Section 1: 10-Q (10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2018

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

For the transition period from ________ to ____________

LEVEL ONE BANCORP, INC.

(Exact name of registrant as specified in its charter)

Commission File Number: 001-38458

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

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

(248) 737-0300

(Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þNo o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or such shorter period that the registrant was required to submit such files). Yes þNo o

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

Large accelerated filer     o                             Accelerated filer         o

Non-accelerated filer    þ                            Smaller reporting company     o

Emerging growth company    þ

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

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

As of November 8, 2018, the number of shares outstanding of the registrant’s Common Stock, no par value, was 7,750,216 shares.

Level One Bancorp, Inc.

Table of Contents

			Page
Part 1:	Financial Information
	Item 1.	Financial Statements	3
		Consolidated Balance Sheets at September 30, 2018 (Unaudited) and December 31, 2017	3
		Consolidated Statements of Income (Unaudited) for the three and nine months ended September 30, 2018 and 2017	4
		Consolidated Statements of Comprehensive Income (Unaudited) for the three and nine months ended September 30, 2018 and 2017	5
		Consolidated Statements of Changes in Shareholders' Equity (Unaudited) for the three and nine months ended September 30, 2018 and 2017	6
		Consolidated Statements of Cash Flows (Unaudited) for the nine months ended September 30, 2018, and 2017	7
		Notes to the Consolidated Statements	8
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	38
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	63
	Item 4.	Controls and Procedures	65
Part 2:	Other Information
	Item 1.	Legal Proceedings	66
	Item 1A.	Risk Factors	66
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	66
	Item 3.	Defaults Upon Senior Securities	66
	Item 4.	Mine Safety Disclosures	66
	Item 5.	Other Information	66
	Item 6.	Exhibits	67
	Signatures		68

PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LEVEL ONE BANCORP, INC.

CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

(Dollars in thousands)	September 30, 2018			December 31, 2017
Assets
Cash and cash equivalents	$	77,837		$	63,661
Securities available-for-sale	199,051			150,969
Federal Home Loan Bank stock	8,325			8,303
Mortgage loans held for sale, at fair value	9,392			4,548
Loans:
Originated loans	1,022,119			920,895
Acquired loans	92,880			114,028
Total loans	1,114,999			1,034,923
Less: Allowance for loan losses	(11,890		)	(11,713		)
Net loans	1,103,109			1,023,210
Premises and equipment	13,506			13,435
Goodwill	9,387			9,387
Other intangible assets, net	502			667
Bank-owned life insurance	11,785			11,542
Income tax benefit	3,201			3,102
Other assets	10,174			12,467
Total assets	$	1,446,269		$	1,301,291
Liabilities
Deposits:
Noninterest-bearing demand deposits	$	380,369		$	324,923
Interest-bearing demand deposits	50,226			62,644
Money market and savings deposits	238,351			289,363
Time deposits	461,365			443,452
Total deposits	1,130,311			1,120,382
Borrowings	146,483			47,833
Subordinated notes	14,882			14,844
Other liabilities	9,134			10,272
Total liabilities	1,300,810			1,193,331
Shareholders' equity
Common stock:
Authorized—20,000,000 shares
Issued and outstanding—7,749,216 shares at 9/30/2018 and 6,435,461 shares at 12/31/2017	90,411			59,511
Retained earnings	59,173			49,232
Accumulated other comprehensive loss, net of tax	(4,125		)	(783		)
Total shareholders' equity	145,459			107,960
Total liabilities and shareholders' equity	$	1,446,269		$	1,301,291

See accompanying notes to the consolidated financial statements.

3

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF INCOME

(UNAUDITED)

	For the three months ended September 30,				For the nine months ended September 30,
(In thousands, except per share data)	2018		2017		2018		2017
Interest income
Originated loans, including fees	$	12,653	$	10,172	$	35,664	$	29,265
Acquired loans, including fees	2,454		2,610		7,173		9,441
Securities:
Taxable	816		422		2,057		1,238
Tax-exempt	450		260		1,181		641
Federal funds sold and other	256		288		708		648
Total interest income	16,629		13,752		46,783		41,233
Interest Expense
Deposits	2,802		1,604		7,467		4,332
Borrowed funds	502		214		946		614
Subordinated notes	256		256		759		759
Total interest expense	3,560		2,074		9,172		5,705
Net interest income	13,069		11,678		37,611		35,528
Provision expense for loan losses	619		194		463		460
Net interest income after provision for loan losses	12,450		11,484		37,148		35,068
Noninterest income
Service charges on deposits	655		607		1,915		1,905
Net gain on sales of securities	—		118		—		176
Mortgage banking activities	754		548		1,394		1,260
Net gain on sale of commercial loans	—		—		11		146
Other charges and fees	515		668		1,428		1,618
Total noninterest income	1,924		1,941		4,748		5,105
Noninterest expense
Salary and employee benefits	6,888		5,413		19,013		16,003
Occupancy and equipment expense	1,173		1,106		3,293		3,130
Professional service fees	494		603		1,231		1,683
Marketing expense	264		289		697		768
Printing and supplies expense	127		137		343		371
Data processing expense	565		492		1,512		1,384
Other expense	943		1,291		3,205		3,520
Total noninterest expense	10,454		9,331		29,294		26,859
Income before income taxes	3,920		4,094		12,602		13,314
Income tax provision	665		1,259		2,167		4,406
Net income	$	3,255	$	2,835	$	10,435	$	8,908
Earnings per common share:
Basic	$	0.42	$	0.44	$	1.44	$	1.40
Diluted	$	0.41	$	0.43	$	1.41	$	1.35
Average common shares outstanding—basic	7,749		6,392		7,264		6,383
Average common shares outstanding—diluted	7,901		6,610		7,414		6,602
Cash dividends declared per common share	$	0.03	$	—	$	0.09	$	—

See accompanying notes to the consolidated financial statements.

4

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
Net income	$	3,255		$	2,835		$	10,435		$	8,908
Other comprehensive income:
Unrealized holding gains (losses) on securities available-for-sale arising during the period	(1,247		)	(225		)	(4,016		)	1,545
Reclassification adjustment for gains included in income	—			(118		)	—			(176		)
Tax effect(1)	261			120			842			(479		)
Net unrealized gains (losses) on securities available-for-sale, net of tax	(986		)	(223		)	(3,174		)	890
Total comprehensive income, net of tax	$	2,269		$	2,612		$	7,261		$	9,798

^{__________________________________________________________________________} 

⁽¹⁾ Includes $41 thousand and $62 thousand of tax expense related to reclassification for the three and nine months ended September 30, 2017, respectively.

See accompanying notes to the consolidated financial statements.

5

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY

(UNAUDITED)

(Dollar in thousands)	Common Stock		Retained Earnings			Accumulated Other Comprehensive Loss			Total Shareholders' Equity
Balance at June 30, 2017	$	58,755	$	45,464		$	(13	)	$	104,206
Net income	—		2,835			—			2,835
Other comprehensive loss	—		—			(223		)	(223		)
Stock-based compensation expense	167		—			—			167
Balance at September 30, 2017	$	58,922	$	48,299		$	(236	)	$	106,985
Balance at December 31, 2016	$	58,306	$	39,391		$	(1,126	)	$	96,571
Net income	—		8,908			—			8,908
Other comprehensive income	—		—			890			890
Exercise of stock options (12,032 shares), including tax benefit	151		—			—			151
Stock-based compensation expense	465		—			—			465
Balance at September 30, 2017	$	58,922	$	48,299		$	(236	)	$	106,985
Balance at June 30, 2018	$	90,201	$	56,383		$	(3,139	)	$	143,445
Net Income	—		3,255			—			3,255
Other comprehensive loss	—		—			(986		)	(986		)
Common stock dividend of $0.06/share	—		(465		)	—			(465		)
Exercise of stock options (1,100 shares)	12		—			—			12
Stock-based compensation expense, net of tax impact	198		—			—			198
Balance at September 30, 2018	$	90,411	$	59,173		$	(4,125	)	$	145,459
Balance at December 31, 2017	$	59,511	$	49,232		$	(783	)	$	107,960
Net income	—		10,435			—			10,435
Other comprehensive loss	—		—			(3,174		)	(3,174		)
Reclass of tax reform adjustments due to early adoption of ASU 2018-02	—		168			(168		)	—
Initial public offering of 1,150,765 shares of common stock, net of issuance costs	29,030		—			—			29,030
Common stock dividend of $0.09/share	—		(662		)	—			(662		)
Exercise of stock options (126,494 shares)	1,269		—			—			1,269
Stock-based compensation expense, net of tax impact	601		—			—			601
Balance at September 30, 2018	$	90,411	$	59,173		$	(4,125	)	$	145,459

See accompanying notes to the consolidated financial statements.

6

LEVEL ONE BANCORP, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

	For the nine months ended September 30,
(Dollars in thousands)	2018			2017
Cash flows from operating activities
Net income	$	10,435		$	8,908
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation of fixed assets	1,008			1,030
Amortization of core deposit intangibles	165			176
Stock-based compensation expense	615			465
Provision expense for loan losses	463			460
Net securities premium amortization	1,001			557
Net gain on sales of securities	—			(176		)
Originations of loans held for sale	(53,918		)	(45,972		)
Proceeds from sales of loans originated for sale	50,160			51,832
Net gain on sales of loans	(1,550		)	(1,406		)
Accretion on acquired purchase credit impaired loans	(3,076		)	(4,188		)
Gain on sale of other real estate owned	(48		)	(204		)
Increase in cash surrender value of life insurance	(243		)	(246		)
Amortization of debt issuance costs	38			44
Net (increase) decrease in accrued interest receivable and other assets	2,586			(1,586		)
Net increase (decrease) in accrued interest payable and other liabilities	(1,370		)	3,729
Deferred income tax benefit (expense)	(180		)	878
Net cash provided by operating activities	6,086			14,301
Cash flows from investing activities
Net increase in loans	(76,822		)	(22,497		)
Principal payments on securities available-for-sale	7,073			6,687
Purchases of securities available-for-sale	(60,877		)	(59,356		)
Purchases of FHLB Stock	(22		)	(2,475		)
Additions to premises and equipment	(1,100		)	(867		)
Proceeds from:
Sale of securities available-for-sale	704			12,490
Sale of other real estate owned	700			—
Net cash used in investing activities	(130,344		)	(66,018		)
Cash flows from financing activities
Net increase in deposits	9,929			144,950
Change in short-term borrowings	98,702			(5,243		)
Repayment of long-term debt	(52		)	(14,506		)
Net proceeds from issuance of common stock related to initial public offering	29,030			—
Proceeds from exercised stock options	1,269			150
Payments related to tax-withholding for share based compensation awards	(14		)	—
Common stock dividend paid	(430		)	—
Net cash provided by financing activities	138,434			125,351
Net change in cash and cash equivalents	14,176			73,634
Beginning cash and cash equivalents	63,661			19,116
Ending cash and cash equivalents	$	77,837		$	92,750
Supplemental disclosure of cash flow information:
Interest paid	$	8,678		$	5,236
Income taxes paid	1,300			3,485
Transfer of loans held for sale to loans held for investment	453			947
Transfer from premises and equipment to other assets	20			1,794
Transfer from loans to other real estate owned	—			385

See accompanying notes to the consolidated financial statements.

