Section 1: 10-K (10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, ~~2020~~2021

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

For the transition period from ________ to ____________

Commission File Number: 001-38458

LEVEL ONE BANCORP, INC.

(Exact name of registrant as specified in its charter)


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


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

(248) 737-0300

(Registrant's telephone number, including area code)

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


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

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☑

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☑

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☑ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act:


Large accelerated filer	☐	Accelerated filer	☑
Non-accelerated filer	☐	Smaller reporting company	☑
Emerging growth company	☑

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15. U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐

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

The aggregate market value of the registrant’s voting and non-voting common equity held by non-affiliates on June 30, ~~2020~~2021 was $84133,~~468~~747,~~885~~532 (based on the closing price on The Nasdaq Global Select Market on that date of $1627.7430).

As of March 504, ~~2021~~2022, the number of shares outstanding of the registrant’s common stock, no par value, was 7,~~623~~787,~~764~~601 shares.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Proxy Statement for the 2022 Annual Meeting of Shareholders ~~to be held May 6, 2021, to be filed within 120 days after December 31, 2020,~~ are incorporated by reference into Part III of this Form 10-K to the extent indicated in such Part.

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Level One Bancorp, Inc.

Table of Contents

		Page
Forward-Looking Statements
	PART I
Item 1.	Business	45
Item 1A.	Risk Factors	1617
Item 1B.	Unresolved Staff Comments	3119
Item 2	Properties	31
Item 2.	Properties	30
Item 3.	Legal Proceedings	3130
Item 4.	Mine Safety Disclosures	3130
	PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer of Purchases of Equity Securities	3231
Item 6.	~~Selected Financial Data~~[Reserved]	3331
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	3432
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	5956
Item 8.	Financial Statements and Supplementary Data	6058
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	~~112~~106
Item 9A.	Controls and Procedures	~~113~~106
Item 9B.	Other Information	~~113~~107
Item 9C.	Disclosure Regarding Foreign Jurisdictions that Prevent Inspections	107
	PART III
Item 10.	Directors, Executive Officers and Corporate Governance	~~113~~107
Item 11.	Executive Compensation	~~113~~107
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	~~113~~107
Item 13.	Certain Relationships and Related Transactions, and Director Independence	~~114~~108
Item 14.	Principal Accountant Fees and Services	~~114~~108
	PART IV
Item 15.	Exhibits and Financial Statement Schedules	~~115~~109
Item 16.	Form 10-K Summary	~~117~~111
Signatures		~~118~~112

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Forward-Looking Statements

This Form 10-K contains forward-looking statements within the meaning of the federal securities laws. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. These statements are often, but not always, made through the use of words or phrases such as "may," "might," "should," "could," "predict," "potential," "believe," "expect," "continue," "will," "anticipate," "seek," "estimate," "intend," "plan," "projection," "goal," "target," "aim," "would," "annualized" and "outlook," or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry, management's beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions, estimates and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed in or implied by the forward-looking statements.

A number of important factors could cause our actual results to differ materially from those indicated in these forward-looking statements, including those factors identified under "Risk Factors" or "Management's Discussion and Analysis of Financial Condition and Results of Operations" or the following:

•our ability to complete our pending merger transaction with First Merchants Corporation on a timely basis, including as a result of any unanticipated delay in the receipt of required regulatory approvals;

•the effects of the COVID-19 pandemic and 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;

•business and economic conditions, particularly those affecting the financial services industry and our primary market areas;

•our ability to successfully manage our credit risk and the sufficiency of our allowance for loan loss;

•factors that can impact the performance of our loan portfolio, including real estate values and liquidity in our primary market areas, the financial health of our commercial borrowers and the success of construction projects that we finance, including any loans acquired in acquisition transactions;

•compliance with governmental and regulatory requirements, particularly those relating to banking, consumer protection, securities and tax matters, and our ability to maintain licenses required in connection with commercial mortgage origination, sale and servicing operations;

•the impact of recent and future legislative and regulatory changes, including changes in banking, securities, tax and trade laws and regulations, and their application by our regulators;

•the effects of acts of war or terrorism, severe weather, natural disasters, widespread disease or pandemics, including the COVID-19 pandemic, and other external events;

•the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents;

•interruptions involving our information technology and telecommunications systems or third-party servicers;

•risks related to our acquisition strategy, including our ability to identify suitable acquisition candidates, exposure to potential asset and credit quality risks and unknown or contingent liabilities, the time and costs of integrating systems, procedures and personnel, the need for capital to finance such transactions, our ability to obtain required regulatory approvals and possible failures in realizing the anticipated benefits from acquisitions;

•our ability to effectively execute our strategic plan and manage our growth;

•accounting treatment for loans acquired in connection with our acquisitions;

•changes in our senior management team and our ability to attract, motivate and retain qualified personnel;

•governmental monetary and fiscal policies;

•interest rate risks associated with our business;

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•liquidity issues, including our ability to raise additional capital, if necessary;

•fluctuations in the values of the securities held in our securities portfolio;

•the effectiveness of our risk management framework;

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•developments and uncertainty related to the future use and availability of some reference rates, such as the London Inter-Bank Offered Rate (“LIBOR”), as well as other alternative reference rates, such as the secured overnight financing rate (“SOFR”), and the adoption of a substitute;

•changes in accounting policies and practices, as may be adopted by state and federal regulatory agencies and the Financial Accounting Standards Board (the "FASB")~~, including the implementation of the Current Expected Credit Loss (CECL) accounting standard~~;

•the effects of severe weather, natural disasters, acts of war or terrorism, widespread disease or pandemics, including the COVID-19 pandemic, and other external events;

•the costs and obligations associated with being a public company;

•effects of competition within our market areas from a wide variety of local, regional, national and other providers of financial, investment and insurance services;

•our dependence on non-core funding sources and our cost of funds;

•our ability to maintain our reputation; and

•the impact of any claims or legal actions to which we may be subject, including any effect on our reputation.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Form 10-K. Because of these risks and other uncertainties, our actual future results, performance or achievement, or industry results, may be materially different from the results indicated by the forward-looking statements in this Form 10-K. In addition, our past results of operations are not necessarily indicative of our future results. You should not rely on any forward-looking statements, which represent our beliefs, assumptions and estimates only as of the dates on which they were made, as predictions of future events. Any forward-looking statement speaks only as of the date on which it is made, and we do not undertake any obligation to update or review any forward-looking statement, whether as a result of new information, future developments or otherwise.

Part I

Item 1 - Business

Company Overview

Level One Bancorp, Inc. (the "Company," "Level One," "we," "our," or "us") is the bank holding company, registered under the Bank Holding Company Act of 1956, as amended ("BHCA"), for Level One Bank (the "Bank"), headquartered in Farmington Hills located in Oakland County, Michigan. The Company is a Michigan corporation incorporated in 2006 and a financial holding company. The Bank has grown rapidly since its founding in 2007 and is one of the largest locally-headquartered commercial banks in southeastern Michigan. This growth has been driven primarily by our entrepreneurial culture, our experienced management team and by the economic strength of our core market area in Oakland County, which, as of December 31, ~~2020~~2021, had the ~~fourteenth~~eighteenth highest median income in the United States of counties with over one million residents. As of December 31, ~~2020~~2021, we had $2.44 52 billion in assets, $1.7265 billion in loans, $12.96 04 billion in deposits and total shareholders’ equity of $~~215~~240.3 1 million. We generated net income of $2032.45 million for the year ended December 31, ~~2020~~2021, or $23.5795 per diluted common share, and $1620.14 million for the year ended December 31, ~~2019~~2020, or $2.0557 per diluted common share.

InSince our ~~thirteen~~formation 15 years ~~of operation~~ago, we have grown to 17 offices, including 9nine banking centers (our full‑service branches) in Oakland County, one banking center in each of Detroit and Grand Rapids, Michigan’s two largest cities, one banking center in Sterling Heights, one banking center in Jackson, and three banking centers and a mortgage loan production office in Ann Arbor. In addition to our organic growth, we acquired Michigan Heritage Bank in 2009, Paramount Bank in 2010, Lotus Bank in 2015, and Bank of Michigan in 2016, which added to our commercial banking, retail banking and mortgage lending while expanding our product suite and staffing levels. We also acquired Ann Arbor State Bank as of January 2, 2020, which expanded our client base in Ann Arbor by adding two banking centers to our already established banking center and a mortgage production office, and another banking center in Jackson. ~~Our aim is to continue our growth, primarily through organic growth but supplemented by opportunistic acquisitions that are additive to our franchise value.~~

~~Lending~~On ~~Activities~~November 4, 2021, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with First Merchants Corporation., an Indiana corporation (“First Merchants”). The Merger Agreement provides that, upon the terms and subject to the conditions set forth therein, we will merge with and into First Merchants (the “Merger”), with First Merchants as the surviving corporation in the Merger. Immediately following the Merger, the Bank will consolidate with and into First Merchant’s’ wholly owned bank subsidiary, First Merchants Bank, with First Merchants Bank as the surviving entity.

We offer a broad and growing set of lending products and related services, made up of commercial real estate loans, including construction and land development loans; commercial and industrial loans, including lines of credit, term loans, and loans under the Small Business Administration (SBA) lending program (including paycheck protection program ("PPP") loans); residential real estate loans; and consumer loans, including home equity loans, automobile loans and credit card services. We target our services to owner-managed businesses, professional firms, real estate professionals, not-for-profit businesses and

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~~consumers~~Upon ~~within~~the terms and subject to the conditions set forth in the Merger Agreement, at the effective time of the Merger, each share of our ~~geographic~~common ~~markets~~stock ~~who~~outstanding ~~meet~~immediately prior to the effective time of the Merger will be converted into the right to receive (i) 0.7167 shares of First Merchants common stock and (ii) $10.17 in cash. Each share of our ~~underwriting~~7.50% ~~standards~~Non-Cumulative Perpetual Preferred Stock, Series B (“Level One Preferred Stock”) outstanding immediately prior to the effective time of the Merger will be converted into the right to receive a share of a newly created series of preferred stock of First Merchants having voting powers, preferences and special rights that are substantially identical to the Level One Preferred Stock (“First Merchants Preferred Stock”). Each depositary share issued pursuant to the Deposit Agreement, dated as of August 13, 2020, among Level One, Continental Stock Transfer & Trust Company, as depositary, and the holders from time to time of the depositary receipts described therein, representing one-hundredth of one share of the Level One Preferred Stock, shall thereupon represent one-hundredth of one share of the First Merchants Preferred Stock.

WeLending focus primarily on originating commercial and industrial loans, owner occupied commercial real estate loans and, to a lesser extent, non-owner occupied commercial real estate loans in our primary market areas, which include Oakland County, the Detroit metropolitan area, the Grand Rapids metropolitan area, and the Ann Arbor metropolitan area. We have lenders dedicated to targeting mid-sized businesses with between $5.0 million and $50.0 million of annual revenue, but we also target small businesses with annual revenue of less than $5.0 million. Activities

Our commercial lending focuses primarily on originating commercial and industrial loans, owner occupied commercial real estate loans and, non-owner occupied commercial real estate loans in our primary market areas, which include Oakland County, the Detroit metropolitan area, the Grand Rapids metropolitan area, and the Ann Arbor metropolitan area. We have lenders dedicated to targeting mid-sized businesses with between $5.0 million and $50.0 million of annual revenue, but we also target small businesses with annual revenue of less than $5.0 million.

Commercial Loans. The commercial loans offered by the Bank include (i) commercial mortgages, (ii) commercial and industrial loans consisting of operating lines of credit, term loans, SBA-guaranteed loans (including PPP loans) and loans guaranteed by other loan programs such as the Michigan Economic Development Corporation (MEDC) collateral support program and, in the past, the U.S. Department of Agriculture (USDA) Business and Industry program; and (iii) commercial real estate construction and land development loans. Targeted customer groups include small and mid-sized business owners and operators. Another target group is professionals who are likely to build and occupy facilities at their principal employment locations.

The Bank’s commercial mortgages are used to provide construction and permanent financing for owner-occupied, retail and office buildings, and multi-family buildings. Commercial real estate secured loans are generally written on a five-year term, with amortizing periods ranging up to twenty years. Interest rates may be fixed for three to seven years, or adjustable. The Bank generally charges an origination fee for its services. We generally require personal guarantees from the principal owners of the property supported by a review of the principal owners’ personal financial statements. We attempt to limit our risk by analyzing the borrowers’ cash flow and collateral value on an ongoing basis and by an annual review of rent rolls and financial statements. The conventional loan-to-value ratio as established by an independent appraisal typically will not exceed 80% for these loans. Owner-occupied commercial real estate loans were $~~275~~283.04 million, or 1617.01% of the Company’s loan portfolio, and non-owner occupied commercial real estate/multi-family loans were $~~445~~467.84 million, or 2528.93% of the Company’s loan portfolio, as of December 31, ~~2020~~2021.

Commercial and industrial loans are generally made to small to mid-sized businesses for business purposes and are supported by the cash flow of the underlying business as well as collateral of accounts receivable, inventory and/or equipment and personal guaranties from the business owners. SBA, MEDC, and USDA lending programs are utilized to enhance the credit quality of loans that already meet the requirements of the Company’s rigorous credit underwriting policies and procedures. These programs have a further benefit to the Company in terms of liquidity and potential fee income, since there is an active secondary market that will purchase the guaranteed portion of these loans at a premium. Our operating lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit and term loans typically are reviewed annually. Commercial and industrial loans are primarily underwritten on the basis of the borrower’s ability to service the loan from operating income. The terms of these loans vary by purpose and by type of underlying collateral. We typically make equipment loans for a term of five years or less at fixed or adjustable rates, with the loan fully amortized over the term. Loans to support working capital typically have terms not exceeding one year and are usually secured by accounts receivable, inventory and personal guarantees of the principals of the business. The interest rates charged on loans vary with the degree of risk and loan amount and are further subject to competitive pressures, money market rates, the availability of funds and government regulations. For loans secured by accounts receivable and inventory, principal is typically repaid as the assets securing the loan are converted into cash (monitored on a monthly, quarterly or more frequent basis as determined necessary in the underwriting process), and for loans secured with other types of collateral, principal is typically due at maturity. As of December 31, ~~2020~~2021, ~~commercial and industrial loans (including PPP loans) totaled approximately $685.5 million, or 39.8% of the Company’s loan portfolio.~~

Construction loans include commercial projects (such as multi-family housing, industrial, office and retail centers). Permanent financing is typically offered for commercial properties under construction. These loans typically have a term of less than 18 months, floating interest rates and commitment fees. Construction loans for investment real estate are made to developers who have an established record of successful project completion and loan repayment. Loan repayment for owner occupied transactions is generally from permanent financing with either the Bank or a qualified mortgage lender. The conventional loan-to-value ratio as established by independent appraisal typically is limited to 80% or less for owner occupied and 75% or less for non-owner occupied real estate. Loan proceeds are disbursed based on the percentage of completion and only after an experienced construction lender or third-party inspector has inspected the project, with construction monitoring handled by the Bank’s Credit Administration department, which ensures title policies are updated for each construction draw. At December 31, 2020, we had in $82.5 million construction loans outstanding, representing 4.8% of the Company’s loan portfolio, with $56.9 million in undisbursed commitments.

Residential Real Estate. We originate both fixed-rate loans and adjustable-rate loans in our residential lending program. Generally, these loans are originated to meet the requirements of the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan Mortgage Corporation ("Freddie Mac"), Federal Housing Administration ("FHA"), Veterans Affairs

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~~("VA")~~commercial and ~~jumbo~~industrial loans ~~for~~(including ~~sale~~PPP ~~in the secondary market to investors. We typically sell our long term fixed rate and retain our adjustable loan originations. We generally underwrite our one- to four-family~~ loans based on the applicant’s employment, debt to income levels, credit history and the appraised value of the subject property. Generally, we lend up to 80% of the lesser of the appraised value or purchase price for one- to four-family conforming residential loans. In situations where we grant a residential first mortgage loan with a loan-to-value ratio in excess of 80%, we generally require private mortgage insurance in order to reduce our exposure to 80% or less. Properties securing our one- to four-family loans are generally appraised by independent appraisers selected by our appraisal management companies conforming with appraisal independent compliance guidelines. We require our borrowers to obtain title and hazard insurance, and flood insurance, if necessary, in an amount equal to the regulatory maximum. Fixed rate loans generally are offered on a fully amortizing basis for terms ranging from 10 to 30 years at interest rates and fees that reflect current secondary market pricing. Most adjustable rate mortgage (ARM) products offered adjust annually after an initial period ranging from one to ten years, subject to a limitation on the annual change of 1.0% to 2.0% and a lifetime limitation of 5.0% to 6.0%. Beginning in 2021, these ARM products most frequently adjust based upon the 30-day average yield of the SOFR index adjusted to a constant maturity of six months plus a margin or spread above the index. Generally, ARM loans held in our portfolio do not allow for interest-only payments nor negative amortization of principal and carry allowable prepayment restrictions. The Bank also makes a limited amount of loans secured by second mortgages on residential real estate. Second residential mortgages may have a loan to value of up 80% when combined with the first mortgage; however exceptions can be made based on credit capacity, collateral and the banking relationship. Also included in residential real estate loans are home equity lines of credit. Home equity lines of credit generally have a loan to value ratio of up to 90% at the time of origination when combined with the first mortgage. In 2020, the Bank temporarily restricted the loan to value ratio to 80% at the time of origination when combined with a first mortgage due to the uncertainty related to COVID-19. The majority of these loans are secured by a first or second mortgage on residential property. Home equity lines of credit allow for a 10-year draw period, followed by a 10-year repayment period, and the interest rate is generally tied to the prime rate as published by the Wall Street Journal and may include a margin. As of December 31, 2020, residential loans totaled approximately $~~315~~460.5 million, or 1827.39% of the Company’s loan portfolio~~, of which $42~~.~~4 million were home equity lines of credit.~~

~~Consumer~~Construction ~~Loans.~~loans ~~Consumer~~include ~~loans~~commercial ~~offered~~projects by(such ~~the~~as ~~Bank~~multi-family ~~include~~housing, ~~personal~~industrial, ~~installment~~office and ~~auto~~retail ~~loans~~centers). ~~and~~Permanent ~~credit~~financing ~~cards~~is ~~through~~typically aoffered ~~third-party~~for ~~provider.~~commercial ~~Personal~~properties ~~lines~~under ofconstruction. ~~credit~~These ~~generally~~loans typically have ~~maturities~~a ~~from~~term ~~one~~of toless ~~five~~than ~~years~~18 ~~and~~months, ~~variable~~floating interest rates. ~~Personal~~and ~~unsecured~~commitment fees. Construction loans for investment real estate are ~~available~~made to ~~creditworthy~~developers ~~bank~~who ~~customers~~have ~~with~~an ~~limits~~established ~~determined~~record onof asuccessful ~~loan~~project bycompletion and loan ~~basis~~repayment. ~~Credit~~Loan ~~reports~~repayment ~~and~~for ~~industry~~owner ~~standard~~occupied ~~debt~~transactions is generally from permanent financing with either the Bank or a qualified mortgage lender. The conventional loan-to-~~income~~value ~~ratios~~ratio as established by independent appraisal typically is limited to 80% or less ~~are~~for ~~used~~owner tooccupied ~~qualify~~and ~~borrowers~~75% or less for non-owner occupied real estate. AsLoan proceeds are disbursed based on the percentage of completion and only after an experienced construction lender or third-party inspector has inspected the project, with construction monitoring handled by the Bank’s Credit Administration department, which ensures title policies are updated for each construction draw. At December 31, ~~2020~~2021, ~~consumer~~we ~~loans~~had ~~totaled~~in ~~approximately~~ $176.74 million construction loans outstanding, orrepresenting 04.16% of the Company’s loan portfolio, with $71.3 million in undisbursed commitments.

~~Loan~~Residential ~~Policy~~Real Estate. We originate both fixed-rate loans and ~~Approval~~adjustable-rate loans in our residential lending program. ~~Loan~~Generally, ~~authority~~these isloans ~~delegated~~are byoriginated to meet the ~~Directors~~requirements of the Federal National Mortgage Association ("Fannie Mae"), the Federal Home Loan ~~Committee.~~Mortgage ~~The~~Corporation ~~Bank~~("Freddie ~~does~~Mac"), ~~not~~Federal ~~provide~~Housing ~~loan~~Administration ~~authority~~("FHA"), Veterans Affairs ("VA") and jumbo loans for sale in the secondary market to ~~any~~investors. ~~one~~We ~~individual,~~typically ~~but~~sell ~~takes~~our along ~~risk~~term ~~management~~fixed ~~approach~~rate and retain our adjustable loan originations. We generally underwrite our one- to four-family loans based on ~~aggregate~~the applicant’s employment, debt to income levels, credit ~~exposure~~history and ~~risk~~the ~~grading~~appraised value of the subject property. ~~Aggregate~~Generally, we lend up to 80% of the lesser of the appraised value or purchase price for one- to four-family conforming residential loans. In situations where we grant a residential first mortgage loan with a loan-to-value ratio in excess of 80%, we generally require private mortgage insurance in order to reduce our exposure ~~less~~to ~~than~~80% $2or less.0 ~~million~~Properties ~~requires~~securing ~~multi~~our one-~~signature~~ ~~approval~~to four-family loans are generally appraised by independent appraisers selected by our appraisal management companies conforming with appraisal independent compliance guidelines. ~~The~~We ~~Management~~require ~~Loan~~our ~~Committee~~borrowers ~~has~~to ~~approval~~obtain ~~authority~~title upand hazard insurance, and flood insurance, if necessary, in an amount equal to $the regulatory maximum. Fixed rate loans generally are offered on a fully amortizing basis for terms ranging from 10 to 30 years at interest rates and fees that reflect current secondary market pricing. Most adjustable rate mortgage (ARM) products offered adjust annually after an initial period ranging from one to ten years, subject to a limitation on the annual change of 1.0% to 2.0% and a lifetime limitation of 5.0% to 6.0%. ~~million~~Beginning in 2021, these ARM products most frequently adjust based upon the 30-day average yield of the SOFR index adjusted to a constant maturity of six months plus a margin or spread above the index. ~~All~~Generally, ~~other~~ARM loans ~~require~~held ~~approval~~in our portfolio do not allow for interest-only payments nor negative amortization of principal and carry allowable prepayment restrictions. The Bank also makes a limited amount of loans secured by ~~the~~second ~~Directors~~mortgages ~~Loan~~on ~~Committee~~residential real estate. ~~Each~~Second ~~loan~~residential ~~request~~mortgages ~~requires~~may ~~some~~have ~~level~~a loan to value of up 80% when combined with the first mortgage; however exceptions can be made based on credit ~~approval~~capacity, collateral and the banking relationship. ~~Under~~Also ~~applicable~~included ~~federal~~in ~~and~~residential ~~state~~real ~~law~~estate loans are home equity lines of credit. Home equity lines of credit generally have a loan to value ratio of up to 90% at the time of origination when combined with the first mortgage. In 2020, the Bank’s ~~permissible~~temporarily ~~loans~~restricted the loan to ~~one~~value ~~borrower~~ratio ~~are~~to ~~limited~~80% at the time of origination when combined with a first mortgage due to ~~$56~~the uncertainty related to COVID-19.1 ~~million~~The inmajority of these loans are secured by a first or second mortgage on residential property. Home equity lines of credit allow for a 10-year draw period, followed by a 10-year repayment period, and the ~~aggregate~~interest rate is generally tied to the prime rate as published by the Wall Street Journal and may include a margin. As of December 31, ~~2020~~2021, ~~subject~~residential toloans ~~two-thirds~~totaled ~~board~~approximately ~~approval~~$440.6 million, or 26.7% of the Company’s loan portfolio, of which $35.2 million were home equity lines of credit.

~~Deposit~~Consumer ~~Services~~Loans. ~~The~~Consumer ~~Bank~~loans ~~offers~~offered aby ~~full~~the ~~range~~Bank ofinclude ~~deposit~~personal ~~services~~installment ~~insured~~and byauto ~~the~~loans ~~Federal~~and ~~Deposit~~credit ~~Insurance~~cards ~~Corporation~~through ~~(FDIC),~~a ~~including~~third-party ~~(i)~~provider. ~~commercial~~Personal ~~checking~~lines ~~and~~of ~~small~~credit ~~business~~generally ~~checking~~have ~~products,~~maturities ~~(ii)~~from ~~retirement~~one ~~accounts~~to ~~such~~five asyears ~~Individual~~and ~~Retirement~~variable ~~Accounts~~interest ~~(IRAs),~~rates. ~~and~~Personal ~~(iii)~~unsecured ~~retail~~loans ~~deposit~~are ~~services~~available ~~such~~to ascreditworthy ~~certificates~~bank ofcustomers ~~deposits,~~with ~~money~~limits ~~market~~determined ~~accounts,~~on ~~savings~~a ~~accounts,~~loan ~~checking~~by ~~account~~loan ~~products~~basis. Credit reports and ~~Automated~~industry ~~Teller~~standard ~~Machines~~debt-to-income ~~(ATMs)~~ratios or less are used to qualify borrowers. ~~The~~As ~~Bank~~of ~~also~~December 31, ~~offers~~2021, ~~debit~~consumer ~~cards~~loans ~~and~~totaled ~~internet~~approximately ~~banking~~$837 asthousand, ~~well~~or ~~commercial~~0.1% ~~depository~~of ~~(treasury~~the ~~management)~~Company’s ~~services~~loan portfolio.

~~The~~Loan ~~Bank’s~~Policy ~~business~~and ~~strategy~~Approval. ~~concentrates~~Loan ~~heavily~~authority onis delegated by the ~~generation~~Directors ofLoan ~~“core”~~Committee. ~~deposits,~~The ~~which~~Bank ~~are~~does ~~generally~~not ~~defined~~provide asloan ~~demand~~authority ~~deposit~~to ~~accounts~~any one individual, ~~money~~but ~~market~~takes ~~accounts,~~a ~~negotiable~~risk ~~order~~management ofapproach ~~withdrawal~~based ~~(NOW)~~on ~~accounts,~~aggregate credit exposure and ~~time~~risk ~~deposit~~grading. ~~accounts~~Aggregate ofexposure less than $~~250 thousand~~2.0 ~~The~~million ~~Bank~~requires ~~focuses~~multi-signature ~~its~~approval. ~~deposit~~The ~~efforts~~Management onLoan ~~cash~~Committee ~~rich~~has ~~businesses~~approval ~~such~~authority asup ~~insurance~~to ~~companies,~~$6.0 ~~insurance~~million. ~~agents,~~All ~~trade~~other ~~associations,~~loans ~~title~~require ~~and~~approval ~~escrow~~by ~~companies,~~the ~~real~~Directors ~~estate~~Loan ~~offices,~~Committee. ~~churches~~Each ~~and~~loan ~~professionals~~request ~~such~~requires assome ~~physicians,~~level ~~attorneys~~of ~~and~~credit ~~other services providers~~approval. ~~The~~Under ~~Bank~~applicable ~~has~~federal ~~implemented deposit gathering strategies~~ and ~~tactics~~state tolaw, ~~attract~~the ~~and~~Bank’s ~~retain~~permissible ~~deposits~~loans ~~utilizing technology~~ to ~~deliver~~one ~~treasury~~borrower ~~management~~are ~~services~~limited (eto $65.g.1 ~~remote~~million ~~deposit capture, lock box, and electronic bill payments)~~ in ~~addition to~~ the ~~traditional~~aggregate ~~generation~~as of ~~deposit~~December ~~relationships~~31, in2021, ~~conjunction~~subject ~~with~~to ~~its~~two-thirds ~~lending~~board ~~activities~~approval.

InDeposit ~~addition,~~Services. asThe Bank offers a full range of ~~December 31,~~deposit ~~2020,~~services insured by the ~~Bank~~Federal ~~had~~Deposit ~~$29.3~~Insurance ~~million~~Corporation of(FDIC), ~~brokered~~including ~~deposits~~(i) commercial checking and ~~deposits~~small ~~obtained~~business ~~through~~checking ~~the~~products, ~~use~~(ii) ofretirement ~~internet~~accounts ~~listing~~such ~~services~~as Individual Retirement Accounts (~~approximately~~IRAs), ~~1.5%~~and of(iii) ~~total~~retail deposit services such as certificates of deposits)., money market accounts, savings

In addition, we generate fee income through our money services business clients (MSB), which provide cash management services for small, locally-owned cash intensive businesses. We intend to continue to grow this line of business, which we acquired in 2016 through our Bank of Michigan acquisition.

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accounts, checking account products and Automated Teller Machines (ATMs). The Bank also offers debit cards and internet banking as well commercial depository (treasury management) services.

The Bank’s business strategy concentrates heavily on the generation of “core” deposits, which are generally defined as demand deposit accounts, money market accounts, negotiable order of withdrawal (NOW) accounts, and time deposit accounts of less than $250 thousand. The Bank focuses its deposit efforts on cash rich businesses such as insurance companies, insurance agents, trade associations, title and escrow companies, real estate offices, churches and professionals such as physicians, attorneys and other services providers. The Bank has implemented deposit gathering strategies and tactics to attract and retain deposits utilizing technology to deliver treasury management services (e.g. remote deposit capture, lock box, and electronic bill payments) in addition to the traditional generation of deposit relationships in conjunction with its lending activities.

As of December 31, 2021, the Bank had $23.1 million of brokered deposits and deposits obtained through the use of internet listing services (approximately 1.1% of total deposits).

Competition

The financial services industry is highly competitive as we compete for loans, deposits and customer relationships in our market. Competition involves efforts to retain current clients, make new loans and obtain new deposits, increase the scope and sophistication of services offered and offer competitive interest rates paid on deposits and charged on loans. Within our branch footprint, we primarily face competition from national, regional and other local financial institutions that have established branch networks throughout our market areas, giving them visible retail presence to customers.

