Grand River Commerce : 2022 Audited Financial Statements

GRAND RIVER COMMERCE, INC.

Table of Contents

April 12, 2023

To our valued shareholders:

We present for your review the audited consolidated financial statements of Grand River Commerce, Inc. ("Company") and its subsidiary, Grand River Bank ("Bank"), for the twelve-month period ended December 31, 2022.

As of December 31, 2022, total assets of the Company stood at $530 million, an increase of $41 million, or 8%, from year-end 2021. Our loan portfolio grew $79 million, or 21%, net of the repayment of Paycheck Protection Program ("PPP") loans. This growth was primarily funded with existing cash and cash equivalents which declined $36 million and deposits, which increased by $34 million during the period, or 8%, from year-end 2021.

Asset quality at year-end remained exceptionally strong, with no charge-offs, negligible delinquency and one relatively small non-performing loan relationship. As has always been our practice, we continue to rigorously monitor our overall portfolio and communicate frequently with our customers. The majority of our commercial customers continue to report high demand for their products and services, and are performing well, with several posting record revenue and earnings. Our single non-performing borrowing relationship is well-secured, remains current on payments and poses virtually no risk of loss.

At year-end, our allowance for loan losses stood at 1.29%, compared to 1.27% as of December 31, 2021. In accordance with accounting standards, we calculate our reserve, in part, by analyzing portfolio mix and applying quantitative and qualitative factors, including lagging indicators that represent overall economic conditions and trends in our portfolio. The methodology will be changing for 2023 as we adopt "CECL", as required. Specifically, ASU No. 2016-13,Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments commonly referred to as CECL. This change was effective as of January 1, 2023.

As will be discussed in the following paragraphs, the Company, as of December 31, posted a net loss of $2.2 million, while the Bank, inclusive of GRMC, reported a consolidated net loss of $1.5 million. Consolidated performance was impacted by expenses associated with the development of Grand River Mortgage Company, LLC ("GRMC"). It's important to note that, excluding the investment in GRMC, the Bank generated solid net income of $2.1 million. The following table provides additional detail:

Grand River Bank is known for consistent growth, strong earnings, pristine asset quality and a uniquely-attractive position in the markets we serve. As we've shared in previous communications, our investment in GRMC, a nationwide mortgage lending subsidiary, is intended to create future income diversification, provide additional financial resources to support the continued expansion of our core West Michigan banking franchise, increase the value of the Company for the benefit of our shareholders, and provide the Bank and our team members with even greater opportunities. The decision to proceed with GRMC was made following a year of rigorous evaluation, financial modeling, and thorough stress testing of a variety of environmental conditions, including market contraction and rapidly rising interest rates. The Bank's directors were advised during their evaluation by a group of nationally-known CPA's, compensation consultants, project managers, and attorneys.

GRMC is led by an industry-leading team with deep experience and a track record of success in all market conditions. The operating platform was largely completed in 2022. Experienced lenders were hired, and loan production began ramping up at the end of the year. As is the case with virtually all start-ups, GRMC is experiencing losses, as production revenue has not had time to catch up with fixed costs. While we cannot predict with certainty the ultimate trajectory of the overall economy and we acknowledge that there are factors beyond our control, our expectation, based upon the experience of our board of directors and combined leadership team - is that Grand River Bank will continue to perform well and that GRMC will achieve its anticipated potential.

Our most-current forecast anticipates that GRMC will begin to generate a meaningful contribution to the Company's consolidated net income by the 4th quarter of 2023. This forecast has been revised to reflect actual performance and current market conditions experienced at the time of this letter. As the steep interest rate increases from the last two quarters of 2022 and early 2023 have begun to abate, market stability provides the basis for our continued confidence. This position is shared by leading US banks with significant stakes in the national mortgage market, leading us to continue our support for the development of our platform.

The future of Grand River Bank as a leading institution in our market is backed by the directors' commitment to a level of performance that rivals our competition. The most recent financial plan approved by the board of directors factors the strength of our market, the skill of our team and the need to provide our stakeholders with a return on investment commensurate with the size and age of our institution.

Led by rising interest rates and growth in earning assets, net interest income increased $1.4 million, or 10.6%, on a year-over-year basis. Overall, this increase compensated for the $1.2 million year-over-year decrease in PPP-related fee income which, in accordance with accounting standards, was recognized over the life of the loans. From the Bank's perspective, the program worked as intended and, as of December 31, 2022, all PPP loans that we originated have been forgiven. As a result, all net fees on those loans have been reflected in interest income.

Non-interest income declined $2.0 million, or 64%, from last year, primarily due to a reduction in the volume of residential mortgage loans sold to secondary market investors and lower aggregate fees realized from those sales. Rising interest rates and other economic factors may further distort local market dynamics, contribute to production limitations over which we have no control and continue to diminish the contribution from our West Michigan mortgage unit in future reporting periods.