What changed in this filing

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Item 1. Business

2021-03-05 compared with 2020-03-06 · 195 added, 480 removed, 131 unchanged (84% of the section changed)

BUSINESS (continued)

The merger or consolidation of an existing bank subsidiary of a bank holding company with another bank, or the acquisition by such a subsidiary of the assets of another bank, or the assumption of the deposit and

other liabilities by such a subsidiary requires the prior written approval of the responsible federal regulatory agency under the Bank Merger Act, based upon a consideration of statutory factors similar to those outlined above with respect to the

In addition, in certain cases, an application to, and the prior approval of, the Federal Reserve under the BHCA and/or Michigan DIFS under Michigan banking laws, may be required.

With certain limited exceptions, the BHCA prohibits any bank holding company from engaging, either directly or indirectly through a subsidiary, in any activity other than managing or controlling banks unless the

proposed non-banking activity is one the Federal Reserve has determined to be so closely related to banking as to be a proper incident thereto.

Under current Federal Reserve regulations, such permissible non-banking activities include such things

as mortgage banking, equipment leasing, securities brokerage, and consumer and commercial finance company operations.

Well-capitalized and well-managed bank holding companies may, however, engage de novo

in certain types of non-banking activities without prior notice to, or approval of, the Federal Reserve, provided that written notice of the new activity is given to the Federal Reserve within 10 business days after the activity is commenced.

bank holding company wishes to engage in a non-banking activity by acquiring a going concern, prior notice and/or prior approval will be required, depending upon the activities in which the company to be acquired is engaged, the size of the company

to be acquired and the financial and managerial condition of the acquiring bank holding company.

Eligible bank holding companies that elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of non-banking activities, including securities and insurance

activities and any other activity the Federal Reserve, in consultation with the Treasury, determines by regulation or order is financial in nature, incidental to any such financial activity or complementary to any such financial activity and does

not pose a substantial risk to the safety or soundness of depository institutions or the financial system generally.

The BHCA generally does not place territorial restrictions on the domestic activities of non-bank subsidiaries of bank or

financial holding companies.

We have not applied for approval to operate as a financial holding company and have no current intention of doing so.

Capital Requirements .

The Federal Reserve uses capital adequacy guidelines in its examination and regulation of bank holding companies.

If capital falls below minimum

guidelines, a bank holding company may, among other things, be denied approval to acquire or establish additional banks or non-bank businesses.

The Federal Reserve’s capital guidelines establish the following minimum regulatory capital requirements for bank holding companies:

(i) a leverage capital requirement expressed as a percentage of total assets, and

(ii) a risk-based requirement expressed as a percentage of total risk-weighted assets.

The leverage capital requirement consists of a minimum ratio of Tier 1 capital (which consists principally of shareholders’ equity) to total assets of 3% for

the most highly-rated companies with minimum requirements of 4% to 5% for all others.

The risk-based requirement consists of a minimum ratio of total capital to total risk-weighted assets of 8%, of which at least one-half must be Tier 1 capital.

The risk‑based and leverage standards presently used by the Federal Reserve are minimum requirements, and higher capital levels will be required if warranted by the particular circumstances or risk profiles of individual banking organizations.

federal bank regulatory agencies are required biennially to review risk-based capital standards to ensure that they adequately address interest rate risk, concentration of credit risk and risks from non-traditional activities.

Our Tier 1 capital as of December 31, 2019, includes $38.2 million of trust preferred securities (classified on our Consolidated Statements of Financial Condition as “Subordinated debentures”).

The Federal Reserve

has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies.

The aggregate amount of trust preferred securities and certain other capital elements is limited to 25 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 could be included in the Tier 2 capital, subject to restrictions.

The provisions

of the Dodd-Frank Wall Street Reform and Consumer Protection Act adopted in 2010 (the “Dodd-Frank Act”) imposed additional limitations on the ability to include trust preferred securities as Tier 1 capital;

however, these additional limitations do

not apply to our outstanding trust preferred securities.

BUSINESS (continued)

On January 1, 2015, we became subject to new regulatory capital rules issued by the Federal Reserve in 2013.

In general, these new capital rules increase the minimum requirements for both the

quantity and quality of capital we maintain.

The rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets.

capital conservation buffer was phased in beginning in 2016 and ending with full implementation of the 2.5% buffer in January 2019.

The rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum

leverage ratio of 4%.

As to the quality of capital, the new rules emphasize common equity Tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments.

The rules also change

the methodology for calculating risk-weighted assets to enhance risk sensitivity.

The application of the new capital rules to our organization is described below.

Under these new capital rules, our existing trust preferred securities are

grandfathered as qualifying regulatory capital.

We believe we currently exceed all of the capital ratio requirements of these new capital rules.

Historically, most of our revenues have been received in the form of dividends paid by our bank.

We can also make requests for returns of capital from our

however, such requests require the approval of the Michigan DIFS.

Thus, our ability to pay dividends to our shareholders is indirectly limited by restrictions on the ability of our bank to pay dividends or return capital to us, as described

Further, in a policy statement, the Federal Reserve has expressed its view that a bank holding company experiencing earnings weaknesses should not pay cash dividends exceeding its net income or that can only be funded in ways that weaken

the bank holding company’s financial health, such as by borrowing.

The Federal Reserve possesses enforcement powers over bank holding companies and their non-bank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices

or violations of applicable statutes and regulations.

Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies.

The “prompt corrective action” provisions of federal law and regulation authorize

the Federal Reserve to restrict the amount of dividends that can be paid by an insured bank that fails to meet specified capital levels.

In addition to the restrictions on dividends imposed by the Federal Reserve, the Michigan Business Corporation Act provides that dividends may be legally declared or paid only if, after the distribution, the

corporation can pay its debts as they come due in the usual course of business and its total assets equal or exceed the sum of its liabilities plus the amount that would be needed to satisfy the preferential rights upon dissolution of any holders

of preferred stock whose preferential rights are superior to those receiving the distribution.

Change in Control Limitations .

Subject to certain exceptions, the Change in the Bank Control Act (“Control Act”) and

regulations promulgated thereunder by the Federal Reserve, require any person acting directly or indirectly, or through or in concert with one or more persons, to give the Federal Reserve 60 days’ written notice before acquiring control of a bank

holding company.

Pursuant to the Control Act, the Federal Reserve has the authority to prevent any such acquisition.

Transactions that are presumed to constitute the acquisition of control include the acquisition of any voting securities of a

bank holding company having securities registered under Section 12 of the Securities Exchange Act of 1934, as amended, if, after the transaction, the acquiring person (or persons acting in concert) owns, controls or holds with power to vote 10% or

more of any class of voting securities of the institution.

