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 March 31, ~~2020~~2021

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



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

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

(Registrant's telephone number, including area code)

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



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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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 þ ☑ No 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 þ	☑
Non-accelerated filer o	☐	Smaller reporting companyþ	☑
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 ~~May 4, 2020,~~April 30, 2021, the number of shares outstanding of the registrant’s common stock, no par value, was ~~7,730,822~~7,629,156 shares.

Table of Contents

Level One Bancorp, Inc.

Table of Contents


						Page
			~~Page~~
Part 1:		FINANCIAL INFORMATION			3
	Item 1.			~~Consolidated~~ Financial Statements		3
				Consolidated Balance Sheets at March 31, ~~2020~~2021 (Unaudited) and December 31, ~~2019~~2020		3
				Consolidated Statements of Income (Unaudited) for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020		4
				Consolidated Statements of Comprehensive Income (Unaudited) for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020		5
				Consolidated Statements of Changes in ~~Shareholder's~~Shareholder s ' Equity (Unaudited) for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020		6
				Consolidated Statements of Cash Flows (Unaudited) for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020		7
				Notes to the Consolidated Financial Statements (Unaudited)		89
	Item 2.			Management's Discussion and Analysis of Financial Condition and Results of Operations		4039
	Item 3.			Quantitative and Qualitative Disclosure about Market Risk		6662
	Item 4.			Controls and Procedures		6863

	Part 2:			OTHER INFORMATION		6863
	Item 1.			Legal Proceedings		6863
	Item 1A.			Risk Factors		6864
	Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds		6964
	Item 3.			Defaults Upon Senior Securities		7064
	Item 4.			Mine Safety Disclosures		7064
	Item 5.			Other Information		7064
	Item 6.			Exhibits		7165

	Signatures					7266

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1 - ~~Consolidated~~ Financial Statements

LEVEL ONE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS


								March 31, 2021		December 31, 2020
	March 31, 2020			December 31, 2019
(Dollars in thousands)	(Unaudited)
(Dollars in thousands, except per share data)							(Dollars in thousands, except per share data)	(Unaudited)
Assets							Assets
Cash and cash equivalents	$	104,867		$	103,930		Cash and cash equivalents	$	224,683	$	264,071
Securities available-for-sale	230,671			180,905			Securities available-for-sale	346,266		302,732
Federal Home Loan Bank stock	12,398			11,475
Other investments							Other investments	14,398		14,398
Mortgage loans held for sale, at fair value	18,305			13,889			Mortgage loans held for sale, at fair value	19,550		43,482
Loans:							Loans:
Originated loans	1,188,107			1,158,138			Originated loans	1,647,847		1,498,458
Acquired loans	278,300			69,471			Acquired loans	213,844		225,079
Total loans	1,466,407			1,227,609			Total loans	1,861,691		1,723,537
Less: Allowance for loan losses	(12,989		)	(12,674		)	Less: Allowance for loan losses	(22,578)		(22,297)
Net loans	1,453,418			1,214,935			Net loans	1,839,113		1,701,240
Premises and equipment, net	16,673			13,838			Premises and equipment, net	15,523		15,834
Goodwill	36,216			9,387			Goodwill	35,554		35,554
Other intangible assets, net	3,974			383
Other real estate owned	2,093			921
Mortgage servicing rights, net							Mortgage servicing rights, net	4,346		3,361
Core deposit intangibles, net							Core deposit intangibles, net	3,028		3,196

Bank-owned life insurance	17,848			12,167			Bank-owned life insurance	18,314		18,200
Income tax benefit	630			1,217			Income tax benefit	5,823		3,686
Interest receivable and other assets	39,730			21,852			Interest receivable and other assets	46,128		37,228
Total assets	$	1,936,823		$	1,584,899		Total assets	$	2,572,726	$	2,442,982
Liabilities							Liabilities
Deposits:							Deposits:
Noninterest-bearing demand deposits	$	410,152		$	325,885		Noninterest-bearing demand deposits	$	744,688	$	618,677
Interest-bearing demand deposits	105,197			62,586			Interest-bearing demand deposits	140,629		127,920
Money market and savings deposits	401,238			313,885			Money market and savings deposits	652,091		619,900
Time deposits	554,021			433,072			Time deposits	556,557		596,815
Total deposits	1,470,608			1,135,428			Total deposits	2,093,965		1,963,312
Borrowings	211,787			212,225			Borrowings	186,440		185,684
Subordinated notes	44,447			44,440			Subordinated notes	44,600		44,592
Other liabilities	34,213			22,103			Other liabilities	30,534		34,067
Total liabilities	1,761,055			1,414,196			Total liabilities	2,355,539		2,227,655
Shareholders' equity							Shareholders' equity
Common stock, no par value per share:
Authorized—20,000,000 shares
Issued and outstanding—7,730,822 shares at March 31, 2020 and 7,715,491 shares at December 31, 2019	88,910			89,345
Preferred stock, no par value per share; authorized—50,000 shares; issued and outstanding—10,000 shares, with a liquidation preference of $2,500 per share, at March 31, 2021 and December 31, 2020							Preferred stock, no par value per share; authorized—50,000 shares; issued and outstanding—10,000 shares, with a liquidation preference of $2,500 per share, at March 31, 2021 and December 31, 2020	23,372		23,372
Common stock, no par value per share; authorized—20,000,000 shares; issued and outstanding—7,630,342 shares at March 31, 2021 and 7,633,780 shares at December 31, 2020							Common stock, no par value per share; authorized—20,000,000 shares; issued and outstanding—7,630,342 shares at March 31, 2021 and 7,633,780 shares at December 31, 2020	86,529		87,615
Retained earnings	81,489			77,766			Retained earnings	104,191		96,158
Accumulated other comprehensive income, net of tax	5,369			3,592			Accumulated other comprehensive income, net of tax	3,095		8,182
Total shareholders' equity	175,768			170,703			Total shareholders' equity	217,187		215,327
Total liabilities and shareholders' equity	$	1,936,823		$	1,584,899		Total liabilities and shareholders' equity	$	2,572,726	$	2,442,982

See accompanying notes to the consolidated financial statements.

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LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME - (UNAUDITED)


	For the three months ended March 31,						For the three months ended March 31,
(In thousands, except per share data)	2020		2019			(In thousands, except per share data)		2021		2020
Interest income						Interest income
Originated loans, including fees	$	14,039	$	13,894		Originated loans, including fees		$	16,822	$	14,039
Acquired loans, including fees	4,089		1,757			Acquired loans, including fees		3,101		4,089
Securities:						Securities:
Taxable	684		936			Taxable		850		684
Tax-exempt	611		545			Tax-exempt		623		611
Federal funds sold and other	394		310
Federal funds sold and other investments						Federal funds sold and other investments		155		394
Total interest income	19,817		17,442			Total interest income		21,551		19,817
Interest Expense						Interest Expense
Deposits	3,832		4,121			Deposits		1,387		3,832
Borrowed funds	530		353			Borrowed funds		466		530
Subordinated notes	635		250			Subordinated notes		541		635
Total interest expense	4,997		4,724			Total interest expense		2,394		4,997
Net interest income	14,820		12,718			Net interest income		19,157		14,820
Provision expense for loan losses	489		422			Provision expense for loan losses		265		489
Net interest income after provision for loan losses	14,331		12,296			Net interest income after provision for loan losses		18,892		14,331
Noninterest income						Noninterest income
Service charges on deposits	634		625			Service charges on deposits		777		634
Net gain (loss) on sales of securities	529		(7		)
Net gain on sales of securities						Net gain on sales of securities		20		529
Mortgage banking activities	2,588		1,120			Mortgage banking activities		5,811		2,588

Other charges and fees	939		548			Other charges and fees		670		939
Total noninterest income	4,690		2,286			Total noninterest income		7,278		4,690
Noninterest expense						Noninterest expense
Salary and employee benefits	8,630		6,913			Salary and employee benefits		9,922		8,630
Occupancy and equipment expense	1,528		1,204			Occupancy and equipment expense		1,708		1,528
Professional service fees	392		362			Professional service fees		643		392
Acquisition and due diligence fees	1,471		—			Acquisition and due diligence fees		0		1,471
FDIC premium expense						FDIC premium expense		324		211
Marketing expense	222		176			Marketing expense		133		222
Loan processing expense						Loan processing expense		331		234
Data processing expense	847		68			Data processing expense		1,224		847
Printing and supplies expense	136		595
Core deposit premium amortization	192		52			Core deposit premium amortization		168		192
Other expense	1,144		998			Other expense		686		835
Total noninterest expense	14,562		10,368			Total noninterest expense		15,139		14,562
Income before income taxes	4,459		4,214			Income before income taxes		11,031		4,459
Income tax provision	349		747			Income tax provision		2,072		349
Net income	$	4,110	$	3,467		Net income		$	8,959	$	4,110
Preferred stock dividends						Preferred stock dividends		469		0
Net income attributable to common shareholders						Net income attributable to common shareholders		$	8,490	$	4,110
Per common share data:						Per common share data:
Basic earnings per common share	$	0.53	$	0.45		Basic earnings per common share		$	1.11	$	0.53
Diluted earnings per common share	$	0.53	$	0.44		Diluted earnings per common share		$	1.10	$	0.53
Cash dividends declared per common share	$	0.05	$	0.04		Cash dividends declared per common share		$	0.06	$	0.05
Weighted average common shares outstanding—basic	7,637		7,752			Weighted average common shares outstanding—basic		7,528		7,637
Weighted average common shares outstanding—diluted	7,738		7,869			Weighted average common shares outstanding—diluted		7,612		7,738

See accompanying notes to the consolidated financial statements.

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LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

- (UNAUDITED)


	For the three months ended March 31,
(Dollars in thousands)		2021		2020
Net income		$	8,959	$	4,110
Other comprehensive income:
Unrealized gains (losses) on securities available-for-sale		(6,419)		2,749
Reclassification adjustment for gains included in income		(20)		(529)
Tax effect(1)		1,352		(443)
Net unrealized gains (losses) on securities available-for-sale, net of tax		(5,087)		1,777
Total comprehensive income, net of tax		$	3,872	$	5,887

For the three months ended March 31,
(Dollars in thousands) 2020 2019
Net income $ 4,110
$ 3,467
Other comprehensive income:
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⁾
(443 ) (550 )
Net unrealized gains (losses) on securities available-for-sale, net of tax 1,777
2,069
Total comprehensive income, net of tax $ 5,887
$ 5,536

^{__________________________________________________________________________}

⁽¹⁾ Includes ~~$111~~$4 thousand and ~~$(1)~~$111 thousand of tax expense ~~(benefit)~~ related to reclassification ~~adjustment for gains included in income~~ for the three months ended March 31, 2021 and 2020, ~~and 2019,~~ respectively.

See accompanying notes to the consolidated financial statements.

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LEVEL ONE BANCORP, INC.

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


(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


(In thousands, except per share data)													(In thousands, except per share data)	Preferred Stock		Common Stock		Retained Earnings		Accumulated Other Comprehensive Income		Total Shareholders' Equity
Balance at December 31, 2019	$	89,345		$	77,766		$	3,592		$	170,703		Balance at December 31, 2019	$	—	$	89,345	$	77,766	$	3,592	$	170,703
Net income	—			4,110			—			4,110			Net income	—		—		4,110		—		4,110
Other comprehensive income	—			—			1,777			1,777			Other comprehensive income	—		—		—		1,777		1,777
Redeemed stock (25,256 shares)	(620		)	—			—			(620		)

Redeemed Stock (25,256 shares)													Redeemed Stock (25,256 shares)	—		(620)		—		—		(620)
Common stock dividends declared ($0.05 per share)	—			(387		)	—			(387		)	Common stock dividends declared ($0.05 per share)	—		—		(387)		—		(387)

Exercise of stock options (6,500 shares)	61			—			—			61			Exercise of stock options (6,500 shares)	—		61		—		—		61
Stock-based compensation expense, net of tax impact	124			—			—			124			Stock-based compensation expense, net of tax impact	—		124		—		—		124
Balance at March 31, 2020	$	88,910		$	81,489		$	5,369		$	175,768		Balance at March 31, 2020	$	—	$	88,910	$	81,489	$	5,369	$	175,768

Balance at December 31, 2020													Balance at December 31, 2020	$	23,372	$	87,615	$	96,158	$	8,182	$	215,327
Net income													Net income	—		—		8,959		—		8,959
Other comprehensive income													Other comprehensive income	—		—		—		(5,087)		(5,087)
Redeemed stock (59,645 shares)													Redeemed stock (59,645 shares)	—		(1,364)		—		—		(1,364)

Dividends on 7.50% Series B Preferred Stock													Dividends on 7.50% Series B Preferred Stock	—		—		(469)		—		(469)
Common stock dividends declared ($0.06 per share)													Common stock dividends declared ($0.06 per share)	—		—		(457)		—		(457)
Exercise of stock options (23,800 shares)													Exercise of stock options (23,800 shares)	—		243		—		—		243
Stock-based compensation expense, net of tax impact													Stock-based compensation expense, net of tax impact	—		35		—		—		35
Balance at March 31, 2021													Balance at March 31, 2021	$	23,372	$	86,529	$	104,191	$	3,095	$	217,187

See accompanying notes to the consolidated financial statements.

Table of Contents

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS - (UNAUDITED)


	For the three months ended March 31,
(Dollars in thousands)	2021		2020
Cash flows from operating activities
Net income	$	8,959	$	4,110
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of fixed assets	402		413
Amortization of core deposit intangibles	168		192

Stock-based compensation expense	134		188
Provision expense for loan losses	265		489
Net securities premium amortization	714		502
Net gain on sales of securities	(20)		(529)
Originations of loans held for sale	(155,584)		(90,076)
Proceeds from sales of loans	181,735		88,516
Net gain on sales of loans	(5,369)		(2,403)
Accretion on acquired purchase credit impaired loans	(402)		(443)


Increase in cash surrender value of life insurance	(114)		(118)
Amortization of debt issuance costs	8		7

Deferred income tax (benefit) expense	(1,159)		144
Net increase in accrued interest receivable and other assets	(9,450)		(14,203)
Net increase (decrease) in accrued interest payable and other liabilities	(2,379)		6,853
Net cash provided by (used in) operating activities	17,908		(6,358)
Cash flows from investing activities
Net increase in loans	(135,877)		(16,005)
Principal payments on securities available-for-sale	7,384		4,477
Purchases of securities available-for-sale	(59,093)		(35,950)



Additions to premises and equipment	(91)		(844)
Proceeds from:

Sale and call of securities available-for-sale	1,042		31,370

Net cash used in acquisition	0		(29,464)
Net cash used in investing activities	(186,635)		(46,416)
Cash flows from financing activities
Net increase in deposits	130,653		70,360
Change in short-term borrowings	789		(40,675)

Issuances of long-term borrowings	0		24,975
Repayment of long-term borrowings	(27)		0


Change in secured borrowing	(6)		(17)

Share buyback - redeemed stock	(1,364)		(620)
Preferred stock dividends paid	(469)		0
Common stock dividends paid	(381)		(309)
Proceeds from exercised stock options	243		61
Payments related to tax-withholding for share based compensation awards	(99)		(64)
Net cash provided by financing activities	129,339		53,711
Net change in cash and cash equivalents	(39,388)		937
Beginning cash and cash equivalents	264,071		103,930
Ending cash and cash equivalents	$	224,683	$	104,867

Table of Contents

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
—


Supplemental disclosure of cash flow information:
Interest paid	$	2,309	$	4,511
Taxes paid	35		40
Transfer from loans held for sale to loans held for investment	2,233		40
Transfer from loans to other real estate owned	0		1,172

Non-cash transactions:
Increase in assets and liabilities in acquisitions:
Assets acquired—Ann Arbor State Bank	$	0	$	324,465
Liabilities assumed—Ann Arbor State Bank	0		283,350

See accompanying notes to the consolidated financial statements.

Table of Contents

LEVEL ONE BANCORP, INC.

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

~~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,” “Level One,” “we,” “our,” or “us”) is a financial holding company headquartered in Farmington Hills, Michigan. In addition to the Company headquarters, as of March 31, ~~2020,~~2021, its wholly owned bank subsidiary, Level One Bank (the "Bank"), had 17 offices, including 11 banking centers (our full service branches) in Metro Detroit, ~~one~~1 banking center in Grand Rapids, ~~one~~1 banking center in Jackson, ~~three~~3 banking centers in Ann Arbor and ~~one~~1 mortgage loan production office in Ann Arbor.

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

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

Preferred Stock Public Offering:

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

Merger with Ann Arbor Bancorp, Inc.:

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

Basis of Presentation and Principles of Consolidation:

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

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

Use of Estimates:

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

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uncertainties, including changes in interest rates and other general economic, business and political conditions, ~~including~~ the effects of the Coronavirus Disease 2019 (“COVID-19”) pandemic, ~~including~~ its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state and local government laws, regulations and orders in

connection with the pandemic. The Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) ~~was signed into law on March 27, 2020, which provides a variety of provisions, including,~~, as supplemented by the Consolidated Appropriations Act, 2021, provided for among other things, a small business lending program to originate paycheck protection loans ~~temporary relief for community bank leverage ratio,~~ and temporary relief for ~~community banks~~financial institutions related to troubled debt restructurings. Actual results may differ from those estimates.

Emerging Growth Company Status:

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

Impact of Recently ~~Adopted Accounting Standards:~~

~~Revenue Recognition~~

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

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

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

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

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

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

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

~~Financial Instruments~~

In January 2016, the FASB issued ASU No. 2016-01, "Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities," to improve the accounting for financial instruments. This ASU requires equity investments with readily determinable fair values to be measured at fair value with changes recognized in net income regardless of classification. For equity investments without a readily determinable fair value, the value of the investment would be measured at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer instead of fair value, unless a qualitative assessment indicates impairment. Additionally, this ASU requires the separate presentation of financial assets and

financial liabilities by measurement category and form of financial asset on the balance sheet or the accompanying notes to the financial statements, as well as the required use of exit pricing when measuring the fair value of financial instruments for disclosure purposes. The guidance became effective for the Company for fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019, and was to be applied prospectively with a cumulative effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The Company adopted ASU 2016-01 and related issues on January 1, 2019 and determined that the implementation of this standard did not have a material impact to our consolidated financial statements.

~~Impact of Recently~~ Issued Accounting Standards:

Leases

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

The guidance is effective for the Company for fiscal years beginning after December 15, ~~2019,~~2021, and interim periods within fiscal years beginning after December 15, ~~2020,~~2022, and is to be applied under an optional transition method. The Company is planning to adopt this new guidance within the time frame noted above. The Company is currently evaluating the impact of adopting this new guidance on ~~the~~its consolidated financial statements but does not expect that the adoption will have a material impact. Additionally, the Company does not expect to significantly change operating lease agreements prior to adoption.

Allowance for Credit Losses

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

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

~~NOTE 2—BUSINESS COMBINATIONS~~Reference Rate Reform

~~On January 2,~~

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

AAB's results of operations were included in the Company’s results beginning January 2, 2020. Acquisition-related costs of $1.5 million are included in the Company’s income statement for the quarter ended March 31, 2020.

~~Goodwill of $26.8 million arising from the acquisition consisted largely of synergies and the cost savings resulting from the combining~~FASB issued ASU No. 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the ~~operations~~Effects of Reference Rate Reform on Financial Reporting" to provide guidance to ease the ~~companies.~~potential burden in accounting for, or recognizing the effects of, reference rate reform on financial reporting. The ~~goodwill arising from the acquisition of AAB is not deductible~~ASU provides optional expedients and exceptions for ~~tax purposes.~~

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

(Dollars in thousands)

Consideration paid:
Cash $ 67,944
Fair value of assets acquired:
Cash and cash equivalents
38,480
Investment securities
47,416
Federal Home Loan Bank stock
923
Loans held for sale 1,703
Loans held for investment
222,356
Premises and equipment
2,404
Core deposit intangibles
3,663
Other assets
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 Company reviewed the loans at acquisition~~other transactions affected by reference rate reform if certain criteria are met and only applies to ~~determine which should be considered purchased credit impaired loans (i.e. loans accounted for under ASC 310-30) defining impaired loans as those~~contracts, hedging relationships and other transactions that ~~were either not accruing interest~~reference LIBOR or exhibited credit risk factors consistent with nonaccrual loans at the acquisition date. Fair values for purchased loans are based on a discounted cash flow methodology that considers various factors including the type of loan and related collateral, classification status, fixed or variable interestanother reference rate term of the loan and whether or not the loan was amortizing, and a discount rate reflecting the Company's assessment of risk inherent in the cash flow estimates. The Company accounts for purchased credit impaired loans in accordance with the provisions of ASC 310-30. The cash flows expected to be ~~collected on purchased loans~~discontinued because of reference rate reform. In addition, the ASU

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provides optional expedients for applying the requirements of certain topics or industry subtopics in the Codification for contracts that are ~~estimated based upon the expected remaining life~~modified because of ~~the underlying loans, which includes the effects~~reference rate reform and contemporaneous modifications of estimated prepayments. Purchased loans are considered credit impaired if there is evidence of credit deterioration at the date of purchase and if it is probable that not all contractually required payments will be collected. Interest income, through accretion of the difference between the carrying value of the loans and the expected cash flows is recognized on the acquired loans accounted for under ASC 310-30.

