Contingencies

6 Months Ended

Jun. 30, 2021

13.	Contingencies

Pandemic

The COVID-19 pandemic and the related government restrictions and guidance have had and may continue to have a significant effect on us, our customers, and the markets we serve. Since the U.S. Food and Drug Administration (FDA) issued its first emergency use authorization for a COVID-19 vaccine on December 11, 2020, more than two-thirds of the adult population in the U.S. has received at least one vaccination. As of July 12, 2021, 62.4% of Michigan residents ages 16 and older have had at least one vaccination. Widespread vaccinations have slowed the spread of the virus. Effective June 22, 2021, the State of Michigan rescinded the emergency orders it implemented in response to the pandemic, including the rescission of restrictions on restaurant capacities and other restrictions on the size of in-person gatherings. Despite these positive developments, the pandemic continues to cause a great deal of economic uncertainty and disruption to financial and other markets, including as a result of concerns relating to possible variants of the original virus.

As a result of the pandemic, the related governmental responses, and the ongoing uncertainty, our business, results of operations, and financial condition may be adversely affected by a number of factors that could impact us and our customers, including but not limited to:

∙	business closures and higher than normal levels of unemployment may cause increases in loan delinquencies, foreclosures and defaults;

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

∙	declines in collateral values may occur;

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

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

∙	we may experience operational failures due to changes in our normal business practices necessitated by the pandemic and related governmental actions; and/or

∙	our production and efficiency may suffer due to employee illnesses and/or employees having to work remotely.

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

The extent to which the COVID-19 pandemic may impact our business, results of operations and financial condition will depend on future developments, which are highly uncertain and difficult to predict. Those developments and factors are expected to include the evolution of the virus and possible virus variants, the number of people who become vaccinated, actions taken by governmental authorities to address the foregoing, and how quickly and to what extent normal economic and operating conditions can resume. We do not yet know the full extent of the impact. However, the effects could have a material adverse impact on our business, asset valuations, financial condition and results of operations. Material adverse impacts may include all or a combination of valuation impairments on our intangible assets, securities available for sale, loans, capitalized mortgage loan servicing rights or deferred tax assets.

Certain industries (such as hotels and restaurants) have been more adversely impacted by the COVID-19 pandemic and related periodic shutdowns of our economy. We believe that the following industry concentrations within our commercial loan portfolio represent greater potential risk in the current economic environment. The balances below are as of June 30, 2021.

Commercial and industrial portfolio segment:

•

Retail - $74 million

•

Food service - $61 million

•

Hotel - $42 million

Commercial real estate portfolio segment:

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Retail - $102 million

•

Office - $76 million

•

Multifamily - $63 million

At June 30, 2021, we had no commercial loans in forbearance. However, we continue to closely monitor these industry concentrations and at present do not foresee any significant losses relative to this portion of our loan portfolio given the current economic conditions in Michigan and the fact that many businesses have reopened. However, a high degree of uncertainty still exists with respect to the impact of the COVID-19 pandemic and the related economic disruptions on the future performance of our loan portfolio, including these concentrations.

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.

Loss Reimbursement Obligations

The provision for loss reimbursement on sold loans 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 provision for loss reimbursement on sold loans was an expense of $0.03 million and $0.08 million for the three month periods ended June 30, 2021 and 2020 and an expense of $0.06 million and $0.11 million for the six month periods ended June 30, 2021 and 2020, respectively. The reserve for loss reimbursements on sold mortgage loans totaled $1.08 million and $1.02 million at June 30, 2021 and December 31, 2020, respectively. This reserve is included in accrued expenses and other liabilities in our Condensed Consolidated Statements of Financial Condition. This reserve is based on an analysis of mortgage loans that we have sold which are further categorized by delinquency status, loan to value, and year of origination. The calculation includes factors such as probability of default, probability of loss reimbursement (breach of representation or warranty) and estimated loss severity. We believe that the amounts that we have accrued for incurred losses on sold mortgage loans are appropriate given our analyses. However, future losses could exceed our current estimate.

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 1.6228 Class A shares for every 1 Class B share and the closing price of VISA Class A shares on June 30, 2021 of $233.82 per share, our 12,566 Class B shares would have a current “value” of approximately $4.8 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.