Independent Bank
Annual Report 2023

Plain-text annual report

2023 ANNUAL REPORT Performance Graph . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 Selected Consolidated Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . 32 Management’s Annual Report on Internal Control Over Financial Reporting (PCAOB ID 173) . . . . . . 52 Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53 Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 56 Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 61 Quarterly Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127 29 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, 2018, 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 Index 12/31/18 12/31/19 12/31/20 12/31/21 12/31/22 12/31/23 Period Ending Independent Bank Corporation . . . . . . . . . . . . . . . . . . $100.00 $111.40 $ 95.49 $128.15 $133.58 $152.25 236.17 NASDAQ Composite. . . . . . . . . . . . . . . . . . . . . . . . . . 149.56 NASDAQ Bank . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 198.10 119.62 163.28 135.89 100.00 100.00 136.69 137.18 242.03 164.26 30 SELECTED CONSOLIDATED FINANCIAL DATA SUMMARY OF OPERATIONS 2023 Year Ended December 31, 2021 (Dollars in thousands, except per share amounts) 2020 2022 2019 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 239,677 $ 169,008 $ 138,080 $ 139,829 $ 148,928 26,347 Interest expense. . . . . . . . . . . . . . . . . . . . . . . . . . . 122,581 Net interest income . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses(1) . . . . . . . . . . . . . . . . . 824 Net gains (losses) on securities available for 8,315 129,765 (1,928) 19,447 149,561 5,341 83,348 156,329 6,210 16,217 123,612 12,463 sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other non-interest income . . . . . . . . . . . . . . . . . . Non-interest expense. . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . Income tax expense. . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . $ (222) 50,898 127,119 73,676 14,609 59,067 $ (275) 62,184 128,341 77,788 14,437 63,351 $ 1,411 75,232 131,023 77,313 14,418 62,895 $ 267 80,478 122,413 69,481 13,329 56,152 $ 307 47,429 111,733 57,760 11,325 46,435 PER COMMON SHARE DATA Net income per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared and paid . . . . . . . . . . . . Book value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.82 $ 2.79 0.92 19.41 3.00 $ 2.97 0.88 16.50 2.91 $ 2.88 0.84 18.82 2.56 $ 2.53 0.80 17.82 2.03 2.00 0.72 15.58 SELECTED BALANCES Assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,263,726 $4,999,787 $4,704,740 $4,204,013 $3,564,694 2,725,023 3,790,901 Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses(1) . . . . . . . . . . . . . . . . 26,148 54,658 3,036,727 4,622,879 Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 350,169 404,449 Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . 88,646 50,026 Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . 39,510 Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . — 39,456 39,728 Subordinated debentures . . . . . . . . . . . . . . . . . . . . 3,465,352 52,435 4,379,069 347,596 86,006 39,433 39,660 2,733,678 35,429 3,637,355 389,522 30,012 39,281 39,524 2,905,045 47,252 4,117,090 398,484 30,009 39,357 39,592 SELECTED RATIOS Net interest income to average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.26% 3.32% 3.10% 3.34% 3.80% 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 . . . . . . 16.04 1.15 7.20 9.03 0.14 18.41 1.31 7.13 8.86 0.11 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 (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. 31 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; 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; 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, 2023, 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 one mortgage loan production facility in Ohio (Fairlawn). As a result, our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula. Significant Developments. As explained in more detail under Item 1A – ‘‘Risk Factors’’ – the closures of several banks in 2023 have impacted the financial services industry. These events have caused banks to reexamine their funding sources and liquidity risks and in some cases have caused deposit holders to reevaluate their banking relationships. As addressed below, we believe these events have caused little to no impact on our deposit base, aside from the mix and pricing of deposits, and that our liquidity and funding and capital resources remain strong. In the 32 wake of these events, initiatives taken with our customer base included discussing how these events unfolded, reinforcing our current capital and liquidity positions and education to maximize FDIC insurance coverage. (See ‘‘Deposits and borrowings’’ and ‘‘Liquidity and capital resources’’). Pressures from various global and national macroeconomic conditions, including heightened inflation, uncertainty regarding future interest rates, foreign currency exchange rate fluctuations, recent adverse weather conditions, escalating tensions in the Middle East, the continuation of the Russia-Ukraine war, and potential governmental responses to these events, continue to create significant economic uncertainty. The extent to which these pressures 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. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale (‘‘AFS’’), securities held to maturity (‘‘HTM’’), 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 2023 as compared to earlier periods. Summary. We recorded net income of $59.1 million, or $2.79 per diluted share, in 2023, net income of $63.4 million, or $2.97 per diluted share, in 2022, and net income of $62.9 million, or $2.88 per diluted share, in 2021. RESULTS OF OPERATIONS KEY PERFORMANCE RATIOS Year Ended December 31, 2021 2022 2023 Net income to Average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income per common share 16.04% 18.41% 16.13% 1.31 1.15 1.41 Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2.82 2.79 $ 3.00 2.97 $ 2.91 2.88 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 $156.3 million during 2023, compared to $149.6 million and $129.8 million during 2022 and 2021, respectively. The increase in net interest income in 2023 compared to 2022 primarily reflects a $262.0 million increase in average interest-earning assets that was partially offset by a six 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 2022 compared to 2021 primarily reflects a $307.5 million increase in average interest-earning assets and a 22 basis point increase in our net interest margin. The increase in average interest-earning assets during 2023 primarily reflects growth in commercial, mortgage and installment loans funded primarily by an increase in deposits and a decrease in securities AFS and securities HTM. The six basis point decrease in the net interest margin during 2023 as compared to 2022 primarily reflects 130 basis point increase in interest expense as a percent of average interest-earning assets which was partially offset by a 124 basis point increase in interest income as a percent of average interest-earning assets. These increases are primarily attributed to the 450 basis point increase in the federal funds rate since June of 2022. Our net interest margin has been negatively impacted by changes in funding mix (such as shifting from non-interest bearing deposits to interest-bearing deposits and an increase in time deposits) as well as higher deposit pricing sensitivity to the increases in interest rates discussed above. See Asset/liability management. 33 2023, 2022 and 2021 interest income on loans includes $0.2 million, $0.3 million and $0.8 million, respectively, of accretion of the discount recorded on loans acquired in connection with our acquisition of Traverse City State Bank (‘‘TCSB’’) in 2018. Interest and fees on loans include zero, $0.8 million and $8.9 million in 2023, 2022 and 2021, respectively, of accretion of net loan fees on Payroll Protection Program (‘‘PPP’’) loans. Unaccreted net loan fees on PPP loans remaining were zero at December 31, 2023 and 2022, respectively. Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled $4.8 million, $4.4 million and $6.2 million in 2023, 2022 and 2021, respectively. AVERAGE BALANCES AND RATES 2023 2022 2021 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 . . . . . . . . . . $3,624,406 6,855 771,121 317,553 83,587 17,557 $197,462 333 23,314 14,039 4,416 1,013 5.45% $3,227,803 7,771 4.86 945,665 3.02 331,322 4.42 28,773 5.28 17,768 5.77 $138,765 370 20,676 10,191 142 742 4.30% $2,881,950 7,240 4.76 915,701 2.19 348,346 3.08 79,915 0.49 18,427 4.18 $116,358 362 14,488 7,892 112 734 4.04% 5.00 1.58 2.27 0.14 3.98 Interest earning assets . . . . . 4,821,079 240,577 4.99 4,559,102 170,886 3.75 4,251,579 139,946 3.30 Cash and due from banks. . . . . Other assets, net . . . . . . . . . . . 58,473 236,072 Total assets . . . . . . . . . . . . $5,115,624 LIABILITIES Savings and interest-bearing checking . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . Other borrowings . . . . . . . . . . $2,564,097 785,684 128,945 Interest bearing liabilities . . . 3,478,726 Non-interest bearing deposits . . Other liabilities . . . . . . . . . . . . Shareholders’ equity . . . . . . . . 1,164,816 103,721 368,361 Total liabilities and shareholders’ equity. . . . . $5,115,624 44,728 30,347 8,273 83,348 1.74 3.86 6.42 2.40 59,507 207,114 $4,825,723 $2,526,296 399,987 121,871 3,048,154 1,338,736 94,638 344,195 $4,825,723 10,278 3,873 5,296 19,447 0.41 0.97 4.35 0.64 56,474 157,524 $4,465,577 $2,282,607 326,081 108,884 2,717,572 1,288,276 69,694 390,035 $4,465,577 2,693 1,772 3,850 8,315 0.12 0.54 3.54 0.31 Net interest income . . . . . . . $157,229 $151,439 $131,631 Net interest income as a percent of average interest earning assets . . . 3.26% 3.32% 3.10% (1) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%. 34 RECONCILIATION OF NET INTEREST MARGIN, FULLY TAXABLE EQUIVALENT (‘‘FTE’’) Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Add: taxable equivalent adjustment. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income - taxable equivalent. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $156,329 900 $157,229 $149,561 1,878 $151,439 $129,765 1,866 $131,631 Net interest margin (GAAP) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest margin (FTE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.24% 3.26% 3.28% 3.32% 3.05% 3.10% 2023 Year Ended December 31, 2022 (Dollars in thousands) 2021 CHANGE IN NET INTEREST INCOME Increase (decrease) in interest income(1) 2023 compared to 2022 Rate Volume 2022 compared to 2021 Rate Net Net (In thousands) Volume Taxable loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $18,485 $40,212 $58,697 $14,551 $ 7,856 $22,407 Tax-exempt loans(2) . . . . . . . . . . . . . . . . . . . . . . . . . 8 6,188 Taxable securities. . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt securities(2) . . . . . . . . . . . . . . . . . . . . . . 2,299 30 Interest bearing cash . . . . . . . . . . . . . . . . . . . . . . . . Other investments . . . . . . . . . . . . . . . . . . . . . . . . . . 8 30,940 Total interest income . . . . . . . . . . . . . . . . . . . . . . (44) (4,291) (440) 702 (9) 14,403 25 488 (403) (108) (27) 14,526 (37) 2,638 3,848 4,274 271 69,691 (17) 5,700 2,702 138 35 16,414 7 6,929 4,288 3,572 280 55,288 Increase (decrease) in interest expense(1) Savings and interest bearing checking . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . Total interest expense . . . . . . . . . . . . . . . . . . . . . 7,585 156 2,101 6,458 1,446 323 11,132 6,937 Net interest income . . . . . . . . . . . . . . . . . . . . . $ 7,466 $ (1,676) $ 5,790 $13,241 $ 6,567 $19,808 34,450 26,474 2,977 63,901 34,294 20,016 2,654 56,964 7,268 1,628 951 9,847 317 473 495 1,285 (1) The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each. (2) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%. COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES Year Ended December 31, 2021 2022 2023 As a percent of average interest earning assets Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other interest earning assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest earning assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75.3% 71.0% 68.0% 29.0 24.7 100.0% 100.0% 100.0% 32.0 Savings and interest-bearing checking. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Time deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average interest bearing liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 53.2% 55.4% 53.7% 8.8 16.3 2.7 2.7 72.2% 66.9% 64.0% 7.7 2.6 Earning asset ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Free-funds ratio(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 94.2% 94.5% 95.2% 33.1 27.8 36.1 (1) Average interest earning assets less average interest bearing liabilities. 35 losses (the ‘‘ACL’’) taking into consideration factors such as loan growth, Provision for credit losses. The provision for credit losses was an expense of $6.2 million in 2023, an expense of $5.3 million in 2022, and a credit of $1.9 million in 2021. The provision reflects our assessment of the allowance for credit levels of non-performing and classified loans, economic conditions and loan net charge-offs. While we use relevant information to recognize losses on loans and securities HTM, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors. The increase in the provision for credit losses in 2023 compared to 2022 was primarily due to a loss incurred on a $3.0 million corporate security HTM (Signature Bank) that defaulted and was fully charged off during the first quarter that was partially offset by a decline in loan growth rate. The higher provision for credit losses in 2022 compared to 2021 was primarily due to new credit loss allocations in the commercial and retail loan portfolios primarily due to loan growth and a decrease in gross recoveries of previously charged-off commercial and retail loans as well as an increase in the adjustment to allocations based on subjective factors. 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 2023 and note #19 to the Consolidated Financial Statements included within this report for a discussion on industry concentrations. loan mix, Non-interest income. Non-interest income is a significant element in assessing our results of operations. Non-interest income totaled $50.7 million during 2023 compared to $61.9 million and $76.6 million during 2022 and 2021, respectively. NON-INTEREST INCOME 2023 Year Ended December 31, 2022 (In thousands) 2021 Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service charges on deposit accounts. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains (losses) on assets Mortgage loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loan servicing, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,996 12,361 $13,955 12,288 $14,045 10,170 7,436 (222) 4,626 3,456 474 8,549 6,431 (275) 18,773 2,898 360 7,479 35,880 1,411 5,745 2,603 567 6,222 Total non-interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $50,676 $61,909 $76,643 Service charges on deposit accounts totaled $12.4 million in 2023, as compared to $12.3 million in 2022 and $10.2 million during 2021. The increases in 2023 and 2022 relative to the respective prior year were primarily due to an increase in non-sufficient funds occurrences (and related fees). We realized net gains of $7.4 million on mortgage loans during 2023, compared to $6.4 million and $35.9 million during 2022 and 2021, respectively. As reflected in the table below, the sale of mortgage loans decreased significantly from both 2022 and 2021. Mortgage loan activity is summarized as follows: MORTGAGE LOAN ACTIVITY 2023 Year Ended December 31, 2022 (Dollars in thousands) 2021 Mortgage loans originated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $554,461 $935,807 $1,861,060 Mortgage loans sold(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,254,638 Net gains on mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,880 Net gains as a percent of mortgage loans sold (‘‘Loan Sales Margin’’) . . . . . . . Fair value adjustments included in the Loan Sales Margin . . . . . . . . . . . . . . . . . 602,797 6,431 1.07% (1.12) 407,613 7,436 1.82% 0.62 2.86% (0.52) (1) 2023 includes the sale of $56.7 million of portfolio residential fixed rate and adjustable rate mortgage loans. 2022 includes the sale of $63.0 million of portfolio residential fixed rate and adjustable rate mortgage loans. 2021 includes the sale of $9.6 million of portfolio residential fixed rate mortgage loans. 36 Mortgage loans originated decreased in both 2023 as compared to 2022 and 2022 as compared to 2021 as higher mortgage loan interest rates in each respective year reduced mortgage loan refinance activity and in 2022 also reduced purchase money activity. Mortgage loans sold decreased in each of these years due primarily to lower loan origination volume. 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. Net gains on mortgage loans increased in 2023 as compared to 2022 primarily due to the increase in the Loan Sales Margin due to the impact of fair value adjustments on certain unhedged construction loans during the 2023 as a result of the significant increase in interest rates during that period. Net gains on mortgage loans decreased in 2022 as compared to 2021 primarily due to the decline in loan sale volume and a decrease in the Loan Sales Margin. We generated net gains (losses) on securities of $(0.22) million, $(0.28) million and $1.41 million in 2023, 2022 and 2021, respectively. These net gains (losses) were due to the sales of securities as outlined in the table below. We recorded no credit related charges in 2023, 2022 or 2021 for securities AFS. See ‘‘Securities’’ below and note #3 to the Condensed Consolidated Financial Statements. GAINS AND LOSSES ON SECURITIES Year Ended December 31, Proceeds Losses Gains (In thousands) Net 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 278 $ — $222 $ (222) (275) 1,411 164 1,475 439 64 70,523 85,371 Mortgage loan servicing, net, generated income of $4.6 million in 2023 compared to income of $18.8 million and $5.7 million in 2022 and 2021 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 and expected float rates. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,828 (280) (3,922) $ 8,577 14,272 (4,076) $ 7,853 3,380 (5,488) Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,626 $18,773 $ 5,745 2023 2022 (In thousands) 2021 Activity related to capitalized mortgage loan servicing rights is as follows: CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS Balance at January 1, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Originated servicing rights capitalized. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,489 3,956 (4,202) $26,232 6,061 10,196 $16,904 11,436 (2,108) Balance at December 31, . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,243 $42,489 $26,232 2023 2022 (In thousands) 2021 37 At December 31, 2023, we were servicing approximately $3.5 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 3.89% and a weighted average service fee of approximately 0.26 basis points. Remaining capitalized mortgage loan servicing rights at December 31, 2023 totaled $42.2 million, representing approximately 1.19 basis points on the related amount of mortgage loans serviced for others. Investment and insurance commissions totaled $3.5 million in 2023 as compared to $2.9 million and $2.6 million in 2022 and 2021. The increase in revenue in 2023 as compared to 2022 and 2021 was primarily due to higher sales volume and an increase in fee based revenue. We earned $0.5 million, $0.4 million and $0.6 million in 2023, 2022 and 2021, 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 $54.3 million and $55.2 million at December 31, 2023 and 2022, respectively. The changes in earnings in each year is due to changes in the crediting rate. Other non-interest income totaled $8.5 million, $7.5 million and $6.2 million in 2023, 2022 and 2021, respectively. Other non-interest income increased in 2023 as compared to 2022 due to an increase in fees related to interest rate swaps for commercial loan customers (due to a higher level of these transactions during 2023), an increase in ATM fees, an increase in merchant credit card related income and an increase in income from bank owned life insurance (due to a higher crediting rate during 2023) that were partially offset by lower gains on the sale of bank owned properties. The increase in 2022 as compared to 2021 is due primarily to the gain on the sale of two bank owned properties of $1.1 million. Non-interest expense. Non-interest expense is an important component of our results of operations. We strive to efficiently manage our cost structure. Non-interest expense totaled $127.1 million in 2023, $128.3 million in 2022, and $131.0 million in 2021. Decreases in performance-based compensation, occupancy, net, communications and loan and collection that were partially offset by increases in compensation, payroll taxes and employee benefits, data processing, FDIC deposit insurance and other expense are primarily responsible for the decrease in 2023 compared to 2022. Decreases in data processing, interchange expense, loan and collection, costs related to unfunded lending commitments, conversion related expenses and other expenses are primarily responsible for the decrease in 2022 compared to 2021. The components of non-interest expense are as follows: NON-INTEREST EXPENSE 2023 Year ended December 31, 2022 (In thousands) 2021 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance-based compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payroll taxes and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,502 11,064 15,399 $50,535 15,875 14,597 $44,226 19,800 15,943 Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan and collection. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amortization of intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs related to unfunded lending commitments. . . . . . . . . . . . . . . . . . . . . . . . . . 78,965 11,862 7,908 4,332 3,756 3,005 2,406 2,208 2,174 2,165 547 501 424 81,007 10,183 8,907 4,242 4,007 2,142 2,871 2,133 2,657 2,074 785 556 599 79,969 10,823 8,794 4,434 4,172 1,396 3,080 2,068 3,172 1,918 970 611 1,207 38 2023 Year ended December 31, 2022 (In thousands) 2021 Correspondent bank service fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for loss reimbursement on sold loans . . . . . . . . . . . . . . . . . . . . . . . . . . Conversion related expenses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net (gains) losses on other real estate and repossessed assets . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 233 20 — 19 6,594 299 57 50 (214) 5,986 382 133 1,827 (230) 6,297 Total non-interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $127,119 $128,341 $131,023 Compensation expense, which is primarily salaries, totaled $52.5 million, $50.5 million and $44.2 million in 2023, 2022 and 2021, respectively. The comparative increase in 2023 to 2022 is primarily due to salary increases that were predominantly effective on January 1, 2023. The comparative increase in 2022 to 2021 is primarily due to salary increases that were predominantly effective on January 1, 2022, and a decreased level of compensation that was deferred as direct origination costs due to lower mortgage loan origination volume. Performance-based compensation expense totaled $11.1 million, $15.9 million and $19.8 million in 2023, 2022 and 2021, respectively. The decrease in 2023 as compared to 2022 was due to actual performance relative to the established incentive plan targets. The decrease in 2022 as compared to 2021 was due to actual performance relative to the established incentive plan targets as well a decrease in mortgage lending related incentives attributed to the decline in mortgage lending volume. 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. Total compensation expense recognized for grants pursuant to our long-term incentive plan was $1.9 million, $1.8 million and $1.6 million in 2023, 2022 and 2021, respectively. 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 $15.4 million, $14.6 million and $15.9 million in 2023, 2022 and 2021, respectively. The increase in 2023 compared to 2022 is primarily due to higher employee medical insurance costs that were partially offset by a decrease in payroll taxes (reflecting lower performance-based compensation costs). The decrease in 2022 compared to 2021 is due to decreases in payroll taxes (reflecting lower performance-based compensation costs), our 401(k) plan match and other indirect costs related to mortgage lending. Data processing expenses totaled $11.9 million, $10.2 million, and $10.8 million in 2023, 2022 and 2021, respectively. The increase in 2023 compared to 2022 is primarily due to annual asset based and consumer price index based cost increases. The decrease in 2022 compared to 2021 is primarily due to lower debit card production costs, lower net mortgage processing costs (lower volume) and a refund of previously expensed charges from our former core data processing provider. Occupancy, net totaled $7.9 million, $8.9 million, and $8.8 million in 2023, 2022 and 2021, respectively. The decrease in 2023 compared to 2022 is due in part to lower seasonal related maintenance costs and Covid-19 related protocol expenses. FDIC deposit insurance expense totaled $3.0 million, $2.1 million, and $1.4 million in 2023, 2022 and 2021, respectively. FDIC deposit insurance expense increased in 2023 compared to 2022 due primarily to a two basis point increase in the assessment rate beginning in the first quarter of 2023 charged to all banks to increase the likelihood that the reserve ratio of the deposit insurance fund reaches its statutory minimum. FDIC deposit insurance expense increased in 2022 compared to 2021 due primarily to an increase in the assessment rate. Communications totaled $2.4 million, $2.9 million, and $3.1 million in 2023, 2022 and 2021, respectively. The decrease in 2023 compared to 2022 is primarily due to lower telephony and networking related costs as well as lower customer statement mailing costs. 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 $2.2 million, $2.7 million and $3.2 million in 2023, 2022 and 2021, respectively. These costs decreased in 2023 and 2022 due in part to recoveries of previously expensed amounts and an overall lower level of non performing loans and assets. 39 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 $0.4 million, $0.6 million, and $1.2 million in 2023, 2022 and 2021, respectively. The decreases in each comparative year are due primarily to decreases in the amount of newly originated unfunded lending commitments. Other non-interest expenses totaled $6.6 million, $6.0 million, and $6.3 million in 2023, 2022 and 2021, respectively. The increase in other expense in 2023 compared to 2022 primarily represents higher Michigan Corporate Income Tax expense as the result of an increase in tax base and an increase in travel and entertainment expenses. The decrease in 2022 compared to 2021 primarily represents lower Michigan Corporate Income Tax expense as the result of a decrease in tax base, a branch write-down and certain one-time contract termination costs expensed in the prior year. Income tax expense. We recorded an income tax expense of $14.61 million, $14.44 million and $14.42 million in 2023, 2022 and 2021, respectively. 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, 2023 and 2022 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. FINANCIAL CONDITION Summary. Our total assets increased to $5.26 billion at December 31, 2023, compared to $5.00 billion at December 31, 2022, primarily due to growth in commercial loans and mortgage loans and interest bearing cash balances. Loans, excluding loans held for sale (‘‘Portfolio Loans’’), totaled $3.79 billion and $3.47 billion at December 31, 2023 and December 31, 2022, respectively. Commercial and mortgage loans increased by $212.9 million and $117.5 million, respectively. Deposits totaled $4.62 billion at December 31, 2023, compared to $4.38 billion at December 31, 2022. The $243.8 million increase in deposits is primarily due to growth in reciprocal deposits, time deposits and brokered time deposits that was partially offset by a decline in non-interest bearing deposits and savings and interest bearing checking deposits. 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 and trust preferred securities. We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow. We believe that the unrealized losses on securities AFS 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’’). On April 1, 2022, we transferred certain securities AFS with an amortized cost and unrealized loss at the date of transfer of $418.1 million and $26.5 million, respectively to securities held to maturity (‘‘HTM’’). The transfer was made at fair value, with the unrealized loss becoming part of the purchase discount which will be accreted over the remaining life of the securities. The other comprehensive loss component is separated from the remaining securities AFS and is accreted over the remaining life of the securities transferred. Based upon our liquidity and capital resources (as explained in more detail below under ‘‘Liquidity and capital resources’’), we believe that we have the ability and intent to hold these securities until they mature, at which time we would receive full value for these securities. 40 SECURITIES AFS Securities AFS Amortized Cost Unrealized Gains Losses (In thousands) Fair Value December 31, 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2022. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $744,050 866,363 $464 329 $65,164 87,345 $679,350 779,347 SECURITIES HTM Carrying Value Transferred Unrealized Loss(1) ACL Amortized Cost (In thousands) Unrealized Gains Losses Fair Value Securities HTM December 31, 2023 . . . . . . . . . . . . . . . . . . $353,988 374,818 December 31, 2022 . . . . . . . . . . . . . . . . . . $19,503 23,066 $157 $373,648 $868 $55,910 $318,606 335,418 11 168 398,052 62,645 (1) Represents the remaining unrealized loss to be accreted on securities that were transferred from AFS to HTM on April 1, 2022. Securities AFS in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities AFS 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 AFS 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 AFS was needed at December 31, 2023. See note #3 to the Consolidated Financial Statements included within this report for further discussion. For securities HTM an ACL is maintained at a level which represents our best estimate of expected credit losses. This ACL is a contra asset valuation account that is deducted from the carrying amount of securities HTM to present the net amount expected to be collected. Securities HTM are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in our Consolidated Statements of Operations in provision for credit loss. We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics and consider historical credit loss information. With regard to U.S. Government-sponsored agency and mortgage-backed securities (residential and commercial), all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to obligations of states and political subdivisions, private label-mortgage-backed, corporate and trust preferred securities HTM, we consider (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. During the first quarter of 2023, one corporate security (Signature Bank) defaulted resulting in a $3.0 million provision for credit losses and a corresponding full charge-off during that period. Despite this lone security loss, the long-term historical loss rates associated with securities having similar grades as those in our portfolio have been insignificant. See note #3 to the Consolidated Financial Statements included within this report for further discussion. 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. 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. 41 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.’’) The retention of newly originated fixed rate jumbo mortgage loans has declined relative to the prior year as the growth in mortgage loans during 2023 has primarily been attributed to the origination of adjustable-rate mortgage loans as well as the continued advances on legacy fixed rate construction mortgage loans. (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, 2023: 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) $ 147,799 398,335 1,111,577 22,020 $1,679,731 $ 178 2,332 116,576 1,366,786 $1,485,872 $ 1,678 58,302 411,930 153,388 $625,298 $ 149,655 458,969 1,640,083 1,542,194 $3,790,901 $ 828,489 851,242 $1,679,731 $ 915,429 570,443 $1,485,872 $620,370 4,928 $625,298 $2,364,288 1,426,613 $3,790,901 In 2023, we sold $56.7 million of portfolio residential fixed and adjustable rate mortgage loans. In 2022, we sold $63.0 million of portfolio residential fixed and adjustable rate mortgage loans servicing retained. In addition, in the fourth quarter of 2022 we reclassified $20.4 million (fair value of $20.4 million) of portfolio mortgage loans to held for sale. These loans were sold to another financial institution on a servicing retained basis during the first quarter of 2023. During 2021, we sold $9.6 million of portfolio residential fixed rate mortgage loans servicing retained. In addition, 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. These loan sale transactions were done primarily for asset/liability management purposes. LOAN PORTFOLIO COMPOSITION December 31, 2023 2022 (In thousands) Real estate(1) Residential first mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Residential home equity and other junior mortgages . . . . . . . . . . . . . . . . . . . . . . . . . Construction and land development. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,248,911 157,006 241,715 1,036,590 619,374 483,129 4,176 $3,790,901 $1,081,359 138,944 319,157 874,019 624,047 423,055 4,771 $3,465,352 (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. 42 NON-PERFORMING ASSETS 2023 December 31, 2022 (Dollars in thousands) 2021 Non-accrual loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans 90 days or more past due and still accruing interest. . . . . . . . . . . . . . . $ 6,991 432 $ 5,381 — $ 5,545 — Sub total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Government guaranteed loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,423 2,191 5,232 569 5,381 1,660 3,721 455 5,545 435 5,110 245 Total non-performing assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,801 $ 4,176 $ 5,355 As a percent of Portfolio Loans Non-accrual loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-performing assets to total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACL as a percent of non-accrual loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ACL as a percent of non-performing loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.18% 0.14 1.44 0.11 781.83 1044.69 0.16% 0.11 1.51 0.08 974.45 1409.16 0.19% 0.18 1.63 0.11 852.16 924.70 Non-performing loans totaled $5.2 million, $3.7 million and $5.1 million at December 31, 2023, 2022 and 2021, respectively. The increase in 2023 compared to 2022 was primarily due to a $1.1 million increase in the residential mortgage loan portfolio segment. Our collection and resolution efforts have generally resulted in a stable trend in non-performing loans. The decrease in non-performing loans in 2022 as compared to 2021 was primarily due to a $1.4 million decrease in the residential mortgage loan portfolio segment which was primarily attributed to loan payoffs and pay downs. Other real estate (‘‘ORE’’) and repossessed assets totaled $0.6 million at December 31, 2023, compared to $0.5 million at December 31, 2022. The ACL as a percent of non-accrual and non-performing loans decreased during 2023 due primarily to an increase in non-accrual and non-performing loans partially offset by an increase in the ACL related to pooled analysis of loans while the increase in 2022 was due primarily to an increase in the ACL related to specific allocations and pooled analysis of loans as well as a decrease in non-accrual and non-performing loans. 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 Specific allocations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pooled analysis allocations. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additional allocations based on subjective factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . December 31, 2023 2022 (In thousands) $ 1,292 40,944 12,422 $54,658 $ 2,078 37,662 12,695 $52,435 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, 43 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 $2.2 million to $54.7 million at December 31, 2023 from $52.4 million at December 21, 2022 and was equal to 1.44% of total Portfolio Loans at December 31, 2023. Two of the three components of the ACL outlined above decreased since December 21, 2022 while one increased. The ACL related to pooled analysis of loans increased $3.3 million due primarily to loan growth in 2023. The ACL related to specific loans decreased $0.8 million due primarily to an $8.1 million decrease in the amount of such loans while the ACL related to subjective factors declined $0.3 million. During 2022 two of the three components of the ACL increased since December 21, 2021. The ACL related to specific loans increased $0.9 million due primarily to a $5.2 million increase in the amount of such loans and the ACL related to pooled analysis of loans increased $4.3 million due primarily to loan growth in 2022. The ACL related to subjective factors was relatively unchanged during 2022. ALLOWANCE FOR CREDIT LOSSES ON LOANS, SECURITIES HTM AND UNFUNDED COMMITMENTS Loans Securities HTM (In thousands) Unfunded Commitments December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $35,429 $ — $1,805 Additions (deductions) Impact of adoption of CECL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Initial allowance on loans purchased with credit deterioration . . . . . . Recoveries credited to the ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges against the ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions included in non-interest expense . . . . . . . . . . . . . . . . . . . . . 11,574 (1,928) 134 4,477 (2,434) — December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,252 Additions (deductions) Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries credited to the ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges against the ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions included in non-interest expense . . . . . . . . . . . . . . . . . . . . . 5,173 2,496 (2,486) — December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 52,435 Additions (deductions) — — — — — — — 168 — — — 168 Provision for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recoveries credited to the ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Charges against the ACL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Additions included in non-interest expense . . . . . . . . . . . . . . . . . . . . . 3,221 2,798 (3,796) — 2,989 — (3,000) — 1,469 — — — 1,207 4,481 — — — 599 5,080 — — — 424 December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,658 $ 157 $5,504 44 RATIO OF NET CHARGE-OFFS TO AVERAGE LOANS OUTSTANDING Commercial Mortgage (Dollars in thousands) Installment Total 2023 Loans charged against (recoveries credited to) the ACL . . . Average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans charged off against (credited to) the ACL to 523 $ 1,537,920 (198) $ $ 1,436,527 673 637,180 $ 998 3,611,627 average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.03% (0.01)% 0.11% 0.03% 2022 Loans charged against (recoveries credited to) the ACL . . . Average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net loans charged off against (credited to) the ACL to (453) $ $ 1,323,840 (365) $ 808 616,854 $ (10) 3,198,222 1,257,528 average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.03)% (0.03)% 0.13% —% 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 1,056,245 $ (2,043) 2,819,295 average Portfolio Loans . . . . . . . . . . . . . . . . . . . . . . . . . . . (0.21)% (0.04)% 0.20% (0.07)% In 2023, we recorded loan net charge offs of $1.00 million compared to loan net recoveries of $0.01 million in 2022 and loan net recoveries of $2.04 million in 2021. The net charge offs in 2023 primarily reflect modest losses in the commercial and installment loan portfolios. The net recoveries in 2022 and 2021 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 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 respectively. totaled $4.62 billion and $4.38 billion at December 31, 2023 and 2022, The $243.8 million increase in deposits during 2023 is due to growth in reciprocal deposits, time deposits and brokered time deposits that were partially offset by decreases in non-interest bearing and savings and interest-bearing checking deposits. Reciprocal deposits totaled $832.0 million and $602.6 million at December 31, 2023 and 2022, respectively. These deposits represent demand, money market and time deposits from our customers that have been placed through the 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. 45 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. A reduction in core deposits would likely increase our need to rely on wholesale funding sources. Data relating to our deposit portfolios (excluding brokered time) follows: Uninsured deposits(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Uninsured deposits as a percentage of deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Average deposit account size . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance of top 100 largest depositors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance of top 100 depositors as a percentage of deposits . . . . . . . . . . . . . . . . . . . . . . December 31, 2023 2022 (Dollars in thousands) $961,974 22.2% 20.38 $ $890,289 20.5% $975,938 23.4% $ 19.33 $752,924 18.1% (1) These amounts exclude intercompany related deposits of $51.2 million and $55.2 million respectively. Uninsured deposits reported in our Call Report at December 31, 2023 and December 31, 2022 totaled $1,013.2 million and $1,031.2 million, respectively. 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 borrowings from the Federal Reserve Bank (‘‘FRB’’) and advances from the Federal Home Loan Bank (the ‘‘FHLB’’), totaled $50.0 million and $86.0 million at December 31, 2023 and 2022. As described above, we utilize wholesale funding, including federal funds purchased, FRB and FHLB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. At December 31, 2023, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $1.17 billion, or 25.0% 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 2023, 2022 and 2021, we entered into $134.6 million, $94.2 million and $79.0 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 $2.05 million, $1.42 million and $0.81 million of fee income related to these transactions during 2023, 2022 and 2021, respectively. We entered into $175.0 million, $41.0 million, and $106.9 million (notional amounts) of certain derivative financial instruments (pay fixed interest rate swap and interest rate cap agreements) to hedge the fair value of certain loans and/or municipal bond securities in 2023, 2022 and 2021, respectively. We also entered into $150.0 million (notional amount) of interest rate floor agreements to manage the variability in future expected cash flows of certain commercial loans during 2023. 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 management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain securities AFS) 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 and FRB, federal funds purchased borrowing facilities with other banks, and access to the capital markets (for Brokered CDs). At December 31 2023, in addition to liquidity available from our normal operating, funding and investing activities 46 we had unused credit lines with the FHLB and FRB of approximately $1,014.4 million and $515.4 million, respectively. We also had approximately $813.8 million in fair value of unpledged securities AFS and HTM at December 31, 2023, which could be pledged for an estimated additional borrowing capacity at the FHLB and FRB of approximately $754.6 million. 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, 2023: Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over three through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over six months through one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Over one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $365,228 236,409 113,205 26,661 $102,526 47,147 24,261 2,634 $467,754 283,556 137,466 29,295 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $741,503 $176,568 $918,071 Less than $250,000 Greater than $250,000 (In thousands) Total (1) Includes time deposits, brokered time deposits and reciprocal time deposits At December 31, 2023, we had $888.8 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, $3.70 billion of our deposits at December 31, 2023, 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 AFS, our access to secured advances from the FHLB and FRB, and our ability to issue Brokered CDs. We also believe that the parent company (including time deposits) of approximately $46.5 million as of December 31, 2023, provides sufficient liquidity resources at the parent company to meet operating expenses, to make interest payments on the subordinated debt and debentures, and, along with dividends from the Bank, to pay projected cash dividends on our common stock. 