Section 1: 10-Q (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, ~~2020~~2021

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ________ to ____________

Commission File Number: 001-38458

LEVEL ONE BANCORP, INC.

(Exact name of registrant as specified in its charter)


Michigan									71-1015624
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)


32991 Hamilton Court									48334
Farmington Hills,									(Zip code)
Michigan
(Address of principal executive offices)

~~(248)~~(248) 737-0300

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, no par value	LEVL	Nasdaq Global Select Market
Depositary Shares, each representing a 1/100th interest in a share of 7.50% Non-Cumulative Perpetual Preferred Stock, Series B	LEVLP	Nasdaq Global Select Market

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 ☑ 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 (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ 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. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer	☐	Accelerated filer	☑
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. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.): Yes ☐ No ☑

As of ~~November 2, 2020~~,October 29, 2021, the number of shares outstanding of the registrant’s common stock, no par value, was ~~7,734,322~~7,641,044 shares.

Table of Contents

Level One Bancorp, Inc.

Table of Contents


		Page
Part 1:I:	FINANCIAL INFORMATION	3
Item 1.	~~Consolidated~~ Financial Statements	3
	Consolidated Balance Sheets at September 30, ~~2020~~2021 (Unaudited) and December 31, ~~2019~~2020	3
	Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	4
	Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	5
	Consolidated Statements of Changes in ~~Shareholder's~~Shareholders' Equity (Unaudited) for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	6
	Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, ~~2020~~2021 and ~~2019~~2020	8
	Notes to the Consolidated Financial Statements (Unaudited)	910
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	4441
Item 3.	Quantitative and Qualitative Disclosure about Market Risk	7565
Item 4.	Controls and Procedures	7766

Part 2:II:	OTHER INFORMATION	7766
Item 1.	Legal Proceedings	7766
Item 1A.	Risk Factors	7767
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	8069
Item 3.	Defaults Upon Senior Securities	8069
Item 4.	Mine Safety Disclosures	8069
Item 5.	Other Information	8069
Item 6.	Exhibits	8170

Signatures		8271

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1 - ~~Consolidated~~ Financial Statements

LEVEL ONE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
(Dollars in thousands)		(Unaudited)
(Dollars in thousands, except per share data)						(Dollars in thousands, except per share data)	(Unaudited)
Assets	Assets					Assets
Cash and cash equivalents	Cash and cash equivalents	$	176,486	$	103,930	Cash and cash equivalents	$	293,824	$	264,071
Securities available-for-sale	Securities available-for-sale	253,527		180,905		Securities available-for-sale	389,528		302,732
Other investments	Other investments	14,398		11,475		Other investments	14,398		14,398
Mortgage loans held for sale, at fair value	Mortgage loans held for sale, at fair value	60,635		13,889		Mortgage loans held for sale, at fair value	15,351		43,482
Loans:	Loans:					Loans:
Originated loans	Originated loans	1,603,893		1,158,138		Originated loans	1,537,145		1,498,458
Acquired loans	Acquired loans	239,995		69,471		Acquired loans	182,572		225,079
Total loans	Total loans	1,843,888		1,227,609		Total loans	1,719,717		1,723,537
Less: Allowance for loan losses	Less: Allowance for loan losses	(21,254)		(12,674)		Less: Allowance for loan losses	(21,731)		(22,297)
Net loans	Net loans	1,822,634		1,214,935		Net loans	1,697,986		1,701,240
Premises and equipment, net	Premises and equipment, net	15,646		13,838		Premises and equipment, net	15,170		15,834
Goodwill	Goodwill	35,554		9,387		Goodwill	35,554		35,554
Other intangible assets, net		5,581		383
Other real estate owned		0		921
Mortgage servicing rights, net						Mortgage servicing rights, net	5,051		3,361
Core deposit intangibles, net						Core deposit intangibles, net	2,695		3,196

Bank-owned life insurance	Bank-owned life insurance	18,083		12,167		Bank-owned life insurance	29,774		18,200
Income tax benefit	Income tax benefit	3,791		1,217		Income tax benefit	4,041		3,686
Interest receivable and other assets	Interest receivable and other assets	40,112		21,852		Interest receivable and other assets	40,511		37,228
Total assets	Total assets	$	2,446,447	$	1,584,899	Total assets	$	2,543,883	$	2,442,982
Liabilities	Liabilities					Liabilities
Deposits:	Deposits:					Deposits:
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	632,427	$	325,885	Noninterest-bearing demand deposits	$	791,879	$	618,677
Interest-bearing demand deposits	Interest-bearing demand deposits	115,395		62,586		Interest-bearing demand deposits	179,814		127,920
Money market and savings deposits	Money market and savings deposits	595,471		313,885		Money market and savings deposits	631,551		619,900
Time deposits	Time deposits	600,142		433,072		Time deposits	463,748		596,815
Total deposits	Total deposits	1,943,435		1,135,428		Total deposits	2,066,992		1,963,312
Borrowings	Borrowings	216,809		212,225		Borrowings	182,058		185,684
Subordinated notes	Subordinated notes	44,555		44,440		Subordinated notes	29,668		44,592
Other liabilities	Other liabilities	32,180		22,103		Other liabilities	31,231		34,067
Total liabilities	Total liabilities	2,236,979		1,414,196		Total liabilities	2,309,949		2,227,655
Shareholders' equity	Shareholders' equity					Shareholders' equity

Preferred stock, no par value per share; authorized—50,000 shares; issued and outstanding—10,000 shares, with a liquidation preference of $2,500 per share, at September 30, 2020 and 0 shares at December 31, 2019		23,370		0

Common stock, no par value per share; authorized—20,000,000 shares; issued and outstanding—7,734,322 shares at September 30, 2020 and 7,715,491 shares at December 31, 2019		89,409		89,345
Preferred stock, no par value per share; authorized—50,000 shares; issued and outstanding—10,000 shares, with a liquidation preference of $2,500 per share, at September 30, 2021 and December 31, 2020						Preferred stock, no par value per share; authorized—50,000 shares; issued and outstanding—10,000 shares, with a liquidation preference of $2,500 per share, at September 30, 2021 and December 31, 2020	23,372		23,372
Common stock, no par value per share; authorized—20,000,000 shares; issued and outstanding—7,639,544 shares at September 30, 2021 and 7,633,780 shares at December 31, 2020						Common stock, no par value per share; authorized—20,000,000 shares; issued and outstanding—7,639,544 shares at September 30, 2021 and 7,633,780 shares at December 31, 2020	86,926		87,615
Retained earnings	Retained earnings	88,646		77,766		Retained earnings	118,781		96,158
Accumulated other comprehensive income, net of tax	Accumulated other comprehensive income, net of tax	8,043		3,592		Accumulated other comprehensive income, net of tax	4,855		8,182
Total shareholders' equity	Total shareholders' equity	209,468		170,703		Total shareholders' equity	233,934		215,327
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	2,446,447	$	1,584,899	Total liabilities and shareholders' equity	$	2,543,883	$	2,442,982

See accompanying notes to the consolidated financial statements.

Table of Contents

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)


		For the three months ended September 30,				For the nine months ended September 30,					For the three months ended September 30,				For the nine months ended September 30,
(In thousands, except per share data)	(In thousands, except per share data)	2020		2019		2020		2019		(In thousands, except per share data)	2021		2020		2021		2020
Interest income	Interest income									Interest income
Originated loans, including fees	Originated loans, including fees	$	15,274	$	14,633	$	44,630	$	42,652	Originated loans, including fees	$	17,796	$	15,274	$	51,785	$	44,630
Acquired loans, including fees	Acquired loans, including fees	3,456		1,501		11,187		4,895		Acquired loans, including fees	2,651		3,456		8,532		11,187
Securities:	Securities:									Securities:
Taxable	Taxable	652		857		1,930		2,773		Taxable	1,054		652		2,895		1,930
Tax-exempt	Tax-exempt	613		588		1,894		1,728		Tax-exempt	630		613		1,880		1,894
Federal funds sold and other investments	Federal funds sold and other investments	250		404		817		1,034		Federal funds sold and other investments	191		250		518		817
Total interest income	Total interest income	20,245		17,983		60,458		53,082		Total interest income	22,322		20,245		65,610		60,458
Interest Expense	Interest Expense									Interest Expense
Deposits	Deposits	2,323		4,478		9,039		13,216		Deposits	965		2,323		3,443		9,039
Borrowed funds	Borrowed funds	693		261		1,866		960		Borrowed funds	468		693		1,409		1,866
Subordinated notes	Subordinated notes	632		256		1,903		759		Subordinated notes	374		632		1,470		1,903
Total interest expense	Total interest expense	3,648		4,995		12,808		14,935		Total interest expense	1,807		3,648		6,322		12,808
Net interest income	Net interest income	16,597		12,988		47,650		38,147		Net interest income	20,515		16,597		59,288		47,650
Provision expense (benefit) for loan losses		4,270		(16)		10,334		835
Provision expense (recovery) for loan losses										Provision expense (recovery) for loan losses	(1,189)		4,270		(384)		10,334
Net interest income after provision for loan losses	Net interest income after provision for loan losses	12,327		13,004		37,316		37,312		Net interest income after provision for loan losses	21,704		12,327		59,672		37,316
Noninterest income	Noninterest income									Noninterest income
Service charges on deposits	Service charges on deposits	616		627		1,798		1,914		Service charges on deposits	859		616		2,436		1,798
Net gain on sales of securities	Net gain on sales of securities	434		151		1,862		151		Net gain on sales of securities	—		434		20		1,862
Mortgage banking activities	Mortgage banking activities	7,108		2,352		15,380		5,788		Mortgage banking activities	4,216		7,108		12,738		15,380

Other charges and fees	Other charges and fees	967		728		2,564		1,768		Other charges and fees	966		967		2,451		2,564
Total noninterest income	Total noninterest income	9,125		3,858		21,604		9,621		Total noninterest income	6,041		9,125		17,645		21,604
Noninterest expense	Noninterest expense									Noninterest expense
Salary and employee benefits	Salary and employee benefits	9,862		7,536		28,090		21,642		Salary and employee benefits	10,551		9,862		29,825		28,090
Occupancy and equipment expense	Occupancy and equipment expense	1,678		1,203		4,773		3,575		Occupancy and equipment expense	1,680		1,678		4,971		4,773
Professional service fees	Professional service fees	808		465		2,141		1,212		Professional service fees	847		808		2,264		2,141
Acquisition and due diligence fees	Acquisition and due diligence fees	17		319		1,664		319		Acquisition and due diligence fees	—		17		—		1,664
FDIC premium expense										FDIC premium expense	244		287		778		722
Marketing expense	Marketing expense	257		379		709		843		Marketing expense	428		257		842		709
Printing and supplies expense		89		78		398		250
Loan processing expense										Loan processing expense	231		262		755		690
Data processing expense	Data processing expense	844		661		2,601		1,862		Data processing expense	928		844		3,209		2,601
Core deposit premium amortization	Core deposit premium amortization	192		29		576		117		Core deposit premium amortization	167		192		501		576
Other expense	Other expense	1,379		869		3,819		3,254		Other expense	913		919		2,571		2,805
Total noninterest expense	Total noninterest expense	15,126		11,539		44,771		33,074		Total noninterest expense	15,989		15,126		45,716		44,771
Income before income taxes	Income before income taxes	6,326		5,323		14,149		13,859		Income before income taxes	11,756		6,326		31,601		14,149
Income tax provision	Income tax provision	1,117		914		2,109		2,428		Income tax provision	2,291		1,117		6,198		2,109

Net income	Net income	$	5,209	$	4,409	$	12,040	$	11,431	Net income	$	9,465	$	5,209	$	25,403	$	12,040
Preferred stock dividends										Preferred stock dividends	468		—		1,406		—
Net income attributable to common shareholders										Net income attributable to common shareholders	$	8,997	$	5,209	$	23,997	$	12,040
Per common share data:	Per common share data:									Per common share data:
Basic earnings per common share	Basic earnings per common share	$	0.68	$	0.57	$	1.56	$	1.48	Basic earnings per common share	$	1.19	$	0.68	$	3.15	$	1.56
Diluted earnings per common share	Diluted earnings per common share	$	0.67	$	0.56	$	1.55	$	1.46	Diluted earnings per common share	$	1.16	$	0.67	$	3.10	$	1.55
Cash dividends declared per common share	Cash dividends declared per common share	$	0.05	$	0.04	$	0.15	$	0.12	Cash dividends declared per common share	$	0.06	$	0.05	$	0.18	$	0.15
Weighted average common shares outstanding—basic	Weighted average common shares outstanding—basic	7,675		7,721		7,640		7,738		Weighted average common shares outstanding—basic	7,519		7,675		7,526		7,640
Weighted average common shares outstanding—diluted	Weighted average common shares outstanding—diluted	7,712		7,752		7,701		7,776		Weighted average common shares outstanding—diluted	7,638		7,712		7,631		7,701

See accompanying notes to the consolidated financial statements.

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LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME - (UNAUDITED)


		For the three months ended September 30,				For the nine months ended September 30,					For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020		2021		2020
Net income	Net income	$	5,209	$	4,409	$	12,040	$	11,431	Net income	$	9,465	$	5,209	$	25,403	$	12,040
Other comprehensive income:	Other comprehensive income:									Other comprehensive income:
Unrealized gains on securities available-for-sale		1,425		1,414		7,497		8,861
Unrealized gains (losses) on securities available-for-sale										Unrealized gains (losses) on securities available-for-sale	(273)		1,425		(4,192)		7,497
Reclassification adjustment for gains included in income	Reclassification adjustment for gains included in income	(434)		151		(1,862)		151		Reclassification adjustment for gains included in income	—		(434)		(20)		(1,862)
Tax effect(1)	Tax effect(1)	(208)		(327)		(1,184)		(1,892)		Tax effect(1)	57		(208)		885		(1,184)
Net unrealized gains on securities available-for-sale, net of tax		783		1,238		4,451		7,120
Net unrealized gains (losses) on securities available-for-sale, net of tax										Net unrealized gains (losses) on securities available-for-sale, net of tax	(216)		783		(3,327)		4,451
Total comprehensive income, net of tax	Total comprehensive income, net of tax	$	5,992	$	5,647	$	16,491	$	18,551	Total comprehensive income, net of tax	$	9,249	$	5,992	$	22,076	$	16,491

(1) Includes ~~$(91) thousand and $32 thousand of~~no tax expense (benefit) related to the reclassification adjustment for gains (losses) included in income for the three months ended September 30, ~~2020 and 2019, respectively.~~2021. There was ~~$(391)~~$91 thousand of tax expense related to the reclassification adjustment for gains included in income for the three months ended September 30, 2020. There was $4 thousand and ~~$32~~$391 thousand of tax expense ~~(benefit)~~ related to the reclassification adjustment for gains included in income for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

See accompanying notes to the consolidated financial statements.

Table of Contents

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY - (UNAUDITED)

For the three months ended September 30, 2020
(Dollar in thousands) Preferred Stock Common Stock Retained Earnings Accumulated Other Comprehensive Income Total Shareholders' Equity
Balance at June 30, 2020 $ 0 $ 89,175 $ 83,824 $ 7,260 $ 180,259
Net income — — 5,209 — 5,209
Other comprehensive income — — — 783 783
Preferred stock offering, net of issuance costs 23,370 — — — 23,370
Common stock dividends declared ($0.05 per share) — — (387) — (387)
Stock-based compensation expense, net of tax impact — 234 — — 234
Balance at September 30, 2020 $ 23,370 $ 89,409 $ 88,646 $ 8,043 $ 209,468
For the nine months ended September 30, 2020
(Dollar in thousands) Preferred Stock Common Stock Retained Earnings Accumulated Other Comprehensive Income Total Shareholders' Equity
Balance at December 31, 2019 $ 0 $ 89,345 $ 77,766 $ 3,592 $ 170,703
Net income — — 12,040 — 12,040
Other comprehensive income — — — 4,451 4,451
Redeemed stock (25,256 shares) — (620) — — (620)
Preferred stock offering, net of issuance costs 23,370 — — — 23,370
Common stock dividends declared ($0.15 per share) — — (1,160) — (1,160)
Exercise of stock options (10,000 shares) — 95 — — 95
Stock-based compensation expense, net of tax impact — 589 — — 589
Balance at September 30, 2020 $ 23,370 $ 89,409 $ 88,646 $ 8,043 $ 209,468


	For the three months ended September 30, 2021
(Dollar in thousands)	Preferred Stock		Common Stock		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders' Equity






Balance at June 30, 2021	$	23,372	$	86,723	$	110,243	$	5,071	$	225,409
Net income	—		—		9,465		—		9,465
Other comprehensive income	—		—		—		(216)		(216)


Dividends on 7.50% Series B Preferred Stock	—		—		(468)		—		(468)
Common stock dividends declared ($0.06 per share)	—		—		(459)		—		(459)

Stock-based compensation expense, net of tax impact	—		203		—		—		203
Balance at September 30, 2021	$	23,372	$	86,926	$	118,781	$	4,855	$	233,934









	For the nine months ended September 30, 2021
(In thousands, except per share data)	Preferred Stock		Common Stock		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders' Equity
Balance at December 31, 2020	$	23,372	$	87,615	$	96,158	$	8,182	$	215,327
Net income	—		—		25,403		—		25,403
Other comprehensive income	—		—		—		(3,327)		(3,327)
Redeemed stock (59,645 shares)	—		(1,364)		—		—		(1,364)




Dividends on 7.50% Series B Preferred Stock	—		—		(1,406)		—		(1,406)
Common stock dividends declared ($0.18 per share)	—		—		(1,374)		—		(1,374)
Exercise of stock options (23,800 shares)	—		243		—		—		243
Stock-based compensation expense, net of tax impact	—		432		—		—		432
Balance at September 30, 2021	$	23,372	$	86,926	$	118,781	$	4,855	$	233,934

See accompanying notes to the consolidated financial statements.

Table of Contents

For the three months ended September 30, 2019
(Dollar in thousands) Common Stock Retained Earnings Accumulated Other Comprehensive Income Total Shareholders' Equity
Balance at June 30, 2019 $ 89,442 $ 69,295 $ 4,130 $ 162,867
Net income — 4,409 — 4,409
Other comprehensive income — — 1,238 1,238
Redeemed stock (20,530 shares) (488) — — (488)
Common stock dividends declared ($0.04 per share) — (310) — (310)
Exercise of stock options (6,250 shares) 63 — — 63
Stock-based compensation expense 189 — — 189
Balance at September 30, 2019 $ 89,206 $ 73,394 $ 5,368 $ 167,968
For the nine months ended September 30, 2019
(Dollar in thousands) Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total Shareholders' Equity
Balance at December 31, 2018 $ 90,621 $ 62,891 $ (1,752) $ 151,760
Net income — 11,431 — 11,431
Other comprehensive income — — 7,120 7,120
Redeemed Stock (88,457 shares) (2,108) — — (2,108)
Common stock dividends declared ($0.12 per share) — (928) — (928)
Exercise of stock options (21,550 shares) 219 — — 219
Stock-based compensation expense 474 — — 474
Balance at September 30, 2019 $ 89,206 $ 73,394 $ 5,368 $ 167,968


	For the three months ended September 30, 2020
(Dollar in thousands)	Preferred Stock		Common Stock		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders' Equity
Balance at June 30, 2020	$	—	$	89,175	$	83,824	$	7,260	$	180,259
Net income	—		—		5,209		—		5,209
Other comprehensive income	—		—		—		783		783

Preferred stock offering, net of issuance costs	23,370		—		—		—		23,370

Common stock dividends declared ($0.05 per share)	—		—		(387)		—		(387)

Stock-based compensation expense, net of tax impact	—		234		—		—		234
Balance at September 30, 2020	$	23,370	$	89,409	$	88,646	$	8,043	$	209,468

	For the nine months ended September 30, 2020
(In thousands, except per share data)	Preferred Stock		Common Stock		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders' Equity
Balance at December 31, 2019	$	—	$	89,345	$	77,766	$	3,592	$	170,703
Net income	—		—		12,040		—		12,040
Other comprehensive income	—		—		—		4,451		4,451
Redeemed stock (25,256 shares)	—		(620)		—		—		(620)
Preferred stock offering, net of issuance costs	23,370		—		—		—		23,370




Common stock dividends declared ($0.15 per share)	—		—		(1,160)		—		(1,160)
Exercise of stock options (10,000 shares)	—		95		—		—		95
Stock-based compensation expense, net of tax impact	—		589		—		—		589
Balance at September 30, 2020	$	23,370	$	89,409	$	88,646	$	8,043	$	209,468

See accompanying notes to the consolidated financial statements.

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LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)


		For the nine months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		(Dollars in thousands)	2021		2020
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	12,040	$	11,431	Net income	$	25,403	$	12,040
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of fixed assets	Depreciation of fixed assets	1,259		986		Depreciation of fixed assets	1,204		1,259
Amortization of core deposit intangibles	Amortization of core deposit intangibles	576		117		Amortization of core deposit intangibles	501		576

Stock-based compensation expense	Stock-based compensation expense	653		517		Stock-based compensation expense	569		653
Provision expense for loan losses		10,334		835
Provision expense (benefit) for loan losses						Provision expense (benefit) for loan losses	(384)		10,334
Net securities premium amortization	Net securities premium amortization	1,526		1,277		Net securities premium amortization	2,180		1,526
Net gain on sales of securities	Net gain on sales of securities	(1,862)		(151)		Net gain on sales of securities	(20)		(1,862)
Originations of loans held for sale	Originations of loans held for sale	(409,312)		(196,616)		Originations of loans held for sale	(336,993)		(409,312)
Proceeds from sales of loans	Proceeds from sales of loans	377,238		179,350		Proceeds from sales of loans	371,371		377,238
Net gain on sales of loans	Net gain on sales of loans	(15,373)		(5,788)		Net gain on sales of loans	(12,988)		(15,373)
Accretion on acquired purchase credit impaired loans	Accretion on acquired purchase credit impaired loans	(1,350)		(1,772)		Accretion on acquired purchase credit impaired loans	(1,160)		(1,350)
Gain on sale of other real estate owned and repossessed assets	Gain on sale of other real estate owned and repossessed assets	(263)		0		Gain on sale of other real estate owned and repossessed assets	—		(263)

Increase in cash surrender value of life insurance	Increase in cash surrender value of life insurance	(353)		(214)		Increase in cash surrender value of life insurance	(474)		(353)
Amortization of debt issuance costs	Amortization of debt issuance costs	115		43		Amortization of debt issuance costs	76		115

Deferred income tax benefit		(3,758)		0
Net increase in accrued interest receivable and other assets		(13,433)		(14,127)
Net increase in accrued interest payable and other liabilities		2,490		4,065
Net cash used by operating activities		(39,473)		(20,047)
Provision (benefit) for deferred income taxes						Provision (benefit) for deferred income taxes	932		(3,758)
Net change in accrued interest receivable and other assets						Net change in accrued interest receivable and other assets	(2,341)		(13,433)
Net change in accrued interest payable and other liabilities						Net change in accrued interest payable and other liabilities	(3,465)		2,490
Net cash provided by (used in) operating activities						Net cash provided by (used in) operating activities	44,411		(39,473)
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Net increase in loans		(393,154)		(39,007)
Net change in loans						Net change in loans	9,057		(393,154)
Principal payments on securities available-for-sale	Principal payments on securities available-for-sale	21,295		11,730		Principal payments on securities available-for-sale	22,552		16,146
Purchases of securities available-for-sale	Purchases of securities available-for-sale	(83,170)		(51,373)		Purchases of securities available-for-sale	(116,827)		(83,170)

Purchases of Bank Owned Life Insurance						Purchases of Bank Owned Life Insurance	(11,100)		—

Purchases of other investments	Purchases of other investments	(2,000)		0		Purchases of other investments	—		(2,000)
Additions to premises and equipment	Additions to premises and equipment	(665)		(1,269)		Additions to premises and equipment	(541)		(665)
Proceeds from:	Proceeds from:					Proceeds from:

Sale of securities available-for-sale		42,640		46,545
Sale and call of securities available-for-sale						Sale and call of securities available-for-sale	1,107		47,789
Sale of other real estate owned and repossessed assets	Sale of other real estate owned and repossessed assets	2,356		0		Sale of other real estate owned and repossessed assets	—		2,356
Net cash used in acquisition	Net cash used in acquisition	(29,464)		0		Net cash used in acquisition	—		(29,464)
Net cash used in investing activities	Net cash used in investing activities	(442,162)		(33,374)		Net cash used in investing activities	(95,752)		(442,162)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities
Net increase in deposits		543,187		59,907
Net change in deposits						Net change in deposits	103,680		543,187
Change in short-term borrowings	Change in short-term borrowings	(65,664)		(87,584)		Change in short-term borrowings	(523)		(65,664)
Issuances of FRB borrowings related to Paycheck Protection Program	Issuances of FRB borrowings related to Paycheck Protection Program	34,098		0		Issuances of FRB borrowings related to Paycheck Protection Program	—		34,098
Issuances of long-term FHLB advances		20,923		100,000
Issuances of long-term borrowings						Issuances of long-term borrowings	—		20,923
Repayment of long-term borrowings						Repayment of long-term borrowings	(3,071)		—

Net proceeds from issuance of preferred stock	Net proceeds from issuance of preferred stock	23,370		0		Net proceeds from issuance of preferred stock	—		23,370
Pay down of subordinated debt						Pay down of subordinated debt	(15,000)		—
Change in secured borrowing	Change in secured borrowing	(52)		(53)		Change in secured borrowing	(32)		(52)

Share buyback - redeemed stock	Share buyback - redeemed stock	(620)		(2,108)		Share buyback - redeemed stock	(1,364)		(620)

Preferred stock dividends paid						Preferred stock dividends paid	(1,406)		—
Common stock dividends paid	Common stock dividends paid	(1,082)		(852)		Common stock dividends paid	(1,296)		(1,082)
Proceeds from exercised stock options	Proceeds from exercised stock options	95		219		Proceeds from exercised stock options	243		95
Payments related to tax-withholding for share based compensation awards	Payments related to tax-withholding for share based compensation awards	(64)		(43)		Payments related to tax-withholding for share based compensation awards	(137)		(64)
Net cash provided by financing activities	Net cash provided by financing activities	554,191		69,486		Net cash provided by financing activities	81,094		554,191
Net change in cash and cash equivalents	Net change in cash and cash equivalents	72,556		16,065		Net change in cash and cash equivalents	29,753		72,556
Beginning cash and cash equivalents	Beginning cash and cash equivalents	103,930		33,296		Beginning cash and cash equivalents	264,071		103,930
Ending cash and cash equivalents	Ending cash and cash equivalents	$	176,486	$	49,361	Ending cash and cash equivalents	$	293,824	$	176,486
Supplemental disclosure of cash flow information:
Interest paid		$	12,117	$	14,109
Taxes paid		6,909		2,071
Transfer from loans held for sale to loans held for investment		2,284		1,895
Transfer from loans to other real estate owned		1,172		373

Increase in assets and liabilities in acquisitions:
Assets acquired—Ann Arbor State Bank		$	325,303	$	—
Liabilities assumed—Ann Arbor State Bank		283,526		—

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Supplemental disclosure of cash flow information:
Interest paid	$	6,324	$	12,117
Taxes paid	6,242		6,909
Transfer from loans held for sale to loans held for investment and repurchases	4,656		2,284
Transfer from loans to other real estate owned	—		1,172

Non-cash transactions:
Increase in assets and liabilities in acquisitions:
Assets acquired—Ann Arbor State Bank	$	—	$	325,303
Liabilities assumed—Ann Arbor State Bank	—		283,526

See accompanying notes to the consolidated financial statements.

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LEVEL ONE BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~September 30, 2020~~

NOTE 1—BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Nature of Operations:

Level One Bancorp, Inc. (the “Company,” “Level One,” “we,” “our,” or “us”) is a financial holding company headquartered in Farmington Hills, Michigan. In addition to the Company headquarters, as of September 30, ~~2020,~~2021, its wholly owned bank subsidiary, Level One Bank (the "Bank"), had 17 offices, including 11 banking centers (our full service branches) in Metro Detroit, 1 banking center in Grand Rapids, 1 banking center in Jackson, 3 banking centers in Ann Arbor and 1 mortgage loan production office in Ann Arbor.

The Bank is a Michigan banking corporation with depository accounts insured by the Deposit Insurance Fund of the Federal Deposit Insurance Corporation (the "FDIC"). The Bank provides a wide range of business and consumer financial services in southeastern Michigan and west Michigan. Its primary deposit products are checking, interest-bearing demand, money market and savings, and term certificate accounts, and its primary lending products are commercial real estate, commercial and industrial, residential real estate, and consumer loans. Substantially all loans are secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Other financial instruments, which potentially represent concentrations of credit risk, include federal funds sold.

~~The Company's subsidiary,~~ Hamilton Court Insurance Company ("Hamilton Court")~~, is~~ was a wholly owned insurance subsidiary of the Company that ~~provides~~provided property and casualty insurance coverage to the Company and the Bank and reinsurance to ten other third party insurance captives for which insurance may not ~~be currently~~have been available or economically feasible in the insurance marketplace. Hamilton Court was designed to insure the risks of the Company and the Bank by providing additional insurance coverage for deductibles, excess limits and uninsured exposures. Hamilton Court iswas incorporated in Nevada. ~~During the third quarter of 2020, it was determined that~~ Hamilton Court Insurance Company ~~will exit~~exited the pool resources relationship to which it was previously a member and ~~will dissolve, which is expected to occur~~was dissolved in ~~the fourth quarter of 2020 or~~ the first quarter of 2021.

Preferred Stock Public Offering:

On August 10, 2020, the Company sold 1,000,000 depositary shares, each representing 1/100th interest in a share of 7.50% Non-Cumulative Perpetual Preferred Stock, Series B, with a liquidation preference of $2,500 per share of Preferred Stock (equivalent to $25 per depositary share). The aggregate offering price for the shares sold by the Company was $25.0 million, and after deducting $1.6 million of underwriting discounts and offering expenses paid to third parties, the Company received total net proceeds of $23.4 million.

Merger with Ann Arbor Bancorp, Inc.:

On January 2, 2020, the Company completed its ~~previously announced~~ acquisition of Ann Arbor Bancorp, Inc. (“AAB”) and its wholly owned subsidiary, Ann Arbor State Bank. The transaction was completed pursuant to a merger of the Company’s wholly owned merger subsidiary (“Merger Sub”) with and into AAB, pursuant to the Agreement and Plan of Merger, dated as of August 12, 2019, among the Company, Merger Sub and AAB. The Company paid aggregate consideration of approximately $67.9 million in cash. ~~See "Note 2 - Business Combinations" for more information.~~

Basis of Presentation and Principles of Consolidation:

The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and conform to practices within the banking industry and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, ~~2019,~~2020, included in our Annual Report on Form 10-K, filed with the SEC on March ~~13, 2020.~~12, 2021.

The accompanying consolidated financial statements include the accounts of the Company and its ~~wholly owned~~consolidated subsidiaries ~~the Bank and Hamilton Court,~~ after elimination of significant intercompany transactions and accounts.

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Use of Estimates:

To prepare financial statements in conformity with GAAP, management makes estimates and assumptions based on available information. These estimates and assumptions affect the amounts reported in the financial statements and the disclosures provided; therefore, future results could differ. These estimates and assumptions are subject to many risks and

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uncertainties, including changes in interest rates and other general economic, business and political conditions, the effects of the Coronavirus Disease 2019 (“COVID-19”) pandemic, its ~~potential~~ effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in connection with the pandemic. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) ~~was signed into law on March 27, 2020, which provides a variety of provisions, including,~~, as supplemented by the Consolidated Appropriations Act, 2021, provided for among other things, a small business lending program to originate paycheck protection loans ~~temporary relief for the community bank leverage ratio,~~ and temporary relief for financial institutions related to troubled debt restructurings. Actual results may differ from those estimates.

Emerging Growth Company Status:

The Company is an "emerging growth company," as defined in the Jumpstart Our Business Startups Act of 2012 (the JOBS Act). through December 31, 2023. Section 107 of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period when complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have elected to take advantage of this extended transition period, which means these financial statements, as well as financial statements we file in the future for as long as we remain an emerging growth company, will be subject to all new or revised accounting standards generally applicable to private companies.

~~Impact of Recently Adopted Accounting Standards:~~

~~Revenue Recognition~~

In May 2014, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2014-09 "Revenue from Contracts with Customers (Topic 606)," which provides a framework for revenue recognition that replaces the existing industry and transaction specific requirements under the existing standards. ASU 2014-09 requires an entity to apply a five-step model to determine when to recognize revenue and at what amount. The model specifies that revenue should be recognized when (or as) an entity transfers control of goods or services to a customer at the amount in which the entity expects to be entitled. Depending on whether certain criteria are met, revenue should be recognized either over time, in a manner that depicts the entity's performance, or at a point in time, when control of the goods or services are transferred to the customer.

The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. The Company adopted ASU 2014-09 and related issuances on January 1, 2019, with no cumulative effect adjustment to opening retained earnings required upon implementation of this standard. The adoption of this guidance does not result in changes to how revenue is recognized or the timing of recognition from our method prior to adoption. Revenue is recognized when obligations, under the terms of a contract with our customer, are satisfied, which generally occurs when services are performed. Revenue is measured as the amount of consideration we expect to receive in exchange for providing services.

The Company performed an analysis of the impact of adoption of this ASU, reviewing revenue recorded from service charges on deposit accounts, gains (losses) on other real estate owned and other assets, debit card interchange fees, and merchant processing fees.

Service fees on deposit accounts - The fees are generated from a depositor’s option to purchase services offered under the contract and are only considered a contract when the depositor exercises their option to purchase these services. Therefore we deem the term of our contracts with depositors to be day-to-day and do not extend beyond the services already provided.

Debit card interchange fees - We collect interchange fee income when debit cards that we have issued to our customers are used in merchant transactions. Our performance obligation is satisfied and revenue is recognized at the point we initiate the payment of funds from a customer’s account to a merchant account.

~~Merchant processing fees - We receive referral fees for referring our customers to a merchant servicer. Fees are immaterial and recognized as received.~~

~~Gain (loss) on sale of other real estate owned - The Company records income or expense only upon consummation of the sale of the real estate.~~

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~~Financial Instruments~~

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," to improve the accounting for financial instruments. This ASU requires equity investments with readily determinable fair values to be measured at fair value with changes recognized in net income regardless of classification. For equity investments without a readily determinable fair value, the value of the investment would be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer instead of fair value, unless a qualitative assessment indicates impairment. Additionally, this ASU requires the separate presentation of financial assets and financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, as well as the required use of exit pricing when measuring the fair value of financial instruments for disclosure purposes. The guidance became effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and was to be applied prospectively with a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company adopted ASU 2016-01 and related issues on January 1, 2019 and determined that the implementation of this standard did not have a material impact to our consolidated financial statements.

Impact of Recently Issued Accounting Standards:

Leases

In February 2016, the FASB issued ASU No. 2016-02, "Leases (Topic 842)," to improve transparency and comparability across entities regarding leasing arrangements. This ASU requires the recognition of a separate lease liability representing the required discounted lease payments over the lease term and a separate lease asset representing the right to use the underlying asset during the same lease term. Additionally, this ASU provides clarification regarding the identification of certain components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements.

The guidance is effective for the Company for fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022, and is to be applied under an optional transition method. The Company is planning to adopt this new guidance within the time frame noted above. The Company is currently evaluating the impact of adopting this new guidance on ~~the~~its consolidated financial statements but does not expect that the adoption will have a material impact. Additionally, the Company does not expect to significantly change operating lease agreements prior to adoption.

Allowance for Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," to replace the current incurred loss methodology for recognizing credit losses, which delays recognition until it is probable a loss has been incurred, with a methodology that reflects an estimate of all expected credit losses and considers additional reasonable and supportable forecasted information when determining credit loss estimates. This impacts the calculation of the allowance for credit losses for all financial assets measured under the amortized cost basis, including PCI loans at the time of and subsequent to acquisition. Additionally, credit losses related to available-for-sale debt securities would be recorded through the allowance for credit losses and not as a direct adjustment to the amortized cost of the securities.

The guidance is effective for the Company for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company is currently evaluating the impact of adopting this new guidance on ~~the~~its consolidated financial statements, current systems and processes. At this time, the Company is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information and has identified certain data and system requirements. Once adopted, we expect our allowance for loan losses to increase through a one-time adjustment to retained earnings; however, until our evaluation is complete, the estimated increase in allowance will be unknown. The Company is planning to adopt this new guidance within the time frame noted above.

Reference Rate Reform

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~~NOTE 2—BUSINESS COMBINATIONS~~

~~On January 2,~~In March 2020, the Company completed its previously announced acquisition of Ann Arbor Bancorp, Inc. and its wholly owned subsidiary, Ann Arbor State Bank. The Company paid an aggregate consideration of approximately $67.9 million in cash.

AAB's results of operations were included in the Company’s results beginning January 2, 2020. Acquisition-related costs of $1.7 million are included in the Company’s income statement for the nine months ended September 30, 2020.

~~Goodwill of $26.2 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining~~FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the ~~operations~~Effects of Reference Rate Reform on Financial Reporting" to provide guidance to ease the ~~companies.~~potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The ~~goodwill arising from the acquisition of AAB is not deductible~~ASU provides optional expedients and exceptions for ~~tax purposes.~~

~~The following table summarizes the amounts of assets acquired~~applying generally accepted accounting principles to contracts, hedging relationships and ~~liabilities assumed recognized at the acquisition date.~~


~~(Dollars in thousands)~~
~~Consideration paid:~~
~~Cash~~	$	~~67,944~~
~~Fair value of assets acquired:~~
~~Cash and cash equivalents~~	~~38,480~~
~~Investment securities~~	~~47,416~~
~~Federal Home Loan Bank stock~~	~~923~~
~~Loans held for sale~~	~~1,703~~
~~Loans held for investment~~	~~222,356~~
~~Premises and equipment~~	~~2,404~~
~~Core deposit intangibles~~	~~3,663~~
~~Other assets~~	~~8,358~~
~~Total assets acquired~~	~~325,303~~
~~Fair value of liabilities assumed:~~
~~Deposits~~	~~264,820~~
~~Federal Home Loan Bank advances~~	~~15,279~~
~~Other liabilities~~	~~3,427~~
~~Total liabilities assumed~~	~~283,526~~
~~Total identifiable net assets~~	~~41,777~~
~~Goodwill recognized in the acquisition~~	$	~~26,167~~

~~Loans acquired in the acquisition were initially recorded at fair value with no separate allowance for loan losses. The Company reviewed the loans at acquisition~~other transactions affected by reference rate reform if certain criteria are met and only applies to ~~determine which should be considered purchased credit impaired loans (i.e. loans accounted for under ASC 310-30) defining impaired loans as those~~contracts, hedging relationships and other transactions that ~~were either not accruing interest~~reference LIBOR or exhibited credit risk factors consistent with nonaccrual loans at the acquisition date. Fair values for purchased loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interestanother reference rate term of the loan and whether or not the loan was amortizing, and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. The Company accounts for purchased credit impaired loans in accordance with the provisions of ASC 310-30. The cash flows expected to be ~~collected on purchased loans are estimated based upon~~discontinued because of reference rate reform. In addition, the expected remaining life of the underlying loans, which includes the effects of estimated prepayments. Purchased loans are considered credit impaired if there is evidence of credit deterioration at the date of purchase and if it is probable that not all contractually required payments will be collected. Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows is recognized on the acquired loans accounted for under ASC 310-30.