7

LEVEL ONE BANCORP, INC.

NOTES TO THE CONSOLIDATED STATEMENTS

SEPTEMBER 30, 2018

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

Organization and Nature of Operations:

Level One Bancorp, Inc. (the "Company") was organized to become a bank holding company to establish and operate a bank, Level One Bank (the "Bank") in Farmington Hills, Michigan. The Company was incorporated on July 17, 2006 under Michigan law. The Bank began operations on October 5, 2007.

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

On July 9, 2017, the Company formed a new subsidiary, Hamilton Court Insurance Company ("Hamilton Court"), which is a wholly owned insurance subsidiary of the Company that provides property and casualty insurance coverage to the Company and the Bank, and reinsurance to ten other third party insurance captives for which insurance may not be currently available or economically feasible in the insurance marketplace. Hamilton Court was designed to insure the risks of the Company and the Bank by providing additional insurance coverage for deductibles, excess limits and uninsured exposures. Hamilton Court is domiciled in Nevada.

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

Basis of Presentation and Principles of Consolidation:

The accompanying unaudited consolidated financial statements and notes thereto of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission (“SEC”) and conform to practices within the banking industry and include all of the information and disclosures required by generally accepted accounting principles in the United States of America (“GAAP”) for interim financial reporting. The accompanying unaudited consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments) that are necessary for a fair presentation of financial results for the interim periods presented. The results of operations for the interim periods are not necessarily indicative of the results for the full year or any other period. These interim unaudited financial statements should be read in conjunction with the audited consolidated financial statements and the notes thereto as of and for the year ended December 31, 2017, included in our registration statement on Form S-1, as amended, filed with the SEC on April 12, 2018 and declared effective on April 19, 2018.

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

Use of Estimates:

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

8

Emerging Growth Company Status:

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

Recent Accounting Standards:

Revenue Recognition

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

The amendments of ASU 2014-09 may be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying ASU 2014-09 recognized at the date of initial application. The guidance will be effective for the Company for the fiscal years beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2019. The Company plans to adopt these amendments within the time frames stated above.

The Company is continuing to evaluate the impact ASU 2014-09 will have on our consolidated financial statements. Based on this evaluation to date, management has determined that the majority of the revenues earned by the Company are not within the scope of ASU 2014-09, and that a few of the revenue streams that have been identified as being in scope would include service charges and interchange fees. Management will continue to evaluate the impact the adoption of ASU 2014-09 will have on our consolidated financial statements, focusing on noninterest income sources within the scope of ASU 2014-09 as well as new disclosures required by these amendments; however, the adoption of ASU 2014-09 is not expected to have a material impact on the Company's consolidated financial statements but is expected to result in additional disclosures.

Financial Instruments

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

Leases

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

9

components of contracts that would represent a lease as well as requires additional disclosures to the notes of the financial statements.

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

Allowance for Credit Losses

In June 2016, the FASB issued ASU No. 2016-13, "Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments," to replace the current incurred loss methodology for recognizing credit losses, which delays recognition until it is probable a loss has been incurred, with a methodology that reflects an estimate of all expected credit losses and considers additional reasonable and supportable forecasted information when determining credit loss estimates. This impacts the calculation of the allowance for credit losses for all financial assets measured under the amortized cost basis, including PCI loans at the time of and subsequent to acquisition. Additionally, credit losses related to available-for-sale debt securities would be recorded through the allowance for credit losses and not as a direct adjustment to the amortized cost of the securities. The guidance will be effective for the Company for fiscal years beginning after December 15, 2020, including interim periods after that fiscal year, and is to be applied under a modified retrospective approach. The Company is currently evaluating the impact of adopting this new guidance on the consolidated financial statements as well as the impact on current systems and processes. At this time, the Company is reviewing potential methodologies for estimating expected credit losses using reasonable and supportable forecast information as well as has identified certain data and system requirements. Once adopted, we expect our allowance for loan losses to increase through a one-time adjustment to retained earnings; however, until our evaluation is complete, the estimated increase in allowance will be unknown. The Company is planning to adopt this new guidance within the time frames stated above.

Investment Securities

The Company elected to early adopt ASU No. 2017-08, "Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20): Premium Amortization on Purchased Callable Debt Securities ("ASU 2017-08")" during the first quarter of 2017. The guidance in ASU 2017-08 shortens the amortization period for certain callable debt securities that are held at a premium to the earliest call date. Debt securities held at a discount will continue to be amortized as a yield adjustment over the life of the instrument. The early adoption of ASU 2017-08 in the first quarter of 2017 did not have a material impact on the Company's Consolidated Financial Statements.

Income Taxes - Tax Cuts and Jobs Act

In February 2018, the FASB issued ASU No. 2018-02, "Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (Topic 220)," which allows an entity to elect a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act ("TCJA"). The amount of that reclassification should include the effect of changes of tax rate on the deferred tax amount, any related valuation allowance and other income tax effects on the items in AOCI. In addition, the ASU requires that an entity state if an election to reclassify the tax effects to retained earnings is made, along with a description of other income tax effects that are reclassified from AOCI. This guidance is effective for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years, with early adoption permitted. The Company early adopted the ASU and reclassified $168 thousand from retained earnings to AOCI during the first quarter of 2018.

In May 2018, the FASB issued an update to ASU No. 2018-05, "Income Taxes (Topic 740): Amendments to SEC Paragraphs Pursuant to SEC Staff Accounting Bulletin No. 118," regarding the accounting implications of the recently issued TCJA. The update clarifies that in a company's financial statements that include the reporting period in which the TCJA was enacted, a company must first reflect the income tax effects of the TCJA in which the accounting under GAAP is complete. These amounts would not be provisional amounts. The Company would also report provisional amounts for those specific income tax effects for which the accounting under GAAP will be incomplete but for which a reasonable estimate can be determined. This accounting update is effective immediately. The Company believes its accounting for the income tax effects of the TCJA is complete. Technical corrections or other forthcoming guidance could change how we interpret provisions of the TCJA, which may impact our effective tax rate and could affect our deferred tax assets, tax positions and/or our tax liabilities.

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NOTE 2—SECURITIES

The following table summarizes the amortized cost and fair value of the available-for-sale securities portfolio at September 30, 2018 and December 31, 2017 and the corresponding amounts of gross unrealized gains and losses recognized in accumulated other comprehensive loss.

(Dollars in thousands)	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
September 30, 2018
U.S. government sponsored entities & agencies	$	2,401	$	—	$	(74	)	$	2,327
State and political subdivision	71,417		205		(1,419		)	70,203
Mortgage-backed securities: residential	10,413		1		(557		)	9,857
Mortgage-backed securities: commercial	12,662		—		(480		)	12,182
Collateralized mortgage obligations: residential	19,897		138		(459		)	19,576
Collateralized mortgage obligations: commercial	33,027		13		(1,001		)	32,039
U.S. Treasury	24,239		—		(1,272		)	22,967
SBA	16,269		—		(189		)	16,080
Asset backed securities	3,870		5		(12		)	3,863
Corporate Bonds	10,077		—		(120		)	9,957
Total available-for-sale	$	204,272	$	362	$	(5,583	)	$	199,051
December 31, 2017
State and political subdivision	$	52,951	$	602	$	(329	)	$	53,224
Mortgage-backed securities: residential	8,689		3		(261		)	8,431
Mortgage-backed securities: commercial	9,879		12		(72		)	9,819
Collateralized mortgage obligations: residential	19,304		125		(208		)	19,221
Collateralized mortgage obligations: commercial	20,879		11		(333		)	20,557
U.S. Treasury	24,283		—		(710		)	23,573
SBA	12,644		10		(38		)	12,616
Corporate Bonds	3,545		—		(17		)	3,528
Total available-for-sale	$	152,174	$	763	$	(1,968	)	$	150,969

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

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	2018			2017		2018			2017
Proceeds	$	704		$	7,503	$	704		$	12,490
Gross gains	2			118		2			176
Gross losses	(2		)	—		(2		)	—

The amortized cost and fair value of securities are shown in the table below by contractual maturity. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below.

	September 30, 2018
(Dollars in thousands)	Amortized Cost		Fair Value
Within one year	$	1,213	$	1,211
One to five years	53,448		51,656
Five to ten years	36,986		36,012
Beyond ten years	112,625		110,172
Total	$	204,272	$	199,051

11

Securities pledged at September 30, 2018 and December 31, 2017 had a carrying amount of $41.3 million and $36.5 million, respectively, and were pledged to secure Federal Home Loan Bank ("FHLB") advances, Federal Reserve Bank line of credit, repurchase agreements and deposits.

As of September 30, 2018, the Bank held 50 tax-exempt state and local municipal securities totaling $36.2 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments, at September 30, 2018 and December 31, 2017, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.

