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Independent Bank Corporation
IBCP
#6584
Rank
$0.67 B
Marketcap
๐Ÿ‡บ๐Ÿ‡ธ United States
Country
$32.75
Share price
1.05%
Change (1 day)
8.19%
Change (1 year)
๐Ÿฆ Banks๐Ÿ’ณ Financial services
Categories
  1. Independent Bank Corporation
  2. Quarterly Reports (10-Q)
  3. Financial Year FY2023 Q3

Independent Bank Corporation - 10-Q quarterly report FY2023 Q3


Text size:
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED September 30, 2023
Commission file number   0-7818
INDEPENDENT BANK CORPORATION
(Exact name of registrant as specified in its charter)
Michigan38-2032782
(State or jurisdiction of Incorporation or Organization)(I.R.S. Employer Identification Number)
4200 East Beltline, Grand Rapids, Michigan 49525
(Address of principal executive offices)
(616) 527-5820
(Registrant's telephone number, including area code)
NONE
Former name, address and fiscal year, if changed since last report.
Securities registered pursuant to Section 12(b) of the Act:
Title of each ClassTrading SymbolName of each exchange which registered
Common stock, no par valueIBCP
The Nasdaq Stock Market, LLC
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES x NO ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
YES x NO ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company.
Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨ Emerging growth company ¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to section 13(a) of the Exchange Act. Yes ¨ No ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
YES ¨ NO x
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: common stock, no par value, 20,840,318 as of November 2, 2023.



INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
INDEX
Number(s)
Financial Information
Condensed Consolidated Statements of Financial Condition September 30, 2023 and December 31, 2022
3
Condensed Consolidated Statements of Operations Three- and Nine-month periods ended September 30, 2023 and 2022
4
Condensed Consolidated Statements of Comprehensive Income (Loss) Three- and Nine-month periods ended September 30, 2023 and 2022
5
Condensed Consolidated Statements of Cash Flows Nine-month periods ended September 30, 2023 and 2022
6
Condensed Consolidated Statements of Shareholders' Equity Three- and Nine-month periods ended September 30, 2023 and 2022
7
Notes to Interim Condensed Consolidated Financial Statements
8-63
Management's Discussion and Analysis of Financial Condition and Results of Operations
64-81
Quantitative and Qualitative Disclosures about Market Risk
82
Controls and Procedures
82
Other Information
Risk Factors
83
Unregistered Sales of Equity Securities and Use of Proceeds
83-84
Item 5.
Other Information
84
Exhibits
84
1
FORWARD-LOOKING STATEMENTS
Statements in this report that are not statements of historical fact, including statements that include terms such as ‘‘will,’’ ‘‘may,’’ ‘‘should,’’ ‘‘believe,’’ ‘‘expect,’’ ‘‘forecast,’’ ‘‘anticipate,’’ ‘‘estimate,’’ ‘‘project,’’ ‘‘intend,’’ ‘‘likely,’’ ‘‘optimistic’’ and ‘‘plan’’ and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; statements about our business and growth strategies; and expectations about economic and market conditions and trends. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals. They are based on assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect. Actual results could differ materially from those discussed in the forward-looking statements for a variety of reasons, including:
•economic, market, operational, liquidity, credit, and interest rate risks associated with our business;
•economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our bank operates;
•the failure of assumptions underlying the establishment of, and provisions made to, our allowance for credit losses;
•increased competition in the financial services industry, either nationally or regionally;
•our ability to achieve loan and deposit growth;
•volatility and direction of market interest rates;
•the continued services of our management team; and
•implementation of new legislation, which may have significant effects on us and the financial services industry.
This list provides examples of factors that could affect the results described by forward-looking statements contained in this report, but the list is not intended to be all-inclusive. The risk factors disclosed in Part I – Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022, as updated by any new or modified risk factors disclosed in Part II – Item 1A of any subsequently filed Quarterly Report on Form 10-Q, include the known risks our management believes could materially affect the results described by forward-looking statements in this report. However, those risks may not be the only risks we face. Our results of operations, cash flows, financial position, and prospects could also be materially and adversely affected by additional factors that are not presently known to us that we currently consider to be immaterial, or that develop after the date of this report. We cannot assure you that our future results will meet expectations. While we believe the forward-looking statements in this report are reasonable, you should not place undue reliance on any forward-looking statement. In addition, these statements speak only as of the date made. We do not undertake, and expressly disclaim, any obligation to update or alter any statements, whether as a result of new information, future events, or otherwise, except as required by applicable law.
2

Part I - Item 1.
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Financial Condition
September 30,
2023		December 31,
2022
(Unaudited)
(In thousands, except share
amounts)
Assets
Cash and due from banks$58,567 $70,180 
Interest bearing deposits68,894 4,191 
Cash and Cash Equivalents127,461 74,371 
Securities available for sale684,641 779,347 
Securities held to maturity (fair value of $309,199 at September 30, 2023 and $335,418 at December 31, 2022 )
358,899 374,818 
Federal Home Loan Bank and Federal Reserve Bank stock, at cost16,821 17,653 
Loans held for sale, carried at fair value13,979 26,518 
Loans held for sale, carried at lower of cost or fair value— 20,367 
Loans
Commercial1,626,122 1,466,853 
Mortgage1,475,908 1,368,409 
Installment639,456 630,090 
Total Loans3,741,486 3,465,352 
Allowance for credit losses(55,495)(52,435)
Net Loans3,685,991 3,412,917 
Other real estate and repossessed assets, net443 455 
Property and equipment, net35,346 35,893 
Bank-owned life insurance54,631 55,204 
Capitalized mortgage loan servicing rights, carried at fair value46,057 42,489 
Other intangibles2,141 2,551 
Goodwill28,300 28,300 
Accrued income and other assets145,308 128,904 
Total Assets$5,200,018 $4,999,787 
Liabilities and Shareholders' Equity
Deposits
Non-interest bearing$1,141,641 $1,269,759 
Savings and interest-bearing checking1,929,947 1,973,308 
Reciprocal799,883 602,575 
Time477,928 321,492 
Brokered time236,213 211,935 
Total Deposits4,585,612 4,379,069 
Other borrowings50,014 86,006 
Subordinated debt39,491 39,433 
Subordinated debentures39,711 39,660 
Accrued expenses and other liabilities110,192 108,023 
Total Liabilities4,825,020 4,652,191 
Commitments and contingent liabilities
Shareholders’ Equity
Preferred stock, no par value, 200,000 shares authorized; none issued or outstanding
— — 
Common stock, no par value, 500,000,000 shares authorized; issued and outstanding: 20,850,455 shares at September 30, 2023 and 21,063,971 shares at December 31, 2022
317,145 320,991 
Retained earnings150,157 119,368 
Accumulated other comprehensive loss(92,304)(92,763)
Total Shareholders’ Equity374,998 347,596 
Total Liabilities and Shareholders’ Equity$5,200,018 $4,999,787 
See notes to interim condensed consolidated financial statements (Unaudited)
3
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Operations
Three months ended September 30,Nine months ended September 30,
2023202220232022
(Unaudited) (Unaudited)
(In thousands, except per share amounts)
Interest Income
Interest and fees on loans$51,419 $37,092 $143,392 $96,964 
Interest on securities
Taxable5,865 5,329 17,668 14,831 
Tax-exempt3,409 2,284 9,775 5,584 
Other investments1,739 220 3,481 651 
Total Interest Income62,432 44,925 174,316 118,030 
Interest Expense
Deposits20,743 3,625 51,964 5,608 
Other borrowings and subordinated debt and debentures2,262 1,403 6,134 3,463 
Total Interest Expense23,005 5,028 58,098 9,071 
Net Interest Income39,427 39,897 116,218 108,959 
Provision for credit losses1,350 3,145 6,827 3,951 
Net Interest Income After Provision for Credit Losses38,077 36,752 109,391 105,008 
Non-interest Income
Interchange income4,100 4,049 10,660 10,553 
Service charges on deposit accounts3,309 3,082 9,300 9,135 
Net gains (losses) on assets
Mortgage loans2,099 2,857 5,475 4,945 
Securities available for sale— — (222)(275)
Mortgage loan servicing, net2,668 4,283 7,068 18,086 
Other3,435 2,590 9,298 7,997 
Total Non-interest Income15,611 16,861 41,579 50,441 
Non-interest Expense
Compensation and employee benefits19,975 20,601 59,916 60,613 
Data processing3,071 2,653 8,953 7,513 
Occupancy, net1,971 2,062 5,975 6,682 
Interchange expense1,119 927 3,222 3,200 
Furniture, fixtures and equipment927 987 2,782 3,074 
FDIC deposit insurance677 591 2,209 1,570 
Communications568 723 1,871 2,242 
Loan and collection520 772 1,718 1,978 
Legal and professional543 573 1,623 1,545 
Advertising360 345 1,286 1,585 
Costs (recoveries) related to unfunded lending commitments451 382 76 676 
Other1,854 1,750 5,610 5,572 
Total Non-interest Expense32,036 32,366 95,241 96,250 
Income Before Income Tax21,652 21,247 55,729 59,199 
Income tax expense4,109 3,950 10,405 10,934 
Net Income$17,543 $17,297 $45,324 $48,265 
Net Income Per Common Share
Basic$0.84 $0.82 $2.16 $2.29 
Diluted$0.83 $0.81 $2.14 $2.27 
See notes to interim condensed consolidated financial statements (Unaudited)
4
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Comprehensive Income (Loss)
Three months ended
September 30,		Nine months ended
September 30,
2023202220232022
(Unaudited - In thousands)
Net income$17,543 $17,297 $45,324 $48,265 
Other comprehensive income (loss)
Securities available for sale
Unrealized losses arising during period
(15,355)(16,320)(1,592)(99,678)
Net unrealized loss at time of transfer on securities available for sale transferred to held to maturity— — — (26,479)
Accretion of net unrealized losses on securities transferred to held to maturity881 1,079 2,667 2,407 
Reclassification adjustments for losses included in earnings
— — 222 275 
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale(14,474)(15,241)1,297 (123,475)
Income tax expense (benefit)(3,040)(3,199)272 (25,929)
Unrealized gains (losses) recognized in other comprehensive income (loss) on securities available for sale, net of tax(11,434)(12,042)1,025 (97,546)
Derivative instruments
Unrealized losses arising during period
(527)— (940)— 
Reclassification adjustment for expense recognized in earnings72 — 224 — 
Unrealized losses recognized in other comprehensive income (loss) on derivative instruments
(455)— (716)— 
Income tax benefit(95)— (150)— 
Unrealized losses recognized in other comprehensive income (loss) on derivative instruments, net of tax
(360)— (566)— 
Other comprehensive income (loss)(11,794)(12,042)459 (97,546)
Comprehensive income (loss) $5,749 $5,255 $45,783 $(49,281)
See notes to interim condensed consolidated financial statements (Unaudited)
5
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Cash Flows
Nine months ended September 30,
20232022
(Unaudited - In thousands)
Net Income$45,324 $48,265 
Adjustments to Reconcile Net Income to Net Cash From Operating Activities  
Proceeds from sales of loans held for sale273,766 432,185 
Disbursements for loans held for sale(255,601)(381,421)
Provision for credit losses6,827 3,951 
Deferred income tax expense821 1,922 
Net deferred loan fees (costs)
285 (4,899)
Net depreciation, amortization of intangible assets and premiums and accretion of discounts on securities and loans7,478 8,340 
Net gains on mortgage loans(5,475)(4,945)
Net losses on securities available for sale222 275 
Share based compensation1,670 1,589 
Increase in accrued income and other assets
(14,642)(19,039)
Increase (decrease) in accrued expenses and other liabilities
(1,887)7,582 
Total Adjustments13,464 45,540 
Net Cash From Operating Activities58,788 93,805 
Cash Flow Used in Investing Activities  
Proceeds from the sale of securities available for sale278 70,523 
Proceeds from maturities, prepayments and calls of securities available for sale89,315 137,605 
Proceeds from maturities, prepayments and calls of securities held to maturity 16,745 16,579 
Purchases of securities held to maturity(1,740)(2,658)
Purchases of securities available for sale— (137,550)
Purchases of Federal Home Loan Bank stock(478)— 
Proceeds from the redemption of Federal Home Loan Bank stock1,310 774 
Net increase in portfolio loans (loans originated, net of principal payments)(311,733)(521,282)
Proceeds from the sale of portfolio loans51,481 56,449 
Proceeds from bank-owned life insurance905 433 
Proceeds from the sale of other real estate and repossessed assets598 735 
Proceeds from the sale of property and equipment
1,632 1,563 
Capital expenditures(4,511)(3,969)
Net Cash Used in Investing Activities(156,198)(380,798)
Cash Flow From Financing Activities  
Net increase in total deposits206,543 209,938 
Net increase (decrease) in other borrowings(60,992)36,698 
Proceeds from Federal Home Loan Bank Advances135,000 190,000 
Payments of Federal Home Loan Bank Advances(110,000)(170,000)
Dividends paid(14,535)(13,931)
Proceeds from issuance of common stock71 74 
Repurchase of common stock(4,963)(4,010)
Share based compensation withholding obligation(624)(617)
Net Cash From Financing Activities150,500 248,152 
Net Increase (Decrease) in Cash and Cash Equivalents53,090 (38,841)
Cash and Cash Equivalents at Beginning of Period74,371 109,473 
Cash and Cash Equivalents at End of Period$127,461 $70,632 
Cash paid during the period for  
Interest$53,936 $8,110 
Income taxes11,300 5,040 
Transfers to other real estate and repossessed assets604 624 
Transfer of securities available for sale to held to maturity— 391,618 
Right of use assets obtained in exchange for lease obligations1,146 791 
See notes to interim condensed consolidated financial statements (Unaudited)
6
INDEPENDENT BANK CORPORATION AND SUBSIDIARIES
Condensed Consolidated Statements of Shareholders’ Equity
Common
Stock 		Retained
Earnings 		Accumulated
Other
Comprehensive Income
(Loss)		Total
Shareholders’
Equity
(Dollars in thousands, except per share amounts)
Balances at July 1, 2023$318,241 $137,431 $(80,510)$375,162 
Net income, three months ended September 30, 2023— 17,543 — 17,543 
Cash dividends declared, $0.23 per share
— (4,817)— (4,817)
Repurchase of 88,401 shares of common stock
(1,693)— — (1,693)
Issuance of 0 shares of common stock
— — — — 
Share based compensation (issuance of 0 shares of common stock)
624 — — 624 
Share based compensation withholding obligation (withholding of 1,443 shares of common stock)
(27)— — (27)
Other comprehensive loss— — (11,794)(11,794)
Balances at September 30, 2023$317,145 $150,157 $(92,304)$374,998 
Balances at July 1, 2022$319,885 $96,252 $(85,003)$331,134 
Net income, three months ended September 30, 2022— 17,297 — 17,297 
Cash dividends declared, $0.22 per share
— (4,633)— (4,633)
Repurchase of 0 shares of common stock
— — — — 
Issuance of 17,900 shares of common stock
42 — — 42 
Share based compensation (issuance of zero shares of common stock)
535 — — 535 
Share based compensation withholding obligation (withholding of 1,666 shares of common stock)
(25)— — (25)
Other comprehensive loss
— — (12,042)(12,042)
Balances at September 30, 2022$320,437 $108,916 $(97,045)$332,308 
Balances at January 1, 2023$320,991 $119,368 $(92,763)$347,596 
Net income, nine months ended September 30, 2023— 45,324 — 45,324 
Cash dividends declared, $0.69 per share
— (14,535)— (14,535)
Repurchase of 288,401 shares of common stock
(4,963)— — (4,963)
Issuance of 23,000 shares of common stock
71 — — 71 
Share based compensation (issuance of 86,763 shares of common stock)
1,670 — — 1,670 
Share based compensation withholding obligation (withholding of 31,483 shares of common stock)
(624)— — (624)
Other comprehensive income— — 459 459 
Balances at September 30, 2023$317,145 $150,157 $(92,304)$374,998 
Balances at January 1, 2022$323,401 $74,582 $501 $398,484 
Net income, nine months ended September 30, 2022— 48,265 — 48,265 
Cash dividends declared, $0.66 per share
— (13,931)— (13,931)
Repurchase of 181,586 shares of common stock
(4,010)— — (4,010)
Issuance of 39,532 shares of common stock
74 — — 74 
Share based compensation (issuance of 62,856 shares of common stock)
1,589 — — 1,589 
Share based compensation withholding obligation (withholding of 27,884 shares of common stock)
(617)— — (617)
Other comprehensive loss— — (97,546)(97,546)
Balances at September 30, 2022$320,437 $108,916 $(97,045)$332,308 
See notes to interim condensed consolidated financial statements (Unaudited)
7
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.    Preparation of Financial Statements
The condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and note disclosures normally included in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) have been condensed or omitted pursuant to those rules and regulations, although we believe that the disclosures made are adequate to make the information not misleading. The unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes for the year ended December 31, 2022 included in our Annual Report on Form 10-K.
In our opinion, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary to present fairly our consolidated financial condition as of September 30, 2023 and December 31, 2022, and the results of operations for the three and nine-month periods ended September 30, 2023 and 2022. The results of operations for the three and nine-month periods ended September 30, 2023, are not necessarily indicative of the results to be expected for the full year. Certain reclassifications have been made in the prior period condensed consolidated financial statements to conform to the current period presentation. Our critical accounting policies include the determination of the allowance for credit losses (“ACL”) and the valuation of capitalized mortgage loan servicing rights. Refer to our 2022 Annual Report on Form 10-K for a disclosure of our accounting policies.
2.    New Accounting Standards
In March 2020, the FASB issued ASU 2020-04, ‘‘Reference Rate Reform (Topic 848), Facilitation of the Effects of Reference Rate Reform on Financial Reporting’’ and in December 2022 the FASB issued ASU 2022-06, "Reference Rate Reform (Topic 848), Deferral of the Sunset Date of Topic 848". These new ASUs provide temporary optional expedients and exceptions to GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates. Entities can elect not to apply certain modification accounting requirements to contracts affected by reference rate reform, if certain criteria are met. Entities that make such elections would not have to remeasure contracts at the modification date or reassess a previous accounting determination. Entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met.
We had formed a cross-functional project team to lead the transition from LIBOR to a planned adoption of reference rates which included Secured Overnight Financing Rate (“SOFR”). We utilized the timeline guidance published by the Alternative Reference Rates Committee to develop and achieve internal milestones during the transitional period. We had discontinued the use of new LIBOR-based loans as of December 31, 2021, according to regulatory guidelines. We also discontinued the use of new LIBOR based interest rate derivatives as of December 31, 2021. The amended guidance under Topic 848 and our ability to elect its temporary optional expedients and exceptions are effective for us through December 31, 2024.
In March, 2022, the FASB issued ASU 2022-02, “Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructuring and Vintage Disclosures”. This ASU eliminates the troubled debt restructuring (“TDR”) accounting model for creditors that have already adopted Topic 326, which is commonly referred to as the current expected credit loss (“CECL”) model. In lieu of the TDR accounting model, creditors now will apply the general loan modification guidance in Subtopic 310-20 to all loan modifications, including modifications made for borrowers experiencing financial difficulty. Under the general loan modification guidance, a modification is treated as a new loan only if the terms of the new loan are at least as favorable to the lender as the terms for comparable loans to other customers with similar collection risks, and modifications to the terms of the original loan are more than minor. If either condition is not met, the modification is accounted for as the continuation of the old loan with any effect of the modification treated as a prospective adjustment to the loan’s effective interest rate. In addition, this ASU requires the disclosure of gross charge-offs recorded in the current period for financing receivables by origination year. For entities that have adopted Topic 326, ASU 2022-02 takes effect in reporting periods beginning after December 15, 2022, with early adoption permitted. The adoption of this ASU on January 1, 2023, did not have a material impact on our Condensed Consolidated Financial Statements.
On March, 2023, the FASB issued ASU 2023-02, "Investments - Equity Method and Joint Ventures (Topic 323): Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method (a consensus of the Emerging Issues Task Force)". This ASU expands the use of the proportional amortization method of accounting —
8
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
currently allowed only for investments in low-income housing tax credit ("LIHTC") structures — to equity investments in other tax credit structures that meet certain criteria. Common tax credit programs that investors access via tax equity structures and that may now be eligible for application of the proportional amortization method include: new markets tax credits, historic rehabilitation tax credit programs, and renewable energy tax credit programs. This ASU takes effect in reporting periods beginning after December 15, 2023, with early adoption permitted. We do not expect the adoption of this this ASU to have a material impact on our Condensed Consolidated Financial Statements.