Purchased loans outside the scope of ASC 310-30 are accounted for under ASC 310-20. Premiums and discounts created when the loans were recorded at their fair values at acquisition are amortized over the remainingother contract 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 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. The pro forma financial information is not necessarily indicative of the results of operations that would have occurred had the transaction been effected on the assumed date. ~~Due diligence, professional fees, and other expenses~~ related to the ~~merger were incurred by~~replacement of the reference rate. The ASU allows companies to apply the standard as of the beginning of the interim period that includes March 12, 2020 or any date thereafter. The Company ~~and AAB during~~is currently assessing the ~~three months ended March 31, 2020, but~~impact of this guidance to its financial statements; however, the ~~pro forma condensed combined statement of income~~impact is not ~~adjusted~~expected to ~~exclude these costs.~~be material.

Three months ended 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

NOTE 3—2—SECURITIES

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


(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
March 31, 2021
U.S. government sponsored entities & agencies	$	26,558	$	80	$	(1,014)	$	25,624
State and political subdivision	137,603		6,935		(1,006)		143,532
Mortgage-backed securities: residential	23,377		171		(188)		23,360
Mortgage-backed securities: commercial	24,604		371		(590)		24,385
Collateralized mortgage obligations: residential	11,942		142		(12)		12,072
Collateralized mortgage obligations: commercial	56,137		782		(1,092)		55,827
U.S. Treasury	29,278		0		(494)		28,784
SBA	16,719		60		(93)		16,686
Asset backed securities	10,131		2		(76)		10,057
Corporate bonds	5,999		16		(76)		5,939
Total available-for-sale	$	342,348	$	8,559	$	(4,641)	$	346,266
December 31, 2020
U.S. government sponsored entities & agencies	$	26,575	$	103	$	(320)	$	26,358
State and political subdivision	124,053		8,751		(81)		132,723
Mortgage-backed securities: residential	25,729		352		0		26,081
Mortgage-backed securities: commercial	11,434		484		0		11,918
Collateralized mortgage obligations: residential	13,320		138		(12)		13,446
Collateralized mortgage obligations: commercial	57,398		1,206		(92)		58,512

SBA	17,639		61		(107)		17,593
Asset backed securities	10,229		0		(157)		10,072
Corporate bonds	5,998		34		(3)		6,029
Total available-for-sale	$	292,375	$	11,129	$	(772)	$	302,732

(Dollars in thousands)
Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value
March 31, 2020

U.S. government sponsored entities & agencies $ 9,624
$ 151
$ —
$ 9,775
State and political subdivision 122,446
5,699
(465 ) 127,680
Mortgage-backed securities: residential 10,047
247
—
10,294
Mortgage-backed securities: commercial 8,527
607
(1 ) 9,133
Collateralized mortgage obligations: residential               7,929
171
(44 ) 8,056
Collateralized mortgage obligations: commercial               28,960
1,107
(6 ) 30,061
U.S. Treasury 1,000
10
—
1,010
SBA 20,609
80
(127 ) 20,562
Asset backed securities 10,394
—
(781 ) 9,613
Corporate bonds 4,483
27
(23 ) 4,487
Total available-for-sale $ 224,019
$ 8,099
$ (1,447 ) $ 230,671
December 31, 2019

State and political subdivision 89,304
4,463
(20 ) 93,747
Mortgage-backed securities: residential 10,609
82
(126 ) 10,565
Mortgage-backed securities: commercial 8,567
224
(12 ) 8,779
Collateralized mortgage obligations: residential               8,541
39
(51 ) 8,529
Collateralized mortgage obligations: commercial               22,891
300
(10 ) 23,181
U.S. Treasury 1,976
23
—
1,999
SBA 22,051
87
(154 ) 21,984
Asset backed securities 10,390
—
(306 ) 10,084
Corporate bonds 2,030
20
(13 ) 2,037
Total available-for-sale $ 176,359
$ 5,238
$ (692 ) $ 180,905

The proceeds from sales and calls of securities and the associated gains and losses for the ~~periods below~~three months ended March 31, 2021 and 2020 are as follows:


(Dollars in thousands)	For the three months ended March 31,
	2021		2020
Proceeds	$	1,042	$	31,370
Gross gains	20		538
Gross losses	0		(9)

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For the three months ended March 31,
(Dollars in thousands) 2020 2019
Proceeds $ 27,581
$ 6,000
Gross gains 538
64
Gross losses (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.


	March 31, 2020					March 31, 2021
(Dollars in thousands)	Amortized Cost		Fair Value		(Dollars in thousands)	Amortized Cost		Fair Value
Within one year	$	8,114	$	8,129	Within one year	$	8,190	$	8,231
One to five years	32,389		33,124		One to five years	28,676		29,422
Five to ten years	49,829		51,617		Five to ten years	147,342		146,495
Beyond ten years	133,687		137,801		Beyond ten years	158,140		162,118
Total	$	224,019	$	230,671	Total	$	342,348	$	346,266

Securities pledged at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 had a carrying amount of ~~$52.0~~$95.8 million and ~~$27.3~~$98.7 million, respectively, and were pledged to secure Federal Home Loan Bank ("FHLB") advances, a Federal Reserve Bank line of credit, repurchase agreements, deposits and mortgage derivatives.

As of March 31, ~~2020~~,2021, the Bank held 7267 tax-exempt state and local municipal securities totaling ~~$52.7~~$51.7 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments and the U.S. government and its agencies, at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, there were no holdings of securities of any one issuer ~~other than the U.S. government and its agencies,~~ in an amount greater than 10% of shareholders' equity.

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


	Less than 12 Months					12 Months or Longer					Total						Less than 12 Months				12 Months or Longer				Total
(Dollars in thousands)	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses			(Dollars in thousands)	Fair value		Unrealized Losses		Fair value		Unrealized Losses		Fair value		Unrealized Losses
March 31, 2020
March 31, 2021																March 31, 2021
Available-for-sale																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
U.S. government sponsored entities & agencies																U.S. government sponsored entities & agencies	$	18,986	$	(1,014)	$	0	$	0	$	18,986	$	(1,014)
State and political subdivision	$	5,109	$	(20	)	$	305	$	—		$	5,414	$	(20	)	State and political subdivision	32,812		(1,006)		0		0		32,812		(1,006)
Mortgage-backed securities: residential	4,022		(39		)	3,982		(87		)	8,004		(126		)	Mortgage-backed securities: residential	16,476		(188)		8		0		16,484		(188)
Mortgage-backed securities: commercial	1,769		(11		)	430		(1		)	2,199		(12		)	Mortgage-backed securities: commercial	16,195		(590)		0		0		16,195		(590)
Collateralized mortgage obligations: residential	770		(1		)	4,631		(50		)	5,401		(51		)	Collateralized mortgage obligations: residential	0		0		1,044		(12)		1,044		(12)
Collateralized mortgage obligations: commercial	—		—			1,716		(10		)	1,716		(10		)	Collateralized mortgage obligations: commercial	31,143		(1,092)		0		0		31,143		(1,092)
U.S. Treasury																U.S. Treasury	28,784		(494)		0		0		28,784		(494)
SBA	3,961		(13		)	12,405		(141		)	16,366		(154		)	SBA	0		0		10,698		(93)		10,698		(93)
Asset backed securities	8,220		(232		)	1,864		(74		)	10,084		(306		)	Asset backed securities	0		0		7,107		(76)		7,107		(76)
Corporate bonds	489		(13		)	—		—			489		(13		)	Corporate bonds	3,924		(76)		0		0		3,924		(76)
Total available-for-sale	$	24,340	$	(329	)	$	25,333	$	(363	)	$	49,673	$	(692	)	Total available-for-sale	$	148,320	$	(4,460)	$	18,857	$	(181)	$	167,177	$	(4,641)
December 31, 2020																December 31, 2020
Available-for-sale																Available-for-sale
U.S. government sponsored entities & agencies																U.S. government sponsored entities & agencies	$	19,680	$	(320)	$	0	$	0	$	19,680	$	(320)
State and political subdivision																State and political subdivision	4,880		(81)		0		0		4,880		(81)

Collateralized mortgage obligations: residential																Collateralized mortgage obligations: residential	0		0		1,109		(12)		1,109		(12)
Collateralized mortgage obligations: commercial																Collateralized mortgage obligations: commercial	26,477		(92)		0		0		26,477		(92)

SBA																SBA	0		0		12,209		(107)		12,209		(107)
Asset backed securities																Asset backed securities	0		0		10,072		(157)		10,072		(157)
Corporate bonds																Corporate bonds	2,497		(3)		0		0		2,497		(3)
Total available-for-sale																Total available-for-sale	$	53,534	$	(496)	$	23,390	$	(276)	$	76,924	$	(772)

As of March 31, ~~2020,~~2021, the Company's investment portfolio consisted of ~~321~~320 securities, 8157 of which were in an unrealized loss position. The unrealized losses for these securities resulted primarily from changes in interest rates since purchased. The

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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 March 31, ~~2020.~~2021.

NOTE 4—3—LOANS

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


(Dollars in thousands)	Originated		Acquired		Total		(Dollars in thousands)	Originated		Acquired		Total
March 31, 2020
March 31, 2021							March 31, 2021
Commercial real estate	$	578,960	$	149,950	$	728,910	Commercial real estate	$	622,185	$	127,680	$	749,865
Commercial and industrial	398,875		70,352		469,227		Commercial and industrial	739,906		54,190		794,096
Residential real estate	209,426		53,468		262,894		Residential real estate	285,058		31,031		316,089
Consumer	846		4,530		5,376		Consumer	698		943		1,641
Total	$	1,188,107	$	278,300	$	1,466,407	Total	$	1,647,847	$	213,844	$	1,861,691
December 31, 2019
December 31, 2020							December 31, 2020
Commercial real estate	$	551,565	$	53,081	$	604,646	Commercial real estate	$	587,631	$	133,201	$	720,832
Commercial and industrial	403,922		6,306		410,228		Commercial and industrial	629,434		56,070		685,504
Residential real estate	201,787		10,052		211,839		Residential real estate	280,645		34,831		315,476
Consumer	864		32		896		Consumer	748		977		1,725
Total	$	1,158,138	$	69,471	$	1,227,609	Total	$	1,498,458	$	225,079	$	1,723,537

At March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had residential loans held for sale, which were originated with the intent to sell, totaling ~~$18.3~~$19.6 million and ~~$13.9~~$43.5 million, respectively. During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the Company sold residential real estate loans with proceeds totaling $181.7 million and $88.5 million, respectively. At March 31, 2021 and ~~$29.1~~December 31, 2020, $405.8 million ~~respectively.~~and $290.1 million, respectively, of PPP loans were included in the commercial and industrial loan balance.

Nonperforming Assets

Nonperforming assets consist of loans for which the accrual of interest has been discontinued and other real estate owned obtained through foreclosure and other repossessed assets. Loans outside of those accounted for under ASC 310-30 are classified as nonaccrual when, in the opinion of management, it is probable that the Company will be unable to collect all the contractual interest and principal payments as scheduled in the loan agreement. The accrual of interest is discontinued when a loan is placed in nonaccrual status and any payments received reduce the carrying value of the loan. A loan may be placed back on accrual status if all contractual payments have been received and collection of future principal and interest payments ~~are~~is no longer doubtful. Acquired loans that are not performing in accordance with contractual terms are not reported as nonperforming because these loans are recorded ~~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~~$7 thousand and ~~$1.2 million~~$12 thousand in commitments to lend additional funds to borrowers whose loans were classified as nonaccrual as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively.

Information as to nonperforming assets was as follows:


(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Nonaccrual loans:					Nonaccrual loans:
Commercial real estate	$	3,721	$	4,832	Commercial real estate	$	4,542	$	7,320
Commercial and industrial	9,364		11,112		Commercial and industrial	6,822		7,490
Residential real estate	2,124		2,569		Residential real estate	3,987		3,991
Consumer	15		16		Consumer	13		15
Total nonaccrual loans	15,224		18,529		Total nonaccrual loans	15,364		18,816
Other real estate owned	2,093		921

Total nonperforming assets	$	17,317	$	19,450	Total nonperforming assets	$	15,364	$	18,816
Loans 90 days or more past due and still accruing	$	437	$	157	Loans 90 days or more past due and still accruing	$	328	$	269

At March 31, ~~2020~~2021 and December 31, ~~2019, all of~~2020, the loans that were 90 days or more past due and still accruing were PCI ~~loans.~~loans or loans that were well-secured and in the process of extension.

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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		(Dollars in thousands)	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total
March 31, 2020
March 31, 2021											March 31, 2021
Commercial real estate	$	726,231	$	1,557	$	293	$	829	$	728,910	Commercial real estate	$	741,778	$	7,795	$	292	$	0	$	749,865
Commercial and industrial	467,608		306		201		1,112		469,227		Commercial and industrial	791,975		1,016		896		209		794,096
Residential real estate	256,486		4,071		868		1,469		262,894		Residential real estate	313,031		1,038		155		1,865		316,089
Consumer	5,350		23		3		—		5,376		Consumer	1,640		0		0		1		1,641
Total	$	1,455,675	$	5,957	$	1,365	$	3,410	$	1,466,407	Total	$	1,848,424	$	9,849	$	1,343	$	2,075	$	1,861,691
December 31, 2019
December 31, 2020											December 31, 2020
Commercial real estate	$	597,892	$	3,630	$	1,286	$	1,838	$	604,646	Commercial real estate	$	714,196	$	4,863	$	1,773	$	0	$	720,832
Commercial and industrial	407,692		377		1,275		884		410,228		Commercial and industrial	681,106		893		3,505		0		685,504
Residential real estate	206,002		3,286		1,429		1,122		211,839		Residential real estate	305,800		5,420		1,110		3,146		315,476
Consumer	892		4		—		—		896		Consumer	1,723		0		0		2		1,725
Total	$	1,212,478	$	7,297	$	3,990	$	3,844	$	1,227,609	Total	$	1,702,825	$	11,176	$	6,388	$	3,148	$	1,723,537

Impaired Loans:

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


(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Nonaccrual loans	$	15,224	$	18,529	Nonaccrual loans	$	15,364	$	18,816
Performing troubled debt restructurings:					Performing troubled debt restructurings:

Commercial and industrial	541		547		Commercial and industrial	335		546
Residential real estate	599		359		Residential real estate	430		432
Total performing troubled debt restructurings	1,140		906		Total performing troubled debt restructurings	765		978
Total impaired loans, excluding purchase credit impaired loans	$	16,364	$	19,435	Total impaired loans, excluding purchase credit impaired loans	$	16,129	$	19,794

Troubled Debt Restructurings:

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

The CARES Act was signed into law on March 27, 2020, which provides a variety of provisions, including, among other things, a small business lending program to originate paycheck protection loans, temporary relief for the community bank leverage ratio, and temporary relief for financial institutions related to troubled debt restructurings. On December 27, 2020, the Consolidated Appropriations Act, 2021 was signed into law and extends the relief related to troubled debt restructurings to the earlier of January 1, 2022 or 60 days after the national emergency termination date. As a result of the COVID-19 pandemic, the Company is currently working with borrowers to provide short-term payment modifications. Any short-term modifications made on a good-faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief are not considered TDRs based on ~~Interagency~~interagency guidance. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of March 31, 2021, we had $22.2 million of loans that remained on a COVID-related deferral of which $10.7 million of loans had payments deferred greater than six months. The $10.7 million of loans were primarily commercial loans and represented 0.57% of our total loan portfolio. In addition, $2.2 million of those loans deferred greater than six months were moved to nonaccrual. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program was implemented. The Company’s modification programs are designed to provide temporary relief for current borrowers affected by the COVID-19 pandemic. The Company has presumed that borrowers that are current on payments are not

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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~~2021 and December 31, ~~2019,~~2020, the Company had a recorded investment in troubled debt restructurings of ~~$3.7~~$7.6 million and ~~$3.9~~$4.8 million, respectively. The Company allocated a specific reserve of ~~$221~~$431 thousand for those loans at March 31, ~~2020~~2021 and a specific reserve of ~~$384~~$317 thousand for those loans at December 31, ~~2019.~~2020. The Company ~~has~~had not committed to lend additional amounts to borrowers whose loans have been modified. As of March 31, ~~2020,~~2021, there were ~~$2.6~~$6.8 million of nonperforming TDRs and ~~$1.1 million~~$765 thousand of performing TDRs included in impaired loans. As of December 31, ~~2019,~~2020, there were ~~$906 thousand~~$3.8 million of nonperforming TDRs and ~~$3.0 million~~$978 thousand of performing TDRs included in impaired loans.

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

The following table presents the recorded investment of loans modified as TDRs during the three months ended March 31, ~~2019~~2021 by type of concession granted. There were no0 loans modified as TDRs during the three months ended 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
(Dollars in thousands)														(Dollars in thousands)	Principal deferral		Interest rate		Forbearance agreement		Total number of loans	Total recorded investment		Net charge-offs		Provision for loan losses
Three months ended March 31, 2021														Three months ended March 31, 2021
Commercial real estate														Commercial real estate	$	0	$	0	$	444	1	$	444	$	0	$	0
Commercial and industrial														Commercial and industrial	0		0		2,445		2	2,445		0		0

Total														Total	$	0	$	0	$	2,889	3	$	2,889	$	0	$	0

	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
For the three months ended March 31, 2019
Commercial and industrial	$	—	$	—	$	335	1	$	335	$	—	$	158
Total	$	—	$	—	$	335	1	$	335	$	—	$	158

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 March 31, ~~2020~~2021 and ~~2019~~2020 for which there was a subsequent payment default, including the recorded investment as of the period end. A payment on a TDR is considered to be in default once it is greater than 30 days past due.

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
Commercial and industrial 1
$ —
$ 12
Total 1
$ —
$ 12


							For the three months ended March 31, 2021
(Dollars in thousands)						(Dollars in thousands)	Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default
Commercial real estate						Commercial real estate	2	$	1,622	$	0

	For the three months ended March 31, 2019
Total						Total	2	$	1,622	$	0

							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		(Dollars in thousands)	Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default
Residential real estate	1	$	115	$	5

Commercial and industrial						Commercial and industrial	1	$	0	$	12

Total	1	$	115	$	5	Total	1	$	0	$	12

Credit Quality Indicators:

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

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

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

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

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

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		(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
March 31, 2020
March 31, 2021											March 31, 2021
Commercial real estate	$	715,292	$	9,828	$	2,932	$	858	$	728,910	Commercial real estate	$	718,724	$	20,692	$	9,935	$	514	$	749,865
Commercial and industrial	441,179		11,995		15,197		856		469,227		Commercial and industrial	733,620		39,765		20,137		574		794,096
Total	$	1,156,471	$	21,823	$	18,129	$	1,714	$	1,198,137	Total	$	1,452,344	$	60,457	$	30,072	$	1,088	$	1,543,961
December 31, 2019
December 31, 2020											December 31, 2020
Commercial real estate	$	591,419	$	8,325	$	4,042	$	860	$	604,646	Commercial real estate	$	685,690	$	21,570	$	13,045	$	527	$	720,832
Commercial and industrial	383,756		8,967		16,527		978		410,228		Commercial and industrial	637,285		25,727		21,876		616		685,504
Total	$	975,175	$	17,292	$	20,569	$	1,838	$	1,014,874	Total	$	1,322,975	$	47,297	$	34,921	$	1,143	$	1,406,336

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

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


(Dollars in thousands)	Performing		Nonperforming		Total
March 31, 2021
Residential real estate	$	312,102	$	3,987	$	316,089
Consumer	1,628		13		1,641
Total	$	313,730	$	4,000	$	317,730
December 31, 2020
Residential real estate	$	311,485	$	3,991	$	315,476
Consumer	1,710		15		1,725
Total	$	313,195	$	4,006	$	317,201

(Dollars in thousands) Performing Nonperforming Total
March 31, 2020

Residential real estate $ 260,770
$ 2,124
$ 262,894
Consumer 5,361
15
5,376
Total $ 266,131
$ 2,139
$ 268,270
December 31, 2019

Residential real estate $ 209,270
$ 2,569
$ 211,839
Consumer 880
16
896
Total $ 210,150
$ 2,585
$ 212,735

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Purchased Credit Impaired Loans:

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


(Dollars in thousand)	Unpaid Principal Balance		Recorded Investment		(Dollars in thousand)	Unpaid Principal Balance		Recorded Investment
March 31, 2020
March 31, 2021					March 31, 2021
Commercial real estate					Commercial real estate	$	4,897	$	1,750
Commercial and industrial					Commercial and industrial	488		142
Residential real estate					Residential real estate	3,945		2,961

Total PCI loans					Total PCI loans	$	9,330	$	4,853
December 31, 2020					December 31, 2020
Commercial real estate	$	6,558	$	2,990	Commercial real estate	$	5,109	$	1,773
Commercial and industrial	1,348		779		Commercial and industrial	643		274
Residential real estate	4,192		2,969		Residential real estate	4,017		2,949
Total PCI loans	$	12,098	$	6,738	Total PCI loans	$	9,769	$	4,996
December 31, 2019
Commercial real estate	$	6,597	$	2,884
Commercial and industrial	556		135
Residential real estate	4,215		2,954
Total PCI loans	$	11,368	$	5,973

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 March 31,							For the three months ended March 31,
(Dollars in thousands)	2020			2019			(Dollars in thousands)		2021		2020
Accretable yield at beginning of period	$	9,141		$	10,947		Accretable yield at beginning of period		$	7,097	$	9,141
Additions due to acquisitions	35			—			Additions due to acquisitions		0		35
Accretion of income	(443		)	(584		)	Accretion of income		(402)		(443)

Accretable yield at end of period	$	8,733		$	10,363		Accretable yield at end of period		$	6,695	$	8,733

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

NOTE 5—4—ALLOWANCE FOR LOAN LOSSES

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

The Company established an allowance for loan losses associated with PCI loans (accounted for under ASC 310-30) based on credit deterioration subsequent to the acquisition date. As of March 31, ~~2020,~~2021, the Company had ~~six~~5 PCI loan pools and 1610 non-pooled PCI loans. The Company re-estimates cash flows expected to be collected for PCI loans on a semi-annual basis, with any decline in expected cash flows recorded as provision for loan losses on a discounted basis during the period. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield to be recognized on a prospective basis over the loan's remaining life.