Federal Securities Regulation .

Our common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as

amended (the “Exchange Act”).

We are therefore subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

BUSINESS (continued)

Independent Bank

Independent Bank is a Michigan banking corporation and a member of the Federal Reserve System, and its deposit accounts are insured by the FDIC’s Deposit Insurance Fund (“DIF”).

As a member of the Federal Reserve

System and a Michigan-chartered bank, our bank is subject to the examination, supervision, reporting and enforcement requirements of the Federal Reserve as its primary federal regulator and the Michigan DIFS as the chartering authority for Michigan

These agencies and the federal and state laws applicable to our bank and its operations extensively regulate various aspects of the banking business including, among other things, permissible types and amounts of loans, investments and other

activities, capital adequacy, branching, interest rates on loans and on deposits, the maintenance of non-interest bearing reserves on deposit accounts, and the safety and soundness of banking practices.

Deposit Insurance .

As an FDIC-insured institution, our bank is required to pay deposit insurance premium

assessments to the FDIC.

Under the FDIC’s risk-based assessment system for deposit insurance premiums, all insured depository institutions are placed into one of four categories (Risk Categories I, II, III, and IV), based primarily on their level

of capital and supervisory evaluations, for purposes of determining the institution’s assessment rate.

Deposit insurance premium assessments are generally based on an institution’s total assets minus its tangible equity.

FICO Assessments .

Our bank, as a member of the Deposit Insurance Fund (“DIF”), was subject to assessments to cover the payments on outstanding obligations of the

Financing Corporation (“FICO”).

FICO was created to finance the recapitalization of the Federal Savings and Loan Insurance Corporation, the predecessor to the FDIC’s Savings Association Insurance Fund, which was created to insure the deposits of

thrift institutions and was merged with the Bank Insurance Fund into the newly formed DIF in 2006.

The FDIC made its final collection of the assessment for these bonds in March 2019.

FDIC-insured institutions accordingly are no longer required to

pay the FICO bond assessment.

Michigan DIFS Assessments .

Michigan banks are required to pay supervisory fees to the Michigan DIFS to fund their operations.

The amount of supervisory fees paid by a

bank is based upon the bank’s total assets.

Capital Requirements .

The Federal Reserve has established the following minimum capital standards for state-chartered, FDIC-insured member banks, such as our bank:

leverage requirement consisting of a minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated banks with minimum requirements of 4% to 5% for all others, and a risk-based capital requirement consisting of a minimum ratio of

total capital to total risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.

Tier 1 capital consists principally of shareholders’ equity.

These capital requirements are minimum requirements.

Higher capital levels will be

required if warranted by the particular circumstances or risk profiles of individual institutions.

For example, Federal Reserve regulations provide that higher capital may be required to take adequate account of, among other things, interest rate

risk and the risks posed by concentrations of credit, nontraditional activities, or securities trading activities.

On January 1, 2015, we became subject to new regulatory capital rules issued by the Federal Reserve in 2013.

In general, these new capital rules increase the minimum requirements for both the

quantity and quality of capital we maintain.

The rules include a new minimum ratio of common equity Tier 1 capital to risk-weighted assets of 4.5% and a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets.

capital conservation buffer was phased in beginning in 2016 and ending with full implementation of the 2.5% buffer in January 2019.

The rules also raise the minimum ratio of Tier 1 capital to risk-weighted assets from 4% to 6% and include a minimum

leverage ratio of 4%.

The rules also change

the methodology for calculating risk-weighted assets to enhance risk sensitivity.

The application of the new capital rules to our organization is described below.

We believe we currently exceed all of the capital ratio requirements of these new

capital rules.

BUSINESS (continued)

Federal law provides the federal banking regulators with broad power to take prompt corrective action to resolve the problems of undercapitalized institutions.

The extent of the regulators’ powers depends on whether

the institution in question is “well capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” Federal regulations define these capital categories as follows:

Capital Ratio

Equity Tier 1

Capital Ratio

Well capitalized

6.5% or above

Adequately capitalized

4.5% or above

Undercapitalized

Less than 4.5%

Significantly undercapitalized

Critically undercapitalized

Tangible equity to total assets of 2% or less

At December 31, 2019, our bank’s ratios exceeded minimum requirements for the well-capitalized category.

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

requiring the submission of a capital restoration plan;

placing limits on asset growth and

restrictions on activities;

requiring the submission of a capital restoration

placing limits on asset growth and restrictions on activities;

requiring the institution to issue additional capital stock (including additional voting stock) or to be acquired;

restricting transactions with affiliates;

restricting the interest rates the institution may pay on

restricting the

interest rates the institution may pay on deposits;

ordering a new election of directors of the institution;

requiring that senior executive officers or directors be dismissed;

prohibiting the institution from accepting deposits from correspondent banks;

requiring the institution to divest

certain subsidiaries;

prohibiting the institution from accepting deposits from correspondent

requiring the institution to divest certain subsidiaries;

prohibiting the payment of principal or interest on subordinated debt;

and ultimately, appointing a receiver for the institution.

In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution regulatory agency determines the institution to

be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice.

This could include a failure by the institution to correct the deficiency following receipt of a less-than-satisfactory rating on its most recent

examination report.

Under Michigan law, banks are restricted as to the maximum amount of dividends they may pay on their common stock.

Our bank may not pay dividends

except out of its net income after deducting its losses and bad debts.

In addition, a Michigan bank may not declare or pay a dividend unless the bank will have a surplus amounting to at least 20 percent of its capital after the payment of the

In addition, as a member of the Federal Reserve System, our bank is required to obtain the prior approval of the Federal Reserve for the declaration or payment of a dividend if the total of all dividends declared in

any year will exceed the total of (a) the bank’s retained net income (as defined by federal regulation) for that year, plus (b) the bank’s retained net income for the preceding two years.

Federal law also generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to its holding company if the depository institution

would thereafter be undercapitalized.

In addition, the Federal Reserve may prohibit the payment of dividends by a bank if such payment is determined, by reason of the financial condition of the bank, to be an unsafe and unsound banking practice or

if the bank is in default of payment of any assessment due to the FDIC.

BUSINESS (continued)

In general, a depository institution may be reclassified to a lower category than is indicated by its capital levels if the appropriate federal depository institution

regulatory agency determines the institution to be otherwise in an unsafe or unsound condition or to be engaged in an unsafe or unsound practice.

This could include a failure by the institution to correct the deficiency following receipt of a

less-than-satisfactory rating on its most recent examination report.

Under Michigan law, banks are restricted as to the maximum

amount of dividends they may pay on their common stock.

