Section 1: 10-Q (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended ~~September 30, 2019~~March 31, 2020

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



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

(248) 737-0300

(Registrant's telephone number, including area code)

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



Title of Each Class Common Stock, no par value	Trading symbol(s) LEVL	Name of each exchange on which registered Nasdaq Global Select Market

~~Securities registered pursuant to Section 12(g) of the Act:~~ ~~None~~

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 þ No o

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 such shorter period that the registrant was required to submit such files). Yes þNo o

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~~ o ~~Accelerated filer~~ o

~~Non-accelerated filer~~ þ ~~Smaller reporting company~~ þ



Large accelerated filer o	Accelerated filer þ
Non-accelerated filer o	Smaller reporting company þ
Emerging growth company þ

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. o

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

As of ~~November 1, 2019,~~May 4, 2020, the number of shares outstanding of the registrant’s ~~Common Stock,~~common stock, no par value, was ~~7,717,850~~7,730,822 shares.

Level One Bancorp, Inc.

Table of Contents



		Page
Part 1:	FINANCIAL INFORMATION	3
Item 1.	Consolidated Financial Statements	3
	Consolidated Balance Sheets at ~~September 30, 2019~~March 31, 2020 (Unaudited) and December 31, ~~2018~~2019	3
	Consolidated Statements of Income (Unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	4
	Consolidated Statements of Comprehensive Income (Unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	5
	Consolidated Statements of Changes in ~~Shareholders'~~Shareholder's Equity (Unaudited) for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	6
	Consolidated Statements of Cash Flows (Unaudited) for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~	87
	Notes to the Consolidated Statements (Unaudited)	98
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3740
Item 3.	Quantitative and Qualitative ~~Disclosures About~~Disclosure about Market Risk	6266
Item 4.	Controls and Procedures	6468

Part 22::	OTHER INFORMATION	68
Item 1.	Legal Proceedings	6468
Item 1A.	Risk Factors	6468
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	6569
Item 3.	Defaults Upon Senior Securities	6570
Item 4.	Mine Safety Disclosures	6570
Item 5.	Other Information	6570
Item 6.	Exhibits	6671

Signatures		6772

PART 1.I. FINANCIAL INFORMATION

Item 1 - Consolidated Financial Statements

LEVEL ONE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS


							March 31, 2020			December 31, 2019
(Dollars in thousands)	September 30, 2019			December 31, 2018			(Unaudited)
Assets	(Unaudited)
Cash and cash equivalents	$	49,361		$	33,296		$	104,867		$	103,930
Securities available-for-sale	205,242			204,258			230,671			180,905
Federal Home Loan Bank stock	8,325			8,325			12,398			11,475
Mortgage loans held for sale, at fair value	26,864			5,595			18,305			13,889
Loans:
Originated loans	1,093,694			1,041,898			1,188,107			1,158,138
Acquired loans	75,229			84,667			278,300			69,471
Total loans	1,168,923			1,126,565			1,466,407			1,227,609
Less: Allowance for loan losses	(12,307		)	(11,566		)	(12,989		)	(12,674		)
Net loans	1,156,616			1,114,999			1,453,418			1,214,935
Premises and equipment	13,427			13,242
Premises and equipment, net							16,673			13,838
Goodwill	9,387			9,387			36,216			9,387
Other intangible assets, net	331			447			3,974			383
Other real estate owned							2,093			921
Bank-owned life insurance	12,080			11,866			17,848			12,167
Income tax benefit	469			2,467			630			1,217
Other assets	27,361			12,333
Interest receivable and other assets							39,730			21,852
Total assets	$	1,509,463		$	1,416,215		$	1,936,823		$	1,584,899
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	322,069		$	309,384		$	410,152		$	325,885
Interest-bearing demand deposits	66,716			52,804			105,197			62,586
Money market and savings deposits	332,432			287,575			401,238			313,885
Time deposits	473,325			484,872			554,021			433,072
Total deposits	1,194,542			1,134,635			1,470,608			1,135,428
Borrowings	111,937			99,574			211,787			212,225
Subordinated notes	14,934			14,891			44,447			44,440
Other liabilities	20,082			15,355			34,213			22,103
Total liabilities	1,341,495			1,264,455			1,761,055			1,414,196
Shareholders' equity
Common stock, no par value per share:
Authorized—20,000,000 shares
Issued and outstanding—7,714,000 shares at September 30, 2019 and 7,750,216 shares at December 31, 2018	89,206			90,621
Issued and outstanding—7,730,822 shares at March 31, 2020 and 7,715,491 shares at December 31, 2019							88,910			89,345
Retained earnings	73,394			62,891			81,489			77,766
Accumulated other comprehensive income (loss), net of tax	5,368			(1,752		)
Accumulated other comprehensive income, net of tax							5,369			3,592
Total shareholders' equity	167,968			151,760			175,768			170,703
Total liabilities and shareholders' equity	$	1,509,463		$	1,416,215		$	1,936,823		$	1,584,899

See accompanying notes to the consolidated financial statements.

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME —- (UNAUDITED)

For the three months ended September 30, For the nine months ended September 30,
(In thousands, except per share data) 2019 2018 2019 2018
Interest income

Originated loans, including fees $ 14,633
$ 12,653
$ 42,652
$ 35,664
Acquired loans, including fees 1,501
2,454
4,895
7,173
Securities:
Taxable 857
816
2,773
2,057
Tax-exempt 588
450
1,728
1,181
Federal funds sold and other 404
256
1,034
708
Total interest income 17,983
16,629
53,082
46,783
Interest Expense

Deposits 4,478
2,802
13,216
7,467
Borrowed funds 261
502
960
946
Subordinated notes 256
256
759
759
Total interest expense 4,995
3,560
14,935
9,172
Net interest income 12,988
13,069
38,147
37,611
Provision expense (benefit) for loan losses (16 ) 619
835
463
Net interest income after provision for loan losses 13,004
12,450
37,312
37,148
Noninterest income

Service charges on deposits 627
655
1,914
1,915
Net gain on sales of securities 151
—
151
—
Mortgage banking activities 2,352
754
5,788
1,394
Net gain (loss) on sale of commercial loans (37 ) —
(37 ) 11
Other charges and fees 765
515
1,805
1,428
Total noninterest income 3,858
1,924
9,621
4,748
Noninterest expense

Salary and employee benefits 7,536
6,888
21,642
19,013
Occupancy and equipment expense 1,203
1,173
3,575
3,293
Professional service fees 465
494
1,212
1,231
Acquisition and due diligence fees 319
—
319
—
Marketing expense 379
264
843
697
Printing and supplies expense 78
127
250
343
Data processing expense 661
565
1,862
1,512
Other expense 898
943
3,371
3,205
Total noninterest expense 11,539
10,454
33,074
29,294
Income before income taxes 5,323
3,920
13,859
12,602
Income tax provision 914
665
2,428
2,167
Net income $ 4,409
$ 3,255
$ 11,431
$ 10,435
Per common share data:

Basic earnings per common share $ 0.57
$ 0.42
$ 1.48
$ 1.44
Diluted earnings per common share $ 0.56
$ 0.41
$ 1.46
$ 1.41
Cash dividends declared per common share $ 0.04
$ 0.03
$ 0.12
$ 0.09
Weighted average common shares outstanding—basic 7,721
7,749
7,738
7,264
Weighted average common shares outstanding—diluted 7,752
7,901
7,776
7,414



	For the three months ended March 31,
(In thousands, except per share data)	2020		2019
Interest income
Originated loans, including fees	$	14,039	$	13,894
Acquired loans, including fees	4,089		1,757
Securities:
Taxable	684		936
Tax-exempt	611		545
Federal funds sold and other	394		310
Total interest income	19,817		17,442
Interest Expense
Deposits	3,832		4,121
Borrowed funds	530		353
Subordinated notes	635		250
Total interest expense	4,997		4,724
Net interest income	14,820		12,718
Provision expense for loan losses	489		422
Net interest income after provision for loan losses	14,331		12,296
Noninterest income
Service charges on deposits	634		625
Net gain (loss) on sales of securities	529		(7		)
Mortgage banking activities	2,588		1,120
Other charges and fees	939		548
Total noninterest income	4,690		2,286
Noninterest expense
Salary and employee benefits	8,630		6,913
Occupancy and equipment expense	1,528		1,204
Professional service fees	392		362
Acquisition and due diligence fees	1,471		—
Marketing expense	222		176
Data processing expense	847		68
Printing and supplies expense	136		595
Core deposit premium amortization	192		52
Other expense	1,144		998
Total noninterest expense	14,562		10,368
Income before income taxes	4,459		4,214
Income tax provision	349		747
Net income	$	4,110	$	3,467
Per common share data:
Basic earnings per common share	$	0.53	$	0.45
Diluted earnings per common share	$	0.53	$	0.44
Cash dividends declared per common share	$	0.05	$	0.04
Weighted average common shares outstanding—basic	7,637		7,752
Weighted average common shares outstanding—diluted	7,738		7,869

See accompanying notes to the consolidated financial statements.

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 March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019
Net income	$	4,409		$	3,255		$	11,431		$	10,435		$	4,110		$	3,467
Other comprehensive income:
Unrealized holding gains (losses) on securities available-for-sale arising during the period	1,414			(1,247		)	8,861			(4,016		)
Reclassification adjustment for gains included in income	151			—			151			—
Unrealized holding gains on securities available-for-sale arising during the period													2,749			2,612
Reclassification adjustment for (gains) losses included in income													(529		)	7
Tax effect⁽¹⁾	(327		)	261			(1,892		)	842			(443		)	(550		)
Net unrealized gains (losses) on securities available-for-sale, net of tax	1,238			(986		)	7,120			(3,174		)	1,777			2,069
Total comprehensive income, net of tax	$	5,647		$	2,269		$	18,551		$	7,261		$	5,887		$	5,536

^{__________________________________________________________________________}

⁽¹⁾ Includes ~~$32~~$111 thousand and $(1) thousand of tax expense (benefit) related to reclassification adjustment for gains included in income for the three months ended March 31, 2020 and ~~nine months ended September 30, 2019. There was no tax expense (benefit) for the three months and nine months ended September 30, 2018 as a result of no reclassification adjustment.~~2019, respectively.

See accompanying notes to the consolidated financial statements.

LEVEL ONE BANCORP, INC.

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

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 (Loss) Income 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, 2018
(Dollar in thousands) Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders' Equity
Balance at June 30, 2018 $ 90,201
$ 56,383
$ (3,139 ) $ 143,445
Net income —
3,255
—
3,255
Other comprehensive loss —
—
(986 ) (986 )
Common stock dividend paid ($0.03 per share) —
(465 ) —
(465 )
Exercise of stock options (1,100 shares) 12
—
—
12
Stock-based compensation expense, net of tax impact 198
—
—
198
Balance at September 30, 2018 $ 90,411
$ 59,173
$ (4,125 ) $ 145,459

For the nine months ended September 30, 2018
(Dollar in thousands) Common Stock Retained Earnings Accumulated Other Comprehensive Loss Total Shareholders' Equity
Balance at December 31, 2017 $ 59,511
$ 49,232
$ (783 ) $ 107,960
Net income —
10,435
—
10,435
Other comprehensive loss —
—
(3,174 ) (3,174 )
Reclass of tax reform adjustments due to early adoption of ASU 2018-02 —
168
(168 ) —
Initial public offering of 1,150,765 shares of common stock, net of issuance costs 29,030
—
—
29,030
Common stock dividend paid ($0.09 per share) —
(662 ) —
(662 )
Exercise of stock options (126,494 shares) 1,269
—
—
1,269
Stock-based compensation expense, net of tax impact 601
—
—
601
Balance at September 30, 2018 $ 90,411
$ 59,173
$ (4,125 ) $ 145,459



(Dollar in thousands)	Common Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Shareholders' Equity
Balance at December 30, 2018	$	90,621		$	62,891		$	(1,752	)	$	151,760
Net income	—			3,467			(1,752		)	3,467
Other comprehensive income	—			—			—			2,069
Redeemed stock (46,626 shares)	(1,104		)	—			2,069			(1,104		)
Common stock dividends declared ($0.04 per share)	—			(309		)	—			(309		)
Exercise of stock options (12,300 shares)	125			—			—			125
Stock-based compensation expense, net of tax impact	11			—			—			11
Balance at March 31, 2019	$	89,753		$	66,049		$	317		$	156,119

Balance at December 31, 2019	$	89,345		$	77,766		$	3,592		$	170,703
Net income	—			4,110			—			4,110
Other comprehensive income	—			—			1,777			1,777
Redeemed stock (25,256 shares)	(620		)	—			—			(620		)
Common stock dividends declared ($0.05 per share)	—			(387		)	—			(387		)
Exercise of stock options (6,500 shares)	61			—			—			61
Stock-based compensation expense, net of tax impact	124			—			—			124
Balance at March 31, 2020	$	88,910		$	81,489		$	5,369		$	175,768

See accompanying notes to the consolidated financial statements.

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS —- (UNAUDITED)

For the nine months ended September 30,
(Dollars in thousands) 2019 2018
Cash flows from operating activities

Net income $ 11,431
$ 10,435
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of fixed assets 986
1,008
Amortization of core deposit intangibles 117
165
Stock-based compensation expense 517
615
Provision expense for loan losses 835
463
Net securities premium amortization 1,277
1,001
Net gain on sales of securities (151 ) —
Originations of loans held for sale (196,616 ) (53,918 )
Proceeds from sales of loans originated for sale 179,350
50,160
Net gain on sales of loans (5,788 ) (1,550 )
Accretion on acquired purchase credit impaired loans (1,772 ) (3,076 )
Gain on sale of other real estate owned and repossessed assets —
(48 )
Increase in cash surrender value of life insurance, net of 1035 exchange charge (214 ) (243 )
Amortization of debt issuance costs 43
38
Net (increase) decrease in accrued interest receivable and other assets (14,127 ) 2,586
Net increase (decrease) in accrued interest payable and other liabilities 4,065
(1,370 )
Deferred income tax benefit —
(180 )
Net cash (used in) provided by operating activities (20,047 ) 6,086
Cash flows from investing activities

Net increase in loans (39,007 ) (76,822 )
Principal payments on securities available-for-sale 11,730
7,073
Purchases of securities available-for-sale (51,373 ) (60,877 )
Purchases of FHLB Stock —
(22 )
Additions to premises and equipment (1,269 ) (1,100 )
Proceeds from:
Sale of securities available-for-sale 46,545
704
Sale of other real estate owned and repossessed assets —
700
Net cash used in investing activities (33,374 ) (130,344 )
Cash flows from financing activities

Net increase in deposits 59,907
9,929
Change in short-term borrowings (87,584 ) 98,702
Issuances of long term FHLB advances 100,000
—
Change in secured borrowing (53 ) (52 )
Net proceeds from issuance of common stock related to initial public offering —
29,030
Share buyback - redeemed stock (2,108 ) —
Common stock dividends paid (852 ) (430 )
Proceeds from exercised stock options 219
1,269
Payments related to tax-withholding for share based compensation awards (43 ) (14 )
Net cash provided by financing activities 69,486
138,434
Net change in cash and cash equivalents 16,065
14,176
Beginning cash and cash equivalents 33,296
63,661
Ending cash and cash equivalents $ 49,361
$ 77,837

Supplemental disclosure of cash flow information:

Interest paid $ 14,109
$ 8,678
Taxes paid 2,071
1,380
Transfer from loans held for sale to loans held for investment 1,895
453
Transfer from loans to other real estate owned 373
—
Transfer from premises and equipment to other assets —
20



	For the three months ended March 31,
(Dollars in thousands)	2020			2019
Cash flows from operating activities
Net income	$	4,110		$	3,467
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of fixed assets	413			327
Amortization of core deposit intangibles	192			52
Gain on mortgage servicing rights	(121		)	—
Stock-based compensation expense	188			154
Provision expense for loan losses	489			422
Net securities premium amortization	502			397
Net (gain) loss on sales of securities	(529		)	7
Originations of loans held for sale	(90,076		)	(36,793		)
Proceeds from sales of loans	88,516			29,137
Net gain on sales of loans	(2,282		)	(1,200		)
Accretion on acquired purchase credit impaired loans	(443		)	(584		)
Increase in cash surrender value of life insurance	(118		)	(79		)
Amortization of debt issuance costs	7			14
Net increase in accrued interest receivable and other assets	(14,059		)	(2,457		)
Net increase in accrued interest payable and other liabilities	6,853			629
Net cash used by operating activities	(6,358		)	(6,507		)
Cash flows from investing activities
Net increase in loans	(16,005		)	(4,022		)
Principal payments on securities available-for-sale	8,266			5,752
Purchases of securities available-for-sale	(35,950		)	(32,153		)
Additions to premises and equipment	(844		)	(290		)
Proceeds from:
Sale of securities available-for-sale	27,581			6,000
Net cash used in acquisition	(29,464		)	—
Net cash used in investing activities	(46,416		)	(24,713		)
Cash flows from financing activities
Net increase in deposits	70,360			16,828
Change in short-term borrowings	(40,675		)	(1,649		)
Issuances of long-term FHLB advances	24,975			20,000
Change in secured borrowing	(17		)	(18		)
Share buyback - redeemed stock	(620		)	(1,104		)
Common stock dividends paid	(309		)	(233		)
Proceeds from exercised stock options	61			125
Payments related to tax-withholding for share based compensation awards	(64		)	(43		)
Net cash provided by financing activities	53,711			33,906
Net change in cash and cash equivalents	937			2,686
Beginning cash and cash equivalents	103,930			33,296
Ending cash and cash equivalents	$	104,867		$	35,982
Supplemental disclosure of cash flow information:
Interest paid	$	4,511		$	4,397
Taxes paid	40			360
Transfer from loans held for sale to loans held for investment	40			239
Transfer from loans to other real estate owned	1,172			373
Increase in assets and liabilities in acquisitions:
Assets acquired—Ann Arbor State Bank	$	324,465		$	—
Liabilities assumed—Ann Arbor State Bank	283,350			—

See accompanying notes to the consolidated financial statements.

LEVEL ONE BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS ~~- (UNAUDITED)~~

~~SEPTEMBER 30, 2019~~MARCH 31, 2020

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

Organization and Nature of Operations:

Level One Bancorp, Inc. (the ~~"Company"~~“Company,” “Level One,” “we,” “our,” or “us”) is a financial holding company headquartered in Farmington Hills, Michigan. ~~Its~~In addition to the Company headquarters, as of March 31, 2020, its wholly owned bank subsidiary, Level One Bank (the "Bank"), ~~has 13~~had 17 offices, including 911 banking centers (our full service branches) in ~~Oakland County,~~Metro Detroit, one banking center in ~~each of Detroit and~~ Grand Rapids, ~~Michigan’s two largest cities,~~ one banking center in ~~Sterling Heights,~~Jackson, three banking centers in Ann Arbor and one 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 a wholly owned insurance subsidiary of the Company that provides 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 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 is incorporated in Nevada.

~~Initial Public Offering:~~

On April 24, 2018, the Company sold 1,150,765 shares of common stock in its initial public offering, including 180,000 shares of common stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares. The aggregate offering price for the shares sold by the Company was $32.2 million, and after deducting $2.1 million of underwriting discounts and $1.1 million of offering expenses paid to third parties, the Company received total net proceeds of $29.0 million from the initial public offering. In addition, certain selling shareholders participated in the offering and sold an aggregate of 229,235 shares of our common stock at an aggregate offering price of $6.4 million. The Company did not receive any proceeds from the sales of shares by the selling shareholders.

~~Proposed~~ Merger with Ann Arbor ~~State Bank:~~Bancorp, Inc.:

On ~~August 13, 2019,~~January 2, 2020, the Company ~~and~~completed its previously announced acquisition of Ann Arbor Bancorp, Inc. ~~("AAB"~~(“AAB”) ~~jointly announced the signing of an Agreement and Plan of Merger, dated August 12, 2019, pursuant to which the Company has agreed to acquire AAB~~ and its wholly owned subsidiary, Ann Arbor State Bank. The transaction ~~is anticipated~~was completed pursuant to ~~close in~~a merger of the ~~fourth quarter of 2019 or the first quarter of 2020, subject~~Company’s wholly owned merger subsidiary (“Merger Sub”) with and into AAB, pursuant to the ~~satisfaction or waiver~~Agreement and Plan of ~~customary closing conditions.~~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, ~~2018,~~2019, included in our Annual Form 10-K, filed with the SEC on March ~~22, 2019.~~13, 2020.

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

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.

~~Change~~ These estimates and assumptions are subject to many risks and uncertainties, including changes in ~~Accounting Policy:~~

~~For fiscal years beginning after December 31, 2018,~~interest rates and other general economic, business and political conditions, including the ~~Company has elected to evaluate goodwill for impairment as~~effects of ~~October 1st as opposed to September 30th, as was done in~~ the ~~preceding years. The change will have no impact~~Coronavirus Disease 2019 (“COVID-19”) pandemic, including its potential effects on the ~~current year's or prior years' financial statements.~~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, among other things, a small business lending program to originate paycheck protection loans, temporary relief for community bank leverage ratio, and temporary relief for community banks 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). 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 ~~Issued~~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. ~~Certain revenue received, such as service charges~~

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

Gain (Loss) on ~~a transaction by transaction basis or as the service is performed. Finally, the methodology used to record revenue from gains (losses) due to the~~ sale of other real estate owned ~~is not anticipated to change, as the~~- The Company ~~currently~~ records income or expense only upon consummation of the ~~sale. 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~~sale of ~~this standard.~~the real estate.

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 isbecame effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and iswas to be applied prospectively with a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. ~~Management is currently developing processes~~The Company adopted ASU 2016-01 and ~~procedures to comply with~~related issues on January 1, 2019 and determined that the ~~disclosures requirements~~implementation of this ~~ASU, which will impact the disclosures the Company makes related to fair value of its financial instruments. This~~ standard isdid not ~~expected to~~ have a material impact ~~on the~~

~~Company's~~to our consolidated financial statements. ~~The Company is planning to adopt this new guidance within the time frames stated above.~~

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 ~~will be~~is effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, ~~2021,~~2020, 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 consolidated financial ~~statements.~~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.

In October 2019, the FASB approved a delayed effective date for the leases standard to January 2021 for certain entities, including certain SEC filers, public business entities, and private companies. As an emerging growth company, the Company is eligible for the delayed effective date. The Company is planning to adopt this new guidance within the time frames stated above but would delay the implementation to the delayed effective date if the proposed delay is effected.