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

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

risk of the loan. For business loans not individually evaluated, losses inherent to the pool are estimated by applying standard reserve factors to outstanding principal balances.

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

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

Loans individually evaluated for impairment are presented below.


(Dollars in thousands)	Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Contractual principal balance		Related allowance
March 31, 2021
Individually evaluated impaired loans:
Commercial real estate	$	4,542	$	0	$	4,542	$	4,737	$	0
Commercial and industrial	6,308		1,301		7,609		8,336		421
Residential real estate	1,013		953		1,966		2,443		79
Total	$	11,863	$	2,254	$	14,117	$	15,516	$	500
December 31, 2020
Individually evaluated impaired loans:
Commercial real estate	$	7,320	$	0	$	7,320	$	7,720	$	0
Commercial and industrial	7,964		630		8,594		9,208		307
Residential real estate	2,153		192		2,345		2,447		25
Total	$	17,437	$	822	$	18,259	$	19,375	$	332


(Dollars in thousands)											(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized

(Dollars in thousands)	Recorded investment with no related allowance		Recorded investment with related allowance		Total recorded investment		Contractual principal balance		Related allowance
March 31, 2020

For the three months ended March 31, 2021											For the three months ended March 31, 2021
Individually evaluated impaired loans:											Individually evaluated impaired loans:
Commercial real estate	$	3,721	$	—	$	3,721	$	4,014	$	—	Commercial real estate	$	6,596	$	0	$	302
Commercial and industrial	9,279		624		9,903		10,437		318		Commercial and industrial	8,282		9		0
Residential real estate	1,192		188		1,380		1,529		22		Residential real estate	2,251		6		0

Total	$	14,192	$	812	$	15,004	$	15,980	$	340	Total	$	17,129	$	15	$	302
December 31, 2019
For the three months ended March 31, 2020											For the three months ended March 31, 2020
Individually evaluated impaired loans:											Individually evaluated impaired loans:
Commercial real estate	$	4,832	$	—	$	4,832	$	5,156	$	—	Commercial real estate	$	4,015	$	0	$	0
Commercial and industrial	10,739		913		11,652		12,521		363		Commercial and industrial	10,998		11		18
Residential real estate	1,197		189		1,386		1,570		22		Residential real estate	1,383		9		0

Total	$	16,768	$	1,102	$	17,870	$	19,247	$	385	Total	$	16,396	$	20	$	18

(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

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


(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer		Total








For the three months ended March 31, 2021
Allowance for loan losses:
Beginning balance	$	9,975	$	8,786	$	3,527	$	9	$	22,297
Provision expense (benefit) for loan losses	536		(260)		(13)		2		265
Gross chargeoffs	0		(11)		0		(6)		(17)
Recoveries	0		10		20		3		33
Net (chargeoffs) recoveries	0		(1)		20		(3)		16
Ending allowance for loan losses	$	10,511	$	8,525	$	3,534	$	8	$	22,578
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	0		(187)		0		(31)		(218)
Recoveries	0		8		34		2		44
Net (chargeoffs) recoveries	0		(179)		34		(29)		(174)
Ending allowance for loan losses	$	6,123	$	5,423	$	1,441	$	2	$	12,989

Allocation of the allowance for ~~loans was as follows:~~loan losses is presented below:


(Dollars in thousands)	Commercial Real Estate		Commercial and Industrial		Residential Real Estate		Consumer		Total
March 31, 2021
Allowance for loan losses:
Individually evaluated for impairment	$	0	$	421	$	79	$	0	$	500
Collectively evaluated for impairment	10,088		8,090		3,226		8		21,412
Acquired with deteriorated credit quality	423		14		229		0		666
Ending allowance for loan losses	$	10,511	$	8,525	$	3,534	$	8	$	22,578
Balance of loans:
Individually evaluated for impairment	$	4,542	$	7,609	$	1,966	$	0	$	14,117
Collectively evaluated for impairment	743,573		786,345		311,162		1,641		1,842,721
Acquired with deteriorated credit quality	1,750		142		2,961		0		4,853
Total loans	$	749,865	$	794,096	$	316,089	$	1,641	$	1,861,691
December 31, 2020
Allowance for loan losses:
Individually evaluated for impairment	$	0	$	307	$	25	$	0	$	332
Collectively evaluated for impairment	9,550		8,465		3,273		9		21,297
Acquired with deteriorated credit quality	425		14		229		0		668
Ending allowance for loan losses	$	9,975	$	8,786	$	3,527	$	9	$	22,297
Balance of loans:
Individually evaluated for impairment	$	7,320	$	8,594	$	2,345	$	0	$	18,259
Collectively evaluated for impairment	711,739		676,636		310,182		1,725		1,700,282
Acquired with deteriorated credit quality	1,773		274		2,949		0		4,996
Total loans	$	720,832	$	685,504	$	315,476	$	1,725	$	1,723,537

(Dollars in thousands)
Commercial
Real Estate

Commercial
and Industrial

Residential
Real Estate
Consumer Total
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 $ 5,227
$ 5,174
$ 1,164
$ 1
$ 11,566
Provision (benefit) for loan losses (46 ) 477
(15 ) 6
422
Gross chargeoffs —
(95 ) —
(6 ) (101 )
Recoveries —
50
21
2
73
Net (chargeoffs) recoveries —
(45 ) 21
(4 ) (28 )
Ending allowance for loan losses $ 5,181
$ 5,606
$ 1,170
$ 3
$ 11,960

Table of Contents

(Dollars in thousands)
Commercial
Real Estate

Commercial
and Industrial

Residential
Real Estate
Consumer Total
March 31, 2020

Allowance for loan losses:

Individually evaluated for impairment $ —
$ 318
$ 22
$ —
$ 340
Collectively evaluated for impairment 5,417
5,076
1,396
2
11,891
Acquired with deteriorated credit quality 706
29
23
—
758
Ending allowance for loan losses $ 6,123
$ 5,423
$ 1,441
$ 2
$ 12,989
Balance of loans:
Individually evaluated for impairment $ 3,721
$ 9,903
$ 1,380
$ —
$ 15,004
Collectively evaluated for impairment 722,199
458,545
258,545
5,376
1,444,665
Acquired with deteriorated credit quality 2,990
779
2,969
—
6,738
Total loans $ 728,910
$ 469,227
$ 262,894
$ 5,376
$ 1,466,407
December 31, 2019
Allowance for loan losses:
Individually evaluated for impairment $ —
$ 363
$ 22
$ —
$ 385
Collectively evaluated for impairment 5,062
5,124
1,339
2
11,527
Acquired with deteriorated credit quality 711
28
23
—
762
Ending allowance for loan losses $ 5,773
$ 5,515
$ 1,384
$ 2
$ 12,674
Balance of loans:
Individually evaluated for impairment $ 4,832
$ 11,652
$ 1,386
$ —
$ 17,870
Collectively evaluated for impairment 596,930
398,441
207,499
896
1,203,766
Acquired with deteriorated credit quality $ 2,884
135
2,954
—
5,973
Total loans $ 604,646
$ 410,228
$ 211,839
$ 896
$ 1,227,609

NOTE 6—5—PREMISES AND EQUIPMENT

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


(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Land	$	3,514	$	2,254	Land	$	3,514	$	3,514
Buildings	10,625		9,825		Buildings	10,656		10,656
Leasehold improvements	3,341		2,714		Leasehold improvements	3,017		3,017
Furniture, fixtures and equipment	7,095		6,539		Furniture, fixtures and equipment	7,866		7,786
Total premises and equipment	$	24,575	$	21,332	Total premises and equipment	$	25,053	$	24,973
Less: Accumulated depreciation	7,902		7,494		Less: Accumulated depreciation	9,530		9,139
Net premises and equipment	$	16,673	$	13,838	Net premises and equipment	$	15,523	$	15,834

Depreciation expense was ~~$413~~$402 thousand and ~~$327~~$413 thousand for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

Most of the Company's branch facilities are rented under non-cancelable operating lease agreements. Total rent expense was ~~$461~~$451 thousand and ~~$297~~$461 thousand for the three months ended March 31, 2021 and 2020, ~~and 2019, respectively,~~respectively.

NOTE 7—6—GOODWILL AND INTANGIBLE ASSETS

~~Goodwill~~:Goodwill: The Company has acquired ~~three~~3 banks, Lotus Bank in March 2015, Bank of Michigan in March 2016, and Ann Arbor State Bank in January 2020, which resulted in the recognition of goodwill of $4.6 million, $4.8 million, and ~~$26.8~~$26.2 million, respectively. Total goodwill was ~~$36.2~~$35.6 million at March 31, ~~2020 and $9.4 million~~2021 at December 31, ~~2019.~~2020.

Goodwill is not amortized but is evaluated annually for impairment and on an interim basis if events or changes in circumstances indicate that goodwill might be impaired. ~~Impairment exists when~~The goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount, and an impairment charge would be recognized for any amount by which the carrying amount exceeds the reporting unit's fair value.

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

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

The ~~Company's most recent~~Company completed its annual goodwill impairment review as of October 1, ~~2019 did not indicate that an impairment existed. However,~~2020, noting strong financial indicators for the Bank, solid credit quality ratios, as well as the strong capital position of the Bank. In addition, third quarter 2020 revenue reflected significant and continuing growth in ~~accordance~~our residential mortgage banking business, as well as net Small Business Administration ("SBA") fees related to Paycheck Protection Program ("PPP") loans funded during second and third quarters of 2020. Management concurred with ~~ASC 350,~~ the ~~Company reviewed the requirements of interim impairment testing based on the current economic conditions resulting~~conclusion derived from the ~~COVID-19 pandemic. As a result,~~quantitative goodwill analysis as of August 31, 2020 and determined that there were no material changes between the ~~Company concluded to perform a qualitative analysis~~valuation date and October 1, 2020. Management also determined that no triggering events have occurred that indicated impairment from the most recent valuation date through March 31, 2021, the stock was trading above book value as of March 31, ~~2020 which indicated no~~2021, and it is more likely than not that there was 0 goodwill impairment as of March 31, ~~2020.~~2021.

~~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.

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


(Dollars in thousands)	March 31, 2020			December 31, 2019			(Dollars in thousands)	March 31, 2021		December 31, 2020
Gross carrying amount	$	5,708		$	2,045		Gross carrying amount	$	5,708	$	5,708
Accumulated amortization	(1,936		)	(1,744		)	Accumulated amortization	(2,680)		(2,512)
Net Intangible	$	3,772		$	301		Net Intangible	$	3,028	$	3,196

Amortization expense for the CDIs was ~~$192~~$168 thousand and ~~$52~~$192 thousand for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

~~Mortgage Servicing Rights ("MSRs")~~:

NOTE 7—MORTGAGE SERVICING RIGHTS, NET

The Company has recorded ~~MSRs~~a mortgage servicing rights asset for residential real estate mortgage loans that are sold ~~with~~to the secondary market for which servicing has been retained. ~~MSRs~~Residential real estate mortgage loans serviced for others are not included in the consolidated balance sheets. Mortgage servicing rights are carried at the lower of the initial capitalized amount, net of accumulated amortization or estimated fair value. ~~MSRs~~Mortgage servicing rights are amortized in proportion to and over the period of estimated net servicing income. The ~~Company serviced residential mortgage loans for others with~~ unpaid principal ~~balances~~balance of ~~approximately $21.9 million and $9.0 million, as of~~these loans at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020 was as follows:


(Dollars in thousands)	March 31, 2021		December 31, 2020
Residential real estate mortgage loan portfolios serviced for:
FNMA	$	445,701	$	320,467

Custodial escrow balances maintained with these serviced loans were $4.2 million and $1.9 million at March 31, 2021 and December 31, 2020, respectively.

~~Changes in our~~Activity for mortgage servicing rights ~~were~~was as follows for the three months ended March 31, ~~2020. The Company had no mortgage~~2021 and 2020:


	For the three months ended March 31,
(Dollars in thousands)	2021		2020
Mortgage servicing rights:
Balance, beginning of period	$	3,361	$	76
Originated servicing	5,210		142
Amortization	(4,225)		(5)
Balance, end of period	4,346		213
Valuation allowance:
Balance, beginning of period	0		0
Additions	0		17

Balance, end of period	0		17
Mortgage servicing rights, net	$	4,346	$	196

Servicing fee income, net of amortization of servicing rights and changes in the valuation allowance was $(228) thousand and $(28) thousand for the three months ended March 31, ~~2019:~~2021 and 2020, respectively.

The Company recorded a valuation allowance of $17 thousand related to mortgage servicing rights during the first quarter of 2020. There was 0 valuation allowance related to mortgage servicing rights during the three months ended March 31, 2021.

The fair value of mortgage servicing rights was $5.9 million and $4.0 million at March 31, 2021 and December 31, respectively. The fair value of mortgage servicing rights is highly sensitive to changes in underlying assumptions. The fair value at March 31, 2021 was determined using a discount rate of 7.75% and prepayment speeds ranging from 7.15% to 10.28%, depending on the stratification of the specific rights. The fair value at December 31, 2020 was determined using a discount rate of 7.75% and prepayment speeds ranging from 8.44% to 10.41%, depending on the stratification of the specific right.

(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

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

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


	March 31, 2021				December 31, 2020
(Dollars in thousands)	Amount		Weighted Average Rate(1)		Amount		Weighted Average Rate(1)
Short-term borrowings:

Securities sold under agreements to repurchase	$	3,993	0.25	%	$	3,204	0.30	%


Total short-term borrowings	3,993		0.25		3,204		0.30
Long-term debt:
Secured borrowing due in 2022	1,298		1.00		1,304		1.00
FHLB advances due in 2022 to 2029(2)	181,149		1.09		181,176		1.09

Subordinated notes due in 2025 and 2029(3)	44,600		5.29		44,592		5.29
Total long-term debt	227,047		1.91		227,072		1.91
Total short-term and long-term borrowings	$	231,040	1.88	%	$	230,276	1.89	%

March 31, 2020 December 31, 2019
(Dollars in thousands) Amount
Weighted
Average
Rate⁽¹⁾
Amount
Weighted
Average
Rate⁽¹⁾
Short-term borrowings:

FHLB Advances $ 25,000
0.29 % $ 60,000
1.61 %
Securities sold under agreements to repurchase 176
0.30
851
0.30
Federal funds purchased —
—
5,000
1.90
Total short-term borrowings 25,176
0.29
65,851
1.62
Long-term debt:
Secured borrowing due in 2022 1,357
1.00
1,374
1.00
FHLB advances due in 2022 to 2029⁽²⁾
185,254
1.10
145,000
1.06
Subordinated notes due in 2025 and 2029⁽³⁾
44,447
5.29
44,440
5.29
Total long-term debt 231,058
1.91
190,814
2.04
Total short-term and long-term borrowings $ 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 March 31, ~~2020,~~2021, the long-term FHLB advances consisted of 0.42% - 2.93% fixed rate notes and can be called through 2024 without penalty by the issuer. The March 31, 2021 balance includes FHLB advances of $181.0 million and purchase accounting premiums of $148 thousand. The December 31, 2020 balance includes FHLB advances of ~~$185.0~~$181.0 million and purchase accounting premiums of ~~$254~~$176 thousand.

⁽³⁾The March 31, 2021 balance includes subordinated notes of $45.0 million and debt issuance costs of $400 thousand. The December 31, 2020 balance includes subordinated notes of $45.0 million and debt issuance costs of ~~$553~~$408 thousand. ~~The December 31, 2019 balance includes subordinated notes of $45.0 million and debt issuance costs of $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~~$181.0 million of ~~short-term and~~ long-term FHLB advances as of March 31, ~~2020~~2021 were secured by a blanket lien on ~~$514.1~~$529.4 million of real estate-related loans. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional ~~$52.4~~$179.8 million from the FHLB at March 31, ~~2020.~~2021. In addition, the Bank can borrow up to $122.5 million through the unsecured lines of credit it has established with other correspondent banks, as well as ~~$5.0~~$5.1 million

through a secured line with the Federal Reserve Bank. The Bank had no0 outstanding federal funds purchased as of March 31, ~~2020~~2021 and ~~$5.0 million outstanding federal funds purchased as of~~ December 31, ~~2019.~~2020.

At March 31, ~~2020,~~2021, the Company had ~~$176 thousand~~$4.0 million of securities sold under agreements to repurchase with customers, which mature overnight. These borrowings were secured by residential collateralized mortgage obligation securities with a fair value of ~~$1.5~~$4.6 million at March 31, ~~2020.~~2021.

The Company had a secured borrowing of ~~$1.4~~$1.3 million as of March 31, ~~2020~~2021 relating to certain loan participations sold by the Company that did not qualify for sales treatment. The secured borrowing bears a fixed rate of 1.00% and matures on September 15, 2022.

~~As of~~At March 31, ~~2020,~~2021, the Company had $45.0 million outstanding subordinated notes and ~~$553~~$400 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 issued on December 21, 2015 bear a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. ~~The~~As of December 15, 2020, the notes ~~will~~ bear 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~~on 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 will bear a floating interest rate of three-month ~~SOFR~~secured overnight financing rate (SOFR) plus 311 basis points payable quarterly after December 18, 2024 through maturity. The notes mature ~~no later than~~on December 18, 2029, and the Company has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or upon the occurrence of a Tier 2 capital event or tax event.

Table of Contents

The Company has a short term line of credit of $30.0 million with Comerica Bank with a fixed interest rate of 4.05% per annum and a commitment fee of 0.20% on the average daily balance of the unused portion of the line of credit. As of March 31, 2021, the Company had 0 balance on the Comerica Bank line of credit. The Company participates in the PPP and also has the ability to borrow from the Federal Reserve's special purpose Paycheck Protection Program Liquidity Facility ("PPPLF") for additional funding. At March 31, 2021, the Company had 0 borrowings from the PPPLF.

NOTE 9—INCOME TAXES

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

A reconciliation of expected income tax expense using the federal statutory rate of 21% as of March 31, ~~2020~~2021 and ~~2019~~2020 and actual income tax expense is as follows:


	For the three months ended March 31,							For the three months ended March 31,
(Dollars in thousands)	2020			2019			(Dollars in thousands)		2021		2020
Income tax expense based on federal corporate tax rate	$	936		$	885		Income tax expense based on federal corporate tax rate		$	2,317	$	936
Changes resulting from:							Changes resulting from:
Tax-exempt income	(150		)	(121		)	Tax-exempt income		(147)		(150)

Net operating loss carryback due to CARES Act	(290		)	—			Net operating loss carryback due to CARES Act		0		(290)
Disqualified dispositions from stock options	(175		)	—			Disqualified dispositions from stock options		0		(175)
Other, net	28			(17		)	Other, net		(98)		28
Income tax expense	$	349		$	747		Income tax expense		$	2,072	$	349

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

NOTE 10—STOCK BASED COMPENSATION

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

The Company ~~has~~ reserved 250,000 shares of common stock for issuance under the 2018 Plan. During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the Company issued ~~38,170~~40,420 and ~~35,633~~38,170 restricted stock awards, respectively, under the 2018 Plan. There were ~~165,597~~130,927 shares available for issuance as of March 31, ~~2020.~~2021.

Stock Options

As of March 31, ~~2020,~~2021, all of the Company's outstanding options were granted under the Stock Option Plan. The term of these options is ten years, and they vest one-third each year, over a three 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..~~grant. There were no0 stock options granted during the three months ended March 31, ~~2020~~2021 or March 31, ~~2019.~~2020.

Table of Contents

The summary of our stock option activity for the three months ended March 31, ~~2020~~2021 is as follows:


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

Exercised	(6,500	)	9.46			Exercised	(23,800)	10.19
Forfeited						Forfeited	(1,500)	10.00
Options outstanding, end of period	348,718		16.76		4.8	Options outstanding, end of period	319,918	17.36		4.1
Options exercisable	338,716		$	16.52	4.7	Options exercisable	319,918	$	17.36	4.1

The aggregate intrinsic value was ~~$904 thousand~~$2.7 million for both options outstanding and exercisable as of March 31, ~~2020.~~2021. As of March 31, ~~2020,~~2021, there was ~~$39 thousand of total~~0 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 0.88 year.~~

Share-based compensation expense charged against income was ~~$11~~$6 thousand and ~~$20~~$11 thousand for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively.