Our bank may not pay dividends except out of its net income after deducting its losses and bad debts.

In addition, a Michigan bank may not declare or pay a dividend unless the bank

will have a surplus amounting to at least 20 percent of its capital after the payment of the dividend.

In addition, as a member of the Federal Reserve System, our bank is required to obtain the prior approval of the Federal Reserve for the declaration or payment of a

dividend if the total of all dividends declared in any year will exceed the total of (a) the bank's retained net income (as defined by federal regulation) for that year, plus (b) the bank's retained net income for the preceding two years.

Federal law also generally prohibits a depository institution from making any capital distribution (including payment of a dividend) or paying any management fee to

its holding company if the depository institution would thereafter be undercapitalized.

In addition, the Federal Reserve may prohibit the payment of dividends by a bank if such payment is determined, by reason of the financial condition of the

bank, to be an unsafe and unsound banking practice or if the bank is in default of payment of any assessment due to the FDIC.

Insider Transactions .

Our bank is subject to certain restrictions imposed by the Federal Reserve Act on “covered transactions” with us or our subsidiaries, which

include investments in our stock or other securities issued by us or our subsidiaries, the acceptance of our stock or other securities issued by us or our subsidiaries as collateral for loans, and extensions of credit to us or our subsidiaries.

Certain limitations and reporting requirements are also placed on extensions of credit by our bank to the directors and officers of the holding company, the bank, and the subsidiaries of the bank;

to the principal shareholders of the holding

Our bank is subject to certain restrictions

imposed by the Federal Reserve Act on "covered transactions" with us or our subsidiaries, which include investments in our stock or other securities issued by us or our subsidiaries, the acceptance of our stock or other securities issued by us or

our subsidiaries as collateral for loans, and extensions of credit to us or our subsidiaries.

Certain limitations and reporting requirements are also placed on extensions of credit by our bank to the directors and officers of the holding company,

the bank, and the subsidiaries of the bank;

to the principal shareholders of the holding company;

and to "related interests" of such directors, officers, and principal shareholders.

In addition, federal law and regulations may affect the terms upon which any person becoming one of our directors or officers or a principal shareholder

may obtain credit from banks with which our bank maintains a correspondent relationship.

In addition, federal law and regulations may affect the terms

upon which any person becoming one of our directors or officers or a principal shareholder may obtain credit from banks with which our bank maintains a correspondent relationship.

Safety and Soundness Standards .

Pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”), the FDIC adopted guidelines to establish

operational and managerial standards to promote the safety and soundness of federally-insured depository institutions.

The guidelines establish standards for internal controls, information systems, internal audit systems, loan documentation,

credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality, and earnings.

Pursuant to the Federal Deposit

Insurance Corporation Improvement Act of 1991 ("FDICIA"), the FDIC adopted guidelines to establish operational and managerial standards to promote the safety and soundness of federally-insured depository institutions.

The guidelines establish

standards for internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality, and earnings.

Investment and Other Activities .

Under federal law and regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining

equity investments of a type, or in an amount, that are not permissible for a national bank.

FDICIA, as implemented by FDIC regulations, also prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging

as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the bank’s primary federal regulator

determines the activity would not pose a significant risk to the DIF.

Impermissible investments and activities must be otherwise divested or discontinued within certain time frames set by the bank’s primary federal regulator in accordance with

Under federal law and regulations,

FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank.

FDICIA, as implemented by FDIC regulations, also

prohibits FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as a principal in any activity that is not permitted for a national bank or its subsidiary, respectively, unless the bank meets, and continues

to meet, its minimum regulatory capital requirements and the bank's primary federal regulator determines the activity would not pose a significant risk to the DIF.

Impermissible investments and activities must be otherwise divested or discontinued

within certain time frames set by the bank's primary federal regulator in accordance with federal law.

These restrictions are not currently expected to have a material impact on the operations of our bank.

BUSINESS (continued)

Consumer Banking .

Our bank’s business includes making a variety

of types of loans to individuals.

In making these loans, our bank is subject to state usury and other consumer protection laws and to various federal statutes, including provisions of the Gramm Leach-Bliley Act aimed at protecting the privacy of

consumer financial information, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Home Mortgage Disclosure Act, and the regulations promulgated

under these statutes, which (among other things) prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of our bank, including the

maintenance and operation of escrow accounts and the transfer of mortgage loan servicing.

In receiving deposits, our bank is subject to extensive regulation under state and federal law and regulations, including the Truth in Savings Act, the

Expedited Funds Availability Act, the Electronic Funds Transfer Act, and the Federal Deposit Insurance Act.

Our bank's business includes making a variety of types of loans to individuals.

In making these

loans, our bank is subject to state usury and other consumer protection laws and to various federal statutes, including provisions of the Gramm Leach-Bliley Act aimed at protecting the privacy of consumer financial information, the Equal Credit

Opportunity Act, the Fair Credit Reporting Act, the Truth in Lending Act (TILA), the Real Estate Settlement Procedures Act (RESPA), the Home Mortgage Disclosure Act, and the regulations promulgated under these statutes, which (among other things)

prohibit discrimination, specify disclosures to be made to borrowers regarding credit and settlement costs, and regulate the mortgage loan servicing activities of our bank, including the maintenance and operation of escrow accounts and the transfer

of mortgage loan servicing.

In receiving deposits, our bank is subject to extensive regulation under state and federal law and regulations, including the Truth in Savings Act, the Expedited Funds Availability Act, the Electronic Funds Transfer

Act, and the Federal Deposit Insurance Act.

Violation of these laws could result in the imposition of significant damages and fines upon our bank and its directors and officers.

Anti-Money Laundering and the USA PATRIOT Act .

The bank is subject to a number of financial recordkeeping and anti-money laundering laws and regulations including

the Bank Secrecy Act and the USA PATRIOT Act, as well as similar rules and guidelines implemented and enforced by the Department of the Treasury’s Financial Crimes Enforcement Network (“FinCEN”) and the Federal Financial Institutions Council

These laws and regulations require the bank to take certain steps to prevent the use of the bank or its systems from facilitating the flow of illegal or illicit money or terrorist funds.

As of May 11, 2018, the bank is required to

comply with FinCEN’s new Customer Due Diligence Requirements for Financial Institutions, which is designed to identify and verify the identity of natural persons (known as beneficial owners) of legal entity customers who own, control and profit

from companies when those companies open accounts.