3.    Securities
Securities available for sale (“AFS”) consist of the following:
Amortized
Cost		Unrealized
GainsLossesFair Value
(In thousands)
September 30, 2023
U.S. agency$10,572 $5 $1,074 $9,503 
U.S. agency residential mortgage-backed92,717 1 12,036 80,682 
U.S. agency commercial mortgage-backed13,891 — 1,734 12,157 
Private label mortgage-backed95,160 248 8,746 86,662 
Other asset backed138,036 7 2,755 135,288 
Obligations of states and political subdivisions339,656 2 53,930 285,728 
Corporate82,013 — 8,335 73,678 
Trust preferred982 — 39 943 
Total$773,027 $263 $88,649 $684,641 
   
December 31, 2022   
U.S. agency$13,191 $10 $1,100 $12,101 
U.S. agency residential mortgage-backed100,700 19 10,261 90,458 
U.S. agency commercial mortgage-backed15,047 — 1,594 13,453 
Private label mortgage-backed102,196 245 8,596 93,845 
Other asset backed200,755 — 6,030 194,725 
Obligations of states and political subdivisions346,187 55 50,565 295,677 
Corporate87,308 — 9,151 78,157 
Trust preferred979 — 48 931 
Total$866,363 $329 $87,345 $779,347 
9
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Securities held to maturity (“HTM”) consist of the following:
Carrying
Value		Transferred
Unrealized
Loss (1)		ACLAmortized
Cost		UnrealizedFair Value
GainsLosses
(In thousands)
September 30, 2023
U.S. agency$26,665 $1,689 $— $28,354 $— $5,871 $22,483 
U.S. agency residential mortgage-backed110,883 9,972 — 120,855 — 28,690 92,165 
U.S. agency commercial mortgage-backed4,537 176 — 4,713 — 560 4,153 
Private label mortgage-backed7,286 331 4 7,621 — 958 6,663 
Obligations of states and political subdivisions162,945 7,300 33 170,278 22 26,454 143,846 
Corporate45,636 882 114 46,632 19 7,762 38,889 
Trust preferred947 49 4 1,000 — — 1,000 
Total$358,899 $20,399 $155 $379,453 $41 $70,295 $309,199 
December 31, 2022
U.S. agency$27,634 $1,839 $— $29,473 $— $5,066 $24,407 
U.S. agency residential mortgage-backed117,650 10,845 — 128,495 — 25,239 103,256 
U.S. agency commercial mortgage-backed4,798 228 — 5,026 — 596 4,430 
Private label mortgage-backed7,242 416 1 7,659 — 997 6,662 
Obligations of states and political subdivisions168,134 8,555 39 176,728 11 25,591 151,148 
Corporate48,418 1,130 123 49,671 — 5,156 44,515 
Trust preferred942 53 5 1,000 — — 1,000 
Total$374,818 $23,066 $168 $398,052 $11 $62,645 $335,418 
(1)Represents the remaining unrealized loss to be accreted on securities that were transferred from AFS to HTM on April 1, 2022.
On April 1, 2022, we transferred certain securities AFS with an amortized cost and unrealized loss at the date of transfer of $418.1 million and $26.5 million, respectively to HTM. The transfer was made at fair value, with the unrealized loss becoming part of the purchase discount which will be accreted over the remaining life of the securities. The other comprehensive loss component is separated from the remaining available for sale securities and is accreted over the remaining life of the securities transferred. We have the ability and intent to hold these securities until they mature, at which time we expect to receive full value for these securities.
10
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Our investments' gross unrealized losses and fair values for securities AFS aggregated by investment type and length of time that individual securities have been at a continuous unrealized loss position follows:
Less Than Twelve MonthsTwelve Months or MoreTotal
Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses		Fair ValueUnrealized
Losses
(In thousands)
September 30, 2023
U.S. agency$251 $— $8,558 $1,074 $8,809 $1,074 
U.S. agency residential mortgage-backed1,481 16 78,989 12,020 80,470 12,036 
U.S. agency commercial mortgage-backed— — 12,157 1,734 12,157 1,734 
Private label mortgage-backed2,933 222 83,029 8,524 85,962 8,746 
Other asset backed6,307 92 126,706 2,663 133,013 2,755 
Obligations of states and political subdivisions1,693 7 284,034 53,923 285,727 53,930 
Corporate— — 73,678 8,335 73,678 8,335 
Trust preferred— — 942 39 942 39 
Total$12,665 $337 $668,093 $88,312 $680,758 $88,649 
December 31, 2022
U.S. agency$8,244 $799 $2,587 $301 $10,831 $1,100 
U.S. agency residential mortgage-backed33,784 1,920 54,793 8,341 88,577 10,261 
U.S. agency commercial mortgage-backed1,609 73 11,844 1,521 13,453 1,594 
Private label mortgage-backed39,954 2,582 53,346 6,014 93,300 8,596 
Other asset backed110,859 2,657 83,802 3,373 194,661 6,030 
Obligations of states and political subdivisions56,455 10,216 231,705 40,349 288,160 50,565 
Corporate24,876 1,737 51,293 7,414 76,169 9,151 
Trust preferred— — 931 48 931 48 
Total$275,781 $19,984 $490,301 $67,361 $766,082 $87,345 
Securities AFS in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities AFS in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities AFS that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, adverse conditions specifically related to the security and the issuer and the impact of changes in market interest rates on the market value of the security, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes. No ACL for securities AFS was needed at September 30, 2023 and December 31, 2022. Accrued interest receivable on securities AFS totaled $4.2 million and $4.7 million at September 30, 2023 and December 31, 2022,
11
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
respectively, and is excluded from the estimate of credit losses and is included in accrued income and other assets in the Condensed Consolidated Statements of Financial Condition.
U.S. agency, U.S. agency residential mortgage-backed and U.S. agency commercial mortgage-backed securities — at September 30, 2023, we had 33 U.S. agency, 175 U.S. agency residential mortgage-backed and 12 U.S. agency commercial mortgage-backed securities whose fair value is less than amortized cost. These securities are either explicitly or implicitly guaranteed by the U.S. government, are highly rated by major credit rating agencies, and have a long history of no credit losses. The unrealized losses are largely attributed to widening spreads to Treasury bonds and/or an increase in interest rates since acquisition.
Private label mortgage backed, other asset backed and corporate securities — at September 30, 2023, we had 89 private label mortgage backed, 112 other asset backed, and 80 corporate securities whose fair value is less than amortized cost. The unrealized losses are primarily due to credit spread widening and/or an increase in interest rates since acquisition.
Obligations of states and political subdivisions — at September 30, 2023, we had 334 municipal securities whose fair value is less than amortized cost. The unrealized losses are primarily due to an increase in interest rates since acquisition.
Trust preferred securities — at September 30, 2023, we had one trust preferred security whose fair value is less than amortized cost. This trust preferred security is a single issue security issued by a trust subsidiary of a bank holding company. The pricing of trust preferred securities has suffered from credit spread widening. This security is rated by a major rating agency as investment grade.
At September 30, 2023 management does not intend to liquidate any of the securities discussed above and it is more likely than not that we will not be required to sell these securities prior to recovery of these unrealized losses.
We recorded no credit related charges in our Condensed Consolidated Statements of Operations related to securities AFS during the three and nine month periods ended September 30, 2023 and 2022, respectively.
The ACL on securities HTM is a contra asset valuation account that is deducted from the carrying amount of securities HTM to present the net amount expected to be collected. Securities HTM are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in our Condensed Consolidated Statements of Operations in provision for credit losses. We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics, and we consider historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. Accrued interest receivable on securities HTM totaled $1.9 million and $1.8 million at September 30, 2023 and December 31, 2022, respectively and is excluded from the estimate of credit losses and is included in accrued income and other assets in the Condensed Consolidated Statements of Financial Condition. With regard to U.S. Government-sponsored agency and mortgage-backed securities (residential and commercial), all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to obligations of states and political subdivisions, private label-mortgage-backed, corporate and trust preferred securities HTM, we consider (1) issuer bond ratings, (2) long-term historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. During the first quarter of 2023, one corporate security (Signature Bank) defaulted resulting in a $3.0 million provision for credit losses and a corresponding full charge-off. Despite this lone security loss, the long-term historical loss rates associated with securities having similar grades as those in our portfolio have been insignificant. Furthermore, as of September 30, 2023 and December 31, 2022, there were no past due principal and interest payments associated with these securities. At those same dates an allowance for credit losses of $155,000 and $168,000, respectively was recorded on non U.S. agency securities HTM based on applying the long-term historical credit loss rate, as published by Moody’s, for similarly rated securities.
12
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
On a quarterly basis, we monitor the credit quality of securities HTM through the use of credit ratings. The carrying value of securities HTM aggregated by credit quality follow:
Private
Label
Mortgage-
Backed		Obligations
of States
and Political
Subdivisions		CorporateTrust
Preferred		Carrying
Value
Total
(In thousands)
September 30, 2023
Credit rating:
AAA$7,286 $36,665 $— $— $43,951 
AA— 102,378 — — 102,378 
A— 3,957 6,917 — 10,874 
BBB— 974 33,864 — 34,838 
BB
— — 1,938 — 1,938 
Non-rated— 18,971 2,917 947 22,835 
Total$7,286 $162,945 $45,636 $947 $216,814 
December 31, 2022
Credit rating:
AAA$7,242 $32,876 $— $— $40,118 
AA— 110,033 — — 110,033 
A— 3,917 6,900 — 10,817 
BBB— 1,167 38,621 — 39,788 
Non-rated— 20,141 2,897 942 23,980 
Total$7,242 $168,134 $48,418 $942 $224,736 
13
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
An analysis of the allowance for credit losses by security HTM type for the three months ended September 30 follows:
Private
Label
Mortgage-
Backed		Obligations
of States
and Political
Subdivisions		CorporateTrust
Preferred		Total
(In thousands)
2023
Balance at beginning of period$1 $39 $116 $4 $160 
Additions (deductions)   
Provision for credit losses3 (6)(2)— (5)
Recoveries credited to the allowance— — — — — 
Securities HTM charged against the allowance— — — — — 
Balance at end of period$4 $33 $114 $4 $155 
2022
Balance at beginning of period$2 $30 $121 $5 $158 
Additions (deductions)
Provision for credit losses(1)9 2 — 10 
Recoveries credited to the allowance— — — — — 
Securities HTM charged against the allowance— — — — — 
Balance at end of period$1 $39 $123 $5 $168 
14
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
An analysis of the allowance for credit losses by security HTM type for the nine months ended September 30 follows:
Private
Label
Mortgage-
Backed		Obligations
of States
and Political
Subdivisions		CorporateTrust
Preferred		Total
(In thousands)
2023
Balance at beginning of period$1 $39 $123 $5 $168 
Additions (deductions)
Provision for credit losses3 (6)2,991 (1)2,987 
Recoveries credited to the allowance— — — — — 
Securities HTM charged against the allowance— — (3,000)— (3,000)
Balance at end of period$4 $33 $114 $4 $155 
2022
Balance at beginning of period$— $— $— $— $— 
Additions (deductions)
Provision for credit losses1 39 123 5 168 
Recoveries credited to the allowance— — — — — 
Securities HTM charged against the allowance— — — — — 
Balance at end of period$1 $39 $123 $5 $168 
The amortized cost and fair value of securities AFS and securities HTM at September 30, 2023, by contractual maturity, follow:
Securities AFSSecurities HTM
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
(In thousands)
Maturing within one year$9,213 $9,105 $5,202 $5,164 
Maturing after one year but within five years150,302 134,803 53,499 47,992 
Maturing after five years but within ten years73,062 61,767 102,566 84,807 
Maturing after ten years200,646 164,177 84,997 68,255 
433,223 369,852 246,264 206,218 
U.S. agency residential mortgage-backed92,717 80,682 120,855 92,165 
U.S. agency commercial mortgage-backed13,891 12,157 4,713 4,153 
Private label mortgage-backed95,160 86,662 7,621 6,663 
Other asset backed138,036 135,288 — — 
Total$773,027 $684,641 $379,453 $309,199 
The actual maturity may differ from the contractual maturity because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
15
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Gains and losses realized on the sale of securities AFS are determined using the specific identification method and are recognized on a trade-date basis. A summary of proceeds from the sale of securities AFS and gains and losses for the nine month periods ending September 30, follows:
Realized
ProceedsGainsLosses
(In thousands)
2023$278 $— $222 
202270,523 164 439 
16
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
4.    Loans
We estimate the ACL based on relevant available information from both internal and external sources, including historical loss trends, current conditions and forecasts, specific analysis of individual loans, and other relevant and appropriate factors. The allowance process is designed to provide for expected future losses based on our reasonable and supportable (“R&S”) forecast as of the reporting date. Our ACL process is administered by our Risk Management group utilizing a third party software solution, with significant input and ultimate approval from our Executive Enterprise Risk Committee. Further, we have established a CECL Forecast Committee, which includes a cross discipline structure with membership from Executive Management, Risk Management, and Accounting, which approves ACL model assumptions each quarter. Our ACL is comprised of three principal elements: (i) specific analysis of individual loans identified during the review of the loan portfolio, (ii) pooled analysis of loans with similar risk characteristics based on historical experience, adjusted for current conditions, R&S forecasts, and expected prepayments, and (iii) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolio.
The first ACL element (specific allocations) includes loans that do not share similar risk characteristics and are evaluated on an individual basis. We will typically evaluate on an individual basis loans that are on nonaccrual; commercial loans that have been modified resulting in a concession, for which the borrower is experiencing financial difficulties, and which are considered troubled loan modifications; and severely delinquent mortgage and installment loans. When we determine that foreclosure is probable or when repayment is expected to be provided substantially through the operation or sale of underlying collateral, expected credit losses are based on the fair value of the collateral at the reporting date, adjusted for estimated selling costs. For loans evaluated on an individual basis that are not determined to be collateral dependent, a discounted cash flow analysis is performed to determine expected credit losses.
The second ACL element (pooled analysis) includes loans with similar risk characteristics, which are broken down by segment, class, and risk metric. The Bank’s primary segments of commercial, mortgage, and installment loans are further classified by other relevant attributes, such as collateral type, lien position, occupancy status, amortization method, and balance size. Commercial classes are additionally segmented by risk rating, and mortgage and installment loan classes by credit score tier, which are updated at least semi-annually.
We utilize a discounted cash flow (“DCF”) model to estimate expected future losses for pooled loans. Expected future cash flows are developed from payment schedules over the contractual term, adjusted for forecasted default (probability of default), loss, and prepayment assumptions. We are not required to develop forecasts over the full contractual term of the financial asset or group of financial assets. Rather, for periods beyond which we are able to make or obtain R&S forecasts of expected credit losses, we revert to the long term average on a straight line or immediate basis, as determined by our CECL Forecast Committee, and which may vary depending on the economic outlook and uncertainty.
The DCF model for the mortgage and installment pooled loan segments includes using probability of default (“PD”) assumptions that are derived through regression analysis with forecasted US unemployment levels by credit score tier. We review a composite forecast of approximately 50 analysts as well as the Federal Open Market Committee (“FOMC”) projections in setting the unemployment forecast for the R&S period. The current ACL utilizes a one year R&S forecast followed by immediate reversion to the 30 year average unemployment rate. PD assumptions for the remaining segments are based primarily on historical rates by risk metric as defaults were not strongly correlated with any economic indicator. Loss given default (“LGD”) assumptions for the mortgage loan segment are based on a two year forecast followed by a two year straight line reversion period to the longer term average, while LGD rates for the remaining segments are the historical average for the entire period. Prepayment assumptions represent average rates per segment for a period determined by the CECL Forecast Committee and as calculated through the Bank’s Asset and Liability Management program.
Pooled reserves for the commercial loan segment are calculated using the DCF model with assumptions generally based on historical averages by class and risk rating. Effective risk rating practices allow for strong predictability of defaults and losses over the portfolio’s expected shorter duration, relative to mortgage and installment loans. Our rating system is similar to those employed by state and federal banking regulators.
The third ACL element (additional allocations based on subjective factors) is based on factors that cannot be associated with a specific credit or loan category and reflects our attempt to ensure that the overall ACL appropriately reflects a margin for the imprecision necessarily inherent in the estimates of expected credit losses. We adjust our quantitative model for certain qualitative factors to reflect the extent to which management expects current conditions and R&S forecasts to differ from the conditions that existed for the period over which historical information was evaluated. The qualitative framework reflects changes related to relevant data, such as changes in asset quality trends, portfolio growth and
17
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
composition, national and local economic factors, credit policy and administration and other factors not considered in the base quantitative model. We utilize a survey completed by business unit management throughout the Bank, as well as discussion with the CECL Forecast Committee to establish reserves under the qualitative framework.
An analysis of the allowance for credit losses by portfolio segment for the three months ended September 30, follows:
Commercial Mortgage Installment Subjective
Allocation 		Total
(In thousands)
2023
Balance at beginning of period$16,284 $20,080 $4,315 $13,285 $53,964 
Additions (deductions)   
Provision for credit losses1,112 (170)(42)455 1,355 
Recoveries credited to the allowance178 112 467 — 757 
Loans charged against the allowance(24)— (557)— (581)
Balance at end of period$17,550 $20,022 $4,183 $13,740 $55,495 
2022
Balance at beginning of period$11,059 $20,313 $4,220 $12,291 $47,883 
Additions (deductions)  
Provision for credit losses1,184 1,219 263 469 3,135 
Recoveries credited to the allowance202 78 450 — 730 
Loans charged against the allowance— — (606)— (606)
Balance at end of period$12,445 $21,610 $4,327 $12,760 $51,142 
18
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
An analysis of the ACL by portfolio segment for the nine months ended September 30, follows:
Commercial Mortgage Installment Subjective
Allocation 		Total
(In thousands)
2023
Balance at beginning of period$13,817 $21,633 $4,290 $12,695 $52,435 
Additions (deductions)    
Provision for credit losses4,350 (1,835)280 1,045 3,840 
Recoveries credited to the allowance436 255 1,391 — 2,082 
Loans charged against the allowance(1,053)(31)(1,778)— (2,862)
Balance at end of period$17,550 $20,022 $4,183 $13,740 $55,495 
    
2022    
Balance at beginning of period$11,519 $19,221 $3,749 $12,763 $47,252 
Additions (deductions)    
Provision for credit losses496 2,087 1,203 (3)3,783 
Recoveries credited to the allowance430 346 1,228 — 2,004 
Loans charged against the allowance— (44)(1,853)— (1,897)
Balance at end of period$12,445 $21,610 $4,327 $12,760 $51,142 
19
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Loans on non-accrual status and past due more than 90 days (“Non-performing Loans”) follow:
Non-
Accrual
with no
Allowance
for Credit
Loss		Non-
Accrual
with an
Allowance
for Credit
Loss		Total
Non-
Accrual		90+ and
Still
Accruing		Total Non-
Performing
Loans
(In thousands)
September 30, 2023
Commercial
Commercial and industrial (1)$— $8 $8 $— $8 
Commercial real estate— — — — — 
Mortgage
1-4 family owner occupied - jumbo— — — — — 
1-4 family owner occupied - non-jumbo (2)1,061 1,531 2,592 — 2,592 
1-4 family non-owner occupied— 498 498 — 498 
1-4 family - 2nd lien— 545 545 — 545 
Resort lending— 271 271 — 271 
Installment
Boat lending— 264 264 — 264 
Recreational vehicle lending— 307 307 — 307 
Other— 230 230 — 230 
Total
$1,061 $3,654 $4,715 $— $4,715 
Accrued interest excluded from total$— $— $— $— $— 
December 31, 2022
Commercial
Commercial and industrial (1)$— $9 $9 $— $9 
Commercial real estate— — — — — 
Mortgage
1-4 family owner occupied - jumbo— — — — — 
1-4 family owner occupied - non-jumbo (2)1,077 852 1,929 — 1,929 
1-4 family non-owner occupied152 323 475 — 475 
1-4 family - 2nd lien— 562 562 — 562 
Resort lending110 38 148 — 148 
Installment
Boat lending— 380 380 — 380 
Recreational vehicle lending— 30 30 — 30 
Other— 188 188 — 188 
Total$1,339 $2,382 $3,721 $— $3,721 
Accrued interest excluded from total$— $— $— $— $— 
(1)Non-performing commercial and industrial loans exclude $0.023 million and $0.029 million of government guaranteed loans at September 30, 2023 and December 31, 2022, respectively.
(2)Non-performing 1-4 family owner occupied – non jumbo loans exclude $2.231 million and $1.631 million of government guaranteed loans at September 30, 2023 and December 31, 2022, respectively.
20
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following table provides collateral information by class of loan for collateral-dependent loans with a specific reserve. A loan is considered to be collateral dependent when the borrower is experiencing financial difficulty and the repayment is expected to be provided substantially through the operation or sale of collateral.
The amortized cost of collateral-dependent loans by class follows:
Collateral TypeAllowance
for
Credit Losses
Real
Estate		Other
(In thousands)
September 30, 2023
Commercial
Commercial and industrial$1,728 $2,994 $1,588 
Commercial real estate2,068 — — 
Mortgage   
1-4 family owner occupied - jumbo— — — 
1-4 family owner occupied - non-jumbo2,228 — 271 
1-4 family non-owner occupied159 — 159 
1-4 family - 2nd lien366 — 165 
Resort lending271 — 211 
Installment
Boat lending— 207 73 
Recreational vehicle lending— 235 83 
Other— 89 32 
Total$6,820 $3,525 $2,582 
Accrued interest excluded from total$14 $13  
December 31, 2022
Commercial
Commercial and industrial$748 $1,309 $197 
Commercial real estate7,329 — 1,243 
Mortgage
1-4 family owner occupied - jumbo— — — 
1-4 family owner occupied - non-jumbo1,721 — 229 
1-4 family non-owner occupied233 — 29 
1-4 family - 2nd lien368 — 203 
Resort lending148 — 14 
Installment
Boat lending— 297 101 
Recreational vehicle lending— 30 11 
Other6 128 47 
Total$10,553 $1,764 $2,074 
Accrued interest excluded from total$40 $6  
21
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
An aging analysis of loans by class follows:
Loans Past DueLoans not
Past Due		Total
Loans
30-59 days60-89 days90+ daysTotal
(In thousands)
September 30, 2023
Commercial
Commercial and industrial$200 $— $31 $231 $773,183 $773,414 
Commercial real estate— — — — 852,708 852,708 
Mortgage
1-4 family owner occupied - jumbo— 544 — 544 840,602 841,146 
1-4 family owner occupied - non-jumbo1,948 1,244 1,176 4,368 299,388 303,756 
1-4 family non-owner occupied17 12 158 187 180,491 180,678 
1-4 family - 2nd lien132 125 354 611 112,875 113,486 
Resort lending— — 271 271 36,571 36,842 
Installment
Boat lending688 131 207 1,026 273,158 274,184 
Recreational vehicle lending520 213 203 936 258,609 259,545 
Other275 76 88 439 105,288 105,727 
Total$3,780 $2,345 $2,488 $8,613 $3,732,873 $3,741,486 
Accrued interest excluded from total$31 $32 $— $63 $11,899 $11,962 
December 31, 2022
Commercial
Commercial and industrial$— $— $38 $38 $732,425 $732,463 
Commercial real estate— — — — 734,390 734,390 
Mortgage
1-4 family owner occupied - jumbo— — — — 752,563 752,563 
1-4 family owner occupied - non-jumbo1,400 521 869 2,790 282,842 285,632 
1-4 family non-owner occupied61 93 200 354 182,746 183,100 
1-4 family - 2nd lien420 107 47 574 104,703 105,277 
Resort lending54 — 148 202 41,635 41,837 
Installment
Boat lending528 14 295 837 252,128 252,965 
Recreational vehicle lending639 147 18 804 269,869 270,673 
Other215 46 123 384 106,068 106,452 
Total$3,317 $928 $1,738 $5,983 $3,459,369 $3,465,352 
Accrued interest excluded from total$27 $7 $— $34 $9,975 $10,009 

22
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
During the three and nine months ended September 30, 2023, there were no troubled loan modifications or subsequent defaults.

