LEVEL ONE BANCORP INC Management’s Discussion and Analysis of Financial Condition and Results of Operations (Form 10-K)

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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  Table of Contents
                            Selected Financial Data
                                                                     As of and for the year
                                                                       ended December 31,
(Dollars in thousands, except per share data)                                       2021                 2020                 2019
Earnings Summary
Interest income                                                                $    86,650          $    82,639          $    70,448
Interest expense                                                                     8,051               15,883               19,393
Net interest income                                                                 78,599               66,756               51,055
Provision for (recovery of) loan losses                                               (725)              11,872                1,383
Noninterest income                                                                  22,372               29,714               14,211
Noninterest expense                                                                 61,839               60,232               44,369
Income before income taxes                                                          39,857               24,366               19,514
Income tax provision                                                                 7,379                3,953                3,403
Net income                                                                          32,478               20,413               16,111
Preferred stock dividends                                                            1,875                  479                    -
Net income available to common shareholders                                         30,603               19,934               16,111
Net income allocated to participating securities (1)                                   441                  244                  159
Net income attributable to common shareholders (1)                          

$30,162 $19,690 $15,952
Data per share Basic earnings per ordinary share

$4.00 $2.58 $2.08
Diluted earnings per common share

                                                     3.95                 2.57                 2.05

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

                                                                3.95                 2.74                 2.12
Book value per common share                                                          28.02                25.14                22.13
Tangible book value per common share (2)                                             22.37                19.63                20.86
Preferred shares outstanding (in thousands)                                             10                   10                    -
Common shares outstanding (in thousands)                                             7,734                7,634                7,715
Average basic common shares (in thousands)                                           7,536                7,627                7,632
Average diluted common shares (in thousands)                                         7,650                7,686                7,747
Selected Period End Balances
Total assets                                                                

$2,515,869 $2,442,982 $1,584,899
Titles available for sale

       397,551              302,732              180,905
Total loans                                                                      1,652,771            1,723,537            1,227,609
Total deposits                                                                   2,040,082            1,963,312            1,135,428
Total liabilities                                                                2,275,778            2,227,655            1,414,196
Total shareholders' equity                                                         240,091              215,327              170,703
Total common shareholders' equity                                                  216,719              191,955              170,703
Tangible common shareholders' equity (2)                                           173,033              149,844              160,940
Performance and Capital Ratios
Return on average assets                                                              1.28  %              0.88  %               1.08 %
Return on average equity                                                             14.24                10.61                 9.90
Net interest margin (fully taxable equivalent) (3)                                    3.33                 3.10                 3.60

Efficiency ratio (non-interest expense/net interest income plus non-interest income)

                                                             61.24                62.44                67.98
Dividend payout ratio                                                                 5.74                 7.37                 7.20
Total shareholders' equity to total assets                                            9.54                 8.81                10.77
Tangible common equity to tangible assets (2)                                         7.00                 6.24                10.22
Common equity tier 1 to risk-weighted assets                                         10.37                 9.30                11.72
Tier 1 capital to risk-weighted assets                                               11.75                10.80                11.72
Total capital to risk-weighted assets                                                14.76                14.91                15.99
Tier 1 capital to average assets (leverage ratio)                                     7.93                 6.93                10.41
Asset Quality Ratios:
Net (recoveries) charge-offs to average loans                                         0.01  %              0.13  %              0.02  %
Nonperforming assets as a percentage of total assets                                  0.46                 0.77                 1.23
Nonaccrual loans as a percent of total loans                                          0.68                 1.09                 1.51
Allowance for loan losses as a percentage of total loans                              1.30                 1.29                 1.03

Allowance for loan losses as a percentage of outstanding loans

                                                                               189.79               118.50                68.40

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

                                                                    184.58               114.95                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 21% tax rate for the 2019, 2020,
and 2021 periods.


GAAP Reconciliation and Management’s 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, 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 table presents these non-GAAP financial measures and their most directly comparable financial measures calculated in accordance with GAAP:

Common tangible equity, ratio of tangible equity to tangible assets and tangible book value per share

                                                          As of and for the 

year ended

                                                                  December 

31,

(Dollars in thousands, except per share data)                                   2021                 2020                 2019

Total shareholders' equity                                                 

$240,091 $215,327 $170,703
Less: preferred shares

                                                                 23,372               23,372                    -
Total common shareholders' equity                                              216,719              191,955              170,703

Less:

Goodwill                                                                        35,554               35,554                9,387
Mortgage servicing rights, net                                                   5,604                3,361                   76
Other intangible assets, net                                                     2,528                3,196                  300
Tangible common shareholders' equity                                       

$173,033 $149,844 $160,940

Common shares outstanding (in thousands)                                         7,734                7,634                7,715
Tangible book value per common share                                       $     22.37          $     19.63          $     20.86

Total assets                                                               $ 2,515,869          $ 2,442,982          $ 1,584,899
Less:
Goodwill                                                                        35,554               35,554                9,387
Mortgage servicing rights, net                                                   5,604                3,361                   76
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 earnings and diluted earnings per share