In mortgage banking, we face competition from a wide range of national financial institutions, regional and local community banks, as well as credit unions and national mortgage companies. In commercial banking, we face competition to underwrite loans to sound, stable businesses and real estate projects at competitive price levels that make sense for our business and risk profile. Our major commercial bank competitors include larger national, regional and local financial institutions that may have the ability to make loans on larger projects than we can or provide a larger mix of product offerings. We also compete with smaller local financial institutions that may have aggressive pricing and unique terms on various types of loans and, increasingly, financial technology platforms that offer their products exclusively through web-based portals.

In retail banking, we primarily compete with national, regional, and local banks that have visible retail presence and personnel in our market areas. The primary factors driving competition in consumer banking are customer service, interest rates, fees charged, branch locations and hours of operation and the range of products offered. We compete for deposits by advertising, offering competitive interest rates and seeking to provide a higher level of personal service. We also face competition from non-traditional alternatives to banks such as credit unions, money centers, money market mutual funds and cash management accounts.

We believe our ability to provide a flexible, sophisticated product offering and an efficient process to our customers allows us to stay competitive in the financial services environment. We believe our local presence and hands-on approach enables us to provide a high level of service that our customers value.

Our Market Areas

We believe the demographics of our market areas provide strong growth opportunities for our loan portfolio and deposits. The following chart, which is based on data from S&P Global Market Intelligence, shows our share of the deposits in our market areas as of June 30, ~~2020~~2021, which is the most recent data available.

	Deposits		Level One
(Dollars in millions)	in Market		Deposits		Market Share
Market Area by County
Oakland County	$	78,941.6	$	1,591.1	2.02	%
Washtenaw County	11,289.8		90.6		0.80
Wayne County	77,649.1		78.4		0.10
Macomb County	19,094.1		38.4		0.20
Kent County	20,458.6		18.6		0.09
Jackson County	2,776.5		16.5		0.59

Human Capital Resources

Level One’s community banking strategy relies heavily on the personal relationships and the quality of service provided by team members. Accordingly, Level One aims to attract, develop and retain team members who can drive financial and strategic growth objectives and build long-term shareholder value. Key items related to Level One’s human capital resources are described below.

Structure. As of December 31, 2020, Level One had 282 full-time equivalent team members, primarily located in Michigan. Level One’s Chief Human Resources Officer reports directly to the Chairman, President and CEO and manages all aspects of the team member experience, including talent acquisition, education and development, talent management, and compensation and benefits. None of our employees are a party to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

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Productivity. Level One carefully manages the size of its workforce and reallocates resources as needed. As of December 31, 2020, Level One’s total headcount was 8% higher than the preceding year-end mostly due to the acquisition of Ann Arbor State Bank that occurred on January 2, 2020. The addition of these new team members enhanced Level One’s presence and opportunity in its southeast Michigan market, Ann Arbor. Additionally, Level One team members produced record high mortgage volumes and outpaced its peers in supporting the PPP loan program for its customer base while providing approximately 900 PPP loans to new clients.


	Deposits		Level One
(Dollars in millions)	in Market		Deposits		Market Share
Market Area by County
Oakland County	$	82,923.0	$	1,609.0	1.94	%
Washtenaw County	12,654.5		276.4		2.18
Wayne County	90,258.1		77.4		0.09
Macomb County	20,970.0		43.1		0.21
Kent County	22,909.4		29.4		0.13
Jackson County	2,808.0		23.0		0.82

~~Diversity.~~Human ~~Level~~Capital One is committed to providing a safe and engaging environment for all team members. Level One has been recognized for eight years in a row as one of Metro Detroit's Best and Brightest Companies to Work for by MichBusiness. Level One believes this was driven largely by the commitment of its diverse talent who have ready access to decision makers. Level One believes that it meets all the requirements for a diverse workforce as evidenced by a strong Affirmative Action Plan and its retention of diverse talent. As an area of focus for Level One in 2020, Level One took a particular interest in the effect of societal turbulence on our minority team members and conducted an honest and sincere conversation about race relations with these team members. The team members then engaged in developing a path to enhance the engagement with Level One through further dialogue and programmatic support.Resources

Structure. As of December 31, 2021, Level One had 291 full-time equivalent team members, primarily located in Michigan. Level One’s Chief Human Resources Officer reports directly to the Chairman and CEO and manages all aspects of the team member experience, including talent acquisition, education and development, talent management, and compensation and benefits. None of Level One's team members are a party to a collective bargaining agreement. We consider Level One's relationship with its team members to be strong.

The Board of Directors and the Compensation Committee are updated on Level One’s talent development and human capital management strategies, with a focus on providing competitive compensation and benefit plans. Additionally, in 2021, the Board of Directors selected a new President of Level One Bank after a rigorous selection process facilitated by Kaplan Partners, an outside firm specializing in talent selection. A special committee of the Board was formed to evaluate two internal candidates, one of which was selected into the position. Selecting an internal candidate for the important position of President is evidence that Level One has invested in talent development.

Productivity. Level One carefully manages the size of its workforce and reallocates resources as needed. As of December 31, 2021, Level One’s total headcount was 11% higher than the preceding year-end due to the growth of Level One's mortgage division and acquisition of high performing mortgage professionals. Level One team members continued to produce record high mortgage volumes in 2021.

Diversity. Level One is committed to providing a safe and engaging environment for all team members. Level One has been recognized for nine years in a row as one of Metro Detroit's Best and Brightest Companies to Work for by MichBusiness. Level One believes this was driven largely by the commitment of its diverse talent who have ready access to decision makers. Level One believes that it meets all the requirements for a diverse workforce as evidenced by a strong Affirmative Action Plan and its retention of diverse talent.

Compensation and Benefits. Level One strives to provide pay, benefits, and services that help meet the varying needs of its team members. Compensation and benefits include market-competitive pay, retirement programs, broad-based bonuses, health and welfare benefits, financial counseling, paid time off, family leave and flexible work schedules. Level One periodically reviews compensation and benefits by grade level and position to ensure similar positions are paid comparatively and to ensure that Level One has a competitive and valuable offering to meet the well-being and needs of its team members.

Development and Retention. Level One measures the success of its talent acquisition strategy on speed and quality of acquisition, retention, and overall performance metrics. Sourcing strategies are reviewed to ensure that the best talent is attracted to Level One.

Level One has also created internal programs to support the development and retention of its team members, including an internal leadership development program designed to train emerging leaders, enhanced training for retail bank team members, and personality-type training for all team members to better understand themselves and others. Level One’s executives and managers participated in a conflict management course (Crucial Conversations) in 2021 as well as a course to enhance a leader’s ability to understand others (Emotional Intelligence). Additionally, specially focused development plans were created for high potential and key talent to ensure learning through a variety of experiences. Level One also supports its team members’ involvement in external development programs. For example, each year, women are sponsored to attend the MBA Women’s Forum and others are supported through attendance in webinars and conferences. A special accelerated program for emerging

Team member turnover for 2020 was 13%. In 2020, Level One conducted its second enterprise-wide team member engagement survey with an 84% participation rate. Two councils representing team members from across the organization were formed to address the feedback.8

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leaders was provided to eight new managers in 2021, facilitated by ICC (Innovate. Coach. Consult). The program was well received by participants and their managers.

Team member turnover for 2021 was 16.7%. Like many other companies, Level One Bank experienced elements of the Great Resignation as the labor market was rich with opportunities. While Level One’s turnover was higher than in the past, it was not considered to threaten Level One’s ability to meet customer needs in a safe and sound manner.

Culture and Core Values. Level One leadership believes the foundation of its culture is built on six core values: Passion, Relationship Focused, Humble Yet Confident, Hardest Job You’ll Ever Love, Do What’s Best, and Results Matter. These core values are embedded in all team members’ performance reviews and talent discussions and are present in all interviews, selection decisions and promotions. The energy and dedication to Level One’s entrepreneurial spirit are driven by these core values and are evidenced by positive engagement survey results.

COVID-19. In 2020, in response to the COVID-19 pandemic, over 75% of Level One’s team members were able to work remotely. Level One also provided 10 days of paid time off for team members exposed to COVID-19 or who were diagnosed with COVID-19 prior to the passing of the Families First Coronavirus Response Act. Level One adopted each of the provisions of the CARES Act relating to 401(k) loan and withdrawal relief and Level One participated in no-cost health care benefits pertaining to COVID-19 along with free telehealth visits. Level One did not reduce salaries or any other benefits during this time to support our team members through the pandemic.

Corporate Information

Our principal executive office is located at 32991 Hamilton Court, Farmington Hills, Michigan, and our telephone number is (248) 737-0300. Our website address is www.levelonebank.com. Through our website, under “Investor Relations - Financials,” we make available, free of charge, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as proxy statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the U.S. Securities and Exchange Commission (the “SEC”). The contents of our website are not incorporated by reference into this report.

Supervision and Regulation

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General

FDIC-insured institutions, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Michigan Department of Insurance and Financial Services (the “DIFS”), the FDIC, the Board of Governors of the Federal Reserve System (the “Federal Reserve”), and the Consumer Financial Protection Bureau (the “CFPB”). Furthermore, taxation laws administered by the Internal Revenue Service and state taxing authorities, accounting rules developed by the FASB, securities laws administered by the SEC and state securities authorities, and anti-money laundering laws enforced by the U.S. Department of the Treasury (“Treasury”) have an impact on our business. The effect of these statutes, regulations, regulatory policies and accounting rules are significant to our operations and results.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of FDIC-insured institutions, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than shareholders. These laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of our business, the kinds and amounts of investments the Company and the Bank may make, required capital levels relative to assets, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with the Company’s and the Bank’s insiders and affiliates and our payment of dividends. In reaction to the global financial crisis and particularly following the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), we experienced heightened regulatory requirements and scrutiny. Although the reforms primarily targeted systemically important financial service providers, their influence filtered down in varying degrees to community banks over time and caused our compliance and risk management processes, and the costs thereof, to increase. Then, in May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (“Regulatory Relief Act”) was enacted by Congress in part to provide regulatory relief for community banks and their holding companies. To that end, the law eliminated questions about the applicability of certain Dodd-Frank Act reforms to community bank systems, including relieving us of any requirement to engage in mandatory stress tests, maintain a risk committee or comply with the Volcker Rule’s complicated prohibitions on proprietary trading and ownership of private funds. We believe these reforms are favorable to our operations.

The supervisory framework for U.S. banking organizations subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that are not publicly available and that can impact the conduct and growth of their business. These examinations consider not only compliance with applicable laws and regulations, but also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to the Company and the Bank, beginning with a discussion of the impact of the COVID-19 pandemic on the banking industry. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

COVID-19 Pandemic

The federal bank regulatory agencies, along with their state counterparts, have issued a steady stream of guidance responding to the COVID-19 pandemic and have taken a number of unprecedented steps to help banks navigate the pandemic and mitigate its impact. These include, without limitation: requiring banks to focus on business continuity and pandemic planning; adding pandemic scenarios to stress testing; encouraging bank use of capital buffers and reserves in lending programs; permitting certain regulatory reporting extensions; reducing margin requirements on swaps; permitting certain otherwise prohibited investments in investment funds; issuing guidance to encourage banks to work with customers affected by the pandemic and encourage loan workouts; and providing credit under the Community Reinvestment Act (“CRA”) for certain pandemic-related loans, investments and public service. Because of the need for social distancing measures, the agencies revamped the manner in which they conducted periodic examinations of their regulated institutions, including making greater use of off-site reviews.

Moreover, the Federal Reserve issued guidance encouraging banking institutions to utilize its discount window for loans and intraday credit extended by its Reserve Banks to help households and businesses impacted by the pandemic and announced numerous funding facilities. The FDIC also has acted to mitigate the deposit insurance assessment effects of participating in the PPP and the Federal Reserve’s PPP Liquidity Facility and Money Market Mutual Fund Liquidity Facility.

Reference is made to “Item 1A. Risk Factors — COVID-19 Risks” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations — Recent Developments — Impact of COVID-19 Pandemic” for information on

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~~the~~The ~~Coronavirus~~following ~~Aid,~~is ~~Relief~~a ~~and~~summary ~~Economic~~of ~~Security~~the ~~Act~~material ~~(“CARES~~elements ~~Act”),~~of ~~PPP~~the ~~program~~supervisory and ~~the~~regulatory ~~Federal~~framework ~~Reserve’s~~applicable ~~lending~~to ~~facilities~~the Company and ~~for~~the ~~discussions~~Bank, beginning with a discussion of the ~~economic~~ impact of the COVID-19 pandemic on the banking industry. InIt ~~addition~~does not describe all of the statutes, ~~information~~regulations asand toregulatory ~~selected~~policies ~~topics~~that apply, ~~such~~nor asdoes ~~the~~it ~~impact~~restate onall ~~capital~~of the requirements, ~~dividend~~of ~~payments,~~those ~~reserves~~that ~~and~~are ~~CRA,~~described. isThe ~~contained~~descriptions are qualified in ~~the~~their ~~relevant~~entirety ~~sections~~by ofreference ~~this~~to ~~Supervision~~the ~~and~~particular ~~Regulation~~statutory ~~discussion~~and ~~provided~~regulatory ~~below~~provision.

The Role of Capital

Regulatory capital represents the net assets of a banking organization available to absorb losses. Because of the risks attendant to their business, FDIC-insured institutions are generally required to hold more capital than other businesses, which directly affects our earnings capabilities. While capital has historically been one of the key measures of the financial health of both bank holding companies and banks, its role became fundamentally more important in the wake of the global financial crisis, as the banking regulators recognized that the amount and quality of capital held by banks prior to the crisis was insufficient to absorb losses during periods of severe stress. Certain provisions of the Dodd-Frank Act and Basel III, discussed below, establish capital standards for banks and bank holding companies that are meaningfully more stringent than those in place previously.

Capital Levels. Banks have been required to hold minimum levels of capital based on guidelines established by the bank regulatory agencies since 1983. The minimums have been expressed in terms of ratios of “capital” divided by “total assets”. The capital guidelines for U.S. banks beginning in 1989 have been based upon international capital accords (known as “Basel” rules) adopted by the Basel Committee on Banking Supervision, a committee of central banks and bank supervisors that acts as the primary global standard-setter for prudential regulation, as implemented by the U.S. bank regulatory agencies on an interagency basis. The accords recognized that bank assets for the purpose of the capital ratio calculations needed to be risk weighted (the theory being that riskier assets should require more capital) and that off-balance sheet exposures needed to be factored in the calculations. Following the global financial crisis, the Group of Governors and Heads of Supervision, the oversight body of the Basel Committee on Banking Supervision, announced agreement on a strengthened set of capital requirements for banking organizations around the world, known as Basel III, to address deficiencies recognized in connection with the global financial crisis.

The Basel III Rule. In July 2013, the U.S. federal banking agencies approved the implementation of the Basel III regulatory capital reforms in pertinent part, and, at the same time, promulgated rules effecting certain changes required by the Dodd-Frank Act (the “Basel III Rule”). In contrast to capital requirements historically, which were in the form of guidelines, Basel III was released in the form of binding regulations by each of the regulatory agencies. The Basel III Rule increased the required quantity and quality of capital and required more detailed categories of risk weighting of riskier, more opaque assets. For nearly every class of assets, the Basel III Rule requires a more complex, detailed and calibrated assessment of risk in the calculation of risk weightings. The Basel III Rule is applicable to all banking organizations that are subject to minimum capital requirements, including federal and state banks and savings and loan associations, as well as to bank and savings and loan holding companies, other than “small bank holding companies” (generally certain holding companies with consolidated assets of less than $3 billion, like the Company) and certain qualifying banking organizations that may elect a simplified framework (which we have not done). Thus, the Bank is currently subject to the Basel III Rule as described below.

Not only did the Basel III Rule increase most of the required minimum capital ratios in effect prior to January 1, 2015, but, in requiring that forms of capital be of higher quality to absorb loss, it introduced the concept of Common Equity Tier 1 Capital, which consists primarily of common stock, related surplus (net of Treasury stock), retained earnings, and Common Equity Tier 1 minority interests subject to certain regulatory adjustments. The Basel III Rule also changed the definition of capital by establishing more stringent criteria that instruments must meet to be considered Additional Tier 1 Capital (primarily non-cumulative perpetual preferred stock that meets certain requirements) and Tier 2 Capital (primarily other types of preferred stock and subordinated debt, subject to limitations). The Basel III Rule also constrained the inclusion of minority interests, mortgage-servicing assets, and deferred tax assets in capital and required deductions from Common Equity Tier 1 Capital in the event that such assets exceeded a percentage of a banking institution’s Common Equity Tier 1 Capital.

The Basel III Rule required minimum capital ratios as of January 1, 2015, as follows:

•A ratio of minimum Common Equity Tier 1 Capital equal to 4.5% of risk-weighted assets;

•A ratio of minimum Tier 1 Capital equal to 6% of risk-weighted assets;

•A continuation of the minimum required amount of Total Capital (Tier 1 plus Tier 2) at 8% of risk-weighted assets; and

•A minimum leverage ratio of Tier 1 Capital to total quarterly average assets equal to 4% in all circumstances.

In addition, institutions that seek the freedom to make capital distributions (including for dividends and repurchases of stock) and pay discretionary bonuses to executive officers without restriction must also maintain 2.5% in Common Equity Tier 1 Capital attributable to a capital conservation buffer. The purpose of the conservation buffer is to ensure that banking institutions maintain a buffer of capital that can be used to absorb losses during periods of financial and economic stress. ~~Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital,~~

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Factoring in the conservation buffer increases the minimum ratios depicted above to 7% for Common Equity Tier 1 Capital, 8.5% for Tier 1 Capital and 10.5% for Total Capital. The federal bank regulators released a joint statement in response to the COVID-19 pandemic reminding the industry that capital and liquidity buffers were meant to give banks the means to support the economy in adverse situations, and that the agencies would support banks that use the buffers for that purpose if undertaken in a safe and sound manner.

Well-Capitalized Requirements. The ratios described above are minimum standards in order for banking organizations to be considered “adequately capitalized.” Bank regulatory agencies uniformly encourage banks to hold more capital and be “well-capitalized” and, to that end, federal law and regulations provide various incentives for banking organizations to maintain regulatory capital at levels in excess of minimum regulatory requirements. For example, a banking organization that is well-capitalized may: (i) qualify for exemptions from prior notice or application requirements otherwise applicable to certain types of activities; (ii) qualify for expedited processing of other required notices or applications; and (iii) accept, roll-over or renew brokered deposits. Higher capital levels could also be required if warranted by the particular circumstances or risk profiles of individual banking organizations. For example, the Federal Reserve’s capital guidelines contemplate that additional capital may be required to take adequate account of, among other things, interest rate risk, or the risks posed by concentrations of credit, nontraditional activities or securities trading activities. Further, any banking organization experiencing or anticipating significant growth would be expected to maintain capital ratios, including tangible capital positions (i.e., Tier 1 Capital less all intangible assets), well above the minimum levels.

Under the capital regulations of the Federal Reserve for the Company and the FDIC for the Bank, in order to be well‑capitalized, we must maintain:

•A Common Equity Tier 1 Capital ratio to risk-weighted assets of 6.5% or more;

•A ratio of Tier 1 Capital to total risk-weighted assets of 8% or more;

•A ratio of Total Capital to total risk-weighted assets of 10% or more; and

•A leverage ratio of Tier 1 Capital to total adjusted average quarterly assets of 5% or greater.

It is possible under the Basel III Rule to be well-capitalized while remaining out of compliance with the capital conservation buffer discussed above.

As of December 31, ~~2020~~2021: (i) the Bank was not subject to a directive from DIFS or FDIC to increase its capital and (ii) the Bank was well-capitalized, as defined by FDIC regulations. As of December 31, ~~2020~~2021, the Company had regulatory capital in excess of the Federal Reserve’s requirements and met the Basel III Rule requirements to be well-capitalized. We are also in compliance with the capital conservation buffer.

Prompt Corrective Action. The concept of an institution being “well-capitalized” is part of a regulatory enforcement regime that provides the federal banking regulators with broad power to take “prompt corrective action” to resolve the problems of institutions based on the capital level of each particular institution. The extent of the regulators’ powers depends on whether the institution in question is “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” or “critically undercapitalized,” in each case as defined by regulation. Depending upon the capital category to which an institution is assigned, the regulators’ corrective powers include: (i) requiring the institution to submit a capital restoration plan; (ii) limiting the institution’s asset growth and restricting its activities; (iii) requiring the institution to issue additional capital stock (including additional voting stock) or to sell itself; (iv) restricting transactions between the institution and its affiliates; (v) restricting the interest rate that the institution may pay on deposits; (vi) ordering a new election of directors of the institution; (vii) requiring that senior executive officers or directors be dismissed; (viii) prohibiting the institution from accepting deposits from correspondent banks; (ix) requiring the institution to divest certain subsidiaries; (x) prohibiting the payment of principal or interest on subordinated debt; and (xi) ultimately, appointing a receiver for the institution.

Community Bank Capital Simplification. Community banks have long raised concerns with bank regulators about the regulatory burden, complexity, and costs associated with certain provisions of the Basel III Rule. In response, Congress provided an “off-ramp” for institutions, like us, with total consolidated assets of less than $10 billion. Section 201 of the Regulatory Relief Act instructed the federal banking regulators to establish a single “Community Bank Leverage Ratio” (“CBLR”) of between 8 and 10%. Under the final rule, a community banking organization is eligible to elect the new framework if it has: less than $10 billion in total consolidated assets, limited amounts of certain assets and off-balance sheet exposures, and a CBLR greater than 9%. The bank regulatory agencies temporarily lowered the CBLR to 8% as a result of the COVID-19 pandemic. We may elect the CBLR framework at any time but have not currently determined to do so.

Regulation and Supervision of the Company

General. As the sole shareholder of the Bank, we are a bank holding company. As a bank holding company, we are registered with, and is subject to regulation supervision and enforcement by, the Federal Reserve under the BHCA. We are legally obligated to act as a source of financial strength to the Bank and to commit resources to support the Bank in circumstances where we might not otherwise do so. Under the BHCA, we are subject to periodic examination by the Federal

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Reserve. We are required to file with the Federal Reserve periodic reports of our operations and such additional information regarding us and our subsidiaries as the Federal Reserve may require.

Acquisitions, Activities and Financial Holding Company Election. The primary purpose of a bank holding company is to control and manage banks. The BHCA generally requires the prior approval of the Federal Reserve for any merger involving a bank holding company or any acquisition by a bank holding company of another bank or bank holding company. Subject to certain conditions (including deposit concentration limits established by the BHCA), the Federal Reserve may allow a bank holding company to acquire banks located in any state of the United States. In approving interstate acquisitions, the Federal Reserve is required to give effect to applicable state law limitations on the aggregate amount of deposits that may be held by the acquiring bank holding company and its FDIC-insured institution affiliates in the state in which the target bank is located (provided that those limits do not discriminate against out-of-state institutions or their holding companies) and state laws that require that the target bank have been in existence for a minimum period of time (not to exceed five years) before being acquired by an out-of-state bank holding company. Furthermore, in accordance with the Dodd-Frank Act, bank holding companies must be well-capitalized and well-managed in order to effect interstate mergers or acquisitions. For a discussion of the capital requirements, see “—The Role of Capital” above.

The BHCA generally prohibits us from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company that is not a bank and from engaging in any business other than that of banking, managing and controlling banks or furnishing services to banks and their subsidiaries. This general prohibition is subject to a number of exceptions. The principal exception allows bank holding companies to engage in, and to own shares of companies engaged in, certain businesses found by the Federal Reserve prior to November 11, 1999 to be “so closely related to banking ... as to be a proper incident thereto.” This authority permits us to engage in a variety of banking-related businesses, including the ownership and operation of a savings association, or any entity engaged in consumer finance, equipment leasing, the operation of a computer service bureau (including software development) and mortgage banking and brokerage services. The BHCA does not place territorial restrictions on the domestic activities of nonbank subsidiaries of bank holding companies.

Additionally, bank holding companies that meet certain eligibility requirements prescribed by the BHCA and elect to operate as financial holding companies may engage in, or own shares in companies engaged in, a wider range of nonbanking activities, including securities and insurance underwriting and sales, merchant banking and any other activity that the Federal Reserve, in consultation with the Secretary of the Treasury, determines by regulation or order is financial in nature or incidental to any such financial activity or that the Federal Reserve determines by order to be complementary to any such financial activity and does not pose a substantial risk to the safety or soundness of FDIC-insured institutions or the financial system generally. We have elected to operate as a financial holding company. In order to maintain our status as a financial holding company, the Company and the Bank must be well-capitalized, well-managed, and the Bank must have a least a satisfactory Community Reinvestment Act ("CRA") rating. If the Federal Reserve determines that either the Company or the Bank is not well-capitalized or well-managed, the Federal Reserve will provide a period of time in which to achieve compliance, but during the period of noncompliance, the Federal Reserve may place any additional limitations on us that it deems appropriate. Furthermore, if non-compliance is based on the failure of the Bank to achieve a satisfactory CRA rating, we would not be able to commence any new financial activities or acquire a company that engages in such activities.

Change in Control. Federal law prohibits any person or company from acquiring “control” of an FDIC-insured depository institution or its holding company without prior notice to the appropriate federal bank regulator. “Control” is conclusively presumed to exist upon the acquisition of 25% or more of the outstanding voting securities of a bank or bank holding company, but may arise under certain circumstances between 10% and 24.99% ownership.

Capital Requirements. As of the date of this filing, the Federal Reserve has not requested that the Company report consolidated regulatory capital, recognizing the exemption under the Federal Reserve’s Small Bank Holding Company Policy Statement applicable to holding companies with less than $3 billion in total assets (as long as they do not: engage in significant nonbanking activities, conduct significant off-balance sheet activities or have a material amount of debt or equity securities registered with the SEC). Unless the Federal Reserve determines otherwise, we are considered well-capitalized, as long as the Bank is well-capitalized. For a discussion of capital requirements, see “—The Role of Capital” above.

Dividend Payments. Our ability to pay dividends to our shareholders may be affected by both general corporate law considerations and policies of the Federal Reserve applicable to bank holding companies. As a Michigan corporation, we are subject to the Michigan Business Corporation Act, as amended, which prohibits us from paying a dividend if, after giving effect to the dividend we would not be able to pay our debts as the debts become due in the usual course of business, or our total assets would be less than the sum of its total liabilities plus, the amount that would be needed, if we were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution.

As a general matter, the Federal Reserve has indicated that the board of directors of a bank holding company should eliminate, defer or significantly reduce dividends to shareholders if: (i) the company’s net income available to shareholders for the past four quarters, net of dividends previously paid during that period, is not sufficient to fully fund the dividends; (ii) the

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prospective rate of earnings retention is inconsistent with the company’s capital needs and overall current and prospective financial condition; or (iii) the company will not meet, or is in danger of not meeting, its minimum regulatory capital adequacy ratios. These factors have come into consideration in the industry as a result of the COVID-19 pandemic. The Federal Reserve also possesses enforcement powers over bank holding companies and their nonbank subsidiaries to prevent or remedy actions that represent unsafe or unsound practices or violations of applicable statutes and regulations. Among these powers is the ability to proscribe the payment of dividends by banks and bank holding companies. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain 2.5% in Common Equity Tier 1 Capital attributable to the capital conservation buffer. See “—The Role of Capital” above.

Monetary Policy. The monetary policy of the Federal Reserve has a significant effect on the operating results of financial or bank holding companies and their subsidiaries, and this is evidenced in its reaction to the COVID-19 pandemic. Among the tools available to the Federal Reserve to affect the money supply are open market transactions in U.S. government securities and changes in the discount rate on bank borrowings. These means are used in varying combinations to influence overall growth and distribution of bank loans, investments and deposits, and their use may affect interest rates charged on loans or paid on deposits.

Federal Securities Regulation. Our common stock is registered with the SEC under the Securities Act of 1933, as amended, and the Exchange Act. Consequently, we are subject to the information, proxy solicitation, insider trading and other restrictions and requirements of the SEC under the Exchange Act.

Corporate Governance. The Dodd-Frank Act addressed many investor protection, corporate governance and executive compensation matters that will affect most U.S. publicly traded companies. The Dodd-Frank Act increased shareholder influence over boards of directors by requiring companies to give shareholders a nonbinding vote on executive compensation and so-called “golden parachute” payments, and authorizing the SEC to promulgate rules that would allow shareholders to nominate and solicit voters for their own candidates using a company’s proxy materials. The legislation also directed the Federal Reserve to promulgate rules prohibiting excessive compensation paid to executives of bank holding companies, regardless of whether such companies are publicly traded.

Supervision and Regulation of the Bank

General. The Bank is a Michigan-chartered bank. The deposit accounts of the Bank are insured by the FDIC’s Deposit Insurance Fund (“DIF”) to the maximum extent provided under federal law and FDIC regulations, currently $250,000 per insured depositor category. As a Michigan-chartered FDIC-insured bank, the Bank is subject to the examination, supervision, reporting and enforcement requirements of the DIFS, the chartering authority for Michigan banks, and the FDIC, designated by federal law as the primary federal regulator of insured state banks that, like the Bank, are not members of the Federal Reserve.

Deposit Insurance. As an FDIC-insured institution, the Bank is required to pay deposit insurance premium assessments to the FDIC. The FDIC has adopted a risk-based assessment system whereby FDIC-insured institutions pay insurance premiums at rates based on their risk classification. For institutions like the Bank that are not considered large and highly complex banking organizations, assessments are now based on examination ratings and financial ratios. The total base assessment rates currently range from 1.5 basis points to 30 basis points. At least semi-annually, the FDIC updates its loss and income projections for the DIF and, if needed, increases or decreases the assessment rates, following notice and comment on proposed rulemaking.