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. ~~Based on the ASU No. 2018-19, "Codification Improvements to Topic 326, Financial Instruments—Credit Losses," the~~

The guidance ~~will be~~is effective for the Company for fiscal years beginning after December 15, ~~2021,~~2022, including interim periods within those fiscal ~~years, and is to be applied under a modified retrospective approach.~~

In October 2019, the FASB approved a delayed effective date for the credit losses standard to January 2023 for certain entities, including certain SEC filers, public business entities, and private companies. As a smaller reporting company, the Company is eligible for the delayed effective date.years. The Company is currently evaluating ~~the impact of the delay on its implementation project plan as well as~~ the impact of adopting this new guidance on the 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 ~~frames stated above but would delay~~frame noted above.

NOTE 2—BUSINESS COMBINATIONS

On January 2, 2020, the ~~implementation to~~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 ~~delayed effective date if~~Company’s results beginning January 2, 2020. Acquisition-related costs of $1.5 million are included in the ~~proposed delay is effected.~~Company’s income statement for the quarter ended March 31, 2020.

~~Income Taxes - Tax Cuts~~Goodwill of $26.8 million arising from the acquisition consisted largely of synergies and ~~Jobs Act~~

~~In February 2018,~~ the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220)," which allowed an entity to elect a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effectscost savings resulting from the ~~Tax Cuts~~combining of the operations of the companies. The goodwill arising from the acquisition of AAB is not deductible for tax purposes.

The following table summarizes the amounts of assets acquired and ~~Jobs Act ("TCJA").~~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	7,520
Total assets acquired	324,465
Fair value of liabilities assumed:
Deposits	264,820
Federal Home Loan Bank advances	15,279
Other liabilities	3,251
Total liabilities assumed	283,350
Total identifiable net assets	41,115
Goodwill recognized in the acquisition	$	26,829

Loans acquired in the acquisition were initially recorded at fair value with no separate allowance for loan losses. The ~~amount~~Company reviewed the loans at acquisition to determine which should be considered purchased credit impaired loans (i.e. loans accounted for under ASC 310-30) defining impaired loans as those that were either not accruing interest 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 interest 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 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 ~~reclassification should include~~not all contractually required payments will be collected. Interest income, through accretion of the ~~effect~~difference between the carrying value of ~~changes of tax rate~~the loans and the expected cash flows is recognized on the ~~deferred tax amount,~~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.



(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 the acquisition had occurred on January 1, 2019. The pro forma information includes adjustments to give the effects to any ~~related valuation allowance~~changes in interest income due to the accretion (amortization) 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 deposits and borrowings and 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~~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 ~~items in AOCI. In addition,~~assumed date. Due diligence, professional fees, and other expenses related to the ~~ASU required that an entity state if an election to reclassify~~merger were incurred by the tax effects to retained earnings is made, along with a description of other income tax effects that are reclassified from AOCI. This guidance became effective for fiscal years beginning after December 15, 2018Company and ~~interim periods within those fiscal years, with early adoption permitted. The Company early adopted the ASU and reclassified $168 thousand from retained earnings to AOCI~~AAB during the ~~first quarter~~three months ended March 31, 2020, but the pro forma condensed combined statement of ~~2018.~~income is not adjusted to exclude these costs.

In May 2018, the FASB issued an update to ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118," regarding the accounting implications of the recently issued TCJA. The update clarified that in a company's financial statements that include the reporting period in which the TCJA was enacted, a company must first reflect the income tax effects of the TCJA in which the accounting under GAAP is complete.



	Three months ended March 31,
(Dollars in thousands, except per share data)	2020		2019
Net interest income	$	14,865	$	15,185
Noninterest income	4,690		2,678
Noninterest expense	14,579		12,099
Net income	4,123		4,066
Net income per diluted share	0.53		0.52

These amounts would not be provisional amounts. The company would also report provisional amounts for those specific income tax effects for which the accounting under GAAP will be incomplete but for which a reasonable estimate can be determined. This accounting update was effective immediately upon announcement. The Company believes its accounting for the income tax effects of the TCJA is complete. Technical corrections or other forthcoming guidance could change how we interpret provisions of the TCJA, which may impact our effective tax rate and could affect our deferred tax assets, tax positions and/or our tax liabilities.

NOTE 2—3—SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive income (loss).


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value		Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2019
March 31, 2020
U.S. government sponsored entities & agencies	$	1,422	$	75	$	—		$	1,497	$	9,624	$	151	$	—		$	9,775
State and political subdivision	85,845		4,892		(4		)	90,733		122,446		5,699		(465		)	127,680
Mortgage-backed securities: residential	9,389		93		(92		)	9,390		10,047		247		—			10,294
Mortgage-backed securities: commercial	19,985		1,067		(3		)	21,049		8,527		607		(1		)	9,133
Collateralized mortgage obligations: residential	9,128		43		(102		)	9,069		7,929		171		(44		)	8,056
Collateralized mortgage obligations: commercial	30,747		862		(11		)	31,598		28,960		1,107		(6		)	30,061
U.S. Treasury	1,974		27		—			2,001		1,000		10		—			1,010
SBA	23,583		104		(151		)	23,536		20,609		80		(127		)	20,562
Asset backed securities	10,384		—		(197		)	10,187		10,394		—		(781		)	9,613
Corporate bonds	5,992		191		(1		)	6,182		4,483		27		(23		)	4,487
Total available-for-sale	$	198,449	$	7,354	$	(561	)	$	205,242	$	224,019	$	8,099	$	(1,447	)	$	230,671
December 31, 2018
U.S. government sponsored entities & agencies	$	2,404	$	4	$	(11	)	$	2,397
December 31, 2019
State and political subdivision	75,093		657		(604		)	75,146		89,304		4,463		(20		)	93,747
Mortgage-backed securities: residential	10,114		4		(379		)	9,739		10,609		82		(126		)	10,565
Mortgage-backed securities: commercial	12,594		17		(229		)	12,382		8,567		224		(12		)	8,779
Collateralized mortgage obligations: residential	18,916		51		(296		)	18,671		8,541		39		(51		)	8,529
Collateralized mortgage obligations: commercial	32,390		98		(500		)	31,988		22,891		300		(10		)	23,181
U.S. Treasury	21,232		—		(751		)	20,481		1,976		23		—			1,999
SBA	15,856		—		(168		)	15,688		22,051		87		(154		)	21,984
Asset backed securities	3,872		—		(30		)	3,842		10,390		—		(306		)	10,084
Corporate bonds	14,006		18		(100		)	13,924		2,030		20		(13		)	2,037
Total available-for-sale	$	206,477	$	849	$	(3,068	)	$	204,258	$	176,359	$	5,238	$	(692	)	$	180,905

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


	For the three months ended September 30,						For the nine months ended September 30,						For the three months ended March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019
Proceeds	$	11,080		$	704		$	46,545		$	704		$	27,581		$	6,000
Gross gains	202			2			543			2			538			64
Gross losses	(51		)	(2		)	(392		)	(2		)	(9		)	(71		)

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


	September 30, 2019				March 31, 2020
(Dollars in thousands)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Within one year	$	2,683	$	2,684	$	8,114	$	8,129
One to five years	24,918		25,353		32,389		33,124
Five to ten years	52,715		54,997		49,829		51,617
Beyond ten years	118,133		122,208		133,687		137,801
Total	$	198,449	$	205,242	$	224,019	$	230,671

Securities pledged at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 had a carrying amount of ~~$36.7~~$52.0 million and ~~$22.7~~$27.3 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, 2019~~March 31, 2020, the Bank held 5672 tax-exempt state and local municipal securities totaling ~~$41.1~~$52.7 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments, at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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, 2019~~March 31, 2020 and December 31, ~~2018~~2019 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)	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses
September 30, 2019
March 31, 2020
Available-for-sale
State and political subdivision																$	15,489	$	(465	)	$	—	$	—		$	15,489	$	(465	)
Mortgage-backed securities: commercial																—		—			427		(1		)	427		(1		)
Collateralized mortgage obligations: residential																—		—			2,708		(44		)	2,708		(44		)
Collateralized mortgage obligations: commercial																871		(6		)	—		—			871		(6		)
SBA																3,846		(11		)	10,467		(116		)	14,313		(127		)
Asset backed securities																3,396		(168		)	6,217		(613		)	9,613		(781		)
Corporate bonds																1,499		(23		)	—		—			1,499		(23		)
Total available-for-sale																$	25,101	$	(673	)	$	19,819	$	(774	)	$	44,920	$	(1,447	)
December 31, 2019
Available-for-sale
State and political subdivision	$	1,051	$	(2	)	$	304	$	(2	)	$	1,355	$	(4	)	$	5,109	$	(20	)	$	305	$	—		$	5,414	$	(20	)
Mortgage-backed securities: residential	—		—			5,570		(92		)	5,570		(92		)	4,022		(39		)	3,982		(87		)	8,004		(126		)
Mortgage-backed securities: commercial	898		(2		)	434		(1		)	1,332		(3		)	1,769		(11		)	430		(1		)	2,199		(12		)
Collateralized mortgage obligations: residential	—		—			5,799		(102		)	5,799		(102		)	770		(1		)	4,631		(50		)	5,401		(51		)
Collateralized mortgage obligations: commercial	—		—			1,730		(11		)	1,730		(11		)	—		—			1,716		(10		)	1,716		(10		)
U.S. Treasury	—		—			—		—			—		—
SBA	4,058		(12		)	13,286		(139		)	17,344		(151		)	3,961		(13		)	12,405		(141		)	16,366		(154		)
Asset backed securities	10,187		(197		)	—		—			10,187		(197		)	8,220		(232		)	1,864		(74		)	10,084		(306		)
Corporate bonds	—		—			1,004		(1		)	1,004		(1		)	489		(13		)	—		—			489		(13		)
Total available-for-sale	$	16,194	$	(213	)	$	28,127	$	(348	)	$	44,321	$	(561	)	$	24,340	$	(329	)	$	25,333	$	(363	)	$	49,673	$	(692	)
December 31, 2018
Available-for-sale
U.S. government sponsored entities & agencies	$	978	$	(11	)	$	—	$	—		$	978	$	(11	)
State and political subdivision	5,121		(25		)	27,667		(579		)	32,788		(604		)
Mortgage-backed securities: residential	2,595		(4		)	6,393		(375		)	8,988		(379		)
Mortgage-backed securities: commercial	1,967		(8		)	8,944		(221		)	10,911		(229		)
Collateralized mortgage obligations: residential	3,814		(27		)	8,958		(269		)	12,772		(296		)
Collateralized mortgage obligations: commercial	—		—			17,939		(500		)	17,939		(500		)
U.S. Treasury	—		—			20,481		(751		)	20,481		(751		)
SBA	12,420		(91		)	3,268		(77		)	15,688		(168		)
Asset backed securities	3,842		(30		)	—		—			3,842		(30		)
Corporate bonds	7,526		(28		)	2,950		(72		)	10,476		(100		)
Total available-for-sale	$	38,263	$	(224	)	$	96,600	$	(2,844	)	$	134,863	$	(3,068	)

As of ~~September 30, 2019,~~March 31, 2020, the Company's investment portfolio consisted of ~~240~~321 securities, 4681 of which were in an unrealized loss position. The unrealized losses for these securities resulted primarily from changes in interest rates since 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 not consider these securities to be other-than-temporarily impaired at ~~September 30, 2019.~~March 31, 2020.

NOTE 3—4—LOANS

The following table presents the recorded investment in loans at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. The recorded investment in loans excludes accrued interest receivable.


(Dollars in thousands)	Originated		Acquired		Total		Originated		Acquired		Total
September 30, 2019
March 31, 2020
Commercial real estate	$	509,704	$	56,077	$	565,781	$	578,960	$	149,950	$	728,910
Commercial and industrial	395,804		8,326		404,130		398,875		70,352		469,227
Residential real estate	187,485		10,792		198,277		209,426		53,468		262,894
Consumer	701		34		735		846		4,530		5,376
Total	$	1,093,694	$	75,229	$	1,168,923	$	1,188,107	$	278,300	$	1,466,407
December 31, 2018
December 31, 2019
Commercial real estate	$	500,809	$	61,284	$	562,093	$	551,565	$	53,081	$	604,646
Commercial and industrial	375,130		8,325		383,455		403,922		6,306		410,228
Residential real estate	165,015		15,003		180,018		201,787		10,052		211,839
Consumer	944		55		999		864		32		896
Total	$	1,041,898	$	84,667	$	1,126,565	$	1,158,138	$	69,471	$	1,227,609

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had residential loans held for sale, which were originated with the intent to sell, totaling ~~$26.9~~$18.3 million and ~~$5.6~~$13.9 million, respectively. During the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company sold residential real estate loans with proceeds totaling ~~$86.4~~$88.5 million and ~~$25.1~~$29.1 million, ~~respectively~~respectively.

Nonperforming Assets

Nonperforming assets consist of loans for which the accrual of interest has been discontinued and ~~$179.4~~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 are no longer doubtful. Acquired loans that are not performing in accordance with contractual terms are not reported as nonperforming because these loans are recorded in pools at their net realizable value based on the principal and interest the Company expects to collect on these loans. There were $2.1 million and ~~$50.2~~$1.2 million ~~during the nine months ended September 30,~~in commitments to lend additional funds to borrowers whose loans were classified as nonaccrual as of March 31, 2020 and December 31, 2019, ~~and 2018,~~ respectively.

Information as to nonperforming assets was as follows:


(Dollars in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Nonaccrual loans:
Commercial real estate	$	5,043	$	5,927	$	3,721	$	4,832
Commercial and industrial	4,071		9,605		9,364		11,112
Residential real estate	2,339		2,915		2,124		2,569
Consumer					15		16
Total nonaccrual loans	11,453		18,447		15,224		18,529
Other real estate owned	373		—		2,093		921
Total nonperforming assets	$	11,826	$	18,447	$	17,317	$	19,450
Loans 90 days or more past due and still accruing	$	157	$	243	$	437	$	157

At ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, all of the loans 90 days or more past due and still accruing were PCI loans.

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


(Dollars in thousands)	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total		Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total
September 30, 2019
March 31, 2020
Commercial real estate	$	561,062	$	4,288	$	—	$	431	$	565,781	$	726,231	$	1,557	$	293	$	829	$	728,910
Commercial and industrial	403,065		918		26		121		404,130		467,608		306		201		1,112		469,227
Residential real estate	195,740		802		743		992		198,277		256,486		4,071		868		1,469		262,894
Consumer	717		—		18		—		735		5,350		23		3		—		5,376
Total	$	1,160,584	$	6,008	$	787	$	1,544	$	1,168,923	$	1,455,675	$	5,957	$	1,365	$	3,410	$	1,466,407
December 31, 2018
December 31, 2019
Commercial real estate	$	559,523	$	497	$	—	$	2,073	$	562,093	$	597,892	$	3,630	$	1,286	$	1,838	$	604,646
Commercial and industrial	381,424		664		82		1,285		383,455		407,692		377		1,275		884		410,228
Residential real estate	174,831		2,499		1,314		1,374		180,018		206,002		3,286		1,429		1,122		211,839
Consumer	998		—		1		—		999		892		4		—		—		896
Total	$	1,116,776	$	3,660	$	1,397	$	4,732	$	1,126,565	$	1,212,478	$	7,297	$	3,990	$	3,844	$	1,227,609

Impaired Loans:

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


(Dollars in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Nonaccrual loans	$	11,453	$	18,447	$	15,224	$	18,529
Performing troubled debt restructurings:
Commercial and industrial	553		568		541		547
Residential real estate	361		363		599		359
Total performing troubled debt restructurings	914		931		1,140		906
Total impaired loans, excluding purchase credit impaired loans	$	12,367	$	19,378	$	16,364	$	19,435

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.

As a result of ~~September~~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 COVID-19 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. Borrowers considered current are those that are less than 30 ~~2019~~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 current borrowers affected by 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 March 31, 2020 and December 31, ~~2018,~~2019, the Company had a recorded investment in troubled debt restructurings of ~~$4.1~~$3.7 million and ~~$5.9~~$3.9 million, respectively. The Company allocated a specific reserve of ~~$498~~$221 thousand for those loans at ~~September 30, 2019~~March 31, 2020 and a specific reserve of ~~$258~~$384 thousand for those loans at December 31, ~~2018.~~2019. The Company has not committed to lend additional amounts to borrowers whose loans have been modified. As of ~~September 30, 2019,~~March 31, 2020, there were ~~$3.2~~$2.6 million of nonperforming TDRs and ~~$914 thousand~~$1.1 million of performing TDRs included in impaired loans. As of December 31, ~~2018,~~2019, there were ~~$5.0 million~~$906 thousand of nonperforming TDRs and ~~$931 thousand~~$3.0 million 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 ~~nine~~three months ended ~~September 30,~~March 31, 2019 ~~and 2018,~~ by type of concession granted. There were no loans modified as TDRs during the three months ended ~~September 30, 2019 and 2018.~~March 31, 2020. 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)	Principal deferral		Interest rate		Forbearance agreement		Total number of loans	Total recorded investment		Net charge-offs		Provision for loan losses		Principal deferral		Interest rate		Forbearance agreement		Total number of loans	Total recorded investment		Net charge-offs		Provision for loan losses
Nine months ended September 30, 2019
For the three months ended March 31, 2019
Commercial and industrial	$	—	$	—	$	351	2	$	351	$	—	$	174	$	—	$	—	$	335	1	$	335	$	—	$	158
Total	$	—	$	—	$	351	2	$	351	$	—	$	174	$	—	$	—	$	335	1	$	335	$	—	$	158
Nine months ended September 30, 2018
Commercial real estate	$	—	$	—	$	2,087	4	$	2,087	$	101	$	—
Commercial and industrial	133		—		990		3	1,123		—		—
Residential real estate	—		—		112		2	112		—		5
Total	$	133	$	—	$	3,189	9	$	3,322	$	101	$	5

On an ongoing basis, the Company monitors the performance of TDRs to their modified terms. The following table presents the number of loans modified as TDRs during the twelve months ended ~~September 30, 2018~~March 31, 2020 and 2019 for which there was a subsequent payment default, including the recorded investment as of the period end. ~~There were no loans modified as TDRs during the twelve months ending September 30, 2019 for which there was a subsequent default.~~ A payment on a TDR is considered to be in default once it is greater than 30 days past due.


	Three months ended September 30, 2018					Nine months ended September 30, 2018					For the three months ended March 31, 2020
(Dollars in thousands)	Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default		Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default		Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default
Commercial real estate	3	$	2,087	$	—	3	$	2,087	$	—
Commercial and industrial	2	1,182		—		3	1,316		—		1	$	—	$	12
Residential real estate	—	—		—		1	111		—
Total	5	$	3,269	$	—	7	$	3,514	$	—	1	$	—	$	12



	For the three months ended March 31, 2019
(Dollars in thousands)	Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default
Residential real estate	1	$	115	$	5
Total	1	$	115	$	5

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.

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.

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


(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total		Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2019
March 31, 2020
Commercial real estate	$	552,320	$	8,342	$	4,653	$	466	$	565,781	$	715,292	$	9,828	$	2,932	$	858	$	728,910
Commercial and industrial	383,380		14,270		6,440		40		404,130		441,179		11,995		15,197		856		469,227
Total	$	935,700	$	22,612	$	11,093	$	506	$	969,911	$	1,156,471	$	21,823	$	18,129	$	1,714	$	1,198,137
December 31, 2018
December 31, 2019
Commercial real estate	$	545,843	$	10,240	$	5,966	$	44	$	562,093	$	591,419	$	8,325	$	4,042	$	860	$	604,646
Commercial and industrial	368,189		2,841		12,425		—		383,455		383,756		8,967		16,527		978		410,228
Total	$	914,032	$	13,081	$	18,391	$	44	$	945,548	$	975,175	$	17,292	$	20,569	$	1,838	$	1,014,874

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)	Performing		Nonperforming		Total		Performing		Nonperforming		Total
September 30, 2019
March 31, 2020
Residential real estate	$	195,938	$	2,339	$	198,277	$	260,770	$	2,124	$	262,894
Consumer	735		—		735		5,361		15		5,376
Total	$	196,673	$	2,339	$	199,012	$	266,131	$	2,139	$	268,270
December 31, 2018
December 31, 2019
Residential real estate	$	177,103	$	2,915	$	180,018	$	209,270	$	2,569	$	211,839
Consumer	999		—		999		880		16		896
Total	$	178,102	$	2,915	$	181,017	$	210,150	$	2,585	$	212,735

Purchased Credit Impaired Loans:

As part of the Company's previous ~~four~~five 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		Unpaid Principal Balance		Recorded Investment
September 30, 2019
March 31, 2020
Commercial real estate	$	6,190	$	3,640	$	6,558	$	2,990
Commercial and industrial	280		162		1,348		779
Residential real estate	4,317		3,081		4,192		2,969
Total PCI loans	$	10,787	$	6,883	$	12,098	$	6,738
December 31, 2018
December 31, 2019
Commercial real estate	$	7,406	$	4,344	$	6,597	$	2,884
Commercial and industrial	177		122		556		135
Residential real estate	4,974		3,409		4,215		2,954
Total PCI loans	$	12,557	$	7,875	$	11,368	$	5,973

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 March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019
Accretable yield at beginning of period	$	10,194		$	12,390		$	10,947		$	14,452		$	9,141		$	10,947
Additions due to acquisitions													35			—
Accretion of income	(597		)	(1,167		)	(1,772		)	(3,076		)	(443		)	(584		)
Adjustments to accretable yield	—			—			422			(159		)
Other activity, net	—			—			—			6
Accretable yield at end of period	$	9,597		$	11,223		$	9,597		$	11,223		$	8,733		$	10,363

"~~Accretion~~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. ~~"Adjustments to accretable yield" represents the net amount of accretable yield added or removed as a result of the semi-annual re-estimation of expected cash flows.~~

NOTE 4—5—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, 2019,~~March 31, 2020, the Company had six PCI loan pools and 1116 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.

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⁽¹⁾		Total recorded investment		Contractual principal balance		Related allowance ⁽¹⁾		Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Contractual principal balance		Related allowance
September 30, 2019
March 31, 2020
Individually evaluated impaired loans:
Commercial real estate	$	4,479	$	564	$	5,043	$	5,244	$	37	$	3,721	$	—	$	3,721	$	4,014	$	—
Commercial and industrial	2,292		2,051		4,343		4,608		443		9,279		624		9,903		10,437		318
Residential real estate	1,207		189		1,396		1,541		18		1,192		188		1,380		1,529		22
Total	$	7,978	$	2,804	$	10,782	$	11,393	$	498	$	14,192	$	812	$	15,004	$	15,980	$	340
December 31, 2018
December 31, 2019
Individually evaluated impaired loans:
Commercial real estate	$	5,898	$	3,991	$	9,889	$	13,076	$	815	$	4,832	$	—	$	4,832	$	5,156	$	—
Commercial and industrial	5,892		4,059		9,951		10,411		526		10,739		913		11,652		12,521		363
Residential real estate	1,666		3,255		4,921		6,604		101		1,197		189		1,386		1,570		22
Total	$	13,456	$	11,305	$	24,761	$	30,091	$	1,442	$	16,768	$	1,102	$	17,870	$	19,247	$	385

⁽¹⁾December 31, 2018 individually evaluated impaired loans included $7.2 million of PCI loans with a related allowance of $920 thousand. September 30, 2019 individually evaluated impaired loans do not include PCI loans with a related allowance.