Purchased loans outside the scope of ASC 310-30 are accounted for under ASC 310-20. Premiums and discounts created when the loans were recorded at their fair values at acquisition are amortized over the remaining terms of the loans as an adjustment to the related loan's yield.ASU

1211

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~~(Dollars in thousands)~~
~~Accounted for under ASC 310-30:~~
~~Contractual cash flows~~	$	~~1,018~~
~~Contractual cash flows not expected to be collected (nonaccretable difference)~~	82
~~Expected cash flows~~	~~936~~
~~Interest component of expected cash flows (accretable yield)~~	35
~~Fair value at acquisition~~	~~901~~
~~Accounted for under ASC 310-20:~~
~~Unpaid principal and interest balance~~	~~221,061~~
~~Fair value premium~~	~~394~~
~~Fair value at acquisition~~	~~221,455~~
~~Total fair value at acquisition~~	$	~~222,356~~

~~The pro forma table below presents information as if~~provides optional expedients for applying the ~~acquisition had occurred on January 1, 2019. The pro forma information includes adjustments to give~~requirements of certain topics or industry subtopics in the ~~effects to any changes in interest income due to the accretion (amortization)~~Codification for contracts that are modified because of the discount (premium) associated with the fair value adjustments to acquired loans, any changes in interest expense due to estimated premium amortization/discount accretion associated with the fair value adjustments to acquired time depositsreference rate reform and ~~borrowings and~~contemporaneous modifications of other debt, amortization of core deposit intangibles that would have resulted had the deposits been acquired as of January 1, 2019, and the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date. ~~Due diligence, professional fees, and other expenses~~contract terms related to the ~~merger were incurred by~~replacement of the reference rate. The ASU allows companies to apply the standard as of the beginning of the interim period that includes March 12, 2020 through December 31, 2022. The Company ~~and AAB during~~is currently assessing the ~~three and nine months ended September 30, 2020, but~~impact of this guidance to its financial statements; however, the ~~pro forma condensed combined statement of income~~impact is not ~~adjusted~~expected to ~~exclude these costs.~~be material.

Three months ended September 30, Nine months ended September 30,
(Dollars in thousands, except per share data) 2020 2019 2020 2019
Net interest income $ 16,593 $ 16,036 $ 47,709 $ 46,217
Noninterest income 9,125 4,486 21,604 11,228
Noninterest expense 15,143 13,742 44,822 38,879
Net income 5,211 4,865 12,062 13,188
Net income per diluted share 0.67 0.62 1.55 1.68

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NOTE 3—2—SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss).


(Dollars in thousands)	(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
September 30, 2020
September 30, 2021										September 30, 2021
U.S. government sponsored entities & agencies	U.S. government sponsored entities & agencies	$	27,092	$	126	$	(19)	$	27,199	U.S. government sponsored entities & agencies	$	24,531	$	41	$	(536)	$	24,036
State and political subdivision	State and political subdivision	109,498		8,140		(88)		117,550		State and political subdivision	139,755		7,358		(418)		146,695
Mortgage-backed securities: residential	Mortgage-backed securities: residential	19,237		255		0		19,492		Mortgage-backed securities: residential	20,026		167		(107)		20,086
Mortgage-backed securities: commercial	Mortgage-backed securities: commercial	8,025		630		0		8,655		Mortgage-backed securities: commercial	23,531		387		(378)		23,540
Collateralized mortgage obligations: residential	Collateralized mortgage obligations: residential	14,177		169		(13)		14,333		Collateralized mortgage obligations: residential	9,796		87		(12)		9,871
Collateralized mortgage obligations: commercial	Collateralized mortgage obligations: commercial	31,659		1,344		0		33,003		Collateralized mortgage obligations: commercial	52,918		674		(854)		52,738
U.S. Treasury	U.S. Treasury	1,000		3		0		1,003		U.S. Treasury	65,118		67		(287)		64,898
SBA	SBA	18,869		63		(124)		18,808		SBA	15,011		154		(57)		15,108
Asset backed securities	Asset backed securities	10,298		0		(344)		9,954		Asset backed securities	9,896		11		(49)		9,858
Corporate bonds	Corporate bonds	3,491		39		0		3,530		Corporate bonds	22,801		27		(130)		22,698
Total available-for-sale	Total available-for-sale	$	243,346	$	10,769	$	(588)	$	253,527	Total available-for-sale	$	383,383	$	8,973	$	(2,828)	$	389,528
December 31, 2019

December 31, 2020										December 31, 2020
U.S. government sponsored entities & agencies										U.S. government sponsored entities & agencies	$	26,575	$	103	$	(320)	$	26,358
State and political subdivision	State and political subdivision	$	89,304	$	4,463	$	(20)	$	93,747	State and political subdivision	124,053		8,751		(81)		132,723
Mortgage-backed securities: residential	Mortgage-backed securities: residential	10,609		82		(126)		10,565		Mortgage-backed securities: residential	25,729		352		—		26,081
Mortgage-backed securities: commercial	Mortgage-backed securities: commercial	8,567		224		(12)		8,779		Mortgage-backed securities: commercial	11,434		484		—		11,918
Collateralized mortgage obligations: residential	Collateralized mortgage obligations: residential	8,541		39		(51)		8,529		Collateralized mortgage obligations: residential	13,320		138		(12)		13,446
Collateralized mortgage obligations: commercial	Collateralized mortgage obligations: commercial	22,891		300		(10)		23,181		Collateralized mortgage obligations: commercial	57,398		1,206		(92)		58,512
U.S. Treasury		1,976		23		0		1,999

SBA	SBA	22,051		87		(154)		21,984		SBA	17,639		61		(107)		17,593
Asset backed securities	Asset backed securities	10,390		0		(306)		10,084		Asset backed securities	10,229		—		(157)		10,072
Corporate bonds	Corporate bonds	2,030		20		(13)		2,037		Corporate bonds	5,998		34		(3)		6,029
Total available-for-sale	Total available-for-sale	$	176,359	$	5,238	$	(692)	$	180,905	Total available-for-sale	$	292,375	$	11,129	$	(772)	$	302,732

The proceeds from sales and calls of securities and the associated gains and losses for the periods below ~~are~~were as follows:


		For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	For the three months ended September 30,				For the nine months ended September 30,
											2021		2020		2021		2020
Proceeds	Proceeds	$	5,051	$	11,080	$	42,640	$	46,545	Proceeds	$	—	$	5,351	$	1,107	$	47,789
Gross gains	Gross gains	434		202		1,871		543		Gross gains	—		434		20		1,871
Gross losses	Gross losses	0		(51)		(9)		(392)		Gross losses	—		—		—		(9)

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The amortized cost and fair value of securities are shown in the table below by contractual maturity. ~~Actual timing~~Expected maturities may differ from contractual maturities ~~if borrowers~~as issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

September 30, 2020
(Dollars in thousands) Amortized
Cost Fair
Value
Within one year $ 11,141 $ 11,228
One to five years 27,530 28,494
Five to ten years 70,259 73,165
Beyond ten years 134,416 140,640
Total $ 243,346 $ 253,527

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	September 30, 2021
(Dollars in thousands)	Amortized Cost		Fair Value
Within one year	$	7,839	$	7,916
One to five years	59,824		60,459
Five to ten years	181,283		182,244
Beyond ten years	134,437		138,909
Total	$	383,383	$	389,528

Securities pledged at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 had a carrying amount of ~~$97.2~~$90.6 million and ~~$27.3~~$98.7 million, respectively, and were pledged to secure Federal Home Loan Bank ("FHLB") advances, a Federal Reserve Bank line of credit, repurchase agreements, deposits and mortgage derivatives.

As of September 30, ~~2020,~~2021, the Bank held 6668 tax-exempt state and local municipal securities totaling ~~$48.9~~$52.8 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments and the U.S. government and its agencies, at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were no holdings of securities of any one issuer ~~other than the U.S. government and its agencies,~~ in an amount greater than 10% of shareholders' equity.

The following table summarizes securities with unrealized losses at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 aggregated by security type and length of time in a continuous unrealized loss position:


		Less than 12 Months				12 Months or Longer				Total					Less than 12 Months				12 Months or Longer				Total
(Dollars in thousands)	(Dollars in thousands)	Fair value		Unrealized Losses		Fair value		Unrealized Losses		Fair value		Unrealized Losses		(Dollars in thousands)	Fair value		Unrealized Losses		Fair value		Unrealized Losses		Fair value		Unrealized Losses
September 30, 2020
September 30, 2021														September 30, 2021
Available-for-sale														Available-for-sale
U.S. government sponsored entities & agencies														U.S. government sponsored entities & agencies	$	—	$	—	$	19,464	$	(536)	$	19,464	$	(536)
State and political subdivision														State and political subdivision	33,804		(418)		—		—		33,804		(418)
Mortgage-backed securities: residential														Mortgage-backed securities: residential	14,096		(107)		—		—		14,096		(107)
Mortgage-backed securities: commercial														Mortgage-backed securities: commercial	16,241		(378)		—		—		16,241		(378)
Collateralized mortgage obligations: residential														Collateralized mortgage obligations: residential	906		(2)		950		(10)		1,856		(12)
Collateralized mortgage obligations: commercial														Collateralized mortgage obligations: commercial	20,219		(484)		10,679		(370)		30,898		(854)
U.S. Treasury														U.S. Treasury	55,186		(287)		—		—		55,186		(287)
SBA														SBA	—		—		6,282		(57)		6,282		(57)
Asset backed securities														Asset backed securities	4,770		(12)		2,493		(37)		7,263		(49)
Corporate bonds														Corporate bonds	12,920		(130)		—		—		12,920		(130)
Total available-for-sale														Total available-for-sale	$	158,142	$	(1,818)	$	39,868	$	(1,010)	$	198,010	$	(2,828)
December 31, 2020														December 31, 2020
Available-for-sale	Available-for-sale													Available-for-sale
U.S. government sponsored entities & agencies	U.S. government sponsored entities & agencies	$	14,981	$	(19)	$	0	$	0	$	14,981	$	(19)	U.S. government sponsored entities & agencies	$	19,680	$	(320)	$	—	$	—	$	19,680	$	(320)
State and political subdivision	State and political subdivision	1,858		(88)		0		0		1,858		(88)		State and political subdivision	4,880		(81)		—		—		4,880		(81)

Collateralized mortgage obligations: residential		0		0		1,136		(13)		1,136		(13)

SBA		0		0		13,190		(124)		13,190		(124)
Asset backed securities		0		0		9,954		(344)		9,954		(344)

Total available-for-sale		$	16,839	$	(107)	$	24,280	$	(481)	$	41,119	$	(588)
December 31, 2019
Available-for-sale

State and political subdivision		$	5,109	$	(20)	$	305	$	0	$	5,414	$	(20)
Mortgage-backed securities: residential		4,022		(39)		3,982		(87)		8,004		(126)
Mortgage-backed securities: commercial		1,769		(11)		430		(1)		2,199		(12)
Collateralized mortgage obligations: residential	Collateralized mortgage obligations: residential	770		(1)		4,631		(50)		5,401		(51)		Collateralized mortgage obligations: residential	—		—		1,109		(12)		1,109		(12)
Collateralized mortgage obligations: commercial	Collateralized mortgage obligations: commercial	0		0		1,716		(10)		1,716		(10)		Collateralized mortgage obligations: commercial	26,477		(92)		—		—		26,477		(92)

SBA	SBA	3,961		(13)		12,405		(141)		16,366		(154)		SBA	—		—		12,209		(107)		12,209		(107)
Asset backed securities	Asset backed securities	8,220		(232)		1,864		(74)		10,084		(306)		Asset backed securities	—		—		10,072		(157)		10,072		(157)
Corporate bonds	Corporate bonds	489		(13)		0		0		489		(13)		Corporate bonds	2,497		(3)		—		—		2,497		(3)
Total available-for-sale	Total available-for-sale	$	24,340	$	(329)	$	25,333	$	(363)	$	49,673	$	(692)	Total available-for-sale	$	53,534	$	(496)	$	23,390	$	(276)	$	76,924	$	(772)

As of September 30, ~~2020,~~2021, the Company's investment portfolio consisted of ~~306~~330 securities, 2967 of which were in an unrealized loss position. The unrealized losses for these securities resulted primarily from changes in interest rates since

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purchased. The Company expects full recovery of the carrying amount of these securities and does not intend to sell the securities in an unrealized loss position nor does it believe it will be required to sell securities in an unrealized loss position before the value is recovered. The Company ~~does~~did not consider these securities to be other-than-temporarily impaired at September 30, ~~2020.~~2021.

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NOTE 4—3—LOANS

The following table presents the recorded investment in loans at September 30, ~~2020~~2021 and December 31, ~~2019.~~2020. The recorded investment in loans excludes accrued interest receivable.


(Dollars in thousands)	(Dollars in thousands)	Originated		Acquired		Total		(Dollars in thousands)	Originated		Acquired		Total
September 30, 2020
September 30, 2021								September 30, 2021
Commercial real estate	Commercial real estate	$	593,156	$	137,033	$	730,189	Commercial real estate	$	660,255	$	114,606	$	774,861
Commercial and industrial	Commercial and industrial	748,913		59,010		807,923		Commercial and industrial	494,689		45,857		540,546
Residential real estate	Residential real estate	261,153		42,935		304,088		Residential real estate	381,515		22,002		403,517
Consumer	Consumer	671		1,017		1,688		Consumer	686		107		793
Total	Total	$	1,603,893	$	239,995	$	1,843,888	Total	$	1,537,145	$	182,572	$	1,719,717
December 31, 2019
December 31, 2020								December 31, 2020
Commercial real estate	Commercial real estate	$	551,565	$	53,081	$	604,646	Commercial real estate	$	587,631	$	133,201	$	720,832
Commercial and industrial	Commercial and industrial	403,922		6,306		410,228		Commercial and industrial	629,434		56,070		685,504
Residential real estate	Residential real estate	201,787		10,052		211,839		Residential real estate	280,645		34,831		315,476
Consumer	Consumer	864		32		896		Consumer	748		977		1,725
Total	Total	$	1,158,138	$	69,471	$	1,227,609	Total	$	1,498,458	$	225,079	$	1,723,537

At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had residential loans held for sale, which were originated with the intent to sell, totaling ~~$60.6~~$15.4 million and ~~$13.9~~$43.5 million, respectively. During the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the Company sold residential real estate loans with proceeds totaling ~~$157.2~~$101.3 million and ~~$86.4~~$157.2 million, respectively, and ~~$377.2~~$371.4 million and ~~$179.4~~$377.2 million during the nine months ended September 30, 2021 and 2020, respectively. At September 30, 2021 and ~~2019, respectively.~~December 31, 2020, $147.6 million and $290.1 million, respectively, of PPP loans were included in the commercial and industrial loan balance.

Nonperforming Assets

Nonperforming assets consist of loans for which the accrual of interest has been discontinued and other real estate owned obtained through foreclosure and other repossessed assets. Loans outside of those accounted for under ASC 310-30 are classified as nonaccrual when, in the opinion of management, it is probable that the Company will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement. The accrual of interest is discontinued when a loan is placed in nonaccrual status and any payments received reduce the carrying value of the loan. A loan may be placed back on accrual status if all contractual payments have been received and collection of future principal and interest payments is no longer doubtful. Acquired loans that are not performing in accordance with contractual terms are not reported as nonperforming because these loans are recorded at their net realizable value based on the principal and interest the Company expects to collect on these loans. There were $6$216 thousand and ~~$1.2 million~~$12 thousand in commitments to lend additional funds to borrowers whose loans were classified as nonaccrual as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Information as to nonperforming assets was as follows:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2021		December 31, 2020
Nonaccrual loans:	Nonaccrual loans:					Nonaccrual loans:
Commercial real estate	Commercial real estate	$	7,022	$	4,832	Commercial real estate	$	3,768	$	7,320
Commercial and industrial	Commercial and industrial	8,078		11,112		Commercial and industrial	4,746		7,490
Residential real estate	Residential real estate	4,151		2,569		Residential real estate	3,610		3,991
Consumer	Consumer	15		16		Consumer	9		15
Total nonaccrual loans	Total nonaccrual loans	19,266		18,529		Total nonaccrual loans	12,133		18,816
Other real estate owned		0		921

Total nonperforming assets	Total nonperforming assets	$	19,266	$	19,450	Total nonperforming assets	$	12,133	$	18,816
Loans 90 days or more past due and still accruing	Loans 90 days or more past due and still accruing	$	552	$	157	Loans 90 days or more past due and still accruing	$	162	$	269

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At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the loans that were 90 days or more past due and still accruing ~~comprised of either~~were PCI ~~loans or loans that were well-secured and in the process of collection.~~

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loans.

Loan delinquency as of the dates presented below was as follows:


(Dollars in thousands)	(Dollars in thousands)	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total		(Dollars in thousands)	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total
September 30, 2020
September 30, 2021												September 30, 2021
Commercial real estate	Commercial real estate	$	726,018	$	3,934	$	237	$	0	$	730,189	Commercial real estate	$	773,426	$	1,435	$	—	$	—	$	774,861
Commercial and industrial	Commercial and industrial	802,363		3,598		1,962		0		807,923		Commercial and industrial	540,441		105		—		—		540,546
Residential real estate	Residential real estate	294,478		4,067		2,133		3,410		304,088		Residential real estate	401,281		851		226		1,159		403,517
Consumer	Consumer	1,684		2		2		0		1,688		Consumer	783		9		1		—		793
Total	Total	$	1,824,543	$	11,601	$	4,334	$	3,410	$	1,843,888	Total	$	1,715,931	$	2,400	$	227	$	1,159	$	1,719,717
December 31, 2019
December 31, 2020												December 31, 2020
Commercial real estate	Commercial real estate	$	597,892	$	3,630	$	1,286	$	1,838	$	604,646	Commercial real estate	$	714,196	$	4,863	$	1,773	$	—	$	720,832
Commercial and industrial	Commercial and industrial	407,692		377		1,275		884		410,228		Commercial and industrial	681,106		893		3,505		—		685,504
Residential real estate	Residential real estate	206,002		3,286		1,429		1,122		211,839		Residential real estate	305,800		5,420		1,110		3,146		315,476
Consumer	Consumer	892		4		0		0		896		Consumer	1,723		—		—		2		1,725
Total	Total	$	1,212,478	$	7,297	$	3,990	$	3,844	$	1,227,609	Total	$	1,702,825	$	11,176	$	6,388	$	3,148	$	1,723,537

Impaired Loans:

Information as to impaired loans, excluding ~~purchased credit impaired~~PCI loans, was as follows:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2021		December 31, 2020
Nonaccrual loans	Nonaccrual loans	$	19,266	$	18,529	Nonaccrual loans	$	12,133	$	18,816
Performing troubled debt restructurings:	Performing troubled debt restructurings:					Performing troubled debt restructurings:

Commercial and industrial	Commercial and industrial	550		547		Commercial and industrial	336		546
Residential real estate	Residential real estate	599		359		Residential real estate	426		432
Total performing troubled debt restructurings	Total performing troubled debt restructurings	1,149		906		Total performing troubled debt restructurings	762		978
Total impaired loans, excluding purchase credit impaired loans	Total impaired loans, excluding purchase credit impaired loans	$	20,415	$	19,435	Total impaired loans, excluding purchase credit impaired loans	$	12,895	$	19,794

Troubled Debt Restructurings:

The Company assesses loan modifications to determine whether a modification constitutes a troubled debt restructuring ("TDR"). This applies to all loan modifications except for modifications to loans accounted for in pools under ASC 310-30, which are not subject to TDR accounting/classification. For loans excluded from ASC 310-30 accounting, a modification is considered a TDR when a borrower is experiencing financial difficulties and the Company grants a concession to the borrower. For loans accounted for individually under ASC 310-30, a modification is considered a TDR when a borrower is experiencing financial difficulties and the effective yield after the modification is less than the effective yield at the time the loan was acquired or less than the effective yield of any re-estimation of cash flows subsequent to acquisition in association with consideration of qualitative factors included within ASC 310-40. All TDRs are considered impaired loans. The nature and extent of impairment of TDRs, including those which have experienced a subsequent default, are considered in the determination of an appropriate level of allowance for loan losses.

The CARES Act was signed into law on March 27, 2020, which provides a variety of provisions, including, among other things, a small business lending program to originate paycheck protection loans, temporary relief for the community bank leverage ratio, and temporary relief for financial institutions related to troubled debt restructurings. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law and extends the relief related to troubled debt restructurings to the earlier of January 1, 2022 or 60 days after the national emergency termination date. As a result of the COVID-19 pandemic, the Company is currently working with borrowers to provide short-term payment modifications. Any short-term modifications made on a good-faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not considered TDRs based on interagency guidance. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of September 30, 2021, we had $1.1 million of loans that remained on a COVID-related deferral, and no loans that had payments deferred greater than six months. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program was implemented. The Company’s modification programs are designed to provide temporary relief for

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current borrowers affected by the COVID-19 pandemic. The Company has presumed that borrowers that are current on payments are not experiencing financial difficulties at the time of the modification for purposes of determining TDR status, and thus no further TDR analysis is required for each loan modification in the program.

As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had a recorded investment in troubled debt restructurings of ~~$3.6~~$4.3 million and ~~$3.9~~$4.8 million, respectively. The Company allocated a specific reserve of ~~$235~~$351 thousand for

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those loans at September 30, ~~2020~~2021 and a specific reserve of ~~$384~~$317 thousand for those loans at December 31, ~~2019.~~2020. The Company ~~has~~had not committed to lend additional amounts to borrowers whose loans have been modified. As of September 30, ~~2020,~~2021, there were ~~$2.4~~$3.5 million of nonperforming TDRs and ~~$1.2 million~~$762 thousand of performing TDRs included in impaired loans. As of December 31, ~~2019,~~2020, there were ~~$3.0~~$3.8 million of nonperforming TDRs and ~~$906~~$978 thousand of performing TDRs included in impaired loans.

All TDRs are considered impaired loans in the calendar year of their restructuring. A loan that has been modified can return to performing status if it satisfies a six-month performance requirement; however, it will continue to be reported as a TDR and considered impaired.

The following table presents the recorded investment of loans modified as TDRs during the three and nine months ended September 30, 2020 ~~and nine months ended September 30, 2019,~~ by type of concession granted. There were 0no loans modified as TDRs during the three months ended September 30, ~~2019.~~2021. There were 3 loans modified as TDRs during the nine months ended September 30, 2021 which were subsequently paid off during the three months ended September 30, 2021. In cases where more than one type of concession was granted, the loans were categorized based on the most significant concession.


		Concession type									Financial effects of modification					Concession type									Financial effects of modification
(Dollars in thousands)	(Dollars in thousands)	Principal deferral		Interest rate		Forbearance agreement		Total number of loans	Total recorded investment		Net charge-offs		Provision for loan losses		(Dollars in thousands)	Principal deferral		Interest rate		Forbearance agreement		Total number of loans	Total recorded investment		Net charge-offs		Provision for loan losses
Three months ended September 30, 2020

Three Months Ended September 30, 2020															Three Months Ended September 30, 2020

Commercial and industrial	Commercial and industrial	$	0	$	0	$	148	1	$	148	$	0	$	0	Commercial and industrial	$	—	$	—	$	148	1	$	148	$	—	$	—

Total	Total	$	0	$	0	$	148	1	$	148	$	0	$	0	Total	$	—	$	—	$	148	1	$	148	$	—	$	—
Nine months ended September 30, 2020
Nine Months Ended September 30, 2020															Nine Months Ended September 30, 2020

Commercial and industrial	Commercial and industrial	$	0	$	0	$	148	1	$	148	$	0	$	0	Commercial and industrial	$	—	$	—	$	148	1	$	148	$	—	$	—
Residential real estate	Residential real estate	0		75		0		1	75		0		0		Residential real estate	—		75		—		1	75		—		—

Total	Total	$	0	$	75	$	148	2	$	223	$	0	$	0	Total	$	—	$	75	$	148	2	$	223	$	—	$	—

Nine months ended September 30, 2019

Commercial and industrial		$	0	$	0	$	351	2	$	351	$	0	$	174

Total		$	0	$	0	$	351	2	$	351	$	0	$	174

On an ongoing basis, the Company monitors the performance of TDRs to their modified terms. ~~There were 0~~The following table presents the number of loans modified as TDRs during the twelve months ~~ending~~ended September 30, ~~2020 and 2019,~~2021 for which there was a subsequent ~~default.~~payment default during the nine months ended September 30, 2021 and the recorded investment as of September 30, 2021. There were no loans modified as TDRs within the previous twelve months that subsequently defaulted during the three months ended September 30, 2021 and the three or nine months ended September 30, 2020. A payment on a TDR is considered to be in default once it is greater than 30 days past due.


	For the nine months ended September 30, 2021
(Dollars in thousands)	Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default
Commercial real estate	2	$	1,556	$	—



Total	2	$	1,556	$	—

Credit Quality Indicators:

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This analysis includes commercial and industrial and commercial real estate loans and is performed on an annual basis. The Company uses the following definitions for risk ratings:

Pass. Loans classified as pass are higher quality loans that do not fit any of the other categories described below. This category includes loans risk rated with the following ratings: cash/stock secured, excellent credit risk, superior credit risk, good credit risk, satisfactory credit risk, and marginal credit risk.

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Special Mention. Loans classified as special mention have a potential weakness that deserves management's close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the Company's credit position at some future date.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable.

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Based on the most recent analysis performed, the risk category of loans by class of loans was as follows:


(Dollars in thousands)	(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total		(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2020
September 30, 2021												September 30, 2021
Commercial real estate	Commercial real estate	$	703,241	$	19,686	$	6,723	$	539	$	730,189	Commercial real estate	$	748,486	$	15,683	$	10,204	$	488	$	774,861
Commercial and industrial	Commercial and industrial	773,242		17,874		12,260		4,547		807,923		Commercial and industrial	476,728		48,959		13,790		1,069		540,546
Total	Total	$	1,476,483	$	37,560	$	18,983	$	5,086	$	1,538,112	Total	$	1,225,214	$	64,642	$	23,994	$	1,557	$	1,315,407
December 31, 2019
December 31, 2020												December 31, 2020
Commercial real estate	Commercial real estate	$	591,419	$	8,325	$	4,042	$	860	$	604,646	Commercial real estate	$	685,690	$	21,570	$	13,045	$	527	$	720,832
Commercial and industrial	Commercial and industrial	383,756		8,967		16,527		978		410,228		Commercial and industrial	637,285		25,727		21,876		616		685,504
Total	Total	$	975,175	$	17,292	$	20,569	$	1,838	$	1,014,874	Total	$	1,322,975	$	47,297	$	34,921	$	1,143	$	1,406,336

For residential real estate loans and consumer loans, the Company evaluates credit quality based on the aging status of the loan and by payment activity. Residential real estate loans and consumer loans are considered nonperforming if they are 90 days or more past due. Consumer loan types are continuously monitored for changes in delinquency trends and other asset quality indicators.

The following presents residential real estate and consumer loans by credit quality:


(Dollars in thousands)	(Dollars in thousands)	Performing		Nonperforming		Total		(Dollars in thousands)	Performing		Nonperforming		Total
September 30, 2020
September 30, 2021								September 30, 2021
Residential real estate	Residential real estate	$	299,937	$	4,151	$	304,088	Residential real estate	$	399,907	$	3,610	$	403,517
Consumer	Consumer	1,673		15		1,688		Consumer	784		9		793
Total	Total	$	301,610	$	4,166	$	305,776	Total	$	400,691	$	3,619	$	404,310
December 31, 2019
December 31, 2020								December 31, 2020
Residential real estate	Residential real estate	$	209,270	$	2,569	$	211,839	Residential real estate	$	311,485	$	3,991	$	315,476
Consumer	Consumer	880		16		896		Consumer	1,710		15		1,725
Total	Total	$	210,150	$	2,585	$	212,735	Total	$	313,195	$	4,006	$	317,201

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Purchased Credit Impaired Loans:

As part of the Company's previous 5 acquisitions, the Company acquired purchase credit impaired ("PCI") loans for which there was evidence of credit quality deterioration since origination, and we determined that it was probable that the Company would be unable to collect all contractually required principal and interest payments. The total balance of all PCI loans from these acquisitions was as follows:

(Dollars in thousand) Unpaid Principal Balance Recorded Investment
September 30, 2020
Commercial real estate $ 6,304 $ 2,841
Commercial and industrial 683 281
Residential real estate 4,048 2,945
Total PCI loans $ 11,035 $ 6,067
December 31, 2019
Commercial real estate $ 6,597 $ 2,884
Commercial and industrial 556 135
Residential real estate 4,215 2,954
Total PCI loans $ 11,368 $ 5,973

~~Table of Contents~~


(Dollars in thousand)	Unpaid Principal Balance		Recorded Investment
September 30, 2021
Commercial real estate	$	3,656	$	1,663
Commercial and industrial	4,545		—
Residential real estate	255		2,698

Total PCI loans	$	8,456	$	4,361
December 31, 2020
Commercial real estate	$	5,109	$	1,773
Commercial and industrial	643		274
Residential real estate	4,017		2,949
Total PCI loans	$	9,769	$	4,996

The following table reflects the activity in the accretable yield of PCI loans from past acquisitions, which includes total expected cash flows, including interest, in excess of the recorded investment.


		For the three months ended September 30,				For the nine months ended September 30,				For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019			(Dollars in thousands)	2021			2020		2021		2020
Accretable yield at beginning of period	Accretable yield at beginning of period	$	8,374	$	10,194	$	9,141	$	10,947		Accretable yield at beginning of period	$	6,242		$	8,374	$	7,097	$	9,141
Additions due to acquisitions	Additions due to acquisitions	0		0		35		0			Additions due to acquisitions	—			—		—		35
Accretion of income	Accretion of income	(482)		(597)		(1,350)		(1,772)			Accretion of income	(368)			(482)		(1,160)		(1,350)
Adjustments to accretable yield	Adjustments to accretable yield	0		0		66		422			Adjustments to accretable yield	—			—		(63)		66

Accretable yield at end of period	Accretable yield at end of period	$	7,892	$	9,597	$	7,892	$	9,597		Accretable yield at end of period	$	5,874		$	7,892	$	5,874	$	7,892

"Additions due to acquisitions" represents the accretable yield added as a result of the AAB acquisition. "Accretion of income" represents the income earned on these loans for the year.

NOTE 5—4—ALLOWANCE FOR LOAN LOSSES

An allowance for loan losses is maintained to absorb probable incurred losses from the loan portfolio. The allowance for loan losses is based on management's continuing evaluation of the risk characteristics and credit quality of the loan portfolio, assessment of current economic conditions, diversification and size of the portfolio, adequacy of collateral, past and anticipated loss experience, and the amount of nonaccrual loans.

The Company established an allowance for loan losses associated with PCI loans (accounted for under ASC 310-30) based on credit deterioration subsequent to the acquisition date. As of September 30, ~~2020,~~2021, the Company had 65 PCI loan pools and 139 non-pooled PCI loans. The Company re-estimates cash flows expected to be collected for PCI loans on a semi-annual basis, with any decline in expected cash flows recorded as provision for loan losses on a discounted basis during the period. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield to be recognized on a prospective basis over the loan's remaining life.

For loans not accounted for under ASC 310-30, the Company individually evaluates certain impaired loans on a quarterly basis and establishes specific allowances for such loans, if required. A loan is considered impaired when it is probable that interest or principal payments will not be made in accordance with the contractual terms of the loan agreement. Consistent with this definition, all loans for which the accrual of interest has been discontinued (nonaccrual loans) and all TDRs are considered impaired. The Company individually evaluates nonaccrual loans with book balances of $250 thousand or more, all loans whose terms have been modified in a TDR, and certain other loans. The threshold for individual evaluation is revised on an infrequent basis, generally when economic circumstances significantly change. Specific allowances for impaired loans are estimated using one of several methods, including the estimated fair value of underlying collateral, observable market value of similar debt or discounted expected future cash flows. All other impaired loans are individually evaluated by identifying its risk characteristics and applying the standard reserve factor for the corresponding loan pool.

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Loans which do not meet the criteria to be individually evaluated are evaluated in pools of loans with similar risk characteristics. Business loans are assigned to pools based on the Company's internal risk rating system. Internal risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by the Company's senior management, generally at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan. For business loans not individually evaluated, losses inherent to the pool are estimated by applying standard reserve factors to outstanding principal balances.

The allowance for loans not individually evaluated is determined by applying estimated loss rates to various pools of loans within the portfolios with similar risk characteristics. Estimated loss rates for all pools are updated quarterly, incorporating quantitative and qualitative factors such as recent charge-off experience, current economic conditions and trends, changes in collateral values of properties securing loans (using index-based estimates), and trends with respect to past due and nonaccrual amounts.

Loans acquired in business combinations are initially recorded at fair value, which includes an estimate of credit losses expected to be realized over the remaining lives of the loans, and therefore no corresponding allowance for loan losses is recorded for these loans at acquisition. Methods utilized to estimate any subsequently required allowance for loan losses for acquired loans not deemed credit-impaired at acquisition are similar to originated loans; however, the estimate of loss is based on the unpaid principal balance less any remaining purchase discount.

Loans individually evaluated for impairment are presented below.