The reserve ratio is the FDIC insurance fund balance divided by estimated insured deposits. The Dodd-Frank Act altered the minimum reserve ratio of the DIF, increasing the minimum from 1.15% to 1.35% of the estimated amount of total insured deposits. The reserve ratio reached 1.36% as of September 30, 2018, exceeding the statutory required minimum. As a result, the FDIC provided assessment credits to insured depository institutions, like the Bank, with total consolidated assets of less than $10 billion for the portion of their regular assessments that contributed to growth in the reserve ratio between 1.15% and 1.35%. The FDIC applied the small bank credits for quarterly assessment periods beginning July 1, 2019. However, the reserve ratio then fell to 1.30% in 2020 as a result of extraordinary insured deposit growth caused by an unprecedented inflow of more than $1 trillion in estimated insured deposits in the first half of 2020, stemming mainly from the COVID-19 pandemic. Although the FDIC could have ceased the small bank credits, it waived the requirement that the reserve ratio be at least 1.35% for full remittance of the remaining assessment credits, and it refunded all small bank credits as of September 30, 2020.

Supervisory Assessments. All Michigan-chartered banks are required to pay supervisory assessments to the DIFS to fund the operations of that agency. The amount of the assessment is calculated on the basis of the Bank’s total assets. During the year ended December 31, ~~2020~~2021, the Bank paid supervisory assessments to the DIFS totaling approximately $243 thousand.

Capital Requirements. Banks are generally required to maintain capital levels in excess of other businesses. For a discussion of capital requirements, see “—The Role of Capital” above.

Liquidity Requirements. Liquidity is a measure of the ability and ease with which bank assets may be converted to cash. Liquid assets are those that can be converted to cash quickly if needed to meet financial obligations. To remain viable, FDIC-insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors.

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~~insured institutions must have enough liquid assets to meet their near-term obligations, such as withdrawals by depositors.~~ Because the global financial crisis was in part a liquidity crisis, Basel III also includes a liquidity framework that requires FDIC-insured institutions to measure their liquidity against specific liquidity tests. One test, referred to as the liquidity coverage ratio (LCR), is designed to ensure that the banking entity has an adequate stock of unencumbered high-quality liquid assets that can be converted easily and immediately in private markets into cash to meet liquidity needs for a 30-calendar day liquidity stress scenario. The other test, known as the net stable funding ratio (NSFR), is designed to promote more medium- and long- term funding of the assets and activities of FDIC-insured institutions over a one-year horizon. These tests provide an incentive for banks and holding companies to increase their holdings in Treasury securities and other sovereign debt as a component of assets, increase the use of long-term debt as a funding source and rely on stable funding like core deposits (in lieu of brokered deposits).

In addition to liquidity guidelines already in place, the federal bank regulatory agencies implemented the Basel III LCR in September 2014, which requires large financial firms to hold levels of liquid assets sufficient to protect against constraints on their funding during times of financial turmoil, and in 2016 proposed implementation of the NSFR. While these rules do not, and will not, apply to the Bank, it continues to review its liquidity risk management policies in light of developments.

Dividend Payments. The primary source of funds for the Company is dividends from the Bank. Under the Michigan Banking Code, the Bank cannot declare or pay a cash dividend or dividend in kind unless it will have a surplus amounting to not less than 20% of its capital after payment of the dividend. In addition, the Bank may pay dividends only out of net income then on hand, after deducting its bad debts. Further, the Bank may not declare or pay a dividend until cumulative dividends on preferred stock, if any, are paid in full.

The payment of dividends by any FDIC-insured institution is affected by the requirement to maintain adequate capital pursuant to applicable capital adequacy guidelines and regulations, and a FDIC-insured institution generally is prohibited from paying any dividends if, following payment thereof, the institution would be undercapitalized. As described above, the Bank exceeded its capital requirements under applicable guidelines as of December 31, ~~2020~~2021. Notwithstanding the availability of funds for dividends, however, the FDIC and the DIFS may prohibit the payment of dividends by the Bank if either or both determine such payment would constitute an unsafe or unsound practice. In addition, under the Basel III Rule, institutions that seek the freedom to pay dividends have to maintain the capital conservation buffer. See “—The Role of Capital” above.

State Bank Investments and Activities. The Bank is permitted to make investments and engage in activities directly or through subsidiaries as authorized by Michigan law. However, under federal law and FDIC regulations, FDIC-insured state banks are prohibited, subject to certain exceptions, from making or retaining equity investments of a type, or in an amount, that are not permissible for a national bank. Federal law and FDIC regulations also prohibit FDIC-insured state banks and their subsidiaries, subject to certain exceptions, from engaging as principal in any activity that is not permitted for a national bank unless the bank meets, and continues to meet, its minimum regulatory capital requirements and the FDIC determines that the activity would not pose a significant risk to the DIF. These restrictions have not had, and are not currently expected to have, a material impact on the operations of the Bank.

Insider Transactions. The Bank is subject to certain restrictions imposed by federal law on “covered transactions” between the Bank and its “affiliates.” We are an affiliate of the Bank for purposes of these restrictions, and covered transactions subject to the restrictions include extensions of credit to the Company, investments in the stock or other securities of the Company and the acceptance of the stock or other securities of the Company as collateral for loans made by the Bank. The Dodd-Frank Act enhanced the requirements for certain transactions with affiliates, including an expansion of the definition of “covered transactions” and an increase in the amount of time for which collateral requirements regarding covered transactions must be maintained.

Certain limitations and reporting requirements are also placed on extensions of credit by the Bank to its directors and officers, to directors and officers of the Company and our subsidiaries, to our principal shareholders and to “related interests” of such directors, officers and principal shareholders. In addition, federal law and regulations may affect the terms upon which any person who is a director or officer of the Company or the Bank, or a principal shareholder of the Company, may obtain credit from banks with which the Bank maintains a correspondent relationship.

Safety and Soundness Standards/Risk Management. The federal banking agencies have adopted operational and managerial standards to promote the safety and soundness of FDIC-insured institutions. The standards apply to internal controls, information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth, compensation, fees and benefits, asset quality and earnings.

In general, the safety and soundness standards prescribe the goals to be achieved in each area, and each institution is responsible for establishing its own procedures to achieve those goals. While regulatory standards do not have the force of law, if an institution operates in an unsafe and unsound manner, the FDIC-insured institution’s primary federal regulator may require the institution to submit a plan for achieving and maintaining compliance. If an FDIC-insured institution fails to submit an acceptable compliance plan, or fails in any material respect to implement a compliance plan that has been accepted by its primary federal regulator, the regulator is required to issue an order directing the institution to cure the deficiency. Until the

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~~primary federal regulator, the regulator is required to issue an order directing the institution to cure the~~ deficiency. ~~Until the deficiency~~ cited in the regulator’s order is cured, the regulator may restrict the FDIC-insured institution’s rate of growth, require the FDIC-insured institution to increase its capital, restrict the rates the institution pays on deposits or require the institution to take any action the regulator deems appropriate under the circumstances. Noncompliance with safety and soundness may also constitute grounds for other enforcement action by the federal bank regulatory agencies, including cease and desist orders and civil money penalty assessments.

During the past decade, the bank regulatory agencies have increasingly emphasized the importance of sound risk management processes and strong internal controls when evaluating the activities of the FDIC-insured institutions they supervise. Properly managing risks has been identified as critical to the conduct of safe and sound banking activities and has become even more important as new technologies, product innovation, and the size and speed of financial transactions have changed the nature of banking markets. The agencies have identified a spectrum of risks facing a banking institution including, but not limited to, credit, market, liquidity, operational, legal and reputational risk. The federal bank regulators have identified key risk themes for 2021 as: credit risk management given projected weaker economic conditions and commercial and residential real estate concentration risk management. The agencies will also be monitoring banks for their transition away from LIBOR as a reference rate, compliance risk management related to COVID-19 pandemic-related activities, Bank Secrecy Act/anti-money laundering compliance, cybersecurity, planning for and implementation of the Current Expected Credit Loss (CECL) accounting standard, and CRA performance. The Bank is expected to have active board and senior management oversight; adequate policies, procedures and limits; adequate risk measurement, monitoring and management information systems; and comprehensive internal controls.

Privacy and Cybersecurity. The Bank is subject to many U.S. federal and state laws and regulations governing requirements for maintaining policies and procedures to protect non-public confidential information of their customers. These laws require the Bank to periodically disclose its privacy policies and practices relating to sharing such information and permit consumers to opt out of their ability to share information with unaffiliated third parties under certain circumstances. They also impact the Bank’s ability to share certain information with affiliates and non-affiliates for marketing and/or non-marketing purposes, or to contact customers with marketing offers. In addition, as a part of its operational risk mitigation, the Bank is required to implement a comprehensive information security program that includes administrative, technical, and physical safeguards to ensure the security and confidentiality of customer records and information and to require the same of its service providers. These security and privacy policies and procedures are in effect across all business lines and geographic locations.

Branching Authority. Michigan banks, such as the Bank, have the authority under Michigan law to establish branches anywhere in the State of Michigan, subject to receipt of all required regulatory approvals. The establishment of new interstate branches has historically been permitted only in those states the laws of which expressly authorize such expansion. The Dodd-Frank Act permits well-capitalized and well-managed banks to establish de novo interstate branches without impediments. Federal law permits state and national banks to merge with banks in other states subject to: (i) regulatory approval; (ii) federal and state deposit concentration limits; and (iii) state law limitations requiring the merging bank to have been in existence for a minimum period of time (not to exceed five years) prior to the merger.

Transaction Account Reserves. Federal law requires FDIC-insured institutions to maintain reserves against their transaction accounts (primarily NOW and regular checking accounts) to provide liquidity. Reserves are maintained on deposit at the Federal Reserve Banks. The reserve requirements are subject to annual adjustment by the Federal Reserve, and, for 2020, the Federal Reserve had determined that the first $16.9 million of otherwise reservable balances had a zero percent reserve requirement; for transaction accounts aggregating between $16.9 million to $127.5 million, the reserve requirement was 3% of those transaction account balances; and for net transaction accounts in excess of $127.5 million, the reserve requirement was 10% of the aggregate amount of total transaction account balances in excess of $127.5 million. However, in March 2020, in an unprecedented move, the Federal Reserve announced that the banking system had ample reserves, and, as reserve requirements no longer played a significant role in this regime, it reduced all reserve tranches to zero percent, thereby freeing banks from the reserve maintenance requirement. The action permits the Bank to loan or invest funds that were previously unavailable. The Federal Reserve has indicated that it expects to continue to operate in an ample reserves regime for the foreseeable future.

Community Reinvestment Act Requirements. The CRA requires the Bank to have a continuing and affirmative obligation in a safe and sound manner to help meet the credit needs of the entire community, including low- and moderate-income neighborhoods. Federal regulators regularly assess the Bank’s record of meeting the credit needs of its communities. Applications for additional acquisitions would be affected by the evaluation of the Bank’s effectiveness in meeting its CRA requirements.

Anti-Money Laundering. The USA PATRIOT Act is designed to deny terrorists and criminals the ability to obtain access to the U.S. financial system and has significant implications for FDIC-insured institutions, brokers, dealers and other businesses involved in the transfer of money. The USA PATRIOT Act, along with other legal authority, mandates financial services companies to have policies and procedures with respect to measures designed to address any or all of the following matters: (i) customer identification programs; (ii) money laundering; (iii) terrorist financing; (iv) identifying and reporting suspicious

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activities and currency transactions; (v) currency crimes; and (vi) cooperation between FDIC-insured institutions and law enforcement authorities.

Concentrations in Commercial Real Estate. Concentration risk exists when FDIC-insured institutions deploy too many assets to any one industry or segment. A concentration in commercial real estate is one example of regulatory concern. The interagency Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices guidance (“CRE Guidance”) provides supervisory criteria, including the following numerical indicators, to assist bank examiners in identifying banks with potentially significant commercial real estate loan concentrations that may warrant greater supervisory scrutiny: (i) commercial real estate loans exceeding 300% of capital and increasing 50% or more in the preceding three years; or (ii) construction and land development loans exceeding 100% of capital. The CRE Guidance does not limit banks’ levels of commercial real estate lending activities, but rather guides institutions in developing risk management practices and levels of capital that are commensurate with the level and nature of their commercial real estate concentrations. On December 18, 2015, the federal banking agencies issued a statement to reinforce prudent risk-management practices related to CRE lending, having observed substantial growth in many CRE asset and lending markets, increased competitive pressures, rising CRE concentrations in banks, and an easing of CRE underwriting standards. The federal bank agencies reminded FDIC-insured institutions to maintain underwriting discipline and exercise prudent risk-management practices to identify, measure, monitor, and manage the risks arising from CRE lending. In addition, FDIC-insured institutions must maintain capital commensurate with the level and nature of their CRE concentration risk.

As of December 31, ~~2020~~2021, the Bank did not exceed these guidelines.

Consumer Financial Services. The historical structure of federal consumer protection regulation applicable to all providers of consumer financial products and services changed significantly on July 21, 2011, when the CFPB commenced operations to supervise and enforce consumer protection laws. The CFPB has broad rulemaking authority for a wide range of consumer protection laws that apply to all providers of consumer products and services, including the Bank, as well as the authority to prohibit “unfair, deceptive or abusive” acts and practices. The CFPB has examination and enforcement authority over providers with more than $10 billion in assets. FDIC-insured institutions with $10 billion or less in assets, like the Bank, continue to be examined by their applicable bank regulators.

Because abuses in connection with residential mortgages were a significant factor contributing to the financial crisis, many new rules issued by the CFPB and required by the Dodd-Frank Act addressed mortgage and mortgage-related products, their underwriting, origination, servicing and sales. The Dodd-Frank Act significantly expanded underwriting requirements applicable to loans secured by 1-4 family residential real property and augmented federal law combating predatory lending practices. In addition to numerous disclosure requirements, the Dodd‑Frank Act imposed new standards for mortgage loan originations on all lenders, including banks and savings associations, in an effort to strongly encourage lenders to verify a borrower’s ability to repay, while also establishing a presumption of compliance for certain “qualified mortgages.” The CFPB has from time to time released additional rules as to qualified mortgages and the borrower’s ability to repay, most recently in October of 2020.

The CFPB’s rules have not had a significant impact on the Bank’s operations, except for higher compliance costs.

Item 1A – Risk Factors

The material risks that management believes affect the Company are described below. You should carefully consider the risks, together with all of the other information included herein. The risks described below are not the only risks the Company faces. Additional risks not presently known or that the Company believes are immaterial also may have a material adverse effect on the Company’s results of operations and financial condition.

~~COVID-19~~ Risks Related to Our Pending Merger Transaction

~~The~~Failure ~~outbreak of COVID-19 has led~~ to ancomplete ~~economic recession and had other severe effects on the U.S. economy and has disrupted~~ our ~~operations.~~proposed ~~The~~Merger ~~ongoing~~with ~~COVID-19~~First ~~pandemic~~Merchants ~~has~~could ~~also~~negatively ~~adversely impacted certain industries in which our clients operate and impaired their ability to fulfill their financial obligations to us. The ultimate~~ impact ~~of the COVID-19 pandemic on~~ our business ~~remains uncertain but may have a material and adverse effect on our business~~, financial ~~condition,~~ results ~~of operations~~ and ~~growth~~stock ~~prospects~~price.

~~The~~If ~~COVID-19 pandemic continues to negatively impact~~ the ~~United~~Merger ~~States~~is ~~and~~not ~~the~~completed ~~world.~~for ~~The~~any ~~spread~~reason, ofour ~~COVID-19~~ongoing ~~has~~business ~~negatively~~may ~~impacted~~be ~~the~~adversely ~~U.S. economy at large~~affected, and ~~small businesses in particular~~, ~~and~~without ~~has~~realizing ~~disrupted~~any ~~our~~of ~~operations. The responses on~~ the ~~part~~benefits of ~~the~~having ~~U.S.~~completed ~~and~~the ~~global governments and populations have created a recessionary environment~~Merger, ~~reduced~~we ~~economic~~will ~~activity~~be ~~and~~subject ~~caused significant volatility in the global stock markets. We have experienced significant disruptions across our business due~~ to ~~these~~a ~~effects,~~number ~~which~~of ~~may in future periods lead to decreased earnings~~risks, ~~significant~~including loan defaults and slowdowns in our loan collections. We expect increased unemployment and recessionary concerns will adversely affect mortgage originations and mortgage banking revenue in future periods. The ultimate impact of the ~~COVID-19 pandemic on our~~ following:

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

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

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

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

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~~business~~•the ~~remains~~Merger ~~uncertain~~Agreement ~~but~~places ~~may~~certain ~~have~~restrictions aon ~~material~~the ~~and~~conduct ~~adverse~~of ~~effect on~~ our business prior to completion of the Merger, ~~financial~~such ~~condition~~restrictions, ~~results~~the waiver of ~~operations~~which ~~and~~is ~~growth~~subject ~~prospects.~~to the consent of First Merchants, may adversely affect our ability to execute certain of our business strategies; and

~~The~~•matters ~~outbreak~~relating ofto ~~COVID-19~~the ~~has~~Merger ~~resulted~~may inrequire asubstantial ~~decline~~commitments ~~in the businesses~~ of ~~certain~~time ~~of our clients, a decrease in consumer confidence, an increase in unemployment,~~ and aresources ~~disruption in the services provided~~ by our ~~vendors.~~management Continued disruptions to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans and could harm local loan demand, liquidity of loan guarantors, the value of loan collateral (~~particularly~~including inintegration ~~real estate~~planning), ~~and~~which ~~deposit~~could ~~availability~~otherwise ~~and~~have ~~negatively~~been ~~impact~~devoted ~~the implementation of our growth strategy. Although the U.S. government introduced a number of programs designed~~ to ~~soften~~other ~~the~~opportunities ~~impact~~that ~~of COVID-19 on small businesses, our borrowers~~ may ~~still~~have ~~not~~been bebeneficial ~~able~~ to ~~satisfy~~us, ~~their~~as ~~financial~~an ~~obligations~~independent ~~to us~~company.

In addition to the above risks, ~~COVID-19~~if ~~has~~the ~~impacted~~Merger Agreement is terminated and ~~likely~~our ~~will~~board ~~continue~~of todirectors ~~impact~~seeks another merger or business combination, the ~~financial~~market ~~ability~~price of ~~businesses~~our ~~and~~common ~~consumers~~stock tocould ~~borrow money~~decline, which ~~would~~could ~~negatively~~make ~~impact~~it ~~loan~~more ~~volumes.~~difficult ~~Certain~~to offind ~~our~~a ~~borrowers~~party ~~are~~willing ~~in,~~to offer equivalent or ~~have~~more ~~exposure~~attractive ~~to,~~consideration than the ~~restaurant~~consideration ~~and~~First ~~hospitality~~Merchants ~~industries~~has ~~and~~agreed ~~are~~to ~~located~~provide. inIf ~~areas~~the ~~that~~Merger ~~are,~~Agreement oris ~~were~~terminated under certain circumstances, ~~quarantined~~we ormay ~~under~~be ~~stay-at-home~~required ~~orders~~to pay a termination fee of $11.13 ~~COVID-19~~million ~~may~~to ~~also~~First ~~have~~Merchants, anwhich ~~adverse~~may ~~effect~~adversely onaffect ~~our~~the ~~commercial~~price ~~real~~of ~~estate~~our ~~portfolio,~~common ~~particularly~~stock. ~~with~~Any ~~respect~~of tothe ~~real~~above ~~estate~~risks ~~with~~could ~~exposure~~materially toaffect ~~these~~our ~~industries~~business, ~~and~~financial ~~our~~results ~~consumer~~and ~~loan~~stock ~~portfolios~~price.

~~The~~We ~~ultimate~~face ~~extent~~risks ~~of the COVID-19 pandemic’s effect on our business will depend on many factors, primarily including the speed~~ and ~~extent~~uncertainties ~~of any recovery from the~~ related economic recession. Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our markets, the distribution, supply, and adoption of vaccines, therapies and other public health initiatives to ~~control the spread of the disease, the nature and size of federal economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in~~ our ~~markets~~proposed inMerger ~~response~~with toFirst ~~the recent surge in the number of COVID-19 cases~~Merchants.

~~The~~Uncertainty ~~initial~~about ~~distribution~~the effect of ~~vaccines~~the ~~has~~Merger ~~been~~on ~~slow,~~our team members and ~~there~~customers may ~~continue~~have toan beadverse ~~challenges~~effect ~~with~~on ~~producing~~us. These uncertainties may impair our ability to attract, retain and ~~distributing~~motivate ~~sufficient~~key ~~quantities~~personnel ofuntil the ~~vaccines.~~Merger Ifis ~~the~~consummated ~~general~~and ~~public~~for isa ~~unwilling~~period orof ~~unable~~time tothereafter, ~~access~~and ~~effective~~could ~~vaccines~~cause customers and ~~therapies,~~others ~~this~~that ~~may~~deal ~~also~~with ~~prolong~~us ~~the~~to ~~COVID-19~~seek ~~pandemic.~~to Inchange ~~addition,~~their ~~new~~existing ~~variants~~business ofrelationships ~~COVID-19~~with us. Team member retention may ~~increase~~be ~~the~~particularly ~~spread~~challenging orduring ~~severity~~the pendency of ~~COVID-19~~the ~~and~~Merger, ~~previously~~as ~~developed~~team ~~vaccines~~members ~~and~~may ~~therapies~~experience ~~may~~uncertainty ~~not~~about betheir asroles ~~effective~~with ~~against~~the ~~new~~surviving ~~COVID-19~~corporation ~~variants~~following the Merger.

AsIn aaddition, ~~result~~the ofMerger ~~the~~Agreement ~~COVID-19~~contains ~~pandemic~~provisions wethat ~~may~~restrict ~~experience~~our ~~adverse~~ability ~~financial~~to, ~~consequences~~among ~~due~~other things, solicit, knowingly encourage or facilitate inquiries or proposals or enter into any agreement with respect to, aor ~~number~~initiate ofor ~~other~~participate ~~factors~~in any negotiations or discussions with any person concerning any alternative business combination proposals, ~~including~~subject ~~but~~to ~~not~~certain ~~limited~~exceptions generally related to: our board of directors’ exercise of its fiduciary duties. These provisions, which include a $11.13 million termination fee payable under certain circumstances, might discourage a potential competing acquirer that might have an interest in engaging in a superior transaction from considering or proposing that acquisition, or might result in lower value received by our shareholders than would have otherwise been received.

•The Company and First Merchants have operated and, until the ~~occurrence~~completion of ~~what~~the ~~management~~Merger, ~~would~~will ~~deem~~continue to beoperate, aindependently. ~~triggering~~The ~~event~~success ~~that~~of ~~could~~the Merger, ~~under~~including ~~certain~~anticipated ~~circumstances~~benefits and cost savings among other things, ~~cause~~will ~~management~~depend, in part, on our and First Merchants’ ability to ~~perform~~successfully ~~impairment~~combine ~~testing~~and onintegrate our ~~goodwill~~and First Merchants’ businesses in a manner that facilitates growth opportunities and ~~other~~realizes ~~intangible~~cost ~~assets~~savings. It is possible that the integration process could result in anthe ~~impairment~~loss ~~charge~~of ~~being~~key ~~recorded~~employees, ~~for~~the ~~that~~loss ~~period~~of customers, the disruption of either company’s or both companies’ ongoing business, inconsistencies in standards, controls, procedures and ~~adversely~~policies, ~~impact~~unexpected ~~our~~integration ~~results~~issues, ofhigher ~~operations~~than expected integration costs and an overall post-completion integration process that takes longer than originally anticipated. If the ~~ability~~combined companies experience difficulties with the integration process, the anticipated benefits of the ~~Bank~~Merger tomay ~~pay~~not ~~dividends~~be realized fully or at all, or may take longer to ~~us;~~realize than expected.

~~•the~~The ~~negative~~Merger ~~effect~~Agreement onmay ~~earnings~~be ~~resulting~~terminated ~~from~~in ~~the~~accordance ~~Bank~~with ~~modifying~~its ~~loans~~terms and ~~agreeing~~the toMerger ~~loan~~may ~~payment~~not ~~deferrals;~~be completed.

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

•We and First Merchants may elect to terminate the ~~modification~~Merger ofAgreement ~~our~~under ~~business~~certain ~~practices~~circumstances. Among other situations, ~~including~~if ~~with~~the ~~respect~~Merger tois ~~branch~~not ~~operations~~completed by July 31, ~~employee~~2022 ~~travel~~(or if the sole impediment to closing is the lack of regulatory approval, ~~employee~~September ~~work~~30, ~~locations~~2022), ~~participation~~either inwe ~~meetings~~or First Merchants may choose not to proceed with the Merger, ~~events~~subject to certain exceptions. We and ~~conferences~~First Merchants can also mutually decide to terminate the Merger Agreement at any time. If the Merger Agreement is terminated, ~~and~~under ~~related~~certain ~~changes~~limited ~~for~~circumstances, ~~our~~we ~~vendors~~may ~~and~~be ~~other~~required ~~business~~to ~~partners;~~pay a termination fee of $11.13 million to First Merchants, or First Merchants may be required to pay a termination fee of $10.0 million to us.

•increases in federal and state taxes as a result of the effects of the pandemic and stimulus programs on governmental budgets;

•increased cyber and payment fraud risk due to increased online and remote activity; and

•other operational failures due to changes in our normal business practices because of the pandemic and governmental actions to contain it.

Overall, we believe that the economic impact from COVID-19 could have a material and adverse impact on our business and result in significant losses in our loan portfolio, all of which would adversely and materially impact our earnings and capital. Even after the COVID-19 pandemic has subsided, we may continue to experience materially adverse impacts to our business as a result of the global economic impact of the COVID-19 pandemic, including the availability of credit, adverse impacts on liquidity and any recession that has occurred or may occur in the future. There are no comparable recent events that provide guidance as to the effect the spread of COVID-19 as a global pandemic may have, and, as a result, the ultimate impact of the pandemic is highly uncertain and subject to change.

The U.S. government and banking regulators, including the Federal Reserve, have taken a number of unprecedented actions in response to the COVID-19 pandemic, which could ultimately have a material adverse effect on our business and results of operations.

On March 27, 2020, President Trump signed into law the CARES Act, which established a $2.0 trillion economic stimulus package, including cash payments to individuals, supplemental unemployment insurance benefits and a $349.0 billion loan program administered through the SBA referred to as the PPP. In addition, on December 27, 2020, President Trump signed the Consolidated Appropriations Act, 2021, a $900.0 billion COVID-19 relief package that includes an additional $284.5 billion in

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~~PPP~~Our ~~funding.~~ability ~~Negotiations~~to ~~continue~~complete inthe ~~Congress~~Merger ~~regarding~~is asubject ~~further~~to ~~federal~~the ~~stimulus~~receipt ~~bill,~~of ~~which,~~approval iffrom ~~passed~~various ~~and~~regulatory ~~signed~~agencies, ~~into~~which ~~law,~~may impose conditions that could ~~have~~adversely aaffect ~~material~~us ~~effect~~or oncause the ~~overall~~Merger ~~economic~~to ~~environment~~be abandoned.

~~The~~Before ~~COVID-19~~the ~~pandemic~~transactions ~~has~~contemplated ~~significantly~~in ~~affected~~ the ~~financial~~Merger ~~markets~~Agreement can be completed, the Company and ~~the~~First ~~Federal~~Merchants ~~Reserve~~must ~~has~~obtain ~~taken~~various aregulatory ~~number~~approvals. The terms and conditions of ~~actions~~the inapprovals ~~response.~~that Inare ~~March~~granted ~~2020,~~may ~~the~~impose ~~Federal~~conditions, ~~Reserve~~limitations, ~~dramatically~~obligations ~~reduced~~or ~~the~~costs, ~~target~~or ~~federal~~place ~~funds~~restrictions ~~rate~~on ~~and~~the ~~announced~~conduct aof ~~$700~~the ~~billion~~combined ~~quantitative~~company’s ~~easing~~business ~~program~~or inrequire ~~response~~changes to the ~~expected~~terms ~~economic~~of ~~downturn~~the ~~caused~~transactions contemplated by the ~~COVID-19~~Merger ~~pandemic~~Agreement. InAlthough ~~addition,~~ the ~~Federal~~Company ~~Reserve~~and ~~reduced~~First ~~the~~Merchants ~~interest~~do not currently expect that itany ~~pays~~such onconditions ~~excess~~or ~~reserves.~~changes Wewould ~~expect~~be imposed, there can be no assurance that ~~these~~the ~~reductions~~regulators inwill ~~interest~~not ~~rates,~~impose ~~especially~~any ifsuch ~~prolonged~~conditions, ~~could~~obligations ~~adversely~~or ~~affect~~restrictions, ~~our~~and ~~net~~that ~~interest~~such ~~income~~conditions, ~~our~~limitations, ~~net~~obligations ~~interest~~or ~~margin~~restrictions ~~and~~will ~~our~~not ~~profitability.~~have ~~The~~the ~~impact~~effect of delaying or preventing completion of any of the ~~COVID-19~~transactions ~~pandemic~~contemplated onby ~~our~~the ~~business~~Merger ~~activities~~Agreement, asimposing aadditional ~~result~~material costs on or materially limiting the revenues of ~~new~~the ~~government~~combined ~~and~~company ~~regulatory~~following ~~laws,~~the ~~policies,~~Merger ~~programs,~~or ~~and~~otherwise ~~guidelines,~~reduce asthe ~~well~~anticipated asbenefits ~~market~~of ~~reactions~~the toMerger ~~such~~if ~~activities,~~the ~~remains~~Merger ~~uncertain~~were ~~but~~consummated ~~may~~successfully ~~ultimately~~within ~~have~~the aexpected ~~material~~timeframe, any of which might have an adverse effect on ~~our~~the ~~business~~combined ~~and~~company ~~results~~following ofthe ~~operations~~Merger.