(Dollars in thousands)
Average
Recorded
Investment

Interest
Income
Recognized

Cash Basis
Interest
Recognized
For the three months ended September 30, 2019

Individually evaluated impaired loans⁽¹⁾:

Commercial real estate $ 3,111
$ 2
$ 35
Commercial and industrial 6,752
14
349
Residential real estate 1,428
7
—
Total $ 11,291
$ 23
$ 384
For the nine months ended September 30, 2019
Individually evaluated impaired loans ⁽¹⁾:

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
For the three months ended September 30, 2018

Individually evaluated impaired loans ⁽¹⁾:

Commercial real estate $ 9,524
$ 430
$ 142
Commercial and industrial 6,559
22
—
Residential real estate 5,217
90
—
Total $ 21,300
$ 542
$ 142
For the nine months ended September 30, 2018
Individually evaluated impaired loans ⁽¹⁾:

Commercial real estate $ 9,258
$ 1,275
$ 142
Commercial and industrial 7,736
71
112
Residential real estate 5,256
277
—
Total $ 22,250
$ 1,623
$ 254

⁽¹⁾ ~~September 30, 2018 individually evaluated impaired loans included PCI loans, whereas September 30, 2019 individually evaluated impaired loans excluded PCI loans.~~



(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
For the three months ended March 31, 2020
Individually evaluated impaired loans:
Commercial real estate	$	4,015	$	—	$	—
Commercial and industrial	10,998		11		18
Residential real estate	1,383		9		—
Total	$	16,396	$	20	$	18
For the three months ended March 31, 2019
Individually evaluated impaired loans:
Commercial real estate	$	5,467	$	—	$	173
Commercial and industrial	10,868		9		224
Residential real estate	2,746		7		—
Total	$	19,081	$	16	$	397

Activity in the allowance for loan losses and the allocation of the allowance for loans was as follows:


(Dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Consumer			Total			Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Consumer			Total
For the three months ended September 30, 2019
For the three months ended March 31, 2020
Allowance for loan losses:
Beginning balance																$	5,773		$	5,515		$	1,384		$	2		$	12,674
Provision for loan losses																350			87			23			29			489
Gross chargeoffs																—			(187		)	—			(31		)	(218		)
Recoveries																—			8			34			2			44
Net (chargeoffs) recoveries																—			(179		)	34			(29		)	(174		)
Ending allowance for loan losses																$	6,123		$	5,423		$	1,441		$	2		$	12,989
For the three months ended March 31, 2019
Allowance for loan losses:
Beginning balance	$	5,219		$	5,990		$	1,142		$	2		$	12,353		$	5,227		$	5,174		$	1,164		$	1		$	11,566
Provision (benefit) for loan losses	184			(280		)	72			8			(16		)	(46		)	477			(15		)	6			422
Gross chargeoffs	—			(49		)	—			(34		)	(83		)	—			(95		)	—			(6		)	(101		)
Recoveries	5			10			12			26			53			—			50			21			2			73
Net (chargeoffs) recoveries	5			(39		)	12			(8		)	(30		)	—			(45		)	21			(4		)	(28		)
Ending allowance for loan losses	$	5,408		$	5,671		$	1,226		$	2		$	12,307		$	5,181		$	5,606		$	1,170		$	3		$	11,960
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		)	—			(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
For the three months ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	5,060		$	5,423		$	977		$	5		$	11,465
Provision for loan losses	34			475			101			9			619
Gross chargeoffs	—			(237		)	—			(8		)	(245		)
Recoveries	23			8			19			1			51
Net (chargeoffs) recoveries	23			(229		)	19			(7		)	(194		)
Ending allowance for loan losses	$	5,117		$	5,669		$	1,097		$	7		$	11,890
For the nine months ended September 30, 2018
Allowance for loan losses:
Beginning balance	$	4,852		$	5,903		$	950		$	8		$	11,713
Provision (benefit) for loan losses	352			(53		)	143			21			463
Gross chargeoffs	(112		)	(995		)	(47		)	(23		)	(1,177		)
Recoveries	25			814			51			1			891
Net (chargeoffs) recoveries	(87		)	(181		)	4			(22		)	(286		)
Ending allowance for loan losses	$	5,117		$	5,669		$	1,097		$	7		$	11,890


(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer		Total		Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer		Total
September 30, 2019
March 31, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	37	$	443	$	18	$	—	$	498	$	—	$	318	$	22	$	—	$	340
Collectively evaluated for impairment	4,619		5,189		1,195		2		11,005		5,417		5,076		1,396		2		11,891
Acquired with deteriorated credit quality	752		39		13		—		804		706		29		23		—		758
Ending allowance for loan losses	$	5,408	$	5,671	$	1,226	$	2	$	12,307	$	6,123	$	5,423	$	1,441	$	2	$	12,989
Balance of loans:
Individually evaluated for impairment	$	5,043	$	4,343	$	1,396	$	—	$	10,782	$	3,721	$	9,903	$	1,380	$	—	$	15,004
Collectively evaluated for impairment	557,098		399,625		193,800		735		1,151,258		722,199		458,545		258,545		5,376		1,444,665
Acquired with deteriorated credit quality	3,640		162		3,081		—		6,883		2,990		779		2,969		—		6,738
Total loans	$	565,781	$	404,130	$	198,277	$	735	$	1,168,923	$	728,910	$	469,227	$	262,894	$	5,376	$	1,466,407
December 31, 2018
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment	$	—	$	504	$	18	$	—	$	522	$	—	$	363	$	22	$	—	$	385
Collectively evaluated for impairment	4,412		4,648		1,063		1		10,124		5,062		5,124		1,339		2		11,527
Acquired with deteriorated credit quality	815		22		83		—		920		711		28		23		—		762
Ending allowance for loan losses	$	5,227	$	5,174	$	1,164	$	1	$	11,566	$	5,773	$	5,515	$	1,384	$	2	$	12,674
Balance of loans:
Individually evaluated for impairment	$	5,898	$	9,829	$	1,854	$	—	$	17,581	$	4,832	$	11,652	$	1,386	$	—	$	17,870
Collectively evaluated for impairment	551,851		373,504		174,755		999		1,101,109		596,930		398,441		207,499		896		1,203,766
Acquired with deteriorated credit quality	4,344		122		3,409		—		7,875		$	2,884	135		2,954		—		5,973
Total loans	$	562,093	$	383,455	$	180,018	$	999	$	1,126,565	$	604,646	$	410,228	$	211,839	$	896	$	1,227,609

NOTE 5—6—PREMISES AND EQUIPMENT

Premises and equipment were as follows at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


(Dollars in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Land	$	2,253	$	2,197	$	3,514	$	2,254
Buildings	9,825		9,746		10,625		9,825
Leasehold improvements	2,192		1,708		3,341		2,714
Furniture, fixtures and equipment	6,322		6,024		7,095		6,539
Total premises and equipment	$	20,592	$	19,675	$	24,575	$	21,332
Less: Accumulated depreciation	7,165		6,433		7,902		7,494
Net premises and equipment	$	13,427	$	13,242	$	16,673	$	13,838

Depreciation expense was ~~$326~~$413 thousand and ~~$345~~$327 thousand for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, and $986 thousand and $1.0 million for the nine months ended September 30, 2019 and 2018,~~ respectively.

Most of the Company's branch facilities are rented under non-cancelable operating lease agreements. Total rent expense was ~~$307~~$461 thousand and ~~$285~~$297 thousand for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, and $840 thousand and $790 thousand for the nine months ended September 30, 2019 and 2018, respectively.~~respectively,

NOTE 6—7—GOODWILL AND INTANGIBLE ASSETS

Goodwill: The Company has acquired ~~two~~three banks, Lotus Bank in March 2015, ~~and~~ 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, ~~and~~ $4.8 million, ofand $26.8 million, respectively. Total goodwill ~~respectively. Goodwill~~ was $36.2 million at March 31, 2020 and $9.4 million at ~~both September 30, 2019 and~~ December 31, ~~2018.~~2019.

Goodwill is not amortized but is evaluated ~~at least~~ annually for ~~impairment.~~impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. Impairment exists when the carrying value of goodwill exceeds its fair value. The Company's most recent annual goodwill impairment review ~~performed~~ as of ~~September 30, 2018~~October 1, 2019 did not indicate that an impairment existed. However, in accordance with ASC 350, the Company reviewed the requirements of ~~goodwill existed. The Company also determined that no triggering events have occurred that indicated~~interim impairment testing based on the current economic conditions resulting from the ~~most recent valuation date through September 30, 2019 and that the Company's goodwill was not impaired at September 30, 2019.~~

~~Beginning with fiscal year 2019,~~COVID-19 pandemic. As a result, the Company ~~has elected~~concluded to ~~evaluate goodwill for~~perform a qualitative analysis as of March 31, 2020 which indicated no impairment as of ~~October 1st rather than September 30th as was done in the preceding years. The change will have no impact on the current year's or prior year's financial statements.~~March 31, 2020.

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

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


(Dollars in thousands)	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Gross carrying amount	$	2,045		$	2,045		$	5,708		$	2,045
Accumulated amortization	(1,715		)	(1,598		)	(1,936		)	(1,744		)
Net Intangible	$	330		$	447		$	3,772		$	301

Amortization expense for the CDIs was ~~$29~~$192 thousand and ~~$55~~$52 thousand for the three months ended ~~September 30,~~March 31, 2020 and 2019, respectively.

Mortgage Servicing Rights ("MSRs"): The Company has recorded MSRs for loans that are sold with servicing retained. MSRs are carried at the lower of the initial capitalized amount, net of accumulated amortization or estimated fair value. MSRs are amortized in proportion to and ~~2018~~over the period of estimated net servicing income. The Company serviced residential mortgage loans for others with unpaid principal balances of approximately $21.9 million and ~~$117 thousand~~$9.0 million, as of March 31, 2020 and ~~$165 thousand~~December 31, 2019, respectively.

Changes in our mortgage servicing rights were as follows for the ~~nine~~three months ended ~~September 30, 2019 and 2018, respectively.~~March 31, 2020. The Company had no mortgage servicing rights for the three months ended March 31, 2019:



(Dollars in thousands)	March 31, 2020
Mortgage servicing rights:
Balance, beginning of period	$	76
Originated servicing	142
Amortization	(5		)
Balance, end of period	213
Valuation allowance:
Balance, beginning of period	—
Additions	17
Balance, end of period	17
Mortgage servicing rights, net	$	196
Fair value:
At beginning of period	$	87
At end of period	196

NOTE 78 —BORROWINGS AND SUBORDINATED DEBT

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


	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
(Dollars in thousands)	Amount		Weighted Average Rate⁽¹⁾		Amount		Weighted Average Rate⁽¹⁾		Amount		Weighted Average Rate⁽¹⁾		Amount		Weighted Average Rate⁽¹⁾
Short-term borrowings:
FHLB Advances	$	—	—	%	$	90,000	2.54	%	$	25,000	0.29	%	$	60,000	1.61	%
Securities sold under agreements to repurchase	545		0.30		609		0.30		176		0.30		851		0.30
FHLB line of credit	—		—		2,520		2.87
Federal funds purchased	10,000		1.90		5,000		2.50		—		—		5,000		1.90
Total short-term borrowings	10,545		1.82		98,129		2.53		25,176		0.29		65,851		1.62
Long-term debt:
Secured borrowing due in 2022	1,392		1.00		1,445		1.00		1,357		1.00		1,374		1.00
FHLB advances due in 2022 to 2029⁽²⁾	100,000		1.11		—		—		185,254		1.10		145,000		1.06
Subordinated notes due in 2025⁽³⁾	14,934		6.38		14,891		6.38
Subordinated notes due in 2025 and 2029⁽³⁾									44,447		5.29		44,440		5.29
Total long-term debt	116,326		1.79		16,336		5.90		231,058		1.91		190,814		2.04
Total short-term and long-term borrowings	$	126,871	1.79	%	$	114,465	3.01	%	$	256,234	1.75	%	$	256,665	1.93	%

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

⁽²⁾ At ~~September 30, 2019,~~March 31, 2020, the long-term FHLB advances consisted of ~~0.66%~~0.42% - ~~2.35%~~2.93% fixed rate ~~notes.~~notes and can be called through 2024 without penalty by the issuer. The March 31, 2020 balance includes FHLB advances of $185.0 million and purchase accounting premiums of $254 thousand.

⁽³⁾ The ~~September 30,~~March 31, 2020 balance includes subordinated notes of $45.0 million and debt issuance costs of $553 thousand. The December 31, 2019 balance includes subordinated notes of ~~$15.0~~$45.0 million and debt issuance costs of ~~$66 thousand. The December 31, 2018 balance includes subordinated notes of $15.0 million and debt issuance costs of $109~~$560 thousand.

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

$210.3 million of short-term and long-term FHLB advances as of March 31, 2020 were secured by a blanket lien on ~~$419.6~~$514.1 million of real estate-related ~~loans as of September 30, 2019.~~loans. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional ~~$144.9~~$52.4 million from the FHLB at ~~September 30, 2019.~~March 31, 2020. In addition, the Bank can borrow up to ~~$130.0~~$122.5 million through the unsecured lines of credit it has established with other correspondent banks, as well as ~~$4.9~~$5.0 million

through a secured line with the Federal Reserve Bank. The Bank had ~~$10.0~~no outstanding federal funds purchased as of March 31, 2020 and $5.0 million outstanding federal funds purchased as of ~~September 30, 2019 and $5.0 million outstanding as of~~ December 31, ~~2018.~~2019.

At ~~September 30, 2019,~~March 31, 2020, the Company had ~~$545~~$176 thousand 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 ~~$1.2~~$1.5 million at ~~September 30, 2019.~~March 31, 2020.

The Company had a secured borrowing of $1.4 million as of ~~September 30, 2019~~March 31, 2020 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.

As of ~~September 30, 2019,~~March 31, 2020, the Company had $45.0 million outstanding subordinated notes and $553 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.

The $15.0 million of subordinated ~~notes. The~~ notes issued on December 21, 2015 bear a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. The notes will bear a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly after December 15, 2020 through maturity. The notes mature no later than December 15, 2025, and the Company has 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.

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 ~~are subordinated~~will bear a floating interest rate of three-month SOFR plus 311 basis points payable quarterly after December 18, 2024 through maturity. The notes mature no later than December 18, 2029, and the Company has the option to redeem any or all ~~other borrowings. At September 30, 2019, there was $66 thousand of debt issuance costs remaining, which are netted against the balance~~ of the subordinated notes ~~and recognized as expense over~~without premium or penalty any time after December 18, 2024 or upon the ~~expected term~~occurrence of ~~the notes.~~a Tier 2 capital event or tax event.

NOTE 8—9—INCOME TAXES

The Company ~~records~~and its subsidiaries are subject to U.S. federal income ~~tax expense using its estimate~~tax. In the ordinary course of business, we are routinely subject to audit by Internal Revenue Service. Currently, the ~~effective income tax rate expected~~Company is subject to examination by taxing authorities for the ~~full~~2016 tax return year and applies that rate on a year-to-date basis. The fluctuations in the Company's effective federal income tax rate reflect changes related to interest income exempt from federal taxation and other nondeductible expenses relative to income tax credits.forward.

A reconciliation of expected income tax expense using the federal ~~corporate tax~~statutory rate of 21% as of March 31, 2020 and ~~the~~2019 and actual income tax expense ~~recorded in our consolidated financial statements was~~is as ~~follows~~:follows:


	For the three months ended September 30,						For the nine months ended September 30,						For the three months ended March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019
Income tax expense based on federal corporate tax rate	$	1,118		$	823		$	2,911		$	2,646		$	936		$	885
Changes resulting from:
Tax-exempt income	(142		)	(104		)	(398		)	(289		)	(150		)	(121		)
Net operating loss carryback due to CARES Act													(290		)	—
Disqualified dispositions from stock options													(175		)	—
Other, net	(62		)	(54		)	(85		)	(190		)	28			(17		)
Income tax expense	$	914		$	665		$	2,428		$	2,167		$	349		$	747

In March 2020, the United States government approved the Coronavirus Aid, Relief and Economic Security Act (the CARES Act), allowing companies to carryback net operating losses generated in 2018-2020 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.

NOTE 9—10—STOCK BASED COMPENSATION

On March 15, 2018, the Company’s Board of Directors approved the 2018 Equity Incentive ~~Compensation~~ 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 ~~it is~~such awards are no longer outstanding. ~~For further discussion on the Stock Option Plan and 2014 Plan, refer to the disclosures included within the Annual Form 10-K, filed with the SEC on March 22, 2019.~~

The Company has reserved 250,000 shares of common stock for issuance under the 2018 Plan. During the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, the Company ~~granted no stock options~~issued 38,170 and ~~issued~~ 35,633 restricted stock awards, respectively, under the 2018 ~~Plan, resulting in 207,617~~Plan. There were 165,597 shares available ~~to be granted~~for issuance as of ~~September 30, 2019. During the nine months ended~~

~~September 30, 2018, the Company granted 30,000 stock options under the Stock Option Plan and 30,271 restricted stock awards under the 2014 Plan.~~March 31, 2020.

Stock Options

As of ~~September 30, 2019,~~March 31, 2020, 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 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. The fair value of the~~grant.. There were no stock options granted induring the ~~nine~~three months ended ~~September 30, 2018 was determined using the following weighted-average assumptions as of grant date:~~



		~~September 30, 2018~~
~~Risk Free Interest Rate~~		~~2.83%~~
~~Expected Term (years)~~		~~7.0~~
~~Expected Volatility~~		~~0.04%~~
~~Weighted average fair value of options granted~~		~~$4.46~~

March 31, 2020 or March 31, 2019.

The summary of our stock option activity for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 is as follows:

Shares
Weighted Average
Exercise Price

Weighted Average Remaining Contractual
Term
Options outstanding at January 1, 2019 376,768
$ 16.26
5.8
Exercised (21,550 ) 10.16

Options outstanding at September 30, 2019 355,218
16.63
5.3
Options exercisable at September 30, 2019 335,214
$ 16.14
5.1



	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term
Options outstanding, beginning of period	355,218		$	16.63	5.0
Exercised	(6,500	)	9.46
Options outstanding, end of period	348,718		16.76		4.8
Options exercisable	338,716		$	16.52	4.7

The aggregate intrinsic value was ~~$2.7 million~~$904 thousand for both options outstanding and exercisable as of ~~September 30, 2019.~~March 31, 2020. As of ~~September 30, 2019,~~March 31, 2020, there was ~~$61~~$39 thousand of total 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 of ~~1.1 years.~~0.88 year.

Share-based compensation expense charged against income was ~~$12~~$11 thousand and ~~$38~~$20 thousand for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, and $43 thousand and $128 thousand for the nine months ended September 30, 2019 and 2018,~~ respectively.

Restricted Stock Awards

A summary of changes in the Company's nonvested shares for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 is as follows:


Nonvested Shares	Shares		Weighted Average Grant-Date Fair Value		Shares		Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2019	53,770		$	24.14
Nonvested at January 1, 2020					80,370		$	24.28
Granted	35,633		23.76		38,170		24.90
Vested	(6,700	)	20.75		(19,850	)	23.10
Forfeited	(3,150	)	23.99		(1,400	)	24.46
Nonvested at September 30, 2019	79,553		$	24.26
Nonvested at March 31, 2020					97,290		$	24.76

As of ~~September 30, 2019,~~March 31, 2020, there was ~~$990 thousand~~$1.6 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 ~~1.9~~2.24 years. The total fair value of shares vested during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was ~~$139~~$459 thousand.

Total expense for restricted stock awards totaled $177 thousand and ~~$175~~$134 thousand for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, and $474 thousand and $487 thousand for the nine months ended September 30, 2019 and 2018,~~ respectively. For the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, there was $64 thousand and $43 thousand, respectively, of restricted stock redeemed to cover the payroll taxes due at the time of vesting.

NOTE ~~10—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. ~~These~~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.~~ 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 March 31, 2020, the allowance for off-balance sheet risk was $380 thousand, compared to $318 thousand at December 31, 2019, and was included in "Other liabilities" on our consolidated balance sheets.

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


	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
(Dollars in thousands)	Fixed		Variable		Fixed		Variable		Fixed		Variable		Fixed		Variable
Commitments to make loans	$	16,252	$	22,769	$	8,608	$	10,900	$	26,088	$	12,778	$	16,276	$	20,128
Unused lines of credit	19,544		289,779		18,672		229,490		37,051		348,460		28,723		288,086
Unused standby letters of credit and commercial letters of credit	4,195		—		3,861		232		4,327		2,028		4,895		—

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments of ~~$16.3~~$26.1 million as of ~~September 30, 2019, have~~March 31, 2020, had interest rates ranging from ~~3.6%~~2.8% to ~~7.8%~~9.0% and maturities ranging from ~~2 years~~8 months to 30 years.

NOTE ~~11—~~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, 2019,~~March 31, 2020, the Company and Bank met all capital adequacy requirements to which they were subject.

The Basel III rules require the Company to maintain a capital conservation buffer of common equity 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. The capital conservation buffer was 2.5% at ~~September 30, 2019~~March 31, 2020 and ~~1.875% at~~ December 31, ~~2018.~~2019.

The failure to maintain a capital conservation buffer greater than 2.5% will result in restrictions on capital distributions (including dividends and repurchases of stock) and discretionary bonus payments to executive officers, unless prior regulatory approval is obtained. If a banking institution’s conservation buffer is less than or equal to 0.625%, the banking institution may not make any capital distributions or discretionary bonus payments to executive officers. If the conservation buffer is greater than 0.625% but less than or equal to 1.25%, capital distributions and discretionary bonus payments are limited to 20% of net income for the four calendar quarters preceding the current calendar quarter (net of any capital distributions made during those four quarters), or “eligible retained income.” If the conservation buffer is greater than 1.25% but less than or equal to 1.875%, the limit is 40% of eligible retained income, and if the conservation buffer is greater than 1.875% but less than or equal to 2.5%, the limit is 60% of eligible retained income.