                                                              As of and for 

the year

                                                                ended December 31,
(Dollars in thousands, except per share data)                                2021              2020              2019

Net income, as reported                                                   $ 32,478          $ 20,413          $ 16,111
Acquisition and due diligence fees                                               -             1,654               539
Income tax benefit (1)                                                           -              (331)              (51)

Net income, excluding acquisition and due diligence costs

                                                                      $ 

32,478 $21,736 $16,599

Diluted earnings per share, as reported                                   $ 

3.95 $2.57 $2.05
Impact of acquisition and due diligence costs, net of tax benefit

                                                               -              0.17              0.07
Diluted earnings per common share, excluding
acquisition and due diligence fees                                        $ 

3.95 $2.74 $2.12
(1) Assuming an income tax rate of 21% on deductible acquisition costs for the 2019 and 2020 periods.

Allowance for loan loss as a percentage of total loans, excluding PPP loans

                                                                              As of and for the year ended December 31,
(Dollars in thousands, except per share data)                                                                                         2021                 2020                 2019

Total loans                                                                                                                      $ 1,652,771          $ 1,723,537          $ 1,227,609
Less:
PPP loans                                                                                                                             76,505              290,135                    -
Total loans, excluding PPP loans                                                                                                 $ 1,576,266          $ 

1,433,402 $1,227,609

Allowance for loan loss                                                                                                          $    21,425          $    22,297          $    12,674
Allowance for loan loss as a percentage of total
loans                                                                                                                                   1.30  %              1.29  %              1.03  %
Allowance for loan loss as a percentage of total
loans excluding PPP loans                                                                                                               1.36  %              1.56  %              1.03  %


                          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, 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

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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 Good will

Goodwill represents $35.6 million of our $2.52 billion in total assets as of
December 31, 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. Hamilton Court Insurance
Company exited the pool resources relationship to which it was previously a
member and was dissolved in January 2021.

Our principal business 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 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 15, 2021, Level One's Board of
Directors declared a fourth quarter 2021 cash dividend of $0.06 per common
share. The dividend was paid on January 14, 2022, to shareholders of record at
the close of business on December 31, 2021.

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First Quarter Preferred Stock Dividend. On January 19, 2022, 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 is payable on February
15, 2022, to shareholders of record at the close of business on January 31,
2022.

Impact of COVID-19 Pandemic. The COVID-19 pandemic in the United States has had,
and is expected to continue to have, a complex and significant impact on the
economy, the banking industry and the Company.

Effects on Our Business. We currently expect that the COVID-19 pandemic,
federal, state and local government responses to the pandemic, supply
disruptions, labor availability challenges, and the 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.

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 COVID-19
pandemic. For our customers, we have provided loan payment deferrals and offered
fee waivers, among other actions.

Level One was also a participating lender in both the first and second rounds of
the PPP. In 2020, the Bank originated 2,208 PPP loans in the aggregate principal
amount of $417.0 million. From January 18, 2021 through June 30, 2021, Level One
funded 1,532 new PPP loan applications for $234.3 million, of which 1,187 were
for loans $150,000 or below. As of December 31, 2021, $76.5 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.

Level One also recognizes that some of the most affected industries are the restaurant and hospitality industries. From December 31, 2021Level One had 3.9% and 0.3% loan concentrations in the restaurant and hospitality sectors, respectively.

                             Results of Operations

Net Income

We had net income of $32.5 million, or $3.95 per diluted common share, for the
year ended December 31, 2021, compared to $20.4 million, or $2.57 per diluted
common share, for the year ended December 31, 2020. The increase of $12.1
million in net income primarily reflected an increase of $11.8 million in net
interest income, primarily due to higher interest income on loans due, in part,
to the recognition of fees on PPP loans as they are forgiven. 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
$12.6 million in provision for loan loss, primarily due to a decrease in general
reserves resulting 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. These were partially offset by a $7.3 million decrease in
noninterest income primarily due to lower mortgage banking activities and net
gain on sales of securities partially offset by an increase in service charges
on deposits. In addition, there were increases of $3.4 million of income tax
provision primarily due to higher income before taxes and $1.6 million of
noninterest expense primarily due to higher salary and employee benefits, other
expense, data processing expense, and professional services fees partially
offset by lower acquisition 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 $78.6 million for the year ended December 31, 2021 was
$11.8 million higher than the net interest income of $66.8 million for the year
ended December 31, 2020. The year ended December 31, 2021 included a
$4.0 million increase in interest income as well as a $7.8 million decrease in
interest expense, compared to December 31, 2020. The increase in interest income
was primarily driven by increases of $2.9 million in interest and fees on loans
and $1.4 million in interest on investment securities. The increase in interest
and fees on loans for the year ended December 31, 2021 compared to the same
period in 2020 was mainly driven by the Bank earning $12.9 million of net SBA
fees on PPP loans compared to $6.5 million for the year ended December 31, 2020.
The increase in interest income on investment securities was mainly due to an
increase of $123.7 million in average balances due to excess liquidity from PPP
loan forgiveness and increased customer liquidity.