AsBecause ~~a participating lender in~~ the ~~PPP,~~market weprice ~~are~~of ~~subject~~First toMerchants ~~additional~~common ~~risks~~stock ofmay ~~litigation~~fluctuate, ~~from~~ our ~~clients~~shareholders orcannot ~~other~~be ~~parties~~certain ~~regarding our processing~~ of ~~loans for~~ the ~~PPP~~precise ~~and~~value ~~risks~~of ~~that~~ the ~~SBA~~Merger ~~may~~consideration ~~not~~they ~~fund~~may ~~some~~receive orin ~~all~~the ~~PPP loan guarantees~~Merger.

~~Since~~At the ~~opening~~time of the ~~PPP,~~Merger several other larger banks have been subject to litigation regarding the process and procedures that such banks used in processing applications for the PPP and claims related to agent fees. If any such litigation is ~~filed~~completed, ~~against~~each usissued and isoutstanding ~~not~~share ~~resolved~~of ~~in a manner favorable to us, it may result in significant financial liability or adversely affect~~ our ~~reputation.~~common Instock ~~addition,~~will ~~litigation can~~ be ~~costly,~~converted ~~regardless~~into ~~of outcome. Any financial liability, litigation costs, or reputational damage caused by~~ the ~~PPP~~right ~~related~~to ~~litigation~~receive ~~could~~0.7167 ~~have~~of a ~~material~~share ~~adverse~~of ~~impact~~First onMerchants ~~our~~common ~~business,~~stock ~~financial condition,~~ and ~~results of operations~~$10.17 ~~Also,~~in ~~it has been reported that many borrowers fraudulently obtained PPP loans through the program~~cash. ~~We may be subject to regulatory and litigation risk if any of our PPP borrowers used fraudulent means to obtain a PPP loan.~~

We ~~also~~The ~~have~~market ~~credit~~value ~~risk~~of onFirst ~~PPP~~Merchants ~~loans~~common ifstock amay ~~determination~~fluctuate isprior ~~made~~to byclosing of the ~~SBA~~Merger ~~that~~as ~~there~~a isresult of a ~~deficiency~~variety inof ~~the~~factors, ~~manner~~including ingeneral ~~which~~market ~~the~~and ~~loan~~economic ~~was originated~~conditions, ~~funded,~~changes orin ~~serviced~~First byMerchants’ ~~the Bank~~businesses, ~~such~~operations asand anprospects, ~~issue~~and ~~with~~regulatory ~~the~~considerations. ~~eligibility~~Many of athese ~~borrower~~factors toare ~~receive~~outside aof ~~PPP~~our ~~loan,~~and ~~which~~First ~~may~~Merchants’ orcontrol. ~~may~~Consequently, ~~not~~your beshareholders ~~related~~will tonot ~~the~~know ~~ambiguity in~~ the ~~laws,~~actual ~~rules,~~market ~~and~~value ~~guidance~~of ~~regarding~~ the ~~operation~~shares of ~~the~~First ~~PPP,~~Merchants orcommon ifstock ~~the~~that ~~borrower~~they ~~fraudulently~~will ~~obtained~~receive awhen ~~PPP loan. In~~ the ~~event~~Merger ofis acompleted. ~~loss~~The ~~resulting~~actual ~~from~~value aof ~~default~~the onshares aof ~~PPP~~First ~~loan~~Merchants ~~and~~common astock ~~determination~~received by ~~the~~our ~~SBA~~shareholders ~~that~~will ~~there~~depend ison ~~a deficiency in~~ the ~~manner~~market invalue ~~which~~of ~~the~~shares ~~PPP~~of ~~loan~~First ~~was~~Merchants ~~originated,~~common ~~funded,~~stock orat ~~serviced~~the bytime ~~us,~~ the ~~SBA~~Merger ~~may~~is ~~deny~~completed. ~~its~~This ~~liability~~market ~~under~~value ~~the~~may ~~guaranty,~~be ~~reduce~~less ~~the~~or ~~amount~~more ofthan the ~~guaranty,~~value orused ifto itdetermine ~~has already paid under~~ the ~~guaranty,~~exchange ~~seek~~ratio ~~recovery~~stated ofin ~~any loss related to~~ the ~~deficiency~~Merger ~~from us~~Agreement.

Shareholder litigation could prevent or delay the closing of the proposed Merger or otherwise negatively impact our business and operations.

In connection with the Merger, lawsuits have and may in the future be filed against us, First Merchants, or the directors and officers of either company in connection with the Merger. Litigation filed against us, our board of directors or First Merchants and its board of directors could prevent or delay the completion of the Merger or result in the payment of damages following completion of the Merger. The defense or settlement of any lawsuit or claim that remains unresolved at the effective time of the Merger may adversely affect the combined company’s business, financial condition, results of operations, cash flows and market price.

COVID-19 Risks

The outbreak of COVID-19 and related developments have led to an economic recession, increased inflation, disruptions in labor markets and had other severe effects on the U.S. economy. The pandemic has also adversely impacted certain industries in which our clients operate and impaired their ability to fulfill their financial obligations to us. The ultimate impact of the COVID-19 pandemic on our business remains uncertain but may have a material and adverse effect on our business, financial condition, results of operations and growth prospects.

The COVID-19 pandemic continues to negatively impact the United States and the world. The spread of COVID-19 has negatively impacted the U.S. economy at large, and small businesses in particular, and has disrupted our operations. The pandemic and responses on the part of the U.S. and local governments and populations have inhibited growth in economic activity and resulted in increased inflation, labor market and supply chain disruptions, a rising interest rate environment, and had other severe effects on the U.S. economy. We expect increased interest rates will adversely affect mortgage originations and mortgage banking revenue in future periods. The ultimate impact of the COVID-19 pandemic on our business remains uncertain but may have a material and adverse effect on our business, financial condition, results of operations and growth prospects.

The outbreak of COVID-19 has resulted in a decline in the businesses of certain of our clients, a decrease in consumer confidence and a disruption in the services provided by our vendors. Continued disruptions to our clients’ businesses could result in increased risk of delinquencies, defaults, foreclosures, and losses on our loans and could harm local loan demand, liquidity of loan guarantors, the value of loan collateral (particularly in real estate), and deposit availability and negatively impact the implementation of our growth strategy. Although the U.S. government introduced a number of programs designed to soften the impact of COVID-19 on small businesses, our borrowers may still not be able to satisfy their financial obligations to us.

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In addition, COVID-19 has impacted and likely will continue to impact the financial ability of businesses and consumers to borrow money, which would negatively impact loan volumes. Certain of our borrowers are in, or have exposure to, the restaurant and hospitality industries and are located in areas that are, or were, quarantined or under stay-at-home orders. COVID-19 may also have an adverse effect on our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries, and our consumer loan portfolios.

The ultimate extent of the COVID-19 pandemic’s effect on our business will depend on many factors, primarily including the speed and extent of any recovery from the related economic recession. Among other things, this will depend on the duration of the COVID-19 pandemic, particularly in our markets, the distribution, supply, and adoption of vaccines, therapies and other public health initiatives to control the spread of the disease, the nature and size of federal economic stimulus and other governmental efforts, and the possibility of additional state lockdown or stay-at-home orders in our markets.

Credit Risks

A decline in general business and economic conditions and any regulatory responses to such conditions could have a material adverse effect on our business, financial position, results of operations and growth prospects.

Our business and operations are sensitive to general business and economic conditions in the United States, generally, and particularly in our market areas in the state of Michigan. If the national, regional and local economies experience worsening economic conditions, including high levels of unemployment, our growth and profitability could be constrained. A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose loan portfolios are geographically diverse. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, and lower home sales and commercial activity. In addition, unfavorable or uncertain economic and market conditions can be caused by declines in economic growth, business activity or investor or business confidence; limitations on the availability or increases in the cost of credit and capital; uncertainty in U.S. trade policies, legislation, treaties and tariffs; natural disasters; acts of war or terrorism; widespread disease or pandemics; or a combination of these or other factors. All of these factors are generally detrimental to our business. Our business is significantly affected by monetary, trade and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have a material adverse effect on our business, financial position, results of operations and growth prospects.

If we do not effectively manage our credit risk, we may experience increased levels of delinquencies, nonaccrual loans and charge-offs, which could require increases in our provision for loan losses.

There are risks inherent in making any loan, including risks inherent in dealing with individual borrowers, risks of nonpayment, risks resulting from uncertainties as to the future value of collateral and cash flows available to service debt and risks resulting from changes in economic and market conditions. We cannot guarantee that our credit underwriting and monitoring procedures will reduce these credit risks, and they cannot be expected to completely eliminate our credit risks. If the overall economic climate in the United States, generally, or our market areas, specifically, declines, our borrowers may experience difficulties in repaying their loans, and the level of nonaccrual loans, charge-offs and delinquencies could rise and require further increases in the provision for loan losses, which would cause our net income, return on equity and capital to decrease.

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Our allowance for loan losses may prove to be insufficient to absorb potential losses in our loan portfolio.

If there are slow economic conditions or real estate values and sales deteriorate, we may experience higher delinquencies and credit losses. As a result, we could be required to increase our provision for loan losses and to charge-off additional loans in the future. If charge-offs in future periods exceed the allowance for loan losses, we may need additional provisions to replenish the allowance for loan losses. Any increases in the allowance for loan losses will result in a decrease in net income and, most likely, capital, and may have a material negative effect on our financial condition and results of operations.

In addition, in June 2016, the FASB issued a new accounting standard that will replace the current approach under U.S. generally accepted accounting principles (GAAP) for establishing the allowance for loan losses. Under this standard, referred to as CECL, credit losses will be measured based on past events, current conditions and reasonable and supportable forecasts of future conditions that affect the collectability of financial assets. The new standard is expected to generally result in increases to allowance levels and will require the application of the revised methodology to existing financial assets through a one-time adjustment to retained earnings upon initial effectiveness, which may be material. As a smaller reporting company, this standard will be effective for us on January 1, 2023. In addition, this change may require us to increase our allowance for loan losses rapidly in future periods, and greatly increases the types of data we need to collect and review to determine the appropriate level of the allowance for loan losses. It may also result in even small changes to future forecasts having a significant impact on the allowance, which could make the allowance more volatile, and regulators may impose additional capital buffers to absorb this volatility.

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Because a significant portion of our loan portfolio is comprised of real estate loans, a decline in real estate values and liquidity could impair the value of collateral securing our real estate loans and result in loan and other losses.

Adverse developments affecting real estate values in our market areas could increase the credit risk associated with our real estate loan portfolio. The market value of real estate can fluctuate significantly in a short period of time as a result of market conditions in the area in which the real estate is located. Adverse changes affecting real estate values and the liquidity of real estate in one or more of our markets could increase the credit risk associated with our loan portfolio, significantly impair the value of property pledged as collateral on loans and affect our ability to sell the collateral upon foreclosure without a loss or additional losses, which could result in losses that would adversely affect profitability. Such declines and losses would have a material adverse impact on our business, results of operations and growth prospects.

Many of our loans are to commercial borrowers, which have a higher degree of risk than other types of loans.

Commercial loans typically involve higher principal amounts than other types of loans, and some of our commercial borrowers have more than one loan outstanding with us. Because payments on such loans are often dependent on the cash flow of the commercial venture and the successful operation or development of the property or business involved, repayment of such loans is often more sensitive than other types of loans to adverse conditions in the real estate market or the general business climate and economy. Repayments of loans secured by non-owner occupied properties depend primarily on the tenant’s continuing ability to pay rent to the property owner, who is our borrower, or, if the property owner is unable to find a tenant, the property owner’s ability to repay the loan without the benefit of a rental income stream. Accordingly, a downturn in the real estate market or a challenging business and economic environment may increase our risk related to commercial loans. In addition, many of our commercial real estate loans are not fully amortizing and require large balloon payments upon maturity. Such balloon payments may require the borrower to either sell or refinance the underlying property in order to make the payment, which may increase the risk of default or non-payment. Our commercial and industrial loans are primarily made based on the identified cash flow of the borrower and secondarily on the collateral underlying the loans. The borrowers’ cash flow may prove to be unpredictable, and collateral securing these loans may fluctuate in value. Most often, this collateral consists of accounts receivable, inventory and equipment. In the case of loans secured by accounts receivable, the availability of funds for the repayment of these loans may be substantially dependent on the ability of the borrower to collect amounts due from its customers. Inventory and equipment may depreciate over time, may be difficult to appraise, may be illiquid and may fluctuate in value based on the success of the business. If the cash flow from business operations is reduced, the borrower’s ability to repay the loan may be impaired.

The level of our commercial real estate loan portfolio may subject us to additional regulatory scrutiny.

The regulatory agencies have promulgated joint guidance on sound risk management practices for financial institutions with concentrations in commercial real estate lending. Under the CRE Guidance, a financial institution that, like us, is actively involved in commercial real estate lending should perform a risk assessment to identify concentrations in commercial real estate lending. The purpose of the guidance is to guide banks in developing risk management practices and capital levels commensurate with the level and nature of real estate concentrations. The guidance states that management should employ heightened risk management practices including board and management oversight and strategic planning, development of underwriting standards, risk assessment and monitoring through market analysis and stress testing. We have concluded that we have a concentration in commercial real estate lending under the foregoing standards because our balance in commercial real estate loans at December 31, ~~2020~~2021 represents greater than 100% but less than 300% of total capital. While we believe we have implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

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implemented policies and procedures with respect to our commercial real estate loan portfolio consistent with this guidance, bank regulators could require us to implement additional policies and procedures consistent with their interpretation of the guidance that may result in additional costs to us.

Our high concentration of large loans to certain borrowers may increase our credit risk.

Our growth over the last several years has been partially attributable to our ability to originate and retain large loans. We have established an informal, internal limit on loans to one borrower, principal or guarantor. Our limit is based on “total exposure,” which represents the aggregate exposure of economically related borrowers for approval purposes. However, we may, under certain circumstances, consider going above this internal limit in situations where management’s understanding of the industry and the credit quality of the borrower are commensurate with the increased size of the loan. Many of these loans have been made to a small number of borrowers, resulting in a high concentration of large loans to certain borrowers. As of December 31, ~~2020~~2021, our 1020 largest borrowing relationships accounted for approximately 913.40% of our total loan portfolio, the largest of which totaled $2219.15 million. Along with other risks inherent in these loans, such as the deterioration of the underlying businesses or property securing these loans, this high concentration of borrowers presents a risk to our lending operations. If any one of these borrowers becomes unable to repay its loan obligations as a result of economic or market conditions, or personal circumstances, such as divorce or death, our nonaccruing loans and our provision for loan losses could increase significantly, which could have a material adverse effect on our business, financial condition, results of operations and prospects.

The small to midsized businesses that we lend to may have fewer resources to weather adverse business developments, which may impair a borrower’s ability to repay a loan, and such impairment could adversely affect our results of operations and financial condition.

We target our business development and marketing strategy primarily to serve the banking and financial services needs of small to midsized businesses, which we define as commercial borrowing relationships at the Bank of less than $10.0 million in aggregate loan exposure. These businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities, frequently have smaller market shares than their competition, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small and midsized business often depends on the management talents and efforts of one or two people or a small group of people, and the death, disability or resignation of one or more of these people could have a material adverse impact on the business and its ability to repay its loan. If general economic conditions negatively impact the markets in which we operate and small to midsized businesses are adversely affected or our borrowers are otherwise affected by adverse business developments, our business, financial condition and results of operations may be adversely affected.

Construction loans are based upon estimates of costs and values associated with the complete project. These estimates may be inaccurate, and we may be exposed to significant losses on loans for these projects.

Construction and land development loans involve additional risks because funds are advanced upon the security of the project, which is of uncertain value prior to its completion, and costs may exceed realizable values in declining real estate markets. Because of the uncertainties inherent in estimating construction costs and the realizable market value of the completed project and the effects of governmental regulation of real property, it is relatively difficult to evaluate accurately the total funds required to complete a project and the related loan-to-value ratio. Changes in demand for new housing and higher than anticipated building costs may cause actual results to vary significantly from those estimated. For these reasons, this type of lending also typically involves higher loan principal amounts and may be concentrated with a small number of builders. A downturn in housing, or the real estate market, could increase delinquencies, defaults and foreclosures, and significantly impair the value of our collateral and our ability to sell the collateral upon foreclosure. Some of the builders we deal with have more than one loan outstanding with us. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss. For certain construction loans, repayment is dependent, in part, on the success of the ultimate project and the ability of the borrower to sell or lease the property, rather than the ability of the borrower or guarantor to repay principal and interest. If our appraisal of the value of the completed project proves to be overstated or market values or rental rates decline, we may have inadequate security for the repayment of the loan upon completion of construction of the project. Because construction loans require active monitoring of the building process, including cost comparisons and on-site inspections, these loans are more difficult and costly to monitor. Properties under construction are often difficult to sell and typically must be completed in order to be successfully sold which also complicates the process of working out problem construction loans. If we are forced to foreclose on a project prior to or at completion due to a default, we may not be able to recover all of the unpaid balance of, and accrued interest on, the loan as well as related foreclosure and holding costs. In addition, we may be required to fund additional amounts to complete the project and may have to hold the property for an unspecified period of time while we attempt to dispose of it. Loans on land under development or held for future construction also pose additional risk because of the lack of income being produced by the property and the potential illiquid nature of the collateral.

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Our business may be adversely affected by credit risk associated with residential property.

One- to four-family residential loans are generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. A decline in residential real estate values resulting from a downturn in the housing market in our market areas may reduce the value of the real estate collateral securing these types of loans and increase our risk of loss if borrowers default on their loans. Recessionary conditions or declines in the volume of real estate sales and/or the sales prices coupled with elevated unemployment rates may result in higher than expected loan delinquencies or problem assets, and a decline in demand for our products and services. These potential negative events may cause us to incur losses, adversely affect our capital and liquidity and damage our financial condition and business operations.

Operational, Strategic and Reputational Risks

The occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

As a bank, we are susceptible to fraudulent activity, information security breaches and cybersecurity-related incidents that may be committed against us or our clients, which may result in financial losses or increased costs to us or our clients, disclosure or misuse of our information or our client information, misappropriation of assets, privacy breaches against our clients, litigation or damage to our reputation. Such fraudulent activity may take many forms, including check fraud, electronic fraud, wire fraud, phishing, social engineering and other dishonest acts. Information security breaches and cybersecurity-related incidents may include fraudulent or unauthorized access to systems used by us or our clients, denial or degradation of service attacks and malware or other cyber-attacks.

In recent periods, there continues to be a rise in electronic fraudulent activity, security breaches and cyber-attacks within the financial services industry, especially in the commercial banking sector due to cyber criminals targeting commercial bank accounts. Moreover, large corporations, including financial institutions and retail companies, have suffered major data breaches, in some cases exposing not only confidential and proprietary corporate information, but also sensitive financial and other personal information of their customers and employees and subjecting them to potential fraudulent activity. Some of our clients may have been affected by such breaches, which could increase their risks of identity theft and other fraudulent activity that could involve their accounts with us.

Information pertaining to us and our clients is maintained, and transactions are executed, on networks and systems maintained by us and certain third-party partners, such as our online banking, mobile banking or accounting systems. The secure maintenance and transmission of confidential information, as well as execution of transactions over these systems, are essential to protect us and our clients against fraud and security breaches and to maintain the confidence of our clients. Breaches of information security also may occur through intentional or unintentional acts by those having access to our systems or the confidential information of our clients, including employees. In addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Our third-party partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could result in a number of negative events, including losses to us or our clients, loss of business or clients, damage to our reputation, the incurrence of additional expenses, disruption to our business, additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We depend on information technology and telecommunications systems of third parties, and any systems failures, interruptions or data breaches involving these systems could adversely affect our operations and financial condition.

Our business is highly dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems, third-party servicers, accounting systems, mobile and online banking platforms and financial intermediaries. We outsource to third parties many of our major systems, such as data processing and mobile and online banking. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience interruptions. A system failure or service denial could result in a deterioration of our ability to process loans or gather deposits and provide customer service, compromise our ability to operate effectively, result in potential noncompliance with applicable laws or regulations, damage our reputation, result in a loss of customer business or subject us to additional regulatory scrutiny and possible financial liability, any of which could have a material adverse effect on business, financial condition, results of operations and growth prospects. In addition, failures of third

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~~parties~~essential to ~~comply~~protect ~~with~~us ~~applicable~~and ~~laws~~our clients against fraud and ~~regulations,~~security orbreaches ~~fraud~~and to maintain the confidence of our clients. Breaches of information security also may occur through intentional or ~~misconduct~~unintentional onacts by those having access to our systems or the ~~part~~confidential information of our clients, including employees. ofIn ~~any~~addition, increases in criminal activity levels and sophistication, advances in computer capabilities, new discoveries, vulnerabilities in third-party technologies (including browsers and operating systems) or other developments could result in a compromise or breach of ~~these~~the technology, processes and controls that we use to prevent fraudulent transactions and to protect data about us, our clients and underlying transactions, as well as the technology used by our clients to access our systems. Our third-party ~~parties~~partners’ inability to anticipate, or failure to adequately mitigate, breaches of security could ~~disrupt~~result in a number of negative events, including losses to us or our ~~operations~~clients, loss of business or ~~adversely~~clients, ~~affect~~damage to our reputation, the incurrence of additional expenses, disruption to our business, additional regulatory scrutiny or penalties or our exposure to civil litigation and possible financial liability, any of which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

It may be difficult for us to replace some of our third-party vendors, particularly vendors providing our core banking and information services, in a timely manner if they are unwilling or unable to provide us with these services in the future for any reason and even if we are able to replace them, it may be at higher cost or result in the loss of customers. Any such events could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our operations rely heavily on the secure processing, storage and transmission of information and the monitoring of a large number of transactions on a minute-by-minute basis, and even a short interruption in service could have significant consequences. We also interact with and rely on retailers, for whom we process transactions, as well as financial counterparties and regulators. Each of these third parties may be targets of the same types of fraudulent activity, computer break-ins and other cyber security breaches described above, and the cyber security measures that they maintain to mitigate the risk of such activity may be different than our own and may be inadequate.

As a result of financial entities and technology systems becoming more interdependent and complex, a cyber incident, information breach or loss, or technology failure that compromises the systems or data of one or more financial entities could have a material impact on counterparties or other market participants, including ourselves. As a result of the foregoing, our ability to conduct business may be adversely affected by any significant disruptions to us or to third parties with whom we interact.

We are subject to certain operational risks, including, but not limited to, customer or employee fraud and data processing system failures and errors.

Employee errors and employee and customer misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of our customers or improper use of confidential information. It is not always possible to prevent employee errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee errors could also subject us to financial claims for negligence.

Our ~~strategy~~branch ofnetwork ~~pursuing~~expansion ~~growth~~strategy ~~via~~may ~~acquisitions~~negatively ~~exposes~~affect ~~us to financial, execution and operational risks that could have a material adverse effect on~~ our ~~business,~~ financial ~~position, results of operations and growth prospects~~performance.

AsOur ~~part~~branch ofexpansion ~~our general growth~~ strategy, wemay ~~have~~not ~~expanded,~~generate ~~and plan on expanding in the future~~earnings, ~~our~~or ~~business~~may ~~through~~not ~~acquisitions,~~generate ~~such~~earnings aswithin ~~our~~a ~~acquisition~~reasonable period of ~~Ann Arbor Bancorp, Inc~~time. ~~Although~~Numerous ~~our~~factors ~~business~~contribute ~~strategy emphasizes organic expansion, we continue, from time~~ to ~~time in~~ the ~~ordinary~~performance ~~course~~ of ~~business,~~a tonew ~~engage~~or inacquired ~~preliminary~~branch, ~~discussions~~such ~~with~~as ~~potential~~a ~~acquisition~~suitable ~~targets.~~location, ~~There~~each ~~can~~market’s becompetitive ~~no assurance that~~environment, inmanagerial ~~the future~~resources, wequalified ~~will successfully identify suitable acquisition candidates~~personnel, ~~complete acquisitions~~ and ~~successfully~~an ~~integrate~~effective ~~acquired~~marketing ~~operations~~strategy. ~~into~~New ~~our~~branches ~~existing~~require ~~operations~~a orsignificant ~~expand~~investment ~~into new markets. The consummation~~ of ~~any~~both ~~future~~financial ~~acquisitions~~and ~~may~~personnel ~~dilute~~resources. ~~shareholder~~Additionally, ~~value~~it ortakes ~~may~~time ~~have~~for ana ~~adverse~~new ~~effect~~branch ~~upon~~to ~~our~~generate ~~operating~~sufficient ~~results~~favorably ~~while~~priced ~~the~~deposits ~~operations~~to ofproduce ~~the~~enough ~~acquired business are being integrated into our operations. In addition~~income, ~~once~~including ~~integrated,~~funding ~~acquired~~loan ~~operations~~growth ~~may~~generated ~~not achieve levels of profitability comparable to those achieved~~ by our ~~existing operations~~organization, orto ~~otherwise~~offset ~~perform~~expenses ~~as expected. Further, transaction-~~related ~~expenses~~to ~~may~~the ~~adversely~~branch, ~~affect~~some ~~our~~of ~~earnings.~~which, ~~These~~like ~~adverse~~salaries ~~effects on our earnings~~ and ~~results~~occupancy ofexpense, ~~operations~~are ~~may~~considered ~~have~~fixed acosts. ~~negative~~Opening ~~impact on the value of our stock.~~

Acquiring banks, bank branches or businesses involves risks commonly associated with acquisitions, including:

•We may incur time and expense associated with identifying and evaluating potential acquisitions and negotiating potential transactions, resulting in management’s attention being diverted from the operation of our existing business;

•We are exposed to potential asset and credit quality risks and unknown or contingent liabilities of the banks or businesses we acquire. If these issues or liabilities exceed our estimates, our earnings, capital and financial condition may be materially and adversely affected;

•Prices at which acquisitions can be made fluctuate with market conditions. We have experienced times during which acquisitions could not be made in specific markets at prices we considered acceptable and expect that we will experience this condition in the future;

•The acquisition of other entities generally requires integration of systems, procedures and personnel of the acquired entity. This integration process is complicated and time consuming and can also be disruptive to the customers and employees of the acquired business and our business. If the integration process is not conducted successfully, we may not realize the anticipated economic benefits of acquisitions within the expected time frame, or ever, and we may lose customers or employees of the acquired business. We may also experience greater than anticipated customer losses even if the integration process is successful;

•To finance an acquisition, we may borrow funds or pursue other forms of financing, such as issuing common stock or convertible preferred stock, which may have high dividend rights or may be highly dilutive to holders of our common stock, thereby increasing our leverage and diminishing our liquidity; and

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~~•We~~new ~~may~~branches ~~be unsuccessful~~ in ~~realizing~~existing ~~the~~markets ~~anticipated~~or ~~benefits~~new ~~from~~market ~~acquisitions.~~areas ~~For~~could ~~example,~~also wedivert ~~may~~resources ~~not~~from becurrent ~~successful~~core inoperations ~~realizing~~and ~~anticipated~~thereby ~~cost~~further ~~savings.~~adversely Weaffect ~~also~~our ~~may~~growth ~~not~~and beprofitability. ~~successful~~Finally, inthere ~~preventing~~is ~~disruptions~~a inrisk ~~service~~that toour ~~existing~~new ~~customer~~branches ~~relationships~~will ofnot ~~the~~be ~~acquired~~successful ~~institution,~~even ~~which~~after ~~could~~they ~~lead~~have tobeen ~~a loss in revenues~~established.

In addition to the foregoing, we may face additional risks in acquisitions to the extent we acquire new lines of business or new products, or enter new geographic areas, in which we have little or no current experience, especially if we lose key employees of the acquired operations. We cannot assure you that we will be successful in overcoming these risks or any other problems encountered in connection with acquisitions. Our inability to overcome risks associated with acquisitions could have an adverse effect on our ability to successfully implement our acquisition growth strategy and grow our business and profitability.

Our branch network expansion strategy may negatively affect our financial performance.

Our branch expansion strategy may not generate earnings, or may not generate earnings within a reasonable period of time. Numerous factors contribute to the performance of a new or acquired branch, such as a suitable location, each market’s competitive environment, managerial resources, qualified personnel, and an effective marketing strategy. New branches require a significant investment of both financial and personnel resources. Additionally, it takes time for a new branch to generate sufficient favorably priced deposits to produce enough income, including funding loan growth generated by our organization, to offset expenses related to the branch, some of which, like salaries and occupancy expense, are considered fixed costs. Opening new branches in existing markets or new market areas could also divert resources from current core operations and thereby further adversely affect our growth and profitability. Finally, there is a risk that our new branches will not be successful even after they have been established.

We are highly dependent on our management team, and the loss of our senior executive officers or other key employees could harm our ability to implement our strategic plan, impair our relationships with customers and adversely affect our business, results of operations and growth prospects.

Our business and growth strategies are built primarily upon our ability to retain employees with experience and business relationships within their respective market areas. The loss of any of our key personnel could have an adverse impact on our business and growth because of their skills, years of industry experience, knowledge of our market areas, the difficulty of finding qualified replacement personnel and any difficulties associated with transitioning of responsibilities to any new members of the executive management team. In addition, although we have non-competition agreements with each of our executive officers and with several others of our senior personnel, we do not have any such agreements with other employees who are important to our business, and the enforceability of non-competition agreements varies across the states in which we do business. While our mortgage originators and loan officers are generally subject to non-solicitation provisions as part of their employment, our ability to enforce such agreements may not fully mitigate the injury to our business from the breach of such agreements, as such employees could leave us and immediately begin soliciting our customers. The departure of any of our personnel who are not subject to enforceable non-competition agreements could have a material adverse impact on our business, results of operations and growth prospects.