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, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the ~~Bank was classified as~~Bank's capital ratios were in excess of the requirement to be "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events that management believes have changed the Bank's category. As of March 31, 2020, the Company did not maintain a full 2.5% capital conservation buffer with respect to its Tier 1 capital to risk-weighted assets ratio above the 2.5% level. As of March 31, 2020, the Company’s capital conservation buffer was 2.1%.

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)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2019
March 31, 2020
Common equity tier 1 to risk-weighted assets:
Consolidated	$	153,143	11.73	%	$	58,754	4.50	%	$	91,396	7.00	%					$	130,442	8.10	%	$	72,503	4.50	%	$	112,782	7.00	%
Bank	160,141		12.25	%	58,804		4.50	%	91,472		7.00	%	$	84,939	6.50	%	171,033		10.62	%	72,481		4.50	%	112,749		7.00	%	$	104,695	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	$	153,143	11.73	%	$	78,339	6.00	%	$	110,980	8.50	%					$	130,442	8.10	%	$	96,670	6.00	%	$	136,950	8.50	%
Bank	160,141		12.25	%	78,405		6.00	%	111,074		8.50	%	$	104,540	8.00	%	171,033		10.62	%	96,642		6.00	%	136,909		8.50	%	$	128,856	8.00	%
Total capital to risk-weighted assets:
Consolidated	$	180,711	13.84	%	$	104,452	8.00	%	$	137,093	10.50	%					$	188,258	11.68	%	$	128,894	8.00	%	$	169,173	10.50	%
Bank	172,774		13.22	%	104,540		8.00	%	137,209		10.50	%	$	130,675	10.00	%	184,402		11.45	%	128,856		8.00	%	169,123		10.50	%	$	161,070	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	$	153,143	10.12	%	$	60,503	4.00	%	$	60,503	4.00	%					$	130,442	7.08	%	$	73,669	4.00	%	$	73,669	4.00	%
Bank	160,141		10.64	%	60,191		4.00	%	60,191		4.00	%	$	75,238	5.00	%	171,033		9.33	%	73,356		4.00	%	73,356		4.00	%	$	91,695	5.00	%
December 31, 2018
December 31, 2019
Common equity tier 1 to risk-weighted assets:
Consolidated	$	144,008	11.82	%	$	54,803	4.50	%	$	77,699	6.38	%					$	157,659	11.72	%	$	60,533	4.50	%	$	94,163	7.00	%
Bank	147,495		12.12	%	54,780		4.50	%	77,666		6.38	%	$	79,126	6.50	%	165,199		12.27	%	60,568		4.50	%	94,217		7.00	%	$	87,487	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	$	144,008	11.82	%	$	73,071	6.00	%	$	95,967	7.88	%					$	157,659	11.72	%	$	80,711	6.00	%	$	114,341	8.50	%
Bank	147,495		12.12	%	73,040		6.00	%	95,926		7.88	%	$	97,386	8.00	%	165,199		12.27	%	80,757		6.00	%	114,406		8.50	%	$	107,676	8.00	%
Total capital to risk-weighted assets:
Consolidated	$	170,503	14.00	%	$	97,428	8.00	%	$	120,324	9.88	%					$	215,091	15.99	%	$	107,615	8.00	%	$	141,244	10.50	%
Bank	159,100		13.07	%	97,386		8.00	%	120,272		9.88	%	$	121,733	10.00	%	178,191		13.24	%	107,676		8.00	%	141,325		10.50	%	$	134,595	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	$	144,008	10.21	%	$	56,411	4.00	%	$	56,411	4.00	%					$	157,659	10.41	%	$	60,580	4.00	%	$	60,580	4.00	%
Bank	147,495		10.48	%	56,309		4.00	%	56,309		4.00	%	$	70,386	5.00	%	165,199		10.96	%	60,276		4.00	%	60,276		4.00	%	$	75,345	5.00	%

(1) Reflects the capital conservation buffer of 2.5% ~~and 1.875% applicable during 2019 and 2018, respectively.~~.

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, 2019,~~March 31, 2020, the Bank had the capacity to pay the Company a dividend of up to ~~$35.6~~$34.1 million without the need to obtain prior regulatory approval.

NOTE ~~12—~~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.

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). NoFor securities ~~are valued~~where pricing on similar securities is not available, a third party is engaged to calculate the fair value using ~~a Level 3 approach.~~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.~~transfer from loans held for sale. 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

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 material input.

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


(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)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2019
March 31, 2020
Securities available for sale:
U.S. government sponsored entities and agencies	$	1,497	$	—	$	1,497	$	—	$	9,775	$	—	$	9,775	$	—
State and political subdivision	90,733		—		90,733		—		127,680		—		125,870		1,810
Mortgage-backed securities: residential	9,390		—		9,390		—		10,294		—		10,294		—
Mortgage-backed securities: commercial	21,049		—		21,049		—		9,133		—		9,133		—
Collateralized mortgage obligations: residential	9,069		—		9,069		—		8,056		—		8,056		—
Collateralized mortgage obligations: commercial	31,598		—		31,598		—		30,061		—		30,061		—
U.S. Treasury	2,001		—		2,001		—		1,010		—		1,010		—
SBA	23,536		—		23,536		—		20,562		—		20,562		—
Asset backed securities	10,187		—		10,187		—		9,613		—		9,613		—
Corporate bonds	6,182		—		6,182		—		4,487		—		4,487		—
Total securities available for sale	205,242		—		205,242		—		230,671		—		228,861		1,810
Loans held for sale	26,864		—		26,864		—		18,305		—		18,305		—
Loans measured at fair value:
Residential real estate	4,890		—		—		4,890		3,712		—		—		3,712
Derivative assets:
Customer-initiated derivatives	5,628		—		5,628		—		13,551		—		13,551		—
Forward contracts related to mortgage loans to be delivered for sale	185		—		185		—		5		—		5		—
Interest rate lock commitments	359		—		359		—		1,783		—		1,783		—
Total assets at fair value	$	243,168	$	—	$	238,278	$	4,890	$	268,027	$	—	$	262,505	$	5,522
Derivative liabilities:
Customer-initiated derivatives	5,628		—		5,628		—		13,551		—		13,551		—
Forward contracts related to mortgage loans to be delivered for sale	56		—		56		—		1,566		—		1,566		—
Interest rate lock commitments	5		—		5		—
Total liabilities at fair value	$	5,689	$	—	$	5,689	$	—	$	15,117	$	—	$	15,117	$	—


(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)		Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2018
December 31, 2019
Securities available for sale:
U.S. government sponsored entities and agencies	$	2,397	$	—	$	2,397	$	—
State and political subdivision	75,146		—		75,146		—		$	93,747	$	—	$	93,747	$	—
Mortgage-backed securities: residential	9,739		—		9,739		—		10,565		—		10,565		—
Mortgage-backed securities: commercial	12,382		—		12,382		—		8,779		—		8,779		—
Collateralized mortgage obligations: residential	18,671		—		18,671		—		8,529		—		8,529		—
Collateralized mortgage obligations: commercial	31,988		—		31,988		—		23,181		—		23,181		—
U.S. Treasury	20,481		—		20,481		—		1,999		—		1,999		—
SBA	15,688		—		15,688		—		21,984		—		21,984		—
Asset backed securities	3,842		—		3,842		—		10,084		—		10,084		—
Corporate bonds	13,924		—		13,924		—		2,037		—		2,037		—
Total securities available for sale	$	204,258	$	—	$	204,258	$	—	$	180,905	$	—	$	180,905	$	—
Loans held for sale	5,595		—		5,595		—		13,889		—		13,889		—
Loans measured at fair value:
Residential real estate	4,571		—		—		4,571		4,063		—		—		4,063
Derivative assets:
Customer-initiated derivatives	1,126		—		1,126		—		4,684		—		4,684		—
Forward contracts related to mortgage loans to be delivered for sale	22		—		22		—		34		—		34		—
Interest rate lock commitments	198		—		198		—		256		—		256		—
Total assets at fair value	$	215,770	$	—	$	211,199	$	4,571	$	203,831	$	—	$	199,768	$	4,063
Derivative liabilities:
Customer-initiated derivatives	1,126		—		1,126		—		4,684		—		4,684		—
Forward contracts related to mortgage loans to be delivered for sale	43		—		43		—		33		—		33		—
Total liabilities at fair value	$	1,169	$	—	$	1,169	$	—	$	4,717	$	—	$	4,717	$	—

There were no transfers between levels within the fair value hierarchy, within a specific category, during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 or ~~during the~~ year ended December 31, ~~2018.~~2019.

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


	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2019			2018			2019			2018			Loans held for investment
Loans held for investment
For the three months ended March 31, 2020
Beginning balance	$	5,624		$	4,414		$	4,571		$	4,291		$	4,063
Transfers from loans held for sale	466			149			1,895			453			40
Gains (losses):
Recorded in "Mortgage banking activities"	(9		)	(32		)	151			(144		)	(7		)
Repayments	(1,191		)	(44		)	(1,727		)	(113		)	(384		)
Ending balance	$	4,890		$	4,487		$	4,890		$	4,487		$	3,712
For the three months ended March 31, 2019
Beginning balance													$	4,571
Transfers from loans held for sale													239
Gains (losses):
Recorded in "Mortgage banking activities"													88
Repayments													(248		)
Ending balance													$	4,650

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, 2019~~March 31, 2020 or December 31, ~~2018.~~

2019.

As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Aggregate fair value	$	26,864	$	5,595	$	18,305	$	13,889
Contractual balance	26,429		5,512		17,587		13,510
Unrealized gain	435		83		718		379

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,~~March 31, 2020 and 2019 ~~and 2018~~ were as follows:


	For the three months ended September 30,					For the nine months ended September 30,				For the three months ended March 31,
(Dollars in thousands)	2019			2018		2019		2018		2020		2019
Change in fair value	$	(98	)	$	69	$	352	$	100	$	339	$	83

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


(Dollars in thousands)	Total		Significant Unobservable Inputs (Level 3)		Total		Significant Unobservable Inputs (Level 3)
September 30, 2019
March 31, 2020
Impaired loans:
Commercial and industrial					$	1,139	$	1,139
Mortgage servicing rights					196		196
Other real estate owned					2,093		2,093
Total					$	3,428	$	3,428
December 31, 2019
Impaired loans:
Commercial real estate	$	897	$	897	$	265	$	265
Commercial and industrial	1,291		1,291		261		261
Mortgage servicing rights					87		87
Other real estate owned	373		373		921		921
Total	$	2,561	$	2,561	$	1,534	$	1,534
December 31, 2018
Impaired loans:
Commercial and industrial	$	3,337	$	3,337
Total	$	3,337	$	3,337

The Company recorded specific reserves of ~~$246~~$317 thousand and ~~$278~~$161 thousand to reduce the value of these loans at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, based on the estimated fair value of the underlying collateral. The Company also recorded chargeoffs of ~~$74~~$108 thousand during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 related to the impaired loans at fair value. There were ~~no charge-offs~~chargeoffs of $298 thousand related to impaired loans at fair value during the year ended December 31, ~~2018.~~2019.

The Company recorded a valuation allowance of $17 thousand related to mortgage servicing rights during the three months ended March 31, 2020. There was no valuation allowance recorded during the year ended December 31, 2019. There were no write downs recorded in other real estate owned during the three ~~and nine~~ months ended ~~September 30, 2019. There were no other real estate owned assets at fair value at~~March 31, 2020 or the year ended December 31, ~~2018.~~2019.

The table below presents quantitative information about the significant unobservable inputs for assets measured at fair value on a nonrecurring basis at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018:~~2019:


(Dollars in thousands)	Fair value at September 30, 2019		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range		Fair value at March 31, 2020		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range
Impaired loans	$	2,188	Discounted appraisals; estimated net realizable value of collateral	Collateral discounts	10-50%		$	1,139	Discounted appraisals; estimated net realizable value of collateral	Collateral discounts	10.00-80.00%
Mortgage servicing rights							196		Discounted cash flow	Prepayment speed	15.34	%
										Discount rate	8.25	%
Other real estate owned	373		Appraisal of property	Discounted appraisal value	36	%	2,093		Appraisal of property	Discounted appraisal value	18.00-41.00%

(Dollars in thousands)

Fair value at
December 31, 2018

Valuation
Technique(s)

Significant
Unobservable Input(s)

Discount % Range

Fair value at
December 31, 2019

Valuation
Technique(s)

Significant
Unobservable Input(s)

Discount % Range

Impaired loans

3,337

Discounted appraisals

Collateral discounts

17-50%

526

Discounted appraisals; estimated net realizable value of collateral

Collateral discounts

10.00-50.00%

Mortgage servicing rights

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%

The carrying amounts and estimated fair values of financial instruments, excluding those previously presented unless otherwise noted, at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018 were~~2019 are noted in the table below. The estimated fair value of loans as ~~follows:~~of March 31, 2020 takes into account exit pricing as a result of our adoption of ASU No. 2016-01.


			Estimated Fair Value										Estimated Fair Value
(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		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, 2019
March 31, 2020
Financial assets:
Cash and cash equivalents	$	49,361	$	32,400	$	16,961	$	—	$	49,361	$	104,867	$	22,775	$	82,092	$	—	$	104,867
Federal Home Loan Bank stock	8,325		NA		NA		NA		NA		12,398		N/A		N/A		N/A		N/A
Net loans	1,156,616		—		—		1,164,984		1,164,984		1,453,418		—		—		1,498,580		1,498,580
Accrued interest receivable	5,280		—		1,916		3,364		5,280		6,019		—		2,027		3,992		6,019
Financial liabilities:
Deposits	1,194,542		—		1,197,718		—		1,197,718		1,470,608		—		1,490,547		—		1,490,547
Borrowings	111,937		—		111,729		—		111,729		211,787		—		216,964		—		216,964
Subordinated notes	14,934		—		15,405		—		15,405		44,447		—		40,950		—		40,950
Accrued interest payable	2,500		—		2,500		—		2,500		2,061		—		2,061		—		2,061
December 31, 2018
December 31, 2019
Financial assets:
Cash and cash equivalents	$	33,296	$	27,072	$	6,224	$	—	$	33,296	$	103,930	$	19,990	$	83,940	$	—	$	103,930
Federal Home Loan Bank stock	8,325		NA		NA		NA		NA		11,475		N/A		N/A		N/A		N/A
Net loans	1,114,999		—		—		1,113,648		1,113,648		1,214,935		—		—		1,203,639		1,203,639
Accrued interest receivable	4,207		—		1,210		2,997		4,207		4,403		—		1,236		3,167		4,403
Financial liabilities:
Deposits	1,134,635		—		1,137,575		—		1,137,575		1,135,428		—		1,138,202		—		1,138,202
Borrowings	99,574		—		100,602		—		100,602		212,225		—		212,125		—		212,125
Subordinated notes	14,891		—		15,450		—		15,450		44,440		—		47,100		—		47,100
Accrued interest payable	1,674		—		1,674		—		1,674		1,574		—		1,574		—		1,574

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)FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its 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 borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are ~~values~~valued at the lower of cost or fair value as described previously. ~~The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.~~

(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

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~~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 ~~13—~~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.

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, 2019				December 31, 2018				March 31, 2020				December 31, 2019
(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value		Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets:
Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives	$	73,512	$	5,628	$	35,733	$	1,126	$	122,703	$	13,551	$	103,941	$	4,684
Forward contracts related to mortgage loans to be delivered for sale	34,459		185		5,241		22		2,000		5		6,018		34
Interest rate lock commitments	42,091		359		18,375		198		83,596		1,783		25,519		256
Total derivatives included in other assets	$	150,062	$	6,172	$	59,349	$	1,346	$	208,299	$	15,339	$	135,478	$	4,974
Included in other liabilities:
Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives	$	73,512	$	5,628	$	35,733	$	1,126	$	122,703	$	13,551	$	103,941	$	4,684
Forward contracts related to mortgage loans to be delivered for sale	19,148		56		11,195		43		74,686		1,566		20,633		33
Interest rate lock commitments	2,296		5		—		—		—		—		928		—
Total derivatives included in other liabilities	$	94,956	$	5,689	$	46,928	$	1,169	$	197,389	$	15,117	$	125,502	$	4,717

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,						Three months ended March 31,
(Dollars in thousands)	Location of Gain (Loss)	2019			2018		2019			2018		Location of Gain (Loss)	2020			2019
Forward contracts related to mortgage loans to be delivered for sale	Mortgage Banking Activities	$	(26	)	$	20	$	(417	)	$	14	Mortgage banking activities	$	(1,958	)	$	(174	)
Interest rate lock commitments	Mortgage Banking Activities	(48		)	65		156			149		Mortgage banking activities	1,527			122
Total gain (loss) recognized in income		$	(74	)	$	85	$	(261	)	$	163
Total loss recognized in income													$	(431	)	$	(52	)

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)	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			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, 2019
March 31, 2020
Offsetting derivative assets:
Customer initiated derivatives	$	5,628	$	—	$	5,628	$	—	$	—	$	5,628		$	13,551	—	$	13,551	—	—		$	13,551
Offsetting derivative liabilities:
Customer initiated derivatives	5,628		—		5,628		—		6,527		(899		)	$	13,551	—	$	13,551	—	$	13,793	$	(242	)
December 31, 2018
December 31, 2019
Offsetting derivative assets:
Customer initiated derivatives	$	1,126	$	—	$	1,126	$	—	$	—	$	1,126		$	4,684	—	$	4,684	—	—		$	4,684
Offsetting derivative liabilities:
Customer initiated derivatives	1,126		—		1,126		—		1,020		106			$	4,684	—	$	4,684	—	$	4,375	$	309

NOTE ~~14—~~15—PARENT COMPANY FINANCIAL STATEMENTS

Balance Sheets—Parent Company


(Dollars in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Assets
Cash and cash equivalents	$	5,910	$	9,690	$	2,391	$	35,210
Investment in banking subsidiary	174,966		155,248		216,357		178,240
Investment in captive insurance subsidiary	2,264		1,622		1,950		1,668
Income tax benefit	456		393		638		520
Other assets	73		21		118		99
Total assets	$	183,669	$	166,974	$	221,454	$	215,737
Liabilities
Subordinated notes	$	14,934	$	14,891	$	44,447	$	44,440
Accrued expenses and other liabilities	767		323		1,239		594
Total liabilities	15,701		15,214		45,686		45,034
Shareholders' equity	167,968		151,760		175,768		170,703
Total liabilities and shareholders' equity	$	183,669	$	166,974	$	221,454	$	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) 2019 2018 2019 2018
Expenses
Interest on subordinated notes $ 256
$ 256
$ 759
$ 759
Other expenses 516
151
902
480
Total expenses 772
407
1,661
1,239
Loss before income taxes and equity in undistributed net earnings of subsidiaries (772 ) (407 ) (1,661 ) (1,239 )
Income tax (benefit) expense 181
(2 ) 272
201
Equity in undistributed earnings of subsidiaries 5,000
3,664
12,820
11,473
Net income $ 4,409
$ 3,255
$ 11,431
$ 10,435
Other comprehensive income (loss) 1,238
(986 ) 7,120
(3,174 )
Total comprehensive income, net of tax $ 5,647
$ 2,269
$ 18,551
$ 7,261



	For the three months ended March 31,
(Dollars in thousands)	2020			2019
Income
Dividend income from bank subsidiary	$	36,500		$	—
Total income	36,500			—
Expenses
Interest on borrowed funds	$	11		$	—
Interest on subordinated notes	636			250
Other expenses	437			200
Total expenses	1,084			450
Income (loss) before income taxes and equity in (overdistributed) undistributed net earnings of subsidiaries	35,416			(450		)
Income tax benefit	127			52
Equity in (overdistributed) undistributed earnings of subsidiaries	(31,433		)	3,865
Net income	$	4,110		$	3,467
Other comprehensive income	1,777			2,069
Total comprehensive income, net of tax	$	5,887		$	5,536

Statements of Cash Flows—Parent Company


	For the nine months ended September 30,						For the three months ended March 31,
(Dollars in thousands)	2019			2018			2020			2019
Cash flows from operating activities
Net income	$	11,431		$	10,435		$	4,110		$	3,467
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries	(12,820		)	(11,473		)
Equity in over (under) distributed earnings of subsidiaries							31,433			(3,865		)
Stock based compensation expense	54			242			13			11
(Increase) decrease in other assets, net	(115		)	33			(137		)	203
Increase in other liabilities, net	411			135
Net cash used in operating activities	(1,039		)	(628		)
Increase (decrease) in other liabilities, net							574			(230		)
Net cash provided by (used in) operating activities							35,993			(414		)
Cash flows from investing activities
Capital infusion to subsidiaries	—			(20,000		)
Cash used in acquisitions							(67,944		)	—
Net cash used in investing activities	—			(20,000		)	(67,944		)	—
Cash flows from financing activities
Net proceeds from issuance of common stock related to initial public offering	—			29,030
Share buyback - redeemed stock	(2,108		)	—			(620		)	(1,104		)
Common stock dividends paid	(852		)	(430		)	(309		)	—
Proceeds from exercised stock options	219			1,269			61			125
Net cash provided by (used in) financing activities	(2,741		)	29,869
Net increase (decrease) in cash and cash equivalents	(3,780		)	9,241
Net cash used in financing activities							(868		)	(979		)
Net decrease in cash and cash equivalents							(32,819		)	(1,393		)
Beginning cash and cash equivalents	9,690			1,158			35,210			9,690
Ending cash and cash equivalents	$	5,910		$	10,399		$	2,391		$	8,297

NOTE ~~15—~~16—EARNINGS PER SHARE

Beginning in the second quarter of 2019, the Company has elected to prospectively 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 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.

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


(Dollars in thousands, except per share data)	For the three months ended September 30, 2019			For the nine months ended September 30, 2019
(In thousands, except per share data)							For the three months ended March 31, 2020
Net income	$	4,409		$	11,431		$	4,110
Net income allocated to participating securities	45			110			47
Net income allocated to common shareholders ⁽¹⁾	$	4,364		$	11,321		$	4,063
Weighted average common shares - issued	7,721			7,738			7,726
Average unvested restricted share awards	(80		)	(76		)	(89		)
Weighted average common shares outstanding - basic	7,641			7,662			7,637
Effect of dilutive securities
Effect of dilutive securities:
Weighted average common stock equivalents	111			114			101
Weighted average common shares outstanding - diluted	7,752			7,776			7,738
EPS available to common shareholders
Basic earnings per common share	$	0.57		$	1.48		$	0.53
Diluted earnings per common share	$	0.56		$	1.46		$	0.53

⁽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.

