Independent Bank
Annual Report 2021

Plain-text annual report

2021 Annual Report LETTER FROM THE PRESIDENT & CEO Fellow Shareholder: It is my honor and pleasure to provide you with an update on Independent Bank Corporation (IBC) as we enter our 158th year. I am pleased to report on our very strong results as we continue to adjust, adapt and advance our mission of working together to make a positive difference in the lives of our customers, associates, shareholders, partners and the communities we serve. Our vision is to guide, to serve and empower people to improve lives and the world we live in. Our Bank associates and their families continue to be resilient in this effort as we work our way through the pandemic. Yet it has not been without pain, suffering and loss of life within our corporate family, as we mirror the communities we live in. Within our communities too many lives continue to be lost, livelihoods decimated, and many of those on the lower end of the income spectrum continue to fall further behind. During 2021, we assisted over 6,923 customers in either acquiring their dream home or refinancing their existing home and improving their financial position. In this effort we originated an IBC record $1.9 billion of mortgage loans in our communities. Our plans to return to work for some were put on hold and our service delivery channels (particularly our branch network) continue to be impacted with staff quarantines. Yet in 2021, we assisted our customers with 24,015 new deposit accounts and 8,212 consumer loans to: renovate or improve their homes; acquire or refinance their recreational or marine vehicles, as well as automobiles; and assist families with educational tuition or other financing needs. In addition, we helped business owners access the Small Business Administration’s Payroll Protection Program (PPP) through round two funding requests and rounds one and two forgiveness applications. Combined, we processed over 4,000 loans or $397 million PPP loan requests for this governmental program to aid businesses in keeping their payrolls intact. Our commercial bankers also provided working capital lines, equipment financing and commercial real estate commitments of $487 million. Despite accessibility limitations related to COVID-19, our associates supported our communities with over of 8,000 volunteer hours, including the holding of our 6th annual Making A Difference Day, where 65 different non-profits or community organizations were touched with our team’s talent and dollars. 2021 FINANCIAL RESULTS Record Pre-tax Earnings, Growth in EPS, TBVPS, and Cash Dividend Through all the above efforts, we generated record pre-tax profits for the second consecutive year. For the year ended December 31, 2021, the Company reported net income of $62.9 million, or $2.88 per diluted share, compared to net income of $56.2 million, or $2.53 per diluted share, in 2020. This 2 represents increases in net income and diluted earnings per share of 12.0%, and 13.8% respectively. Over this same period our tangible book value per share increased by $1.00 per share or 6.1%, to $17.33 per share. Our growth in earnings was largely driven by an increase in net interest income and a decrease in provision for credit losses that were partially offset by a decrease in non-interest income and an increase in non-interest expense and income tax expense. IBC’s 5-year compounded growth rate for diluted earnings per share and tangible book value per share are 22.4% and 8.3% respectively. For the full year 2021, our return on average assets and return on average equity was 1.4% and 16.1%, respectively, as compared to the prior year of 1.4% and 15.7%, respectively. In 2021, we increased our total annual cash dividends by 5%, to $0.84 per share from $0.80 per share in 2020. In January of 2022, your Board of Directors further increased the quarterly cash dividend by another 5%, to $0.22 per share from $0.21 per share. This represents the eighth consecutive year we have increased our common stock cash dividend. For the full year 2021, we repurchased 814,910 shares of our common stock at a weighted average cost of $21.19 per share. During 2021, through a combination of dividends and share repurchases we returned 56.3% of our 2021 earnings to our shareholders. Growing Loan and Deposit Portfolios As reflected in our balance sheet, our fundamentals continue to be strong. Loans, excluding loans held for sale, totaled $2.9 billion at December 31, 2021, an increase of 6.3% from $2.7 billion at December 31, 2020. For the year, our commercial loan portfolio decreased by $38.8 million or 3.1% (net of PPP loans our commercial portfolio grew by $104.6 million or 9.8%). Our consumer installment loan portfolio increased by $86.5 million or 18.2% and our mortgage loan portfolio increased by $123.7 million or 12.2%. For the year, we originated an IBC record $1.9 billion in mortgage loans, $136 million in paycheck protection program loans, $487 million in new commercial commitments, and $335 million in consumer loans. On the funding side, deposits totaled $4.1 billion at December 31, 2021, compared to $3.6 billion at December 31, 2020. The $479.7 million or 13.2% increase in total deposits during 2021 reflects growth in business, retail, and municipal deposits. At year-end 2021 our loan to deposit ratio was a healthy 70.6%, a 4.6% decrease from 75.2% at the prior year end, allowing capacity for additional loan growth prospectively. Our balance sheet continues to be slightly asset sensitive, as a result of which we would benefit from rising interest rates. Excellent Credit Quality Metrics On the credit quality front, our loan portfolio continues to perform well with past due loans continuing near historic lows. Non-performing loans at December 31, 2021, decreased to $5.1 million from $7.9 million at the prior year end. Other real estate and repossessed assets totaled just $0.2 million at December 31, 2021 compared to $0.8 million at December 31, 2020. Our ratio of our non- performing assets to total assets decreased to 11 basis points at year-end 2021, compared to 21 basis points at year-end 2020. We recorded loan net recoveries to average loans of seven basis points in 2021 as compared to net charge-offs of 11 basis points in 2020. The allowance for credit losses 3 totaled $47.3 million at December 31, 2021, compared to $35.4 million at December 31, 2020. The increase from December 31, 2020, is due to the adoption of FASB’s new current expected credit loss methodology (“CECL”) on January 1, 2021. The impact of the adoption of CECL was an increase in the allowance for credit losses of $11.7 million. At December 31, 2021, the allowance for credit losses equaled 1.63% of total portfolio loans, compared to 1.30% of total portfolio loans at December 31, 2020, under the probable incurred loss methodology. Strong Capital Levels Our capital levels also continue to be strong, which supports our growth initiatives and provides us with flexibility to address changes in market and business conditions. 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 that was partially offset by share repurchases and dividends. Our ratio of tangible common equity to tangible assets was 7.9% as of the end of 2021 compared to 8.6% at the end of 2020. 2021 HIGHLIGHTS In addition to our strong financial results, we had many other significant highlights for the year, a few of which are discussed below. Making Banking Easier During 2021, we completed the initial phase of our investment in a new core data processing system. This multi-million dollar investment required thousands of service hours by both our team and our new strategic partner, Fiserv. A whole bank conversion is very complex; in this case it involved over 30 different interconnected systems. As previously shared, the benefits of this change include moving to a modern core platform with flexible application processing interfaces (APIs). This will allow faster integration with new technology; real-time processing capabilities; and better access to our data and decision management. This investment includes ONE Wallet, ONE Wallet+ and TreasuryONE platforms, our new mobile and online platform for consumer and business clients. The new improvements listed below demonstrate the depth in the features and functionality of our new ONE Wallet mobile and online banking service, all in an effort to make it easier for our customers to do their banking and easier for our associates to serve our customers: • Improved Bill Pay service with faster payments • Custom ONE Account ‘Swipe Stats’ widget • New Payments widget to see and pay your bills in a couple clicks • Pay anyone, anywhere with Zelle® • Open a new account, apply for a loan or credit card with fast, pre-filled applications • Instantly transfer funds to other Independent Bank customers • Setup Real-Time Alerts to be notified when important events happen on your accounts • One click access to your Independent Bank Credit Card and IB Wealth accounts • Transfer funds to and from accounts you own at other Financial Institutions 4 • ONE Wallet+ – See all your accounts, loans, investments, credit cards, and more from all the financial institutions you do business with in one easy place. Plus create budgets, track spending, and much more! • Debit Card Controls – Lock your debit card, setup restrictions, create transaction alerts, and set travel alert • View your Statements and Tax Documents • Ask questions with Integrated Chat and Secure Messaging • Easily Deposit Checks with a couple clicks • Enroll in the Club Checking Bundle with a couple clicks • Refer-A-Friend quickly and easily • Easily search for transactions by type, date, description, or amount • Access our full suite of Financial Calculators • Update your phone number, address, email, user ID or password This change was not without its challenges; yet as a whole, we have received very positive feedback from our customer base. Spurring Neighborhood Stability Also during 2021, we announced our one million dollar pledge for low income communities to spur neighborhood stability. This commitment assists eligible home purchase or refinance applicants in low income neighborhoods through often times zero closing costs. During 2021, we assisted 166 borrowers in low income neighborhoods with over $450,000 in costs being waived or covered by the Bank. Launch of New IBC Environmental, Social & Governance (ESG) Report On Website At mid-year of 2021, we released our first ESG report. While this is our first report, the principles behind ESG are not new and are fundamental to our community banking strategy. As a community bank, natural parts of our culture and keys to our success include being: 1.) Good corporate citizens who care for our environment and enable others to do the same; 2.) Great place to work and bank; 3.) Excellent neighbors and supporters of our communities; and 4.) Strong corporate stewards with good governance, enabling effective operations in a heavily regulated industry. We published this report in a section on our website, IndependentBank.com, to communicate more broadly the numerous efforts made by our Company to provide sustainable long-term value to our stakeholders. This report contains highlights of key initiatives and/or progress we have made as it pertains to protecting our environment, social equality, and sound governance. What you won’t find is lofty goals and promises of something we hope to do some day. Instead, we highlight the many good things that we do in these areas today and our opportunities for improvement going forward. We will be publishing an update to this report later in 2022. 5 Investing in Our Commercial Banking Line of Business During 2021, we grew our commercial banking sales team from 30 professionals to over 40. Generally, these additions to our team came from larger in-market bank competitors, and often times involved some level of market disruption. The appeal expressed in the desire to work for a community bank like Independent related to: 1.) being customer centric vs. bank centric; 2.) involved local leadership vs. out of area decision makers and; 3.) most importantly, the opportunity to make a difference vs. being just a number. I am hopeful our on-going investments in this area of the Company reward us with accelerated growth in market share and accelerated rotation in our earning asset mix from lower yielding investments into higher yielding loans. 2022 AND BEYOND - A LOOK FORWARD Highly Competitive Financial Services Market The financial services industry continues to undergo significant changes with the advancement of new technologies and changes in consumer and business behaviors. The pandemic accelerated these changes with the movement to remote work, and increased mobile and online activity for consumers and businesses. Our competition today comes from many fronts as the financial services industry has expanded from the traditional competitors (large, regional and community banks, credit unions, and mortgage companies) to now include the traditional competitors plus neo-banks (online only companies), specialty banks (partner with neo-banks to offer FDIC insured deposits and other products), and bank tech enablers (enable or enhance traditional bank user interface (UI)/ user experience (UX)). Provided there is a level playing field, competition is good as it can drive innovation, enhance productivity, reduce costs and improve the customer experience. I believe there continues to be a demand for a community bank like Independent Bank. With scale, we offer relationship banking to small business and lower middle market businesses as well as serve both consumer and mortgage segments. This scale delivered by local decision makers, in an agile culture, includes providing to our customers the expertise of a talented and caring workforce, the technology to support our customers’ payment, investment, and financing needs and the size to effectively support their growth. Accordingly, our roadmap for many years has been built around investing in people and technology; and taking advantage of market opportunities as they present themselves. As we look to 2022 and beyond, the key to our success is our ability to continue to execute on our strategic plan. This plan has four major objectives: 1.) Talent management, fielding a highly engaged and talented team to serve our customers; 2.) Growing our customer base, organically and acquisitively where it makes sense; 3.) Managing our costs and Improving our productivity, through leveraging new technology and scale, and; 4.) Utilizing sound risk management practices enterprise wide. Over the years, we have been successful in the execution of this strategic plan. This has enabled us to consistently achieve our performance targets. Our current targets include a 1.25% or better return on average assets and a 13.0% or better return on average equity. 