Our mortgage banking profitability could significantly decline if we are not able to originate and resell a high volume of mortgage loans.

Mortgage production, especially refinancing activity, declines in rising interest rate environments. While we have been experiencing historically low interest rates over the last few years, ~~this low~~ interest ~~rate~~rates ~~environment~~have ~~likely~~begun ~~will~~to ~~not~~rise ~~continue~~in ~~indefinitely~~recent periods. ~~Moreover~~Accordingly, ~~when interest rates increase further,~~ there can be no assurance that our mortgage production will continue at ~~current~~recent levels. Because we sell a substantial portion of the mortgage loans we originate, the profitability of our mortgage banking business also depends in large part on our ability to aggregate a high volume of loans and sell them in the secondary market at a gain. Thus, in addition to our dependence on the interest rate environment, we are dependent upon (i) the existence of an active secondary market and (ii) our ability to profitably sell loans or securities into that market. If our level of mortgage production declines, the profitability will depend upon our ability to reduce our costs commensurate with the reduction of revenue from our mortgage operations.

Our ability to maintain our reputation is critical to the success of our business, and the failure to do so may materially adversely affect our business and the value of our stock.

We are a community bank, and our reputation is one of the most valuable components of our business. As such, we strive to conduct our business in a manner that enhances our reputation. This is done, in part, by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve, delivering superior service to our customers and caring about our customers and associates. If our reputation is negatively affected, by the actions of our employees or otherwise, our business and, therefore, our operating results and the value of our stock may be materially adversely affected.

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We have a continuing need for technological change, and we may not have the resources to effectively implement new technology or we may experience operational challenges when implementing new technology.

The financial services industry is undergoing rapid technological changes with frequent introductions of new technology-driven products and services. In addition to better serving customers, the effective use of technology increases efficiency and enables financial institutions to reduce costs. Our future success will depend in part upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands for convenience as well as to create additional efficiencies in our operations as we continue to grow and expand our market area. We may experience operational challenges as we implement these new technology enhancements, or seek to implement them across all of our offices and business units, which could result in us not fully realizing the anticipated benefits from such new technology or require us to incur significant costs to remedy any such challenges in a timely manner.

Many of our larger competitors have substantially greater resources to invest in technological improvements. As a result, they may be able to offer additional or superior products to those that we will be able to offer, which would put us at a competitive disadvantage. Accordingly, a risk exists that we will not be able to effectively implement new technology-driven products and services or be successful in marketing such products and services to our customers.

In addition, the implementation of technological changes and upgrades to maintain current systems and integrate new ones may also cause service interruptions, transaction processing errors and system conversion delays and may cause us to fail to comply with applicable laws. We expect that new technologies and business processes applicable to the banking industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. Because the pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

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pace of technological change is high and our industry is intensely competitive, we may not be able to sustain our investment in new technology as critical systems and applications become obsolete or as better ones become available. A failure to successfully keep pace with technological change affecting the financial services industry and failure to avoid interruptions, errors and delays could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

Our real estate lending exposes us to the risk of environmental liabilities.

In the course of our business, we may foreclose and take title to real estate, and we could be subject to environmental liabilities with respect to these properties. We may be held liable by a governmental entity or by third persons for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, as the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we ever become subject to significant environmental liabilities, our business, financial condition and results of operations could be materially and adversely affected.

We depend on the accuracy and completeness of information provided by customers and counterparties.

In deciding whether to extend credit or enter into other transactions with customers and counterparties, we may rely on information furnished to us by or on behalf of customers and counterparties, including financial statements and other financial information. We also may rely on representations of customers and counterparties as to the accuracy and completeness of that information. In deciding whether to extend credit, we may rely upon our customers’ representations that their financial statements conform to GAAP and present fairly, in all material respects, the financial condition, results of operations and cash flows of the customer. We also may rely on customer representations and certifications, or other audit or accountants’ reports, with respect to the business and financial condition of our clients. Our financial condition, results of operations, financial reporting and reputation could be negatively affected if we rely on materially misleading, false, inaccurate or fraudulent information.

We face strong competition from financial services companies and other companies that offer banking, mortgage, and leasing services and providers of SBA loans, which could harm our business.

Our operations consist of offering banking and mortgage services, and we also offer SBA lending, trust and leasing services to generate noninterest income. Many of our competitors offer the same, or a wider variety of, banking and related financial services within our market areas. These competitors include national banks, regional banks and other community banks. We also face competition from many other types of financial institutions. In addition, a number of out-of-state financial intermediaries have opened production offices or otherwise solicit deposits in our market areas. Additionally, we face growing competition from so-called “online businesses” with few or no physical locations, including online banks, lenders and consumer and commercial lending platforms, as well as automated retirement and investment service providers. Increased competition in our markets may result in reduced loans, deposits and commissions and brokers’ fees, as well as reduced net interest margin and profitability. Ultimately, we may not be able to compete successfully against current and future competitors. If we are unable to attract and retain banking, mortgage, and leasing customers, we may be unable to continue to grow our business, and our financial condition and results of operations may be adversely affected.

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Our ability to compete successfully depends on a number of factors, including, among other things, the ability to develop, maintain and build long-term customer relationships based on top quality service, high ethical standards and safe, sound assets; the scope, relevance and pricing of products and services offered to meet customer needs and demands; the rate at which we introduce new products and services relative to our competitors; customer satisfaction with our level of service; the ability to expand our market position; and industry and general economic trends.

Failure to perform in any of these areas could significantly weaken our competitive position, which could adversely affect our growth and profitability, which, in turn, could adversely affect our business, financial condition and results of operations.

The success of our SBA lending program is dependent upon the continued availability of SBA loan programs, our status as a preferred lender under the SBA loan programs and our ability to comply with applicable SBA lending requirements.

As an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose other restrictions, including revocation of the lender’s Preferred Lender status. If we lose our status as a Preferred Lender, we may lose our ability to compete effectively with other SBA Preferred Lenders, and as a result we would experience a material adverse effect to our financial results. Any changes to the SBA program, including changes to the level of guaranty provided by the federal government on SBA loans or changes to the level of funds appropriated by the federal government to the various SBA programs, may also have an adverse effect on our business, results of operations and financial condition.

Historically we have sold the guaranteed portion of our SBA 7(a) loans in the secondary market. These sales have resulted in our earning premium income and have created a stream of future servicing income. There can be no assurance that we will be able to continue originating these loans, that a secondary market will exist or that we will continue to realize premiums upon the sale of the guaranteed portion of these loans. When we sell the guaranteed portion of our SBA 7(a) loans, we incur credit risk on the retained, non-guaranteed portion of the loans.

In order for a borrower to be eligible to receive an SBA loan, the lender must establish that the borrower would not be able to secure a bank loan without the credit enhancements provided by a guaranty under the SBA program. Accordingly, the SBA loans in our portfolio generally have weaker credit characteristics than the rest of our portfolio, and may be at greater risk of default in the event of deterioration in economic conditions or the borrower’s financial condition. In the event of a loss resulting from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced by us, the SBA may require us to repurchase the previously sold portion of the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from us.

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from default and a determination by the SBA that there is a deficiency in the manner in which the loan was originated, funded or serviced by us, the SBA may require us to repurchase the previously sold portion of the loan, deny its liability under the guaranty, reduce the amount of the guaranty, or, if it has already paid under the guaranty, seek recovery of the principal loss related to the deficiency from us.

We may be adversely affected by the soundness of other financial institutions.

Our ability to engage in routine funding transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services companies are interrelated as a result of trading, clearing, counterparty, and other relationships. We have exposure to different industries and counterparties, and through transactions with counterparties in the financial services industry, including brokers and dealers, commercial banks, investment banks, and other institutional clients. As a result, defaults by, or even rumors or questions about, one or more financial services companies, or the financial services industry generally, have led to market-wide liquidity problems and could lead to losses or defaults by us or by other institutions. These losses or defaults could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Additionally, if our competitors were extending credit on terms we found to pose excessive risks, or at interest rates which we believed did not warrant the credit exposure, we may not be able to maintain our business volume and could experience deteriorating financial performance.

Legal, Accounting and Compliance Risks

We provide financial services to money services businesses and other cash-intensive businesses, which include, but are not limited to, check cashers, issuers/sellers of traveler’s checks, money orders and stored value cards, and money transmitters. Providing banking services to such businesses exposes us to enhanced risks from noncompliance with a variety of laws and regulations.

We provide financial services to the check cashing industry, offering currency, check clearing, monetary instrument, depository and credit services. We also provide treasury management services to money transmitters. Financial institutions that open and maintain accounts for money services businesses and other cash-intensive businesses are expected to apply the requirements of the USA Patriot Act and Bank Secrecy Act, as they do with all accountholders, on a risk-assessed basis. As with any category of accountholder, there will be money services businesses and other cash-intensive businesses that pose little risk of money laundering or lack of compliance with other laws and regulations and those that pose a significant risk. Providing treasury management services to money services businesses and other cash-intensive businesses represents a significant compliance and regulatory risk, and failure to comply with all statutory and regulatory requirements could result in fines or sanctions.

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compliance and regulatory risk, and failure to comply with all statutory and regulatory requirements could result in fines or sanctions.

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

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

We determine impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of the reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess. Any such adjustments are reflected in our results of operations in the periods in which they become known. As of December 31, ~~2020~~2021, our goodwill totaled $35.6 million. The Company conducted anits ~~interim~~annual ~~period~~ goodwill impairment assessment as of ~~August~~October 311, ~~2020~~2021, ~~triggered by the COVID-19 pandemic,~~ and concluded that goodwill was not impaired as of such date. There can be no assurance that our future evaluations of goodwill will not result in findings of impairment and related write-downs, which may have a material adverse effect on our financial condition and results of operations.

Changes in accounting standards could materially impact our financial statements.

From time to time, the FASB or the SEC may change the financial accounting and reporting standards that govern the preparation of our financial statements, such as the implementation of the CECL accounting standard. Such changes may result in us being subject to new or changing accounting and reporting standards. In addition, the bodies that interpret the accounting standards (such as banking regulators or outside auditors) may change their interpretations or positions on how these standards should be applied. These changes may be beyond our control, can be hard to predict and can materially impact how we record and report our financial condition and results of operations. In some cases, we could be required to apply a new or revised standard retrospectively, or apply an existing standard differently, also retrospectively, in each case resulting in our needing to revise or restate prior period financial statements.

The financial reporting resources we have put in place may not be sufficient to ensure the accuracy of the additional information we are required to disclose as a publicly listed company.

As a result of becoming a publicly listed company, we are subject to the heightened financial reporting standards under GAAP and SEC rules, including more extensive levels of disclosure. If we are unable to meet the demands that will be placed upon us as a public company, including the requirements of the Sarbanes-Oxley Act, we may be unable to report our financial results accurately, or report them within the timeframes required by law or stock exchange regulations. Failure to comply with the Sarbanes-Oxley Act, when and as applicable, could also potentially subject us to sanctions or investigations by the SEC or other regulatory authorities. If material weaknesses or other deficiencies occur, our ability to report our financial results accurately and timely could be impaired, which could result in late filings of our annual and quarterly reports under the Exchange Act, restatements of our consolidated financial statements, a decline in our stock price, or suspension or delisting of our common stock from the Nasdaq Global Select Market, and could have a material adverse effect on our business, financial condition, results of operations and growth prospects. Even if we are able to report our financial statements accurately and in a timely manner, any failure in our efforts to implement the improvements or disclosure of material weaknesses in our future filings with the SEC could cause our reputation to be harmed and our stock price to decline significantly. We have engaged our independent registered public accounting firm to perform an audit of our internal control over financial reporting as of any balance sheet date reported in our financial statements under FDICIA guidelines; however, we have not engaged them under Section 404(b) of Sarbanes-Oxley Act.

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

Under the Basel III Rule, we are required to meet specified capital requirements. In addition, banking institutions that do not maintain a capital conservation buffer, comprised of Common Equity Tier 1 Capital, of 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. 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.

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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. 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.

Litigation and regulatory actions, including possible enforcement actions, could subject us to significant fines, penalties, judgments or other requirements resulting in increased expenses or restrictions on our business activities.

Our business is subject to increased litigation and regulatory risks as a result of a number of factors, including the highly regulated nature of the financial services industry and the focus of state and federal prosecutors on banks and the financial services industry generally. In the normal course of business, from time to time, we have in the past and may in the future be named as a defendant in various legal actions, including arbitrations, class actions and other litigation, arising in connection with our current or prior business activities. Any such legal or regulatory actions may subject us to substantial compensatory or punitive damages, significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished income and damage to our reputation. Our involvement in any such matters, whether tangential or otherwise and even if the matters are ultimately determined in our favor, could also cause significant harm to our reputation and divert management attention from the operation of our business. Further, any settlement, consent order or adverse judgment in connection with any formal or informal proceeding or investigation by government agencies may result in litigation, investigations or proceedings as other litigants and government agencies begin independent reviews of the same activities. As a result, the outcome of legal and regulatory actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

For example, recent regulations require us to enhance our due diligence, ongoing monitoring and control over our third-party vendors and other ongoing third-party business relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third-party vendors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including civil money penalties or other administrative or judicial penalties or fines, as well as requirements for customer remediation, any of which could have a material adverse effect our business, financial condition, results of operations and growth prospects.

Legislative and regulatory actions taken now or in the future may increase our costs and impact our business, governance structure, financial condition or results of operations.

New proposals for legislation continue to be introduced in the U.S. Congress that could substantially increase regulation of the bank and non-bank financial services industries and impose restrictions on the operations and general ability of firms within the industry to conduct business consistent with historical practices. Federal and state regulatory agencies also frequently adopt changes to their regulations or change the manner in which existing regulations are applied. In addition, political developments, including possible changes in law introduced by the Biden administration or the appointment of new personnel in regulatory agencies, add uncertainty to the implementation, scope and timing of regulatory reforms. Certain aspects of current or proposed regulatory or legislative changes to laws applicable to the financial industry, if enacted or adopted, may impact the profitability of our business activities, require more oversight or change certain of our business practices, including the ability to offer new products, obtain financing, attract deposits, make loans and achieve satisfactory interest spreads and could expose us to additional costs, including increased compliance costs. Changes in federal policy and at regulatory agencies are expected to occur over time through policy and personnel changes, which could lead to changes involving the level of oversight and focus on the financial services industry. Regulations and legislation may be impacted by the political ideologies of the executive and legislative branches of the U.S. government as well as the heads of regulatory and administrative agencies, which may change as a result of elections. The nature, timing and economic and political effects of potential changes to the current legal and regulatory framework affecting financial institutions remain highly uncertain. These changes also may require us to invest significant management attention and resources to make any necessary changes to operations to comply and could have an adverse effect on our business, financial condition and results of operations.

We are subject to numerous laws designed to protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The CRA, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations prohibit discriminatory lending practices by financial institutions. The U.S. Department of Justice and federal and state banking and other agencies are responsible for enforcing these laws and regulations. A challenge to an institution’s compliance with fair lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

~~We face a risk of noncompliance and enforcement action with the Bank Secrecy Act and other anti-money laundering statutes and regulations.~~26

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~~The~~We ~~federal~~face ~~banking~~a ~~agencies~~risk ~~and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations~~ of ~~those~~noncompliance ~~requirements~~ and ~~have engaged in coordinated~~ enforcement ~~efforts~~action ~~against banks and other financial services providers~~ with the ~~U.S.~~Bank ~~Department~~Secrecy ofAct ~~Justice, Drug Enforcement Administration~~ and ~~Internal~~other Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat anti-money laundering ~~and~~statutes ~~terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations~~ and ~~growth prospects~~regulations.

The Bank Secrecy Act, the USA Patriot Act and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and to file reports such as suspicious activity reports and currency transaction reports. We are required to comply with these and other anti-money laundering requirements. The federal banking agencies and Financial Crimes Enforcement Network are authorized to impose significant civil money penalties for violations of those requirements and have engaged in coordinated enforcement efforts against banks and other financial services providers with the U.S. Department of Justice, Drug Enforcement Administration and Internal Revenue Service. We are also subject to increased scrutiny of compliance with the rules enforced by the Office of Foreign Assets Control. If our policies, procedures and systems are deemed deficient, we would be subject to liability, including fines and regulatory actions, which may include restrictions on our ability to pay dividends and the necessity to obtain regulatory approvals to proceed with certain aspects of our business plan, including our acquisition plans. Failure to maintain and implement adequate programs to combat money laundering and terrorist financing could also have serious reputational consequences for us. Any of these results could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

The Federal Reserve may require us to commit capital resources to support the Bank.

As a matter of policy, the Federal Reserve expects a bank holding company to act as a source of financial and managerial strength to a subsidiary bank and to commit resources to support such subsidiary bank. Under the “source of strength” doctrine, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to a subsidiary bank. A capital injection may be required at times when the holding company may not have the resources to provide it and therefore may be required to borrow the funds or raise capital. Any loans by a holding company to its subsidiary banks are subordinate in right of payment to deposits and to certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the institution’s general unsecured creditors, including the holders of its note obligations. Thus, any borrowing that must be done by the Company to make a required capital injection becomes more difficult and expensive and could have an adverse effect on our business, financial condition and results of operations.

Market and Interest Rate Risks

Fluctuations in interest rates or an increase in inflation could negatively impact our financial condition and results of operations.

Shifts in short-term interest rates may reduce net interest income, which is the principal component of our earnings. Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default. At the same time, the marketability of the underlying property may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their mortgages and other indebtedness at lower rates.

A sustained increase in market interest rates could adversely affect our earnings. A significant portion of our loans have fixed interest rates and longer terms than our deposits and borrowings. As a result of the relatively low interest rate environment, an increasing percentage of our deposits have been comprised of certificates of deposit and other deposits yielding no or a relatively low rate of interest having a shorter duration than our assets. We would incur a higher cost of funds to retain these deposits in a rising interest rate environment. Our net interest income could be adversely affected if the rates we pay on deposits and borrowings increase more rapidly than the rates we earn on loans. In addition, a substantial amount of our residential mortgage loans and home equity lines of credit have adjustable interest rates. As a result, these loans may experience a higher rate of default in a rising interest rate environment.

If short-term interest rates rise or remain at their ~~historically~~ low levels for a prolonged period, and ~~assuming~~ longer term interest rates fall ~~further~~, we could experience further net interest margin compression as our interest earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. This ~~would~~could have a material adverse effect on our net interest income and our results of operations.

In addition, any ~~trend~~significant ~~towards~~continued inflation, ~~including as a result of recent monetary or fiscal policy in response to the COVID-19 pandemic,~~ could negatively impact our financial condition and results of operations, including by reducing the real value of our loan and securities portfolios, or by negatively impacting our economic environment and our borrowers’ business operations.

Changes to, or elimination of, LIBOR could adversely affect our financial instruments with interest rates currently indexed to LIBOR.

In 2017, the Financial Conduct Authority of the United Kingdom announced its intention to cease sustaining LIBOR after 2021. While there is no consensus on what rate or rates may become accepted alternatives to LIBOR, the Alternative Reference Rates Committee (“ARRC”), a steering committee comprised of U.S. financial market participants, selected by the Federal Reserve Bank of New York, began to publish SOFR as an alternative to LIBOR. SOFR is a broad measure of the cost of 27

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~~overnight~~In ~~borrowings~~2017, ~~collateralized~~the byFinancial ~~Treasury~~Conduct ~~securities~~Authority ~~selected~~of by the ~~ARRC.~~United ItKingdom isannounced ~~unknown~~its intention to uscease ~~whether~~sustaining ~~during~~LIBOR. ~~the~~While ~~transition~~there ~~period,~~is ~~banks~~no ~~like~~certainty uson ~~will~~what berate ~~permitted~~or torates ~~retain~~may ~~LIBOR~~become asaccepted aalternatives ~~reference~~to ~~rate~~LIBOR, bethe ~~required~~Alternative toReference ~~amend~~Rates ~~contracts~~Committee to(“ARRC”), ~~reference~~a ~~SOFR~~steering ~~without~~committee ~~economic~~comprised ~~impact~~of (U.S. financial market participants, ~~legal~~selected ~~and~~by ~~documentation~~the ~~costs)~~Federal Reserve Bank of New York, orbegan beto ~~allowed~~publish SOFR as an alternative to ~~amend~~LIBOR. SOFR is a broad measure of the ~~definition~~cost of ~~LIBOR~~overnight ~~through~~borrowings acollateralized ~~specific~~by ~~grandfathering~~Treasury ~~protocol~~securities selected by the ARRC.

The market transition away from LIBOR to an alternative reference rate, such as SOFR, is complex and could have a range of adverse effects on our business, financial condition and results of operations. In particular, any such transition could:

•adversely affect the interest rates paid or received on, the revenue and expenses associated with, and the value of our floating-rate obligations, loans, deposits, subordinated debentures and other financial instruments tied to LIBOR rates, or other securities or financial arrangements given LIBOR’s role in determining market interest rates globally;

•prompt inquiries or other actions from regulators in respect of our preparation and readiness for the replacement of LIBOR with an alternative reference rate;

•result in disputes, litigation or other actions with counterparties regarding the interpretation and enforceability of certain fallback language, or lack of fallback language, in LIBOR-based instruments; and

•require the transition to or development of appropriate systems and analytics to effectively transition our risk management processes from LIBOR-based products to those based on the applicable alternative pricing benchmark, such as SOFR.

We have floating rate loans and investment securities, interest rate swap agreements and subordinated debentures whose interest rates are indexed to LIBOR that mature after December 31, 2021. The transition from LIBOR could create additional costs as well as economic and reputation risk. We cannot predict any unfavorable effect the chosen alternative index may have on financial instruments currently indexed to LIBOR.

Our securities portfolio has and may continue to be negatively impacted by fluctuations in market value and interest rates.

Our securities portfolio has and may continue to be impacted by fluctuations in market value, ~~potentially~~which ~~reducing~~reduce accumulated other comprehensive income and/or earnings. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the fair value of these securities. Changes in interest rates can have an adverse effect on our financial condition, as our available-for-sale securities are reported at their estimated fair value, and therefore are impacted by fluctuations in interest rates. For example, fixed-rate securities acquired by us are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer or individual mortgagors with respect to the underlying securities, and limited investor demand. Our securities portfolio is evaluated quarterly for other-than-temporary impairment. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. If this evaluation shows impairment to the actual or projected cash flows associated with one or more securities, a potential loss to earnings may occur. We increase or decrease our shareholders’ equity by the amount of change in the estimated fair value of the available-for-sale securities, net of taxes. There can be no assurance that the declines in market value will not result in other-than-temporary impairments of these assets, which would lead to accounting charges that could have a material adverse effect on our financial condition and results of operations.

Downgrades in the credit rating of one or more insurers that provide credit enhancement for our state and municipal securities portfolio may have an adverse impact on the market for and valuation of these types of securities.

We invest in tax-exempt state and local municipal securities, some of which are insured by monoline insurers. Several of these insurers have come under scrutiny by rating agencies. Even though management generally purchases municipal securities on the overall credit strength of the issuer, the reduction in the credit rating of an insurer may negatively impact the market for and valuation of our investment securities. Such downgrade could adversely affect our liquidity, financial condition and results of operations.

Monetary policies and regulations of the Federal Reserve could adversely affect our business, financial condition and results of operations.

In addition to being affected by general economic conditions, our earnings and growth are affected by the policies of the Federal Reserve. An important function of the Federal Reserve is to regulate the money supply and credit conditions. Among the instruments used by the Federal Reserve to implement these objectives are open market purchases and sales of U.S. government securities, adjustments of the discount rate and changes in banks’ reserve requirements against bank deposits. These instruments are used in varying combinations to influence overall economic growth and the distribution of credit, bank loans, investments and deposits. Their use also affects interest rates charged on loans or paid on deposits.

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The monetary policies and regulations of the Federal Reserve have had a significant effect on the operating results of commercial banks in the past and are expected to continue to do so in the future. The effects of such policies upon our business, financial condition and results of operations cannot be predicted.

Liquidity and Funding Risks

Liquidity risks could affect operations and jeopardize our business, financial condition, and results of operations.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and/or investment securities and from other sources could have a substantial negative effect on our liquidity. Our most important source of funds consists of our customer deposits, including escrow deposits held in connection with our commercial mortgage servicing business. Such deposit balances can decrease when customers perceive alternative investments, such as the stock market, as providing a better risk/return tradeoff, or, in connection with our commercial mortgage servicing business, third parties for whom we provide servicing choose to terminate that relationship with us. If customers move money out of bank deposits and into other investments, we could lose a relatively low cost source of funds, which would require us to seek wholesale funding alternatives in order to continue to grow, thereby increasing our funding costs and reducing our net interest income and net income.

Other primary sources of funds consist of cash from operations, investment security maturities and sales, and proceeds from the issuance and sale of our equity and debt securities to investors. Additional liquidity is provided by brokered deposits, repurchase agreements and the ability to borrow from the Federal Reserve Bank and the Federal Home Loan Bank of Indianapolis (FHLB). We also may borrow from third-party lenders from time to time. Our access to funding sources in amounts adequate to finance or capitalize our activities or on terms that are acceptable to us could be impaired by factors that affect us directly or the financial services industry or economy in general, such as disruptions in the financial markets or negative views and expectations about the prospects for the financial services industry.

Any decline in available funding could adversely impact our ability to continue to implement our strategic plan, including originating loans, investing in securities, meeting our expenses, paying dividends to our shareholders or fulfilling obligations such as repaying our borrowings or meeting deposit withdrawal demands, any of which could have a material adverse impact on our liquidity, business, financial condition and results of operations.

We depend on non-core funding sources, which causes our cost of our funds to be higher when compared to other financial institutions.

We use certain non-core, wholesale funding sources, including brokered deposits and FHLB advances. Unlike traditional deposits from our local clients, there is a higher likelihood that the funds wholesale deposits provide will not remain with us after maturity. Although we are increasing our efforts to reduce our reliance on non-core funding sources, we may not be able to increase our market share of core-deposit funding in our highly competitive market area. If we are unable to do so, we may be forced to increase the amounts of wholesale funding sources. The cost of these funds can be volatile and may exceed the cost of core deposits in our market area, which could have a material adverse effect on our net interest income.

Municipal deposits are one important source of funds for us, and a reduced level of such deposits may hurt our profits.

Municipal deposits are an important source of funds for our lending and investment activities. Given our use of these high-average balance municipal deposits as a source of funds, our inability to retain such funds could have an adverse effect on our liquidity. In addition, our municipal deposits are primarily demand deposit accounts or short-term deposits and therefore are more sensitive to changes in interest rates. If we are forced to pay higher rates on our municipal deposits to retain those funds, or if we are unable to retain those funds and we are forced to turn to borrowing sources for our lending and investment activities, the interest expense associated with such borrowings may be higher than the rates we are paying on our municipal deposits, which could adversely affect our net income.

Our liquidity is dependent on dividends from the Bank.

The Company is a legal entity separate and distinct from the Bank. A substantial portion of our cash flow, including cash flow to pay principal and interest on any debt we may incur, comes from dividends the Company received from the Bank. Various federal and state laws and regulations limit the amount of dividends that the Bank may pay to the Company. In the event the Bank is unable to pay dividends to us, we may not be able to service any debt we may incur, which could have a material adverse effect on our business, financial condition, results of operations and growth prospects.

We may need to raise additional capital in the future, and if we fail to maintain sufficient capital, whether due to losses, an inability to raise additional capital or otherwise, our financial condition, liquidity and results of operations, as well as our ability to maintain regulatory compliance, would be adversely affected.

We face significant capital and other regulatory requirements as a financial institution. We may need to raise additional capital in the future to provide us with sufficient capital resources and liquidity to meet our commitments and business needs, which could include the possibility of financing acquisitions. In addition, the Company, on a consolidated basis, and the Bank,

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on a stand-alone basis, must meet certain regulatory capital requirements and maintain sufficient liquidity. Importantly, regulatory capital requirements could increase from current levels, which could require us to raise additional capital or contract our operations. Our ability to raise additional capital depends on conditions in the capital markets, economic conditions and a number of other factors, including investor perceptions regarding the banking industry, market conditions and governmental activities, and on our financial condition and performance. Accordingly, we cannot assure you that we will be able to raise additional capital if needed or on terms acceptable to us. If we fail to maintain capital to meet regulatory requirements, our financial condition, liquidity and results of operations would be materially and adversely affected.

Item 1B – Unresolved Staff Comments

None.

Item 2 - Properties

Our headquarters are located at 32991 Hamilton Court, Farmington Hills, Michigan. Including our headquarters building, we operate 17 offices, including 16 full-service banking centers located in southeastern and west Michigan, and one mortgage loan production office in Ann Arbor, Michigan. We own our headquarters building and our branch offices located in Novi and Bloomfield Hills as well as two of the branch offices in Ann Arbor, and lease the remainder of our locations.

Item 3 – Legal Proceedings

In the normal course of business, we are named or threatened to be named as a defendant in various lawsuits, none of which we expect to have a material effect on the Company. However, given the nature, scope and complexity of the extensive legal and regulatory landscape applicable to our business (including laws and regulations governing consumer protection, fair lending, fair labor, privacy, information security, anti-money laundering and anti-terrorism), we, like all banking organizations, are subject to heightened legal and regulatory compliance and litigation risk. There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries is a party or to which our

property is the subject.

Item 4 – Mine Safety Disclosures

Not Applicable.

