Exhibit 13

Performance Graph	8
Selected Consolidated Financial Data	9
Management’s Discussion and Analysis	10
Management’s Annual Report on Internal Control Over Financial Reporting	32
Report of Independent Registered Public Accounting Firm	33
Consolidated Financial Statements	35
Notes to Consolidated Financial Statements	40
Quarterly Data	102

7

PERFORMANCE GRAPH

The graph below compares the total returns (assuming reinvestment of dividends) of Independent Bank Corporation common stock, the NASDAQ Composite Index and the NASDAQ Bank Stock Index. The graph assumes $100 invested in Independent Bank Corporation common stock (returns based on stock prices per the NASDAQ) and each of the indices on December 31, 2013 and the reinvestment of all dividends during the periods presented. The performance shown on the graph is not necessarily indicative of future performance.

Independent Bank Corporation

 

	Period Ending
Index	12/31/13		12/31/14		12/31/15		12/31/16		12/31/17		12/31/18
Independent Bank Corporation		100.00		110.30		131.19		191.04		200.58		193.54
NASDAQ Composite		100.00		114.75		122.74		133.62		173.22		168.30
NASDAQ Bank		100.00		111.83		114.30		144.63		171.24		143.15

8

SELECTED CONSOLIDATED FINANCIAL DATA

	Year Ended December 31,
	2018			2017			2016			2015			2014
	(Dollars in thousands, except per share amounts)
SUMMARY OF OPERATIONS
Interest income	$	130,773		$	98,309		$	86,523		$	80,842		$	80,555
Interest expense		17,491			9,123			6,882			5,856			7,299
Net interest income		113,282			89,186			79,641			74,986			73,256
Provision for loan losses		1,503			1,199			(1,309	)		(2,714	)		(3,136	)
Net gains on securities		138			260			563			20			320
Net gain on branch sale		—			—			—			1,193			—
Gain on extinguishment of debt		—			—			—			—			500
Other non-interest income		44,677			42,273			41,735			38,917			37,955
Non-interest expenses		107,461			92,082			90,347			88,450			89,951
Income before income tax		49,133			38,438			32,901			29,380			25,216
Income tax expense		9,294			17,963			10,135			9,363			7,195
Net income	$	39,839		$	20,475		$	22,766		$	20,017		$	18,021
PER COMMON SHARE DATA
Net income per common share
Basic	$	1.70		$	0.96		$	1.06		$	0.88		$	0.79
Diluted		1.68			0.95			1.05			0.86			0.77
Cash dividends declared and paid		0.60			0.42			0.34			0.26			0.18
Book value		14.38			12.42			11.71			11.28			10.91
SELECTED BALANCES
Assets	$	3,353,281		$	2,789,355		$	2,548,950		$	2,409,066		$	2,248,730
Loans		2,582,520			2,018,817			1,608,248			1,515,050			1,409,962
Allowance for loan losses		24,888			22,587			20,234			22,570			25,990
Deposits		2,913,428			2,400,534			2,225,719			2,085,963			1,924,302
Shareholders’ equity		338,994			264,933			248,980			251,092			250,371
Other borrowings		25,700			54,600			9,433			11,954			12,470
Subordinated debentures		39,388			35,569			35,569			35,569			35,569
SELECTED RATIOS
Net interest income to average interest earning assets		3.88	%		3.65	%		3.52	%		3.58	%		3.67	%
Net income to
Average common equity		12.38			7.82			9.21			7.89			7.43
Average assets		1.27			0.77			0.92			0.86			0.80
Average shareholders’ equity to average assets		10.27			9.88			9.98			10.93			10.83
Tier 1 capital to average assets		10.47			10.57			10.50			10.91			11.18
Non-performing loans to Portfolio Loans		0.35			0.41			0.83			0.71			1.08

9

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclaimer Regarding Forward-Looking Statements. Statements in this report that are not statements of historical fact, including statements that include terms such as “will,” “may,” “should,” “believe,” “expect,” “forecast,” “anticipate,” “estimate,” “project,” “intend,” “likely,” “optimistic” and “plan” and statements about future or projected financial and operating results, plans, projections, objectives, expectations, and intentions, are forward-looking statements. Forward-looking statements include, but are not limited to, descriptions of plans and objectives for future operations, products or services; projections of our future revenue, earnings or other measures of economic performance; forecasts of credit losses and other asset quality trends; statements about our business and growth strategies; and expectations about economic and market conditions and trends. These forward-looking statements express our current expectations, forecasts of future events, or long-term goals. They are based on assumptions, estimates, and forecasts that, although believed to be reasonable, may turn out to be incorrect. Actual results could differ materially from those discussed in the forward-looking statements for a variety of reasons, including:

• economic, market, operational, liquidity, credit, and interest rate risks associated with our business;

• economic conditions generally and in the financial services industry, particularly economic conditions within Michigan and the regional and local real estate markets in which our bank operates;

• the failure of assumptions underlying the establishment of, and provisions made to, our allowance for loan 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, 2018, 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 all 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.