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. 47 CAPITALIZATION December 31, 2023 2022 (In thousands) Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount not qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,510 39,728 (734) $ 39,433 39,660 (657) Amount qualifying as regulatory capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78,504 78,436 Shareholders’ equity Common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total shareholders’ equity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 317,483 159,108 (72,142) 404,449 320,991 119,368 (92,763) 347,596 Total capitalization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $482,953 $426,032 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, 2023 and 2022 balance of $39.5 million and $39.4 million, respectively, is net of remaining unamortized deferred issuance costs of $0.5 million at those same dates, 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 $39.7 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) are limited to 25 percent 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. At the parent company, all of these securities qualified as Tier 1 capital at December 31, 2023 and 2022. Common shareholders’ equity increased to $404.4 million at December 31, 2023 from $347.6 million at December 31, 2022, due primarily to earnings retention and the change in our accumulated other comprehensive income (due primarily to a change in the fair value of securities AFS). Our tangible common equity (‘‘TCE’’) totaled $374.1 million and $316.7 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 7.15% and 6.37% at December 31, 2023 and 2022, respectively. TCE and the ratio of TCE to tangible assets are non-GAAP measures. TCE represents total common equity less goodwill and other intangible assets. In December 2023, our Board of Directors authorized the 2024 share repurchase plan. Under the terms of the 2024 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, 2024, and is expected to last through December 31, 2024. In December 2022, our Board of Directors authorized the 2023 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, 2023. We repurchased 298,601 shares during 2023 at an average cost of $17.27 per share. We currently pay a quarterly cash dividend on our common stock. The annual total dividends paid were $0.92, $0.88 and $0.84 per share for 2023, 2022 and 2021, respectively. We currently favor a dividend payout ratio between 30% and 50% of net income. 48 As of December 31, 2023 and 2022, 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 assets and liabilities 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. At December 31, 2023, both our interest rate risk profile as measured by our short term earnings simulation and our longer term interest rate risk measure based on changes in economic value indicates exposure to rising rates. These measures have increased modestly from December 31, 2022 as an adverse impact of changes in our deposit mix were largely offset by a favorable impact of additional hedging and term funding transactions. In addition, at December 31, 2023 our simulation base-rate scenario for market value of portfolio equity declined from December 31, 2022 due primarily to the changes in our funding mix. We are carefully monitoring the change in our funding mix as well as 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, interest rate caps and interest rate floors) to manage interest rate risk and may continue to sell some fixed rate jumbo and other portfolio mortgage loans in the future. 49 CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY, NET INTEREST INCOME AND NET INTEREST MARGIN Change in Interest Rates Market Value of Portfolio Equity(1) Percent Change Net Percent Interest Income(2) Change (Dollars in thousands) Net Interest Margin(3) Percent Change December 31, 2023 200 basis point rise . . . . . . . . . . . . . . . . . . . . . . 100 basis point rise . . . . . . . . . . . . . . . . . . . . . . Base-rate scenario. . . . . . . . . . . . . . . . . . . . . . . . 100 basis point decline. . . . . . . . . . . . . . . . . . . . 200 basis point decline. . . . . . . . . . . . . . . . . . . . December 31, 2022 200 basis point rise . . . . . . . . . . . . . . . . . . . . . . 100 basis point rise . . . . . . . . . . . . . . . . . . . . . . Base-rate scenario. . . . . . . . . . . . . . . . . . . . . . . . 100 basis point decline. . . . . . . . . . . . . . . . . . . . 200 basis point decline. . . . . . . . . . . . . . . . . . . . $447,600 494,500 541,200 582,800 603,200 $457,800 500,700 544,100 586,400 608,800 (8.63) (17.29)% $166,000 168,300 — 169,500 169,000 167,800 7.69 11.46 (7.98) (15.86)% $165,800 167,000 — 167,300 166,600 164,000 7.77 11.89 (2.06)% 3.30% (0.71) — (0.29) (1.00) 3.35 3.38 3.36 3.34 (0.90)% 3.46% (0.18) — (0.42) (1.97) 3.49 3.49 3.48 3.42 (2.37)% (0.89) — (0.59) (1.18) (0.86)% — — (0.29) (2.01) (1) (2) (3) 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 or loan origination costs. Simulation analyses calculate the change in tax equivalent net interest income as a percent of average interest-earning assets (the ‘‘net interest margin’’) under immediate parallel shifts in interest rates over the next twelve months, based upon a static statement of financial condition, which includes debt and related financial derivative instruments, and do not consider loan fees or loan origination costs. 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 AFS, loans held for sale, carried at fair value, 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 50 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. 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. See also notes #1 and #4 to the Consolidated Financial Statements included within this report for further discussion on CECL. At December 31, 2023 and 2022, we had approximately $42.2 million and $42.5 million, respectively, of mortgage loan servicing rights capitalized on our Consolidated Statements of Financial Condition. The fair value of our mortgage loan servicing rights has been determined based on a valuation model used by an independent third party. 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. 51 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, 2023. 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, 2023, 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, 2023, 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, 2023. Their report immediately follows our report. William B. Kessel President and Chief Executive Officer Independent Bank Corporation March 8, 2024 Gavin A. Mohr Executive Vice President and Chief Financial Officer 52 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, 2023 and 2022, the related consolidated statements of operations, comprehensive income (loss), shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2023, 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, 2023, 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, 2023 and 2022, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2023 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, 2023, 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 corporation’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 53 accordance with generally accepted accounting principles. A corporation’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 corporation; (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 corporation are being made only in accordance with authorizations of management and directors of the corporation; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the corporation’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 the critical audit matter 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. The ACL under the CECL methodology is a significant estimate recorded within the Corporation’s financial statements with a reported balance for loans of $54.7 million as of December 31, 2023. 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. 54 • 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 8, 2024 Crowe LLP 55 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION December 31, 2023 2022 (In thousands, except share amounts) Assets Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities held to maturity (fair value of $318,606 at December 31, 2023 and $335,418 at December 31, 2022) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 68,208 101,573 169,781 679,350 353,988 16,821 12,063 — 1,679,731 1,485,872 625,298 3,790,901 (54,658) 3,736,243 569 35,523 54,341 42,243 2,004 28,300 132,500 $5,263,726 $1,076,093 1,905,701 832,020 524,325 284,740 4,622,879 50,026 39,510 39,728 107,134 4,859,277 $ 70,180 4,191 74,371 779,347 374,818 17,653 26,518 20,367 1,466,853 1,368,409 630,090 3,465,352 (52,435) 3,412,917 455 35,893 55,204 42,489 2,551 28,300 128,904 $4,999,787 $1,269,759 1,973,308 602,575 321,492 211,935 4,379,069 86,006 39,433 39,660 108,023 4,652,191 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: 20,835,633 shares at December 31, 2023 and 21,063,971 shares at December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 317,483 159,108 (72,142) 404,449 $5,263,726 320,991 119,368 (92,763) 347,596 $4,999,787 See accompanying notes to consolidated financial statements 56 CONSOLIDATED STATEMENTS OF OPERATIONS Year Ended December 31, 2022 (In thousands, except per share amounts) 2021 2023 INTEREST INCOME Interest and fees on loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest on securities $197,725 $139,057 $116,644 Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax-exempt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other investments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23,314 13,209 5,429 20,676 8,391 884 14,488 6,102 846 Total Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 239,677 169,008 138,080 INTEREST EXPENSE Deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other borrowings and subordinated debt and debentures. . . . . . . . . . . . . . . Total Interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 75,075 8,273 83,348 156,329 6,210 Net Interest Income After Provision for Credit Losses . . . . . . . . . . . . . . 150,119 14,151 5,296 19,447 149,561 5,341 144,220 4,465 3,850 8,315 129,765 (1,928) 131,693 NON-INTEREST INCOME Interchange income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Service charges on deposit accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains (losses) on assets Mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mortgage loan servicing, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Non-interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . NON-INTEREST EXPENSE Compensation and employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Data processing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Occupancy, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Furniture, fixtures and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FDIC deposit insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal and professional . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loan and collection . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Advertising . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Costs related to unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . Conversion related expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,996 12,361 7,436 (222) 4,626 12,479 50,676 78,965 11,862 7,908 4,332 3,756 3,005 2,406 2,208 2,174 2,165 424 — 7,914 13,955 12,288 6,431 (275) 18,773 10,737 61,909 81,007 10,183 8,907 4,242 4,007 2,142 2,871 2,133 2,657 2,074 599 50 7,469 14,045 10,170 35,880 1,411 5,745 9,392 76,643 79,969 10,823 8,794 4,434 4,172 1,396 3,080 2,068 3,172 1,918 1,207 1,827 8,163 Total Non-interest Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 127,119 128,341 131,023 Income Before Income Tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 73,676 14,609 77,788 14,437 77,313 14,418 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,067 $ 63,351 $ 62,895 Net income per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.82 2.79 $ $ 3.00 2.97 $ $ 2.91 2.88 See accompanying notes to consolidated financial statements 57 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) 2023 Year Ended December 31, 2022 (In thousands) 2021 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,067 $ 63,351 $ 62,895 Other comprehensive income (loss) Securities available for sale Unrealized gain (loss) arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . Net unrealized loss at time of transfer on securities available for sale 22,094 (95,263) (10,644) transferred to held to maturity. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — (26,479) — Accretion of net unrealized losses on securities transferred to held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustments for (gains) losses included in earnings . . . . . . . . 3,563 222 3,413 275 — (1,411) Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense (benefit) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25,879 5,435 (118,054) (24,790) (12,055) (2,532) Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale, net of tax . . . . . . . . . . . . . . . . . . . . 20,444 (93,264) (9,523) Derivative instruments Unrealized losses arising during period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reclassification adjustment for expense recognized in earnings . . . . . . . . . . . . (213) 437 Unrealized gains recognized in other comprehensive income (loss) on derivative instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 224 47 Unrealized gains recognized in other comprehensive income (loss) on derivative instruments, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 177 — — — — — — — — — — Other comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,621 (93,264) (9,523) Comprehensive income (loss) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $79,688 $ (29,913) $ 53,372 See accompanying notes to consolidated financial statements 58 CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders’ Equity (Dollars in thousands, except per share amounts) Balances at December 31, 2020 . . . . . . . . . . . . . . . . . . . . . . Adoption of ASU 2016-13 . . . . . . . . . . . . . . . . . . . . . . . . . . $339,353 $ 40,145 — (10,303) $ 10,024 — 29,842 339,353 62,895 — — (18,155) — — (17,269) 61 10,024 — — — — $389,522 (10,303) 379,219 62,895 (18,155) (17,269) 61 Balances at December 31, 2020, as adjusted . . . . . . . . . . . . Net income for 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared, $0.84 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . Balances at December 31, 2021 . . . . . . . . . . . . . . . . . . . . . . Net income for 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared, $0.88 per share . . . . . . . . . . . . . . Repurchase of 181,586 shares of common stock. . . . . . . . . Issuance of 40,532 shares of common stock . . . . . . . . . . . . Share based compensation (issuance of 62,114 shares of 1,947 (691) — — — — 74,582 323,401 — 63,351 — (18,565) — — (4,010) 77 common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,143 Share based compensation withholding obligation (withholding of 28,125 shares of common stock) . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (620) — — — — Balances at December 31, 2022 . . . . . . . . . . . . . . . . . . . . . . Net income for 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends declared, $0.92 per share . . . . . . . . . . . . . . Repurchase of 298,601 shares of common stock. . . . . . . . . Issuance of 28,583 shares of common stock . . . . . . . . . . . . Share based compensation (issuance of 77,211 shares of 119,368 320,991 59,067 — — (19,327) — — (5,157) 70 — 1,947 — (9,523) 501 — — — — — — (93,264) (92,763) — — — — (691) (9,523) 398,484 63,351 (18,565) (4,010) 77 2,143 (620) (93,264) 347,596 59,067 (19,327) (5,157) 70 common stock) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,229 Share based compensation withholding obligation (withholding of 35,531 shares of common stock) . . . . . . Other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . . . . . . (650) — — — — — 2,229 — 20,621 (650) 20,621 Balances at December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . $317,483 $159,108 $(72,142) $404,449 See accompanying notes to consolidated financial statements 59 CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended December 31, 2022 (In thousands) Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,067 $ 63,351 $ ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM 2023 2021 62,895 OPERATING ACTIVITIES Proceeds from sales of loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Disbursements for loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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) losses on securities available for sale. . . . . . . . . . . . . . . . . . . . . . . . Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in accrued income and other assets. . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase (decrease) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from maturities, prepayments and calls of securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of securities available for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchases of securities held to maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from the redemption of Federal Home Loan Bank stock . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 356,207 (334,174) 6,210 215 1,244 549,079 (514,244) 5,341 (359) (4,155) 1,283,741 (1,210,897) (1,928) 1,912 (7,857) 10,019 (7,436) 222 2,229 (14,617) (3,597) 16,522 75,589 10,827 (6,431) 275 2,143 (25,843) 14,648 31,281 94,632 12,130 (35,880) (1,411) 1,947 (11,669) 17,171 47,259 110,154 278 70,523 85,371 122,806 167,550 375,723 22,317 21,964 — (137,550) (2,658) 774 — (606,069) 63,564 723 433 1,833 (5,679) (424,592) (1,740) 1,310 (478) (361,609) 56,561 650 1,336 1,648 (6,024) (162,945) 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. . . . . . . . . . . . . . . . . . . . . . . . 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. . . . . . . . . . . . . . . . . . . . . . . . . . 243,810 (60,980) 135,000 (110,000) (19,327) 70 (5,157) (650) 182,766 95,410 74,371 261,979 60,997 290,000 (295,000) (18,565) 77 (4,010) (620) 294,858 (35,102) 109,473 Cash and Cash Equivalents at End of Year. . . . . . . . . . . . . . . . . . . . . . . . . $ 169,781 $ 74,371 $ Cash paid during the year for Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 79,101 $ 17,657 $ Income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Transfers to other real estate and repossessed assets . . . . . . . . . . . . . . . . . . . . . . . Right of use assets obtained in exchange for lease obligations . . . . . . . . . . . . . . . Transfer of securities available for sale to held to maturity . . . . . . . . . . . . . . . . . . Transfer of mortgage loans to held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,040 719 791 — 391,618 — 20,367 16,100 783 865 See accompanying notes to consolidated financial statements 60 — (824,348) — — — (205,539) 10,032 1,004 467 63 (5,837) (563,064) 479,735 (3) 100,000 (100,000) (18,155) 61 (17,269) (691) 443,678 (9,232) 118,705 109,473 8,419 14,059 253 283 — 34,811 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 one loan production facility in Ohio. At December 31, 2023, 70.8% 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, 2022, were carried at the lower of cost or fair value on an aggregate loan basis and were sold during the first quarter of 2023. 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 $8.8 million, $8.6 million and $7.9 million for the years ended December 31, 2023, 2022 and 2021, 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. 61 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) SECURITIES — We classify our securities as equity, trading, held to maturity (‘‘HTM’’) or available for sale (‘‘AFS’’). 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 HTM 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. During 2022 we transferred certain securities AFS with an amortized cost and unrealized loss at the date of transfer of $418.1 million and $26.5 million, respectively to HTM. See note #3 for further discussion of this transfer. We did not have any equity securities or trading securities at December 31, 2023 and 2022. Securities AFS 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 AFS in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities AFS 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 AFS 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 allowance for credit losses (‘‘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. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of securities HTM to present the net amount expected to be collected. Securities HTM are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in our Consolidated Statements of Operations in provision for credit losses. We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics and consider historical credit loss information. Accrued interest receivable on securities HTM is excluded from the estimate of credit losses. With regard to U.S. Government-sponsored agency and mortgage-backed securities (residential and commercial), all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to obligations of states and political subdivisions, private label-mortgage-backed, corporate and trust preferred securities HTM, we consider (1) issuer bond ratings, (2) long-term historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. 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 62 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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. loan segment ALLOWANCE FOR CREDIT LOSSES — 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 loan modifications; and severely delinquent mortgage and installment loans. When 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 63 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 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. On January 1, 2021 we adopted Accounting Standards Update 2016-13, ‘‘Financial Instruments — Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments’’ using the modified retrospective method for all financial assets measured at amortized cost and unfunded lending commitments. 