(Dollars in thousands)	Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Contractual principal balance		Related allowance
September 30, 2021
Individually evaluated impaired loans:
Commercial real estate	$	3,768	$	—	$	3,768	$	4,112	$	—
Commercial and industrial	4,055		842		4,897		5,512		343
Residential real estate	1,801		135		1,936		2,283		27
Total	$	9,624	$	977	$	10,601	$	11,907	$	370
December 31, 2020
Individually evaluated impaired loans:
Commercial real estate	$	7,320	$	—	$	7,320	$	7,720	$	—
Commercial and industrial	7,964		630		8,594		9,208		307
Residential real estate	2,153		192		2,345		2,447		25
Total	$	17,437	$	822	$	18,259	$	19,375	$	332

2019

Table of Contents

~~Loans individually evaluated for impairment are presented below.~~

(Dollars in thousands) Recorded investment with
no related
allowance Recorded investment
with related
allowance Total
recorded
investment Contractual
principal
balance Related
allowance
September 30, 2020
Individually evaluated impaired loans:
Commercial real estate $ 7,022 $ 0 $ 7,022 $ 7,355 $ 0
Commercial and industrial 4,465 4,717 9,182 10,031 798
Residential real estate 2,942 266 3,208 3,459 26
Total $ 14,429 $ 4,983 $ 19,412 $ 20,845 $ 824
December 31, 2019
Individually evaluated impaired loans:
Commercial real estate $ 4,832 $ 0 $ 4,832 $ 5,156 $ 0
Commercial and industrial 10,739 913 11,652 12,521 363
Residential real estate 1,197 189 1,386 1,570 22
Total $ 16,768 $ 1,102 $ 17,870 $ 19,247 $ 385


(Dollars in thousands)	(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized		(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
For the three months ended September 30, 2021								For the three months ended September 30, 2021
Individually evaluated impaired loans:								Individually evaluated impaired loans:
Commercial real estate								Commercial real estate	$	4,259	$	—	$	30
Commercial and industrial								Commercial and industrial	5,356		8		118
Residential real estate								Residential real estate	2,125		7		—

Total								Total	$	11,740	$	15	$	148
For the nine months ended September 30, 2021								For the nine months ended September 30, 2021
Individually evaluated impaired loans:								Individually evaluated impaired loans:
Commercial real estate								Commercial real estate	$	5,298	$	—	$	332
Commercial and industrial								Commercial and industrial	6,449		23		233
Residential real estate								Residential real estate	2,143		18		10

Total								Total	$	13,890	$	41	$	575
For the three months ended September 30, 2020	For the three months ended September 30, 2020							For the three months ended September 30, 2020
Individually evaluated impaired loans:	Individually evaluated impaired loans:							Individually evaluated impaired loans:
Commercial real estate	Commercial real estate	$	7,139	$	0	$	0	Commercial real estate	$	7,139	$	—	$	—
Commercial and industrial	Commercial and industrial	8,960		12		0		Commercial and industrial	8,960		12		—
Residential real estate	Residential real estate	3,265		7		0		Residential real estate	3,265		7		—

Total	Total	$	19,364	$	19	$	0	Total	$	19,364	$	19	$	—
For the nine months ended September 30, 2020	For the nine months ended September 30, 2020							For the nine months ended September 30, 2020
Individually evaluated impaired loans:	Individually evaluated impaired loans:							Individually evaluated impaired loans:
Commercial real estate	Commercial real estate	$	7,433	$	0	$	0	Commercial real estate	$	7,433	$	—	$	—
Commercial and industrial	Commercial and industrial	13,086		34		84		Commercial and industrial	13,086		34		84
Residential real estate	Residential real estate	3,266		26		0		Residential real estate	3,266		26		—

Total	Total	$	23,785	$	60	$	84	Total	$	23,785	$	60	$	84
For the three months ended September 30, 2019
Individually evaluated impaired loans:
Commercial real estate		$	3,111	$	2	$	35
Commercial and industrial		6,752		14		349
Residential real estate		1,428		7		0

Total		$	11,291	$	23	$	384
For the nine months ended September 30, 2019
Individually evaluated impaired loans:
Commercial real estate		$	4,034	$	2	$	209
Commercial and industrial		9,080		33		573
Residential real estate		2,059		21		10

Total		$	15,173	$	56	$	792

~~Table of Contents~~

~~Activity in the allowance for loan losses is presented below:~~

(Dollars in thousands) Commercial
Real Estate Commercial
and Industrial Residential
Real Estate Consumer Total
For the three months ended September 30, 2020
Allowance for loan losses:
Beginning balance $ 7,987 $ 6,496 $ 2,565 $ 15 $ 17,063
Provision (benefit) for loan losses 1,820 1,679 781 (10) 4,270
Gross chargeoffs 0 (10) (110) (4) (124)
Recoveries 12 15 10 8 45
Net (chargeoffs) recoveries 12 5 (100) 4 (79)
Ending allowance for loan losses $ 9,819 $ 8,180 $ 3,246 $ 9 $ 21,254
For the nine months ended September 30, 2020
Allowance for loan losses:
Beginning balance $ 5,773 $ 5,515 $ 1,384 $ 2 $ 12,674
Provision for loan losses 4,034 4,347 1,921 32 10,334
Gross chargeoffs 0 (1,729) (110) (47) (1,886)
Recoveries 12 47 51 22 132
Net (chargeoffs) recoveries 12 (1,682) (59) (25) (1,754)
Ending allowance for loan losses $ 9,819 $ 8,180 $ 3,246 $ 9 $ 21,254
For the three months ended September 30, 2019
Allowance for loan losses:
Beginning balance $ 5,219 $ 5,990 $ 1,142 $ 2 $ 12,353
Provision (benefit) for loan losses 184 (280) 72 8 (16)
Gross chargeoffs 0 (49) 0 (34) (83)
Recoveries 5 10 12 26 53
Net (chargeoffs) recoveries 5 (39) 12 (8) (30)
Ending allowance for loan losses $ 5,408 $ 5,671 $ 1,226 $ 2 $ 12,307
For the nine months ended September 30, 2019
Allowance for loan losses:
Beginning balance $ 5,227 $ 5,174 $ 1,164 $ 1 $ 11,566
Provision for loan losses 249 560 7 19 835
Gross chargeoffs (74) (164) 0 (48) (286)
Recoveries 6 101 55 30 192
Net (chargeoffs) recoveries (68) (63) 55 (18) (94)
Ending allowance for loan losses $ 5,408 $ 5,671 $ 1,226 $ 2 $ 12,307

2220

Table of Contents

Activity in the allowance for loan losses is presented below:


(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer		Total
For the three months ended September 30, 2021
Allowance for loan losses:
Beginning balance	$	10,931	$	8,390	$	3,819	$	4	$	23,144
Provision expense (benefit) for loan losses	(1,141)		(278)		232		(2)		(1,189)
Gross chargeoffs	—		(6)		(242)		(7)		(255)
Recoveries	—		8		14		9		31
Net (chargeoffs) recoveries	—		2		(228)		2		(224)
Ending allowance for loan losses	$	9,790	$	8,114	$	3,823	$	4	$	21,731
For the nine months ended September 30, 2021
Allowance for loan losses:
Beginning balance	$	9,975	$	8,786	$	3,527	$	9	$	22,297
Provision expense (benefit) for loan losses	(185)		(692)		492		1		(384)
Gross chargeoffs	—		(24)		(242)		(21)		(287)
Recoveries	—		44		46		15		105
Net (chargeoffs) recoveries	—		20		(196)		(6)		(182)
Ending allowance for loan losses	$	9,790	$	8,114	$	3,823	$	4	$	21,731
For the three months ended September 30, 2020
Allowance for loan losses:
Beginning balance	$	7,987	$	6,496	$	2,565	$	15	$	17,063
Provision expense (benefit) for loan losses	1,820		1,679		781		(10)		4,270
Gross chargeoffs	—		(10)		(110)		(4)		(124)
Recoveries	12		15		10		8		45
Net (chargeoffs) recoveries	12		5		(100)		4		(79)
Ending allowance for loan losses	$	9,819	$	8,180	$	3,246	$	9	$	21,254
For the nine months ended September 30, 2020
Allowance for loan losses:
Beginning Balance	$	5,773	$	5,515	$	1,384	$	2	$	12,674
Provision expense for loan losses	4,034		4,347		1,921		32		10,334
Gross chargeoffs	—		(1,729)		(110)		(47)		(1,886)
Recoveries	12		47		51		22		132
Net (chargeoffs) recoveries	12		(1,682)		(59)		(25)		(1,754)
Ending Allowance for loan losses	$	9,819	$	8,180	$	3,246	$	9	$	21,254

Table of Contents

Allocation of the allowance for loan losses is presented below:


(Dollars in thousands)	(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer		Total		(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer		Total
September 30, 2020
September 30, 2021												September 30, 2021
Allowance for loan losses:	Allowance for loan losses:											Allowance for loan losses:
Individually evaluated for impairment	Individually evaluated for impairment	$	0	$	798	$	26	$	0	$	824	Individually evaluated for impairment	$	—	$	343	$	27	$	—	$	370
Collectively evaluated for impairment	Collectively evaluated for impairment	9,109		7,352		3,023		9		19,493		Collectively evaluated for impairment	9,353		7,771		3,563		4		20,691
Acquired with deteriorated credit quality	Acquired with deteriorated credit quality	710		30		197		0		937		Acquired with deteriorated credit quality	437		—		233		—		670
Ending allowance for loan losses	Ending allowance for loan losses	$	9,819	$	8,180	$	3,246	$	9	$	21,254	Ending allowance for loan losses	$	9,790	$	8,114	$	3,823	$	4	$	21,731
Balance of loans:	Balance of loans:											Balance of loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	7,022	$	9,182	$	3,208	$	0	$	19,412	Individually evaluated for impairment	$	3,768	$	4,897	$	1,936	$	—	$	10,601
Collectively evaluated for impairment	Collectively evaluated for impairment	720,326		798,460		297,935		1,688		1,818,409		Collectively evaluated for impairment	769,430		535,649		398,883		793		1,704,755
Acquired with deteriorated credit quality	Acquired with deteriorated credit quality	2,841		281		2,945		0		6,067		Acquired with deteriorated credit quality	1,663		—		2,698		—		4,361
Total loans	Total loans	$	730,189	$	807,923	$	304,088	$	1,688	$	1,843,888	Total loans	$	774,861	$	540,546	$	403,517	$	793	$	1,719,717
December 31, 2019
December 31, 2020												December 31, 2020
Allowance for loan losses:	Allowance for loan losses:											Allowance for loan losses:
Individually evaluated for impairment	Individually evaluated for impairment	$	0	$	363	$	22	$	0	$	385	Individually evaluated for impairment	$	—	$	307	$	25	$	—	$	332
Collectively evaluated for impairment	Collectively evaluated for impairment	5,062		5,124		1,339		2		11,527		Collectively evaluated for impairment	9,550		8,465		3,273		9		21,297
Acquired with deteriorated credit quality	Acquired with deteriorated credit quality	711		28		23		0		762		Acquired with deteriorated credit quality	425		14		229		—		668
Ending allowance for loan losses	Ending allowance for loan losses	$	5,773	$	5,515	$	1,384	$	2	$	12,674	Ending allowance for loan losses	$	9,975	$	8,786	$	3,527	$	9	$	22,297
Balance of loans:	Balance of loans:											Balance of loans:
Individually evaluated for impairment	Individually evaluated for impairment	$	4,832	$	11,652	$	1,386	$	0	$	17,870	Individually evaluated for impairment	$	7,320	$	8,594	$	2,345	$	—	$	18,259
Collectively evaluated for impairment	Collectively evaluated for impairment	596,930		398,441		207,499		896		1,203,766		Collectively evaluated for impairment	711,739		676,636		310,182		1,725		1,700,282
Acquired with deteriorated credit quality	Acquired with deteriorated credit quality	2,884		135		2,954		0		5,973		Acquired with deteriorated credit quality	1,773		274		2,949		—		4,996
Total loans	Total loans	$	604,646	$	410,228	$	211,839	$	896	$	1,227,609	Total loans	$	720,832	$	685,504	$	315,476	$	1,725	$	1,723,537

~~Table of Contents~~

NOTE 6—5—PREMISES AND EQUIPMENT

Premises and equipment were as follows at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2021		December 31, 2020
Land	Land	$	3,514	$	2,254	Land	$	3,572	$	3,514
Buildings	Buildings	10,656		9,825		Buildings	10,710		10,656
Leasehold improvements	Leasehold improvements	2,993		2,714		Leasehold improvements	3,007		3,017
Furniture, fixtures and equipment	Furniture, fixtures and equipment	7,231		6,539		Furniture, fixtures and equipment	8,147		7,786
Total premises and equipment	Total premises and equipment	$	24,394	$	21,332	Total premises and equipment	$	25,436	$	24,973
Less: Accumulated depreciation	Less: Accumulated depreciation	8,748		7,494		Less: Accumulated depreciation	10,266		9,139
Net premises and equipment	Net premises and equipment	$	15,646	$	13,838	Net premises and equipment	$	15,170	$	15,834

Depreciation expense was ~~$426~~$406 thousand and ~~$326~~$426 thousand for the three months ended September 30, 2021 and 2020, respectively, and ~~2019,~~$1.2 million and $1.3 million ~~and $986 thousand~~ for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

Most of the Company's branch facilities are rented under non-cancelable operating lease agreements. Total rent expense was ~~$450~~$456 thousand and ~~$307~~$450 thousand for the three months ended September 30, 2021 and 2020, ~~and 2019,~~respectively, and $1.4 million ~~and $840 thousand~~ for the nine months ended September 30, ~~2020~~2021 and ~~2019, respectively.~~2020.

NOTE 76—GOODWILL AND INTANGIBLE ASSETS

Goodwill: The Company has acquired 3 banks, Lotus Bank in March 2015, Bank of Michigan in March 2016, and Ann Arbor State Bank in January 2020, which resulted in the recognition of goodwill of $4.6 million, $4.8 million, and ~~$26.2~~$26.2 million, respectively. Total goodwill was $35.6 million at September 30, ~~2020~~2021 and ~~$9.4 million at~~ December 31, ~~2019.~~2020.

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Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value. ~~The Company's most recent annual goodwill impairment review as of October 1, 2019 did not indicate that an impairment existed.~~

As a result of the unprecedented decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including our stock price, saw a significant decline in March 2020, which then continued into the second quarter of 2020. These events indicated that goodwill may be impaired and resulted in management performing a qualitative goodwill impairment assessment in the second quarter of 2020. As a result of the analysis, we concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount.

Since the price of our stock did not fully recover during the third quarter of 2020, the Company ~~concluded to engage~~engaged a ~~reputable,~~ third-party valuation firm to perform a quantitative analysis of goodwill as of August 31, 2020 ("the valuation date"). In deriving at the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events toon financial performance; the market price of our common stock and other relevant events. In addition, the valuation relied on financial projections through 2023 and growth rates prepared by management. Based on the valuation prepared, it was determined that the Company's estimated fair value of the reporting unit at August 31, 2020 was greater than its book value, and impairment of goodwill was not required.

~~Furthermore, management noted that despite the market capitalization declining from December 2019 to September~~The Company completed its annual goodwill impairment review as of October 1, 2020, ~~as a result of the COVID-19 pandemic, the Bank’s financial performance has remained positive. This is evidenced by the~~noting strong financial indicators for the Bank, solid credit quality ratios, as well as the strong capital position of the Bank. In addition, third quarter 2020 revenue reflected significant and continuing growth in our residential mortgage banking business, as well as net ~~SBA~~Small Business Administration ("SBA") fees related to Paycheck Protection Program ("PPP") loans funded during second and third quarters of 2020. Management concurred with the conclusion derived from the quantitative goodwill analysis as of August 31, 2020 and determined that there were no material changes between the valuation date and October 1, 2020. Management also determined that no triggering events have occurred that indicated impairment from the most recent valuation date through September 30, ~~2020. As such, management concluded that~~2021, the stock was trading above book value as of September 30, 2021, and it is more likely than not that there was 0no goodwill impairment as of September 30, ~~2020.~~

2021.

Intangible Assets: The Company recorded core deposit intangibles ("CDIs") associated with each of its acquisitions. CDIs are amortized on an accelerated basis over their estimated useful lives.

~~Table of Contents~~

The table below presents the Company's net carrying amount of CDIs:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2021		December 31, 2020
Gross carrying amount	Gross carrying amount	$	5,708	$	2,045	Gross carrying amount	$	5,708	$	5,708
Accumulated amortization	Accumulated amortization	(2,320)		(1,744)		Accumulated amortization	(3,013)		(2,512)
Net Intangible	Net Intangible	$	3,388	$	301	Net Intangible	$	2,695	$	3,196

Amortization expense for the CDIs was ~~$191~~$167 thousand and ~~$29~~$191 thousand for the three months ended September 30, 2021 and 2020, respectively, and ~~2019,~~$501 thousand and $576 ~~thousand and $117~~ thousand for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively.

~~Mortgage Servicing Rights ("MSRs")~~NOTE 7: —MORTGAGE SERVICING RIGHTS, NET

The Company has recorded ~~MSRs~~a mortgage servicing rights asset for residential real estate mortgage loans that are sold ~~with~~to the secondary market for which servicing has been retained. ~~MSRs~~Residential real estate mortgage loans serviced for others are not included in the consolidated balance sheets. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization or estimated fair value. ~~MSRs~~Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. The ~~Company serviced residential mortgage loans for others with~~ unpaid principal balances of ~~approximately $211.0 million and $9.0 million as of~~these loans at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020 were as follows:


(Dollars in thousands)	September 30, 2021		December 31, 2020
Residential real estate mortgage loan portfolios serviced for:
FNMA	$	535,348	$	320,467

Custodial escrow balances maintained with these serviced loans were $3.3 million and $1.9 million at September 30, 2021 and December 31, 2020, respectively.

~~Changes in our~~

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Activity for mortgage servicing rights ~~were~~was as follows for the three and nine months ended September 30, 2021 and 2020:


	For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Mortgage servicing rights:
Balance, beginning of period	$	4,599	$	1,213	$	3,361	$	76
Originated servicing	787		1,073		3,199		2,250
Amortization	(335)		(93)		(1,509)		(133)
Balance, end of period	$	5,051	$	2,193	$	5,051	$	2,193

Servicing fee income, net of amortization of servicing rights and changes in the valuation allowance was $(32) thousand and $(93) thousand for the three months ended September 30, 2021 and 2020, . respectively, and $(289) thousand and $(129) thousand for the nine months ended September 30, 2021 and 2020, respectively.

The ~~Company had $1~~Company recorded a valuation allowance of $17 thousand inrelated to mortgage servicing rights during the first quarter of 2020, which was then reversed during the second quarter of 2020 as a result of the fair value at June 30, 2020 being higher than book value. The fair value remained higher than book value at September 30, ~~2019:~~2020. There was no valuation allowance related to mortgage servicing rights during the three or nine months ended September 30, 2021.

For the three months ended September 30, For the nine months ended September 30,
(Dollars in thousands) 2020 2020
Mortgage servicing rights:
Balance, beginning of period $ 1,213 $ 76
Originated servicing 1,073 2,250
Amortization (93) (133)
Balance, end of period 2,193 2,193
Fair value:
At beginning of period $ 1,256 $ 87
At end of period 2,567 2,567
The fair value of mortgage servicing rights was $7.2 million and $4.0 million at September 30, 2021 and December 31, 2020, respectively. The fair value of mortgage servicing rights is highly sensitive to changes in underlying assumptions. The fair value at September 30, 2021 was determined using a discount rate of 8.00% and prepayment speeds ranging from 6.12% to 8.25%, depending on the stratification of the specific rights. The fair value at December 31, 2020 was determined using a discount rate of 7.75% and prepayment speeds ranging from 8.44% to 10.41%, depending on the stratification of the specific right.

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NOTE ~~8 —BORROWINGS~~8—BORROWINGS AND SUBORDINATED DEBT

The following table presents the components of our short-term borrowings and long-term debt.


		September 30, 2020				December 31, 2019					September 30, 2021				December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Amount		Weighted Average Rate(1)		Amount		Weighted Average Rate(1)		(Dollars in thousands)	Amount		Weighted Average Rate(1)		Amount		Weighted Average Rate(1)
Short-term borrowings:	Short-term borrowings:									Short-term borrowings:
FHLB Advances		$	0	0	%	$	60,000	1.61	%

Securities sold under agreements to repurchase	Securities sold under agreements to repurchase	187		0.30		851		0.30		Securities sold under agreements to repurchase	$	2,681	0.25	%	$	3,204	0.30	%

Federal funds purchased		0		0		5,000		1.90

Total short-term borrowings	Total short-term borrowings	187		0.30		65,851		1.62		Total short-term borrowings	2,681		0.25		3,204		0.30
Long-term debt:	Long-term debt:									Long-term debt:
Secured borrowing due in 2022	Secured borrowing due in 2022	1,322		1.00		1,374		1.00		Secured borrowing due in 2022	1,272		1.00		1,304		1.00
FHLB advances due in 2022 to 2029(2)	FHLB advances due in 2022 to 2029(2)	181,202		1.09		145,000		1.06		FHLB advances due in 2022 to 2029(2)	178,105		1.06		181,176		1.09
FRB borrowings (3)		34,098		0.35		0		0

Subordinated notes due in 2025 and 2029~~(4)~~(3)	Subordinated notes due in 2025 and 2029~~(4)~~(3)	44,555		5.29		44,440		5.29		Subordinated notes due in 2025 and 2029~~(4)~~(3)	29,668		4.75		44,592		5.29
Total long-term debt	Total long-term debt	261,177		1.71		190,814		2.04		Total long-term debt	209,045		1.58		227,072		1.91
Total short-term and long-term borrowings	Total short-term and long-term borrowings	$	261,364	1.71	%	$	256,665	1.93	%	Total short-term and long-term borrowings	$	211,726	1.56	%	$	230,276	1.89	%

(1) Weighted average rate presented is the contractual rate which excludes premiums and discounts related to purchase accounting.

(2) At September 30, ~~2020,~~2021, the long-term FHLB advances consisted of 0.42% - 2.93% fixed rate notes and can be called through 2024 without penalty by the issuer. The September 30, 2021 balance includes FHLB advances of $178.0 million and purchase accounting premiums of $105 thousand. The December 31, 2020 balance includes FHLB advances of $181.0 million and purchase accounting premiums of ~~$202~~$176 thousand.

(3) The September 30, ~~2020~~2021 balance includes subordinated notes of ~~FRB borrowings consisted~~$30.0 million and debt issuance costs of ~~0.35% fixed rate notes utilized to fund the PPP loans.~~$332 thousand. The ~~FRB borrowings have a maturity date equal to the maturity date of the respective PPP loans pledged to secure the borrowings, which is two years after the origination date of the PPP loans.~~

~~(4)~~ ~~The September 30,~~December 31, 2020 balance includes subordinated notes of $45.0 million and debt issuance costs of ~~$445 thousand. The December 31, 2019 balance includes subordinated notes of $45.0 million and debt issuance costs of $560~~$408 thousand.

The following table presents long-term borrowings by contractual maturity date:

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At September 30, 2020, the Company had $34.1 million of debt outstanding with the Federal Reserve Bank. These borrowings reflected the Company's efforts to help facilitate the funding of the PPP loans that were approved by the SBA during the quarter ended September 30, 2020. The FRB borrowings bear a 0.35% fixed interest rate and mature two years after the origination date of the respective PPP loans that have been pledged to secure them.


(Dollars in thousands)	As of September 30, 2021
2021	$	3,008
2022	11,272
2023	3,047
2024	30,000
2025	2,050
Thereafter	159,668
Total long-term borrowings	$	209,045

The Bank is a member of the FHLB of Indianapolis, which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rates based on LIBOR. The ~~$181.0~~$178.0 million of long-term FHLB advances as of September 30, ~~2020~~2021 were secured by a blanket lien on ~~$510.6~~$582.8 million of real estate-related loans. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional ~~$211.1~~$219.4 million from the FHLB at September 30, ~~2020.~~2021. In addition, the Bank can borrow up to ~~$122.5~~$157.5 million through the unsecured lines of credit it has established with other correspondent banks, as well as ~~$5.3~~$5.1 million through a secured line with the Federal Reserve Bank. The Bank had 0no outstanding federal funds purchased as of September 30, ~~2020~~2021 and ~~$5.0 million outstanding federal funds purchased as of~~ December 31, ~~2019.~~2020.

At September 30, ~~2020,~~2021, the Company had ~~$187 thousand~~$2.7 million of securities sold under agreements to repurchase with customers, which mature overnight. These borrowings were secured by residential collateralized mortgage obligation securities with a fair value of ~~$1.9~~$3.8 million at September 30, ~~2020.~~2021.

The Company had a secured borrowing of $1.3 million as of September 30, ~~2020~~2021 relating to certain loan participations sold by the Company that did not qualify for sales treatment. The secured borrowing bears a fixed rate of 1.00% and matures on September 15, 2022.

At September 30, ~~2020,~~2021, the Company had ~~$45.0~~$30.0 million outstanding subordinated notes and ~~$445~~$332 thousand of debt issuance costs. The debt issuance costs are netted against the balance of the subordinated notes and recognized as expense over the expected term of the notes.

~~Table of Contents~~

The $15.0 million of subordinated notes issued on December 21, 2015 ~~bear~~had a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. ~~The~~As of December 15, 2020, the notes ~~will bear~~had a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly ~~after December 15, 2020~~ through maturity. The notes were scheduled to mature ~~no later than~~on December 15, 2025, and the Company ~~has~~had the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 15, 2020 or upon an occurrence of a Tier 2 capital event or tax event. These subordinated notes were redeemed in June 2021.

The $30.0 million of subordinated notes issued on December 18, 2019 bear a fixed interest rate of 4.75% per annum, payable semiannually through December 18, 2024. The notes will bear a floating interest rate of three-month secured overnight financing rate (SOFR) plus 311 basis points payable quarterly after December 18, 2024 through maturity. The notes mature ~~no later than~~on December 18, 2029, and the Company has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or upon the occurrence of a Tier 2 capital event or tax event.

The Company has a short term line of credit of $30.0 million with Comerica Bank with a fixed interest rate of 4.05% per annum and a commitment fee of 0.20% on the average daily balance of the unused portion of the line of credit. As of September 30, 2021, the Company had no balance on the Comerica Bank line of credit. The Company participated in the PPP and also had the ability to borrow from the Federal Reserve's special purpose Paycheck Protection Program Liquidity Facility ("PPPLF") for additional funding. At September 30, 2021, the Company had no borrowings from the PPPLF.

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NOTE 9—INCOME TAXES

The Company and its subsidiaries are subject to U.S. federal income tax. In the ordinary course of business, we are routinely subject to audit by Internal Revenue Service. Currently, the Company is subject to examination by taxing authorities for the ~~2016~~2017 tax return year and forward.

A reconciliation of expected income tax expense using the federal statutory rate of 21% ~~as of~~for the three and nine months ended September 30, ~~2020~~2021 and ~~2019~~2020 and actual income tax expense is as follows:

For the three months ended September 30, For the nine months ended September 30,
(Dollars in thousands) 2020 2019 2020 2019
Income tax expense based on federal corporate tax rate $ 1,328 $ 1,118 $ 2,970 $ 2,911
Changes resulting from:
Tax-exempt income (154) (142) (469) (398)
Net operating loss carryback due to CARES Act 0 0 (290) 0
Disqualified dispositions from stock options 0 0 (175) 0
Other, net (57) (62) 73 (85)
Income tax expense $ 1,117 $ 914 $ 2,109 $ 2,428

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	For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Income tax expense based on federal corporate tax rate	$	2,469	$	1,328	$	6,637	$	2,970
Changes resulting from:
Tax-exempt income	(166)		(154)		(471)		(469)


Net operating loss carryback due to CARES Act	—		—		—		(290)
Disqualified dispositions from stock options	—		—		(4)		(175)
Other, net	(12)		(57)		36		73
Income tax expense	$	2,291	$	1,117	$	6,198	$	2,109

In March 2020, the United States government approved the CARES Act, allowing companies to carryback net operating losses generated in 2018 through 2020 for five years to periods in which the tax rate was higher. Ann Arbor State Bank had a net operating loss ("NOL") of approximately $2.2 million generated on its 2020 short tax return which resulted in an increase in value of the NOL (which is part of the deferred tax assets) and therefore a $290 thousand tax benefit to be recognized during the first quarter of 2020. Additionally, disqualified dispositions of Ann Arbor State Bank’s stock options generated a $175 thousand tax ~~benefit.~~

benefit in the first quarter of 2020.

NOTE 10—STOCK BASED COMPENSATION

On March 15, 2018, the Company’s Board of Directors approved the 2018 Equity Incentive Plan ("2018 Plan"). The 2018 Plan became effective upon shareholder approval at the annual shareholders meeting held on April 17, 2018. Under the 2018 Plan, the Company can grant incentive and non-qualified stock options, stock awards, stock appreciation rights, and other incentive awards to directors and employees of, and certain service providers to, the Company and its subsidiaries. Once the 2018 Plan became effective, no further awards could be granted from the 2007 Stock Option Plan ("Stock Option Plan") or the 2014 Equity Incentive Plan ("2014 Plan"). However, any outstanding equity awards granted under the Stock Option Plan or the 2014 Plan will remain subject to the terms of such plans until the time such awards are no longer outstanding.

The Company ~~has~~ reserved 250,000 shares of common stock for issuance under the 2018 Plan. During the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the Company issued ~~38,170~~55,320 and ~~35,633~~38,170 restricted stock awards, respectively, under the 2018 Plan. There were ~~165,597~~120,327 shares available for issuance as of September 30, ~~2020.~~2021.

Stock Options

As of September 30, ~~2020,~~2021, all of the Company's outstanding options were granted under the Stock Option Plan. The term of these options is ten years, and they vest one-third each year, over a three ~~years~~year period. The Company will use authorized but unissued shares to satisfy share option exercises. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model.

Expected volatilities are based on historical volatilities of the Company's common stock. The Company assumes all awards will vest. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. There were 0no stock options granted during the nine months ended September 30, ~~2020~~2021 or September 30, ~~2019.~~

~~Table of Contents~~

2020.

The summary of our stock option activity for the nine months ended September 30, ~~2020~~2021 is as follows:


		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term		Shares	Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Options outstanding, beginning of period	Options outstanding, beginning of period	355,218	$	16.63	5.0	Options outstanding, beginning of period	345,218	$	16.83	4.1

Exercised	Exercised	(10,000)	9.57			Exercised	(23,800)	10.19

Forfeited						Forfeited	(1,500)	10.00
Options outstanding, end of period	Options outstanding, end of period	345,218	16.83		4.4	Options outstanding, end of period	319,918	17.36		3.6
Options exercisable	Options exercisable	335,216	$	16.59	4.3	Options exercisable	319,918	$	17.36	3.6

The aggregate intrinsic value was ~~$516 thousand~~$3.9 million for both options outstanding and exercisable as of September 30, ~~2020.~~2021. As of September 30, ~~2020,~~2021, there was ~~$17 thousand of total~~no unrecognized compensation cost related to stock options granted under the Stock Option Plan. ~~The cost is expected to be recognized over a weighted-average period~~

Table of ~~0.38 years.~~Contents

Share-based compensation expense charged against income was $11 thousand ~~and $12 thousand~~ for the three months ended September 30, 2020, and ~~2019, respectively,~~$6 thousand and $33 ~~thousand and $43~~ thousand for the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ respectively. There was no share-based compensation expense charged against income for the three months ending September 30, 2021.

Restricted Stock Awards

A summary of changes in the Company's nonvested shares for the nine months ended September 30, ~~2020~~2021 is as follows:


Nonvested Shares	Nonvested Shares	Shares	Weighted Average Grant-Date Fair Value		Nonvested Shares	Shares	Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2020		80,370	$	24.28
Nonvested at January 1, 2021					Nonvested at January 1, 2021	93,270	$	24.75
Granted	Granted	38,170	24.90		Granted	55,320	22.68
Vested	Vested	(19,850)	23.10		Vested	(22,220)	25.54
Forfeited	Forfeited	(1,400)	24.46		Forfeited	(8,000)	25.22
Nonvested at September 30, 2020		97,290	$	24.76
Nonvested at September 30, 2021					Nonvested at September 30, 2021	118,370	$	23.60

As of September 30, ~~2020,~~2021, there was ~~$1.2~~$1.5 million of total unrecognized compensation cost related to nonvested shares granted under the ~~2014 Plan and~~ 2018 Plan. The cost is expected to be recognized over a weighted average period of ~~1.88~~2.0 years. The total fair value of shares vested during the nine months ended September 30, ~~2020~~2021 was ~~$459~~$568 thousand.

Total expense for restricted stock awards totaled ~~$223~~$203 thousand and ~~$177~~$223 thousand for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively, and ~~$620~~$563 thousand and ~~$474~~$620 thousand for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. For the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, there was ~~$64~~$137 thousand and ~~$43~~$64 thousand, respectively, of restricted stock redeemed to cover the payroll taxes due at the time of vesting.

NOTE ~~11 —OFF-BALANCE~~11—OFF-BALANCE SHEET ACTIVITIES

In the normal course of business, the Company offers a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit. Commitments to extend credit are agreements to provide credit to a customer, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used and the total commitment amounts do not necessarily represent future cash flow requirements.

Standby letters of credit and commercial letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally are contingent upon the failure of the customer to perform according to the terms of the underlying contract with the third party, while commercial letters of credit are issued specifically to facilitate commerce and typically result in the commitment being drawn on when the underlying transaction is consummated between the customer and the third party. These financial standby letters of credit irrevocably obligate the Company to pay a third-party beneficiary when a customer fails to repay an outstanding loan or debt instrument.

Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment. We maintain an allowance to cover probable losses inherent in our financial instruments with off-balance sheet risk. At September 30, ~~2020,~~2021, the allowance for off-balance sheet risk was ~~$498~~$318 thousand, compared to ~~$318~~$490 thousand at December 31, ~~2019,~~2020, and was included in "Other liabilities" on our consolidated balance sheets.

~~Table of Contents~~

A summary of the contractual amounts of the Company's exposure to off-balance sheet risk is as follows:


		September 30, 2020				December 31, 2019					September 30, 2021				December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Fixed		Variable		Fixed		Variable		(Dollars in thousands)	Fixed		Variable		Fixed		Variable
Commitments to make loans	Commitments to make loans	$	5,302	$	5,295	$	16,276	$	20,128	Commitments to make loans	$	9,087	$	6,600	$	18,269	$	17,058
Unused lines of credit	Unused lines of credit	30,496		361,749		28,723		288,086		Unused lines of credit	33,383		397,716		28,898		385,307
Unused standby letters of credit and commercial letters of credit	Unused standby letters of credit and commercial letters of credit	3,705		2,028		4,895		0		Unused standby letters of credit and commercial letters of credit	3,353		—		2,340		1,992

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments of ~~$5.3~~$9.1 million as of September 30, ~~2020,~~2021, had interest rates ranging from ~~3.0%~~3.5% to ~~5.5%~~5.00% and maturities ranging from ~~3 months~~1 year to 20 years.

~~15 years~~.

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NOTE 12—REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believed that as of September 30, ~~2020,~~2021, the Company and Bank met all capital adequacy requirements to which they were subject.

The Basel III rules require the Company and the Bank to maintain a capital conservation buffer of common equity Tier 1 capital of ~~greater than~~ 2.5% above the minimum risk-weighted assets ~~ratios, which is the fully phased-in amount of the capital conservation buffer.~~ratios.

Prompt corrective action regulations provide five classifications: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and capital restoration plans are required.

At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company's and the Bank's capital ratios were in excess of the requirement to be "well capitalized" under ~~the~~ regulatory ~~framework for prompt corrective action.~~guidelines. There are no conditions or events that management believes have changed the Company or the Bank's category.

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Actual and required capital amounts and ratios are presented below:


		Actual				For Capital Adequacy Purposes				For Capital Adequacy Purposes + Capital Conservation Buffer(1)				Well Capitalized Under Prompt Corrective Action Provisions					Actual				For Capital Adequacy Purposes				For Capital Adequacy Purposes + Capital Conservation Buffer(1)				Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2020
September 30, 2021																		September 30, 2021
Common equity tier 1 to risk-weighted assets:	Common equity tier 1 to risk-weighted assets:																	Common equity tier 1 to risk-weighted assets:
Consolidated	Consolidated	$	139,067	8.83	%	$	70,875	4.50	%	$	110,250	7.00	%					Consolidated	$	167,229	9.82	%	$	76,616	4.50	%	$	119,181	7.00	%
Bank	Bank	176,593		11.23	%	70,760		4.50	%	110,070		7.00	%	$	102,208	6.50	%	Bank	213,794		12.55	%	76,644		4.50	%	119,224		7.00	%	$	110,708	6.50	%
Tier 1 capital to risk-weighted assets:	Tier 1 capital to risk-weighted assets:																	Tier 1 capital to risk-weighted assets:
Consolidated	Consolidated	$	162,437	10.31	%	$	94,500	6.00	%	$	133,875	8.50	%					Consolidated	$	190,602	11.19	%	$	102,155	6.00	%	$	144,719	8.50	%
Bank	Bank	176,593		11.23	%	94,346		6.00	%	133,657		8.50	%	$	125,795	8.00	%	Bank	213,794		12.55	%	102,192		6.00	%	144,772		8.50	%	$	136,256	8.00	%
Total capital to risk-weighted assets:	Total capital to risk-weighted assets:																	Total capital to risk-weighted assets:
Consolidated	Consolidated	$	226,679	14.39	%	$	126,000	8.00	%	$	165,375	10.50	%					Consolidated	$	241,562	14.19	%	$	136,206	8.00	%	$	178,771	10.50	%
Bank	Bank	196,274		12.48	%	125,795		8.00	%	165,106		10.50	%	$	157,244	10.00	%	Bank	235,093		13.80	%	136,256		8.00	%	178,836		10.50	%	$	170,320	10.00	%
Tier 1 capital to average assets (leverage ratio):	Tier 1 capital to average assets (leverage ratio):																	Tier 1 capital to average assets (leverage ratio):
Consolidated	Consolidated	$	162,437	7.17	%	$	90,664	4.00	%	$	90,664	4.00	%					Consolidated	$	190,602	7.68	%	$	99,227	4.00	%	$	99,227	4.00	%
Bank	Bank	176,593		7.83	%	90,220		4.00	%	90,220		4.00	%	$	112,776	5.00	%	Bank	213,794		8.64	%	98,954		4.00	%	98,954		4.00	%	$	123,692	5.00	%
December 31, 2019
December 31, 2020																		December 31, 2020
Common equity tier 1 to risk-weighted assets:	Common equity tier 1 to risk-weighted assets:																	Common equity tier 1 to risk-weighted assets:
Consolidated	Consolidated	$	157,659	11.72	%	$	60,533	4.50	%	$	94,163	7.00	%					Consolidated	$	144,938	9.30	%	$	70,141	4.50	%	$	109,108	7.00	%
Bank	Bank	165,199		12.27	%	60,568		4.50	%	94,217		7.00	%	$	87,487	6.50	%	Bank	185,655		11.94	%	69,950		4.50	%	108,812		7.00	%	$	101,040	6.50	%
Tier 1 capital to risk-weighted assets:	Tier 1 capital to risk-weighted assets:																	Tier 1 capital to risk-weighted assets:
Consolidated	Consolidated	$	157,659	11.72	%	$	80,711	6.00	%	$	114,341	8.50	%					Consolidated	$	168,310	10.80	%	$	93,521	6.00	%	$	132,488	8.50	%
Bank	Bank	165,199		12.27	%	80,757		6.00	%	114,406		8.50	%	$	107,676	8.00	%	Bank	185,655		11.94	%	93,267		6.00	%	132,129		8.50	%	$	124,356	8.00	%
Total capital to risk-weighted assets:	Total capital to risk-weighted assets:																	Total capital to risk-weighted assets:
Consolidated	Consolidated	$	215,091	15.99	%	$	107,615	8.00	%	$	141,244	10.50	%					Consolidated	$	232,386	14.91	%	$	124,695	8.00	%	$	163,662	10.50	%
Bank	Bank	178,191		13.24	%	107,676		8.00	%	141,325		10.50	%	$	134,595	10.00	%	Bank	205,127		13.20	%	124,356		8.00	%	163,218		10.50	%	$	155,446	10.00	%
Tier 1 capital to average assets (leverage ratio):	Tier 1 capital to average assets (leverage ratio):																	Tier 1 capital to average assets (leverage ratio):
Consolidated	Consolidated	$	157,659	10.41	%	$	60,580	4.00	%	$	60,580	4.00	%					Consolidated	$	168,310	6.93	%	$	97,200	4.00	%	$	97,200	4.00	%
Bank	Bank	165,199		10.96	%	60,276		4.00	%	60,276		4.00	%	$	75,345	5.00	%	Bank	185,655		7.67	%	96,809		4.00	%	96,809		4.00	%	$	121,011	5.00	%

(1) Reflects the capital conservation buffer of 2.5%. for risk-weighted asset ratios.

Dividend Restrictions - The Company’s primary source of cash is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of September 30, ~~2020,~~2021, the Bank had the capacity to pay the Company a dividend of up to ~~$42.9~~$56.3 million without the need to obtain prior regulatory approval.

NOTE 13—FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (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. There are three levels of inputs that may be used to measure fair values:

Level 1—Quoted prices (unadjusted) for identical assets or liabilities in active markets that the entity has the ability to access as of the measurement date.

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Level 2—Significant other observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data.

Level 3—Significant unobservable inputs that reflect a company's own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company used the following methods and significant assumptions to estimate the fair value of each type of financial instrument:

Investment Securities: Securities available for sale are recorded at fair value on a recurring basis as follows: the fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). For securities where pricing on similar securities is not available, a third party is engaged to calculate the fair value using the Municipal Market Data curve (Level 3).

Loans Held for Sale, at Fair Value: The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2).

Loans Measured at Fair Value: During the normal course of business, loans originated with the initial intention to sell, but not ultimately sold, are transferred from held for sale to our portfolio of loans held for investment at fair value as the Company adopted the fair value option at origination. The fair value of these loans is determined by obtaining fair value pricing from a third-party software, and then layering an additional adjustment, ranging from 5 to 75 basis points, as determined by management, depending on the reason for the transfer from loans held for sale. Loans are also evaluated for further credit deterioration and additional credit adjustments are applied to the loan as necessary. Due to the adjustments made, the Company classifies the loans transferred from loans held for sale as recurring Level 3.

Mortgage Servicing Rights ("MSRs"): In accordance with GAAP, the Company must record impairment charges on mortgage servicing rights on a non-recurring basis when the carrying value exceeds the estimated fair value. The fair value of our MSRs is obtained from a third-party valuation company that uses a discounted cash flow valuation model which calculates the present value of estimated future net servicing cash flows, taking into consideration expected mortgage loan prepayment rates, discount rates, costs to service, contractual servicing fee income, ancillary income, late fees, replacement reserves and other economic factors that are determined based on current market conditions. The reliance on Level 3 inputs to derive at the fair value of MSRs results in a Level 3 classification.

Impaired Loans: Impaired loans are measured and recorded at fair value on a non-recurring basis. All of our nonaccrual loans and trouble debt restructured loans are considered impaired and are reviewed individually for the amount of impairment, if any. The fair value of impaired loans is estimated using one of several methods, including the fair value of the collateral or the present value of the expected future cash flows discounted at the loan's effective interest rate. For loans that are collateral dependent, the fair value of each loan’s collateral is generally based on estimated market prices from an independently prepared appraisal. 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 appraisers to adjust for differences between the comparable sales and income data available. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business. Such adjustments are considered unobservable, and the fair value measurement is categorized as a Level 3 measurement.

Other Real Estate Owned: Other real estate owned assets are recorded at the lower of cost or fair value upon the transfer of a loan to other real estate owned and, subsequently, continue to be measured and carried at the lower of cost or fair value. The fair value of other real estate owned is based on recent real estate appraisals which are generally updated annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales, cost, 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 are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Other real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and real estate owned 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 either the Company or the Company's appraisal services vendor. Once received, management 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. Management monitors the

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actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

Derivatives: Customer-initiated derivatives are traded in over-the counter markets where quoted market prices are not readily available. Fair value of customer-initiated derivatives is measured on a recurring basis using valuation models that use market observable inputs (Level 2).