Introduction. The following section presents additional information to assess the financial condition and results of operations of Independent Bank Corporation (“IBCP”), its wholly-owned bank, Independent Bank (the “Bank”), and their subsidiaries. This section should be read in conjunction with the consolidated financial statements and the supplemental financial data contained elsewhere in this annual report. We also encourage you to read our Annual Report on Form 10-K filed with the U.S. Securities and Exchange Commission (“SEC”). That report includes a list of risk factors that you should consider in connection with any decision to buy or sell our securities.

Overview. We provide banking services to customers located primarily in Michigan’s Lower Peninsula and have recently opened two loan production offices in Ohio (Columbus and Fairlawn). As a result, our success depends to a great extent upon the economic conditions in Michigan’s Lower Peninsula. At times, we have experienced a difficult economy in Michigan. Economic conditions in Michigan began to show signs of improvement during 2010.

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Generally, these improvements have continued into 2018, albeit at an uneven pace. In addition, since early- to mid-2009, we have seen an improvement in our asset quality metrics. In particular, since early 2012, we have generally experienced a decline in non-performing assets, lower levels of new loan defaults, and reduced levels of loan net charge-offs.

Recent Developments. On December 22, 2017, “H.R. 1”, also known as the “Tax Cuts and Jobs Act” was signed into law. H.R.1, among other things, reduced the federal corporate income tax rate to 21%, effective January 1, 2018. As a result, we concluded that our deferred tax assets, net (“DTA”) had to be remeasured. Our DTA represents expected corporate tax benefits anticipated to be realized in the future. The reduction in the federal corporate income tax rate reduced these anticipated future benefits. The remeasurement of our DTA at December 31, 2017 resulted in a reduction of these net assets and a corresponding increase in income tax expense of $6.0 million that was recorded in the fourth quarter of 2017.

On December 4, 2017, we entered into an Agreement and Plan of Merger with TCSB Bancorp, Inc. (“TCSB”) (the “Merger Agreement”) providing for a business combination of IBCP and TCSB. On April 1, 2018, TCSB was merged with and into IBCP, with IBCP as the surviving corporation (the “Merger”). In connection with the Merger, on April 1, 2018, IBCP consolidated Traverse City State Bank, TCSB’s wholly-owned subsidiary bank, with and into Independent Bank (with Independent Bank as the surviving institution).

We paid aggregate Merger consideration of approximately $64.5 million in IBCP common stock or stock options for all of the shares of TCSB common stock and TCSB stock options issued and outstanding immediately before the effective time of the Merger. Based on a preliminary valuation of the assets acquired and liabilities assumed in the Merger, we initially recorded: $29.0 million of goodwill, a core deposit intangible (“CDI”) of $5.8 million, discounts of $6.5 million, $0.4 million and $1.5 million on loans, time deposits and borrowings, respectively, and a $0.5 million write-down of property and equipment. In the third quarter of 2018, goodwill was reduced by $0.7 million (to $28.3 million) related to the collection of a TCSB acquired loan that had been charged off in full prior to the Merger. Because of the status of the collection activities related to this loan at the time of the Merger, we determined that this transaction was a measurement period adjustment and reduced goodwill accordingly. The goodwill will be periodically tested for impairment and the CDI will be amortized over a ten year period ($0.6 million of amortization for this CDI was recorded in 2018). The discounts will be accreted based on the lives of the related assets or liabilities. On or before March 31, 2019, we will finalize the valuation of the assets acquired and liabilities assumed in the Merger and record and disclose any additional adjustments to the preliminary valuation.

Regulation. On July 2, 2013, the Federal Reserve Board approved a final rule that establishes an integrated regulatory capital framework (the “New Capital Rules”). The rule implements in the United States the Basel III regulatory capital reforms from the Basel Committee on Banking Supervision and certain changes required by the 2010 Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). In general, under the New Capital Rules, minimum requirements have increased for both the quantity and quality of capital held by banking organizations. Consistent with the international Basel framework, the New Capital Rules include a new minimum ratio of common equity tier 1 capital to risk-weighted assets of 4.5% and a common equity tier 1 capital conservation buffer of 2.5% of risk-weighted assets that applies to all supervised financial institutions. The 2.5% capital conservation buffer is being phased in ratably over a four-year period that began in 2016. In 2018, 1.875% was added to the minimum ratio for adequately capitalized institutions. To avoid limits on capital distributions and certain discretionary bonus payments we must meet the minimum ratio for adequately capitalized institutions plus the phased in buffer. The rule also raises the minimum ratio of tier 1 capital to risk-weighted assets from 4% to 6% and includes a minimum leverage ratio of 4% for all banking organizations. As to the quality of capital, the New Capital Rules emphasize common equity tier 1 capital, the most loss-absorbing form of capital, and implements strict eligibility criteria for regulatory capital instruments. The New Capital Rules also change the methodology for calculating risk-weighted assets to enhance risk sensitivity. Under the New Capital Rules our existing trust preferred securities are grandfathered as qualifying regulatory capital. As of December 31, 2018 and 2017 we exceeded all of the capital ratio requirements of the New Capital Rules.