BUSINESS (continued)

A number of new consumer protection laws were implemented following the 2008 recession, including:

The Homeowner Affordability and Stability Plan (HASP) was implemented in 2009 to support a recovery in the housing market and ensure that borrowers can continue to pay off their mortgages through initiatives such as access to

low-cost refinancing for responsible homeowners suffering from falling home prices;

a $75 billion homeowner stability plan to prevent foreclosure, and support of low mortgage rates by strengthening confidence in Fannie Mae and Freddie

The Dodd-Frank Act, adopted in 2010, included the creation of the Consumer Financial Protection Bureau (CFPB), which was given the power to issue and enforce certain consumer protection laws.

The CFPB has issued several new

consumer protection regulations, including regulations that impact residential mortgage lending and servicing.

The Dodd-Frank Act also implemented new restrictions on how mortgage brokers and loan originators may be compensated.

We have experienced, and expect to continue to experience, increased costs and expenses related to compliance with these and other new consumer protection regulations.

The bank is subject to

a number of financial recordkeeping and anti-money laundering laws and regulations including the Bank Secrecy Act and the USA PATRIOT Act, as well as similar rules and guidelines implemented and enforced by the Department of the Treasury's

Financial Crimes Enforcement Network ("FinCEN") and the Federal Financial Institutions Council ("FFIEC").

These laws and regulations require the bank to take certain steps to prevent the use of the bank or its systems from facilitating the flow of

illegal or illicit money or terrorist funds.

These regulations include FinCEN's Customer Due Diligence Requirements for Financial Institutions, which is designed to identify and verify the identity of natural persons (known as beneficial owners)

of legal entity customers who own, control and profit from companies when those companies open accounts.

A number of consumer protection laws were implemented following the 2008 recession, including the Dodd-Frank Act, adopted in 2010.

The Dodd-Frank Act created the

Consumer Financial Protection Bureau (CFPB), which was given the power to issue and enforce certain consumer protection laws.

The CFPB has issued a number of consumer protection regulations over the last decade, including regulations that impact

residential mortgage lending and servicing.

We have experienced, and expect to continue to experience, increased costs and expenses related to compliance with these consumer protection regulations as well as new

regulations that may be implemented in the future.

2018 Regulatory Reform .

In May 2018 the Economic Growth, Regulatory Relief and Consumer Protection Act (the “2018 Act”), was enacted to modify or remove certain

financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act.

While the 2018 Act maintains most of the regulatory structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory

framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.

Among other changes, the 2018 Act expanded the definition of qualified mortgages that may be held by a financial institution and simplified the regulatory capital rules for financial institutions and their holding

companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single “Community Bank Leverage Ratio” of between 8% and 10% to replace the leverage and risk-based regulatory capital

Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (the “CBLR”) requirement in lieu of the currently applicable requirements for calculating and

reporting risk-based capital ratios.

In May 2018 the Economic Growth, Regulatory

Relief and Consumer Protection Act (the "2018 Act"), was enacted to modify or remove certain financial reform rules and regulations, including some of those implemented under the Dodd-Frank Act.

While the 2018 Act maintains most of the regulatory

structure established by the Dodd-Frank Act, it amends certain aspects of the regulatory framework for small depository institutions with assets of less than $10 billion and for large banks with assets of more than $50 billion.

Among other changes, the 2018 Act expanded the definition of qualified mortgages that may be held by a financial institution and simplified the regulatory capital

rules for financial institutions and their holding companies with total consolidated assets of less than $10 billion by instructing the federal banking regulators to establish a single "Community Bank Leverage Ratio" of between 8% and 10% to

replace the leverage and risk-based regulatory capital ratios.

Effective January 1, 2020, qualifying community banking organizations may elect to comply with a greater than 9% community bank leverage ratio (the “CBLR”) requirement in lieu of the

currently applicable requirements for calculating and reporting risk-based capital ratios.

The CBLR is equal to Tier 1 capital divided by average total consolidated assets.

In order to qualify for the CBLR election, a community bank must (1) have a leverage capital ratio greater than 9 percent, (2)

have less than $10 billion in average total consolidated assets, (3) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities, and (4) not be an advanced approaches banking organization.

A community bank

that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is also considered to be “well capitalized” under

the prompt corrective action rules.

The 2018 Act also includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading prohibitions), mortgage disclosures, and risk weights

for certain high-risk commercial real estate loans.

It is difficult to predict at this time when or how any additional new standards under the 2018 Act will ultimately be applied to us or what specific impact the 2018 Act and the

yet-to-be-written implementing rules and regulations will have on community banks.

In order to qualify for the CBLR election, a community bank must (1) have a

leverage capital ratio greater than 9 percent, (2) have less than $10 billion in average total consolidated assets, (3) not exceed certain levels of off-balance sheet exposure and trading assets plus trading liabilities, and (4) not be an advanced

approaches banking organization.

A community bank that meets the above qualifications and elects to utilize the CBLR is considered to have satisfied the risk-based and leverage capital requirements in the generally applicable capital rules and is

also considered to be “well capitalized” under the prompt corrective action rules.

BUSINESS (continued)

The 2018 Act also includes regulatory relief for community banks regarding regulatory examination cycles, call reports, the Volcker Rule (proprietary trading

prohibitions), mortgage disclosures, and risk weights for certain high-risk commercial real estate loans.

However, it remains difficult to predict the full extent to which the 2018 Act or the implementing rules and regulations will affect our

business in the future.

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security ("CARES") Act of 2020 was signed into law.

Among other things, the CARES Act temporarily lowered the community bank leverage ratio to 8%.

federal bank regulators subsequently issued a rule implementing the lower ratio effective April 23, 2020.

The rule also established a two-quarter grace period for a qualifying institution whose leverage ratio falls below the 8% community bank

leverage ratio requirement so long as the bank maintains a leverage ratio of 7% or greater.

Another rule was issued to transition back to the 9% community bank leverage ratio by increasing the ratio to 8.5% for calendar year 2021 and 9%

In addition, the CARES Act allows banks to elect to suspend requirements under U.S.

GAAP for loan modifications related to the COVID-19 pandemic (for loans that were not more than 30 days past due as of December 31, 2019) that would

otherwise be categorized as a TDR, including impairment for accounting purposes.

The passage of the Bipartisan-Bicameral Omnibus COVID Relief Deal in December 2020 permitted further suspension of these requirements until the earlier of 60 days

after the termination date of the national emergency or January 1, 2022.

Finally, as discussed below, the CARES Act and this

December 2020 legislation delayed the required implementation of the Current Expected Credit Loss (CECL) accounting standard.

Anti-Money Laundering Act of 2020 .

The National Defense Authorization Act for Fiscal Year 2021 (the "NDAA") enacted January 1, 2021 over a presidential veto, includes a number of significant new requirements intended to enhance U.S.

laundering efforts.

