)	$	(1,727	)	$	(3,786	)
Other comprehensive income (loss) before reclassifications		12,294			0			(279	)		12,015
Amounts reclassified from AOCIL		(211	)		0			2,006			1,795
Net current period other comprehensive income		12,083			0			1,727			13,810
Balances at end of period	$	15,822		$	(5,798	)	$	0		$	10,024
2019
Balances at beginning of period	$	(4,185	)	$	(5,798	)	$	(125	)	$	(10,108	)
Other comprehensive income (loss) before reclassifications		8,035			0			(1,266	)		6,769
Amounts reclassified from AOCIL		(111	)		0			(336	)		(447	)
Net current period other comprehensive income (loss)		7,924			0			(1,602	)		6,322
Balances at end of period	$	3,739		$	(5,798	)	$	(1,727	)	$	(3,786	)

The disproportionate tax effects from securities available for sale arose primarily due to tax effects of other comprehensive income (‘‘OCI’’) in the presence of a valuation allowance against our deferred tax assets and a pretax loss from operations. Generally, the amount of income tax expense or benefit allocated to operations is determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories in the current period. In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in operations. Release of material disproportionate tax effects from other comprehensive income to earnings is done by the portfolio method whereby the effects will remain in AOCIL as long as we carry a more than inconsequential portfolio of securities available for sale.

103

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

A summary of reclassifications out of each component of AOCIL for the years ended December 31 follows:

AOCIL Component	Reclassified From AOCIL			Affected Line Item in  Consolidated Statements of Operations
	(In thousands)
2021
Unrealized gains (losses) on securities available for sale	$	1,411		Net gains on securities available for sale
		0		Net impairment loss recognized in earnings
		1,411		Total reclassifications before tax
		296		Income tax expense
	$	1,115		Reclassifications, net of tax
2020
Unrealized gains (losses) on securities available for sale	$	267		Net gains on securities available for sale
		0		Net impairment loss recognized in earnings
		267		Total reclassifications before tax
		56		Income tax expense
	$	211		Reclassifications, net of tax
Unrealized gains (losses) on cash flow hedges	$	2,539		Interest expense
		533		Income tax expense
	$	2,006		Reclassification, net of tax
	$	(1,795	)	Total reclassifications for the period, net of tax
2019
Unrealized gains (losses) on securities available for sale	$	140		Net gains on securities available for sale
		0		Net impairment loss recognized in earnings
		140		Total reclassifications before tax
		29		Income tax expense
	$	111		Reclassifications, net of tax
Unrealized gains (losses) on cash flow hedges	$	(425	)	Interest expense
		(89	)	Income tax expense
	$	(336	)	Reclassification, net of tax
	$	447		Total reclassifications for the period, net of tax

104

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

NOTE 24 – INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION

Presented below are condensed financial statements for our parent company.

CONDENSED STATEMENTS OF FINANCIAL CONDITION
	December 31,
	2021		2020
	(In thousands)
ASSETS
Cash and due from banks	$	6,093	$	10,466
Interest bearing deposits - time		40,000		40,000
Investment in subsidiaries		432,949		418,465
Accrued income and other assets		96		805
Total Assets	$	479,138	$	469,736
LIABILITIES AND SHAREHOLDERS’ EQUITY
Subordinated debt	$	39,357	$	39,281
Subordinated debentures		39,592		39,524
Accrued expenses and other liabilities		844		684
Shareholders’ equity		399,345		390,247
Total Liabilities and Shareholders’ Equity	$	479,138	$	469,736

CONDENSED STATEMENTS OF OPERATIONS

	Year Ended December 31,
	2021			2020			2019
	(In thousands)
OPERATING INCOME
Dividends from subsidiary	$	32,000		$	24,000		$	29,000
Interest income		55			99			230
Other income		33			42			61
Total Operating Income		32,088			24,141			29,291
OPERATING EXPENSES
Interest expense		3,625			2,893			2,104
Administrative and other expenses		787			733			655
Total Operating Expenses		4,412			3,626			2,759
Income Before Income Tax and Equity in Undistributed Net Income of Subsidiaries		27,676			20,515			26,532
Income tax benefit		(1,048	)		(937	)		(423	)
Income Before Equity in Undistributed Net Income of Subsidiaries		28,724			21,452			26,955
Equity in undistributed net income of subsidiaries		34,171			34,700			19,480
Net Income	$	62,895		$	56,152		$	46,435