It is against this backdrop that we discuss our results of operations and financial condition in 2018 as compared to earlier periods.

11

RESULTS OF OPERATIONS

Summary. We recorded net income of $39.8 million, or $1.68 per diluted share, in 2018, net income of $20.5 million, or $0.95 per diluted share, in 2017, and net income of $22.8 million, or $1.05 per diluted share, in 2016. 2018 results include the benefit of a reduced federal income tax rate pursuant to H.R. 1 and 2017 results include an additional $6.0 million ($0.28 per diluted share) of income tax expense related to the remeasurement of our DTA, both as described earlier under “Recent Developments.”

KEY PERFORMANCE RATIOS

	Year Ended December 31,
	2018			2017			2016
Net income to
Average common equity		12.38	%		7.82	%		9.21	%
Average assets		1.27			0.77			0.92
Net income per common share
Basic	$	1.70		$	0.96		$	1.06
Diluted		1.68			0.95			1.05

Net interest income. Net interest income is the most important source of our earnings and thus is critical in evaluating our results of operations. Changes in our net interest income are primarily influenced by our level of interest-earning assets and the income or yield that we earn on those assets and the manner and cost of funding our interest-earning assets. Certain macro-economic factors can also influence our net interest income such as the level and direction of interest rates, the difference between short-term and long-term interest rates (the steepness of the yield curve) and the general strength of the economies in which we are doing business. Finally, risk management plays an important role in our level of net interest income. The ineffective management of credit risk and interest-rate risk in particular can adversely impact our net interest income.

Net interest income totaled $113.3 million during 2018, compared to $89.2 million and $79.6 million during 2017 and 2016, respectively. The increase in net interest income in 2018 compared to 2017 primarily reflects a $462.0 million increase in average interest-earning assets and a 23 basis point increase in our tax equivalent net interest income as a percent of average interest-earning assets (the “net interest margin”).

The increase in average interest-earning assets primarily reflects the Merger and loan growth utilizing funds from increases in deposits and borrowed funds. The increase in the net interest margin reflects a change in the mix of average-interest earning assets (higher percentage of loans) as well as increases in short-term market interest rates.

The increase in net interest income in 2017 compared to 2016 primarily reflects a $191.2 million increase in average interest-earning assets and a 13 basis point increase in our net interest margin.

Our net interest income is also impacted by our level of non-accrual loans. Average non-accrual loans totaled $8.4 million, $9.5 million and $10.9 million in 2018, 2017 and 2016, respectively.

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AVERAGE BALANCES AND RATES

	2018							2017							2016
	Average Balance		Interest		Rate			Average Balance		Interest		Rate			Average Balance		Interest		Rate
	(Dollars in thousands)
ASSETS
Taxable loans	$	2,418,421	$	116,634		4.82	%	$	1,845,661	$	84,169		4.56	%	$	1,596,136	$	74,014		4.64	%
Tax-exempt loans (1)		6,118		292		4.77			3,199		172		5.38			3,763		220		5.85
Taxable securities		394,160		10,874		2.76			485,343		10,928		2.25			534,233		9,921		1.86
Tax-exempt securities (1)		67,574		2,192		3.24			86,902		3,063		3.52			54,390		1,917		3.52
Interest bearing cash		32,593		371		1.14			37,119		264		0.71			78,606		403		0.51
Other investments		16,936		920		5.43			15,543		836		5.38			15,474		792		5.12
Interest earning assets		2,935,802		131,283		4.48			2,473,767		99,432		4.02			2,282,602		87,267		3.82
Cash and due from banks		33,384							31,980							36,831
Other assets, net		162,750							144,442							155,778
Total assets	$	3,131,936						$	2,650,189						$	2,475,211
LIABILITIES
Savings and interest- bearing checking	$	1,218,243		4,146		0.34		$	1,052,215		1,530		0.15		$	1,018,685		1,115		0.11
Time deposits		632,330		10,332		1.63			502,284		5,245		1.04			447,243		3,826		0.86
Other borrowings		79,519		3,013		3.79			74,876		2,348		3.14			47,058		1,941		4.12
Interest bearing liabilities		1,930,092		17,491		0.91			1,629,375		9,123		0.56			1,512,986		6,882		0.45
Non-interest bearing deposits		846,718							728,208							688,697
Other liabilities		33,354							30,838							26,439
Shareholders’ equity		321,772							261,768							247,089
Total liabilities and shareholders’ equity	$	3,131,936						$	2,650,189						$	2,475,211
Net interest income			$	113,792						$	90,309						$	80,385
Net interest income as a percent of average interest earning assets						3.88	%						3.65	%						3.52	%

(1) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21% in 2018 and 35% in 2017 and 2016.