Mortgage banking related derivatives including commitments to fund mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of these mortgage loans are recorded at fair value on a recurring basis. The fair value of these commitments is based on the fair value of related mortgage loans determined using observable market data (Level 2). Interest rate lock commitments are adjusted for expectations of exercise and funding. This adjustment is not considered to be a material input.

Assets and liabilities measured at fair value on a recurring basis are summarized below:


(Dollars in thousands)	(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2020
September 30, 2021										September 30, 2021
Securities available for sale:	Securities available for sale:									Securities available for sale:
U.S. government sponsored entities and agencies	U.S. government sponsored entities and agencies	$	27,199	$	0	$	27,199	$	0	U.S. government sponsored entities and agencies	$	24,036	$	—	$	24,036	$	—
State and political subdivision	State and political subdivision	117,550		0		115,838		1,712		State and political subdivision	146,695		—		145,562		1,133
Mortgage-backed securities: residential	Mortgage-backed securities: residential	19,492		0		19,492		0		Mortgage-backed securities: residential	20,086		—		20,086		—
Mortgage-backed securities: commercial	Mortgage-backed securities: commercial	8,655		0		8,655		0		Mortgage-backed securities: commercial	23,540		—		23,540		—
Collateralized mortgage obligations: residential	Collateralized mortgage obligations: residential	14,333		0		14,333		0		Collateralized mortgage obligations: residential	9,871		—		9,871		—
Collateralized mortgage obligations: commercial	Collateralized mortgage obligations: commercial	33,003		0		33,003		0		Collateralized mortgage obligations: commercial	52,738		—		52,738		—
U.S. Treasury	U.S. Treasury	1,003		0		1,003		0		U.S. Treasury	64,898		—		64,898		—
SBA	SBA	18,808		0		18,808		0		SBA	15,108		—		15,108		—
Asset backed securities	Asset backed securities	9,954		0		9,954		0		Asset backed securities	9,858		—		9,858		—
Corporate bonds	Corporate bonds	3,530		0		3,530		0		Corporate bonds	22,698		—		22,698		—
Total securities available for sale	Total securities available for sale	253,527		0		251,815		1,712		Total securities available for sale	389,528		—		388,395		1,133
Loans held for sale	Loans held for sale	60,635		0		60,635		0		Loans held for sale	15,351		—		15,351		—
Loans measured at fair value:	Loans measured at fair value:									Loans measured at fair value:
Residential real estate	Residential real estate	5,080		0		0		5,080		Residential real estate	9,764		—		—		9,764
Derivative assets:	Derivative assets:									Derivative assets:
Customer-initiated derivatives	Customer-initiated derivatives	14,422		0		14,422		0		Customer-initiated derivatives	6,906		—		6,906		—
Forward contracts related to mortgage loans to be delivered for sale	Forward contracts related to mortgage loans to be delivered for sale	117		0		117		0		Forward contracts related to mortgage loans to be delivered for sale	227		—		227		—
Interest rate lock commitments	Interest rate lock commitments	2,068		0		2,068		0		Interest rate lock commitments	670		—		670		—
Total assets at fair value	Total assets at fair value	$	335,849	$	0	$	329,057	$	6,792	Total assets at fair value	$	422,446	$	—	$	411,549	$	10,897
Derivative liabilities:	Derivative liabilities:									Derivative liabilities:
Customer-initiated derivatives	Customer-initiated derivatives	14,422		0		14,422		0		Customer-initiated derivatives	6,906		—		6,906		—
Forward contracts related to mortgage loans to be delivered for sale	Forward contracts related to mortgage loans to be delivered for sale	441		0		441		0		Forward contracts related to mortgage loans to be delivered for sale	21		—		21		—
Interest rate lock commitments	Interest rate lock commitments	4		0		4		0		Interest rate lock commitments	8		—		8		—
Total liabilities at fair value	Total liabilities at fair value	$	14,867	$	0	$	14,867	$	0	Total liabilities at fair value	$	6,935	$	—	$	6,935	$	—

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(Dollars in thousands)	(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019
December 31, 2020										December 31, 2020
Securities available for sale:	Securities available for sale:									Securities available for sale:

U.S. government sponsored entities and agencies										U.S. government sponsored entities and agencies	$	26,358	$	—	$	26,358	$	—
State and political subdivision	State and political subdivision	$	93,747	$	0	$	93,747	$	0	State and political subdivision	132,723		—		131,259		1,464
Mortgage-backed securities: residential	Mortgage-backed securities: residential	10,565		0		10,565		0		Mortgage-backed securities: residential	26,081		—		26,081		—
Mortgage-backed securities: commercial	Mortgage-backed securities: commercial	8,779		0		8,779		0		Mortgage-backed securities: commercial	11,918		—		11,918		—
Collateralized mortgage obligations: residential	Collateralized mortgage obligations: residential	8,529		0		8,529		0		Collateralized mortgage obligations: residential	13,446		—		13,446		—
Collateralized mortgage obligations: commercial	Collateralized mortgage obligations: commercial	23,181		0		23,181		0		Collateralized mortgage obligations: commercial	58,512		—		58,512		—
U.S. Treasury		1,999		0		1,999		0

SBA	SBA	21,984		0		21,984		0		SBA	17,593		—		17,593		—
Asset backed securities	Asset backed securities	10,084		0		10,084		0		Asset backed securities	10,072		—		10,072		—
Corporate bonds	Corporate bonds	2,037		0		2,037		0		Corporate bonds	6,029		—		6,029		—
Total securities available for sale	Total securities available for sale	$	180,905	$	0	$	180,905	$	0	Total securities available for sale	$	302,732	$	—	$	301,268	$	1,464
Loans held for sale	Loans held for sale	13,889		0		13,889		0		Loans held for sale	43,482		—		43,482		—
Loans measured at fair value:	Loans measured at fair value:									Loans measured at fair value:
Residential real estate	Residential real estate	4,063		0		0		4,063		Residential real estate	8,037		—		—		8,037
Derivative assets:	Derivative assets:									Derivative assets:
Customer-initiated derivatives	Customer-initiated derivatives	4,684		0		4,684		0		Customer-initiated derivatives	12,515		—		12,515		—
Forward contracts related to mortgage loans to be delivered for sale	Forward contracts related to mortgage loans to be delivered for sale	34		0		34		0		Forward contracts related to mortgage loans to be delivered for sale	46		—		46		—
Interest rate lock commitments	Interest rate lock commitments	256		0		256		0		Interest rate lock commitments	2,194		—		2,194		—
Total assets at fair value	Total assets at fair value	$	203,831	$	0	$	199,768	$	4,063	Total assets at fair value	$	369,006	$	—	$	359,505	$	9,501
Derivative liabilities:	Derivative liabilities:									Derivative liabilities:
Customer-initiated derivatives	Customer-initiated derivatives	4,684		0		4,684		0		Customer-initiated derivatives	12,515		—		12,515		—
Forward contracts related to mortgage loans to be delivered for sale	Forward contracts related to mortgage loans to be delivered for sale	33		0		33		0		Forward contracts related to mortgage loans to be delivered for sale	423		—		423		—
Total liabilities at fair value	Total liabilities at fair value	$	4,717	$	0	$	4,717	$	0	Total liabilities at fair value	$	12,938	$	—	$	12,938	$	—

There were no transfers between levels within the fair value hierarchy, within a specific category, during the nine months ended September 30, ~~2020~~2021 or ~~during the~~ year ended December 31, ~~2019.~~2020. The ~~level~~Level 3 investment securities disclosed as of September 30, 2021 and December 31, 2020 were acquired from Ann Arbor State Bank during the first quarter of 2020.

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The following table summarizes the changes in Level 3 ~~assets~~loans measured at fair value on a recurring basis.


		For the three months ended September 30,				For the nine months ended September 30,					For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020		2021		2020
Loans held for investment	Loans held for investment									Loans held for investment
Beginning balance	Beginning balance	$	4,056	$	5,624	$	4,063	$	4,571	Beginning balance	$	11,059	$	4,056	$	8,037	$	4,063
Transfers from loans held for sale	Transfers from loans held for sale	1,468		466		2,284		1,895		Transfers from loans held for sale	—		1,468		4,656		2,284
Gains (losses):	Gains (losses):									Gains (losses):
Recorded in "Mortgage banking activities"	Recorded in "Mortgage banking activities"	65		(9)		62		151		Recorded in "Mortgage banking activities"	(43)		65		(397)		62
Repayments	Repayments	(509)		(1,191)		(1,329)		(1,727)		Repayments	(1,252)		(509)		(2,532)		(1,329)
Ending balance	Ending balance	$	5,080	$	4,890	$	5,080	$	4,890	Ending balance	$	9,764	$	5,080	$	9,764	$	5,080

There were $100 thousand in loans held for investment measured at fair value that were on nonaccrual status or 90 days past due with a fair value of $100 thousand as of September 30, 2021. There were $105 thousand in loans held for investment measured at fair value that were on nonaccrual status or 90 days past due with a fair value of $109 thousand as of December 31, 2020.

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The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company's policy on loans held for investment. ~~There were no loans held for sale that were on nonaccrual status or 90 days past due as of September 30, 2020 or December 31, 2019.~~

As of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the aggregate fair value, contractual balance (including accrued interest), and gain or loss for loans held for sale carried at fair value was as follows:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2021		December 31, 2020
Aggregate fair value	Aggregate fair value	$	60,635	$	13,889	Aggregate fair value	$	15,351	$	43,482
Contractual balance	Contractual balance	59,055		13,510		Contractual balance	14,835		41,808
Unrealized gain	Unrealized gain	1,580		379		Unrealized gain	516		1,674

The total amount of gains as a result of changes in fair value of loans held for sale included in "Mortgage banking activities" for the three ~~and nine~~ months ended September 30, ~~2020~~2021 and ~~2019~~2020 were as follows:

For the three months ended September 30, For the nine months ended September 30,
(Dollars in thousands) 2020 2019 2020 2019
Change in fair value $ 556 $ (98) $ 1,201 $ 352

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	For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Change in fair value	$	194	$	556	$	(1,158)	$	1,201

Assets measured at fair value on a non-recurring basis are summarized below:


(Dollars in thousands)	(Dollars in thousands)	Total		Significant Unobservable Inputs (Level 3)		(Dollars in thousands)	Total		Significant Unobservable Inputs (Level 3)
September 30, 2020
September 30, 2021						September 30, 2021
Impaired loans:	Impaired loans:					Impaired loans:
Residential real estate	Residential real estate	$	1,305	$	1,305	Residential real estate	$	488	$	488

Commercial and industrial	Commercial and industrial	761		761		Commercial and industrial	302		302
Mortgage servicing rights	Mortgage servicing rights	2,567		2,567		Mortgage servicing rights	7,205		7,205

Total	Total	$	4,633	$	4,633	Total	$	7,995	$	7,995
December 31, 2019
December 31, 2020						December 31, 2020
Impaired loans:	Impaired loans:					Impaired loans:
Commercial real estate		$	265	$	265

Commercial and industrial	Commercial and industrial	261		261		Commercial and industrial	$	1,270	$	1,270
Mortgage servicing rights	Mortgage servicing rights	87		87		Mortgage servicing rights	3,981		3,981
Other real estate owned		921		921

Total	Total	$	1,534	$	1,534	Total	$	5,251	$	5,251

The Company recorded specific reserves of ~~$91~~$130 thousand and ~~$161~~$95 thousand to reduce the value of ~~these~~the impaired loans noted above at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, based on the estimated fair value of the underlying collateral. The Company also recorded ~~chargeoffs~~$242 thousand of ~~$364 thousand~~chargeoffs during the nine months ended September 30, ~~2020~~2021 related to the impaired loans at fair value. There were chargeoffs of ~~$298~~$315 thousand related to impaired loans at fair value during the year ended December 31, ~~2019.~~2020.

The Company recorded a valuation allowance of $17 thousand related to mortgage servicing rights during the first quarter of 2020, which was then reversed during the second quarter of 2020 as a result of the fair value at June 30, 2020 being higher than book value, and the fair value remained higher as of September 30, 2020. There was 0 valuation allowance related to mortgage servicing rights during the year ended December 31, 2019. There were 0no write downs recorded in other real estate owned during the ~~three and~~ nine months ended September 30, ~~2020~~2021 or the year ended December 31, ~~2019.~~2020.

The table below presents quantitative information about the significant unobservable inputs for assets measured at fair value on a nonrecurring basis at September 30, ~~2020~~2021 and December 31, ~~2019:~~2020:

(Dollars in thousands) Fair value at
September 30, 2020 Valuation
Technique(s) Significant
Unobservable Input(s) Discount % Range/Amount
Impaired loans $ 2,066 Discounted appraisals; estimated net realizable value of collateral Collateral discounts 10.00-80.00%
Mortgage servicing rights 2,567 Discounted cash flow Prepayment speed 9.40 %
Discount rate 7.75 %

(Dollars in thousands) Fair value at
December 31, 2019 Valuation
Technique(s) Significant
Unobservable Input(s) Discount % Range/Amount
Impaired loans $ 526 Discounted appraisals; estimated net realizable value of collateral Collateral discounts 10.00-50.00%
Mortgage servicing rights 87 Discounted cash flow Prepayment speed 13.42 %
Discount rate 8.50 %
Other real estate owned 921 Appraisal of property Discounted appraisal value 18.00-36.00%


(Dollars in thousands)	Fair Value at September 30, 2021		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range/Amount
Impaired loans	$	790	Discounted appraisals; estimated net realizable value of collateral	Collateral discounts	5.00-100.00%
Mortgage servicing rights	7,205		Discounted cash flow	Prepayment speed	6.83	%
				Discount rate	8.00	%

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(Dollars in thousands)	Fair value at December 31, 2020		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range/Amount
Impaired loans	$	1,270	Discounted appraisals; estimated net realizable value of collateral	Collateral discounts	10.00-90.00%
Mortgage servicing rights	3,981		Discounted cash flow	Prepayment speed	8.71	%
				Discount rate	7.75	%

The carrying amounts and estimated fair values of financial instruments, excluding those previously presented unless otherwise noted, at September 30, ~~2020~~2021 and December 31, ~~2019~~2020 are noted in the table below.


				Estimated Fair Value											Estimated Fair Value
(Dollars in thousands)	(Dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		(Dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
September 30, 2020
September 30, 2021												September 30, 2021
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	176,486	$	31,080	$	145,406	$	0	$	176,486	Cash and cash equivalents	$	293,824	$	30,810	$	263,014	$	—	$	293,824
Other investments	Other investments	14,398		N/A		N/A		N/A		N/A		Other investments	14,398		N/A		N/A		N/A		N/A
Net loans	Net loans	1,822,634		0		0		1,863,805		1,863,805		Net loans	1,697,986		—		—		1,728,396		1,728,396
Accrued interest receivable	Accrued interest receivable	8,541		0		1,966		6,575		8,541		Accrued interest receivable	7,779		—		2,696		5,083		7,779
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	1,943,435		0		2,008,494		0		2,008,494		Deposits	2,066,992		—		2,099,195		—		2,099,195
Borrowings	Borrowings	216,809		0		224,511		0		224,511		Borrowings	182,058		—		186,018		—		186,018
Subordinated notes	Subordinated notes	44,555		0		44,795		0		44,795		Subordinated notes	29,668		—		31,500		—		31,500
Accrued interest payable	Accrued interest payable	2,265		0		2,265		0		2,265		Accrued interest payable	1,079		—		1,079		—		1,079
December 31, 2019
December 31, 2020												December 31, 2020
Financial assets:	Financial assets:											Financial assets:
Cash and cash equivalents	Cash and cash equivalents	$	103,930	$	19,990	$	83,940	$	0	$	103,930	Cash and cash equivalents	$	264,071	$	25,245	$	238,826	$	—	$	264,071
Other investments	Other investments	11,475		N/A		N/A		N/A		N/A		Other investments	14,398		N/A		N/A		N/A		N/A
Net loans	Net loans	1,214,935		0		0		1,203,639		1,203,639		Net loans	1,701,240		—		—		1,740,093		1,740,093
Accrued interest receivable	Accrued interest receivable	4,403		0		1,236		3,167		4,403		Accrued interest receivable	7,511		—		1,460		6,051		7,511
Financial liabilities:	Financial liabilities:											Financial liabilities:
Deposits	Deposits	1,135,428		0		1,138,202		0		1,138,202		Deposits	1,963,312		—		2,022,399		—		2,022,399
Borrowings	Borrowings	212,225		0		212,125		0		212,125		Borrowings	185,684		—		192,546		—		192,546
Subordinated notes	Subordinated notes	44,440		0		47,100		0		47,100		Subordinated notes	44,592		—		45,902		—		45,902
Accrued interest payable	Accrued interest payable	1,574		0		1,574		0		1,574		Accrued interest payable	1,081		—		1,081		—		1,081

The methods and assumptions, not previously presented, used to estimate fair value are described as follows:

(a)Cash and Cash Equivalents

The carrying amounts of cash on hand and non-interest due from bank accounts approximate fair values and are classified as Level 1. The carrying amounts of fed funds sold and interest bearing due from bank accounts approximate fair values and are classified as Level 2.

(b)Other Investments

It is not practical to determine the fair value of FHLB stock and Arctaris investment bond due to restrictions placed on ~~its~~their transferability.

(c)Loans

Fair value of loans, excluding loans held for sale, are estimated as follows: Fair values for all loans are estimated using present value of future estimated cash flows, using interest rates currently being offered for loans with similar terms to

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borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.

(d)Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. Fair values for fixed and variable rate certificates of deposit are estimated using a present

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value of future estimated cash flows calculation that applies interest rates currently being offered on certificates of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

(e) Borrowings

The fair values of the Company's short-term and long-term borrowings are estimated using present value of future estimated cash flows using current interest rates offered to the Company for similar types of borrowing arrangements, resulting in a Level 2 classification.

(f)Subordinated Notes

The fair value of the Company's subordinated notes is calculated based on present value of future estimated cash flows using current interest rates offered to the Company for similar types of borrowing arrangements, resulting in a Level 2 classification.

(g) Accrued Interest Receivable/Payable

The carrying amounts of accrued interest approximate fair value resulting in a Level 3 classification for receivable and a Level 2 classification for payable, consistent with their associated assets/liabilities.

NOTE 14—DERIVATIVES

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered standalone derivatives, and changes in the fair value of derivatives are reported in earnings as non-interest income.

Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Company's exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. There are provisions in the agreements with the counterparties that allow for certain unsecured credit exposure up to an agreed threshold. Exposures in excess of the agreed thresholds are collateralized. In addition, the Company minimizes credit risk through credit approvals, limits, and monitoring procedures.

Commitments to fund certain mortgage loans (interest rate locks) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives. It is the Company's practice to enter into forward commitments for the future delivery of residential mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from its commitments to fund the loans. These mortgage banking derivatives are not designated in hedge relationships. Fair values were estimated based on changes in mortgage interest rates from the date of the commitments. Changes in the fair values of these mortgage-banking derivatives are included in mortgage banking activities.

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The following table presents the notional amount and fair value of the Company's derivative instruments held or issued in connection with customer initiated and mortgage banking activities:


		September 30, 2020				December 31, 2019					September 30, 2021				December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value		(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets:	Included in other assets:									Included in other assets:
Customer-initiated and mortgage banking derivatives:	Customer-initiated and mortgage banking derivatives:									Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives	Customer-initiated derivatives	$	135,462	$	14,422	$	103,941	$	4,684	Customer-initiated derivatives	$	151,095	$	6,906	$	136,023	$	12,515
Forward contracts related to mortgage loans to be delivered for sale	Forward contracts related to mortgage loans to be delivered for sale	38,840		117		6,018		34		Forward contracts related to mortgage loans to be delivered for sale	38,721		227		10,191		46
Interest rate lock commitments	Interest rate lock commitments	110,179		2,068		25,519		256		Interest rate lock commitments	56,871		670		91,531		2,194
Total derivatives included in other assets	Total derivatives included in other assets	$	284,481	$	16,607	$	135,478	$	4,974	Total derivatives included in other assets	$	246,687	$	7,803	$	237,745	$	14,755
Included in other liabilities:	Included in other liabilities:									Included in other liabilities:
Customer-initiated and mortgage banking derivatives:	Customer-initiated and mortgage banking derivatives:									Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives	Customer-initiated derivatives	$	135,462	$	14,422	$	103,941	$	4,684	Customer-initiated derivatives	$	151,095	$	6,906	$	136,023	$	12,515
Forward contracts related to mortgage loans to be delivered for sale	Forward contracts related to mortgage loans to be delivered for sale	99,697		441		20,633		33		Forward contracts related to mortgage loans to be delivered for sale	15,645		21		92,899		423
Interest rate lock commitments	Interest rate lock commitments	4,053		4		928		0		Interest rate lock commitments	3,096		8		—		—
Total derivatives included in other liabilities	Total derivatives included in other liabilities	$	239,212	$	14,867	$	125,502	$	4,717	Total derivatives included in other liabilities	$	169,836	$	6,935	$	228,922	$	12,938

In the normal course of business, the Company may decide to settle a forward contract rather than fulfill the contract. Cash received or paid in this settlement manner is included in "Mortgage banking activities" in the consolidated statements of income and is considered a cost of executing a forward contract. The following table presents the gains (losses) related to derivative instruments reflecting the changes in fair value:


			For the three months ended September 30,				For the nine months ended September 30,						For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	Location of Gain (Loss)	2020		2019		2020		2019		(Dollars in thousands)	Location of Gain (Loss)	2021		2020		2021		2020
Forward contracts related to mortgage loans to be delivered for sale	Forward contracts related to mortgage loans to be delivered for sale	Mortgage banking activities	$	(1,207)	$	(26)	$	(3,996)	$	(417)	Forward contracts related to mortgage loans to be delivered for sale	Mortgage banking activities	$	34	$	(1,207)	$	1,528	$	(3,996)
Interest rate lock commitments	Interest rate lock commitments	Mortgage banking activities	391		(48)		1,808		156		Interest rate lock commitments	Mortgage banking activities	87		391		(1,532)		1,808
Total loss recognized in income	Total loss recognized in income		$	(816)	$	(74)	$	(2,188)	$	(261)	Total loss recognized in income		$	121	$	(816)	$	(4)	$	(2,188)

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Balance Sheet Offsetting:

Certain financial instruments, including customer-initiated derivatives and interest rate swaps, may be eligible for offset in the consolidated balance sheets and/or subject to master netting arrangements or similar agreements. The Company is a party to master netting arrangements with its financial institution counterparties; however, the Company does not offset assets and liabilities under these arrangements for financial statement presentation purposes based on an accounting policy election. The table below presents information about the Company's financial instruments that are eligible for offset.


								Gross amounts not offset in the statements of financial position													Gross amounts not offset in the statements of financial position
(Dollars in thousands)	(Dollars in thousands)	Gross amounts recognized		Gross amounts offset in the statements of financial condition		Net amounts presented in the statements of financial condition		Financial instruments		Collateral (received)/posted		Net amount		(Dollars in thousands)	Gross amounts recognized		Gross amounts offset in the statements of financial condition		Net amounts presented in the statements of financial condition		Financial instruments		Collateral (received)/posted		Net amount
September 30, 2020
September 30, 2021														September 30, 2021
Offsetting derivative assets:	Offsetting derivative assets:													Offsetting derivative assets:
Customer initiated derivatives	Customer initiated derivatives	$	14,422	$	0	$	14,422	$	0	$	0	$	14,422	Customer initiated derivatives	$	6,906	$	—	$	6,906	$	—	$	—	$	6,906
Offsetting derivative liabilities:	Offsetting derivative liabilities:													Offsetting derivative liabilities:
Customer initiated derivatives	Customer initiated derivatives	14,422		0		14,422		0		15,383		(961)		Customer initiated derivatives	$	6,906	$	—	$	6,906	$	—	$	10,383	$	(3,477)
December 31, 2019
December 31, 2020														December 31, 2020
Offsetting derivative assets:	Offsetting derivative assets:													Offsetting derivative assets:
Customer initiated derivatives	Customer initiated derivatives	$	4,684	$	0	$	4,684	$	0	$	0	$	4,684	Customer initiated derivatives	$	12,515	$	—	$	12,515	$	—	$	—	$	12,515
Offsetting derivative liabilities:	Offsetting derivative liabilities:													Offsetting derivative liabilities:
Customer initiated derivatives	Customer initiated derivatives	4,684		0		4,684		0		4,375		309		Customer initiated derivatives	$	12,515	$	—	$	12,515	$	—	$	15,383	$	(2,868)

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NOTE 15—PARENT COMPANY FINANCIAL STATEMENTS

Balance Sheets—Parent Company

(Dollars in thousands) September 30, 2020 December 31, 2019
Assets
Cash and cash equivalents $ 29,105 $ 35,210
Investment in banking subsidiary 223,624 178,240
Investment in captive insurance subsidiary 2,306 1,668
Income tax benefit 158 520
Other assets 41 99
Total assets $ 255,234 $ 215,737
Liabilities
Subordinated notes $ 44,555 $ 44,440
Accrued expenses and other liabilities 1,211 594
Total liabilities 45,766 45,034
Shareholders' equity 209,468 170,703
Total liabilities and shareholders' equity $ 255,234 $ 215,737

~~Statements of Income and Comprehensive Income—Parent Company~~

For the three months ended September 30, For the nine months ended September 30,
(Dollars in thousands) 2020 2019 2020 2019
Income
Dividend income from bank subsidiary $ 5,000 $ 0 $ 41,500 $ 0
Total income $ 5,000 $ 0 $ 41,500 $ 0
Expenses
Interest on borrowed funds 11 0 33 0
Interest on subordinated notes 632 256 1,903 759
Other expenses 302 516 1,017 902
Total expenses $ 945 $ 772 $ 2,953 $ 1,661
Income (loss) before income taxes and equity in (overdistributed) undistributed net earnings of subsidiaries 4,055 (772) 38,547 (1,661)
Income tax benefit 228 181 383 272
Equity in (overdistributed) undistributed earnings of subsidiaries 926 5,000 (26,890) 12,820
Net income $ 5,209 $ 4,409 $ 12,040 $ 11,431
Other comprehensive income 783 1,238 4,451 7,120
Total comprehensive income, net of tax $ 5,992 $ 5,647 $ 16,491 $ 18,551


(Dollars in thousands)	September 30, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	8,220	$	25,779
Investment in banking subsidiary	257,126		232,671
Investment in captive insurance subsidiary	—		1,625
Income tax benefit	78		355
Other assets	23		63
Total assets	$	265,447	$	260,493
Liabilities
Subordinated notes	$	29,668	$	44,592
Accrued expenses and other liabilities	1,845		574
Total liabilities	31,513		45,166
Shareholders' equity	233,934		215,327
Total liabilities and shareholders' equity	$	265,447	$	260,493

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Statements of Income and Comprehensive Income—Parent Company


	For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	2021		2020		2021		2020
Income
Dividend income from bank subsidiary	$	—	$	5,000	$	—	$	41,500
Dividend income from captive subsidiary	—		—		1,629		—
Total income	$	—	$	5,000	$	1,629	$	41,500
Expenses
Interest on borrowed funds	—		11		—		33
Interest on subordinated notes	373		632		1,469		1,903
Other expenses	363		302		895		1,017
Total expenses	$	736	$	945	$	2,364	$	2,953
Income (loss) before income taxes and equity in undistributed net earnings of subsidiaries	(736)		4,055		(735)		38,547
Income tax (benefit) expense	132		228		342		383
Equity in (overdistributed) undistributed earnings of subsidiaries	10,069		926		25,796		(26,890)
Net income	$	9,465	$	5,209	$	25,403	$	12,040
Other comprehensive income (loss)	(216)		783		(3,327)		4,451
Total comprehensive income, net of tax	$	9,249	$	5,992	$	22,076	$	16,491

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Statements of Cash Flows—Parent Company


		For the nine months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		(Dollars in thousands)	2021		2020
Cash flows from operating activities	Cash flows from operating activities					Cash flows from operating activities
Net income	Net income	$	12,040	$	11,431	Net income	$	25,403	$	12,040
Adjustments to reconcile net income to net cash provided by operating activities:	Adjustments to reconcile net income to net cash provided by operating activities:					Adjustments to reconcile net income to net cash provided by operating activities:
Equity in over (under) distributed earnings of subsidiaries	Equity in over (under) distributed earnings of subsidiaries	26,890		(12,820)		Equity in over (under) distributed earnings of subsidiaries	(25,796)		26,890
Stock based compensation expense	Stock based compensation expense	72		54		Stock based compensation expense	71		72
(Increase) Decrease in other assets, net		420		(115)
Increase in other liabilities, net		654		411
Net cash provided by (used in) operating activities		40,076		(1,039)
Net change in other assets, net						Net change in other assets, net	317		420
Net change in other liabilities, net						Net change in other liabilities, net	1,269		654
Net cash provided by operating activities						Net cash provided by operating activities	1,264		40,076
Cash flows from investing activities	Cash flows from investing activities					Cash flows from investing activities
Cash used in acquisitions	Cash used in acquisitions	(67,944)		0		Cash used in acquisitions	—		(67,944)

Net cash used in investing activities	Net cash used in investing activities	(67,944)		0		Net cash used in investing activities	—		(67,944)
Cash flows from financing activities	Cash flows from financing activities					Cash flows from financing activities

Preferred stock offering, net of issuance costs	Preferred stock offering, net of issuance costs	23,370		0		Preferred stock offering, net of issuance costs	—		23,370

Pay down of subordinated debt						Pay down of subordinated debt	(15,000)		—
Share buyback - redeemed stock	Share buyback - redeemed stock	(620)		(2,108)		Share buyback - redeemed stock	(1,364)		(620)
Common stock dividends paid	Common stock dividends paid	(1,082)		(852)		Common stock dividends paid	(1,296)		(1,082)
Preferred stock dividends paid						Preferred stock dividends paid	(1,406)		—
Proceeds from exercised stock options	Proceeds from exercised stock options	95		219		Proceeds from exercised stock options	243		95
Net cash provided by (used in) financing activities		21,763		(2,741)
Net cash (used in) provided by financing activities						Net cash (used in) provided by financing activities	(18,823)		21,763
Net decrease in cash and cash equivalents	Net decrease in cash and cash equivalents	(6,105)		(3,780)		Net decrease in cash and cash equivalents	(17,559)		(6,105)
Beginning cash and cash equivalents	Beginning cash and cash equivalents	35,210		9,690		Beginning cash and cash equivalents	25,779		35,210
Ending cash and cash equivalents	Ending cash and cash equivalents	$	29,105	$	5,910	Ending cash and cash equivalents	$	8,220	$	29,105

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NOTE 16—EARNINGS PER COMMON SHARE

The Company has elected to use the two-class method in calculating earnings per share due to the unvested restricted stock awards qualifying as participating securities. The two-class method is used in the calculation of basic and diluted earnings per common share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings.

Average shares of common stock for diluted net income per common share include shares to be issued upon the exercise of stock options granted under the Company's share-based compensation plans and restricted stock awards.

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The calculation of basic and diluted earnings per share using the two-class method for the periods noted below was as follows:


		For the three months ended September 30,				For the nine months ended September 30,					For the three months ended September 30,				For the nine months ended September 30,
(In thousands, except per share data)	(In thousands, except per share data)	2020		2019		2020		2019		(In thousands, except per share data)	2021		2020		2021		2020
Net income	Net income	$	5,209	$	4,409	$	12,040	$	11,431	Net income	$	9,465	$	5,209	$	25,403	$	12,040
Preferred stock dividends										Preferred stock dividends	468		—		1,406		—
Net income available to common shareholders										Net income available to common shareholders	8,997		5,209		23,997		12,040
Net income allocated to participating securities	Net income allocated to participating securities	40		45		140		110		Net income allocated to participating securities	138		40		331		140

Net income allocated to common shareholders (1)	Net income allocated to common shareholders (1)	$	5,169	$	4,364	$	11,900	$	11,321	Net income allocated to common shareholders (1)	$	8,859	$	5,169	$	23,666	$	11,900
Weighted average common shares - issued	Weighted average common shares - issued	7,734		7,721		7,730		7,738		Weighted average common shares - issued	7,638		7,734		7,633		7,730
Average unvested restricted share awards	Average unvested restricted share awards	(59)		(80)		(90)		(76)		Average unvested restricted share awards	(119)		(59)		(107)		(90)
Weighted average common shares outstanding - basic	Weighted average common shares outstanding - basic	7,675		7,641		7,640		7,662		Weighted average common shares outstanding - basic	7,519		7,675		7,526		7,640
Effect of dilutive securities:	Effect of dilutive securities:									Effect of dilutive securities:
Weighted average common stock equivalents	Weighted average common stock equivalents	37		111		61		114		Weighted average common stock equivalents	119		37		105		61
Weighted average common shares outstanding - diluted	Weighted average common shares outstanding - diluted	7,712		7,752		7,701		$	7,776	Weighted average common shares outstanding - diluted	7,638		7,712		7,631		7,701
EPS available to common shareholders	EPS available to common shareholders									EPS available to common shareholders
Basic earnings per common share	Basic earnings per common share	$	0.68	$	0.57	$	1.56	$	1.48	Basic earnings per common share	$	1.19	$	0.68	$	3.15	$	1.56
Diluted earnings per common share	Diluted earnings per common share	$	0.67	$	0.56	$	1.55	$	1.46	Diluted earnings per common share	$	1.16	$	0.67	$	3.10	$	1.55

(1) Net income allocated to common shareholders for basic and diluted earnings per share may differ under the two-class method as a result of adding common share equivalents for options to dilutive shares outstanding, which alters the ratio used to allocate net income to common shareholders and participating securities for the purposes of calculating diluted earnings per share.

~~Stock~~There were no common stock options excluded in computing diluted earnings per share for the three and nine months ending September 30, 2021 compared to 214,668 and ~~30,000~~117,334 shares of common stock options that were ~~not considered~~excluded in computing diluted earnings per common share for the three and nine months ~~ended~~ending September 30, 2020, because they were anti-dilutive.

NOTE 17—SUBSEQUENT EVENTS

On November 4, 2021, the Company entered into an Agreement and ~~2019, respectively,~~Plan of Merger with First Merchants Corporation (“First Merchants”), pursuant to which the Company will merge with and ~~117,334 and 30,000~~into First Merchants (the “Merger”), subject to the satisfaction of customary closing conditions. At the effective time of the Merger, each outstanding share of common stock ~~were not considered~~of the Company will be converted into the right to receive 0.7167 shares of First Merchants common stock and $10.17 in ~~computing diluted earnings per common~~cash, and each outstanding share ~~for~~of the ~~nine months ended September 30, 2020~~Company’s 7.50% Non-Cumulative Perpetual Preferred Stock, Series B (the “Company Preferred Stock”) will be converted into the right to receive a share of a newly created series of preferred stock of First Merchants having voting powers, preferences and~~2019, respectively, because they were antidilutive.~~ special rights that are substantially identical to the Company Preferred Stock.

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Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion explains our financial condition and results of operations as of and for the three and nine months ended September 30, ~~2020.~~2021. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, filed with the SEC on March ~~13, 2020.~~12, 2021. Annualized results for these interim periods may not be indicative of results for the full year or future periods.

In addition to the historical information contained herein, this Form 10-Q includes "forward-looking statements" within the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including its effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic; risks related to the pending Merger with First Merchants, including the inability to complete the Merger due to the failure of the Company’s shareholders to approve the merger agreement, the failure to satisfy other conditions to completion of the Merger, including receipt of required regulatory and other approvals, the failure of the proposed Merger to close for any other reason, diversion of management’s attention from ongoing business operations and opportunities due to the Merger, and the effect of the announcement of the Merger on the Company’s customer and employee relationships and operating results; the ability of the Company to implement its strategy and expand its lending

operations; changes in interest rates and other general economic, business and political conditions, including changes in the

financial markets; changes in business plans as circumstances warrant; ~~risks related to mergers and acquisitions;~~ changes in benchmark interest rates used to price loans and deposits, including the expected elimination of ~~LIBOR;~~LIBOR and the development of a substitute; changes in tax laws, regulations and guidance; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

Critical Accounting Policies

Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States. Our critical accounting policies require reliance on estimates and assumptions, which are based upon historical experience and on various other assumptions that management believes are reasonable under current circumstances, but may prove to be inaccurate or can be subject to variations. Changes in underlying factors, assumptions, or estimates could have a material impact on our future financial condition and results of operations.

~~The most~~Our critical ~~of these significant~~ accounting policies are set forth in "Note 1 – Basis of Presentation and Summary of Significant Accounting Policies" of the Notes to the Consolidated Financial Statements and "Item 7 Management's Discussion and Analysis of Financial Condition and Results of Operations" included in our Annual Report on Form 10-K for the year ended December 31, ~~2019,~~2020, which was filed with the SEC on March ~~13, 2020.~~12, 2021. There have been no ~~significant~~material changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, ~~2019.~~2020.

Overview

Level One Bancorp, Inc. is a financial holding company headquartered in Farmington Hills, Michigan, with its primary branch operations in southeastern and west Michigan. Through our wholly owned subsidiary, Level One Bank, we offer a broad range of loan products to the residential and commercial markets, as well as retail and business banking services. Hamilton Court Insurance Company, a wholly owned subsidiary of the Company, ~~provides~~provided property and casualty insurance to the Company and the Bank and reinsurance to ten other third-party insurance captives for which insurance may not ~~be currently~~have been available or economically feasible in the insurance marketplace. ~~During the third quarter of 2020, it was determined that~~ Hamilton Court Insurance Company ~~will exit~~exited the pool resources relationship to which it was previously a member and ~~will dissolve, which is expected to occur~~was dissolved in ~~the fourth quarter of 2020 or the first quarter of~~January 2021.

Our principal business activities have been lending to and accepting deposits from individuals, businesses, municipalities and other entities. We derive income principally from interest charged on loans and leases and, to a lesser extent, from interest and dividends earned on investment securities. We have also derived income from noninterest sources, such as fees received in connection with various lending and deposit services and originations and sales of residential mortgage loans. Our principal expenses include interest expense on deposits and borrowings, operating expenses, such as salaries and employee benefits, occupancy and equipment expenses, data processing costs, professional fees and other noninterest expenses, provisions for loan losses and income tax expense.

Since 2007, we have grown substantially through organic growth and a series of five acquisitions, all of which have been fully integrated into our operations. We have made significant investments over the last several years in hiring additional staff and upgrading technology and system security. In 2016, we opened our first branch in the Grand Rapids, Michigan market. In the third quarter of 2017, we opened our second location in Bloomfield Township located in Oakland County. In the third quarter of 2018, we doubled the size of our mortgage division with the addition of new mortgage officers and support staff.Recent Developments

4441

On January 2, 2020, the Company completed its previously announced acquisition of Ann Arbor Bancorp, Inc. (“AAB”) and its wholly owned subsidiary, Ann Arbor State Bank. The transaction was completed pursuant to a merger of the Company’s wholly owned merger subsidiary (“Merger Sub”) with and into AAB, pursuant to the Agreement and Plan of Merger, dated as of August 12, 2019, among the Company, Merger Sub and AAB. The Company paid aggregate consideration of approximately $67.9 million in cash.