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PART II

Item 5 – Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer of Purchases of Equity Securities

Market Information

Our common stock began trading on the Nasdaq Global Select Market (“Nasdaq”) under the symbol “LEVL” on April 20, 2018. Prior to that, there was no public market for our common stock. On August 10, 2020, our preferred stock began trading on Nasdaq under the symbol "LEVLP."

Shareholders

As of February 9, 2021, the Company had 167 common stock shareholders of record and approximately 938 beneficial holders.

Unregistered Sales of Equity Securities

None.

Issuer Purchases of Equity Securities

Share Buyback Program. On January 23, 2019, the Company announced that its Board of Directors approved a repurchase program under which the Company is authorized to repurchase, from time to time as the Company deems appropriate, shares of the Company’s common stock with an aggregate purchase price of up to $5 million. The repurchase program began on January 23, 2019, and expired on December 31, 2020. The repurchase program did not obligate the Company to repurchase any dollar amount or number of shares, and the program could have been extended, modified, suspended or discontinued at any time.

On December 16, 2020, the Company announced that its Board of Directors approved a new share repurchase program that began on January 1, 2021 and expires on December 31, 2022 to replace the prior repurchase program. This repurchase program authorizes the repurchase shares of the Company's common stock with an aggregate purchase price of up to $10.0 million.

~~The~~There ~~following~~were ~~table~~no ~~sets~~repurchases ~~forth~~of ~~information regarding~~ the Company’'s ~~repurchase of~~ shares of its outstanding common stock during the three months ended December 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
October 1-31, 2020	—	$	—	—	$	2,215
November 1-30, 2020	13,067	18.55		13,067	1,972
December 1-31, 2020	87,475	20.42		87,475	—
Total	100,542	$	20.17	100,542

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 December 31, 2021, the total shares repurchased in the amount of $6.2 million were redeemed but remain authorized, unissued shares.

~~Under~~As ~~applicable~~of ~~state~~March ~~law~~4, ~~Michigan corporations are not permitted to retain treasury stock. As such~~2022, the ~~price~~Company ~~paid~~has ~~for~~not ~~the~~ repurchased ~~shares~~any ~~is recorded to common stock. As of December 31, 2020, the total~~ shares ~~repurchased~~during ~~in the amount of $4~~2022.~~8 million were redeemed but remain authorized, unissued shares.~~

AsItem of6 ~~March~~- 5, 2021, the Company had repurchased a total of 54,123 shares at an average price of $22.76 per share. The shares repurchased in the amount of $1.2 million were redeemed but remain authorized, unissued shares.[Reserved]

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Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion explains our financial condition as of December 31, 2021 and 2020 and results of operations for the years ended December 31, 2021, 2020 and 2019. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented in Item 8 of this report.

This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Certain risks, uncertainties and other factors, including but not limited to those set forth under "Forward-Looking Statements," "Risk Factors" and elsewhere in this Form 10-K, may cause actual results to differ materially from those projected in the forward-looking statements. We assume no obligation to update any of these forward-looking statements.

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~~Item 6 -~~ Selected Financial Data

~~As of and for the year ended December 31,~~

As of and for the year ended December 31,

(Dollars in thousands, except per share data)

~~2020~~

~~2019~~

~~2018~~

~~2017~~2021

~~2016~~2020

2019

Earnings Summary

Interest income

~~82,639~~

~~70,448~~

~~63,824~~

5586,~~607~~650

5282,~~903~~639

70,448

Interest expense

~~15,883~~

~~19,393~~

~~13,400~~

8,~~078~~051

515,~~832~~883

19,393

Net interest income

~~66,756~~

~~51,055~~

~~50,424~~

4778,~~529~~599

4766,~~071~~756

51,055

Provision expense for loan losses

11,872

1,383

412

1,416

3,925

Provision for (recovery of) loan losses

(725)

11,872

1,383

Noninterest income

~~29,714~~

~~14,211~~

~~7,055~~

622,~~502~~372

629,~~407~~714

14,211

Noninterest expense

~~60,232~~

~~44,369~~

~~39,678~~

3661,~~051~~839

3260,~~407~~232

44,369

Income before income taxes

~~24,366~~

~~19,514~~

~~17,389~~

1639,~~564~~857

1724,~~146~~366

19,514

Income tax provision

~~3,953~~

~~3,403~~

~~3,003~~

67,~~723~~379

63,~~100~~953

3,403

Net income

~~20,413~~

~~16,111~~

~~14,386~~

932,~~841~~478

1120,~~046~~413

16,111

Preferred stock dividends

~~479~~

—

—1,875

—479

—

Net income available to common shareholders

~~19,934~~

~~16,111~~

~~14,386~~

930,~~841~~603

1119,~~046~~934

16,111

Net income allocated to participating securities (1)

~~244~~

~~159~~

—

—441

—244

159

Net income attributable to common shareholders (1)

~~19,690~~

~~15,952~~

~~14,386~~

930,~~841~~162

1119,~~046~~690

15,952

Per Share Data

Basic earnings per common share

~~2.58~~

~~2.08~~

~~1.95~~

14.5400

12.7458

2.08

Diluted earnings per common share

~~2.57~~

~~2.05~~

~~1.91~~

13.4995

12.6957

2.05

Diluted earnings per common share, excluding acquisition and due diligence fees (2)

~~2.74~~

~~2.12~~

~~1.91~~

13.4995

12.6974

2.12

Book value per common share

~~25.14~~

~~22.13~~

~~19.58~~

1628.7802

1525.2114

22.13

Tangible book value per common share (2)

~~19.63~~

~~20.86~~

~~18.31~~

1522.2137

1319.5963

20.86

Preferred shares outstanding (in thousands)

—

—10

—

Common shares outstanding (in thousands)

~~7,634~~

~~7,715~~

~~7,750~~

67,~~435~~734

67,~~351~~634

7,715

Average basic common shares (in thousands)

~~7,627~~

~~7,632~~

~~7,377~~

67,~~388~~536

67,~~341~~627

7,632

Average diluted common shares (in thousands)

~~7,686~~

~~7,747~~

~~7,524~~

67,~~610~~650

67,~~549~~686

7,747

Selected Period End Balances

Total assets

~~2,442,982~~

~~1,584,899~~

~~1,416,215~~

12,~~301~~515,~~291~~869

12,~~127~~442,~~531~~982

1,584,899

Securities available-for-sale

~~302,732~~

~~180,905~~

~~204,258~~

~~150~~397,~~969~~551

~~100~~302,~~533~~732

180,905

Total loans

~~1,723,537~~

~~1,227,609~~

~~1,126,565~~

1,~~034~~652,~~923~~771

~~953~~1,~~393~~723,537

1,227,609

Total deposits

~~1,963,312~~

~~1,135,428~~

~~1,134,635~~

12,~~120~~040,~~382~~082

~~924~~1,~~924~~963,312

1,135,428

Total liabilities

~~2,227,655~~

~~1,414,196~~

~~1,264,455~~

12,~~193~~275,~~331~~778

12,~~030~~227,~~960~~655

1,414,196

Total shareholders' equity

~~215,327~~

~~170,703~~

~~151,760~~

~~107~~240,~~960~~091

96215,~~571~~327

170,703

Total common shareholders' equity

~~191,955~~

~~170,703~~

~~151,760~~

~~107~~216,~~960~~719

96191,~~571~~955

170,703

Tangible common shareholders' equity (2)

~~149,844~~

~~160,940~~

~~141,926~~

97173,~~906~~033

86149,~~283~~844

160,940

Performance and Capital Ratios

Return on average assets

~~0.88~~

~~1.08~~

~~1.07~~

01.8228

10.0588

1.08 %

Return on average equity

~~10.61~~

~~9.90~~

~~10.68~~

914.4524

1110.9361

9.90

Net interest margin (fully taxable equivalent) (3)

~~3.10~~

~~3.60~~

~~3.92~~

43.1833

43.7310

3.60

Efficiency ratio (noninterest expense/net interest income plus noninterest income)

~~62.44~~

~~67.98~~

~~69.03~~

6661.7224

6062.6044

67.98

Dividend payout ratio

~~7.37~~

~~7.20~~

~~4.60~~

—5.74

—7.37

7.20

Total shareholders' equity to total assets

~~8.81~~

~~10.77~~

~~10.72~~

89.3054

8.5681

10.77

Tangible common equity to tangible assets (2)

~~6.24~~

~~10.22~~

~~10.09~~

7.5800

76.7224

10.22

Common equity tier 1 to risk-weighted assets

~~9.30~~

~~11.72~~

~~11.82~~

9.10.37

89.7230

11.72

Tier 1 capital to risk-weighted assets

~~10.80~~

~~11.72~~

~~11.82~~

911.1075

810.7280

11.72

Total capital to risk-weighted assets

~~14.91~~

~~15.99~~

~~14.00~~

1114.5576

1114.2891

15.99

Tier 1 capital to average assets (leverage ratio)

~~6.93~~

~~10.41~~

~~10.21~~

7.9293

76.9593

10.41

Asset Quality Ratios:

Net charge-offs to average loans

0.13

0.02

0.05

0.08

Net (recoveries) charge-offs to average loans

0.01

0.13

0.02

Nonperforming assets as a percentage of total assets

~~0.77~~

~~1.23~~

~~1.30~~

10.1346

10.3677

1.23

Nonaccrual loans as a percent of total loans

~~1.09~~

~~1.51~~

~~1.64~~

10.3668

1.5809

1.51

Allowance for loan losses as a percentage of total loans

~~1.29~~

~~1.03~~

1.1330

1.1629

1.03

Allowance for loan losses as a percentage of nonaccrual loans

~~118.50~~

~~68.40~~

~~62.70~~

83189.3879

73118.7650

68.40

Allowance for loan losses as a percentage of nonaccrual loans, excluding allowance allocated to loans accounted for under ASC 310-30

~~114.95~~

~~64.29~~

~~57.71~~

75184.6858

68114.1395

64.29

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

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

(3) Presented on a tax equivalent basis using a ~~35% tax rate for the 2016 and 2017 periods and a~~ 21% tax rate for the ~~2018~~2019, ~~2019~~2020, and ~~2020~~2021 periods.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

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

Tangible Common Shareholders' Equity, Tangible Common Equity to Tangible Assets Ratio and Tangible Book Value Per Share
	~~As of and for the year ended December 31,~~			As of and for the year ended December 31,
(Dollars in thousands, except per share data)	~~2020~~				~~2019~~			~~2018~~			2021			~~2017~~			2020			~~2016~~			2019
Total shareholders' equity	$	~~215,327~~			$	~~170,703~~		$	~~151,760~~		$	240,091		$	~~107,960~~		$	215,327		$	~~96,571~~		$	170,703
Less:
Preferred stock	~~23,372~~				—			—			23,372			—			23,372			—			—
Total common shareholders' equity	~~191,955~~				~~170,703~~			~~151,760~~			216,719			~~107,960~~			191,955			~~96,571~~			170,703
Less:
Goodwill	~~35,554~~				~~9,387~~			~~9,387~~			35,554			~~9,387~~			35,554			~~9,387~~			9,387
Other intangible assets, net	6,557				376			447						667						901
Mortgage servicing rights, net											5,604						3,361						76
Tangible common shareholders' equity	$	149,844			$	160,940		$	141,926					$	97,906					$	86,283
Other intangible assets, net											2,528						3,196						300
Common shares outstanding (in thousands)	7,634				7,715			7,750						6,435						6,351
Tangible common shareholders' equity											$	173,033					$	149,844					$	160,940
Tangible book value per common share	$	19.63			$	20.86		$	18.31					$	15.21					$	13.59
Common shares outstanding (in thousands)											7,734						7,634						7,715
Total assets	$	2,442,982			$	1,584,899		$	1,416,215					$	1,301,291					$	1,127,531
Tangible book value per common share											$	22.37					$	19.63					$	20.86
Less:
Total assets											$	2,515,869					$	2,442,982					$	1,584,899
Goodwill	35,554				9,387			9,387						9,387						9,387
Less:
Other intangible assets, net	6,557				376			447						667						901
Goodwill											35,554						35,554						9,387
Tangible assets	$	2,400,871			$	1,575,136		$	1,406,381					$	1,291,237					$	1,117,243
Mortgage servicing rights, net											5,604						3,361						76
Tangible common equity to tangible assets	6.24		%		10.22		%	10.09		%				7.58		%				7.72		%
Other intangible assets, net											2,528						3,196						300
Tangible assets											$	2,472,183					$	2,400,871					$	1,575,136
Tangible common equity to tangible assets											7.00		%				6.24		%				10.22		%

Adjusted Income and Diluted Earnings Per Share
	~~As of and for the year ended December 31,~~		As of and for the year ended December 31,
(Dollars in thousands, except per share data)	~~2020~~		~~2019~~		~~2018~~		~~2017~~2021		~~2016~~2020		2019
Net income, as reported	$	~~20,413~~	$	~~16,111~~	$	~~14,386~~	$	932,~~841~~478	$	1120,~~046~~413	$	16,111
Acquisition and due diligence fees	~~1,654~~		~~539~~		—		—		21,~~684~~654		539
Income tax benefit (1)	~~(331)~~		~~(51)~~		—		—		(~~939~~331)		(51)
Net income, excluding acquisition and due diligence fees	$	~~21,736~~	$	~~16,599~~	$	~~14,386~~	$	932,~~841~~478	$	1221,~~791~~736	$	16,599
Diluted earnings per share, as reported	$	~~2.57~~	$	~~2.05~~	$	~~1.91~~	$	13.4995	$	12.6957	$	2.05
Effect of acquisition and due diligence fees, net of income tax benefit	~~0.17~~		~~0.07~~		—		—		0.2717		0.07
Diluted earnings per common share, excluding acquisition and due diligence fees	$	~~2.74~~	$	~~2.12~~	$	~~1.91~~	$	13.4995	$	12.9674	$	2.12
(1) Assumes income tax rate of 21% on deductible acquisition expenses for the 2019 and 2020 periods and 35% on deductible acquisition expenses for the 2016 period.
(1) Assumes income tax rate of 21% on deductible acquisition expenses for the 2019 and 2020 periods.

Allowance for Loan Loss as a Percentage of Total Loans, Excluding PPP Loans
	As of the year ended December 31,
				As of and for the year ended December 31,
(Dollars in thousands, except per share data)	~~2020~~				~~2019~~			~~2018~~			~~2017~~2021			~~2016~~2020			2019
Total loans	$	~~1,723,537~~			$	~~1,227,609~~		$	~~1,126,565~~		$	1,~~034~~652,~~923~~771		$	~~953~~1,~~393~~723,537		$	1,227,609
Less:
PPP loans	~~290,135~~				—			—			—76,505			—290,135			—
Total loans, excluding PPP loans	$	~~1,433,402~~			$	~~1,227,609~~		$	~~1,126,565~~		$	1,~~034~~576,~~923~~266		$	~~953~~1,~~393~~433,402		$	1,227,609
Allowance for loan loss	$	~~22,297~~			$	~~12,674~~		$	~~11,566~~		$	1121,~~713~~425		$	1122,~~089~~297		$	12,674
Allowance for loan loss as a percentage of total loans	~~1.29~~		%		~~1.03~~		%	~~1.03~~		%	1.1330		%	1.1629		%	1.03		%
Allowance for loan loss as a percentage of total loans excluding PPP loans	~~1.56~~		%		~~1.03~~		%	~~1.03~~		%	1.1336		%	1.1656		%	1.03		%

Table of Contents

Item 7 – Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion explains our financial condition as of December 31, 2020 and 2019 and results of operations for the years ended December 31, 2020, 2019 and 2018. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented in Item 8 of this report.

Critical Accounting Policies

Our consolidated financial statements are prepared based on the application of accounting policies generally accepted in the United States. Our 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 in our consolidated financial statements included in Item 8. Financial Statements and Supplementary Data in this Form 10-K. Some of these 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. At December 31, ~~2020~~2021, the most critical of these significant accounting policies in understanding the estimates and assumptions involved in preparing our consolidated financial statements were the policies related to the allowance for loan losses, fair value measurement, and goodwill, which are discussed more fully below.

Allowance for Loan Losses

The allowance for loan losses is calculated with the objective of maintaining a reserve sufficient to absorb estimated probable losses. Management's determination of the appropriateness of the allowance is based on periodic evaluations of the loan portfolio, lending-related commitments, and other relevant factors. This evaluation is inherently subjective as it requires numerous estimates, including the loss content for internal risk ratings, collateral values, and the amounts and timing of expected future cash flows. In addition, management may include qualitative adjustments intended to capture the impact of other uncertainties in the lending environment such as underwriting standards, current economic and political conditions, and other factors affecting the credit quality. Changes to one or more of the estimates used would result in a different estimated allowance for loan loss.

Fair Value Measurement

Investment securities available-for-sale, derivatives, loans held for sale, and certain other loans are recorded at fair value on a recurring basis. Additionally, from time to time, other assets and liabilities may be recorded at fair value on a nonrecurring basis, such as impaired loans, other real estate, and certain other assets and liabilities. Fair value is an estimate of the exchange price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value.

At December 31, 2020, assets and liabilities measured using observable inputs that are classified as Level 1 or Level 2 represented 97.43% and 100.00% of total assets and liabilities recorded at fair value, respectively. Valuations generated from model-based techniques that use at least one significant assumption not observable in the market are considered Level 3 and reflect estimates of assumptions market participants would use in pricing the asset or liability.33

price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (i.e., not a forced transaction, such as a liquidation or distressed sale) between market participants at the measurement date and is based on the assumptions market participants would use when pricing an asset or liability. Fair value measurement and disclosure guidance establishes a three-level hierarchy for disclosure of assets and liabilities recorded at fair value.

At December 31, 2021, assets and liabilities measured using observable inputs that are classified as Level 1 or Level 2 represented 97.45% and 100.00% of total assets and liabilities recorded at fair value, respectively. Valuations generated from model-based techniques that use at least one significant assumption not observable in the market are considered Level 3 and reflect estimates of assumptions market participants would use in pricing the asset or liability.

Valuation and Recoverability of Goodwill

Goodwill represents $35.6 million of our $2.4452 billion in total assets as of December 31, ~~2020~~2021. We review goodwill for impairment annually as of October 1st and also test for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of our Company below its carrying amount. The accounting estimates related to our goodwill require us to make considerable assumptions about fair values. Our assumptions regarding fair values require significant judgment about economic and industry factors and the growth and earnings prospects of the Company. Changes in these judgements, either individually or collectively, may have a significant effect on the estimated fair values.

Overview

Level One Bancorp, Inc. is a financial holding company headquartered in Farmington Hills, Michigan, with its primary branch operations in southeastern and west Michigan. Through our wholly owned subsidiary, Level One Bank, we offer a broad range of loan products to the residential and commercial markets, as well as retail and business banking services. Hamilton Court Insurance Company, a wholly owned subsidiary of the Company, 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 have been available or economically feasible in the insurance marketplace. ~~During the third quarter of 2020, it was determined that~~ Hamilton Court Insurance Company ~~would~~exited ~~exit~~ the pool resources relationship to which it was previously a member, and itwas dissolved in January 2021.

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

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

On January 2, 2020, the Company completed its 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 year ended December 31~~subsidiary, ~~2020~~Ann ~~include~~Arbor ~~the~~State ~~results of operations of AAB on and after January 2, 2020, including $1~~Bank.7 ~~million~~The oftransaction ~~acquisition~~was ~~fees.~~completed ~~Results~~pursuant ~~for~~to ~~periods~~a before January 2, 2020 reflect only those of Level One and do not include the results of operations of AAB. See "Note 2 - Business Combinations" for more information. In addition, all identifiable assets, including the intangible assets that consisted of $26.2 million in goodwill and $3.7 million in core deposit intangibles, and liabilities of AAB as of the merger ~~date have been recorded at their estimated fair value and added to those~~ of ~~Level One. As of December 31, 2020,~~ the Company’s ~~had~~wholly ~~total consolidated assets of $2.44 billion, total consolidated deposits of $1.96 billion and total consolidated shareholders' equity of $215.3 million.~~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 years ended December 31, 2021 and 2020 include the results of operations of AAB on and after January 2, 2020, including $1.7 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 $26.2 million in goodwill and $3.7 million in core deposit intangibles, and liabilities of AAB as of the merger date have been recorded at their estimated fair value and added to those of Level One.

Recent Developments

Fourth Quarter Common Stock Dividend. On December 1615, ~~2020~~2021, ~~the~~Level ~~Company~~One's Board of Directors declared a fourth quarter ~~2020~~2021 cash dividend of $0.0506 per common share. The dividend was paid on January 1514, ~~2020~~2022, to shareholders of record at the close of business on December 31, ~~2020~~2021.

First Quarter Preferred Stock Dividend. On January 20, 2021, Level One’s Board of Directors declared a quarterly cash dividend of $46.88 per share on its 7.50% Non-Cumulative Perpetual Preferred Stock, Series B. Holders of depositary shares will receive $0.4688 per depositary share. The dividend was paid on February 15, 2021, to shareholders of record at the close of business on January 31, 2021.34

~~Impact~~First ofQuarter ~~COVID-19~~Preferred ~~Pandemic~~Stock Dividend. ~~The~~On ~~COVID-~~January 19, ~~pandemic~~2022, inLevel ~~the~~One’s ~~United~~Board ~~States~~of ~~has~~Directors ~~had,~~declared ~~and~~a isquarterly ~~expected~~cash todividend ~~continue~~of to$46.88 ~~have,~~per ashare ~~complex~~on ~~and~~its ~~significant~~7.50% ~~impact~~Non-Cumulative onPerpetual ~~the~~Preferred ~~economy~~Stock, ~~the~~Series ~~banking~~B. ~~industry~~Holders ~~and~~of ~~the~~depositary ~~Company~~shares inwill ~~future~~receive ~~fiscal~~$0.4688 ~~periods,~~per ~~all~~depositary ~~subject~~share. The dividend is payable on February 15, 2022, to ashareholders ~~high~~of ~~degree~~record at the close of ~~uncertainty~~business on January 31, 2022.

~~Effects~~Impact onof ~~Our~~COVID-19 ~~Market Areas~~Pandemic. ~~Our~~ ~~commercial~~The ~~and~~COVID-19 ~~consumer~~pandemic ~~banking~~in ~~products~~the ~~and~~United ~~services~~States ~~are~~has ~~offered primarily in Michigan~~had, ~~where individuals, companies~~ and ~~other~~is ~~organizations~~expected ~~have limited their economic activities in response~~ to ~~the~~continue ~~pandemic. It is uncertain whether and~~ to ~~what~~have, ~~extent~~a ~~additional~~complex ~~restrictions on economic activities~~ and ~~social~~significant ~~gatherings will be imposed in future periods. These limitations on economic activity have had an adverse~~ impact on the ~~Michigan~~ economy, ~~and~~the ~~our~~banking ~~clients.~~industry ~~The Bank~~ and ~~its~~the ~~branches have remained open during these orders because banks have been deemed essential businesses~~Company. ~~We are currently serving our customers through our drive-thrus, by appointment only for in-person services, and~~

35Effects on Our Business. We currently expect that the COVID-19 pandemic, federal, state and local government responses to the pandemic, supply disruptions, labor availability challenges, and the effects of existing and future variants of the disease, such as the Delta variant, may continue to have a significant impact on our business. A substantial portion of the Bank’s borrowers in the restaurant and hospitality industries have endured substantial economic distress, and while those challenges have been largely mitigated by the PPP and other governmental assistance, there is still some uncertainty about the ability of these clients to return to cash flow levels necessary to cover their debt service. These developments, together with economic conditions generally, are also expected to impact our commercial real estate portfolio, particularly with respect to real estate with exposure to these industries and the value of certain collateral securing our loans.

~~online~~Level ~~and~~One's ~~mobile~~Response ~~banking~~to ~~tools~~the COVID-19 Pandemic. WeLevel ~~will~~One ~~continue~~has totaken becomprehensive ~~diligent~~steps into help our ~~efforts~~customers, toteam ~~follow~~members ~~all~~and ~~CDC~~communities ~~guidelines~~during tothe ~~ensure~~COVID-19 ~~the~~pandemic. ~~health~~For ~~and~~our ~~safety~~customers, ofwe ~~our~~have ~~clients~~provided loan payment deferrals and ~~team~~offered ~~members.~~fee waivers, among other actions.

AsLevel One was also a ~~result~~participating lender in both the first and second rounds of the ~~COVID-19~~PPP. ~~pandemic~~In 2020, the ~~state’s~~Bank ~~unemployment~~originated ~~rate~~2,208 ~~remained~~PPP ~~elevated~~loans atin ~~7.5%~~the inaggregate ~~December~~principal ~~2020~~amount ~~compared~~of to$417.0 4million. From January 18, 2021 through June 30, 2021, Level One funded 1%,532 innew ~~March~~PPP ~~2020~~loan ~~before~~applications ~~the~~for ~~full~~$234.3 ~~impact~~million, of ~~COVID-19~~which 1,187 ~~according~~were tofor ~~the~~loans ~~Michigan~~$150,000 ~~Department~~or below. As of ~~Technology~~December 31, ~~Management~~2021, &$76.5 ~~Budget~~million of PPP loans were still outstanding. The Bank is actively working with the borrowers of PPP loans to obtain loan forgiveness from the SBA.

~~Policy~~Level ~~and~~One ~~Regulatory~~also ~~Developments.~~recognizes ~~Federal,~~that ~~state~~some ~~and~~of ~~local~~the ~~governments~~most ~~and~~impacted ~~regulatory~~industries ~~authorities~~are ~~have~~the ~~enacted~~restaurant and ~~issued~~hospitality aindustries. ~~range~~As of ~~policy~~December ~~responses~~31, to2021, ~~the~~Level ~~COVID-19~~One ~~pandemic,~~had ~~including~~3.9% and 0.3% of loan concentrations in the ~~following:~~restaurant and hospitality industries, respectively.

•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 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 SBA, referred to as the PPP. The Bank participates as a lender in the PPP. After the initial $349 billion in funds for the PPP was exhausted, an additional $310 billion in funding for PPP loans was authorized. In addition, 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 funding, and Congress is in the process of negotiating additional stimulus bills and other actions in response to COVID-19.

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

•On April 9, 2020, the Federal Reserve announced additional measures aimed at supporting small and midsized business, as well as state and local governments impacted by COVID-19. The Federal Reserve announced the Main Street Business Lending Program, which established three new loan facilities intended to facilitate lending to small and midsized businesses: (1) the Main Street New Loan Facility (“MSNLF”), (2) the Main Street Priority Loan Facility (“MSPLF”), and (3) the Main Street Expanded Loan Facility (“MSELF”). MSNLF and MSPLF loans are unsecured term loans originated on or after April 24, 2020, while MSELF loans are provided as upsized tranches of existing loans originated before April 24, 2020. The combined size of the program was authorized up to $600 billion. The Company participated in all three loan facilities established by the Main Street Business Lending Program. The Main Street Business Lending Program terminated on January 8, 2021.

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

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 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 I-Item 1A. Risk Factors” for additional information regarding the effects and risks of the COVID-19 pandemic to our business, financial condition and results of operations.

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

Level One is also a participating lender in the PPP. In 2020, the Bank originated 2,208 PPP loans in the aggregate principal amount of $417.0 million. As of December 31, 2020, $290.1 million of PPP loans were still outstanding. The Bank is actively working with the borrowers of PPP loans to obtain forgiveness from the SBA. Level One is continuing to originate PPP loans in the second round of PPP funding. From January 18, 2021 through March 5, 2021, Level One received 1,507 new PPP loan applications, or a total amount of $231.8 million of funding, of which 1,167 applications were for loans $150,000 or below.

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 team members whose roles require them to come into the office, which include the development, implementation and communication of a comprehensive return to office plan. As of March 1, 2021, we opened branches for walk in services. We will continue to evaluate this fluid situation and take additional actions as necessary.

Level One also recognizes that some of the most impacted industries are the restaurant and hospitality industries. As of December 31, 2020, Level One had less than 4.5% and 0.5% of loan concentrations in the restaurant and hospitality industries, respectively.

Results of Operations

For a discussion on the comparison of results of operations for the years ended December 31, 2019 and 2018, refer to "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operation" in the Company's Annual Report on Form 10-K, filed with the SEC on March 13, 2020.

Net Income

We had net income of $2032.45 million, or $23.5795 per diluted common share, for the year ended December 31, ~~2020~~2021, compared to $1620.1 4 million, or $2.0557 per diluted common share, for the year ended December 31, ~~2019~~2020. The increase of $412.31 million in net income primarily reflected ~~increases~~an increase of $1511.78 million in net interest income, primarily due to higher interest income on loans due, in part, to the ~~acquisition~~recognition of ~~Ann~~fees ~~Arbor~~on ~~State~~PPP ~~Bank~~loans as they are forgiven. In addition, there was higher interest income on securities due to increased volumes of investment securities and lower interest expense on deposits, borrowed funds, and subordinated notes. The increase in net income also reflected a decrease of $1512.56 million in ~~noninterest~~provision ~~income~~for loan loss, primarily asdue to a ~~result~~decrease ofin ~~higher~~general ~~mortgage~~reserves ~~banking~~resulting ~~income~~from an increase in the economic qualitative factors in the year ended December 31, 2020 and a reduction in qualitative factors in the third quarter of 2021. ~~This~~These ~~was~~were partially offset by ~~increases~~a of $157.93 million decrease in noninterest ~~expense,~~income primarily due to ~~higher~~lower ~~salary~~mortgage banking activities and ~~employee~~net ~~benefits~~gain ~~and~~on sales of securities partially offset by an increase in service charges on deposits. In addition, there were increases of $103.54 million inof income tax provision ~~for~~primarily ~~loan~~due ~~losses~~to ashigher aincome ~~result~~before taxes and $1.6 million of ~~the~~noninterest ~~uncertainty~~expense ~~surrounding~~primarily ~~the~~due ~~COVID-19~~to ~~pandemic~~higher assalary ~~well~~and asemployee ~~trends~~benefits, inother ~~nonaccrual~~expense, ~~loans~~data processing expense, and ~~delinquencies~~professional ~~caused~~services fees partially offset by ~~the~~lower ~~COVID-19~~acquisition ~~pandemic~~and due diligence fees.