During the nine months ended September 30, 2022, the terms of one loan were modified as a TDR. The modification of the terms of this loan included a reduction of the stated interest rate of the loan and a 34 month extension of the maturity date. The pre- and post-modification outstanding loan balances were both $0.3 million at September 30, 2022. This TDR increased the ACL by $0.03 million and resulted in zero charge-offs during the nine months ended September 30, 2022. There were no TDRs that subsequently defaulted within twelve months following the modification during the three and nine month period ended September 30, 2022.
A loan is considered to be in payment default generally once it is 90 days contractually past due under the modified terms.
In order to determine whether a borrower is experiencing financial difficulty, we perform an evaluation of the probability that the borrower will be in payment default on any of its debt in the foreseeable future without the modification. This evaluation is performed under our internal underwriting policy.
Credit Quality Indicators – As part of our on-going monitoring of the credit quality of our loan portfolios, we track certain credit quality indicators including (a) risk grade of commercial loans, (b) the level of classified commercial loans, (c) credit scores of mortgage and installment loan borrowers, and (d) delinquency history and non-performing loans.
For commercial loans, we use a loan rating system that is similar to those employed by state and federal banking regulators. Loans are graded on a scale of 1 to 12. A description of the general characteristics of the ratings follows:
Rating 1 through 6: These loans are generally referred to as our “non-watch” commercial credits that include very high or exceptional credit fundamentals through acceptable credit fundamentals.
Rating 7 and 8: These loans are generally referred to as our “watch” commercial credits. These ratings include loans to borrowers that exhibit potential credit weakness or downward trends. If not checked or cured these trends could weaken our asset or credit position. While potentially weak, no loss of principal or interest is envisioned with these ratings.
Rating 9: These loans are generally referred to as our “substandard accruing” commercial credits. This rating includes loans to borrowers that exhibit a well-defined weakness where payment default is probable and loss is possible if deficiencies are not corrected. Generally, loans with this rating are considered collectible as to both principal and interest primarily due to collateral coverage.
Rating 10 and 11: These loans are generally referred to as our ‘‘substandard - non-accrual’’ and ‘‘doubtful’’ commercial credits. Our doubtful rating includes a sub classification for a loss rate other than 50% (which is the standard doubtful loss rate). These ratings include loans to borrowers with weaknesses that make collection of the loan in full, on the basis of current facts, conditions and values at best questionable and at worst improbable. All of these loans are placed in non-accrual.
Rating 12: These loans are generally referred to as our “loss” commercial credits. This rating includes loans to borrowers that are deemed incapable of repayment and are charged-off.
23
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The following tables summarize loan ratings by loan class for our commercial portfolio loan segment at September 30, 2023 and December 31, 2022:
Commercial
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Amortized
Cost Basis		Total
20232022202120202019Prior
(In thousands)
September 30, 2023
Commercial and industrial
Non-watch (1-6)$89,614 $161,231 $81,054 $48,715 $52,897 $116,890 $186,838 $737,239 
Watch (7-8)598 4,622 3,087 5,274 4,204 3,972 9,695 31,452 
Substandard Accrual (9)— 930 1,447 48 1,442 53 772 4,692 
Non-Accrual (10-11)— — — — — 31 — 31 
Total$90,212 $166,783 $85,588 $54,037 $58,543 $120,946 $197,305 $773,414 
Accrued interest excluded from total$150 $448 $163 $131 $136 $533 $970 $2,531 
Current period gross charge-offs$— $— $— $— $— $69 $24 $93 
Commercial real estate
Non-watch (1-6)$154,789 $181,519 $142,549 $30,333 $83,663 $188,916 $45,739 $827,508 
Watch (7-8)— — 15,144 — 2,364 5,624 — 23,132 
Substandard Accrual (9)— — — — 2,068 — — 2,068 
Non-Accrual (10-11)— — — — — — — — 
Total$154,789 $181,519 $157,693 $30,333 $88,095 $194,540 $45,739 $852,708 
Accrued interest excluded from total$312 $689 $644 $68 $354 $686 $177 $2,930 
Current period gross charge-offs$— $— $— $— $960 $— $— $960 
Total Commercial
Non-watch (1-6)$244,403 $342,750 $223,603 $79,048 $136,560 $305,806 $232,577 $1,564,747 
Watch (7-8)598 4,622 18,231 5,274 6,568 9,596 9,695 54,584 
Substandard Accrual (9)— 930 1,447 48 3,510 53 772 6,760 
Non-Accrual (10-11)— — — — — 31 — 31 
Total$245,001 $348,302 $243,281 $84,370 $146,638 $315,486 $243,044 $1,626,122 
Accrued interest excluded from total$462 $1,137 $807 $199 $490 $1,219 $1,147 $5,461 
Current period gross charge-offs$— $— $— $— $960 $69 $24 $1,053 
24
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Amortized
Cost Basis 		Total
20222021202020192018Prior
(In thousands)
December 31, 2022
Commercial and industrial
Non-watch (1-6)$157,561 $89,251 $58,292 $45,792 $30,715 $95,908 $237,906 $715,425 
Watch (7-8)680 4,539 781 1,690 105 4,474 2,793 15,062 
Substandard Accrual (9)— 971 68 388 109 402 — 1,938 
Non-Accrual (10-11)— — — — — 38 — 38 
Total$158,241 $94,761 $59,141 $47,870 $30,929 $100,822 $240,699 $732,463 
Accrued interest excluded from total$238 $178 $146 $105 $181 $308 $890 $2,046 
Commercial real estate
Non-watch (1-6)$170,238 $154,918 $38,062 $97,762 $56,580 $159,514 $42,030 $719,104 
Watch (7-8)— 182 313 4,769 1,010 1,641 112 8,027 
Substandard Accrual (9)— — — 181 2,014 5,064 — 7,259 
Non-Accrual (10-11)— — — — — — — — 
Total$170,238 $155,100 $38,375 $102,712 $59,604 $166,219 $42,142 $734,390 
Accrued interest excluded from total$609 $468 $88 $368 $206 $515 $109 $2,363 
Total Commercial
Non-watch (1-6)$327,799 $244,169 $96,354 $143,554 $87,295 $255,422 $279,936 $1,434,529 
Watch (7-8)680 4,721 1,094 6,459 1,115 6,115 2,905 23,089 
Substandard Accrual (9)— 971 68 569 2,123 5,466 — 9,197 
Non-Accrual (10-11)— — — — — 38 — 38 
Total$328,479 $249,861 $97,516 $150,582 $90,533 $267,041 $282,841 $1,466,853 
Accrued interest excluded from total$847 $646 $234 $473 $387 $823 $999 $4,409 
For each of our mortgage and installment portfolio segment classes, we generally monitor credit quality based on the credit scores of the borrowers. These credit scores are generally updated semi-annually.
The following tables summarize credit scores by loan class for our mortgage and installment loan portfolio segments at September 30, 2023 and December 31, 2022:
Mortgage (1)
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Amortized
Cost Basis		Total
20232022202120202019Prior
(In thousands)
September 30, 2023
1-4 family owner occupied - jumbo
800 and above$5,778 $25,024 $56,386 $17,942 $4,590 $5,027 $499 $115,246 
750-79937,645 126,267 202,333 63,734 19,976 18,693 1,024 469,672 
700-74916,196 48,227 71,004 24,661 11,723 12,439 1,496 185,746 
650-6992,039 11,233 20,227 10,123 2,291 5,751 — 51,664 
600-649— 4,552 1,748 3,981 1,131 3,122 — 14,534 
550-599— 1,078 499 — — — — 1,577 
500-549— — 550 1,480 — 677 — 2,707 
Under 500— — — — — — — — 
Unknown— — — — — — — — 
Total$61,658 $216,381 $352,747 $121,921 $39,711 $45,709 $3,019 $841,146 
Accrued interest excluded from total$266 $669 $754 $293 $113 $156 $23 $2,274 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
25
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Mortgage (1)
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Amortized
Cost Basis		Total
20232022202120202019Prior
(In thousands)
September 30, 2023 - continued
1-4 family owner occupied - non-jumbo
800 and above$2,197 $8,999 $8,949 $4,629 $2,872 $9,432 $4,128 $41,206 
750-79911,105 36,171 24,067 14,942 5,009 18,221 7,883 117,398 
700-7496,630 21,429 10,896 5,379 3,936 23,609 3,401 75,280 
650-6999,606 8,206 4,390 3,671 2,487 12,577 1,299 42,236 
600-649— 232 783 1,343 946 8,699 58 12,061 
550-599— 241 1,061 682 705 5,072 94 7,855 
500-549— — 306 1,654 476 2,872 — 5,308 
Under 500— — 95 150 740 1,427 — 2,412 
Unknown— — — — — — — — 
Total$29,538 $75,278 $50,547 $32,450 $17,171 $81,909 $16,863 $303,756 
Accrued interest excluded from total$107 $262 $118 $79 $51 $307 $134 $1,058 
Current period gross charge-offs$— $— $— $— $— $26 $— $26 
1-4 family non-owner occupied
800 and above$2,566 $2,888 $11,981 $2,837 $3,383 $6,672 $1,557 $31,884 
750-79910,860 20,388 32,253 12,347 5,743 13,679 2,913 98,183 
700-7493,265 7,066 8,859 5,446 1,558 6,484 2,131 34,809 
650-699291 1,348 2,496 2,812 217 3,594 570 11,328 
600-649— 389 137 — 30 1,692 88 2,336 
550-599— — 541 — 75 1,052 60 1,728 
500-549— — — — — 221 — 221 
Under 500— — — — — 189 — 189 
Unknown— — — — — — — — 
Total$16,982 $32,079 $56,267 $23,442 $11,006 $33,583 $7,319 $180,678 
Accrued interest excluded from total$65 $116 $156 $66 $35 $132 $56 $626 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
1-4 family - 2nd lien
800 and above$187 $912 $539 $617 $183 $1,375 $9,794 $13,607 
750-7991,618 2,883 2,899 2,435 1,074 3,637 35,805 50,351 
700-7491,450 2,186 1,656 618 567 2,469 24,817 33,763 
650-699553 188 424 806 172 1,330 7,418 10,891 
600-649— 166 109 — 129 902 2,069 3,375 
550-599— — — 39 33 234 169 475 
500-549— — — — 172 496 186 854 
Under 500— — — — 76 94 — 170 
Unknown— — — — — — — — 
Total$3,808 $6,335 $5,627 $4,515 $2,406 $10,537 $80,258 $113,486 
Accrued interest excluded from total$13 $27 $14 $12 $9 $45 $653 $773 
Current period gross charge-offs$— $— $— $— $— $5 $— $5 
26
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Mortgage - continued (1)
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Amortized
Cost Basis		Total
20232022202120202019Prior
(In thousands)
September 30, 2023 - continued
Resort lending
800 and above$— $— $523 $— $— $6,177 $— $6,700 
750-799— 821 960 1,046 180 14,492 — 17,499 
700-749— 109 592 250 — 6,519 — 7,470 
650-699— — — 50 — 4,134 — 4,184 
600-649— — — — — 451 — 451 
550-599— — — — — 352 — 352 
500-549— — — — — 92 — 92 
Under 500— — — — — 94 — 94 
Unknown— — — — — — — — 
Total$— $930 $2,075 $1,346 $180 $32,311 $— $36,842 
Accrued interest excluded from total$— $4 $4 $4 $— $133 $— $145 
Current period gross charge-offs$— $— $— $— $— $— $— $— 
Total Mortgage
800 and above$10,728 $37,823 $78,378 $26,025 $11,028 $28,683 $15,978 $208,643 
750-79961,228 186,530 262,512 94,504 31,982 68,722 47,625 753,103 
700-74927,541 79,017 93,007 36,354 17,784 51,520 31,845 337,068 
650-69912,489 20,975 27,537 17,462 5,167 27,386 9,287 120,303 
600-649— 5,339 2,777 5,324 2,236 14,866 2,215 32,757 
550-599— 1,319 2,101 721 813 6,710 323 11,987 
500-549— — 856 3,134 648 4,358 186 9,182 
Under 500— — 95 150 816 1,804 — 2,865 
Unknown— — — — — — — — 
Total$111,986 $331,003 $467,263 $183,674 $70,474 $204,049 $107,459 $1,475,908 
Accrued interest excluded from total$451 $1,078 $1,046 $454 $208 $773 $866 $4,876 
Current period gross charge-offs$— $— $— $— $— $31 $— $31 
27
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Amortized
Cost Basis		Total
20222021202020192018Prior
(In thousands)
December 31, 2022
1-4 family owner occupied - jumbo
800 and above$23,764 $54,637 $16,848 $9,211 $2,988 $6,946 $639 $115,033 
750-79997,269 189,653 71,555 16,091 1,828 16,140 683 393,219 
700-74934,158 91,189 28,701 12,666 2,775 8,852 1,536 179,877 
650-69910,905 20,743 7,216 2,554 4,250 4,020 827 50,515 
600-6491,712 1,275 4,534 464 — 2,150 — 10,135 
550-599549 1,516 — — 469 — — 2,534 
500-549— — 561 — — 689 — 1,250 
Under 500— — — — — — — — 
Unknown— — — — — — — — 
Total$168,357 $359,013 $129,415 $40,986 $12,310 $38,797 $3,685 $752,563 
Accrued interest excluded from total$506 $773 $315 $108 $44 $127 $19 $1,892 
1-4 family owner occupied - non-jumbo
800 and above$8,894 $10,498 $5,558 $3,220 $2,074 $6,074 $1,680 $37,998 
750-79933,833 26,239 13,956 6,018 4,501 18,009 9,936 112,492 
700-74917,629 13,526 7,626 3,938 3,263 22,506 3,509 71,997 
650-6997,983 5,124 2,679 3,270 1,992 10,893 983 32,924 
600-6491,539 1,226 1,836 423 1,035 7,044 99 13,202 
550-599— — 56 1,472 938 5,481 132 8,079 
500-549— 76 850 341 570 4,142 115 6,094 
Under 500— 207 764 475 285 1,115 — 2,846 
Unknown— — — — — — — — 
Total$69,878 $56,896 $33,325 $19,157 $14,658 $75,264 $16,454 $285,632 
Accrued interest excluded from total$283 $123 $78 $58 $58 $242 $111 $953 

28
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Mortgage - continued (1)
Term Loans Amortized Cost Basis by Origination YearRevolving
Loans
Amortized
Cost Basis		Total
20222021202020192018Prior
(In thousands)
December 31, 2022 - (continued)
1-4 family non-owner occupied
800 and above$4,329 $9,308 $5,178 $4,147 $752 $5,842 $1,683 $31,239 
750-79922,171 36,363 12,242 6,103 2,549 12,257 4,132 95,817 
700-7498,739 12,423 5,507 1,335 1,198 6,825 1,930 37,957 
650-6991,476 2,489 3,798 190 292 4,350 550 13,145 
600-649954 139 — 107 491 1,475 203 3,369 
550-599— — — 121 54 404 335 914 
500-549— — — — — 402 60 462 
Under 500— — — — — 197 — 197 
Unknown— — — — — — — — 
Total$37,669 $60,722 $26,725 $12,003 $5,336 $31,752 $8,893 $183,100 
Accrued interest excluded from total$106 $161 $69 $36 $21 $108 $57 $558 
1-4 family - 2nd lien
800 and above$238 $282 $454 $267 $200 $503 $8,000 $9,944 
750-7992,109 2,749 2,334 665 333 3,597 38,346 50,133 
700-7491,495 1,820 931 759 459 2,649 20,981 29,094 
650-699192 292 90 237 275 1,496 8,188 10,770 
600-64920 99 258 192 23 974 2,040 3,606 
550-599130 — — — 132 395 228 885 
500-549— — — 18 — 418 122 558 
Under 500— — — 129 3 55 100 287 
Unknown— — — — — — — — 
Total$4,184 $5,242 $4,067 $2,267 $1,425 $10,087 $78,005 $105,277 
Accrued interest excluded from total$11 $11 $8 $7 $4 $36 $511 $588 
Resort lending
800 and above$— $429 $— $— $268 $7,031 $— $7,728 
750-7991,045 1,272 1,211 183 616 15,815 — 20,142 
700-74985 651 114 — — 6,331 — 7,181 
650-699107 — 53 — — 5,413 — 5,573 
600-649— — — — — 895 — 895 
550-599— — — — — 68 — 68 
500-549— — — — — 140 — 140 
Under 500— — — — — 110 — 110 
Unknown— — — — — — — — 
Total$1,237 $2,352 $1,378 $183 $884 $35,803 $— $41,837 
Accrued interest excluded from total$4 $4 $3 $— $3 $111 $— $125 
Total Mortgage
800 and above$37,225 $75,154 $28,038 $16,845 $6,282 $26,396 $12,002 $201,942 
750-799156,427 256,276 101,298 29,060 9,827 65,818 53,097 671,803 
700-74962,106 119,609 42,879 18,698 7,695 47,163 27,956 326,106 
650-69920,663 28,648 13,836 6,251 6,809 26,172 10,548 112,927 
600-6494,225 2,739 6,628 1,186 1,549 12,538 2,342 31,207 
550-599679 1,516 56 1,593 1,593 6,348 695 12,480 
500-549— 76 1,411 359 570 5,791 297 8,504 
Under 500— 207 764 604 288 1,477 100 3,440 
Unknown— — — — — — — — 
Total$281,325 $484,225 $194,910 $74,596 $34,613 $191,703 $107,037 $1,368,409 
Accrued interest excluded from total$910 $1,072 $473 $209 $130 $624 $698 $4,116 
(1)Credit scores have been updated within the last twelve months.
29
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Installment (1)
Term Loans Amortized Cost Basis by Origination Year
20232022202120202019PriorTotal
(In thousands)
September 30, 2023
Boat lending
800 and above$9,045 $7,028 $8,329 $3,798 $4,537 $7,583 $40,320 
750-79931,098 38,514 31,549 16,162 13,243 22,875 153,441 
700-74914,711 15,631 11,659 5,850 5,112 8,871 61,834 
650-6992,317 3,141 4,040 1,309 1,303 1,954 14,064 
600-649450 452 935 424 108 678 3,047 
550-599— 147 335 15 67 465 1,029 
500-549— — — 164 18 112 294 
Under 500— — 110 — — 45 155 
Unknown— — — — — — — 
Total$57,621 $64,913 $56,957 $27,722 $24,388 $42,583 $274,184 
Accrued interest excluded from total$210 $149 $130 $61 $57 $93 $700 
Current period gross charge-offs$— $28 $— $— $15 $24 $67 
Recreational vehicle lending
800 and above$3,201 $9,133 $11,354 $3,872 $3,907 $5,918 $37,385 
750-79916,444 44,914 40,915 13,082 9,322 12,950 137,627 
700-7496,871 19,854 22,015 6,451 3,964 4,234 63,389 
650-6991,613 4,399 5,411 1,369 1,042 1,472 15,306 
600-64935 570 1,687 227 259 543 3,321 
550-599— 380 516 55 89 170 1,210 
500-549— 373 372 122 164 91 1,122 
Under 500— 24 114 — 39 8 185 
Unknown— — — — — — — 
Total$28,164 $79,647 $82,384 $25,178 $18,786 $25,386 $259,545 
Accrued interest excluded from total$111 $194 $191 $57 $45 $55 $653 
Current period gross charge-offs$14 $29 $148 $32 $66 $— $289 
Other
800 and above$2,528 $1,278 $1,425 $1,096 $691 $898 $7,916 
750-79910,627 11,883 7,785 3,923 1,973 4,686 40,877 
700-7494,341 7,949 5,271 2,551 1,107 3,069 24,288 
650-69921,037 3,411 2,114 624 372 1,346 28,904 
600-649151 617 342 155 93 436 1,794 
550-5996 157 186 81 74 141 645 
500-549— 171 160 15 60 118 524 
Under 500— 54 43 13 20 25 155 
Unknown624 — — — — — 624 
Total$39,314 $25,520 $17,326 $8,458 $4,390 $10,719 $105,727 
Accrued interest excluded from total$85 $61 $33 $18 $11 $64 $272 
Current period gross charge-offs$1,189 $67 $10 $17 $— $139 $1,422 
30
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Installment (1)
Term Loans Amortized Cost Basis by Origination Year
20232022202120202019PriorTotal
(In thousands)
September 30, 2023 - continued
Total installment
800 and above$14,774 $17,439 $21,108 $8,766 $9,135 $14,399 $85,621 
750-79958,169 95,311 80,249 33,167 24,538 40,511 331,945 
700-74925,923 43,434 38,945 14,852 10,183 16,174 149,511 
650-69924,967 10,951 11,565 3,302 2,717 4,772 58,274 
600-649636 1,639 2,964 806 460 1,657 8,162 
550-5996 684 1,037 151 230 776 2,884 
500-549— 544 532 301 242 321 1,940 
Under 500— 78 267 13 59 78 495 
Unknown624 — — — — — 624 
Total$125,099 $170,080 $156,667 $61,358 $47,564 $78,688 $639,456 
Accrued interest excluded from total$406 $404 $354 $136 $113 $212 $1,625 
Current period gross charge-offs$1,203 $124 $158 $49 $81 $163 $1,778 
31
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Installment - continued (1)
Term Loans Amortized Cost Basis by Origination Year
20222021202020192018PriorTotal
(In thousands)
December 31, 2022
Boat lending
800 and above$7,901 $8,763 $4,391 $5,102 $3,612 $5,955 $35,724 
750-79944,498 37,531 20,179 16,506 12,814 14,504 146,032 
700-74915,390 13,704 7,281 5,848 4,357 6,132 52,712 
650-6993,933 4,135 1,498 1,290 1,032 2,213 14,101 
600-649661 1,043 149 286 200 670 3,009 
550-59922 195 16 53 203 274 763 
500-549277 57 62 43 106 30 575 
Under 500— — — — 26 23 49 
Unknown— — — — — — — 
Total$72,682 $65,428 $33,576 $29,128 $22,350 $29,801 $252,965 
Accrued interest excluded from total$171 $148 $84 $78 $52 $68 $601 
Recreational vehicle lending
800 and above$9,327 $10,752 $4,524 $4,834 $3,416 $4,319 $37,172 
750-79951,555 49,949 16,175 11,920 8,990 7,818 146,407 
700-74923,143 24,945 7,680 4,459 2,279 2,939 65,445 
650-6995,013 6,516 1,598 1,361 727 904 16,119 
600-649793 1,608 374 446 232 268 3,721 
550-599107 381 129 202 234 87 1,140 
500-549— 293 111 61 59 15 539 
Under 500— 85 7 22 — 16 130 
Unknown— — — — — — — 
Total$89,938 $94,529 $30,598 $23,305 $15,937 $16,366 $270,673 
Accrued interest excluded from total$219 $227 $72 $58 $38 $34 $648 
Other
800 and above$1,974 $1,647 $1,449 $942 $366 $731 $7,109 
750-79915,692 9,973 5,521 3,393 1,678 3,612 39,869 
700-7499,848 7,517 3,404 1,801 999 2,653 26,222 
650-69922,740 2,851 1,051 593 405 1,286 28,926 
600-649711 634 127 222 147 507 2,348 
550-599122 63 170 54 115 118 642 
500-54967 217 29 64 19 90 486 
Under 5006 52 22 28 13 28 149 
Unknown701 — — — — — 701 
Total$51,861 $22,954 $11,773 $7,097 $3,742 $9,025 $106,452 
Accrued interest excluded from total$84 $48 $25 $19 $10 $49 $235 
Total installment
800 and above$19,202 $21,162 $10,364 $10,878 $7,394 $11,005 $80,005 
750-799111,745 97,453 41,875 31,819 23,482 25,934 332,308 
700-74948,381 46,166 18,365 12,108 7,635 11,724 144,379 
650-69931,686 13,502 4,147 3,244 2,164 4,403 59,146 
600-6492,165 3,285 650 954 579 1,445 9,078 
550-599251 639 315 309 552 479 2,545 
500-549344 567 202 168 184 135 1,600 
Under 5006 137 29 50 39 67 328 
Unknown701 — — — — — 701 
Total$214,481 $182,911 $75,947 $59,530 $42,029 $55,192 $630,090 
Accrued interest excluded from total$474 $423 $181 $155 $100 $151 $1,484 
(1)Credit scores have been updated within the last twelve months.
Foreclosed residential real estate properties included in other real estate and repossessed assets on our Condensed Consolidated Statements of Financial Condition totaled $0.4 million and $0.4 million at September 30, 2023 and
32
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
December 31, 2022, respectively. Retail mortgage loans secured by residential real estate properties for which formal foreclosure proceedings are in process according to local requirements totaled $0.3 million and $0.8 million at September 30, 2023 and December 31, 2022, respectively.