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. 64 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 256 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 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. 65 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 primarily 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 and (ii) certain pay-fixed and pay-variable interest rate swap agreements related to commercial loan customers. 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. Net cash settlements on derivatives that qualify for hedge accounting are recorded in net interest income 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) 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. 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 (LOSS) — Comprehensive income (loss) 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, performance share units and stock units for a deferred compensation plan for non-employee directors. 66 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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, 2023, 0.1 million shares of common stock were reserved for issuance under the dividend reinvestment plan, 0.6 million shares of common stock were reserved for issuance under our long-term incentive plan and 0.2 million shares of common stock were reserved for issuance under our non-employee director stock purchase plan. RECLASSIFICATION — Certain amounts in the 2022 and 2021 consolidated financial statements have been reclassified to conform to the 2023 presentation. loan modification guidance in Subtopic 310-20 to all ADOPTION OF NEW ACCOUNTING STANDARDS — In March, 2022, the Financial Accounting Standards Board (‘‘FASB’’) issued Accounting Standards Update (‘‘ASU’’) 2022-02, ‘‘Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures’’. This ASU eliminates the troubled debt restructuring (‘‘TDR’’) accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss (‘‘CECL’’) model. In lieu of the TDR accounting model, creditors now will apply the general including modifications made for borrowers experiencing financial difficulty. Under the general loan modification guidance, a modification is treated as a new loan only if the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks, and modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate. In addition, this ASU requires the disclosure of gross charge-offs recorded in the current period for financing receivables by origination year. For entities that have adopted Topic 326, ASU 2022-02 takes effect in reporting periods beginning after December 15, 2022, with early adoption permitted. The adoption of this ASU on January 1, 2023, did not have a material impact on our Condensed Consolidated Financial Statements. loan modifications, 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’’ and in December 2022 the FASB issued ASU 2022-06, ‘‘Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848’’. These new ASUs provide 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 formed a cross-functional project team to lead the transition from LIBOR to an adoption of reference rates that include Secured Overnight Financing Rate (‘‘SOFR’’). We utilized the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during this transitional period. We 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, 2024. In March, 2023, the FASB issued ASU 2023-02, ‘‘Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)’’. This ASU expands the use of the proportional amortization method of accounting — currently allowed only for investments in low-income housing tax credit (‘‘LIHTC’’) structures — to equity investments in other tax credit structures that meet certain criteria. Common tax credit programs that investors access via tax equity structures and that may now be eligible for application of the proportional amortization method include: 67 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) new markets tax credits, historic rehabilitation tax credit programs, and renewable energy tax credit programs. This ASU takes effect in reporting periods beginning after December 15, 2023, with early adoption permitted. We do not expect the adoption of this this ASU to have a material impact on our Condensed Consolidated Financial Statements. In November, 2023, the FASB issued ASU 2023-07, ‘‘Segment Reporting (Topic 323): Improvements to Reportable Segment Disclosures’’. This ASU enhances disclosures of significant segment expenses by requiring entities to disclose significant segment expenses regularly provided to the chief operating decision maker, extend certain annual disclosures to interim periods, and permit more than one measure of segment profit or loss to be reported under certain conditions. This ASU takes effect in reporting periods beginning after December 15, 2023, with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements. In December, 2023, the FASB issued ASU 2023-09, ‘‘Income Taxes (Topic 740): Improvements to Income Tax Disclosures’’. This ASU modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). This ASU also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. This ASU takes effect in reporting periods beginning after December 15, 2024, with early adoption permitted. We do not expect the adoption of this ASU to have a material impact on our Consolidated Financial Statements. 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 2023 and 2022 were zero. We do not maintain compensating balances with correspondent banks. We may also be required to maintain reserve balances related to certain mortgage banking related derivatives not classified as hedges. These balances are held at unrelated financial institutions and totaled $0.3 million and $0.3 million at December 31, 2023 and 2022. 68 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) NOTE 3 – SECURITIES Securities AFS consist of the following at December 31: Amortized Cost Unrealized Gains Losses (In thousands) 2023 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 10,299 90,195 13,706 93,527 114,867 341,177 79,296 983 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $744,050 2022 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13,191 100,700 15,047 102,196 200,755 346,187 87,308 979 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $866,363 Securities HTM consist of the following at December 31: $ 5 3 — 249 3 204 — — $464 $ 10 19 — 245 — 55 — — $329 Fair Value $ 9,507 81,217 12,297 86,469 112,931 302,737 73,250 942 $ 797 8,981 1,409 7,307 1,939 38,644 6,046 41 $65,164 $679,350 $ 1,100 10,261 1,594 8,596 6,030 50,565 9,151 48 $ 12,101 90,458 13,453 93,845 194,725 295,677 78,157 931 $87,345 $779,347 Carrying Value Transferred Unrealized Loss(1) Amortized Cost ACL (In thousands) Unrealized Gains Losses Fair Value 2023 U.S. agency. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 25,768 108,770 U.S. agency residential mortgage-backed . . . 4,146 U.S. agency commercial mortgage-backed . . Private label mortgage-backed. . . . . . . . . . . . 7,302 Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . 161,352 45,702 948 $ 1,603 9,715 153 302 $ — $ 27,371 $ — $ 4,892 $ 22,479 94,636 3,839 6,754 — 118,485 — 23,849 460 4,299 — — 854 7,608 — 4 6,879 803 48 33 116 4 88 168,264 46,621 780 1,000 — 18,807 7,033 15 149,545 40,368 985 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $353,988 $19,503 $157 $373,648 $868 $55,910 $318,606 2022 U.S. agency. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,634 117,650 U.S. agency residential mortgage-backed . . . 4,798 U.S. agency commercial mortgage-backed . . 7,242 Private label mortgage-backed. . . . . . . . . . . . $ 1,839 10,845 228 416 $ — $ 29,473 $ — $ 5,066 $ 24,407 103,256 4,430 6,662 — 128,495 — 25,239 596 5,026 — — 997 7,659 — 1 69 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Carrying Value Transferred Unrealized Loss(1) Amortized Cost ACL (In thousands) Unrealized Gains Losses Fair Value Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . 168,134 48,418 942 8,555 1,130 53 39 123 5 176,728 25,591 11 49,671 — 5,156 — 1,000 — 151,148 44,515 1,000 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $374,818 $23,066 $168 $398,052 $11 $62,645 $335,418 (1) Represents the remaining unrealized loss to be accreted on securities that were transferred from AFS to HTM on April 1, 2022. On April 1, 2022, we transferred certain securities AFS with an amortized cost and unrealized loss at the date of transfer of $418.1 million and $26.5 million, respectively to HTM. The transfer was made at fair value, with the unrealized loss becoming part of the purchase discount which will be accreted over the remaining life of the securities. The other comprehensive loss component is separated from the remaining available for sale securities and is accreted over the remaining life of the securities transferred. We have the ability and intent to hold these securities until they mature, at which time we expect to receive full value for these securities. Our investments’ gross unrealized losses and fair values for securities AFS 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) 2023 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 . . . . . . . . . . . . . . . . . . . . . . . . . 130 358 — 6,285 7,714 — — — $ — $ 1 — 356 88 8,453 $ 80,008 12,297 79,507 97,203 797 $ 8,583 $ 8,980 1,409 6,951 1,851 80,366 12,297 85,792 104,917 797 8,981 1,409 7,307 1,939 — 301,038 73,249 — 942 — 38,644 6,046 41 301,038 73,249 942 38,644 6,046 41 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 14,487 $ 445 $652,697 $64,719 $667,184 $65,164 2022 U.S. agency. . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,244 33,784 U.S. agency residential mortgage-backed . . . . 1,609 U.S. agency commercial mortgage-backed . . . 39,954 Private label mortgage-backed. . . . . . . . . . . . . Other asset backed . . . . . . . . . . . . . . . . . . . . . . 110,859 Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Trust preferred . . . . . . . . . . . . . . . . . . . . . . . . . 56,455 24,876 — $ 799 1,920 73 2,582 2,657 $ 2,587 $ 54,793 11,844 53,346 83,802 301 $ 10,831 $ 1,100 10,261 88,577 1,594 13,453 8,596 93,300 6,030 194,661 8,341 1,521 6,014 3,373 10,216 1,737 — 231,705 51,293 931 40,349 7,414 48 288,160 76,169 931 50,565 9,151 48 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $275,781 $19,984 $490,301 $67,361 $766,082 $87,345 70 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Securities AFS in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities AFS 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 AFS 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 AFS was needed at December 31, 2023 and 2022. Accrued interest receivable on securities AFS totaled $4.6 million and $4.7 million at December 31, 2023 and 2022, respectively and 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, 2023, we had 31 U.S. agency, 169 U.S. agency residential mortgage-backed and 11 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, 2023, we had 88 private label mortgage backed, 104 other asset backed, and 76 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, 2023, we had 327 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, 2023, we had one trust preferred security whose fair value is less than amortized cost. This trust preferred securities is a single issue security issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities has suffered from credit spread widening. This security is rated by a major rating agency as investment grade. At December 31, 2023 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 2023, 2022, and 2021. The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of securities HTM to present the net amount expected to be collected. Securities HTM are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in our Consolidated Statements of Operations in provision for credit losses. We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics and consider historical credit loss information. Accrued interest receivable on securities HTM totaled $1.8 million and $1.8 million at December 31, 2023 and 2022, respectively and is excluded from the estimate of credit losses and is included in accrued income and other assets in the Consolidated Statements of Financial Condition. With regard to U.S. Government-sponsored agency and mortgage-backed securities (residential and commercial), all these securities are issued by a U.S. government- sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to obligations of states and political subdivisions, private label-mortgage-backed, corporate and trust preferred securities HTM, we consider (1) issuer bond ratings, (2) historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers 71 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) continue to make timely principal and interest payments under the contractual terms of the securities. Historical loss rates associated with securities having similar grades as those in our portfolio have been insignificant. During the first quarter of 2023, one corporate security (Signature Bank) defaulted resulting in a $3.0 million provision for credit losses and a corresponding full charge-off. Subsequent to this security’s charge-off, a portion of its fair value had recovered and was subsequently sold during the first quarter of 2024 for $1.1 million during which period we expect to record that amount as a recovery to the ACL. Despite this lone security loss, the long-term historical loss rates associated with securities having similar grades as those in our portfolio have been insignificant. Furthermore, as of December 31, 2023 and 2022, there were no past due principal and interest payments associated with these securities. At those same dates an allowance for credit losses of $157,000 and $168,000, respectively was recorded on non U.S. agency securities HTM based on applying the long-term historical credit loss rate, as published by credit rating agencies, for similarly rated securities. On a quarterly basis, we monitor the credit quality of securities HTM through the use of credit ratings. The carrying value of securities HTM at December 31, aggregated by credit quality follow: Private Label Mortgage- Backed Obligations of States and Political Subdivisions Corporate (In thousands) Trust Preferred Carrying Value Total 2023 Credit rating: AAA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,302 — — — — — $ 36,629 102,583 3,172 856 — 18,112 $ — $ — $ 43,931 — 102,583 10,095 — 34,769 — 1,943 — 21,983 948 — 6,923 33,913 1,943 2,923 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,302 $161,352 $45,702 $948 $215,304 2022 Credit rating: AAA. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . AA . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . BBB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-rated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,242 — — — — $ 32,876 110,033 3,917 1,167 20,141 $ — $ — $ 40,118 110,033 — 10,817 — 39,788 — 23,980 942 — 6,900 38,621 2,897 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $7,242 $168,134 $48,418 $942 $224,736 An analysis of the ACL by security HTM type for the year ended December 31, follows: Private Label Mortgage- Backed Obligations of States and Political Subdivisions Corporate (In thousands) Trust Preferred Total 2023 Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . $ 1 $39 $ 123 $ 5 $ 168 Additions (deductions) Provision for credit losses. . . . . . . . . . . . . . . . . . . . . Recoveries credited to the allowance . . . . . . . . . . . . Securities HTM charged against the allowance . . . . 3 — — (6) — — 2,993 — (3,000) (1) — — 2,989 — (3,000) Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4 $33 $ 116 $ 4 $ 157 72 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Private Label Mortgage- Backed Obligations of States and Political Subdivisions Corporate (In thousands) Trust Preferred Total 2022 Balance at beginning of period. . . . . . . . . . . . . . . . . . . . . $— Additions (deductions) Provision for credit losses. . . . . . . . . . . . . . . . . . . . . Recoveries credited to the allowance . . . . . . . . . . . . Securities HTM charged against the allowance . . . . 1 — — Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $— 39 — — $39 $ — $— $ — 123 — — 5 — — 168 — — $123 $ 5 $168 The amortized cost and fair value of securities AFS and securities HTM at December 31, 2023, by contractual maturity, follow: 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Securities AFS Securities HTM Amortized Cost Fair Value Amortized Cost Fair Value (In thousands) $ 5,471 153,786 67,713 204,785 431,755 90,195 13,706 93,527 114,867 $ 5,382 141,420 59,667 179,967 386,436 81,217 12,297 86,469 112,931 $ 4,881 55,292 99,383 83,700 243,256 118,485 4,299 7,608 — $ 4,874 50,856 85,409 72,238 213,377 94,636 3,839 6,754 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $744,050 $679,350 $373,648 $318,606 The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties. A summary of proceeds from the sale of securities available for sale and gains and losses for the years ended December 31 follow: Realized Proceeds Gains Losses (In thousands) 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 278 70,523 85,371 $ — $222 439 64 164 1,475 Securities AFS and HTM with a fair value of $103.6 million and zero at December 31, 2023 and 2022, 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, 2023 or 2022. 73 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) NOTE 4 – LOANS Our loan portfolios by class at December 31 follow: 2023 2022 (In thousands) Commercial Commercial and industrial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 810,145 $ 732,463 734,390 Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 869,586 Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,679,731 1,466,853 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 859,236 301,172 173,816 116,032 35,616 752,563 285,632 183,100 105,277 41,837 Total mortgage. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,485,872 1,368,409 Installment Boat lending. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 268,648 251,852 104,798 625,298 252,965 270,673 106,452 630,090 Total loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Allowance for credit losses. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,790,901 (54,658) 3,465,352 (52,435) Net Loans. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,736,243 $3,412,917 Loans include net deferred loan costs of $25.3 million and $26.6 million at December 31, 2023 and 2022, respectively. During 2023, we sold $56.7 million of portfolio residential fixed rate and adjustable rate mortgage loans servicing retained and recognized a loss on sale of $0.14 million. During 2022, we sold $63.0 million of portfolio residential fixed and adjustable rate mortgage loans servicing retained and recognized a gain on sale of $0.55 million. During 2021, we sold $9.6 million of portfolio residential fixed rate mortgage loans servicing retained and recognized a gain on sale of $0.45 million. These loan sale transactions were done primarily for asset/liability management purposes. An analysis of the ACL by portfolio segment for the years ended December 31 follows: 2023 Balance at beginning of period . . . . . . . . . . . . . . . . . . Additions (deductions) Commercial Mortgage Installment (In thousands) Subjective Allocation Total $13,817 $21,633 $ 4,290 $12,695 $52,435 Provision for credit losses . . . . . . . . . . . . . . . . . . . . Recoveries credited to allowance. . . . . . . . . . . . . . . Loans charged against the allowance. . . . . . . . . . . . 3,430 531 (1,054) (445) 352 (154) 509 1,915 (2,588) 3,221 (273) — 2,798 — (3,796) Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . $16,724 $21,386 $ 4,126 $12,422 $54,658 74 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 2022 Balance at beginning of period . . . . . . . . . . . . . . . . . . Additions (deductions) Commercial Mortgage Installment (In thousands) Subjective Allocation Total $11,519 $19,221 $ 3,749 $12,763 $47,252 Provision for credit losses . . . . . . . . . . . . . . . . . . . . Recoveries credited to allowance. . . . . . . . . . . . . . . Loans charged against the allowance. . . . . . . . . . . . 1,845 453 — 2,047 435 (70) 1,349 1,608 (2,416) 5,173 (68) — 2,496 — (2,486) Balance at end of period . . . . . . . . . . . . . . . . . . . . . . . $13,817 $21,633 $ 4,290 $12,695 $52,435 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 The allocation of the ACL by portfolio segment at December 31 follows: 2023 Allowance for Credit Losses Amount Percent of Loans to Total Portfolio Loans Allowance for Credit Losses Amount (Dollars in thousands) 2022 Percent of Loans to Total Portfolio Loans Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $16,724 21,386 Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,126 Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12,422 Subjective allocation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44.3% $13,817 21,633 39.2 4,290 16.5 12,695 — 42.3% 39.5 18.2 — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $54,658 100.0% $52,435 100.0% 75 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Loans on non-accrual status and past due more than 90 days (‘‘Non-performing Loans’’) at December 31 follow: Non-Accrual with no Allowance for Credit Loss Non-Accrual with an Allowance for Credit Loss Total Non- Accrual 90+ and Still Accruing Total Non- Performing Loans (In thousands) 2023 Commercial Commercial and industrial(1) . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . $ — — $ 7 — $ 7 — Mortgage 1-4 family owner occupied - jumbo. . . . . . . . . 1-4 family owner occupied - non-jumbo(2) . . . 1-4 family non-owner occupied . . . . . . . . . . . . 1-4 family - 2nd lien. . . . . . . . . . . . . . . . . . . . . Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending. . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544 575 — — — — — — — 1,655 282 624 143 352 419 199 544 2,230 282 624 143 352 419 199 $ — $ — — 432 — — — — — — 7 — 544 2,662 282 624 143 352 419 199 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,119 $3,681 $4,800 $432 $5,232 Accrued interest excluded from total . . . . . . . . . . $ — $ — $ — $ — $ — 2022 Commercial Commercial and industrial(1) . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . $ — — $ Mortgage 1-4 family owner occupied - jumbo. . . . . . . . . 1-4 family owner occupied - non-jumbo(2) . . . 1-4 family non-owner occupied . . . . . . . . . . . . 1-4 family - 2nd lien. . . . . . . . . . . . . . . . . . . . . Resort lending . . . . . . . . . . . . . . . . . . . . . . . . . . Installment Boat lending . . . . . . . . . . . . . . . . . . . . . . . . . . . Recreational vehicle lending. . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,077 152 — 110 — — — 9 — — 852 323 562 38 380 30 188 $ 9 — — 1,929 475 562 148 380 30 188 $ — $ 9 — — 1,929 475 562 148 380 30 188 — — — — — — — — — Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,339 $2,382 $3,721 $ — $3,721 Accrued interest excluded from total . . . . . . . . . . $ — $ — $ — $ — $ — (1) Non-performing commercial and industrial loans exclude $0.021 million and $0.029 million of government guaranteed loans at December 31, 2023 and 2022, respectively. (2) Non-performing 1-4 family owner occupied – non jumbo loans exclude $2.170 million and $1.631 million of government guaranteed loans at December 31, 2023 and 2022, respectively. If non-performing loans had continued to accrue interest in accordance with their original terms, approximately $0.3 million, $0.2 million and $0.2 million of interest income would have been recognized in each of the years ended 2023, 2022 and 2021, respectively. Interest income recorded on these loans was approximately zero during each of the years ended 2023, 2022 and 2021. 76 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) The following table provides collateral information by class of loan for collateral-dependent loans with a specific reserve. A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral. The amortized cost of collateral-dependent loans by class at December 31, follows: Collateral Type Real Estate Other Allowance for Credit Losses (In thousands) 2023 Commercial Commercial and industrial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 565 $ 232 — — $ 224 — 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 544 2,243 211 244 143 — — — — — — — — 297 303 102 — 504 178 87 51 105 107 36 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,950 $ 934 $1,292 Accrued interest excluded from total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1 $ — 2022 Commercial Commercial and industrial. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 748 $1,309 — 7,329 $ 197 1,243 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — 1,721 233 368 148 — — 6 — — — — — 297 30 128 — 229 29 203 14 101 11 47 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,553 $1,764 $2,074 Accrued interest excluded from total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 40 $ 6 77 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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) $ — $ — $ $ 28 — 28 $ 810,117 $ 810,145 869,586 — 869,586 2023 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . — — 1,763 215 241 — 320 414 313 — — 742 64 139 50 16 35 86 544 1,431 158 215 143 261 280 54 544 3,936 437 595 193 597 729 453 858,692 297,236 173,379 115,437 35,423 268,051 251,123 104,345 859,236 301,172 173,816 116,032 35,616 268,648 251,852 104,798 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,266 $1,132 $3,114 $7,512 $3,783,389 $3,790,901 Accrued interest excluded from total . . . . . . $ 31 $ 17 $ — $ 48 $ 12,452 $ 12,500 2022 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — $ — $ — — 1,400 61 420 54 528 639 215 — — 521 93 107 — 14 147 46 $ 38 — 38 $ 732,425 $ 732,463 734,390 — 734,390 — 869 200 47 148 295 18 123 — 2,790 354 574 202 837 804 384 752,563 282,842 182,746 104,703 41,635 252,128 269,869 106,068 752,563 285,632 183,100 105,277 41,837 252,965 270,673 106,452 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,317 $ 928 $1,738 $5,983 $3,459,369 $3,465,352 Accrued interest excluded from total . . . . . . $ 27 $ 7 $ — $ 34 $ 9,975 $ 10,009 78 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) For the year ended December 31, 2023, there were no troubled loan modifications or subsequent defaults. 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. 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. Credit Quality Indicators – As part of our on-going monitoring of the credit quality of our loan portfolios, we track certain credit quality indicators including (a) risk grade of commercial loans, (b) the level of classified commercial loans, (c) credit scores of mortgage and installment loan borrowers, and (d) delinquency history and non-performing loans. For commercial loans, we use a loan rating system that is similar to those employed by state and federal banking regulators. Loans are graded on a scale of 1 to 12. A description of the general characteristics of the ratings follows: Rating 1 through 6: These loans are generally referred to as our ‘‘non-watch’’ commercial credits that include very high or exceptional credit fundamentals through acceptable credit fundamentals. Rating 7 and 8: These loans are generally referred to as our ‘‘watch’’ commercial credits. These ratings include loans to borrowers that exhibit potential credit weakness or downward trends. If not checked or cured these trends could weaken our asset or credit position. While potentially weak, no loss of principal or interest is envisioned with these ratings. Rating 9: These loans are generally referred to as our ‘‘substandard accruing’’ commercial credits. This rating includes loans to borrowers that exhibit a well-defined weakness where payment default is probable and loss is possible if deficiencies are not corrected. Generally, loans with this rating are considered collectible as to both principal and interest primarily due to collateral coverage. Rating 10 and 11: These loans are generally referred to as our ‘‘substandard - non-accrual’’ and ‘‘doubtful’’ commercial credits. These ratings include loans to borrowers with weaknesses that make collection of debt in full, on the basis of current facts, conditions and values at best questionable and at worst improbable. All of these loans are placed in non-accrual. 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. 79 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) The following tables summarize loan ratings by loan class for our commercial loan portfolio segment at December 31: Commercial Term Loans Amortized Cost Basis by Origination Year 2023 2022 2021 2020 2019 (In thousands) Prior Revolving Loans Amortized Cost Basis Total December 31, 2023 Commercial and industrial Non-watch (1-6) . . . . . . . $110,472 $152,715 $ 70,081 $47,644 $ 42,576 $ 97,960 $260,634 $ 782,082 27,267 964 Watch (7-8) . . . . . . . . . . . 768 547 Substandard Accrual (9) . . 28 — Non-Accrual (10-11). . . . . 11,938 196 — 2,580 — — 4,173 21 — 5,239 — — 2,277 4 28 96 — — Total . . . . . . . . . . . . . . $ 110,568 $ 157,954 $ 71,592 $ 50,224 $ 46,770 $100,269 $ 272,768 $ 810,145 Accrued interest excluded from total. . . . . . . . . . . . . $ 239 $ 438 $ 132 $ 128 $ 120 $ 326 $ 1,327 $ 2,710 Current period gross charge- offs . . . . . . . . . . . . . . . . . $ — $ — $ — $ — $ — $ 69 $ 25 $ 94 Commercial real estate Non-watch (1-6). . . . . . . . $ 202,576 $ 169,230 $131,428 $ 29,684 $ 78,706 $176,265 $ 73,852 $ 861,741 7,845 — Watch (7-8) . . . . . . . . . . . — — Substandard Accrual (9) . . — — Non-Accrual (10-11). . . . . 2,322 — — 5,523 — — — — — — — — — — — — — — Total . . . . . . . . . . . . . . $ 202,576 $ 169,230 $131,428 $ 29,684 $ 81,028 $181,788 $ 73,852 $ 869,586 Accrued interest excluded from total. . . . . . . . . . . . . $ 548 $ 685 $ 431 $ 73 $ 347 $ 661 $ 288 $ 3,033 Current period gross charge- offs . . . . . . . . . . . . . . . . . $ — $ — $ — $ — $ 960 $ — $ — $ 960 Total Commercial Non-watch (1-6). . . . . . . . $ 313,048 $ 321,945 $201,509 $ 77,328 $121,282 $274,225 $ 334,486 $1,643,823 35,112 964 Watch (7-8) . . . . . . . . . . . 768 547 Substandard Accrual (9) . . 28 — Non-Accrual (10-11). . . . . 11,938 196 — 5,239 — — 2,580 — — 6,495 21 — 7,800 4 28 96 — — Total . . . . . . . . . . . . . . $ 313,144 $ 327,184 $203,020 $ 79,908 $127,798 $282,057 $ 346,620 $1,679,731 Accrued interest excluded from total. . . . . . . . . . . . . $ Current period gross charge- offs . . . . . . . . . . . . . . . . . $ 787 $ 1,123 $ 563 $ 201 $ 467 $ 987 $ 1,615 $ 5,743 — $ — $ — $ — $ 960 $ 69 $ 25 $ 1,054 80 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Commercial Term Loans Amortized Cost Basis by Origination Year 2022 2021 2020 2019 2018 (In thousands) Prior Revolving Loans Amortized Cost Basis Total December 31, 2022 Commercial and industrial Non-watch (1-6). . . . . . . . . . $157,561 $ 89,251 $58,292 $ 45,792 $30,715 $ 95,908 $237,906 $ 715,425 15,062 781 Watch (7-8) . . . . . . . . . . . . . 1,938 68 Substandard Accrual (9). . . . 38 — Non-Accrual (10-11) . . . . . . 4,539 971 — 1,690 388 — 4,474 402 38 2,793 — — 680 — — 105 109 — Total. . . . . . . . . . . . . . . . . $158,241 $ 94,761 $59,141 $ 47,870 $30,929 $100,822 $240,699 $ 732,463 Accrued interest excluded from total . . . . . . . . . . . . . . . $ 238 $ 178 $ 146 $ 105 $ 181 $ 308 $ 890 $ 2,046 Commercial real estate Non-watch (1-6). . . . . . . . . . $170,238 $154,918 $38,062 $ 97,762 $56,580 $159,514 $ 42,030 $ 719,104 8,027 313 Watch (7-8) . . . . . . . . . . . . . 7,259 — Substandard Accrual (9). . . . — — Non-Accrual (10-11) . . . . . . 4,769 181 — 1,010 2,014 — 1,641 5,064 — 182 — — 112 — — — — — Total. . . . . . . . . . . . . . . . . $170,238 $155,100 $38,375 $102,712 $59,604 $166,219 $ 42,142 $ 734,390 Accrued interest excluded from total . . . . . . . . . . . . . . . $ 609 $ 468 $ 88 $ 368 $ 206 $ 515 $ 109 $ 2,363 Total Commercial Non-watch (1-6). . . . . . . . . . $327,799 $244,169 $96,354 $143,554 $87,295 $255,422 $279,936 $1,434,529 23,089 1,094 Watch (7-8) . . . . . . . . . . . . . 9,197 68 Substandard Accrual (9). . . . 38 — Non-Accrual (10-11) . . . . . . 4,721 971 — 6,459 569 — 1,115 2,123 — 6,115 5,466 38 2,905 — — 680 — — Total. . . . . . . . . . . . . . . . . $328,479 $249,861 $97,516 $150,582 $90,533 $267,041 $282,841 $1,466,853 Accrued interest excluded from total . . . . . . . . . . . . . . . $ 847 $ 646 $ 234 $ 473 $ 387 $ 823 $ 999 $ 4,409 81 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) For each of our mortgage and installment portfolio segment classes we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated semi-annually. The following tables summarize credit scores by loan class for our mortgage and installment loan portfolio segments at December 31: Mortgage(1) Term Loans Amortized Cost Basis by Origination Year 2023 2022 2021 2020 (In thousands) 2019 Prior December 31, 2023 1-4 family owner occupied - jumbo 800 and above. . . . . . . $ 6,299 $ 30,789 $ 63,377 $ 17,672 $ 4,503 $ 8,813 14,836 750-799 . . . . . . . . . . . . 11,768 700-749 . . . . . . . . . . . . 5,881 650-699 . . . . . . . . . . . . 2,592 600-649 . . . . . . . . . . . . — 550-599 . . . . . . . . . . . . 673 500-549 . . . . . . . . . . . . — Under 500 . . . . . . . . . . — Unknown . . . . . . . . . . . 193,587 66,597 24,648 2,486 527 — — — 117,454 51,991 13,804 7,815 — 544 — — 24,288 4,738 2,142 3,198 — — — — 61,986 25,170 12,949 505 1,908 923 — — 42,726 14,965 11,274 1,638 — — — — Revolving Loans Amortized Cost Basis Total $ 1,084 1,586 1,500 — — — — — — $132,537 456,463 176,729 70,698 18,234 2,435 2,140 — — Total. . . . . . . . . . . . . $76,902 $222,397 $351,222 $121,113 $38,869 $44,563 $ 4,170 $859,236 Accrued interest excluded from total. . . $ 329 $ 669 $ 785 $ 299 $ 107 $ 156 $ 30 $ 2,375 Current period gross charge-offs. . . . . . . . . . $ — $ — $ — $ — $ — $ — $ — $ — 1-4 family owner occupied - non-jumbo 800 and above. . . . . . . $ 2,280 $ 10,083 $ 7,780 $ 5,425 $ 2,802 $ 9,130 19,852 750-799 . . . . . . . . . . . . 20,042 700-749 . . . . . . . . . . . . 12,369 650-699 . . . . . . . . . . . . 6,415 600-649 . . . . . . . . . . . . 5,390 550-599 . . . . . . . . . . . . 4,077 500-549 . . . . . . . . . . . . 1,750 Under 500 . . . . . . . . . . — Unknown . . . . . . . . . . . 12,306 8,136 2,524 833 1,705 998 272 — 21,664 11,661 4,606 1,694 71 1,335 462 — 13,233 11,696 9,576 136 188 — — — 32,729 18,133 5,717 1,334 624 — 311 — 5,954 3,280 2,393 1,096 557 413 518 — $ 3,029 8,462 4,482 1,500 84 65 — — — $ 40,529 114,200 77,430 38,685 11,592 8,600 6,823 3,313 — Total. . . . . . . . . . . . . $37,109 $ 68,931 $ 49,273 $ 32,199 $17,013 $79,025 $17,622 $301,172 Accrued interest excluded from total. . . $ 153 $ 235 $ 119 $ 78 $ 56 $ 331 $ 139 $ 1,111 Current period gross charge-offs. . . . . . . . . . $ — $ — $ — $ — $ — $ 29 $ — $ 29 82 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Mortgage(1) Term Loans Amortized Cost Basis by Origination Year 2023 2022 2021 2020 (In thousands) 2019 Prior Revolving Loans Amortized Cost Basis Total 1-4 family non-owner occupied 800 and above. . . . . . . $ 2,320 10,937 750-799 . . . . . . . . . . . . 3,904 700-749 . . . . . . . . . . . . 216 650-699 . . . . . . . . . . . . — 600-649 . . . . . . . . . . . . — 550-599 . . . . . . . . . . . . — 500-549 . . . . . . . . . . . . — Under 500 . . . . . . . . . . — Unknown . . . . . . . . . . . $ 6,026 16,635 7,013 1,879 388 61 — — — $12,338 28,051 8,825 1,844 1,445 52 — — — $ 3,474 11,545 4,145 2,543 — — — — — $ 3,048 $ 6,030 13,400 6,719 3,521 1,226 873 142 137 — 6,709 667 197 75 — — — — $ 1,199 3,498 2,095 277 362 — — — — $ 34,435 90,775 33,368 10,477 3,496 986 142 137 — Total. . . . . . . . . . . . . $17,377 $32,002 $52,555 $21,707 $10,696 $32,048 $ 7,431 $173,816 Accrued interest excluded from total. . . $ 77 $ 125 $ 149 $ 60 $ 35 $ 146 $ 62 $ 654 Current period gross charge-offs. . . . . . . . . . $ — $ — $ — $ — $ — $ — $ — $ — 1-4 family - 2nd lien $ 800 and above. . . . . . . $ 750-799 . . . . . . . . . . . . 700-749 . . . . . . . . . . . . 650-699 . . . . . . . . . . . . 600-649 . . . . . . . . . . . . 550-599 . . . . . . . . . . . . 500-549 . . . . . . . . . . . . Under 500 . . . . . . . . . . Unknown . . . . . . . . . . . 537 2,260 1,895 425 51 — — — — $ 156 2,879 1,243 285 107 80 — 19 — $ 703 2,359 1,464 182 97 203 12 — — $ 389 2,341 324 519 67 — — — — 159 $ 1,153 3,084 898 2,348 224 1,869 302 563 37 238 157 487 — 61 77 — — $ 9,817 38,277 25,849 8,945 1,886 638 331 35 — $ 12,914 52,098 33,347 12,527 2,808 1,316 830 192 — Total. . . . . . . . . . . . . $ 5,168 $ 4,769 $ 5,020 $ 3,640 $ 1,854 $ 9,803 $85,778 $116,032 Accrued interest excluded from total. . . $ 19 $ 14 $ 10 $ 7 $ 6 $ 41 $ 707 $ 804 Current period gross charge-offs. . . . . . . . . . $ — $ — $ — $ — $ — $ 5 $ — $ 5 83 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Mortgage(1) Term Loans Amortized Cost Basis by Origination Year 2023 2022 2021 2020 (In thousands) 2019 Prior Revolving Loans Amortized Cost Basis Total Resort lending 800 and above. . . . . . . $ 750-799 . . . . . . . . . . . . 700-749 . . . . . . . . . . . . 650-699 . . . . . . . . . . . . 600-649 . . . . . . . . . . . . 550-599 . . . . . . . . . . . . 500-549 . . . . . . . . . . . . Under 500 . . . . . . . . . . Unknown . . . . . . . . . . . Total. . . . . . . . . . . . . $ Accrued interest — $ 41 — — — — — — — 41 $ — $ 99 $ — $ — $ 5,643 $ 817 108 — — — — — — 910 871 — — — — — — 858 111 316 49 — — — — 179 12,649 — 5,439 — 6,219 844 — 267 — 59 — 137 — — — 925 $ 1,880 $ 1,334 $ 179 $ 31,257 $ — $ — — — — — — — — — $ 5,742 15,454 6,529 6,535 893 267 59 137 — 35,616 excluded from total. . . $ — $ 4 $ 3 $ 4 $ — $ 142 $ — $ 153 Current period gross charge-offs. . . . . . . . . . $ — $ — $ — $ — $ — $ 120 $ — $ 120 Total Mortgage 800 and above. . . . . . . $ 11,436 $ 47,054 $ 84,297 $ 26,960 $10,512 $ 30,769 $ 15,129 $ 226,157 728,990 750-799 . . . . . . . . . . . . 327,403 700-749 . . . . . . . . . . . . 138,922 650-699 . . . . . . . . . . . . 37,023 600-649 . . . . . . . . . . . . 13,604 550-599 . . . . . . . . . . . . 9,994 500-549 . . . . . . . . . . . . 3,779 Under 500 . . . . . . . . . . — Unknown . . . . . . . . . . . 246,571 89,418 31,280 5,722 853 1,347 462 — 170,514 78,488 21,685 9,644 765 544 330 — 38,028 8,909 5,034 4,406 714 413 595 — 89,036 37,886 18,851 1,454 3,613 1,921 272 — 51,823 33,926 10,722 2,332 703 331 35 — 63,821 46,316 29,859 11,640 6,768 5,438 2,085 — 69,197 32,460 21,491 1,825 188 — — — Total. . . . . . . . . . . . . $136,597 $329,024 $459,950 $179,993 $68,611 $196,696 $115,001 $1,485,872 Accrued interest excluded from total. . . $ 578 $ 1,047 $ 1,066 $ 448 $ 204 $ 816 $ 938 $ 5,097 Current period gross charge-offs. . . . . . . . . . $ — $ — $ — $ — $ — $ 154 $ — $ 154 84 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Mortgage(1) Term Loans Amortized Cost Basis by Origination Year 2022 2021 2020 2019 (In thousands) 2018 Prior Revolving Loans Amortized Cost Basis Total December 31, 2022 1-4 family owner occupied - jumbo 800 and above. . . . . . . $ 23,764 $ 54,637 $ 16,848 $ 9,211 $ 2,988 $ 6,946 16,140 750-799 . . . . . . . . . . . . 8,852 700-749 . . . . . . . . . . . . 4,020 650-699 . . . . . . . . . . . . — 2,150 600-649 . . . . . . . . . . . . — 550-599 . . . . . . . . . . . . 689 500-549 . . . . . . . . . . . . — Under 500 . . . . . . . . . . — Unknown . . . . . . . . . . . 189,653 91,189 20,743 1,275 1,516 — — — 97,269 34,158 10,905 1,712 549 — — — 71,555 28,701 7,216 4,534 — 561 — — 16,091 12,666 2,554 464 — — — — 1,828 2,775 4,250 469 — — — $ 639 683 1,536 827 — — — — — $115,033 393,219 179,877 50,515 10,135 2,534 1,250 — — Total. . . . . . . . . . . . . $168,357 $359,013 $129,415 $40,986 $12,310 $38,797 $ 3,685 $752,563 Accrued interest excluded from total. . . $ 506 $ 773 $ 315 $ 108 $ 44 $ 127 $ 19 $ 1,892 1-4 family owner occupied - non-jumbo 800 and above. . . . . . . $ 750-799 . . . . . . . . . . . . 700-749 . . . . . . . . . . . . 650-699 . . . . . . . . . . . . 600-649 . . . . . . . . . . . . 550-599 . . . . . . . . . . .. 500-549 . . . . . . . . . . . . Under 500 . . . . . . . . . . Unknown . . . . . . . . . . . 8,894 $ 10,498 $ 5,558 $ 3,220 $ 2,074 $ 6,074 18,009 22,506 10,893 7,044 5,481 4,142 1,115 — 26,239 13,526 5,124 1,226 — 76 207 — 13,956 7,626 2,679 1,836 56 850 764 — 6,018 3,938 3,270 423 1,472 341 475 — 4,501 3,263 1,992 1,035 938 570 285 — 33,833 17,629 7,983 1,539 — — — — $ 1,680 9,936 3,509 983 99 132 115 — — $ 37,998 112,492 71,997 32,924 13,202 8,079 6,094 2,846 — Total. . . . . . . . . . . . . $ 69,878 $ 56,896 $ 33,325 $19,157 $14,658 $75,264 $16,454 $285,632 Accrued interest excluded from total. . . $ 283 $ 123 $ 78 $ 58 $ 58 $ 242 $ 111 $ 953 85 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Mortgage(1) Term Loans Amortized Cost Basis by Origination Year 2022 2021 2020 2019 (In thousands) 2018 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 . . . . . . . . . . . $ 4,329 22,171 8,739 1,476 954 — — — — $ 9,308 36,363 12,423 2,489 139 — — — — $ 5,178 12,242 5,507 3,798 — — — — — $ 4,147 6,103 1,335 190 107 121 — — — $ 752 2,549 1,198 292 491 54 — — — $ 5,842 12,257 6,825 4,350 1,475 404 402 197 — $ 1,683 4,132 1,930 550 203 335 60 — — $ 31,239 95,817 37,957 13,145 3,369 914 462 197 — Total. . . . . . . . . . . . . $37,669 $60,722 $26,725 $12,003 $5,336 $31,752 $ 8,893 $183,100 Accrued interest excluded from total. . . $ 106 $ 161 $ 69 $ 36 $ 21 $ 108 $ 57 $ 558 1-4 family - 2nd lien $ 800 and above. . . . . . . 750-799 . . . . . . . . . . . . 700-749 . . . . . . . . . . . . 650-699 . . . . . . . . . . . . 600-649 . . . . . . . . . . . . 550-599 . . . . . . . . . . . . 500-549 . . . . . . . . . . . . Under 500 . . . . . . . . . . Unknown . . . . . . . . . . . $ 238 2,109 1,495 192 20 130 — — — $ 282 2,749 1,820 292 99 — — — — $ 454 2,334 931 90 258 — — — — 267 665 759 237 192 — 18 129 — $ 200 333 459 275 23 132 — 3 — $ 503 3,597 2,649 1,496 974 395 418 55 — $ 8,000 38,346 20,981 8,188 2,040 228 122 100 — $ 9,944 50,133 29,094 10,770 3,606 885 558 287 — Total. . . . . . . . . . . . . $ 4,184 $ 5,242 $ 4,067 $ 2,267 $1,425 $10,087 $78,005 $105,277 Accrued interest excluded from total. . . $ 11 $ 11 $ 8 $ 7 $ 4 $ 36 $ 511 $ 588 Resort lending 800 and above. . . . . . . 750-799 . . . . . . . . . . . . 700-749 . . . . . . . . . . . . 650-699 . . . . . . . . . . . . 600-649 . . . . . . . . . . . . 550-599 . . . . . . . . . . . . 500-549 . . . . . . . . . . . . Under 500 . . . . . . . . . . Unknown . . . . . . . . . . . $ — $ 1,045 85 107 — — — — — 429 1,272 651 — — — — — — $ — $ — $ 268 616 — — — — — — — 1,211 114 53 — — — — — 183 — — — — — — — $ 7,031 15,815 6,331 5,413 895 68 140 110 — $ — $ 7,728 20,142 7,181 5,573 895 68 140 110 — — — — — — — — — Total. . . . . . . . . . . . . 1,237 $ 2,352 $ 1,378 $ 183 $ 884 $35,803 $ — $ 41,837 Accrued interest excluded from total. . . $ 4 $ 4 $ 3 $ — $ 3 $ 111 $ — $ 125 86 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Mortgage(1) Term Loans Amortized Cost Basis by Origination Year 2022 2021 2020 2019 (In thousands) 2018 Prior Revolving Loans Amortized Cost Basis Total Total Mortgage 800 and above. . . . . . . $ 37,225 $ 75,154 $ 28,038 $16,845 $ 6,282 $ 26,396 $ 12,002 $ 201,942 671,803 750-799 . . . . . . . . . . . . 326,106 700-749 . . . . . . . . . . . . 112,927 650-699 . . . . . . . . . . . . 31,207 600-649 . . . . . . . . . . . . 12,480 550-599 . . . . . . . . . . . . 8,504 500-549 . . . . . . . . . . . . 3,440 Under 500 . . . . . . . . . . — Unknown . . . . . . . . . . . 156,427 62,106 20,663 4,225 679 — — — 101,298 42,879 13,836 6,628 56 1,411 764 — 256,276 119,609 28,648 2,739 1,516 76 207 — 65,818 47,163 26,172 12,538 6,348 5,791 1,477 — 53,097 27,956 10,548 2,342 695 297 100 — 29,060 18,698 6,251 1,186 1,593 359 604 — 9,827 7,695 6,809 1,549 1,593 570 288 — Total. . . . . . . . . . . . . $281,325 $484,225 $194,910 $74,596 $34,613 $191,703 $107,037 $1,368,409 Accrued interest excluded from total. . . $ 910 $ 1,072 $ 473 $ 209 $ 130 $ 624 $ 698 $ 4,116 (1) Credit scores have been updated within the last twelve months. 87 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) December 31, 2023 Boat lending 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . 2023 $ 6,110 34,174 15,593 3,652 281 85 — — — Installment(1) Term Loans Amortized Cost Basis by Origination Year 2020 (In thousands) 2021 2019 Prior 2022 $ 8,150 35,921 15,042 3,029 432 344 152 — — $ 8,250 29,665 11,859 4,277 808 229 207 — — $ 3,612 16,329 4,481 1,545 268 139 97 — — $ 4,061 13,173 4,757 1,237 171 108 — — — $ 7,665 21,432 7,279 2,842 620 335 198 39 — Total $ 37,848 150,694 59,011 16,582 2,580 1,240 654 39 — Total . . . . . . . . . . . . . . $59,895 $63,070 $55,295 $26,471 $23,507 $40,410 $268,648 Accrued interest excluded from total . . . . . . . . . . . . Current period gross $ 216 $ 154 $ 132 $ 63 $ 58 charge-offs . . . . . . . . . . . $ — $ 53 $ — $ — $ 15 $ $ 91 53 $ $ 714 121 Recreational vehicle lending 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . $ 3,168 15,677 6,481 2,524 713 90 — — — $10,759 41,037 18,630 5,108 724 304 880 108 — $11,568 39,113 20,161 6,073 1,573 973 326 106 — $ 3,484 13,025 5,243 1,706 394 71 153 34 — $ 3,838 8,415 3,689 936 308 249 136 70 — $ 5,482 11,934 4,460 1,157 429 383 154 6 — $ 38,299 129,201 58,664 17,504 4,141 2,070 1,649 324 — Total . . . . . . . . . . . . . . $28,653 $77,550 $79,893 $24,110 $17,641 $24,005 $251,852 Accrued interest excluded from total . . . . . . . . . . . . Current period gross charge-offs . . . . . . . . . . . $ $ 112 28 $ $ 201 122 $ $ 189 192 $ $ 56 32 $ $ 44 81 $ $ 53 11 $ $ 655 466 88 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 2023 Installment(1) Term Loans Amortized Cost Basis by Origination Year 2020 (In thousands) 2021 2019 Prior 2022 Other 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . $ 1,599 11,782 16,717 12,483 515 49 98 — 649 $ 1,673 11,017 6,564 2,997 605 329 260 97 — $ 1,633 6,600 5,013 1,494 395 294 246 65 — $ 897 3,557 2,268 627 138 35 43 14 — $ 582 1,622 1,047 266 107 53 31 57 — $ 756 4,077 3,361 1,390 410 176 72 38 — Total $ 7,140 38,655 34,970 19,257 2,170 936 750 271 649 Total . . . . . . . . . . . . . . $ 43,892 $ 23,542 $ 15,740 $ 7,579 $ 3,765 $10,280 $104,798 Accrued interest excluded from total . . . . . . . . . . . . Current period gross charge-offs . . . . . . . . . . . Total installment $ $ 101 1,677 $ $ 62 104 $ $ 34 44 $ $ 17 17 $ $ 10 12 $ $ 67 $ 291 147 $ 2,001 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . $ 10,877 61,633 38,791 18,659 1,509 224 98 — 649 $ 20,582 87,975 40,236 11,134 1,761 977 1,292 205 — $ 21,451 75,378 37,033 11,844 2,776 1,496 779 171 — $ 7,993 32,911 11,992 3,878 800 245 293 48 — $ 8,481 23,210 9,493 2,439 586 410 167 127 — $13,903 37,443 15,100 5,389 1,459 894 424 83 — $ 83,287 318,550 152,645 53,343 8,891 4,246 3,053 634 649 Total . . . . . . . . . . . . . . $132,440 $164,162 $150,928 $58,160 $44,913 $74,695 $625,298 Accrued interest excluded from total . . . . . . . . . . . . Current period gross charge-offs . . . . . . . . . . . $ $ 429 1,705 $ $ 417 279 $ $ 355 236 $ $ 136 49 $ $ 112 108 $ $ 211 $ 1,660 211 $ 2,588 89 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) December 31, 2022 Boat lending 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . 2022 $ 7,901 44,498 15,390 3,933 661 22 277 — — Installment(1) Term Loans Amortized Cost Basis by Origination Year 2019 (In thousands) 2020 2018 Prior 2021 $ 8,763 37,531 13,704 4,135 1,043 195 57 — — $ 4,391 20,179 7,281 1,498 149 16 62 — — $ 5,102 16,506 5,848 1,290 286 53 43 — — $ 3,612 12,814 4,357 1,032 200 203 106 26 — $ 5,955 14,504 6,132 2,213 670 274 30 23 — Total $ 35,724 146,032 52,712 14,101 3,009 763 575 49 — Total . . . . . . . . . . . . . . $72,682 $65,428 $33,576 $29,128 $22,350 $29,801 $252,965 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 . . . . . . . . . . . . $ 171 $ 148 $ 84 $ 78 $ 52 $ 68 $ 601 $ 9,327 51,555 23,143 5,013 793 107 — — — $10,752 49,949 24,945 6,516 1,608 381 293 85 — $ 4,524 16,175 7,680 1,598 374 129 111 7 — $ 4,834 11,920 4,459 1,361 446 202 61 22 — $ 3,416 8,990 2,279 727 232 234 59 — — $ 4,319 7,818 2,939 904 268 87 15 16 — $ 37,172 146,407 65,445 16,119 3,721 1,140 539 130 — Total . . . . . . . . . . . . . . $89,938 $94,529 $30,598 $23,305 $15,937 $16,366 $270,673 Accrued interest excluded from total . . . . . . . . . . . . $ 219 $ 227 $ 72 Other 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . $ 1,974 15,692 9,848 22,740 711 122 67 6 701 $ 1,647 9,973 7,517 2,851 634 63 217 52 — $ 1,449 5,521 3,404 1,051 127 170 29 22 — $ $ 58 942 3,393 1,801 593 222 54 64 28 — $ $ 38 366 1,678 999 405 147 115 19 13 — $ $ 34 $ 648 731 3,612 2,653 1,286 507 118 90 28 — $ 7,109 39,869 26,222 28,926 2,348 642 486 149 701 Total . . . . . . . . . . . . . . $51,861 $22,954 $11,773 $ 7,097 $ 3,742 $ 9,025 $106,452 Accrued interest excluded from total . . . . . . . . . . . . $ 84 $ 48 $ 25 $ 19 $ 10 $ 49 $ 235 90 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 2022 Total installment Installment(1) Term Loans Amortized Cost Basis by Origination Year 2019 (In thousands) 2020 2018 Prior 2021 800 and above . . . . . . . . 750-799 . . . . . . . . . . . . . 700-749 . . . . . . . . . . . . . 650-699 . . . . . . . . . . . . . 600-649 . . . . . . . . . . . . . 550-599 . . . . . . . . . . . . . 500-549 . . . . . . . . . . . . . Under 500 . . . . . . . . . . . Unknown . . . . . . . . . . . . $ 19,202 111,745 48,381 31,686 2,165 251 344 6 701 $ 21,162 97,453 46,166 13,502 3,285 639 567 137 — $10,364 41,875 18,365 4,147 650 315 202 29 — $10,878 31,819 12,108 3,244 954 309 168 50 — $ 7,394 23,482 7,635 2,164 579 552 184 39 — $11,005 25,934 11,724 4,403 1,445 479 135 67 — Total $ 80,005 332,308 144,379 59,146 9,078 2,545 1,600 328 701 Total . . . . . . . . . . . . . . $214,481 $182,911 $75,947 $59,530 $42,029 $55,192 $630,090 Accrued interest excluded from total . . . . . . . . . . . . $ 474 $ 423 $ 181 $ 155 $ 100 $ 151 $ 1,484 (1) Credit scores have been updated within the last twelve months. 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: 2023 2022 (In thousands) Mortgage loans serviced for: Fannie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Freddie Mac . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ginnie Mae . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FHLB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,772,030 1,381,693 161,899 173,311 52,936 $1,840,221 1,375,514 169,421 72,809 35,347 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $3,541,869 $3,493,312 Custodial deposit accounts maintained in connection with mortgage loans serviced for others totaled $28.6 million and $28.4 million, at December 31, 2023 and 2022, 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. 91 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) An analysis of capitalized mortgage loan servicing rights for the years ended December 31 follows: 2023 2022 (In thousands) 2021 Balance at beginning of period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Originated servicing rights capitalized. . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value due to price . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in fair value due to pay downs. . . . . . . . . . . . . . . . . . . . . . . . $ $ 42,489 3,956 (280) (3,922) $ 26,232 6,061 14,272 (4,076) 16,904 11,436 3,380 (5,488) Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 42,243 $ 42,489 $ 26,232 Loans sold and serviced that have had servicing rights capitalized. . . . $3,541,869 $3,493,312 $3,323,521 Fair value of capitalized mortgage loan servicing rights was determined using an average coupon rate of 3.89%, average servicing fee of 0.26%, average discount rate of 10.25% and an average Public Securities Association (‘‘PSA’’) prepayment rate of 142 for December 31, 2023; and average coupon rate of 3.60%, average servicing fee of 0.26%, average discount rate of 10.12% and an average PSA prepayment rate of 133 for December 31, 2022. 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 . . . . . . . . . . . . . . . . . . . . . . Balance at end of year, net of valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) 2021 $ 443 783 (603) (54) $ 569 $ 235 719 (511) — $ 443 $ 738 253 (745) (11) $ 235 (1) Table excludes other repossessed assets totaling zero and $0.01 million at December 31, 2023 and 2022, 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) 2021 $ — 54 (54) $ — $ 31 — (31) $ — $ 90 11 (70) $ 31 At December 31, 2023 and 2022, the balance of other real estate includes $0.6 million and $0.4 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 $0.8 million at December 31, 2023 and 2022, respectively. Other real estate and repossessed assets totaling $0.6 million and $0.5 million at December 31, 2023 and 2022, respectively, are presented net of the valuation allowance on the Consolidated Statements of Financial Condition. 92 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) NOTE 6 – PROPERTY AND EQUIPMENT A summary of property and equipment at December 31 follows: 2023 2022 (In thousands) Land and land improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16,421 61,190 78,648 $ 17,435 60,708 75,770 Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 156,259 (120,736) 153,913 (118,020) Property and equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 35,523 $ 35,893 Depreciation expense was $5.2 million, $5.3 million and $5.4 million in 2023, 2022 and 2021, respectively. NOTE 7 – GOODWILL AND OTHER INTANGIBLES Intangible assets, net of amortization, at December 31 follows: 2023 2022 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization (In thousands) Amortized intangible assets - core deposits. . . . . . . . . . . . . . . . . . $11,916 $9,912 $11,916 $9,365 Unamortized intangible assets - goodwill . . . . . . . . . . . . . . . . . . . $28,300 $28,300 At December 31, 2023, 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 $0.5 million, $0.8 million and $1.0 million during the years ended 2023, 2022 and 2021, respectively. A summary of estimated core deposit intangible amortization at December 31, 2023, follows: 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (In thousands) $ 516 487 460 434 107 $2,004 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,601 23,429 13,766 13,279 $ 6,078 4,421 1,902 1,750 $2,101 764 1,507 93 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $75,075 $14,151 $4,465 2023 2022 (In thousands) 2021 93 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Aggregate time deposits in denominations of $0.25 million or more amounted to $176.6 million and $82.9 million at December 31, 2023 and 2022, respectively. A summary of the maturity of time deposits at December 31, 2023, follows(1): 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2029 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $888,776 15,105 7,779 3,399 2,984 28 Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $918,071 (In thousands) (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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $722,407 607 109,006 $554,585 1,196 46,794 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $832,020 $602,575 2023 2022 (In thousands) NOTE 9 – OTHER BORROWINGS A summary of other borrowings at December 31 follows: Advances from the FHLB. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . FRB . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) $50,000 — 26 $50,026 $25,000 61,000 6 $86,006 Borrowings with the FRB at December 31, 2023 and 2022 were zero and $61.0 million, respectively. Average borrowings with the FRB during the years ended December 31, 2023, 2022 and 2021 totaled $4.5 million, $26.4 million and zero, respectively. We had unused borrowing capacity with the FRB (subject to the FRB’s credit requirements and policies) of $515.4 million at December 31, 2023. Collateral for FRB borrowings are certain securities AFS, securities HTM, commercial loans and installment loans. Interest expense on borrowings with the FRB amounted to $0.2 million, $0.8 million and zero for the years ended December 31, 2023, 2022 and 2021, respectively. Advances from the FHLB are secured by unencumbered qualifying mortgage and home equity loans with a market value equal to at least 125% to 165%, respectively, of outstanding advances as well as certain securities AFS, securities HTM and by the FHLB stock that we own. Unused borrowing capacity with the FHLB (subject to the FHLB’s credit requirements and policies) was $1.01 billion at December 31, 2023. Interest expense on advances amounted to $2.4 million, $0.2 million and $0.2 million for the years ended December 31, 2023, 2022 and 2021, respectively. 94 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) As a member of the FHLB, we must own FHLB stock equal to the greater of 0.10% of total assets or 4.5% of our outstanding advances and loans sold to the FHLB. At December 31, 2023, 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: Fixed Rate Advances 2023 2022 Amount Rate Amount (Dollars in thousands) Rate 2023. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total fixed rate advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 50,000 $50,000 —% $25,000 — 5.16 5.16% $25,000 4.28% — 4.28% Assets, consisting of securities AFS, securities HTM, FHLB stock and loans, pledged to secure other borrowings and unused borrowing capacity totaled $2.46 billion at December 31, 2023. 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 $39.51 million and $39.43 million at December 31, 2023 and 2022, respectively are net of remaining unamortized deferred issuance costs of approximately $0.49 million and $0.57 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 $38.5 million and $38.4 million at December 31, 2023 and 2022, 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. 95 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Summary information regarding subordinated debentures as of December 31 follows: Entity Name Issue Date Subordinated Debentures 2023 Trust Preferred Securities Issued IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007 September 2007 IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 (996) $12,000 15,000 7,500 5,000 (996) $39,728 $38,504 Entity Name Issue Date Subordinated Debentures 2022 Trust Preferred Securities Issued IBC Capital Finance III. . . . . . . . . . . . . . . . . . . . . . . . . . . . . May 2007 September 2007 IBC Capital Finance IV . . . . . . . . . . . . . . . . . . . . . . . . . . . . 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 (1,064) $12,000 15,000 7,500 5,000 (1,064) $39,660 $38,436 Common Stock Issued $ 372 465 232 155 — $1,224 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, 2023 and 2022 follow: Entity Name Maturity Date Interest Rate at 12/31/2022 Interest Rate at 12/31/2023 First Permitted Redemption Date IBC Capital Finance III . . . July 30, 2037 IBC Capital Finance IV . . . September 15, 2037 3 month LIBOR plus 2.85% 3 month SOFR plus 3.11% September 15, 2012 Midwest Guaranty Trust I . . November 7, 2032 TCSB Statutory Trust I. . . . March 17, 2035 3 month LIBOR plus 3.45% 3 month SOFR plus 3.71% November 7, 2007 3 month LIBOR plus 2.20% 3 month SOFR plus 2.46% March 17, 2010 3 month LIBOR plus 1.60% 3 month SOFR plus 1.86% July 30, 2012 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, 2023 and 2022. 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 96 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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: 2023 2022 (In thousands) Financial instruments whose risk is represented by contract amounts Commitments to extend credit. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Standby letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $881,697 11,651 $811,957 8,371 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and generally require payment of a fee. Since commitments may expire without being drawn upon, the commitment amounts do not represent future cash requirements. Commitments are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities. Standby letters of credit are written conditional commitments issued to guarantee the performance of a customer to a third party. The credit risk involved in such transactions is essentially the same as that involved in extending loan facilities and, accordingly, standby letters of credit are issued subject to similar underwriting standards, including collateral requirements, as are generally involved in the extension of credit facilities. The majority of the standby letters of credit are on-demand with no stated maturity date and have variable rates that range from 1.00% to 14.50%. Economic Pressures from various global and national macroeconomic conditions, including heightened inflation, uncertainty regarding future interest rates, foreign currency exchange rate fluctuations, recent adverse weather conditions, escalating tensions in the Middle East, the continuation of the Russia-Ukraine war, and potential governmental responses to these events, continue to create significant economic uncertainty. The extent to which these pressures 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. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale, securities held to maturity, loans, capitalized mortgage loan servicing rights or deferred tax assets. We continue to closely monitor and analyze the higher risk segments within our portfolio, and senior management is cautiously optimistic that we are positioned to continue managing the impact of the varied set of risks and uncertainties currently impacting the global and U.S. economies. However, a high degree of uncertainty still exists with respect to the impact of these fluid macroeconomic conditions on the future performance of our loan portfolio and our financial results. 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 97 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 Inc. Class B-1 common stock. At the present time, these shares can only be sold to other Class B-1 shareholders. As a result, there has generally been limited transfer activity in private transactions between buyers and sellers. Given the limited activity that we have become aware of and the continuing uncertainty regarding the likelihood, ultimate timing and eventual exchange rate for Class B-1 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 1.5875 Class A shares for every 1 Class B-1 share and the closing price of Visa Class A shares on February 23, 2024 of $283.60 per share, our 12,566 Class B-1 shares would have a current ‘‘value’’ of approximately $5.7 million. Visa recently announced its intent to make an offer to exchange up to all of its outstanding shares of Class B-1 common stock for Class B-2 common shares and Class C common shares. If conducted, this exchange offer is expected to result in some degree of liquidity for holders of Class B-1 common shares. 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 2023, 2022 and 2021. During 2023, 2022 and 2021 repurchases were made through open market and negotiated transactions and totaled 298,601, 181,586 and 814,910 shares of common stock, respectively for an aggregate purchase price of $5.2 million, $4.0 million and $17.3 million, respectively. A reconciliation of basic and diluted net income per common share for the years ended December 31 follows: 2023 2022 (In thousands, except per share amounts) 2021 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,067 $63,351 $62,895 Weighted average shares outstanding(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock units for deferred compensation plan for non-employee directors . . Effect of stock options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Performance share units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,976 160 11 23 21,096 137 38 25 21,585 121 69 32 Weighted average shares outstanding for calculation of diluted earnings per share. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,170 21,296 21,807 Net income per common share Basic(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 2.82 2.79 $ 3.00 $ 2.91 $ 2.97 $ 2.88 (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 2023, 2022 and 2021, respectively. 98 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) 2021 $14,394 215 $14,609 $14,796 (359) $14,437 $12,506 1,912 $14,418 A reconciliation of income tax expense to the amount computed by applying the statutory federal income tax rate of 21% for 2023, 2022 and 2021 to the income before income tax for the years ended December 31 follows: Statutory rate applied to income before income tax. . . . . . . . . . . . . . . . . . . . . Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Low income housing tax credit investments. . . . . . . . . . . . . . . . . . . . . . . . . . . Employee stock ownership plan dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-deductible meals, entertainment and memberships. . . . . . . . . . . . . . . . . . Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) 2021 $15,472 (508) (235) (106) (99) (50) 77 58 $16,335 (1,475) (134) (97) (140) (144) 30 62 $16,236 (1,487) (19) (89) (119) (184) 32 48 Income tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,609 $14,437 $14,418 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: 2023 2022 (In thousands) Deferred tax assets Unrealized loss on securities AFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,587 $18,274 11,011 Allowance for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,843 Unrealized loss on securities HTM transferred from AFS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,909 Property and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,880 Incentive compensation. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,067 Reserve for unfunded lending commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,211 Lease liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 764 Share-based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 792 Securities premium amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 458 Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 254 Loss reimbursement on sold loans reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 144 Other than temporary impairment charge on securities available for sale . . . . . . . . . . . . . . . . 128 Non accrual loan interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11,478 4,095 1,387 1,174 1,156 1,074 824 814 551 259 146 121 Gross deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36,666 42,735 Deferred tax liabilities Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred loan fees. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Lease right of use asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase premiums, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrealized gain on derivative financial instruments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,871 2,271 1,031 602 47 8,923 2,430 1,164 681 — 99 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46 42 2023 2022 (In thousands) Gross deferred tax liabilities. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13,240 Deferred tax assets, net(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $23,798 $29,495 12,868 (1) 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, 2023 and 2022, that the realization of substantially all of our deferred tax assets continues to be more likely than not. Changes in unrecognized tax benefits for the years ended December 31 follow: 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. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) 2021 $186 13 (11) — $188 $180 13 (7) — $186 $180 11 (11) — $180 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, 2023, 2022 and 2021. No amounts were accrued for interest and penalties at December 31, 2023, 2022 and 2021. At December 31, 2023, U.S. Federal tax years 2020 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 0.5 million shares of common stock as of December 31, 2023. The non-employee director stock purchase plan permits the issuance of additional share based payments for up to 0.1 million shares of common stock as of December 31, 2023. 