6 CLOSING In closing, I encourage you to attend the 2022 Annual Meeting of Shareholders of Independent Bank Corporation at 3:00 pm Eastern Time, on Tuesday, April 19, 2022. We will be conducting our annual Meeting of Shareholders by means of remote communication via the Internet. To attend the meeting, please visit www.virtualshareholdermeeting.com/IBCP2022. From this site you will be able to vote electronically and submit questions during the meeting. I would like to thank you, our shareholders, for investing in IBC, and I would like to acknowledge the commitment and ongoing effort of your Board of Directors, our Bank officers, and all of our Bank associates. Their dedication and service are exemplary, and each is truly making a positive difference in the lives of our customers, our shareholders, and the communities we serve. Sincerely, William B. (Brad) Kessel President and CEO 7 FINANCIAL HIGHLIGHTS Dollars in thousands, except per share data FOR THE YEAR Interest income Interest expense Net interest income Provision for loan losses Net gains on securities Other non-interest income Non-interest expense Income before income tax Income tax expense Net income PER COMMON SHARE DATA Net income per common share Basic Diluted Cash dividends declared and paid AT YEAR END Assets Loans Deposits Interest-earning assets Shareholders' equity Book value per common share Tangible book value per common share RATIOS Net income to Average common equity Average assets As a percent of average interest-earning assets Interest income Interest expense Net interest income 2021 2020 CHANGE AMOUNT CHANGE PERCENT $ 138,080 $ 139,829 $ (1,749) (1.25) % 8,315 129,765 (1,928) 1,411 75,232 131,023 77,313 14,418 16,217 123,612 12,463 267 80,478 122,413 69,481 13,329 (7,902) 6,153 (14,391) 1,144 (5,246) 8,610 7,832 1,089 (48.73) 4.98 (115.47) 428.46 (6.52) 7.03 11.27 8.17 $ 62,895 $ 56,152 $ 6,743 12.01 % $ $ 2.91 2.88 0.84 2.56 2.53 0.80 $ 0.35 13.67 % 0.35 0.04 13.83 5.00 $ 4,704,740 $ 4,204,013 $ 500,727 11.91 % 2,905,045 2,733,678 4,117,090 4,484,987 398,484 18.82 17.33 3,637,355 3,979,397 389,522 17.82 16.33 171,367 479,735 505,590 8,962 1.00 1.00 6.27 13.19 12.71 2.30 5.61 6.12 16.13 % 1.41 15.68 % 1.43 0.45 % (0.02) 2.87 % (1.40) 3.30 % 0.20 3.10 3.78 % (0.48) % (12.70) % 0.44 3.34 (0.24) (0.24) (54.55) (7.19) 8 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 . . . . . . . . . . . . . . . . . . . . . . 36 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 37 Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 45 Quarterly Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107 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 Independent Bank Corporation NASDAQ Composite NASDAQ Bank $350 $300 $250 $200 $150 $100 e u l a V x e d n I $50 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 Index 12/31/16 12/31/17 12/31/18 12/31/19 12/31/20 12/31/21 Period Ending Independent Bank Corporation . . . . . . . . . . . . . . . . . . $100.00 $105.03 $101.29 $112.84 $ 96.72 $129.79 304.85 NASDAQ Composite. . . . . . . . . . . . . . . . . . . . . . . . . . 162.58 NASDAQ Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 129.64 118.39 249.51 118.40 172.17 135.78 100.00 100.00 125.96 98.98 10 SELECTED CONSOLIDATED FINANCIAL DATA SUMMARY OF OPERATIONS 2021 Year Ended December 31, 2019 (Dollars in thousands, except per share amounts) 2020 2018 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 138,080 $ 139,829 $ 148,928 $ 130,773 $ Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses(1) . . . . . . . . . . . . . . . . . Net gains on securities available for sale . . . . . . Other non-interest income . . . . . . . . . . . . . . . . . . Non-interest expense. . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . 26,347 122,581 824 307 47,429 111,733 57,760 11,325 46,435 $ 17,491 113,282 1,503 138 44,677 107,461 49,133 9,294 39,839 $ 8,315 129,765 (1,928) 1,411 75,232 131,023 77,313 14,418 62,895 $ 16,217 123,612 12,463 267 80,478 122,413 69,481 13,329 56,152 $ Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ PER COMMON SHARE DATA Net income per common share 2017 98,309 9,123 89,186 1,199 260 42,273 92,082 38,438 17,963 20,475 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared and paid . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.91 $ 2.88 0.84 18.82 2.56 $ 2.53 0.80 17.82 2.03 $ 2.00 0.72 15.58 1.70 $ 1.68 0.60 14.38 0.96 0.95 0.42 12.42 SELECTED BALANCES Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,704,740 $4,204,013 $3,564,694 $3,353,281 $2,789,355 2,018,817 2,905,045 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses(1) . . . . . . . . . . . . . . . . 22,587 47,252 2,400,534 4,117,090 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 264,933 398,484 Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . 54,600 30,009 Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . — 39,357 Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . 35,569 39,592 Subordinated debentures . . . . . . . . . . . . . . . . . . . . 2,582,520 24,888 2,913,428 338,994 25,700 — 39,388 2,733,678 35,429 3,637,355 389,522 30,012 39,281 39,524 2,725,023 26,148 3,036,727 350,169 88,646 — 39,456 SELECTED RATIOS Net interest income to average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . Net income to . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average shareholders’ equity . . . . . . . . . . . . . . Average assets . . . . . . . . . . . . . . . . . . . . . . . . . . Average shareholders’ equity to average assets . . Tier 1 capital to average assets . . . . . . . . . . . . . . Non-performing loans to Portfolio Loans . . . . . . 3.10% 3.34% 3.80% 3.88% 3.65% 16.13 1.41 8.73 8.79 0.18 15.68 1.43 9.10 9.15 0.29 13.63 1.35 9.90 10.11 0.35 12.38 1.27 10.27 10.47 0.33 7.82 0.77 9.88 10.57 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, 2019 2020 2021 Net income to Average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16.13% 15.68% 13.63% 1.43 1.41 1.35 Net income per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.91 2.88 $ 2.56 2.53 $ 2.03 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 . . . . . . . . . . . . . Tax-exempt loans(1) . . . . . . . . . Taxable securities . . . . . . . . . . Tax-exempt securities(1) . . . . . . Interest bearing cash . . . . . . . . Other investments . . . . . . . . . . $2,881,950 7,240 915,701 348,346 79,915 18,427 $116,358 362 14,488 7,892 112 734 4.04% $2,863,846 7,145 5.00 635,914 1.58 137,330 2.27 59,056 0.14 18,410 3.98 $122,875 360 12,655 3,673 184 905 4.29% $2,713,690 5.04 7,937 397,598 1.99 52,324 2.67 48,023 0.31 18,359 4.92 $133,574 391 11,842 1,683 818 1,043 4.92% 4.93 2.98 3.22 1.70 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. . . . . Other assets, net . . . . . . . . . . . 56,474 157,524 Total assets . . . . . . . . . . . . $4,465,577 49,886 162,068 $3,933,655 37,575 164,726 $3,440,232 LIABILITIES Savings and interest- bearing checking . . . . . . . . . Time deposits . . . . . . . . . . . . . Other borrowings . . . . . . . . . . $2,282,607 326,081 108,884 Interest bearing liabilities . . . 2,717,572 Non-interest bearing deposits . . Other liabilities . . . . . . . . . . . . Shareholders’ equity . . . . . . . . 1,288,276 69,694 390,035 Total liabilities and 2,693 1,772 3,850 8,315 0.12 0.54 3.54 0.31 $1,821,115 516,306 117,904 3,882 8,784 3,551 2,455,325 16,217 0.21 1.70 3.01 0.66 $1,453,061 655,718 77,254 2,186,033 10,228 13,197 2,922 26,347 0.70 2.01 3.78 1.21 1,054,230 65,943 358,157 867,314 46,153 340,732 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″) 2021 Year Ended December 31, 2020 (Dollars in thousands) 2019 Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $129,765 $123,612 $122,581 423 Net interest income - taxable equivalent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $131,631 $124,435 $123,004 Add: taxable equivalent adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,866 823 Net interest margin (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin (FTE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.05% 3.10% 3.32% 3.34% 3.79% 3.80% CHANGE IN NET INTEREST INCOME 2021 compared to 2020 Rate Volume 2020 compared to 2019 Rate Net Volume Net (In thousands) Increase (decrease) in interest income(1) Taxable loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Tax-exempt loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . Taxable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities(2) . . . . . . . . . . . . . . . . . . . . . . Interest bearing cash . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest income . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) in interest expense(1) 772 $ (7,289) $(6,517) $ 7,105 $(17,804) $(10,699) (31) 813 1,990 (634) (138) (8,699) (40) 2 5,582 1,833 2,318 4,219 154 (72) 3 (171) (706) 15,122 9 (4,769) (328) (788) (141) (23,821) (3) (2,956) (640) (123) (172) (11,183) 5 4,789 4,859 51 1 10,477 Savings and interest bearing checking . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . (6,346) 825 (4,413) (2,463) 629 (286) (10,130) (1,924) Net interest income . . . . . . . . . . . . . . . . . . . . . $12,401 $ (5,205) $ 7,196 $14,257 $(12,826) $ 1,431 (8,455) (1,858) (682) (10,995) (2,014) (4,549) 585 (5,978) (1,189) (7,012) 299 (7,902) 2,109 (2,555) 1,311 865 (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, 2019 2020 2021 As a percent of average interest earning assets Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other interest earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 68.0% 77.1% 84.1% 22.9 32.0 100.0% 100.0% 100.0% 15.9 Savings and interest-bearing checking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.7% 48.9% 44.9% 13.9 7.7 3.2 2.6 64.0% 66.0% 67.5% 20.3 2.3 Earning asset ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Free-funds ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 95.2% 94.6% 94.1% 34.0 36.1 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 Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service charges on deposit accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on assets Mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loan servicing, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 Year Ended December 31, 2020 (In thousands) $11,230 8,517 $10,297 11,208 2019 $14,045 10,170 35,880 1,411 5,745 2,603 567 6,222 $76,643 62,560 267 (9,350) 1,971 910 4,640 $80,745 19,978 307 (3,336) 1,658 1,111 6,513 $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 2021 Year Ended December 31, 2020 (Dollars in thousands) 2019 Mortgage loans originated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,861,060 $1,820,697 $1,011,141 Mortgage loans sold(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 738,910 Net gains on mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,978 Net gains as a percent of mortgage loans sold (‘‘Loan Sales Margin’’) . . . . . . . Fair value adjustments included in the Loan Sales Margin . . . . . . . . . . . . . . . . . 1,447,031 62,560 1,254,638 35,880 2.86% (0.52) 4.32% 0.47 2.70% 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 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,371 38,095 68,716 $1,475 271 415 $ 64 4 108 $1,411 267 307 Year Ended December 31, Proceeds Gains(1) (In thousands) Losses Net (1) Gains in 2019 include $0.166 million related to equity securities at fair value. 18 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 Mortgage loan servicing: Revenue, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value change due to price . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fair value change due to pay-downs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,853 3,380 (5,488) $ 6,874 (10,833) (5,391) $ 6,196 (6,408) (3,124) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,745 $ (9,350) $(3,336) 2021 2020 (In thousands) 2019 Activity related to capitalized mortgage loan servicing rights is as follows: CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS 2021 2020 (In thousands) 2019 Balance at January 1,. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Originated servicing rights capitalized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,904 11,436 (2,108) $ 19,171 13,957 (16,224) $21,400 7,303 (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. 19 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 2021 Year ended December 31, 2020 (In thousands) 2019 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payroll taxes and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 44,226 19,800 15,943 $ 41,517 19,725 13,539 $ 41,719 12,066 13,716 Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan and collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion related expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs related to unfunded lending commitments. . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Correspondent bank service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loss reimbursement on sold loans . . . . . . . . . . . . . . . . . . . . . . . . . . Branch closure costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (gains) losses on other real estate and repossessed assets . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,969 10,823 8,794 4,434 4,172 3,172 3,080 2,068 1,918 1,827 1,396 1,207 970 611 382 133 — (230) 6,297 74,781 8,534 8,938 3,342 4,089 3,037 3,194 2,027 2,230 2,586 1,596 263 1,020 680 395 200 417 64 5,020 67,501 8,905 9,013 3,215 4,113 2,685 2,947 1,814 2,450 — 685 246 1,089 638 411 229 — (90) 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). 20 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, 21 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. 22 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 Securities available for sale Amortized Cost Unrealized Gains (In thousands) Losses Fair Value December 31, 2021. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,404,858 $16,594 $8,622 $1,412,830 1,072,159 December 31, 2020. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,052,147 21,416 1,404 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. 23 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: Due in one year or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Due after one but within five years . . . . . . . . . . . . . . . . . . . Due after five but within 15 years . . . . . . . . . . . . . . . . . . . . Due after 15 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fixed rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable rate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial Mortgage Installment Total (In thousands) $ 117,497 293,483 774,772 17,829 $1,203,581 $ 840 2,610 114,703 1,021,506 $1,139,659 $ 2,033 49,500 454,134 56,138 $561,805 $ 120,370 345,593 1,343,609 1,095,473 $2,905,045 $ 626,148 577,433 $1,203,581 $ 736,515 403,144 $1,139,659 $558,069 3,736 $561,805 $1,920,732 984,313 $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 $50,000 or less. 24 PAYCHECK PROTECTION PROGRAM A summary of our participation in the PPP follows: Closed and outstanding - Round 1 loans. . . . . . . . . . . . . . . . . . . . . . . . . Closed and outstanding - Round 2 loans. . . . . . . . . . . . . . . . . . . . . . . . . Total closed and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unaccreted net fees remaining at period end . . . . . . . . . . . . . . . . . . . . . December 31, 2021 2020 Amount (#) Amount ($) Amount (#) Amount ($) (Dollars in thousands) 6 180 186 $ 197 26,167 $26,364 $ 806 1,483 — 1,483 $169,782 — $169,782 $ 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: Loan Category Covid-19 Accommodations Amount (#) Amount ($) Total Loans (Dollars in thousands) % of Total Loans Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loans serviced for others(1) . . . . . . . . . . . . . . . . . . . . . . . . . — 22 1 23 46 $ — $1,203,581 1,139,659 561,805 2,278 55 $2,333 $2,905,045 $5,163 $3,323,521 0.0% 0.2% 0.0% 0.1% 0.2% (1) We have delegated authority from all investors to grant these deferrals on their behalf. 25 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 Commercial and industrial: Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food service. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hotel. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: Retail . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount % of Total Loans (Dollars in millions) $ 70 49 40 159 109 72 55 236 2.4% 1.7 1.4 5.5 3.8 2.5 1.9 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . . Construction and land development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 870,169 128,801 278,992 726,224 339,785 555,696 5,378 $ 792,762 138,128 232,693 669,150 468,090 429,011 3,844 Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,905,045 $2,733,678 (1) (2) Includes both residential and non-residential commercial loans secured by real estate. Includes loans secured by multi-family residential and non-farm, non-residential property. 