These provisions, many of which are contained within a section of the NDAA known as the Anti-Money Laundering Act of 2020 (the "AMLA"), include establishment of a beneficial ownership registration database, the creation of two

new criminal offenses regarding money laundering, new penalties for Bank Secrecy Act violations, and increased whistleblower rewards and protections.

Under these new laws, various government agencies will also be tasked with identification of

policy priorities, establishment of streamlined processes, creation of information sharing programs, and regular reporting to Congress in an effort to modernize anti-money laundering enforcement.

The development of rules and regulations

implementing the AMLA are currently in the very early stages and future impacts are difficult to predict at this time.

Branching Authority .

Michigan banks, such as our bank, have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to

receipt of all required regulatory approvals.

Michigan banks, such as our bank, have the

authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals.

Banks may establish interstate branch networks through acquisitions of other banks.

The establishment of de novo interstate branches or the acquisition of

individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in its entirety) is allowed only if specifically authorized by state law.

BUSINESS (continued)

The establishment

of de novo interstate branches or the acquisition of individual branches of a bank in another state (rather than the acquisition of an out-of-state bank in

its entirety) is allowed only if specifically authorized by state law.

Michigan permits both U.S.

banks to establish branch offices in Michigan.

The Michigan Banking Code permits, in appropriate circumstances and with the approval of the Michigan DIFS (1) the acquisition

of Michigan banks by FDIC-insured banks or savings banks located in other states, (2) the sale by a Michigan bank of branches to an FDIC-insured bank or savings bank located in a state in which a Michigan bank could purchase branches of the

purchasing entity, (3) the consolidation of Michigan banks and FDIC-insured banks or savings banks located in other states having laws permitting such consolidation, (4) the establishment of branches in Michigan by FDIC-insured banks located in

other states, the District of Columbia or U.S.

territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) the establishment by foreign banks of branches located in Michigan.

The Michigan Banking Code permits, in appropriate circumstances and with the

approval of the Michigan DIFS (1) the acquisition of Michigan banks by FDIC-insured banks or savings banks located in other states, (2) the sale by a Michigan bank of branches to an FDIC-insured bank or savings bank located in a state in which a

Michigan bank could purchase branches of the purchasing entity, (3) the consolidation of Michigan banks and FDIC-insured banks or savings banks located in other states having laws permitting such consolidation, (4) the establishment of branches in

Michigan by FDIC-insured banks located in other states, the District of Columbia or U.S.

territories or protectorates having laws permitting a Michigan bank to establish a branch in such jurisdiction, and (5) the establishment by foreign banks of

branches located in Michigan.

BUSINESS (continued)

Current Expected Credit Loss ("CECL") .

The Financial Accounting Standards Board (“FASB”) has adopted a new accounting standard that will be effective for the Bank

for our calendar year beginning on January 1, 2020.

This standard, referred to as Current Expected Credit Loss, or CECL, will require financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and

recognize the expected credit losses as allowances for loan losses.

This will change the current method of providing allowances for loan losses that are probable and may require us to increase our allowance for loan losses.

It may also greatly

increase the data we will need to collect and review to determine the appropriate level of the allowance for loan losses.

Any increase in our allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for

loan losses, may have a material adverse effect on our financial condition and results of operations.

In June 2016, the Financial

Accounting Standards Board (“FASB”) adopted a new accounting standard that was expected to be effective for the Bank for the calendar year beginning on January 1, 2020.

This standard, referred to as Current Expected Credit Loss, or CECL, requires

financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and recognize the expected credit losses as allowances for loan losses.

This represents a change from the previous method of providing allowances

for loan losses that are probable and the implementation of the new standard may require us to increase our allowance for loan losses.

It may also greatly increase the data we will need to collect and review to determine the appropriate level of

the allowance for loan losses.

Any increase in our allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses, may have a material adverse effect on our financial condition and results of

However, pursuant to the CARES Act passed on March 27, 2020 and subsequent legislation passed in December 2020, the required implementation of CECL was permitted to be delayed until the earlier of January 1, 2022 or the first day of the

fiscal year that begins after the termination of the COVID-related national emergency.

Early adoption is allowed on either January 1, 2020 or January 1, 2021.

In addition, on March 27, 2020, the Federal Reserve and other federal bank regulatory

agencies released a joint regulatory capital rule providing a new option for phasing CECL impacts into regulatory capital over the next five years.

London Interbank Offered Rate ("LIBOR") .

In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it

intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR after 2021.

In 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for

the calibration of LIBOR after 2021.

The Federal Reserve and the Alternative Reference Rates Committee ("ARRC"), a steering committee comprised primarily of large U.S.

institutions, have identified the Secured Overnight Financing Rate (“SOFR”), a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as a potential alternative to LIBOR, and the Federal Reserve announced

final plans for the production of SOFR.

However, whether SOFR will become a LIBOR replacement and the ultimate future of LIBOR remain uncertain.

The language in our LIBOR-based contracts and financial instruments has developed over time and may

specify various events that will trigger when a successor rate would be selected.

Some contracts and financial instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates.

Furthermore, implementation of successor indices may lead to additional documentation requirements, compliance measures, and financial impacts, as well as potential disputes or litigation with customers and creditors.

financial institutions, have identified the Secured Overnight Financing Rate

("SOFR"), a broad measure of the cost of borrowing cash overnight collateralized by Treasury securities, as a potential alternative to LIBOR, and the Federal Reserve announced final plans for the production of SOFR.

Whether SOFR will become a

LIBOR replacement and the ultimate future of LIBOR remain uncertain.

However, both Fannie Mae and Freddie Mac announced in 2020 that they would cease purchasing and issuing LIBOR-based products by the end of 2020 and have begun accepting

mortgages based on SOFR.

The language in our LIBOR-based contracts and financial instruments has developed over time and may specify various events that will trigger when a successor rate would be selected.

Some contracts and financial

instruments may give the calculation agent discretion over the substitute index or indices for the calculation of interest rates.

Furthermore, implementation of successor indices may lead to additional documentation requirements, compliance

measures, and financial impacts, as well as potential disputes or litigation with customers and creditors.

Future Legislation

Various other legislative and regulatory initiatives, including proposals to overhaul the bank regulatory system, are from time to time introduced in Congress and state legislatures, as well as regulatory

Such future legislation regarding financial institutions may change banking statutes and our operating environment in substantial and unpredictable ways and could increase or decrease the cost of doing business, limit or expand

permissible activities, or affect the competitive balance among organizations within the industry.

The nature and extent of future legislative and regulatory changes affecting financial institutions is very unpredictable.