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 2023, 2022 and 2021 pursuant to our long-term incentive plan, we granted 0.08 million, 0.06 million and 0.09 million shares, respectively of restricted stock and 0.02 million during each year of performance stock units (‘‘PSU’’), to certain officers. The shares of restricted stock and PSUs cliff vest after a period of three years. The performance criteria of the PSUs granted in 2023 and 2022 is split evenly between a comparison of (i) our total shareholder return and (ii) our return on average assets each over the three year period starting on the grant date to these same criteria over that period to an index of our banking peers. The performance criteria of the PSUs granted in 2021 is based on a comparison of our total shareholder return over the three year period starting on the grant date to the same criteria over that period to an index of our banking peers. 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 100 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 shares to directors pursuant to this plan during each of the years ending 2023, 2022 and 2021 and expensed their value during those same periods. Total compensation expense recognized for grants pursuant to our long-term incentive plan was $1.9 million, $1.8 million and $1.6 million in 2023, 2022 and 2021, respectively. The corresponding tax benefit relating to this expense was $0.4 million, $0.4 million, and $0.3 million during each year, respectively. Total expense recognized for non-employee director share based payments was $0.4 million, $0.4 million, and $0.4 million for the years ending 2023, 2022 and 2021, respectively. The corresponding tax benefit relating to this expense was $0.08 million, $0.08 million and $0.08 million in 2023, 2022 and 2021, respectively. At December 31, 2023, the total expected compensation cost related to non-vested restricted stock and PSUs not yet recognized was $2.4 million. The weighted-average period over which this amount will be recognized is 1.78 years. A summary of outstanding stock option grants and related transactions follows: Outstanding at January 1, 2023 . . . . . . . . . . . . . . . . . . . . . . Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expired. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted- Average Remaining Contractual Term (Years) Aggregated Intrinsic Value (In thousands) Average Exercise Price $ 8.32 6.92 Number of Shares 40,307 — (28,583) — — Outstanding at December 31, 2023 . . . . . . . . . . . . . . . . . . . 11,724 $11.73 2.16 Vested and expected to vest at December 31, 2023 . . . . . . Exercisable at December 31, 2023 . . . . . . . . . . . . . . . . . . . . 11,724 11,724 $11.73 $11.73 2.16 2.16 A summary of outstanding non-vested stock and related transactions follows: Outstanding at January 1, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Granted. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Vested. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Forfeited. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Number of Shares 246,136 103,636 (61,902) (18,637) Outstanding at December 31, 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 269,233 Certain information regarding options exercised during the periods ending December 31 follows: $168 $168 $168 Weighted- Average Grant Date Fair Value $22.82 22.84 22.31 23.02 $22.93 Intrinsic value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash proceeds received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Tax benefit realized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 $352 $198 $ 74 2022 (In thousands) $761 $131 $160 2021 $752 $117 $158 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 2023, 2022 and 2021. Contributions to the employee stock ownership plan are determined annually 101 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 each of 2023, 2022 and 2021. Amounts expensed for these retirement plans were $3.1 million, $2.9 million and $3.3 million in 2023, 2022 and 2021, respectively. Our employees participate in various performance-based compensation plans. Amounts expensed for all incentive plans totaled $8.0 million, $12.7 million and $15.6 million in 2023, 2022 and 2021, respectively. We also provide certain health care and life insurance programs to substantially all full-time employees. Amounts expensed for these programs totaled $7.2 million, $6.2 million and $6.1 million in 2023, 2022 and 2021 respectively. These insurance programs are also available to retired employees at their own expense. NOTE 15 – OTHER NON-INTEREST INCOME Other non-interest income for the years ended December 31 follows: 2023 2022 (In thousands) 2021 Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,456 1,683 474 6,866 $ 2,898 1,216 360 6,263 $2,603 1,133 567 5,089 Total other non-interest income. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,479 $10,737 $9,392 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: 2023 Average Maturity (years) (Dollars in thousands) Notional Amount Fair Value Fair value hedge designation Pay-fixed interest rate swap agreement - commercial . . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements - securities available for sale . . . . . . . . Pay-fixed interest rate swap agreements - installment . . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements - mortgage . . . . . . . . . . . . . . . . . . . . . . . Interest rate cap agreements - securities available for sale . . . . . . . . . . . . . . . . . . $ 6,033 148,895 100,000 100,000 40,970 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $395,898 5.4 3.9 3.4 4.3 4.3 3.9 $ 349 15,287 (1,228) (2,131) 456 $12,733 Cash flow hedge designation Interest rate floor agreements - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $150,000 3.5 $ 4,221 102 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 2023 Average Maturity (years) (Dollars in thousands) Notional Amount Fair Value No hedge designation Rate-lock mortgage loan commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . Pay-variable interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . $ 18,081 30,442 379,012 379,012 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $806,547 0.1 0.1 5.9 5.9 5.5 $ 173 (279) 7,169 (7,169) $ (106) 2022 Average Maturity (years) (Dollars in thousands) Fair Value Notional Amount Fair value hedge designation Pay-fixed interest rate swap agreement - commercial . . . . . . . . . . . . . . . . . . . . . . $ Pay-fixed interest rate swap agreements - securities available for sale . . . . . . . . Pay-fixed interest rate swap agreements - installment . . . . . . . . . . . . . . . . . . . . . . Interest rate cap agreements - securities available for sale . . . . . . . . . . . . . . . . . . 6,401 148,895 25,000 40,970 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $221,266 No hedge designation Rate-lock mortgage loan commitments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 19,918 49,258 Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . 279,005 Pay-fixed interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . 279,005 Pay-variable interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $627,186 6.4 4.8 2.0 5.3 4.6 0.1 0.1 6.0 6.0 5.3 $ 447 19,906 77 931 $ 21,361 $ (1,056) 315 17,063 (17,063) $ (741) 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. We have entered into pay-fixed interest rate swaps and caps to protect a portion of the fair value of a certain fixed rate commercial loan and certain mortgage and installment loans (‘‘Fair Value Hedge – Portfolio Loans’’). As a result, changes in the fair values of the pay-fixed interest rate swap and caps are expected to offset changes in the fair values of the fixed rate portfolio loans due to fluctuations in interest rates. We record the fair values of Fair Value Hedge – Portfolio Loans in accrued income and other assets and accrued expenses and other liabilities on our Consolidated Statements of Financial Condition. The hedged items (a fixed rate commercial loan and certain fixed rate mortgage and installment loans) are also recorded at fair value which offsets the adjustment to the Fair Value Hedge – Portfolio Loans. On an ongoing basis, we adjust our Consolidated Statements of Financial Condition to reflect the then current fair values of both the Fair Value Hedge – Portfolio Loans and the hedged items. The related gains or losses are reported in interest income – interest and fees on loans in our Consolidated Statements of Operations. During the second quarter of 2023 we terminated the interest rate cap that was previously hedging certain installment loans. The remaining unrealized gain on this terminated interest cap is being amortized into earnings over the original life of the interest rate cap. We have entered into pay-fixed interest rate swaps and interest rate cap agreements 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 103 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) the fair value of the pay-fixed interest rate swaps and interest rate cap agreements is expected to offset a portion of the change in the fair value of the fixed rate securities available for sale due to fluctuations in interest rates. We record the fair value of Fair Value Hedge – AFS Securities in accrued income and other assets and accrued expenses and other liabilities on our Consolidated Statements of Financial Condition. The hedged items (fixed rate securities available for sale) are also recorded at fair value which offsets the adjustment to the Fair Value Hedge – AFS Securities. On an ongoing basis, we adjust our Consolidated Statements of Financial Condition to reflect the then current fair value of both the Fair Value Hedge – AFS Securities and the hedged item. The related gains or losses are reported in interest income – interest on securities – tax-exempt in our Consolidated Statements of Operations. We have entered into interest rate floor agreements to manage the variability in future expected cash flows of certain commercial loans (‘‘Cash Flow Hedge – Portfolio Loans’’). We record the fair value of Cash Flow Hedge – Portfolio Loans in accrued income and other assets and accrued expenses and other liabilities on our Consolidated Statements of Financial Condition. The changes in the fair value of Cash Flow Hedge - Portfolio Loans are recorded in accumulated other comprehensive loss and are reclassified into the line item in our Consolidated Statements of Operations in which the hedged items are recorded in the same period the hedged items affect earnings. It is anticipated that as of December 31, 2023, $0.7 million will be reclassified from accumulated other comprehensive loss on Cash Flow Hedge - Portfolio Loans into earnings as a reduction of interest and fees on loans over the next twelve months. The maximum term of any Cash Flow Hedge - Portfolio Loans at December 31, 2023 is 4.2 years. 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 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. We had entered into a no hedge designation pay-variable interest rate swap agreement in an attempt to manage the cost of certain funding liabilities. The changes in fair value of this no hedge pay-variable interest rate swap is recorded in non-interest expense-other in our Consolidated Statements of Operations. This no hedge designation pay-variable interest rate swap agreement matured during the third quarter of 2023. We had purchased a swaption agreement during 2021 in an attempt to reduce the impact of price fluctuations of certain mortgage construction loans held for sale. The swaption agreement is presented as ‘‘Interest rate swaption agreement’’ in the table below. The swaption agreement terminated during 2022. The changes in the fair value of the swaption agreement was recognized currently as part of net gains on mortgage loans in our Consolidated Statements of Operations. In prior years we had entered into certain derivative financial instruments to manage the variability in future expected cash flows of certain debt obligations (‘‘Cash Flow Hedges’’). Cash Flow Hedges had included certain pay-fixed interest rate swap and interest rate cap agreements. The no hedge designation ‘‘Interest rate cap agreements’’ and ‘‘Pay-fixed interest rate swap agreements’’ in the table below had previously qualified for cash flow hedge accounting but were classified to a no hedge designation during 2020 and any changes in fair value since the 104 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) transfers to the no hedge designation have been recognized in interest expense – other borrowings and subordinated debt and debentures in our Consolidated Statements of Operations since that time. Also in 2020 it became probable that the forecasted transactions being hedged by these interest rate cap agreements would not occur by the end of the originally specified time period and all remaining unrealized losses included as a component of accumulated other comprehensive income (loss) were reclassified into earnings at that time. The pay-fixed interest rate swaps matured in 2021 and during 2022 we terminated $75.0 million of interest rate caps while $15.0 million matured. 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 below relate to this Altitude CD product and matured during the fourth quarter of 2021. 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, 2023 2022 2023 Balance Sheet Location Fair Value Balance Sheet Location Fair Value Balance Sheet Location Fair Value 2022 Balance Sheet Location Fair Value (In thousands) Derivatives designated as hedging instruments Pay-fixed interest rate swap agreements . . . . . . . . . . . Other assets $15,636 Other assets $20,430 Other liabilities $ 3,359 Other liabilities $ — — 931 Other liabilities — Other liabilities 456 Other assets Interest rate cap agreements . Other assets Interest rate floor agreements . . . . . . . . . . . Other assets 4,221 Other assets — Other liabilities — Other liabilities 20,313 21,361 3,359 — — Derivatives not designated as hedging instruments Rate-lock mortgage loan commitments . . . . . . . . . Other assets $ 173 Other assets $ — Other liabilities $ — Other liabilities $ 1,056 Mandatory commitments to sell mortgage loans . . . . . Other assets — Other assets 315 Other liabilities 279 Other liabilities — Pay-fixed interest rate swap agreements - commercial . Other assets 12,683 Other assets 17,567 Other liabilities 5,514 Other liabilities 504 Pay-variable interest rate swap agreements - commercial. . . . . . . . . . . Other assets Total derivatives . . . . . . . 5,514 Other assets 504 Other liabilities 12,683 Other liabilities 17,567 18,370 $38,683 18,386 $39,747 18,476 $21,835 19,127 $19,127 105 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 (Loss) into Income (Effective Portion) Year Ended December 31, Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Income(Effective Portion) 2023 2022 2021 (In thousands) Gain (loss) Recognized in Other Comprehensive Income (Loss) (Effective Portion) 2023 2022 2021 Fair Value Hedges Pay-fixed interest rate swap agreement - commercial. . Pay-fixed interest rate swap agreement - securities available for sale. . . . . . Pay-fixed interest rate swap agreement - installment . . Pay-fixed interest rate swap agreements - Mortgage . . Interest rate cap agreements - securities available for sale . . . . . . . . . . . . . $(848) $— $— Interest rate cap agreements - installment . . . . . . . . . — Total . . . . . . . . . . . . $(848) — $— — $— Interest on securities available for sale - tax - exempt Interest and fees on loans $(262) $— $— — $(262) — $— — $— Location of Gain (Loss) Recognized in Income Gain (Loss) Recognized in Income 2023 2022 2021 Interest and fees on loans Interest on securities available for sale - tax- exempt Interest and fees on loans Interest and fees on loans Interest on securities available for sale - tax - exempt Interest and fees on loans $ (98) $ 831 $ 392 (4,619) 15,493 4,398 (1,305) (2,131) 90 (14) 77 — — — — — — — $(8,077) $ 16,401 $ 4,790 Cash Flow Hedges Interest rate floor agreements - commercial . . . . . . . . No hedge designation $ 635 $— $— Interest expense $(175) $— $— Interest and fees on loans $ (175) $ — $ — Rate-lock mortgage loan commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Mandatory commitments to sell mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements - commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-variable interest rate swap agreements -commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate swaption agreement. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-variable interest rate swap agreement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pay-fixed interest rate swap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest rate cap agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchased options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Written options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net gains on mortgage loans Net gains on mortgage loans Interest income Interest income Net gains on mortgage loans Non-interest expense - other Interest expense Interest expense Interest expense Interest expense $ 1,229 $ (3,196) $(4,880) (594) 383 873 (9,894) 22,242 4,521 9,894 (22,242) (4,521) — (186) (2) (12) — — — — — — 245 — — — 295 30 (42) 42 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 623 $ (2,754) $(3,684) 106 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 2023 and 2022. 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: Balance at beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . New loans and advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Repayments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) $7,742 478 (847) $7,373 $ 6,879 1,957 (1,094) $ 7,742 We had $1.69 million and $1.91 million in loan commitments to directors and executive officers at December 31, 2023 and 2022, respectively. Of these commitments, $0.03 million and $0.01 million were outstanding at December 31, 2023 and 2022, respectively, and included in the table above. Deposits held by us for directors and executive officers totaled $2.9 million and $2.6 million at December 31, 2023 and 2022, 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, 2023). 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) 2021 $1,436 97 94 $1,627 $1,636 78 91 $1,805 $1,672 63 64 $1,799 107 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities. 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2023 2022 (In thousands) $4,911 $5,114 $5,544 $5,769 6.03 2.7% 5.86 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, 2023 based on required contractual payments follows: 2024. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2025. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2026. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2027. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2028. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2029 and thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total lease payments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less imputed interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,142 1,075 903 714 685 1,041 5,560 (446) Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,114 (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 affected. Our major concentrations of credit risk arise by collateral type and by industry. The significant concentrations by collateral type at December 31, 2023, include $1.406 billion of loans secured by residential real estate and $241.7 million of construction and land development loans. Additionally, within our commercial real estate and commercial and industrial loan classes, we had significant standard industry classification concentrations in the following categories as of December 31, 2023: Lessors of Nonresidential Real Estate ($530.9 million); Accommodation and Food Services ($146.8 million); Construction ($128.7 million); Lessors of Residential Real Estate ($123.4 million); Health Care and Social Assistance ($119.5 million); and Manufacturing ($95.5 million). A geographic concentration arises because we primarily conduct our lending activities in the State of Michigan. 108 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) NOTE 20 – REGULATORY MATTERS Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank’s current year net profits, combined with the retained net profits of the preceding two years. Further, the Bank cannot pay a dividend at any time that it has negative undivided profits. As of December 31, 2023, the Bank had positive undivided profits of $176.6 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, 2023 and 2022, have our Bank categorized as well capitalized and exceeding the minimum ratio for adequately capitalized institutions plus the capital conservation buffer. 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): 2023 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 Ratio Amount (Dollars in thousands) Minimum for Well-Capitalized Institutions Amount Ratio $573,972 521,374 13.71% $335,014 334,673 12.46 8.00% 8.00 NA $418,341 NA 10.00% $481,569 469,023 11.50% $251,260 251,005 11.21 6.00% 6.00 NA $334,673 NA 8.00% $443,065 469,023 10.58% $188,445 188,254 11.21 4.50% 4.50 NA $271,922 NA 6.50% NA 5.00% Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . $481,569 469,023 9.03% $213,227 213,180 8.80 4.00% 4.00 NA $266,475 2022 Total capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . Tier 1 capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . $536,549 480,886 13.62% $315,059 314,733 12.22 8.00% 8.00 NA $393,416 NA 10.00% $447,299 431,685 11.36% $236,294 236,049 10.97 6.00% 6.00 NA $314,733 NA 8.00% 109 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Actual Amount Ratio Minimum for Adequately Capitalized Institutions Ratio Amount (Dollars in thousands) Minimum for Well-Capitalized Institutions Amount Ratio Common equity tier 1 capital to risk-weighted assets Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . Tier 1 capital to average assets $408,863 431,685 10.38% $177,221 177,037 10.97 4.50% 4.50 NA $255,720 Consolidated. . . . . . . . . . . . . . . . . . Independent Bank . . . . . . . . . . . . . $447,299 431,685 8.86% $201,875 201,820 8.56 4.00% 4.00 NA $252,275 NA 6.50% NA 5.00% (1) These ratios do not reflect a capital conservation buffer of 2.50% at December 31, 2023 and 2022. NA - Not applicable The components of our regulatory capital are as follows: Consolidated December 31, Independent Bank December 31, 2023 2022 2023 2022 (In thousands) Total shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $404,449 $347,596 $430,407 $370,418 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66,344 (30,304) 2,576 443,065 38,504 481,569 40,000 86,966 (30,851) 5,152 408,863 38,436 447,299 40,000 66,344 (30,304) 2,576 469,023 — 469,023 — 86,966 (30,851) 5,152 431,685 — 431,685 — 52,403 49,250 52,351 49,201 Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . $573,972 $536,549 $521,374 $480,886 (1) We elected the three years CECL transition method for regulatory purposes. 