26 NON-PERFORMING ASSETS(1) 2021 December 31, 2020 (Dollars in thousands) 2019 Non-accrual loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans 90 days or more past due and still accruing interest. . . . . . . . . . . . . . . $ 5,545 — $ 8,312 — Sub total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Government guaranteed loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,545 435 5,110 245 8,312 439 7,873 766 $10,178 — 10,178 646 9,532 1,865 Total non-performing assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,355 $ 8,639 $11,397 As a percent of Portfolio Loans Non-accrual loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACL(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACL as a percent of non-accrual loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACL as a percent of non-performing loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . . 0.19% 0.18 1.63 0.11 852.16 924.70 0.30% 0.29 1.30 0.21 426.24 450.01 0.37% 0.35 0.96 0.32 256.91 274.32 (1) (2) Excludes loans classified as ‘‘troubled debt restructured’’ that are performing. 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 Performing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing TDRs(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,481 — $4,481 $31,589 1,016(3) $36,070 1,016 $32,605 $37,086 December 31, 2021 Commercial Retail(1) Total (In thousands) December 31, 2020 Commercial Retail(1) Total (In thousands) Performing TDRs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing TDRs(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,956 1,148 $9,104 $36,385 1,584(3) $44,341 2,732 $37,969 $47,073 (1) (2) Retail loans include mortgage and installment loan portfolio segments. 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 27 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) Specific allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pooled analysis allocations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional allocations based on subjective factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2021 January 1, 2021 (In thousands) $ 1,130 33,359 12,763 $47,252 $ 2,452 30,796 13,889 $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 28 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 Balance at beginning of year . . . . . . . . . . $35,429 Additions (deductions) (In thousands) $1,805 $26,148 $1,542 $24,888 $1,296 Impact of adoption of CECL . . . . . . . . Provision for credit losses(1) . . . . . . . . . Initial allowance on loans purchased with credit deterioration . . . . . . . . . . Recoveries credited to the ACL . . . . . . Loans charged against the ACL . . . . . . Additions included in non-interest 11,574 (1,928) 1,469 — — 12,463 134 4,477 (2,434) — — 3,069 (6,251) — — — — — 824 3,961 (3,525) — — — — expense. . . . . . . . . . . . . . . . . . . . . . . . . . — Balance at end of year . . . . . . . . . . . . . . . $47,252 1,207 $4,481 — 263 — 246 $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 (Dollars in thousands) Installment Total 2021 Loans charged against (recoveries credited to) the ACL . . . Average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans charged off against (credited to) the ACL to (2,607) $ $ 1,241,961 (471) $ 1,035 521,089 $ (2,043) 2,819,295 1,056,245 average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.21)% (0.04)% 0.20% (0.07)% 2020 Loans charged against (recoveries credited to) the ACL . . . Average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans charged off against (credited to) the ACL to 2,272 $ 1,294,217 303 $ 1,020,507 607 $ 472,210 3,182 $ 2,786,934 average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.18% 0.03% 0.13% 0.11% 2019 Loans charged against (recoveries credited to) the ACL . . . Average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans charged off against (credited to) the ACL to (1,483) $ $ 1,167,518 288 1,060,643 $ 759 426,730 $ (436) 2,654,891 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 29 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 30 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: Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over three through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over six months through one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,671 53,328 57,565 57,155 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $242,719 $18,870 13,582 51,051 9,570 $93,073 Less than $250,000 Greater than $250,000 (In thousands) Total $ 93,541 66,910 108,616 66,725 $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 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. the available cash on hand at 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. 31 CAPITALIZATION December 31, 2021 2020 (In thousands) Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount not qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,357 39,592 (581) $ 39,281 39,524 (505) Amount qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,368 78,300 Shareholders’ equity Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 323,401 74,582 501 398,484 339,353 40,145 10,024 389,522 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 32 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) Net Interest Income(2) Percent Change (Dollars in thousands) Percent Change December 31, 2021 200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Base-rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $514,200 550,900 546,200 473,000 (5.86)% $137,800 136,800 0.86 133,400 — 126,700 (13.40) 3.30% 2.55 — (5.02) 33 Change in Interest Rates Market Value of Portfolio Equity(1) Net Interest Income(2) Percent Change (Dollars in thousands) Percent Change December 31, 2020 200 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point rise . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Base-rate scenario . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 100 basis point decline . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $494,600 483,200 430,000 395,500 15.02% $125,200 123,700 12.37 120,200 — 114,900 (8.02) 4.16% 2.91 — (4.41) (1) (2) 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. 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. 34 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. 35 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 President and Chief Executive Officer Independent Bank Corporation March 4, 2022 Gavin A. Mohr Executive Vice President and Chief Financial Officer 36 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 37 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 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. limitations, 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. 38 • 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. We have served as the Corporation’s auditor since 2005. South Bend, Indiana March 4, 2022 Crowe LLP 39 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2021 2020 (In thousands, except share amounts) Assets Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Federal Home Loan Bank and Federal Reserve Bank stock, at cost . . . . . . . . . . Loans held for sale, carried at fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale, carried at lower of cost or fair value . . . . . . . . . . . . . . . . . . Loans Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate and repossessed assets, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights, carried at fair value . . . . . . . . . . . . . Other intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deposits Liabilities and Shareholders’ Equity Non-interest bearing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Savings and interest-bearing checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reciprocal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brokered time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 51,069 58,404 109,473 1,412,830 18,427 55,470 34,811 1,203,581 1,139,659 561,805 2,905,045 (47,252) 2,857,793 245 36,404 55,279 26,232 3,336 28,300 66,140 $4,704,740 $1,321,601 1,897,487 586,626 308,438 2,938 4,117,090 30,009 39,357 39,592 80,208 4,306,256 $ 56,006 62,699 118,705 1,072,159 18,427 92,434 — 1,242,415 1,015,926 475,337 2,733,678 (35,429) 2,698,249 766 36,127 55,180 16,904 4,306 28,300 62,456 $4,204,013 $1,153,473 1,526,465 556,185 287,402 113,830 3,637,355 30,012 39,281 39,524 68,319 3,814,491 Commitments and contingent liabilities Shareholders’ Equity Preferred stock, no par value, 200,000 shares authorized; none issued or outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common stock, no 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 323,401 74,582 501 398,484 $4,704,740 339,353 40,145 10,024 389,522 $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 40 CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2020 (In thousands, except per share amounts) 2021 2019 $116,644 $123,159 $133,883 INTEREST INCOME Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on securities available for sale Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . INTEREST EXPENSE Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings and subordinated debt and debentures. . . . . . . . . . . . . . . Total Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Interest Income After Provision for Credit Losses . . . . . . . . . . . . . . NON-INTEREST INCOME Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on assets Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loan servicing, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Non-interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NON-INTEREST EXPENSE 14,488 6,102 846 138,080 4,465 3,850 8,315 129,765 (1,928) 131,693 14,045 10,170 35,880 1,411 5,745 9,392 76,643 Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan and collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs related to unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Non-interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income Before Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 79,969 10,823 8,794 4,434 4,172 3,172 3,080 2,068 1,918 1,827 1,396 1,207 8,163 131,023 77,313 14,418 $ 62,895 12,655 2,926 1,089 139,829 12,666 3,551 16,217 123,612 12,463 111,149 11,230 8,517 62,560 267 (9,350) 7,521 80,745 74,781 8,534 8,938 3,342 4,089 3,037 3,194 2,027 2,230 2,586 1,596 263 7,796 122,413 69,481 13,329 $ 56,152 11,842 1,342 1,861 148,928 23,425 2,922 26,347 122,581 824 121,757 10,297 11,208 19,978 307 (3,336) 9,282 47,736 67,501 8,905 9,013 3,215 4,113 2,685 2,947 1,814 2,450 — 685 246 8,159 111,733 57,760 11,325 $ 46,435 Net income per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.91 2.88 $ $ 2.56 2.53 $ $ 2.03 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 41 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME 2021 Year Ended December 31, 2020 (In thousands) 2019 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other comprehensive income (loss) $ 62,895 $56,152 $46,435 Securities available for sale Unrealized gain (loss) arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in unrealized gains and losses for which a portion of other than (10,644) 15,611 10,235 temporary impairment has been recognized in earnings . . . . . . . . . . . . . . . . Reclassification adjustments for gains included in earnings . . . . . . . . . . . . . . . — (1,411) (49) (267) (65) (140) Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (12,055) (2,532) 15,295 3,212 10,030 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for (income) expense recognized in earnings . . . . Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gains (losses) recognized in other comprehensive income (loss) on derivative instruments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . — — — — — (354) 2,539 (1,603) (425) 2,185 458 (2,028) (426) 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 42 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Balances at January 1, 2019 . . . . . . . . . . . . . . . . . . . . . . . . . Net income for 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared, $.72 per share . . . . . . . . . . . . . . . Repurchase of 1,204,688 shares of common stock . . . . . . . Issuance of 71,799 shares of common stock . . . . . . . . . . . . Share based compensation (issuance of 92,275 shares of Retained Earnings (Accumulated Deficit) Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity Common Stock (Dollars in thousands, except per share amounts) $377,372 — — (26,284) 284 $(28,270) 46,435 (16,554) — — $(10,108) — — — — $338,994 46,435 (16,554) (26,284) 284 common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,854 Share based compensation withholding obligation (withholding of 57,468 shares of common stock) . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . Balances at December 31, 2019 . . . . . . . . . . . . . . . . . . . . . . Net income for 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared, $.80 per share . . . . . . . . . . . . . . . Repurchase of 708,956 shares of common stock. . . . . . . . . Issuance of 17,317 shares of common stock . . . . . . . . . . . . Share based compensation (issuance of 103,429 shares of common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation withholding obligation (withholding of 39,633 shares of common stock) . . . . . . Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . Balances at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . Adoption of ASU 2016-13 . . . . . . . . . . . . . . . . . . . . . . . . . . Balances at December 31, 2020, as adjusted . . . . . . . . . . . . Net income for 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared, $.84 per share . . . . . . . . . . . . . . . Repurchase of 814,910 shares of common stock. . . . . . . . . Issuance of 40,350 shares of common stock . . . . . . . . . . . . Share based compensation (issuance of 128,018 shares of common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation withholding obligation (withholding of 36,222 shares of common stock) . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (882) — 352,344 — — (14,231) 15 1,980 (755) — 339,353 — 339,353 — — (17,269) 61 1,947 (691) — — — — 1,611 56,152 (17,618) — — — — — 40,145 (10,303) 29,842 62,895 (18,155) — — — — — — 1,854 — 6,322 (3,786) — — — — (882) 6,322 350,169 56,152 (17,618) (14,231) 15 — 1,980 — 13,810 10,024 — 10,024 — — — — (755) 13,810 389,522 (10,303) 379,219 62,895 (18,155) (17,269) 61 — 1,947 — (9,523) (691) (9,523) Balances at December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . $323,401 $ 74,582 $ 501 $398,484 See accompanying notes to consolidated financial statements 43 CONSOLIDATED STATEMENTS OF CASH FLOWS Net Income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Proceeds from the sale of equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . . Proceeds from sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disbursements for loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income tax (benefit) expense. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net deferred loan fees (costs) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities, loans and interest bearing deposits - time . . . . . . . . . . . . . . Net gains on mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in accrued income and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Adjustments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOW USED IN INVESTING ACTIVITIES Proceeds from the sale of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturities, prepayments and calls of securities available for sale . . . . . . Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from the maturity of interest bearing deposits - time . . . . . . . . . . . . . . . . . . . Purchase of Federal Home Loan Bank stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase in portfolio loans (loans originated, net of principal payments) . . . . . . . . . Proceeds from the sale of portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from the sale of other real estate and repossessed assets . . . . . . . . . . . . . . . . Proceeds from bank-owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from the sale of property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . Capital expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . CASH FLOW FROM FINANCING ACTIVITIES Net increase in total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net increase (decrease) in other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from Federal Home Loan Bank advances. . . . . . . . . . . . . . . . . . . . . . . . . . . Payments of Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of subordinated debt, net of issuance costs . . . . . . . . . . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation withholding obligation. . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash From Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Increase (Decrease) in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2021 Year Ended December 31, 2020 (In thousands) 2019 62,895 $ 56,152 $ 46,435 — 1,283,741 (1,210,897) (1,928) 1,912 (7,857) — 1,478,908 (1,438,982) 12,463 (2,130) 1,686 560 642,537 (647,606) 824 1,088 (2,936) 12,130 (35,880) (1,411) 1,947 (11,669) 17,171 47,259 110,154 85,371 375,723 (824,348) — — (205,539) 10,032 1,004 467 63 (5,837) (563,064) 9,161 (62,560) (267) 1,980 (7,966) 10,239 2,532 58,684 38,095 306,691 (859,068) 350 (68) (41,861) 2,395 1,367 1,441 1,133 (4,383) (553,908) 6,059 (19,978) (307) 1,854 (6,061) 12,023 (11,943) 34,492 68,716 153,938 (237,672) 250 — (215,276) 50,516 1,766 470 74 (4,936) (182,154) 479,735 (3) 100,000 (100,000) — (18,155) 61 (17,269) (691) 443,678 (9,232) 118,705 109,473 $ 123,299 600,628 25,002 (24,994) 111,000 239,254 (73,143) (272,910) — 39,236 (16,554) (17,618) 284 15 (26,284) (14,231) (882) (755) 142,722 548,625 (4,940) 53,401 65,304 70,244 118,705 $ 65,304 Cash paid during the year for Interest. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers to other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfer of mortgage loans to held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securitization of portfolio loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Right of use assets obtained in exchange for lease obligations . . . . . . . . . . . . . . . . . . . . . Purchase of securities available for sale not yet settled . . . . . . . . . . . . . . . . . . . . . . . . . . 8,419 $ 14,059 253 34,811 — 283 — 16,912 $ 26,697 9,534 15,500 2,242 332 36,622 — 65,070 26,324 9,906 1,587 — 1,000 (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 44 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 one 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. 45 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 four 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. 46 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) loan segment 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 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. 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 47 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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 48 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. COMMITMENTS TO EXTEND CREDIT AND RELATED FINANCIAL INSTRUMENTS — Financial instruments may include commitments to extend credit and standby letters of credit. Financial instruments involve 49 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 50 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. 51 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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 (In thousands) Impact of ASU 2016-13 Assets Loans Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,242,510 1,015,944 Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 475,358 Installment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,733,812 Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (47,137) Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,686,675 $1,242,415 1,015,926 475,337 2,733,678 (35,429) $2,698,249 $ 95 18 21 134 (11,708) $(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) (2) Included in Accrued income and other assets in our Consolidated Statements of Financial Condition. Included in Accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. 52 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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 zero. 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 zero 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 zero 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 Cost Unrealized Gains (In thousands) Losses Fair Value 2021 U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . . . . . . . U.S. agency commercial mortgage-backed . . . . . . . . . . . . . . . . . . . . . Private label mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34,634 $ 309,907 23,066 102,480 215,235 568,355 148,707 1,975 499 152 $ 112 $ 1,952 84 807 1,204 9,942 2,446 — 7 3,874 224 672 269 2,221 1,194 56 — 34,674 307,985 22,926 102,615 216,170 576,076 149,959 1,919 506 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,404,858 $16,594 $8,622 $1,412,830 2020 U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . . . . . . . U.S. agency commercial mortgage-backed . . . . . . . . . . . . . . . . . . . . . Private label mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,456 $ 340,224 6,869 41,429 252,596 305 $ 4,951 326 1,539 1,796 13 $ 593 — 139 211 10,748 344,582 7,195 42,829 254,181 53 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Amortized Cost Unrealized Gains (In thousands) Losses Fair Value Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . Corporate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 315,780 82,307 1,971 500 8,691 3,807 — 16 178 97 173 — 324,293 86,017 1,798 516 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,052,132 $21,431 $1,404 $1,072,159 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 Unrealized Losses Unrealized Losses Fair Value Fair Value Total Fair Value Unrealized Losses (In thousands) 2021 U.S. agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,986 171,398 U.S. agency residential mortgage-backed . . . 19,900 U.S. agency commercial mortgage-backed . . 64,408 Private label mortgage-backed . . . . . . . . . . . . 86,581 Other asset backed . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . 178,484 75,166 — $ 109 3,555 224 640 248 2,151 1,150 — $ 1,286 19,024 — 2,180 978 7,093 1,050 1,919 $ 3 319 — 32 21 70 44 56 $ 13,272 $ 112 3,874 224 672 269 190,422 19,900 66,588 87,559 185,577 76,216 1,919 2,221 1,194 56 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $607,923 $8,077 $33,530 $545 $641,453 $8,622 2020 U.S. agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ U.S. agency residential mortgage-backed . . . Private label mortgage-backed . . . . . . . . . . . . Other asset backed . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . 1,469 96,839 11,838 7,142 28,957 1,924 — $ 3 592 95 25 177 97 — $ 2,329 83 2,050 21,197 800 — 1,798 $ 10 1 44 186 1 — 173 $ 3,798 $ 96,922 13,888 28,339 29,757 1,924 1,798 13 593 139 211 178 97 173 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. No ACL for 54 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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 two 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. One of the securities is rated by a major rating agency as investment grade while the other one 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 no 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturing after one year but within five years. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturing after five years but within ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Maturing after ten years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ U.S. agency residential mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency commercial mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Private label mortgage-backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,874 133,681 266,057 340,558 754,170 309,907 23,066 102,480 215,235 $ 13,991 134,901 266,282 347,960 763,134 307,985 22,926 102,615 216,170 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. 55 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $85,371 38,095 68,716 $1,475 271 248 $ 64 4 108 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 $ 792,762 138,128 Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . 232,693 Construction and land development . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 669,150 468,090 Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 429,011 Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,844 Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 128,801 278,992 726,224 339,785 555,696 5,378 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,905,045 $2,733,678 (1) (2) Includes both residential and non-residential commercial loans secured by real estate. 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. 56 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) An analysis of the ACL by portfolio segment for the years ended December 31 follows: Commercial Mortgage Installment (In thousands) Subjective Allocation Total 2021 Balance at beginning of period . . . . . . . . . . . . . . . . . . Additions (deductions) Impact of adoption of CECL . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . Initial allowance on loans purchased with credit deterioration . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries credited to allowance. . . . . . . . . . . . . . . Loans charged against the allowance. . . . . . . . . . . . $ 7,401 $ 6,998 $ 1,112 $19,918 $35,429 2,551 (1,135) 12,000 (266) 3,052 599 (6,029) (1,126) 11,574 (1,928) 95 2,607 — 18 846 (375) 21 1,024 (2,059) 134 — — 4,477 — (2,434) Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . $11,519 $19,221 $ 3,749 $12,763 $47,252 2020 Balance at beginning of period . . . . . . . . . . . . . . . . . . Additions (deductions) Provision for credit losses(1). . . . . . . . . . . . . . . . . . . Recoveries credited to allowance. . . . . . . . . . . . . . . Loans charged against the allowance. . . . . . . . . . . . $ 7,922 $ 8,216 $ 1,283 $ 8,727 $26,148 1,751 1,804 (4,076) (915) 513 (816) 436 752 (1,359) 12,463 11,191 — 3,069 — (6,251) Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . $ 7,401 $ 6,998 $ 1,112 $19,918 $35,429 2019 Balance at beginning of period . . . . . . . . . . . . . . . . . . Additions (deductions) Provision for credit losses(1). . . . . . . . . . . . . . . . . . . Recoveries credited to allowance. . . . . . . . . . . . . . . Loans charged against the allowance. . . . . . . . . . . . $ 7,090 $ 7,978 $ 895 $ 8,925 $24,888 (651) 2,165 (682) 526 933 (1,221) 1,147 863 (1,622) (198) 824 3,961 — — (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 Allowance for Credit Losses Amount Percent of Loans to Total Portfolio Loans Allowance for Credit Losses Amount(1) (Dollars in thousands) 2020 Percent of Loans to Total Portfolio Loans Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,519 19,221 Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,749 Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,763 Subjective allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41.5% $ 7,401 6,998 39.2 1,112 19.3 19,918 — 45.4% 37.2 17.4 — 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. 57 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) ACL and recorded investment in loans by portfolio segment at December 31, 2020 follows(1): Commercial Mortgage Installment (In thousands) Subjective Allocation Total December 31, 2020 ACL: Individually evaluated for impairment. . . . . . . . . . . $ Collectively evaluated for impairment. . . . . . . . . . . Loans acquired with deteriorated credit quality . . . Total ending ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,266 $ 6,135 — 7,401 $ 4,124 $ 2,874 — 6,998 $ 191 $ — $ 921 — 19,918 — 1,112 $19,918 $ 5,581 29,848 — 35,429 Loans 1,996 Individually evaluated for impairment. . . . . . . . . . . $ 474,379 Collectively evaluated for impairment. . . . . . . . . . . 147 Loans acquired with deteriorated credit quality . . . 476,522 Total loans recorded investment. . . . . . . . . . . . . . . . 1,185 Accrued interest included in recorded investment . Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,242,415 $1,015,926 $475,337 1,236,052 468 1,245,951 3,536 980,449 410 1,020,104 4,178 39,245 $ 9,431 $ $ 50,672 2,690,880 1,025 2,742,577 8,899 $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. 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 (In thousands) Total Non- Performing Loans December 31, 2020 Total Non- Performing Loans(1) Commercial Commercial and industrial(2) . . . . . . . . . . . . . Commercial real estate. . . . . . . . . . . . . . . . . . $ — $ — 15 — $ 15 — $— — $ 15 — $1,387 — Mortgage 1-4 family owner occupied - jumbo . . . . . . . 1-4 family owner occupied - non-jumbo(3) . . 1-4 family non-owner occupied. . . . . . . . . . . 1-4 family - 2nd lien. . . . . . . . . . . . . . . . . . . . Resort lending. . . . . . . . . . . . . . . . . . . . . . . . . 607 137 275 182 118 Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — $1,319 — 1,815 592 681 119 210 177 182 $3,791 607 1,952 867 863 237 210 177 182 $5,110 — — — — — — — — $— 607 1,952 867 863 237 210 177 182 $5,110 623 2,281 1,112 1,344 607 52 74 393 $7,873 Accrued interest excluded from total . . . . . . . . $ — $ — $ — $— $ — $ — (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. 58 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 zero during each of the years ended 2021, 2020 and 2019. 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 Real Estate Other Allowance for Credit Losses (In thousands) December 31, 2021 Commercial Commercial and industrial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 80 $245 84 — $ 51 19 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 607 — 940 — 477 — 370 — 237 — Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 80 — 121 — 70 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,795 $516 — 286 72 67 42 29 44 25 $635 Accrued interest excluded from total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ 1 An aging analysis of loans by class at December 31 follows: Loans Past Due 30-59 days 60-89 days 90+ days Total Loans not Past Due Total Loans (In thousands) 2021 Commercial Commercial and industrial . . . . . . . . . . . . . Commercial real estate. . . . . . . . . . . . . . . . $ — — $ 2 — $ $ 62 — 64 $ 593,048 $ 593,112 610,469 — 610,469 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. . . . . . . . . . . . . . . . . . . . . . . — 774 87 422 — Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 438 377 252 $2,350 — 408 26 60 — 28 65 57 $646 607 657 462 289 237 607 1,839 575 771 237 540,416 264,571 194,277 87,958 48,408 541,023 266,410 194,852 88,729 48,645 52 120 49 $2,535 518 562 358 228,140 227,622 234,745 234,183 98,920 98,562 $5,531 $2,899,514 $2,905,045 Accrued interest excluded from total . . . . . . $ 25 $ 9 $ — $ 34 $ 6,802 $ 6,836 59 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Loans Past Due 30-59 days 60-89 days 90+ days Total Loans not Past Due Total Loans (In thousands) 2020 Commercial Commercial and industrial . . . . . . . . . . . . . Commercial real estate. . . . . . . . . . . . . . . . $ 5,003 2,600 $ 131 — $ 70 $ 5,204 $ 671,115 $ 676,319 569,632 — 2,600 567,032 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. . . . . . . . . . . . . . . . . . . . . . . 