RECONCILIATION OF NET INTEREST MARGIN, FULLY TAXABLE EQUIVALENT (“FTE”)

	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Net interest income	$	113,282		$	89,186		$	79,641
Add: taxable equivalent adjustment		510			1,123			744
Net interest income - taxable equivalent	$	113,792		$	90,309		$	80,385
Net interest margin (GAAP)		3.85	%		3.61	%		3.49	%
Net interest margin (FTE)		3.88	%		3.65	%		3.52	%

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CHANGE IN NET INTEREST INCOME

	2018 compared to 2017									2017 compared to 2016
	Volume			Rate			Net			Volume			Rate			Net
	(In thousands)
Increase (decrease) in interest income (1)
Taxable loans	$	27,388		$	5,077		$	32,465		$	11,398		$	(1,243	)	$	10,155
Tax-exempt loans (2)		141			(21	)		120			(31	)		(17	)		(48	)
Taxable securities		(2,263	)		2,209			(54	)		(966	)		1,973			1,007
Tax-exempt securities (2)		(641	)		(230	)		(871	)		1,146			—			1,146
Interest bearing cash		(35	)		142			107			(260	)		121			(139	)
Other investments		76			8			84			4			40			44
Total interest income		24,666			7,185			31,851			11,291			874			12,165
Increase (decrease) in interest expense (1)
Savings and interest bearing checking		275			2,341			2,616			38			377			415
Time deposits		1,599			3,488			5,087			508			911			1,419
Other borrowings		153			512			665			952			(545	)		407
Total interest expense		2,027			6,341			8,368			1,498			743			2,241
Net interest income	$	22,639		$	844		$	23,483		$	9,793		$	131		$	9,924

(1) The change in interest due to changes in both balance and rate has been allocated to change due to balance and change due to rate in proportion to the relationship of the absolute dollar amounts of change in each.

(2) Interest on tax-exempt loans and securities is presented on a fully tax equivalent basis assuming a marginal tax rate of 21% in 2018 and 35% in 2017 and 2016.

COMPOSITION OF AVERAGE INTEREST EARNING ASSETS AND INTEREST BEARING LIABILITIES

	Year Ended December 31,
	2018			2017			2016
As a percent of average interest earning assets
Loans		82.6	%		74.7	%		70.1	%
Other interest earning assets		17.4			25.3			29.9
Average interest earning assets		100.0	%		100.0	%		100.0	%
Savings and NOW		41.5	%		42.5	%		44.6	%
Time deposits		14.7			18.2			19.6
Brokered CDs		6.8			2.2			—
Other borrowings		2.7			3.0			2.1
Average interest bearing liabilities		65.7	%		65.9	%		66.3	%
Earning asset ratio		93.7	%		93.3	%		92.2	%
Free-funds ratio (1)		34.3			34.1			33.7

(1) Average interest earning assets less average interest bearing liabilities.

Provision for loan losses. The provision for loan losses was an expense of $1.5 million and $1.2 million in 2018 and 2017, respectively, and was a credit of $1.3 million in 2016. The provision reflects our assessment of the allowance for loan losses taking into consideration factors such as loan mix, levels of non-performing and classified loans 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 allowance for loan losses and their impact on the provision for loan losses.

14

Non-interest income. Non-interest income is a significant element in assessing our results of operations. Non-interest income totaled $44.8 million during 2018 compared to $42.5 million and $42.3 million during 2017 and 2016, respectively. We adopted Financial Accounting Standards Board Accounting Standards Update 2014-09 “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”) on January 1, 2018, using the modified retrospective method. Although ASU 2014-09 did not have any impact on our January 1, 2018 shareholders’ equity or 2018 net income, it did result in a classification change in non-interest income and non-interest expense as compared to the prior year periods. Specifically, in 2018, interchange income and interchange expense each increased by $1.5 million, due to classification changes under ASU 2014-09 (also see notes #1 and #25 to our Consolidated Financial Statements).

NON-INTEREST INCOME

	Year Ended December 31,
	2018		2017		2016
	(In thousands)
Service charges on deposit accounts	$	12,258	$	12,673	$	12,406
Interchange income		9,905		8,023		7,938
Net gains on assets
Mortgage loans		10,597		11,762		10,566
Securities		138		260		563
Mortgage loan servicing, net		3,157		1,647		2,222
Investment and insurance commissions		1,971		1,968		1,647
Bank owned life insurance		970		1,061		1,124
Other		5,819		5,139		5,832
Total non-interest income	$	44,815	$	42,533	$	42,298

Service charges on deposit accounts totaled $12.3 million in 2018, as compared to $12.7 million in 2017 and $12.4 million during 2016. These yearly variations primarily reflect changes in service charges on commercial accounts and in non-sufficient funds fees.

Interchange income totaled $9.9 million in 2018 compared to $8.0 million in 2017 and $7.9 million in 2016. The increase in 2018 as compared to 2017, is primarily due to the aforementioned impact of ASU 2014-09 as well as increased transaction volume. The increase in 2017 as compared to 2016, is primarily due to increased transaction volume.