The following table summarizes securities with unrealized losses at September 30, 2018 and December 31, 2017 aggregated by security type and length of time in a continuous unrealized loss position:

	Less than 12 Months					12 Months or Longer					Total
(Dollars in thousands)	Fair value		Unrealized Losses			Fair value		Unrealized Losses			Fair value		Unrealized Losses
September 30, 2018
Available-for-sale
U.S. government sponsored entities & agencies	$	2,327	$	(74	)	$	—	$	—		$	2,327	$	(74	)
State and political subdivision	35,807		(701		)	15,956		(718		)	51,763		(1,419		)
Mortgage-backed securities: residential	2,669		(47		)	7,119		(510		)	9,788		(557		)
Mortgage-backed securities: commercial	7,683		(298		)	4,500		(182		)	12,183		(480		)
Collateralized mortgage obligations: residential	4,056		(64		)	8,254		(395		)	12,310		(459		)
Collateralized mortgage obligations: commercial	17,566		(363		)	13,496		(638		)	31,062		(1,001		)
U.S. Treasury	2,867		(100		)	20,099		(1,172		)	22,966		(1,272		)
SBA	12,738		(104		)	3,342		(85		)	16,080		(189		)
Asset backed securities	1,927		(12		)	—		—			1,927		(12		)
Corporate Bonds	8,473		(87		)	975		(33		)	9,448		(120		)
Total available-for-sale	$	96,113	$	(1,850	)	$	73,741	$	(3,733	)	$	169,854	$	(5,583	)
December 31, 2017
Available-for-sale
State and political subdivision	$	17,285	$	(127	)	$	6,002	$	(202	)	$	23,287	$	(329	)
Mortgage-backed securities: residential	1,966		(33		)	6,226		(228		)	8,192		(261		)
Mortgage-backed securities: commercial	5,874		(31		)	1,867		(41		)	7,741		(72		)
Collateralized mortgage obligations: residential	4,609		(40		)	7,828		(168		)	12,437		(208		)
Collateralized mortgage obligations: commercial	15,717		(294		)	2,813		(39		)	18,530		(333		)
U.S. Treasury	3,937		(27		)	19,637		(683		)	23,574		(710		)
SBA	8,516		(25		)	367		(13		)	8,883		(38		)
Corporate Bonds	3,528		(17		)	—		—			3,528		(17		)
Total available-for-sale	$	61,432	$	(594	)	$	44,740	$	(1,374	)	$	106,172	$	(1,968	)

As of September 30, 2018, the Company's investment portfolio consisted of 259 securities, 205 of which were in an unrealized loss position. The unrealized losses for these securities resulted primarily from changes in interest rates. The Company expects full recovery of the carrying amount of these securities and does not intend to sell the securities in an unrealized loss position nor does it believe it will be required to sell securities in an unrealized loss position before the value is recovered. The Company does not consider these securities to be other-than-temporarily impaired at September 30, 2018.

12

NOTE 3—LOANS

The following table presents the recorded investment in loans at September 30, 2018 and December 31, 2017. The recorded investment in loans excludes accrued interest receivable.

(Dollars in thousands)	Originated		Acquired		Total
September 30, 2018
Commercial real estate	$	484,614	$	67,967	$	552,581
Commercial and industrial	387,919		9,141		397,060
Residential real estate	148,648		15,708		164,356
Consumer	938		64		1,002
Total	$	1,022,119	$	92,880	$	1,114,999
December 31, 2017
Commercial real estate	$	431,872	$	79,890	$	511,762
Commercial and industrial	365,679		12,007		377,686
Residential real estate	122,551		21,888		144,439
Consumer	793		243		1,036
Total	$	920,895	$	114,028	$	1,034,923

Information as to nonperforming assets was as follows:

(Dollars in thousands)	September 30, 2018		December 31, 2017
Nonaccrual loans:
Commercial real estate	$	4,559	$	2,257
Commercial and industrial	5,763		9,024
Residential real estate	2,546		2,767
Consumer	5		—
Total nonperforming loans	12,873		14,048
Other real estate owned	—		652
Total nonperforming assets	$	12,873	$	14,700
Loans 90 days or more past due and still accruing	$	354	$	440

The loans 90 days or more past due and still accruing consisted of $341 thousand of PCI loans and $13 thousand of restructured PCI loans as of September 30, 2018 and $440 thousand of PCI loans as of December 31, 2017.

13

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

(Dollars in thousands)	Current		30 - 59 Days Past Due		60 - 89 Days Past Due		90+ Days Past Due		Total
September 30, 2018
Commercial real estate	$	549,992	$	2,515	$	74	$	—	$	552,581
Commercial and industrial	392,685		3,305		916		154		397,060
Residential real estate	159,376		2,414		1,255		1,311		164,356
Consumer	997		—		—		5		1,002
Total	$	1,103,050	$	8,234	$	2,245	$	1,470	$	1,114,999
December 31, 2017
Commercial real estate	$	507,250	$	3,066	$	1,412	$	34	$	511,762
Commercial and industrial	373,829		1,397		2,455		5		377,686
Residential real estate	138,613		3,808		1,258		760		144,439
Consumer	985		51		—		—		1,036
Total	$	1,020,677	$	8,322	$	5,125	$	799	$	1,034,923

Impaired Loans:

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

(Dollars in thousands)	September 30, 2018		December 31, 2017
Nonaccrual loans	$	12,873	$	14,048
Performing troubled debt restructurings:
Commercial real estate	1,511		—
Commercial and industrial	574		961
Residential real estate	365		261
Total performing troubled debt restructurings	2,450		1,222
Total impaired loans, excluding purchase credit impaired loans	$	15,323	$	15,270

Troubled Debt Restructurings:

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

As of September 30, 2018 and December 31, 2017, the Company had a recorded investment in troubled debt restructurings of $8.7 million and $7.6 million, respectively. The Company has allocated a specific reserve of $938 thousand for those loans at September 30, 2018 and a specific reserve of $975 thousand for those loans at December 31, 2017. The Company has not committed to lend additional amounts to borrowers whose loans have been modified. As of September 30, 2018, there were $6.2 million of nonperforming TDRs and $2.5 million of performing TDRs included in impaired loans. As of December 31, 2017, there were $6.4 million of nonperforming TDRs and $1.2 million of performing TDRs included in impaired loans.

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

14

The following table presents the recorded investment of loans modified as TDRs during the nine months ended September 30, 2018 and the three and nine months ended September 30, 2017, by type of concession granted. There were no loans modified as TDRs during the three months ended September 30, 2018. In cases where more than one type of concession was granted, the loans were categorized based on the most significant concession.

	Concession type									Financial effects of modification
(Dollars in thousands)	Principal deferral		Interest rate		Forbearance agreement		Total number of loans	Total recorded investment		Net charge-offs		Provision for loan losses
For the three months ended September 30, 2017
Commercial and industrial	$	—	$	—	$	4,408	5	$	4,408	$	—	$	547
Residential real estate	784		—		—		1	784		—		—
Total	$	784	$	—	$	4,408	6	$	5,192	$	—	$	547
For the nine months ended September 30, 2018
Commercial real estate	$	—	$	—	$	2,087	4	$	2,087	$	101	$	—
Commercial and industrial	133		—		990		3	1,123		—		—
Residential real estate	—		—		112		2	112		—		5
Total	$	133	$	—	$	3,189	9	$	3,322	$	101	$	5
For the nine months ended September 30, 2017
Commercial and industrial	$	—	$	—	$	4,408	5	$	4,408	$	—	$	547
Residential real estate	784		361		—		3	1,145		—		—
Total	$	784	$	361	$	4,408	8	$	5,553	$	—	$	547

On an ongoing basis, the Company monitors the performance of TDRs to their modified terms. The following tables present the number of loans modified in TDRs during the previous 12 months for which there was payment default during the three and nine months ended September 30, 2018 and September 30, 2017, including the recorded investment as of each period end. A payment on a TDR is considered to be in default once it is greater than 30 days past due.

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

	Three months ended September 30, 2017					Nine months ended September 30, 2017
(Dollars in thousands)	Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default		Total number of loans	Total recorded investment		Provision for loan losses following a subsequent default
Residential real estate	1	$	301	$	—	1	$	301	$	—
Total	1	$	301	$	—	1	$	301	$	—

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:

15

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

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

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

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

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

(Dollars in thousands)	Pass		Special Mention		Substandard		Doubtful		Total
September 30, 2018
Commercial real estate	$	535,570	$	10,762	$	6,208	$	41	$	552,581
Commercial and industrial	376,155		4,707		16,089		109		397,060
Total	$	911,725	$	15,469	$	22,297	$	150	$	949,641
December 31, 2017
Commercial real estate	$	492,731	$	10,664	$	8,323	$	44	$	511,762
Commercial and industrial	361,740		5,945		9,963		38		377,686
Total	$	854,471	$	16,609	$	18,286	$	82	$	889,448

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

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

(Dollars in thousands)	Performing		Nonperforming		Total
September 30, 2018
Residential real estate	$	161,810	$	2,546	$	164,356
Consumer	997		5		1,002
Total	$	162,807	$	2,551	$	165,358
December 31, 2017
Residential real estate	$	141,672	$	2,767	$	144,439
Consumer	1,036		—		1,036
Total	$	142,708	$	2,767	$	145,475

Purchased Credit Impaired Loans:

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

16

(Dollars in thousand)	Unpaid Principal Balance		Recorded Investment
September 30, 2018
Commercial real estate	$	9,500	$	5,537
Commercial and industrial	338		111
Residential real estate	5,043		3,413
Total PCI loans	$	14,881	$	9,061
December 31, 2017
Commercial real estate	$	10,084	$	5,771
Commercial and industrial	808		417
Residential real estate	4,068		3,558
Total PCI loans	$	14,960	$	9,746

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

	Three months ended September 30						Nine months ended September 30
(Dollars in thousands)	2018			2017			2018			2017
Balance at beginning of period	$	12,390		$	16,850		$	14,452		$	19,893
Accretion of income	(1,167		)	(1,011		)	(3,076		)	(4,188		)
Adjustments to accretable yield	—			(1		)	(159		)	133
Other activity, net	—			—			6			—
Balance at end of period	$	11,223		$	15,838		$	11,223		$	15,838

"Accretion of income" represents the income earned on these loans for the year. "Adjustments to accretable yield" represents the net amount of accretable yield added or removed as a result of the semi-annual re-estimation of expected cash flows.