761 1,888 1,184 710 32 — 453 139 228 195 623 502 476 732 358 1,384 2,843 1,799 1,670 585 438,794 264,730 157,977 92,860 57,462 440,178 267,573 159,776 94,530 58,047 Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total recorded investment . . . . . . . . . . . 95 207 337 $12,817 101 37 162 $1,446 Accrued interest included in recorded — 48 199 207,513 169,574 99,435 $3,008 $17,271 $2,725,306 $2,742,577 207,317 169,282 98,737 196 292 698 investment. . . . . . . . . . . . . . . . . . . . . . . . . . $ 147 $ 22 $ — $ 169 $ 8,730 $ 8,899 Impaired loans at December 31, 2020 are as follows(1): Impaired loans with no allocated ACL TDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non - TDR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impaired loans with an allocated ACL TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TDR - allowance based on present value cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non - TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total impaired loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount of ACL allocated(1) TDR - allowance based on collateral . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . TDR - allowance based on present value cash flow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-TDR - allowance based on collateral. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total amount of ACL allocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 (In thousands) $ 93 1,367 9,027 37,953 1,873 $50,313 $ 1,058 3,755 768 $ 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. Impaired loans by class as of December 31, 2020 are as follows(1): Recorded Investment 2020 Unpaid Principal Balance (In thousands) Related ACL(1) With no related ACL recorded: Commercial Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $77 — $80 — $— — 60 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . With an ACL recorded: Commercial Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Commercial Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recorded Investment 2020 Unpaid Principal Balance (In thousands) Related ACL(1) 623 — 305 301 154 — — — 629 — 473 304 379 — — — 1,460 1,865 2,227 7,127 506 21,655 4,335 811 10,555 7 87 1,902 2,370 7,096 880 22,311 4,704 829 10,764 11 100 2,040 — — — — — — — — — 756 510 50 2,300 495 200 1,079 2 19 170 49,212 51,105 5,581 2,304 7,127 1,129 21,655 4,640 1,112 10,709 7 87 1,902 2,450 7,096 1,509 22,311 5,177 1,133 11,143 11 100 2,040 756 510 50 2,300 495 200 1,079 2 19 170 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. 61 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending. . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 125 159 408 252 308 380 92 — — — With an a ACL recorded: Commercial Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending. . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,724 2,230 10,751 1,083 19,624 4,664 3,376 11,316 59 81 2,416 $ 9 — — 4 10 — — — — — 23 242 1,043 84 2,033 375 22 799 1 4 225 $ 51 278 — 201 123 136 — — — — 789 2,256 5,778 995 15,183 2,874 13,383 11,697 54 22 3,186 $ — 5 — — — 7 — — — 1 13 72 315 39 594 291 809 669 — — 189 55,600 4,828 55,428 2,978 Total Commercial Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,355 10,910 1,491 19,876 4,972 3,756 11,408 251 1,043 84 2,037 385 22 799 2,307 6,056 995 15,384 2,997 13,519 11,697 72 320 39 594 291 816 669 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 2020 2019 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (In thousands) Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending. . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 59 81 2,416 1 4 225 54 22 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. Troubled debt restructurings at December 31 follow: Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing TDR’s(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $4,481 — $4,481 $31,589 1,016(3) $36,070 1,016 $32,605 $37,086 Commercial 2021 Retail(1) (In thousands) Total Commercial 2020 Retail(1) (In thousands) Total Performing TDR’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing TDR’s(2). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,956 1,148 $9,104 $36,385 1,584(3) $44,341 2,732 $37,969 $47,073 (1) (2) Retail loans include mortgage and installment loan portfolio segments. 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. 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. 63 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending. . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 Commercial Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending. . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7 4 — 5 2 2 — — — 4 24 8 3 — 2 1 3 — — — 7 24 $1,207 7,012 $1,207 7,012 — 357 111 44 — — — 91 — 374 116 46 — — — 93 $8,822 $8,848 $1,609 1,479 $1,609 1,479 — 478 507 75 — — — 188 — 483 505 75 — — — 191 $4,336 $4,342 (1) There were no 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 zero 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 four consecutive payments are missed for mortgage loans. There were no 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 zero charge offs during 2019. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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: Loan Category Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loans serviced for others(1). . . . . . . . . . . . . . . . . . . . . . . COVID-19 Accommodations Total Amount ($) Amount (#) Loans (Dollars in thousands) $ — $1,203,581 1,139,659 2,278 55 561,805 $2,905,045 $2,333 — 22 1 23 46 $5,163 $3,323,521 % of Total Loans 0.0% 0.2% 0.0% 0.1% 0.2% (1) We have delegated authority from all investors to grant these deferrals on their behalf. Information on subsequent COVID-19 accommodation extensions for portfolio loans follows(1): Loan Category Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount (#) Amount ($) (Dollars in thousands) $ — 2,194 — $2,194 — 19 — 19 (1) Subsequent accommodations are extensions of the original accommodations that were given as summarized in the paragraph above. 65 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 $150,000 or less. The Economic Aid Act also established second draw loans for entities that had already used the initial PPP funds, subject to numerous limitations and eligibility criteria. PPP Round 2 loans are eligible for forgiveness similar to Round 1 PPP loans, subject to limitations set forth in the Economic Aid Act. Round 2 closed on May 31, 2021. PPP loans outstanding at December 31 follows: Closed and outstanding - Round 1 loans. . . . . . . . . . . . . . . . . . . . . . . . . Closed and outstanding - Round 2 loans. . . . . . . . . . . . . . . . . . . . . . . . . Total closed and outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unaccreted net fees remaining at period end . . . . . . . . . . . . . . . . . . . . . 2021 2020 Amount (#) Amount ($) Amount (#) Amount ($) (Dollars in thousands) 6 180 186 $ 197 26,167 $26,364 $ 806 1,483 — 1,483 $169,782 — $169,782 $ 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 zero. PPP loans funded totaled $135.5 million, $261.1 million and zero 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 zero 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. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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 2021 2020 2019 2018 2017 (In thousands) Prior Revolving Loans Amortized Cost Basis Total 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 9,019 Watch (7-8) . . . . . . . . . . 532 11,300 1,159 Substandard Accrual (9) . 62 — Non-Accrual (10-11). . . . 6,274 1,530 62 1,294 247 — 476 6,793 — 81 1,569 — 362 — — — 2 — 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 14,161 Watch (7-8). . . . . . . . . . . 2,742 Substandard Accrual (9) . — Non-Accrual (10-11). . . . 1,423 — — 7,678 1,193 — 1,708 1,108 — 3,028 — — 324 — — — 441 — — — — 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 23,180 Watch (7-8). . . . . . . . . . . 14,042 Substandard Accrual (9) . 62 Non-Accrual (10-11). . . . 7,697 1,530 62 476 6,793 — 8,972 1,440 — 2,070 1,108 — 3,560 1,159 — 81 2,010 — 324 2 — 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 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) The following table summarizes loan ratings by loan class for our commercial portfolio loan segment as of December 31, 2020: Non-watch 1-6 Watch 7-8 Commercial Substandard Accrual 9 (In thousands) Non- Accrual 10-11 Total December 31, 2020 Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . $ 637,826 $32,765 5,978 Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,199,208 $38,743 561,382 Accrued interest included in total. . . . . . . . . . . . . . . . . . . . . $ 3,408 $ 105 $4,341 2,272 $6,613 $ 23 $1,387 $ 676,319 — 569,632 $1,387 $1,245,951 $ — $ 3,536 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 2021 2020 2019 2018 2017 (In thousands) Prior December 31, 2021 1-4 family owner occupied - jumbo 800 and above . . . . . . . . $ 31,137 $ 17,652 $ 8,491 $ 2,565 $ 7,516 $ 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . 527 5,043 92,590 4,856 34,665 690 10,313 976 2,638 — 469 — 1,411 — — — — Total . . . . . . . . . . . . . . $255,101 $159,738 $58,281 $20,402 $33,038 $12,092 135,292 67,255 19,367 2,050 — — — — 30,072 13,765 5,447 506 — — — — 7,118 4,421 5,285 1,013 — — — — 9,469 7,748 6,080 837 781 — 607 — Revolving Loans Amortized Cost Basis Total 2,371 $ — $ 67,888 281,955 — 132,710 47,182 — 8,020 — 1,250 — 1,411 — 607 — — — $541,023 $ 2,371 Accrued interest excluded from total . . . . . . . . . . . . $ 557 $ 370 $ 163 $ 77 $ 87 $ 33 $ 3 $ 1,290 1-4 family owner 6,185 $ occupied - non-jumbo 800 and above . . . . . . . . $ 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . 5,534 $ 3,756 $ 2,514 $ 3,566 $ 4,569 12,498 5,664 20,300 21,806 4,035 10,572 12,423 2,010 4,233 8,663 1,549 1,082 5,802 758 295 3,169 327 57 684 394 616 — — — Total . . . . . . . . . . . . . . $ 67,441 $ 42,689 $24,306 $17,251 $24,039 $69,614 33,227 19,317 6,593 2,119 — — — — 8,887 5,008 3,135 1,660 1,023 510 250 — 9,688 4,813 3,217 1,051 1,076 421 284 — $ 4,026 8,341 5,637 2,812 89 147 18 — — $21,070 $ 30,150 98,605 71,188 34,423 16,213 9,101 4,502 2,228 — $266,410 Accrued interest excluded from total . . . . . . . . . . . . $ 208 $ 97 $ 84 $ 58 $ 68 $ 226 $ 57 $ 798 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Mortgage(1) Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 (In thousands) Prior Revolving Loans Amortized Cost Basis Total 1-4 family non-owner occupied 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . Total . . . . . . . . . . . . . . Accrued interest excluded from total . . . . . . . . . . . . 1-4 family - 2nd lien $15,406 44,201 16,486 6,617 125 — — — — $82,835 $ 1,786 21,885 7,807 3,095 57 25 — — — $34,655 $ 2,857 10,517 2,764 257 108 — — — — $16,503 $1,459 3,667 1,878 299 282 192 55 — — $7,832 $ 2,627 $ 5,058 10,004 6,956 6,095 966 6,019 248 174 2,051 — 1,121 638 — 172 — — — $10,971 $31,158 $ 1,639 5,117 2,756 955 381 — 50 — — $10,898 $ 30,832 102,347 38,752 17,490 3,178 1,338 743 172 — $194,852 $ 171 $ 95 $ 46 $ 23 $ 33 $ 107 $ 38 $ 513 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . Total . . . . . . . . . . . . . . $ 415 2,161 1,307 122 — — — — — $ 4,005 $ 964 2,413 1,049 309 177 — — — — $ 4,912 $ 426 714 771 460 72 61 99 54 — $ 2,657 $ 95 1,332 561 405 106 — — 3 — $2,502 $ 266 $ 353 2,415 2,365 1,639 1,143 476 190 16 — $ 3,880 $ 8,597 1,859 1,374 140 92 — 89 60 — $ 8,465 30,106 16,316 5,286 1,370 228 155 250 — $62,176 $ 10,984 41,000 23,743 8,361 2,960 765 533 383 — $ 88,729 Accrued interest excluded from total . . . . . . . . . . . . Resort lending 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . Total . . . . . . . . . . . . . . Accrued interest excluded from total . . . . . . . . . . . . $ 7 $ 9 $ 9 $ 5 $ 8 $ 34 $ 211 $ 283 $ — $ — $ — $ 274 511 301 — — — — — — $1,086 600 — 951 — — — — — $ 1,551 1,246 174 — — — — — — $ 1,420 250 — — — — — — — 250 $ $ — $ 7,347 19,630 63 67 9,052 — 6,057 — 1,841 80 — 201 — — — — — 130 $44,208 $ $ — $ — — — — — — — — 7,621 22,300 9,594 7,008 1,841 80 201 — — $ — $ 48,645 $ 2 $ 3 $ — $ 3 $ — $ 106 $ — $ 114 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Mortgage(1) Term Loans Amortized Cost Basis by Origination Year 2021 2020 2019 2018 2017 (In thousands) Prior Total Mortgage 800 and above . . . . . . . . $ 53,143 $ 25,936 $ 15,530 $ 6,907 $13,975 $ 17,854 49,590 138,434 750-799 . . . . . . . . . . . . . 44,174 54,267 700-749 . . . . . . . . . . . . . 26,828 17,950 650-699 . . . . . . . . . . . . . 14,674 3,954 600-649 . . . . . . . . . . . . . 7,479 789 550-599 . . . . . . . . . . . . . 4,198 1,468 500-549 . . . . . . . . . . . . . 872 616 Under 500 . . . . . . . . . . . — — Unknown . . . . . . . . . . . . Total . . . . . . . . . . . . . . $410,933 $243,414 $101,997 $49,073 $72,058 $165,669 215,481 104,365 33,650 4,294 — — — — 51,241 22,113 9,381 1,737 1,137 520 338 — 27,234 15,163 9,603 2,763 1,804 599 917 — 18,292 11,196 7,999 2,950 950 382 397 — Revolving Loans Amortized Cost Basis Total $14,130 $ 147,475 546,207 45,935 275,987 24,709 114,464 9,053 32,212 1,840 12,534 375 7,390 223 3,390 250 — — $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. December 31, 2021 Boat lending 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . Total . . . . . . . . . . . . . . Accrued interest excluded from total . . . . . . . . . . . . Recreational vehicle lending 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . Total . . . . . . . . . . . . . . Accrued interest excluded from total . . . . . . . . . . . . Installment (1) Term Loans Amortized Cost Basis by Origination Year 2018 (In thousands) 2019 2017 2020 Prior $ 5,786 24,968 9,724 1,679 419 81 49 — — $42,706 $ 6,015 21,052 8,263 2,301 209 91 — — — $37,931 $ 4,906 15,681 6,467 1,223 327 113 85 10 — $28,812 $ 2,968 9,797 3,109 1,166 185 115 — 168 — $17,508 $ 4,433 10,971 4,953 1,378 604 191 67 4 — $22,601 2021 $ 7,513 47,434 19,180 3,845 373 237 — — — $ 78,582 Total $ 31,621 129,903 51,696 11,592 2,117 828 201 182 — $228,140 $ 169 $ 102 $ 106 $ 69 $ 44 $ 47 $ 537 $ 8,475 66,834 32,702 7,390 990 271 39 — — $116,701 $ 5,121 22,707 9,500 2,423 408 100 21 — — $40,280 $ 5,837 17,173 6,169 1,842 291 163 105 11 — $31,591 $ 4,627 11,973 3,768 948 333 318 62 — — $22,029 $ 2,456 5,281 1,657 649 152 6 26 — — $10,227 $ 3,594 6,794 2,343 905 111 72 91 7 — $13,917 $ 30,110 130,762 56,139 14,157 2,285 930 344 18 — $234,745 $ 265 $ 93 $ 78 $ 56 $ 26 $ 28 $ 546 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 2021 Installment (1) Term Loans Amortized Cost Basis by Origination Year 2018 (In thousands) 2019 2017 2020 Prior Total $ 7,179 37,179 24,517 25,681 2,232 695 308 154 975 $ 98,920 Other 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . Total . . . . . . . . . . . . . . Accrued interest excluded from total . . . . . . . . . . . . Total installment 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . Total . . . . . . . . . . . . . . Accrued interest excluded from total . . . . . . . . . . . . $ 2,328 13,923 10,791 20,167 761 159 8 6 975 $ 49,118 $ 1,424 9,093 5,426 1,715 368 42 53 62 — $ 18,183 $ 1,493 6,074 3,301 1,249 272 127 56 42 — $12,614 $ 882 3,175 1,899 657 190 167 55 14 — $ 7,039 $ 357 2,183 906 561 284 46 38 12 — $ 4,387 $ 695 2,731 2,194 1,332 357 154 98 18 — $ 7,579 $ 73 $ 40 $ 36 $ 19 $ 11 $ 38 $ 217 $ 18,316 128,191 62,673 31,402 2,124 667 47 6 975 $244,401 $ 12,331 56,768 24,650 5,817 1,195 223 123 62 — $101,169 $13,345 44,299 17,733 5,392 772 381 161 53 — $82,136 $10,415 30,829 12,134 2,828 850 598 202 24 — $57,880 $ 5,781 17,261 5,672 2,376 621 167 64 180 — $32,122 $ 8,722 20,496 9,490 3,615 1,072 417 256 29 — $44,097 $ 68,910 297,844 132,352 51,430 6,634 2,453 853 354 975 $561,805 $ 507 $ 235 $ 220 $ 144 $ 81 $ 113 $ 1,300 (1) Credit scores have been updated within the last twelve months. 