During the nine month period ended September 30, 2023, we sold $51.5 million of portfolio residential mortgage loans servicing retained and recognized a gain (loss) on sale of $(0.15) million. No portfolio residential mortgage loans were sold during the three month period ended September 30, 2023. During the three and nine periods of 2022, we sold $22.7 million and $56.2 million, respectively, of portfolio residential mortgage loans servicing retained and recognized a gain (loss) on sale of $(0.15) million and $0.25 million respectively. These transactions were done primarily for asset/liability management purposes.
33
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
5.    Shareholders’ Equity and Earnings Per Common Share
On December 20, 2022, our Board of Directors authorized a share repurchase plan (the “Repurchase Plan”) to buy back up to 1,100,000 shares of our outstanding common stock through December 31, 2023. Shares would be repurchased through open market transactions, though we could execute repurchases through other means, such as privately negotiated transactions. The timing and amount of any share repurchases will depend on a variety of factors, including, among others, securities law restrictions, the trading price of our common stock, regulatory requirements, potential alternative uses for capital, and our financial performance. During the nine month periods ended September 30, 2023 and 2022 repurchases were made totaling 288,401 shares and 181,586 shares of common stock, for an aggregate purchase price of $5.0 million and $4.0 million, respectively.
A reconciliation of basic and diluted net income per common share follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
(In thousands, except
per share data)
Net income$17,543 $17,297 $45,324 $48,265 
Weighted average shares outstanding (1)20,922 21,058 21,021 21,106 
Stock units for deferred compensation plan for non-employee directors163 139 157 134 
Effect of stock options8 30 12 43 
Performance share units21 25 17 23 
Weighted average shares outstanding for calculation of diluted earnings per share21,114 21,252 21,207 21,306 
Net income per common share
Basic (1)$0.84 $0.82 $2.16 $2.29 
Diluted$0.83 $0.81 $2.14 $2.27 
(1)Basic net income per common share includes weighted average common shares outstanding during the period and participating share awards.
Weighted average stock options outstanding that were not considered in computing diluted net income per common share because they were anti-dilutive were zero for the three and nine month periods ended September 30, 2023 and 2022, respectively.
6.    Derivative Financial Instruments
We are required to record derivatives on our Condensed Consolidated Statements of Financial Condition as assets and liabilities measured at their fair value. The accounting for increases and decreases in the value of derivatives depends upon the use of derivatives and whether the derivatives qualify for hedge accounting.
34
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Our derivative financial instruments according to the type of hedge in which they are designated follows:
September 30, 2023
Notional
Amount		Average
Maturity
(years)		Fair
Value
(Dollars in thousands)
Fair value hedge designation
Pay-fixed interest rate swap agreement - commercial$6,127 5.6$560 
Pay-fixed interest rate swap agreements - securities available for sale148,895 4.120,456 
Pay-fixed interest rate swap agreements - installment100,000 3.71,439 
Pay-fixed interest rate swap agreements - mortgage
75,000 4.9785 
Interest rate cap agreements - securities available for sale40,970 4.61,062 
Total$370,992 4.2$24,302 
Cash flow hedge designation
Interest rate floor agreements - commercial
$75,000 3.9$1,398 
No hedge designation
Rate-lock mortgage loan commitments$28,704 0.1$(140)
Mandatory commitments to sell mortgage loans41,034 0.1484 
Pay-fixed interest rate swap agreements - commercial348,825 5.821,757 
Pay-variable interest rate swap agreements - commercial348,825 5.8(21,757)
Total$767,388 5.3$344 
December 31, 2022
Notional
Amount		Average
Maturity
(years)		Fair
Value
(Dollars in thousands)
Fair value hedge designation
Pay-fixed interest rate swap agreement - commercial$6,401 6.4$447 
Pay-fixed interest rate swap agreements - securities available for sale148,895 4.819,906 
Pay-fixed interest rate swap agreements - installment25,000 2.077 
Interest rate cap agreements - securities available for sale40,970 5.3931 
Total$221,266 4.6$21,361 
No hedge designation
Rate-lock mortgage loan commitments19,918 0.1(1,056)
Mandatory commitments to sell mortgage loans49,258 0.1315 
Pay-fixed interest rate swap agreements - commercial279,005 6.017,063 
Pay-variable interest rate swap agreements - commercial279,005 6.0(17,063)
Total$627,186 5.3$(741)

We have established management objectives and strategies that include interest-rate risk parameters for maximum fluctuations in net interest income and market value of portfolio equity. We monitor our interest rate risk position via simulation modeling reports. The goal of our asset/liability management efforts is to maintain profitable financial leverage within established risk parameters.
35
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)

We have entered into pay-fixed interest rate swaps and caps to protect a portion of the fair value of a certain fixed rate commercial loan and certain mortgage and installment loans (‘‘Fair Value Hedge – Portfolio Loans’’). As a result, changes in the fair values of the pay-fixed interest rate swap and caps are expected to offset changes in the fair values of the fixed rate portfolio loans due to fluctuations in interest rates. We record the fair values of Fair Value Hedge – Portfolio Loans in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition. The hedged items (fixed rate commercial loan and certain fixed rate mortgage and installment loans) are also recorded at fair value which offsets the adjustment to the Fair Value Hedge – Portfolio Loans. On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair values of both the Fair Value Hedge – Portfolio Loans and the hedged items. The related gains or losses are reported in interest income – interest and fees on loans in our Condensed Consolidated Statements of Operations. During the second quarter of 2023 we terminated the interest rate cap that was previously hedging certain installment loans. The remaining unrealized gain on this terminated interest cap is being amortized into earnings over the original life of the interest rate cap.

We have entered into pay-fixed interest rate swap and interest rate cap agreements to protect a portion of the fair value of certain securities available for sale (‘‘Fair Value Hedge – AFS Securities’’). As a result, the change in the fair value of the pay-fixed interest rate swap and interest rate cap agreements is expected to offset a portion of the change in the fair value of the fixed rate securities available for sale due to fluctuations in interest rates. We record the fair value of Fair Value Hedge – AFS Securities in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition. The hedged items (fixed rate securities available for sale) are also recorded at fair value which offsets the adjustment to the Fair Value Hedge – AFS Securities. On an ongoing basis, we adjust our Condensed Consolidated Statements of Financial Condition to reflect the then current fair value of both the Fair Value Hedge – AFS Securities and the hedged item. The related gains or losses are reported in interest income – interest on securities – taxable and interest income – interest on securities – tax-exempt in our Condensed Consolidated Statements of Operations.
We have entered into interest rate floor agreements to manage the variability in future expected cash flows of certain commercial loans (‘‘Cash Flow Hedge – Portfolio Loans’’). We record the fair value of Cash Flow Hedge – Portfolio Loans in accrued income and other assets and accrued expenses and other liabilities on our Condensed Consolidated Statements of Financial Condition. The changes in the fair value of Cash Flow Hedge - Portfolio Loans are recorded in accumulated other comprehensive loss and are reclassified into the line item in our Condensed Consolidated Statements of Operations in which the hedged items are recorded in the same period the hedged items affect earnings. It is anticipated that $0.4 million of unrealized losses on Cash Flow Hedge - Portfolio Loans at September 30, 2023, will be reclassified into earnings over the next twelve months. The maximum term of any Cash Flow Hedge - Portfolio Loans at September 30, 2023 is 4.2 years.
Certain financial derivative instruments have not been designated as hedges. The fair value of these derivative financial instruments has been recorded on our Condensed Consolidated Statements of Financial Condition and is adjusted on an ongoing basis to reflect their then current fair value. The changes in fair value of derivative financial instruments not designated as hedges are recognized in our Condensed Consolidated Statements of Operations.
In the ordinary course of business, we enter into rate-lock mortgage loan commitments with customers (“Rate-Lock Commitments”). These commitments expose us to interest rate risk. We also enter into mandatory commitments to sell mortgage loans (“Mandatory Commitments”) to reduce the impact of price fluctuations of mortgage loans held for sale and Rate-Lock Commitments. Mandatory Commitments help protect our loan sale profit margin from fluctuations in interest rates. The changes in the fair value of Rate-Lock Commitments and Mandatory Commitments are recognized currently as part of net gains on mortgage loans in our Condensed Consolidated Statements of Operations. We obtain market prices on Mandatory Commitments and Rate-Lock Commitments. Net gains on mortgage loans, as well as net income may be more volatile as a result of these derivative instruments, which are not designated as hedges.
We have a program that allows commercial loan customers to lock in a fixed rate for a longer period of time than we would normally offer for interest rate risk reasons. We will enter into a variable rate commercial loan and an interest rate swap agreement with a customer and then enter into an offsetting interest rate swap agreement with an unrelated party. The interest rate swap agreement fair values will generally move in opposite directions resulting in little or no net impact on our Condensed Consolidated Statements of Operations. All of the interest rate swap agreements - commercial in the table above with no hedge designation relate to this program.
36
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
We had entered into a no hedge designation pay-variable interest rate swap agreement in an attempt to manage the cost of certain funding liabilities. The changes in fair value of this no hedge pay-variable interest rate swap is recorded in non-interest expense-other in our Condensed Consolidated Statements of Operations. This no hedge designation pay-variable interest rate swap agreement matured during the third quarter of 2023.
The following tables illustrate the impact that the derivative financial instruments discussed above have on individual line items in the Condensed Consolidated Statements of Financial Condition for the periods presented:
Fair Values of Derivative Instruments
Asset DerivativesLiability Derivatives
September 30,
2023		December 31,
2022		September 30,
2023		December 31,
2022
Balance
Sheet
Location		Fair
Value		Balance
Sheet
Location		Fair
Value		Balance
Sheet
Location		Fair
Value		Balance
Sheet
Location		Fair
Value
(In thousands)
Derivatives designated as hedging instruments
Pay-fixed interest rate swap agreementsOther assets$23,240 Other assets$20,430 Other liabilities$— Other liabilities$— 
Interest rate cap agreementsOther assets1,062 Other assets931 Other liabilities— Other liabilities— 
Interest rate floor agreements
Other assets1,398 Other assets— Other liabilities— Other liabilities— 
25,700 21,361 — — 
Derivatives not designated as hedging instruments
Rate-lock mortgage loan commitmentsOther assets— Other assets— Other liabilities140 Other liabilities1,056 
Mandatory commitments to sell mortgage loansOther assets484 Other assets315 Other liabilities— Other liabilities— 
Pay-fixed interest rate swap agreements - commercialOther assets22,400 Other assets17,567 Other liabilities643 Other liabilities504 
Pay-variable interest rate swap agreements - commercialOther assets643 Other assets504 Other liabilities22,400 Other liabilities17,567 
23,527 18,386 23,183 19,127 
Total derivatives$49,227 $39,747 $23,183 $19,127 

37
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The effect of derivative financial instruments on the Condensed Consolidated Statements of Operations follows:
Loss Recognized in Other
Comprehensive Income (Loss) (Effective Portion)
Location of Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion)
Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)Gain (Loss)
Recognized
in Income
Three Month
Periods Ended
September 30,		Three Month
Periods Ended
September 30,		Location of
Gain (Loss)
Recognized
in Income		Three Month
Periods Ended
September 30,
202320222023202220232022
(In thousands)
Fair Value Hedges
Pay-fixed interest rate swap agreement - commercial
Interest and fees on loans$96 $292 
Pay-fixed interest rate swap agreements - securities available for sale
Interest on securities available for sale - tax - exempt926 5,881 
Pay-fixed interest rate swap agreements - Installment
Interest and fees on loans765 — 
Pay-fixed interest rate swap agreements - Mortgage
Interest and fees on loans785 — 
Interest rate cap agreements - securities available for sale$(25)$— Interest on securities available for sale - tax - exempt$(55)$— Interest on securities available for sale - tax - exempt39 — 
Interest rate cap agreements - installment— — Interest and fees on loans— — Interest and fees on loans— — 
Total$(25)$— $(55)$— $2,611 $6,173 
Cash Flow Hedges
Interest rate floor agreements - commercial
$(502)$— Interest and fees on loans$(17)$— Interest and fees on loans(17)— 
No hedge designation
Rate-lock mortgage loan commitmentsNet gains on mortgage loans$(147)$(1,284)
Mandatory commitments to sell mortgage loansNet gains on mortgage loans238 2,250 
Pay-fixed interest rate swap agreements - commercialInterest income5,579 $9,015 
Pay-variable interest rate swap agreements - commercialInterest income(5,579)(9,015)
Interest rate swaption agreementNet gains on mortgage loans— $— 
Pay-fixed interest rate swap agreements - mortgageNet gains on mortgage loans— (650)
Pay-variable interest rate swap agreementNon-interest expense - other— $— 
Interest rate cap agreementsInterest expense— — 
Total$91 $316 
38
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Loss Recognized in Other
Comprehensive Income (Loss) (Effective Portion)
Location of Loss Reclassified from Accumulated Other Comprehensive Income (Loss) into Income (Effective Portion)
Loss Reclassified from Accumulated Other Comprehensive Loss into Income (Effective Portion)Gain (Loss)
Recognized
in Income
Nine Month
Periods Ended
September 30,		Nine Month
Periods Ended
September 30,		Location of
Gain (Loss)
Recognized
in Income		Nine Month
Periods Ended
September 30,
202320222023202220232022
(In thousands)
Fair Value Hedges
Pay-fixed interest rate swap agreement - commercial
Interest and fees on loans$113 $868 
Pay-fixed interest rate swap agreements - securities available for sale
Interest on securities available for sale - tax - exempt550 16,929 
Pay-fixed interest rate swap agreements - Installment
Interest and fees on loans1,362 — 
Pay-fixed interest rate swap agreements - Mortgage
Interest and fees on loans785 — 
Interest rate cap agreements - securities available for sale$(438)$— Interest on securities available for sale - tax - exempt$(207)$— Interest on securities available for sale - tax - exempt286 — 
Interest rate cap agreements - installment— — Interest and fees on loans— — Interest and fees on loans(14)— 
Total$(438)$— $(207)$— $3,082 $17,797 
Cash Flow Hedges
Interest rate floor agreements - commercial
$(502)$— Interest and fees on loans$(17)$— Interest and fees on loans$(17)$— 
No hedge designation
Rate-lock mortgage loan commitmentsNet gains on mortgage loans$916 $(8,496)
Mandatory commitments to sell mortgage loansNet gains on mortgage loans169 2,874 
Pay-fixed interest rate swap agreements - commercialInterest income4,694 23,739 
Pay-variable interest rate swap agreements - commercialInterest income(4,694)(23,739)
Interest rate swaption agreementNet gains on mortgage loans— (186)
Pay-fixed interest rate swap agreements - mortgageNet gains on mortgage loans— 633 
Pay-variable interest rate swap agreementNon-interest expense - other(12)— 
Interest rate cap agreementsInterest expense— 245 
Total$1,073 $(4,930)