For the nine months ended September 30, 2018 and year ended December 31, 2017, respectively, allowance for loans losses on PCI loans decreased by $96 thousand and increased by $234 thousand.

17

NOTE 4—ALLOWANCE

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

The Company established an allowance for loan losses associated with PCI loans (accounted for under ASC 310-30) based on credit deterioration subsequent to the acquisition date. As of September 30, 2018, the Company had six PCI loan pools and 12 non-pooled PCI loans. The Company re-estimates cash flows expected to be collected for PCI loans on a semi-annual basis, with any decline in expected cash flows recorded as provision for loan losses on a discounted basis during the period. For any increases in cash flows expected to be collected, the Company adjusts the amount of accretable yield recognized on a prospective basis over the loan's remaining life.

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

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

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

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

18

Information as to loans individually evaluated for impairment, including impaired PCI loans, is as follows:

(Dollars in thousands)	Recorded with no related allowance		Recorded with related allowance		Total recorded investment		Contractual principal balance		Related allowance
September 30, 2018
Individually evaluated impaired loans:
Commercial real estate	$	6,039	$	5,183	$	11,222	$	15,362	$	828
Commercial and industrial	2,927		3,379		6,306		7,532		982
Residential real estate	1,681		3,262		4,943		6,672		145
Total	$	10,647	$	11,824	$	22,471	$	29,566	$	1,955
December 31, 2017
Individually evaluated impaired loans:
Commercial real estate	$	2,222	$	5,339	$	7,561	$	13,536	$	876
Commercial and industrial	5,238		5,059		10,297		11,677		1,549
Residential real estate	1,696		3,132		4,828		6,502		154
Total	$	9,156	$	13,530	$	22,686	$	31,715	$	2,579

(Dollars in thousands)	Average Recorded Investment		Interest Income Recognized		Cash Basis Interest Recognized
For the three months ended September 30, 2018
Individually evaluated impaired loans:
Commercial real estate	$	9,524	$	430	$	142
Commercial and industrial	6,559		22		—
Residential real estate	5,217		90		—
Total	$	21,300	$	542	$	142
For the nine months ended September 30, 2018
Individually evaluated impaired loans:
Commercial real estate	$	9,258	$	1,275	$	142
Commercial and industrial	7,736		71		112
Residential real estate	5,256		277		—
Total	$	22,250	$	1,623	$	254
For the three months ended September 30, 2017
Individually evaluated impaired loans:
Commercial real estate	$	6,554	$	403	$	—
Commercial and industrial	11,542		59		—
Residential real estate	4,170		74		—
Total	$	22,266	$	536	$	—
For the nine months ended September 30, 2017
Individually evaluated impaired loans:
Commercial real estate	$	6,225	$	1,318	$	—
Commercial and industrial	13,301		179		—
Residential real estate	4,431		231		—
Total	$	23,957	$	1,728	$	—

19

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

(Dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Consumer			Total
For the three months ended September 30, 2018
Allowance for loan losses:
Beginning Balance	$	5,060		$	5,423		$	977		$	5		$	11,465
Provision for loan losses	34			475			101			9			619
Gross chargeoffs	—			(237		)	—			(8		)	(245		)
Recoveries	23			8			19			1			51
Net (chargeoffs) recoveries	23			(229		)	19			(7		)	(194		)
Ending Allowance for loan losses	$	5,117		$	5,669		$	1,097		$	7		$	11,890
For the nine months ended September 30, 2018
Allowance for loan losses:
Beginning Balance	$	4,852		$	5,903		$	950		$	8		$	11,713
Provision for loan losses	352			(53		)	143			21			463
Gross chargeoffs	(112		)	(995		)	(47		)	(23		)	(1,177		)
Recoveries	25			814			51			1			891
Net (chargeoffs) recoveries	(87		)	(181		)	4			(22		)	(286		)
Ending Allowance for loan losses	$	5,117		$	5,669		$	1,097		$	7		$	11,890
September 30, 2018
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	957		$	13		$	—		$	970
Collectively evaluated for impairment	4,289			4,687			952			7			9,935
Acquired with deteriorated credit quality	828			25			132			—			985
Ending Allowance for loan losses	$	5,117		$	5,669		$	1,097		$	7		$	11,890
Balance of loans:
Individually evaluated for impairment	$	6,039		$	6,194		$	1,870		$	—		$	14,103
Collectively evaluated for impairment	541,005			390,755			159,073			1,002			1,091,835
Acquired with deteriorated credit quality	5,537			111			3,413			—			9,061
Total loans	$	552,581		$	397,060		$	164,356		$	1,002		$	1,114,999

20

(Dollars in thousands)	Commercial Real Estate			Commercial and Industrial			Residential Real Estate			Consumer		Total
For the three months ended September 30, 2017
Allowance for loan losses:
Beginning Balance	$	4,829		$	5,749		$	821		$	5	$	11,404
Provision for loan losses	(412		)	710			(104		)	—		194
Gross chargeoffs	—			(38		)	(3		)	—		(41		)
Recoveries	2			16			55			—		73
Net (chargeoffs) recoveries	2			(22		)	52			—		32
Ending Allowance for loan losses	$	4,419		$	6,437		$	769		$	5	$	11,630
For the nine months ended September 30, 2017
Allowance for loan losses:
Beginning Balance	$	4,124		$	5,932		$	1,030		$	3	$	11,089
Provision for loan losses	279			465			(285		)	1		460
Gross chargeoffs	—			(139		)	(86		)	—		(225		)
Recoveries	16			179			110			1		306
Net (chargeoffs) recoveries	16			40			24			1		81
Ending Allowance for loan losses	$	4,419		$	6,437		$	769		$	5	$	11,630
December 31, 2017
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	1,480		$	18		$	—	$	1,498
Collectively evaluated for impairment	3,976			4,354			796			8		9,134
Acquired with deteriorated credit quality	876			69			136			—		1,081
Ending Allowance for loan losses	$	4,852		$	5,903		$	950		$	8	$	11,713
Balance of loans:
Individually evaluated for impairment	$	2,222		$	9,976		$	1,778		$	—	$	13,976
Collectively evaluated for impairment	503,769			367,293			139,103			1,036		1,011,201
Acquired with deteriorated credit quality	5,771			417			3,558			—		9,746
Total loans	$	511,762		$	377,686		$	144,439		$	1,036	$	1,034,923

21

NOTE 5—PREMISES AND EQUIPMENT

Premises and equipment were as follows at September 30, 2018 and December 31, 2017:

(Dollars in thousands)	September 30, 2018		December 31, 2017
Land	$	2,197	$	2,197
Building	9,746		9,132
Leasehold improvements	1,691		1,655
Furniture, fixtures and equipment	5,986		5,614
Total premises and equipment	$	19,620	$	18,598
Less: Accumulated depreciation	6,114		5,163
Net premises and equipment	$	13,506	$	13,435

Depreciation expense was $345 thousand and $333 thousand for the three months ended September 30, 2018 and 2017, respectively, and $1,008 thousand and $1,030 thousand for the nine months ended September 30, 2018 and 2017, respectively.

Most of the Company's branch facilities are rented under non-cancelable operating lease agreements. Total rent expense for the three months ended September 30, 2018 and 2017, was $285 thousand and $288 thousand respectively, and $790 thousand and $662 thousand for the nine months ended September 30, 2018 and 2017, respectively.

NOTE 6—GOODWILL AND INTANGIBLE ASSETS

Goodwill:    The Company acquired two banks, Lotus Bank in March 2015 and Bank of Michigan in March 2016, which resulted in the recognition of $4.6 million and $4.8 million of goodwill, respectively. Goodwill was $9.4 million at both September 30, 2018 and December 31, 2017.

Goodwill is not amortized but is evaluated at least annually for impairment. The Company's most recent annual goodwill impairment review performed with September 30, 2017 data did not indicate that an impairment of goodwill existed. The Company also determined that no triggering events have occurred that indicated impairment from the most recent valuation date through September 30, 2018 and that the Company's goodwill was not impaired at September 30, 2018.

There was no change in goodwill for the three and nine months ended September 30, 2018 and year ended December 31, 2017.

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

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

(Dollars in thousands)	September 30, 2018			December 31, 2017
Gross carrying amount	$	2,045		$	2,045
Accumulated amortization	(1,543		)	(1,378		)
Net Intangible	$	502		$	667

Aggregate amortization expense was $55 thousand and $59 thousand for the three months ended September 30, 2018 and 2017, respectively, and $165 thousand and $176 thousand for the nine months ended September 30, 2018 and 2017, respectively.

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NOTE 7 —BORROWINGS AND SUBORDINATED DEBT

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

	September 30, 2018				December 31, 2017
(Dollars in thousands)	Amount		Weighted Average Rate(1)		Amount		Weighted Average Rate(1)
Short-term borrowings:
Securities sold under agreements to repurchase	10,021		2.34		1,319		0.30
FHLB Advances	125,000		1.94		35,000		1.25
Total short-term borrowings	135,021		1.97		36,319		1.22
Long-term debt:
Secured borrowing due in 2022	1,462		1.00		1,514		1.00
FHLB advances due in 2022	10,000		1.75		10,000		1.75
Subordinated notes due in 2025(2)	14,882		6.38		14,844		6.38
Total long-term debt	26,344		4.32		26,358		4.31
Total short-term and long-term borrowings	$	161,365	2.35	%	$	62,677	2.52	%

_______________________________________________________________________________

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

⁽²⁾ The September 30, 2018 balance includes subordinated notes of $15.0 million and debt issuance costs of $118 thousand. The December 31, 2017 balance includes subordinated notes of $15.0 million and debt issuance costs of $156 thousand.

The Bank is a member of the FHLB of Indianapolis, which provides short- and long-term funding collateralized by mortgage-related assets to its members. FHLB short-term borrowings bear interest at variable rates based on LIBOR. The advances were secured by a blanket lien on $368.5 million of real estate-related loans as of September 30, 2018. Based on this collateral and the Company's holdings of FHLB stock, the Company was eligible to borrow up to an additional $78 million at September 30, 2018.