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The 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 (FTE) for the year ended December 31, 2021 was 3.33%,
compared to 3.10% for the same period in 2020. The increase of 23 basis points
in the net interest margin year over year was primarily a result of a decrease
in cost of funds, which declined 52 basis points to 0.53% in 2021, compared to
1.05% in 2020 primarily due to lower interest rates paid as a result of revised
internal deposit rates and maturity of higher cost time deposits. The decrease
in cost of funds was accompanied by a lower yields across most interest-earning
assets, mostly reflecting the impact of lower market interest rates.

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, 2021 and 2020, the yield on total loans was
impacted by 6 basis points and 7 basis points due to the accretable yield on
purchased credit impaired loans. Our net interest margin for the years ended
December 31, 2021 and 2020, benefited by 4 basis points and 8 basis points,
respectively, as a result of the excess accretable yield. As of December 31,
2021 and December 31, 2020, our remaining accretable yield was $5.7 million and
$7.1 million, respectively, and our nonaccretable difference was $1.4 million
and $2.7 million, respectively.


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

Net Interest Income Analysis – Fully Taxable Equivalent

                                                                                For the years ended December 31,
(Dollars in thousands)                                                                 2021                 2020                 2019
Average Balance Sheets:
Gross loans(1)                                                             

$1,791,671 $1,730,470 $1,169,486
Investment securities: (2) Taxable

                                                                               254,913              138,837              129,274
Tax-exempt                                                                            103,609               96,020               84,392
Interest-earning cash balances                                                        218,931              194,545               38,268
Other investments                                                                      14,398               12,903                8,523
Total interest-earning assets                                                     $ 2,383,522          $ 2,172,775          $ 1,429,943
Non-earning assets:                                                                   145,990              135,229               68,015
Total assets                                                                      $ 2,529,512          $ 2,308,004          $ 1,497,958

Interest-bearing demand deposits                                            

$162,405 $115,249 $57,480
Money market and savings deposits

          613,883              496,827              314,918
Time deposits                                                                         519,447              573,823              527,605
Borrowings                                                                            183,503              279,949               79,864
Subordinated notes                                                                     36,376               44,490               16,061
Total interest-bearing liabilities                                                  1,515,614            1,510,338              995,928
Noninterest-bearing demand deposits                                                   754,376              574,537              321,487
Other liabilities                                                                      31,466               30,787               17,750
Shareholders' equity                                                                  228,056              192,342              162,793
Total liabilities and shareholders' equity                                        $ 2,529,512          $ 2,308,004          $ 1,497,958

Yields: (3)
Earning Assets
Gross loans                                                                              4.43  %              4.42  %              5.42  %
Investment securities:
Taxable                                                                                  1.58  %              1.93  %              2.71  %
Tax-exempt                                                                               3.02  %              3.19  %              3.27  %
Interest earning cash balances                                                           0.13  %              0.24  %              2.23  %
Other investments                                                                        3.13  %              4.07  %              5.26  %
Total interest earning assets                                                            3.66  %              3.83  %              4.96  %

Interest-bearing liabilities
Interest-bearing demand deposits                                                         0.14  %              0.28  %              0.49  %
Money market and savings deposits                                                        0.19  %              0.56  %              1.43  %
Time deposits                                                                            0.56  %              1.38  %              2.30  %
Borrowings                                                                               1.02  %              0.84  %              1.73  %
Subordinated notes                                                                       5.12  %              5.70  %              6.69  %
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.
(2) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost, adjusted
for amortization of premiums and accretion of discounts.
(3) Average rates and yields are presented on an annual basis and include a
taxable equivalent adjustment to interest income of $617 thousand, $574 thousand
and $453 thousand on tax-exempt securities for the years ended December 31,
2021, 2020 and 2019, respectively, using the federal corporate tax rate of 21%.
(4) Net interest margin represents net interest income divided by average total
interest-earning assets.
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Rate/volume analysis

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




                                                             For the year 

ended December 31, 2021 compared to 2020

                                                                    Increase
                                                               (Decrease) Due to:
                                                                                                  Net Increase
(Dollars in thousands)                                      Rate               Volume              (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 compared to 2019

                                                                    Increase
                                                               (Decrease) Due to:
                                                                                                  Net Increase
(Dollars in thousands)                                      Rate               Volume              (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

                                       38
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Allowance 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 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, 2021, and December 31,
2020, our remaining accretable yield was $5.7 million and $7.1 million, and our
nonaccretable difference was $1.4 million and $2.7 million, respectively.

The provision for loan losses was a provision benefit of $725 thousand for the
year ended December 31, 2021, compared to a provision expense of $11.9 million
for the year ended December 31, 2020. The decrease of $12.6 million in the
provision for loan losses was primarily due to a decrease in general reserves of
$10.6 million due to a reduction in qualitative factors within the allowance for
loan loss model as a result of improved credit quality while qualitative factors
were increased during the year ended December 31, 2020 due to economic
uncertainty regarding the impact of the COVID-19 pandemic on credit quality. In
addition, there was a decrease of $2.1 million in net chargeoffs resulting from
a $1.3 million chargeoff on a nonaccrual loan during the second quarter of 2020.