We realized net gains of $10.6 million on mortgage loans during 2018, compared to $11.8 million and $10.6 million during 2017 and 2016 respectively. Mortgage loan activity is summarized as follows:

MORTGAGE LOAN ACTIVITY

	Year Ended December 31,
	2018			2017			2016
	(Dollars in thousands)
Mortgage loans originated	$	807,408		$	871,222		$	428,249
Mortgage loans sold		491,798			423,327			313,985
Net gains on mortgage loans		10,597			11,762			10,566
Net gains as a percent of mortgage loans sold (“Loan Sales Margin”)		2.15	%		2.78	%		3.37	%
Fair value adjustments included in the Loan Sales Margin		(0.02	)		(0.07	)		0.12

The increase in mortgage loan originations, sales and net gains in 2018 and 2017 as compared to 2016 is due primarily to the expansion of our mortgage-banking operations. In addition, an improving housing market has resulted in an increase in purchase money mortgage origination volume.

During the last quarter of 2016 and the first half of 2017, we significantly expanded our mortgage-banking operations by adding new employees and opening new loan production offices (Ann Arbor, Brighton, Dearborn, Grosse Pointe, Traverse City and Troy, Michigan and Columbus and Fairlawn, Ohio). This business expansion has accelerated the growth of portfolio mortgage loans and mortgage loans serviced for others, leading to increased

15

mortgage loan interest income and mortgage loan servicing revenue. However, this expansion has also increased non-interest expenses, particularly compensation and employee benefits and occupancy. In addition, due to higher interest rates, mortgage loan refinance volume has declined in 2018 on an industry-wide basis. It is important to our future results of operations that we continue to effectively and successfully manage this business expansion.

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 as a percentage of mortgage loans sold (our “Loan Sales Margin”) are impacted by several factors including competition and the manner in which the loan is sold. Net gains on mortgage loans are also impacted by recording fair value accounting adjustments. Excluding these fair value accounting adjustments, the Loan Sales Margin would have been 2.17% in 2018, 2.85% in 2017 and 3.25% in 2016. The higher Loan Sales Margin in 2016 as compared to 2018 and 2017, was principally due to more favorable competitive conditions including wider primary-to-secondary market pricing spreads for much of that year. In 2018 and 2017, our Loan Sales Margin contracted due to competitive factors. In general, as overall industry-wide mortgage loan origination levels drop, pricing becomes more competitive. The changes in the fair value accounting adjustments are primarily due to changes in the amount of commitments to originate mortgage loans for sale during each period. In addition, we recorded a loss on mortgage loans of $0.25 million in the fourth quarter of 2018 on the pending sale of approximately $41.5 million of portfolio mortgage loans. These loans were classified as held for sale at December 31, 2018 and carried at the lower of cost or fair value. This sale closed on January 30, 2019.

We generated net gains on securities of $0.14 million, $0.26 million and $0.56 million in 2018, 2017 and 2016, respectively. These net gains were due to the sales of securities and changes in the fair value of equity/trading securities as outlined in the table below. We recorded no net impairment losses in 2018, 2017 or 2016 for other than temporary impairment of securities available for sale.

GAINS AND LOSSES ON SECURITIES

	Year Ended December 31,
	Proceeds		Gains (1)		Losses (2)		Net
	(In thousands)
2018	$	48,736	$	336	$	198	$	138
2017		17,308		263		3		260
2016		64,103		616		53		563

(1) Gains in 2018 include $0.144 million related to the sale of 1,000 VISA Class B shares. Gains in 2017 and 2016 include $0.045 million and $0.262 million, respectively related to an increase in the fair value of trading securities.

(2) Losses in 2018 include $0.062 million related to a decrease in the fair value of equity securities at fair value.

Mortgage loan servicing generated net earnings of $3.2 million, $1.6 million and $2.2 million in 2018, 2017 and 2016, respectively. This activity is summarized in the following table:

MORTGAGE LOAN SERVICING ACTIVITY

	2018			2017			2016
	(In thousands)
Mortgage loan sevicing:
Revenue, net	$	5,480		$	4,391		$	4,106
Fair value change due to price		191			(718	)		—
Fair value change due to pay-downs		(2,514	)		(2,026	)		—
Amortization		—			—			(2,850	)
Impairment (charge) recovery		—			—			966
Total	$	3,157		$	1,647		$	2,222

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Effective on January 1, 2017, we adopted the fair value accounting method for capitalized mortgage loan servicing rights. Activity related to capitalized mortgage loan servicing rights is as follows:

CAPITALIZED MORTGAGE LOAN SERVICING RIGHTS

	2018			2017			2016
	(In thousands)
Balance at January 1,	$	15,699		$	13,671		$	12,436
Change in accounting		—			542			—
Balance at January 1, as adjusted		15,699			14,213			12,436
Originated servicing rights capitalized		4,977			4,230			3,119
Servicing rights acquired		3,047			—			—
Amortization		—			—			(2,850	)
Change in valuation allowance		—			—			966
Change in fair value		(2,323	)		(2,744	)		—
Balance at December 31,	$	21,400		$	15,699		$	13,671
Valuation allowance at December 31,	$	—		$	—		$	2,306

At December 31, 2018, we were servicing approximately $2.33 billion in mortgage loans for others on which servicing rights have been capitalized. This servicing portfolio had a weighted average coupon rate of 4.23% and a weighted average service fee of approximately 25.8 basis points. Remaining capitalized mortgage loan servicing rights at December 31, 2018 totaled $21.4 million, representing approximately 91.7 basis points on the related amount of mortgage loans serviced for others.