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. 110 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 are classified as Level 1 of the valuation hierarchy. We currently do not have any Level 1 securities. If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and primarily include agency securities, private label mortgage-backed securities, other asset backed securities, obligations of states and political subdivisions, trust preferred securities, corporate securities and foreign government securities. 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) and the fair value of mortgage loans held for sale carried at the lower of cost or fair value is based on a quoted sales price (non-recurring Level 1). 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 on other real estate and repossessed assets, which is part of non-interest expense - other 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 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. 111 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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, interest rate floor 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). 112 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 Un-observable Inputs (Level 3) (In thousands) Fair Value Measure-ments December 31, 2023: 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale, carried at fair value . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . . . Derivatives(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,507 81,217 12,297 86,469 112,931 302,737 73,250 942 12,063 42,243 38,683 Liabilities Derivatives(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21,835 Measured at Fair Value on a Non-recurring Basis: Assets Collateral dependent loans(3) Commercial Commercial and industrial. . . . . . . . . . . . . . . . . . . . . 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 551 732 33 157 92 192 196 66 $— — — — — — — — — — — — — — — — — — — — $ 9,507 81,217 12,297 86,469 112,931 302,737 73,250 942 12,063 — 38,683 $ — — — — — — — — — 42,243 — 21,835 — — — — — — — — — 551 732 33 157 92 192 196 66 (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. 113 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 Un-observable Inputs (Level 3) (In thousands) Fair Value Measure-ments December 31, 2022: 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Loans held for sale, carried at fair value . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . . . Derivatives(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12,101 90,458 13,453 93,845 194,725 295,677 78,157 931 26,518 42,489 39,747 $ — — — — — — — — — — — $ 12,101 90,458 13,453 93,845 194,725 295,677 78,157 931 26,518 — 39,747 $ — — — — — — — — — 42,489 — Liabilities Derivatives(2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,127 — 19,127 — Measured at Fair Value on a Non-recurring Basis: Assets Loans held for sale, carried at the lower of cost or fair value . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,367 20,367 Collateral dependent loans(3) Commercial Commercial and industrial. . . . . . . . . . . . . . . . . . . . . Commercial real estate . . . . . . . . . . . . . . . . . . . . . . . 138 1,068 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 415 52 165 25 196 19 87 — — — — — — — — — — — — — — — — — — — — 138 1,068 415 52 165 25 196 19 87 (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. 114 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 - Mortgage Loans Mortgage Loan Servicing, net (In thousands) Total Change in Fair Values Included in Current Period Earnings 2023 Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . $ 2,281 — $ — (4,202) $ 2,281 (4,202) 2022 Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . (3,393) — — 10,196 (3,393) 10,196 2021 Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Capitalized mortgage loan servicing rights . . . . . . . . . . . . . . . . . . . . . (2,805) — — (2,108) (2,805) (2,108) 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, 2023, 2022 and 2021 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 $2.0 million, which is net of a valuation allowance of $1.3 million at December 31, 2023, and had a carrying amount of $2.2 million, which is net of a valuation allowance of $2.1 million at December 31, 2022. An additional provision for credit losses relating to these collateral dependent loans of $1.1 million, $1.5 million and $0.3 million was included in our results of operations for the years ending December 31, 2023, 2022 and 2021, respectively. 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 2022 (In thousands) 2021 2023 Beginning balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $42,489 $26,232 $16,904 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Ending balance. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,202) — 3,956 — $42,243 10,196 — 6,061 — $42,489 (2,108) — 11,436 — $26,232 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ (4,202) $10,196 $ (2,108) 115 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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) Valuation Technique Unobservable Inputs Range Weighted Average 2023 Capitalized mortgage loan servicing rights . . . . . . . $42,243 2022 Capitalized mortgage loan servicing rights . . . . . . . $42,489 Present value of net servicing revenue Discount rate Cost to service Ancillary income Float rate Prepayment rate 10.00% to 14.27% $70 to $442 20 to 30 3.82% 6.56% to 26.47% Present value of net servicing revenue Discount rate Cost to service Ancillary income Float rate Prepayment rate 10.00% to 13.23% $66 to $150 20 to 35 4.03% 7.03% to 30.40% 10.25% $79 20 3.82% 8.50% 10.12% $78 21 4.03% 7.97% 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 2023 Collateral dependent loans Commercial . . . . . . . . . . . . . . $ 551 Mortgage and Installment(1) . . . 1,468 2022 Collateral dependent loans Commercial . . . . . . . . . . . . . . $1,206 Mortgage and Installment(1) . . . 959 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 (5.0)% to 6.0% (0.4)% (4.1) to 10.5 3.1 41.7% to 20.0% (0.4)% (73.3) to 65.2 (5.3) (1) In addition to the valuation techniques and unobservable inputs discussed above, at December 31, 2023 and 2022 certain collateral dependent installment loans totaling approximately $0.45 million and $0.30 million are secured by collateral other than real estate. For the majority of these loans, we apply internal discount rates to industry valuation guides. 116 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 2023 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2022 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2021 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,063 26,518 55,470 $ (61) (2,342) 1,051 $12,124 28,860 54,419 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 Significant Other Observable Inputs (Level 2) Significant Un- observable Inputs (Level 3) Quoted Prices in Active Markets for Identical Assets (Level 1) (In thousands) 2023 Assets Cash and due from banks . . . . . . . . . . . . . $ Interest bearing deposits. . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . Securities held to maturity . . . . . . . . . . . . . Federal Home Loan Bank and Federal $ 68,208 $ 101,573 679,350 353,988 68,208 101,573 679,350 318,606 Reserve Bank Stock . . . . . . . . . . . . . . . . Net loans and loans held for sale . . . . . . . Accrued interest receivable . . . . . . . . . . . . Derivative financial instruments . . . . . . . . 16,821 3,748,306 19,044 38,683 NA 3,453,790 19,044 38,683 68,208 101,573 $ — $ — — 679,350 — 318,606 — — — — NA — 58 — NA 12,063 6,486 38,683 NA 3,441,727 12,500 — Liabilities Deposits with no stated maturity(1) . . . . . . $3,704,808 $3,704,808 Deposits with stated maturity(1). . . . . . . . . 914,404 49,831 Other borrowings . . . . . . . . . . . . . . . . . . . . 40,352 Subordinated debt. . . . . . . . . . . . . . . . . . . . 38,103 Subordinated debentures . . . . . . . . . . . . . . 6,534 Accrued interest payable . . . . . . . . . . . . . . 21,835 Derivative financial instruments . . . . . . . . 918,071 50,026 39,510 39,728 6,534 21,835 117 $3,704,808 — $ $ — 914,404 49,831 — 40,352 — 38,103 — 6,052 482 21,835 — — — — — — — — NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Recorded Book Balance Fair Value Fair Value Using Significant Other Observable Inputs (Level 2) Significant Un- observable Inputs (Level 3) Quoted Prices in Active Markets for Identical Assets (Level 1) (In thousands) 2022 Assets Cash and due from banks . . . . . . . . . . . . . $ Interest bearing deposits. . . . . . . . . . . . . . . Securities available for sale . . . . . . . . . . . . Securities held to maturity . . . . . . . . . . . . . Federal Home Loan Bank and Federal $ 70,180 $ 4,191 779,347 374,818 70,180 4,191 779,347 335,418 70,180 4,191 $ — $ — — 779,347 — 335,418 — — — — Reserve Bank Stock . . . . . . . . . . . . . . . . Net loans and loans held for sale . . . . . . . Accrued interest receivable . . . . . . . . . . . . Derivative financial instruments . . . . . . . . 17,653 3,459,802 16,513 39,747 NA 3,185,518 16,513 39,747 NA 20,367 1 — NA 26,518 6,503 39,747 NA 3,138,633 10,009 — Liabilities Deposits with no stated maturity(1) . . . . . . $3,798,848 $3,798,848 Deposits with stated maturity(1). . . . . . . . . 573,739 86,006 Other borrowings . . . . . . . . . . . . . . . . . . . . 41,058 Subordinated debt. . . . . . . . . . . . . . . . . . . . 38,982 Subordinated debentures . . . . . . . . . . . . . . 2,287 Accrued interest payable . . . . . . . . . . . . . . 19,127 Derivative financial instruments . . . . . . . . 580,221 86,006 39,433 39,660 2,287 19,127 $3,798,848 — $ $ — 573,739 86,006 — 41,058 — 38,982 — 1,872 415 19,127 — — — — — — — — NA – Not applicable (1) Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $723.014 million and $555.781 million at December 31, 2023 and 2022, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $109.006 million and $46.794 million at December 31, 2023 and 2022, 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. 118 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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 AFS Unrealized Losses on Securities Transferred to Securities HTM(1) Dispropor- tionate Tax Effects from Securities AFS (In thousands) Unrealized Gains on Derivative Instruments Total 2023 Balances at beginning of period . . . . . . . . . . . . . . . . . . . $(68,742) $(18,223) $(5,798) $ — $(92,763) Other comprehensive income (loss) before reclassifications . . . . . . . . . . . . . . . . . . . . . . . . . . . Amounts reclassified from AOCIL . . . . . . . . . . . . . . . Net current period other comprehensive income . . 17,454 175 17,629 2,815 — 2,815 — — — (168) 345 177 20,101 520 20,621 Balances at end of period. . . . . . . . . . . . . . . . . . . . . . . . $(51,113) $(15,408) $(5,798) $ 177 $(72,142) 2022 Balances at beginning of period . . . . . . . . . . . . . . . . . . . Other comprehensive loss before reclassifications . . . Amounts reclassified from AOCIL . . . . . . . . . . . . . . . $ 6,299 (75,258) 217 $ — $(5,798) — — (18,223) — Net current period other comprehensive loss . . . . . (75,041) (18,223) — $ — $ — — — 501 (93,481) 217 (93,264) Balances at end of period. . . . . . . . . . . . . . . . . . . . . . . . $(68,742) $(18,223) $(5,798) $ — $(92,763) 2021 Balances at beginning of period . . . . . . . . . . . . . . . . . . . Other comprehensive loss before reclassifications . . . Amounts reclassified from AOCIL . . . . . . . . . . . . . . . $ 15,822 (8,408) (1,115) $ — $(5,798) — — — — $ — $ 10,024 (8,408) (1,115) — — Net current period other comprehensive loss . . . . . (9,523) — — — (9,523) Balances at end of period. . . . . . . . . . . . . . . . . . . . . . . . $ 6,299 $ — $(5,798) $ — $ 501 (1) Represents the remaining unrealized loss to be accreted on securities that were transferred from AFS to HTM on April 1, 2022. The disproportionate tax effects from securities AFS 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 AFS. 119 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) A summary of reclassifications out of each component of AOCIL for the years ended December 31 follows: AOCIL Component 2023 Unrealized gains (losses) on securities available for sale Unrealized gains on derivative instruments 2022 Unrealized gains (losses) on securities available for sale 2021 Unrealized gains (losses) on securities available for sale Reclassified From AOCIL (In thousands) $ (222) (47) $ (175) $ 437 92 $ 345 Affected Line Item in Consolidated Statements of Operations Net gains (losses) on securities available for sale Income tax expense Reclassifications, net of tax Interest income Income tax expense Reclassifications, net of tax $ (520) Total reclassifications for the period, net of tax $ (275) (58) $ (217) $1,411 296 $1,115 Net gains (losses) on securities available for sale Income tax expense Reclassifications, net of tax Net gains (losses) on securities available for sale Income tax expense Reclassifications, net of tax 120 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) NOTE 24 – INDEPENDENT BANK CORPORATION (PARENT COMPANY ONLY) FINANCIAL INFORMATION Presented below are condensed financial statements for our parent company. CONDENSED STATEMENTS OF FINANCIAL CONDITION December 31, 2023 2022 (In thousands) ASSETS Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest bearing deposits - time. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued income and other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 6,519 40,000 436,887 4,419 $ 10,502 40,000 376,930 6,220 Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $487,825 $433,652 LIABILITIES AND SHAREHOLDERS’ EQUITY Subordinated debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Subordinated debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued expenses and other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 39,510 39,728 3,186 405,401 $ 39,433 39,660 6,048 348,511 Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $487,825 $433,652 CONDENSED STATEMENTS OF OPERATIONS 2023 Year Ended December 31, 2022 (In thousands) 2021 OPERATING INCOME Dividends from subsidiary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Operating Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,000 1,317 96 25,413 $30,000 199 54 30,253 $32,000 55 33 32,088 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. . . . . . . . . . . . . . . . . . . . 5,726 1,134 6,860 18,553 (1,215) 19,768 39,299 4,311 892 5,203 25,050 (1,108) 26,158 37,193 3,625 787 4,412 27,676 (1,048) 28,724 34,171 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $59,067 $63,351 $62,895 121 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) CONDENSED STATEMENTS OF CASH FLOWS 2023 Year Ended December 31, 2022 (In thousands) 2021 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 59,067 $ 63,351 $ 62,895 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH FROM OPERATING ACTIVITIES Deferred income tax benefit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accretion of discount on subordinated debt and debentures . . . . . . . . . . . . (Increase) decrease in accrued income and other assets. . . . . . . . . . . . . . . . Increase (decrease) in accrued expenses and other liabilities . . . . . . . . . . . Equity in undistributed net income of subsidiaries. . . . . . . . . . . . . . . . . . . . Total Adjustments. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (56) 91 145 1,857 (2,862) (39,299) (40,124) Net Cash From Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18,943 (110) 95 144 (6,012) 5,205 (37,193) (37,871) 25,480 (81) 95 144 788 159 (34,171) (33,066) 29,829 CASH FLOW USED IN INVESTING ACTIVITIES Purchases of interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . . . . . Maturity of interest bearing deposits - time . . . . . . . . . . . . . . . . . . . . . . . . . (80,000) 80,000 (115,000) 115,000 (160,000) 160,000 Net Cash Used In Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . — — — CASH FLOW USED IN FINANCING ACTIVITIES Dividends paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Proceeds from issuance of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . Share based compensation withholding obligation . . . . . . . . . . . . . . . . . . . . Repurchase of common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (19,327) 2,208 (650) (5,157) Net Cash Used In Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . (22,926) Net Increase (Decrease) in Cash and Cash Equivalents. . . . . . . . . . . . . . Cash and Cash Equivalents at Beginning of Year . . . . . . . . . . . . . . . . . . . . (3,983) 10,502 (18,565) 2,124 (620) (4,010) (21,071) 4,409 6,093 (18,155) 1,913 (691) (17,269) (34,202) (4,373) 10,466 Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . $ 6,519 $ 10,502 $ 6,093 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 (losses) on securities AFS, mortgage loan servicing, net and bank owned life insurance and were approximately 86.8%, 84.1% and 84.6% of total revenues at December 31, 2023, 2022 and 2021, respectively. Material sources of revenue that are included in the scope of this topic include service charges on deposit accounts, 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, 2023 and 2022. 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 122 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) 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, NYCE (during 2021) and Accel. 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 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) losses 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 2023, 2022 or 2021 that were financed by us. 123 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Disaggregation of our revenue sources by attribute for the years ended December 31 follow: Service Charges on Deposit Accounts Other Deposit Related Income Investment and Insurance Commissions Total Interchange Income (In thousands) 2023 Retail Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . Account service charges. . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,686 2,162 — — $ — — 1,636 993 Business Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange income . . . . . . . . . . . . . . . . . . . . Asset management revenue . . . . . . . . . . . . . . Transaction based revenue . . . . . . . . . . . . . . . 513 — — — — — — 47 414 — — — $ — — — — — — — 13,996 — — $ — — — — — — — — 1,861 1,595 $ 9,686 2,162 1,636 993 513 47 414 13,996 1,861 1,595 Total . . . . . . . . . . . . . . . . . . . . . . . . . . $12,361 $3,090 $13,996 $3,456 $32,903 Reconciliation to Consolidated Statement of Operations: Non-interest income - other: Other deposit related income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,090 3,456 474 5,459 $12,479 (1) Excluded from the scope of ASC Topic 606. 124 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Service Charges on Deposit Accounts Other Deposit Related Income Investment and Insurance Commissions Total Interchange Income (In thousands) 2022 Retail Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . Account service charges. . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,090 1,626 — — $ — — 1,186 972 Business Overdraft fees . . . . . . . . . . . . . . . . . . . . . . . ATM fees . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interchange income . . . . . . . . . . . . . . . . . . . . Asset management revenue . . . . . . . . . . . . . . Transaction based revenue . . . . . . . . . . . . . . . 572 — — — — — — 29 315 — — — $ — — — — — — — 13,955 — — $ — — — — — — — — 1,781 1,117 $10,090 1,626 1,186 972 572 29 315 13,955 1,781 1,117 Total . . . . . . . . . . . . . . . . . . . . . . . . . . $12,288 $2,502 $13,955 $2,898 $31,643 Reconciliation to Consolidated Statement of Operations: Non-interest income - other: Other deposit related income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Investment and insurance commissions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bank owned life insurance(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,502 2,898 360 4,977 $10,737 (1) Excluded from the scope of ASC Topic 606. 125 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS − (Continued) Service Charges on Deposit Accounts Other Deposit Related Income Investment and Insurance Commissions Total Interchange Income (In thousands) 2021 Retail 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 $ 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(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other(1). . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,280 2,603 567 3,942 $9,392 (1) Excluded from the scope of ASC Topic 606. 126 QUARTERLY FINANCIAL DATA (UNAUDITED) A summary of selected quarterly results of operations for the years ended December 31 follows: Three Months Ended March 31, June 30, September 30, December 31, (In thousands, except per share amounts) 2023 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53,936 38,441 2,160 15,875 12,991 $57,948 38,350 3,317 18,202 14,790 $62,432 39,427 1,350 21,652 17,543 $65,361 40,111 (617) 17,947 13,743 Net income per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.62 0.61 0.70 0.70 0.84 0.83 0.66 0.65 2022 Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before income tax . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $34,741 33,001 (1,573) 22,072 17,967 $38,364 36,061 2,379 15,880 13,001 $44,925 39,897 3,145 21,247 17,297 $50,978 40,602 1,390 18,589 15,086 Net income per common share Basic . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.85 0.84 0.62 0.61 0.82 0.81 0.72 0.71 QUARTERLY SUMMARY (UNAUDITED) First quarter . . . . . . . . . . . . . . . . . . . Second quarter. . . . . . . . . . . . . . . . . Third quarter . . . . . . . . . . . . . . . . . . Fourth quarter . . . . . . . . . . . . . . . . . High $24.73 19.33 21.35 26.99 Reported Sales Prices of Common Shares 2022 2023 Low Low Close High Cash Dividends Declared Close 2023 2022 $16.45 14.90 16.45 16.90 $17.77 16.96 18.34 26.02 $26.00 22.59 21.87 24.97 $21.87 17.87 18.38 19.00 $22.00 19.28 19.10 23.92 $0.23 0.23 0.23 0.23 $0.22 0.22 0.22 0.22 We have approximately 1,200 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). 127 [THIS PAGE INTENTIONALLY LEFT BLANK] 

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