At September 30, 2018, the Company had $418 thousand of securities sold under agreements to repurchase with customers, which mature overnight. These borrowings were secured by residential collateralized mortgage obligation securities with a fair value of $1.8 million at September 30, 2018. Additionally, at September 30, 2018, the Company had $9.6 million of U.S. Treasury securities sold under agreements to repurchase with a correspondent bank, which mature on October 29, 2018, and were secured by securities with a fair value of $9.6 million.

The Company had a secured borrowing of $1.5 million as of September 30, 2018 relating to certain loan participations sold by the Company that did not qualify for sales treatment. The secured borrowing bears a fixed rate of 1.00% and matures on September 15, 2022.

As of September 30, 2018, the Company had outstanding $15.0 million of subordinated notes. The notes bear a fixed interest rate of 6.375% per annum, payable semiannually through December 15, 2020. The notes will bear a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly after December 15, 2020 through maturity. The notes mature no later than December 15, 2025, and the Company has the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 15, 2020 or upon an occurrence of a Tier 2 capital event or tax event. The notes are subordinated to all other borrowings. At September 30, 2018, there was $118 thousand of debt issuance costs remaining, which are netted against the balance of the subordinated notes and recognized as expense over the expected term of the notes.

23

Selected financial information pertaining to the components of our short-term borrowings is as follows:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
FHLB Line of Credit
Average Daily Balance	$	3,026		$	45		$	4,085		$	2,347
Weighted-average rate	2.40		%	1.40		%	2.06		%	0.91		%
Maximum month-end balance	$	37,081		$	—		$	37,081		$	20,551
Securities sold under agreements to repurchase
Average Daily Balance	$	9,824		$	707		$	4,413		$	806
Weighted-average rate	2.34		%	0.30		%	2.34		%	0.30		%
Maximum month-end balance	$	10,276		$	896		$	10,761		$	1,085
FHLB Advances
Average Daily Balance	$	71,054		$	74,140		$	47,077		$	33,224
Weighted-average rate	2.14		%	1.13		%	1.94		%	0.92		%
Maximum month-end balance	$	125,000		$	72,000		$	125,000		$	120,000

NOTE 8—INCOME TAXES

The Company records its federal income tax expense using its estimate of the effective income tax rate expected for the full year and applies that rate on a year-to-date basis. The fluctuations in the Company’s effective federal income tax rate reflect changes related to interest income exempt from federal taxation and other nondeductible expenses relative to income tax credits.

A reconciliation of expected income tax expense using the federal corporate tax rate of 21% and 35% as of September 30, 2018 and 2017, respectively, and actual income tax expense is as follows:

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
Income tax expense based on federal corporate tax rate	$	823		$	1,433		$	2,646		$	4,660
Changes resulting from:
Tax-exempt income	104			120			289			307
Other, net	(262		)	(294		)	(768		)	(561		)
Income tax expense	$	665		$	1,259		$	2,167		$	4,406

NOTE 9—STOCK BASED COMPENSATION

2007 Stock Option Plan

On January 16, 2008, the shareholders of the Company approved the Level One Bancorp, Inc. 2007 Stock Option Plan (the "Stock Option Plan"). The Stock Option Plan was intended to promote equity ownership of the Company by (i) selected officers and employees of the Company and the Bank; (ii) directors of the Company and the Bank; and (iii) the organizers. Such ownership was intended to promote the proprietary interest of the individuals to whom stock options will be granted ("Optionees"), to attract and retain qualified officers, employees and directors, and to further align the interests of Optionees with the interests of the Company's shareholders.

The Company's Board of Directors had reserved (with consent of the Company's shareholders) 630,265 shares of common stock for issuance under the Stock Option Plan. During the nine months ended September 30, 2018, the Company granted 30,000 stock options. No options were granted during the nine months ended September 30, 2017.

24

The term of the options is ten years and options vest over three years, one-third each year. The Company will use authorized but unissued shares to satisfy share option exercises. The fair value of each option award is estimated on the date of grant using a closed form option valuation (Black-Scholes) model.

Expected volatilities are based on historical volatilities of the Company's common stock. The Company assumes all awards will vest. The expected term of options granted represents the period of time that options granted are expected to be outstanding, which takes into account that the options are not transferable. The risk-free interest rate for the expected term of the option is based on the U.S. Treasury yield curve in effect at the time of the grant. The fair value of the stock options granted was determined using the following weighted-average assumptions as of grant date:

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

The employee stock option activity for the nine months ended September 30, 2018 is summarized below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at 1/1/2018	484,147		$	13.96	4.76	$	6,700
Granted	30,000		24.80
Exercised	(126,494	)	10.04
Forfeited	(9,885	)	10.00
Outstanding at 9/30/2018	377,768		$	16.24	6.05	$	4,367
Exercisable at 9/30/2018	318,263		$	15.02	5.61	$	4,069

Share-based compensation expense charged against income was $38 thousand and $39 thousand for the three months ended September 30, 2018 and 2017, and $128 thousand for both the nine months ended September 30, 2018 and 2017, respectively.

As of September 30, 2018, there was $132 thousand of total unrecognized compensation cost related to stock options granted under the Stock Option Plan. The cost is expected to be recognized over a weighted-average period of 1.4 years.

2014 Equity Incentive Plan

Under the 2014 Equity Incentive Plan ("2014 Plan"), the Company could grant restricted stock awards to its directors ("Plan A") and employees ("Plan B"). Restricted stock awards are participating shares that vest upon completion of future service requirements. If an individual awarded restricted stock awards terminates employment prior to the end of the vesting period, the unvested portion of the stock award is forfeited. The fair value of these awards is equal to the fair value of the stock as of the issuance date. The Company recognizes stock-based compensation expense for these awards over the vesting period, using the straight-line method, based upon the number of shares of restricted stock ultimately expected to vest.

The Company had reserved 150,000 shares of common stock for issuance under the 2014 Plan. During the nine months ended September 30, 2018, the Company granted 30,271 restricted stock awards under the 2014 Plan.

2018 Equity Incentive Plan

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

25

The Company has reserved 250,000 shares of common stock for issuance under the 2018 Plan. During the nine months ended September 30, 2018, the Company granted 6,750 restricted stock awards under the 2018 Plan.

A summary of changes in the Company's nonvested shares for the nine months ended September 30, 2018 is as follows:

Nonvested Shares	Shares		Weighted Average Grant-Date Fair Value
Nonvested at 1/1/2018	30,150		$	22.03
Granted	37,021		25.53
Vested	(10,747	)	22.81
Nonvested at 9/30/2018	56,424		$	24.18

Total expense for restricted stock awards totaled $175 thousand and $128 thousand for the three months ended September 30, 2018 and 2017, and $487 thousand and $337 thousand for the nine months ended September 30, 2018 and 2017, respectively. As of September 30, 2018, there was $858 thousand of total unrecognized compensation cost related to nonvested shares granted under the 2014 Plan and 2018 Plan. The cost is expected to be recognized over a weighted average period of 2.0 years. The total fair value of shares vested during the three and nine months ended September 30, 2018, was $114 thousand and $245 thousand respectively.

26

NOTE 10—OFF-BALANCE SHEET ACTIVITIES

In the normal course of business, the Company offers a variety of financial instruments with off-balance sheet risk to meet the financing needs of its customers. These financial instruments include outstanding commitments to extend credit, credit lines, commercial letters of credit and standby letters of credit. These 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.

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

	September 30, 2018				December 31, 2017
(Dollars in thousands)	Fixed		Variable		Fixed		Variable
Commitments to make loans	$	16,273	$	2,325	$	5,041	$	8,837
Unused lines of credit	14,121		213,270		12,407		189,787
Unused standby letters of credit	3,705		232		3,584		1,411

Commitments to make loans are generally made for periods of 90 days or less. The fixed rate loan commitments have interest rates ranging from 4.75% to 6.15% and maturities ranging from 1 to 10 years.

NOTE 11—REGULATORY CAPITAL MATTERS

Banks and bank holding companies are subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and, additionally for banks, prompt corrective action regulations, involve quantitative measures of assets, liabilities, and certain off-balance sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators. Failure to meet capital requirements can initiate regulatory action. Management believed as of September 30, 2018, the Company and Bank met all capital adequacy requirements to which they were subject.

During the first quarter of 2015, regulations implementing the Basel III regulatory capital framework and the Dodd-Frank Wall Street Reform and Consumer Protection Act became effective, certain provisions of which are subject to a multi-year phase-in period. These rules modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. When fully phased in on January 1, 2019, the rules will require the Company to maintain a capital conservation buffer of common equity capital that exceeds by more than 2.5% the minimum risk-weighted assets ratios. The capital conservation buffer was 1.875% at September 30, 2018 and was 1.25% at December 31, 2017.

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

At September 30, 2018 and December 31, 2017, the most recent regulatory notifications categorized the Bank as "well capitalized" under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category.

27

Actual and required capital amounts and ratios are presented below:

	Actual				For Capital Adequacy Purposes				For Capital Adequacy Purposes + Capital Conservation Buffer(1)				Well Capitalized Under Prompt Corrective Action Provisions
(Dollars in thousands)	Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2018
Common equity tier 1 to risk-weighted assets:
Consolidated	$	140,050	11.75	%	$	53,657	4.50	%	$	76,074	6.38	%
Bank	143,368		12.00	%	53,757		4.50	%	76,215		6.38	%	$	77,649	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	$	140,050	11.75	%	$	71,543	6.00	%	$	93,959	7.88	%
Bank	143,368		12.00	%	71,676		6.00	%	94,134		7.88	%	$	95,567	8.00	%
Total capital to risk-weighted assets:
Consolidated	$	166,852	13.99	%	$	95,390	8.00	%	$	117,807	9.88	%
Bank	155,288		13.00	%	95,567		8.00	%	118,026		9.88	%	$	119,459	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	$	140,050	10.31	%	$	54,344	4.00	%	$	54,344	4.00	%
Bank	143,368		10.62	%	54,018		4.00	%	54,018		4.00	%	$	67,522	5.00	%
December 31, 2017
Common equity tier 1 to risk-weighted assets:
Consolidated	$	98,912	9.10	%	$	48,904	4.50	%	$	62,488	5.75	%
Bank	111,781		10.29	%	48,891		4.50	%	62,472		5.75	%	$	70,620	6.50	%
Tier 1 capital to risk-weighted assets:
Consolidated	$	98,912	9.10	%	$	65,205	6.00	%	$	78,790	7.25	%
Bank	111,781		10.29	%	65,188		6.00	%	78,768		7.25	%	$	86,917	8.00	%
Total capital to risk-weighted assets:
Consolidated	$	125,472	11.55	%	$	86,940	8.00	%	$	100,525	9.25	%
Bank	123,496		11.37	%	86,917		8.00	%	100,498		9.25	%	$	108,646	10.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	$	98,912	7.92	%	$	49,978	4.00	%	$	49,978	4.00	%
Bank	111,781		8.96	%	49,893		4.00	%	49,893		4.00	%	$	62,366	5.00	%

_______________________________________________________________________________

⁽¹⁾Reflects the capital conservation buffer of 1.875% and 1.25% applicable during 2018 and 2017, respectively.