Non-interest income

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

                                                  For the year ended December 31,
(Dollars in thousands)                                             2021          2020          2019
Noninterest income
Service charges on deposits                                     $  3,311      $  2,446      $  2,547
Net gain on sales of securities                                       21         1,862         1,174
Mortgage banking activities                                       15,843        22,190         7,880

Other charges and fees                                             3,197         3,216         2,610
Total noninterest income                                        $ 22,372      $ 29,714      $ 14,211


Noninterest income decreased $7.3 million to $22.4 million for the year ended
December 31, 2021, compared to $29.7 million for the same period in 2020. The
decrease in noninterest income was primarily due to decreases of $6.3 million in
mortgage banking activities and $1.8 million in net gain on sales of securities.
These decreases were partially offset by an increase of $865 thousand in service
charges on deposits. The decrease in mortgage banking activities was primarily
due to $115.7 million lower residential loan originations held for sale and
$56.0 million lower residential loans sold. The higher volumes in the year ended
December 31, 2020 were primarily due to a decrease in interest rates during the
first half of 2020 while interest rates have remained relatively stable in 2021.
The decrease in net gains on sales of securities was primarily due to fewer
securities sold during 2021 compared to 2020. The increase in service charges on
deposits was due to higher transaction volumes and deposit balances.






                                       39
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Non-interest expenses

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

                                                     For the year ended December 31,
(Dollars in thousands)                                                2021          2020          2019
Noninterest expense
Salary and employee benefits                                       $ 39,353      $ 38,304      $ 28,775
Occupancy and equipment expense                                       6,631         6,549         4,939
Professional service fees                                             3,542         2,935         1,808
Acquisition and due diligence fees                                        -         1,654           539
FDIC premium                                                          1,027         1,119           310
Marketing expense                                                     1,288           956         1,107
Loan processing expense                                                 983           935           661
Data processing expense                                               4,125         3,460         2,374
Core deposit premium amortization                                       668           768           146
Other expense                                                         4,222         3,552         3,710
Total noninterest expense                                          $ 61,839      $ 60,232      $ 44,369


Noninterest expense increased $1.6 million to $61.8 million for the year ended
December 31, 2021, compared to $60.2 million for the same period in 2020. The
increase in noninterest expense was primarily due to increases in salary and
employee benefits of $1.0 million, other expense of $670 thousand, data
processing expense of $665 thousand, professional service fees of $607 thousand,
and marketing expense of $332 thousand. These increases were partially offset by
a decrease of $1.7 million in acquisition and due diligence fees. The increase
in salary and employee benefits was primarily due to annual compensation
increases and an increase of 8 full-time equivalent employees. The increase in
other expenses was primarily due to an increase in fraud losses. The increase in
data processing expense was primarily due to a new loan processing system used
for PPP loans. The increase in professional fees was primarily due to fees
related to the pending merger. The increase in marketing expense was primarily
due to an increase in advertising efforts. The decrease in acquisition and due
diligence fees was due to the acquisition of Ann Arbor State Bank in the first
quarter of 2020.

Income taxes and tax-related items

During the year ended December 31, 2021, we recognized income tax expense of
$7.4 million on $39.9 million of pre-tax income resulting in an effective tax
rate of 18.5%, compared to the same period in 2020, in which we recognized an
income tax expense of $4.0 million on $24.4 million of pre-tax income, resulting
in an effective tax rate of 16.2%.

The increase in income tax provision for the year ended December 31, 2021
compared to the same period in 2020 was primarily as a result of higher income
before taxes. Additionally, a $290 thousand tax benefit related to the Ann Arbor
State Bank net operating loss (NOL) in the first quarter of 2020 resulting from
the Coronavirus Aid, Relief and 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.

See “Note 11 – Income Taxes” in the Notes to the Consolidated Financial Statements for a reconciliation between forecast and actual income tax expense for the years ended. December 31, 2021 and 2020.

                                       40
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                              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 at
December 31, 20212020 and 2019.

                                                                 As of December 31,
(Dollars in thousands)                                   2021           2020           2019
Securities available-for-sale:
U.S. government sponsored entities and agencies       $  21,774      $  26,358      $       -
State and political subdivision                         148,276        132,723         93,747
Mortgage-backed securities: residential                  22,211         26,081         10,565
Mortgage-backed securities: commercial                   23,271         11,918          8,779
Collateralized mortgage obligations: residential         13,461         13,446          8,529
Collateralized mortgage obligations: commercial          51,183         58,512         23,181
U.S. Treasury                                            64,387              -          1,999
SBA                                                      13,927         17,593         21,984
Asset backed securities                                   9,706         10,072         10,084
Corporate bonds                                          29,355          6,029          2,037
Total securities available-for-sale                   $ 397,551      $ 