Our results of operations for the three and nine months ended September 30, 2020 include the results of operations of AAB on and after January 2, 2020, including $17 thousand and $1.7 million of acquisition fees, respectively. Results for periods before January 2, 2020 reflect only those of Level One and do not include the results of operations of AAB. See "Note 2 - Business Combinations" for more information. In addition, all identifiable assets, including the intangible assets that consisted of $26.2 million in goodwill and $3.7 million in core deposit intangibles, and liabilities of AAB as of the merger date have been recorded at their estimated fair value and added to those of Level One. As of September 30, 2020, the Company had total consolidated assets of $2.45 billion, total consolidated deposits of $1.94 billion and total consolidated shareholders' equity of $209.5 million.

~~Recent Developments~~

Third Quarter Common Stock Dividend. On September ~~16, 2020, the Company~~15, 2021, Level One's Board of Directors declared a third quarter ~~2020~~2021 cash dividend of ~~$0.05~~$0.06 per ~~common share, payable~~common share. The dividend was paid on October 15, ~~2020.~~2021, to shareholders of record at the close of business on September 30, 2021.

Third Quarter Preferred Stock ~~Public Offering and First Cash~~ Dividend. On ~~August 10, 2020, the Company sold 1,000,000 depositary shares, each representing a 1/100th interest in a share of 7.50% Non-Cumulative Perpetual Preferred Stock, Series B,~~ ~~with a liquidation preference of $2,500 per share of Preferred Stock (equivalent to $25 per depositary share).~~ The aggregate offering price for the shares sold by the Company was $25.0 million, and after deducting $1.6 million of underwriting discounts and offering expenses paid to third parties, the Company received total net proceeds of $23.4 million.

On October ~~21, 2020,~~20, 2021, Level One’s Board of Directors declared a quarterly cash dividend of ~~$47.92~~$46.88 per share on its 7.50% Non-Cumulative Perpetual Preferred Stock, Series B. Holders of depositary shares will receive ~~$0.4792~~$0.4688 per depositary share. The dividend is payable on November 15, ~~2020,~~2021, to shareholders of record at the close of business on October 31, ~~2020.~~2021.

Impact of COVID-19 Pandemic. The COVID-19 pandemic in the United States has had, and is expected to continue to have, a complex and significant ~~adverse~~ impact on the economy, the banking industry and the ~~Company in future fiscal periods, all subject to a high degree of uncertainty.~~

~~Effects on Our Market Areas~~. Our commercial and consumer banking products and services are offered primarily in Michigan, where individuals, companies and other organizations have limited their economic activity in response to the pandemic. It is uncertain whether and to what extent additional restrictions on economic activities and social gatherings will be imposed in future periods. These limitations on economic activity have had an adverse impact on the Michigan economy and our clients. The Bank and its branches have remained open during these orders because banks have been deemed essential businesses. Up until June 22, 2020, the Bank had been serving its customers through its drive-thrus, by appointment only for in-person services, and online and mobile banking tools. While our branches became fully available for in-person services to serve our clients on June 22, 2020, we will continue to be diligent in our efforts to follow all CDC guidelines to ensure the health and safety of our clients and team members.

As a result of the COVID-19 pandemic, the state’s unemployment rate remained slightly elevated at 8.5% in September 2020 compared to 4.1% in March 2020 before the full impact of COVID-19, according to the Michigan Department of Technology, Management & Budget.

~~Policy and Regulatory Developments.~~ ~~Federal, state and local governments and regulatory authorities have enacted and issued a range of policy responses to the COVID-19 pandemic, including the following:~~

•~~The Federal Reserve decreased the range for the federal funds target rate by 0.5% on March 3, 2020, and by another 1.0% on March 16, 2020, reaching a range of 0.0 - 0.25%.~~

•On March 27, 2020, President Trump signed the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349 billion loan program administered through the U.S. Small Business Administration (“SBA”), referred to as the paycheck protection program (“PPP”). The Bank participated as a lender in the PPP. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited

~~period of time to account for the effects of COVID-19. Refer to Note 4 - Loans for further discussion of the CARES Act and its impact on TDRs.~~

•On April 7, 2020, federal banking regulators issued a revised Interagency Statement on Loan Modifications and Reporting for Financial Institutions, which, among other things, encouraged financial institutions to work prudently with borrowers who are or may be unable to meet their contractual payment obligations because of the effects of COVID-19, and stated that institutions generally do not need to categorize COVID-19-related modifications as TDRs and that the agencies will not direct supervised institutions to automatically categorize all COVID-19 related loan modifications as TDRs.

•On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which establishes three new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility (“MSNLF”), (2) the Main Street Priority Loan Facility (“MSPLF”), and (3) the Main Street Expanded Loan Facility (“MSELF”). MSNLF and MSPLF loans are unsecured term loans originated on or after April 24, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 24, 2020. The combined size of the program is authorized up to $600 billion. The Company is currently participating in all three loan facilities established by the Main Street Business Lending Program.

•In addition to the policy responses described above, the federal bank regulatory agencies, along with their state counterparts, have issued a stream of guidance in response to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic-related loans, investments and public service. Moreover, because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews. The Federal Reserve also issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC has also acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

•On August 3, 2020, the FFIEC issued a joint statement on Additional Loan Accommodations Related to COVID-19, which, among other things, encouraged financial institutions to consider prudent additional loan accommodation options when borrowers are unable to meet their obligations due to continuing financial challenges. Accommodation options should be based on prudent risk management and consumer protection principles.

Company.

Effects on Our Business. We currently expect that the COVID-19 pandemic, federal, state and local government responses to the pandemic, supply disruptions, labor availability challenges, and the ~~specific developments referred~~effects of existing and future variants of the disease, such as the Delta variant, may continue to ~~above will~~ have a significant impact on our business. ~~In particular, we anticipate that a significant~~A substantial portion of the Bank’s borrowers in the restaurant and hospitality industries ~~will continue to endure significant~~have endured substantial economic distress, ~~which has caused,~~ and ~~will continue~~while those challenges have been largely mitigated by the PPP and other governmental assistance, there is still some uncertainty about the ability of these clients to ~~cause, them~~return to ~~draw on~~cash flow levels necessary to cover their ~~existing lines of credit and adversely affect their ability and willingness to repay existing indebtedness, and is expected to adversely impact the value of collateral.~~debt service. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries and the value of certain collateral securing our loans. ~~See “Part II-Item 1A. Risk Factors” for additional information regarding the effects and risks of the COVID-19 pandemic to our business, financial condition and results of operations.~~

Level One's Response to the COVID-19 Pandemic. Level One has taken comprehensive steps to help our customers, team members and communities during the ~~current~~ COVID-19 ~~pandemic health crisis.~~pandemic. For our customers, we have provided loan payment deferrals and offered fee waivers, among other actions. ~~Through September~~

Level One was also a participating lender in both the first and second rounds of the PPP. In 2020, the Bank originated 2,208 PPP loans in the aggregate principal amount of $417.0 million. From January 18, 2021 through June 30, ~~2020, we have helped our consumer and small business customers by deferring~~2021, Level One funded 1,532 new PPP loan ~~payments and waiving fees on $416.3~~applications for $234.3 million, of ~~non-PPP~~which 1,187 were for loans ~~($388.9 million of commercial balances and $27.4 million of consumer balances).~~ $150,000 or below. As of September 30, ~~2020, we had $16.3~~2021, $147.6 million of PPP loans ~~that had an outstanding payment deferral.~~were still outstanding. The Bank is actively working with the borrowers of PPP loans to obtain loan forgiveness from the SBA.

We are continuing to enable the vast majority of our main office team members to work remotely ~~each day.~~most days. We have also taken significant actions to help ensure the safety of our team members whose roles require them to come into the office, which include the development, implementation and communication of ~~a comprehensive return to office plan. In addition, while our~~

protocols necessary for those who return. As of March 1, 2021, we opened branches ~~have fully opened to serve our clients, we continue to be diligent~~for walk in ~~our efforts to follow all CDC guidelines to ensure the health and safety of our clients and team members.~~services. We ~~will~~ continue to evaluate this fluid situation and take additional actions as necessary.

~~To support our communities, we have made charitable donations, including one to a local health system, in order to help support the frontline workers impacted by the COVID-19 pandemic.~~

Level One also recognizes that some of the most impacted industries are the ~~food service~~restaurant and hospitality industries. As of September 30, ~~2020,~~2021, Level One had less than ~~4.4%~~4.1% and ~~0.5%~~0.3% of loan concentrations in the ~~food service~~restaurant and hospitality industries, respectively.

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Table of Contents

Selected Financial Data - Unaudited


		As of and for the three months ended									As of and for the nine months ended							As of and for the three months ended									As of and for the nine months ended
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	September 30, 2020			June 30, 2020			September 30, 2019			September 30, 2020			September 30, 2019			(Dollars in thousands, except per share data)	September 30, 2021			June 30, 2021			September 30, 2020			September 30, 2021			September 30, 2020
Earnings Summary	Earnings Summary																Earnings Summary
Interest income	Interest income	$	20,245		$	20,396		$	17,983		$	60,458		$	53,082		Interest income	$	22,322		$	21,737		$	20,245		$	65,610		$	60,458
Interest expense	Interest expense	3,648			4,163			4,995			12,808			14,935			Interest expense	1,807			2,121			3,648			6,322			12,808
Net interest income	Net interest income	16,597			16,233			12,988			47,650			38,147			Net interest income	20,515			19,616			16,597			59,288			47,650
Provision expense (benefit) for loan losses		4,270			5,575			(16)			10,334			835
Provision expense (recovery) for loan losses																	Provision expense (recovery) for loan losses	(1,189)			540			4,270			(384)			10,334
Noninterest income	Noninterest income	9,125			7,789			3,858			21,604			9,621			Noninterest income	6,041			4,326			9,125			17,645			21,604
Noninterest expense	Noninterest expense	15,126			15,083			11,539			44,771			33,074			Noninterest expense	15,989			14,588			15,126			45,716			44,771
Income before income taxes	Income before income taxes	6,326			3,364			5,323			14,149			13,859			Income before income taxes	11,756			8,814			6,326			31,601			14,149
Income tax provision	Income tax provision	1,117			643			914			2,109			2,428			Income tax provision	2,291			1,835			1,117			6,198			2,109
Net income	Net income	5,209			2,721			4,409			12,040			11,431			Net income	9,465			6,979			5,209			25,403			12,040

Preferred stock dividends																	Preferred stock dividends	468			469			—			1,406			—
Net income available to common shareholders																	Net income available to common shareholders	8,997			6,510			5,209			23,997			12,040
Net income allocated to participating securities	Net income allocated to participating securities	40			19			45			140			110			Net income allocated to participating securities	138			92			40			331			140
Net income attributable to common shareholders	Net income attributable to common shareholders	$	5,169		$	2,702		$	4,364		$	11,900		$	11,321		Net income attributable to common shareholders	$	8,859		$	6,418		$	5,169		$	23,666		$	11,900
Per Share Data	Per Share Data																Per Share Data
Basic earnings per common share	Basic earnings per common share	$	0.68		$	0.35		$	0.57		$	1.56		$	1.48		Basic earnings per common share	$	1.19		$	0.85		$	0.68		$	3.15		$	1.56
Diluted earnings per common share	Diluted earnings per common share	0.67			0.35			0.56			1.55			1.46			Diluted earnings per common share	1.16			0.84			0.67			3.10			1.55
Diluted earnings per common share, excluding acquisition and due diligence fees (1)	Diluted earnings per common share, excluding acquisition and due diligence fees (1)	0.67			0.37			0.60			1.72			1.50			Diluted earnings per common share, excluding acquisition and due diligence fees (1)	1.16			0.84			0.67			3.10			1.72
Book value per common share	Book value per common share	24.06			23.31			21.77			27.08			21.77			Book value per common share	27.56			26.48			24.06			27.56			27.08
Tangible book value per common share (1)	Tangible book value per common share (1)	18.74			18.09			20.51			18.74			20.51			Tangible book value per common share (1)	21.89			20.84			18.74			21.89			18.74
Preferred shares outstanding (in thousands)	Preferred shares outstanding (in thousands)	10			—			—			10			—			Preferred shares outstanding (in thousands)	10			10			10			10			10
Common shares outstanding (in thousands)	Common shares outstanding (in thousands)	7,734			7,734			7,714			7,734			7,714			Common shares outstanding (in thousands)	7,640			7,629			7,734			7,640			7,734
Average basic common shares (in thousands)	Average basic common shares (in thousands)	7,675			7,676			7,721			7,640			7,738			Average basic common shares (in thousands)	7,519			7,520			7,675			7,526			7,640
Average diluted common shares (in thousands)	Average diluted common shares (in thousands)	7,712			7,721			7,752			7,701			7,776			Average diluted common shares (in thousands)	7,638			7,633			7,712			7,631			7,701
Selected Period End Balances	Selected Period End Balances																Selected Period End Balances
Total assets	Total assets	$	2,446,447		$	2,541,696		$	1,509,463		$	2,446,447		$	1,509,463		Total assets	$	2,543,883		$	2,506,523		$	2,446,447		$	2,543,883		$	2,446,447
Securities available-for-sale	Securities available-for-sale	253,527			217,172			205,242			253,527			205,242			Securities available-for-sale	389,528			376,453			253,527			389,528			253,527
Total loans	Total loans	1,843,888			1,815,353			1,168,923			1,843,888			1,168,923			Total loans	1,719,717			1,775,243			1,843,888			1,719,717			1,843,888
Total deposits	Total deposits	1,943,435			1,821,351			1,194,542			1,943,435			1,194,542			Total deposits	2,066,992			2,031,808			1,943,435			2,066,992			1,943,435
Total liabilities	Total liabilities	2,236,979			2,361,437			1,341,495			2,236,979			1,341,495			Total liabilities	2,309,949			2,281,114			2,236,979			2,309,949			2,236,979
Total shareholders' equity	Total shareholders' equity	209,468			180,259			167,968			209,468			167,968			Total shareholders' equity	233,934			225,409			209,468			233,934			209,468
Total common shareholders' equity	Total common shareholders' equity	186,098			180,259			167,968			186,098			167,968			Total common shareholders' equity	210,562			202,037			186,098			210,562			186.098
Tangible common shareholders' equity (1)	Tangible common shareholders' equity (1)	144,963			139,913			158,250			144,963			158,250			Tangible common shareholders' equity (1)	167,262			159,022			144,963			167,262			144,963
Performance and Capital Ratios	Performance and Capital Ratios																Performance and Capital Ratios
Return on average assets	Return on average assets	0.83		%	0.46		%	1.16		%	0.71		%	1.02		%	Return on average assets	1.50		%	1.09		%	0.83		%	1.34		%	0.71 %
Return on average equity	Return on average equity	10.48			6.02			10.58			8.68			9.51			Return on average equity	16.32			12.52			10.48			15.06			8.68 %
Net interest margin (fully taxable equivalent) (2)	Net interest margin (fully taxable equivalent) (2)	2.80			2.98			3.59			3.04			3.61			Net interest margin (fully taxable equivalent) (2)	3.47			3.30			2.80			3.36			3.04 %
Efficiency ratio (noninterest expense/net interest income plus noninterest income)	Efficiency ratio (noninterest expense/net interest income plus noninterest income)	58.81			62.79			68.50			64.65			69.24			Efficiency ratio (noninterest expense/net interest income plus noninterest income)	60.21			60.93			58.81			59.42			64.65 %
Dividend payout ratio	Dividend payout ratio	7.41			14.22			7.03			8.99			7.45			Dividend payout ratio	5.08			7.02			7.41			5.40			8.99 %
Total shareholders' equity to total assets	Total shareholders' equity to total assets	8.56			7.09			11.13			8.56			11.13			Total shareholders' equity to total assets	9.20			8.99			8.56			9.20			8.56 %
Tangible common equity to tangible assets (1)	Tangible common equity to tangible assets (1)	6.03			5.59			10.55			6.03			10.55			Tangible common equity to tangible assets (1)	6.69			6.46			6.03			6.69			6.03 %
Common equity tier 1 to risk-weighted assets	Common equity tier 1 to risk-weighted assets	8.83			8.76			11.73			8.83			11.73			Common equity tier 1 to risk-weighted assets	9.82			9.66			8.83			9.82			8.83 %
Tier 1 capital to risk-weighted assets	Tier 1 capital to risk-weighted assets	10.31			8.76			11.73			10.31			11.73			Tier 1 capital to risk-weighted assets	11.19			11.09			10.31			11.19			10.31 %
Total capital to risk-weighted assets	Total capital to risk-weighted assets	14.39			12.81			13.84			14.39			13.84			Total capital to risk-weighted assets	14.19			14.15			14.39			14.19			14.39 %
Tier 1 capital to average assets (leverage ratio)	Tier 1 capital to average assets (leverage ratio)	7.17			6.21			10.12			7.17			10.12			Tier 1 capital to average assets (leverage ratio)	7.68			7.24			7.17			7.68			7.17 %
Asset Quality Ratios:	Asset Quality Ratios:																Asset Quality Ratios:
Net charge-offs to average loans		0.02		%	0.34		%	0.01		%	0.14		%	0.03		%
Net (recoveries) charge-offs to average loans																	Net (recoveries) charge-offs to average loans	0.05		%	(0.01)		%	0.02		%	0.01		%	0.14 %
Nonperforming assets as a percentage of total assets	Nonperforming assets as a percentage of total assets	0.79			0.33			0.78			0.79			0.78			Nonperforming assets as a percentage of total assets	0.48			0.55			0.79			0.48			0.79 %
Nonaccrual loans as a percent of total loans	Nonaccrual loans as a percent of total loans	1.04			0.46			0.98			1.04			0.98			Nonaccrual loans as a percent of total loans	0.71			0.77			1.04			0.71			1.04 %
Allowance for loan losses as a percentage of total loans	Allowance for loan losses as a percentage of total loans	1.15			0.94			1.05			1.15			1.05			Allowance for loan losses as a percentage of total loans	1.26			1.30			1.15			1.26			1.15 %
Allowance for loan losses as a percentage of nonaccrual loans	Allowance for loan losses as a percentage of nonaccrual loans	110.32			206.37			107.46			110.32			107.46			Allowance for loan losses as a percentage of nonaccrual loans	179.11			168.64			110.32			179.11			110.32 %
Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30	Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30	105.46			195.04			100.52			105.46			100.52			Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30	173.58			163.76			105.46			173.58			105.46 %

(1) See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" ~~below.~~below for a reconciliation to most comparable GAAP equivalent.

(2) Presented on a tax equivalent basis using a 21% tax rate.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial measures included in this report are not measures of financial condition or performance recognized by GAAP. These non-GAAP financial measures include tangible common shareholders' equity, tangible book value per common share, ~~and~~ the ratio of tangible common equity to tangible assets, net income and diluted earnings per common share excluding acquisition and due diligence fees as well as allowance for loan loss as a percentage of total loans excluding PPP loans. Our management uses these non-GAAP financial measures in its analysis of our performance, and we believe that providing this information to financial analysts and investors allows them to evaluate capital adequacy, as well as better understand and evaluate the Company’s core financial results for the periods in question.

The following presents these non-GAAP financial measures along with their most directly comparable financial measures calculated in accordance with GAAP:


Tangible Common Shareholders' Equity, Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share	Tangible Common Shareholders' Equity, Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share							Tangible Common Shareholders' Equity, Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share
		As of							As of
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	September 30, 2020			June 30, 2020					September 30, 2019			(Dollars in thousands, except per share data)	September 30, 2021			June 30, 2021			September 30, 2020
		(Unaudited)			(Unaudited)					(Unaudited)				(Unaudited)			(Unaudited)			(Unaudited)
Total shareholders' equity	Total shareholders' equity	$	209,468		$	180,259				$	167,968		Total shareholders' equity	$	233,934		$	225,409		$	209,468
Less:	Less:												Less:
Preferred stock	Preferred stock	23,370			—					—			Preferred stock	23,372			23,372			23,370
Total common shareholders' equity	Total common shareholders' equity	186,098			180,259					167,968			Total common shareholders' equity	210,562			202,037			186,098
Less:	Less:												Less:
Goodwill	Goodwill	35,554			35,554					9,387			Goodwill	35,554			35,554			35,554
Mortgage servicing rights, net													Mortgage servicing rights, net	5,051			4,599			2,193
Other intangible assets, net	Other intangible assets, net	5,581			4,792					331			Other intangible assets, net	2,695			2,862			3,388
Tangible common shareholders' equity	Tangible common shareholders' equity	$	144,963		$	139,913				$	158,250		Tangible common shareholders' equity	$	167,262		$	159,022		$	144,963

Common shares outstanding (in thousands)	Common shares outstanding (in thousands)	7,734			7,734					7,714			Common shares outstanding (in thousands)	7,640			7,629			7,734
Tangible book value per common share	Tangible book value per common share	$	18.74		$	18.09				$	20.51		Tangible book value per common share	$	21.89		$	20.84		$	18.74

Total assets	Total assets	$	2,446,447		$	2,541,696				$	1,509,463		Total assets	$	2,543,883		$	2,506,523		$	2,446,447
Less:	Less:												Less:
Goodwill	Goodwill	35,554			35,554					9,387			Goodwill	35,554			35,554			35,554
Mortgage servicing rights, net													Mortgage servicing rights, net	5,051			4,599			2,193
Other intangible assets, net	Other intangible assets, net	5,581			4,792					331			Other intangible assets, net	2,695			2,862			3,388
Tangible assets	Tangible assets	$	2,405,312		$	2,501,350				$	1,499,745		Tangible assets	$	2,500,583		$	2,463,508		$	2,405,312

Tangible common equity to tangible assets	Tangible common equity to tangible assets	6.03		%	5.59		%			10.55		%	Tangible common equity to tangible assets	6.69		%	6.46		%	6.03		%


Adjusted Income and Diluted Earnings Per Share	Adjusted Income and Diluted Earnings Per Share											Adjusted Income and Diluted Earnings Per Share
		For the three months ended						For the nine months ended					For the three months ended						For the nine months ended
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	September 30, 2020		June 30, 2020		September 30, 2019		September 30, 2020		September 30, 2019		(Dollars in thousands, except per share data)	September 30, 2021		June 30, 2021		September 30, 2020		September 30, 2021		September 30, 2020
		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)			(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)		(Unaudited)
Net income, as reported	Net income, as reported	$	5,209	$	2,721	4,409		$	12,040	11,431		Net income, as reported	$	9,465	$	6,979	$	5,209	$	25,403	$	12,040
Acquisition and due diligence fees	Acquisition and due diligence fees	17		176		319		1,664		319		Acquisition and due diligence fees	—		—		17		—		1,664
Income tax benefit (1)	Income tax benefit (1)	(4)		(34)		(25)		(333)		(25)		Income tax benefit (1)	—		—		(4)		—		(333)
Net income, excluding acquisition and due diligence fees	Net income, excluding acquisition and due diligence fees	$	5,222	$	2,863	4,703		$	13,371	11,725		Net income, excluding acquisition and due diligence fees	$	9,465	$	6,979	$	5,222	$	25,403	$	13,371

Diluted earnings per share, as reported	Diluted earnings per share, as reported	$	0.67	$	0.35	$	0.56	$	1.55	$	1.46	Diluted earnings per share, as reported	$	1.16	$	0.84	$	0.67	$	3.10	$	1.55
Effect of acquisition and due diligence fees, net of income tax benefit	Effect of acquisition and due diligence fees, net of income tax benefit	0.00		0.02		0.04		0.17		0.04		Effect of acquisition and due diligence fees, net of income tax benefit	—		—		—		—		0.17
Diluted earnings per common share, excluding acquisition and due diligence fees	Diluted earnings per common share, excluding acquisition and due diligence fees	$	0.67	$	0.37	$	0.60	$	1.72	$	1.50	Diluted earnings per common share, excluding acquisition and due diligence fees	$	1.16	$	0.84	$	0.67	$	3.10	$	1.72

(1) Assumes income tax rate of 21% on deductible acquisition expenses.	(1) Assumes income tax rate of 21% on deductible acquisition expenses.											(1) Assumes income tax rate of 21% on deductible acquisition expenses.


Allowance for Loan Loss as a Percentage of Total Loans, Excluding PPP Loans	Allowance for Loan Loss as a Percentage of Total Loans, Excluding PPP Loans										Allowance for Loan Loss as a Percentage of Total Loans, Excluding PPP Loans
		As of										As of
(Dollars in thousands, except per share data)	(Dollars in thousands, except per share data)	September 30, 2020			June 30, 2020			September 30, 2019			(Dollars in thousands, except per share data)	September 30, 2021			June 30, 2021			December 31, 2020			September 30, 2020
		(Unaudited)			(Unaudited)			(Unaudited)				(Unaudited)			(Unaudited)						(Unaudited)
Total loans	Total loans	$	1,843,888		$	1,815,353		$	1,168,923		Total loans	$	1,719,717		$	1,775,243		$	1,723,537		$	1,843,888
Less:	Less:										Less:
PPP loans	PPP loans	392,521			388,264			—			PPP loans	147,645			259,303			290,135			392,521
Total loans, excluding PPP loans	Total loans, excluding PPP loans	$	1,451,367		$	1,427,089		$	1,168,923		Total loans, excluding PPP loans	$	1,572,072		$	1,515,940		$	1,433,402		$	1,451,367

Allowance for loan loss	Allowance for loan loss	21,254			17,063			12,307			Allowance for loan loss	$	21,731		$	23,144		$	22,297		$	21,254
Allowance for loan loss as a percentage of total loans	Allowance for loan loss as a percentage of total loans	1.15		%	0.94		%	1.05		%	Allowance for loan loss as a percentage of total loans	1.26		%	1.30		%	1.29		%	1.15		%
Allowance for loan loss as a percentage of total loans excluding PPP loans	Allowance for loan loss as a percentage of total loans excluding PPP loans	1.46		%	1.20		%	1.05		%	Allowance for loan loss as a percentage of total loans excluding PPP loans	1.38		%	1.53		%	1.56		%	1.46		%

~~Table of Contents~~

Results of Operations

Net Income

We had net income of $9.5 million, or $1.16 per diluted common share, for the three months ended September 30, 2021, compared to $5.2 million, or $0.67 per diluted common share, for the three months ended September 30, ~~2020, compared to $4.4 million, or $0.56 per diluted common share, for the three months ended September 30, 2019.~~2020. The increase of ~~$800 thousand~~$4.3 million in net income reflected ~~increases~~an increase of ~~$5.3 million in noninterest income, primarily as a result of higher mortgage banking income, and $3.6~~$3.9 million in net interest income, primarily due to higher interest income on loans due, in part, to the recognition of fees on PPP loans as they are forgiven, and lower interest expense on deposits, ~~year over year. This was partially offset by increases~~borrowed funds, and subordinated notes. The increase in net income also reflected a decrease of ~~$4.3~~$5.5 million in provision for loan ~~losses~~loss, primarily due to a decrease in general reserves resulting from a reduction in qualitative factors within the allowance for loan loss model as a result of ~~the economic factors relating to COVID-19 and $3.6~~improved credit quality. These were partially offset by decreases of $3.1 million in noninterest income, primarily due to lower mortgage banking activities and net gain on sales of securities, and increases of $1.2 million in income tax provision expense ~~mainly as a result of~~due to higher income before taxes and $863 thousand in noninterest expense due to higher salary and employee ~~benefits.~~benefits expense.

We had net income of $25.4 million, or $3.10 per diluted common share, for the nine months ended September 30, 2021, compared to $12.0 million, or $1.55 per diluted common share, for the nine months ended September 30, ~~2020, compared~~2020. The increase of $13.4 million in net income primarily reflected an increase of $11.6 million in net interest income, primarily due to ~~$11.4~~higher interest income on loans due, in part, to the recognition of fees on PPP loans as they are forgiven. In addition, there was higher interest income on securities due to increased volumes of investment securities and lower interest expense on deposits, borrowed funds, and subordinated notes. The increase in net income also reflected a decrease of $10.7 million ~~or $1.46 per diluted common share,~~in provision for loan loss, primarily due to a decrease in general reserves resulting from an increase in the economic qualitative factors in the nine months ended September 30, ~~2019. The increase of $609 thousand in net income primarily reflected increases of $12.0 million in noninterest income and $9.5 million in net interest income~~2020 and a ~~decrease~~reduction in qualitative factors in the third quarter of ~~$319 thousand in income tax provision. The factors contributing to the increases in noninterest income and net interest income year over year are noted above. This was~~2021. These were partially offset by increases of ~~$11.7~~$4.1 million in of income tax provision primarily due to higher income before taxes and $945 thousand of

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noninterest expense primarily due to ~~higher~~increases of $1.7 million of salary and employee benefits ~~as well as increase~~expense and $608 thousand of data processing expense partially offset by a decrease of $1.7 million in acquisition and due diligence fees ~~and $9.5 million in provision for loan losses~~ due to the ~~same factors discussed above.~~merger with Ann Arbor State Bank in the first quarter of 2020. In addition, there was a $4.0 million decrease in noninterest income primarily due to lower mortgage banking activities and net gain on sales of securities partially offset by an increase in service charges on deposits.

Net Interest Income

Our primary source of revenue is net interest income, which is the difference between interest income from interest-earning assets (primarily loans and securities) and interest expense of funding sources (primarily interest-bearing deposits and borrowings).

Net interest income of ~~$16.6~~$20.5 million infor the ~~third quarter of 2020~~three months ended September 30, 2021 was ~~$3.6~~$3.9 million higher than the net interest income of ~~$13.0~~$16.6 million infor the ~~third quarter of 2019.~~three months ended September 30, 2020. The three months ended September 30, ~~2020~~2021 included a ~~$2.3~~$2.1 million increase in interest income as well as a ~~$1.3~~$1.8 million decrease in interest expense, compared to the same period in ~~2019.~~2020. The increase in interest income was primarily driven by increases of ~~$2.6~~$1.7 million in interest and fees on loans ~~partially offset by a decrease of $180~~and $419 thousand in interest on investment securities. The increase in interest and fees on loans for the three months ended September 30, ~~2020~~2021 compared to the same period in ~~2019~~2020 was mainly driven by ~~an increase of $688.4 million in~~ the ~~average balance of loans primarily as a result of the origination of $392.5~~Bank earning $3.6 million of ~~PPP loans and the acquisition of Ann Arbor State Bank. In the third quarter of 2020, the Bank earned $1.5 million of the total projected $12.1 million~~ net SBA fees on PPP loans compared to $1.5 million in the three months ended September 30, 2020, with the remaining $5.3 million of SBA fees expected to be earned over the life of the ~~loans, the~~loans. The majority of ~~which~~the PPP loans are expected to mature two or five years from the date of funding, depending on the round of PPP funding, unless modified by the lender and borrower. We anticipate a large portion of the PPP loan balance will be forgiven before the maturity of the loans. In addition to the net SBA fees, the Bank also recognized ~~$1.0 million~~$521 thousand of interest income on PPP loans in the ~~PPP loans.~~third quarter of 2021. The ~~decrease~~increase in interest income on investment securities was mainly due to ~~lower~~an increase of $136.2 million in average ~~interest rates.~~ balances due to increased customer liquidity and new customer growth.

The decrease in interest expense was primarily driven by a decrease of ~~$2.2~~$1.4 million in interest expense on deposits ~~partially offset by increases~~and a decrease of ~~$432~~$483 thousand ofin interest expense on borrowed funds and ~~$376 thousand of interest expense on~~ subordinated notes. The decrease in deposit interest expense ~~during the three months ended September 30, 2020 compared to 2019~~ was primarily due to lower interest rates paid as a result of revised internal deposit rates ~~mainly driven by the decreases in the target federal funds interest rate~~and maturity of ~~150 basis points during first quarter of 2020 and 25 basis points in each of August, September and October of 2019.~~higher cost time deposits. The ~~increase~~decrease in interest expense on borrowed funds and subordinated notes was primarily due to the ~~issuance~~redemption of ~~$30.0~~$15.0 million of subordinated ~~debt in~~notes during the ~~fourth~~second quarter of ~~2019. The increase~~2021 and a decrease in Federal Reserve Bank borrowings

Net interest ~~expense on borrowings~~income of $59.3 million for the nine months ended September 30, 2021 was ~~mainly driven by an increase of $323.3~~$11.6 million inhigher than the ~~average balance of borrowings primarily as a result of funding PPP loans through FRB borrowings.~~

~~Net~~net interest income of $47.7 million for the nine months ended September 30, ~~2020 was $9.4 million higher than the net interest income of $38.1 million for the nine months ended September 30, 2019.~~2020. The nine months ended September 30, ~~2020~~2021 included a ~~$7.4~~$5.2 million increase in interest income as well as a ~~$2.0~~$6.5 million decrease in interest expense, compared to the same period in ~~2019.~~2020. The increase in interest income was primarily driven by increases of ~~$8.3~~$4.5 million in interest and fees on loans ~~partially offset by a decrease of $677~~and $951 thousand in interest on investment securities. These increases were partially offset by a $299 thousand decrease in interest on federal funds and other investments. The increase in interest and fees on loans for the nine months ended September 30, ~~2020~~2021 compared to the same period in ~~2019~~2020 was mainly driven by ~~an increase of $538.2 million~~ ~~in the average balance of loans primarily as result of the acquisition of Ann Arbor State Bank, as well as the origination of PPP loans. In the nine months ending September 30, 2020,~~ the Bank ~~earned $2.9~~earning $10.3 million of ~~the total projected $12.1 million~~ net SBA fees on PPP loans ~~with~~compared to $2.9 million in the ~~remaining expected to be earned over the life of the loans, the majority of which are expected to mature~~ ~~two years from the date of funding unless modified by the lender and borrower.~~nine months ended September 30, 2020. In addition to the net SBA fees, the Bank also recognized ~~$1.8~~$2.4 million of interest income on PPP loans in the nine months ended September 30, 2021. This was partially offset by a 56 basis point decrease in yield on loans excluding PPP ~~loans.~~loans for the nine months ended September 30, 2021 compared to the same period in 2020. The ~~decrease~~increase in interest income on investment securities was mainly due to ~~lower~~an increase of $125.3 million in average ~~interest rates.~~ balances due to increased customer liquidity and new customer growth.

The decrease in interest expense was primarily driven by a decrease of ~~$4.2~~$5.6 million in interest expense on deposits ~~partially offset by increases~~and a decrease of ~~$1.1 million in interest expense on subordinated notes and $906~~$890 thousand in interest expense on borrowed ~~funds.~~funds and subordinated notes. The ~~increase~~decrease in deposit interest expense was primarily due to lower interest rates paid as a result of revised internal deposit rates and maturity of higher cost time deposits. The decrease in interest expense on ~~borrowings was mainly~~

~~Table of Contents~~

driven by an increase of $249.0 million in the average balance of borrowings primarily as a result of higher FHLB borrowings as well as funding PPP loans through FRB borrowings. The increase in interest expense onborrowed funds and subordinated notes was primarily due to the ~~same factors mentioned above.~~redemption of $15.0 million of subordinated notes during the second quarter of 2021 and a decrease in Federal Reserve Bank borrowings.

Our net interest margin (on a fully tax equivalent basis ("FTE")) for the three months ended September 30, ~~2020~~2021 was ~~2.80%~~3.47%, compared to ~~3.59%~~2.80% for the same period in ~~2019.~~2020. The ~~decrease~~increase of 7967 basis points in the net interest margin year over year was primarily a result of lower average loan yield as well as lower yields on interest earning cash balances. Average loan yield decreased to 3.98% for the third quarter of 2020, compared to 5.41% for the third quarter of 2019, primarily due to the target federal funds interest rate dropping 150 basis points in March 2020 in response to the COVID-19 pandemic and decreasing 25 basis points in each of August, September and October of 2019. Another contributing factor to thea decrease in loan yields was the impact of the PPP loans originated during the second and third quarters of 2020, which had an average yield of 2.59%, net of deferred fees/costs, compared to the non-PPP loans which had an average yield of 4.35%. The decrease in loan yields was accompanied by a corresponding decrease in the cost of funds, which declined ~~110~~40 basis points to 0.48% in the third quarter of 2021, compared to 0.88% in the third quarter ~~2020 from 1.98% in the third quarter of 2019. Finally, during the third quarter~~ of 2020 ~~our average interest-earning cash balances of $259.3 million, of which the vast majority comprised of excess funding from the PPP process, earned 0.12%, which negatively affected the net~~primarily due to lower interest ~~margin. As~~rates paid as a result of ~~the reductions in the target federal funds interest rate, as well as the impact~~revised internal deposit rates and maturity of ~~the COVID-19 pandemic, we expect that our net interest income and net interest margin will~~higher cost time deposits. The decrease in ~~future periods.~~cost of funds was accompanied by higher yield on loans mostly reflecting the increase in PPP fees earned during the period.

Our net interest margin benefits from discount accretion on our purchased credit impaired loan portfolios, a component of our accretable yield. The accretable yield represents the excess of the net present value of expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion. The accretable yield is

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recognized as interest income over the expected remaining life of the purchased credit impaired loan. The difference between the actual yield earned on total loans and the yield generated based on the contractual coupon (not including any interest income for loans in nonaccrual status) represents excess accretable yield. The contractual coupon of the loan considers the contractual coupon rates of the loan and does not include any interest income for loans in nonaccrual status. For both the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the yield on total loans was impacted by 7 basis points ~~and 15 basis points, respectively,~~ due to the accretable yield on purchased credit impaired loans. Our net interest margin for the three months ended September 30, ~~2020~~2021 and ~~2019,~~2020, benefited by 86 basis points and 138 basis points, respectively, as a result of the excess accretable yield. As of September 30, 2020 and December 31, 2019, our remaining accretable yield was $7.9 million and $9.1 million, respectively, and our nonaccretable difference was $2.7 million and $3.9 million, respectively.

Our net interest margin (FTE) for the nine months ended September 30, 2020 was 3.04%, compared to 3.61% for the same period in 2019. The decrease of 57 basis points reflected the lower average loan yield as well as lower average interest earning cash yield that is described above. For the nine months ended September 30, 2021 and 2020, ~~and 2019,~~ the average yield on total loans was 4.40% and 5.49%, respectively. PPP loans had an average yield of 2.87%, net of deferred fees/costs, compared to the non-PPP loans which had an average yield of 4.62%. The yield on total loans was impacted by 6 and 7 basis points ~~and 15 basis points, respectively~~ due to the accretable yield on purchased credit impaired loans. Our net interest margin for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, benefited by 94 basis points and 129 basis points, respectively, as a result of the excess accretable yield. As of September 30, 2021 and December 31, 2020, our remaining accretable yield was $5.9 million and $7.1 million, respectively, and our nonaccretable difference was $2.1 million and $2.7 million, respectively.