For the three ~~and nine~~ months ended ~~September 30, 2018,~~March 31, 2019, the basic and diluted earnings per share were calculated using the treasury stock method, as disclosed in the table below.


(Dollars in thousands, except per share data)	For the three months ended September 30, 2018		For the nine months ended September 30, 2018
(In thousands, except per share data)					For the three months ended March 31, 2019
Basic:
Net Income attributable to common shareholders	$	3,255	$	10,435
Net income attributable to common shareholders					$	3,467
Weighted average common shares outstanding	7,749,047		7,264,494		7,751,750
Basic earnings per share	$	0.42	$	1.44	$	0.45
Diluted:
Net Income attributable to common shareholders	$	3,255	$	10,435
Net income attributable to common shareholders					$	3,467
Weighted average common shares outstanding	7,749,047		7,264,494		7,751,750
Add: Dilutive effects of assumed exercises of stock options	152,062		149,182		117,431
Weighted average common and dilutive potential common shares outstanding	7,901,109		7,413,676		7,869,181
Diluted earnings per common share	$	0.41	$	1.41	$	0.44

Stock options for 30,000 shares of common stock were not considered in computing diluted earnings per common share for both the three months ended ~~September 30,~~March 31, 2020 and 2019, and 2018, and stock options for 30,000 shares and 25,055 shares of common stock were not considered in computing diluted earnings per common share for the nine months ended September 30, 2019 and 2018, respectively, because they were antidilutive.

NOTE 17—SUBSEQUENT EVENTS

In March 2020, the Paycheck Protection Program ("PPP") was established by the CARES Act in response to the COVID-19 pandemic. Level One has taken comprehensive steps to provide loan payment deferrals and offer fee waivers, among other actions. Through May 5, 2020, we have helped our consumer and small business customers by deferring loan payments and waiving fees on $376.1 million of loans. In addition, our teams have worked to meet the high demand of PPP applications coming in. Through May 5, 2020, we had facilitated 1,884 or $411.4 million of PPP loans that were approved by the SBA.

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, 2019.~~March 31, 2020. 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, ~~2018,~~2019, filed with the SEC on March ~~22, 2019.~~13, 2020. 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 potential 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; 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; 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 critical of these significant accounting policies are set forth in ~~"Note~~"Note 1 – Basis of Presentation and Summary of Significant Accounting Policies" of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, ~~2018,~~2019, which was filed with the SEC on March ~~22, 2019.~~13, 2020. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, ~~2018.~~2019.

Overview

Level One Bancorp, Inc. is a ~~bank~~financial holding company headquartered in Farmington Hills, Michigan, with its primary branch operations in southeastern ~~Michigan~~ and ~~Grand Rapids,~~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 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 available or economically feasible in the insurance marketplace.

Since 2007, we have grown substantially through organic growth and a series of four 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. As of September 30, 2019, the Company had total consolidated assets of $1.51 billion, total consolidated deposits of $1.19 billion and total consolidated shareholders' equity of $168.0 million.

Our principal business activity has 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~~

~~Proposed Merger with Ann Arbor State Bank:~~ On ~~August 13, 2019,~~January 2, 2020, the Company ~~and~~completed its previously announced acquisition of Ann Arbor Bancorp, Inc. ~~("AAB"~~(“AAB”) ~~jointly announced the signing of an Agreement and Plan of Merger, dated August 12, 2019, pursuant to which the Company has agreed to acquire AAB~~ and its wholly owned subsidiary, Ann Arbor State Bank. The transaction ~~is anticipated~~was completed pursuant to ~~close~~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 ~~the fourth quarter~~cash.

Our results of ~~2019 or~~operations for the first quarter of 2020 ~~subject~~include the results of operations of AAB on and after January 2, 2020, including $1.5 million of acquisition fees. 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 $26.8 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 March 31, 2020, the ~~satisfaction or waiver~~Company had total consolidated assets of ~~customary closing conditions.~~$1.94 billion, total consolidated deposits of $1.47 billion and total consolidated shareholders' equity of $175.8 million.

Recent Developments

~~Third~~First Quarter Dividend. On ~~September 19, 2019,~~March 18, 2020, the Company declared a ~~third~~first quarter ~~2019~~2020 cash dividend of ~~$0.04~~$0.05 per share, payable on ~~October~~April 15, ~~2019~~2020. The first quarter cash dividend of $0.05 per share represents an increase of $0.01 per share, compared to ~~shareholders~~$0.04 per share declared in the prior quarter.

Impact of ~~record~~COVID-19. The COVID-19 pandemic in the United States is expected to have a complex and significant adverse impact on ~~September 30, 2019.~~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 individual and governmental responses to the COVID-19 pandemic have led to a broad curtailment of economic activity beginning in March 2020. In Michigan, the Governor issued a series of orders, including an order that, subject to limited exceptions, all individuals stay at home and non‑essential businesses cease all activities, which orders became effective during late March 2020. The stay-at-home order is currently effective through May 28, 2020. The Bank and its branches have remained open during these orders because banks have been deemed essential businesses. The Bank has been serving its customers through its drive-thrus, by appointment only for in-person services, and online and mobile banking tools.

Across the United States, as a result of stay-at-home orders, many states have experienced a dramatic increase in unemployment levels as a result of the curtailment of business activities. According to the U.S. Department of Labor, the insured unemployment rate in Michigan was 21.8% during the week ended April 25, 2020.

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”). Under the PPP, small businesses, sole proprietorships, independent contractors and self-employed individuals could apply for loans from existing SBA lenders and other approved regulated lenders that enroll in the program, subject to numerous limitations and eligibility criteria. The Bank is participating as a lender in the PPP. On or about April 16, 2020, the SBA notified lenders that the $349 billion earmarked for the PPP was exhausted. On April 24, 2020, an additional $310 billion in funding for PPP loans was authorized, with such funds available for PPP loans beginning on April 27, 2020. 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 two new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility (“MSNLF”), and (2) the Main Street Expanded Loan Facility (“MSELF”). MSNLF loans are unsecured term loans originated on or after April 8, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 8, 2020. The combined size of the program will be up to $600 billion. The program is designed for businesses with up to 10,000 employees or $2.5 billion in 2019 revenues. To obtain a loan, borrowers must confirm that they are seeking financial support because of COVID-19 and that they will not use proceeds from the loan to pay off debt. The Federal Reserve also stated that it would provide additional funding to banks offering PPP loans to struggling small businesses. Lenders participating in the PPP will be able to exclude loans financed by the facility from their leverage ratio.

Effects on Our Business. We currently expect that the COVID-19 pandemic and the specific developments referred to above will have a significant impact on our business. In particular, we anticipate that a significant portion of the Bank’s borrowers in the restaurants and hospitality industries will continue to endure significant economic distress, which has caused, and will continue to cause, them to draw on 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. 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 COVID-19 to our business, financial condition and results of operations.

Level One's Response to COVID-19. Level One has taken comprehensive steps to help our customers, employees and communities during the current COVID-19 health crisis. For our customers, we have provided loan payment deferrals and offered fee waivers, among other actions. Through May 5, 2020, we have helped our consumer and small business customers by deferring loan payments and waiving fees on $376.1 million of loans. In addition, our teams have worked diligently and tirelessly to meet the high demand of PPP applications coming in. Through May 5, 2020, we had facilitated 1,884 or $411.4 million of PPP loans that were approved by the SBA.

For our employees, we have enabled the vast majority of our main office team members to work remotely each day. We have also taken significant actions to help ensure the safety of our employees whose roles require them to come into the office. 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 COVID-19. We will continue to evaluate this fluid situation and take additional actions as necessary.

Level One also recognizes that the industries feeling the most immediate impact of COVID-19 are the hospitality and food service industries. As of March 31, 2020, Level One had less than 0.5% and 4% of loan concentrations in the hospitality and food service industries, respectively.

Selected Financial Data - Unaudited


	As of and for the three months ended									As of and for the nine months ended
	September 30,			June 30,			September 30,			September 30,			September 30,			As of and for the three months ended
(Dollars in thousands, except per share data)	2019			2019			2018			2019			2018			March 31, 2020			December 31, 2019			March 31, 2019
Earnings Summary
Interest income	$	17,983		$	17,657		$	16,629		$	53,082		$	46,783		$	19,817		$	17,366		$	17,442
Interest expense	4,995			5,216			3,560			14,935			9,172			4,997			4,458			4,724
Net interest income	12,988			12,441			13,069			38,147			37,611			14,820			12,908			12,718
Provision expense (benefit) for loan losses	(16		)	429			619			835			463
Provision expense for loan losses																489			548			422
Noninterest income	3,858			3,477			1,924			9,621			4,748			4,690			4,590			2,286
Noninterest expense	11,539			11,167			10,454			33,074			29,294			14,562			11,295			10,368
Income before income taxes	5,323			4,322			3,920			13,859			12,602			4,459			5,655			4,214
Income tax provision	914			767			665			2,428			2,167			349			975			747
Net income	4,409			3,555			3,255			11,431			10,435			4,110			4,680			3,467
Net income allocated to participating securities⁽¹⁾																47			50			—
Net income attributable to common shareholders⁽¹⁾																$	4,063		$	4,630		$	3,467
Per Share Data
Basic earnings per common share	$	0.57		$	0.46		$	0.42		$	1.48		$	1.44		$	0.53		$	0.60		$	0.45
Diluted earnings per common share	0.56			0.45			0.41			1.46			1.41			0.53			0.60			0.44
Book value per common share	21.77			21.07			18.77			21.77			18.77			22.74			22.13			20.15
Tangible book value per share ⁽¹⁾	20.51			19.81			17.50			20.51			17.50
Tangible book value per share ⁽²⁾																17.54			20.86			18.88
Shares outstanding (in thousands)	7,714			7,728			7,749			7,714			7,749			7,731			7,715			7,749
Average basic common shares (in thousands)	7,721			7,741			7,749			7,738			7,264			7,637			7,632			7,752
Average diluted common shares (in thousands)	7,752			7,856			7,901			7,776			7,414			7,738			7,747			7,869
Selected Period End Balances
Total assets	$	1,509,463		$	1,505,376		$	1,446,269		$	1,509,463		$	1,446,269		$	1,936,823		$	1,584,899		$	1,456,552
Securities available-for-sale	205,242			218,145			199,051			205,242			199,051			230,671			180,905			226,874
Total loans	1,168,923			1,166,501			1,114,999			1,168,923			1,114,999			1,466,407			1,227,609			1,131,097
Total deposits	1,194,542			1,229,445			1,130,311			1,194,542			1,130,311			1,470,608			1,135,428			1,151,463
Total liabilities	1,341,495			1,342,509			1,300,810			1,341,495			1,300,810			1,761,055			1,414,196			1,300,433
Total shareholders' equity	167,968			162,867			145,459			167,968			145,459			175,768			170,703			156,119
Tangible shareholders' equity ⁽¹⁾	158,250			153,121			135,570			158,250			135,570
Tangible shareholders' equity ⁽²⁾																135,578			160,940			146,337
Performance and Capital Ratios
Return on average assets	1.16		%	0.95		%	0.95		%	1.02		%	1.06		%	0.87		%	1.23		%	0.96		%
Return on average equity	10.58			8.92			8.95			9.51			10.68			9.40			10.98			8.99
Net interest margin (fully taxable equivalent)⁽²⁾	3.59			3.5			3.97			3.61			3.99
Net interest margin (fully taxable equivalent)⁽³⁾																3.42			3.56			3.76
Efficiency ratio (noninterest expense/net interest income plus noninterest income)	68.50			70.15			69.73			69.24			69.16			74.64			64.55			69.10
Dividend payout ratio	7.03			8.69			7.13			7.45			4.12			7.52			6.60			6.72
Total shareholders' equity to total assets	11.13			10.82			10.06			11.13			10.06			9.08			10.77			10.72
Tangible equity to tangible assets ⁽¹⁾	10.55			10.24			9.44			10.55			9.44
Tangible equity to tangible assets ⁽²⁾																7.15			10.22			10.11
Common equity tier 1 to risk-weighted assets	11.73			11.49			11.75			11.73			11.75			8.10			11.77			11.78
Tier 1 capital to risk-weighted assets	11.73			11.49			11.75			11.73			11.75			8.10			11.77			11.78
Total capital to risk-weighted assets	13.84			13.62			13.99			13.84			13.99			11.68			16.05			13.95
Tier 1 capital to average assets (leverage ratio)	10.12			10.01			10.31			10.12			10.31			7.08			10.41			10.19
Asset Quality Ratios:
Net charge-offs to average loans	0.01		%	0.01		%	0.07		%	0.03		%	0.04		%	0.05		%	0.06		%	0.01		%
Nonperforming assets as a percentage of total assets	0.78			0.99			0.89			0.78			0.89			0.89			1.23			1.17
Nonaccrual loans as a percent of total loans	0.98			1.25			1.15			0.98			1.15			1.04			1.51			1.47
Allowance for loan losses as a percentage of period-end loans	1.05			1.06			1.07			1.05			1.07			0.89			1.03			1.06
Allowance for loan losses as a percentage of nonaccrual loans	107.46			84.94			92.36			107.46			92.36			85.32			68.40			71.85
Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30	100.52			79.41			84.72			100.52			84.72			80.34			64.29			66.33

⁽¹⁾ Amounts presented are used in the two-class earnings per common share calculation. This method was adopted by the Company in second quarter of 2019.

⁽²⁾ See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below.

~~(2)~~⁽³⁾ 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 shareholders' equity, tangible book value per share and the ratio of tangible equity to tangible ~~assets.~~assets, as well as net income and diluted earnings per common share excluding acquisition and due diligence fees. 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.

We calculate: (i) tangible shareholders' equity as total shareholders' equity less core deposit intangibles, mortgage servicing rights and goodwill; (ii) tangible book value per share as tangible shareholders' equity divided by shares of common stock outstanding; ~~and~~ (iii) tangible assets as total assets, less core deposit intangibles, mortgage servicing rights and ~~goodwill.~~goodwill; (iv) net income, excluding acquisition and due diligence fees, as net income, as reported, less acquisition and due diligences fees, net of income tax benefit; and (v) diluted earnings per common share, excluding acquisition and due diligence fees, as diluted earnings per common share, as reported, less effect of acquisition and due diligence fees on diluted earnings per share, net of income tax benefit.

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

(Dollars in thousands, except per share data) September 30, 2019
December 31,
2018
September 30, 2018
(Unaudited) (Unaudited)
Total shareholders' equity $ 167,968
$ 151,760
$ 145,459
Less:
Goodwill 9,387
9,387
9,387
Other intangible assets, net 331
447
502
Tangible shareholders' equity $ 158,250
$ 141,926
$ 135,570

Shares outstanding (in thousands) 7,714
7,750
7,749
Tangible book value per share $ 20.51
$ 18.31
$ 17.50

Total assets $ 1,509,463
$ 1,416,215
$ 1,446,269
Less:
Goodwill 9,387
9,387
9,387
Other intangible assets, net 331
447
502
Tangible assets $ 1,499,745
$ 1,406,381
$ 1,436,380

Tangible equity to tangible assets 10.55 % 10.09 % 9.44 %



	As of and for the three months ended
(Dollars in thousands, except per share data)	March 31, 2020			December 31, 2019			March 31, 2019
	(Unaudited)			(Unaudited)			(Unaudited)
Total shareholders' equity	$	175,768		$	170,703		$	156,119
Less:
Goodwill	36,216			9,387			9,387
Other intangible assets, net	3,974			376			395
Tangible shareholders' equity	$	135,578		$	160,940		$	146,337

Shares outstanding (in thousands)	7,731			7,715			7,749
Tangible book value per share	$	17.54		$	20.86		$	18.88

Total assets	$	1,936,823		$	1,584,899		$	1,456,552
Less:
Goodwill	36,216			9,387			9,387
Other intangible assets, net	3,974			376			395
Tangible assets	$	1,896,633		$	1,575,136		$	1,446,770

Tangible equity to tangible assets	7.15		%	10.22		%	10.11		%

Net income, as reported	$	4,110		$	4,680		$	3,467
Acquisition and due diligence fees	1,471			220			—
Income tax benefit ⁽¹⁾	(295		)	(26		)	—
Net income, excluding acquisition and due diligence fees	$	5,286		$	4,874		$	3,467

Diluted earnings per share, as reported	$	0.53		$	0.60		$	0.44
Effect of acquisition and due diligence fees, net of income tax benefit	0.15			0.03			—
Diluted earnings per common share, excluding acquisition and due diligence fees	$	0.68		$	0.63		$	0.44

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

Results of Operations

Net Income

We had net income of ~~$4.4~~$4.1 million, or ~~$0.56~~$0.53 per diluted common share, for the three months ended ~~September 30, 2019,~~March 31, 2020, compared to ~~$3.3~~$3.5 million, or ~~$0.41~~$0.44 per diluted common share, for the three months ended ~~September 30, 2018.~~March 31, 2019. The increase of ~~$1.2 million~~$643 thousand in net income ~~in the third quarter of 2019~~ primarily reflected ~~an increase~~increases of ~~$1.9~~$2.4 million in noninterest income, $2.1 million in net interest income and a decrease ~~in provision for loan losses~~ of ~~$635 thousand. This was partially offset by increases of $1.0 million in noninterest expense and $249~~$398 thousand in income tax provision.

We had net income of $11.4 million, or $1.46 per diluted common share, for the nine months ended September 30, 2019, compared to $10.4 million, or $1.41 per diluted common share, for the nine months ended September 30, 2018. The increase of $996 thousand in net income year over year primarily reflected These increases ~~of $4.9 million in noninterest income and $536 thousand in net interest income. This was~~were partially offset by ~~increases~~$4.2 million of ~~$3.8 million in~~higher noninterest ~~expense, $372 thousand in provision for loan losses and $261 thousand in income tax provision.~~expense. The first quarter 2020 earnings were impacted by the acquisition of Ann Arbor State Bank.

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 was ~~$13.0~~$14.8 million and ~~$13.1~~$12.7 million for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. AnThe three months ended March 31, 2020 included a $2.4 million increase ~~of $1.7 million~~ in ~~deposit~~ interest ~~expense was partially offset by~~income as well as a ~~decrease~~$273 thousand increase in interest expense, ~~on borrowed funds of $241 thousand and~~compared to the same period in 2019. The increase in interest income was primarily driven by increases of ~~$1.0~~$2.5 million in interest and fees on ~~loans, $179 thousand in interest income from investment securities, and $148 thousand in interest income on federal funds sold.~~

loans. The increase in interest and fees on loans for the three months ended ~~September 30, 2019~~March 31, 2020 compared to ~~the same period in 2018,~~2019, was mainly ~~attributable to the~~driven by an increase of $254.8 million in the average balance of loans primarily as a result of ~~$107.1 million. This~~the acquisition of Ann Arbor State Bank. The increase in interest expense was primarily driven by an increase of $385 thousand interest expense on subordinated notes and $177 thousand interest expense on borrowed funds, partially offset by a ~~16 basis point~~ decrease of $289 thousand in interest expense on deposits. The increase in interest expense on subordinated notes was primarily due to the issuance of $30.0 million of subordinated debt in the ~~average yield on loans.~~

fourth quarter of 2019. The ~~increase~~decrease in deposit interest expense during the three months ended ~~September 30,~~March 31, 2020 compared to 2019 was primarily due to ~~a higher average rate~~lower interest paid ~~on deposits of 1.42% compared to 1.02% for the same period in 2018, which was mainly~~ as a result of revised internal deposit rates, mainly driven by the decreases in the target federal funds interest rate ~~increase~~ of 50150 basis points during ~~the nine months ended September 30, 2018~~first quarter 2020 and ~~decrease of 25~~75 basis points in the ~~third quarter~~second half of 2019 leaving the cost of funds higher year over year, as well as increased competition. In addition, the increase in deposit expense was impacted by an increase in average balance of deposits of $147.3 million compared to the same period in 2018.

~~Net interest income was $38.1 million and~~ ~~$37.6 million~~ ~~for the nine months ended September 30, 2019 and 2018, respectively. The~~ ~~$536 thousand~~ ~~increase in net interest income was primarily driven by a~~ ~~$4.7 million~~ ~~increase in interest and fees on loans and a $1.3 million increase in interest income from investment securities, partially offset by a $5.7 million increase in deposit interest expense.~~

The changes in interest and fees on loans and interest income from investment securities for the nine months ended September 30, 2019 compared to the same period in 2018 was primarily driven by increases in the average balance of loans of $104.9 million and average balance of investments securities portfolio of $42.0 million.

The increase in deposit interest expense during nine months ended September 30, 2019 was primarily due to a higher average rate paid on total deposits of 1.43% compared to 0.91% for the same period in 2018, which was mainly as a result of the federal funds rate increase of 50 basis points during the nine months ended September 30, 2018 and decrease of 25 basis points in the third quarter of 2019 leaving the cost of funds higher year over year, as well as increased competition. In addition, the increase in deposit expense was impacted by increase in average balance of deposits of $138.9 million compared to the same period in 2018.2019.

Our net interest margin (on a fully tax equivalent basis ("FTE")) for the three months ended ~~September 30, 2019~~March 31, 2020 was ~~3.59%~~3.42%, compared to ~~3.97%~~3.76% for the same period in ~~2018.~~2019. The decrease of 3834 basis points in the net interest margin asyear over year was primarily a result of lower average loan yield. Average loan yield decreased to 5.00% for the first quarter of 2020, compared to 5.64% for the ~~same period in 2018 was~~first quarter of 2019, primarily due to the target federal funds interest rate ~~increase of 50~~dropping 150 basis points ~~during~~in March 2020 as a result of the ~~nine months ended September 30, 2018~~COVID-19 pandemic and ~~decrease of 25~~decreasing 75 basis points in the ~~third quarter~~second half of ~~2019, leaving~~2019. As a result of the ~~cost~~reductions in the target federal funds interest rate, as well as the impact of ~~funds higher year over year.~~ the COVID-19 pandemic, we expect that our net interest income and net interest margin will decrease in future periods.

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 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 ~~con~~

~~tractual~~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 the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the average yield on total loans was ~~5.41%~~5.00% and ~~5.57%~~5.64%, respectively. The yield on total loans was impacted by 158 basis points and 3317 basis points, respectively, due to the accretable yield on purchased credit impaired loans. Our net interest margin for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ benefited by 1310 basis points and 2714 basis points, respectively, as a result of the excess accretable yield. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, our remaining accretable yield was ~~$9.6~~$8.7 million and ~~$10.9~~$9.1 million, respectively, and our nonaccretable difference was ~~$4.4~~$4.0 million and ~~$5.6~~$3.9 million, respectively.