39
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
7.    Goodwill and Other Intangibles
The following table summarizes intangible assets, net of amortization:
September 30, 2023December 31, 2022
Gross
Carrying
Amount		Accumulated
Amortization		Gross
Carrying
Amount		Accumulated
Amortization
(In thousands)
Amortized intangible assets - core deposits$11,916 $9,775 $11,916 $9,365 
Unamortized intangible assets - goodwill$28,300  $28,300  
A summary of estimated core deposits intangible amortization at September 30, 2023 follows:
(In thousands)
Three months ending December 31, 2023137 
2024516 
2025487 
2026460 
2027434 
2028 and thereafter107 
Total$2,141 
8.    Share Based Compensation
We maintain share based payment plans that include a non-employee director stock purchase plan and a long-term incentive plan that permits the issuance of share based compensation, including stock options and non-vested share awards. The long-term incentive plan, which is shareholder approved, permits the grant of additional share based awards for up to 0.6 million shares of common stock as of September 30, 2023. The non-employee director stock purchase plan permits the issuance of additional share based payments for up to 0.1 million shares of common stock as of September 30, 2023. Share based awards and payments are measured at fair value at the date of grant and are expensed over the requisite service period. Common shares issued upon exercise of stock options come from currently authorized but unissued shares.
A summary of restricted stock and performance stock units (“PSU”) granted pursuant to our long-term incentive plan follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
Restricted stock—2,00084,84660,787
PSU——18,79019,748
The shares of restricted stock and PSUs shown in the above table cliff vest after a period of three years. The performance criteria of the PSUs is split evenly between a comparison of (i) our total shareholder return and (ii) our return on average assets each over the three year period starting on the grant date to these same criteria over that period to an index of our banking peers.
Our directors may elect to receive all or a portion of their cash retainer fees in the form of common stock (either on a current basis or on a deferred basis) pursuant to the non-employee director stock purchase plan referenced above. Shares equal in value to that portion of each director’s fees that he or she has elected to receive in stock on a current basis are
40
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
issued each quarter and vest immediately. Shares issued on a deferred basis are credited at the rate of 90% of the current fair value of our common stock and vest immediately. During the nine month periods ended September 30, 2023 and 2022 we issued 0.014 million and 0.013 million shares, respectively and expensed their value during those same periods.
Total compensation expense recognized for grants pursuant to our long-term incentive plan was $0.5 million and $1.4 million during the three and nine month periods ended September 30, 2023, respectively, and was $0.4 million and $1.3 million during the same periods in 2022, respectively. The corresponding tax benefit relating to this expense was $0.1 million and $0.3 million for the three and nine month periods ended September 30, 2023, respectively and $0.1 million and $0.3 million for the same periods in 2022. Total expense recognized for non-employee director share based payments was $0.09 million and $0.27 million during the three and nine month periods ended September 30, 2023, respectively, and was $0.09 million and $0.28 million during the same periods in 2022, respectively. The corresponding tax benefit relating to this expense was $0.02 million and $0.06 million for the three and nine month periods ended September 30, 2023, respectively and $0.02 million and $0.06 million during the same periods in 2022.
At September 30, 2023, the total expected compensation cost related to non-vested restricted stock and PSUs not yet recognized was $3.0 million. The weighted-average period over which this amount will be recognized is 1.9 years.
A summary of outstanding stock option grants and related transactions follows:
Number of
Shares 		Average
Exercise
Price		Weighted-
Average
Remaining
Contractual
Term (Years)		Aggregated
Intrinsic
Value
(In thousands)
Outstanding at January 1, 202340,307$8.32 
Granted—— 
Exercised(23,000)6.42 
Forfeited—— 
Expired—— 
Outstanding at September 30, 202317,307$10.83 2.0$132 
Vested and expected to vest at September 30, 202317,307$10.83 2.0$132 
Exercisable at September 30, 202317,307$10.83 2.0$132 
A summary of outstanding non-vested stock and related transactions follows:
Number
of Shares 		Weighted-
Average
Grant Date
Fair Value
Outstanding at January 1, 2023246,136$22.82 
Granted103,63622.84 
Vested(60,623)22.35 
Forfeited(13,888)23.23 
Outstanding at September 30, 2023275,261$24.78 
41
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Certain information regarding options exercised during the periods follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
(In thousands)(In thousands)
Intrinsic value$— $322 $299 $746 
Cash proceeds received$— $52 $148 $124 
Tax benefit realized$— $68 $63 $157 
9.    Income Tax
Income tax expense was $4.1 million and $4.0 million during the three month periods ended September 30, 2023 and 2022, respectively and $10.4 million and $10.9 million during the nine months ended September 30, 2023 and 2022, respectively. Our actual federal income tax expense is different than the amount computed by applying our statutory income tax rate to our income before income tax primarily due to tax-exempt interest income and tax-exempt income from the increase in the cash surrender value on life insurance. In addition, the three and nine month periods ending September 30, 2023 include reductions of $0.003 million and $0.047 million, respectively, of income tax expense related to the impact of the excess value of stock awards that vested and stock options that were exercised as compared to the initial fair values that were expensed. These amounts during the same periods in 2022 were $0.062 million and $0.138 million, respectively.
We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. The ultimate realization of this asset is primarily based on generating future income. We concluded at September 30, 2023, September 30, 2022 and December 31, 2022 that the realization of substantially all of our deferred tax assets continues to be more likely than not.
At both September 30, 2023 and December 31, 2022, we had approximately $0.2 million, respectively, of gross unrecognized tax benefits. We do not expect the total amount of unrecognized tax benefits to significantly increase or decrease during the remainder of 2023.
10.    Regulatory Matters
Capital guidelines adopted by federal and state regulatory agencies and restrictions imposed by law limit the amount of cash dividends our Bank can pay to us. Under these guidelines, the amount of dividends that may be paid in any calendar year is limited to the Bank’s current year net profits, combined with the retained net profits of the preceding two years. Further, the Bank cannot pay a dividend at any time that it has negative undivided profits. As of September 30, 2023, the Bank had positive undivided profits of $167.7 million. It is not our intent to have dividends paid in amounts that would reduce the capital of our Bank to levels below those which we consider prudent or that would not be in accordance with guidelines of regulatory authorities.
We are also subject to various regulatory capital requirements. The prompt corrective action regulations establish quantitative measures to ensure capital adequacy and require minimum amounts and ratios of total, Tier 1, and common equity Tier 1 capital to risk-weighted assets and Tier 1 capital to average assets. Failure to meet minimum capital requirements can result in certain mandatory, and possibly discretionary, actions by regulators that could have a material effect on our interim condensed consolidated financial statements. In addition, capital adequacy rules include a common equity Tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized institutions plus the buffer. Under capital adequacy guidelines, we must meet specific capital requirements that involve quantitative measures as well as qualitative judgments by the regulators. The most recent regulatory filings as of September 30, 2023 and December 31, 2022, categorized our Bank as well capitalized. Management is not aware of any conditions or events that would have changed the most recent Federal Deposit Insurance Corporation (“FDIC”) categorization.
42
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Our actual capital amounts and ratios follow (1):
Actual Minimum for
Adequately Capitalized
Institutions 		Minimum for
Well-Capitalized
Institutions
AmountRatio AmountRatio AmountRatio
(Dollars in thousands)
September 30, 2023
Total capital to risk-weighted assets
Consolidated$564,115 13.58 %$332,292 8.00 %NANA
Independent Bank512,002 12.34 331,958 8.00 $414,947 10.00 %
Tier 1 capital to risk-weighted assets
Consolidated$472,126 11.37 %$249,219 6.00 %NANA
Independent Bank460,064 11.09 248,968 6.00 $331,958 8.00 %
Common equity tier 1 capital to risk-weighted assets
Consolidated$433,639 10.44 %$186,914 4.50 %NANA
Independent Bank460,064 11.09 186,726 4.50 $269,716 6.50 %
Tier 1 capital to average assets      
Consolidated$472,126 8.94 %$211,355 4.00 %NANA
Independent Bank460,064 8.71 211,328 4.00 $264,160 5.00 %
December 31, 2022      
Total capital to risk-weighted assets      
Consolidated$536,549 13.62 %$315,059 8.00 %NANA
Independent Bank480,886 12.22 314,733 8.00 $393,416 10.00 %
Tier 1 capital to risk-weighted assets      
Consolidated$447,299 11.36 %$236,294 6.00 %NANA
Independent Bank431,685 10.97 236,049 6.00 $314,733 8.00 %
Common equity tier 1 capital to risk-weighted assets      
Consolidated$408,863 10.38 %$177,221 4.50 %NANA
Independent Bank431,685 10.97 177,037 4.50 $255,720 6.50 %
Tier 1 capital to average assets      
Consolidated$447,299 8.86 %$201,875 4.00 %NANA
Independent Bank431,685 8.56 201,820 4.00 $252,275 5.00 %
_______________________________________
(1)
These ratios do not reflect a capital conservation buffer of 2.50% at September 30, 2023 and December 31, 2022.
NA - Not applicable
43
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The components of our regulatory capital are as follows:
Consolidated Independent Bank
September 30,
2023		December 31,
2022		September 30,
2023		December 31,
2022
(In thousands)
Total shareholders' equity $374,998 $347,596 $401,423 $370,418 
Add (deduct) 
Accumulated other comprehensive (income) loss for regulatory purposes86,506 86,966 86,506 86,966 
Goodwill and other intangibles(30,441)(30,851)(30,441)(30,851)
CECL (1)2,576 5,152 2,576 5,152 
Common equity tier 1 capital433,639 408,863 460,064 431,685 
Qualifying trust preferred securities38,487 38,436 — — 
Tier 1 capital472,126 447,299 460,064 431,685 
Subordinated debt40,000 40,000 — — 
Allowance for credit losses and allowance for unfunded lending commitments limited to 1.25% of total risk-weighted assets51,989 49,250 51,938 49,201 
Total risk-based capital$564,115 $536,549 $512,002 $480,886 
(1)
We elected the three year CECL transition method for regulatory purposes.
11.    Fair Value Disclosures
FASB ASC topic 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC topic 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
Level 1: Valuation is based upon quoted prices for identical instruments traded in active markets. Level 1 instruments include securities traded on active exchange markets, such as the New York Stock Exchange, as well as U.S. Treasury securities that are traded by dealers or brokers in active over-the-counter markets.
Level 2: Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market. Level 2 instruments include securities traded in less active dealer or broker markets.
Level 3: Valuation is generated from model-based techniques that use at least one significant assumption not observable in the market. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models and similar techniques.
We used the following methods and significant assumptions to estimate fair value:
Securities: Where quoted market prices are available in an active market, securities are classified as Level 1 of the valuation hierarchy. We currently do not have any Level 1 securities. If quoted market prices are not available for the specific security, then fair values are estimated by (1) using quoted market prices of securities with similar characteristics, (2) matrix pricing, which is a mathematical technique used widely in the industry to value debt securities without relying exclusively on quoted prices for specific securities but rather by relying on the securities’ relationship to other benchmark quoted prices, or (3) a discounted cash flow analysis whose significant fair value inputs can generally be verified and do
44
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
not typically involve judgment by management. These securities are classified as Level 2 of the valuation hierarchy and primarily include agency securities, private label mortgage-backed securities, other asset backed securities, obligations of states and political subdivisions, trust preferred securities, corporate securities and foreign government securities.
Loans held for sale: The fair value of mortgage loans held for sale, carried at fair value is based on agency cash window loan pricing for comparable assets (recurring Level 2).
Collateral dependent loans with specific loss allocations based on collateral value: From time to time, certain collateral dependent loans will have an ACL established. When the fair value of the collateral is based on an appraised value or when an appraised value is not available we record the collateral dependent loan as nonrecurring Level 3. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and thus will typically result in a Level 3 classification of the inputs for determining fair value.
Other real estate: At the time of acquisition, other real estate is recorded at fair value, less estimated costs to sell, which becomes the property’s new basis. Subsequent write-downs to reflect declines in value since the time of acquisition may occur from time to time and are recorded in net gains on other real estate and repossessed assets, which is part of non-interest expense - other in the Condensed Consolidated Statements of Operations. The fair value of the property used at and subsequent to the time of acquisition is typically determined by a third party appraisal of the property. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments can be significant and typically result in a Level 3 classification of the inputs for determining fair value.
Appraisals for both collateral-dependent loans and other real estate are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by us. Once received, an independent third party, or a member of our Collateral Evaluation Department (for commercial properties), or a member of our Special Assets Group (for residential properties) reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. We compare the actual selling price of collateral that has been sold to the most recent appraised value of our properties to determine what additional adjustment, if any, should be made to the appraisal value to arrive at fair value. For commercial and residential properties we typically discount an appraisal to account for various factors that the appraisal excludes in its assumptions. These additional discounts generally do not result in material adjustments to the appraised value.
Capitalized mortgage loan servicing rights: The fair value of capitalized mortgage loan servicing rights is based on a valuation model used by an independent third party that calculates the present value of estimated net servicing income. The valuation model incorporates assumptions that market participants would use in estimating future net servicing income. Certain model assumptions are generally unobservable and are based upon the best information available including data relating to our own servicing portfolio, reviews of mortgage servicing assumption and valuation surveys and input from various mortgage servicers and, therefore, are recorded as Level 3. Management evaluates the third party valuation for reasonableness each quarter as part of our financial reporting control processes.
Derivatives: The fair value of rate-lock mortgage loan commitments is based on agency cash window loan pricing for comparable assets and the fair value of mandatory commitments to sell mortgage loans is based on mortgage backed security pricing for comparable assets (recurring Level 2). The fair value of interest rate swap, interest rate cap and swaption agreements are derived from proprietary models which utilize current market data. The significant fair value inputs can generally be observed in the market place and do not typically involve judgment by management (recurring Level 2).
45
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Assets and liabilities measured at fair value, including financial assets for which we have elected the fair value option, were as follows:
Fair Value Measurements Using
Fair Value
Measure-
ments		Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		 Significant
Un-
observable
Inputs
(Level 3)
(In thousands)
September 30, 2023:
Measured at Fair Value on a Recurring Basis
Assets
Securities available for sale
U.S. agency$9,503 $— $9,503 $— 
U.S. agency residential mortgage-backed80,682 — 80,682 — 
U.S. agency commercial mortgage-backed12,157 — 12,157 — 
Private label mortgage-backed86,662 — 86,662 — 
Other asset backed135,288 — 135,288 — 
Obligations of states and political subdivisions285,728 — 285,728 — 
Corporate73,678 — 73,678 — 
Trust preferred943 — 943 — 
Loans held for sale, carried at fair value13,979 — 13,979 — 
Capitalized mortgage loan servicing rights46,057 — — 46,057 
Derivatives (1)49,227 — 49,227 — 
Liabilities
Derivatives (2)23,183 — 23,183 — 
Measured at Fair Value on a Non-recurring Basis:
Assets
Collateral dependent loans (3)
Commercial
Commercial and industrial2,769 — — 2,769 
Mortgage
1-4 family owner occupied - non-jumbo655 — — 655 
1-4 family - 2nd lien201 — — 201 
Resort lending60 — — 60 
Installment
Boat lending134 — — 134 
Recreational vehicle lending152 — — 152 
Other57 — — 57 
________________________________
(1)Included in accrued income and other assets
(2)Included in accrued expenses and other liabilities
(3)Only includes individually evaluated loans with specific loss allocations based on collateral value.
(4)Only includes other real estate with subsequent write downs to fair value.
46
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Fair Value Measurements Using
Fair Value
Measure-
ments		Quoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Un-
observable
Inputs
(Level 3)
(In thousands)
December 31, 2022:
Measured at Fair Value on a Recurring Basis
Assets
Securities available for sale
U.S. agency$12,101 $— $12,101 $— 
U.S. agency residential mortgage-backed90,458 — 90,458 — 
U.S. agency commercial mortgage-backed13,453 — 13,453 — 
Private label mortgage-backed93,845 — 93,845 — 
Other asset backed194,725 — 194,725 — 
Obligations of states and political subdivisions295,677 — 295,677 — 
Corporate78,157 — 78,157 — 
Trust preferred931 — 931 — 
Loans held for sale, carried at fair value26,518 — 26,518 — 
Capitalized mortgage loan servicing rights42,489 — — 42,489 
Derivatives (1)39,747 — 39,747 — 
Liabilities    
Derivatives (2)19,127 — 19,127 — 
    
Measured at Fair Value on a Non-recurring Basis:    
Assets    
Loans held for sale, carried at the lower of cost or fair value20,367 20,367 — — 
Collateral dependent loans (3)
Commercial
Commercial and industrial138 — — 138 
Commercial real estate1,068 — — 1,068 
Mortgage
1-4 family owner occupied - non-jumbo415 — — 415 
1-4 family non-owner occupied52 — — 52 
1-4 family - 2nd lien165 — — 165 
Resort lending25 — — 25 
Installment
Boat lending196 — — 196 
Recreational vehicle lending19 — — 19 
Other87 — — 87 
_________________________________
(1)Included in accrued income and other assets
(2)Included in accrued expenses and other liabilities
(3)Only includes impaired loans with specific loss allocations based on collateral value.
47
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Changes in fair values for financial assets which we have elected the fair value option for the periods presented were as follows:
Changes in Fair Values for the Nine
Month Periods Ended September 30 for
items Measured at Fair Value Pursuant
to Election of the Fair Value Option
Net Gains
on Assets 		Mortgage
Loan
Servicing, net		Total
Change
in Fair
Values
Included
in Current
Period
Earnings
Mortgage
Loans
(In thousands)
2023
Loans held for sale$1,519 $— $1,519 
Capitalized mortgage loan servicing rights— 456 456 
2022
Loans held for sale(1,518)— (1,518)
Capitalized mortgage loan servicing rights— 11,689 11,689 
For those items measured at fair value pursuant to our election of the fair value option, interest income is recorded within the Condensed Consolidated Statements of Operations based on the contractual amount of interest income earned on these financial assets and dividend income is recorded based on cash dividends received.
The following represent impairment charges recognized during the three and nine month periods ended September 30, 2023 and 2022 relating to assets measured at fair value on a non-recurring basis:
•Loans that are individually evaluated using the fair value of collateral for collateral dependent loans had a carrying amount of $4.0 million, which is net of a valuation allowance of $2.6 million at September 30, 2023, and had a carrying amount of $2.2 million, which is net of a valuation allowance of $2.1 million at December 31, 2022. The provision for credit losses included in our results of operations relating to collateral dependent loans was a net expense of $0.2 million and $0.3 million for the three month periods ending September 30, 2023 and 2022, respectively, and a net expense of $2.1 million and $0.4 million for the nine month periods ending September 30, 2023 and 2022, respectively.



48
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
A reconciliation for all assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) follows:
Capitalized Mortgage Loan Servicing Rights
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
(In thousands) (In thousands)
Beginning balance$44,427 $39,477 $42,489 $26,232 
Total gains (losses) realized and unrealized:
Included in results of operations471 2,093 456 11,689 
Included in other comprehensive loss— — — — 
Purchases, issuances, settlements, maturities and calls1,159 1,588 3,112 5,237 
Transfers in and/or out of Level 3— — — — 
Ending balance$46,057 $43,158 $46,057 $43,158 
Amount of total gains (losses) for the period included in earnings attributable to the change in unrealized gains (losses) relating to assets and liabilities still held at June 30$471 $2,093 $456 $11,689 
The fair value of our capitalized mortgage loan servicing rights has been determined based on a valuation model used by an independent third party as discussed above. The significant unobservable inputs used in the fair value measurement of the capitalized mortgage loan servicing rights are discount rate, cost to service, ancillary income, float rate and prepayment rate. Significant changes in all five of these assumptions in isolation would result in significant changes to the value of our capitalized mortgage loan servicing rights. Quantitative information about our Level 3 fair value measurements measured on a recurring basis follows:
Asset
Fair
Value		Valuation
Technique		Unobservable
Inputs		Range Weighted
Average
(In thousands)
September 30, 2023
Capitalized mortgage loan servicing rights$46,057 Present value of net servicing revenueDiscount rate
10.00% to 16.96%
10.21 %
Cost to service
$63 to $442
$78 
Ancillary income
18 to 35
21 
Float rate4.66 %4.66 %
Prepayment rate
6.58% to 33.54%
7.78 %
December 31, 2022
Capitalized mortgage loan servicing rights$42,489 Present value of net servicing revenueDiscount rate
10.00% to 13.23%
10.12 %
Cost to service
$66 to $150
$78 
Ancillary income
20 to 35
21 
Float rate4.03 %4.03 %
Prepayment rate
7.03% to 30.40%
7.97%
49
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Quantitative information about Level 3 fair value measurements measured on a non-recurring basis follows:
Asset
Fair
Value		Valuation
Technique		Unobservable
Inputs		RangeWeighted
Average
(In thousands)
September 30, 2023
Collateral dependent loans
Commercial(1)$2,769 Discounting financial statement and machinery and equipment appraised valuesDiscount rates used
55.0% to 100.0%
65.7 %
Sales comparison approachAdjustment for differences between comparable sales
(14.2) to 42.8
4.0
Mortgage and Installment(2)1,259 Sales comparison approachAdjustment for differences between comparable sales
(15.2) to 33.3
2.4
December 31, 2022
Collateral dependent loans
Commercial$1,206 Sales comparison approachAdjustment for differences between comparable sales
(41.7)% to 20.0%
(0.4)%
Mortgage and Installment(2)959 Sales comparison approachAdjustment for differences between comparable sales
(73.3) to 65.2
(5.3)
(1)
$1.80 million of this amount primarily relates to one collateral dependent relationship credit. Collateral securing this relationship primarily included accounts receivable, inventory and machinery and equipment at September 30, 2023. Valuation techniques at September 30, 2023 included discounting financial statement values for accounts receivable and inventory and appraised values for machinery and equipment.
(2)
In addition to the valuation techniques and unobservable inputs discussed above, at September 30, 2023 and December 31, 2022 certain collateral dependent installment loans totaling approximately $0.34 million and $0.30 million, respectively, are secured by collateral other than real estate. For the majority of these loans, we apply internal discount rates to industry valuation guides.
The following table reflects the difference between the aggregate fair value and the aggregate remaining contractual principal balance outstanding for loans held for sale for which the fair value option has been elected for the periods presented.
Aggregate
Fair Value		Difference Contractual
Principal
(In thousands)
Loans held for sale
September 30, 2023$13,979 $(823)$14,802 
December 31, 202226,518 (2,342)28,860 
50
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
12.    Fair Values of Financial Instruments
Most of our assets and liabilities are considered financial instruments. Many of these financial instruments lack an available trading market and it is our general practice and intent to hold the majority of our financial instruments to maturity. Significant estimates and assumptions were used to determine the fair value of financial instruments. These estimates are subjective in nature, involving uncertainties and matters of judgment, and therefore, fair values may not be a precise estimate. Changes in assumptions could significantly affect the estimates.
Estimated fair values have been determined using available data and methodologies that are considered suitable for each category of financial instrument. For instruments with adjustable interest rates which reprice frequently and without significant credit risk, it is presumed that estimated fair values approximate the recorded book balances.
51
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The estimated recorded book balances and fair values follow:
Fair Value Using
Recorded
Book
Balance		Fair ValueQuoted
Prices
in Active
Markets
for
Identical
Assets
(Level 1)		Significant
Other
Observable
Inputs
(Level 2)		Significant
Un-
observable
Inputs
(Level 3)
(In thousands)
September 30, 2023
Assets
Cash and due from banks$58,567 $58,567 $58,567 $— $— 
Interest bearing deposits68,894 68,894 68,894 — — 
Securities available for sale684,641 684,641 — 684,641 — 
Securities held to maturity358,899 309,199 — 309,199 — 
Federal Home Loan Bank and Federal      
Reserve Bank Stock16,821 NANANANA
Net loans and loans held for sale3,699,970 3,306,342 — 13,979 3,292,363 
Accrued interest receivable18,229 18,229 90 6,177 11,962 
Derivative financial instruments49,227 49,227 — 49,227 — 
     
Liabilities     
Deposits with no stated maturity (1)$3,771,900 $3,771,900 $3,771,900 $— $— 
Deposits with stated maturity (1)813,712 807,830 — 807,830 — 
Other borrowings50,014 49,539 — 49,539 — 
Subordinated debt39,491 38,883 — 38,883 — 
Subordinated debentures39,711 39,190 — 39,190 — 
Accrued interest payable6,449 6,449 465 5,984 — 
Derivative financial instruments23,183 23,183 — 23,183 — 
     
December 31, 2022     
Assets     
Cash and due from banks$70,180 $70,180 $70,180 $— $— 
Interest bearing deposits4,191 4,191 4,191 — — 
Securities available for sale779,347 779,347 — 779,347 — 
Securities held to maturity374,818 335,418 — 335,418 — 
Federal Home Loan Bank and Federal      
Reserve Bank Stock17,653 NANANANA
Net loans and loans held for sale3,459,802 3,185,518 20,367 26,518 3,138,633 
Accrued interest receivable16,513 16,513 1 6,503 10,009 
Derivative financial instruments39,747 39,747 — 39,747 — 
Liabilities     
Deposits with no stated maturity (1)$3,798,848 $3,798,848 $3,798,848 $— $— 
Deposits with stated maturity (1)580,221 573,739 — 573,739 — 
Other borrowings86,006 86,006 — 86,006 — 
Subordinated debt39,433 41,058 — 41,058 — 
Subordinated debentures39,660 38,982 — 38,982 — 
Accrued interest payable2,287 2,287 415 1,872 — 
Derivative financial instruments19,127 19,127 — 19,127 — 
(1)
Deposits with no stated maturity include reciprocal deposits with a recorded book balance of $700.312 million and $555.781 million at September 30, 2023 and December 31, 2022, respectively. Deposits with a stated maturity include reciprocal deposits with a recorded book balance of $99.571 million and $46.794 million at September 30, 2023 and December 31, 2022, respectively.
52
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The fair values for commitments to extend credit and standby letters of credit are estimated to approximate their aggregate book balance, which is nominal and therefore are not disclosed.
Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale the entire holdings of a particular financial instrument.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business, the value of future earnings attributable to off-balance sheet activities and the value of assets and liabilities that are not considered financial instruments.
Fair value estimates for deposit accounts do not include the value of the core deposit intangible asset resulting from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market.
53
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
13.    Contingencies

Pressures from various global and national macroeconomic conditions, including heightened inflation, rising interest rates, elevated energy prices, supply chain disruptions, recent adverse weather conditions, concerns over the Russia-Ukraine war and the economic sanctions related thereto, escalating tensions in the Middle East, and foreign currency exchange rate fluctuations continue to create significant economic uncertainty. The extent to which these pressures may impact our business, results of operations, asset valuations, financial condition, and customers will depend on future developments, which continue to be highly uncertain and difficult to predict. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale, securities held to maturity, loans, capitalized mortgage loan servicing rights or deferred tax assets.

