What changed in this filing

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Item 1A. Risk Factors

2022-03-04 compared with 2021-03-05 · 248 added, 242 removed, 80 unchanged (86% of the section changed)

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Risk Factors Relating to the COVID-19 Pandemic

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of

operations and financial condition, and such effects will depend on future developments, which are highly uncertain and are difficult to predict.

Global health concerns relating to the COVID-19 pandemic and related government actions have resulted in significant disruptions and increased economic uncertainty.

Government restrictions and recommendations designed to contain the virus and limit its effects have substantially limited the activities of individuals and the operations of businesses in the markets we serve.

The Governor of Michigan issued her first "stay home, stay safe" executive order effective March 24, 2020.

In general, that order and subsequent

modifications required individuals in Michigan to stay at home or their place of residence, except for certain specified activities that were deemed necessary to sustain or protect life.

That original executive order was amended several times and

was later rescinded and replaced entirely by a series of "Safer at Home" executive orders, which generally extended certain social distancing restrictions, but lifted the requirement that individuals remain in their homes.

The series of "Safer at

Home" orders, along with all other executive orders relating to the pandemic issued by Michigan's Governor after April 30, 2020, were then deemed unconstitutional by the Michigan Supreme Court on October 2, 2020.

On October 4, 2020, Michigan's

Attorney General announced her office would no longer enforce the Governor's executive orders that were ruled unconstitutional, effective immediately.

Since then, the Michigan Department of Health and Human Services (MDHHS) and the Michigan

Occupational Safety and Health Administration (MIOSHA) have issued orders imposing restrictions similar to the Governor's former executive orders under authority granted to the MDHHS by the Michigan Public Health Code and to MIOSHA under the

Michigan Occupational Safety and Health Act – different statutes than the law on which the Governor based her executive orders.

Under the MDHHS and MIOSHA orders, social distancing and gathering restrictions remain in place;

however, certain

retail operations, restaurants and bars, and other businesses are permitted to conduct in-person operations, subject to capacity limitations and other workplace safety requirements.

The degree to which businesses may resume operations varies based

on the type of business operations being conducted.

It is currently expected that various forms of state and local government restrictions similar to those described above will continue for the foreseeable future.

As a result of these events,

Michigan has experienced a significant increase in unemployment.

The COVID-19 pandemic, the related executive orders, and other government restrictions and guidance have had and continue to have a significant effect on us, our

customers and the markets we serve.

Our business, results of operations and financial condition may be adversely affected by a number of factors that could impact us and our customers, including but not limited to:

restrictions on activity and high levels of unemployment may cause increases in loan delinquencies, foreclosures and defaults;

increases in allowance for loan losses may be necessary;

The ongoing COVID-19 pandemic and measures intended to prevent its spread could have a material adverse effect on our business, results of operations

and financial condition, and such effects will depend on future developments, which remain highly uncertain and difficult to predict.

The COVID-19 pandemic and the related government mandates, restrictions, and guidance have created and may continue to create and contribute to significant economic

uncertainty and market disruptions.

Throughout 2020 and 2021, the volatility created by the pandemic and responses to the pandemic impacted our performance, customers, and the markets we serve.

Federal and state government responses have also created uncertainty.

On November 4, 2021, the U.S.

Department of Labor implemented an emergency temporary standard (ETS)

mandating that all employers with 100 workers or more must require their employees to be fully vaccinated or submit to weekly testing.

The ETS has been met with many subsequent legal challenges.

On January 13, 2022, the U.S.

Supreme Court stayed

the ETS, sending the case back to the U.S.

Court of Appeals for the Sixth Circuit for a decision on the merits.

Effective January 26, 2022, the U.S.

Department of Labor withdrew the ETS as an enforceable emergency temporary standard, but did not

withdraw it as a proposed permanent rule.

As a result, the future of this proposed standard and its potential impact on our business remains unpredictable.

