What changed in this filing

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Item 1A. Risk Factors

2024-03-08 compared with 2023-03-03 · 36 added, 22 removed, 139 unchanged (29% of the section changed)

1 unchanged sentence

Risk Factors Relating to the Financial Services Industry

Pressures from various macroeconomic events, including recessionary concerns, heightened inflation, increased interest rates, rising energy prices, supply chain disruptions, concerns over the Russia-Ukraine war, and foreign currency exchange rate fluctuations have created, and continue to create, significant economic uncertainty and could materially and adversely impact our financial condition and performance.

Pressures from various global and national macroeconomic events, including recessionary concerns, 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 have created, and continue to create, significant economic uncertainty and could materially and adversely impact our financial condition and performance.

The extent to which these macroeconomic 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.

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Further, our customers may be adversely impacted by such conditions, which could have a negative impact on our business, financial condition and results of operations.

Adverse developments affecting the financial services industry, including bank failures and the resulting liquidity concerns, may have a material effect on our business, financial condition, results of operations, or cash flows.

Recent developments and events within the financial services industry, including the closures of several banks in 2023 due to large-scale deposit withdrawals over a short period of time, created liquidity risks and concerns within the industry, as well as decreased confidence in banks among depositors, investors, and other counterparties.

In general, these events have caused volatility and disruption in the capital markets, as well as reduced valuations of equity and other securities of banks, which may increase the risk of a potential recession.

These failures also highlighted the importance of maintaining diversified funding sources.

These market conditions and related factors may impact the competitive landscape for deposits in the financial services industry in an unpredictable manner.

Specifically, these developments and events may materially adversely impact our business, financial condition, results of operations, and/or cash flows, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses.

They may also adversely impact the market price and volatility of our common stock.

Government responses to these events may also adversely impact us.

Our deposits are insured up to applicable limits by FDIC and are subject to deposit insurance premiums and assessments.

The FDIC may increase premiums or impose special assessments on all banks to replenish the Deposit Insurance Fund to ensure that all depositors in failed banks are made whole at no cost to taxpayers.

The 2023 bank failures may also prompt changes to laws or regulations governing banks, which could impact our profitability and business.

The soundness of other financial institutions could adversely affect us.

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We are subject to extensive regulation, supervision and examination by the Federal Reserve, the FDIC, the Michigan DIFS, the SEC and other regulatory bodies.

Such regulation and supervision governs the activities in which we may engage.

Such regulation and supervision govern the activities in which we may engage.

Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, limitations related to our securities, the classification of our assets, and the determination of the level of our allowance for credit losses.

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We face cybersecurity risks, including attacks targeting our systems and customers' systems.

Our business involves the collection, transmission, and storage of sensitive data, including personally identifiable information of our customers and employees.

While we have not to date experienced a significant security breach, our business is very susceptible to cybersecurity risks, and it is possible we could experience a significant breach in the future.

The cybersecurity risks our business face include cyberattacks, other unauthorized access, loss or destruction of data, unavailability of service, and similar events.

Our business involves the collection, transmission, and storage of large amounts of sensitive data, including personally identifiable information of our customers and employees.

The cybersecurity risks our business face include cyberattacks, other unauthorized access to data, loss or destruction of data, unavailability of service, and similar events.

We are also susceptible to cybersecurity risks faced by third party vendors on which we rely for components of our business infrastructure and data processing and which often have access to the sensitive data of our customers.

While we have not to date experienced a security breach that has had a material impact on us, our business is very susceptible to cybersecurity risks, and it is possible we could experience a significant breach in the future that could materially impact our financial condition or results of operations.

A material data breach or other cybersecurity incident affecting our business could result in significant reputational risk, loss of customers, legal claims, additional costs, financial loss, regulatory penalties, and similar damages.

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The operations of financial institutions such as us are dependent to a large degree on net interest income, which is the difference between interest income from loans and investments and interest expense on deposits and borrowings.

Prevailing economic conditions, the trade, fiscal and monetary policies of the federal government and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which in turn significantly affect financial institutions' net interest income.

Prevailing economic conditions;

the trade, fiscal and monetary policies of the federal government;

and the policies of various regulatory agencies all affect market rates of interest and the availability and cost of credit, which in turn significantly affect financial institutions' net interest income.

Volatility in interest rates can also result in disintermediation, which is the flow of funds away from financial institutions into direct investments, such as federal government and corporate securities and other investment vehicles, which, because of the absence of federal insurance premiums and reserve requirements, generally pay higher rates of return than financial institutions.

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It is inherently difficult to assess the outcome of these matters, and there can be no assurance that we will prevail in any proceeding or litigation.

such matter could result in substantial cost and diversion of our efforts, which by itself could have a material adverse effect on our financial condition and operating results.

Any such matter could result in substantial cost and diversion of our efforts, which by itself could have a material adverse effect on our financial condition and operating results.

Further, adverse determinations in such matters could result in actions by our regulators that could materially adversely affect our business, financial condition or results of operations.

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Our allowance for credit losses coverage ratio of non-performing loans was 1,044.69% and 1,409.16% at December 31, 2023, and December 31, 2022, respectively.

The increase in this coverage ratio in 2022 was primarily due to a combination of an increase in the allowance for credit losses and a reduction in non-performing loans.

The decrease in this coverage ratio in 2023 was primarily due to an increase in non-performing loans that was partially offset by an increase in the allowance for credit losses.

In determining the size of the allowance for credit losses, we rely on our experience and our evaluation of current economic conditions.

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We seek to limit credit losses in our securities portfolios by principally purchasing highly rated securities (generally rated "AA" or higher by a major debt rating agency) and by conducting due diligence on the issuer.