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. . . . . . . . . . . . . . . . . . . . 750-799 . . . . . . . . . . . . . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . . . . . . . . . . . . . Under 500 . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . $ 61,077 223,177 101,086 40,296 11,146 — 3,396 — $440,178 $ 40,187 70,642 75,489 44,344 18,519 11,021 5,129 2,242 $267,573 $ 25,468 82,124 30,326 13,182 4,303 2,388 1,580 405 $159,776 $12,490 42,138 22,962 11,269 2,703 1,608 1,012 348 $94,530 $ 9,546 27,530 11,726 6,393 1,670 917 192 73 $58,047 $ 148,768 445,611 241,589 115,484 38,341 15,934 11,309 3,068 $1,020,104 Accrued interest included in total . . . . $ 1,301 $ 1,641 $ 587 $ 373 $ 276 $ 4,178 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Installment Boat Lending Recreational Vehicle Lending Other Total (In thousands) December 31, 2020 800 and above . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 750-799 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Under 500 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unknown . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,231 123,689 38,223 10,189 2,083 661 342 95 — $207,513 $ 29,223 95,890 33,476 8,794 1,305 551 283 52 — $169,574 $ 9,154 37,512 25,262 21,138 3,730 1,299 767 63 510 $99,435 $ 70,608 257,091 96,961 40,121 7,118 2,511 1,392 210 510 $476,522 Accrued interest included in total . . . . . . . . . . . . . . . . . . . . . . . $ 572 $ 457 $ 156 $ 1,185 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,753,255 1,344,675 170,983 49,581 5,027 $1,656,060 1,095,877 181,615 39,294 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 four 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. 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) An analysis of capitalized mortgage loan servicing rights for the years ended December 31 follows: Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Originated servicing rights capitalized. . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value due to price . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value due to pay downs. . . . . . . . . . . . . . . . . . . . . . . . $ 16,904 11,436 3,380 (5,488) 2021 2020 (In thousands) $ 19,171 13,957 (10,833) (5,391) 2019 $ 21,400 7,303 (6,408) (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. NOTE 5 – OTHER REAL ESTATE A summary of other real estate activity for the years ended December 31 follows(1): Balance at beginning of year, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . Loans transferred to other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Sales of other real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions to valuation allowance charged to expense . . . . . . . . . . . . . . . . . . . . . . $ 738 253 (745) (11) $ 1,715 332 (1,161) (148) $ 1,178 2,242 (1,438) (267) Balance at end of year, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . $ 235 $ 738 $ 1,715 2021 2020 (In thousands) 2019 (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: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions charged to expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Direct write-downs upon sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) 2019 $ 90 11 (70) $ 31 $ 92 148 (150) $ 90 $ 144 267 (319) $ 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. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) NOTE 6 – PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 follows: Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) $ 17,296 58,870 74,844 151,010 (114,606) $ 36,404 $ 17,083 57,208 72,542 146,833 (110,706) $ 36,127 Depreciation expense was $5.4 million, $5.3 million and $5.2 million in 2021, 2020 and 2019, respectively. NOTE 7 – GOODWILL AND OTHER INTANGIBLES Intangible assets, net of amortization, at December 31 follows: 2021 2020 Gross Carrying Amount Gross Accumulated Amortization Carrying Amount Accumulated Amortization (In thousands) Amortized intangible assets - core deposits. . . . . . . . . . . . . . . . . . $11,916 $8,580 Unamortized intangible assets - goodwill . . . . . . . . . . . . . . . . . . . $28,300 $11,916 $28,300 $7,610 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 785 547 516 487 460 541 $3,336 NOTE 8 – DEPOSITS A summary of interest expense on deposits for the years ended December 31 follows: Savings and interest-bearing checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reciprocal. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Brokered time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 $2,101 764 1,507 93 $4,465 2020 (In thousands) $ 2,264 2,158 7,073 1,171 $12,666 2019 $ 5,371 6,024 7,148 4,882 $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. 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) A summary of the maturity of time deposits at December 31, 2021, follows(1): (In thousands) 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $269,067 43,692 10,067 5,834 6,794 338 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: Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $559,664 2,546 24,416 $515,092 3,308 37,785 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $586,626 $556,185 2021 2020 (In thousands) NOTE 9 – OTHER BORROWINGS A summary of other borrowings at December 31 follows: Advances from the FHLB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) $30,000 9 $30,009 $30,000 12 $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. No 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 (Dollars in thousands) Rate Fixed-rate advances - 2027 and thereafter. . . . . . . . . . . . . . . . . . . . . . . . $30,000 0.74% $30,000 0.74% 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Borrowings with the FRB at December 31, 2021 and 2020 were zero. Average borrowings with the FRB during the years ended December 31, 2021, 2020 and 2019 totaled zero, $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 zero, $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. Summary information regarding subordinated debentures as of December 31 follows: Entity Name Issue Date Subordinated Debentures 2021 Trust Preferred Securities Issued IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007 IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 2007 Midwest Guaranty Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2002 TCSB Statutory Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 2005 Discount on TCSB Statutory Trust I . . . . . . . . . . . . . . . . . . (In thousands) $12,372 15,465 7,732 5,155 (1,132) $12,000 15,000 7,500 5,000 (1,132) $39,592 $38,368 Common Stock Issued $ 372 465 232 155 — $1,224 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Entity Name Issue Date Subordinated Debentures 2020 Trust Preferred Securities Issued IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007 IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . September 2007 Midwest Guaranty Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . November 2002 TCSB Statutory Trust I . . . . . . . . . . . . . . . . . . . . . . . . . . . . . March 2005 Discount on TCSB Statutory Trust I . . . . . . . . . . . . . . . . . . (In thousands) $12,372 15,465 7,732 5,155 (1,200) $12,000 15,000 7,500 5,000 (1,200) $39,524 $38,300 Common Stock Issued $ 372 465 232 155 — $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. . . . . IBC Capital Finance IV . . . . Midwest Guaranty Trust I . . . November 7, 2032 TCSB Statutory Trust I . . . . . March 17, 2035 July 30, 2037 September 15, 2037 3 month LIBOR plus 1.60% July 30, 2012 3 month LIBOR plus 2.85% September 15, 2012 3 month LIBOR plus 3.45% November 7, 2007 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. 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: Financial instruments whose risk is represented by contract amounts Commitments to extend credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $672,693 9,208 $644,815 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 2021 2020 (In thousands) 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. Commercial and industrial: Retail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Food service . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Hotel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial real estate: Retail. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Multifamily . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . % of Total Amount Loans (Dollars in millions) $ 70 49 40 159 109 72 55 236 2.4% 1.7 1.4 5.5 3.8 2.5 1.9 8.1 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $395 13.6% At December 31, 2021, we had no 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. 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 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 2019 2020 (In thousands, except per share amounts) Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,895 $56,152 $46,435 Weighted average shares outstanding(1) . . . . . . . . . . . . . . . . . . . . . . . Stock units for deferred compensation plan for non-employee directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Effect of stock options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance share units. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average shares outstanding for calculation of diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,585 21,977 22,894 121 69 32 121 90 33 132 115 42 21,807 22,221 23,183 Net income per common share Basic(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.91 2.88 $ $ 2.56 2.53 $ $ 2.03 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 zero for each year ended 2021, 2020 and 2019, respectively. NOTE 13 – INCOME TAX The composition of income tax expense for the years ended December 31 follows: Current expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred expense (benefit). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) 2019 $12,506 1,912 $14,418 $15,459 (2,130) $13,329 $10,237 1,088 $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. 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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: Statutory rate applied to income before income tax. . . . . . . . . . . . . . . . . . . . . Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-deductible meals, entertainment and memberships. . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) 2019 $16,236 (1,487) (184) (119) (11) 32 (49) $14,591 (690) (204) (196) (206) 57 (23) $12,130 (375) (204) (233) (134) 86 55 Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,418 $13,329 $11,325 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: 2020 2021 (In thousands) Deferred tax assets Allowance for credit losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,923 $ 7,363 1,047 Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,652 Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 379 Reserve for unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 742 Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 321 Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 214 Loss reimbursement on sold loans reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 203 Non accrual loan interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Other than temporary impairment charge on securities available for sale . . . . . . . . . . . . . . . . — Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,405 1,386 941 734 390 242 194 144 276 Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15,635 12,065 Deferred tax liabilities Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred loan fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease right of use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,509 2,011 1,674 1,361 735 — 3,550 1,901 4,206 1,606 509 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. 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Changes in unrecognized tax benefits for the years ended December 31 follow: Balance at beginning of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions based on tax positions related to the current year. . . . . . . . . . . . . . . . . Reductions due to the statute of limitations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reductions due to settlements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) 2019 $180 11 (11) — $180 $ 438 15 (273) — $ 180 $ 588 20 (170) — $ 438 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. No amounts were expensed for interest and penalties for the years ended December 31, 2021, 2020 and 2019. No 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. 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. 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) A summary of outstanding stock option grants and related transactions follows: Outstanding at January 1, 2021 . . . . . . . . . . . . . . . . . . . . . . Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted- Average Remaining Contractual Term (Years) Aggregated Intrinsic Value (In thousands) Average Exercise Price $4.81 2.90 Number of Shares 121,189 — (40,350) — — Outstanding at December 31, 2021 . . . . . . . . . . . . . . . . . . . 80,839 $5.76 Vested and expected to vest at December 31, 2021 . . . . . . Exercisable at December 31, 2021 . . . . . . . . . . . . . . . . . . . . 80,839 80,839 $5.76 $5.76 A summary of outstanding non-vested stock and related transactions follows: Outstanding at January 1, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 1.6 1.6 Number of Shares 207,117 114,565 (73,081) (14,375) Outstanding at December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 234,226 Certain information regarding options exercised during the periods ending December 31 follows: $1,464 $1,464 $1,464 Weighted- Average Grant Date Fair Value $22.70 20.45 22.82 21.89 $21.64 Intrinsic value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash proceeds received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 $752 $117 $158 2020 (In thousands) $293 $ 57 $ 61 2019 $897 $706 $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. 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) NOTE 15 – OTHER NON-INTEREST INCOME Other non-interest income for the years ended December 31 follows: Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total other non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) 2019 $2,603 1,133 567 5,089 $9,392 $1,971 1,197 910 3,443 $7,521 $1,658 1,403 1,111 5,110 $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. Our derivative financial instruments according to the type of hedge in which they are designated at December 31 follow: 2021 Average Maturity (years) (Dollars in thousands) Notional Amount Fair Value Fair value hedge designation Pay-fixed interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements - securities available for sale . . . . . . . . $ 6,753 148,895 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $155,648 No hedge designation Rate-lock mortgage loan commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaption agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . Pay-variable interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $129,846 97,737 10,000 207,080 207,080 90,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $741,743 7.4 5.8 5.9 0.1 0.1 0.2 5.7 5.7 1.3 3.4 $ (384) 4,413 $ 4,029 $ 2,140 (68) 186 (5,179) 5,179 35 $ 2,293 2020 Average Maturity (years) (Dollars in thousands) Notional Amount Fair Value Fair value hedge designation Pay-fixed interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements - securities available for sale . . . . . . . . $ 7,088 41,950 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,038 No hedge designation Rate-lock mortgage loan commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . $168,816 186,092 8.4 7.1 7.3 0.1 0.1 $ (776) 15 $ (761) $7,020 (941) 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 2020 Average Maturity (years) (Dollars in thousands) Notional Amount Fair Value Pay-fixed interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . Pay-variable interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchased options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written options. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 147,456 147,456 25,000 135,000 2,908 2,848 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $815,576 4.5 4.5 0.6 1.8 0.5 0.5 2.0 (9,700) 9,700 (295) 5 42 (42) $ 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. 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 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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. 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 December 31, Liability Derivatives December 31, 2021 2020 Balance Sheet Location Fair Value Balance Sheet Location Fair Value 2021 Balance Sheet Location Fair Value 2020 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 $ — Other liabilities $ — Mandatory commitments to sell mortgage loans. . . . . . . Other assets — Other assets — Other liabilities 68 Other liabilities 941 Interest rate swaption agreement . . . . . . . . . . . . . Other assets 186 Other assets — Other liabilities — Other liabilities — Pay-fixed interest rate swap agreements - commercial. . . Other assets 165 Other assets — 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 Pay-fixed interest rate swap agreements . . . . . . . . . . . . Other assets Interest rate cap agreements. . . Other assets Purchased options. . . . . . . . . . Other assets Written options . . . . . . . . . . . Other assets — Other assets 35 Other assets — Other assets — Other assets — Other liabilities 5 Other liabilities 42 Other liabilities — Other liabilities — Other liabilities — Other liabilities — Other liabilities — Other liabilities Total derivatives. . . . . . . . . 7,870 $12,283 16,767 $16,782 5,577 $5,961 — 295 — — 42 10,978 $11,754 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) The effect of derivative financial instruments on the Consolidated Statements of Operations follows: Location of Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) Year Ended December 31, Gain (Loss) Reclassified from Accumulated Other Comprehensive Income into Income (Effective Portion) 2021 2020 2019 (In thousands) Gain (Loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion) 2021 2020 2019 Fair Value Hedges Pay-fixed interest rate swap agreement - commercial . . . . . . . . Pay-fixed interest rate swap agreement - securities available for sale . . . . . . . . . . . . . Total . . . . . . . . . . . . Cash Flow Hedges Interest rate cap agreements . . . . . . . . $— $ 125 $(1,211) Pay-fixed interest rate swap agreements . . . . — (479) (392) Total . . . . . . . . . . . . $— $(354) $(1,603) No hedge designation Interest expense Interest expense $— $(1,885) $363 — (654) 62 $— $(2,539) $425 Location of Gain (Loss) Recognized in Income Gain (loss) Recognized in Income 2021 2020 2019 Interest and fees on loans Interest on securities available for sale - tax- exempt $ 392 $ (534) $ (242) 4,398 15 — $ 4,790 $ (519) $ (242) Rate-lock mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaption agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-variable interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchased options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on mortgage loans Net gains on mortgage loans Net gains on mortgage loans Interest income Interest income Interest expense Interest expense Interest expense Interest expense $(4,880) $ 5,608 $ 725 873 (791) 233 (2) — — 4,521 (6,059) (4,046) (4,521) 6,059 4,046 295 231 30 (57) (42) (99) — — 25 42 97 (23) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(3,684) $ 4,989 $ 960 88 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,416 5,722 (1,259) $ 13,077 417 (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: Operating lease cost. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Variable lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Short-term lease cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) 2019 $1,672 63 64 $1,799 $1,780 69 36 $1,885 $2,217 142 19 $2,378 Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities. 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Supplemental balance sheet information related to our operating leases follows: Lease right of use asset(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease liabilities(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average remaining lease term (years). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted average discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 2020 (In thousands) $6,481 $6,602 $7,646 $7,868 6.50 2.3% 7.12 2.4% (1) (2) Included in Accrued income and other assets in our Consolidated Statements of Financial Condition. 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: 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,619 1,311 816 809 744 1,795 7,094 (492) Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,602 (In thousands) NOTE 19 – CONCENTRATIONS OF CREDIT RISK in any activity where success depends on counterparty, 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 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 type and by industry. The significant affected. Our major concentrations of credit risk arise by collateral 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. 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 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. Our actual capital amounts and ratios at December 31 follow(1): 2021 Total capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . Tier 1 capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . Common equity tier 1 capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . Tier 1 capital to average assets 2020 Total capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . Tier 1 capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . Common equity tier 1 capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . Tier 1 capital to average assets Actual Amount Ratio Minimum for Adequately Capitalized Institutions Amount Ratio (Dollars in thousands) Minimum for Well-Capitalized Institutions Amount Ratio $488,495 438,352 14.53% $268,991 268,808 13.05 8.00% 8.00 NA $336,011 NA 10.00% $406,645 396,351 12.09% $201,743 201,606 11.80 6.00% 6.00 NA $268,808 NA 8.00% $368,277 396,351 10.95% $151,307 151,205 11.80 4.50% 4.50 NA $218,407 $455,072 401,005 15.95% $228,214 228,111 14.06 8.00% 8.00 NA $285,139 NA 10.00% $379,395 365,343 13.30% $171,161 171,083 12.81 6.00% 6.00 NA $228,111 NA 8.00% $341,095 365,343 11.96% $128,370 128,312 12.81 4.50% 4.50 NA $185,340 NA 6.50% NA 5.00% NA 6.50% NA 5.00% Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . $406,645 396,351 8.79% $185,034 185,077 8.57 4.00% 4.00 NA $231,347 Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . $379,395 365,343 9.15% $165,825 165,828 8.81 4.00% 4.00 NA $207,285 (1) These ratios do not reflect a capital conservation buffer of 2.50% at December 31, 2021 and 2020. NA - Not applicable 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) The components of our regulatory capital are as follows: Consolidated December 31, Independent Bank 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and other intangibles . . . . . . . . . . . . . . . . . . . . . . . CECL(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Common equity tier 1 capital. . . . . . . . . . . . . . . . . . . . . . . Qualifying trust preferred securities . . . . . . . . . . . . . . . . . . . . Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses and allowance for unfunded lending commitments limited to 1.25% of total risk- weighted assets(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . (6,298) (31,636) 7,727 368,277 38,368 406,645 40,000 (15,821) (32,606) — 341,095 38,300 379,395 40,000 (6,298) (31,636) 7,727 396,351 — 396,351 — (15,821) (32,606) — 365,343 — 365,343 — 41,850 35,677 42,001 35,662 $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 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. 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). 93 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 Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In thousands) Fair Value Measurements December 31, 2021: Measured at Fair Value on a Recurring Basis Assets Securities available for sale U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency residential mortgage-backed . . . . . . . . . . . . U.S. agency commercial mortgage-backed . . . . . . . . . . . Private label mortgage-backed . . . . . . . . . . . . . . . . . . . . Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions. . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale, carried at fair value . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . . . Derivatives(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 34,674 307,985 22,926 102,615 216,170 576,076 149,959 1,919 506 55,470 26,232 12,283 Liabilities Derivatives(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,961 Measured at Fair Value on a Non-recurring Basis: Assets Collateral dependent loans(3) Commercial Commercial and industrial. . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . Mortgage 1-4 family owner occupied - non-jumbo . . . . . . . . . . 1-4 family non-owner occupied . . . . . . . . . . . . . . . . . 1-4 family - 2nd lien . . . . . . . . . . . . . . . . . . . . . . . . . Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 274 65 516 130 121 77 51 77 45 $— — — — — — — — — — — — — — — — — — — — — — $ 34,674 307,985 22,926 102,615 216,170 576,076 149,959 1,919 506 55,470 — 12,283 $ — — — — — — — — — — 26,232 — 5,961 — — — — — — — — — — 274 65 516 130 121 77 51 77 45 (1) (2) Included in accrued income and other assets in the Consolidated Statements of Financial Condition. 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. 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Fair Value Measurements Using Quoted Prices in Active Markets for Identical Assets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) (In thousands) Fair Value Measurements December 31, 2020: Measured at Fair Value on a Recurring Basis Assets Securities available for sale U.S. agency . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . U.S. agency residential mortgage-backed . . . . . . . . . . . . U.S. agency commercial mortgage-backed . . . . . . . . . . . Private label mortgage-backed . . . . . . . . . . . . . . . . . . . . Other asset backed . . . . . . . . . . . . . . . . . . . . . . . . . . . . Obligations of states and political subdivisions. . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign government . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale, carried at fair value . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . . . Derivatives(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,748 344,582 7,195 42,829 254,181 324,293 86,017 1,798 516 92,434 16,904 16,782 Liabilities Derivatives(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,754 Measured at Fair Value on a Non-recurring Basis: Assets Impaired loans(3) Commercial Commercial and industrial. . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . 1,468 6,586 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate(4) 1-4 family owner occupied - non-jumbo . . . . . . . . . . — 321 155 324 61 4 31 124 102 $— — — — — — — — — — — — — — — — — — — — — — — — $ 10,748 344,582 7,195 42,829 254,181 324,293 86,017 1,798 516 92,434 — 16,782 $ — — — — — — — — — — 16,904 — 11,754 — — — — — — — — — — — — 1,468 6,586 — 321 155 324 61 4 31 124 102 (1) (2) Included in accrued income and other assets in the Consolidated Statements of Financial Condition. 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. 95 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 Securities Available For Sale Mortgage Loans Mortgage Loan Servicing, net (In thousands) Total Change in Fair Values Included in Current Period Earnings 2021 Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . $ — — $(2,805) — $ — (2,108) $ (2,805) (2,108) 2020 Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . 2019 Equity securities at fair value . . . . . . . . . . . . . . . . . . . . . . Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . — — 167 — — 1,962 — — (16,224) 1,962 (16,224) — 637 — — — (9,532) 167 637 (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 zero 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 zero, $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. 96 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 2020 (In thousands) 2019 2021 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,904 $ 19,171 $21,400 Total losses realized and unrealized: Included in results of operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Included in other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . Purchases, issuances, settlements, maturities and calls . . . . . . . . . . . . . . . . . . . . . Transfers in and/or out of Level 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (2,108) — 11,436 — (16,224) — 13,957 — (9,532) — 7,303 — 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 (In thousands) 2021 Capitalized mortgage loan servicing rights . . . . . . . $26,232 2020 Capitalized mortgage loan servicing rights . . . . . . . $16,904 Valuation Technique Unobservable Inputs Range Weighted Average Present value of net servicing revenue Discount rate Cost to service Ancillary income Float rate Prepayment rate 10.00% to 13.00% $67 to $281 20 to 30 1.36% 7.02% to 44.21% Present value of net servicing revenue Discount rate Cost to service Ancillary income Float rate Prepayment rate 10.00% to 13.00% $69 to $289 20 to 37 0.43% 7.92% to 64.70% 10.07% $78 21 1.36% 13.92% 10.09% $79 22 0.43% 20.85% 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Quantitative information about Level 3 fair value measurements measured on a non-recurring basis follows: Asset Fair Value (In thousands) Valuation Technique Unobservable Inputs Range Weighted Average 2021 Collateral dependent loans Commercial . . . . . . . . . . . . . . $ 339 Mortgage and Installment(1) . . . 1,017 2020 Impaired loans Commercial . . . . . . . . . . . . . . $8,054 Mortgage and Installment(1) . . . 1,020 Other real estate Mortgage . . . . . . . . . . . . . . . . 102 Sales comparison approach Sales comparison approach Sales comparison approach Sales comparison approach Sales comparison approach Adjustment for differences between comparable sales Adjustment for differences between comparable sales Adjustment for differences between comparable sales Adjustment for differences between comparable sales Adjustment for differences between comparable sales (12.5)% to 12.0% 1.5% (30.1) to 29.3 0.2 (40.0)% to 75.0% 3.8% (73.3) to 104.6 (1.5) (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 Contractual Principal Difference (In thousands) Loans held for sale 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2019 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $55,470 92,434 69,800 $1,051 3,856 1,894 $54,419 88,578 67,906 98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. The estimated recorded book balances and fair values at December 31 follow: Recorded Book Balance Fair Value Fair Value Using Quoted Prices in Active Markets for Identical Assets (Level 1) (In thousands) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) 2021 Assets Cash and due from banks . . . . . . . . . . . . . . . . $ Interest bearing deposits . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . Federal Home Loan Bank and Federal 51,069 $ 58,404 1,412,830 51,069 $ 58,404 1,412,830 51,069 $ 58,404 — $ — — 1,412,830 — — — Reserve Bank Stock . . . . . . . . . . . . . . . . . . Net loans and loans held for sale . . . . . . . . . . Accrued interest receivable. . . . . . . . . . . . . . . Derivative financial instruments. . . . . . . . . . . 