Restricted Stock Awards

A summary of changes in the Company's nonvested shares for the three months ended March 31, ~~2020~~2021 is as follows:


Nonvested Shares	Shares		Weighted Average Grant-Date Fair Value		Nonvested Shares	Shares	Weighted Average Grant-Date Fair Value
Nonvested at January 1, 2020	80,370		$	24.28
Nonvested at January 1, 2021					Nonvested at January 1, 2021	93,270	$	24.75
Granted	38,170		24.90		Granted	40,420	21.22
Vested	(19,850	)	23.10		Vested	(17,970)	24.80
Forfeited	(1,400	)	24.46		Forfeited	(3,700)	27.44
Nonvested at March 31, 2020	97,290		$	24.76
Nonvested at March 31, 2021					Nonvested at March 31, 2021	112,020	$	23.38

As of March 31, ~~2020,~~2021, there was $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 ~~2.24~~2.13 years. The total fair value of shares vested during the three months ended March 31, ~~2020~~2021 was ~~$459~~$446 thousand.

Total expense for restricted stock awards totaled ~~$177~~$128 thousand and ~~$134~~$177 thousand for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. For the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, there was ~~$64~~$99 thousand and ~~$43~~$64 thousand, respectively, of restricted stock redeemed to cover the payroll taxes due at the time of vesting.

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

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

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

Off-balance sheet risk to credit loss exists up to the face amount of these instruments, although material losses are not anticipated. The same credit policies used for loans are used to make such commitments, including obtaining collateral at exercise of the commitment. We maintain an allowance to cover probable losses inherent in our financial instruments with off-balance sheet risk. At March 31, ~~2020,~~2021, the allowance for off-balance sheet risk was ~~$380~~$355 thousand, compared to ~~$318~~$490 thousand at December 31, ~~2019,~~2020, and was included in "Other liabilities" on our consolidated balance sheets.

Table of Contents

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


	March 31, 2020				December 31, 2019					March 31, 2021				December 31, 2020
(Dollars in thousands)	Fixed		Variable		Fixed		Variable		(Dollars in thousands)	Fixed		Variable		Fixed		Variable
Commitments to make loans	$	26,088	$	12,778	$	16,276	$	20,128	Commitments to make loans	$	8,226	$	10,705	$	18,269	$	17,058
Unused lines of credit	37,051		348,460		28,723		288,086		Unused lines of credit	222,795		218,490		28,898		385,307
Unused standby letters of credit and commercial letters of credit	4,327		2,028		4,895		—		Unused standby letters of credit and commercial letters of credit	1,791		3,669		2,340		1,992

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments of ~~$26.1~~$8.2 million as of March 31, ~~2020,~~2021, had interest rates ranging from ~~2.8%~~3.8% to ~~9.0%~~5.50% and maturities ranging from ~~8 months~~1 year to 3020 years.

NOTE 12—REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believed that as of March 31, ~~2020,~~2021, the Company and Bank met all capital adequacy requirements to which they were subject.

The Basel III rules require the Company and the Bank to maintain a capital conservation buffer of common equity Tier 1 capital of ~~greater than~~ 2.5% above the minimum risk-weighted assets ~~ratios, which is the fully phased-in amount of the capital conservation buffer. The capital conservation buffer was 2.5% at March 31, 2020 and December 31, 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.

ratios.

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

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

Table 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%.Contents

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		(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
March 31, 2020
March 31, 2021																	March 31, 2021
Common equity tier 1 to risk-weighted assets:																	Common equity tier 1 to risk-weighted assets:
Consolidated	$	130,442	8.10	%	$	72,503	4.50	%	$	112,782	7.00	%					Consolidated	$	152,016	9.63	%	$	71,061	4.50	%	$	110,539	7.00	%
Bank	171,033		10.62	%	72,481		4.50	%	112,749		7.00	%	$	104,695	6.50	%	Bank	195,309		12.37	%	71,044		4.50	%	110,513		7.00	%	$	102,619	6.50	%
Tier 1 capital to risk-weighted assets:																	Tier 1 capital to risk-weighted assets:
Consolidated	$	130,442	8.10	%	$	96,670	6.00	%	$	136,950	8.50	%					Consolidated	$	175,388	11.11	%	$	94,747	6.00	%	$	134,225	8.50	%
Bank	171,033		10.62	%	96,642		6.00	%	136,909		8.50	%	$	128,856	8.00	%	Bank	195,309		12.37	%	94,725		6.00	%	134,194		8.50	%	$	126,300	8.00	%
Total capital to risk-weighted assets:																	Total capital to risk-weighted assets:
Consolidated	$	188,258	11.68	%	$	128,894	8.00	%	$	169,173	10.50	%					Consolidated	$	239,767	15.18	%	$	126,330	8.00	%	$	165,808	10.50	%
Bank	184,402		11.45	%	128,856		8.00	%	169,123		10.50	%	$	161,070	10.00	%	Bank	215,093		13.62	%	126,300		8.00	%	165,769		10.50	%	$	157,876	10.00	%
Tier 1 capital to average assets (leverage ratio):																	Tier 1 capital to average assets (leverage ratio):
Consolidated	$	130,442	7.08	%	$	73,669	4.00	%	$	73,669	4.00	%					Consolidated	$	175,388	7.15	%	$	98,149	4.00	%	$	98,149	4.00	%
Bank	171,033		9.33	%	73,356		4.00	%	73,356		4.00	%	$	91,695	5.00	%	Bank	195,309		7.99	%	97,825		4.00	%	97,825		4.00	%	$	122,281	5.00	%
December 31, 2019
December 31, 2020																	December 31, 2020
Common equity tier 1 to risk-weighted assets:																	Common equity tier 1 to risk-weighted assets:
Consolidated	$	157,659	11.72	%	$	60,533	4.50	%	$	94,163	7.00	%					Consolidated	$	144,938	9.30	%	$	70,141	4.50	%	$	109,108	7.00	%
Bank	165,199		12.27	%	60,568		4.50	%	94,217		7.00	%	$	87,487	6.50	%	Bank	185,655		11.94	%	69,950		4.50	%	108,812		7.00	%	$	101,040	6.50	%
Tier 1 capital to risk-weighted assets:																	Tier 1 capital to risk-weighted assets:
Consolidated	$	157,659	11.72	%	$	80,711	6.00	%	$	114,341	8.50	%					Consolidated	$	168,310	10.80	%	$	93,521	6.00	%	$	132,488	8.50	%
Bank	165,199		12.27	%	80,757		6.00	%	114,406		8.50	%	$	107,676	8.00	%	Bank	185,655		11.94	%	93,267		6.00	%	132,129		8.50	%	$	124,356	8.00	%
Total capital to risk-weighted assets:																	Total capital to risk-weighted assets:
Consolidated	$	215,091	15.99	%	$	107,615	8.00	%	$	141,244	10.50	%					Consolidated	$	232,386	14.91	%	$	124,695	8.00	%	$	163,662	10.50	%
Bank	178,191		13.24	%	107,676		8.00	%	141,325		10.50	%	$	134,595	10.00	%	Bank	205,127		13.20	%	124,356		8.00	%	163,218		10.50	%	$	155,446	10.00	%
Tier 1 capital to average assets (leverage ratio):																	Tier 1 capital to average assets (leverage ratio):
Consolidated	$	157,659	10.41	%	$	60,580	4.00	%	$	60,580	4.00	%					Consolidated	$	168,310	6.93	%	$	97,200	4.00	%	$	97,200	4.00	%
Bank	165,199		10.96	%	60,276		4.00	%	60,276		4.00	%	$	75,345	5.00	%	Bank	185,655		7.67	%	96,809		4.00	%	96,809		4.00	%	$	121,011	5.00	%

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

Dividend Restrictions - The Company’s primary source of cash is dividends received from the Bank. Banking regulations limit the amount of dividends that may be paid without prior approval of regulatory agencies. As of March 31, ~~2020,~~2021, the Bank had the capacity to pay the Company a dividend of up to ~~$34.1~~$49.3 million without the need to obtain prior regulatory approval.

NOTE 13—FAIR VALUE

Fair value is the exchange price that would be received for an asset or paid to transfer a liability (exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. There are three levels of inputs that may be used to measure fair values:

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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). For securities where pricing on similar securities is not available, a third party is engaged to calculate the fair value using the Municipal Market Data curve (Level 3).

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

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

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

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

Other Real Estate Owned: Other real estate owned assets are recorded at the lower of cost or fair value upon the transfer of a loan to other real estate owned and, subsequently, continue to be measured and carried at the lower of cost or fair value.

The fair value of other real estate owned is based on recent real estate appraisals which are generally updated annually. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales, cost, and the income approach. Adjustments are routinely made in the appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Other real estate owned properties are evaluated on a quarterly basis for additional impairment and adjusted accordingly.

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and

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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)
March 31, 2021
Securities available for sale:
U.S. government sponsored entities and agencies	$	25,624	$	0	$	25,624	$	0
State and political subdivision	143,532		0		142,266		1,266
Mortgage-backed securities: residential	23,360		0		23,360		0
Mortgage-backed securities: commercial	24,385		0		24,385		0
Collateralized mortgage obligations: residential	12,072		0		12,072		0
Collateralized mortgage obligations: commercial	55,827		0		55,827		0
U.S. Treasury	28,784		0		28,784		0
SBA	16,686		0		16,686		0
Asset backed securities	10,057		0		10,057		0
Corporate bonds	5,939		0		5,939		0
Total securities available for sale	346,266		0		345,000		1,266
Loans held for sale	19,550		0		19,550		0
Loans measured at fair value:
Residential real estate	9,109		0		0		9,109
Derivative assets:
Customer-initiated derivatives	6,182		0		6,182		0
Forward contracts related to mortgage loans to be delivered for sale	450		0		450		0
Interest rate lock commitments	680		0		680		0
Total assets at fair value	$	382,237	$	0	$	371,862	$	10,375
Derivative liabilities:
Customer-initiated derivatives	6,182		0		6,182		0
Forward contracts related to mortgage loans to be delivered for sale	1		0		1		0
Interest rate lock commitments	20		0		20		0
Total liabilities at fair value	$	6,203	$	0	$	6,203	$	0

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(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)
March 31, 2020

Securities available for sale:

U.S. government sponsored entities and agencies $ 9,775
$ —
$ 9,775
$ —
State and political subdivision 127,680
—
125,870
1,810
Mortgage-backed securities: residential 10,294
—
10,294
—
Mortgage-backed securities: commercial 9,133
—
9,133
—
Collateralized mortgage obligations: residential 8,056
—
8,056
—
Collateralized mortgage obligations: commercial 30,061
—
30,061
—
U.S. Treasury 1,010
—
1,010
—
SBA 20,562
—
20,562
—
Asset backed securities 9,613
—
9,613
—
Corporate bonds 4,487
—
4,487
—
Total securities available for sale 230,671
—
228,861
1,810
Loans held for sale 18,305
—
18,305
—
Loans measured at fair value:
Residential real estate 3,712
—
—
3,712
Derivative assets:
Customer-initiated derivatives 13,551
—
13,551
—
Forward contracts related to mortgage loans to be delivered for sale 5
—
5
—
Interest rate lock commitments 1,783
—
1,783
—
Total assets at fair value $ 268,027
$ —
$ 262,505
$ 5,522
Derivative liabilities:
Customer-initiated derivatives 13,551
—
13,551
—
Forward contracts related to mortgage loans to be delivered for sale 1,566
—
1,566
—
Total liabilities at fair value $ 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)		(Dollars in thousands)	Total		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
December 31, 2019
December 31, 2020									December 31, 2020
Securities available for sale:									Securities available for sale:
U.S. government sponsored entities and agencies									U.S. government sponsored entities and agencies	$	26,358	$	0	$	26,358	$	0
State and political subdivision	$	93,747	$	—	$	93,747	$	—	State and political subdivision	132,723		0		131,259		1,464
Mortgage-backed securities: residential	10,565		—		10,565		—		Mortgage-backed securities: residential	26,081		0		26,081		0
Mortgage-backed securities: commercial	8,779		—		8,779		—		Mortgage-backed securities: commercial	11,918		0		11,918		0
Collateralized mortgage obligations: residential	8,529		—		8,529		—		Collateralized mortgage obligations: residential	13,446		0		13,446		0
Collateralized mortgage obligations: commercial	23,181		—		23,181		—		Collateralized mortgage obligations: commercial	58,512		0		58,512		0
U.S. Treasury	1,999		—		1,999		—

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

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

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

(Dollars in thousands) Loans held for investment
For the three months ended March 31, 2020
Beginning balance $ 4,063
Transfers from loans held for sale 40
Gains (losses):
Recorded in "Mortgage banking activities" (7 )
Repayments (384 )
Ending balance $ 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



(Dollars in thousands)	Loans held for investment
For the three months ended March 31, 2021
Beginning balance	$	8,037
Transfers from loans held for sale	2,233
Gains (losses):
Recorded in "Mortgage banking activities"	(374)
Repayments	(787)
Ending balance	$	9,109
For the three months ended March 31, 2020
Beginning balance	$	4,063
Transfers from loans held for sale	40
Gains (losses):
Recorded in "Mortgage banking activities"	(7)
Repayments	(384)
Ending balance	$	3,712

There were $102 thousand in loans held for investment measured at fair value that were on nonaccrual status or 90 days past due with a fair value of $101 thousand as of March 31, 2021. There were $105 thousand in loans held for investment measured at fair value that were on nonaccrual status or 90 days past due with a fair value of $109 thousand as of December 31, 2020.

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

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


(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Aggregate fair value	$	18,305	$	13,889	Aggregate fair value	$	19,550	$	43,482
Contractual balance	17,587		13,510		Contractual balance	19,202		41,808
Unrealized gain	718		379		Unrealized gain	348		1,674

The total amount of gains as a result of changes in fair value of loans held for sale included in "Mortgage banking activities" for the three months ended March 31, ~~2020~~2021 and ~~2019~~2020 were as follows:


	For the three months ended March 31,
(Dollars in thousands)		2021		2020
Change in fair value		$	(1,326)	$	339

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For the three months ended March 31,
(Dollars in thousands) 2020 2019
Change in fair value $ 339
$ 83

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


(Dollars in thousands)					(Dollars in thousands)	Total		Significant Unobservable Inputs (Level 3)
March 31, 2021					March 31, 2021
Impaired loans:					Impaired loans:

(Dollars in thousands)	Total		Significant Unobservable Inputs (Level 3)
March 31, 2020
Impaired loans:
Commercial and industrial	$	1,139	$	1,139	Commercial and industrial	$	757	$	757
Mortgage servicing rights	196		196		Mortgage servicing rights	5,898		5,898
Other real estate owned	2,093		2,093

Total	$	3,428	$	3,428	Total	$	6,655	$	6,655
December 31, 2019
December 31, 2020					December 31, 2020
Impaired loans:					Impaired loans:
Commercial real estate	$	265	$	265

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

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

The Company recorded specific reserves of ~~$317~~$210 thousand and ~~$161~~$95 thousand to reduce the value of ~~these~~the impaired loans noted above at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, based on the estimated fair value of the underlying collateral. The Company also recorded 0 chargeoffs ~~of $108 thousand~~ during the three months ended March 31, ~~2020~~2021 related to the impaired loans at fair value. There were chargeoffs of ~~$298~~$315 thousand related to impaired loans at fair value during the year ended December 31, ~~2019.~~2020.

The Company recorded a valuation allowance of $17 thousand related to mortgage servicing rights during the three months ended March 31, 2020. There was no valuation allowance recorded during the year ended December 31, 2019. There were no0 write downs recorded in other real estate owned during the three months ended March 31, ~~2020~~2021 or the year ended December 31, ~~2019.~~2020.

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


(Dollars in thousands)	Fair value at March 31, 2021		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range/Amount
Impaired loans	$	757	Discounted appraisals; estimated net realizable value of collateral	Collateral discounts	10.00-100.00%
Mortgage servicing rights	5,898		Discounted cash flow	Prepayment speed	7.78	%
				Discount rate	7.75	%


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

(Dollars in thousands) Fair value at March 31, 2020
Valuation
Technique(s)

Significant
Unobservable Input(s)
Discount % Range
Impaired loans $ 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 2,093
Appraisal of property Discounted appraisal value 18.00-41.00%

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(Dollars in thousands) Fair value at
December 31, 2019 Valuation
Technique(s) Significant
Unobservable Input(s) Discount % Range
Impaired loans $ 526
Discounted appraisals; estimated net realizable value of collateral Collateral discounts 10.00-50.00%
Mortgage servicing rights 87
Discounted cash flow Prepayment speed 13.42 %

Discount rate 8.50 %
Other real estate owned 921
Appraisal of property Discounted appraisal value 18.00-36.00%

The carrying amounts and estimated fair values of financial instruments, excluding those previously presented unless otherwise noted, at March 31, ~~2020~~2021 and December 31, ~~2019~~2020 are noted in the table below. ~~The estimated fair value of loans as 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		(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
March 31, 2020
March 31, 2021											March 31, 2021
Financial assets:											Financial assets:
Cash and cash equivalents	$	104,867	$	22,775	$	82,092	$	—	$	104,867	Cash and cash equivalents	$	224,683	$	32,992	$	191,691	$	0	$	224,683
Federal Home Loan Bank stock	12,398		N/A		N/A		N/A		N/A
Other investments											Other investments	14,398		N/A		N/A		N/A		N/A
Net loans	1,453,418		—		—		1,498,580		1,498,580		Net loans	1,839,113		0		0		1,873,035		1,873,035
Accrued interest receivable	6,019		—		2,027		3,992		6,019		Accrued interest receivable	8,481		0		2,285		6,196		8,481
Financial liabilities:											Financial liabilities:
Deposits	1,470,608		—		1,490,547		—		1,490,547		Deposits	2,093,965		0		2,022,399		0		2,022,399
Borrowings	211,787		—		216,964		—		216,964		Borrowings	186,440		0		192,546		0		192,546
Subordinated notes	44,447		—		40,950		—		40,950		Subordinated notes	44,600		0		46,425		0		46,425
Accrued interest payable	2,061		—		2,061		—		2,061		Accrued interest payable	1,166		0		1,166		0		1,166
December 31, 2019
December 31, 2020											December 31, 2020
Financial assets:											Financial assets:
Cash and cash equivalents	$	103,930	$	19,990	$	83,940	$	—	$	103,930	Cash and cash equivalents	$	264,071	$	25,245	$	238,826	$	0	$	264,071
Federal Home Loan Bank stock	11,475		N/A		N/A		N/A		N/A
Other investments											Other investments	14,398		N/A		N/A		N/A		N/A
Net loans	1,214,935		—		—		1,203,639		1,203,639		Net loans	1,701,240		0		0		1,740,093		1,740,093
Accrued interest receivable	4,403		—		1,236		3,167		4,403		Accrued interest receivable	7,511		0		1,460		6,051		7,511
Financial liabilities:											Financial liabilities:
Deposits	1,135,428		—		1,138,202		—		1,138,202		Deposits	1,963,312		0		2,022,399		0		2,022,399
Borrowings	212,225		—		212,125		—		212,125		Borrowings	185,684		0		192,546		0		192,546
Subordinated notes	44,440		—		47,100		—		47,100		Subordinated notes	44,592		0		45,902		0		45,902
Accrued interest payable	1,574		—		1,574		—		1,574		Accrued interest payable	1,081		0		1,081		0		1,081

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

(a)Cash and Cash Equivalents

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

(b)~~FHLB Stock~~Other Investments

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

(c)Loans

Fair value of loans, excluding loans held for sale, are estimated as follows: Fair values for all loans are estimated using present value of future estimated cash flows, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are valued at the lower of cost or fair value as described previously.