105

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

	Year Ended December 31,
	2021			2020			2019
	(In thousands)
Net Income	$	62,895		$	56,152		$	46,435
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES
Deferred income tax (benefit) expense		(81	)		(34	)		1,503
Share based compensation		95			89			65
Accretion of discount on subordinated debt and debentures		144			113			68
(Increase) decrease in accrued income and other assets		788			(307	)		891
Increase in accrued expenses and other liabilities		159			109			45
Equity in undistributed net income of subsidiaries		(34,171	)		(34,700	)		(19,480	)
Total Adjustments		(33,066	)		(34,730	)		(16,908	)
Net Cash From Operating Activities		29,829			21,422			29,527
CASH FLOW FROM (USED IN) INVESTING ACTIVITIES
Purchases of interest bearing deposits - time		(160,000	)		(85,000	)		(20,000	)
Maturity of interest bearing deposits - time		160,000			55,000			35,000
Net Cash From (Used In) Investing Activities		0			(30,000	)		15,000
CASH FLOW FROM (USED IN) FINANCING ACTIVITIES
Proceeds from issuance of subordinated debt, net of issuance costs		0			39,236			0
Dividends paid		(18,155	)		(17,618	)		(16,554	)
Proceeds from issuance of common stock		1,913			1,907			2,074
Share based compensation withholding obligation		(691	)		(755	)		(882	)
Repurchase of common stock		(17,269	)		(14,231	)		(26,284	)
Net Cash From (Used In) Financing Activities		(34,202	)		8,539			(41,646	)
Net Increase (Decrease) in Cash and Cash Equivalents		(4,373	)		(39	)		2,881
Cash and Cash Equivalents at Beginning of Year		10,466			10,505			7,624
Cash and Cash Equivalents at End of Year	$	6,093		$	10,466		$	10,505

NOTE 25 – REVENUE FROM CONTRACTS WITH CUSTOMERS

We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. We derive the majority of our revenue from financial instruments and their related contractual rights and obligations which for the most part are excluded from the scope of this topic. These sources of revenue that are excluded from the scope of this topic include interest income, net gains on mortgage loans, net gains on securities available for sale, mortgage loan servicing, net and bank owned life insurance and were approximately 84.6%, 88.1% and 84.9% of total revenues at December 31, 2021, 2020 and 2019, respectively.

Material sources of revenue that are included in the scope of ASC Topic 606 include service charges on deposits, other deposit related income, interchange income and investment and insurance commissions and are discussed in the following paragraphs. Generally these sources of revenue are earned at the time the service is delivered or over the course of a monthly period and do not result in any contract asset or liability balance at any given period end. As a result, there were 0 contract assets or liabilities recorded as of December 31, 2021.

106

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

Service charges on deposit accounts and other deposit related income: Revenues are earned on depository accounts for commercial and retail customers and include fees for transaction-based, account maintenance and overdraft services. Transaction-based fees, which includes services such as ATM use fees, stop payment charges and ACH fees are recognized at the time the transaction is executed as that is the time we fulfill our customer’s request. Account maintenance fees, which includes monthly maintenance services are earned over the course of a month representing the period over which the performance obligation is satisfied. Our obligation for overdraft services is satisfied at the time of the overdraft.

Interchange income: Interchange income primarily includes debit card interchange and network revenues. Debit card interchange and network revenues are earned on debit card transactions conducted through payment networks such as MasterCard and NYCE. Interchange income is recognized concurrently with the delivery of services on a daily basis. Interchange and network revenues are presented gross of interchange expenses, which are presented separately as a component of non-interest expense.

Investment and insurance commissions: Investment and insurance commissions include fees and commissions from asset management, custody, recordkeeping, investment advisory and other services provided to our customers. Revenue is recognized on an accrual basis at the time the services are performed and are generally based on either the market value of the assets managed or the services provided. We have an agent relationship with a third party  provider of these services and net certain direct costs charged by the third party provider associated with providing these services to our customers.

Net gains on other real estate and repossessed assets: We record a gain or loss from the sale of other real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. If we were to finance the sale of other real estate to the buyer, we would assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction is probable. Once these criteria are met, the other real estate asset would be derecognized and the gain or loss on sale would be recorded upon the transfer of control of the property to the buyer. There were 0 other real estate properties sold during 2021 that were financed by us.

Disaggregation of our revenue sources by attribute for the years ended December 31 follow:

2021
	Service Charges on Deposit Accounts		Other Deposit Related Income		Interchange Income		Investment and Insurance Commissions		Total
	(In thousands)
Retail
Overdraft fees	$	8,431	$	-	$	-	$	-	$	8,431
Account service charges		1,130		-		-		-		1,130
ATM fees		-		1,109		-		-		1,109
Other		-		819		-		-		819
Business
Overdraft fees		609		-		-		-		609
ATM fees		-		24		-		-		24
Other		-		328		-		-		328
Interchange income		-		-		14,045		-		14,045
Asset management revenue		-		-		-		1,689		1,689
Transaction based revenue		-		-		-		914		914
Total	$	10,170	$	2,280	$	14,045	$	2,603	$	29,098
Reconciliation to Consolidated Statement of Operations:
Non-interest income - other:
Other deposit related income									$	2,280
Investment and insurance commissions										2,603
Bank owned life insurance										567
Other										3,942
Total									$	9,392