Our net interest margin (FTE) for the nine months ended September 30, 2019 was 3.61%, compared to 3.99% for the same period in 2018. The decrease of 38 basis points reflected the federal funds rate increase of 50 basis points during the nine months ended September 30, 2018 and decrease of 25 basis points in the third quarter of 2019 leaving the cost of funds higher year over year. For the nine months ended September 30, 2019 and 2018, the average yield on total loans was 5.49% and 5.44%, respectively. The yield on total loans was impacted by 15 basis points and 30 basis points, respectively, due to the accretable yield on purchased credit impaired loans. Our net interest margin for the nine months ended September 30, 2019 and 2018, benefited by 12 basis points and 25 basis points, respectively, as a result of the excess accretable yield.

The following ~~tables set~~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 ~~are~~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,														For the three months ended March 31,
	2019							2018							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⁾		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⁾	$	1,182,764		$	16,134	5.41	%	$	1,075,642		$	15,107	5.57	%	$	1,458,897		$	18,128	5.00	%	$	1,125,213		$	15,651	5.64	%
Investment securities⁽⁴⁾:
Taxable	121,473			857		2.80		134,619			816		2.41		117,835			684		2.33		141,282			936		2.69
Tax-exempt	85,332			588		3.28		67,599			450		3.13		93,858			611		3.18		80,760			545		3.17
Interest-earning cash balances	51,142			289		2.24		28,685			157		2.17		77,475			256		1.33		28,076			176		2.54
Federal Home Loan Bank stock	8,325			115		5.48		8,303			99		4.73		12,387			138		4.48		8,325			134		6.53
Total interest-earning assets	1,449,036			17,983		4.96	%	1,314,848			16,629		5.04	%	$	1,760,452		$	19,817	4.56	%	$	1,383,656		$	17,442	5.14	%
Non-earning assets:
Cash and due from banks	23,103							22,358							24,785							24,794
Premises and equipment	13,228							13,465							16,498							13,289
Goodwill	9,387							9,387							35,921							9,387
Other intangible assets, net	347							533							3,968							425
Bank-owned life insurance	12,023							11,732							17,710							11,893
Allowance for loan losses	(12,241		)					(11,591		)					(12,726		)					(11,563		)
Other non-earning assets	27,145							7,414							35,079							11,841
Total assets	$	1,522,028						$	1,368,146						$	1,881,687						$	1,443,722
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	51,963		$	63	0.48	%	$	60,022		52		0.34	%	$	106,236		$	124	0.47	%	53,299			$	48	0.37	%
Money market and savings deposits	320,363			1,170		1.45		249,595			625		0.99		403,712			1,100		1.10		306,496			1,094		1.45
Time deposits	543,765			3,245		2.37		463,373			2,125		1.82		547,838			2,608		1.91		544,130			2,979		2.22
Borrowings	70,766			261		1.46		95,371			502		2.09		185,586			530		1.15		55,814			353		2.57
Subordinated notes	14,925			256		6.81		14,874			256		6.83		44,465			635		5.74		14,896			250		6.81
Total interest-bearing liabilities	1,001,782			4,995		1.98	%	883,235			3,560		1.60	%	$	1,287,837		$	4,997	1.56	%	$	974,635		$	4,724	1.97	%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	333,690							329,459							393,519							$	300,680
Other liabilities	19,804							9,956							25,493							14,136
Shareholders' equity	166,752							145,496							174,838							154,271
Total liabilities and shareholders' equity	$	1,522,028						$	1,368,146						$	1,881,687						$	1,443,722
Net interest income				$	12,988						$	13,069						$	14,820						$	12,718
Interest spread						2.98	%						3.44	%						3.00	%						3.17	%
Net interest margin⁽⁵⁾						3.56							3.94							3.39							3.73
Tax equivalent effect						0.03							0.03							0.03							0.03
Net interest margin on a fully tax equivalent basis						3.59	%						3.97	%						3.42	%						3.76	%

(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 ~~$118~~$130 thousand and ~~$84~~$87 thousand on tax-exempt securities for the three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018, 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.~~

For the nine months ended September 30,
2019 2018
(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⁾
$ 1,157,837
$ 47,547
5.49 % $ 1,052,942
$ 42,837
5.44 %
Investment securities⁽⁴⁾:

Taxable 135,460
2,773
2.74
117,356
2,057
2.34
Tax-exempt 84,476
1,728
3.28
60,570
1,181
3.13
Interest-earning cash balances 37,359
670
2.40
27,207
382
1.88
Federal Home Loan Bank stock 8,325
364
5.85
8,303
326
5.25
Total interest-earning assets $ 1,423,457
$ 53,082
5.02 % $ 1,266,378
$ 46,783
4.96 %
Non-earning assets:
Cash and due from banks 24,075
19,577

Premises and equipment 13,252
13,150

Goodwill 9,387
9,387

Other intangible assets, net 383
588

Bank-owned life insurance 11,955
11,651

Allowance for loan losses (11,950 ) (11,628 )
Other non-earning assets 18,642
9,132

Total assets $ 1,489,201
$ 1,318,235

Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 53,894
$ 180
0.45 % $ 62,626
$ 151
0.32 %
Money market and savings deposits 307,461
3,389
1.47
266,508
1,851
0.93
Time deposits 556,922
9,647
2.32
455,299
5,465
1.60
Borrowings 62,006
960
2.07
67,073
946
1.89
Subordinated notes 14,910
759
6.81
14,859
759
6.83
Total interest-bearing liabilities $ 995,193
$ 14,935
2.01 % $ 866,365
$ 9,172
1.42 %
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits 316,754
311,675

Other liabilities 17,048
9,941

Shareholders' equity 160,206
130,254

Total liabilities and shareholders' equity $ 1,489,201
$ 1,318,235

Net interest income $ 38,147
$ 37,611

Interest spread 3.01 % 3.54 %
Net interest margin⁽⁵⁾
3.58
3.97
Tax equivalent effect 0.03
0.02
Net interest margin on a fully tax equivalent basis 3.61 % 3.99 %

~~(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 $347 thousand and $235 thousand on tax-exempt securities for the nine months ended September 30, 2019 and 2018, respectively, using the federal corporate tax rate of 21%.

(3) Includes nonaccrual loans

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

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 ~~year's~~period's average rate. Changes in rate are changes in the average rate multiplied by the average balance from the previous ~~year.~~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, 2019 vs. 2018

Increase
(Decrease) Due to:

(Dollars in thousands) Rate Volume Net Increase (Decrease)
Interest-earning assets
Gross loans $ (443 ) $ 1,470
$ 1,027
Investment securities:
Taxable 125
(84 ) 41
Tax-exempt (8 ) 146
138
Interest-earning cash balances 5
127
132
FHLB Stock 16
—
16
Total interest income (305 ) 1,659
1,354
Interest-bearing liabilities

Interest-bearing demand deposits 19
(8 ) 11
Money market and savings deposits 337
208
545
Time deposits 711
409
1,120
Borrowings (129 ) (112 ) (241 )
Subordinated debt (1 ) 1
—
Total interest expense 937
498
1,435
Change in net interest income $ (1,242 ) $ 1,161
$ (81 )


	For the nine months ended September 30, 2019 vs. 2018									For the three months ended March 31, 2020 vs. 2019
	Increase (Decrease) Due to:									Increase (Decrease) Due to:
(Dollars in thousands)	Rate				Volume			Net Increase (Decrease)		Rate			Volume			Net Increase (Decrease)
Interest-earning assets
Gross loans	$	406		��	$	4,304		$	4,710	$	(1,782	)	$	4,259		$	2,477
Investment securities:
Taxable	373				343			716		(108		)	(144		)	(252		)
Tax-exempt	(37		)		584			547		(36		)	102			66
Interest-earning cash balances	123				165			288		(113		)	193			80
FHLB Stock	37				1			38		4			—			4
Total interest income	902				5,397			6,299		(2,035		)	4,410			2,375
Interest-bearing liabilities
Interest-bearing demand deposits	52				(23		)	29		18			58			76
Money market and savings deposits	1,219				319			1,538		(294		)	300			6
Time deposits	2,784				1,398			4,182		(391		)	20			(371		)
Borrowings	89				(75		)	14		(277		)	454			177
Subordinated debt	(3		)		3			—		(40		)	425			385
Total interest expense	4,141				1,622			5,763		(984		)	1,257			273
Change in net interest income	$	(3,239	)		$	3,775		$	536	$	(1,051	)	$	3,153		$	(2,102	)

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 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, 2019,~~March 31, 2020, and December 31, ~~2018,~~2019, our remaining accretable yield was ~~$9.6~~$8.7 million and ~~$10.9~~$9.1 million, ~~respectively,~~ and our nonaccretable difference was ~~$4.4~~$4.0 million and ~~$5.6~~$3.9 million, respectively.

The provision for loan losses was a provision ~~benefit~~expense of ~~$16~~$489 thousand for the three months ended ~~September 30, 2019,~~March 31, 2020 compared to a ~~$619~~$422 thousand provision expense for the same period in ~~2018.~~2019. The ~~decrease~~increase in the provision for loan losses was primarily due to a ~~$243~~$200 thousand increase in general reserves as a result of continued growth in our originated loan portfolio as well as an adjustment of the economic qualitative factors within the allowance for loan loss model as a result of the

deterioration of macroeconomic factors in the first quarter of 2020 due to COVID-19. In addition, the Company had $145 thousand higher charge-offs during the first quarter of 2020 compared to the same period in 2019. The increase in provision was partially offset by a $275 thousand decrease in specific reserves on impaired loans, a $228 thousand decrease in general reserves on originated loans due to slower loan growth during third quarter 2019 compared to the same period in 2018 and $164 thousand lower charge-offs during the 2019 period compared to the same period in 2018.loans.

The ~~provision for loan losses was a provision expense~~Company will continue to evaluate the impacts of ~~$835 thousand for the nine months ended September 30, 2019, compared~~COVID-19 and will take further action to ~~$463 thousand provision expense for the nine months ended September 30, 2018. The~~appropriately increase in the provision for loan losses ~~year over year was primarily attributable to~~should there be any indications of a ~~$473 thousand increase~~decrease in ~~specific reserves on impaired loans and a $111 thousand increase in general reserves on originated loans~~the credit quality of our portfolio as a result of ~~stronger~~COVID-19. The Company will re-evaluate the appropriateness of the provision for loan ~~growth. This was partially offset by $191 thousand lower net charge offs between~~losses in the ~~two periods. Our total nonaccrual loans decreased by $6.9 million to $11.5 million at September 30, 2019 compared to $18.4 million at December 31, 2018. The decrease~~second quarter of 2020 and in nonaccrual loans was primarily a result of payoffs of three commercial loan relationships totaling $12.4 million, partially offset by two commercial loan relationships totaling $5.2 million moving to nonaccrual during the nine months ending September 30, 2019.future quarters as needed.

Noninterest Income

The following table presents noninterest income for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.


	For the three months ended September 30,					For the nine months ended September 30,					For the three months ended March 31,
(Dollars in thousands)	2019			2018		2019			2018		2020		2019
Noninterest income
Service charges on deposits	$	627		$	655	$	1,914		$	1,915	$	634	$	625
Net gain on sales of securities	151			—		151			—
Net gain (loss) on sales of securities											529		(7		)
Mortgage banking activities	2,352			754		5,788			1,394		2,588		1,120
Net gain on sale of commercial loans	(37		)	—		(37		)	11
Other charges and fees	765			515		1,805			1,428		939		548
Total noninterest income	$	3,858		$	1,924	$	9,621		$	4,748	$	4,690	$	2,286

Noninterest income increased ~~$1.9~~$2.4 million to ~~$3.9~~$4.7 million for the three months ended ~~September 30, 2019,~~March 31, 2020 compared to ~~$1.9~~$2.3 million for the same period in ~~2018.~~2019. The increase in noninterest income was primarily due to an increase in mortgage banking activities of ~~$1.6~~$1.5 million, ~~as well as increases~~an increase in net gains on sales of securities of $536 thousand and an increase in interest rate swap fees of $181 thousand (included in "other charges and fees" in the table above). The increase in the mortgage banking activities income ~~year over year~~ was ~~predominantly~~mainly attributable to higher origination fee income and secondary market fees due to record volumes of mortgage loans originated and sold as a result of the ~~doubling of our mortgage team during~~lower interest rate environment in the ~~third~~first quarter of ~~2018 which resulted in an increase in mortgage loans originated and sold.~~

~~Noninterest income increased $4.9 millionto $9.6 million for the nine months ended September 30, 2019, compared to $4.7 million for the same period in 2018.~~2020. The increase in ~~noninterest income was primarily due to an increase in mortgage banking activities of $4.4 million, which was attributable to the same factors mentioned above, as well as increases in~~ net ~~gains~~gain on sales of securities was due to $31.3 million of sales of corporate bonds, mortgage backed securities, and collateralized mortgage obligations in an effort to reposition our investment portfolio. The increase in interest rate swap fees ~~(included in "other charges and fees" in the table above).~~was due to increased volumes of customer-initiated derivatives.

Noninterest Expense

The following table presents noninterest expense for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.


	For the three months ended September 30,				For the nine months ended September 30,				For the three months ended March 31,
(Dollars in thousands)	2019		2018		2019		2018		2020		2019
Noninterest expense
Salary and employee benefits	$	7,536	$	6,888	$	21,642	$	19,013	$	8,630	$	6,913
Occupancy and equipment expense	1,203		1,173		3,575		3,293		1,528		1,204
Professional service fees	465		494		1,212		1,231		392		362
Acquisition and due diligence fees	319		—		319		—		1,471		—
Marketing expense	379		264		843		697		222		176
Data processing expense									847		595
Printing and supplies expense	78		127		250		343		136		68
Data processing expense	661		565		1,862		1,512
Core deposit premium amortization									192		52
Other expense	898		943		3,371		3,205		1,144		998
Total noninterest expense	$	11,539	$	10,454	$	33,074	$	29,294	$	14,562	$	10,368

Noninterest expense increased ~~$1.0~~$4.2 million to ~~$11.5~~$14.6 million for the three months ended ~~September 30, 2019,~~March 31, 2020, as compared to ~~$10.5~~$10.4 million for the same period in ~~2018.~~2019. The increase in noninterest expense was primarily ~~attributable~~due to increases in salary and employee benefits of ~~$648 thousand,~~$1.7 million, acquisition and due diligence fees of ~~$319 thousand, marketing~~$1.5 million, occupancy and equipment expense of ~~$115~~$324 thousand, ~~and~~ data processing expense of ~~$96~~$252 thousand and core deposit premium amortization of $140 thousand. The

increase in salary and employee benefits between the periods was primarily due to an increase of ~~$387~~$879 thousand in mortgage commissions expense as a result of higher loan volumes. The increase in acquisition and due diligence fees was related to the pending merger with Ann Arbor State Bank. The increase in marketing expense was due to incremental increases in marketing efforts. The increase in data processing expense was related to higher software costs to sustain the growth of the Company.

Noninterest expense increased $3.8 million to $33.1 million for the nine months ended September 30, 2019, as compared to $29.3 million for the same period in 2018. The increase in noninterest expense was primarily due to an increase in salary and employee benefits of $2.6 million, an increase in data processing expense of $350 thousand, an increase in acquisition and due diligence fees of $319 thousand, an increase in occupancy and equipment expense of $282 thousand, an increase in other expense of $166 thousand, and an increase in marketing expense of $146 thousand. The increase in salary and employee benefits between the periods was primarily due to an increase of $1.5 million in mortgage commissions expense as a result of higher loan volumes, as well as an increase ~~in headcount~~ of ~~seven~~17 full-time equivalent employees. The increase in acquisition and due diligence fees ~~was~~and core deposit premium amortization were related to the ~~pending~~ merger with Ann Arbor State ~~Bank.~~Bank, which closed on January 2, 2020. Acquisition fees and due diligence fees were mainly related to contract terminations, core system conversion, and severance and retention payments. 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 during first quarter 2020. The increase in occupancy and equipment expenses were primarily attributable to increased building rent and other ~~expense was primarily due~~expenses related to ~~an increase~~the addition of three new branches acquired with Ann Arbor State Bank, as well as incremental increases in ~~the provision for unfunded commitments~~these expenses as a result of ~~a change~~organic growth in the ~~assumptions within the calculation, which resulted~~organization. The increase in ~~a better representation of our line of credit utilization. The increases in the~~ data processing ~~occupancy and equipment, and marketing categories were~~expense was primarily attributable to ~~incremental increases~~the retention and maintenance of Ann Arbor State Bank legacy systems during the first quarter of 2020 prior to system integration, in ~~software costs, building expenses and marketing efforts~~addition to ~~sustain~~ the organic growth ofin the ~~Company.~~organization.

Income Taxes and Tax-Related Items

During the three months ended ~~September 30, 2019,~~March 31, 2020, we recognized income tax expense of ~~$914~~$349 thousand on ~~$5.3~~$4.5 million of pre-tax income resulting in an effective tax rate of ~~17.2%,~~7.8% compared to the same period in ~~2018,~~2019, in which we recognized an income tax expense of ~~$665~~$747 thousand on ~~$3.9~~$4.2 million of pre-tax income, resulting in an effective tax rate of ~~17.0%~~17.7%.

~~During the nine months ended September 30, 2019, we recognized~~The decrease in income tax ~~expense of $2.4 million on $13.9 million of pre-tax income resulting in an effective tax rate of 17.5%,~~provision compared to the ~~same period~~prior year's quarter was primarily as a result of a $290 thousand tax benefit related to the Ann Arbor State Bank net operating loss (NOL) resulting from the CARES Act provision that allows for NOLs generated in ~~2018, in which we recognized an income~~2018-2020 to be carried back five years. Additionally, disqualified dispositions of Ann Arbor State Bank’s stock options generated a $175 thousand tax ~~expense of $2.2 million on $12.6 million of pre-tax income, resulting in an effective tax rate of 17.2%.~~benefit.

Refer to Note 89 - Income Taxes in the notes to the consolidated financial statements for a reconciliation between expected and actual income tax expense for the three ~~and nine~~ months ended ~~September 30, 2019~~March 31, 2020 and ~~2018.~~2019.

Financial Condition

Total assets increased $93.2 million to $1.51 billion at September 30, 2019 as compared to $1.42 billion at December 31, 2018. The increase in total assets was primarily due to increases of $42.4 million in gross loans, $21.3 million in mortgage loans held for sale, $16.1 million in cash and cash equivalents, $8.6 million in receivables from a loan sub-servicer (included in "other assets" on the consolidated balance sheet), $4.5 million in fair value of interest rate swaps (included in "other assets" on the consolidated balance sheet), and $1.0 million in securities available-for-sale. The year to date increase in loans was primarily driven by the growth in our commercial and industrial as well as our residential real estate loan portfolios. The increase in mortgage loans held for sale was attributable to the increase in volumes of loans held for sale as a result of the doubling of our mortgage team during the third quarter of 2018. Cash and cash equivalents increased primarily as a result of a $5.2 million increase in cash balances held with the Federal Reserve Bank as well as higher balances held at other correspondent banks. The Company maintains a cash balance at the Federal Reserve and manages this liquidity balance on a daily basis as required, and may have significant cash balance fluctuations in the ordinary course of business based on inflows and outflows from changing loan totals, investment activity, and deposit flows.

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, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.


(Dollars in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Securities available-for-sale:
U.S. government sponsored entities and agencies	$	1,497	$	2,397	$	9,775	$	—
State and political subdivision	90,733		75,146		127,680		93,747
Mortgage-backed securities: residential	9,390		9,739		10,294		10,565
Mortgage-backed securities: commercial	21,049		12,382		9,133		8,779
Collateralized mortgage obligations: residential	9,069		18,671		8,056		8,529
Collateralized mortgage obligations: commercial	31,598		31,988		30,061		23,181
U.S. Treasury	2,001		20,481		1,010		1,999
SBA	23,536		15,688		20,562		21,984
Asset backed securities	10,187		3,842		9,613		10,084
Corporate bonds	6,182		13,924		4,487		2,037
Total securities available-for-sale	$	205,242	$	204,258	$	230,671	$	180,905

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, 2019,~~March 31, 2020, total investment securities were ~~$205.2~~$230.7 million, or ~~13.6%~~11.9% of total assets, compared to ~~$204.3~~$180.9 million, or ~~14.4%~~11.4% of total assets, at December 31, ~~2018.~~2019. The ~~$984 thousand~~$49.8 million increase in securities available-for-sale from December 31, ~~2018~~2019 to ~~September 30, 2019,~~March 31, 2020, was primarily ~~reflected increases in obligations~~due to the acquisition of ~~state~~Ann Arbor State Bank, which contributed $47.4 million of investment securities as of January 2, 2020. In addition, we repositioned the investment portfolio through purchases of $36.0 million and ~~political subdivisions, mortgage backed securities: commercial, SBA securities, and asset backed securities.~~sales of $31.3 million. Securities with a carrying value of ~~$36.7~~$52.0 million and ~~$22.7~~$27.3 million were pledged at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively, to secure borrowings, deposits and mortgage derivatives.