Our net interest margin (FTE) for the nine months ended September 30, 2021 was 3.36%, compared to 3.04% for the same period in 2020. The increase of 32 basis points in the net interest margin year over year was primarily a result of a decrease in cost of funds, which declined 60 basis points to 0.55% in the first nine months of 2021, compared to 1.15% in the first nine months of 2020 primarily due to lower interest rates paid as a result of revised internal deposit rates and maturity of higher cost time deposits. The decrease in cost of funds was accompanied by a lower yields across most interest-earning assets, mostly reflecting the impact of lower market interest rates.

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The following table sets forth information related to our average balance sheet, average yields on assets, and average rates on liabilities for the periods indicated. We derived these yields by dividing income or expense by the average daily balance of the corresponding assets or liabilities. In this table, adjustments were made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.

Analysis of Net Interest Income—Fully Taxable Equivalent


		For the three months ended September 30,
		2020						2019						For the three months ended September 30, 2021		For the nine months ended September 30, 2021
(Dollars in thousands)	(Dollars in thousands)	Average Balance		Interest Revenue/Expense (1)		Average Yield/Rate (2)		Average Balance		Interest Revenue/Expense (1)		Average Yield/Rate (2)			(Dollars in thousands)	2021			2020			2021			2020
Interest-earning assets:
Gross loans(3)		$	1,871,164	$	18,730	3.98	%	$	1,182,764	$	16,134	5.41	%
Investment securities(4):
Average Balance Sheets:															Average Balance Sheets:
Gross loans(1)															Gross loans(1)	$	1,763,214		$	1,871,164		$	1,823,888		$	1,696,073
Investment securities: (2)															Investment securities: (2)
Taxable	Taxable	139,237		652		1.86		121,473		857		2.80			Taxable	265,885			139,237			243,377			124,169
Tax-exempt	Tax-exempt	94,526		613		3.19		85,332		588		3.28			Tax-exempt	104,063			94,526			103,158			97,104
Interest-earning cash balances	Interest-earning cash balances	259,349		76		0.12		51,142		289		2.24			Interest-earning cash balances	221,261			259,349			192,309			188,179
Other investments	Other investments	12,419		174		5.57		8,325		115		5.48			Other investments	14,398			12,419			14,398			12,401
Total interest-earning assets	Total interest-earning assets	$	2,376,695	$	20,245	3.41	%	$	1,449,036	$	17,983	4.96	%		Total interest-earning assets	$	2,368,821		$	2,376,695		$	2,377,130		$	2,117,926
Non-earning assets:	Non-earning assets:														Non-earning assets:	151,077			140,480			145,971			133,968
Cash and due from banks		27,571						23,103
Premises and equipment		15,791						13,228
Goodwill		35,554						9,387
Other intangible assets, net		4,980						347
Bank-owned life insurance		18,006						12,023
Allowance for loan losses		(17,321)						(12,241)
Other non-earning assets		55,899						27,145
Total assets	Total assets	$	2,517,175					$	1,522,028						Total assets	$	2,519,898		$	2,517,175		$	2,523,101		$	2,251,894
Interest-bearing liabilities:
Deposits:

Interest-bearing demand deposits	Interest-bearing demand deposits	$	116,285	$	65	0.22	%	$	51,963	$	63	0.48	%		Interest-bearing demand deposits	$	156,977		$	116,285		$	144,449		$	112,579
Money market and savings deposits	Money market and savings deposits	513,420		556		0.43		320,363		1,170		1.45			Money market and savings deposits	624,190			513,420			623,123			458,438
Time deposits	Time deposits	575,179		1,702		1.18		543,765		3,245		2.37			Time deposits	489,261			575,179			541,018			564,396
Borrowings	Borrowings	394,020		693		0.70		70,766		261		1.46			Borrowings	181,911			394,020			183,983			311,024
Subordinated notes	Subordinated notes	44,468		632		5.65		14,925		256		6.81			Subordinated notes	29,657			44,468			38,633			44,463
Total interest-bearing liabilities	Total interest-bearing liabilities	$	1,643,372	$	3,648	0.88	%	$	1,001,782	$	4,995	1.98	%		Total interest-bearing liabilities	1,481,996			1,643,372			1,531,206			1,490,900
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	Noninterest-bearing demand deposits	$	640,095					$	333,690						Noninterest-bearing demand deposits	774,926			640,095			735,162			546,066
Other liabilities	Other liabilities	34,846						19,804							Other liabilities	31,012			34,846			31,822			30,047
Shareholders' equity	Shareholders' equity	198,862						166,752							Shareholders' equity	231,964			198,862			224,911			184,881
Total liabilities and shareholders' equity	Total liabilities and shareholders' equity	$	2,517,175					$	1,522,028						Total liabilities and shareholders' equity	$	2,519,898		$	2,517,175		$	2,523,101		$	2,251,894
Net interest income				$	16,597					$	12,988

Yields: (3)															Yields: (3)
Earning Assets															Earning Assets
Gross loans															Gross loans	4.60		%	3.98		%	4.42		%	4.40		%
Investment securities:															Investment securities:
Taxable															Taxable	1.57		%	1.86		%	1.59		%	2.08		%
Tax-exempt															Tax-exempt	2.99		%	3.19		%	3.04		%	3.20		%
Interest earning cash balances															Interest earning cash balances	0.15		%	0.12		%	0.12		%	0.28		%
Other investments															Other investments	2.95		%	5.57		%	3.18		%	4.49		%
Total interest earning assets															Total interest earning assets	3.76		%	3.41		%	3.72		%	3.84		%

Interest-bearing liabilities															Interest-bearing liabilities
Interest-bearing demand deposits															Interest-bearing demand deposits	0.14		%	0.22		%	0.15		%	0.31		%
Money market and savings deposits															Money market and savings deposits	0.17		%	0.43		%	0.20		%	0.65		%
Time deposits															Time deposits	0.53		%	1.18		%	0.58		%	1.55		%
Borrowings															Borrowings	1.02		%	0.70		%	1.02		%	0.80		%
Subordinated notes															Subordinated notes	5.00		%	5.65		%	5.09		%	5.72		%
Total interest-bearing liabilities															Total interest-bearing liabilities	0.48		%	0.88		%	0.55		%	1.15		%

Interest spread	Interest spread					2.53	%					2.98	%		Interest spread	3.28		%	2.53		%	3.17		%	2.69		%
Net interest margin(5)						2.78	%					3.56	%
Net interest margin(4)															Net interest margin(4)	3.44		%	2.78		%	3.33		%	3.01		%
Tax equivalent effect	Tax equivalent effect					0.02	%					0.03	%		Tax equivalent effect	0.03		%	0.02		%	0.03		%	0.03		%
Net interest margin on a fully tax equivalent basis	Net interest margin on a fully tax equivalent basis					2.80	%					3.59	%		Net interest margin on a fully tax equivalent basis	3.47		%	2.80		%	3.36		%	3.04		%

(1) ~~Interest income is shown on actual basis and does not include taxable equivalent adjustments.~~

(2) Average rates and yields are presented on an annual basis and include a taxable equivalent adjustment to interest income of $144 thousand and $118 thousand on tax-exempt securities for the three months ended September 30, 2020 and 2019, respectively, using the federal corporate tax rate of 21%.

~~(3)~~ Includes nonaccrual loans.

~~(4)~~(2) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

~~(5) Net interest margin represents net interest income divided by average total interest-earning assets.~~

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For the nine months ended September 30,
2020 2019
(Dollars in thousands) Average Balance
Interest Revenue/Expense(1)
Average Yield/Rate(2)
Average Balance
Interest Revenue/Expense(1)
Average Yield/Rate(2)
Interest-earning assets:
Gross loans(3)
$ 1,696,073 $ 55,817 4.40 % $ 1,157,837 $ 47,547 5.49 %
Investment securities(4):
Taxable 124,169 1,930 2.08 135,460 2,773 2.74
Tax-exempt 97,104 1,894 3.20 84,476 1,728 3.28
Interest-earning cash balances 188,179 400 0.28 37,359 670 2.40
Other investments 12,401 417 4.49 8,325 364 5.85
Total interest-earning assets $ 2,117,926 $ 60,458 3.84 % $ 1,423,457 $ 53,082 5.02 %
Non-earning assets:
Cash and due from banks 26,264 24,075
Premises and equipment 16,195 13,252
Goodwill 35,894 9,387
Other intangible assets, net 4,420 383
Bank-owned life insurance 17,868 11,955
Allowance for loan losses (14,387) (11,950)
Other non-earning assets 47,714 18,642
Total assets $ 2,251,894 $ 1,489,201
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 112,579 $ 262 0.31 % $ 53,894 $ 180 0.45 %
Money market and savings deposits 458,438 2,217 0.65 307,461 3,389 1.47
Time deposits 564,396 6,560 1.55 556,922 9,647 2.32
Borrowings 311,024 1,866 0.80 62,006 960 2.07
Subordinated notes 44,463 1,903 5.72 14,910 759 6.81
Total interest-bearing liabilities $ 1,490,900 $ 12,808 1.15 % $ 995,193 $ 14,935 2.01 %
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits $ 546,066 $ 316,754
Other liabilities 30,047 17,048
Shareholders' equity 184,881 160,206
Total liabilities and shareholders' equity $ 2,251,894 $ 1,489,201
Net interest income $ 47,650 $ 38,147
Interest spread 2.69 % 3.01 %
Net interest margin(5)
3.01 % 3.58 %
Tax equivalent effect 0.03 % 0.03 %
Net interest margin on a fully tax equivalent basis 3.04 % 3.61 %

~~(1) Interest income is shown on actual basis and does not include taxable equivalent adjustments.~~

~~(2)~~(3) Average rates and yields are presented on an annual basis and include a taxable equivalent adjustment to interest income of ~~$431~~$155 thousand and ~~$347~~$144 thousand on tax-exempt securities for the three months ended September 30, 2021 and 2020, respectively, and $462 thousand and $431 thousand for the nine months ended September 30, 2021and 2020, ~~and 2019,~~ respectively, using the federal corporate tax rate of 21%.

~~(3) Includes nonaccrual loans.~~

(4) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

~~(5)~~ Net interest margin represents net interest income divided by average total interest-earning assets.

Table of Contents

Rate/Volume Analysis

The table below presents the effect of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous period's average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous period. The net changes attributable to the combined impact of both rate and volume have been allocated proportionately to the changes due to volume and the changes due to rate. The average rate for tax-exempt securities is reported on a fully taxable equivalent basis.


		For the three months ended September 30, 2020 vs. 2019							For the three months ended September 30, 2021 vs. 2020
		Increase (Decrease) Due to:							Increase (Decrease) Due to:
(Dollars in thousands)	(Dollars in thousands)	Rate		Volume		Net Increase (Decrease)		(Dollars in thousands)	Rate		Volume		Net Increase (Decrease)
Interest-earning assets	Interest-earning assets							Interest-earning assets
Gross loans	Gross loans	$	(5,085)	$	7,681	$	2,596	Gross loans	$	2,842	$	(1,125)	$	1,717
Investment securities:	Investment securities:							Investment securities:
Taxable	Taxable	(317)		112		(205)		Taxable	(111)		513		402
Tax-exempt	Tax-exempt	(49)		74		25		Tax-exempt	(56)		73		17
Interest-earning cash balances	Interest-earning cash balances	(486)		273		(213)		Interest-earning cash balances	20		(12)		8
Other investments	Other investments	59		—		59		Other investments	(92)		25		(67)
Total interest income	Total interest income	(5,878)		8,140		2,262		Total interest income	2,603		(526)		2,077
Interest-bearing liabilities	Interest-bearing liabilities							Interest-bearing liabilities
Interest-bearing demand deposits	Interest-bearing demand deposits	(47)		49		2		Interest-bearing demand deposits	(30)		19		(11)
Money market and savings deposits	Money market and savings deposits	(1,091)		477		(614)		Money market and savings deposits	(396)		101		(295)
Time deposits	Time deposits	(1,721)		178		(1,543)		Time deposits	(827)		(225)		(1,052)
Borrowings	Borrowings	(202)		634		432		Borrowings	240		(465)		(225)
Subordinated debt	Subordinated debt	(52)		428		376		Subordinated debt	(66)		(192)		(258)
Total interest expense	Total interest expense	(3,113)		1,766		(1,347)		Total interest expense	(1,079)		(762)		(1,841)
Change in net interest income	Change in net interest income	$	(2,765)	$	6,374	$	3,609	Change in net interest income	$	3,682	$	236	$	3,918

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For the nine months ended September 30, 2020 vs. 2019
Increase
(Decrease) Due to:
(Dollars in thousands) Rate Volume Net Increase (Decrease)
Interest-earning assets
Gross loans $ (10,773) $ 19,043 $ 8,270
Investment securities:
Taxable (625) (218) (843)
Tax-exempt (137) 303 166
Interest-earning cash balances (1,016) 746 (270)
Other investments (98) 151 53
Total interest income (12,649) 20,025 7,376
Interest-bearing liabilities
Interest-bearing demand deposits (68) 150 82
Money market and savings deposits (2,398) 1,226 (1,172)
Time deposits (3,215) 128 (3,087)
Borrowings (895) 1,801 906
Subordinated debt (138) 1,282 1,144
Total interest expense (6,714) 4,587 (2,127)
Change in net interest income $ (5,935) $ 15,438 $ 9,503


	For the nine months ended September 30, 2021 vs. 2020
	Increase (Decrease) Due to:
(Dollars in thousands)	Rate		Volume		Net Increase (Decrease)
Interest-earning assets
Gross loans	$	276	$	4,224	$	4,500
Investment securities:
Taxable	(539)		1,504		965
Tax-exempt	(155)		141		(14)
Interest-earning cash balances	(233)		9		(224)
Other investments	(135)		60		(75)
Total interest income	(786)		5,938		5,152
Interest-bearing liabilities
Interest-bearing demand deposits	(164)		61		(103)
Money market and savings deposits	(1,894)		612		(1,282)
Time deposits	(3,951)		(260)		(4,211)
Borrowings	429		(886)		(457)
Subordinated debt	(198)		(235)		(433)
Total interest expense	(5,778)		(708)		(6,486)
Change in net interest income	$	4,992	$	6,646	$	11,638

Provision for Loan Losses

We established an allowance for loan losses through a provision for loan losses charged as an expense in our consolidated statements of income. Management reviews the loan portfolio, consisting of originated loans and ~~purchased~~acquired loans, on a quarterly basis to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.

Loans acquired in connection with acquisitions that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30. These credit-impaired loans have been recorded at their estimated fair value on the respective acquisition date, based on subjective determinations regarding risk ratings, expected future cash flows and fair value of the underlying collateral, without a carryover of the related allowance for loan losses. At the acquisition date, the Company recognizes the expected shortfall of expected future cash flows, as compared to the contractual amount due, as a nonaccretable discount. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as the accretable discount, or accretable yield. We evaluate these loans semi-annually to assess expected cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income. As of September 30, ~~2020,~~2021, and December 31, ~~2019,~~2020, our remaining accretable yield was ~~$7.9~~$5.9 million and ~~$9.1~~$7.1 million, respectively, and our nonaccretable difference was $2.1 million and $2.7 million ~~and $3.9 million, respectively.~~as of both dates.

The provision for loan losses was a provision benefit of $1.2 million for the three months ended September 30, 2021, compared to a provision expense of $4.3 million for the three months ended September 30, ~~2020 compared to a $16 thousand provision benefit for the same period in 2019.~~2020. The ~~$4.3~~decrease of $5.5 million ~~increase~~ in the provision for loan losses was primarily due to a ~~result of a $3.3 million increase~~decrease in general reserves of $5.1 million due to a reduction in qualitative factors within the ~~uncertainty surrounding the impact of the COVID-19 pandemic on the~~allowance for loan ~~portfolio~~loss model as a result improved credit quality as well as a ~~$794~~decrease of $531 thousand ~~increase~~ in specific reserves.

The provision for loan losses was a provision benefit of $384 thousand for the nine months ended September 30, 2021, compared to a provision expense of $10.3 million for the nine months ended September 30, ~~2020, compared to $835 thousand for the nine months ended September 30, 2019.~~2020. The ~~increase~~decrease of ~~$9.5~~$10.7 million in the provision for loan losses was primarily asdue to a ~~result of a $6.7 million increase~~decrease in general reserves of $8.6 million due to ~~an adjustment of~~a reduction in qualitative factors ~~attributable~~mentioned above during the third quarter of 2021 while qualitative factors were increased during the nine months ended September 30, 2020 due to economic uncertainty regarding the impact of the COVID-19 pandemic ~~during the second and third quarters of 2020. In addition, there was a $1.6 million increase in provision resulting primarily from a $1.3 million chargeoff during the second quarter of 2020~~ on ~~a nonaccrual loan that was subsequently sold. Lastly, there was also a $782 thousand increase in specific reserves on loans individually evaluated~~credit

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~~for impairment. The Company will continue to monitor~~quality. In addition, there was a decrease of $1.6 million in net chargeoffs resulting from a $1.3 million chargeoff on a nonaccrual loan during the ~~impacts~~second quarter of ~~the COVID-19 pandemic~~2020 and ~~will re-evaluate the appropriateness~~a decrease of ~~the provision for loan losses~~$402 thousand in ~~future quarters as needed.~~specific reserves.

Noninterest Income

The following table presents noninterest income for the three and nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.


		For the three months ended September 30,				For the nine months ended September 30,					For the three months ended September 30,			For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)		2021		2020		2021		2020
Noninterest income	Noninterest income									Noninterest income
Service charges on deposits	Service charges on deposits	$	616	$	627	$	1,798	$	1,914	Service charges on deposits		$	859	$	616	$	2,436	$	1,798
Net gain on sales of securities	Net gain on sales of securities	434		151		1,862		151		Net gain on sales of securities		—		434		20		1,862
Mortgage banking activities	Mortgage banking activities	7,108		2,352		15,380		5,788		Mortgage banking activities		4,216		7,108		12,738		15,380

Other charges and fees	Other charges and fees	967		728		2,564		1,768		Other charges and fees		966		967		2,451		2,564
Total noninterest income	Total noninterest income	$	9,125	$	3,858	$	21,604	$	9,621	Total noninterest income		$	6,041	$	9,125	$	17,645	$	21,604

Noninterest income ~~increased $5.2~~decreased $3.1 million to ~~$9.1~~$6.0 million for the three months ended September 30, ~~2020~~2021, compared to ~~$3.9~~$9.1 million for the same period in ~~2019.~~2020. The ~~increase~~decrease in noninterest income year over year was primarily due to ~~increases~~decreases of $2.9 million in mortgage banking activities ~~of $4.8 million~~ and $434 thousand in net gains on sales of ~~securities~~investment securities. This was partially offset by an increase of ~~$283 thousand.~~$243 thousand in service charges on deposits. The ~~increase~~decrease in ~~the~~ mortgage banking activities compared to the third quarter of 2020 was ~~mainly attributable~~primarily due to ~~$98.2~~$84.2 million ~~higher~~fewer residential loan originations held for sale and ~~$66.9~~$54.5 million ~~higher~~fewer residential loans ~~sold~~sold. The higher volumes in the third quarter of 2020 were primarily as a result of the ~~lower~~decrease in interest ~~rate environment~~rates during the ~~third quarter~~first half of ~~2020.~~2020 while interest rates have remained relatively stable in 2021. The ~~increase~~decrease in net ~~gain~~gains on sales of investment securities was due to ~~higher gains realized on~~no securities sold in the third quarter of ~~2020 than those sold~~2021. The increase in ~~the third quarter of 2019.~~service charges on deposits was primarily due to higher transaction volumes and deposit balances.

Noninterest income ~~increased $12.0~~decreased $4.0 million to ~~$21.6~~$17.6 million for the nine months ended September 30, ~~2020,~~2021, compared to ~~$9.6~~$21.6 million for the same period in ~~2019.~~2020. The ~~increase~~decrease in noninterest income was primarily due to ~~increases~~decreases of $2.6 million in mortgage banking activities ~~of $9.6~~and $1.8 million in net ~~gain~~gains on sales of ~~securities~~securities. These decreases were partially offset by an increase of ~~$1.7 million, as well as increases of $263 thousand net gain on sales of other real estate owned, $139~~$638 thousand in ~~bank owned life insurance ("BOLI") interest income, and $118 thousand~~service charges on deposits. The decrease in ~~interest rate swap fees (all included in "other charges and fees" in the table above). The increase in the~~ mortgage banking activities was ~~mainly attributable~~primarily due to ~~$214.4~~$74.0 million ~~higher~~lower residential loan originations held for sale and ~~$189.8~~$4.8 million ~~higher~~lower residential loans ~~sold as a result of~~sold. The higher volumes in the nine months ended September 30, 2020 were primarily due to lower interest ~~rate environment~~rates during the first half of 2020 while interest rates have remained relatively stable in ~~2020.~~2021. The ~~increase in the net gain on sales of securities was attributable to the same factors mentioned above. The increase~~decrease in net gains on sales of ~~other real estate owned~~securities was primarily due to ~~the sale of four properties~~fewer securities sold during the ~~second and third quarters~~first nine months of 2021 compared to the same period in 2020. The increase in ~~BOLI interest income~~service charges on deposits was due to ~~an increase in bank owned life insurance attributable to the acquisition of Ann Arbor State Bank. The increase in interest rate swap fees was due to increased~~higher transaction volumes ~~of customer-initiated derivatives.~~and deposit balances.

Noninterest Expense

The following table presents noninterest expense for the three and nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.


		For the three months ended September 30,				For the nine months ended September 30,					For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020		2021		2020
Noninterest expense	Noninterest expense									Noninterest expense
Salary and employee benefits	Salary and employee benefits	$	9,862	$	7,536	$	28,090	$	21,642	Salary and employee benefits	$	10,551	$	9,862	$	29,825	$	28,090
Occupancy and equipment expense	Occupancy and equipment expense	1,678		1,203		4,773		3,575		Occupancy and equipment expense	1,680		1,678		4,971		4,773
Professional service fees	Professional service fees	808		465		2,141		1,212		Professional service fees	847		808		2,264		2,141
Acquisition and due diligence fees	Acquisition and due diligence fees	17		319		1,664		319		Acquisition and due diligence fees	—		17		—		1,664
FDIC premium										FDIC premium	244		287		778		722
Marketing expense	Marketing expense	257		379		709		843		Marketing expense	428		257		842		709
Printing and supplies expense		89		78		398		250
Loan processing expense										Loan processing expense	231		262		755		690
Data processing expense	Data processing expense	844		661		2,601		1,862		Data processing expense	928		844		3,209		2,601
Core deposit premium amortization	Core deposit premium amortization	192		29		576		117		Core deposit premium amortization	167		192		501		576
Other expense	Other expense	1,379		869		3,819		3,254		Other expense	913		919		2,571		2,805
Total noninterest expense	Total noninterest expense	$	15,126	$	11,539	$	44,771	$	33,074	Total noninterest expense	$	15,989	$	15,126	$	45,716	$	44,771

Noninterest expense increased ~~$3.6 million~~$863 thousand to ~~$15.1~~$16.0 million for the three months ended September 30, ~~2020, as~~2021, compared to ~~$11.5~~$15.1 million for the same period in ~~2019.~~2020. The increase in noninterest expense year over year was ~~primarily due~~mainly attributable to ~~increases in salary and employee benefits of $2.3 million, occupancy and equipment expense of $475 thousand, FDIC premium expense of $417~~

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increases of $689 thousand ~~(included~~ in ~~"other expense"~~salary and employee benefits and $171 thousand in the table above), professional service fees of $343 thousand, data processing expense of $183 thousand, and core deposit premium amortization of $163 thousand. This was partially offset by a decrease in acquisition expense of $302 thousand.marketing expenses. The increase in salary and employee benefits between the periods was primarily due to an increase of ~~$1.6 million in mortgage commissions expense~~20 full-time equivalent employees as well as ~~an increase of 37 full-time equivalent employees, mainly attributable to the acquisition of Ann Arbor State Bank as well as organic growth.~~ incentive compensation. The increase in ~~occupancy and equipment~~marketing expense ~~was primarily attributable to increased building rent and other expenses related to~~between the addition of the three new branches acquired with Ann Arbor State Bank, as well as organic growth in the organization. The increase in FDIC premium expense was primarily due to the increase in assets related to the acquisition of Ann Arbor State Bank in addition to credits received during the third quarter of 2019. The increase in professional service fees was primarily related to increased residential mortgage volumes as well as increased legal fees. ~~The increase in data processing expense~~periods was due to ~~increased costs of loan systems.~~ ~~As a result of the acquisition, the Company recorded $3.7 million of core deposit premiums, leading to the increased amortization expense on core deposit intangibles compared to the same period~~an increase in prior year. The decrease in acquisition and due diligence fees was primarily due to the majority of expenses related to the merger with Ann Arbor State Bank being incurred from the third quarter of 2019 to the first quarter of 2020.advertising efforts.

Noninterest expense increased ~~$11.7 million~~$945 thousand to ~~$44.8~~$45.7 million for the nine months ended September 30, ~~2020, as~~2021, compared to ~~$33.1~~$44.8 million for the same period in ~~2019.~~2020. The increase in noninterest expense was primarily due to increases in salary and employee benefits of ~~$6.4~~$1.7 million, data processing expense of $608 thousand and occupancy and equipment expense of $198 thousand. These increases were partially offset by decreases of $1.7 million in acquisition and due diligence fees and $234 thousand of $1.3 million, occupancy and equipment expense of $1.2 million, professional service fees of $929 thousand, data processing expense of $739 thousand, FDIC premium expense of $525 thousand (included in "other expense" in the table above), and core deposit premium amortization of $459 thousand.other expense. The increase in salary and employee benefits ~~between the periods~~ was primarily due to ~~an increase~~increases of ~~$4.3 million~~$719 thousand in ~~mortgage commissions~~incentive compensation, $606 thousand in salaries expense, ~~as well as an increase of 30 full-time equivalent employees. The increase~~and $291 thousand in acquisition and due diligence fees and core deposit premium amortization related to the merger with Ann Arbor State Bank, which closed on January 2, 2020. Acquisition and due diligence fees comprised of contract terminations, core system conversion, as well as severance and retention payments during the nine months ended September 30, 2020. The increase in occupancy and equipment expense, FDIC premium, professional service fees, and core deposit premiums were attributable to the same factors mentioned above.labor. The increase in data processing expense was primarily ~~attributable~~due to the ~~retention~~new loan processing system used for PPP loans. The increase in occupancy and equipment expense was primarily due to software maintenance and licensing. The decrease in acquisition and due diligence fees was primarily due to the acquisition of Ann Arbor State Bank ~~legacy systems during~~in the first quarter of ~~2020 prior~~2020. The decrease in other expense was primarily due to ~~system integration, in addition to the organic growth~~a decrease in the ~~organization.~~provision for unfunded commitments.

Income Taxes and Tax-Related Items

During the three months ended September 30, ~~2020,~~2021, we recognized income tax expense of $2.3 million on $11.8 million of pre-tax income resulting in an effective tax rate of 19.5%, compared to the same period in 2020, in which we recognized an income tax expense of $1.1 million on $6.3 million of pre-tax income, resulting in an effective tax rate of 17.7% ~~compared to~~.

During the ~~same period in 2019, in which~~nine months ended September 30, 2021, we recognized an income tax expense of ~~$914 thousand~~$6.2 million on ~~$5.3~~$31.6 million of pre-tax income resulting in an effective tax rate of ~~17.2%.~~

~~During~~19.6%, compared to the ~~nine months ended September 30,~~same period in 2020, in which we recognized an income tax expense of $2.1 million on $14.1 million of pre-tax income, resulting in an effective tax rate of 14.9%~~, compared to the same period in 2019, in which we recognized an income tax expense of $2.4 million on $13.9 million of pre-tax income, resulting in an effective tax rate of 17.5%~~.

The ~~decrease~~increase in income tax provision for the nine months ended September 30, ~~2020~~2021 compared to the same period in ~~2019~~2020 was primarily as a result of a $290 thousand tax benefit related to the Ann Arbor State Bank net operating loss (NOL) in the first quarter of 2020 resulting from the CARES Act provision that allows for NOLs generated in 2018 to 2020 to be carried back five years. Additionally, disqualified dispositions of Ann Arbor State Bank’s stock options generated a $175 thousand tax ~~benefit.~~benefit in the first quarter of 2020.

~~Refer to Note~~See "Note 9 - Income ~~Taxes in the notes~~Taxes" of Notes to ~~the consolidated financial statements~~Consolidated Financial Statements for a reconciliation between expected and actual income tax expense for the three and nine months ended September 30, ~~2020~~2021 and ~~2019.~~2020.

~~Table of Contents~~

Financial Condition

Investment Securities

The following table presents the fair value of the Company's investment securities portfolio, all of which were classified as available-for-sale as of September 30, ~~2020~~2021 and December 31, ~~2019.~~2020.


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2021		December 31, 2020
Securities available-for-sale:	Securities available-for-sale:					Securities available-for-sale:
U.S. government sponsored entities and agencies	U.S. government sponsored entities and agencies	$	27,199	$	—	U.S. government sponsored entities and agencies	$	24,036	$	26,358
State and political subdivision	State and political subdivision	117,550		93,747		State and political subdivision	146,695		132,723
Mortgage-backed securities: residential	Mortgage-backed securities: residential	19,492		10,565		Mortgage-backed securities: residential	20,086		26,081
Mortgage-backed securities: commercial	Mortgage-backed securities: commercial	8,655		8,779		Mortgage-backed securities: commercial	23,540		11,918
Collateralized mortgage obligations: residential	Collateralized mortgage obligations: residential	14,333		8,529		Collateralized mortgage obligations: residential	9,871		13,446
Collateralized mortgage obligations: commercial	Collateralized mortgage obligations: commercial	33,003		23,181		Collateralized mortgage obligations: commercial	52,738		58,512
U.S. Treasury	U.S. Treasury	1,003		1,999		U.S. Treasury	64,898		—
SBA	SBA	18,808		21,984		SBA	15,108		17,593
Asset backed securities	Asset backed securities	9,954		10,084		Asset backed securities	9,858		10,072
Corporate bonds	Corporate bonds	3,530		2,037		Corporate bonds	22,698		6,029
Total securities available-for-sale	Total securities available-for-sale	$	253,527	$	180,905	Total securities available-for-sale	$	389,528	$	302,732

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for both normal operations and potential acquisitions, while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral. At September 30, ~~2020,~~2021, total investment securities were ~~$253.5~~$389.5 million, or ~~10.4%~~15.3% of total assets, compared to ~~$180.9~~$302.7 million,

Table of Contents

or ~~11.4%~~12.4% of total assets, at December 31, ~~2019.~~2020. The ~~$72.6~~$86.8 million increase in securities available-for-sale from December 31, ~~2019~~2020 to September 30, ~~2020,~~2021, was ~~primarily~~ due to the ~~acquisition~~purchase of ~~Ann Arbor State Bank, which contributed $47.4 million~~securities using the excess cash balances generated by the payoffs of ~~investment securities as of January 2, 2020. In addition, we repositioned our investment portfolio through purchases of investment securities of $83.2 million~~PPP loans and ~~sales, calls, payoffs and maturities of investment securities of $52.4 million.~~increase in deposits. Securities with a carrying value of ~~$97.2~~$90.6 million and ~~$27.3~~$98.7 million were pledged at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, to secure borrowings, deposits and mortgage derivatives.

As of September 30, ~~2020,~~2021, the Company held 6668 tax-exempt state and local municipal securities totaling ~~$48.9~~$52.8 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments and the U.S. government and its agencies, at September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, there were no holdings of securities of any one issuer ~~other than the U.S. government and its agencies,~~ in an amount greater than 10% of shareholders' equity.

The securities available-for-sale presented in the following tables are reported at amortized cost and by contractual maturity as of September 30, ~~2020~~2021 and December 31, ~~2019. Actual timing~~2020. Expected maturities may differ from contractual maturities ~~if borrowers~~as issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent basis.


	September 30, 2021
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Securities available-for-sale:
U.S. government sponsored agency obligations	$	4,010	1.61	%	$	521	1.62	%	$	15,000	1.22	%	$	5,000	1.48	%
State and political subdivision	1,254		2.44		13,514		2.46		50,986		2.71		74,001		2.89
Mortgage-backed securities: residential	—		—		87		1.71		27		1.92		19,912		0.75
Mortgage-backed securities: commercial	—		—		5,120		2.46		16,620		1.28		1,791		3.63
Collateralized mortgage obligations: residential	—		—		331		2.91		186		1.21		9,279		1.09
Collateralized mortgage obligations: commercial	2,575		3.70		4,509		2.57		39,203		1.28		6,631		2.25
U.S. Treasury	—		—		35,742		0.87		29,376		1.34		—		—
SBA	—		—		—		—		8,084		1.46		6,927		1.37
Asset backed securities	—		—		—		—		—		—		9,896		0.76
Corporate bonds	—		—		—		—		21,801		3.82		1,000		3.25
Total securities available-for-sale	$	7,839	2.43	%	$	59,824	1.52	%	$	181,283	2.00	%	$	134,437	2.14	%


	December 31, 2020
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Securities available-for-sale:
U.S. government sponsored agency obligations	$	4,027	1.61	%	$	2,548	1.61	%	$	15,000	1.22	%	$	5,000	1.48	%
State and political subdivision	1,768		1.96		10,095		2.46		31,142		2.80		81,048		2.99
Mortgage-backed securities: residential	—		—		78		0.94		87		0.19		25,564		1.44
Mortgage-backed securities: commercial	847		1.36		3,795		2.46		4,985		1.69		1,807		3.64
Collateralized mortgage obligations: residential	—		—		46		4.02		559		2.11		12,715		1.25
Collateralized mortgage obligations: commercial	577		2.54		8,011		3.10		40,889		1.26		7,921		2.46

SBA	—		—		—		—		9,879		1.40		7,760		1.21
Asset backed securities	—		—		—		—		—		—		10,229		0.84
Corporate bonds	3,498		3.08		—		—		2,500		4.38		—		—
Total securities available-for-sale	$	10,717	2.18	%	$	24,573	2.58	%	$	105,041	1.82	%	$	152,044	2.28	%

Loans

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September 30, 2020
One year or less One to five years Five to ten years After ten years
(Dollars in thousands) Amortized
Cost Average
Yield Amortized
Cost Average
Yield Amortized
Cost Average
Yield Amortized
Cost Average
Yield
Securities available-for-sale:
U.S. government sponsored agency obligations $ 2,520 1.61 % $ 4,572 1.62 % $ 15,000 1.22 % $ 5,000 1.48 %
State and political subdivision 2,267 2.08 9,942 2.39 29,081 2.87 68,208 3.18
Mortgage-backed securities: residential — — 96 0.89 111 2.23 19,030 1.90
Mortgage-backed securities: commercial 858 1.38 3,943 2.45 1,412 2.63 1,812 3.64
Collateralized mortgage obligations: residential — — 51 3.98 589 2.01 13,537 1.23
Collateralized mortgage obligations: commercial 1,005 1.51 8,926 3.08 13,678 1.66 8,050 2.44
U.S. Treasury 1,000 1.65 — — — — — —
SBA — — — — 10,388 1.36 8,481 1.22
Asset backed securities — — — — — — 10,298 0.89
Corporate bonds 3,491 3.09 — — — — — —
Total securities available-for-sale $ 11,141 2.15 % $ 27,530 2.49 % $ 70,259 2.04 % $ 134,416 2.40 %

December 31, 2019
One year or less One to five years Five to ten years After ten years
(Dollars in thousands) Amortized
Cost Average
Yield Amortized
Cost Average
Yield Amortized
Cost Average
Yield Amortized
Cost Average
Yield
Securities available-for-sale:
State and political subdivision $ 1,375 2.25 % $ 3,747 2.24 % $ 18,566 2.95 % $ 65,616 3.38 %
Mortgage-backed securities: residential — — 153 0.93 143 2.07 10,313 2.84
Mortgage-backed securities: commercial 431 0.99 4,874 2.27 1,435 2.65 1,827 3.64
Collateralized mortgage obligations: residential — — — — 727 2.15 7,814 2.11
Collateralized mortgage obligations: commercial — — 9,031 2.87 4,371 2.83 9,489 2.39
U.S. Treasury — — 1,976 2.06 — — — —
SBA — — — — 8,706 2.59 13,345 2.49
Asset backed securities — — — — — — 10,390 2.59
Corporate bonds 1,006 2.44 1,024 4.43 — — — —
Total securities available-for-sale $ 2,812 2.13 % $ 20,805 2.60 % $ 33,948 2.81 % $ 118,794 3.01 %

~~Loans~~

Our loan portfolio represents a broad range of borrowers comprised of commercial real estate, commercial and industrial, residential real estate, and consumer financing loans.

Commercial real estate loans consist of term loans secured by a mortgage lien on the real property, such as office and industrial buildings, retail shopping centers and apartment buildings, as well as commercial real estate construction loans that are offered to builders and developers. Commercial real estate loans are then segregated into two classes: non-owner occupied and owner occupied commercial real estate loans. Non-owner occupied loans, which include loans secured by non-owner occupied and nonresidential properties, generally have a greater risk profile than owner-occupied loans, which include loans secured by multifamily structures and owner-occupied commercial structures.

Commercial and industrial loans include financing for commercial purposes in various lines of ~~businesses,~~business, including manufacturing, service industry and professional service areas. Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners. The PPP loans funded during the second and third quarters of 2020 and first and second quarters of 2021, which are guaranteed by the SBA, are reported within the commercial and industrial loan category.

~~Table of Contents~~

Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30-year term and, in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms. Real estate construction loans are also offered to consumers who wish to build their own homes and are often structured to be converted to permanent loans at the end of the construction phase, which is typically twelve months. Residential real estate loans also include home equity loans and lines of credit that are secured by a first- or second-lien on the borrower's residence. Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.

Consumer loans include loans made to individuals not secured by real estate, including loans secured by automobiles or watercraft, and personal unsecured loans.