Investment and insurance commissions totaled $2.0 million in both 2018 and 2017 as compared to $1.6 million in 2016. The higher levels of revenue in 2018 and 2017 as compared to 2016 was due primarily to growth in sales and assets under management.

We earned $1.0 million, $1.1 million and $1.1 million in 2018, 2017 and 2016, respectively, on our separate account bank owned life insurance principally as a result of increases in the cash surrender value. Our separate account is primarily invested in agency mortgage-backed securities and managed by a fixed income investment manager. The crediting rate (on which the earnings are based) reflects the performance of the separate account. The total cash surrender value of our bank owned life insurance was $55.1 million and $54.6 million at December 31, 2018 and 2017, respectively.

Other non-interest income totaled $5.8 million, $5.1 million and $5.8 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to increases in a variety of categories including: wire transfer fees, credit card interchange income, merchant processing fees, income from a small business investment company and proceeds from a retired director’s life insurance policy. The decrease in 2017 as compared to 2016 is primarily due to a reduction in title insurance fees and lower rental income on other real estate.

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 totaled $107.5 million in 2018, $92.1 million in 2017, and $90.3 million in 2016. Many of our components of non-interest expense increased in 2018 due to the Merger. The components of non-interest expense are as follows:

NON-INTEREST EXPENSE

	Year ended December 31,
	2018			2017			2016
	(In thousands)
Compensation	$	37,878		$	35,397		$	33,080
Performance-based compensation		11,942			9,874			7,866
Payroll taxes and employee benefits		12,258			9,818			8,633
Compensation and employee benefits		62,078			55,089			49,579
Occupancy, net		8,912			8,102			8,023
Data processing		8,262			7,657			7,952
Furniture, fixtures and equipment		4,080			3,870			3,912
Merger related expenses		3,465			284			—
Communications		2,848			2,684			3,142
Interchange expense		2,702			1,156			1,111
Loan and collection		2,682			2,230			2,512
Advertising		2,155			1,905			1,856
Legal and professional		1,839			1,892			1,742
FDIC deposit insurance		1,081			894			1,049
Amortization of intangible assets		969			346			347
Supplies		689			666			728
Credit card and bank service fees		414			529			791
Costs (recoveries) related to unfunded lending commitments		171			475			(2	)
Provision for loss reimbursement on sold loans		10			171			30
Net (gains) losses on other real estate and repossessed assets		(672	)		(606	)		250
Litigation settlement expense		—			—			2,300
Loss on sale of payment plan business		—			—			320
Other		5,776			4,738			4,705
Total non-interest expense	$	107,461		$	92,082		$	90,347

Compensation expense, which is primarily salaries, totaled $37.9 million, $35.4 million and $33.1 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to annual merit based salary increases and the Merger. The increase in 2017 as compared to 2016 is primarily due to annual merit based salary increases and a 6.8% rise in average total full-time equivalent employees due principally to the aforementioned expansion of our mortgage banking operations.

Performance-based compensation expense totaled $11.9 million, $9.9 million and $7.9 million in 2018, 2017 and 2016, respectively. The increases in 2018 as compared to 2017, and in 2017 as compared to 2016, are both primarily related to higher compensation under our Management Incentive Compensation Plan (“MICP”) based on our performance relative to plan targets, increased mortgage loan officer commissions and increased employee stock ownership plan contributions. In computing MICP results for 2017, our Board of Directors determined that it was appropriate to exclude the impact of the $6.0 million of additional income tax expense related to the remeasurement of our DTA as described earlier under “Recent Developments”, consistent with the prior practice of excluding unique, one-time, adjustments to our reported financial results.

We maintain performance-based compensation plans. In addition to commissions and cash incentive awards, such plans include an employee stock ownership plan (ESOP) and a long-term equity based incentive plan. The amount of expense recognized in 2018, 2017 and 2016 for share-based awards under our long-term equity based incentive plan was $1.5 million, $1.6 million and $1.5 million, respectively. In 2018, 2017 and 2016, the Board and Compensation Committee of the Board authorized the grant of restricted stock and performance share awards under the plan.

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Payroll taxes and employee benefits expense totaled $12.3 million, $9.8 million and $8.6 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to a $0.5 million increase in payroll taxes, a $1.1 million increase in health care insurance and a $0.6 million increase in 401(k) plan employer contributions. A portion of the increases in 2018 were due to the Merger. However, we maintain a self-insured health care plan (with an individual claim stop loss limit) and we experienced a significant rise in claims in 2018. In 2018, we also increased the 401(k) employer match to 4% (from 3%) of an employee’s eligible compensation. The increase in 2017 as compared to 2016 is primarily due to a $0.6 million increase in payroll taxes, a $0.4 million increase in health care insurance and a $0.2 million increase in recruiting costs.

Occupancy expenses, net, totaled $8.9 million, $8.1 million and $8.0 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to additional locations acquired in the Merger and additional loan production offices opened during 2017. The increase in 2017 as compared to 2016 is primarily due to increased lease costs for new loan production offices related to the aforementioned expansion of our mortgage banking operations.