(d)Deposits

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

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

(e) Borrowings

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

(f)Subordinated Notes

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

(g) Accrued Interest Receivable/Payable

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

NOTE 14—DERIVATIVES

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

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

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

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


	March 31, 2021				December 31, 2020
(Dollars in thousands)	Notional Amount		Fair Value		Notional Amount		Fair Value
Included in other assets:
Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives	$	143,636	$	6,182	$	136,023	$	12,515
Forward contracts related to mortgage loans to be delivered for sale	50,654		450		10,191		46
Interest rate lock commitments	46,095		680		91,531		2,194
Total derivatives included in other assets	$	240,385	$	7,312	$	237,745	$	14,755
Included in other liabilities:
Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives	$	143,636	$	6,182	$	136,023	$	12,515
Forward contracts related to mortgage loans to be delivered for sale	1,000		1		92,899		423
Interest rate lock commitments	3,456		20		0		0
Total derivatives included in other liabilities	$	148,092	$	6,203	$	228,922	$	12,938

March 31, 2020 December 31, 2019
(Dollars in thousands) Notional Amount Fair Value Notional Amount Fair Value
Included in other assets:
Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives $ 122,703
$ 13,551
$ 103,941
$ 4,684
Forward contracts related to mortgage loans to be delivered for sale 2,000
5
6,018
34
Interest rate lock commitments 83,596
1,783
25,519
256
Total derivatives included in other assets $ 208,299
$ 15,339
$ 135,478
$ 4,974
Included in other liabilities:
Customer-initiated and mortgage banking derivatives:
Customer-initiated derivatives $ 122,703
$ 13,551
$ 103,941
$ 4,684
Forward contracts related to mortgage loans to be delivered for sale 74,686
1,566
20,633
33
Interest rate lock commitments —
—
928
—
Total derivatives included in other liabilities $ 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:


		Three months ended March 31,
(Dollars in thousands)	Location of Gain (Loss)		2021		2020
Forward contracts related to mortgage loans to be delivered for sale	Mortgage banking activities		$	2,096	$	(1,958)
Interest rate lock commitments	Mortgage banking activities		(1,534)		1,527
Total loss recognized in income			$	562	$	(431)

Three months ended March 31,
(Dollars in thousands) Location of Gain (Loss) 2020 2019
Forward contracts related to mortgage loans to be delivered for sale Mortgage banking activities $ (1,958 ) $ (174 )
Interest rate lock commitments Mortgage banking activities 1,527
122
Total loss recognized in income $ (431 ) $ (52 )

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Balance Sheet Offsetting:

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


							Gross amounts not offset in the statements of financial position
(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
March 31, 2021
Offsetting derivative assets:
Customer initiated derivatives	$	6,182	$	0	$	6,182	$	0	$	0	$	6,182
Offsetting derivative liabilities:
Customer initiated derivatives	$	6,182	$	0	$	6,182	$	0	$	10,383	$	(4,201)
December 31, 2020
Offsetting derivative assets:
Customer initiated derivatives	$	12,515	$	0	$	12,515	$	0	$	0	$	12,515
Offsetting derivative liabilities:
Customer initiated derivatives	$	12,515	$	0	$	12,515	$	0	$	15,383	$	(2,868)

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
March 31, 2020
Offsetting derivative assets:
Customer initiated derivatives $ 13,551
—
$ 13,551
—
—
$ 13,551
Offsetting derivative liabilities:
Customer initiated derivatives $ 13,551
—
$ 13,551
—
$ 13,793
$ (242 )
December 31, 2019
Offsetting derivative assets:
Customer initiated derivatives $ 4,684
—
$ 4,684
—
—
$ 4,684
Offsetting derivative liabilities:
Customer initiated derivatives $ 4,684
—
$ 4,684
—
$ 4,375
$ 309

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NOTE 15—PARENT COMPANY FINANCIAL STATEMENTS

Balance Sheets—Parent Company


(Dollars in thousands)	March 31, 2021		December 31, 2020
Assets
Cash and cash equivalents	$	25,024	$	25,779
Investment in banking subsidiary	237,108		232,671
Investment in captive insurance subsidiary	0		1,625
Income tax benefit	569		355
Other assets	85		63
Total assets	$	262,786	$	260,493
Liabilities
Subordinated notes	$	44,600	$	44,592
Accrued expenses and other liabilities	999		574
Total liabilities	45,599		45,166
Shareholders' equity	217,187		215,327
Total liabilities and shareholders' equity	$	262,786	$	260,493

(Dollars in thousands) March 31, 2020 December 31, 2019
Assets

Cash and cash equivalents $ 2,391
$ 35,210
Investment in banking subsidiary 216,357
178,240
Investment in captive insurance subsidiary 1,950
1,668
Income tax benefit 638
520
Other assets 118
99
Total assets $ 221,454
$ 215,737
Liabilities
Subordinated notes $ 44,447
$ 44,440
Accrued expenses and other liabilities 1,239
594
Total liabilities 45,686
45,034
Shareholders' equity 175,768
170,703
Total liabilities and shareholders' equity $ 221,454
$ 215,737

Statements of Income and Comprehensive Income—Parent Company


	For the three months ended March 31,
(Dollars in thousands)		2021		2020
Income
Dividend income from bank subsidiary		$	0	$	36,500
Dividend income from captive subsidiary		1,629		0
Total income		1,629		36,500
Expenses
Interest on borrowed funds		0		11
Interest on subordinated notes		541		636
Other expenses		224		437
Total expenses		765		1,084
Income before income taxes and equity in undistributed net earnings of subsidiaries		864		35,416
Income tax benefit		218		127
Equity in (overdistributed) undistributed earnings of subsidiaries		7,877		(31,433)
Net income		$	8,959	$	4,110
Other comprehensive income (loss)		(5,087)		1,777
Total comprehensive income, net of tax		$	3,872	$	5,887

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

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Statements of Cash Flows—Parent Company


	For the three months ended March 31,
(Dollars in thousands)	2021		2020
Cash flows from operating activities
Net income	$	8,959	$	4,110
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in over (under) distributed earnings of subsidiaries	(7,877)		31,433
Stock based compensation expense	13		13
Increase in other assets, net	(236)		(137)
Increase in other liabilities, net	357		574
Net cash provided by operating activities	1,216		35,993
Cash flows from investing activities
Cash used in acquisitions	0		(67,944)


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



Share buyback - redeemed stock	(1,364)		(620)
Common stock dividends paid	(381)		(309)
Preferred stock dividends paid	(469)		0
Proceeds from exercised stock options	243		61
Net cash provided by financing activities	(1,971)		(868)
Net decrease in cash and cash equivalents	(755)		(32,819)
Beginning cash and cash equivalents	25,779		35,210
Ending cash and cash equivalents	$	25,024	$	2,391

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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:
Equity in over (under) distributed earnings of subsidiaries 31,433
(3,865 )
Stock based compensation expense 13
11
(Increase) decrease in other assets, net (137 ) 203
Increase (decrease) in other liabilities, net 574
(230 )
Net cash provided by (used in) operating activities 35,993
(414 )
Cash flows from investing activities
Cash used in acquisitions (67,944 ) —
Net cash used in investing activities (67,944 ) —
Cash flows from financing activities
Share buyback - redeemed stock (620 ) (1,104 )
Common stock dividends paid (309 ) —
Proceeds from exercised stock options 61
125
Net cash used in financing activities (868 ) (979 )
Net decrease in cash and cash equivalents (32,819 ) (1,393 )
Beginning cash and cash equivalents 35,210
9,690
Ending cash and cash equivalents $ 2,391
$ 8,297

NOTE 16—EARNINGS PER COMMON SHARE

~~Beginning in the second quarter of 2019, the~~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 common share. Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participating rights in undistributed earnings.

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

The calculation of basic and diluted earnings per share using the two-class method for the ~~period noted below~~three months ended March 31, 2021 and 2020 was as follows:


	For the three months ended March 31,
(In thousands, except per share data)	2021		2020
Net income	$	8,959	$	4,110
Preferred stock dividends	469		0
Net income available to common shareholders	8,490		4,110
Net income allocated to participating securities	111		47
Net income allocated to common shareholders (1)	$	8,379	$	4,063
Weighted average common shares - issued	7,629		7,726
Average unvested restricted share awards	(101)		(89)
Weighted average common shares outstanding - basic	7,528		7,637
Effect of dilutive securities:
Weighted average common stock equivalents	84		101
Weighted average common shares outstanding - diluted	7,612		7,738
EPS available to common shareholders
Basic earnings per common share	$	1.11	$	0.53
Diluted earnings per common share	$	1.10	$	0.53

(In thousands, except per share data) For the three months ended March 31, 2020
Net income $ 4,110
Net income allocated to participating securities 47
Net income allocated to common shareholders ⁽¹⁾
$ 4,063
Weighted average common shares - issued 7,726
Average unvested restricted share awards (89 )
Weighted average common shares outstanding - basic 7,637
Effect of dilutive securities:
Weighted average common stock equivalents 101
Weighted average common shares outstanding - diluted 7,738
EPS available to common shareholders
Basic earnings per common share $ 0.53
Diluted earnings per common share $ 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 months ended March 31, 2019, the basic and diluted earnings per share were calculated using the treasury stock method, as disclosed in the table below.~~

(In thousands, except per share data) For the three months ended March 31, 2019
Basic:
Net income attributable to common shareholders $ 3,467
Weighted average common shares outstanding 7,751,750
Basic earnings per share $ 0.45
Diluted:
Net income attributable to common shareholders $ 3,467
Weighted average common shares outstanding 7,751,750
Add: Dilutive effects of assumed exercises of stock options 117,431
Weighted average common and dilutive potential common shares outstanding 7,869,181
Diluted earnings per common share $ 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 March 31, ~~2020~~2021 and ~~2019,~~2020, 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

Table 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.Contents

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

In addition to the historical information contained herein, this Form 10-Q includes "forward-looking statements" within

the meaning of such term in the Private Securities Litigation Reform Act of 1995. These statements are subject to many risks

and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including its ~~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; the ability of the Company to implement its strategy and expand its lending

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

financial markets; changes in business plans as circumstances warrant; risks related to mergers and acquisitions; changes in

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

Critical Accounting Policies

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

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

Overview

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

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

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

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

Our results of operations for the first quarter of 2020 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 Company had total consolidated assets of $1.94 billion, total consolidated deposits of $1.47 billion and total consolidated shareholders' equity of $175.8 million.

Recent Developments

First Quarter Common Stock Dividend. On March ~~18, 2020, the Company~~15, 2021, Level One's Board of Directors declared a first quarter ~~2020~~2021 cash dividend of ~~$0.05~~$0.06 per ~~share, payable~~common share. The dividend was paid on April 15, ~~2020. The first quarter~~2021, to shareholders of record at the close of business on March 31, 2021.

First Quarter Preferred Stock Dividend. On April 20, 2021, Level One’s Board of Directors declared a quarterly cash dividend of ~~$0.05~~$46.88 per share ~~represents an increase~~on its 7.50% Non-Cumulative Perpetual Preferred Stock, Series B. Holders of ~~$0.01~~depositary shares will receive $0.4688 per ~~share, compared~~depositary share. The dividend is payable on May 15, 2021, to ~~$0.04 per share declared in~~shareholders of record at the ~~prior quarter.~~close of business on April 30, 2021.

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

Effects on Our Market ~~Areas.~~ Areas. Our commercial and consumer banking products and services are offered primarily in Michigan, where ~~individual~~individuals, companies and ~~governmental responses~~other organizations have limited their economic activities in response to the ~~COVID-19 pandemic have led~~pandemic. It is uncertain when, whether and to ~~a broad curtailment of~~what extent additional restrictions on economic activities and social gatherings will be imposed in future periods or existing restrictions will be eased or lifted. These limitations on economic activity ~~beginning in March 2020. In~~have had an adverse impact on the Michigan ~~the Governor issued a series of orders, including an order that, subject to limited exceptions, all individuals stay at home~~economy 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.~~our clients. 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~~businesses through its drive-thrus, ~~by appointment only~~appointment-only for in-person services, and online and mobile banking tools. As of March 1, 2021, we opened branches for walk in services. We will continue to be diligent in our efforts to follow all CDC guidelines to ensure the health and safety of our clients and team members.

~~Across~~The state’s unemployment rate was 5.1% in March 2021 compared to 4.1% in March 2020, before the ~~United States, as a result~~full impact 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~~COVID-19, and compared to the ~~U.S.~~highest level of unemployment during the pandemic of 22.7% in April 2020, according to the Michigan Department of ~~Labor, the insured unemployment rate in Michigan was 21.8% during the week ended April 25, 2020.~~Technology, Management & Budget.

Policy and Regulatory ~~Developments~~. 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~~CARES 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”),~~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.PPP. The Bank ~~is participating~~participates as a lender in the PPP. ~~On or about April 16, 2020,~~After the ~~SBA notified lenders that the~~initial $349 billion ~~earmarked~~in funds for the PPP was ~~exhausted. On April 24, 2020,~~exhausted, an additional $310 billion in funding for PPP loans was ~~authorized, with such funds available for~~authorized. In addition, on December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900 billion COVID-19 relief package that includes an additional $284 billion in PPP ~~loans beginning on April 27, 2020.~~ funding. On March 11, 2021, President Biden signed into law the American Rescue Plan Act of 2021, an additional $1.9 trillion federal stimulus bill that includes cash payments to individuals, supplemental unemployment insurance and the modification and expansion of the PPP. In March 2021, President Biden also signed the PPP Extension Act of 2021, which extended the PPP application deadline to May 31, 2021.

•In addition, the CARES Act, as extended by the Coronavirus Response and Relief Supplemental Appropriations Act (a part of the Consolidated Appropriations Act, 2021), 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~~In addition, 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,~~August 3, 2020, the ~~Federal Reserve announced~~FFIEC issued a joint statement on Additional Loan Accommodations Related to COVID-19, which, among other things, encouraged financial institutions to consider prudent additional ~~measures aimed at supporting small~~loan accommodation options when borrowers are unable to meet their obligations due to continuing financial challenges. Accommodation options should be based on prudent risk management and 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.consumer protection principles.

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~~restaurant 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 the COVID-19 Pandemic. Level One has taken comprehensive steps to help our customers, ~~employees~~team members and communities during the current COVID-19 pandemic health crisis. For our customers, we have provided loan payment deferrals and offered fee waivers, among other actions. ~~Through May 5,~~

Level One is also a participating lender in both the first and second rounds of the PPP. In 2020, ~~we have helped our consumer and small business customers by deferring~~the Bank originated 2,208 PPP loans in the aggregate principal amount of $417.0 million. From January 18, 2021 through April 27, 2021, Level One has funded 1,487 new PPP loan ~~payments and waiving fees on $376.1~~applications for $230.5 million, of ~~loans. In addition, our teams have worked diligently and tirelessly to meet the high demand~~which 1,150 were for loans $150,000 or below. As of ~~PPP applications coming in. Through May 5, 2020, we had facilitated 1,884 or $411.4~~March 31, 2021, $405.8 million of PPP loans ~~that~~ were ~~approved by~~still outstanding. The Bank is actively working with the borrowers of PPP loans to obtain loan forgiveness from the SBA.

~~For our employees, we have enabled~~We are continuing to enable 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~~team members whose roles require them to come into the ~~office. To support our communities,~~office, which include the development, implementation and communication of protocols necessary for those who return. As of March 1, 2021, we ~~have made charitable donations, including one to a local health system,~~opened branches for walk in ~~order to help support the frontline workers impacted by COVID-19.~~services. We will continue to evaluate this fluid situation and take additional actions as necessary.

Level One also recognizes that ~~the industries feeling~~some of the most ~~immediate impact of COVID-19~~impacted industries are the ~~hospitality~~restaurant and ~~food service~~hospitality industries. As of March 31, ~~2020,~~2021, Level One had less than ~~0.5%~~5.0% and 4%1.0% of loan concentrations in the ~~hospitality~~restaurant and ~~food service~~hospitality industries, respectively.

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Selected Financial Data - Unaudited


	As of and for the three months ended										As of and for the three months ended
(Dollars in thousands, except per share data)	March 31, 2020			December 31, 2019			March 31, 2019			(Dollars in thousands, except per share data)	March 31, 2021			December 31, 2020			March 31, 2020
Earnings Summary										Earnings Summary
Interest income	$	19,817		$	17,366		$	17,442		Interest income	$	21,551		$	22,181		$	19,817
Interest expense	4,997			4,458			4,724			Interest expense	2,394			3,075			4,997
Net interest income	14,820			12,908			12,718			Net interest income	19,157			19,106			14,820
Provision expense for loan losses	489			548			422			Provision expense for loan losses	265			1,538			489
Noninterest income	4,690			4,590			2,286			Noninterest income	7,278			8,110			4,690
Noninterest expense	14,562			11,295			10,368			Noninterest expense	15,139			15,461			14,562
Income before income taxes	4,459			5,655			4,214			Income before income taxes	11,031			10,217			4,459
Income tax provision	349			975			747			Income tax provision	2,072			1,844			349
Net income	4,110			4,680			3,467			Net income	8,959			8,373			4,110
Net income allocated to participating securities⁽¹⁾	47			50			—
Net income attributable to common shareholders⁽¹⁾	$	4,063		$	4,630		$	3,467
Preferred stock dividends										Preferred stock dividends	469			479			—
Net income available to common shareholders										Net income available to common shareholders	8,490			7,894			4,110
Net income allocated to participating securities										Net income allocated to participating securities	111			65			47
Net income attributable to common shareholders										Net income attributable to common shareholders	$	8,379		$	7,829		$	4,063
Per Share Data										Per Share Data
Basic earnings per common share	$	0.53		$	0.60		$	0.45		Basic earnings per common share	$	1.11		$	1.02		$	0.53
Diluted earnings per common share	0.53			0.60			0.44			Diluted earnings per common share	1.10			1.02			0.53
Diluted earnings per common share, excluding acquisition and due diligence fees (1)										Diluted earnings per common share, excluding acquisition and due diligence fees (1)	1.10			1.02			0.68
Book value per common share	22.74			22.13			20.15			Book value per common share	25.40			25.14			22.74
Tangible book value per share ⁽²⁾	17.54			20.86			18.88
Shares outstanding (in thousands)	7,731			7,715			7,749
Tangible book value per common share (1)										Tangible book value per common share (1)	19.78			19.63			17.54
Preferred shares outstanding (in thousands)										Preferred shares outstanding (in thousands)	10			10			—
Common shares outstanding (in thousands)										Common shares outstanding (in thousands)	7,630			7,634			7,731
Average basic common shares (in thousands)	7,637			7,632			7,752			Average basic common shares (in thousands)	7,528			7,642			7,637
Average diluted common shares (in thousands)	7,738			7,747			7,869			Average diluted common shares (in thousands)	7,612			7,695			7,738
Selected Period End Balances										Selected Period End Balances
Total assets	$	1,936,823		$	1,584,899		$	1,456,552		Total assets	$	2,572,726		$	2,442,982		$	1,936,823
Securities available-for-sale	230,671			180,905			226,874			Securities available-for-sale	346,266			302,732			230,671
Total loans	1,466,407			1,227,609			1,131,097			Total loans	1,861,691			1,723,537			1,466,407
Total deposits	1,470,608			1,135,428			1,151,463			Total deposits	2,093,965			1,963,312			1,470,608
Total liabilities	1,761,055			1,414,196			1,300,433			Total liabilities	2,355,539			2,227,655			1,761,055
Total shareholders' equity	175,768			170,703			156,119			Total shareholders' equity	217,187			215,327			175,768
Tangible shareholders' equity ⁽²⁾	135,578			160,940			146,337
Total common shareholders' equity										Total common shareholders' equity	193,815			191,955			175,768
Tangible common shareholders' equity (1)										Tangible common shareholders' equity (1)	150,887			149,844			135,578
Performance and Capital Ratios										Performance and Capital Ratios
Return on average assets	0.87		%	1.23		%	0.96		%	Return on average assets	1.44		%	1.35		%	0.87		%
Return on average equity	9.40			10.98			8.99			Return on average equity	16.31			15.61			9.40
Net interest margin (fully taxable equivalent)⁽³⁾	3.42			3.56			3.76
Net interest margin (fully taxable equivalent) (2)										Net interest margin (fully taxable equivalent) (2)	3.33			3.27			3.42
Efficiency ratio (noninterest expense/net interest income plus noninterest income)	74.64			64.55			69.10			Efficiency ratio (noninterest expense/net interest income plus noninterest income)	57.27			56.81			74.64
Dividend payout ratio	7.52			6.60			6.72			Dividend payout ratio	4.50			4.90			7.52
Total shareholders' equity to total assets	9.08			10.77			10.72			Total shareholders' equity to total assets	8.44			8.81			9.08
Tangible equity to tangible assets ⁽²⁾	7.15			10.22			10.11
Tangible common equity to tangible assets (1)										Tangible common equity to tangible assets (1)	5.96			6.24			7.15
Common equity tier 1 to risk-weighted assets	8.10			11.77			11.78			Common equity tier 1 to risk-weighted assets	9.63			9.30			8.10
Tier 1 capital to risk-weighted assets	8.10			11.77			11.78			Tier 1 capital to risk-weighted assets	11.11			10.80			8.10
Total capital to risk-weighted assets	11.68			16.05			13.95			Total capital to risk-weighted assets	15.18			14.91			11.68
Tier 1 capital to average assets (leverage ratio)	7.08			10.41			10.19			Tier 1 capital to average assets (leverage ratio)	7.15			6.93			7.08
Asset Quality Ratios:										Asset Quality Ratios:
Net charge-offs to average loans	0.05		%	0.06		%	0.01		%	Net charge-offs to average loans	—		%	0.11		%	0.05		%
Nonperforming assets as a percentage of total assets	0.89			1.23			1.17			Nonperforming assets as a percentage of total assets	0.60			0.77			0.89
Nonaccrual loans as a percent of total loans	1.04			1.51			1.47			Nonaccrual loans as a percent of total loans	0.83			1.09			1.04
Allowance for loan losses as a percentage of period-end loans	0.89			1.03			1.06
Allowance for loan losses as a percentage of total loans										Allowance for loan losses as a percentage of total loans	1.21			1.29			0.89
Allowance for loan losses as a percentage of nonaccrual loans	85.32			68.40			71.85			Allowance for loan losses as a percentage of nonaccrual loans	146.95			118.50			85.32
Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30	80.34			64.29			66.33			Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30	142.62			114.95			80.34

⁽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.~~below for a reconciliation to most comparable GAAP equivalent.

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

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

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; (iii) tangible assets as total assets, less core deposit intangibles, mortgage servicing rights and 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:


Tangible Common Shareholders' Equity, Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share
	As of
(Dollars in thousands, except per share data)	March 31, 2021			December 31, 2020			March 31, 2020
	(Unaudited)			(Unaudited)			(Unaudited)
Total shareholders' equity	$	217,187		$	215,327		$	175,768
Less:
Preferred stock	23,372			23,372			—
Total common shareholders' equity	193,815			191,955			175,768
Less:
Goodwill	35,554			35,554			36,216
Mortgage servicing rights, net	4,346			3,361			196
Other intangible assets, net	3,028			6,557			3,778
Tangible common shareholders' equity	$	150,887		$	149,844		$	135,578

Common shares outstanding (in thousands)	7,630			7,634			7,731
Tangible book value per common share	$	19.78		$	19.63		$	17.54

Total assets	$	2,572,726		$	2,442,982		$	1,936,823
Less:
Goodwill	35,554			35,554			36,216
Mortgage servicing rights, net	4,346			3,361			196
Other intangible assets, net	3,028			6,557			3,778
Tangible assets	$	2,529,798		$	2,400,871		$	1,896,633

Tangible common equity to tangible assets	5.96		%	6.24		%	7.15		%

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.