Net Interest Income

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

Net interest income of $6678.8 6 million for the year ended December 31, ~~2020~~2021 was $1511.7 8 million higher than the net interest income of $5166.1 8 million for the year ended December 31, ~~2019~~2020. The year ended December 31, ~~2020~~2021 included a $124.2 0 million increase in interest income as well as a $37.5 8 million decrease in interest expense, compared to ~~the~~December ~~same~~31, ~~period in 2019~~2020. The increase in interest income was primarily driven by increases of $~~13.~~2 .9 million in interest and fees on loans ~~partially~~and ~~offset by a decrease of~~ $~~651~~1.4 million ~~thousand~~ in interest on investment securities. The increase in interest and fees on loans for the year ended December 31, ~~2020~~2021 compared to the same period in ~~2019~~2020 was mainly driven by ~~an increase of $561.0 million in~~ the ~~average balance of loans primarily as result of the acquisition of Ann Arbor State~~ Bank, asearning ~~well as the origination of PPP loans. In the year ended December 31, 2020, the Bank earned~~ $~~6.5 million of the total projected $~~12.1 9 million of net SBA fees on PPP loans, ~~with~~compared ~~the remaining expected~~ to be$6.5 million ~~earned~~for ~~over~~ the ~~life~~year ofended ~~the~~December ~~loans~~31, ~~the majority of which are expected to mature two years from the date of funding unless modified by the lender and borrower~~2020. WeThe ~~anticipate~~increase ain ~~large~~interest ~~portion~~income ofon ~~the~~investment ~~PPP~~securities ~~loan~~was ~~balance~~mainly due to bean ~~forgiven~~increase ~~before the maturity~~ of ~~the loan. In addition to the net SBA fees, the Bank also recognized~~ $2123.7 million ~~of interest income on the PPP loans. The decrease~~ in ~~interest~~average ~~income~~balances ondue ~~investment~~to ~~securities~~excess ~~was~~liquidity ~~mainly~~from ~~due~~PPP toloan ~~lower~~forgiveness ~~average~~and ~~interest~~increased ~~rates.~~customer liquidity.

The decrease in interest expense was primarily driven by a decrease of $5.9 million in interest expense on deposits partially offset by increases of $1.5 million in interest expense on subordinated notes and $975 thousand in interest expense on borrowed funds. The decrease in deposit interest expense 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 of 2020 and 25 basis points in each of August, September, and October of 2019. 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 increase in interest expense on borrowings was mainly driven by an increase of $200.1 million in the average balance of borrowings primarily as a result of higher FHLB borrowings as well as funding PPP loans through FRB borrowings.35

37The decrease in interest expense was primarily driven by a decrease of $6.7 million in interest expense on deposits and a decrease of $1.2 million in interest expense on borrowed funds and subordinated notes. The decrease in deposit interest expense was primarily due to lower interest rates paid as a result of revised internal deposit rates and maturity of higher cost time deposits. The decrease in interest expense on borrowed funds and subordinated notes was primarily due to the redemption of $15.0 million of subordinated notes during the second quarter of 2021 and a decrease in FHLB borrowings.

Our net interest margin (~~on a fully tax equivalent basis ("~~FTE")) for the year ended December 31, ~~2020~~2021 was 3.1033%, compared to 3.6010% for the same period in ~~2019~~2020. The ~~decrease~~increase of 5023 basis points in the net interest margin year over year was primarily a result of ~~lower~~a ~~average~~decrease ~~loan~~in ~~yield~~cost asof ~~well~~funds, aswhich ~~lower~~declined ~~yields~~52 onbasis ~~interest~~points ~~earning cash balances. Average loan yield decreased~~ to 40.4253% ~~for~~in ~~2020~~2021, compared to 51.4205% ~~for~~in ~~2019,~~2020 primarily due to ~~the~~lower ~~target federal funds~~ interest ~~rate~~rates ~~dropping~~paid ~~150~~as ~~basis~~a ~~points~~result inof ~~March~~revised ~~2020~~internal indeposit ~~response~~rates ~~to the COVID-19 pandemic~~ and ~~decreasing~~maturity ~~25 basis points in each~~ of ~~August,~~higher ~~September~~cost ~~and~~time ~~October of 2019~~deposits. The decrease in ~~loan~~cost ~~yield~~of funds was accompanied by a ~~corresponding~~lower ~~decrease~~yields inacross ~~the~~most ~~cost of funds, which declined 90 basis points to 1.05% in 2020 from 1.95% in 2019. Finally, during 2020, our average~~ interest-earning ~~cash balances of $194.5 million~~assets, ofmostly ~~which~~reflecting the vast majority comprised of excess funding from the PPP process, earned 0.12%, which negatively affected the net interest margin. As a result of the reductions in the target federal funds interest rate, as well as the impact of ~~the~~lower ~~COVID-19~~market ~~pandemic, we expect that our net~~ interest ~~income and net interest margin will decrease in future periods~~rates. ~~We are participating in the second round of PPP funding, and we anticipate PPP fee income to increase in 2021.~~

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 years ended December 31, ~~2020~~2021 and ~~2019~~2020, the yield on total loans was impacted by 76 basis points and 167 basis points, ~~respectively,~~ due to the accretable yield on purchased credit impaired loans. Our net interest margin for the ~~year~~years ended December 31, ~~2020~~2021 and ~~2019~~2020, benefited by 84 basis points and 158 basis points, respectively, as a result of the excess accretable yield. As of December 31, ~~2020~~2021 and December 31, ~~2019~~2020, our remaining accretable yield was $75.17 million and $97.1 million, respectively, and our nonaccretable difference was $21.74 million and $32.97 million, respectively.

3836

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 year ended December 31,
			For the years ended December 31,
	2020							2019								2018
(Dollars in thousands)					2021			2020			2019
(Dollars in thousands)	Average Balance		Interest Revenue/Expense (1)		Average Yield/Rate (2)			Average Balance			Interest Revenue/Expense (1)			Average Yield/Rate (2)		Average Balance		Interest Revenue/Expense (1)		Average Yield/Rate (2)
Average Balance Sheets:
Interest-earning assets:
Gross loans(1)					$	1,791,671		$	1,730,470		$	1,169,486
Gross loans(3)	$	1,730,470	$	76,490	4.42		%	$	1,169,486		$	63,331		5.42	%	$	1,072,794	$	58,262	5.43	%
Investment securities: (2)
Investment securities(4):
Taxable					254,913			138,837			129,274
Taxable	138,837		2,677		1.93			129,274			3,509			2.71		121,505		2,939		2.42
Tax-exempt					103,609			96,020			84,392
Tax-exempt	96,020		2,486		3.19			84,392			2,305			3.27		63,205		1,657		3.13
Interest-earning cash balances					218,931			194,545			38,268
Interest-earning cash balances	194,545		461		0.24			38,268			855			2.23		27,182		546		2.01
Other investments					14,398			12,903			8,523
Other investments	12,903		525		4.07			8,523			448			5.26		8,308		420		5.06
Total interest-earning assets					$	2,383,522		$	2,172,775		$	1,429,943
Total interest-earning assets	$	2,172,775	$	82,639	3.83		%	$	1,429,943		$	70,448		4.96	%	$	1,292,994	$	63,824	4.96	%
Non-earning assets:					145,990			135,229			68,015
Non-earning assets:
Total assets					$	2,529,512		$	2,308,004		$	1,497,958
Cash and due from banks	27,261							23,910								20,556
Interest-bearing demand deposits					$	162,405		$	115,249		$	57,480
Premises and equipment	16,127							13,379								13,207
Money market and savings deposits					613,883			496,827			314,918
Goodwill	35,808							9,387								9,387
Time deposits					519,447			573,823			527,605
Other intangible assets, net	4,806							375								560
Borrowings					183,503			279,949			79,864
Bank-owned life insurance	17,933							11,994								11,692
Subordinated notes					36,376			44,490			16,061
Allowance for loan losses	(16,021)							(12,035)								(11,691)
Total interest-bearing liabilities					1,515,614			1,510,338			995,928
Other non-earning assets	49,315							21,005								9,014
Noninterest-bearing demand deposits					754,376			574,537			321,487
Total assets	$	2,308,004						$	1,497,958							$	1,345,719
Other liabilities					31,466			30,787			17,750
Interest-bearing liabilities:
Shareholders' equity					228,056			192,342			162,793
Deposits:
Total liabilities and shareholders' equity					$	2,529,512		$	2,308,004		$	1,497,958
Interest-bearing demand deposits	$	115,249	$	322	0.28		%	$	57,480		$	281		0.49	%	$	60,203	$	198	0.33	%
Yields: (3)
Money market and savings deposits	496,827		2,759		0.56			314,918			4,518			1.43		264,656		2,609		0.99
Earning Assets
Time deposits	573,823		7,912		1.38			527,605			12,142			2.30		477,164		8,248		1.73
Gross loans					4.43		%	4.42		%	5.42		%
Borrowings	279,949		2,353		0.84			79,864			1,378			1.73		66,926		1,330		1.99
Investment securities:
Subordinated notes	44,490		2,537		5.70			16,061			1,074			6.69		14,866		1,015		6.83
Taxable					1.58		%	1.93		%	2.71		%
Total interest-bearing liabilities	$	1,510,338	$	15,883	1.05		%	$	995,928		$	19,393		1.95	%	$	883,815	$	13,400	1.52	%
Tax-exempt					3.02		%	3.19		%	3.27		%
Noninterest-bearing liabilities and shareholders' equity:
Interest earning cash balances					0.13		%	0.24		%	2.23		%
Noninterest-bearing demand deposits	$	574,537						$	321,487							$	316,764
Other investments					3.13		%	4.07		%	5.26		%
Other liabilities	30,787							17,750								10,436
Total interest earning assets					3.66		%	3.83		%	4.96		%
Shareholders' equity	192,342							162,793								134,704
Interest-bearing liabilities
Total liabilities and shareholders' equity	$	2,308,004						$	1,497,958							$	1,345,719
Interest-bearing demand deposits					0.14		%	0.28		%	0.49		%
Net interest income			$	66,756							$	51,055						$	50,424
Money market and savings deposits					0.19		%	0.56		%	1.43		%
Interest spread					2.78		%							3.01	%					3.44	%
Time deposits					0.56		%	1.38		%	2.30		%
Net interest margin(5)					3.07		%							3.57	%					3.90	%
Borrowings					1.02		%	0.84		%	1.73		%
Tax equivalent effect					0.03		%							0.03	%					0.02	%
Subordinated notes					5.12		%	5.70		%	6.69		%
Net interest margin on a fully tax equivalent basis					3.10		%							3.60	%					3.92	%
Total interest-bearing liabilities					0.53		%	1.05		%	1.95		%
Interest spread					3.13		%	2.78		%	3.01		%
Net interest margin(4)					3.30		%	3.07		%	3.57		%
Tax equivalent effect					0.03		%	0.03		%	0.03		%
Net interest margin on a fully tax equivalent basis					3.33		%	3.10		%	3.60		%

~~______________________________________________________________________~~(1) Includes nonaccrual loans.

(12) ~~Interest~~For ~~income~~presentation isin ~~shown~~this ontable, ~~actual~~average ~~basis~~balances and ~~does~~the ~~not~~corresponding ~~include~~average ~~taxable~~rates ~~equivalent~~for ~~adjustments~~investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(23) Average rates and yields are presented on an annual basis and include a taxable equivalent adjustment to interest income of $~~574~~ 617 thousand, $~~453~~ 574 thousand, and $~~319~~ 453 thousand on tax-exempt securities for the ~~year~~years ended December 31, ~~2020~~2021, ~~2019,~~2020 and ~~2018~~2019, respectively, using the federal corporate tax rate of 21%.

(34) ~~Includes~~Net ~~nonaccrual~~interest ~~loans~~margin represents net interest income divided by average total interest-earning assets.

(4) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.37

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

Rate/Volume Analysis

The table below presents the effect of volume and rate changes on interest income and expense for the periods indicated. Changes in volume are changes in the average balance multiplied by the previous 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.

The tables below present 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 year ended December 31, 2021 vs. 2020
	Increase (Decrease) Due to:
(Dollars in thousands)	Rate		Volume		Net Increase (Decrease)
Interest-earning assets
Gross loans	$	163	$	2,711	$	2,874
Investment securities:
Taxable	(547)		1,906		1,359
Tax-exempt	(210)		234		24
Interest-earning cash balances	(225)		53		(172)
Other investments	(130)		56		(74)
Total interest income	(949)		4,960		4,011
Interest-bearing liabilities
Interest-bearing demand deposits	(190)		102		(88)
Money market and savings deposits	(2,128)		542		(1,586)
Time deposits	(4,317)		(689)		(5,006)
Borrowings	439		(917)		(478)
Subordinated debt	(242)		(432)		(674)
Total interest expense	(6,438)		(1,394)		(7,832)
Change in net interest income	$	5,489	$	6,354	$	11,843
	For the year ended December 31, 2020 vs. 2019
	Increase (Decrease) Due to:
(Dollars in thousands)	Rate		Volume		Net Increase (Decrease)
Interest-earning assets
Gross loans	$	(13,194)	$	26,353	$	13,159
Investment securities:
Taxable	(1,076)		244		(832)
Tax-exempt	(191)		372		181
Interest-earning cash balances	(1,327)		933		(394)
Other investments	(117)		194		77
Total interest income	(15,905)		28,096		12,191
Interest-bearing liabilities
Interest-bearing demand deposits	(157)		198		41
Money market and savings deposits	(3,589)		1,830		(1,759)
Time deposits	(5,217)		987		(4,230)
Borrowings	(1,009)		1,984		975
Subordinated debt	(180)		1,643		1,463
Total interest expense	(10,152)		6,642		(3,510)
Change in net interest income	$	(5,753)	$	21,454	$	15,701

	For the year ended December 31, 2020 vs. 2019
	Increase(Decrease) Due to:
(Dollars in thousands)	Rate		Volume		Net Increase (Decrease)
Interest-earning assets
Gross loans	$	(13,194)	$	26,353	$	13,159
Investment securities:
Taxable	(1,076)		244		(832)
Tax-exempt	(191)		372		181
Interest-earning cash balances	(1,327)		933		(394)
Other investments	(117)		194		77
Total interest income	(15,905)		28,096		12,191
Interest-bearing liabilities
Interest-bearing demand deposits	(157)		198		41
Money market and savings deposits	(3,589)		1,830		(1,759)
Time deposits	(5,217)		987		(4,230)
Borrowings	(1,009)		1,984		975
Subordinated debt	(180)		1,643		1,463
Total interest expense	(10,152)		6,642		(3,510)
Change in net interest income	$	(5,753)	$	21,454	$	15,701

	For the year ended December 31, 2019 vs. 2018
	Increase(Decrease) Due to:
(Dollars in thousands)	Rate		Volume		Net Increase (Decrease)
Interest-earning assets
Gross loans	$	(171)	$	5,240	$	5,069
Investment securities:
Taxable	374		196		570
Tax-exempt	(41)		689		648
Interest-earning cash balances	67		242		309
Other investments	17		11		28
Total interest income	246		6,378		6,624
Interest-bearing liabilities
Interest-bearing demand deposits	92		(9)		83
Money market and savings deposits	1,345		564		1,909
Time deposits	2,951		943		3,894
Borrowings	(189)		237		48
Subordinated debt	(21)		80		59
Total interest expense	4,178		1,815		5,993
Change in net interest income	$	(3,932)	$	4,563	$	631

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 December 31, ~~2020~~2021, and December 31, ~~2019~~2020, our remaining accretable yield was $75.1 7 million and $97.1 million, and our nonaccretable difference was $21.74 million and $32.97 million, respectively.

The provision for loan losses was a provision ~~expense~~benefit of $~~11.9~~725 ~~million~~thousand for the year ended December 31, ~~2020~~2021, compared to a provision expense of $111.4 9 million for the year ended December 31, ~~2019~~2020. The ~~increase~~decrease of $1012.5 6 million in the provision for loan losses was primarily asdue ato ~~result of~~ a ~~$8.3~~decrease ~~million increase~~ in general reserves of $10.6 million due to ana ~~adjustment~~reduction ofin qualitative factors ~~attributable~~within to the ~~COVID-19~~allowance ~~pandemic~~for ~~during~~loan ~~the~~loss ~~last~~model ~~nine~~as ~~months of 2020. In addition, there was~~ a ~~$2.0~~result ~~million~~of ~~increase~~improved incredit ~~provision~~quality ~~resulting~~while ~~primarily~~qualitative ~~from~~factors awere ~~$1.3~~increased ~~million chargeoff~~ during the ~~second~~year ~~quarter~~ended ofDecember 31, 2020 ondue ato ~~nonaccrual~~economic ~~loan~~uncertainty ~~that~~regarding ~~was~~the ~~subsequently~~impact ~~sold~~of asthe ~~well~~COVID-19 aspandemic ~~a $285 thousand chargeoff~~ on acredit ~~residential~~quality. ~~loan~~In ~~that~~addition, there was ~~subsequently~~a ~~transferred~~decrease toof ~~other real estate owned~~$2.1 ~~The~~million ~~Company~~in ~~will~~net ~~continue~~chargeoffs toresulting ~~monitor~~from ~~the~~a ~~impacts~~$1.3 ofmillion ~~the~~chargeoff ~~COVID-19~~on ~~pandemic~~a ~~and~~nonaccrual ~~will~~loan ~~re-evaluate~~during the ~~appropriateness~~second quarter of ~~the provision for loan losses in future quarters as needed~~2020.

Noninterest Income

The following table presents noninterest income for the years ended December 31, ~~2020~~2021, ~~2019~~2020 and ~~2018~~2019.

For the year ended December 31,

(Dollars in thousands)

~~2020~~2021

~~2019~~2020

~~2018~~2019

Noninterest income

Service charges on deposits

23,~~446~~311

2,~~547~~446

2,~~556~~547

Net gain on sales of securities

~~1,862~~21

1,~~174~~862

~~(71)~~1,174

Mortgage banking activities

2215,~~190~~843

722,~~880~~190

27,~~330~~880

Other charges and fees

3,~~216~~197

23,~~610~~216

2,~~240~~610

Total noninterest income

2922,~~714~~372

1429,~~211~~714

714,~~055~~211

Noninterest income ~~increased~~decreased $157.53 million to $2922.74 million for the year ended December 31, ~~2020~~2021, compared to $1429.2 7 million for the same period in ~~2019~~2020. The ~~increase~~decrease in noninterest income was primarily due to ~~increases~~decreases ~~in mortgage banking activities~~ of $146.3 million ~~and~~in ~~net~~mortgage ~~gain~~banking onactivities ~~sales~~and ~~of securities of~~ $~~688~~1.8 million ~~thousand, as well as increases of $316 thousand~~ in net gain on sales of other real estate owned, $200 thousand in deposit account wire fees, and $169 thousand in bank owned life insurance ("BOLI") interest income (all included in "other charges and fees" in the table above)securities. ~~This~~These ~~was~~decreases were partially offset by aan ~~$328~~increase ~~decrease~~of in$865 thousand ~~interest rate swap fees (included~~ in ~~"other~~service charges ~~and~~on ~~fees" in the table above)~~deposits. The ~~increase~~decrease in ~~the~~ mortgage banking activities was ~~mainly~~primarily ~~attributable~~due to $~~284~~115.47 million ~~higher~~lower residential loan originations held for sale and $~~260~~56.10 million ~~higher~~lower residential loans sold. asThe ahigher ~~result~~volumes ofin the ~~lower~~year ~~interest~~ended ~~rate~~December ~~environment~~31, in 2020. ~~The~~were ~~increase~~primarily indue ~~net~~to ~~gains~~a ondecrease ~~sales~~in ofinterest ~~other~~rates ~~real~~during ~~estate~~the ~~owned~~first ~~was~~half ~~due~~of to2020 ~~the~~while ~~sale~~interest ofrates ~~five~~have ~~properties~~remained ~~during~~relatively ~~2020~~stable in 2021. The ~~increase~~decrease in ~~deposit~~net ~~account~~gains ~~wire~~on ~~fees~~sales of securities was primarily due to ~~the~~fewer ~~acquisition~~securities ofsold ~~Ann~~during ~~Arbor~~2021 ~~State~~compared ~~Bank~~to ~~as well as organic growth~~2020. The increase in ~~BOLI~~service ~~interest~~charges ~~income~~on deposits was due to anhigher ~~increase~~transaction involumes ~~bank~~and ~~owned~~deposit ~~life insurance attributable to the acquisition of Ann Arbor State Bank~~balances.

4139

Noninterest Expense

The following table presents noninterest expense for the years ~~end~~ended December 31, ~~2020~~2021, ~~2019~~ 2020 and ~~2018~~2019.

For the year ended December 31,

(Dollars in thousands)

~~2020~~2021

~~2019~~2020

~~2018~~2019

Noninterest expense

Salary and employee benefits

3839,~~304~~353

2838,~~775~~304

2528,~~781~~775

Occupancy and equipment expense

6,~~549~~631

46,~~939~~549

4,~~425~~939

Professional service fees

23,~~935~~542

12,~~808~~935

1,~~672~~808

Acquisition and due diligence fees

~~1,654~~—

~~539~~1,654

—539

FDIC premium

1,~~119~~027

~~310~~1,119

~~657~~310

Marketing expense

~~956~~1,288

~~1,107~~956

1,~~033~~107

Loan processing expense

~~935~~983

~~661~~935

~~498~~661

Data processing expense

34,~~460~~125

23,~~374~~460

2,~~146~~374

Core deposit premium amortization

~~768~~668

~~146~~768

~~220~~146

Other expense

34,~~552~~222

3,~~710~~552

3,~~246~~710

Total noninterest expense

6061,~~232~~839

4460,~~369~~232

3944,~~678~~369

Noninterest expense increased $151.8 6 million to $6061.28 million for the year ended December 31, ~~2020~~2021, as compared to $4460.42 million for the same period in ~~2019~~2020. The increase in noninterest expense was primarily due to increases in salary and employee benefits of $91.5 0 million, ~~occupancy~~other ~~and equipment~~ expense of $~~1.6~~670 ~~million~~thousand, ~~acquisition~~data ~~and~~processing ~~due~~expense ~~diligence fees~~ of $~~1.1 million~~665 thousand, professional service fees of $~~1.1 million~~607 thousand, ~~data~~and ~~processing~~marketing expense of $1332 thousand.1 ~~million,~~These ~~FDIC~~increases ~~premium~~were ~~expense~~partially ofoffset ~~$809~~by ~~thousand,~~a ~~and~~decrease ~~core~~of ~~deposit~~$1.7 million ~~premium~~in ~~amortization~~acquisition ofand ~~$622~~due ~~thousand~~diligence fees. The increase in salary and employee benefits ~~between the periods~~ was primarily due to anannual ~~increase~~compensation ofincreases ~~$5.6~~and ~~million in mortgage commissions expense as a result of the increased residential loan originations in 2020 as well as~~ an increase of 298 full-time equivalent employees. The increase in ~~occupancy~~other ~~and~~expenses ~~equipment expense~~ was primarily ~~attributable~~due to ~~increased~~an ~~building~~increase ~~rent and other expenses related to the addition of the three new branches acquired with Ann Arbor State Bank, as well as organic growth~~ in ~~the~~fraud ~~organization~~losses. The increase in ~~acquisition~~data ~~and~~processing ~~due~~expense ~~diligence~~was ~~fees~~primarily ~~related~~due to ~~the~~a ~~merger~~new ~~with~~loan ~~Ann~~processing ~~Arbor~~system ~~State~~used ~~Bank,~~for ~~which~~PPP ~~closed on January 2, 2020~~loans. The increase in professional ~~service~~ fees was primarily ~~related~~due to ~~increased~~fees ~~mortgage~~related ~~professional~~to ~~services~~the aspending ~~well as legal fees~~merger. The increase in ~~data~~marketing ~~processing~~ expense was primarily ~~attributable~~due to ~~the~~an ~~retention~~increase ~~and maintenance of Ann Arbor State Bank legacy systems during the first quarter of 2020 prior to system integration,~~ in ~~addition~~advertising ~~to the organic growth in the organization~~efforts. The ~~increase~~decrease in ~~FDIC~~acquisition ~~premium~~and ~~was primarily~~ due todiligence ~~the~~fees ~~increase~~was indue ~~assets related~~ to the acquisition of Ann Arbor State Bank ~~as well as $307 thousand of FDIC credits received~~ in ~~2019. As a result of~~ the ~~acquisition,~~first ~~the~~quarter ~~Company recorded $3.7 million~~ of ~~core deposit premiums, leading to the increased amortization expense on core deposit intangibles compared to the prior year~~2020.

Income Taxes and Tax-Related Items

During the year ended December 31, ~~2020~~2021, we recognized income tax expense of $47.0 4 million on $2439.4 9 million of pre-tax income resulting in an effective tax rate of 1618.25%, compared to the same period in ~~2019~~2020, in which we recognized an income tax expense of $3.4 .0 million on $1924.5 4 million of pre-tax income, resulting in an effective tax rate of 1716.42%.

~~Refer~~The toincrease ~~Note~~in 11income -tax ~~Income~~provision ~~Taxes~~for in the ~~notes~~year ended December 31, 2021 compared to the ~~consolidated~~same ~~financial~~period ~~statements~~in ~~for~~2020 awas ~~reconciliation~~primarily ~~between~~as ~~expected~~a ~~and~~result ~~actual~~of higher income before taxes. Additionally, a $290 thousand tax ~~expense~~benefit ~~for~~related to the ~~years~~Ann ~~ended~~Arbor ~~December~~State ~~31,~~Bank net operating loss (NOL) in the first quarter of 2020 resulting from the Coronavirus Aid, Relief and ~~2019~~Economic Security Act ("CARES Act") provision that allows for NOLs generated in 2018 to 2020 to be carried back five years as well as disqualified dispositions of Ann Arbor State Bank’s stock options generated a $175 thousand tax benefit in the first quarter of 2020.

42See "Note 11 - Income Taxes" of Notes to Consolidated Financial Statements for a reconciliation between expected and actual income tax expense for the years ended December 31, 2021 and 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 December 31, ~~2020~~2021, ~~2019~~2020 and ~~2018~~2019.

(Dollars in thousands)

December 31, 2020

December 31, 2019

December 31, 2018

As of December 31,

(Dollars in thousands)

2021

2020

2019

Securities available-for-sale:

U.S. government sponsored entities and agencies

2621,~~358~~774

—26,358

~~2,397~~—

State and political subdivision

~~132~~148,~~723~~276

93132,~~747~~723

7593,~~146~~747

Mortgage-backed securities: residential

2622,~~081~~211

1026,~~565~~081

910,~~739~~565

Mortgage-backed securities: commercial

1123,~~918~~271

811,~~779~~918

128,~~382~~779

Collateralized mortgage obligations: residential

13,~~446~~461

813,~~529~~446

188,~~671~~529

Collateralized mortgage obligations: commercial

5851,~~512~~183

2358,~~181~~512

3123,~~988~~181

U.S. Treasury

—64,387

~~1,999~~—

201,~~481~~999

SBA

1713,~~593~~927

2117,~~984~~593

1521,~~688~~984

Asset backed securities

109,~~072~~706

10,~~084~~072

310,~~842~~084

Corporate bonds

629,~~029~~355

26,~~037~~029

132,~~924~~037

Total securities available-for-sale

~~302~~397,~~732~~551

~~180~~302,~~905~~732

~~204~~180,~~258~~905

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for both normal operations and potential acquisitions, while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral. At December 31, ~~2020~~2021, total investment securities were $~~302~~397.7 6 million, or 1215.48% of total assets, compared to $~~180~~302.9 7 million, or 1112.4% of total assets, at December 31, ~~2019~~2020. The $~~121~~94.8 million increase in securities available-for-sale from December 31, ~~2019~~2020 to December 31, ~~2020~~2021, was due to the purchase of securities using the excess cash balances generated by the payoffs of PPP loans as well as the acquisition of Ann Arbor State Bank, which contributed $47.4 million of investment securities as of January 2, 2020. In addition, we repositioned our investment portfolio through purchases of investment securities of $140.1 million and ~~sales,~~forgiveness ~~calls, payoffs and maturities~~ of ~~investment~~PPP ~~securities of $55~~loans.~~0 million.~~ Securities with a carrying value of $9888.76 million and $2798.37 million were pledged at December 31, ~~2020~~2021 and December 31, ~~2019~~2020, respectively, to secure borrowings, deposits and mortgage derivatives.

As of December 31, ~~2020~~2021, the Company held 6668 tax-exempt state and local municipal securities totaling $4952.03 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments and the U.S. government and its agencies, at December 31, ~~2020~~2021 and December 31, ~~2019~~2020, there were no holdings of securities of any one issuer 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 December 31, ~~2020~~2021 and December 31, ~~2019~~2020. ~~Actual~~Expected ~~timing~~maturities may differ from contractual maturities ifas ~~borrowers~~issuers may have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent basis.