We continue to closely monitor and analyze the higher risk segments within our portfolio, and senior management is cautiously optimistic that we are positioned to continue managing the impact of the varied set of risks and uncertainties currently impacting the global and U.S. economies. However, a high degree of uncertainty still exists with respect to the impact of these fluid macroeconomic conditions on the future performance of our loan portfolio and our financial results.
Litigation
We are involved in various litigation matters in the ordinary course of business. At the present time, we do not believe any of these matters will have a significant impact on our interim condensed consolidated financial position or results of operations. The aggregate amount we have accrued for losses we consider probable as a result of these litigation matters is immaterial. However, because of the inherent uncertainty of outcomes from any litigation matter, we believe it is reasonably possible we may incur losses in addition to the amounts we have accrued. At this time, we estimate the maximum amount of additional losses that are reasonably possible is insignificant. However, because of a number of factors, including the fact that certain of these litigation matters are still in their early stages, this maximum amount may change in the future.
The litigation matters described in the preceding paragraph primarily include claims that have been brought against us for damages, but do not include litigation matters where we seek to collect amounts owed to us by third parties (such as litigation initiated to collect delinquent loans). These excluded, collection-related matters may involve claims or counterclaims by the opposing party or parties, but we have excluded such matters from the disclosure contained in the preceding paragraph in all cases where we believe the possibility of us paying damages to any opposing party is remote.
Visa Stock
We own 12,566 shares of VISA Class B common stock. At the present time, these shares can only be sold to other Class B shareholders. As a result, there has generally been limited transfer activity in private transactions between buyers and sellers. Given the limited activity that we have become aware of and the continuing uncertainty regarding the likelihood, ultimate timing and eventual exchange rate for Class B shares into Class A shares, we continue to carry these shares at zero, representing cost basis less impairment. However, given the current conversion ratio of 1.5875 Class A shares for every 1 Class B share and the closing price of VISA Class A shares on October 26, 2023 of $231.28 per share, our 12,566 Class B shares would have a current “value” of approximately $4.6 million. We continue to monitor Class B trading activity and the status of the resolution of certain litigation matters at VISA that would trigger the conversion of Class B common shares into Class A common shares, which would not have any trading restrictions.
54
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
14.    Accumulated Other Comprehensive Income (Loss) (“AOCIL”)
A summary of changes in AOCIL follows:
Unrealized
Gains
(Losses) on
Securities
AFS		Unrealized
Losses on
Securities
Transferred
to Securities
HTM (1)		Dispropor-
tionate
Tax Effects
from
Securities
AFS		Unrealized Losses on Derivative InstrumentsTotal
(In thousands)
For the three months ended September 30,
2023
Balances at beginning of period$(57,695)$(16,811)$(5,798)$(206)$(80,510)
Other comprehensive income (loss) before reclassifications(12,130)696 — (417)(11,851)
Amounts reclassified from AOCIL— — — 57 57 
Net current period other comprehensive income (loss)(12,130)696 — (360)(11,794)
Balances at end of period$(69,825)$(16,115)$(5,798)$(566)$(92,304)
2022
Balances at beginning of period$(59,335)$(19,870)$(5,798)$— $(85,003)
Other comprehensive loss before reclassifications(12,895)853 — — (12,042)
Amounts reclassified from AOCIL— — — — — 
Net current period other comprehensive loss(12,895)853 — — (12,042)
Balances at end of period$(72,230)$(19,017)$(5,798)$— $(97,045)
For the nine months ended September 30,
2023
Balances at beginning of period$(68,742)$(18,223)$(5,798)$— $(92,763)
Other comprehensive income (loss) before reclassifications(1,258)2,108 — (743)107 
Amounts reclassified from AOCIL175 — — 177 352 
Net current period other comprehensive income (loss)(1,083)2,108 — (566)459 
Balances at end of period$(69,825)$(16,115)$(5,798)$(566)$(92,304)
2022
Balances at beginning of period$6,299 $— $(5,798)$— $501 
Other comprehensive loss before reclassifications(78,312)(19,017)— — (97,329)
Amounts reclassified from AOCIL(217)— — — (217)
Net current period other comprehensive loss (78,529)(19,017)— — (97,546)
Balances at end of period$(72,230)$(19,017)$(5,798)$— $(97,045)
(1)Represents the remaining unrealized loss to be accreted on securities that were transferred from AFS to HTM on April 1, 2022.
55
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
The disproportionate tax effects from securities AFS arose due to tax effects of other comprehensive income (“OCI”) in the presence of a valuation allowance against our deferred tax assets and a pretax loss from operations. Generally, the amount of income tax expense or benefit allocated to operations is determined without regard to the tax effects of other categories of income or loss, such as OCI. However, an exception to the general rule is provided when, in the presence of a valuation allowance against deferred tax assets, there is a pretax loss from operations and pretax income from other categories in the current period. In such instances, income from other categories must offset the current loss from operations, the tax benefit of such offset being reflected in operations. Release of material disproportionate tax effects from other comprehensive income to earnings is done by the portfolio method whereby the effects will remain in AOCIL as long as we carry a more than inconsequential portfolio of securities AFS.
A summary of reclassifications out of each component of AOCIL for the three months ended September 30 follows:
AOCIL ComponentAmount
Reclassified
From
AOCIL 		Affected Line Item in Condensed
Consolidated Statements of Operations
(In thousands)
2023
Unrealized gains (losses) on securities available for sale
$— Net gains (losses) on securities available for sale
— Income tax expense
$— Reclassifications, net of tax
Unrealized losses on derivative instruments
$72 Interest income
15 Income tax expense
$57 Reclassifications, net of tax
$(57)Total reclassifications for the period, net of tax
2022
Unrealized gains (losses) on securities available for sale
$— Net gains (losses) on securities available for sale
— Income tax expense
$— Reclassifications, net of tax
56
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
A summary of reclassifications out of each component of AOCIL for the nine months ended September 30 follows:
AOCIL ComponentAmount
Reclassified
From
AOCIL 		Affected Line Item in Condensed
Consolidated Statements of Operations
(In thousands)
2023
Unrealized gains (losses) on securities available for sale
$(222)Net gains (losses) on securities available for sale
(47)Income tax expense
$(175)Reclassifications, net of tax
Unrealized losses on derivative instruments
$224 Interest income
47 Income tax expense
$177 Reclassifications, net of tax
$(352)Total reclassifications for the period, net of tax
2022
Unrealized gains (losses) on securities available for sale
$(275)Net gains (losses) on securities available for sale
(58)Income tax expense
$(217)Reclassifications, net of tax

15.    Revenue from Contracts with Customers
We account for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers. We derive the majority of our revenue from financial instruments and their related contractual rights and obligations which for the most part are excluded from the scope of this topic. These sources of revenue that are excluded from the scope of this topic include interest income, net gains on mortgage loans, net gains (losses) on securities AFS, mortgage loan servicing, net and bank owned life insurance and were approximately 86.6% and 83.7% of total revenues for the nine month periods ending September 30, 2023 and 2022, respectively.
Material sources of revenue that are included in the scope of this topic include service charges on deposit accounts, other deposit related income, interchange income and investment and insurance commissions and are discussed in the following paragraphs. Generally these sources of revenue are earned at the time the service is delivered or over the course of a monthly period and do not result in any contract asset or liability balance at any given period end. As a result, there were no contract assets or liabilities recorded as of September 30, 2023 and December 31, 2022.
Service charges on deposit accounts and other deposit related income: Revenues are earned on depository accounts for commercial and retail customers and include fees for transaction-based, account maintenance and overdraft services. Transaction-based fees, which includes services such as ATM use fees, stop payment charges and ACH fees are recognized at the time the transaction is executed as that is the time we fulfill our customer’s request. Account maintenance fees, which includes monthly maintenance services are earned over the course of a month representing the period over which the performance obligation is satisfied. Our obligation for overdraft services is satisfied at the time of the overdraft.
57
NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Interchange income: Interchange income primarily includes debit card interchange and network revenues. Debit card interchange and network revenues are earned on debit card transactions conducted through payment networks such as MasterCard and Accel. Interchange income is recognized concurrently with the delivery of services on a daily basis. Interchange and network revenues are presented gross of interchange expenses, which are presented separately as a component of non-interest expense.
Investment and insurance commissions: Investment and insurance commissions include fees and commissions from asset management, custody, recordkeeping, investment advisory and other services provided to our customers. Revenue is recognized on an accrual basis at the time the services are performed and generally based on either the market value of the assets managed or the services provided. We have an agent relationship with a third party provider of these services and net certain direct costs charged by the third party provider associated with providing these services to our customers.
Net (gains) losses on other real estate and repossessed assets: We record a gain or loss from the sale of other real estate when control of the property transfers to the buyer, which generally occurs at the time of an executed deed. If we were to finance the sale of other real estate to the buyer, we would assess whether the buyer is committed to perform their obligations under the contract and whether collectability of the transaction is probable. Once these criteria are met, the other real estate asset would be derecognized and the gain or loss on sale would be recorded upon the transfer of control of the property to the buyer. There were no other real estate properties sold during the nine month periods ending September 30, 2023 and 2022 that were financed by us.
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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Disaggregation of our revenue sources by attribute follows:
Service
Charges
on Deposit
Accounts		Other
Deposit
Related
Income		Interchange
Income		Investment
and
Insurance
Commissions		Total
Three months ending September 30, 2023(In thousands)
Retail
Overdraft fees$2,090 $— $— $— $2,090 
Account service charges1,079 — — — 1,079 
ATM fees— 457 — — 457 
Other— 247 — — 247 
Business    
Overdraft fees140 — — — 140 
ATM fees— 13 — — 13 
Other— 109 — — 109 
Interchange income— — 4,100 — 4,100 
Asset management revenue— — — 488 488 
Transaction based revenue— — — 388 388 
     
Total$3,309 $826 $4,100 $876 $9,111 
     
Reconciliation to Condensed Consolidated Statement of Operations:  
Non-interest income - other:     
Other deposit related income    $826 
Investment and insurance commissions   876 
Bank owned life insurance (1)    124 
Other (1)
    1,609 
Total    $3,435 
(1)Excluded from the scope of ASC Topic 606.
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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Service
Charges
on Deposit
Accounts		 Other
Deposit
Related
Income		Interchange
Income		Investment
and
Insurance
Commissions		Total
Three months ending September 30, 2022(In thousands)
Retail
Overdraft fees$2,492 $— $— $— $2,492 
Account service charges436 — — — 436 
ATM fees— 318 — — 318 
Other— 239 — — 239 
Business    
Overdraft fees154 — — — 154 
ATM fees— 8 — — 8 
Other— 79 — — 79 
Interchange income— — 4,049 — 4,049 
Asset management revenue— — — 433 433 
Transaction based revenue— — — 316 316 
     
Total$3,082 $644 $4,049 $749 $8,524 
Reconciliation to Condensed Consolidated Statement of Operations:
Non-interest income - other:
Other deposit related income$644 
Investment and insurance commissions749 
Bank owned life insurance (1) 59 
Other (1) 1,138 
Total$2,590 
(1)Excluded from the scope of ASC Topic 606.
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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Service
Charges
on Deposit
Accounts		Other
Deposit
Related
Income		Interchange
Income		Investment
and
Insurance
Commissions		Total
Nine months ending September 30, 2023(In thousands)
Retail
Overdraft fees$6,770 $— $— $— $6,770 
Account service charges2,135 — — — 2,135 
ATM fees— 1,235 — — 1,235 
Other— 756 — — 756 
Business    
Overdraft fees395 — — — 395 
ATM fees— 35 — — 35 
Other— 312 — — 312 
Interchange income— — 10,660 — 10,660 
Asset management revenue— — — 1,389 1,389 
Transaction based revenue— — — 1,057 1,057 
     
Total$9,300 $2,338 $10,660 $2,446 $24,744 
     
Reconciliation to Condensed Consolidated Statement of Operations:  
Non-interest income - other:     
Other deposit related income    $2,338 
Investment and insurance commissions   2,446 
Bank owned life insurance (1)    333 
Other (1)
    4,181 
Total    $9,298 
(1)Excluded from the scope of ASC Topic 606.
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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Service
Charges
on Deposit
Accounts		Other
Deposit
Related
Income		Interchange
Income		Investment
and
Insurance
Commissions		Total
Nine months ending September 30, 2022(In thousands)
Retail
Overdraft fees$7,497 $— $— $— $7,497 
Account service charges1,209 — — — 1,209 
ATM fees— 905 — — 905 
Other— 727 — — 727 
Business    
Overdraft fees429 — — — 429 
ATM fees— 22 — — 22 
Other— 237 — — 237 
Interchange income— — 10,553 — 10,553 
Asset management revenue— — — 1,355 1,355 
Transaction based revenue— — — 814 814 
     
Total$9,135 $1,891 $10,553 $2,169 $23,748 
     
Reconciliation to Condensed Consolidated Statement of Operations:  
Non-interest income - other:     
Other deposit related income    $1,891 
Investment and insurance commissions   2,169 
Bank owned life insurance (1)    302 
Other (1)
    3,635 
Total    $7,997 
(1)Excluded from the scope of ASC Topic 606.
16.    Leases
We have entered into leases in the normal course of business primarily for office facilities, some of which include renewal options and escalation clauses. Certain leases also include both lease components (fixed payments including rent, taxes and insurance costs) and non-lease components (common area or other maintenance costs) which are accounted for as a single lease component as we have elected the practical expedient to group lease and non-lease components together for all leases. We have also elected not to recognize leases with original lease terms of 12 months or less (short-term leases) on our Condensed Consolidated Statements of Financial Condition. Most of our leases include one or more options to renew. The exercise of lease renewal options is typically at our sole discretion and are included in our right of use (“ROU”) assets and lease liabilities if they are reasonably certain of exercise.
Leases are classified as operating or finance leases at the lease commencement date (we did not have any finance leases as of September 30, 2023). Lease expense for operating leases and short-term leases is recognized on a straight-line basis over the lease term. The ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of the lease payment over the lease term.
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NOTES TO INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the lease commencement date in determining the present value of the lease payments.
The cost components of our operating leases follows:
Three Months Ended
September 30,		Nine Months Ended
September 30,
2023202220232022
(In thousands)(In thousands)
Operating lease cost$359 $410 $1,080 $1,233 
Variable lease cost24 25 72 66 
Short-term lease cost25 20 71 57 
Total$408 $455 $1,223 $1,356 
Variable lease costs consist primarily of taxes, insurance, and common area or other maintenance costs for our leased facilities.
Supplemental balance sheet information related to our operating leases follows:
September 30,
2023		December 31,
2022
(Dollars in thousands)
Lease right of use asset (1)$5,231 $5,544 
Lease liabilities (2)$5,423 $5,769 
Weighted average remaining lease term (years)6.115.86
Weighted average discount rate2.7 %2.4 %
(1)Included in Accrued income and other assets in our Condensed Consolidated Statements of Financial Condition.
(2)Included in Accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition.
Maturity analysis of our lease liabilities at September 30, 2023 based on required contractual payments follows:
(In thousands)
Three months ending December 31, 2023$351 
20241,142 
20251,075 
2026903 
2027714 
2028 and thereafter1,720 
Total lease payments5,905 
Less imputed interest(482)
Total$5,423 
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ITEM 2.
MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction. The following section presents additional information to assess the financial condition and results of operations of Independent Bank Corporation (“IBCP”), its wholly-owned bank, Independent Bank (the “Bank”), and their subsidiaries. This section should be read in conjunction with the Condensed Consolidated Financial Statements. We also encourage you to read our 2022 Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”). That report includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.
Overview. We provide banking services to customers located primarily in Michigan’s Lower Peninsula. We also have a loan production office in Fairlawn, Ohio. As a result, our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula.
Recent Developments. As explained in more detail below under Item 1A – “Risk Factors” – the closures of Silicon Valley Bank and Signature Bank earlier this year have impacted the financial services industry. These events have caused banks to reexamine their funding sources and liquidity risks and in some cases have caused deposit holders to reevaluate their banking relationships. As addressed below, we believe these events have caused little to no impact on our deposit base, aside from the mix and pricing of deposits, and that our liquidity and funding and capital resources remain strong. In the wake of these events, initiatives taken with our customer base included discussing how these events unfolded, reinforcing our current capital and liquidity positions and education to maximize FDIC insurance coverage. (See “Deposits and borrowings” and "Liquidity and capital resources").
Pressures from various global and national macroeconomic conditions, including heightened inflation, rising interest rates, elevated energy prices, supply chain disruptions, recent adverse weather conditions, concerns over the Russia-Ukraine war and the economic sanctions related thereto, escalating tensions in the Middle East, and foreign currency exchange rate fluctuations continue to create significant economic uncertainty. The extent to which these pressures may impact our business, results of operations, asset valuations, financial condition, and customers will depend on future developments, which continue to be highly uncertain and difficult to predict. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale ("AFS"), securities held to maturity ("HTM"), loans, capitalized mortgage loan servicing rights or deferred tax assets.

It is against this backdrop that we discuss our results of operations and financial condition for the third quarter of 2023 as compared to earlier periods.
RESULTS OF OPERATIONS
Summary. We recorded net income of $17.5 million and $17.3 million during the three months ended September 30, 2023 and 2022, respectively. The increase in 2023 third quarter results as compared to 2022 is due to decreases in the provision for credit losses and non-interest expense that were partially offset by decreases in net-interest income and non-interest income and an increase in income tax expense.
We recorded net income of $45.3 million and $48.3 million during the nine months ended September 30, 2023 and 2022, respectively. The decrease in 2023 year-to-date results as compared to 2022 is primarily due to an increase in the provision for credit losses and a decrease in non-interest income that was partially offset by an increase in net-interest income and decreases in non-interest expense and income tax expense.
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Key performance ratios
Three months ended September 30,Nine months ended September 30,
2023202220232022
Net income (annualized) to
Average assets1.34 %1.40 %1.19 %1.35 %
Average shareholders’ equity18.68 %20.48 %16.62 %18.56 %
Net income per common share
Basic$0.84 $0.82 $2.16 $2.29 
Diluted0.83 0.81 2.14 2.27 

Net interest income. Net interest income is the most important source of our earnings and thus is critical in evaluating our results of operations. Changes in our net interest income are primarily influenced by our level of interest-earning assets and the income or yield that we earn on those assets and the manner and cost of funding our interest-earning assets. Certain macro-economic factors can also influence our net interest income such as the level and direction of interest rates, the difference between short-term and long-term interest rates (the steepness of the yield curve) and the general strength of the economies in which we are doing business. Finally, risk management plays an important role in our level of net interest income. The ineffective management of credit risk and interest-rate risk in particular can adversely impact our net interest income.
Our net interest income totaled $39.4 million during the third quarter of 2023, a decrease of $0.5 million, or 1.2% from the year-ago period. This decrease primarily reflects a 24 basis point decrease in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) that was partially offset by a $281.9 million increase in average interest-earning assets.
For the first nine months of 2023, net interest income totaled $116.2 million, an increase of $7.3 million, or 6.7% from 2022. This increase primarily reflects a $252.1 million increase in average interest-earning assets and a three basis point increase in our net interest margin.
The increase in average interest-earning assets in 2023 as compared to 2022 primarily reflects growth in commercial, mortgage and installment loans (year to date) funded from an increase in deposits.
The 24 basis point decrease in our net interest margin during the most recent three month period is attributed to a 144 basis point increase in interest expense as a percent of average interest-earning assets which was partially offset by a 120 basis point increase in interest income as a percent of average interest-earning assets. These increases are primarily attributed to the 450 basis point increase in the federal funds rate since June of 2022. Our net interest margin has been negatively impacted by changes in funding mix (such as shifting from non-interest bearing deposits to interest-bearing deposits and an increase in time deposits) as well as higher deposit pricing sensitivity to the increases in interest rates discussed above. This change in funding mix and pricing is expected to continue to have an impact on our net interest margin during 2023. See Asset/liability management.
Our net interest income is also impacted by our level of non-accrual loans. In the third quarter and first nine months of 2023, non-accrual loans averaged $4.4 million and $4.0 million, respectively. In the third quarter and first nine months of 2022, non-accrual loans averaged $4.0 million and $4.6 million, respectively. In addition, in the third quarter and first nine months of 2023 we had net recoveries of $0.1 million and $0.5 million, respectively of unpaid interest on loans placed on or taken off non-accrual or on loans previously charged-off compared to net recoveries of $0.1 million and $0.4 million, respectively, during the same periods in 2022.
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Average Balances and Tax Equivalent Rates
Three Months Ended September 30,
20232022
Average
Balance		InterestRate (2)Average
Balance		InterestRate (2)
(Dollars in thousands)
Assets
Taxable loans$3,687,637 $51,352 5.54 %$3,353,102 $37,019 4.39 %
Tax-exempt loans (1)6,897 85 4.89 7,519 92 4.85 
Taxable securities755,054 5,865 3.11 891,677 5,329 2.39 
Tax-exempt securities (1)316,157 3,813 4.82 334,526 2,727 3.26 
Interest bearing cash108,389 1,468 5.37 5,830 28 1.91 
Other investments18,074 271 5.95 17,653 192 4.32 
Interest Earning Assets4,892,208 62,854 5.12 4,610,307 45,387 3.92 
Cash and due from banks61,094 62,340 
Other assets, net238,812 212,194 
Total Assets$5,192,114 $4,884,841 
Liabilities
Savings and interest-bearing checking$2,598,170 12,272 1.87 $2,548,213 2,803 0.44 
Time deposits816,810 8,471 4.11 402,466 822 0.81 
Other borrowings139,199 2,262 6.45 124,531 1,403 4.47 
Interest Bearing Liabilities3,554,179 23,005 2.57 3,075,210 5,028 0.65 
Non-interest bearing deposits1,162,816 1,376,279 
Other liabilities102,452 98,232 
Shareholders’ equity372,667 335,120 
Total liabilities and shareholders’ equity$5,192,114 $4,884,841 
Net Interest Income$39,849 $40,359 
Net Interest Income as a Percent of Average Interest Earning Assets3.25 %3.49 %
_________________________________
(1)Interest on tax-exempt loans and securities available for sale is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%.
(2)Annualized