The following table details our loan portfolio by loan type at the dates presented:


		As of September 30,		As of December 31,									As of September 30,		As of December 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2018		2017		2016		(Dollars in thousands)	2021		2020		2019		2018		2017
Commercial real estate:	Commercial real estate:											Commercial real estate:
Non-owner occupied	Non-owner occupied	$	460,708	$	388,515	$	367,671	$	343,420	$	322,354	Non-owner occupied	$	479,633	$	445,810	$	388,515	$	367,671	$	343,420
Owner occupied	Owner occupied	269,481		216,131		194,422		168,342		169,348		Owner occupied	295,228		275,022		216,131		194,422		168,342
Total commercial real estate	Total commercial real estate	730,189		604,646		562,093		511,762		491,702		Total commercial real estate	774,861		720,832		604,646		562,093		511,762
Commercial and industrial	Commercial and industrial	807,923		410,228		383,455		377,686		342,069		Commercial and industrial	540,546		685,504		410,228		383,455		377,686
Residential real estate	Residential real estate	304,088		211,839		180,018		144,439		118,730		Residential real estate	403,517		315,476		211,839		180,018		144,439
Consumer	Consumer	1,688		896		999		1,036		892		Consumer	793		1,725		896		999		1,036
Total loans	Total loans	$	1,843,888	$	1,227,609	$	1,126,565	$	1,034,923	$	953,393	Total loans	$	1,719,717	$	1,723,537	$	1,227,609	$	1,126,565	$	1,034,923

Total loans were ~~$1.84~~$1.72 billion at September 30, ~~2020, an increase~~2021, a decrease of ~~$616.3~~$3.8 million from December 31, ~~2019.~~2020. The ~~growth~~decline in our loan portfolio compared to December 31, ~~2019~~2021 was primarily due to ~~$392.5~~a $145.0 million decrease in our commercial and industrial loan portfolio, $142.5 million of which was due to the net change in PPP loans that were originated during the second and third quarters of 2020. The acquisition of Ann Arbor State Bank also contributed $224.1 million of loans as of January 2, 2020. There was additional organic growth of $53.3 million during the first three quarters of 2020. The loan growthloans. This was partially offset by ~~$53.6~~increases of $88.0 million ~~of runoff of acquired loans.~~in our residential real estate portfolio and $54.0 million in our commercial real estate portfolio. In general, we target a loan portfolio mix of approximately one-half commercial real estate, approximately one-third commercial and industrial loans and one-sixth a mix of residential real estate and consumer loans. As of September 30, ~~2020,~~2021, approximately ~~39.6%~~45.1% of our loans were commercial real estate, ~~43.8%~~31.4% were commercial and industrial, and ~~16.6%~~23.5% were residential real estate and consumer loans. ~~The loan mix was affected by PPP loans, which fall into the commercial and industrial loan type.~~

We originate both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of Fannie Mae and Freddie Mac, as well as home equity loans and lines of credit that are secured by first or junior liens. Most of our fixed rate residential loans, along with some of our adjustable rate mortgages, are sold to Fannie Mae and other financial institutions with which we have established a correspondent lending relationship. The Company established a direct relationship with Fannie Mae and began locking and selling loans to Fannie Mae with servicing retained during the third quarter of 2019. Refer to Note ~~7- Goodwill and Intangible Assets~~7 - Mortgage Servicing Rights, Net for further details on our mortgage servicing rights.

Loan Maturity/Rate Sensitivity

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~~Loan Maturity/Rate Sensitivity~~

The following table shows the contractual maturities of our loans as of September 30, ~~2020.~~2021.


(Dollars in thousands)	(Dollars in thousands)	One year or less		After one but within five years		After five years		Total		(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
September 30, 2020
September 30, 2021										September 30, 2021
Commercial real estate	Commercial real estate	$	93,069	$	435,324	$	201,796	$	730,189	Commercial real estate	$	105,954	$	427,610	$	241,297	$	774,861
Commercial and industrial	Commercial and industrial	149,938		579,914		78,071		807,923		Commercial and industrial	148,351		320,319		71,876		540,546
Residential real estate	Residential real estate	9,175		7,907		287,006		304,088		Residential real estate	14,176		6,911		382,430		403,517
Consumer	Consumer	59		1,499		130		1,688		Consumer	121		630		42		793
Total loans	Total loans	$	252,241	$	1,024,644	$	567,003	$	1,843,888	Total loans	$	268,602	$	755,470	$	695,645	$	1,719,717
Sensitivity of loans to changes in interest rates:	Sensitivity of loans to changes in interest rates:									Sensitivity of loans to changes in interest rates:
Fixed interest rates	Fixed interest rates			$	905,028	$	185,832			Fixed interest rates			$	650,027	$	273,194
Floating interest rates	Floating interest rates			119,616		381,171				Floating interest rates			105,443		422,451
Total	Total			$	1,024,644	$	567,003			Total			$	755,470	$	695,645

Summary of Impaired Assets and Past Due Loans

Nonperforming assets consist of nonaccrual loans and other real estate owned. We do not consider performing ~~troubled debt restructurings (TDRs)~~TDRs to be nonperforming assets, but they are included as part of impaired assets. The level of nonaccrual loans is an important element in assessing asset quality. Loans are classified as nonaccrual when, in the opinion of management, collection of principal or interest is not expected according to the terms of the agreement. Generally, loans are placed on nonaccrual status due to the continued failure by the borrower to adhere to contractual payment terms coupled with other pertinent factors, such as insufficient collateral value.

A loan is categorized as a troubled debt restructuring if a concession is granted, such as to provide for the reduction of either interest or principal, due to deterioration in the financial condition of the borrower. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than the current market rate, forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. In accordance with bank regulatory guidance, troubled debt restructurings do not include short-term modifications made on a good-faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of September 30, 2021, there were $1.1 million of loans that remained on a COVID-related deferral compared to $19.8 million as of December 31, 2020. As of September 30, 2021, there were no loans that had payments deferred greater than six months compared to $11.4 million as of December 31, 2020.

Credit Quality Indicators:

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~~Table of Contents~~

Purchased credit impaired loans accounted for under ASC 310-30 are classified as performing, even though they may be contractually past due, as any nonpayment of contractual principal or interest is considered in the semi-annual re-estimation of expected cash flows and is included in the resulting recognition of current period loan loss provision or future period yield adjustments.

Total classified and criticized loans as of September 30, ~~2020~~2021 compared to December 31, ~~2019~~2020 were as follows:


(Dollars in thousands)	(Dollars in thousands)	September 30, 2020		December 31, 2019		(Dollars in thousands)	September 30, 2021		December 31, 2020
Classified loans:	Classified loans:					Classified loans:
Substandard	Substandard	$	18,983	$	20,569	Substandard	$	23,994	$	34,921
Doubtful	Doubtful	5,086		1,838		Doubtful	1,557		1,143
Total classified loans	Total classified loans	$	24,069	$	22,407	Total classified loans	$	25,551	$	36,064
Special mention	Special mention	37,560		17,292		Special mention	64,642		47,297
Total classified and criticized loans	Total classified and criticized loans	$	61,629	$	39,699	Total classified and criticized loans	$	90,193	$	83,361

A summary of nonperforming assets (defined as nonaccrual loans and other real estate owned), performing troubled debt restructurings and loans 90 days or more past due and still accruing, as of the dates indicated, are presented below.


		As of September 30,		As of December 31,									As of September 30,		As of December 31,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2018		2017		2016		(Dollars in thousands)	2021		2020		2019		2018		2017
Nonaccrual loans	Nonaccrual loans											Nonaccrual loans
Commercial real estate	Commercial real estate	$	7,022	$	4,832	$	5,927	$	2,257	$	147	Commercial real estate	$	3,768	$	7,320	$	4,832	$	5,927	$	2,257
Commercial and industrial	Commercial and industrial	8,078		11,112		9,605		9,024		13,389		Commercial and industrial	4,746		7,490		11,112		9,605		9,024
Residential real estate	Residential real estate	4,151		2,569		2,915		2,767		1,498		Residential real estate	3,610		3,991		2,569		2,915		2,767
Consumer	Consumer	15		16		—		—		—		Consumer	9		15		16		—		—
Total nonaccrual loans(1)	Total nonaccrual loans(1)	19,266		18,529		18,447		14,048		15,034		Total nonaccrual loans(1)	12,133		18,816		18,529		18,447		14,048
Other real estate owned	Other real estate owned	—		921		—		652		258		Other real estate owned	—		—		921		—		652
Total nonperforming assets	Total nonperforming assets	19,266		19,450		18,447		14,700		15,292		Total nonperforming assets	12,133		18,816		19,450		18,447		14,700
Performing troubled debt restructurings	Performing troubled debt restructurings											Performing troubled debt restructurings
Commercial real estate		—		—		—		—		290

Commercial and industrial	Commercial and industrial	550		547		568		961		1,018		Commercial and industrial	336		546		547		568		961
Residential real estate	Residential real estate	599		359		363		261		207		Residential real estate	426		432		359		363		261
Total performing troubled debt restructurings	Total performing troubled debt restructurings	1,149		906		931		1,222		1,515		Total performing troubled debt restructurings	762		978		906		931		1,222
Total impaired assets, excluding ASC 310-30 loans	Total impaired assets, excluding ASC 310-30 loans	$	20,415	$	20,356	$	19,378	$	15,922	$	16,807	Total impaired assets, excluding ASC 310-30 loans	$	12,895	$	19,794	$	20,356	$	19,378	$	15,922
Loans 90 days or more past due and still accruing	Loans 90 days or more past due and still accruing	$	552	$	157	$	243	$	440	$	377	Loans 90 days or more past due and still accruing	$	162	$	269	$	157	$	243	$	440

(1)Nonaccrual loans include nonperforming troubled debt restructurings of ~~$2.4~~$3.5 million, $3.8 million, $3.0 million, $5.0 million ~~$6.4 million,~~ and ~~$5.8~~$6.4 million at the respective dates indicated above.

During the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, the Company recorded ~~$144~~$616 thousand and ~~$848~~$144 thousand, respectively, of interest income on nonaccrual loans and performing TDRs excluding PCI loans.`

In addition to nonperforming and impaired assets, the Company had purchased credit impaired loans accounted for under ASC 310-30 which amounted to ~~$6.1~~$4.4 million, $5.0 million, $6.0 million, $7.9 million, ~~$9.7 million,~~ and ~~$11.6~~$9.7 million at the respective dates indicated in the table above. ~~The increase in purchase credit impaired loans as of September 30, 2020 compared to December 31, 2019 was due to the acquisition of Ann Arbor State Bank.~~

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Nonperforming assets decreased ~~$184 thousand~~$6.7 million as of September 30, ~~2020~~2021 compared to December 31, ~~2019.~~2020. The decrease in nonperforming assets was attributable to a decrease in nonaccrual loans primarily due to pay offs of ~~$921 thousand in other real estate owned,~~three commercial loan relationships totaling $5.1 million and a $2.8 million paydown on one commercial loan relationship. This was partially offset by an increase of $737 thousand in nonaccrual loans. The decrease in other real estate owned assets was due to the sale of four properties totaling $2.1 million during the second and third quarters of 2020, which included the sale of a property related to a $1.0 millionthree commercial loan ~~relationship transferred from nonaccrual loans to other real estate owned during the first nine months of 2020. The increase in nonaccrual loans was primarily due to five commercial loan~~ relationships ~~and two residential loan relationships totaling $11.4 million~~ moving to nonaccrual status ~~partially offset by~~totaling $2.3 million. There was $735 thousand of nonperforming loans that were in the ~~sale~~process of a $7.9 million commercial loan relationship on nonaccrual status as well as the transfer of the $1.0 million commercial loan relationship from nonaccrual loans to other real estate owned during the second quarter of 2020.foreclosure at September 30, 2021.

Allowance for Loan Losses

We maintain the allowance for loan losses at a level we believe is sufficient to absorb probable incurred losses in our loan portfolio given the conditions at the time. Management determines the adequacy of the allowance based on periodic evaluations of the loan portfolio and other factors. These evaluations are inherently subjective as they require management to make material estimates, all of which may be susceptible to significant change. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries.

~~Purchased~~Acquired Loans

The allowance for loan losses on ~~purchased~~acquired loans is based on credit deterioration subsequent to the acquisition date. In accordance with the accounting guidance for business combinations, there was no allowance brought forward on any of the acquired loans as any credit deterioration evident in the loans was included in the determination of the fair value of the loans at the acquisition date. For purchased credit impaired loans, accounted for under ASC 310-30, management establishes an allowance for credit deterioration subsequent to the date of acquisition by re-estimating expected cash flows on a semi-annual basis with any decline in expected cash flows recorded as provision for loan losses. Impairment is measured as the excess of the recorded investment in a loan over the present value of expected future cash flows discounted at the pre-impairment accounting yield of the loan. For increases in cash flows expected to be collected, we first reverse any previously recorded allowance for loan losses, then adjust the amount of accretable yield recognized on a prospective basis over the loan's remaining life. These cash flow evaluations are inherently subjective as they require material estimates, all of which may be susceptible to significant change. For non-purchased credit impaired loans acquired in our acquisitions that are accounted for under ASC 310-20, the historical loss estimates are based on the historical losses experienced since acquisition. We record an allowance for loan losses only when the calculated amount exceeds the discount remaining from acquisition that was established for the similar period covered in the allowance for loan loss calculation. For all other purchased loans, the allowance is calculated in accordance with the methods used to calculate the allowance for loan losses for originated loans, as described below.

Originated Loans

The allowance for loan losses represents management's assessment of probable credit losses inherent in the loan portfolio. The allowance for loan losses consists of specific components, based on individual evaluation of certain loans, and general components for homogeneous pools of loans with similar risk characteristics.

Impaired loans include loans placed on nonaccrual status and troubled debt restructurings. Loans are considered impaired when based on current information and events it is probable that we will be unable to collect all amounts due in accordance with the original contractual terms of the loan agreements. When determining if we will be unable to collect all principal and interest payments due in accordance with the original contractual terms of the loan agreement, we consider the borrower's overall financial condition, resources and payment record, support from guarantors, and the realizable value of any collateral. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to the principal and interest owed.

All impaired loans are identified to be individually evaluated for impairment. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the discounted expected future cash flows or at the fair value of collateral if repayment is collateral dependent.

The allowance for our nonimpaired loans, which includes commercial real estate, commercial and industrial, residential real estate, and consumer loans that are not individually evaluated for impairment, begins with a process of estimating the probable incurred losses in the portfolio. These estimates are established based on our historical loss data. Additional allowance estimates for commercial and industrial and commercial real estate loans are based on internal credit risk ratings. Internal credit risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by

~~Table of Contents~~

senior management, at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan. There is no allowance on PPP loans (included in the commercial and industrial loan category) since they are 100% guaranteed by the SBA.

Table of Contents

The Company's current methodology on historical loss analysis incorporates and fully relies on the Company's own historical loss data. The historical loss estimates are established by loan type including commercial real estate, commercial and industrial, residential real estate, and consumer. In addition, consideration is given to the borrower’s rating for commercial and industrial and commercial real estate loans.

The following table presents, by loan type, the changes in the allowance for loan losses for the periods presented.


		For the three months ended September 30,						For the nine months ended September 30,							For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020			2019			2020			2019			(Dollars in thousands)		2021			2020			2021			2020
Balance at beginning of period	Balance at beginning of period	$	17,063		$	12,353		$	12,674		$	11,566		Balance at beginning of period		$	23,144		$	17,063		$	22,297		$	12,674
Loan charge-offs:	Loan charge-offs:													Loan charge-offs:
Commercial real estate		—			—			—			(74)

Commercial and industrial	Commercial and industrial	(10)			(49)			(1,729)			(164)			Commercial and industrial		(6)			(10)			(24)			(1,729)

Residential real estate														Residential real estate		(242)			(110)			(242)			(110)
Consumer	Consumer	(4)			(34)			(47)			(48)			Consumer		(7)			(4)			(21)			(47)
Total loan charge-offs	Total loan charge-offs	(124)			(83)			(1,886)			(286)			Total loan charge-offs		(255)			(124)			(287)			(1,886)
Recoveries of loans previously charged-off:	Recoveries of loans previously charged-off:													Recoveries of loans previously charged-off:
Commercial real estate	Commercial real estate	12			5			12			6			Commercial real estate		—			12			—			12
Commercial and industrial	Commercial and industrial	15			10			47			101			Commercial and industrial		8			15			44			47
Residential real estate	Residential real estate	10			12			51			55			Residential real estate		14			10			46			51
Consumer	Consumer	8			26			22			30			Consumer		9			8			15			22
Total loan recoveries	Total loan recoveries	45			53			132			192			Total loan recoveries		31			45			105			132
Net charge-offs	Net charge-offs	(79)			(30)			(1,754)			(94)			Net charge-offs		(224)			(79)			(182)			(1,754)
Provision expense for loan losses		4,270			(16)			10,334			835
Provision expense (benefit) for loan losses														Provision expense (benefit) for loan losses		(1,189)			4,270			(384)			10,334
Balance at end of period	Balance at end of period	$	21,254		$	12,307		$	21,254		$	12,307		Balance at end of period		$	21,731		$	21,254		$	21,731		$	21,254
Allowance for loan losses as a percentage of period-end loans	Allowance for loan losses as a percentage of period-end loans	1.15		%	1.05		%	1.15		%	1.05		%	Allowance for loan losses as a percentage of period-end loans		1.26		%	1.15		%	1.26		%	1.15		%
Net charge-offs to average loans	Net charge-offs to average loans	0.02			0.01			0.14			0.03			Net charge-offs to average loans		0.05			0.02			0.01			0.14

Our allowance for loan losses was ~~$21.3~~$21.7 million, or ~~1.15%~~1.26% of loans, at September 30, ~~2020~~2021 compared to ~~$12.7~~$22.3 million, or ~~1.03%~~1.29% of loans, at December 31, ~~2019.~~2020. As of September 30, 2021 and December 31, 2020, the allowance for loan losses as a percentage of loans excluding PPP loans (a non-GAAP measure), was ~~1.46%.~~1.38% and 1.56%, respectively. The ~~$8.6 million increase~~$566 thousand decrease in the allowance for loan losses ~~since December 31, 2019~~during the nine months ended September 30, 2021 was primarily due to ~~increases~~a decrease in general reserves related to ~~a 25 basis point increase of~~ the ~~economic~~reduction in qualitative factors ~~reflecting~~within the ~~expected economic impact of the COVID-19 pandemic in the second quarter of 2020 as well~~allowance for loan loss model as a ~~20-25 basis point increase~~result of ~~the qualitative factors in the third quarter of 2020 reflecting the uncertainty surrounding the impact of the COVID-19 pandemic on the loan portfolio.~~improved credit quality.

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The following table presents, by loan type, the allocation of the allowance for loan losses at the dates presented.


(Dollars in thousands)	(Dollars in thousands)	Allocated Allowance		Percentage of loans in each category to total loans		(Dollars in thousands)	Allocated Allowance		Percentage of loans in each category to total loans
September 30, 2020
September 30, 2021						September 30, 2021
Balance at end of period applicable to:						Balance at end of period applicable to:
Commercial real estate						Commercial real estate	$	9,790	45.1	%
Commercial and industrial						Commercial and industrial	8,114		31.4
Residential real estate						Residential real estate	3,823		23.5
Consumer						Consumer	4		—
Total loans						Total loans	$	21,731	100.0	%
December 31, 2020						December 31, 2020
Balance at end of period applicable to:	Balance at end of period applicable to:					Balance at end of period applicable to:
Commercial real estate	Commercial real estate	$	9,819	39.6	%	Commercial real estate	$	9,975	41.8	%
Commercial and industrial	Commercial and industrial	8,180		43.8		Commercial and industrial	8,786		39.8
Residential real estate	Residential real estate	3,246		16.5		Residential real estate	3,527		18.3
Consumer	Consumer	9		0.1		Consumer	9		0.1
Total loans	Total loans	$	21,254	100.0	%	Total loans	$	22,297	100.0	%
December 31, 2019	December 31, 2019					December 31, 2019
Balance at end of period applicable to:	Balance at end of period applicable to:					Balance at end of period applicable to:
Commercial real estate	Commercial real estate	$	5,773	49.2	%	Commercial real estate	$	5,773	49.2	%
Commercial and industrial	Commercial and industrial	5,515		33.4		Commercial and industrial	5,515		33.4
Residential real estate	Residential real estate	1,384		17.3		Residential real estate	1,384		17.3
Consumer	Consumer	2		0.1		Consumer	2		0.1
Total loans	Total loans	$	12,674	100.0	%	Total loans	$	12,674	100.0	%
December 31, 2018	December 31, 2018					December 31, 2018
Balance at end of period applicable to:	Balance at end of period applicable to:					Balance at end of period applicable to:
Commercial real estate	Commercial real estate	$	5,227	49.9	%	Commercial real estate	$	5,227	49.9	%
Commercial and industrial	Commercial and industrial	5,174		34.0		Commercial and industrial	5,174		34.0
Residential real estate	Residential real estate	1,164		16.0		Residential real estate	1,164		16.0
Consumer	Consumer	1		0.1		Consumer	1		0.1
Total loans	Total loans	$	11,566	100.0	%	Total loans	$	11,566	100.0	%
December 31, 2017	December 31, 2017					December 31, 2017
Balance at end of period applicable to:	Balance at end of period applicable to:					Balance at end of period applicable to:
Commercial real estate	Commercial real estate	$	4,852	49.4	%	Commercial real estate	$	4,852	49.4	%
Commercial and industrial	Commercial and industrial	5,903		36.5		Commercial and industrial	5,903		36.5
Residential real estate	Residential real estate	950		14.0		Residential real estate	950		14.0
Consumer	Consumer	8		0.1		Consumer	8		0.1
Total loans	Total loans	$	11,713	100.0	%	Total loans	$	11,713	100.0	%
December 31, 2016
Balance at end of period applicable to:
Commercial real estate		$	4,124	51.5	%
Commercial and industrial		5,932		35.9
Residential real estate		1,030		12.5
Consumer		3		0.1
Total loans		$	11,089	100.0	%

Goodwill

The Company has acquired three banks, Lotus Bank in March 2015, Bank of Michigan in March 2016, and Ann Arbor State Bank in January 2020, which resulted in the recognition of goodwill. Total goodwill was $35.6 million at September 30, ~~2020~~2021 and ~~$9.4 million at~~ December 31, ~~2019.~~2020.

As a result of the unprecedented decline in economic conditions triggered by the COVID-19 pandemic, the market valuations, including our stock price, saw a significant decline in March 2020, which then continued into the second quarter of 2020. These events indicated that goodwill may be impaired and resulted in us performing a qualitative goodwill impairment assessment in the second quarter of 2020. As a result of the analysis, we concluded that it was more-likely-than-not that the fair value of the reporting unit could be greater than its carrying amount.

Since the price of our stock did not fully recover during the third quarter of 2020, the Company ~~decided to engage~~engaged a reputable, third-party valuation firm to perform a quantitative analysis of goodwill as of August 31, 2020 ("the valuation date").

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In deriving at the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events toon financial performance; the market price of our common stock; and other relevant events. In addition, the valuation relied on financial projections through 2023 and growth

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rates prepared by management. Based on the valuation prepared, it was determined that the Company's estimated fair value of the reporting unit at August 31, 2020 was greater than its book value, and impairment of goodwill was not required.

~~Furthermore, management noted that despite the market capitalization declining from December 2019 to September~~The Company completed its annual goodwill impairment review as of October 1, 2020, ~~as a result of the COVID-19 pandemic, the Bank’s financial performance has remained positive. This is evidenced by the~~noting strong financial indicators for the Bank, solid credit quality ratios, as well as the strong capital position of the Bank. In addition, third quarter 2020 revenue reflected significant and continuing growth in our residential mortgage banking business, as well as net SBA fees related to PPP loans funded during second and third quarters of 2020. Management concurred with the conclusion derived from the quantitative goodwill analysis as of August 31, 2020 and determined that there were no material changes between the valuation date and October 1, 2020. Management also determined that no triggering events have occurred that indicated impairment from the most recent valuation date through September 30, ~~2020. As such, management concluded that~~2021, the stock was trading above book value as of September 30, 2021, and it is more likely than not that there was no goodwill impairment as of September 30, ~~2020.~~2021.

Deposits

Total deposits were ~~$1.94~~$2.07 billion at September 30, ~~2020~~2021 and ~~$1.14~~$1.96 billion at December 31, ~~2019,~~2020, representing ~~86.9%~~89.5% and ~~80.3%~~88.1% of total liabilities, respectively. The increase in deposits of ~~$808.0~~$103.7 million was comprised of increases of ~~$359.4~~$225.1 million in demand deposits ~~$281.6~~and $11.7 million in money market and savings deposits, ~~and $167.1~~partially offset by a decrease of $133.1 million in time deposits. The increase in deposits was primarily due to ~~$543.2 million of~~ organic deposit growth during the nine months ended September 30, ~~2020~~2021 mainly as a result of ~~PPP loan funds deposited into~~increased customer ~~accounts. In addition, the acquisition of Ann Arbor State Bank in first quarter of 2020 contributed $264.8 million in deposits.~~liquidity and new customer growth.

Our average interest-bearing deposit costs were ~~1.06%~~0.35% and ~~1.92%~~1.06% for the nine months ended September 30, ~~2020~~2021 and ~~2019,~~2020, respectively. The decrease in interest-bearing deposit costs between the two periods was ~~impacted~~primarily due to lower interest rates paid as a result of revised internal deposit rates, mainly driven by the ~~changing mix~~continuation of ~~deposit types, as well as by~~ the ~~decrease in overnight market rates, as measured by~~low level of the target federal funds ~~interest~~ rate. The target federal funds interest rate ~~decreased 25 basis points in each of August, September and October of 2019 and~~ decreased 150 basis points during March 2020.

Brokered deposits. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. For these brokered deposits, detailed records of owners are maintained by ~~the~~The Depository Trust Company under the name of CEDE & Co. This relationship provides a large source of deposits for the Company. Due to the competitive nature of the brokered deposit market, brokered deposits tend to bear higher rates of interest than non-brokered deposits. At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had approximately ~~$54.4~~$23.1 million and ~~$67.4~~$29.3 million, respectively, of brokered ~~deposits, respectively.~~deposits. The Company's ability to accept, roll-over or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well-capitalized."

Included in the brokered deposits total at September 30, 2021 and December 31, ~~2019~~2020 was ~~$514~~$679 thousand and $1.2 million, respectively, in Certificate of Deposit Account Registry Service ("CDARS") ~~customer deposit accounts due to an early withdrawal~~one-way buys that were acquired from ~~a CDARS customer deposit account in the first quarter of 2018 that was paid at maturity.~~Ann Arbor State Bank.

Management understands the importance of core deposits as a stable source of funding and may periodically implement various deposit promotion strategies to encourage core deposit growth. For periods of rising interest rates, management has modeled the aggregate yields for non-maturity deposits and time deposits to increase at a slower pace than the increase in underlying market rates, which is intended to result in net interest margin expansion and an increase in net interest income.

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The following table sets forth the distribution of average deposits by account type for the periods indicated below.

Three Months Ended September 30, 2020
(Dollars in thousands) Average
Balance Percent Average
Rate
Noninterest-bearing demand deposits $ 640,095 34.6 % — %
Interest-bearing demand deposits 116,285 6.3 0.22
Money market and savings deposits 513,420 27.8 0.43
Time deposits 575,179 31.3 1.18
Total deposits $ 1,844,979 100.0 % 0.50 %

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Nine Months Ended September 30, 2020
(Dollars in thousands) Average
Balance Percent Average
Rate
Noninterest-bearing demand deposits $ 546,066 32.5 % — %
Interest-bearing demand deposits 112,579 6.7 0.31
Money market and savings deposits 458,438 27.3 0.65
Time deposits 564,396 33.5 1.55
Total deposits $ 1,681,479 100.0 % 0.72 %


	Three Months Ended September 30, 2021
(Dollars in thousands)	Average Balance		Percent		Average Rate
Noninterest-bearing demand deposits	$	774,926	37.9	%	—	%
Interest-bearing demand deposits	156,977		7.7		0.14
Money market and savings deposits	624,190		30.5		0.17
Time deposits	489,261		23.9		0.53
Total deposits	$	2,045,354	100.0	%	0.19	%

	Nine Months Ended September 30, 2021
(Dollars in thousands)	Average Balance		Percent		Average Rate
Noninterest-bearing demand deposits	$	735,162	35.9	%	—	%
Interest-bearing demand deposits	144,449		7.1		0.15
Money market and savings deposits	623,123		30.5		0.20
Time deposits	541,018		26.5		0.58
Total deposits	$	2,043,752	100.0	%	0.23	%

The following table shows the contractual maturity of time deposits, including CDARS and IRA deposits and other brokered funds, of $100 thousand and over that were outstanding as of the date presented.


(Dollars in thousands)	September 30, ~~2020~~2021
Maturing in:
3 months or less	$	~~5,232~~108,867
3 months to 6 months	~~140,383~~118,644
6 months to 1 year	~~130,872~~120,922
1 year or greater	~~243,354~~67,157
Total	$	~~519,841~~415,590

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Borrowings

Total debt outstanding at September 30, ~~2020~~2021 was ~~$261.4~~$211.7 million, ~~an increase~~a decrease of ~~$4.6~~$18.6 million from ~~$256.7~~$230.3 million at December 31, ~~2019.~~2020. The ~~increase~~decrease in total borrowings was primarily due to ~~increases~~a $15.0 million redemption of ~~$34.1 million~~subordinated debt in ~~FRB borrowings~~ ~~to help facilitate the funding of PPP loans,~~ and $36.2 million in long-term FHLB advances, partially offset by decreases of $60.0 million in short-term FHLB advances, $5.0 million in federal funds purchased and $664 thousand in securities sold under agreements to repurchase.June 2021.

At September 30, 2020, the Company had $34.1 million of debt outstanding with the Federal Reserve Bank under the PPP Liquidity Facility. The FRB borrowings bear a 0.35% fixed interest rate and mature two years after the origination date of the respective PPP loans that have been pledged to secure them.

~~At September 30, 2020,~~2021, FHLB advances were secured by a blanket lien o~~n $510.6~~on $582.8 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of ~~$1.9~~$3.8 million. At December 31, ~~2019~~,2020, FHLB advances were secured by a blanket lien on ~~$408.9~~$512.3 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of ~~$1.5~~$3.7 million.

As of September 30, 2021, the Company had $30.0 million of subordinated notes outstanding and debt issuance costs of $332 thousand related to these subordinated notes. As of December 31, 2020, the Company had $45.0 million of subordinated notes outstanding and debt issuance costs of ~~$445 thousand related to these subordinated notes. As of December 31, 2019, the Company had $45.0 million of subordinated notes outstanding and debt issuance costs of $560~~$408 thousand related to these subordinated notes.

The $15.0 million of subordinated notes issued on December 21, 2015 ~~bear~~had a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. ~~The~~From December 15, 2020, through maturity, the notes ~~will bear~~had a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly ~~after December 15, 2020~~ through maturity. The notes were scheduled to mature ~~no later than~~on December 15, 2025, and the Company ~~has~~had the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 15, 2020 or upon an occurrence of a Tier 2 capital event or tax event. These subordinated notes were redeemed in June 2021.

The $30.0 million of subordinated notes issued on December 18, 2019 bear a fixed interest rate of 4.75% per annum, payable semiannually through December 18, 2024. The notes will bear a floating interest rate of three-month ~~secured overnight financing rate (SOFR)~~SOFR plus 311 basis points payable quarterly after December 18, 2024 through maturity. The notes mature ~~no later than~~on December 18, 2029, and the Company has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or uponupon the occurrence of a Tier 2 capital event or tax event. The issuance of the $30.0 million subordinated notes

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reflected management's efforts to fund the liquidity needs of the Company as well as pay the merger consideration to purchase Ann Arbor State Bank.

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Selected financial information pertaining to the components of our short-term borrowings for the periods and as of the dates indicated is as follows:


		For the three months ended September 30,						For the nine months ended September 30,							For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020			2019			2020			2019			(Dollars in thousands)	2021			2020			2021			2020
Securities sold under agreements to repurchase	Securities sold under agreements to repurchase													Securities sold under agreements to repurchase
Average daily balance	Average daily balance	$	163		$	563		$	330		$	537		Average daily balance	$	2,517		$	163		$	3,011		$	330
Weighted-average rate during period	Weighted-average rate during period	0.30		%	0.30		%	0.30		%	0.30		%	Weighted-average rate during period	0.25		%	0.30		%	0.25		%	0.30		%
Amount outstanding at period end	Amount outstanding at period end	$	187		$	545		$	187		$	545		Amount outstanding at period end	$	2,681		$	187		$	2,681		$	187
Weighted-average rate at period end	Weighted-average rate at period end	0.30		%	0.30		%	0.30		%	0.30		%	Weighted-average rate at period end	0.25		%	0.30		%	0.25		%	0.30		%
Maximum month-end balance	Maximum month-end balance	$	187		$	866		$	936		$	866		Maximum month-end balance	$	2,681		$	187		$	3,993		$	936
FHLB Advances	FHLB Advances													FHLB Advances
Average daily balance	Average daily balance	$	—		$	6,630		$	5,456		$	27,903		Average daily balance	$	—		$	—		$	—		$	5,456
Weighted-average rate during period	Weighted-average rate during period	—		%	2.57		%	0.99		%	2.49		%	Weighted-average rate during period	—		%	—		%	—		%	0.99		%
Amount outstanding at period end		$	—		$	—		$	—		$	—
Weighted-average rate at period end		—		%	—		%	—		%	—		%

Maximum month-end balance	Maximum month-end balance	$	—		$	—		$	25,000		$	95,000		Maximum month-end balance	$	—		$	—		$	—		$	25,000
FHLB Line of Credit	FHLB Line of Credit													FHLB Line of Credit
Average daily balance	Average daily balance	$	63		$	—		$	60		$	111		Average daily balance	$	—		$	63		$	4		$	60
Weighted-average rate during period	Weighted-average rate during period	—		%	—		%	1.29		%	2.92		%	Weighted-average rate during period	—		%	—		%	0.44		%	1.29		%
Amount outstanding at period end		$	—		$	—		$	—		$	—
Weighted-average rate at period end		—		%	—		%	—		%	—		%
Maximum month-end balance		$	—		$	—		$	—		$	895

Federal funds purchased	Federal funds purchased													Federal funds purchased
Average daily balance	Average daily balance	$	—		$	109		$	193		$	2,044		Average daily balance	$	—		$	—		$	—		$	193
Weighted-average rate during period	Weighted-average rate during period	—		%	—		%	2.73		%	2.74		%	Weighted-average rate during period	—		%	—		%	—		%	2.73		%
Amount outstanding at period end		$	—		$	10,000		$	—		$	10,000
Weighted-average rate at period end		—		%	1.90		%	—		%	1.90		%
Maximum month-end balance		$	—		$	10,000		$	—		$	15,000

Capital Resources

Shareholders' equity is influenced primarily by earnings, dividends, the Company's sales and repurchases of its common stock and changes in accumulated other comprehensive income caused primarily by fluctuations in unrealized gains or losses, net of taxes, on available for sale securities.

Shareholders' equity increased ~~$38.8~~$18.6 million to ~~$209.5~~$233.9 million at September 30, ~~2020~~2021 as compared to ~~$170.7~~$215.3 million at December 31, ~~2019.~~2020. The increase in shareholders' equity was primarily impacted by ~~$23.4 million from the issuance of preferred stock as well as $12.0~~$25.4 million of net income generated during the nine months ended September 30, ~~2020 and an increase~~2021, partially offset by decreases of ~~$4.5~~$3.3 million of accumulated other comprehensive income due to ~~increases~~decreases in net unrealized gains on available-for-sale securities, ~~partially offset by $1.2~~$1.4 million of dividends declared on our preferred stock, $1.4 million of dividends declared on our common stock, and ~~$620 thousand~~$1.4 million of stock repurchased through the share buyback program during the nine months ended September 30, ~~2020.~~2021.

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The following table summarizes the changes in our shareholders' equity for the periods indicated below:


		For the three months ended September 30,				For the nine months ended September 30,					For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	(Dollars in thousands)	2020		2019		2020		2019		(Dollars in thousands)	2021		2020		2021		2020
Balance at beginning of period	Balance at beginning of period	$	180,259	$	162,867	$	170,703	$	151,760	Balance at beginning of period	$	225,409	$	180,259	$	215,327	$	170,703
Net income	Net income	5,209		4,409		12,040		11,431		Net income	9,465		5,209		25,403		12,040
Other comprehensive income		783		1,238		4,451		7,120

Other comprehensive income (loss)										Other comprehensive income (loss)	(216)		783		(3,327)		4,451
Preferred stock offering, net of issuance costs	Preferred stock offering, net of issuance costs	23,370		—		23,370		—		Preferred stock offering, net of issuance costs	—		23,370		—		23,370
Redeemed stock	Redeemed stock	—		(488)		(620)		(2,108)		Redeemed stock	—		—		(1,364)		(620)
Common stock dividends declared	Common stock dividends declared	(387)		(310)		(1,160)		(928)		Common stock dividends declared	(459)		(387)		(1,374)		(1,160)
Dividends on 7.50% Series B Preferred Stock										Dividends on 7.50% Series B Preferred Stock	(468)		—		(1,406)		—
Exercise of stock options	Exercise of stock options	—		63		95		219		Exercise of stock options	—		—		243		95

Stock-based compensation expense	Stock-based compensation expense	234		189		589		474		Stock-based compensation expense	203		234		432		589
Balance at end of period	Balance at end of period	$	209,468	$	167,968	$	209,468	$	167,968	Balance at end of period	$	233,934	$	209,468	$	233,934	$	209,468

We strive to maintain an adequate capital base to support our activities in a safe and sound manner while at the same time attempting to maximize shareholder value. We assess capital adequacy against the risk inherent in our balance sheet, recognizing that unexpected loss is the common denominator of risk and that common equity has the greatest capacity to absorb unexpected loss.

We are subject to various regulatory capital requirements both at the Company level and at the Bank level. Failure to meet minimum capital requirements could result in certain mandatory and possible additional discretionary actions by regulators that, if undertaken, could have an adverse material effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting policies. We have consistently maintained regulatory capital ratios at or above the well-capitalized standards.

A capital conservation buffer, comprised of common equity tier 1 capital, is established above the regulatory minimum capital requirements, and financial institutions that maintain a capital conservation buffer ~~greater than~~of 2.5% are generally not subject to the additional restrictions on dividends, share repurchases and discretionary bonus payments to executive officers under the Basel III Rule.

At September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company's and the Bank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory ~~framework for prompt corrective action.~~

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guidelines.