Adjusted Income and Diluted Earnings Per Share
	For the three months ended
(Dollars in thousands, except per share data)	March 31, 2021		December 31, 2020		March 31, 2020
	(Unaudited)				(Unaudited)
Net income, as reported	$	8,959	$	8,373	$	4,110
Acquisition and due diligence fees	—		—		1,471
Income tax benefit (1)	—		2		(295)
Net income, excluding acquisition and due diligence fees	$	8,959	$	8,375	$	5,286

Diluted earnings per share, as reported	$	1.10	$	1.02	$	0.53
Effect of acquisition and due diligence fees, net of income tax benefit	—		—		0.15
Diluted earnings per common share, excluding acquisition and due diligence fees	$	1.10	$	1.02	$	0.68
(1) Assumes income tax rate of 21% on deductible acquisition expenses.


Allowance for Loan Loss as a Percentage of Total Loans, Excluding PPP Loans
	As of
(Dollars in thousands, except per share data)	March 31, 2021			December 31, 2020			March 31, 2020
	(Unaudited)						(Unaudited)
Total loans	$	1,861,691		$	1,723,537		$	1,466,407
Less:
PPP loans	405,770			290,135			—
Total loans, excluding PPP loans	$	1,455,921		$	1,433,402		$	1,466,407

Allowance for loan loss	$	22,578		$	22,297		$	12,989
Allowance for loan loss as a percentage of total loans	1.21		%	1.29		%	0.89		%
Allowance for loan loss as a percentage of total loans excluding PPP loans	1.55		%	1.56		%	0.89		%

Results of Operations

Net Income

We had net income of $9.0 million, or $1.10 per diluted common share, for the three months ended March 31, 2021, compared to $4.1 million, or $0.53 per diluted common share, for the three months ended March 31, ~~2020, compared to $3.5 million, or $0.44 per diluted common share, for the three months ended March 31, 2019.~~2020. The increase of ~~$643 thousand~~$4.8 million in net income primarily reflected increases of ~~$2.4 million in noninterest income, $2.1~~$4.3 million in net interest income, primarily due to higher interest income on loans due, in part, to the recognition of fees on PPP loans as they are forgiven, and lower interest expense on deposits. The increase in net income also reflected an increase of $2.6 million in noninterest income, primarily as a ~~decrease~~result of ~~$398 thousand in income tax provision.~~higher mortgage banking income. These increases were partially offset by ~~$4.2 million~~increases of $577 thousand in noninterest expense, primarily due to higher ~~noninterest~~salary and employee benefits and data processing expense partially offset by lower acquisition and due diligence 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~~interest-bearing deposits and borrowings).

Net interest income ~~was $14.8 million and $12.7~~of $19.2 million for the three months ended March 31, ~~2020 and 2019, respectively.~~2021 was $4.4 million higher than the net interest income of $14.8 million for the three months ended March 31, 2020. The three months ended March 31, ~~2020~~2021 included a ~~$2.4~~$1.7 million increase in interest income as well as a ~~$273 thousand increase~~$2.6 million decrease in interest expense, compared to the same period in ~~2019.~~2020. The increase in interest income was primarily driven by increases of ~~$2.5~~$1.8 million in interest and fees on ~~loans.~~loans and $178 thousand in interest on investment securities. This was partially offset by a decrease of $239 thousand in interest on fed funds sold and other investments. The increase in interest and fees on loans for the ~~three months~~year ended March 31, ~~2020~~2021 compared to ~~2019,~~the same period in 2020 was mainly driven by an increase of ~~$254.8~~$397.1 million in the average balance of loans primarily as a result of the ~~acquisition~~origination of ~~Ann Arbor State Bank.~~PPP loans. In the three months ended March 31, 2021, the Bank earned $3.0 million of net SBA fees on PPP loans, with the remaining $12.0 million of SBA fees expected to be earned over the life of the loans, the majority of which are

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expected to mature two or five years from the date of funding, depending on the round of PPP funding, unless modified by the lender and borrower. We anticipate a large portion of the PPP loan balance will be forgiven before the maturity of the loans. In addition to the net SBA fees, the Bank also recognized $954 thousand of interest income on the PPP loans. The increase in interest income on investment securities was mainly due to an increase of $105.5 million in average balances due to excess liquidity from increased deposit levels. The decrease in interest income on fed funds sold and other investments was primarily due to lower average interest rates.

The decrease 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 decrease of ~~$289 thousand~~$2.4 million 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 fourth quarter of 2019. The~~ decrease in deposit interest expense ~~during the three months ended March 31, 2020 compared to 2019~~ was primarily due to lower interest rates paid as a result of revised internal deposit rates, mainly driven by the decreases in the target federal funds interest rate of 150 basis points during the first quarter ~~2020 and 75 basis points in the second half~~ of ~~2019.~~2020.

Our net interest margin (on a fully tax equivalent basis ("FTE")) for the three months ended March 31, ~~2020~~2021 was ~~3.42%~~3.33%, compared to ~~3.76%~~3.42% for the same period in ~~2019.~~2020. The decrease of 349 basis points in the net interest margin year over year was primarily a result of lower ~~average loan yield.~~yields across most interest-earning assets, mostly reflecting the impact of lower market interest rates. Average loan yield decreased 65 basis points to 4.35% for the first quarter of 2021 from 5.00% for the first quarter of 2020, ~~compared to 5.64% for the first quarter of 2019,~~ primarily due to the target federal funds ~~interest~~ rate dropping 150 basis points in March 2020 in response to the COVID-19 pandemic. The decrease in loan yields was accompanied by a corresponding decrease in the cost of funds, which declined 93 basis points to 0.63% in the first quarter of 2021, compared to 1.56% in the first quarter of 2020 primarily due to lower interest rates paid as a result of revised internal deposit rates, mainly driven by the ~~COVID-19 pandemic and decreasing 75 basis points in the second half of 2019. As a result of the reductions~~decreases in the target federal funds ~~interest rate, as well as the impact of the COVID-19 pandemic, we expect that our net interest income and net interest margin will decrease in future periods.~~rate.

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 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 March 31, 2021 and 2020, ~~and 2019,~~ the ~~average yield on total loans was 5.00% and 5.64%, respectively. The~~ yield on total loans was impacted by 87 basis points and 178 basis points, respectively, due to the accretable yield on purchased credit impaired loans. Our net interest margin for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, benefited by 106 basis points and 1410 basis points, respectively, as a result of the excess accretable yield. As of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, our remaining accretable yield was ~~$8.7~~$6.7 million and ~~$9.1~~$7.1 million, respectively, and our nonaccretable difference was ~~$4.0~~$2.7 million ~~and $3.9 million, respectively.~~as of both dates.

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

Analysis of Net Interest Income—Fully Taxable Equivalent

For the three months ended March 31,
2020 2019
(Dollars in thousands) Average Balance
Interest Revenue/Expense ⁽¹⁾

Average Yield/Rate⁽²⁾
Average Balance
Interest Revenue/Expense ⁽¹⁾

Average Yield/Rate ⁽²⁾
Interest-earning assets:
Gross loans⁽³⁾
$ 1,458,897
$ 18,128
5.00 % $ 1,125,213
$ 15,651
5.64 %
Investment securities⁽⁴⁾:

Taxable 117,835
684
2.33
141,282
936
2.69
Tax-exempt 93,858
611
3.18
80,760
545
3.17
Interest-earning cash balances 77,475
256
1.33
28,076
176
2.54
Federal Home Loan Bank stock 12,387
138
4.48
8,325
134
6.53
Total interest-earning assets $ 1,760,452
$ 19,817
4.56 % $ 1,383,656
$ 17,442
5.14 %
Non-earning assets:
Cash and due from banks 24,785
24,794

Premises and equipment 16,498
13,289

Goodwill 35,921
9,387

Other intangible assets, net 3,968
425

Bank-owned life insurance 17,710
11,893

Allowance for loan losses (12,726 ) (11,563 )
Other non-earning assets 35,079
11,841

Total assets $ 1,881,687
$ 1,443,722

Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits $ 106,236
$ 124
0.47 % 53,299
$ 48
0.37 %
Money market and savings deposits 403,712
1,100
1.10
306,496
1,094
1.45
Time deposits 547,838
2,608
1.91
544,130
2,979
2.22
Borrowings 185,586
530
1.15
55,814
353
2.57
Subordinated notes 44,465
635
5.74
14,896
250
6.81
Total interest-bearing liabilities $ 1,287,837
$ 4,997
1.56 % $ 974,635
$ 4,724
1.97 %
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits 393,519
$ 300,680

Other liabilities 25,493
14,136

Shareholders' equity 174,838
154,271

Total liabilities and shareholders' equity $ 1,881,687
$ 1,443,722

Net interest income $ 14,820
$ 12,718

Interest spread 3.00 % 3.17 %
Net interest margin⁽⁵⁾
3.39
3.73
Tax equivalent effect 0.03
0.03
Net interest margin on a fully tax equivalent basis 3.42 % 3.76 %


	For the three months ended March 31,
(Dollars in thousands)	2021			2020
Average Balance Sheets:
Gross loans(1)	$	1,856,030		$	1,458,897
Investment securities: (2)
Taxable	214,945			117,835
Tax-exempt	102,208			93,858
Interest-earning cash balances	168,906			77,475
Other investments	14,398			12,387
Total interest-earning assets	$	2,356,487		$	1,760,452
Non-earning assets:	139,100			121,235
Total assets	$	2,495,587		$	1,881,687

Interest-bearing demand deposits	$	132,816		$	106,236
Money market and savings deposits	604,491			403,712
Time deposits	584,085			547,838
Borrowings	185,688			185,586
Subordinated notes	44,598			44,465
Total interest-bearing liabilities	1,551,678			1,287,837
Noninterest-bearing demand deposits	692,617			393,519
Other liabilities	31,608			25,493
Shareholders' equity	219,684			174,838
Total liabilities and shareholders' equity	$	2,495,587		$	1,881,687

Yields: (3)
Earning Assets
Gross loans	4.35		%	5.00		%
Investment securities:
Taxable	1.60		%	2.33		%
Tax-exempt	3.08		%	3.18		%
Interest earning cash balances	0.10		%	1.33		%
Other investments	3.18		%	4.48		%
Total interest earning assets	3.74		%	4.56		%

Interest-bearing liabilities
Interest-bearing demand deposits	0.16		%	0.47		%
Money market and savings deposits	0.25		%	1.10		%
Time deposits	0.66		%	1.91		%
Borrowings	1.02		%	1.15		%
Subordinated notes	4.92		%	5.74		%
Total interest-bearing liabilities	0.63		%	1.56		%

Interest spread	3.11		%	3.00		%
Net interest margin(4)	3.30		%	3.39		%
Tax equivalent effect	0.03		%	0.03		%
Net interest margin on a fully tax equivalent basis	3.33		%	3.42		%

(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 $130 thousand and $87 thousand on tax-exempt securities for the three months ended March 31, 2020 and 2019, respectively, using the federal corporate tax rate of 21%.

~~(3)~~ Includes nonaccrual ~~loans~~loans.

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

~~(5)~~(3) Average rates and yields are presented on an annual basis and include a taxable equivalent adjustment to interest income of $152 thousand and $130 thousand on tax-exempt securities for the three months ended March 31, 2021 and 2020, respectively, using the federal corporate tax rate of 21%.

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

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Rate/Volume Analysis

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


	For the three months ended March 31, 2021 vs. 2020
	Increase (Decrease) Due to:
(Dollars in thousands)	Rate		Volume		Net Increase (Decrease)
Interest-earning assets
Gross loans	$	(2,708)	$	4,503	$	1,795
Investment securities:
Taxable	(269)		435		166
Tax-exempt	(53)		65		12
Interest-earning cash balances	(359)		145		(214)
Other investments	(25)		—		(25)
Total interest income	(3,414)		5,148		1,734
Interest-bearing liabilities
Interest-bearing demand deposits	(98)		26		(72)
Money market and savings deposits	(1,104)		383		(721)
Time deposits	(1,814)		162		(1,652)
Borrowings	(64)		—		(64)
Subordinated debt	(96)		2		(94)
Total interest expense	(3,176)		573		(2,603)
Change in net interest income	$	(238)	$	4,575	$	4,337

For the three months ended March 31, 2020 vs. 2019

Increase
(Decrease) Due to:

(Dollars in thousands) Rate Volume Net Increase (Decrease)
Interest-earning assets
Gross loans $ (1,782 ) $ 4,259
$ 2,477
Investment securities:
Taxable (108 ) (144 ) (252 )
Tax-exempt (36 ) 102
66
Interest-earning cash balances (113 ) 193
80
FHLB Stock 4
—
4
Total interest income (2,035 ) 4,410
2,375
Interest-bearing liabilities

Interest-bearing demand deposits 18
58
76
Money market and savings deposits (294 ) 300
6
Time deposits (391 ) 20
(371 )
Borrowings (277 ) 454
177
Subordinated debt (40 ) 425
385
Total interest expense (984 ) 1,257
273
Change in net interest income $ (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~~acquired loans, on a quarterly basis to evaluate the outstanding loans and to measure both the performance of the portfolio and the adequacy of the allowance for loan losses.

Loans acquired in connection with acquisitions that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30. These credit-impaired loans have been recorded at their estimated fair value on the respective acquisition date, based on subjective determinations regarding risk ratings, expected future cash flows and fair value of the underlying collateral, without a carryover of the related allowance for loan losses. At the acquisition date, the Company recognizes the expected shortfall of expected future cash flows, as compared to the contractual amount due, as a nonaccretable discount. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as the accretable discount, or accretable yield. We evaluate these loans semi-annually to assess expected cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income. As of March 31, ~~2020,~~2021, and December 31, ~~2019,~~2020, our remaining accretable yield was ~~$8.7~~$6.7 million and ~~$9.1~~$7.1 million, respectively, and our nonaccretable difference was ~~$4.0~~$2.7 million ~~and $3.9 million, respectively.~~as of both dates.

The provision for loan losses was a provision expense of $265 thousand for the three months ended March 31, 2021, compared to $489 thousand for the three months ended March 31, ~~2020 compared to a $422~~2020. The decrease of $224 thousand ~~provision expense for the same period in 2019. The increase~~ in the provision for loan losses was primarily due to a ~~$200 thousand increase~~decrease in general reserves ~~as a result~~ of ~~continued growth in our originated loan portfolio~~$250 thousand as well as ~~an adjustment~~a decrease of ~~the economic qualitative factors within the allowance for loan loss model as a result of the~~

~~deterioration of macroeconomic factors~~$191 thousand 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~~net chargeoffs. This was partially offset by a ~~$275~~$215 thousand ~~decrease~~increase in specific ~~reserves on impaired loans.~~reserves.

~~The Company will continue to evaluate the impacts~~

Table of COVID-19 and will take further action to appropriately increase the provision for loan losses should there be any indications of a decrease in the credit quality of our portfolio as a result of COVID-19. The Company will re-evaluate the appropriateness of the provision for loan losses in the second quarter of 2020 and in future quarters as needed.Contents

Noninterest Income

The following table presents noninterest income for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.


	For the three months ended March 31,						For the three months ended March 31,
(Dollars in thousands)	2020		2019			(Dollars in thousands)		2021		2020
Noninterest income						Noninterest income
Service charges on deposits	$	634	$	625		Service charges on deposits		$	777	$	634
Net gain (loss) on sales of securities	529		(7		)
Net gain on sales of securities						Net gain on sales of securities		20		529
Mortgage banking activities	2,588		1,120			Mortgage banking activities		5,811		2,588

Other charges and fees	939		548			Other charges and fees		670		939
Total noninterest income	$	4,690	$	2,286		Total noninterest income		$	7,278	$	4,690

Noninterest income increased ~~$2.4~~$2.6 million to ~~$4.7~~$7.3 million for the three months ended March 31, ~~2020~~2021, compared to ~~$2.3~~$4.7 million for the same period in ~~2019.~~2020. The increase in noninterest income year over year was primarily due to an increase of $3.2 million in mortgage banking activities ~~of $1.5 million,~~and an increase of $143 thousand in service charges on deposits. This was partially offset by decreases of $509 thousand in net gains on sales of investment securities ~~of $536~~and $269 thousand ~~and an increase~~ in ~~interest rate swap fees of $181 thousand (included in "other~~other charges and ~~fees" in the table above).~~fees. The increase in ~~the~~ mortgage banking activities ~~income~~compared to the first quarter of 2020 was ~~mainly attributable to higher origination fee income and secondary market fees~~primarily due to ~~record volumes of mortgage~~$65.5 million higher residential loan originations held for sale and $90.1 million higher residential loans ~~originated and~~ sold primarily as a result of higher volumes caused by the lower interest rate ~~environment~~environment. The decrease in net gains on sales of investment securities was due to fewer securities sold in the first quarter of 2021 than in the first quarter of 2020. The ~~increase~~decrease in ~~net gain on sales of securities~~other charges and fees was primarily 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~~a decrease in interest rate swap ~~fees was due to increased volumes of customer-initiated derivatives.~~fees.

Noninterest Expense

The following table presents noninterest expense for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.


	For the three months ended March 31,					For the three months ended March 31,
(Dollars in thousands)	2020		2019		(Dollars in thousands)		2021		2020
Noninterest expense					Noninterest expense
Salary and employee benefits	$	8,630	$	6,913	Salary and employee benefits		$	9,922	$	8,630
Occupancy and equipment expense	1,528		1,204		Occupancy and equipment expense		1,708		1,528
Professional service fees	392		362		Professional service fees		643		392
Acquisition and due diligence fees	1,471		—		Acquisition and due diligence fees		—		1,471
FDIC premium					FDIC premium		324		211
Marketing expense	222		176		Marketing expense		133		222
Loan processing expense					Loan processing expense		331		234
Data processing expense	847		595		Data processing expense		1,224		847
Printing and supplies expense	136		68
Core deposit premium amortization	192		52		Core deposit premium amortization		168		192
Other expense	1,144		998		Other expense		686		835
Total noninterest expense	$	14,562	$	10,368	Total noninterest expense		$	15,139	$	14,562

Noninterest expense increased ~~$4.2 million~~$577 thousand to ~~$14.6~~$15.1 million for the three months ended March 31, ~~2020,~~2021, as compared to ~~$10.4~~$14.6 million for the same period in ~~2019.~~2020. The increase in noninterest expense year over year was ~~primarily due~~mainly attributable to increases of $1.3 million in salary and employee benefits, $377 thousand in data processing expense, $251 thousand in professional service fees, $180 thousand in occupancy and equipment expense, and $113 thousand in FDIC premium expense. These increases were partially offset by decreases of ~~$1.7~~$1.5 million in acquisition and due diligence fees ~~of $1.5 million, occupancy~~ and ~~equipment expense of $324~~$149 thousand ~~data processing expense of $252 thousand and core deposit premium amortization of $140 thousand.~~in other expense. The

increase in salary and employee benefits between the periods was primarily due to ~~an increase~~increases of ~~$879 thousand~~$1.2 million in mortgage commissions expense and $170 thousand in contract labor expenses incurred for the PPP loan program. The increase in data processing expense was due to the new loan processing system used for the PPP loans. The increase in professional service fees was primarily related to increased residential mortgage volumes and consulting fees for residential mortgage systems incurred as well as increased audit fees. The increase in occupancy and equipment expense was primarily attributable to software maintenance and licensing. The increase in FDIC premium expense was primarily due to a lower leverage ratio and an increase ~~of 17 full-time equivalent employees.~~in assets year over year. The ~~increase~~decrease in acquisition and due diligence fees ~~and core deposit premium amortization were related~~was primarily due to the merger with Ann Arbor State 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 expenses related to the addition of three new branches acquired with Ann Arbor State Bank, as well as incremental increases in these expenses as a result of organic growth in the organization. The increase in data processing expense was primarily attributable to the retention and maintenance of Ann Arbor State Bank legacy systems during the first quarter of ~~2020 prior to system integration,~~2020. The decrease in ~~addition~~other expense was primarily due to the ~~organic growth in the organization.~~provision on unfunded commitments.

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Income Taxes and Tax-Related Items

During the three months ended March 31, ~~2020,~~2021, we recognized income tax expense of $2.1 million on $11.0 million of pre-tax income resulting in an effective tax rate of 18.8%, compared to the same period in 2020, in which we recognized an income tax expense of $349 thousand on $4.5 million of pre-tax income, resulting in an effective tax rate of 7.8% ~~compared to the same period in 2019, in which we recognized an income tax expense of $747 thousand on $4.2 million of pre-tax income, resulting in an effective tax rate of 17.7%~~.

The decrease in income tax provision compared to the 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 2018-2020 to be carried back five years. Additionally, disqualified dispositions of Ann Arbor State Bank’s stock options generated a $175 thousand tax benefit.

Refer to Note 9 - Income Taxes in the notes to the consolidated financial statements for a reconciliation between expected and actual income tax expense for the three months ended March 31, ~~2020~~2021 and ~~2019.~~2020.