Data processing expenses totaled $8.3 million, $7.7 million, and $8.0 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to the Merger as well as higher mobile banking activity and software costs for new applications in several departments. The decrease in 2017 as compared to 2016 is primarily due to a $0.8 million decline related to the sale of our payment processing business in May 2017 that was partially offset by a $0.5 million increase related to higher mobile banking activity and software costs for new or expanded lending systems.

Furniture, fixtures and equipment expense totaled $4.1 million, $3.9 million, and $3.9 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to the Merger.

Merger related expenses totaled $3.5 million and $0.3 million in 2018 and 2017, respectively. These expenses include our investment banking fees, certain accounting and legal costs, various contract termination fees, data processing conversion costs, payments made on officer change-in-control contracts, and employee severance costs.

Communications expense totaled $2.8 million, $2.7 million and $3.1 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due the Merger. The decrease in 2017 as compared to 2016 is primarily due to the sale of our payment plan processing business in May 2017, reduced checking account related direct mail and a change in our telecommunications provider as well as 2016 including a debit card mailing.

Interchange expense, which totaled $2.7 million, $1.2 million, and $1.1 million in 2018, 2017 and 2016, respectively, primarily represents fees paid to our core information systems processor and debit card licensor related to debit card and ATM transactions. The increase in 2018 is due primarily to the impact of the implementation of ASU 2014-09 on January 1, 2018. Prior to 2018, certain processing costs were being netted against interchange income. As described above, under ASU 2014-09 these costs are no longer being netted against interchange income but instead are being reported as part of interchange expense.

Loan and collection expenses reflect costs related to new lending activity as well as the management and collection of non-performing loans and other problem credits. These expenses totaled $2.7 million, $2.2 million and $2.5 million in 2018, 2017 and 2016, respectively. The reduced level of expense in 2017 primarily reflects a higher level of recoveries of previously incurred expenses related to the resolution and collection of non-performing or previously charged-off loans.

Advertising expense totaled $2.2 million, $1.9 million, and $1.9 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to increased outdoor advertising (billboards) as well as the Merger.

Legal and professional fees totaled $1.8 million, $1.9 million, and $1.7 million in 2018, 2017 and 2016, respectively. The decrease in 2018 as compared to 2017 is primarily due to lower consulting costs for certain deposit account programs. The increase in 2017 as compared to 2016 is primarily due to higher co-sourced internal audit costs and higher consulting costs for certain deposit account programs.

FDIC deposit insurance expense totaled $1.1 million, $0.9 million, and $1.0 million in 2018, 2017 and 2016, respectively. The increase in 2018 as compared to 2017 is primarily due to the Merger and growth in total assets. The

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decline in 2017 compared to 2016 principally results from the FDIC Deposit Insurance Fund reserve ratio reaching a 1.15% reserve ratio at June 30, 2016, which triggered a new assessment method and generally lower deposit insurance premiums for banks with less than $10 billion in assets.

The amortization of intangible assets primarily relates to the Merger (for 2018) and branch acquisitions and the related amortization of the deposit customer relationship value, including core deposit value, which was acquired in connection with those transactions. We had remaining unamortized intangible assets of $6.4 million and $1.6 million at December 31, 2018 and 2017 respectively. See note #7 to the Consolidated Financial Statements for a schedule of future amortization of intangible assets.

Supplies expenses were relatively unchanged at approximately $0.7 million for all periods presented.

Credit card and bank service fees totaled $0.4 million, $0.5 million, and $0.8 million in 2018, 2017 and 2016, respectively. The declines in 2018 and 2017 compared to 2016 is primarily due to the sale of our payment plan processing business in May 2017.

The changes in costs (recoveries) related to unfunded lending commitments are primarily impacted by changes in the amounts of such commitments to originate Portfolio Loans as well as (for commercial loan commitments) the grade (pursuant to our loan rating system) of such commitments.

The provision for loss reimbursement on sold loans was an expense of $0.01 million, $0.17 million and $0.03 million in 2018, 2017 and 2016, respectively. This provision represents our estimate of incurred losses related to mortgage loans that we have sold to investors (primarily Fannie Mae, Freddie Mac, Ginnie Mae and the Federal Home Loan Bank of Indianapolis). Since we sell mortgage loans without recourse, loss reimbursements only occur in those instances where we have breached a representation or warranty or other contractual requirement related to the loan sale. The reserve for loss reimbursements on sold mortgage loans totaled $0.78 million and $0.67 million at December 31, 2018 and 2017, respectively. This reserve is included in accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. We believe that the amounts that we have accrued for incurred losses on sold mortgage loans are appropriate based upon our prior experience and other assumptions. However, future losses could exceed our current estimate.