We cannot determine the

ultimate effect that any such potential legislation, if enacted, would have upon our financial condition or results of operations.

Various other legislative and regulatory initiatives, including proposals to overhaul the bank regulatory system, are from time to time introduced in Congress and

state legislatures, as well as regulatory agencies.

Such future legislation regarding financial institutions may change banking statutes and our operating environment in substantial and unpredictable ways and could increase or decrease the cost of

doing business, limit or expand permissible activities, or affect the competitive balance among organizations within the industry.

The nature and extent of future legislative and regulatory changes affecting financial institutions is very

unpredictable.

We cannot determine the ultimate effect that any such potential legislation, if enacted, would have upon our financial condition or results of operations.

Available Information

Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Forms 8-K, and all amendments to those reports are available free of charge through our website at www.IndependentBank.com

as soon as reasonably practicable after filing with the Securities and Exchange Commission (SEC).

Our annual reports on Forms 10-K, quarterly reports on Forms 10-Q, current reports on Forms 8-K, and all amendments to those reports are available free of charge

through our website at www.IndependentBank.com as soon as reasonably practicable after filing with the Securities and Exchange Commission (SEC).

BUSINESS -- STATISTICAL DISCLOSURE

2 unchanged sentences

INTEREST RATES AND DIFFERENTIAL

The information set forth in the tables captioned “Average Balances and Rates” and “Change in Net Interest Income” of our annual report, to be delivered to shareholders in connection with the April 21, 2020 Annual

Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.

The information set forth in the tables captioned "Average Balances and Rates" and "Change in Net Interest Income" of our annual report, to be delivered to

shareholders in connection with the April 20, 2021 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), is incorporated herein by reference.

INVESTMENT PORTFOLIO

2 unchanged sentences

Equity securities at fair value

Trading securities

Available for sale

7 unchanged sentences

BUSINESS -- STATISTICAL DISCLOSURE (Continued)

(B) The following table sets forth contractual maturities of securities at December 31, 2019 and the weighted average yield of such securities:

(B) The following

table sets forth contractual maturities of securities at December 31, 2020 and the weighted average yield of such securities:

(dollars in thousands)

Available for sale

Obligations of states and political subdivisions

agency residential mortgage-backed

Obligations of states and political subdivisions

Other asset backed

4 unchanged sentences

Tax equivalent adjustment for calculation of yield

The rates set forth in the tables above for those obligations of state and political subdivisions that are tax exempt have been restated on a tax equivalent basis assuming a marginal tax rate of 21%.

The amount of

the adjustment is as follows.

The rates set forth in the tables above for those obligations of state and political subdivisions that are tax exempt have been restated on a tax equivalent basis

assuming a marginal tax rate of 21%.

The amount of the adjustment is as follows.

Available for sale

After 10 years

The rates in this table are different from the rates in the table above due to obligations of states and political subdivisions in the table above include both taxable and tax exempt securities.

The rates in this table are different from the rates in the table above due to obligations of states and political subdivisions in the table above include both taxable and tax

exempt securities.

BUSINESS -- STATISTICAL DISCLOSURE (Continued)

3 unchanged sentences

Loans held for sale(a)

Payment plan receivables

2016 includes $30.6 million of payment plan receivables and $0.8 million commercial loans related to the then pending sale of Mepco and $35.9 million of 1-4 family residential mortgages.

2016 includes $30.6 million of payment plan receivables and $0.8 million commercial loans related to the then pending sale of Mepco and $35.9 million of 1-4 family residential

The loan portfolio is periodically and systematically reviewed, and the results of these reviews are reported to the Board of Directors of our bank.

The purpose of these reviews is to assist in assuring proper

loan documentation, to facilitate compliance with applicable laws and regulations, to provide for the early identification of potential problem loans (which enhances collection prospects) and to evaluate the adequacy of the allowance for loan

(B) The following table sets forth scheduled loan repayments (excluding 1-4 family residential mortgages and installment loans) at December 31, 2019:

The purpose of

these reviews is to assist in assuring proper loan documentation, to facilitate compliance with applicable laws and regulations, to provide for the early identification of potential problem loans (which enhances collection prospects) and to

evaluate the adequacy of the allowance for loan losses.

(B) The following table sets forth scheduled loan repayments (excluding

1-4 family residential mortgages and installment loans) at December 31, 2020:

(in thousands)

4 unchanged sentences

BUSINESS -- STATISTICAL DISCLOSURE (Continued)

(C) The following table sets forth loans on non-accrual, loans ninety days or more past due and troubled debt restructured loans at December 31:

days or more past due and troubled debt restructured loans at December 31:

(in thousands)

1 unchanged sentence

(b) Aggregate amount of loans ninety days or more past due (excludes loans in (a) above)

The accrual of interest income is discontinued when a loan becomes 90 days past due and the borrower's capacity to repay the loan and collateral values appear insufficient.

Non-accrual loans may be restored to accrual status when

interest and principal payments are current and the loan appears otherwise collectible.

Non-accrual loans may be restored to accrual status when interest and principal payments are current and the loan appears otherwise collectible.

Interest in the amount of $3.25 million would have been earned in 2020 had loans in categories (a) and (c) remained at their original terms;

however, only $3.23 million was included in interest income for the year with respect to

however, only $2.74 million was

included in interest income for the year with respect to these loans.

Potential problem loans identified by the loan review department which are not included as non-performing in the table above were zero at December 31, 2020.

At December 31, 2019, there was no concentration of loans exceeding 10% of total loans which is not already disclosed as a category of loans in this section “Loan Portfolio” (Item III(A)).

At December 31, 2020, there was no concentration of loans exceeding 10% of total loans which is not already disclosed as a category of loans in this section "Loan

Portfolio" (Item III(A)).

There were no other interest-bearing assets at December 31, 2020, that would be required to be disclosed above (Item III(C)), if such assets were loans.

12 unchanged sentences

Net loans charged-off (recovered)

Additions (deductions) included in operations

Additions included in operations

Balance at end of year

Net loans charged-off (recovered) as a percent of average loans outstanding (includes loans held for sale) for the year

Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the end of the year

Net loans charged-off (recovered) as a percent of average loans outstanding (includes loans held for

sale) for the year

Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the

end of the year

BUSINESS -- STATISTICAL DISCLOSURE (Continued)

7 unchanged sentences

Total recoveries

Net loans charged-off

Net loans charged-off (recovered)

Reclassification to loans held for sale

1 unchanged sentence

Balance at end of year

Net loans charged-off as a percent of average loans outstanding (includes loans held for sale) for the year

Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the end of the year

Net loans charged-off as a percent of average loans outstanding (includes loans held for sale) for

Allowance for loan losses as a percent of loans outstanding (includes loans held for sale) at the

end of the year

The allowance for loan losses reflected above is a valuation allowance in its entirety and the only allowance available to absorb probable incurred loan losses.