In Michigan, the Department of Health and Human Services announced its intent to update

quarantine and isolation periods to align with the Centers for Disease Control and Prevention’s newly shortened guidelines.

These impending mandates and guidelines may have significant effects on the U.S.

and Michigan economies, the banking sector

generally, and our business specifically, the scope of which cannot be foreseen.

Based on this uncertainty, it is difficult to predict the extent to which the pandemic will continue to adversely impact our business, results of operations, financial

condition, and customers.

The potential impacts may include, but are not limited to:

∙ difficulties encountered by our business customers in

addressing the effects of the pandemic may cause increases in loan delinquencies, foreclosures and defaults;

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

∙ declines in collateral values may occur;

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

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

operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions;

key personnel or significant numbers of our employees being unable to work effectively, including because of illness or restrictions in connection with COVID-19.

These factors may continue for a significant period of time.

The spread of COVID-19 has caused us to modify many of our business practices.

Currently, approximately 38% of our total employees are working remotely.

also expanded sick and vacation time for certain employees.

We may take further actions as may be required or as we determine to be prudent.

There is no certainty that such measures will be sufficient to mitigate the risks posed by COVID-19.

The extent to which the COVID-19 pandemic will impact our business, results of operations and financial condition will depend on future developments, which are highly

uncertain and difficult to predict.

Those developments and factors include the duration and spread of the pandemic, its severity, the actions to contain the pandemic or address its impact, and how quickly and to what extent normal economic and

operating conditions can resume.

We do not yet know the full extent of the impact.

However, the effects could have a material adverse impact on our business, financial condition and results of operations.

Material adverse impacts may include valuation impairments on our intangible assets, securities available for sale, loans, capitalized mortgage loan servicing rights and deferred tax assets.

As a participating lender in the U.S.

Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”), the Company and the Bank are

subject to additional risks regarding the Bank’s processing of loans for the PPP and risks that the SBA may not fund some or all PPP loan guaranties.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), was signed into law which included a $349 billion loan program administered

through the SBA referred to as the PPP.

Under the PPP, small businesses and other entities and individuals can apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous

limitations and eligibility criteria.

PPP loans are eligible for forgiveness, subject to numerous limitations.

The Bank is participating as a lender in the PPP.

The PPP opened on April 3, 2020;

however, because of the short timeframe between the

passing of the CARES Act and the opening of the PPP, there is some ambiguity in the laws, rules and guidance regarding the operation of the PPP, which exposes us to potential risks relating to noncompliance with the PPP.

Since then, the SBA and

Department of Treasury have provided additional guidance and clarity on the PPP through the issuance of over 20 interim final rules implementing the PPP.

On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for

the PPP was exhausted.

The PPP was then expanded by the Paycheck Protection Program and Health Care Enhancement Act in late April 2020, adding an additional $310 billion in funding while the Paycheck Protection Program Flexibility Act made certain

changes to the PPP by allowing for more time to spend the funds and making it easier to get a loan fully forgiven.

The PPP initially closed on August 8, 2020.

On December 27, 2020, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and

Venues Act ("Economic Aid Act") was signed into law which allocates an additional $284 billion in funding for the PPP.

The Economic Aid Act reopens the PPP through March 31, 2021 with generally the same terms and conditions as originally enacted

under the CARES Act while clarifying eligibility and ineligibility for certain entities and expanding the permitted uses of PPP funds.

In addition, the Economic Aid Act simplifies the loan forgiveness process for PPP loans of $150,000 or less.

Economic Aid Act also establishes second draw loans for entities that have already used the initial PPP funds, subject to numerous limitations and eligibility criteria.

PPP second draw loans are eligible for forgiveness similar to initial PPP

loans, subject to limitations set forth in the Economic Aid Act.

As of December 31, 2020, we had 1,483 initial PPP loans outstanding with a total balance of $169.8 million.

As of December 31, 2020, we had 808 forgiveness

applications for initial PPP loans totaling $123.0 million that remained pending.