302 732 $180,905


The composition of our investment securities portfolio reflects our investment
strategy of maintaining an appropriate level of liquidity for both normal
operations and potential acquisitions, while providing an additional source of
revenue. The investment portfolio also provides a balance to interest rate risk
and credit risk in other categories of the balance sheet, while providing a
vehicle for the investment of available funds, furnishing liquidity, and
supplying securities to pledge as collateral. At December 31, 2021, total
investment securities were $397.6 million, or 15.8% of total assets, compared to
$302.7 million, or 12.4% of total assets, at December 31, 2020. The
$94.8 million increase in securities available-for-sale from December 31, 2020
to December 31, 2021, was due to the purchase of securities using the excess
cash balances generated by the payoffs and forgiveness of PPP loans. Securities
with a carrying value of $88.6 million and $98.7 million were pledged at
December 31, 2021 and December 31, 2020, respectively, to secure borrowings,
deposits and mortgage derivatives.

As of December 31, 2021, the Company held 68 tax-exempt state and local
municipal securities totaling $52.3 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, 2021 and December 31, 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, 2021 and
December 31, 2020. Expected maturities may differ from contractual maturities as
issuers may have the right to call or prepay obligations with or without call or
prepayment penalties. Additionally, residential mortgage-backed securities and
collateralized mortgage obligations receive monthly principal payments, which
are not reflected below. The yields below are calculated on a tax equivalent
basis.

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                                                                                                                   December 31, 2021
                                                     One year or less                          One to five years                       Five to ten years                           After ten years
                                              Amortized              Average            Amortized            Average             Amortized            Average               Amortized              Average
(Dollars in thousands)                          Cost                  Yield                Cost               Yield                Cost                Yield                  Cost                  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
                                           Amortized            Average            Amortized            Average             Amortized            Average               Amortized              Average
(Dollars in thousands)                        Cost               Yield                Cost               Yield                Cost                Yield                  Cost                  Yield
Securities available-for-sale:
U.S. government sponsored agency
obligations                               $   4,027                 1.61  %       $   2,548                 1.61  %       $   15,000                 1.22  %       $        5,000                 1.48  %
State and political subdivision               1,768                 1.96             10,095                 2.46              31,142                 2.80                  81,048                 2.99
Mortgage-backed securities:
residential                                       -                    -                 78                 0.94                  87                 0.19                  25,564                 1.44
Mortgage-backed securities:
commercial                                      847                 1.36              3,795                 2.46               4,985                 1.69                   1,807                 3.64
Collateralized mortgage
obligations: residential                          -                    -                 46                 4.02                 559                 2.11                  12,715                 1.25
Collateralized mortgage
obligations: commercial                         577                 2.54              8,011                 3.10              40,889                 1.26                   7,921                 2.46

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


Loans

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 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.

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

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

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

                                                                                     As of December 31,
(Dollars in thousands)                            2021                 2020                 2019                 2018                 2017
Commercial real estate:
Non-owner occupied                           $   467,364          $   445,810          $   388,515          $   367,671          $   343,420
Owner occupied                                   283,400              275,022              216,131              194,422              168,342
Total commercial real estate                     750,764              720,832              604,646              562,093              511,762
Commercial and industrial                        460,530              685,504              410,228              383,455              377,686
Residential real estate                          440,640              315,476              211,839              180,018              144,439
Consumer                                             837                1,725                  896                  999                1,036
Total loans                                  $ 1,652,771          $ 1,723,537          $ 1,227,609          $ 1,126,565          $ 1,034,923


Total loans were $1.65 billion at December 31, 2021, a decrease of $70.8 million
from December 31, 2020. The decline in our loan portfolio compared to December
31, 2020 was primarily due to a $225.0 million decrease in our commercial and
industrial loan portfolio, $213.6 million of which was due to the net change in
PPP loans. This was partially offset by an increase of $125.2 million in our
residential real estate portfolio. In general, we target a loan portfolio mix of
approximately one-half commercial real estate, approximately one-third
commercial and industrial loans and one-sixth a mix of residential real estate
and consumer loans. As of December 31, 2021, approximately 45.4% of our loans
were commercial real estate, 27.9% were commercial and industrial, and 26.7%
were residential real estate and consumer loans.

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, 2021.

                                                                    After one but           After five but
                                              One year or            within five            within fifteen           After fifteen
(Dollars in thousands)                           less                   years                   years                    years                 

Total

December 31, 2021
Commercial real estate                      $     90,512          $      

422,681 $228,432 $9,139 $750,764
Commercial and industrial

                        135,940                 243,580                   78,135                   2,875              

460 530

Residential real estate                           25,846                   8,366                   39,740                 366,688              440,640
Consumer                                              62                     586                       40                     149                  837
Total loans                                 $    252,360          $      675,213          $       346,347          $      378,851          $ 1,652,771
Sensitivity of loans to changes in
interest rates:
Fixed interest rates                                              $      

576,033 $177,823 $148,970
Floating interest rates

99,180                  168,524                 229,881
Total                                                             $      675,213          $       346,347          $      378,851


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Summary of Impaired Assets and Defaulted Loans

Nonperforming assets consist of nonaccrual loans and other real estate owned. We
do not consider performing 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, 2021, there were no loans that remained on a
COVID-related deferral compared to $20.1 million as of December 31, 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 impaired have all of the inherent weaknesses of those classified as poor, with the additional characteristic that the weaknesses make recovery or full liquidation, based on currently existing facts, conditions and values, highly questionable and unlikely.