Financial Condition

Investment Securities

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


(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Securities available-for-sale:					Securities available-for-sale:
U.S. government sponsored entities and agencies	$	9,775	$	—	U.S. government sponsored entities and agencies	$	25,624	$	26,358
State and political subdivision	127,680		93,747		State and political subdivision	143,532		132,723
Mortgage-backed securities: residential	10,294		10,565		Mortgage-backed securities: residential	23,360		26,081
Mortgage-backed securities: commercial	9,133		8,779		Mortgage-backed securities: commercial	24,385		11,918
Collateralized mortgage obligations: residential	8,056		8,529		Collateralized mortgage obligations: residential	12,072		13,446
Collateralized mortgage obligations: commercial	30,061		23,181		Collateralized mortgage obligations: commercial	55,827		58,512
U.S. Treasury	1,010		1,999		U.S. Treasury	28,784		—
SBA	20,562		21,984		SBA	16,686		17,593
Asset backed securities	9,613		10,084		Asset backed securities	10,057		10,072
Corporate bonds	4,487		2,037		Corporate bonds	5,939		6,029
Total securities available-for-sale	$	230,671	$	180,905	Total securities available-for-sale	$	346,266	$	302,732

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for both normal operations and potential acquisitions, while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral. At March 31, ~~2020,~~2021, total investment securities were ~~$230.7~~$346.3 million, or ~~11.9%~~13.5% of total assets, compared to ~~$180.9~~$302.7 million, or ~~11.4%~~12.4% of total assets, at December 31, ~~2019.~~2020. The ~~$49.8~~$43.5 million increase in securities available-for-sale from December 31, ~~2019~~2020 to March 31, ~~2020,~~2021, was ~~primarily~~ due to the ~~acquisition~~purchase of ~~Ann Arbor State Bank, which contributed $47.4 million~~securities using the excess cash balances generated by the payoffs of ~~investment securities as of January 2, 2020. In addition, we repositioned the investment portfolio through purchases of $36.0 million~~PPP loans and ~~sales of $31.3 million.~~increase in deposits. Securities with a carrying value of ~~$52.0~~$95.8 million and ~~$27.3~~$98.7 million were pledged at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, respectively, to secure borrowings, deposits and mortgage derivatives.

As of March 31, ~~2020~~,2021, the Company held 7267 tax-exempt state and local municipal securities totaling ~~$52.7~~$51.7 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments and the U.S. government and its agencies, at March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, there were no holdings of securities of any one issuer ~~other than the U.S. government and its agencies,~~ in an amount greater than 10% of shareholders' equity.

The securities available-for-sale presented in the following tables are reported at amortized cost and by contractual maturity as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020. 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.

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	March 31, 2020																	March 31, 2021
	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		(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Securities available-for-sale:																	Securities available-for-sale:
U.S. government sponsored agency obligations	$	2,000	1.66	%	$	7,624	1.64	%	$	—	—	%	$	—	—	%	U.S. government sponsored agency obligations	$	4,016	1.61	%	$	2,542	1.61	%	$	15,000	1.22	%	$	5,000	1.48	%
State and political subdivision	2,219		2.18		8,771		2.16		27,985		2.73		83,471		3.18		State and political subdivision	1,765		1.97		9,870		2.46		34,682		2.74		91,286		2.85
Mortgage-backed securities: residential	—		—		131		0.91		132		2.08		9,784		2.77		Mortgage-backed securities: residential	—		—		66		1.04		81		2.22		23,230		1.01
Mortgage-backed securities: commercial	428		1.58		4,850		2.27		1,428		2.64		1,821		3.64		Mortgage-backed securities: commercial	840		2.22		3,781		2.45		18,181		1.38		1,802		3.63
Collateralized mortgage obligations: residential	—		—		—		—		695		2.17		7,234		1.96		Collateralized mortgage obligations: residential	—		—		341		3.03		224		1.20		11,377		1.39
Collateralized mortgage obligations: commercial	—		—		8,997		2.90		11,659		2.40		8,304		2.43		Collateralized mortgage obligations: commercial	570		2.62		7,155		3.08		40,584		1.27		7,828		2.42
U.S. Treasury	1,000		1.65		—		—		—		—		—		—		U.S. Treasury	—		—		4,921		0.83		24,357		1.35		—		—
SBA	—		—		—		—		7,930		2.54		12,679		2.41		SBA	—		—		—		—		9,233		1.41		7,486		1.26
Asset backed securities	—		—		—		—		—		—		10,394		2.22		Asset backed securities	—		—		—		—		—		—		10,131		0.84
Corporate bonds	2,467		3.11		2,016		3.09		—		—		—		—		Corporate bonds	999		1.72		—		—		5,000		4.14		—		—
Total securities available-for-sale	$	8,114	2.24	%	$	32,389	2.31	%	$	49,829	2.61	%	$	133,687	2.89	%	Total securities available-for-sale	$	8,190	1.83	%	$	28,676	2.26	%	$	147,342	1.74	%	$	158,140	2.21	%


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

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

December 31, 2019
One year or less One to five years Five to ten years After ten years
(Dollars in thousands) Amortized
Cost Average
Yield Amortized
Cost Average
Yield Amortized
Cost Average
Yield Amortized
Cost Average
Yield
Securities available-for-sale:

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

Loans

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

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

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

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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 March 31,		As of December 31,									As of March 31,		As of December 31,
(Dollars in thousands)	2020		2019		2018		2017		2016		(Dollars in thousands)	2021		2020		2019		2018		2017
Commercial real estate:											Commercial real estate:
Non-owner occupied	$	450,694	$	388,515	$	367,671	$	343,420	$	322,354	Non-owner occupied	$	449,690	$	445,810	$	388,515	$	367,671	$	343,420
Owner occupied	278,216		216,131		194,422		168,342		169,348		Owner occupied	300,175		275,022		216,131		194,422		168,342
Total commercial real estate	728,910		604,646		562,093		511,762		491,702		Total commercial real estate	749,865		720,832		604,646		562,093		511,762
Commercial and industrial	469,227		410,228		383,455		377,686		342,069		Commercial and industrial	794,096		685,504		410,228		383,455		377,686
Residential real estate	262,894		211,839		180,018		144,439		118,730		Residential real estate	316,089		315,476		211,839		180,018		144,439
Consumer	5,376		896		999		1,036		892		Consumer	1,641		1,725		896		999		1,036
Total loans	$	1,466,407	$	1,227,609	$	1,126,565	$	1,034,923	$	953,393	Total loans	$	1,861,691	$	1,723,537	$	1,227,609	$	1,126,565	$	1,034,923

Total loans were ~~$1.47~~$1.86 billion at March 31, ~~2020,~~2021, an increase of ~~$238.8~~$138.2 million from December 31, ~~2019.~~2020. The growth in our loan portfolio compared to ~~March 31, 2019 and~~ December 31, ~~2019~~2020 was primarily due to ~~the acquisition~~an increase 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 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 $37.0$108.6 million in our commercial and ~~residential~~industrial loan portfolio, $216.7 million of which were PPP loans originated during the quarter, partially offset by $129.6 million of PPP loans that were forgiven. In addition, there was $29.0 million of new loan growth in the commercial real estate ~~loan portfolios, respectively.~~portfolio during the first quarter of 2021. 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 March 31, ~~2020,~~2021, approximately ~~49.7%~~40.3% of our loans were commercial real estate, ~~32.0%~~42.7% were commercial and industrial, and ~~18.3%~~17.1% were residential real estate and consumer loans. The loan mix was affected by PPP loans, which fall into the commercial and industrial loan type.

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

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Loan Maturity/Rate Sensitivity

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

2021.


(Dollars in thousands)	One year or less		After one but within five years		After five years		Total		(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
March 31, 2020
March 31, 2021									March 31, 2021
Commercial real estate	$	74,460	$	458,960	$	195,490	$	728,910	Commercial real estate	$	110,793	$	430,129	$	208,943	$	749,865
Commercial and industrial	177,395		205,186		86,646		469,227		Commercial and industrial	137,948		583,354		72,794		794,096
Residential real estate	11,336		9,374		242,184		262,894		Residential real estate	8,443		7,203		300,443		316,089
Consumer	3,486		1,692		198		5,376		Consumer	157		1,420		64		1,641
Total loans	$	266,677	$	675,212	$	524,518	$	1,466,407	Total loans	$	257,341	$	1,022,106	$	582,244	$	1,861,691
Sensitivity of loans to changes in interest rates:									Sensitivity of loans to changes in interest rates:
Fixed interest rates			$	562,990	$	169,306			Fixed interest rates			$	897,604	$	204,235
Floating interest rates			112,222		355,212				Floating interest rates			124,502		378,009
Total			$	675,212	$	524,518			Total			$	1,022,106	$	582,244

Summary of Impaired Assets and Past Due Loans

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

A loan is categorized as a troubled debt restructuring if a concession is granted, such as to provide for the reduction of either interest or principal, due to deterioration in the financial condition of the borrower. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than the current market rate, forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. In accordance with bank regulatory guidance, troubled debt restructurings do not include short-term modifications made on a good-faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief. This includes short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant. As of March 31, 2021, there were $22.2 million of loans that remained on a COVID-related deferral compared to $19.8 million as of December 31, 2020. As of March 31, 2021, $10.7 million of those loans had payments deferred greater than six months compared to $11.4 million as of December 31, 2020.

Credit Quality Indicators:

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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 March 31, ~~2020~~2021 compared to December 31, ~~2019~~2020 were as follows:


(Dollars in thousands)	March 31, 2020		December 31, 2019		(Dollars in thousands)	March 31, 2021		December 31, 2020
Classified loans:					Classified loans:
Substandard	$	18,129	$	20,569	Substandard	$	30,072	$	34,921
Doubtful	1,714		1,838		Doubtful	1,088		1,143
Total classified loans	$	19,843	$	22,407	Total classified loans	$	31,160	$	36,064
Special mention	21,823		17,292		Special mention	60,457		47,297
Total classified and criticized loans	$	41,666	$	39,699	Total classified and criticized loans	$	91,617	$	83,361

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


	As of March 31,		As of December 31,
(Dollars in thousands)	2021		2020		2019		2018		2017
Nonaccrual loans
Commercial real estate	$	4,542	$	7,320	$	4,832	$	5,927	$	2,257
Commercial and industrial	6,822		7,490		11,112		9,605		9,024
Residential real estate	3,987		3,991		2,569		2,915		2,767
Consumer	13		15		16		—		—
Total nonaccrual loans(1)	15,364		18,816		18,529		18,447		14,048
Other real estate owned	—		—		921		—		652
Total nonperforming assets	15,364		18,816		19,450		18,447		14,700
Performing troubled debt restructurings

Commercial and industrial	335		546		547		568		961
Residential real estate	430		432		359		363		261
Total performing troubled debt restructurings	765		978		906		931		1,222
Total impaired assets, excluding ASC 310-30 loans	$	16,129	$	19,794	$	20,356	$	19,378	$	15,922
Loans 90 days or more past due and still accruing	$	328	$	269	$	157	$	243	$	440

As of March 31, As of December 31,
(Dollars in thousands) 2020 2019 2018 2017 2016
Nonaccrual loans

Commercial real estate $ 3,721
$ 4,832
$ 5,927
$ 2,257
$ 147
Commercial and industrial 9,364
11,112
9,605
9,024
13,389
Residential real estate 2,124
2,569
2,915
2,767
1,498
Consumer 15
16
—
—
—
Total nonaccrual loans⁽¹⁾
15,224
18,529
18,447
14,048
15,034
Other real estate owned 2,093
921
—
652
258
Total nonperforming assets 17,317
19,450
18,447
14,700
15,292
Performing troubled debt restructurings

Commercial real estate —
—
—
—
290
Commercial and industrial 541
547
568
961
1,018
Residential real estate 599
359
363
261
207
Total performing troubled debt restructurings 1,140
906
931
1,222
1,515
Total impaired assets, excluding ASC 310-30 loans $ 18,457
$ 20,356
$ 19,378
$ 15,922
$ 16,807
Loans 90 days or more past due and still accruing $ 437
$ 157
$ 243
$ 440
$ 377
(1)Nonaccrual loans include nonperforming troubled debt restructurings of $6.8 million, $3.8 million, $3.0 million, $5.0 million and $6.4 million at the respective dates indicated above.


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

During the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, the Company recorded ~~$38~~$317 thousand and ~~$414~~$38 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 ~~$6.7~~$4.9 million, $5.0 million, $6.0 million, $7.9 million, ~~$9.7 million,~~ and ~~$11.6~~$9.7 million at the respective dates indicated in the table above. ~~The increase in purchase credit impaired loans as~~

Table of ~~March 31, 2020 compared to December 31, 2019 was due to the acquisition of Ann Arbor State Bank.~~Contents

~~Impaired~~Nonperforming assets decreased ~~$2.1~~$3.5 million as of March 31, ~~2020~~2021 compared to December 31, ~~2019.~~2020. The decrease in ~~impaired~~nonperforming 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~~a $2.7 million paydown of ~~two large commercial loan relationships on nonaccrual status as well as moving one~~a commercial loan relationship and two residential loan relationships in the amount of $500 thousand moving to ~~other real estate owned.~~accrual status.

Allowance for Loan Losses

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

~~Purchased~~Acquired Loans

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

Originated Loans

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

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

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

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

There is no allowance on PPP loans (included in commercial and industrial) since they are 100% guaranteed by the SBA.

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.

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


	For the three months ended March 31,							For the three months ended March 31,
(Dollars in thousands)	2020			2019			(Dollars in thousands)		2021			2020
Balance at beginning of period	$	12,674		$	11,566		Balance at beginning of period		$	22,297		$	12,674
Loan charge-offs:							Loan charge-offs:

Commercial and industrial	(187		)	(95		)	Commercial and industrial		(11)			(187)

Consumer	(31		)	(6		)	Consumer		(6)			(31)
Total loan charge-offs	(218		)	(101		)	Total loan charge-offs		(17)			(218)
Recoveries of loans previously charged-off:							Recoveries of loans previously charged-off:

Commercial and industrial	8			50			Commercial and industrial		10			8
Residential real estate	34			21			Residential real estate		20			34
Consumer	2			2			Consumer		3			2
Total loan recoveries	44			73			Total loan recoveries		33			44
Net charge-offs	(174		)	(28		)
Net (charge-offs) recoveries							Net (charge-offs) recoveries		16			(174)
Provision expense for loan losses	489			422			Provision expense for loan losses		265			489
Balance at end of period	$	12,989		$	11,960		Balance at end of period		$	22,578		$	12,989
Allowance for loan losses as a percentage of period-end loans	0.89		%	1.06		%	Allowance for loan losses as a percentage of period-end loans		1.21		%	0.89		%
Net charge-offs to average loans	0.05			0.01			Net charge-offs to average loans		—			0.05

Our allowance for loan losses was ~~$13.0~~$22.6 million, or ~~0.89%~~1.21% of loans, at March 31, ~~2020~~2021 compared to ~~$12.7~~$22.3 million, or ~~1.03%~~1.29% of loans, at December 31, ~~2019.~~2020. As of March 31, 2021 and December 31, 2020, the allowance for loan losses as a percentage of loans excluding PPP loans, was 1.55% and 1.56%, respectively. The ~~$315~~$281 thousand increase in the allowance for loan losses during the three months ended March 31, ~~2020~~2021 was primarily due to ~~a $365 thousand~~an increase in general reserves related to ~~organic~~the increase in non-PPP loan ~~growth which includes a $230 thousand~~balances as well as an increase ~~as a result~~in specific reserves on individually evaluated loans.

Table 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.Contents

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
March 31, 2021
Balance at end of period applicable to:
Commercial real estate	$	10,511	40.2	%
Commercial and industrial	8,525		42.7
Residential real estate	3,534		17.0
Consumer	8		0.1
Total loans	$	22,578	100.0	%
December 31, 2020
Balance at end of period applicable to:
Commercial real estate	$	9,975	41.8	%
Commercial and industrial	8,786		39.8
Residential real estate	3,527		18.3
Consumer	9		0.1
Total loans	$	22,297	100.0	%
December 31, 2019
Balance at end of period applicable to:
Commercial real estate	$	5,773	49.2	%
Commercial and industrial	5,515		33.4
Residential real estate	1,384		17.3
Consumer	2		0.1
Total loans	$	12,674	100.0	%
December 31, 2018
Balance at end of period applicable to:
Commercial real estate	$	5,227	49.9	%
Commercial and industrial	5,174		34.0
Residential real estate	1,164		16.0
Consumer	1		0.1
Total loans	$	11,566	100.0	%
December 31, 2017
Balance at end of period applicable to:
Commercial real estate	$	4,852	49.4	%
Commercial and industrial	5,903		36.5
Residential real estate	950		14.0
Consumer	8		0.1
Total loans	$	11,713	100.0	%

(Dollars in thousands)
Allocated
Allowance

Percentage of loans in each category
to total loans
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 $ 5,773
49.2 %
Commercial and industrial 5,515
33.4
Residential real estate 1,384
17.3
Consumer 2
0.1
Total loans $ 12,674
100.0 %
December 31, 2018
Balance at end of period applicable to:
Commercial real estate $ 5,227
49.9 %
Commercial and industrial 5,174
34.0
Residential real estate 1,164
16.0
Consumer 1
0.1
Total loans $ 11,566
100.0 %
December 31, 2017
Balance at end of period applicable to:
Commercial real estate $ 4,852
49.4 %
Commercial and industrial 5,903
36.5
Residential real estate 950
14.0
Consumer 8
0.1
Total loans $ 11,713
100.0 %
December 31, 2016
Balance at end of period applicable to:
Commercial real estate $ 4,124
51.5 %
Commercial and industrial 5,932
35.9
Residential real estate 1,030
12.5
Consumer 3
0.1
Total loans $ 11,089
100.0 %

Goodwill

The Company has acquired three banks, Lotus Bank in March 2015, Bank of Michigan in March 2016, and Ann Arbor State Bank in January 2020, which resulted in the recognition of goodwill. Total goodwill was ~~$36.2~~$35.6 million at March 31, ~~2020~~2021 and ~~$9.4 million at~~ December 31, ~~2019.~~2020.

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

Since the price of our stock did not fully recover during the third quarter of 2020, the Company engaged a reputable, third-party valuation firm to perform a quantitative analysis of goodwill as of August 31, 2020 ("the valuation date"). In deriving the fair value of the reporting unit (the Bank), the third-party firm assessed general economic conditions and outlook; industry and market considerations and outlook; the impact of recent events on financial performance; the market price of our common stock; and other relevant events. In addition, the valuation relied on financial projections through 2023 and growth

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

The Company completed its annual goodwill impairment review as of October 1, 2020, noting strong financial indicators for the Bank, solid credit quality ratios, as well as the strong capital position of the Bank. In addition, third quarter 2020 revenue reflected significant and continuing growth in our residential mortgage banking business, as well as net SBA fees related to PPP loans funded during second and third quarters of 2020. Management concurred with the conclusion derived from the ~~COVID-19 pandemic. Although~~quantitative goodwill analysis as of August 31, 2020 and determined that there were no material changes between the ~~Company's~~valuation date and October 1, 2020. Management also determined that no triggering events have occurred that indicated impairment from the most recent valuation date through March 31, 2021, the stock was trading above 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.~~2021, and it is more likely than not that there was no goodwill impairment as of March 31, 2021.

Deposits

Total deposits were ~~$1.47~~$2.09 billion at March 31, ~~2020~~2021 and ~~$1.14~~$1.96 billion at December 31, ~~2019,~~2020, representing ~~83.5%~~88.9% and ~~80.3%~~88.1% of total liabilities, respectively. The increase in deposits of ~~$335.2~~$130.7 million was comprised of increases of ~~$126.9~~$138.8 million in demand deposits ~~$120.9 million in time deposits,~~ and ~~$87.4~~$32.2 million in money market and savings deposits, partially offset by a decrease of $40.3 million in time deposits. The increase in deposits was primarily ~~attributable~~due to ~~$264.8 million of deposits acquired from Ann Arbor State Bank. In addition, during the first quarter of 2020, there was~~ organic deposit growth during the three months ended March 31, 2021 mainly as a result of ~~$99.2 million, partially offset by $28.8 million of deposit runoff.~~customers increasing their liquidity and government stimulus programs.

Our average interest-bearing deposit costs were ~~1.46%~~0.43% and ~~1.85%~~1.46% for the three months ended March 31, ~~2020~~2021 and ~~2019,~~2020, respectively. The decrease in interest-bearing deposit costs between the two periods was impacted ~~by the changing mix of deposit types, as well as~~ by the decrease in overnight market rates, as measured by the target federal funds interest rate. The target federal funds interest rate decreased ~~75 basis points during the second half of the year ended December 31, 2019 and decreased~~ 150 basis points during ~~the three months ended~~ 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~~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 March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, the Company had approximately ~~$82.2 million and $67.4~~$29.3 million of brokered ~~deposits, respectively.~~deposits. The Company's ability to accept, roll-over or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well-capitalized."