4341


	December 31, 2021
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Securities available-for-sale:
U.S. government sponsored agency obligations	$	2,522	1.61	%	$	—	—	%	$	15,000	1.22	%	$	5,000	1.48	%
State and political subdivision	1,341		2.41		12,869		2.42		53,553		2.68		73,988		2.88
Mortgage-backed securities: residential	—		—		73		1.90		27		1.92		22,216		1.09
Mortgage-backed securities: commercial	—		—		5,090		2.44		16,534		1.27		1,787		3.63
Collateralized mortgage obligations: residential	—		—		326		2.91		163		1.20		13,068		1.21
Collateralized mortgage obligations: commercial	2,248		5.62		4,424		2.77		38,782		1.20		6,428		1.96
U.S. Treasury	—		—		35,705		0.87		29,393		1.34		—		—
SBA	—		—		—		—		7,424		1.45		6,427		1.31
Asset backed securities	—		—		—		—		—		—		9,762		0.76
Corporate bonds	—		—		—		—		29,673		3.61		—		—
Total securities available-for-sale	$	6,111	3.26	%	$	58,487	1.51	%	$	190,549	2.03	%	$	138,676	2.13	%


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

Loans

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

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

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

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 42

44Residential 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.

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 December 31,

(Dollars in thousands)

~~2020~~2021

~~2019~~2020

~~2018~~2019

~~2017~~2018

~~2016~~2017

Commercial real estate:

Non-owner occupied

~~445~~467,~~810~~364

~~388~~445,~~515~~810

~~367~~388,~~671~~515

~~343~~367,~~420~~671

~~322~~343,~~354~~420

Owner occupied

~~275~~283,~~022~~400

~~216~~275,~~131~~022

~~194~~216,~~422~~131

~~168~~194,~~342~~422

~~169~~168,~~348~~342

Total commercial real estate

~~720~~750,~~832~~764

~~604~~720,~~646~~832

~~562~~604,~~093~~646

~~511~~562,~~762~~093

~~491~~511,~~702~~762

Commercial and industrial

~~685~~460,~~504~~530

~~410~~685,~~228~~504

~~383~~410,~~455~~228

~~377~~383,~~686~~455

~~342~~377,~~069~~686

Residential real estate

~~315~~440,~~476~~640

~~211~~315,~~839~~476

~~180~~211,~~018~~839

~~144~~180,~~439~~018

~~118~~144,~~730~~439

Consumer

~~1,725~~837

~~896~~1,725

~~999~~896

~~1,036~~999

~~892~~1,036

Total loans

1,~~723~~652,~~537~~771

1,~~227~~723,~~609~~537

1,~~126~~227,~~565~~609

1,~~034~~126,~~923~~565

~~953~~1,~~393~~034,923

Total loans were $1.72 65 billion at December 31, ~~2020~~2021, ana ~~increase~~decrease of $~~495~~70.9 8 million from December 31, ~~2019~~2020. The ~~growth~~decline in our loan portfolio compared to December 31, ~~2019~~2020 was primarily due to a $~~290~~225.1 0 million ofdecrease ~~PPP~~in ~~loans~~our ~~that~~commercial ~~were originated during the second~~ and ~~third~~industrial ~~quarters~~loan ofportfolio, ~~2020~~$213.6 million ~~The acquisition~~ of ~~Ann~~which ~~Arbor~~was ~~State~~due ~~Bank~~to ~~also~~the ~~contributed~~net ~~$224.1~~change ~~million~~in ofPPP loans ~~as of January 2, 2020~~. ~~The~~This ~~loan growth mentioned above~~ was partially offset by aan ~~net~~increase ~~decrease~~ of $18125.3 2 million ~~due~~in toour ~~loan~~residential ~~payoffs,~~real ~~including~~estate ~~through the forgiveness of PPP loans, and lower line of credit usage partially offset by new loan growth during the year ended December 31, 2020~~portfolio. In general, we target a loan portfolio mix of approximately one-half commercial real estate, approximately one-third commercial and industrial loans and one-sixth a mix of residential real estate and consumer loans. As of December 31, ~~2020~~2021, approximately 4145.84% of our loans were commercial real estate, 3927.89% were commercial and industrial, and 1826.47% 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 8 - Mortgage Servicing Rights, Net for further details on our mortgage servicing rights.

Loan Maturity/Rate Sensitivity

The following table shows the contractual maturities of our loans as of December 31, ~~2020~~2021.

(Dollars in thousands)

One year orless

After one butwithin fiveyears

After ~~fiveyears~~five butwithin fifteenyears

~~Total~~After fifteenyears

Total

December 31, 2020

December 31, 2021

Commercial real estate

~~102~~90,~~231~~512

~~426~~422,~~834~~681

~~191~~228,~~767~~432

~~720~~9,~~832~~139

750,764

Commercial and industrial

~~141~~135,~~270~~940

~~468~~243,~~216~~580

7678,~~018~~135

~~685~~2,~~504~~875

460,530

Residential real estate

725,~~159~~846

78,~~657~~366

~~300~~39,~~660~~740

~~315~~366,~~476~~688

440,640

Consumer

~~140~~62

~~1,498~~586

8740

~~1,725~~149

837

Total loans

~~250~~252,~~800~~360

~~904~~675,~~205~~213

~~568~~346,~~532~~347

1378,~~723,537~~851

1,652,771

Sensitivity of loans to changes in interest rates:

Fixed interest rates

~~783~~576,~~520~~033

~~183~~177,~~549~~823

148,970

Floating interest rates

~~120~~99,~~685~~180

~~384~~168,~~983~~524

229,881

Total

~~904~~675,~~205~~213

~~568~~346,~~532~~347

378,851

4543

Summary of Impaired Assets and Past Due Loans

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

A loan is categorized as a troubled debt restructuring if a concession is granted, such as to provide for the reduction of either interest or principal, due to deterioration in the financial condition of the borrower. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than the current market rate, forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received. 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 December 31, ~~2020~~2021, wethere ~~had~~were ~~$20.1~~no ~~million of~~ loans that remained on a COVID-related deferral ofcompared ~~which~~to $1120.61 million as of ~~loans~~December ~~had~~31, ~~payments deferred greater than six months~~2020.

Credit Quality Indicators:

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

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

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

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

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

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.

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.

46Total classified and criticized loans as of December 31, 2021 compared to December 31, 2020 were as follows:

~~Total classified and criticized loans as of December 31, 2020 compared to December 31, 2019 were as follows:~~44

(Dollars in thousands)

December 31, ~~2020~~2021

December 31, ~~2019~~2020

Classified loans:

Substandard

3424,~~921~~866

2034,~~569~~921

Doubtful

1,~~143~~477

1,~~838~~143

Total classified loans

3626,~~064~~343

2236,~~407~~064

Special mention

4774,~~297~~254

1747,~~292~~297

Total classified and criticized loans

83100,~~361~~597

3983,~~699~~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 December 31,
(Dollars in thousands)	~~2020~~2021		~~2019~~2020		~~2018~~2019		~~2017~~		~~2016~~
Nonaccrual loans
Commercial real estate	$	74,~~320~~246	$	47,~~832~~320	$	54,~~927~~832	$	~~2,257~~	$	~~147~~
Commercial and industrial	74,~~490~~208		117,~~112~~490		911,~~605~~112		~~9,024~~		~~13,389~~
Residential real estate	32,~~991~~819		23,~~569~~991		2,~~915~~569		~~2,767~~		~~1,498~~
Consumer	1516		1615		—16		—		—
Total nonaccrual loans(1)	1811,~~816~~289		18,~~529~~816		18,~~447~~529		~~14,048~~		~~15,034~~
Other real estate owned	—201		~~921~~—		—921		~~652~~		~~258~~
Total nonperforming assets	1811,~~816~~490		1918,~~450~~816		1819,~~447~~450		~~14,700~~		~~15,292~~
Performing troubled debt restructurings
Commercial real estate	—		—		—		—		290
Commercial and industrial	334		546		547
Commercial and industrial	546		547		568		961		1,018
Residential real estate	365		432		359
Residential real estate	432		359		363		261		207
Total performing troubled debt restructurings	699		978		906
Total performing troubled debt restructurings	978		906		931		1,222		1,515
Total impaired assets, excluding ASC 310-30 loans	$	12,189	$	19,794	$	20,356
Total impaired assets, excluding ASC 310-30 loans	$	19,794	$	20,356	$	19,378	$	15,922	$	16,807
Loans 90 days or more past due and still accruing	$	162	$	269	$	157
Loans 90 days or more past due and still accruing	$	269	$	157	$	243	$	440	$	377

~~______________________________________________________~~(1)Nonaccrual loans include nonperforming troubled debt restructurings of $3.4 million, $3.8 million, $3.0 million, $5.0 million and $6.4 million at the respective dates indicated above.

~~(1)Nonaccrual~~During ~~loans~~the ~~include~~years ~~nonperforming~~ended ~~troubled~~December ~~debt~~31, ~~restructurings~~2021 ofand ~~$3.8 million~~2020, the Company recorded $~~3.0~~641 ~~million,~~thousand and $~~5.0~~234 ~~million~~thousand, ~~$6.4 million~~respectively, ~~and~~of ~~$5.8 million~~interest atincome ~~the~~on ~~respective~~nonaccrual ~~dates~~loans ~~indicated~~and ~~above~~performing TDRs excluding PCI loans.

~~During~~In ~~the~~addition ~~years~~to ~~ended~~nonperforming ~~December 31, 2020~~ and ~~2019~~impaired assets, the Company ~~recorded~~had purchased credit impaired loans accounted for under ASC 310-30 which amounted to $~~234~~4.2 ~~thousand~~million, ~~and~~$5.0 million, $~~865~~6.0 ~~thousand~~million, ~~respectively~~$7.9 million, ofand ~~interest~~$9.7 ~~income~~million onat ~~nonaccrual~~the ~~loans~~respective ~~and~~dates ~~performing~~indicated ~~TDRs~~in ~~excluding~~the ~~PCI~~table ~~loans~~above.`

InNonperforming ~~addition~~assets decreased $7.3 million as of December 31, 2021 compared to ~~nonperforming~~December ~~and~~31, ~~impaired~~2020. The decrease in nonperforming assets, ~~the~~was ~~Company~~attributable ~~had~~to ~~purchased~~a ~~credit~~decrease ~~impaired~~in nonaccrual loans ~~accounted~~primarily ~~for~~due ~~under~~to ~~ASC~~pay ~~310-30~~offs ~~which~~of ~~amounted~~four tocommercial loan relationships totaling $5.04 million, ~~$6.0~~paydowns ~~million,~~on ~~$7.9~~four ~~million,~~commercial loan relationships totaling $93.79 million, and one $11759 thousand residential loan relationship moving back to accruing.6 ~~million~~This atwas ~~the~~partially ~~respective~~offset ~~dates~~by ~~indicated~~two incommercial ~~the~~loan ~~table~~relationships ~~above~~moving to nonaccrual status totaling $2.6 million.

Nonperforming assets decreased $634 thousand as of December 31, 2020 compared to December 31, 2019. The decrease in nonperforming assets was attributable to a decrease of $921 thousand in other real estate owned, partially offset by an increase of $287 thousand in nonaccrual loans. The decrease in other real estate owned assets was due to the sale of five properties totaling $4.2 million during the last nine months of 2020, which included the sale of a property related to a $1.0 million commercial loan relationship transferred from nonaccrual loans to other real estate owned during the first nine months of 2020.

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.

47Acquired Loans

ofThe ~~the~~allowance for loan ~~portfolio~~losses ~~and~~on ~~other~~acquired ~~factors.~~loans ~~These~~is ~~evaluations~~based ~~are~~on ~~inherently~~credit ~~subjective~~deterioration assubsequent ~~they~~to ~~require~~the ~~management~~acquisition todate. ~~make~~In ~~material~~accordance ~~estimates~~with the accounting guidance for business combinations, ~~all~~there ofwas ~~which~~no ~~may~~allowance bebrought ~~susceptible~~forward toon ~~significant~~any ~~change.~~of ~~The~~the ~~allowance~~acquired isloans ~~increased~~as byany ~~provisions~~credit ~~charged~~deterioration toevident ~~expense~~in ~~and~~the ~~decreased~~loans bywas ~~actual~~included ~~charge-offs,~~in ~~net~~the determination of ~~recoveries.~~the fair value of the loans at

~~Purchased Loans~~45

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

Originated Loans

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

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

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

The allowance for our nonimpaired loans, which includes commercial real estate, commercial and industrial, residential real estate, and consumer loans that are not individually evaluated for impairment, begins with a process of estimating the probable incurred losses in the portfolio. These estimates are established based on our historical loss data. Additional allowance estimates for commercial and industrial and commercial real estate loans are based on internal credit risk ratings. Internal credit risk ratings are assigned to each business loan at the time of approval and are subjected to subsequent periodic reviews by senior management, at least annually or more frequently upon the occurrence of a circumstance that affects the credit risk of the loan. There is no allowance on PPP loans (included in the commercial and industrial loan category) 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.

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

	For the year ended December 31,
(Dollars in thousands)		2020			2019			2018			2017			2016
Balance at beginning of period		$	12,674		$	11,566		$	11,713		$	11,089		$	7,890
Loan charge-offs:
Commercial real estate		—			(92)			(112)			(360)			—
Commercial and industrial		(2,118)			(438)			(1,283)			(697)			(943)
Residential real estate		(285)			—			(47)			(85)			(211)
Consumer		(58)			(106)			(35)			—			—
Total loan charge-offs		(2,461)			(636)			(1,477)			(1,142)			(1,154)
Recoveries of loans previously charged-off:
Commercial real estate		12			6			23			17			53
Commercial and industrial		87			246			823			190			172
Residential real estate		85			77			70			141			201
Consumer		28			32			2			2			2
Total loan recoveries		212			361			918			350			428
Net charge-offs		(2,249)			(275)			(559)			(792)			(726)
Provision expense for loan losses		11,872			1,383			412			1,416			3,925
Balance at end of period		$	22,297		$	12,674		$	11,566		$	11,713		$	11,089
Allowance for loan losses as a percentage of period-end loans		1.29		%	1.03		%	1.03		%	1.13		%	1.16		%
Net charge-offs to average loans		0.13			0.02			0.05			0.08			0.08

Our allowance for loan losses was $22.3 million, or 1.29% of loans, at December 31, 2020 compared to $12.7 million, or 1.03% of loans, at December 31, 2019. As of December 31, 2020, the allowance for loan losses as a percentage of loans excluding PPP loans, was 1.56%. The $9.6 million increase in the allowance for loan losses since December 31, 2019 was primarily due to increases in general reserves related to a 25 basis point increase of the economic qualitative factors, reflecting the expected economic impact of the COVID-19 pandemic in the second quarter of 2020, a 20-25 basis point increase of the qualitative factors in the third quarter of 2020 reflecting the uncertainty surrounding the impact of the COVID-19 pandemic on the loan portfolio, and a 25 basis point increase in commercial and industrial and commercial owner occupied qualitative factors due to trends in delinquencies and nonaccrual loans as a result of the COVID-19 pandemic.


	For the year ended December 31,
(Dollars in thousands)		2021			2020			2019
Balance at beginning of period		$	22,297		$	12,674		$	11,566
Loan charge-offs:
Commercial real estate		—			—			(92)
Commercial and industrial		(31)			(2,118)			(438)
Residential real estate		(242)			(285)			—
Consumer		(33)			(58)			(106)
Total loan charge-offs		(306)			(2,461)			(636)
Recoveries of loans previously charged-off:
Commercial real estate		—			12			6
Commercial and industrial		53			87			246
Residential real estate		86			85			77
Consumer		20			28			32
Total loan recoveries		159			212			361
Net charge-offs		(147)			(2,249)			(275)
Provision for (recovery of) loan losses		(725)			11,872			1,383
Balance at end of period		$	21,425		$	22,297		$	12,674
Allowance for loan losses as a percentage of period-end loans		1.30		%	1.29		%	1.03		%
Net charge-offs to average loans		0.01			0.13			0.02

49Our allowance for loan losses was $21.4 million, or 1.30% of loans, at December 31, 2021 compared to $22.3 million, or 1.29% of loans, at December 31, 2020. As of December 31, 2021 and December 31, 2020, the allowance for loan losses as a percentage of loans excluding PPP loans (a non-GAAP measure), was 1.36% and 1.56%, respectively. The $872 thousand decrease in the allowance for loan losses during the year ended December 31, 2021 was primarily due to a decrease in general reserves related to the reduction in qualitative factors within the allowance for loan loss model as a result of improved credit quality partially offset by loan growth..

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

(Dollars in thousands)	AllocatedAllowance		Percentage of loans in each categoryto total loans
December 31, 2021
Balance at end of period applicable to:
Commercial real estate	$	9,455	45.3	%
Commercial and industrial	7,799		27.9
Residential real estate	4,166		26.7
Consumer	5		0.1
Total loans	$	21,425	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	%
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	%

The following table presents, by loan type, the net loan charge-offs for the dates presented.


(Dollars in thousands)	Net charge-offs (recoveries)		Percentage of average loans
For the year ended December 31, 2021

Commercial and industrial	$	(22)	—	%
Residential real estate	156		—
Consumer	13		1.1
Total net charge-offs (recoveries)	$	147	—	%
For the year ended December 31, 2020
Commercial real estate	$	(12)	—	%
Commercial and industrial	2,031		0.3
Residential real estate	200		0.1
Consumer	30		1.0
Total net charge-offs (recoveries)	$	2,249	0.1	%

Goodwill

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

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

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

5048

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 book value, and impairment of goodwill was not required.

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

Deposits

Total deposits were $12.96 04 billion at December 31, ~~2020~~2021 and $1.14 96 billion at December 31, ~~2019~~2020, representing 8889.16% and 8088.31% of total liabilities, respectively. The increase in deposits of $~~827~~76.9 8 million was comprised of ~~increases~~an increase of $~~358~~291.2 0 million in demand deposits, partially offset by decreases of $~~306~~171.0 million in ~~money~~time ~~market and savings~~ deposits and $~~163~~43.7 2 million in ~~time~~money market and savings deposits. The increase in deposits was primarily due to ~~$563.1 million of~~ organic deposit growth during the year ended December 31, ~~2020~~2021 mainly as a result of ~~customers~~increased ~~increasing~~customer ~~their~~ liquidity and ~~government~~new ~~stimulus~~customer ~~programs~~growth. InWe ~~addition,~~had ~~the~~$1.16 ~~acquisition~~billion ofand ~~Ann~~$1.13 ~~Arbor~~billion ~~State~~at ~~Bank~~December in31, ~~the~~2021 ~~first~~and ~~quarter of~~ 2020, ~~contributed $264~~respectively.~~8 million in deposits.~~

Our average interest-bearing deposit costs were 0.9333% and 10.8893% for the ~~year~~years ended December 31, ~~2020~~2021 and ~~2019~~2020, respectively. The decrease in interest-bearing deposit costs between the two periods was ~~impacted~~primarily bydue ~~the~~to ~~decrease~~lower ininterest ~~overnight~~rates ~~market~~paid as a result of revised internal deposit rates, asmainly ~~measured~~driven by the continuation of the low level of the target federal funds ~~interest~~ rate. The target federal funds interest rate decreased ~~25 basis points in each of August, September and October of 2019 and decreased~~ 150 basis points during March 2020.

Brokered deposits. Brokered deposits are marketed through national brokerage firms to their customers in $1,000 increments. For these brokered deposits, detailed records of owners are maintained by The 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 December 31, ~~2020~~2021 and December 31, ~~2019~~2020, the Company had approximately $2923.31 million and $6729.43 million, respectively, of brokered deposits~~, respectively~~. The Company's ability to accept, roll-over or renew brokered deposits is contingent upon the Bank maintaining a capital level of "well-capitalized."

Included in the brokered deposits total at December 31, 2021 and December 31, 2020 was $690 thousand and $1.2 million, respectively, in Certificate of Deposit Account Registry Service ("CDARS") one-way buys that were acquired from Ann Arbor State Bank. Included in the brokered deposits total at December 31, 2019 was $514 thousand in CDARS customer deposit accounts due to an early withdrawal from a CDARS customer deposit account in the first quarter of 2018 that was paid at maturity.

Management understands the importance of core deposits as a stable source of funding and may periodically implement various deposit promotion strategies to encourage core deposit growth. 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.

5149

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

	Year Ended December 31, 2021
(Dollars in thousands)	AverageBalance		Percent		AverageRate
Noninterest-bearing demand deposits	$	754,376	36.9	%	—	%
Interest-bearing demand deposits	162,405		7.9		0.14
Money market and savings deposits	613,883		29.9		0.19
Time deposits	519,447		25.3		0.56
Total deposits	$	2,050,111	100.0	%	0.21	%
	Year Ended December 31, 2020
(Dollars in thousands)	AverageBalance		Percent		AverageRate
Noninterest-bearing demand deposits	$	574,537	32.7	%	—	%
Interest-bearing demand deposits	115,249		6.5		0.28
Money market and savings deposits	496,827		28.2		0.56
Time deposits	573,823		32.6		1.38
Total deposits	$	1,760,436	100.0	%	0.62	%
	Year Ended December 31, 2019
(Dollars in thousands)	AverageBalance		Percent		AverageRate
Noninterest-bearing demand deposits	$	321,487	26.3	%	—	%
Interest-bearing demand deposits	57,480		4.7		0.49
Money market and savings deposits	314,918		25.8		1.43
Time deposits	527,605		43.2		2.30
Total deposits	$	1,221,490	100.0	%	1.39	%
	Year Ended December 31, 2018
(Dollars in thousands)	AverageBalance		Percent		AverageRate
Noninterest-bearing demand deposits	$	316,764	28.3	%	—	%
Interest-bearing demand deposits	60,203		5.4	%	0.33
Money market and savings deposits	264,656		23.6	%	0.99
Time deposits	477,164		42.7	%	1.73
Total deposits	$	1,118,787	100.0	%	0.99	%

The following table shows the contractual maturity of time deposits, including CDARS and IRA deposits and other brokered funds, ofover $~~100~~250 thousand ~~and over~~ that were outstanding as of the date presented.

(Dollars in thousands)	December 31, ~~2020~~2021
Maturing in:
3 months or less	$	~~110~~124,718
3 months to 6 months	~~156~~60,~~190~~458
6 months to 1 year	~~121~~64,~~156~~470
1 year or greater	~~258~~17,~~620~~668
Total	$	~~536~~267,~~076~~314

Borrowings

Total debt outstanding at December 31, ~~2020~~2021 was $~~230~~208.3 4 million, a decrease of $2621.49 million from $~~256~~230.7 3 million at December 31, ~~2019~~2020. The decrease in total borrowings ~~was~~compared ~~primarily due~~ to ~~decreases~~December ~~of $60.0 million in short-term FHLB advances and $5.0 million in federal funds purchased~~31, ~~partially~~2020 ~~offset~~was byprimarily ~~increases~~due ofto ~~$36.2~~the ~~million~~redemption ~~in long-term FHLB advances,~~ of ~~which~~ $1115.0 million ~~was~~of ~~acquired~~subordinated ~~through~~notes ~~the~~as ~~Ann~~well ~~Arbor~~as ~~State~~a ~~Bank~~decrease ~~acquisition,~~of ~~and~~ $26.40 million in ~~securities~~FHLB ~~sold~~long ~~under~~term ~~agreements to repurchase~~borrowings.

At December 31, ~~2020~~2021, FHLB advances were secured by a blanket lien on $~~512~~580.36 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of $34.70 million. At December 31, ~~2019~~2020, FHLB advances were secured by a blanket lien on $~~408~~512.93 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of $13.27 million.

As of December 31, ~~2020~~2021, the Company had $4530.0 million of subordinated notes outstanding and debt issuance costs of $~~408~~306 thousand related to these subordinated notes. As of December 31, ~~2019~~2020, 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. From December 15, 2020, through maturity, the notes bear a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly through maturity. The notes mature 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. 50

The $15.0 million of subordinated notes issued on December 21, 2015 had a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. From December 15, 2020, through maturity, the notes had a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly through maturity. The notes were scheduled to mature on December 15, 2025, and the Company had the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 15, 2020 or upon an occurrence of a Tier 2 capital event or tax event. These subordinated notes were redeemed in June 2021.

The $30.0 million of subordinated notes issued on December 18, 2019 bear a fixed interest rate of 4.75% per annum, payable semiannually through December 18, 2024. The notes will bear a floating interest rate of three-month SOFR plus 311 basis points payable quarterly after December 18, 2024 through maturity. The notes mature on December 18, 2029, and the Company has the option to redeem any or all of the subordinated notes without premium or penalty any time after December 18, 2024 or upon the occurrence of a Tier 2 capital event or tax event. The issuance of the $30.0 million subordinated notes reflected management's efforts to fund the liquidity needs of the Company as well as pay the merger consideration to purchase Ann Arbor State Bank.

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

	For the year ended December 31,
(Dollars in thousands)		~~2020~~2021			~~2019~~2020			~~2018~~2019
Securities sold under agreements to repurchase
Average daily balance		$	~~730~~3,001		$	~~547~~730		$	~~4,210~~547
Weighted-average rate during period		0.3025		%	0.30		%	10.8330		%
Amount outstanding at period end		$	32,~~204~~342		$	~~851~~3,204		$	~~609~~851
Weighted-average rate at period end		0.3025		%	0.30		%	0.30		%
Maximum month-end balance		$	3,~~204~~993		$	~~866~~3,204		$	~~12,847~~866
FHLB Advances
Average daily balance		$	~~4,085~~—		$	264,~~952~~085		$	4726,~~581~~952
Weighted-average rate during period		~~0.98~~—		%	20.3298		%	2.0432		%
Amount outstanding at period end		$	—		$	~~60,000~~—		$	9060,000
Weighted-average rate at period end		—		%	~~1.61~~—		%	21.5461		%
Maximum month-end balance		$	~~25,000~~—		$	9525,000		$	~~125~~95,000
FHLB Line of Credit
Average daily balance		$	455		$	9345		$	~~3,279~~93
Weighted-average rate during period		10.4744		%	21.8547		%	2.1085		%
Amount outstanding at period end		$	—		$	—		$	~~2,520~~—
Weighted-average rate at period end		—		%	—		%	~~2.87~~—		%
Maximum month-end balance		$	—		$	~~895~~—		$	~~37,081~~895
Federal funds purchased
Average daily balance		$	~~148~~—		$	~~1,679~~148		$	~~873~~1,679
Weighted-average rate during period		~~1.79~~—		%	21.7579		%	2.5275		%
Amount outstanding at period end		$	—		$	~~5,000~~—		$	5,000
Weighted-average rate at period end		—		%	~~1.90~~—		%	21.5090		%
Maximum month-end balance		$	—		$	~~15,000~~—		$	15,000

Capital Resources

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

Shareholders' equity increased $4424.6 8 million to $~~215~~240.31 million at December 31, ~~2020~~2021 as compared to $~~170~~215.73 million at December 31, ~~2019~~2020. The increase in shareholders' equity was primarily impacted by $2332.45 million ~~from the issuance~~ of ~~preferred stock as well as $20.4 million of~~ net income generated during the year ended December 31, ~~2020~~2021 and ~~an increase of~~ $41.69 million of ~~other~~options ~~comprehensive~~exercised ~~income~~during ~~due~~the ~~to increases in net unrealized gains on available-for-sale securities~~year, partially offset by ~~$2.6~~ ~~million~~decreases of ~~stock repurchased through the share buyback program and $1.5 million of dividends declared on our common stock during the year ended December 31, 2020.~~

5451

$5.2 million of accumulated other comprehensive income due to decreases in net unrealized gains on available-for-sale securities, $1.9 million of dividends declared on our preferred stock, $1.8 million of dividends declared on our common stock, and $1.4 million of stock repurchased through the share buyback program during the year ended December 31, 2021.

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

	For the year ended December 31,
(Dollars in thousands)		~~2020~~2021		~~2019~~2020		~~2018~~2019
Balance at beginning of period		$	~~170~~215,~~703~~327	$	~~151~~170,~~760~~703	$	~~107~~151,~~960~~760
Net income		2032,~~413~~478		1620,~~111~~413		1416,~~386~~111
Other comprehensive income		4,590		5,344		(801)
Other comprehensive income (loss)		(5,237)		4,590		5,344
Initial public offering of 1,150,765 shares of common stock, net of issuance costs		—		—		29,030
Preferred stock offering, net of issuance costs		—		23,372		—
Preferred stock offering of 10,000 shares, net of issuance costs		23,372		—		—
Redeemed stock		(1,364)		(2,648)		(2,165)
Redeemed stock		(2,648)		(2,165)		—
Dividends on 7.50% Series B Preferred Stock		(1,875)		(479)		—
Common stock dividends declared		(1,~~542~~838)		(1,~~236~~542)		(~~895~~1,236)
Dividends on 7.50% Series B Preferred Stock		(479)		—		—
Exercise of stock options		1,920		95		219
Exercise of stock options		95		219		1,279
Stock-based compensation expense		680		823		670
Stock-based compensation expense		823		670		801
Balance at end of period		$	240,091	$	215,327	$	170,703
Balance at end of period		$	215,327	$	170,703	$	151,760

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 of 2.5% are generally not subject to the additional restrictions on dividends, share repurchases and discretionary bonus payments to executive officers under the Basel III Rule.

At December 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 guidelines.

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

	ActualCapitalRatio		CapitalAdequacyRegulatoryRequirement		Capital AdequacyRegulatory Requirement +Capital ConservationBuffer(1)		WellCapitalizedRegulatoryRequirement
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	%
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	%

_______________________________________________________________________________


	Actual Capital Ratio		Capital Adequacy Regulatory Requirement		Capital Adequacy Regulatory Requirement + Capital Conservation Buffer(1)		Well Capitalized Regulatory Requirement
December 31, 2021
Common equity tier 1 to risk-weighted assets:
Consolidated	10.37	%	4.50	%	7.00	%
Bank	13.12	%	4.50	%	7.00	%	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	11.75	%	6.00	%	8.50	%
Bank	13.12

Filing Compare · Level One Bancorp Inc