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.

Total loans classified and criticized in December 31, 2021 compared to
December 31, 2020 were the following:

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(Dollars in thousands)                        December 31, 2021       December 31, 2020
Classified loans:
Substandard                                  $           24,866      $           34,921
Doubtful                                                  1,477                   1,143
Total classified loans                       $           26,343      $           36,064
Special mention                                          74,254                  47,297

Total loans classified and discriminated $100,597

83,361


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

                                                                    As of December 31,
(Dollars in thousands)                                       2021          2020          2019
Nonaccrual loans
Commercial real estate                                    $  4,246      $  7,320      $  4,832
Commercial and industrial                                    4,208         7,490        11,112
Residential real estate                                      2,819         3,991         2,569
Consumer                                                        16            15            16
Total nonaccrual loans(1)                                   11,289        18,816        18,529
Other real estate owned                                        201             -           921
Total nonperforming assets                                  11,490        18,816        19,450
Performing troubled debt restructurings

Commercial and industrial                                      334           546           547
Residential real estate                                        365           432           359
Total performing troubled debt restructurings                  699           978           906

Total impaired assets, excluding ASC 310-30 loans $12,189 $19,794 $20,356
Loans 90 days or more past due and still outstanding $162 $

269 $157

(1) Unexpected loans include non-performing distressed debt restructurings of $3.4 million, $3.8 million, $3.0 million, $5.0 million and $6.4 million on the respective dates indicated above.

During the years ended December 31, 2021 and 2020, the Company recorded $641
thousand and $234 thousand, respectively, of interest income on nonaccrual loans
and performing TDRs excluding PCI loans.

In addition to non-performing and impaired assets, the Company had purchased impaired loans accounted for under ASC 310-30 which amounted to $4.2 million, $5.0 million, $6.0 million, $7.9 millionand $9.7 million on the respective dates indicated in the table above.

Nonperforming assets decreased $7.3 million as of December 31, 2021 compared to
December 31, 2020. The decrease in nonperforming assets was attributable to a
decrease in nonaccrual loans primarily due to pay offs of four commercial loan
relationships totaling $5.4 million, paydowns on four commercial loan
relationships totaling $3.9 million, and one $759 thousand residential loan
relationship moving back to accruing. This was partially offset by two
commercial loan relationships moving to nonaccrual status totaling $2.6 million.

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.

Acquired loans

The allowance for loan losses on acquired loans is based on credit deterioration
subsequent to the acquisition date. In accordance with the accounting guidance
for business combinations, there was no allowance brought forward on any of the
acquired loans as any credit deterioration evident in the loans was included in
the determination of the fair value of the loans at

                                       45
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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 type of loan, the evolution of the provision for loan losses for the periods presented.

                                       46
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                                                                                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 loans at end of period

                  1.30  %           1.29  %           1.03  %
Net charge-offs to average loans                                                              0.01              0.13              0.02


Our 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..

















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

                                                                                       Percentage of loans in
                                                                   Allocated               each category
(Dollars in thousands)                                             Allowance               to 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  %


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

                                                                 Net charge-offs          Percentage of average
(Dollars in thousands)                                             (recoveries)                   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, 2021
and December 31, 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 engaged a reputable, third-party valuation firm to perform a
quantitative analysis of goodwill as of August 31, 2020 ("the valuation date").
In
                                       48
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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,
2021, noting strong financial indicators for the Bank, solid credit quality
ratios, as well as the strong capital position of the Bank. Management
determined that no triggering events have occurred that indicated impairment
from the most recent valuation date through December 31, 2021, the 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, 2021.

Deposits

Total deposits were $2.04 billion at December 31, 2021 and $1.96 billion at
December 31, 2020, representing 89.6% and 88.1% of total liabilities,
respectively. The increase in deposits of $76.8 million was comprised of an
increase of $291.0 million in demand deposits partially offset by decreases of
$171.0 million in time deposits and $43.2 million in money market and savings
deposits. The increase in deposits was primarily due to organic deposit growth
during the year ended December 31, 2021 mainly as a result of increased customer
liquidity and new customer growth. We had $1.16 billion and $1.13 billion at
December 31, 2021 and 2020, respectively.

Our average interest-bearing deposit costs were 0.33% and 0.93% for the years
ended December 31, 2021 and 2020, respectively. The decrease in interest-bearing
deposit costs between the two periods was primarily due to lower interest rates
paid as a result of revised internal deposit rates, mainly driven by the
continuation of the low level of the target federal funds rate. The target
federal funds interest rate 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, 2021 and December 31, 2020, the Company had
approximately $23.1 million and $29.3 million, respectively, of brokered
deposits. The Company's ability to accept, roll-over or renew brokered deposits
is contingent upon the Bank maintaining a capital level of "well-capitalized."