Net (gains) losses on other real estate and repossessed assets represent the gain or loss on the sale or additional write downs on these assets subsequent to the transfer of the asset from our loan portfolio. This transfer occurs at the time we acquire the collateral that secured the loan. At the time of acquisition, the other real estate or repossessed asset is valued at fair value, less estimated costs to sell, which becomes the new basis for the asset. Any write-downs at the time of acquisition are charged to the allowance for loan losses. The net gain of $0.7 million in 2018 was primarily due to improved market conditions leading to better sales prices for both commercial and residential properties. The net gain of $0.6 million in 2017 was primarily due to the sale of a commercial property in the fourth quarter of that year. The net loss of $0.25 million in 2016 was primarily due to $0.46 million of write-downs on a group of commercial income-producing properties that were subsequently sold in 2017.

We incurred a $2.3 million expense in 2016 for the settlement of a litigation matter as described in note #11 to the Consolidated Financial Statements.

We incurred a $0.3 million loss in 2016 related to the sale of our payment plan business as described in note #27 to the Consolidated Financial Statements.

Other non-interest expenses totaled $5.8 million, $4.7 million, and $4.7 million in 2018, 2017 and 2016, respectively. The increase in 2018 compared to 2017 and 2016 is due to increases in several expense categories, including: directors’ fees (a new director was added in each of 2018 and 2017), travel and entertainment expenses (in part due to the Merger), debit card and check fraud losses and certain outsourcing costs related to mortgage lending.

Income tax expense. We recorded an income tax expense of $9.3 million, $18.0 million and $10.1 million in 2018, 2017 and 2016, respectively. 2018 reflects a lower corporate federal income tax rate and 2017 includes an additional $6.0 million of income tax expense related to the remeasurement of our DTA, both as described earlier under “Recent Developments.”

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Our actual federal income tax expense is different than the amount computed by applying our statutory federal income tax rate to our pre-tax income primarily due to tax-exempt interest income, share based compensation and tax-exempt income from the increase in the cash surrender value on life insurance (and for 2017, the remeasurement of our DTA as well).

We assess whether a valuation allowance should be established against our DTA based on the consideration of all available evidence using a “more likely than not” standard. The ultimate realization of this asset is primarily based on generating future income. We concluded at December 31, 2018 and 2017 that the realization of substantially all of our DTA continues to be more likely than not.

We had maintained a valuation allowance against our DTA of approximately $1.1 million at December 31, 2016. This valuation allowance on our DTA related to state income taxes at Mepco. In this instance, we determined that the future realization of this particular DTA was not more likely than not. That conclusion was based on the pending sale of Mepco’s payment plan business. After accounting for the May 2017 sale of our payment plan business, all that remained of this DTA was loss carryforwards that we wrote off against the related valuation allowance as of June 30, 2017 as we will no longer be doing business in those states.

FINANCIAL CONDITION

Summary. Our total assets increased to $3.35 billion at December 31, 2018, compared to $2.79 billion at December 31, 2017, primarily due to the Merger and organic loan growth. The total assets, loans and deposits acquired in the Merger were approximately $343.5 million, $295.8 million (including $1.3 million of loans held for sale) and $287.7 million, respectively.

Loans, excluding loans held for sale (“Portfolio Loans”), totaled $2.58 billion at December 31, 2018, an increase of 27.9% from $2.02 billion at December 31, 2017. (See “Portfolio Loans and asset quality”). The increase in Portfolio Loans, excluding the impact of the Merger, during the last few years is part of our overall strategy to grow revenues, earnings and improve our operating leverage by increasing our loans to deposits ratio. The expansion of our mortgage banking operations, as described earlier, is part of this strategy along with continuing to increase our commercial and consumer installment lending.

Deposits totaled $2.91 billion at December 31, 2018, compared to $2.40 billion at December 31, 2017. The $512.9 million increase in total deposits during the period reflects growth in all categories, due primarily to the Merger as well as increases in reciprocal deposits and brokered time 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. Except as discussed below, we believe that the unrealized losses on securities available for sale are temporary in nature and are expected to be recovered within a reasonable time period. We believe that we have the ability to hold securities with unrealized losses to maturity or until such time as the unrealized losses reverse. (See “Asset/liability management.”) Securities available for sale declined by $95.0 million during 2018 as these funds were utilized to support net Portfolio Loan growth.

We adopted FASB ASU 2017-08, “Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities” during the first quarter of 2017 using a modified retrospective approach. As a result, the amortized cost of securities as of January 1, 2017 was adjusted lower by $0.46 million.

Our portfolio of securities available for sale is reviewed quarterly for impairment in value. In performing this review, management considers (1) the length of time and extent that fair value has been less than cost, (2) the financial condition and near term prospects of the issuer, (3) the impact of changes in market interest rates on the market value of the security and (4) an assessment of whether we intend to sell, or it is more likely than not that we will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. For securities that do not meet these recovery criteria, the amount of impairment recognized in earnings is limited to the amount related to credit losses, while impairment related to other factors is recognized in other comprehensive income. We recorded no net impairment losses related to other than temporary impairment on securities available for sale in 2018, 2017 or 2016.

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SECURITIES

	Amortized Cost		Unrealized				Fair Value
			Gains		Losses
	(In thousands)
Securities available for sale
December 31, 2018	$	433,224	$	1,520	$	6,818	$	427,926