We had no PPP second draw loans outstanding as of December 31, 2020.

Since the initiation of the PPP, several larger banks have been subject to litigation regarding the protocols and procedures that they used in processing applications

We may be exposed to the risk of similar litigation, from both customers and non‑customers that approached us regarding PPP loans, regarding our policies and procedures used in processing applications for the PPP.

litigation is filed against the Company or the Bank and is not resolved in a manner favorable to us, it could result in financial liability or adversely affect our reputation.

In addition, litigation can be costly, regardless of outcome.

financial liability, litigation costs or reputational damage caused by PPP related litigation could have an adverse impact on our business, financial condition and results of operations.

We also have credit risk on PPP loans if a determination is made by the SBA that there is a deficiency in the manner in which the loan was originated, funded, or

serviced by the Bank, such as an issue with the eligibility of a borrower to receive a PPP loan, which may or may not be related to the ambiguity in the laws, rules and guidance regarding the operation of the PPP.

In the event of a loss resulting

from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded, or serviced by us, the SBA may deny its liability under the guaranty, reduce the amount of the

guaranty, or, if it has already paid under the guaranty, seek recovery of any loss related to the deficiency from us.

∙ third party disruptions may occur, including outages at

network providers, on-line banking vendors and other suppliers;

∙ there is increased cyber and payment fraud risk, as

cybercriminals attempt to profit from the disruption, given increased online and remote activity;

∙ we may experience operational failures due to changes in our

normal business practices necessitated by the pandemic and related governmental actions;

∙ our production and efficiency may suffer due to employee

illnesses and/or employees having to work remotely.

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

The extent to which the COVID-19 pandemic may impact our business, results of operations, asset valuations, financial condition, and customers will depend on future

developments, which continue to be highly uncertain and difficult to predict.

Those developments and factors are expected to include the evolution of the virus and new and emerging virus variants, vaccination rates and subsequent vaccine

“boosters,” actions taken by governmental authorities to address the foregoing, and the enforcement thereof, and how quickly and to what extent normal economic and operating conditions stabilize.

Potential developments also include market factors,

such as interest rates, supply chain disruptions, inflation, consumer-welfare, and employment rates.

We do not know the full extent of the potential impact.

Material adverse impacts may include all or a combination of

valuation impairments on our intangible assets, securities available for sale, loans, capitalized mortgage loan servicing rights or deferred tax assets.

Risk Factors Relating to the Financial Services Industry

Downturns in general political, economic or industry conditions, either domestically or internationally, would have an adverse effect on our

financial condition and performance.

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.

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.

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.

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

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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 loan losses.

related to our securities, the classification of our assets, and the determination of the level of our allowance for credit losses.

Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, legislation or

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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.

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.

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.

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.

Any 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.

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.

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.

Legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving us, could adversely affect us or the financial services

industry in general.

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.

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.

Legal and regulatory proceedings and related matters with respect to the financial services industry, including those directly involving us, could

adversely affect us or the financial services industry in general.

We have been, and may in the future be, subject to various legal and regulatory proceedings.

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.

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.

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.

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

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.

Methods of reducing risk exposures might not be effective.

Instruments, systems and strategies used to hedge or otherwise manage exposure to various types of credit, market and liquidity, operational, compliance, business risks and enterprise-wide risk could be less

effective than anticipated.

As a result, we may not be able to effectively mitigate our risk exposures in particular market environments or against particular types of risk, which could have a material adverse impact on our business, financial

condition or results of operations.

Instruments, systems and strategies used to hedge or otherwise manage exposure to various types of credit, market and liquidity, operational, compliance, business risks

and enterprise-wide risk could be less effective than anticipated.

As a result, we may not be able to effectively mitigate our risk exposures in particular market environments or against particular types of risk, which could have a material adverse

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

Risk Factors More Specific to Our Business

Our business is subject to additional risks in the near term related to our plan to complete a core data processing systems conversion.