Further discussion of the provision and allowance for loan losses (a critical accounting policy) as well as non-performing loans, is presented in Management’s Discussion and Analysis of Financial Condition and

Results of Operations in our annual report, to be delivered to shareholders in connection with the April 21, 2020 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.

Further discussion of the provision and allowance for loan losses (a critical accounting policy) as well as non-performing loans, is presented in Management's

Discussion and Analysis of Financial Condition and Results of Operations in our annual report, to be delivered to shareholders in connection with the April 20, 2021 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K),

and is incorporated herein by reference.

BUSINESS -- STATISTICAL DISCLOSURE (Continued)

SUMMARY OF LOAN LOSS EXPERIENCE (Continued)

(B) We have allocated the allowance for loan losses to provide for probable incurred losses within the categories of loans set forth in the table below.

The amount of the allowance for loan

losses that is allocated and the ratio of loans within each category to total loans at December 31 follow:

(B) We have allocated the allowance for loan losses to provide for probable incurred losses within the categories of loans set forth in the table

The amount of the allowance for loan losses that is allocated and the ratio of loans within each category to total loans at December 31 follow:

(dollars in thousands)

24 unchanged sentences

Average shareholders' equity as a percent of average assets

Additional performance ratios are set forth in Selected Consolidated Financial Data in our annual report, to be delivered to shareholders in connection with the April 21, 2020 Annual Meeting of Shareholders (filed

as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.

Any significant changes in the current trend of the above ratios are reviewed in Management’s Discussion and Analysis of Financial Condition and Results of

Operations in our annual report, to be delivered to shareholders in connection with the April 21, 2020 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.

Additional performance ratios are set forth in Selected Consolidated Financial Data in our annual report, to be delivered to shareholders in connection with the April

20, 2021 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is incorporated herein by reference.

Any significant changes in the current trend of the above ratios are reviewed in Management's Discussion and

Analysis of Financial Condition and Results of Operations in our annual report, to be delivered to shareholders in connection with the April 20, 2021 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K), and is

incorporated herein by reference.

SHORT-TERM BORROWINGS

Short-term borrowings are discussed in note 9 to the consolidated financial statements incorporated herein by reference to Part II, Item 8 of this report.

Investing in our common stock involves risks, including (among others) the following factors:

Downturns in general political, economic or industry conditions, either domestically or internationally, would have an adverse effect on our financial condition and performance.

Local, domestic, and international economic, political and industry-specific conditions affect the financial services industry, directly and indirectly.

Conditions such as or related to inflation, recession,

unemployment, volatile interest rates, international conflicts and other factors outside of our control, such as real estate values, energy costs, fuel prices, state and local municipal budget deficits, and government spending and the U.S.

national debt, may, directly and indirectly, adversely affect us.

Economic downturns could result in the delinquency of outstanding loans, which could have a material adverse impact on our earnings.

Governmental monetary and fiscal policies may adversely affect the financial services industry and therefore impact our financial condition and results of operations.

Monetary and fiscal policies of various governmental and regulatory agencies, particularly the Federal Reserve, affect the financial services industry, directly and indirectly.

The Federal Reserve regulates the

supply of money and credit in the U.S., and its monetary and fiscal policies determine in a large part our cost of funds for lending and investing and the return that can be earned on such loans and investments.

Changes in such policies,

including changes in interest rates, will influence the origination of loans, the value of investments, the value of capitalized mortgage loan servicing rights, the generation of deposits and the rates received on loans and investment securities

and paid on deposits.

Changes in monetary and fiscal policies are beyond our control and difficult to predict.

Our financial condition and results of operations could be materially adversely impacted by changes in governmental monetary and fiscal

Volatility and disruptions in global capital and credit markets may adversely impact our business, financial condition and results of operations.

Even though we operate in a distinct geographic region in the U.S., we are impacted by global capital and credit markets, which are sometimes subject to periods of extreme volatility and disruption.

uncertainty or volatility in the capital and credit markets may limit our ability to access capital and manage liquidity, which may adversely affect our business, financial condition and results of operations.

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.

The soundness of other financial institutions could adversely affect us.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions.

Financial services institutions are interrelated as a

result of trading, clearing, counterparty and other relationships.

We have exposure to many different industries and counterparties, and we routinely execute transactions with counterparties in the financial industry.

As a result, defaults by,

or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, can lead to market-wide liquidity problems and losses or defaults by us or by other institutions.

Many of these

transactions could expose us to credit risk in the event of default by a counterparty.

In addition, our credit risk may be impacted when the collateral held by us cannot be realized upon or is liquidated at prices not sufficient to recover the

full amount of the financial instrument exposure due to us.

There is no assurance that any such losses would not adversely affect us and possibly be material in nature.

Changes in regulation or oversight may have a material adverse impact on our operations.

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.

Regulatory authorities have extensive discretion in their supervisory and enforcement activities, including the imposition of restrictions on our operations, investigations and limitations related to our securities, the

classification of our assets and determination of the level of our allowance for loan losses.

Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or supervisory action, may have a

material adverse impact on our business, financial condition or results of operations.

RISK FACTORS (continued)

Additional regulatory focus on the financial services industry is common in connection with an economic downturn, as the industry experienced following the most recent financial crisis.

As a result, the adverse

effects on our business relating to a future economic downturn could be exacerbated by additional regulations and regulatory scrutiny that accompanied or followed any such downturn.

We can neither predict when or whether future regulatory or

legislative reforms will be enacted nor what their contents will be.

The impact of any future legislation or regulatory actions on our businesses or operations cannot be determined at this time, and such impact may adversely affect us.

We have credit risk inherent in our loan portfolios, and our allowance for loan losses may not be sufficient to cover actual loan losses.

Our loan customers may not repay their loans according to their respective terms, and the collateral securing the payment of these loans may be insufficient to cover any losses we may incur.

various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.

Non-performing loans amounted to $9.5 million and $8.6 million at December 31, 2019 and December 31, 2018, respectively.

Our allowance for loan losses coverage ratio of non-performing loans was 274.32% and 290.27% at December 31, 2019 and

December 31, 2018, respectively.

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

If our assumptions or judgments prove to be incorrect, our current allowance

for loan losses may not be sufficient to cover certain loan losses inherent in our loan portfolio, and adjustments may be necessary to account for different economic conditions or adverse developments in our loan portfolio.

Material additions to

our allowance for loan losses would adversely impact our operating results.