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NOTE 12—FAIR VALUE

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

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

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

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

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

Investment Securities:    Securities available for sale are recorded at fair value on a recurring basis as follows: the fair values for investment securities are determined by quoted market prices, if available (Level 1). For securities where quoted prices are not available, fair values are calculated based on market prices of similar securities (Level 2). No securities are valued using a Level 3 approach.

Interest Rate Contracts: The fair values of derivatives are based on valuation models using observable market data as of the measurement date (Level 2).

Loans Held for Sale, at Fair Value:    The fair value of loans held for sale is determined using quoted prices for similar assets, adjusted for specific attributes of that loan (Level 2). Mortgage banking related derivatives including interest rate locks with customers and commitments to sell loans are also recorded at fair value using observable market data as of the measurement date (Level 2) but were not significant for the periods ended September 30, 2018 or December 31, 2017.

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

Impaired Loans:    The fair value of impaired loans with specific allocations of the allowance for loan losses is generally based on recent real estate or collateral appraisals. These appraisals may utilize a single valuation approach or a combination of approaches including comparable sales and the income approach. Adjustments are routinely made in the appraisal process by the appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower's financial statements, or aging reports, adjusted or discounted based on management's historical knowledge, changes in market conditions from the time of the valuation, and management's expertise and knowledge of the client and client's business, resulting in a Level 3 fair value classification.

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

Appraisals for both collateral-dependent impaired loans and real estate owned are performed by certified general appraisers (for commercial properties) or certified residential appraisers (for residential properties) whose qualifications and licenses have been reviewed and verified by the Company. Once received, management reviews the assumptions and approaches utilized in the appraisal as well as the overall resulting fair value in comparison with independent data sources such as recent market data or industry-wide statistics. Management monitors the actual selling price of collateral that has been sold to the most recent appraised value to determine what additional adjustment should be made to the appraisal value to arrive at fair value.

29

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

(Dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2018
Securities available for sale:
U.S. government sponsored entities and agencies	$	2,327	$	—	$	2,327	$	—
State and political subdivision	70,203		—		70,203		—
Mortgage-backed securities: residential	9,857		—		9,857		—
Mortgage-backed securities: commercial	12,182		—		12,182
Collateralized mortgage obligations: residential	19,576				19,576		—
Collateralized mortgage obligations: commercial	32,039		—		32,039		—
U.S. Treasury	22,967		—		22,967		—
SBA	16,080		—		16,080		—
Asset backed securities	3,863		—		3,863		—
Corporate Bonds	9,957		—		9,957		—
Total securities available for sale	199,051		—		199,051		—
Loans held for sale	9,392		—		9,392		—
Loans measured at fair value:
Residential real estate	4,487		—		—		4,487
Other assets (interest rate swaps)	17				17
Total assets at fair value	$	212,947	$	—	$	208,460	$	4,487
Other liabilities (interest rate swaps)	17		—		17		—
Total liabilities at fair value	$	17	$	—	$	17	$	—
December 31, 2017
Securities available for sale:
State and political subdivision	$	53,224	$	—	$	53,224	$	—
Mortgage-backed securities: residential	8,431		—		8,431		—
Mortgage-backed securities: commercial	9,819		—		9,819		—
Collateralized mortgage obligations: residential	19,221		—		19,221		—
Collateralized mortgage obligations: commercial	20,557		—		20,557		—
U.S. Treasury	23,573		—		23,573		—
SBA	12,616		—		12,616		—
Corporate Bonds	3,528		—		3,528		—
Total securities available for sale	$	150,969	$	—	$	150,969	$	—
Loans held for sale	4,548		—		4,548		—
Loans measured at fair value:
Residential real estate	4,291		—		—		4,291
Total assets at fair value	$	159,808	$	—	$	155,517	$	4,291

There were no transfers between levels within the fair value hierarchy, within a specific category, during the nine months ended September 30, 2018.

30

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

(Dollars in thousands)	Loans held for investment
For the three months ended September 30, 2018
Beginning balance	$	4,414
Transfers from loans held for sale	149
Gains (losses):
Recorded in "Mortgage banking activities"	(32		)
Repayments	(44		)
Ending balance	$	4,487
For the nine months ended September 30, 2018
Beginning balance	$	4,291
Transfers from loans held for sale	453
Gains (losses):
Recorded in "Mortgage banking activities"	(144		)
Repayments	(113		)
Ending balance	$	4,487

The Company has elected the fair value option for loans held for sale. These loans are intended for sale and the Company believes that the fair value is the best indicator of the resolution of these loans. Interest income is recorded based on the contractual terms of the loan and in accordance with the Company's policy on loans held for investment. There were no loans held for sale that were on nonaccrual status or 90 days past due as of September 30, 2018 and December 31, 2017.

As of September 30, 2018 and December 31, 2017, the aggregate fair value, contractual balance (including accrued interest), and gain or loss for loans held for sale carried at fair value was as follows:

(Dollars in thousands)	September 30, 2018		December 31, 2017
Aggregate fair value	$	9,392	$	4,548
Contractual balance	9,210		4,466
Unrealized gain	182		82

The total amount of gains (losses) from changes in fair value of loans held for sale included in "Mortgage banking activities" were as follows:

	For the three months ended September 30,					For the nine months ended September 30,
(Dollars in thousands)	2018		2017			2018		2017
Change in fair value	$	69	$	(5	)	$	100	$	(154	)

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

(Dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2018
Impaired loans:
Commercial and industrial	$	185	$	—	$	—	$	185
Total	$	185	$	—	$	—	$	185
December 31, 2017
Other real estate owned	$	652	$	—	$	—	$	652
Other assets (1)	1,654		—		—		1,654
Total	$	2,306	$	—	$	—	$	2,306

(1) Impaired other assets represent building and furniture held-for-sale, which had a writedown of $140 thousand during the year ended December 31, 2017 and a writedown of $10 thousand during the nine months ended September 30, 2018. The building held for sale was sold prior to September 30, 2018.

At September 30, 2018, the Company had reduced the carrying value of its impaired loans (all of which are included in nonaccrual loans) by $233 thousand to the estimated fair value of $185 thousand. The $233 thousand adjustment to reduce the carrying value of such impaired loans to estimated fair value consisted of partial charge-offs and no specific allowance allocations for loan losses. There were no impaired loans at fair value at December 31, 2017.

Other real estate owned measured at fair value had a net carrying amount of $652 thousand at December 31, 2017. There were no write downs in other real estate owned during the year ended December 31, 2017. There were no other real estate owned assets at fair value at September 30, 2018.

The table below presents quantitative information about the significant unobservable inputs for assets measured at fair value on a nonrecurring basis at September 30, 2018 and December 31, 2017:

(Dollars in thousands)	Fair value at September 30, 2018		Valuation Technique(s)	Significant Unobservable Input(s)	Discount %
Impaired loans	$	185	Appraisal value and cash surrender value of life insurance	Discount for type of collateral and age of appraisal	0-35%

(Dollars in thousands)	Fair value at December 31, 2017		Valuation Technique(s)	Significant Unobservable Input(s)	Discount % Range
Other real estate owned	$	652	Sales comparison approach per appraisal	Discount for type of collateral and age of appraisal	0-5%
Other assets (building held for sale)	1,654		Sales comparison approach per appraisal	Discount for type of collateral and age of appraisal	0-10%

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The carrying amounts and estimated fair values of financial instruments, excluding those previously presented unless otherwise noted, at September 30, 2018 and December 31, 2017 were as follows:

(Dollars in thousands)	Carrying Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2018
Financial assets:
Cash and cash equivalents	$	77,837	$	21,750	$	56,087	$	—
Federal Home Loan Bank stock	8,325		NA		NA		NA
Net loans	1,103,109		—		—		1,102,005
Accrued interest receivable	4,714		—		1,673		3,041
Financial liabilities:
Deposits	1,130,311		—		1,122,317		—
Borrowings	146,483		—		146,947		—
Subordinated notes	14,882		—		15,000		—
Accrued interest payable	1,402		—		1,402		—
December 31, 2017
Financial assets:
Cash and cash equivalents	$	63,661	$	17,712	$	45,949	$	—
Federal Home Loan Bank stock	8,303		NA		NA		NA
Net loans	1,023,210		—		—		1,025,319
Accrued interest receivable	3,730		—		807		2,923
Financial liabilities:
Deposits	1,120,382		—		1,122,473		—
Borrowings	47,833		—		47,473		—
Subordinated notes	14,844		—		14,993		—
Accrued interest payable	908		—		908		—

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

(a) Cash and Cash Equivalents

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

(b) FHLB Stock

It is not practical to determine the fair value of FHLB stock due to restrictions placed on its transferability.

(c) Loans

Fair value of loans, excluding loans held for sale, are estimated as follows: Fair values for all loans are estimated using present value of future estimated cash flows, using interest rates currently being offered for loans with similar terms to borrowers of similar credit quality, resulting in a Level 3 classification. Impaired loans are values at the lower of cost or fair value as described previously. The methods utilized to estimate the fair value of loans do not necessarily represent an exit price.

(d) Deposits

The fair values disclosed for demand deposits (e.g., interest and non-interest checking, passbook savings, and money market accounts) are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amount) resulting in a Level 2 classification. Fair values for fixed and variable rate certificates of deposit are estimated using a present value of future estimated cash flows calculation that applies interest rates currently being offered on certificates of aggregated expected monthly maturities on time deposits resulting in a Level 2 classification.