The summary below compares the actual capital ratios with the minimum quantitative measures established by regulation to ensure capital adequacy:

Actual
Capital
Ratio Capital
Adequacy
Regulatory
Requirement Capital Adequacy
Regulatory Requirement +
Capital Conservation
Buffer(1) Well
Capitalized
Regulatory
Requirement
September 30, 2020
Common equity tier 1 to risk-weighted assets:
Consolidated 8.83 % 4.50 % 7.00 %
Bank 11.23 % 4.50 % 7.00 % 6.50 %
Tier 1 capital to risk-weighted assets:
Consolidated 10.31 % 6.00 % 8.50 %
Bank 11.23 % 6.00 % 8.50 % 8.00 %
Total capital to risk-weighted assets:
Consolidated 14.39 % 8.00 % 10.50 %
Bank 12.48 % 8.00 % 10.50 % 10.00 %
Tier 1 capital to average assets (leverage ratio):
Consolidated 7.17 % 4.00 % 4.00 %
Bank 7.83 % 4.00 % 4.00 % 5.00 %
December 31, 2019
Common equity tier 1 to risk-weighted assets:
Consolidated 11.72 % 4.50 % 7.00 %
Bank 12.27 % 4.50 % 7.00 % 6.50 %
Tier 1 capital to risk-weighted assets:
Consolidated 11.72 % 6.00 % 8.50 %
Bank 12.27 % 6.00 % 8.50 % 8.00 %
Total capital to risk-weighted assets:
Consolidated 15.99 % 8.00 % 10.50 %
Bank 13.24 % 8.00 % 10.50 % 10.00 %
Tier 1 capital to average assets (leverage ratio):
Consolidated 10.41 % 4.00 % 4.00 %
Bank 10.96 % 4.00 % 4.00 % 5.00 %

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	Actual Capital Ratio		Capital Adequacy Regulatory Requirement		Capital Adequacy Regulatory Requirement + Capital Conservation Buffer(1)		Well Capitalized Regulatory Requirement
September 30, 2021
Common equity tier 1 to risk-weighted assets:
Consolidated	9.82	%	4.50	%	7.00	%
Bank	12.55	%	4.50	%	7.00	%	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	11.19	%	6.00	%	8.50	%
Bank	12.55	%	6.00	%	8.50	%	8.00	%
Total capital to risk-weighted assets:
Consolidated	14.19	%	8.00	%	10.50	%
Bank	13.80	%	8.00	%	10.50	%	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	7.68	%	4.00	%	4.00	%
Bank	8.64	%	4.00	%	4.00	%	5.00	%
December 31, 2020
Common equity tier 1 to risk-weighted assets:
Consolidated	9.30	%	4.50	%	7.00	%
Bank	11.94	%	4.50	%	7.00	%	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	10.80	%	6.00	%	8.50	%
Bank	11.94	%	6.00	%	8.50	%	8.00	%
Total capital to risk-weighted assets:
Consolidated	14.91	%	8.00	%	10.50	%
Bank	13.20	%	8.00	%	10.50	%	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	6.93	%	4.00	%	4.00	%
Bank	7.67	%	4.00	%	4.00	%	5.00	%

(1) Reflects the capital conservation buffer of 2.5%. for risk-weighted asset ratios.

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Contractual Obligations

In the ordinary course of our operations, we enter into certain contractual obligations. Total contractual obligations at September 30, ~~2020~~2021 were ~~$873.4~~$686.4 million, ~~an increase~~a decrease of ~~$173.1~~$152.2 million from ~~$700.3~~$838.6 million at December 31, ~~2019.~~2020. The ~~increase~~decrease of ~~$173.1~~$152.2 million was primarily due to ~~increases~~decreases of ~~$167.1~~$133.1 million in time deposits ~~$36.2~~and $14.9 million in long-term FHLB advances, $34.1 million in FRB borrowings under the Paycheck Protection Program Liquidity Facility ("PPPLF"), and $1.4 million in operating lease obligations, partially offset by a decrease of $65.7 million in short-term borrowings.subordinated notes.

The following tables present our contractual obligations as of September 30, ~~2020~~2021 and December 31, ~~2019.The $34.1 million of FRB borrowings under PPPLF~~ ~~mature two years after the origination date of the respective PPP loans that have been pledged to secure them.~~2020.


		Contractual Maturities as of September 30, 2020											Contractual Maturities as of September 30, 2021
(Dollars in thousands)	(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total		(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	Operating lease obligations	$	1,739	$	3,507	$	2,613	$	4,074	$	11,933	Operating lease obligations	$	1,820	$	3,320	$	2,446	$	3,382	$	10,968
Short-term borrowings	Short-term borrowings	187		—		—		—		187		Short-term borrowings	2,681		—		—		—		2,681
Long-term borrowings	Long-term borrowings	3,202		51,420		32,000		130,000		216,622		Long-term borrowings	13,105		14,272		22,000		130,000		179,377
Subordinated notes	Subordinated notes	—		—		—		44,555		44,555		Subordinated notes	—		—		—		29,668		29,668
Time deposits	Time deposits	444,662		150,575		4,905		—		600,142		Time deposits	389,990		70,841		2,917		—		463,748
Total	Total	$	449,790	$	205,502	$	39,518	$	178,629	$	873,439	Total	$	407,596	$	88,433	$	27,363	$	163,050	$	686,442

Contractual Maturities as of December 31, 2019
(Dollars in thousands) Less Than
One Year One to
Three Years Three to
Five Years Over
Five Years Total
Operating lease obligations $ 1,341 $ 2,351 $ 2,149 $ 4,736 $ 10,577
Short-term borrowings 65,851 — — — 65,851
Long-term borrowings — 11,375 30,000 105,000 146,375
Subordinated notes — — — 44,440 44,440
Time deposits 392,839 39,855 378 — 433,072
Total $ 460,031 $ 53,581 $ 32,527 $ 154,176 $ 700,315


	Contractual Maturities as of December 31, 2020
(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	1,731	$	3,478	$	2,509	$	3,775	$	11,493
Short-term borrowings	3,204		—		—		—		3,204
Long-term borrowings	6,176		14,304		32,000		130,000		182,480
Subordinated notes	—		—		15,000		29,592		44,592
Time deposits	437,211		153,759		5,845		—		596,815
Total	$	448,322	$	171,541	$	55,354	$	163,367	$	838,584

Off-Balance Sheet Arrangements

In the normal course of business, the Company offers a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit. These are agreements to provide credit, as long as conditions established in the contract are met, and usually have expiration dates. Commitments may expire without being used. Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment.

We maintain an allowance to cover probable losses inherent in our financial instruments with off-balance sheet risk. At September 30, ~~2020,~~2021, the allowance for off-balance sheet risk was ~~$498~~$318 thousand, compared to ~~$318~~$490 thousand at December 31, ~~2019,~~2020, and was included in "Other liabilities" on our consolidated balance sheets.

A summary of the contractual amounts of our exposure to off-balance sheet risk is as follows.


		September 30, 2020				December 31, 2019					September 30, 2021				December 31, 2020
(Dollars in thousands)	(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	Commitments to make loans	$	5,302	$	5,295	$	16,276	$	20,128	Commitments to make loans	$	9,087	$	6,600	$	18,269	$	17,058
Unused lines of credit	Unused lines of credit	30,496		361,749		28,723		288,086		Unused lines of credit	33,383		397,716		28,898		385,307
Unused standby letters of credit and commercial letters of credit	Unused standby letters of credit and commercial letters of credit	3,705		2,028		4,895		—		Unused standby letters of credit and commercial letters of credit	3,353		—		2,340		1,992

Of the total unused lines of credit of ~~$392.2~~$431.1 million at September 30, ~~2020, $49.2~~2021, $58.7 million was comprised of undisbursed construction loan commitments. The Company expects to have sufficient access to liquidity to fund its off-balance sheet commitments.

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Liquidity

Liquidity management is the process by which we manage the flow of funds necessary to meet our financial commitments on a timely basis and at a reasonable cost and to take advantage of earnings enhancement opportunities. These financial commitments include withdrawals by depositors, credit commitments to borrowers, expenses of our operations, and capital expenditures. Liquidity is monitored and closely managed by the Bank's Asset and Liability Committee (ALCO), a group of senior officers from the finance, enterprise risk management, treasury, and lending areas, as well as two board members. It is ALCO's responsibility to ensure we have the necessary level of funds available for normal operations as well as maintain a contingency funding policy to ensure that potential liquidity stress events are planned for and quickly identified, and management has plans in place to respond. ALCO has created policies which establish limits and require measurements to monitor liquidity trends, including modeling and management reporting that identifies the amounts and costs of all available funding sources. In addition, we have implemented modeling software that projects cash flows from the balance sheet under a broad range of potential scenarios, including severe changes in the economic environment.

During the second quarter of 2020, management took steps to increase liquidity on the balance sheet and expand the capacity for additional funding in the uncertain ~~environment.~~economic environment due to COVID-19. Management maintained an elevated level of liquidity on the balance sheet in the third quarter of ~~2020,~~2021, and will continue to monitor and determine the appropriate levels of liquidity as economic conditions develop. Furthermore, the Company continues to monitor its capital ratios regularly and has benefited from income from participation in the PPP, offset by potential stress from the weakening economy due to the COVID-19 ~~pandemic.~~pandemic.

At September 30, ~~2020,~~2021, we had liquid assets of ~~$316.8~~$592.7 million, compared to ~~$257.5~~$455.4 million at December 31, ~~2019.~~2020. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered securities available-for-sale. Cash and due from banks increased to ~~$176.5~~$293.8 million, compared to ~~$103.9~~$264.1 million at December 31, ~~2019~~2020 primarily as a result of ~~excess deposits.~~forgiveness of PPP loans and increased deposit balances.

The Bank is a member of the FHLB, which provides short- and long-term funding to its members through advances collateralized by real estate-related assets and other select collateral, most typically in the form of debt securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of September 30, ~~2020,~~2021, we had ~~$181.2~~$178.1 million of outstanding borrowings from the FHLB, and these advances were secured by a blanket lien on ~~$510.6~~$582.8 million of real estate-related loans. Based on this collateral and the approved policy limits, the Company is eligible to borrow up to an additional ~~$211.1~~$219.4 million from the FHLB. Additionally, the Bank can borrow up to ~~$122.5~~$157.5 million through the unsecured lines of credit it has established with eight other banks, as well as ~~$5.3~~$5.1 million through a secured line with the Federal Reserve Bank.

Further, because the Bank is "well capitalized," it can accept wholesale funding up to 40% of total assets, or approximately ~~$977.5 million,~~$1.02 billion, based on current policy limits at September 30, ~~2020.~~2021. Management believed that as of September 30, ~~2020,~~2021, we had adequate resources to fund all of our commitments.

The following liquidity ratios compare certain assets and liabilities to total deposits or total assets.


		September 30, 2020		December 31, 2019			September 30, 2021		December 31, 2020
Investment securities available-for-sale to total assets	Investment securities available-for-sale to total assets	10.36	%	11.41	%	Investment securities available-for-sale to total assets	15.31	%	12.39	%
Loans to total deposits	Loans to total deposits	94.88		108.12		Loans to total deposits	83.20		87.79
Interest-earning assets to total assets	Interest-earning assets to total assets	94.32		95.58		Interest-earning assets to total assets	94.17		94.64
Interest-bearing deposits to total deposits	Interest-bearing deposits to total deposits	67.46		71.30		Interest-bearing deposits to total deposits	61.69		68.49

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from adverse changes in the fair value of financial instruments due to changes in interest rates. Interest-rate risk is the risk to earnings and equity value arising from changes in market interest rates and arises in the normal course of business to the extent that there is a divergence between the amount of our interest-earning assets and the amount of interest-bearing liabilities that are prepaid/withdrawn, re-price, or mature in specified periods. We seek to achieve consistent growth in net interest income and equity while managing volatility arising from shifts in market interest rates. ALCO oversees market risk management, monitoring risk measures, limits, and policy guidelines for managing the amount of interest-rate risk and its effect on net interest income and capital. Our Board of Directors approves policy limits with respect to interest rate risk.

Interest Rate Risk

Interest rate risk management is an active process that encompasses monitoring loan and deposit flows complemented by investment and funding activities. Effective interest rate risk management begins with understanding the dynamic characteristics of assets and liabilities and determining the appropriate interest rate risk position given business activities, management objectives, market expectations and ALCO policy limits and guidelines.

Interest rate risk can come in a variety of forms, including repricing risk, basis risk, yield curve risk and option risk. Repricing risk is the risk of adverse consequences from a change in interest rates that arises because of differences in the timing of when those interest rate changes impact our assets and liabilities. Basis risk is the risk of adverse consequence resulting from unequal change in the spread between two or more rates for different instruments with the same maturity. Yield curve risk is the risk of adverse consequence resulting from unequal changes in the spread between two or more rates for different maturities for the same or different instruments. Option risk in financial instruments arises from embedded options such as options provided to borrowers to make unscheduled loan prepayments, options provided to debt issuers to exercise call options prior to maturity, and depositor options to make withdrawals and early redemptions.

We regularly review our exposure to changes in interest rates. Among the factors we consider are changes in the mix of interest-earning assets and interest-bearing liabilities, interest rate spreads and repricing periods. ALCO reviews, on at least a quarterly basis, our interest rate risk position.

The interest rate risk position is measured and monitored at the Bank using net interest income simulation models and economic value of equity sensitivity analysis that capture both short-term and long-term interest-rate risk exposure.

Modeling the sensitivity of net interest income and the economic value of equity to changes in market interest rates is highly dependent on numerous assumptions incorporated into the modeling process. The models used for these measurements rely on estimates of the potential impact that changes in interest rates may have on the value and prepayment speeds on all components of our loan portfolio, investment portfolio, as well as embedded options and cash flows of other assets and liabilities. Balance sheet growth assumptions are also included in the simulation modeling process. The analysis provides a framework as to what our overall sensitivity position is as of our most recent reported position and the impact that potential changes in interest rates may have on net interest income and the economic value of our equity.

Modeling assumptions were enhanced in the first quarter of 2020 to include a more robust modeling of decay rates for non-maturity deposits. The assumption changes more accurately reflect the interest rate position of the Bank to increase in value for rising interest rate scenarios. In addition, the ~~lower~~low rate environment in the quarter extended the expected average life on certain borrowings.

Net interest income simulation involves forecasting net interest income under a variety of interest rate scenarios including instantaneous shocks.

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The estimated impact on our net interest income as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, assuming immediate parallel moves in interest rates is presented in the table below.

~~Table of Contents~~


		September 30, 2020				December 31, 2019					September 30, 2021				December 31, 2020
Change in rates	Change in rates	Following 12 months		Following 24 months		Following 12 months		Following 24 months		Change in rates	Following 12 months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	+400 basis points	(2.6)	%	4.8	%	5.8	%	1.9	%	+400 basis points	(4.6)	%	(10.8)	%	2.8	%	5.5	%
+300 basis points	+300 basis points	1.2		7.0		5.2		2.6		+300 basis points	0.9		(4.2)		5.5		7.6
+200 basis points	+200 basis points	3.2		8.3		4.2		2.7		+200 basis points	3.4		1.2		6.2		8.6
+100 basis points	+100 basis points	3.9		7.9		2.7		2.1		+100 basis points	4.8		5.3		5.7		8.2
-100 basis points	-100 basis points	(2.8)		(4.2)		(4.0)		(3.9)		-100 basis points	(4.4)		(7.3)		(3.3)		(5.2)

Management strategies may impact future reporting periods, as our actual results may differ from simulated results due to the timing, magnitude, and frequency of interest rate changes, the difference between actual experience and the characteristics assumed, as well as changes in market conditions. Market-based prepayment speeds are factored into the analysis for loan and securities portfolios. Rate sensitivity for transactional deposit accounts is modeled based on both historical experience and external industry studies.

We use economic value of equity sensitivity analysis to understand the impact of interest rate changes on long-term cash flows, income, and capital. Economic value of equity is based on discounting the cash flows for all balance sheet instruments under different interest rate scenarios.

The table below presents the change in our economic value of equity as of September 30, ~~2020~~2021 and December 31, ~~2019,~~2020, assuming immediate parallel shifts in interest rates. Changes noted between the two periods reflect recent enhancements in our asset/liability modeling, including projected values for non-maturity deposits in changing interest rate environments and limitations on lowering certain deposit rates below zero.


Change in rates	Change in rates	September 30, 2020		December 31, 2019		Change in rates	September 30, 2021		December 31, 2020
+400 basis points	+400 basis points	24.0	%	(39.4)	%	+400 basis points	(10.0)	%	15.0	%
+300 basis points	+300 basis points	27.0		(28.4)		+300 basis points	(3.0)		19.0
+200 basis points	+200 basis points	26.0		(17.8)		+200 basis points	2.0		20.0
+100 basis points	+100 basis points	19.0		(8.1)		+100 basis points	4.0		15.0
-100 basis points	-100 basis points	(30.0)		6.6		-100 basis points	(13.0)		(26.0)

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Item 4 – Controls and Procedures

Evaluation of disclosure controls and procedures. The Company’s management, including our ~~President and~~ Chief Executive Officer and our Chief Financial Officer, have evaluated the effectiveness of our “disclosure controls and procedures” (as defined in Rule 13a-15(e) under the Securities Exchange ~~Act)~~Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our ~~President and~~ Chief Executive Officer and our Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures were effective as of that date to provide reasonable assurance that the information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including its ~~President and~~ Chief Executive Officer and its Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

~~PART II.~~Part II - OTHER INFORMATION

Item 1 – Legal Proceedings

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive

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legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, anti-money laundering and anti-terrorism), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries is a party or to which our

property is the subject.

Item 1A – Risk Factors

~~In addition to~~For information regarding the factors that could affect our business, results of operations, financial condition and liquidity, see the risk factors ~~set forth~~discussed under Part I, Item 1A ~~“Risk Factors” in the Company’s~~of our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2019,~~2020.

The risk factors set forth in our Annual Report on Form 10-K for the year ended December 31, 2020, are updated by adding the following risk ~~factors apply~~factors:

Failure to complete our proposed Merger with First Merchants could negatively impact our business, financial results and stock price.

If the Merger is not completed for any reason, our ongoing business may be adversely affected, and, without realizing any of the benefits of having completed the Merger, we will be subject to a number of risks, including the following:

•we may experience negative reactions from the financial markets, including negative impacts on our stock price;

•the market price of our common stock could decline to the ~~Company.~~extent that the current market prices reflect a market assumption that the Merger will be completed;

•we may experience negative reactions from our customers, vendors and team members;

•we will have incurred substantial expenses and will be required to pay certain costs relating to the Merger, whether or not the Merger is completed, such as legal, accounting, investment banking and advisory and printing fees;

•the merger agreement places certain restrictions on the conduct of our business prior to completion of the Merger, such restrictions, the waiver of which is subject to the consent of First Merchants, may adversely affect our ability to execute certain of our business strategies; and

•matters relating to the Merger may require substantial commitments of time and resources by our management (including integration planning), which could otherwise have been devoted to other opportunities that may have been beneficial to us, as an independent company.

In addition to the above risks, if the merger agreement is terminated and our board of directors seeks another merger or business combination, the market price of our common stock could decline, which could make it more difficult to find a party willing to offer equivalent or more attractive consideration than the consideration First Merchants has agreed to provide. If the merger agreement is terminated under certain circumstances, we may be required to pay a termination fee of $11.13 million to First Merchants, which may adversely affect the price of our common stock. Any of the above risks could materially affect our business, financial results and stock price.

We face risks and uncertainties related to our proposed Merger with First Merchants.

Uncertainty about the effect of the Merger on our team members and customers may have an adverse effect on us. These uncertainties may impair our ability to attract, retain and motivate key personnel until the Merger is consummated and for a period of time thereafter, and could cause customers and others that deal with us to seek to change their existing business relationships with us. Team member retention may be particularly challenging during the pendency of the Merger, as team members may experience uncertainty about their roles with the surviving corporation following the Merger.

In addition, the merger agreement contains provisions that restrict our ability to, among other things, solicit, knowingly encourage or facilitate inquiries or proposals or enter into any agreement with respect to, or initiate or participate in any negotiations or discussions with any person concerning any alternative business combination proposals, subject to certain exceptions generally related to our board of directors’ exercise of its fiduciary duties. These provisions, which include a $11.13 million termination fee payable under certain circumstances, might discourage a potential competing acquirer that might have an interest in engaging in a superior transaction from considering or proposing that acquisition, or might result in lower value received by our shareholders than would have otherwise been received.

The ~~COVID-19 pandemic has adversely impacted our business,~~Company and ~~we expect that it~~First Merchants have operated and, until the completion of the Merger, will continue to ~~negatively affect economic conditions,~~operate, independently. The success of the Merger, including anticipated benefits and cost savings among other things, will depend, in part, on our ~~borrowers~~ and First Merchants’ ability to successfully combine and integrate our ~~business, financial condition, liquidity~~ and ~~results of operations, all~~First Merchants’ businesses in a ~~complex~~ manner ~~with uncertain duration~~that facilitates growth opportunities and ~~magnitude.~~

~~The COVID-19 pandemic has caused substantial economic dislocation~~realizes cost savings. It is possible that the integration process could result in the ~~United States. As a result,~~loss of key employees, the ~~Company has taken comprehensive steps to help our~~loss of customers, ~~team members and communities during~~ the current COVID-19 pandemic health crisis. For our customers, we have provided loan payment deferrals and offered fee waivers, among other actions. Through September 30, 2020, we have helped our consumer and smalldisruption of either company’s or both companies’ ongoing business, customers by deferring loan payments and waiving fees on $416.3 million of non-PPP loans ($388.9 million of commercial balances and $27.4 million of consumer balances). As of September 30, 2020, we had $16.3 million of loans that had an outstanding payment deferral.

In addition, the spread of the coronavirus has caused us to modify our business practices, including employee travel, employee work locations, social distancing in our branches and cancellation of physical participation in meetings, events and conferences. We have many employees working remotely, and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers and business partners.

Given the ongoing and dynamic nature of the pandemic, it is difficult to predict the full impact on our business. The extent of such impact will depend on future developments, which are highly uncertain, including when and whether the pandemic can be controlled or abated. Further, while jurisdictions in which we operate have gradually allowed the reopening of businesses and other organizations, and removed the sheltering restrictions, those actions can be reversed, and it is premature to assess whether such reopening will result in a meaningful increase in economic activity and the impact of such actions on further COVID-19 cases. As the result of the pandemic and the related adverse local and national economic consequences, we could be subject to the following risks, among others, any of which could have a material, adverse effect on our business, financial condition, liquidity and results of operations:

•~~demand for our products and services may decline, and we may determine that we are not able to prudently grow our loan portfolio, any of which would negatively affect our future growth and income;~~inconsistencies

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•in standards, controls, procedures and policies, unexpected integration issues, higher than expected integration costs and an overall post-completion integration process that takes longer than originallyanticipated. If the combined companies experience difficulties with the integration process, the anticipated benefits of the Merger may not be realized fully or at all, or may take longer to realize than expected.

The merger agreement may be terminated in accordance with its terms and the Merger may not be completed.

The merger agreement is subject to a number of conditions which must be fulfilled in order to complete the Merger. Those conditions include: the approval of the Merger by our shareholders; the effectiveness of the registration statement on Form S-4 for the shares of First Merchants common stock and preferred stock (or depositary shares in respect thereof) to be issued in the Merger; the receipt of authorization for listing on Nasdaq of the shares of First Merchants common stock and preferred stock (or depositary shares in respect thereof) to be issued in the Merger; the receipt of all required regulatory approvals; the absence of any order, decree or injunction enjoining or prohibiting the Merger; the receipt of a fairness opinion by the Company’s financial advisor; subject to certain exceptions, the accuracy of representations and warranties under the merger agreement; our and First Merchants’ performance of our and their respective obligations under the merger agreement in all material respects; and each of our and First Merchants’ receipt of a tax opinion to the effect that the Merger will be treated as a “reorganization” within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended. These conditions to the closing of the Merger may not be fulfilled in a timely manner or at all, and, accordingly, the Merger may be delayed or may not be completed.

We and First Merchants may elect to terminate the merger agreement under certain circumstances. Among other situations, if the ~~economy, including our business~~Merger is not completed by July 31, 2022 (or if the sole impediment to closing is the lack of regulatory approval, September 30, 2022), either we or First Merchants may choose not to proceed with the Merger, subject to certain exceptions. We and ~~commercial real estate borrowers and customers,~~First Merchants can also mutually decide to terminate the merger agreement at any time. If the merger agreement is ~~unable~~terminated, under certain limited circumstances, we may be required to ~~substantially and successfully reopen,~~pay a termination fee of $11.13 million to First Merchants, or ~~if high levels~~First Merchants may be required to pay a termination fee of ~~unemployment continue for an extended period~~$10.0 million to us.

Our ability to complete the Merger is subject to the receipt of ~~time, loan delinquencies, problem assets, and foreclosures~~approval from various regulatory agencies, which may ~~increase, resulting in increased provisions for credit losses and charge-offs and reduced income;~~impose conditions that could adversely affect us or cause the Merger to be abandoned.

•Before the transactions contemplated in the ~~event~~merger agreement can be completed, the Company and First Merchants must obtain various regulatory approvals. The terms and conditions of the approvals that are granted may impose conditions, limitations, obligations or costs, or place restrictions on the conduct of the combined company’s business or require changes to the terms of the transactions contemplated by the merger agreement. Although the Company and First Merchants do not currently expect that any such conditions or changes would be imposed, there can be no assurance that the regulators will not impose any such conditions, obligations or restrictions, and that such conditions, limitations, obligations or restrictions will not have the effect of delaying or preventing completion of any of the transactions contemplated by the merger agreement, imposing additional material costs on or materially limiting the revenues of the combined company following the Merger or otherwise reduce the anticipated benefits of the Merger if the Merger were consummated successfully within the expected timeframe, any of which might have an adverse effect on the combined company following the Merger.

Because the market price of First Merchants common stock may fluctuate, our shareholders cannot be certain of the precise value of the Merger consideration they may receive in the Merger.

At the time the Merger is completed, each issued and outstanding share of our common stock will be converted into the right to receive 0.7167 of a ~~prolonged or more permanent shift toward~~share of First Merchants common stock and $10.17 in cash.

There will be a ~~wide-spread work-remote environment, collateral for loans, especially commercial real estate, may decline in value, which could cause loan losses to increase;~~

•~~our allowance for credit losses may increase if borrowers experience financial difficulties beyond forbearance periods, which will adversely affect our net income;~~

•~~the net worth and liquidity of loan guarantors may decline, impairing their ability to honor commitments to us;~~

•a further and sustained decline in our stock price or the occurrence of other developments could, under certain circumstances, cause our management to perform impairment testing on our goodwill or other intangibles, which could require us to record an impairment charge that would adversely impact our results of operations, the abilitytime lapse between each of the ~~Bank~~date of the proxy statement/prospectus for the shareholder meeting to ~~pay dividends~~adopt the merger agreement, the date on which our shareholders vote to ~~us,~~approve the merger agreement, and the ~~Company's ability~~date on which our shareholders entitled to ~~pay dividends to its shareholders;~~

•receive shares of First Merchants common stock actually receive such shares. The market value of First Merchants common stock may fluctuate during these periods as a result of a variety of factors, including general market and economic conditions, changes in First Merchants’ businesses, operations and prospects, and regulatory considerations. Many of these factors are outside of our and First Merchants’ control. Consequently, at the ~~decline~~time that our shareholders must decide whether to approve the merger agreement, they will not know the actual market value of the shares of First Merchants common stock that they will receive when the Merger is completed. The actual value of the shares of First Merchants common stock received by our shareholders will depend on the market value of shares of First Merchants common stock at the time the Merger is completed. This market value may be less or more than the value used to determine the exchange ratio stated in the ~~Federal Reserve’s target federal funds rate to near 0% (or possibly below 0% in~~merger agreement.

Shareholder litigation could prevent or delay the ~~future),~~closing of the ~~yield on our assets may decline to a greater extent than the decline in our cost of interest-bearing liabilities, reducing our net interest margin and reducing net income;~~

•~~uncertainties created by the pandemic, combined with the disruptions to our own business, will~~proposed Merger or otherwise negatively ~~affect our ability to execute our acquisition strategy for the foreseeable future, limiting or delaying our future growth plans;~~

•~~any negative developments in~~impact our business ~~financial condition, capital ratios, liquidity or results of operations could result in the elimination of or a decrease in the rate of our historical quarterly cash dividend on our common stock,~~ and ~~could affect our board of directors’ determination of whether to declare dividends on our preferred stock;~~operations.

•
~~our cyber security risks are increased as the result of an increase in the number of our employees and the employees of our third-party vendors and partners working remotely;~~

•we rely on third party vendors and partners for certain services, and the unavailability of a critical service due to the COVID-19 pandemic, including as a result of any heightened cyber-related risks and/or incidents such third-parties might experience, could adversely affect us;

•local, state and federal taxes may increase as a result of deficits created by the numerous governmental support programs enacted and efforts taken to attempt to lessen the economic impact of the pandemic, which could reduce our net income; and

•~~FDIC premiums may increase if the agency experiences additional resolution costs.~~

Moreover, our future success and profitability depend substantially upon the management skills of our executive officers and directors, many of whom have held officer and director positions with us for many years. The unanticipated loss or unavailability of key employees due to the pandemic could harm our ability to operate our business or execute our business strategy. We may not be successful in finding and integrating suitable successors in the event of key employee loss or unavailability.

~~Any one or a combination of the factors identified above, or other factors, could materially and adversely affect our business, financial condition, results of operations and prospects.~~

~~We may be adversely affected by actions taken by the U.S. government to mitigate the impact of the COVID-19 pandemic on the U.S. economy.~~

The United States government has taken a number of actions to mitigate the impact of the COVID-19 pandemic on the U.S. economy. Among other steps, the Federal Reserve cut the federal funds rate in March 2020, and also lowered the interest rate on emergency lending at the discount window and lengthened the term of loans to 90 days. On March 27, 2020, the CARES Act was signed into law, which, among other things, provided for one-time payments to individuals, additional unemployment insurance, additional health-care funding, loans and grants to certain businesses, and temporary amendments to the Internal Revenue Code. In addition, the CARES Act provides financial institutions the option to temporarily suspend certain requirements under GAAP related to TDRs for a limited period of time to account for the effects of COVID-19 pandemic.

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~~The SBA was tapped to lead~~In connection with the ~~effort to loan funds to small businesses,~~Merger, lawsuits may be filed against us, First Merchants, or the directors and officers of either company in ~~conjunction~~connection with ~~banks. The Federal Reserve~~the Merger. Litigation filed against us, our board of directors or First Merchants and its board of directors could prevent or delay the ~~U.S. Treasury have also responded with lending programs under the CARES Act. Further, the Federal Reserve has intervened with a number of credit facilities intended to keep the capital markets liquid.~~

~~There can be no assurance that these actions or any future interventions by the U.S. government will be successful in mitigating the impact~~completion of the COVID-19 pandemic, and it is unclear what the cumulative effect of these extraordinary actions will be on the economy as a whole and our business. In addition, many of these measures designed to support and benefit the economy, businesses and consumers during this time have expiredMerger or ~~are set to expire~~result in the ~~near future, absent further affirmative action~~payment of ~~and extension by~~damages following completion of the ~~government. There can be no assurance~~Merger. The defense or settlement of any lawsuit or claim that remains unresolved at the ~~expiration~~effective time of ~~these programs and measures will not have a material adverse effect on our customers, including our borrowers, our employees and~~ the ~~economies in our market areas, which, in turn, could negatively~~Merger may adversely affect ~~our~~the combined company’s business, financial condition, results of operations, cash flows and growth strategy. Also, we may experience a significant increase in inflation as a result of local, state and federal deficits created as a result of the numerous governmental support efforts enacted to attempt to lessen the economic impact of the COVID-19 pandemic, which could negatively impact our business and our earnings.market price.

We are subject to potential litigation, regulatory enforcement risk and reputation risk regarding the Bank’s participation in the Paycheck Protection Program and the risk that the SBA may not fund some or all PPP loan guaranties.

The ~~CARES Act included a $349 billion loan program administered through the SBA referred to as the PPP. The $349 billion~~risks described above and in ~~funds~~our Annual Report on Form 10-K for the ~~PPP were exhausted on April 16, 2020. On April 27,~~year ended December 31, 2020, are not the ~~program was reopened with an additional $310 billion approved by Congress. Under the PPP, small businesses~~only risks that we encounter. Additional risks and ~~other entities and individuals could apply for loans from existing SBA lenders and other approved regulated lenders~~uncertainties not currently known to us or that enroll in the program, subject to detailed qualifications and eligibility criteria. As of September 30, 2020, Level One had $392.5 million of PPP loans outstanding to more than 2,000 small and mid-sized businesses.

Because of the short timeframe between the passing of the CARES Act and implementation of the PPP, some of the rules and guidance relating to PPP were issued after lenders began processing PPP applications. Also, there was and continueswe currently deem to be uncertainty in the laws, rules and guidance relating to the PPP. Since the opening of the PPP, several banks have been subject to litigation regarding the procedures used in processing PPP applications or litigation from agents with respect to agent fees. In addition, some banks and borrowers have received negative media attention associated with PPP loans. Although we believe that we have administered the PPP in accordance with all applicable laws, regulations and guidance, weimmaterial also may be exposed to litigation risk and negative media attention our participation in the PPP. Any financial liability, litigation costs or reputational damage caused by PPP-related litigation or media attention could have a material adverse impact on our business, financial condition, and results of operations.

The PPP has also attracted interest from federal and state enforcement authorities, oversight agencies, regulators, and Congressional committees. State Attorneys General and other federal and state agencies may assert that they are not subject to the provisions of the CARES Act and the PPP regulations entitling the Bank to rely on borrower certifications, and take more aggressive action against the Bank for alleged violations of the provisions governing the Bank’s participation in the PPP. Federal and state regulators can impose or request that we consent to substantial sanctions, restrictions and requirements if they determine there are violations of laws, rules or regulations or weaknesses or failures with respect to general standards of safety and soundness, which couldmaterially adversely affect our business, ~~reputation, results of operation and financial condition.~~

The Bank also has credit risk on PPP loans if the SBA determines that there is a deficiency in the manner in which any loans were originated, funded or serviced by the Bank, including any issue with the eligibility of a borrower to receive a PPP loan. In the event of a loss resulting from a default on a PPP loan and a determination by the SBA that there was a deficiency in the manner in which the PPP loan was originated, funded or serviced by the Bank, the SBA may deny its liability under the guaranty, reduce the amount of the guaranty or, if the SBA has already paid under the guaranty, seek recovery of any loss related to the deficiency from the Bank.

If the goodwill that we recorded in connection with a business acquisition becomes impaired, it could require charges to earnings, which would have a negative impact on our financial condition and results of operations.

Goodwill represents the amount by which the cost of an acquisition exceeded the fair value of net assets we acquired in connection with the purchase. We review goodwill for impairment at least annually, or more frequently if events or changes in circumstances indicate that the carrying value of the asset might be impaired.

We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations,

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in the periods in which they become known. As of September 30, 2020, our goodwill totaled $35.6 million. The Company conducted an interim period goodwill impairment assessment, triggered by the COVID-19 pandemic, and concluded that goodwill was not impaired as of September 30, 2020. However, there can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition ~~and results of operations.~~and/or liquidity.

Item 2 –- Unregistered Sales of Equity Securities and Use of Proceeds

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

Share Buyback Program. On ~~January 23, 2019,~~December 16, 2020, the Company announced that its Board of Directors approved a new share repurchase program ~~under which~~that began on January 1, 2021 and expires on December 31, 2022 to replace the ~~Company is authorized to~~prior repurchase program. This repurchase program authorizes the repurchase, from time to time as the Company deems appropriate, shares of the ~~Company’s~~Company's common stock with an aggregate purchase price of up to $5$10.0 million. ~~The repurchase program began on January 23, 2019, and expires on December 31, 2020.~~ The repurchase program does not obligate the Company to repurchase any dollar amount or number of shares, and the program ~~may~~can be extended, modified, suspended or discontinued at any time. ~~As of September 30, 2020, $2.2 million of shares remained available to be repurchased under the repurchase program.~~

~~The following table sets forth information regarding~~There were no repurchases of the Company’s ~~repurchase of~~ shares of its outstanding common stock during the three months ended September 30, ~~2020.~~2021.

~~(Dollars in thousands, except per share amounts)~~

~~Total Number of Shares Purchased~~

~~Average Price Paid Per Share~~

~~Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs~~

~~Approximate Dollar Value of Shares That May Yet be Purchased under the Plans or Programs~~

~~July 1-31, 2020~~

—

~~2,215~~

~~August 1-31, 2020~~

—

~~2,215~~

~~September 1-30, 2020~~

—

~~2,215~~

~~Total~~

—

Under applicable state law, Michigan corporations are not permitted to retain treasury stock. As such, the price paid for the repurchased shares is recorded to common stock. As of September 30, 2020, the total shares repurchased in the amount of $2.8 million were redeemed but remain authorized, unissued shares.

Item 3 –- Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 –- Other Information

None.

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Item 6 - Exhibits


Exhibit No.						Description


3.1						Articles of Incorporation, as amended, of Level One Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K filed August 13, 2020).

3.2						Amended and Restated Bylaws of Level One Bancorp, Inc. (incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-1 (File no. 333-223866) filed March 23, 2018).








































































~~1.1~~						Underwriting Agreement, dated as of August 10, 2020, between Level One Bancorp, Inc. and Piper Sandler & Co. (incorporated by reference to Exhibit 1.1 to the Company’s current report on Form 8-K filed August 13, 2020).

~~3.1~~						~~Articles of Incorporation, as amended, of Level One Bancorp, Inc. (incorporated by reference to Exhibit 3.1 to the Company’s current report on Form 8-K filed August 13, 2020).~~

~~4.1~~						Deposit Agreement, dated as of August 13, 2020, among Level One Bancorp, Inc., Continental Stock Transfer & Trust Company, as Depositary, and the holders from time to time of the Depositary Receipts issued thereunder (incorporated by reference to Exhibit 4.1 to the Company’s current report on Form 8-K filed August 13, 2020).

~~4.2~~						~~Form of Depositary Receipt (included as Exhibit A to Exhibit 4.1 hereto) (incorporated by reference to Exhibit 4.2 to the Company’s current report on Form 8-K filed August 13, 2020).~~

31.1						~~Chief~~Principal Executive Officer’s Certifications required by Rule 13(a)-14(a) – filed herewith.

31.2						~~Chief~~Principal Financial Officer’s Certifications required by Rule 13(a)-14(a) – filed herewith.

32.1						~~Chief~~Principal Executive Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

32.2						~~Chief~~Principal Financial Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.

101						Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, ~~2020,~~2021, formatted in iXBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of ~~Changes in~~ Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements – filed herewith.

104						Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) 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.


	Level One Bancorp, Inc.

Date: November ~~6, 2020~~5, 2021	By:	/s/	Patrick J. Fehring
			Patrick J. Fehring
			~~President and~~ Chief Executive Officer
			(principal executive officer)

Date: November ~~6, 2020~~5, 2021	By:	/s/	David C. Walker
			David C. Walker
			Executive Vice President and Chief Financial Officer
			(principal financial officer)


	Three months ended September 30,				Nine months ended September 30,
(Dollars in thousands, except per share data)	2020		2019		2020		2019
Net interest income	$	16,593	$	16,036	$	47,709	$	46,217
Noninterest income	9,125		4,486		21,604		11,228
Noninterest expense	15,143		13,742		44,822		38,879
Net income	5,211		4,865		12,062		13,188
Net income per diluted share	0.67		0.62		1.55		1.68


(Dollars in thousands)	Fair value at September 30, 2020		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range/Amount
Impaired loans	$	2,066	Discounted appraisals; estimated net realizable value of collateral	Collateral discounts	10.00-80.00%
Mortgage servicing rights	2,567		Discounted cash flow	Prepayment speed	9.40	%
				Discount rate	7.75	%


(Dollars in thousands)	Fair value at December 31, 2019		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range/Amount
Impaired loans	$	526	Discounted appraisals; estimated net realizable value of collateral	Collateral discounts	10.00-50.00%
Mortgage servicing rights	87		Discounted cash flow	Prepayment speed	13.42	%
				Discount rate	8.50	%
Other real estate owned	921		Appraisal of property	Discounted appraisal value	18.00-36.00%