66
Average Balances and Tax Equivalent Rates
Nine Months Ended September 30,
20232022
Average
Balance		InterestRateAverage
Balance		InterestRate (2)
(Dollars in thousands)
Assets
Taxable loans$3,579,569 $143,203 5.34 %$3,155,410 $96,742 4.09 %
Tax-exempt loans (1)6,705 239 4.77 7,922 281 4.74 
Taxable securities788,654 17,668 2.99 978,668 14,831 2.02 
Tax-exempt securities (1)320,724 11,009 4.58 336,123 6,950 2.76 
Interest bearing cash71,355 2,769 5.19 36,761 94 0.34 
Other investments17,805 712 5.35 17,806 557 4.18 
Interest Earning Assets4,784,812 175,600 4.90 4,532,690 119,455 3.52 
Cash and due from banks59,163 59,851 
Other assets, net231,872 196,406 
Total Assets$5,075,847 $4,788,947 
Liabilities
Savings and interest-bearing checking$2,550,973 31,644 1.66 $2,528,655 4,232 0.22 
Time deposits745,983 20,320 3.64 365,245 1,376 0.50 
Other borrowings128,846 6,134 6.37 116,774 3,463 3.96 
Interest Bearing Liabilities3,425,802 58,098 2.27 3,010,674 9,071 0.40 
Non-interest bearing deposits1,184,548 1,342,228 
Other liabilities100,929 88,281 
Shareholders’ equity364,568 347,764 
Total liabilities and shareholders’ equity$5,075,847 $4,788,947 
Net Interest Income$117,502 $110,384 
Net Interest Income as a Percent of Average Interest Earning Assets3.28 %3.25 %
_________________________________
(1)Interest on tax-exempt loans and securities available for sale is presented on a fully tax equivalent basis assuming a marginal tax rate of 21%.
(2)Annualized
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Reconciliation of Non-GAAP Financial Measures
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(Dollars in thousands)
Net Interest Margin, Fully Taxable Equivalent ("FTE")
Net interest income$39,427 $39,897 $116,218 $108,959 
Add:  taxable equivalent adjustment422 462 1,284 1,425 
Net interest income - taxable equivalent$39,849 $40,359 $117,502 $110,384 
Net interest margin (GAAP) (1)3.21 %3.45 %3.25 %3.21 %
Net interest margin (FTE) (1)3.25 %3.49 %3.28 %3.25 %
(1)Annualized.
Provision for credit losses. The provision for credit losses was an expense of $1.4 million and an expense of $3.1 million for the three months ended September 30, 2023 and 2022, respectively. During the nine-month periods ended September 30, 2023 and 2022, the provision for credit losses was an expense of $6.8 million and an expense of $4.0 million, respectively. The provision on loans reflects our assessment of the allowance for credit losses (the “ACL”) on loans taking into consideration factors such as loan growth, loan mix, levels of non-performing and classified loans, economic conditions and loan net charge-offs. While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors. See “Portfolio Loans and asset quality” for a discussion of the various components of the ACL on loans and their impact on the provision for credit losses on loans in 2023. The decrease in the provision for credit losses on loans from the prior year quarter to date period is primarily due to a decrease in the change in expected loss rates in our mortgage loan segment as well as a decline in loan growth rate.
The year-to-date provision for credit losses in 2023 compared to 2022, was relatively unchanged. The provision for credit losses on securities HTM in 2023 was an expense of $2.99 million as the result of a loss incurred on a $3.0 million corporate security (Signature Bank) that defaulted during the first quarter. This security was fully charged off during the first quarter of 2023.
Non-interest income. Non-interest income is a significant element in assessing our results of operations. Non-interest income totaled $15.6 million during the third quarter of 2023 compared to $16.9 million in the third quarter of 2022. For the first nine months of 2023, non-interest income totaled $41.6 million compared to $50.4 million for the first nine months of 2022.
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The components of non-interest income are as follows:
Non-Interest Income
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(In thousands)
Interchange income$4,100 $4,049 $10,660 $10,553 
Service charges on deposit accounts3,309 3,082 9,300 9,135 
Net gains on assets
Mortgage loans2,099 2,857 5,475 4,945 
Securities— — (222)(275)
Mortgage loan servicing, net2,668 4,283 7,068 18,086 
Investment and insurance commissions875 750 2,446 2,170 
Bank owned life insurance124 59 333 302 
Other2,436 1,781 6,519 5,525 
Total non-interest income$15,611 $16,861 $41,579 $50,441 
As reflected in the table below, the sale of mortgage loans dropped significantly on a quarterly and year to date basis in 2023 compared to 2022. Mortgage loan activity is summarized as follows:
Mortgage Loan Activity
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(Dollars in thousands)
Mortgage loans originated$172,914 $209,041 $446,450 $796,918 
Mortgage loans sold115,269 157,511 321,140 522,213 
Net gains on mortgage loans2,099 2,857 5,475 4,945 
Net gains as a percent of mortgage loans sold  ("Loan Sales Margin")1.82 %1.81 %1.70 %0.95 %
Fair value adjustments included in the Loan Sales Margin(0.32)0.25 0.60 (0.54)
Mortgage loans originated decreased in 2023 as compared to 2022 due primarily to a decrease in mortgage loan refinance volumes. Mortgage loan refinance volumes declined in 2023 as compared to 2022 as higher mortgage loan interest rates in 2023 reduced this activity. Mortgage loans sold decreased in 2023 as compared to 2022 due primarily to lower loan origination volume.
The volume of loans sold is dependent upon our ability to originate mortgage loans as well as the demand for fixed-rate obligations and other loans that we choose to not put into portfolio because of our established interest-rate risk parameters. (See “Portfolio Loans and asset quality.”) Net gains on mortgage loans are also dependent upon economic and competitive factors as well as our ability to effectively manage exposure to changes in interest rates and thus can often be a volatile part of our overall revenues.
Net gains on mortgage loans totaled $2.1 million and $2.9 million during the third quarters of 2023 and 2022, respectively. For the first nine months of 2023 and 2022, net gains on mortgage loans totaled $5.5 million and $4.9 million, respectively. The decrease from the prior year quarter was primarily due to a decrease in mortgage loans sold. The increase from the prior year to date period, despite decrease in mortgage loans sold, was primarily due to the impact of fair value adjustments on certain unhedged construction loans during the first three quarters of 2022 as a result of the significant increase in interest rates during that period. During the the first three quarters of 2023, interest rates were less volatile and these construction loans were fully hedged.
69
We recorded a net loss of $0.2 million and a net loss $0.3 million on securities AFS for the first nine months of 2023 and 2022, respectively. We recorded no credit related charges in either 2023 or 2022 on securities AFS. See “Securities” below and note #3 to the Condensed Consolidated Financial Statements.
Mortgage loan servicing, net, generated income of $2.7 million and $4.3 million in the third quarters of 2023 and 2022, respectively. For the first nine months of 2023 and 2022, mortgage loan servicing, net, generated income of $7.1 million and $18.1 million, respectively. The significant variances in mortgage loan servicing, net are primarily due to changes in the fair value of capitalized mortgage loan servicing rights associated with changes in interest rates and the associated expected future prepayment levels and expected float rates.
Mortgage loan servicing, net activity is summarized in the following table:
Mortgage Servicing Revenue
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
Mortgage loan servicing, net:(In thousands)
  Revenue, net $2,197 $2,190 $6,612 $6,397 
  Fair value change due to price$1,556 $3,203 $3,364 $14,775 
  Fair value change due to pay-downs$(1,085)$(1,110)$(2,908)$(3,086)
Total$2,668 $4,283 $7,068 $18,086 