In addition, federal and state regulators periodically review our allowance for loan losses and may require us to increase our provision for loan losses or recognize additional loan charge-offs,

notwithstanding any internal analysis that has been performed.

Any increase in our allowance for loan losses or loan charge-offs required by these regulatory agencies could have a material adverse effect on our results of operations and financial

We have credit risk in our securities portfolio.

We maintain diversified securities portfolios, which include obligations of the Treasury and government-sponsored agencies as well as securities issued by states and political subdivisions, mortgage-backed

securities, corporate securities and asset-backed securities.

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 in our portfolio totaled approximately $1.1 million as of December 31, 2019 (compared to approximately $6.8 million as of December 31,

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

However, we evaluate securities available for sale for other than temporary impairment (OTTI) at least quarterly and more frequently when economic or market concerns warrant such evaluation.

Those evaluations may result in OTTI charges

to our earnings.

In addition to these impairment charges, we may, in the future, experience additional losses in our securities portfolio which may result in charges that could materially adversely affect our results of operations.

RISK FACTORS (continued)

Our mortgage-banking revenues are susceptible to substantial variations, due in part to factors we do not control, such as market interest rates.

A portion of our revenues are derived from net gains on mortgage loans.

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.

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

We realized net gains of $20.0 million on mortgage loans during 2019 compared to $10.6 million during 2018 and

$11.8 million during 2017.

We are subject to liquidity risk in our operations, which could adversely impact our ability to fund various obligations.

Liquidity risk is the possibility of being unable to meet obligations as they come due or capitalize on growth opportunities as they arise because of an inability to liquidate assets or obtain adequate funding on a

timely basis, at a reasonable cost and within acceptable risk tolerances.

Liquidity is required to fund various obligations, including credit obligations to borrowers, loan originations, withdrawals by depositors, repayment of debt, dividends to

shareholders, operating expenses and capital expenditures.

Liquidity is derived primarily from retail deposit growth and earnings retention, principal and interest payments on loans and investment securities, net cash provided from operations and

access to other funding.

If we are unable to maintain adequate liquidity, then our business, financial condition and results of operations could be negatively impacted.

Our parent company must rely on dividends or returns of capital from our bank for most of its cash flow.

Our parent company is a separate and distinct legal entity from our bank.

Generally, our parent company receives substantially all of its cash flow from dividends or returns of capital from our subsidiary bank.

These dividends or returns of capital are the principal source of funds to pay our parent company’s operating expenses and for cash dividends on our common stock.

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.

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.

Further, the assimilation of the acquired entity’s customers and markets could result in higher than expected deposit attrition, loss of key employees, disruption of our businesses or the businesses of

the acquired entity or otherwise adversely affect our ability to maintain relationships with customers and employees or achieve the anticipated benefits of the acquisition.

These matters could have an adverse effect on us for an undetermined

We will be subject to similar risks and difficulties in connection with any future decisions to downsize, sell or close units or otherwise change our business mix.

Compliance with new 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.

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.

Maintaining higher levels of capital may reduce our profitability and otherwise adversely affect our business, financial condition, or results of operations.

RISK FACTORS (continued)

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 volatile businesses and industries such as the automotive production industry and the real estate business.

These industries are sensitive to global

economic conditions and supply chain factors.

Any decline in one of those customers’ businesses or industries 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.

We make certain projections and develop plans and strategies for our banking and financial products.

If we do not accurately determine demand for or changes in our banking and financial product needs, it could

result in us incurring significant expenses without the anticipated increases in revenue, which could result in a material adverse effect on our business.

We may not be able to utilize technology to efficiently and effectively develop, market, and deliver new products and services to our customers.

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.

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.

Operational difficulties, failure of technology infrastructure or information security incidents could adversely affect our business and operations.

We are exposed to many types of operational risk, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, failure of our controls and procedures and

unauthorized transactions by employees or operational errors, including clerical or recordkeeping errors or those resulting from computer or telecommunications systems malfunctions.

Given the high volume of transactions we process, certain errors

may be repeated or compounded before they are identified and resolved.

In particular, our operations rely on the secure processing, storage and transmission of confidential and other information on our technology systems and networks.

failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems.

We also face the risk of operational disruption, failure or capacity constraints due to our dependency on third party vendors for components of our business infrastructure, including our core data processing

systems which are largely outsourced.

While we have selected these third party vendors carefully, we do not control their operations.

As such, any failure on the part of these business partners to perform their various responsibilities could also

adversely affect our business and operations.

We may also be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control, which may include, for example, computer viruses, cyber attacks, spikes in

transaction volume and/or customer activity, electrical or telecommunications outages, or natural disasters.

Although we have programs in place related to business continuity, disaster recovery and information security to maintain the

confidentiality, integrity, and availability of our systems, business applications and customer information, such disruptions may give rise to interruptions in service to customers and loss or liability to us.

RISK FACTORS (continued)

The occurrence of any failure or interruption in our operations or information systems, or any security breach, could cause reputational damage, jeopardize the confidentiality of customer information, result in a

loss of customer business, subject us to regulatory intervention or expose us to civil litigation and financial loss or liability, any of which could have a material adverse effect on us.

Changes in the financial markets, including fluctuations in interest rates and their impact on deposit pricing, could adversely affect our net interest income and financial condition.

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.

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.

Our financial results could be materially adversely impacted by changes in financial market conditions.

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.

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.

Changes in customer behavior may adversely impact our business, financial condition and results of operations.

We use a variety of methods to anticipate customer behavior as a part of our strategic planning and to meet certain regulatory requirements.

Individual, economic, political, industry-specific conditions and other

factors outside of our control, such as fuel prices, energy costs, real estate values or other factors that affect customer income levels, could alter predicted customer borrowing, repayment, investment and deposit practices.

Such a change in

these practices could materially adversely affect our ability to anticipate business needs and meet regulatory requirements.

Further, difficult economic conditions may negatively affect consumer confidence levels.

A decrease in consumer confidence levels would likely aggravate the adverse effects of these difficult market conditions on

us, our customers and others in the financial institutions industry.

Our ability to maintain and expand customer relationships may differ from expectations.

The financial services industry is very competitive.

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.

Failure to create new customer relationships

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

Our ability to retain key officers and employees may change.

Our future operating results depend substantially upon the continued service of our executive officers and key personnel.

Our future operating results also depend in significant part upon our ability to attract and

retain qualified management, financial, technical, marketing, sales and support personnel.

Competition for qualified personnel is intense, and we cannot ensure success in attracting or retaining qualified personnel.

There may be only a limited

number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time.

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

What changed 10-K

Item 1. Business