Included in the brokered deposits total at 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.

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.













                                       49
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The following table shows the distribution of average deposits by account type for the periods indicated below.

                                                                                            Year Ended December 31, 2021
                                                                              Average                                         Average
(Dollars in thousands)                                                        Balance                 Percent                  Rate
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
                                                                              Average                                         Average
(Dollars in thousands)                                                        Balance                 Percent                  Rate
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
                                                                              Average                                         Average
(Dollars in thousands)                                                        Balance                 Percent                  Rate
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  %


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

(Dollars in thousands)         December 31, 2021
Maturing in:
3 months or less              $          124,718
3 months to 6 months                      60,458
6 months to 1 year                        64,470
1 year or greater                         17,668
Total                         $          267,314


Borrowings

Total debt outstanding at December 31, 2021 was $208.4 million, a decrease of
$21.9 million from $230.3 million at December 31, 2020. The decrease in total
borrowings compared to December 31, 2020 was primarily due to the redemption of
$15.0 million of subordinated notes as well as a decrease of $6.0 million in
FHLB long term borrowings.

At December 31, 2021, FHLB advances were secured by a blanket lien on $580.6
million of real estate-related loans, and repurchase agreements were secured by
securities with a fair value of $4.0 million. At December 31, 2020, FHLB
advances were secured by a blanket lien on $512.3 million of real estate-related
loans, and repurchase agreements were secured by securities with a fair value of
$3.7 million.

As of December 31, 2021, the Company had $30.0 million of subordinated notes
outstanding and debt issuance costs of $306 thousand related to these
subordinated notes. As of December 31, 2020, the Company had $45.0 million of
subordinated notes outstanding and debt issuance costs of $408 thousand related
to these subordinated notes.

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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 relating to the components of our short-term borrowings for the periods and dates indicated is as follows:

                                                                          For the year ended December 31,
(Dollars in thousands)                                                          2021                2020                2019
Securities sold under agreements to repurchase
Average daily balance                                                       

$3,001 $730 $547
Weighted average rate during the period

                                               0.25  %             0.30  %             0.30  %
Amount outstanding at period end                                            

$2,342 $3,204 $851
Weighted average rate at the end of the period

                                               0.25  %             0.30  %             0.30  %
Maximum month-end balance                                                   

$3,993 $3,204 $866
FHLB advances Average daily balance

$- $4,085 $26,952
Weighted average rate during the period

                                                  -  %             0.98  %             2.32  %
Amount outstanding at period end                                            

$-$- $60,000
Weighted average rate at the end of the period

                                                  -  %                -  %             1.61  %
Maximum month-end balance                                                   

$- $25,000 $95,000
FHLB Line of Credit Average Daily Balance

$5 $45 $93
Weighted average rate during the period

                                               0.44  %             1.47  %             2.85  %
Amount outstanding at period end                                            

$ – $ – $ – Weighted average rate at the end of the period

         -  %                -  %                -  %
Maximum month-end balance                                                   $        -          $        -          $      895
Federal funds purchased
Average daily balance                                                      

$- $148 $1,679
Weighted average rate during the period

                                                  -  %             1.79  %             2.75  %
Amount outstanding at period end                                            

$-$- $5,000
Weighted average rate at the end of the period

         -  %                -  %             1.90  %
Maximum month-end balance                                                   $        -          $        -          $   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 $24.8 million to $240.1 million at December 31,
2021 compared to $215.3 million at December 31, 2020. The increase in
shareholders' equity was primarily impacted by $32.5 million of net income
generated during the year ended December 31, 2021 and $1.9 million of options
exercised during the year, partially offset by decreases of

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$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)                                                       2021                2020                2019
Balance at beginning of period                                           $  215,327          $  170,703          $  151,760
Net income                                                                   32,478              20,413              16,111
Other comprehensive income (loss)                                            (5,237)              4,590               5,344
Preferred stock offering, net of issuance costs                                   -              23,372                   -
Redeemed stock                                                               (1,364)             (2,648)             (2,165)
Dividends on 7.50% Series B Preferred Stock                                  (1,875)               (479)                  -
Common stock dividends declared                                              (1,838)             (1,542)             (1,236)
Exercise of stock options                                                     1,920                  95                 219
Stock-based compensation expense                                                680                 823                 670
Balance at end of period                                                 $  240,091          $  215,327          $  170,703


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, 2021 and December 31, 2020the capital ratios of the Corporation and the Bank exceeded the requirement to be “well capitalized” under regulatory guidelines.