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(e) Borrowings

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

(f) Subordinated notes

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

(g) Accrued Interest Receivable/Payable

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

NOTE 13—DERIVATIVES

The Company executes interest rate swaps with commercial banking customers to facilitate their respective risk management strategies. The notional amounts of these interest rate swaps and the offsetting counterparty derivative instruments were $10.4 million at September 30, 2018. There were no open interest rate swap agreements as of December 31, 2017. These interest rate swaps are simultaneously hedged by offsetting interest rate swaps that the Company executes with a third party, such that the Company minimizes its net risk exposure resulting from such transactions with approved, reputable, independent counterparties with substantially matching terms. The agreements are considered stand alone derivatives and changes in the fair value of derivatives are reporting in earnings as non-interest income.

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

The following table reflects the fair value hedges included in the Consolidated Balance Sheets as of the date indicated:

	September 30, 2018
(Dollars in thousands)	Notional Amount		Fair Value
Included in other assets:
Interest rate swaps	$	10,394	$	17
Included in other liabilities:
Interest rate swaps	$	10,394	$	17

There was no effect of derivative instruments on the Consolidated Statements of Income for the three or nine months ended September 30, 2018.

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NOTE 14—PARENT COMPANY FINANCIAL STATEMENTS

Balance Sheets—Parent Company

(Dollars in thousands)	September 30, 2018		December 31, 2017
Assets
Cash and cash equivalents	$	10,399	$	1,158
Investment in banking subsidiary	148,777		120,829
Investment in captive subsidiary	1,373		663
Income tax benefit	298		339
Other assets	38		30
Total assets	$	160,885	$	123,019
Liabilities
Subordinated notes	$	14,882	$	14,844
Accrued expenses and other liabilities	544		215
Total liabilities	15,426		15,059
Shareholders' equity	145,459		107,960
Total liabilities and shareholders' equity	$	160,885	$	123,019

Statements of Income and Comprehensive Income—Parent Company

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
Expenses
Interest on subordinated notes	$	256		$	256		$	759		$	759
Salaries and employee benefits	—			12			86			41
Professional services	9			223			23			446
Other expenses	142			120			371			347
Total expenses	407			611			1,239			1,593
Loss before income taxes and equity in undistributed net earnings of subsidiaries	(407		)	(611		)	(1,239		)	(1,593		)
Income tax benefit (expense)	(2		)	187			201			531
Equity in undistributed earnings of subsidiaries	3,664			3,259			11,473			9,970
Net income	$	3,255		$	2,835		$	10,435		$	8,908
Other comprehensive income (loss)	(986		)	(223		)	(3,174		)	890
Total comprehensive income, net of tax	$	2,269		$	2,612		$	7,261		$	9,798

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Statements of Cash Flows—Parent Company

	For the nine months ended September 30,
(Dollars in thousands)	2018			2017
Cash flows from operating activities
Net income	$	10,435		$	8,908
Adjustments to reconcile net income to net cash provided by operating activities:
Equity in undistributed earnings of subsidiaries	(11,473		)	(9,970		)
Stock based compensation expense	242			246
Decrease in other assets, net	33			917
Increase (decrease) in other liabilities, net	135			512
Net cash provided by (used in) operating activities	(628		)	613
Cash flows from investing activities
Capital infusion to subsidiaries	(20,000		)	(250		)
Net cash used in investing activities	(20,000		)	(250		)
Cash flows from financing activities
Net proceeds from issuance of common stock related to initial public offering	29,030			—
Common stock dividend paid	(430		)	—
Proceeds from exercised stock options	1,269			150
Net cash provided by financing activities	29,869			150
Net increase in cash and cash equivalents	9,241			513
Beginning cash and cash equivalents	1,158			539
Ending cash and cash equivalents	$	10,399		$	1,052

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NOTE 15—EARNINGS PER SHARE

The calculation of basic and diluted earnings per share for each period noted below was as follows:

	For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands, except per share data)	2018		2017		2018		2017
Basic:
Net Income attributable to common shareholders	$	3,255	$	2,835	$	10,435	$	8,908
Weighted average common shares outstanding	7,749,047		6,392,041		7,264,494		6,382,723
Basic earnings per share	$	0.42	$	0.44	$	1.44	$	1.40
Diluted:
Net Income attributable to common shareholders	$	3,255	$	2,835	$	10,435	$	8,908
Weighted average common shares outstanding	7,749,047		6,392,041		7,264,494		6,382,723
Add: Dilutive effects of assumed exercises of stock options	152,062		217,575		149,182		219,633
Weighted average common and dilutive potential common shares outstanding	7,901,109		6,609,616		7,413,676		6,602,356
Diluted earnings per common share	$	0.41	$	0.43	$	1.41	$	1.35

Stock options for 30,000 and 25,055 shares of common stock were not considered in computing diluted earnings per common share for the three and nine months ended September 30, 2018 because they were antidilutive. There were no antidilutive stock options for the three and nine months ended September 30, 2017.

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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS

The following discussion explains our financial condition and results of operations as of and for the three and nine months ended September 30, 2018 and 2017. The following discussion and analysis should be read in conjunction with the consolidated financial statements and related notes presented elsewhere in this report and our Registration Statement on Form S–1, as amended, which contains audited financial statements of the Company as of and for the year ended December 31, 2017, previously filed with the SEC on April 12, 2018. Annualized results for these interim periods may not be indicative of results for the full year or future periods.

In addition to the historical information contained herein, this Form 10-Q includes "forward-looking statements." These statements are subject to many risks and uncertainties, including changes in interest rates and other general economic, business and political conditions, including changes in the financial markets; changes in business plans as circumstances warrant; and other risks detailed from time to time in filings made by the Company with the SEC. Readers should note that the forward-looking statements included herein are not a guarantee of future events, and that actual events may differ materially from those made in or suggested by the forward-looking statements. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe" or "continue," or similar terminology. Any forward-looking statements presented herein are made only as of the date of this document, and we do not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

Critical Accounting Policies

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

The most critical of these significant accounting policies are set forth in Note 1 – Basis of Presentation and Summary of Significant Accounting Policies of the Notes to the Consolidated Statements in our consolidated financial statements as of and for the periods ended December 31, 2017, and 2016 included in our registration statement on Form S-1, as amended, filed with the SEC on April 12, 2018. There have been no significant changes in critical accounting policies or the assumptions and judgments utilized in applying these policies since December 31, 2017.

Overview

Level One Bancorp, Inc. is a bank holding company headquartered in Farmington Hills, Michigan, with its primary branch operations in southeastern Michigan and Grand Rapids, 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.

Since 2007, we have grown substantially through organic growth and a series of four successful 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.

We had net income of $3.3 million for the three months ended September 30, 2018, compared to $2.8 million for the three months ended September 30, 2017. We had net income of $10.4 million for the nine months ended September 30, 2018, compared to $8.9 million for the nine months ended September 30, 2017.

As of September 30, 2018, the Company had total consolidated assets of $1.45 billion, total consolidated deposits of $1.13 billion and total consolidated shareholders' equity of $145.5 million.

We continue to focus on growing our commercial business, commercial real estate and residential mortgage lending portfolios. At September 30, 2018, we had $1.11 billion in total loans. Of this amount $92.9 million, or 8.3%, consisted of loans we acquired (all of which were recorded at their estimated fair values at the time of acquisition), and $1.02 billion, or 91.7%, consisted of loans we originated.

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Recent Developments

Third Quarter Dividend: On September 20, 2018, the Company’s Board of Directors declared a quarterly cash dividend of $0.03 per share. This dividend was paid out on October 15, 2018, to stockholders of record at the close of business on September 30, 2018.

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Summary Consolidated Financial Information

(Unaudited)

	As of and for the three months ended,									As of and for the nine months ended,
	September 30,			June 30,			September 30,			September 30,			September 30,
(Dollars in thousands, except per share data)	2018			2018			2017			2018			2017
Earnings Summary
Interest income	$	16,629		$	15,380		$	13,752		$	46,783		$	41,233
Interest expense	3,560			2,965			2,074			9,172			5,705
Net interest income	13,069			12,415			11,678			37,611			35,528
Provision expense (benefit) for loan losses	619			(710		)	194			463			460
Noninterest income	1,924			1,452			1,941			4,748			5,105
Noninterest expense	10,454			9,705			9,331			29,294			26,859
Income before income taxes	3,920			4,872			4,094			12,602			13,314
Income tax provision	665			860			1,259			2,167			4,406
Net income	3,255			4,012			2,835			10,435			8,908
Per Share Data
Basic earnings per common share	$	0.42		$	0.54		$	0.44		$	1.44		$	1.40
Diluted earnings per common share	0.41			0.53			0.43			1.41			1.35
Book value per common share	18.77			18.51			16.74			18.77			16.74
Tangible book value per share (1)	17.50			17.23			15.16			17.50			15.16
Shares outstanding (in thousands)	7,749			7,749			6,392			7,749			6,392
Average basic common shares (in thousands)	7,749			7,456			6,392			7,264			6,383
Average diluted common shares (in thousands)	7,901			7,613			6,610			7,414			6,602
Selected Period End Balances
Total assets	$	1,446,269		$	1,322,913		$	1,266,919		$	1,446,269		$	1,266,919
Securities available-for-sale	199,051			196,047			141,700			199,051			141,700
Total loans	1,114,999			1,045,789			980,721			1,114,999			980,721
Total deposits	1,130,311			1,065,216			1,069,874			1,130,311			1,069,874
Total liabilities	1,300,810			1,179,468			1,159,934			1,300,810			1,159,934
Total shareholders' equity	145,459			143,445			106,985			145,459			106,985
Tangible shareholders' equity (1)	135,570			133,501			96,872			135,570			96,872
Performance and Capital Ratios
Return on average assets	0.95		%	1.23		%	0.94		%	1.06		%	1.00		%
Return on average equity	8.95			11.97			10.58			10.68			11.58
Net interest margin (fully taxable equivalent) (2)	3.97			3.99			4.07			3.99			4.32
Efficiency ratio (noninterest expense/net interest income plus noninterest income)	69.73			69.99			68.51			69.16			66.10
Total shareholders' equity to total assets	10.06			10.84			8.44			10.06			8.44
Tangible equity to tangible assets (1)	9.44			10.17			7.71			9.44			7.71
Common equity tier 1 to risk-weighted assets	11.75			12.11			9.33			11.75			9.33
Tier 1 capital to risk-weighted assets	11.75			12.11			9.33			11.75			9.33
Total capital to risk-weighted assets	13.99			14.44			11.86			13.99			11.86
Tier 1 capital to average assets (leverage ratio)	10.31			10.60			8.14			10.31			8.14
Asset Quality Ratios:
Net charge-offs (recoveries) to average loans	0.07		%	(0.26		)%	(0.01		)%	0.04		%	(0.01		)%
Nonperforming assets as a percentage of total assets	0.89			0.85			1.26			0.89			1.26
Nonperforming loans as a percent of total loans	1.15			1.08			1.59			1.15			1.59
Allowance for loan losses as a percentage of period-end loans	1.07			1.10			1.19			1.07			1.19
Allowance for loan losses as a percentage of nonperforming loans	92.36			101.67			74.38			92.36			74.38
Allowance for loan losses as a percentage of nonperforming loans, excluding allowance allocated to loans accounted for under ASC 310-30	84.72			92.93			66.62			84.72			66.62

⁽¹⁾ See section entitled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures" below.