Activity related to capitalized mortgage loan servicing rights is as follows:
Capitalized Mortgage Loan Servicing Rights
Three months ended September 30,Nine months ended September 30,
2023202220232022
(In thousands)
Balance at beginning of period$44,427 $39,477 $42,489 $26,232 
Originated servicing rights capitalized1,159 1,588 3,112 5,237 
Change in fair value471 2,093 456 11,689 
Balance at end of period$46,057 $43,158 $46,057 $43,158 
At September 30, 2023 we were servicing approximately $3.55 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 3.82% and a weighted average service fee of approximately 25.6 basis points. Capitalized mortgage loan servicing rights at September 30, 2023 totaled $46.1 million, representing approximately 129.9 basis points on the related amount of mortgage loans serviced for others.
Investment and insurance commissions represent revenues generated on the sale or management of investments and insurance for our customers. These increased on both a quarterly and year-to-date basis in 2023 as compared to 2022, primarily due to growth in assets under management and in annuity sales (reflecting customers seeking alternatives to traditional fixed income products such as time deposits given the prolonged low interest rate environment).
Other non-interest income increased on a comparative quarterly and year to date basis in 2023 as compared to 2022 due primarily to a gain on the sale of a vacant building (quarter to date only) as well as increases in swap fee income (year to date only), title insurance income (quarter to date only), ATM related income and bank owned life insurance income.
Non-interest expense. Non-interest expense is an important component of our results of operations. We strive to efficiently manage our cost structure.
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Non-interest expense decreased by $0.3 million to $32.0 million and decreased by $1.0 million to $95.2 million during the three- and nine-month periods ended September 30, 2023, respectively, compared to the same periods in 2022.
The components of non-interest expense are as follows:
Non-Interest Expense
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(In thousands)
Compensation$13,054 $12,839 $39,846 $37,807 
Performance-based compensation2,955 4,290 8,420 11,728 
Payroll taxes and employee benefits3,966 3,472 11,650 11,078 
Compensation and employee benefits19,975 20,601 59,916 60,613 
Data processing3,071 2,653 8,953 7,513 
Occupancy, net1,971 2,062 5,975 6,682 
Interchange expense1,119 927 3,222 3,200 
Furniture, fixtures and equipment927 987 2,782 3,074 
FDIC deposit insurance677 591 2,209 1,570 
Communications568 723 1,871 2,242 
Loan and collection520 772 1,718 1,978 
Legal and professional543 573 1,623 1,545 
Advertising360 345 1,286 1,585 
Amortization of intangible assets136 174 410 639 
Supplies135 147 363 431 
Correspondent bank service fees56 75 178 232 
Net gains on other real estate and repossessed assets1 (18)18 (214)
Provision for loss reimbursement on sold loans7 12 21 57 
Costs related to unfunded lending commitments451 382 76 676 
Other1,519 1,360 4,620 4,427 
Total non-interest expense$32,036 $32,366 $95,241 $96,250 
Compensation and employee benefits expenses, in total, decreased $0.6 million on a quarterly comparative basis and decreased $0.7 million for the first nine months of 2023 compared to the same periods in 2022.
Compensation expense increased by $0.2 million and $2.0 million in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. These comparative increases in 2023 were primarily due to salary increases that were predominantly effective on January 1, 2023, and a decreased level of compensation that was deferred as direct origination costs due to lower mortgage loan origination volume.
Performance-based compensation decreased by $1.3 million and $3.3 million in the third quarter and first nine months of 2023, respectively, compared to the same periods in 2022. The decrease is primarily due to lower expected incentive compensation payout for salaried and hourly employees and a decrease in mortgage lending related incentives attributed to the decline in mortgage lending
Data processing expense increased by $0.4 million and $1.4 million in the third quarter and first nine months of 2023, respectively, compared to the same prior year periods due in part to core data processor annual asset growth and CPI related cost increases as well as the prior year to date period including a credit from our core data processor related to certain expenses that had been previously paid and expensed.
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Loan and collection expense decreased by $0.3 million in both the third quarter and first nine months of 2023, respectively, compared to the same prior year periods due primarily to lower mortgage lending volume as well as to generally low level of problem credits.
Costs (recoveries) related to unfunded lending commitments increased (decreased) by $0.1 million and ($0.6) million in the third quarter and first nine months of 2023, respectively, compared to the same prior year periods. The decrease in the first nine months of 2023 is due primarily to a decrease in loss rates applied to lending commitments.
Income tax expense. We recorded an income tax expense of $4.1 million and $10.4 million in the third quarter and the first nine months of 2023, respectively. This compares to an income tax expense of $4.0 million and $10.9 million in the third quarter and the first nine months of 2022, respectively. The changes in expense for the first nine months of 2023 compared to the same period in 2022 is primarily due to changes in pretax income.
Our actual income tax expense is different than the amount computed by applying our statutory income tax rate to our income before income tax primarily due to tax-exempt interest income, tax-exempt income from the increase in the cash surrender value on life insurance, and differences in the value of stock awards that vest and stock options that are exercised as compared to the initial fair values that were expensed.
We assess whether a valuation allowance should be established against our deferred tax assets based on the consideration of all available evidence using a “more likely than not” standard. The ultimate realization of this asset is primarily based on generating future income. We concluded at September 30, 2023 and 2022 and at December 31, 2022, that the realization of substantially all of our deferred tax assets continues to be more likely than not.
FINANCIAL CONDITION
Summary. Our total assets increased by $200.2 million during the first nine months of 2023. Loans, excluding loans held for sale, were $3.74 billion at September 30, 2023, compared to $3.47 billion at December 31, 2022. Commercial loans, mortgage loans and installment loans each increased during the first nine months of 2023. (See “Portfolio Loans and asset quality.”)
Deposits totaled $4.59 billion at September 30, 2023, an increase of $206.5 million from December 31, 2022. The increase in deposits from December 31, 2022, is due in part to the seasonal cash management needs of our business and municipal customers, new business customers and our increased use of brokered deposits.
Securities. We maintain diversified securities portfolios, which include obligations of U.S. government-sponsored agencies, securities issued by states and political subdivisions, residential and commercial mortgage-backed securities, asset-backed securities, corporate securities, trust preferred securities and foreign government securities (that are denominated in U.S. dollars). We regularly evaluate asset/liability management needs and attempt to maintain a portfolio structure that provides sufficient liquidity and cash flow.
We believe that the unrealized losses on securities AFS are temporary in nature and are expected to be recovered within a reasonable time period. Based upon our liquidity and capital resources (as explained in more detail below under "Liquidity and capital resources"), we believe that we have the ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse.(See “Asset/liability management.”)
On April 1, 2022, we transferred certain securities AFS with an amortized cost and unrealized loss at the date of transfer of $418.1 million and $26.5 million, respectively to securities HTM. The transfer was made at fair value, with the unrealized loss becoming part of the purchase discount which will be accreted over the remaining life of the securities. The other comprehensive loss component is separated from the remaining available for sale securities and is accreted over the remaining life of the securities transferred. Based upon our liquidity and capital resources (as explained in more detail below under "Liquidity and capital resources"), we believe that we have the ability and intent to hold these securities until they mature, at which time we would receive full value for these securities.
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Securities Available for Sale
Amortized
Cost		UnrealizedFair
Value
GainsLosses
Securities available for sale(In thousands)
September 30, 2023$773,027 $263 $88,649 $684,641 
December 31, 2022866,363 329 87,345 779,347 
Securities Held to Maturity
Carrying
Value
Transferred
Unrealized
Loss (1)
ACLAmortized
Cost		UnrealizedFair Value
GainsLosses
(In thousands)
Securities held to maturity
September 30, 2023$358,899 $20,399 $155 $379,453 $41 $70,295 $309,199 
December 31, 2022374,818 23,066 168 398,052 11 62,645 335,418 
(1)Represents the remaining unrealized loss to be accreted on securities that were transferred from AFS to HTM on April 1, 2022.
Securities AFS in unrealized loss positions are evaluated quarterly for impairment related to credit losses. For securities AFS in an unrealized loss position, we first assess whether we intend to sell, or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security’s amortized cost basis is written down to fair value through income. For securities AFS that do not meet this criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, adverse conditions specifically related to the security and the issuer and the impact of changes in market interest rates on the market value of the security, among other factors. If this assessment indicates that a credit loss exists, we compare the present value of cash flows expected to be collected from the security with the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis for the security, a credit loss exists and an ACL is recorded, limited to the amount that the fair value of the security is less than its amortized cost basis. Any impairment that has not been recorded through an ACL is recognized in other comprehensive income (loss), net of applicable taxes. No ACL for securities AFS was needed at September 30, 2023. The decrease in unrealized losses during the first nine months of 2023 is attributed to pay downs of security balances, improvements in pricing metrics of securities issued by states and political subdivisions and par reversion. See note #3 to the Condensed Consolidated Financial Statements included within this report for further discussion.
For securities HTM an ACL is maintained at a level which represents our best estimate of expected credit losses. This ACL is a contra asset valuation account that is deducted from the carrying amount of securities HTM to present the net amount expected to be collected. Securities HTM are charged off against the ACL when deemed uncollectible. Adjustments to the ACL are reported in our Condensed Consolidated Statements of Operations in provision for credit loss. We measure expected credit losses on securities HTM on a collective basis by major security type with each type sharing similar risk characteristics, and considers historical credit loss information that is adjusted for current conditions and reasonable and supportable forecasts. With regard to U.S. Government-sponsored agency and mortgage-backed securities (residential and commercial), all these securities are issued by a U.S. government-sponsored entity and have an implicit or explicit government guarantee; therefore, no allowance for credit losses has been recorded for these securities. With regard to obligations of states and political subdivisions, private label-mortgage-backed, corporate and trust preferred securities HTM, we consider (1) issuer bond ratings, (2) long-term historical loss rates for given bond ratings, (3) the financial condition of the issuer, and (4) whether issuers continue to make timely principal and interest payments under the contractual terms of the securities. During the first quarter of 2023, one corporate security (Signature Bank) defaulted resulting in a $3.0 million provision for credit losses and a corresponding full charge-off during that period. Despite this lone security loss, the long-term historical loss rates associated with securities having similar grades as those in our portfolio have been insignificant. See note #3 to the Condensed Consolidated Financial Statements included within this report for further discussion.
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Sales of securities were as follows (See “Non-interest income.”):
Sales of Securities
Three Months Ended September 30,Nine Months Ended September 30,
2023202220232022
(in thousands)(In thousands)
Proceeds$— $— $278 $70,523 
Gross gains— — — 164 
Gross losses— — 222 439 
Net gains (losses)$— $— $(222)$(275)
Portfolio Loans and asset quality. In addition to the communities served by our Bank branch and loan production office network, our principal lending markets also include nearby communities and metropolitan areas. Subject to established underwriting criteria, we also may participate in commercial lending transactions with certain non-affiliated banks and make whole loan purchases from other financial institutions.
The senior management and board of directors of our Bank retain authority and responsibility for credit decisions and we have adopted uniform underwriting standards. Our loan committee structure and the loan review process attempt to provide requisite controls and promote compliance with such established underwriting standards. However, there can be no assurance that our lending procedures and the use of uniform underwriting standards will prevent us from incurring significant credit losses in our lending activities.
We generally retain loans that may be profitably funded within established risk parameters. (See “Asset/liability management.”) As a result, we may hold adjustable-rate and fixed rate jumbo mortgage loans as Portfolio Loans, while 15- and 30-year fixed-rate non-jumbo mortgage loans are generally sold to mitigate exposure to changes in interest rates. (See “Non-interest income.”) The retention of newly originated fixed rate jumbo mortgage loans has declined relative to the prior year as the growth in mortgage loans during the first nine months of 2023 has primarily been attributed to the origination of adjustable-rate mortgage loans as well as the continued advances on legacy fixed rate construction mortgage loans. (See “Asset/liability management.”).
A summary of our Portfolio Loans follows:
September 30,
2023		December 31,
2022
(In thousands)
Real estate(1)
Residential first mortgages$1,228,762 $1,081,359 
Residential home equity and other junior mortgages154,779 138,944 
Construction and land development266,216 319,157 
Other(2)1,001,648 874,019 
Consumer633,475 624,047 
Commercial452,267 423,055 
Agricultural4,339 4,771 
Total loans$3,741,486 $3,465,352 
_________________________________
(1)Includes both residential and non-residential commercial loans secured by real estate.
(2)Includes loans secured by multi-family residential and non-farm, non-residential property.
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Non-performing assets
September 30,
2023		December 31,
2022
(Dollars in thousands)
Non-accrual loans$6,969 $5,381 
Loans 90 days or more past due and still accruing interest— — 
Subtotal6,969 5,381 
Less:  Government guaranteed loans2,254 1,660 
Total non-performing loans4,715 3,721 
Other real estate and repossessed assets443 455 
Total non-performing assets$5,158 $4,176 
As a percent of Portfolio Loans
Non-performing loans0.13 %0.11 %
Allowance for credit losses1.48 1.51 
Non-performing assets to total assets0.10 0.08 
Allowance for credit losses as a percent of non-performing loans1176.99 %1409.16 
Non-performing loans have remained relatively stable as a percent of Portfolio Loans since year-end 2022, reflecting generally improving economic conditions and our ongoing collection efforts. Our collection and resolution efforts have generally resulted in a positive trend in non-performing loans.
Other real estate and repossessed assets totaled $0.44 million and $0.46 million at September 30, 2023, and December 31, 2022, respectively.
We will place a loan that is 90 days or more past due on non-accrual, unless we believe the loan is both well secured and in the process of collection. Accordingly, we have determined that the collection of the accrued and unpaid interest on any loans that are 90 days or more past due and still accruing interest is probable.
The following tables reflect activity in our ACL on loans, securities and unfunded lending commitments as well as the allocation of our ACL on loans.
Allowance for credit losses on loans and unfunded lending commitments
Nine months ended September 30,
20232022
LoansSecuritiesUnfunded
Commitments		LoansSecuritiesUnfunded
Commitments
(Dollars in thousands)
Balance at beginning of period$52,435$168 $5,080 $47,252$— $4,481 
Additions (deductions)
Provision for credit losses3,8402,987 — 3,783168 — 
Recoveries credited to allowance2,082— — 2,004— — 
Assets charged against the allowance(2,862)(3,000)— (1,897)— — 
Additions included in non-interest expense—— 76 —— 676 
Balance at end of period$55,495$155 $5,156 $51,142$168 $5,157 
Net loans charged (recovered) against the allowance to average Portfolio Loans0.03 %0.00 %
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Allocation of the Allowance for Credit Losses on Loans
September 30,
2023		December 31,
2022
(Dollars in thousands)
Specific allocations$2,582 $2,078 
Pooled analysis allocations39,173 37,662 
Additional allocations based on subjective factors13,740 12,695 
Total$55,495 $52,435 
Some loans will not be repaid in full. Therefore, an ACL on loans is maintained at a level which represents our best estimate of expected credit losses. Our ACL on loans is comprised of three principal elements: (i) specific analysis of individual loans identified during the review of the loan portfolio, (ii) pooled analysis of loans with similar risk characteristics based on historical experience, adjusted for current conditions, reasonable and supportable forecasts, and expected prepayments, and (iii) additional allowances based on subjective factors, including local and general economic business factors and trends, portfolio concentrations and changes in the size and/or the general terms of the loan portfolios. See note #4 to the Condensed Consolidated Financial Statements included within this report for further discussion on the ACL on loans.
While we use relevant information to recognize losses on loans, additional provisions for related losses may be necessary based on changes in economic conditions, customer circumstances and other credit risk factors.
The ACL increased $3.1 million to $55.5 million at September 30, 2023 from $52.4 million at December 31, 2022, and was equal to 1.48% and 1.51% of total Portfolio Loans at September 30, 2023, and December 31, 2022, respectively.
Since December 31, 2022, the ACL related to specific loans increased $0.5 million due primarily to one commercial loan addition in the second quarter that was partially offset by a partial charge-off of a different commercial loan during the first quarter. The ACL related to pooled analysis of loans increased $1.5 million due primarily to loan growth. The ACL related to subjective factors increased $0.6 million also reflecting loan growth.
Deposits and borrowings. Historically, the loyalty of our customer base has allowed us to price deposits competitively, contributing to a net interest margin that generally compares favorably to our peers. However, we still face a significant amount of competition for deposits within many of the markets served by our branch network, which limits our ability to materially increase deposits without adversely impacting the weighted-average cost of core deposits.
To attract new core deposits, we have implemented various account acquisition strategies as well as branch staff sales training. Account acquisition initiatives have historically generated increases in customer relationships. Over the past several years, we have also expanded our treasury management products and services for commercial businesses and municipalities or other governmental units and have also increased our sales calling efforts in order to attract additional deposit relationships from these sectors. We view long-term core deposit growth as an important objective. Core deposits generally provide a more stable and lower cost source of funds than alternative sources such as short-term borrowings. (See “Liquidity and capital resources.”)
Deposits totaled $4.59 billion and $4.38 billion at September 30, 2023, and December 31, 2022, respectively. The increase in deposits is primarily due to growth in reciprocal deposits, time deposits and brokered time deposits that were partially offset by decreases in non-interest bearing and savings and interest-bearing checking deposits. Reciprocal deposits totaled $799.9 million and $602.6 million at September 30, 2023 and December 31, 2022, respectively. These deposits represent demand, money market and time deposits from our customers that have been placed through IntraFi Network. This service allows our customers to access multi-million dollar FDIC deposit insurance on deposit balances greater than the standard FDIC insurance maximum.
We cannot be sure that we will be able to maintain our current level of core deposits. In particular, those deposits that are uninsured may be susceptible to outflow. Data relating to our deposit portfolios (excluding brokered time) follows:
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September 30,
2023		December 31,
2022
(Dollars in thousands)
Uninsured deposits (1) $1,010,891 $975,938 
Uninsured deposits as a percentage of deposits23.2 %23.4 %
Average deposit account size$20.42 $19.33 
Balance of top 100 largest depositors$915,587 $752,924 
Balance of top 100 depositors as a percentage of deposits21.1 %18.1 %
(1) These amounts exclude intercompany related deposits of $51.3 million and $55.2 million respectively. Uninsured deposits reported in our Call Report at September 30, 2023 and December 31, 2022 totaled $1,062.2 million and $1,031.2 million, respectively.
We have also implemented strategies that incorporate using federal funds purchased, other borrowings and Brokered CDs to fund a portion of our interest-earning assets. The use of such alternate sources of funds supplements our core deposits and is also an integral part of our asset/liability management efforts.
Other borrowings, comprised primarily of FRB and FHLB borrowings, totaled $50.0 million and $86.0 million at September 30, 2023, and December 31, 2022, respectively.
As described above, we have utilized wholesale funding, including federal funds purchased, FHLB and FRB borrowings and Brokered CDs to augment our core deposits and fund a portion of our assets. At September 30, 2023, our use of such wholesale funding sources (including reciprocal deposits) amounted to approximately $1.09 billion, or 23.4% of total funding (deposits and all borrowings, excluding subordinated debt and debentures). Because wholesale funding sources are affected by general market conditions, the availability of such funding may be dependent on the confidence these sources have in our financial condition and operations. The continued availability to us of these funding sources is not certain, and Brokered CDs may be difficult for us to retain or replace at attractive rates as they mature. Our liquidity may be constrained if we are unable to renew our wholesale funding sources or if adequate financing is not available in the future at acceptable rates of interest or at all. Our financial performance could also be affected if we are unable to maintain our access to funding sources or if we are required to rely more heavily on more expensive funding sources. In such case, our net interest income and results of operations could be adversely affected.
We historically employed derivative financial instruments to manage our exposure to changes in interest rates. During the first nine months of 2023 and 2022, we entered into $92.9 million and $74.1 million (aggregate notional amounts), respectively, of interest rate swaps with commercial loan customers, which were offset with interest rate swaps that the Bank entered into with a broker-dealer. We recorded $1.5 million and $0.9 million of fee income related to these transactions during the first nine months of 2023 and 2022, respectively. See note #6 to the Condensed Consolidated Financial Statements included within this report for more information on our derivative financial instruments.
Liquidity and capital resources. Liquidity risk is the risk of being unable to timely meet obligations as they come due at a reasonable funding cost or without incurring unacceptable losses. Our liquidity management involves the measurement and monitoring of a variety of sources and uses of funds. Our Condensed Consolidated Statements of Cash Flows categorize these sources and uses into operating, investing and financing activities. We primarily focus our liquidity management on maintaining adequate levels of liquid assets (primarily funds on deposit with the FRB and certain securities AFS) as well as developing access to a variety of borrowing sources to supplement our deposit gathering activities and provide funds for purchasing securities or originating Portfolio Loans as well as to be able to respond to unforeseen liquidity needs.
Our primary sources of funds include our deposit base, secured advances from the FHLB and FRB, federal funds purchased borrowing facilities with other banks, and access to the capital markets (for Brokered CDs). At September 30, 2023, in addition to liquidity available from our normal operating, funding and investing activities we had unused credit lines with the FHLB and FRB of approximately $989.9 million and $504.0 million, respectively. We also had approximately $812.3 million in fair value of unpledged securities AFS and HTM at September 30, 2023, which could be pledged for an estimated additional borrowing capacity at the FHLB and FRB of approximately $749.4 million.
At September 30, 2023, we had $770.3 million of time deposits that mature in the next 12 months. Historically, a majority of these maturing time deposits are renewed by our customers. Additionally, $3.77 billion of our deposits at September 30, 2023, were in account types from which the customer could withdraw the funds on demand. Changes in the balances of deposits that can be withdrawn upon demand are usually predictable and the total balances of these accounts have generally
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grown or have been stable over time as a result of our marketing and promotional activities. However, there can be no assurance that historical patterns of renewing time deposits or overall growth or stability in deposits will continue in the future.
We have developed contingency funding plans that stress test our liquidity needs that may arise from certain events such as an adverse change in our financial metrics (for example, credit quality or regulatory capital ratios). Our liquidity management also includes periodic monitoring that measures quick assets (defined generally as highly liquid or short-term assets) to total assets, short-term liability dependence and basic surplus (defined as quick assets less volatile liabilities to total assets). Policy limits have been established for our various liquidity measurements and are monitored on a quarterly basis. In addition, we also prepare cash flow forecasts that include a variety of different scenarios.
We believe that we currently have adequate liquidity at our Bank because of our cash and cash equivalents, our portfolio of securities AFS, our access to secured advances from the FHLB and FRB and our ability to issue Brokered CDs.
We also believe that the available cash on hand at the parent company (including time deposits) of approximately $46.6 million as of September 30, 2023, provides sufficient liquidity resources at the parent company to meet operating expenses, to make interest payments on the subordinated debt and debentures, and, along with dividends from the Bank, to pay projected cash dividends on our common stock.
Effective management of capital resources is critical to our mission to create value for our shareholders. In addition to common stock, our capital structure also currently includes subordinated debt and cumulative trust preferred securities.
Capitalization
September 30,
2023		December 31,
2022
(In thousands)
Subordinated debt$39,491 $39,433 
Subordinated debentures39,711 39,660 
Amount not qualifying as regulatory capital(715)(657)
Amount qualifying as regulatory capital78,487 78,436 
Shareholders’ equity
Common stock317,145 320,991 
Retained earnings150,157 119,368 
Accumulated other comprehensive income (loss)(92,304)(92,763)
Total shareholders’ equity374,998 347,596 
Total capitalization$453,485 $426,032 
In May 2020, we issued $40.0 million of fixed to floating subordinated notes with a ten year maturity and a five year call option. The initial coupon rate is 5.95% fixed for five years and then floats at the Secured Overnight Financing Rate (“SOFR”) plus 5.825%. These notes are presented in the Condensed Consolidated Statement of Financial Condition under the caption “Subordinated debt” and the September 30, 2023, balance of $39.5 million is net of remaining unamortized deferred issuance costs of approximately $0.5 million that are being amortized through the maturity date into interest expense on other borrowings and subordinated debt and debentures in our Condensed Consolidated Statements of Operations.
We currently have four special purpose entities with $39.7 million of outstanding cumulative trust preferred securities as of September 30, 2023. These special purpose entities issued common securities and provided cash to our parent company that in turn issued subordinated debentures to these special purpose entities equal to the trust preferred securities and common securities. The subordinated debentures represent the sole asset of the special purpose entities. The common securities and subordinated debentures are included in our Condensed Consolidated Statements of Financial Condition.
The FRB has issued rules regarding trust preferred securities as a component of the Tier 1 capital of bank holding companies. The aggregate amount of trust preferred securities (and certain other capital elements) are limited to 25 percent of Tier 1 capital elements, net of goodwill (net of any associated deferred tax liability). The amount of trust preferred securities and certain other elements in excess of the limit can be included in Tier 2 capital, subject to restrictions. At the parent company, all of these securities qualified as Tier 1 capital at September 30, 2023, and December 31, 2022.
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Common shareholders’ equity increased to $375.0 million at September 30, 2023, from $347.6 million at December 31, 2022. The increase is primarily due to earnings retention that was partially offset by share repurchases. Our tangible common equity (“TCE”) totaled $344.6 million and $316.7 million, respectively, at those same dates. Our ratio of TCE to tangible assets was 6.67% and 6.37% at September 30, 2023, and December 31, 2022, respectively. TCE and the ratio of TCE to tangible assets are non-GAAP measures. TCE represents total common equity less goodwill and other intangible assets.
In December 2022, our Board of Directors authorized a 2023 share repurchase plan. Under the terms of the 2023 share repurchase plan, we are authorized to buy back up to 1,100,000, or approximately 5% of our outstanding common stock. During the first nine months of 2023 repurchases were made totaling 288,401 shares of common stock, for an aggregate purchase price of $5.0 million.
We pay a quarterly cash dividend on our common stock. These dividends totaled $0.69 per share and $0.66 per share in the first nine months of 2023 and 2022, respectively. We generally favor a dividend payout ratio between 30% and 50% of net income.
As of September 30, 2023 and December 31, 2022, our Bank (and holding company) continued to meet the requirements to be considered “well-capitalized” under federal regulatory standards (also see note #10 to the Condensed Consolidated Financial Statements included within this report).
Asset/liability management. Interest-rate risk is created by differences in the cash flow characteristics of our assets and liabilities. Options embedded in certain financial instruments, including caps on adjustable-rate loans as well as borrowers’ rights to prepay fixed-rate loans, also create interest-rate risk.
Our asset/liability management efforts identify and evaluate opportunities to structure our assets and liabilities in a manner that is consistent with our mission to maintain profitable financial leverage within established risk parameters. We evaluate various opportunities and alternate asset/liability management strategies carefully and consider the likely impact on our risk profile as well as the anticipated contribution to earnings. The marginal cost of funds is a principal consideration in the implementation of our asset/liability management strategies, but such evaluations further consider interest-rate and liquidity risk as well as other pertinent factors. We have established parameters for interest-rate risk. We regularly monitor our interest-rate risk and report at least quarterly to our board of directors.
We employ simulation analyses to monitor our interest-rate risk profile and evaluate potential changes in our net interest income and market value of portfolio equity that result from changes in interest rates. The purpose of these simulations is to identify sources of interest-rate risk. The simulations do not anticipate any actions that we might initiate in response to changes in interest rates and, accordingly, the simulations do not provide a reliable forecast of anticipated results. The simulations are predicated on immediate, permanent and parallel shifts in interest rates and generally assume that current loan and deposit pricing relationships remain constant. The simulations further incorporate assumptions relating to changes in customer behavior, including changes in prepayment rates on certain assets and liabilities. At September 30, 2023, both our interest rate risk profile as measured by our short term earnings simulation and our longer term interest rate risk measure based on changes in economic value indicates exposure to rising rates. These measures have increased modestly from December 31, 2022 as an adverse impact of changes in our deposit mix were largely offset by a favorable impact of additional hedging and term funding transactions. In addition, at September 30, 2023 our simulation base-rate scenario for market value of portfolio equity declined from December 31, 2022 due primarily to the changes in our funding mix and change in deposit pricing betas. We are carefully monitoring the change in our funding mix as well as the composition of our earning assets and the impact of potential future changes in interest rates on our changes in market value of portfolio equity and changes in net interest income. As a result, we may add some longer-term borrowings, may utilize derivatives (interest rate swaps, interest rate caps and interest rate floors) to manage interest rate risk and may continue to sell some fixed rate jumbo and other portfolio mortgage loans in the future.
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CHANGES IN MARKET VALUE OF PORTFOLIO EQUITY, NET INTEREST INCOME AND NET INTEREST MARGIN
Change in Interest RatesMarket
Value of
Portfolio
Equity(1)		Percent
Change		Net
Interest
Income(2)		Percent
Change
Net Interest Margin(3)
Percent
Change
(Dollars in thousands)
September 30, 2023
200 basis point rise$400,200 (17.76)%$169,200 (1.69)%3.40 %(1.45)%
100 basis point rise443,900 (8.78)171,200 (0.52)3.44 (0.29)
Base-rate scenario486,600 — 172,100 — 3.45 — 
100 basis point decline524,000 7.69 171,100 (0.58)3.43 (0.58)
200 basis point decline563,800 15.87 169,500 (1.51)3.40 (1.45)
December 31, 2022
200 basis point rise$457,800 (15.86)%$165,800 (0.90)%3.46 %(0.86)%
100 basis point rise500,700 (7.98)167,000 (0.18)3.49 — 
Base-rate scenario544,100 — 167,300 — 3.49 — 
100 basis point decline586,400 7.77 166,600 (0.42)3.48 (0.29)
200 basis point decline608,800 11.89 164,000 (1.97)3.42 (2.01)
_________________________________
(1)Simulation analyses calculate the change in the net present value of our assets and liabilities, including debt and related financial derivative instruments, under parallel shifts in interest rates by discounting the estimated future cash flows using a market-based discount rate. Cash flow estimates incorporate anticipated changes in prepayment speeds and other embedded options.
(2)Simulation analyses calculate the change in net interest income under immediate parallel shifts in interest rates over the next twelve months, based upon a static statement of financial condition, which includes debt and related financial derivative instruments, and do not consider loan fees or loan origination costs.
(3)Simulation analyses calculate the change in tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”) under immediate parallel shifts in interest rates over the next twelve months, based upon a static statement of financial condition, which includes debt and related financial derivative instruments, and do not consider loan fees or loan origination costs.
Accounting standards update. See note #2 to the Condensed Consolidated Financial Statements included elsewhere in this report for details on recently issued accounting pronouncements and their impact on our interim condensed consolidated financial statements.
Fair valuation of financial instruments. Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820 - “Fair Value Measurements and Disclosures” (“FASB ASC Topic 820”) defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
We utilize fair value measurements to record fair value adjustments to certain financial instruments and to determine fair value disclosures. FASB ASC Topic 820 differentiates between those assets and liabilities required to be carried at fair value at every reporting period (“recurring”) and those assets and liabilities that are only required to be adjusted to fair value under certain circumstances (“nonrecurring”). Securities AFS, loans held for sale, carried at fair value, derivatives and capitalized mortgage loan servicing rights are financial instruments recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other financial assets on a nonrecurring basis, such as loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower of cost or fair value accounting or write-downs of individual assets. See note #11 to the Condensed Consolidated Financial Statements included within this report for a complete discussion on our use of fair valuation of financial instruments and the related measurement techniques.
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LITIGATION MATTERS
The aggregate amount we have accrued for losses we consider probable as a result of 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.
CRITICAL ACCOUNTING POLICIES
Our accounting and reporting policies are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the banking industry. Accounting and reporting policies for the ACL and capitalized mortgage loan servicing rights are deemed critical since they involve the use of estimates and require significant management judgments. Application of assumptions different than those that we have used could result in material changes in our consolidated financial position or results of operations. There have been no material changes to our critical accounting policies as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022.
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Item 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
See applicable disclosures set forth in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 2 under the caption “Asset/liability management.”
Item 4.
CONTROLS AND PROCEDURES
(a)Evaluation of Disclosure Controls and Procedures.
With the participation of management, our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a – 15(e) and 15d – 15(e)) for the period ended September 30, 2023, have concluded that, as of such date, our disclosure controls and procedures were effective.
(b)Changes in Internal Controls.
During the quarter ended September 30, 2023, there were no changes in our internal control over financial reporting that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
82
Part II
Item 1A. Risk Factors
In adition to the risk factors disclosed in Item 1A. Risk Factors of our Annual Report on Form 10-K for the year ended December 31, 2022 the following risk factors apply to the Company:
Adverse developments affecting the financial services industry, including recent bank failures and the resulting liquidity concerns, may have a material effect on our business, financial condition, results of operations, or cash flows.

Recent developments and events, including the closures of Silicon Valley Bank and Signature Bank due to large-scale deposit withdrawals over a short period of time, created liquidity risks and concerns within the financial services industry, as well as decreased confidences in banks among depositors, investors, and other counterparties. In general, these events have caused volatility and disruption in the capital markets, as well as reduced valuations of equity and other securities of banks, which may increase the risk of a potential recession. These failures have also highlighted the importance of maintaining diversified funding sources. These market conditions and related factors may impact the competitive landscape for deposits in the financial services industry in an unpredictable manner.

Specifically, these developments and events may materially adversely impact our business, financial condition, results of operations, and/or cash flows, including through potential liquidity pressures, reduced net interest margins, and potential increased credit losses. They may also adversely impact the market price and volatility of our common stock. Government responses to these events may also adversely impact us. Our deposits are insured up to applicable limits by FDIC and are subject to deposit insurance premiums and assessments. The FDIC may increase premiums or impose special assessments on all banks to replenish the Deposit Insurance Fund, which is being used to ensure that all depositors in Silicon Valley Bank and Signature Bank are made whole at no cost to taxpayers. The recent bank failures may also prompt changes to laws or regulations governing banks, which could impact our profitability and business.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The Company maintains a Deferred Compensation and Stock Purchase Plan for Non-Employee Directors (the "Plan") pursuant to which non-employee directors can elect to receive shares of the Company's common stock in lieu of fees otherwise payable to the director for his or her service as a director. A director can elect to receive shares on a current basis or to defer receipt of the shares, in which case the shares are issued to a trust to be held for the account of the director and then generally distributed to the director after his or her retirement from the Board. Pursuant to this Plan, during the third quarter of 2023, the Company issued 523 shares of common stock to non-employee directors on a current basis and 4,995 shares of common stock to the trust for distribution to directors on a deferred basis. These shares were issued on October 1, 2023 representing aggregate fees of $0.09 million. The shares on a current basis were issued at a price of $16.96 per share and the shares on a deferred basis were issued at a price of $15.26 per share, representing 90% of the fair value of the shares on the credit date. The price per share was the consolidated closing bid price per share of the Company's common stock as of the date of issuance, as determined in accordance with NASDAQ Marketplace Rules. The Company issued the shares pursuant to an exemption from registration under Section 4(2) of the Securities Act of 1933 due to the fact that the issuance of the shares was made on a private basis pursuant to the Plan.
83
The following table shows certain information relating to repurchases of common stock for the three-months ended September 30, 2023:
PeriodTotal Number of
Shares Purchased (1)		Average Price
Paid Per Share		Total Number of
Shares Purchased
as Part of a
Publicly
Announced Plan		Remaining
Number of
Shares Authorized
for Purchase
Under the Plan
July 2023—$— —900,000
August 202388,46019.15 88,401811,599
September 20231,38419.34 —811,599
Total89,844$19.15 88,401811,599
(1) August and September include 59 shares and 1,384 shares, respectively, withheld from the shares that would otherwise have been issued to certain officers in order to satisfy the the tax withholding obligations resulting from the vesting of restricted stock.
Item 5. Other Information
During the period covered by this Quarterly Report on Form 10-Q, no director or officer of the Company adopted or terminated a "Rule 10b5-1 Trading Arrangement" or "Non-Rule 10b5‑1 Trading Arrangement," as each term is defined in Item 408(a) of Regulation S-K.
Item 6. Exhibits
(a)The following exhibits (listed by number corresponding to the Exhibit Table as Item 601 in Regulation S-K) are filed with this report:
Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Executive Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
Certificate of the Chief Financial Officer of Independent Bank Corporation pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. 1350).
101.INS Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document)
101.SCH Inline XBRL Taxonomy Extension Schema Document
101.CAL Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE Inline XBRL Taxonomy Extension Presentation Linkbase Document
104Cover page interactive data file (formatted as inline XBRL and contained in Exhibit 101)
84
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DateNovember 3, 2023By/s/ Gavin A. Mohr
Gavin A. Mohr, Principal Financial Officer
DateNovember 3, 2023By/s/ James J. Twarozynski
James J. Twarozynski, Principal Accounting Officer
85

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