107

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

2020
	Service Charges on Deposit Accounts		Other Deposit Related Income		Interchange Income		Investment and Insurance Commissions		Total
	(In thousands)
Retail
Overdraft fees	$	5,627	$	-	$	-	$	-	$	5,627
Account service charges		2,017		-		-		-		2,017
ATM fees		-		1,173		-		-		1,173
Other		-		769		-		-		769
Business
Overdraft fees		873		-		-		-		873
ATM fees		-		24		-		-		24
Other		-		342		-		-		342
Interchange income		-		-		11,230		-		11,230
Asset management revenue		-		-		-		1,283		1,283
Transaction based revenue		-		-		-		688		688
Total	$	8,517	$	2,308	$	11,230	$	1,971	$	24,026
Reconciliation to Consolidated Statement of Operations:
Non-interest income - other:
Other deposit related income									$	2,308
Investment and insurance commissions										1,971
Bank owned life insurance										910
Other										2,332
Total									$	7,521

108

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued)

2019
	Service Charges on Deposit Accounts		Other Deposit Related Income		Interchange Income		Investment and Insurance Commissions		Total
	(In thousands)
Retail
Overdraft fees	$	7,590	$	-	$	-	$	-	$	7,590
Account service charges		2,103		-		-		-		2,103
ATM fees		-		1,368		-		-		1,368
Other		-		965		-		-		965
Business
Overdraft fees		1,515		-		-		-		1,515
ATM fees		-		35		-		-		35
Other		-		422		-		-		422
Interchange income		-		-		10,297		-		10,297
Asset management revenue		-		-		-		1,123		1,123
Transaction based revenue		-		-		-		535		535
Total	$	11,208	$	2,790	$	10,297	$	1,658	$	25,953
Reconciliation to Consolidated Statement of Operations:
Non-interest income - other:
Other deposit related income									$	2,790
Investment and insurance commissions										1,658
Bank owned life insurance										1,111
Other										3,723
Total									$	9,282

109

QUARTERLY FINANCIAL DATA (UNAUDITED)

A summary of selected quarterly results of operations for the years ended December 31 follows:

	Three Months Ended
	March 31,			June 30,			September 30,			December 31,
	(In thousands, except per share amounts)
2021
Interest income	$	32,502		$	33,499		$	35,855		$	36,224
Net interest income		30,284			31,393			33,803			34,285
Provision for credit losses		(474	)		(1,425	)		(659	)		630
Income before income tax		27,143			15,053			19,645			15,472
Net income		22,037			12,388			15,962			12,508
Net income per common share
Basic		1.01			0.57			0.74			0.59
Diluted		1.00			0.56			0.73			0.58
2020
Interest income	$	35,579		$	33,754		$	35,034		$	35,462
Net interest income		30,191			30,462			31,966			30,993
Provision for credit losses(1)		6,721			5,188			975			(421	)
Income before income tax		5,755			18,295			24,361			21,070
Net income		4,810			14,772			19,584			16,986
Net income per common share
Basic		0.22			0.67			0.90			0.78
Diluted		0.21			0.67			0.89			0.77

(1) Beginning January 1, 2021, calculation is based on CECL methodology. Prior to January 1, 2021, calculation was based on the probable incurred loss methodology.

During the fourth quarter of 2021, we recognized a negative fair value adjustment on certain mortgage banking related loans held for sale and derivatives not designated as hedging instruments (see note #16). During the fourth quarter of 2020, we recognized $1.6 million of losses in interest expense relating to cash flow hedges that had been transferred to a no hedge designation (see note #16), $1.5 million of core data processing conversion related expenses and a negative fair value adjustment due to price on our capitalized mortgage loan servicing rights of $0.9 million (see note #4).

QUARTERLY SUMMARY (UNAUDITED)

	Reported Sales Prices of Common Shares												Cash Dividends
	2021						2020						Declared
	High		Low		Close		High		Low		Close		2021		2020
First quarter	$	24.73	$	18.18	$	23.64	$	22.98	$	9.19	$	12.87	$	0.21	$	0.20
Second quarter		24.50		21.10		21.71		16.92		10.91		14.85		0.21		0.20
Third quarter		22.22		19.60		21.48		16.20		12.14		12.57		0.21		0.20
Fourth quarter		24.48		21.44		23.87		19.28		12.42		18.47		0.21		0.20

We have approximately 1,300 holders of record of our common stock. Our common stock trades on the NASDAQ Global Select Market System under the symbol “IBCP.” The prices shown above are supplied by NASDAQ and reflect the inter-dealer prices and may not include retail markups, markdowns or commissions. There may have been transactions or quotations at higher or lower prices of which we are not aware.

In addition to limitations imposed by the provisions of the Michigan Business Corporation Act (which, among other things, limits us from paying dividends to the extent we are insolvent), our ability to pay dividends is limited by our ability to obtain funds from our Bank and by regulatory capital guidelines applicable to us (see note #20).

110