We are in the process of converting our core data processing system to a new system hosted by a different vendor.

A systems conversion of this nature is extremely complicated, time-consuming, and resource

The process will be even more challenging in light of the COVID-19 pandemic, including the challenges presented as a result of a portion of our workforce working remotely.

The timing and success of this systems conversion is also

heavily dependent on the reliability of the vendors for both our existing and new systems.

If either or both of these vendors experience workforce shortages due to the pandemic or otherwise, it could impact our ability to complete the systems

conversion on the timeline and budget currently expected.

Difficulties in completing the conversion could also negatively impact our operations and financial performance.

We expect to complete this conversion in the second quarter of 2021.

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.

We make 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.

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

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.

We make 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 $5.1 million and $7.9 million at December 31, 2021 and December 31, 2020, respectively.

Our allowance for loan losses coverage ratio of non-performing loans was 450.01% and 274.32% at December 31, 2020 and

December 31, 2019, 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 condition.

Our allowance for credit losses coverage ratio of non-performing loans was

924.70% and 450.01% at December 31, 2021 and December 31, 2020, respectively.

The increase in this coverage ratio in 2021 was primarily due to an increase in the allowance for credit losses resulting from the adoption of CECL on January 1, 2021.

In determining the size of the allowance for credit 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 credit losses may not be

sufficient to cover certain credit 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 credit

losses would adversely impact our operating results.

In addition, federal and state regulators periodically review our allowance for credit losses and may require us to increase our provision for credit

losses or recognize additional loan charge-offs, notwithstanding any internal analysis that has been performed.

Any increase in our allowance for credit losses or loan charge-offs required by these regulatory agencies could have a material adverse

effect on our results of operations and financial condition.

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 $1.4 million as of December 31, 2020 (compared to approximately $1.1 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.

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 $8.6 million as of December 31, 2021 (compared to approximately $1.4

million as of December 31, 2020).

the unrealized losses reverse.

However, we evaluate securities available for sale for other impairment related to credit at least quarterly and more frequently when economic or market concerns warrant such evaluation.

Those evaluations may result

in a provision for credit losses recorded in our earnings.

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

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.

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 $62.6 million on mortgage loans during 2020 compared to $20.0 million during 2019 and

$10.6 million during 2018.

We realized net gains of $35.9 million on mortgage loans during 2021

compared to $62.6 million during 2020 and $20.0 million during 2019.

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.

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.

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

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 period.

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.

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.

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.

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.

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

as the impact of COVID-19.

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.

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.

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.

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.

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.

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.

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.

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.

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

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.

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.

Further, our ability to retain key officers and employees may be impacted by legislation and regulation affecting the financial services industry.

Our business, financial condition or results of operations could

be materially adversely affected by the loss of any key employees, or our inability to attract and retain skilled employees.

Catastrophic events, including, but not limited to, hurricanes, tornadoes, earthquakes, fires, floods and pandemic outbreaks may adversely affect the general economy, financial and capital

markets, specific industries, and us.

Our business, financial

condition or results of operations could be materially adversely affected by the loss of any key employees, or our inability to attract and retain skilled employees.

Catastrophic events, including, but not limited to, hurricanes, tornadoes, earthquakes, fires, floods and pandemic outbreaks may adversely affect the

general economy, financial and capital markets, specific industries, and us.

We have significant operations and a significant customer base in Michigan where natural and other disasters may occur, such as tornadoes and floods.

These types of natural catastrophic events at times have

disrupted the local economy, our business, and our customers and have posed physical risks to our property.

In addition, catastrophic events occurring in other regions of the world may have an impact on our customers and in turn, on us.

significant catastrophic event could materially adversely affect our operating results.

These types of

natural catastrophic events at times have disrupted the local economy, our business, and our customers and have posed physical risks to our property.

In addition, catastrophic events occurring in other regions of the world may have an impact on our

customers and in turn, on us.

A significant catastrophic event could materially adversely affect our operating results.