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

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

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










	Three Months Ended March 31, 2021
(Dollars in thousands)	Average Balance		Percent		Average Rate
Noninterest-bearing demand deposits	$	692,617	34.3	%	—	%
Interest-bearing demand deposits	132,816		6.6	%	0.16	%
Money market and savings deposits	604,491		30.0	%	0.25	%
Time deposits	584,085		29.1	%	0.66	%
Total deposits	$	2,014,009	100.0	%	0.28	%

Three Months Ended March 31, 2020
(Dollars in thousands)
Average
Balance
Percent
Average
Rate
Noninterest-bearing demand deposits $ 393,519
27.1 % — %
Interest-bearing demand deposits 106,236
7.3
0.47
Money market and savings deposits 403,712
27.8
1.10
Time deposits 547,838
37.8
1.91
Total deposits $ 1,451,305
100.0 % 1.06 %

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


(Dollars in thousands)	March 31, 2021
Maturing in:
3 months or less	$	146,092
3 months to 6 months	92,821
6 months to 1 year	154,630
1 year or greater	104,459
Total	$	498,002

(Dollars in thousands) March 31, 2020
Maturing in:
3 months or less $ —
3 months to 6 months 137,157
6 months to 1 year 106,136
1 year or greater 180,938
Total $ 424,231

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Borrowings

Total debt outstanding at March 31, ~~2020~~2021 was ~~$256.2~~$231.0 million, ~~a decrease~~an increase of ~~$431~~$764 thousand from ~~$256.7~~$230.3 million at December 31, ~~2019.~~2020. The ~~decrease~~increase in total borrowings was primarily due to ~~decreases of $35.0 million~~a $789 thousand increase in ~~short-term FHLB advances and $5.0 million in federal funds purchased, partially offset by an increase of $40.3 million in long-term FHLB advances, of which $15.0 million related~~securities sold under agreements to ~~the AAB acquisition.~~repurchase.

At March 31, ~~2020,~~2021, FHLB advances were secured by a blanket lien on ~~$514.1~~$529.4 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of ~~$1.5~~$4.6 million. At December 31, ~~2019,~~2020, FHLB advances were secured by a blanket lien on ~~$408.9~~$512.3 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of ~~$1.5~~$3.7 million.

As of March 31, 2021, the Company had $45.0 million of subordinated notes outstanding and debt issuance costs of $400 thousand related to these subordinated notes. As of December 31, 2020, the Company had $45.0 million of subordinated notes outstanding and debt issuance costs of ~~$553 thousand related to these subordinated notes. As of December 31, 2019, the Company had 45.0 million of subordinated notes outstanding and debt issuance costs of $560~~$408 thousand related to these subordinated notes.

The $15.0 million of subordinated notes issued on December 21, 2015 bear a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. ~~The~~From December 15, 2020, through maturity, the notes ~~will~~ bear 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~~on 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 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~~on December 18, 2029, and the Company has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or ~~upon~~upon the occurrence of a Tier 2 capital event or tax event. The issuance of the $30.0 million subordinated notes reflected management's efforts to fund the liquidity needs of the ~~Company.~~

Company as well as pay the merger consideration to purchase Ann Arbor State Bank.

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


	Three months ended March 31,
(Dollars in thousands)		2021			2020
Securities sold under agreements to repurchase
Average daily balance		$	3,224		$	641
Weighted-average rate during period		0.26		%	0.30		%
Amount outstanding at period end		$	3,993		$	176
Weighted-average rate at period end		0.25		%	0.30		%
Maximum month-end balance		$	3,993		$	936
FHLB Advances
Average daily balance		$	—		$	8,736
Weighted-average rate during period		—		%	1.59		%
Amount outstanding at period end		$	—		$	25,000
Weighted-average rate at period end		—		%	0.29		%
Maximum month-end balance		$	—		$	25,000
FHLB Line of Credit
Average daily balance		$	—		$	203
Weighted-average rate during period		—		%	1.14		%



Federal funds purchased
Average daily balance		$	—		$	560
Weighted-average rate during period		—		%	1.84		%

Three months ended March 31,
(Dollars in thousands) 2020 2019
Securities sold under agreements to repurchase

Average daily balance $ 641
$ 533
Weighted-average rate during period 0.30 % 0.30 %
Amount outstanding at period end $ 176
$ 585
Weighted-average rate at period end 0.30 % 0.30 %
Maximum month-end balance $ 936
$ 682
FHLB Advances
Average daily balance $ 8,736
$ 48,028
Weighted-average rate during period 1.59 % 2.63 %
Amount outstanding at period end $ 25,000
$ 95,000
Weighted-average rate at period end 0.29 % 2.64 %
Maximum month-end balance $ 25,000
$ 95,000
FHLB Line of Credit
Average daily balance $ 203
$ 320
Weighted-average rate during period 1.14 % 2.65 %
Amount outstanding at period end $ —
$ 895
Weighted-average rate at period end — % 2.84 %
Maximum month-end balance $ —
$ 895
Federal funds purchased
Average daily balance $ 560
$ 3,278
Weighted-average rate during period 1.84 % 3.01 %

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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 ~~$5.1~~$1.9 million to ~~$175.8~~$217.2 million at March 31, ~~2020~~2021 as compared to ~~$170.7~~$215.3 million at December 31, ~~2019.~~2020. The increase in shareholders' equity was primarily impacted by ~~$4.1~~$9.0 million of net income generated during the three months ended March 31, ~~2020 as well as an increase~~2021, partially offset by decreases of ~~$1.8~~$5.1 million of accumulated other comprehensive income due to ~~increases~~decreases in net unrealized gains on available-for-sale securities, ~~partially offset by $620 thousand~~$1.4 million of stock repurchased through the share buyback program, $469 thousand of dividends declared on our preferred stock and ~~$387~~$457 thousand of dividends declared on our common stock during the three months ended March 31, ~~2020.~~

2021.

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


	Three months ended March 31,							Three months ended March 31,
(Dollars in thousands)	2020			2019			(Dollars in thousands)		2021		2020
Balance at beginning of period	$	170,703		$	151,760		Balance at beginning of period		$	215,327	$	170,703
Net income	4,110			3,467			Net income		8,959		4,110
Other comprehensive income	1,777			2,069
Other comprehensive income (loss)							Other comprehensive income (loss)		(5,087)		1,777

Redeemed stock	(620		)	(1,104		)	Redeemed stock		(1,364)		(620)
Dividends declared	(387		)	(309		)
Common stock dividends declared							Common stock dividends declared		(457)		(387)
Dividends on 7.50% Series B Preferred Stock							Dividends on 7.50% Series B Preferred Stock		(469)		—
Exercise of stock options	61			125			Exercise of stock options		243		61
Stock-based compensation expense	124			111			Stock-based compensation expense		35		124
Balance at end of period	$	175,768		$	156,119		Balance at end of period		$	217,187	$	175,768

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

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

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

At March 31, 2021 and December 31, 2020, the ~~Company~~Company's and the ~~Bank met the minimum~~Bank's capital requirements for capital adequacy purposes, but the Company did not maintain a 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%. Consequently, during the second quarter of 2020, the aggregate amount of dividends, stock repurchases, and discretionary bonus payments to executive officers by the Company is limited to 60%ratios were in excess of the ~~Company’s net income for~~requirement to be "well capitalized" under the ~~four calendar quarters ended March 31, 2020 (net~~regulatory guidelines.

Table of ~~any capital distributions made during the four calendar quarters ended March 31, 2020), unless prior regulatory approval is obtained.~~Contents

Level One’s capital ratios declined in the 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 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
March 31, 2021
Common equity tier 1 to risk-weighted assets:
Consolidated	9.63	%	4.50	%	7.00	%
Bank	12.37	%	4.50	%	7.00	%	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	11.11	%	6.00	%	8.50	%
Bank	12.37	%	6.00	%	8.50	%	8.00	%
Total capital to risk-weighted assets:
Consolidated	15.18	%	8.00	%	10.50	%
Bank	13.62	%	8.00	%	10.50	%	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	7.15	%	4.00	%	4.00	%
Bank	7.99	%	4.00	%	4.00	%	5.00	%
December 31, 2020
Common equity tier 1 to risk-weighted assets:
Consolidated	9.30	%	4.50	%	7.00	%
Bank	11.94	%	4.50	%	7.00	%	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	10.80	%	6.00	%	8.50	%
Bank	11.94	%	6.00	%	8.50	%	8.00	%
Total capital to risk-weighted assets:
Consolidated	14.91	%	8.00	%	10.50	%
Bank	13.20	%	8.00	%	10.50	%	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	6.93	%	4.00	%	4.00	%
Bank	7.67	%	4.00	%	4.00	%	5.00	%

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

Actual
Capital
Ratio

Capital
Adequacy
Regulatory
Requirement

Capital Adequacy
Regulatory Requirement +
Capital Conservation
Buffer(1)

Well
Capitalized
Regulatory
Requirement
March 31, 2020

Common equity tier 1 to risk-weighted assets:

Consolidated 8.10 % 4.50 % 7.00 %

Bank 10.62 % 4.50 % 7.00 % 6.50 %
Tier 1 capital to risk-weighted assets:
Consolidated 8.10 % 6.00 % 8.50 %

Bank 10.62 % 6.00 % 8.50 % 8.00 %
Total capital to risk-weighted assets:
Consolidated 11.68 % 8.00 % 10.50 %

Bank 11.45 % 8.00 % 10.50 % 10.00 %
Tier 1 capital to average assets (leverage ratio):
Consolidated 7.08 % 4.00 % 4.00 %

Bank 9.33 % 4.00 % 4.00 % 5.00 %
December 31, 2019

Common equity tier 1 to risk-weighted assets:

Consolidated 11.72 % 4.50 % 7.00 %

Bank 12.27 % 4.50 % 7.00 % 6.50 %
Tier 1 capital to risk-weighted assets:
Consolidated 11.72 % 6.00 % 8.50 %

Bank 12.27 % 6.00 % 8.50 % 8.00 %
Total capital to risk-weighted assets:
Consolidated 15.99 % 8.00 % 10.50 %

Bank 13.24 % 8.00 % 10.50 % 10.00 %
Tier 1 capital to average assets (leverage ratio):
Consolidated 10.41 % 4.00 % 4.00 %

Bank 10.96 % 4.00 % 4.00 % 5.00 %


~~(1)~~	~~Reflects the capital conservation buffer of 2.5%.~~

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Contractual Obligations

In the ordinary course of our operations, we enter into certain contractual obligations. Total contractual obligations at March 31, ~~2020~~2021 were ~~$822.2~~$799.1 million, ~~an increase~~a decrease of ~~$215.0~~$39.5 million from ~~$607.2~~$838.6 million at December 31, ~~2019.~~2020. The ~~increase~~decrease of ~~$215.0~~$39.5 million was primarily due to ~~increases~~a decrease of ~~$185.3 million in long-term FHLB advances, of which $15.0 million related to FHLB advances acquired from AAB, $69.1~~$40.3 million in time ~~deposits, $29.6 million in subordinated notes net of debt issuance costs, and $4.1 million in operating lease obligations, partially offset by a decrease of $73.0 million in short-term borrowings.~~deposits.

The following tables present our contractual obligations as of March 31, ~~2020~~2021 and December 31, ~~2019.~~2020.


	Contractual Maturities as of March 31, 2021
(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	1,739	$	3,478	$	2,509	$	3,775	$	11,501
Short-term borrowings	3,993		—		—		—		3,993
Long-term borrowings	16,149		14,298		22,000		130,000		182,447
Subordinated notes	—		—		15,000		29,600		44,600
Time deposits	435,825		115,259		5,473		—		556,557
Total	$	457,706	$	133,035	$	44,982	$	163,375	$	799,098


	Contractual Maturities as of March 31, 2020											Contractual Maturities as of December 31, 2020
(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total		(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	1,731	$	3,147	$	2,616	$	4,484	$	11,978	Operating lease obligations	$	1,731	$	3,478	$	2,509	$	3,775	$	11,493
Short-term borrowings	25,176		—		—		—		25,176		Short-term borrowings	3,204		—		—		—		3,204
Long-term borrowings	4,000		20,611		30,000		132,000		186,611		Long-term borrowings	6,176		14,304		32,000		130,000		182,480
Subordinated notes	—		—		—		44,447		44,447		Subordinated notes	—		—		15,000		29,592		44,592
Time deposits	500,295		48,531		5,195		—		554,021		Time deposits	437,211		153,759		5,845		—		596,815
Total	$	531,202	$	72,289	$	37,811	$	180,931	$	822,233	Total	$	448,322	$	171,541	$	55,354	$	163,367	$	838,584

Contractual Maturities as of December 31, 2019
(Dollars in thousands) Less Than
One Year One to
Three Years Three to
Five Years Over
Five Years Total
Operating lease obligations $ 1,160
$ 1,849
$ 1,628
$ 3,235
$ 7,872
Short-term borrowings 98,129
—
—
—
98,129
Long-term borrowings —
—
1,445
—
1,445
Subordinated notes —
—
—
14,891
14,891
Time deposits 408,408
74,055
2,409
—
484,872
Total $ 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 March 31, ~~2020,~~2021, the allowance for off-balance sheet risk was ~~$380~~$355 thousand, compared to ~~$318~~$490 thousand at December 31, ~~2019,~~2020, and was included in "Other liabilities" on our consolidated balance sheets.

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


	March 31, 2020				December 31, 2019					March 31, 2021				December 31, 2020
(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate		(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	26,088	$	12,778	$	16,276	$	20,128	Commitments to make loans	$	8,226	$	10,705	$	18,269	$	17,058
Unused lines of credit	37,051		348,460		28,723		288,086		Unused lines of credit	222,795		218,490		28,898		385,307
Unused standby letters of credit and commercial letters of credit	4,327		2,028		4,895		—		Unused standby letters of credit and commercial letters of credit	1,791		3,669		2,340		1,992

Of the total unused lines of credit of ~~$385.5~~$441.3 million at March 31, ~~2020, $58.9~~2021, $50.4 million was comprised of undisbursed construction loan commitments. The Company expects to have sufficient access to liquidity to fund its off-balance sheet commitments.

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Liquidity

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

~~Level One expects to utilize~~During the ~~SBA PPP Lending Facility designed by the Treasury to finance and facilitate PPP lending. Management has taken recent~~second quarter of 2020, management took steps to increase liquidity on the balance sheet and ~~has expanded~~expand the capacity for additional funding ~~should there be a need.~~in the uncertain economic environment due to COVID-19. Management maintained an elevated level of liquidity on the balance sheet in the first quarter of 2021, and will continue to monitor and determine the appropriate levels of liquidity as economic conditions develop. Furthermore, ~~Level One~~the Company continues to monitor its capital ratios regularly and ~~will benefit~~has benefited from income from participation in the PPP, offset by potential stress from the weakening economy due to ~~COVID-19.~~the COVID-19 pandemic.

At March 31, ~~2020,~~2021, we had liquid assets of ~~$283.6~~$475.1 million, compared to ~~$257.5~~$455.4 million at December 31, ~~2019.~~2020. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered securities available-for-sale. Cash and due from banks decreased to $224.7 million, compared to $264.1 million at December 31, 2020 primarily as a result of purchasing additional 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 March 31, ~~2020,~~2021, we had ~~$210.3~~$181.1 million of outstanding borrowings from the FHLB, and these advances were secured by a blanket lien on ~~$514.1~~$529.4 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 ~~$52.4~~$179.8 million from the FHLB. Additionally, the Bank can borrow up to $122.5 million through the unsecured lines of credit it has established with eight other banks, as well as ~~$5.0~~$5.1 million through a secured line with the Federal Reserve Bank.

Further, because the Bank is "well capitalized," it can accept wholesale funding up to 40% of total assets, or approximately ~~$773.7 million,~~$1.03 billion, based on current policy limits at March 31, ~~2020.~~2021. Management believed that as of March 31, ~~2020,~~2021, we had adequate resources to fund all of our commitments.

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


	March 31, 2021		December 31, 2020
Investment securities available-for-sale to total assets	13.46	%	12.39	%
Loans to total deposits	88.91		87.79
Interest-earning assets to total assets	94.43		94.64
Interest-bearing deposits to total deposits	64.44		68.49

March 31, 2020 December 31, 2019
Investment securities available-for-sale to total assets 11.91 % 11.41 %
Loans to total deposits 99.71
108.12
Interest-earning assets to total assets 93.16
95.58
Interest-bearing deposits to total deposits 72.11
71.30

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Item 3 – Quantitative and Qualitative Disclosures About Market Risk

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

Interest Rate Risk

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

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

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

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

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

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

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

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The estimated impact on our net interest income as of March 31, ~~2020~~2021 and December 31, ~~2019,~~2020, 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.


	March 31, 2020				December 31, 2019					March 31, 2021				December 31, 2020
Change in rates	Following 12 months		Following 24 months		Following 12 months		Following 24 months		Change in rates	Following 12 months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	(1.9	)%	(5.6	)%	5.8	%	1.9	%	+400 basis points	(3.9)	%	(5.9)	%	2.8	%	5.5	%
+300 basis points	(0.4	)	(2.6	)	5.2		2.6		+300 basis points	1.0		(0.5)		5.5		7.6
+200 basis points	0.9		(0.1	)	4.2		2.7		+200 basis points	3.3		3.7		6.2		8.6
+100 basis points	2.2		2.4		2.7		2.1		+100 basis points	4.5		6.8		5.7		8.2
-100 basis points	(6.1	)	(11.4	)	(4.0	)	(3.9	)	-100 basis points	(3.3)		(5.4)		(3.3)		(5.2)

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

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

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


Change in rates	March 31, 2021		December 31, 2020
+400 basis points	(3.0)	%	15.0	%
+300 basis points	3.0		19.0
+200 basis points	7.0		20.0
+100 basis points	7.0		15.0
-100 basis points	(14.0)		(26.0)

Change in rates March 31, 2020 December 31, 2019
+400 basis points — % (39.4 )%
+300 basis points 4.0
(28.4 )
+200 basis points 7.0
(17.8 )
+100 basis points 6.0
(8.1 )
-100 basis points (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 over financial reporting. There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

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

Item 1 – Legal Proceedings

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

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

property is the subject.

Item 1A – Risk Factors

~~In addition to~~There have been no material changes from the risk factors ~~set forth under Part I, Item 1A “Risk Factors”~~previously disclosed in the ~~Company’s~~"Risk Factors" section included in our Annual Report on Form 10-K for the ~~fiscal~~ year ended December 31, ~~2019, the following risk factors apply to the Company.~~2020.

~~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~~

~~None.~~

Issuer Purchases of Equity Securities

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


(Dollars in thousands, except per share amounts)	Total Number of Shares Purchased	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs	Approximate Dollar Value of Shares That May Yet be Purchased under the Plans or Programs
January 1-31, 2021	—	$	—	—	$	10,000
February 1-28, 2021	52,349	22.78		52,349	8,807
March 1-31, 2021	7,296	23.44		7,296	8,636
Total	59,645	$	22.86	59,645

(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 March 31, 2020, the total shares repurchased in the amount of $2.8 million were redeemed but remain authorized, unissued shares.

Item 3 –- Defaults Upon Senior Securities

None.

Item 4 – Mine Safety Disclosures

Not Applicable.

Item 5 –- Other Information

~~On May 6, 2020, the Company entered into employment agreements with each~~

None.

Table 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.Contents

Item 6 - Exhibits


Exhibit No.		Description


~~Exhibit No.~~3.1		~~Description~~
~~2.1~~	~~Agreement and Plan~~Articles of ~~Merger, dated~~Incorporation, as amended, of ~~August 12, 2019, among~~ Level One ~~Bancorp, Inc., AASB Acquisition, Inc. and Ann Arbor~~ Bancorp, Inc. (incorporated by reference to Exhibit ~~2.1~~3.1 to the Company’s current report on Form 8-K filed August ~~14, 2019)~~13, 2020).†

~~10.1~~3.2		~~Employment Agreement, dated May 6, 2020, among~~Amended and Restated Bylaws of Level One Bancorp, Inc.~~, Level One Bank and Patrick Fehring -~~ (incorporated by reference to Exhibit 3.2 to the Company's registration statement on Form S-1 (File no. 333-223866) filed ~~herewith.~~March 23, 2018).

~~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~~






























































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

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

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

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

101		Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended March 31, ~~2020,~~2021, formatted in ~~XBRL~~iXBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of ~~Changes in~~ Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements – filed herewith.

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

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


		Level One Bancorp, Inc.

		~~Level One Bancorp, Inc.~~

Date: May ~~8, 2020~~7, 2021	By:		/s/		Patrick J. Fehring
						Patrick J. Fehring
						President and Chief Executive Officer
						(principal executive officer)

Date: May ~~8, 2020~~7, 2021		By:		/s/		David C. Walker
						David C. Walker
						Executive Vice President and Chief Financial Officer
						(principal financial officer)



(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



(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



(Dollars in thousands)	Fair value at March 31, 2020		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range
Impaired loans	$	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	2,093		Appraisal of property	Discounted appraisal value	18.00-41.00%



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



(In thousands, except per share data)	For the three months ended March 31, 2019
Basic:
Net income attributable to common shareholders	$	3,467
Weighted average common shares outstanding	7,751,750
Basic earnings per share	$	0.45
Diluted:
Net income attributable to common shareholders	$	3,467
Weighted average common shares outstanding	7,751,750
Add: Dilutive effects of assumed exercises of stock options	117,431
Weighted average common and dilutive potential common shares outstanding	7,869,181
Diluted earnings per common share	$	0.44



	Three Months Ended March 31, 2020
(Dollars in thousands)	Average Balance		Percent		Average Rate
Noninterest-bearing demand deposits	$	393,519	27.1	%	—	%
Interest-bearing demand deposits	106,236		7.3		0.47
Money market and savings deposits	403,712		27.8		1.10
Time deposits	547,838		37.8		1.91
Total deposits	$	1,451,305	100.0	%	1.06	%