As of ~~September 30, 2019~~March 31, 2020, the Company held 5672 tax-exempt state and local municipal securities totaling ~~$41.1~~$52.7 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments, at ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, 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, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. Actual timing may differ from contractual maturities if borrowers 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, 2019																March 31, 2020
	One year or less				One to five years				Five to ten years				After ten years				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		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	$	—	—	%	$	—	—	%	$	1,422	3.21	%	$	—	—	%	$	2,000	1.66	%	$	7,624	1.64	%	$	—	—	%	$	—	—	%
State and political subdivision	738		2.04		4,404		2.30		18,254		2.97		62,449		3.43		2,219		2.18		8,771		2.16		27,985		2.73		83,471		3.18
Mortgage-backed securities: residential	—		—		176		0.96		153		2.21		9,060		3.07		—		—		131		0.91		132		2.08		9,784		2.77
Mortgage-backed securities: commercial	436		1.91		5,599		2.36		10,720		3.07		3,230		3.52		428		1.58		4,850		2.27		1,428		2.64		1,821		3.64
Collateralized mortgage obligations: residential	—		—		—		—		763		2.12		8,365		2.34		—		—		—		—		695		2.17		7,234		1.96
Collateralized mortgage obligations: commercial	—		—		9,268		2.90		11,316		3.13		10,163		2.41		—		—		8,997		2.90		11,659		2.40		8,304		2.43
U.S. Treasury	—		—		1,974		2.02		—		—		—		—		1,000		1.65		—		—		—		—		—		—
SBA	—		—		—		—		9,101		1.73		14,482		3.18		—		—		—		—		7,930		2.54		12,679		2.41
Asset backed securities	—		—		—		—		—		—		10,384		2.81		—		—		—		—		—		—		10,394		2.22
Corporate bonds	1,509		2.32		3,497		3.84		986		4.04		—		—		2,467		3.11		2,016		3.09		—		—		—		—
Total securities available-for-sale	$	2,683	2.18	%	$	24,918	2.72	%	$	52,715	2.82	%	$	118,133	3.15	%	$	8,114	2.24	%	$	32,389	2.31	%	$	49,829	2.61	%	$	133,687	2.89	%


	December 31, 2018																December 31, 2019
	One year or less				One to five years				Five to ten years				After ten years				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		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	$	—	—	%	$	—	—	%	$	2,404	3.09	%	$	—	—	%
State and political subdivision	181		2.02		6,273		2.16		16,329		2.91		52,310		3.41		$	1,375	2.25	%	$	3,747	2.24	%	$	18,566	2.95	%	$	65,616	3.38	%
Mortgage-backed securities: residential	—		—		235		1.21		183		2.33		9,696		2.84		—		—		153		0.93		143		2.07		10,313		2.84
Mortgage-backed securities: commercial	—		—		6,124		2.30		5,016		2.91		1,454		3.46		431		0.99		4,874		2.27		1,435		2.65		1,827		3.64
Collateralized mortgage obligations: residential	—		—		—		—		837		2.09		18,079		3.22		—		—		—		—		727		2.15		7,814		2.11
Collateralized mortgage obligations: commercial	—		—		9,772		2.90		10,047		3.27		12,571		2.49		—		—		9,031		2.87		4,371		2.83		9,489		2.39
U.S. Treasury	—		—		21,232		1.53		—		—		—		—		—		—		1,976		2.06		—		—		—		—
SBA	—		—		—		—		1,664		3.17		14,192		3.21		—		—		—		—		8,706		2.59		13,345		2.49
Asset backed securities	—		—		—		—		—		—		3,872		3.04		—		—		—		—		—		—		10,390		2.59
Corporate bonds	1,501		2.04		10,034		3.43		2,471		3.75		—		—		1,006		2.44		1,024		4.43		—		—		—		—
Total securities available-for-sale	$	1,682	2.04	%	$	53,670	2.29	%	$	38,951	3.06	%	$	112,174	3.19	%	$	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, 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.

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 March 31,		As of December 31,
(Dollars in thousands)	2019		2018		2017		2016		2015		2020		2019		2018		2017		2016
Commercial real estate:
Non-owner occupied	$	369,284	$	367,671	$	343,420	$	322,354	$	240,161	$	450,694	$	388,515	$	367,671	$	343,420	$	322,354
Owner occupied	196,497		194,422		168,342		169,348		146,487		278,216		216,131		194,422		168,342		169,348
Total commercial real estate	565,781		562,093		511,762		491,702		386,648		728,910		604,646		562,093		511,762		491,702
Commercial and industrial	404,130		383,455		377,686		342,069		254,808		469,227		410,228		383,455		377,686		342,069
Residential real estate	198,277		180,018		144,439		118,730		116,734		262,894		211,839		180,018		144,439		118,730
Consumer	735		999		1,036		892		1,528		5,376		896		999		1,036		892
Total loans	$	1,168,923	$	1,126,565	$	1,034,923	$	953,393	$	759,718	$	1,466,407	$	1,227,609	$	1,126,565	$	1,034,923	$	953,393

Total loans were ~~$1.17~~$1.47 billion at ~~September 30, 2019,~~March 31, 2020, an increase of ~~$42.4~~$238.8 million from December 31, ~~2018.~~2019. The ~~total increase~~growth in ~~loans from~~our loan portfolio compared to March 31, 2019 and December 31, ~~2018~~2019 was primarily due to ~~an increase~~the acquisition of Ann Arbor State Bank, which contributed $224.1 million of loans as of January 2, 2020. In addition, we saw $30.0 million of growth in ~~commercial~~our originated loan portfolio, partially offset by $15.3 million of runoff of acquired loans during first quarter 2020. Year over year, excluding the acquisition of Ann Arbor State Bank, we saw growth of $71.9 million and ~~industrial loans of $20.7~~$37.0 million in our commercial and residential real estate ~~of $18.3 million.~~loan portfolios, respectively. 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, 2019,~~March 31, 2020, approximately ~~48.4%~~49.7% of our loans were commercial real estate, ~~34.6%~~32.0% were commercial and industrial, and ~~17.0%~~18.3% were residential real estate and consumer loans.

We originate both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of ~~the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation,~~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 other financial institutions with which we have established a correspondent lending relationship. The Company ~~has~~ established a direct relationship with ~~FNMA~~Fannie Mae and began locking and selling loans to ~~FNMA~~Fannie Mae with servicing retained during the third quarter of 2019. Refer to Note 7- Goodwill and Intangible Assets for further details on our mortgage servicing rights.

Loan Maturity/Rate Sensitivity

The following table shows the contractual maturities of our loans as of ~~September 30, 2019.~~March 31, 2020.


(Dollars in thousands)	One year or less		After one but within five years		After five years		Total		One year or less		After one but within five years		After five years		Total
September 30, 2019
March 31, 2020
Commercial real estate	$	59,219	$	356,318	$	150,244	$	565,781	$	74,460	$	458,960	$	195,490	$	728,910
Commercial and industrial	145,158		172,562		86,410		404,130		177,395		205,186		86,646		469,227
Residential real estate	6,132		4,712		187,433		198,277		11,336		9,374		242,184		262,894
Consumer	10		565		160		735		3,486		1,692		198		5,376
Total loans	$	210,519	$	534,157	$	424,247	$	1,168,923	$	266,677	$	675,212	$	524,518	$	1,466,407
Sensitivity of loans to changes in interest rates:
Fixed interest rates			$	428,693	$	164,923					$	562,990	$	169,306
Floating interest rates			105,464		259,324						112,222		355,212
Total			$	534,157	$	424,247					$	675,212	$	524,518

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) 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.

Credit Quality Indicators:

days or more past due. Consumer loan types are continuously monitored for changes in delinquency trends and other asset quality indicators.

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, 2019~~March 31, 2020 compared to December 31, ~~2018~~2019 were as follows:


(Dollars in thousands)	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Classified loans:
Substandard	$	11,093	$	18,391	$	18,129	$	20,569
Doubtful	506		44		1,714		1,838
Total classified loans	$	11,599	$	18,435	$	19,843	$	22,407
Special mention	22,612		13,081		21,823		17,292
Total classified and criticized loans	$	34,211	$	31,516	$	41,666	$	39,699

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 March 31,		As of December 31,
(Dollars in thousands)	2019		2018		2017		2016		2015		2020		2019		2018		2017		2016
Nonaccrual loans
Commercial real estate	$	5,043	$	5,927	$	2,257	$	147	$	141	$	3,721	$	4,832	$	5,927	$	2,257	$	147
Commercial and industrial	4,071		9,605		9,024		13,389		309		9,364		11,112		9,605		9,024		13,389
Residential real estate	2,339		2,915		2,767		1,498		1,177		2,124		2,569		2,915		2,767		1,498
Consumer											15		16		—		—		—
Total nonaccrual loans⁽¹⁾	11,453		18,447		14,048		15,034		1,627		15,224		18,529		18,447		14,048		15,034
Other real estate owned	373		—		652		258		81		2,093		921		—		652		258
Total nonperforming assets	11,826		18,447		14,700		15,292		1,708		17,317		19,450		18,447		14,700		15,292
Performing troubled debt restructurings
Commercial real estate	—		—		—		290		—		—		—		—		—		290
Commercial and industrial	553		568		961		1,018		1,069		541		547		568		961		1,018
Residential real estate	361		363		261		207		279		599		359		363		261		207
Total performing troubled debt restructurings	914		931		1,222		1,515		1,348		1,140		906		931		1,222		1,515
Total impaired assets, excluding ASC 310-30 loans	$	12,740	$	19,378	$	15,922	$	16,807	$	3,056	$	18,457	$	20,356	$	19,378	$	15,922	$	16,807
Loans 90 days or more past due and still accruing	$	157	$	243	$	440	$	377	$	883	$	437	$	157	$	243	$	440	$	377


⁽¹⁾	Nonaccrual loans include nonperforming troubled debt restructurings of ~~$3.2~~$2.6 million, ~~$5.0~~$3.0 million, 5.0 million, $6.4 million, and $5.8 million ~~and $564 thousand~~ at the respective dates indicated above.

During the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ the Company recorded ~~$848~~$38 thousand and ~~$380~~$414 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 ~~$6.9~~$6.7 million, $6.0 million, $7.9 million, $9.7 million, ~~$11.6 million,~~ and ~~$17.6~~$11.6 million at the respective dates indicated in the table above. The increase in purchase credit impaired loans as of March 31, 2020 compared to December 31, 2019 was due to the acquisition of Ann Arbor State Bank.

Impaired assets decreased $2.1 million as of March 31, 2020 compared to December 31, 2019. The decrease in impaired assets was attributable to a decrease of $3.3 million in nonaccrual loans, partially offset by an increase of $1.2 million in other real estate owned. The decrease in nonaccrual loans was primarily due to the pay down of two large commercial loan relationships on nonaccrual status as well as moving one commercial loan relationship to other real estate owned.

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 Loans

The allowance for loan losses on purchased 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 senior management, at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan.

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 March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019
Balance at beginning of period	$	12,353		$	11,465		$	11,566		$	11,713		$	12,674		$	11,566
Loan charge-offs:
Commercial real estate	—			—			(74		)	(112		)
Commercial and industrial	(49		)	(237		)	(164		)	(995		)	(187		)	(95		)
Residential real estate	—			—			—			(47		)
Consumer	(34		)	(8		)	(48		)	(23		)	(31		)	(6		)
Total loan charge-offs	(83		)	(245		)	(286		)	(1,177		)	(218		)	(101		)
Recoveries of loans previously charged-off:
Commercial real estate	5			23			6			25
Commercial and industrial	10			8			101			814			8			50
Residential real estate	12			19			55			51			34			21
Consumer	26			1			30			1			2			2
Total loan recoveries	53			51			192			891			44			73
Net charge-offs	(30		)	(194		)	(94		)	(286		)	(174		)	(28		)
Provision expense (benefit) for loan losses	(16		)	619			835			463
Provision expense for loan losses													489			422
Balance at end of period	$	12,307		$	11,890		$	12,307		$	11,890		$	12,989		$	11,960
Allowance for loan losses as a percentage of period-end loans	1.05		%	1.07		%	1.05		%	1.07		%	0.89		%	1.06		%
Net charge-offs to average loans	0.01			0.07			0.03			0.04			0.05			0.01

Our allowance for loan losses was ~~$12.3~~$13.0 million, or ~~1.05%~~0.89% of loans, at ~~September 30, 2019~~March 31, 2020 compared to ~~$11.6~~$12.7 million, or 1.03% of loans, at December 31, ~~2018.~~2019. The ~~$741~~$315 thousand increase in the allowance for loan losses during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 was primarily due to ana $365 thousand increase in general reserves related to organic loan ~~growth.~~

growth which includes a $230 thousand increase as a result of an adjustment of the economic qualitative factors within the allowance for loan loss model as a result of the deterioration of macroeconomic factors in the first quarter of 2020 due to COVID-19 pandemic.

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


(Dollars in thousands)	Allocated Allowance		Percentage of loans in each category to total loans		Allocated Allowance		Percentage of loans in each category to total loans
September 30, 2019
March 31, 2020
Balance at end of period applicable to:
Commercial real estate					$	6,123	49.7	%
Commercial and industrial					5,423		32.0
Residential real estate					1,441		17.9
Consumer					2		0.4
Total loans					$	12,989	100.0	%
December 31, 2019
Balance at end of period applicable to:
Commercial real estate	$	5,408	48.3	%	$	5,773	49.2	%
Commercial and industrial	5,671		34.6		5,515		33.4
Residential real estate	1,226		17.0		1,384		17.3
Consumer	2		0.1		2		0.1
Total loans	$	12,307	100.0	%	$	12,674	100.0	%
December 31, 2018
Balance at end of period applicable to:
Commercial real estate	$	5,227	49.9	%	$	5,227	49.9	%
Commercial and industrial	5,174		34.0		5,174		34.0
Residential real estate	1,164		16.0		1,164		16.0
Consumer	1		0.1		1		0.1
Total loans	$	11,566	100.0	%	$	11,566	100.0	%
December 31, 2017
Balance at end of period applicable to:
Commercial real estate	$	4,852	49.4	%	$	4,852	49.4	%
Commercial and industrial	5,903		36.5		5,903		36.5
Residential real estate	950		14.0		950		14.0
Consumer	8		0.1		8		0.1
Total loans	$	11,713	100.0	%	$	11,713	100.0	%
December 31, 2016
Balance at end of period applicable to:
Commercial real estate	$	4,124	51.5	%	$	4,124	51.5	%
Commercial and industrial	5,932		35.9		5,932		35.9
Residential real estate	1,030		12.5		1,030		12.5
Consumer	3		0.1		3		0.1
Total loans	$	11,089	100.0	%	$	11,089	100.0	%
December 31, 2015
Balance at end of period applicable to:
Commercial real estate	$	3,299	50.9	%
Commercial and industrial	3,256		33.5
Residential real estate	1,307		15.4
Consumer	28		0.2
Total loans	$	7,890	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 $36.2 million at March 31, 2020 and $9.4 million at December 31, 2019.

In its interim period goodwill impairment assessment, triggered by COVID-19, the Company documented that its net income (excluding acquisition expense) and earnings during the first quarter increased since the fourth quarter of 2019 largely due to the acquisition of AAB. First quarter earnings were also positively impacted by the significant increase in residential mortgage fee income driven by record levels of residential mortgage originations. Due to the increased demand for residential mortgages, mortgage banking income increased 24% since fourth quarter of 2019 and 131% since first quarter of 2019.

In addition to the increase in assets resulting from the acquisition of AAB, the Company experienced organic loan growth of $30.0 million compared to December 31, 2019. Furthermore, the credit quality of the Company's loan portfolio remained consistent quarter over quarter, with nonaccrual loans decreasing $3.3 million compared to December 31, 2019. In addition, the

delinquency of our loan portfolio has improved with loans in the "30 days or more past due" classification decreasing $4.4 million compared to December 31, 2019.

The Company is also participating in the Paycheck Protection Program that was approved by the United States government which will result in additional future earnings. Return on assets and return on equity ratios remained strong, while the Company's stock price decreased 23% to $18.00 per share as of March 31, 2020, which is comparable to the stock price decreases our peers have also experienced as a result of the increased market volatility from the COVID-19 pandemic. Although the Company's market capitalization has declined sharply and is now lower than the book value, the Company believes that the goodwill is recoverable. In accordance with ASC 350, the Company concluded, quantitatively, that the reporting unit's fair value exceeded its carrying value as of March 31, 2020.

Deposits

Total deposits were ~~$1.19~~$1.47 billion at ~~September 30, 2019~~March 31, 2020 and ~~$1.13~~$1.14 billion at December 31, ~~2018,~~2019, representing ~~89.0%~~83.5% and ~~89.7%~~80.3% of total liabilities, respectively. The increase in deposits of ~~$59.9~~$335.2 million was ~~due to~~comprised of increases of ~~$44.9~~$126.9 million in demand deposits, $120.9 million in time deposits, and $87.4 million in money market and savings deposits. The increase in deposits ~~and $26.6~~was primarily attributable to $264.8 million ~~in demand~~of deposits acquired from Ann Arbor State Bank. In addition, during the first quarter of 2020, there was organic deposit growth of $99.2 million, partially offset by ~~a decrease~~$28.8 million of ~~$11.5 million in time deposits.~~ deposit runoff.

Our average interest-bearing deposit costs were ~~1.92%~~1.46% and ~~1.27%~~1.85% for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The ~~increase~~decrease in interest-bearing deposit costs between the two periods was impacted by the changing mix of deposit types, as well as by the ~~increase~~decrease in overnight market rates, as measured by the target federal funds interest rate. The target federal funds interest rate ~~rose 1.00%~~decreased 75 basis points during ~~2018~~the second half of the year ended December 31, 2019 and decreased ~~0.25%~~150 basis points during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 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 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, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, the Company had approximately ~~$77.5~~$82.2 million and ~~$110.3~~$67.4 million inof brokered

deposits, respectively. The Company's ability to accept, roll-over or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well-capitalized."

For periods prior to September 30, 2018, Certificate of Deposit Account Registry Service (CDARS) and reciprocal money market accounts were considered to be brokered deposits by regulatory authorities and were reported as such on quarterly Call Reports. With the passage of The Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, these items are no longer considered brokered deposits. Included in the brokered deposits total at ~~September 30, 2019 and~~ December 31, ~~2018 were~~2019 was $514 thousand ~~and $1.8 million~~ in ~~CDARS~~Certificate of Deposit Account Registry Service ("CDARS") customer deposit accounts ~~respectively. The $514 thousand at September 30, 2019 was~~ due to an early withdrawal from a CDARS customer deposit account in the first quarter of 2018 that ~~will be~~was paid at maturity.

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, including recent promotions for time deposits and money market deposits.~~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.

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


	Three Months Ended September 30, 2019						Three Months Ended March 31, 2020
(Dollars in thousands)	Average Balance		Percent		Average Rate		Average Balance		Percent		Average Rate
Noninterest-bearing demand deposits	$	333,690	26.7	%	—	%	$	393,519	27.1	%	—	%
Interest-bearing demand deposits	51,963		4.2		0.48		106,236		7.3		0.47
Money market and savings deposits	320,363		25.6		1.45		403,712		27.8		1.10
Time deposits	543,765		43.5		2.37		547,838		37.8		1.91
Total deposits	$	1,249,781	100.0	%	1.42	%	$	1,451,305	100.0	%	1.06	%

	Nine Months Ended September 30, 2019
(Dollars in thousands)	Average Balance		Percent		Average Rate
Noninterest-bearing demand deposits	$	316,754	25.6	%	—	%
Interest-bearing demand deposits	53,894		4.4		0.45
Money market and savings deposits	307,461		24.9		1.47
Time deposits	556,922		45.1		2.32
Total deposits	$	1,235,031	100.0	%	1.43	%

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, 2019		March 31, 2020
Maturing in:
3 months or less	$	—	$	—
3 months to 6 months	141,851		137,157
6 months to 1 year	72,990		106,136
1 year or greater	135,863		180,938
Total	$	350,704	$	424,231

Borrowings

Total debt outstanding at ~~September 30, 2019~~March 31, 2020 was ~~$126.9~~$256.2 million, ~~an increase~~a decrease of ~~$12.4 million~~$431 thousand from ~~$114.5~~$256.7 million at December 31, ~~2018.~~2019. The ~~increase~~decrease in total borrowings was primarily due to ~~a $100.0~~decreases of $35.0 million ~~increase~~ in ~~long-term~~short-term FHLB advances and a $5.0 million ~~increase~~ in ~~our~~ federal funds purchased, partially offset by ~~a decrease~~an increase of ~~$90.0~~$40.3 million in ~~short-term~~long-term FHLB advances, ~~and $2.5~~of which $15.0 million ~~decrease in our FHLB line of credit. The increase in total borrowings was a result of more long-term borrowings needed~~related to ~~fund~~ the ~~liquidity needs of the Company, as well as a decrease in brokered deposits.~~AAB acquisition.

At ~~September 30, 2019,~~March 31, 2020, FHLB advances were secured by a blanket lien on ~~$419.6~~$514.1 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of ~~$1.2~~$1.5 million. At December 31, ~~2018,~~2019, FHLB advances were secured by a blanket lien on ~~$372.5~~$408.9 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of ~~$1.0~~$1.5 million.

As of ~~September 30, 2019~~March 31, 2020, the Company had $45.0 million of subordinated notes outstanding and debt issuance costs of $553 thousand related to these subordinated notes. As of December 31, ~~2018,~~2019, the Company had 45.0 million of subordinated notes outstanding and debt issuance costs of $560 thousand related to these subordinated notes.

The $15.0 million of subordinated notes ~~outstanding at each date, and debt issuance costs of $66 thousand and $109 thousand, respectively, related to these subordinated notes. The notes~~issued on December 21, 2015 bear a fixed interest rate of 6.375% per annum, payable ~~semi-annually~~semiannually through December 15, 2020. The notes will bear a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly after December 15, 2020 through maturity. The notes mature no later than December 15, 2025, and the Company has the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 15, 2020 or atupon an occurrence of a Tier 2 capital event or tax event.

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 SOFR plus 311 basis points payable quarterly after December 18, 2024 through maturity. The notes mature no later than December 18, 2029, and the Company has the option to redeem any or all of the subordinated notes without premium or penalty any time inafter December 18, 2024 or upon the occurrence of a Tier 2 capital event ~~of certain changes that affect the deductibility of interest for~~or tax ~~purposes or the treatment~~event. The issuance of the $30.0 million subordinated notes ~~as Tier 2 Capital.~~reflected management's efforts to fund the liquidity needs of the Company.

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,						Three months ended March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019
Securities sold under agreements to repurchase
Average daily balance	$	563		$	9,824		$	537		$	4,413		$	641		$	533
Weighted-average rate during period	0.30		%	2.00		%	0.30		%	1.76		%	0.30		%	0.30		%
Amount outstanding at period end	$	545		$	10,061		$	545		$	10,061		$	176		$	585
Weighted-average rate at period end	0.30		%	2.34		%	0.30		%	2.34		%	0.30		%	0.30		%
Maximum month-end balance	$	866		$	10,338		$	866		$	12,718		$	936		$	682
FHLB Advances
Average daily balance	$	6,630		$	71,054		$	27,903		$	47,077		$	8,736		$	48,028
Weighted-average rate during period	2.57		%	2.14		%	2.49		%	1.94		%	1.59		%	2.63		%
Amount outstanding at period end	$	—		$	125,000		$	—		$	125,000		$	25,000		$	95,000
Weighted-average rate at period end	—		%	1.94		%	—		%	1.94		%	0.29		%	2.64		%
Maximum month-end balance	$	—		$	125,000		$	95,000		$	125,000		$	25,000		$	95,000
FHLB Line of Credit
Average daily balance	$	—		$	3,026		$	111		$	4,085		$	203		$	320
Weighted-average rate during period	—		%	2.40		%	2.92		%	2.06		%	1.14		%	2.65		%
Amount outstanding at period end	$	—		$	—		$	—		$	—		$	—		$	895
Weighted-average rate at period end	—		%	—		%	—		%	—		%	—		%	2.84		%
Maximum month-end balance	$	—		$	37,081		$	895		$	37,081		$	—		$	895
Federal funds purchased
Average daily balance	$	109		$	—		$	2,044		$	—		$	560		$	3,278
Weighted-average rate during period	—		%	—		%	2.74		%	—		%	1.84		%	3.01		%
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 ~~$16.2~~$5.1 million to ~~$168.0~~$175.8 million at ~~September 30, 2019~~March 31, 2020 as compared to ~~$151.8~~$170.7 million at December 31, ~~2018.~~2019. The increase in shareholders' equity was primarily impacted by ~~$11.4~~$4.1 million of net income generated during the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 as well as an increase of ~~$7.0~~$1.8 million of other comprehensive income due to increases in net unrealized gains on available-for-sale securities, partially offset by ~~$2.1 million~~$620 thousand of stock repurchased through the share buyback program and ~~$928~~$387 thousand of dividends declared on our common stock during the ~~nine~~three months ended ~~September 30, 2019.~~March 31, 2020.