18,427 2,948,074 12,865 12,283 NA 2,931,079 12,865 12,283 NA 35,233 1 — NA 55,470 6,028 12,283 NA 2,840,376 6,836 — Liabilities Deposits with no stated maturity(1) . . . . . . . . $3,781,298 $3,781,298 $3,781,298 $ Deposits with stated maturity(1) . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures . . . . . . . . . . . . . . . . . Accrued interest payable. . . . . . . . . . . . . . . . . Derivative financial instruments. . . . . . . . . . . 335,792 30,009 39,357 39,592 497 5,961 336,006 30,155 44,999 33,866 497 5,961 — — — — 67 — — $ 336,006 30,155 44,999 33,866 430 5,961 2020 Assets Cash and due from banks . . . . . . . . . . . . . . . . $ Interest bearing deposits . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . Federal Home Loan Bank and Federal 56,006 $ 62,699 1,072,159 56,006 $ 62,699 1,072,159 56,006 $ 62,699 — $ — — 1,072,159 — — — — — — — — — — Reserve Bank Stock . . . . . . . . . . . . . . . . . . Net loans and loans held for sale . . . . . . . . . . Accrued interest receivable. . . . . . . . . . . . . . . Derivative financial instruments. . . . . . . . . . . 18,427 2,790,683 12,315 16,782 NA 2,794,058 12,315 16,782 NA — 3 — NA 92,434 3,414 16,782 NA 2,701,624 8,898 — Liabilities Deposits with no stated maturity(1) . . . . . . . . $3,198,338 $3,198,338 $3,198,338 $ Deposits with stated maturity(1) . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . 439,017 30,012 441,457 30,844 — — — $ 441,457 30,844 — — — 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Recorded Book Balance Subordinated debt . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures . . . . . . . . . . . . . . . . . Accrued interest payable. . . . . . . . . . . . . . . . . Derivative financial instruments. . . . . . . . . . . 39,281 39,524 601 11,754 Fair Value Using Quoted Prices in Active Markets for Identical Assets (Level 1) (In thousands) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) — — 59 — 41,417 30,265 542 11,754 — — — — Fair Value 41,417 30,265 601 11,754 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. 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 Disproportionate Tax Effects from Securities Available for Sale Unrealized Losses on Cash Flow Hedges Total (In thousands) 2021 Balances at beginning of period . . . . . . . . . . . . . . . . . . . Other comprehensive loss before reclassifications . . . Amounts reclassified from AOCIL . . . . . . . . . . . . . . . Net current period other comprehensive loss . . . . . $15,822 (8,408) (1,115) (9,523) $(5,798) — — — $ — — — — $10,024 (8,408) (1,115) (9,523) Balances at end of period. . . . . . . . . . . . . . . . . . . . . . . . $ 6,299 $(5,798) $ — $ 501 2020 Balances at beginning of period . . . . . . . . . . . . . . . . . . . $ 3,739 $(5,798) $(1,727) $ (3,786) Other comprehensive income (loss) before reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts reclassified from AOCIL . . . . . . . . . . . . . . . Net current period other comprehensive income . . 12,294 (211) 12,083 — — — (279) 2,006 1,727 12,015 1,795 13,810 Balances at end of period. . . . . . . . . . . . . . . . . . . . . . . . $15,822 $(5,798) $ — $10,024 100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Unrealized Gains (Losses) on Securities Available for Sale Disproportionate Tax Effects from Securities Available for Sale Unrealized Losses on Cash Flow Hedges Total (In thousands) 2019 Balances at beginning of period . . . . . . . . . . . . . . . . . . . $(4,185) $(5,798) $ (125) $(10,108) Other comprehensive income (loss) before reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts reclassified from AOCIL . . . . . . . . . . . . . . . Net current period other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,035 (111) 7,924 — — — (1,266) (336) 6,769 (447) (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. A summary of reclassifications out of each component of AOCIL for the years ended December 31 follows: AOCIL Component 2021 Unrealized gains (losses) on securities available for sale 2020 Unrealized gains (losses) on securities available for sale Reclassified From AOCIL (In thousands) Affected Line Item in Consolidated Statements of Operations $1,411 — 1,411 296 Net gains on securities available for sale Net impairment loss recognized in earnings Total reclassifications before tax Income tax expense $1,115 Reclassifications, net of tax $ 267 — 267 56 Net gains on securities available for sale Net impairment loss recognized in earnings Total reclassifications before tax Income tax expense $ 211 Reclassifications, net of tax 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) AOCIL Component Unrealized gains (losses) on cash flow hedges 2019 Unrealized gains (losses) on securities available for sale Unrealized gains (losses) on cash flow hedges Reclassified From AOCIL (In thousands) Affected Line Item in Consolidated Statements of Operations $ 2,539 533 $ 2,006 Interest expense Income tax expense Reclassification, net of tax $(1,795) Total reclassifications for the period, net of tax $ $ 140 — 140 29 111 Net gains on securities available for sale Net impairment loss recognized in earnings Total reclassifications before tax Income tax expense Reclassifications, net of tax $ (425) (89) Interest expense Income tax expense $ (336) Reclassification, net of tax $ 447 Total reclassifications for the period, net of tax 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing deposits - time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,093 40,000 432,949 96 $ 10,466 40,000 418,465 805 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $479,138 $469,736 LIABILITIES AND SHAREHOLDERS’ EQUITY Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,357 39,592 844 399,345 $ 39,281 39,524 684 390,247 Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $479,138 $469,736 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) CONDENSED STATEMENTS OF OPERATIONS 2021 Year Ended December 31, 2020 (In thousands) 2019 OPERATING INCOME Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,000 55 33 32,088 $24,000 99 42 24,141 $29,000 230 61 29,291 OPERATING EXPENSES Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administrative and other expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Operating Expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income Before Income Tax and Equity in Undistributed Net Income of Subsidiaries. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income Before Equity in Undistributed Net Income of Subsidiaries . . . Equity in undistributed net income of subsidiaries. . . . . . . . . . . . . . . . . . . . 3,625 787 4,412 27,676 (1,048) 28,724 34,171 2,893 733 3,626 20,515 (937) 21,452 34,700 2,104 655 2,759 26,532 (423) 26,955 19,480 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $62,895 $56,152 $46,435 CONDENSED STATEMENTS OF CASH FLOWS 2021 Year Ended December 31, 2020 (In thousands) 2019 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 62,895 $ 56,152 $ 46,435 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Deferred income tax (benefit) expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of discount on subordinated debt and debentures . . . . . . . . . . . . (Increase) decrease in accrued income and other assets. . . . . . . . . . . . . . . . Increase in accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . Equity in undistributed net income of subsidiaries. . . . . . . . . . . . . . . . . . . . (81) 95 144 788 159 (34,171) (34) 89 113 (307) 109 (34,700) 1,503 65 68 891 45 (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 . . . . . . . . . . . . . . . . . . . . . . . . Maturity of interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . . . . . . (160,000) 160,000 (85,000) 55,000 (20,000) 35,000 Net Cash From (Used In) Investing Activities . . . . . . . . . . . . . . . . . . . . . — (30,000) 15,000 CASH FLOW FROM (USED IN) FINANCING ACTIVITIES Proceeds from issuance of subordinated debt, net of issuance costs . . . . . . Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation withholding obligation . . . . . . . . . . . . . . . . . . . . — (18,155) 1,913 (691) 39,236 (17,618) 1,907 (755) — (16,554) 2,074 (882) 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 2021 Year Ended December 31, 2020 (In thousands) 2019 Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Cash From (Used In) Financing Activities . . . . . . . . . . . . . . . . . . . . Net Increase (Decrease) in Cash and Cash Equivalents. . . . . . . . . . . . . . Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . (17,269) (34,202) (4,373) 10,466 (14,231) (26,284) 8,539 (41,646) (39) 10,505 2,881 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 no contract assets or liabilities recorded as of December 31, 2021. 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 no other real estate properties sold during 2021that were financed by us. 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Disaggregation of our revenue sources by attribute for the years ended December 31 follow: 2021 Retail Service Charges on Deposit Accounts Other Deposit Related Income Investment and Insurance Commissions Interchange Income (In thousands) Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . Account service charges. . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,431 1,130 — — $ — — 1,109 819 Business Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange income . . . . . . . . . . . . . . . . . . . . . . . Asset management revenue . . . . . . . . . . . . . . . . . Transaction based revenue . . . . . . . . . . . . . . . . . . 609 — — — — — — 24 328 — — — $ — — — — — — — 14,045 — — $ — — — — — — — — 1,689 914 Total $ 8,431 1,130 1,109 819 609 24 328 14,045 1,689 914 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,280 2,603 567 3,942 $9,392 2020 Retail Service Charges on Deposit Accounts Other Deposit Related Income Investment and Insurance Commissions Interchange Income (In thousands) Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . Account service charges. . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange income . . . . . . . . . . . . . . . . . . . . . . . Asset management revenue . . . . . . . . . . . . . . . . . Transaction based revenue . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,627 2,017 — — 873 — — — — — $8,517 $ — — 1,173 769 — 24 342 — — — $2,308 $ — — — — — — — 11,230 — — $11,230 $ — — — — — — — — 1,283 688 $1,971 Total $ 5,627 2,017 1,173 769 873 24 342 11,230 1,283 688 $24,026 Reconciliation to Consolidated Statement of Operations: Non-interest income - other: Other deposit related income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,308 1,971 910 2,332 $7,521 105 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Service Charges on Deposit Accounts Other Deposit Related Income Investment and Insurance Commissions Interchange Income (In thousands) 2019 Retail Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . Account service charges. . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Business Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange income . . . . . . . . . . . . . . . . . . . . . . . Asset management revenue . . . . . . . . . . . . . . . . . Transaction based revenue . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,590 2,103 — — 1,515 — — — — — $11,208 $ — — 1,368 965 — 35 422 — — — $2,790 $ — — — — — — — 10,297 — — $10,297 $ — — — — — — — — 1,123 535 $1,658 Total $ 7,590 2,103 1,368 965 1,515 35 422 10,297 1,123 535 $25,953 Reconciliation to Consolidated Statement of Operations: Non-interest income - other: Other deposit related income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,790 1,658 1,111 3,723 $9,282 106 A summary of selected quarterly results of operations for the years ended December 31 follows: QUARTERLY FINANCIAL DATA (UNAUDITED) Three Months Ended March 31, June 30, September 30, December 31, (In thousands, except per share amounts) 2021 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $32,502 30,284 (474) 27,143 22,037 $33,499 31,393 (1,425) 15,053 12,388 $35,855 33,803 (659) 19,645 15,962 $36,224 34,285 630 15,472 12,508 Net income per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.01 1.00 0.57 0.56 0.74 0.73 0.59 0.58 2020 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses(1) . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,579 30,191 6,721 5,755 4,810 $33,754 30,462 5,188 18,295 14,772 $35,034 31,966 975 24,361 19,584 $35,462 30,993 (421) 21,070 16,986 Net income per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.22 0.21 0.67 0.67 0.90 0.89 0.78 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) First quarter . . . . . . . . . . . . . . . . . . . Second quarter. . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . High $24.73 24.50 22.22 24.48 Reported Sales Prices of Common Shares 2020 2021 Low Low Close High Cash Dividends Declared Close 2021 2020 $18.18 21.10 19.60 21.44 $23.64 21.71 21.48 23.87 $22.98 16.92 16.20 19.28 $ 9.19 10.91 12.14 12.42 $12.87 14.85 12.57 18.47 $0.21 0.21 0.21 0.21 $0.20 0.20 0.20 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). 107 [THIS PAGE INTENTIONALLY LEFT BLANK] INDEPENDENT BANK CORPORATION SENIOR OFFICERS William B. Kessel Gavin A. Mohr James J. Twarozynski BOARD OF DIRECTORS1 Michael M. Magee, Jr., Chairperson Joan A. Budden Dennis W. Archer, Jr. Michael J. Cok Terance L. Beia Stephen L. Gulis, Jr. William J. Boer, Lead Director Christina L. Keller William B. Kessel Ronia F. Kruse Matthew J. Missad INDEPENDENT BANK SENIOR OFFICERS William B. Kessel Larry R. Daniel Patrick J. Ervin Stefanie M. Kimball Gavin A. Mohr Joel F. Rahn Cheryl A. Bartholic David R. Boeve Helene S. Dimitroff Melissa A. Hewlett Susan M. Johnson Keith J. Lightbody Jaime L. Macumber Kimberly K. Martin Joshua C. Meyers Daniel G. Plumert Vern S. Rowley Edward W. Ryan Tricia L. Schabel Anna M. Sperling Raymond P. Stecko Michael J. Stodolak Christopher S. Michaels Kent K. Takacs Angela M. Champagne Tami E. Coates Dean M. Morse Kevin D. Pierce James J. Twarozynski Linda K. Winters 1Individuals listed also serve on the Board of Directors for Independent Bank. STOCK Independent Bank Corporation’s common stock trades on the NASDAQ Global Select Market System under the symbol IBCP. TRANSFER AGENT AND REGISTRAR Broadridge Corporate Issuer Solutions, Inc., P.O. Box 1342, Brentwood, New York 11717, shareholder.broadridge.com, (telephone 866.741.7930), serves as transfer agent and registrar of our common stock. Inquiries related to shareholder records and change of name, address or ownership of stock should be directed to our transfer agent and registrar. INVESTOR RELATIONS ON THE INTERNET Go to our website at IndependentBank.com to find the latest investor relations information about Independent Bank Corporation, including stock quotes, news releases and financial data. DIVIDEND REINVESTMENT AND DIRECT STOCK PURCHASES OR SALES Our Dividend Reinvestment & Direct Stock Purchase and Sale Plan is sponsored and administered by Broadridge Corporate Issuer Solutions, Inc., the transfer agent for Independent Bank Corporation. The plan materials are available at Stockplans.broadridge.com. FORM 10-K Shareholders may obtain, without charge, a copy of Form 10-K, the 2021 Annual Report to the Securities and Exchange Commission, through our website at IndependentBank.com or by writing to the Chief Financial Officer, Independent Bank Corporation, 4200 East Beltline, Grand Rapids, Michigan 49525 or by email at info@ibcp.com. Looking to THE FUTURE In 2021, as a community and as a bank, we grew, we adapted, and together, we achieved. As we move forward, we’re always here to help you 

Continue reading text version or see original annual report in PDF format above