However, gross unrealized losses on securities available for sale and securities held to maturity in our portfolio totaled approximately $87.3 million and $62.6 million, respectively as of December 31, 2022 (compared to approximately $8.6 million and zero, respectively as of December 31, 2021).

However, gross unrealized losses on securities available for sale and securities held to maturity in our portfolio totaled approximately $65.2 million and $55.9 million, respectively as of December 31, 2023 (compared to approximately $87.3 million and $62.6, respectively as of December 31, 2022).

We believe these unrealized losses are temporary in nature and are expected to be recovered within a reasonable time period as we believe we have the ability to hold the securities to maturity or until such time as the unrealized losses reverse.

1 unchanged sentence

Those evaluations may result in a provision for credit losses recorded in our earnings.

We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts.

We measure expected credit losses on securities held to maturity ("HTM") on a collective basis by major security type with each type sharing similar risk characteristics, and we consider historical credit loss information.

We may, in the future, experience losses in our securities portfolios which may result in credit losses that could materially adversely affect our results of operations.

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These net gains primarily depend on the volume of loans we sell, which in turn depends on our ability to originate real estate mortgage loans and the demand for fixed-rate obligations and other loans that are outside of our established interest-rate risk parameters.

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.

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.

Consequently, they can often be a volatile part of our overall revenues.

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Various federal and/or state laws and regulations limit the amount of dividends that the bank may pay to the parent company.

Any future strategic acquisitions or divestitures may present certain risks to our business and operations.

Any future strategic acquisitions or divestitures may present additional risks to our business and operations.

Difficulties in capitalizing on the opportunities presented by a future acquisition may prevent us from fully achieving the expected benefits from the acquisition or may cause the achievement of such expectations to take longer to realize than expected.

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Compliance with capital requirements may adversely affect us.

The capital requirements applicable to us as a bank holding company as well as to our subsidiary bank have been substantially revised in connection with Basel III and the requirements of the Financial Reform Act.

The capital requirements applicable to banks and bank holding companies have been substantially revised in recent years.

These more stringent capital requirements, and any other new regulations, could adversely affect our ability to pay dividends in the future, or could require us to reduce business levels or to raise capital, including in ways that may adversely affect our results of operations or financial condition and/or existing shareholders.

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Declines in the businesses or industries of our customers could cause increased credit losses, which could adversely affect us.

Our business customer base consists, in part, of customers in businesses and industries that are sensitive to global economic conditions and supply chain factors.

These industries include the automotive production industry, real estate businesses, retail C&I, hotels, entertainment and food service.

Any decline in one of those customers' businesses or industries could cause increased credit losses, which in turn could adversely affect us.

Our business customer base consists, in part, of customers in businesses and industries that are sensitive to global economic conditions and supply chain factors, including businesses that operate within the automotive, real estate, retail, commercial and industrial (C&I), hotel, entertainment, and food service industries.

Any decline in any of these industries or business sectors could cause increased credit losses, which in turn could adversely affect us.

The introduction, implementation, withdrawal, success and timing of business initiatives and strategies may be less successful or may be different than anticipated, which could adversely affect our business.

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The financial services industry experiences rapid technological change with regular introductions of new technology-driven products and services.

The efficient and effective utilization of technology enables financial institutions to better serve customers and to reduce costs.

The efficient and effective utilization of technology enables financial institutions to better serve

customers and to reduce costs.

Our future success depends, in part, upon our ability to address the needs of our customers by using technology to market and deliver products and services that will satisfy customer demands, meet regulatory requirements, and create additional efficiencies in our operations.

We may not be able to effectively develop new technology-driven products and services or be successful in marketing or supporting these products and services to our customers, which could have a material adverse impact on our financial condition and results of operations.

We may not be able to effectively develop or offer new technology-driven products and services or be successful in marketing or supporting these products and services to our customers, which could have a material adverse impact on our financial condition and results of operations.

Competitive product and pricing pressures among financial institutions within our markets may change.

We operate in a very competitive environment, which is characterized by competition from a number of other financial institutions in each market in which we operate.

We compete with large national and regional financial institutions and with smaller financial institutions in terms of products and pricing.

We compete with large national and regional financial institutions and with smaller financial institutions, including credit unions, in terms of products and pricing.

We also compete with fintech companies, securities brokerage firms, insurance companies, and other non-depository institutions with respect to some of the products and services we offer.

If we are unable to compete effectively in products and pricing in our markets, business could decline, which could have a material adverse effect on our business, financial condition or results of operations.

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We not only vie for business opportunities with new customers, but also compete to maintain and expand the relationships we have with our existing customers.

While we believe that we can continue to grow many of these relationships, we will continue to experience pressures to maintain these relationships as our competitors attempt to capture our customers, particularly as financial products and services similar to those we offer become more widely available and accessible via the internet and other technology.

Failure to create new customer relationships and to maintain and expand existing customer relationships to the extent anticipated may adversely impact our earnings.

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We must exercise judgment in selecting and applying many of these accounting policies and processes so they comply with U.S.

generally accepted accounting principles ("GAAP").

In some cases, we must select the accounting policy or method to apply from two or more alternatives, any of which may be reasonable under the circumstances, yet may result in our reporting materially different results than would have been reported under a different alternative.

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See note #1, "Accounting Policies" in the Notes to Consolidated Financial Statements in our annual report, to be delivered to shareholders in connection with the April 23, 2024 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K).

UNRESOLVED STAFF COMMENTS

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

What changed 10-K

Item 1A. Risk Factors