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,						Three months ended March 31,
(Dollars in thousands)	2019			2018			2019			2018			2020			2019
Balance at beginning of period	$	162,867		$	143,445		$	151,760		$	107,960		$	170,703		$	151,760
Net income	4,409			3,255			11,431			10,435			4,110			3,467
Other comprehensive income (loss)	1,238			(986		)	7,120			(3,174		)
Initial public offering of 1,150,765 shares of common stock, net of issuance costs	—			—			—			29,030
Other comprehensive income													1,777			2,069
Redeemed stock	(488		)	—			(2,108		)	—			(620		)	(1,104		)
Dividends declared	(310		)	(465		)	(928		)	(662		)	(387		)	(309		)
Exercise of stock options	63			12			219			1,269			61			125
Stock-based compensation expense	189			198			474			601			124			111
Balance at end of period	$	167,968		$	145,459		$	167,968		$	145,459		$	175,768		$	156,119

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 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.

~~The Basel III rules require~~A capital conservation buffer, comprised of common equity tier 1 capital, is established above the ~~Company to~~regulatory minimum capital requirements, and financial institutions that maintain a capital conservation buffer greater than 2.5% are generally not subject to restrictions on dividends, share repurchases and discretionary bonus payments to executive officers under the Basel III Rule. As of ~~common equity capital of 2.5% above~~March 31, 2020, the Company and the Bank met the minimum ~~risk-weighted assets ratios, which is~~capital requirements for capital adequacy purposes, but the ~~fully phased-in amount of the capital conservation buffer. The~~Company did not maintain a capital conservation buffer ~~requirement~~with respect to its Tier 1 capital to risk-weighted assets ratio above the 2.5% level. As of March 31, 2020, the Company’s capital conservation buffer was ~~2.5% as~~2.1%. Consequently, during the second quarter of ~~September 30, 2019~~2020, the aggregate amount of dividends, stock repurchases, and ~~1.875% as~~discretionary bonus payments to executive officers by the Company is limited to 60% of ~~December~~the Company’s net income for the four calendar quarters ended March 31, ~~2018, which~~2020 (net of any capital distributions made during the four calendar quarters ended March 31, 2020), unless prior regulatory approval is ~~reflected~~obtained.

Level One’s capital ratios declined in the ~~table below.~~

first quarter of 2020 as a result of the acquisition of Ann Arbor State Bank, which was funded with a combination of cash and $30.0 million of subordinated notes issued in December 2019. At ~~September 30, 2019,~~March 31, 2020, the Company and the Bank met all the capital adequacy requirements to which they were subject.

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		Actual Capital Ratio		Capital Adequacy Regulatory Requirement		Capital Adequacy Regulatory Requirement + Capital Conservation Buffer(1)		Well Capitalized Regulatory Requirement
September 30, 2019
March 31, 2020
Common equity tier 1 to risk-weighted assets:
Consolidated	11.73	%	4.50	%	7.00	%			8.10	%	4.50	%	7.00	%
Bank	12.25	%	4.50	%	7.00	%	6.50	%	10.62	%	4.50	%	7.00	%	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	11.73	%	6.00	%	8.50	%			8.10	%	6.00	%	8.50	%
Bank	12.25	%	6.00	%	8.50	%	8.00	%	10.62	%	6.00	%	8.50	%	8.00	%
Total capital to risk-weighted assets:
Consolidated	13.84	%	8.00	%	10.50	%			11.68	%	8.00	%	10.50	%
Bank	13.22	%	8.00	%	10.50	%	10.00	%	11.45	%	8.00	%	10.50	%	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	10.12	%	4.00	%	4.00	%			7.08	%	4.00	%	4.00	%
Bank	10.64	%	4.00	%	4.00	%	5.00	%	9.33	%	4.00	%	4.00	%	5.00	%
December 31, 2018
December 31, 2019
Common equity tier 1 to risk-weighted assets:
Consolidated	11.82	%	4.50	%	6.38	%			11.72	%	4.50	%	7.00	%
Bank	12.12	%	4.50	%	6.38	%	6.50	%	12.27	%	4.50	%	7.00	%	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	11.82	%	6.00	%	7.88	%			11.72	%	6.00	%	8.50	%
Bank	12.12	%	6.00	%	7.88	%	8.00	%	12.27	%	6.00	%	8.50	%	8.00	%
Total capital to risk-weighted assets:
Consolidated	14.00	%	8.00	%	9.88	%			15.99	%	8.00	%	10.50	%
Bank	13.07	%	8.00	%	9.88	%	10.00	%	13.24	%	8.00	%	10.50	%	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	10.21	%	4.00	%	4.00	%			10.41	%	4.00	%	4.00	%
Bank	10.48	%	4.00	%	4.00	%	5.00	%	10.96	%	4.00	%	4.00	%	5.00	%


(1)	Reflects the capital conservation buffer of 2.5% ~~and 1.875% applicable during 2019 and 2018, respectively.~~.

Contractual Obligations

In the ordinary course of our operations, we enter into certain contractual obligations. Total contractual obligations at ~~September 30, 2019~~March 31, 2020 were ~~$610.9~~$822.2 million, an increase of ~~$3.7~~$215.0 million, from $607.2 million at December 31, ~~2018.~~2019. The increase of ~~$3.7~~$215.0 million was due to increases of ~~$100.0~~$185.3 million in long-term FHLB advances, of which $15.0 million related to FHLB advances acquired from AAB, $69.1 million in time deposits, $29.6 million in subordinated notes net of debt issuance costs, and ~~$2.8~~$4.1 million in operating lease obligations, partially offset by a decrease of ~~$87.6~~$73.0 million in short-term ~~borrowings and $11.5 million in time deposits.~~borrowings.

The following tables present our contractual obligations as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019.


	Contractual Maturities as of September 30, 2019										Contractual Maturities as of March 31, 2020
(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total		Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	1,303	$	2,228	$	2,034	$	5,145	$	10,710	$	1,731	$	3,147	$	2,616	$	4,484	$	11,978
Short-term borrowings	10,545		—		—		—		10,545		25,176		—		—		—		25,176
Long-term borrowings	—		11,392		10,000		80,000		101,392		4,000		20,611		30,000		132,000		186,611
Subordinated notes	—		—		—		14,934		14,934		—		—		—		44,447		44,447
Time deposits	413,145		58,514		1,666		—		473,325		500,295		48,531		5,195		—		554,021
Total	$	424,993	$	72,134	$	13,700	$	100,079	$	610,906	$	531,202	$	72,289	$	37,811	$	180,931	$	822,233


	Contractual Maturities as of December 31, 2018										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		Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	1,160	$	1,849	$	1,628	$	3,235	$	7,872	$	1,160	$	1,849	$	1,628	$	3,235	$	7,872
Short-term borrowings	98,129		—		—		—		98,129		98,129		—		—		—		98,129
Long-term borrowings	—		—		1,445		—		1,445		—		—		1,445		—		1,445
Subordinated notes	—		—		—		14,891		14,891		—		—		—		14,891		14,891
Time deposits	408,408		74,055		2,409		—		484,872		408,408		74,055		2,409		—		484,872
Total	$	507,697	$	75,904	$	5,482	$	18,126	$	607,209	$	507,697	$	75,904	$	5,482	$	18,126	$	607,209

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, 2019,~~March 31, 2020, the allowance for off-balance sheet risk was ~~$326~~$380 thousand, compared to ~~$38~~$318 thousand at December 31, ~~2018,~~2019, and was included in "Other liabilities" on our consolidated balance sheets. The increase in the allowance for off-balance sheet risk as compared to December 31, 2018 was due to a change in the assumptions within the calculation for provision of unfunded commitments, which resulted in a better representation of our line of credit utilization.

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


	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	16,252	$	22,769	$	8,608	$	10,900	$	26,088	$	12,778	$	16,276	$	20,128
Unused lines of credit	19,544		289,779		18,672		229,490		37,051		348,460		28,723		288,086
Unused standby letters of credit and commercial letters of credit	4,195		—		3,861		232		4,327		2,028		4,895		—

Of the total unused lines of credit of ~~$309.3~~$385.5 million at ~~September 30, 2019, $49.9~~March 31, 2020, $58.9 million was comprised of undisbursed construction loan commitments. The Company expects to have sufficient access to liquidity to fund its off-balance sheet commitments.

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.

Level One expects to utilize the SBA PPP Lending Facility designed by the Treasury to finance and facilitate PPP lending. Management has taken recent steps to increase liquidity on the balance sheet and has expanded capacity for additional funding should there be a need. Furthermore, Level One continues to monitor its capital ratios regularly and will benefit from income from participation in the PPP, offset by potential stress from the weakening economy due to COVID-19.

At ~~September 30, 2019,~~March 31, 2020, we had liquid assets of ~~$205.3~~$283.6 million, compared to ~~$213.7~~$257.5 million at December 31, ~~2018.~~2019. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered securities available-for-sale.

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, 2019,~~March 31, 2020, we had ~~$100.0~~$210.3 million of outstanding borrowings from the FHLB, and these advances were secured by a blanket lien on ~~$419.6~~$514.1 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 ~~$144.9~~$52.4 million ~~with~~from the FHLB. Additionally, the Bank can borrow up to ~~$130.0~~$122.5 million through the unsecured lines of credit it has established with ~~nine~~eight other banks, as well as ~~$4.9~~$5.0 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 ~~$602.5~~$773.7 million, based on current policy limits at ~~September 30, 2019.~~March 31, 2020. Management believed that as of ~~September 30, 2019,~~March 31, 2020, 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, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Investment securities available-for-sale to total assets	13.60	%	14.42	%	11.91	%	11.41	%
Loans to total deposits	97.86		99.29		99.71		108.12
Interest-earning assets to total assets	94.11		95.31		93.16		95.58
Interest-bearing deposits to total deposits	73.04		72.73		72.11		71.30

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 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.

The estimated impact on our net interest income as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, assuming immediate parallel moves in interest rates is presented in the table below. The main driver of the changes noted between the two periods below is due to the adoption of ASU No. 2016-01 and the incorporation of exit pricing into the net interest income model as of March 31, 2020.


	September 30, 2019				December 31, 2018				March 31, 2020				December 31, 2019
Change in rates	Following 12 months		Following 24 months		Following 12 months		Following 24 months		Following 12 months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	1.5	%	(2.0	)%	1.8	%	(1.0	)%	(1.9	)%	(5.6	)%	5.8	%	1.9	%
+300 basis points	2.0		(0.3	)	1.8		(0.2	)	(0.4	)	(2.6	)	5.2		2.6
+200 basis points	2.0		0.8		1.5		0.4		0.9		(0.1	)	4.2		2.7
+100 basis points	1.4		0.9		1.3		0.8		2.2		2.4		2.7		2.1
-100 basis points	(2.0	)	(2.0	)	(0.9	)	(0.8	)	(6.1	)	(11.4	)	(4.0	)	(3.9	)

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. ~~Deposit premiums are based on external industry studies and utilizing historical experience.~~

The table below presents the change in our economic value of equity as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, assuming immediate parallel shifts in interest rates.


Change in rates	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
+400 basis points	(35.2	)%	(38.1	)%	—	%	(39.4	)%
+300 basis points	(25.0	)	(28.5	)	4.0		(28.4	)
+200 basis points	(15.7	)	(18.3	)	7.0		(17.8	)
+100 basis points	(7.4	)	(8.4	)	6.0		(8.1	)
-100 basis points	6.2		7.9		(13.0	)	6.6

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 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~~internal control over ~~Financial Reportin~~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. 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 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

~~There have been no material changes from~~In addition to the risk factors ~~previously disclosed~~set forth under Part I, Item 1A “Risk Factors” in the ~~“Risk Factors” section included in our Annual Report on~~Company’s Form 10-K for the fiscal year ended December 31, ~~2018.~~2019, the following risk factors apply to the Company.

The Company and the Bank are subject to stringent capital and liquidity requirements.

As a result of the implementation of the Basel III Rule, we are required to meet increased capital requirements. In addition, banking institutions that do not maintain a capital conservation buffer, comprised of Common Equity Tier 1 Capital, greater than 2.5% above the regulatory minimum capital requirements face constraints on the payment of dividends, stock repurchases and discretionary bonus payments to executive officers based on the amount of the shortfall, unless prior regulatory approval is obtained. Accordingly, if the Bank or the Company fails to maintain the applicable minimum capital ratios and the capital conservation buffer, distributions by the Bank to the Company, or dividends or stock repurchases by the Company, may be prohibited or limited. As of March 31, 2020, the Company failed to maintain the capital conservation buffer with respect to its Tier 1 capital to risk-weighted assets ratio, and as a result, is subject to limitations on capital distributions (including dividends and repurchases of stock) and discretionary bonus payments to executive officers, unless prior regulatory approval is obtained.

Future increases in minimum capital requirements could adversely affect our net income. Furthermore, our failure to comply with the minimum capital requirements could result in our regulators taking formal or informal actions against us that could restrict our future growth or operations.

The outbreak of Coronavirus Disease 2019 (“COVID-19”) has adversely impacted, or an outbreak of other highly infectious or contagious diseases could adversely impact, certain industries in which the Company’s customers operate and impair their ability to fulfill their obligations to the Company. Further, the spread of the outbreak could lead to an economic recession or other severe disruptions in the U.S. economy and may disrupt banking and other financial activity in the areas in which the Company operates and could potentially create widespread business continuity issues for the Company.

The spread of highly infectious or contagious diseases could cause, and the spread of COVID-19 has caused, severe disruptions in the U.S. economy at large, and for small businesses in particular, which could disrupt the Company’s operations. We are starting to see the impact from COVID-19 pandemic on our business, and we believe that it will likely be significant, adverse and potentially material. Currently, COVID-19 is spreading through the United States and the world. The resulting

concerns on the part of the U.S. and global population have created the threat of a recession, reduced economic activity and a significant correction in the global stock markets. We expect that we will likely experience significant disruption across our business due to these effects, leading to decreased earnings, significant slowdowns in our loan collections and loan defaults. In addition, it is possible that we may be required to record impairments to goodwill as a result of the effects of COVID-19 on our business.

COVID-19 pandemic may impact businesses’ and consumers’ desire and willingness to borrow money, which would negatively impact loan volumes. In addition, some of our borrowers are in or have exposure to the hospitality and restaurant industries and/or are located in areas that are quarantined or under stay-at-home orders, and the COVID-19 pandemic may also have an adverse effect on our commercial real estate and consumer loan portfolios. A prolonged quarantine or stay-at-home order would have a negative adverse impact on these borrowers and their revenue streams, which consequently impacts their ability to meet their financial obligations and could result in loan defaults.

The outbreak of COVID-19 or an outbreak of other highly infectious or contagious diseases may result in a decrease in our customers’ businesses, a decrease in consumer confidence and business generally, an increase in unemployment or a disruption in the services provided by the Company’s vendors. Disruptions to our customers could result in increased risk of delinquencies, defaults, foreclosures and losses on our loans, declines in assets under management and wealth management revenues, negatively impact regional economic conditions, result in declines in local loan demand, liquidity of loan guarantors, loan collateral (particularly in real estate), loan originations and deposit availability and negatively impact the implementation of our growth strategy.

The Company relies upon its third-party vendors to conduct business and to process, record, and monitor transactions. If any of these vendors are unable to continue to provide the Company with these services, it could negatively impact the Company’s ability to serve its customers. Furthermore, the outbreak could negatively impact the ability of the Company’s employees and customers to engage in banking and other financial transactions in the geographic areas in which the Company operates and could create widespread business continuity issues for the Company. The Company also could be adversely affected if key personnel or a significant number of employees were to become unavailable due to the effects and restrictions of a COVID-19 outbreak in our market areas. Although the Company has business continuity plans and other safeguards in place, there is no assurance that such plans and safeguards will be effective.

The Company believes that the economic impact from COVID-19 pandemic could be severe and could have a material and adverse impact on our business and that it could result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital.

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

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Registered Securities

On April 24, 2018, the Company sold 1,150,765 shares of common stock in its initial public offering, including 180,000 shares of common stock pursuant to the exercise in full by the underwriters of their option to purchase additional shares. All of the shares were sold pursuant to our Registration Statement on Form S-1, as amended (File No. 333-223866), which was declared effective by the SEC on April 19, 2018. Our common stock is currently traded on Nasdaq under the symbol “LEVL”.

There has been no material change in the planned use of proceeds from our initial public offering as described in our prospectus filed with the SEC on April 20, 2018 pursuant to Rule 424(b)(4) under the Securities Act. On April 25, 2018, the Company contributed $20.0 million of the net proceeds of the initial public offering to the Bank.None.

Issuer Purchases of Equity Securities

Share Buyback Program. On January 23, 2019, the Company announced that its Board of Directors approved a repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company’s common stock with an aggregate purchase price of up to $5 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 be extended, modified, suspended or discontinued at any time. As of March 31, 2020, $2.2 million of shares remained available to be repurchased under the repurchase program. As of March 31, 2020, the Company failed to maintain the capital conservation buffer with respect to its Tier 1 capital to risk-weighted assets ratio, and as a result, is subject to limitations on future repurchases of stock unless prior regulatory approval is obtained.

The following table sets forth information regarding the Company’s repurchase of shares of its outstanding common stock during the three months ended ~~September 30, 2019.~~March 31, 2020.

(Dollars in thousands, except per share amounts) Total Number of Shares Purchased Average Price Paid Per Share Total Number of Shares Repurchased 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, 2019 —
$ —
—
$ 3,380
August 1-31, 2019 20,530
23.74
20,530
2,892
September 1-30, 2019 —
—
—
2,892
Total 20,530
$ 23.74
20,530



(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
January 1-31, 2020	—	$	—	—	$	2,835
February 1-29, 2020	20,878	24.96		20,878	2,314
March 1-31, 2020	4,378	22.66		4,378	2,215
Total	25,256	$	24.56	25,256

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, 2019,~~March 31, 2020, the total shares repurchased in the amount of ~~$2.1~~$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.~~On May 6, 2020, the Company entered into employment agreements with each of Patrick J. Fehring, Gregory A. Wernette and David C. Walker, which supersede their previous employment agreements with the Company. The terms and conditions of the new employment agreements are consistent with the summaries of the previous employment agreements set forth in the proxy statement for the Company’s 2020 annual meeting of shareholders filed with the SEC on March 25, 2020, which summaries are incorporated herein by reference, except that (i) under each new employment agreement the initial term of the agreement is from May 6, 2020 through December 31, 2021, subject to automatic extensions unless either party delivers notice that the term will not be extended, (ii) the duration of the non-competition and non-solicitation covenants has been increased from twelve months to eighteen months, except that the twelve-month period will continue to apply in the case of a termination within six months prior, or twelve months after, certain change of control transactions, (iii) in the case of a termination of employment not in connection with a change in control, each executive would be entitled to receive a payment equal to 100% of the sum of his annual base salary plus average annual bonus, payable in lump sum, or in the case of a termination in connection with certain change of control transactions, each executive would be entitled to receive a payment equal to 150% of such sum (200% with respect to Mr. Fehring), and (iv) instead of receiving full reimbursement of COBRA premiums for a 12-month period following a termination of employment, each executive would instead be required to pay the same amount as he would pay if he continued in employment with the Company during such period. The foregoing summaries are qualified in their entirety by reference to the employment agreements, copies of which are filed with this Form 10-Q as Exhibits 10.1, 10.2 and 10.3, respectively.

Item 6 – - Exhibits




Exhibit No.		Description
2.1		Agreement and Plan of Merger, dated as of August 12, 2019, among Level One Bancorp, Inc., AASB Acquisition, Inc. and Ann Arbor Bancorp, Inc. (incorporated by reference to Exhibit 2.1 ofto the ~~Company's Current Report~~Company’s current report on Form 8-K filed ~~with the SEC on~~ August 14, 2019).†

10.1		Employment Agreement, dated May 6, 2020, among Level One Bancorp, Inc., Level One Bank and Patrick Fehring - filed herewith.

10.2		Employment Agreement, dated May 6, 2020, among Level One Bancorp, Inc., Level One Bank and Gregory Wernette - filed herewith.

10.3		Employment Agreement, dated May 6, 2020, among Level One Bancorp, Inc., Level One Bank and David Walker - filed herewith.

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

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

32.1		Chief 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 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, 2019,~~ March 31, 2020, formatted in XBRL 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.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Level One Bancorp, Inc.

Date: ~~November~~May 8, ~~2019~~2020	By:	/s/	Patrick J. Fehring
			Patrick J. Fehring
			President and Chief Executive Officer
			(principal executive officer)

Date: ~~November~~May 8, ~~2019~~2020	By:	/s/	David C. Walker
			David C. Walker
			Executive Vice President and Chief Financial Officer
			(principal financial officer)

6772



(Dollars in thousands, except per share data)	September 30, 2019			December 31, 2018			September 30, 2018
	(Unaudited)						(Unaudited)
Total shareholders' equity	$	167,968		$	151,760		$	145,459
Less:
Goodwill	9,387			9,387			9,387
Other intangible assets, net	331			447			502
Tangible shareholders' equity	$	158,250		$	141,926		$	135,570

Shares outstanding (in thousands)	7,714			7,750			7,749
Tangible book value per share	$	20.51		$	18.31		$	17.50

Total assets	$	1,509,463		$	1,416,215		$	1,446,269
Less:
Goodwill	9,387			9,387			9,387
Other intangible assets, net	331			447			502
Tangible assets	$	1,499,745		$	1,406,381		$	1,436,380

Tangible equity to tangible assets	10.55		%	10.09		%	9.44		%