Our failure to appropriately apply certain critical accounting policies could result in our misstatement of our financial results and condition.

Accounting policies and processes are fundamental to how we record and report our financial condition and results of operations.

We must exercise judgment in selecting and applying many of these accounting

policies and processes so they comply with U.S.

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.

We have identified certain accounting policies as being critical because they require us to make difficult, subjective or complex judgments about matters that are uncertain.

Materially different amounts could be

reported under different conditions or using different assumptions or estimates.

We have established detailed policies and control procedures that are intended to ensure these critical accounting estimates and judgments are subject to internal

controls and applied consistently.

We must exercise judgment in selecting

and applying many of these accounting policies and processes so they comply with U.S.

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.

We have identified certain accounting policies as being critical because they require us to make difficult, subjective or complex judgments about matters that are

Materially different amounts could be reported under different conditions or using different assumptions or estimates.

We have established detailed policies and control procedures that are intended to ensure these critical accounting

estimates and judgments are subject to internal controls and applied consistently.

In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner.

Because of the uncertainty surrounding management's judgments and

the estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or restate prior period financial statements.

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 20, 2021 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K).

Because of the

uncertainty surrounding management's judgments and the estimates pertaining to these matters, we cannot guarantee that we will not be required to adjust accounting policies or restate prior period financial statements.

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 19, 2022 Annual Meeting of Shareholders (filed as exhibit 13 to this report on Form 10-K).

UNRESOLVED STAFF COMMENTS

We and our bank operate a total of 85 facilities in Michigan and 2 leased facilities in Ohio.

We own 60 and lease 25 of the facilities in Michigan.

With the exception of the potential remodeling of certain facilities to provide for the efficient use of workspace or to maintain an appropriate appearance, each property

is considered reasonably adequate for current and anticipated needs.

LEGAL PROCEEDINGS

We are involved in various litigation matters in the ordinary course of business.

At the present time, we do not

believe any of these matters will have a significant impact on our consolidated financial position or results of operations.

The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial.

However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued.

At this time, we estimate the maximum amount of additional

losses that are reasonably possible is insignificant.

However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages, this maximum amount may change in the future.

The litigation matters described in the preceding paragraph primarily include claims that have been brought

against us for damages, but do not include litigation matters where we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans).

These excluded, collection-related matters may involve claims or

counterclaims by the opposing party or parties, but we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote.

MINE SAFETY DISCLOSURES

Not applicable.

ADDITIONAL ITEM - EXECUTIVE OFFICERS

Our executive officers are appointed annually by our Board of Directors at the meeting of directors preceding the Annual Meeting of Shareholders.

There are no family

relationships among these officers and/or our directors nor any arrangement or understanding between any officer and any other person pursuant to which the officer was elected.

The following sets forth certain information with respect to our executive officers at February 19, 2022.

First elected

as an executive

President, Chief Executive Officer and Director

Executive Vice President and Chief Financial Officer(1)

Executive Vice President and Chief Risk Officer

Joel Rahn (55)

Executive Vice President and Chief Lending Officer(2)

Executive Vice President, Operations and Digital Banking

Executive Vice President, Mortgage Banking

Twarozynski (56)

Senior Vice President and Chief Accounting Officer

Mohr joined Independent Bank in September 2020, as Executive Vice President and Chief Financial Officer.

Prior to joining Independent Bank,

Mohr served as the Chief Financial Officer of STAR Financial Bank, (“STAR”), a $2.1 billion bank, located in Fort Wayne, Indiana.

Prior to joining STAR, Mr.

Mohr served as Treasurer of Yadkin Bank and

Trust (Statesville, North Carolina) from 2013 to 2014.

Rahn joined Independent Bank in April of 2018 as Senior Vice President Commercial Lending.

He was promoted to

Executive Vice President and Chief Lending Officer in January, 2021.

He has 33 years of commercial banking experience and has served in senior leadership positions for the past 16 years.

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