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

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                                                                                                     Capital Adequacy
                                                                             Capital                    Regulatory                       Well
                                                   Actual                   Adequacy                   Requirement +                 Capitalized
                                                   Capital                 Regulatory              Capital Conservation               Regulatory
                                                    Ratio                  Requirement                   Buffer(1)                   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  %                     6.00  %                       8.50  %                      8.00  %
Total capital to risk-weighted assets:
Consolidated                                           14.76  %                     8.00  %                      10.50  %
Bank                                                   14.37  %                     8.00  %                      10.50  %                     10.00  %
Tier 1 capital to average assets
(leverage ratio):
Consolidated                                            7.93  %                     4.00  %                       4.00  %
Bank                                                    8.86  %                     4.00  %                       4.00  %                      5.00  %
December 31, 2020
Common equity tier 1 to risk-weighted
assets:
Consolidated                                            9.30  %                     4.50  %                       7.00  %
Bank                                                   11.94  %                     4.50  %                       7.00  %                      6.50  %
Tier 1 capital to risk-weighted assets:
Consolidated                                           10.80  %                     6.00  %                       8.50  %
Bank                                                   11.94  %                     6.00  %                       8.50  %                      8.00  %
Total capital to risk-weighted assets:
Consolidated                                           14.91  %                     8.00  %                      10.50  %
Bank                                                   13.20  %                     8.00  %                      10.50  %                     10.00  %
Tier 1 capital to average assets
(leverage ratio):
Consolidated                                            6.93  %                     4.00  %                       4.00  %
Bank                                                    7.67  %                     4.00  %                       4.00  %                      5.00  %

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

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Contractual obligations

In the ordinary course of our operations, we enter into certain contractual
obligations. Total contractual obligations at December 31, 2021 were
$644.7 million, a decrease of $193.9 million from $838.6 million at December 31,
2020. The decrease of $193.9 million was primarily due to decreases of $171.0
million in time deposits and $14.9 million in subordinated notes.

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

                                                                Contractual 

Maturity at December 31, 2021

                                         Less Than               One to               Three to              Over
(Dollars in thousands)                    One Year             Three Years           Five Years          Five Years            Total
Operating lease obligations           $     1,833            $      3,185          $     2,391          $    3,110          $  10,519
Short-term borrowings                       2,342                       -                    -                   -              2,342
Long-term borrowings                       11,254                  33,039                2,047             130,000            176,340
Subordinated notes                              -                       -                    -              29,694             29,694
Time deposits                             359,707                  64,036                2,058                   -            425,801
Total                                 $   375,136            $    100,260          $     6,496          $  162,804          $ 644,696


                                                               Contractual

Maturity at December 31, 2020

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

Off-balance sheet arrangements

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

We maintain an allowance to cover probable losses inherent in our financial
instruments with off-balance sheet risk. At December 31, 2021, the allowance for
off-balance sheet risk was $369 thousand, compared to $490 thousand at December
31, 2020, and was included in "Other liabilities" on our consolidated balance
sheets.

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

                                                                  December 31, 2021                           December 31, 2020
(Dollars in thousands)                                   Fixed Rate           Variable Rate          Fixed Rate           Variable Rate
Commitments to make loans                               $   13,532          

$13,531 $18,269 $17,058
Unused credit lines

                                      49,841                 392,186              28,898                 385,307
Unused standby letters of credit and commercial
letters of credit                                            2,145                       -               2,340                   1,992


Of the total unused lines of credit of $442.0 million at December 31, 2021,
$71.3 million was comprised of undisbursed construction loan commitments. The
Company expects to have sufficient access to liquidity to fund its off-balance
sheet commitments.

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Liquidity

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

At December 31, 2021, we had liquid assets of $639.1 million, compared to
$455.4 million at December 31, 2020. Liquid assets include cash and due from
banks, federal funds sold, interest-bearing deposits with banks and unencumbered
securities available-for-sale. Cash and due from banks increased to $330.1
million, compared to $264.1 million at December 31, 2020 primarily as a result
of forgiveness of PPP loans and new customer growth.

The Bank is a member of the FHLB, which provides short- and long-term funding to
its members through advances collateralized by real estate-related assets and
other select collateral, most typically in the form of debt securities. The
actual borrowing capacity is contingent on the amount of collateral available to
be pledged to the FHLB. As of December 31, 2021, we had $175.1 million of
outstanding borrowings from the FHLB, and these advances were secured by a
blanket lien on $580.6 million of real estate-related loans. Based on this
collateral and the approved policy limits, the Company is eligible to borrow up
to an additional $228.7 million from the FHLB. Additionally, the Bank can borrow
up to $157.5 million through the unsecured lines of credit it has established
with eight other banks, as well as $5.0 million through a secured line with the
Federal Reserve Bank.

Further, because the Bank is "well capitalized," it can accept wholesale funding
up to 40% of total assets, or approximately $1.01 billion, based on current
policy limits at December 31, 2021. Management believed that as of December 31,
2021, we had adequate resources to fund all of our commitments.

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

                                                                               December 31, 2021         December 31, 2020
Investment securities available-for-sale to total assets                                 15.80  %                  12.39  %
Loans to total deposits                                                                  81.01                     87.79
Interest-earning assets to total assets                                                  94.37                     94.64
Interest-bearing deposits to total deposits                                              60.94                     68.49


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