⁽²⁾ Presented on a tax equivalent basis using a 35% tax rate for 2017 periods and a 21% tax rate for 2018 periods.

40

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial measures included in this report are not measures of financial condition or performance recognized by GAAP. These non-GAAP financial measures include tangible shareholders' equity, tangible book value per share and the ratio of tangible shareholders' equity to tangible assets. Our management uses these non-GAAP financial measures in its analysis of our performance, and we believe financial analysts and others frequently use these measures, and other similar measures, to evaluate capital adequacy. We calculate: (i) tangible shareholders' equity as total shareholders' equity less core deposit intangibles and goodwill; (ii) tangible book value per share as tangible shareholders' equity divided by shares of common stock outstanding; and (iii) tangible assets as total assets, less core deposit intangibles and goodwill.

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

	September 30,			December 31,			September 30,
(Dollars in thousands, except per share data)	2018			2017			2017
Total shareholders' equity	$	145,459		$	107,960		$	106,985
Less:
Goodwill	9,387			9,387			9,387
Core deposit intangibles	502			667			726
Tangible shareholders' equity	$	135,570		$	97,906		$	96,872
Shares outstanding (in thousands)	7,749			6,435			6,392
Tangible book value per share	$	17.50		$	15.21		$	15.16
Total assets	$	1,446,269		$	1,301,291		$	1,266,919
Less:
Goodwill	9,387			9,387			9,387
Core deposit intangibles	502			667			726
Tangible assets	$	1,436,380		$	1,291,237		$	1,256,806
Tangible equity to tangible assets	9.44		%	7.58		%	7.71		%

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Results of Operations

Net Income

We had net income of $3.3 million, or $0.41 per diluted common share, for the three months ended September 30, 2018, compared to $2.8 million, or $0.43 per diluted common share, for the three months ended September 30, 2017. The increase of $0.5 million in net income year over year primarily reflects an increase in net interest income of $1.4 million and a decrease in income tax provision of $594 thousand. This was partially offset by an increase in noninterest expense of $1.1 million and an increase in provision expense for loan losses of $425 thousand.

We had net income of $10.4 million, or $1.41 per diluted common share, for the nine months ended September 30, 2018, compared to $8.9 million, or $1.35 per diluted common share, for the nine months ended September 30, 2017. The increase of $1.5 million in net income year over year primarily reflects an increase of $2.1 million in net interest income and a decrease in income tax provision of $2.2 million. This was partially offset by an increase in noninterest expense of $2.4 million and a decrease in noninterest income of $357 thousand.

Net Interest Income

Net interest income is the difference between interest income and yield-related fees earned on assets and interest expense paid on liabilities.

We had net interest income of $13.1 million and $11.7 million for the three months ended September 30, 2018 and 2017, respectively. The three months ended September 30, 2018 included a $2.9 million increase in interest income as well as a $1.5 million increase in interest expense compared to the three months ended September 30, 2017. The increase in interest income was primarily driven by an increase of $2.3 million in interest and fees on loans and an increase of $584 thousand in interest income from investment securities, whereas the increase in interest expense was primarily driven by an increase of $1.2 million in deposit interest expense and an increase of $288 thousand in interest expense on borrowed funds. The change in interest and fees on loans and interest income from investment securities for the three months ended September 30, 2018, compared to the same period in 2017, was primarily driven by the growth in average balances of loans and investment securities, as well as an increase in yield on loans. The increase in deposit interest expense during the three months ended September 30, 2018, compared to the same period in 2017, was primarily due to an increase in the average balances of deposits as well as higher average rates paid on deposits.

We had net interest income of $37.6 million and $35.5 million for the nine months ended September 30, 2018 and 2017, respectively. The nine months ended September 30, 2018 included a $5.6 million increase in interest income as well as a $3.5 million increase in interest expense, compared to the same period in 2017. The increase in interest income was primarily driven by an increase of $4.1 million in interest and fees on loans and an increase of $1.4 million in interest income from investment securities, whereas the increase in interest expense was primarily driven by an increase of $3.1 million in deposit interest expense and an increase of $332 thousand in interest expense on borrowed funds. The change in interest and fees on loans and interest income from investment securities, as well as the increase in deposit interest expense during the nine months ended September 30, 2018, compared to the same period in the prior year, are reflective of the same reasons described in the three month analysis above.

Our net interest margin (FTE) for the three months ended September 30, 2018 was 3.97%, compared to 4.07% for the same period in 2017. The decrease of 10 basis points was primarily a result of higher cost of funds compared to the same period in 2017. Our net interest margin benefits from discount accretion on our purchased credit impaired loan portfolios, a component of our accretable yield. The accretable yield represents the excess of the net present value of expected future cash flows over the acquisition date fair value and includes both the expected coupon of the loan and the discount accretion. The accretable yield is recognized as interest income over the expected remaining life of the purchased credit impaired loan. The difference between the actual yield earned on total loans and the yield generated based on the contractual coupon (not including any interest income for loans in nonaccrual status) represents excess accretable yield. The contractual coupon of the loan considers the contractual coupon rates of the loan and does not include any interest income for loans in nonaccrual status. For the three months ended September 30, 2018 and 2017, the average yield on total loans was 5.57% and 5.25%, respectively. The yield on total loans was impacted by 33 basis points and 32 basis points, respectively, due to the accretable yield on purchased credit impaired loans. Our net interest margin for the three months ended September 30, 2018 and 2017, both benefited by 27 basis points as a result of the excess accretable yield. As of September 30, 2018 and December 31, 2017, our remaining accretable yield was $11.2 million and $14.5 million, respectively, and our nonaccretable difference was $5.9 million and $10.1 million, respectively.

Our net interest margin (FTE) for the nine months ended September 30, 2018 was 3.99%, compared to 4.24% for the same period in 2017. The decrease of 25 basis points is reflective of the same reason described in the three month analysis above. For the nine months ended September 30, 2018 and 2017, the average yield on total loans was 5.44% and 5.39%,

42

respectively. The yield on total loans was impacted by 30 basis points and 49 basis points, respectively, due to the accretable yield on purchased credit impaired loans. Our net interest margin for the nine months ended September 30, 2018 and 2017, benefited by 25 basis points and 41 basis points, respectively, as a result of the excess accretable yield.

The following tables set forth information related to our average balance sheet, average yields on assets, and average rates of 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 these tables, adjustments are made to the yields on tax-exempt assets in order to present tax-exempt income and fully taxable income on a comparable basis.

43

Analysis of Net Interest Income—Fully Taxable Equivalent

	For the three months ended September 30,
	2018							2017
(Dollars in thousands)	Average Balance			Interest (1)		Average Rate (2)		Average Balance			Interest (1)		Average Rate (2)
Interest-earning assets:
Gross loans(3)	$	1,075,642		$	15,107	5.57	%	$	965,149		$	12,782	5.25	%
Investment securities(4):
Taxable	134,619			816		2.41		83,402			422		2.01
Tax-exempt	67,599			450		3.13		42,300			260		3.60
Interest-earning cash balances	28,685			157		2.17		50,213			162		1.27
Federal Home Loan Bank stock	8,303			99		4.73		8,303			126		6.02
Total interest-earning assets	$	1,314,848		$	16,629	5.04	%	$	1,149,367		$	13,752	4.79	%
Non-earning assets:
Cash and due from banks	22,358							18,905
Premises and equipment	13,465							13,846
Goodwill	9,387							9,387
Other intangible assets, net	533							761
Bank-owned life insurance	11,732							11,406
Allowance for loan losses	(11,591		)					(11,594		)
Other non-earning assets	7,414							14,039
Total assets	$	1,368,146						$	1,206,117
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	60,022		$	52	0.34	%	$	59,684		$	41	0.27	%
Money market and savings deposits	249,595			625		0.99		241,819			405		0.66
Time deposits	463,373			2,125		1.82		375,839			1,158		1.22
Borrowings	95,371			502		2.09		74,892			214		1.13
Subordinated notes	14,874			256		6.83		14,821			256		6.85
Total interest-bearing liabilities	$	883,235		$	3,560	1.60	%	$	767,055		$	2,074	1.07	%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	329,459							319,822
Other liabilities	9,956							12,939
Shareholders' equity	145,496							106,301
Total liabilities and shareholders' equity	$	1,368,146						$	1,206,117
Net interest income				$	13,069						$	11,678
Interest spread						3.44	%						3.72	%
Net interest margin(5)						3.94							4.03
Tax equivalent effect						0.03							0.04
Net interest margin on a fully tax equivalent basis						3.97							4.07

_______________________________________________________________________________

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

⁽²⁾  Average rates and yields are presented on an annual basis and include a taxable equivalent adjustment to interest income of $84 thousand and $124 thousand on tax-exempt securities for the three months ended September 30, 2018 and 2017, respectively, using the federal corporate tax rate of 21% for the period ended September 30, 2018 and 35% for the period ended September 30, 2017.

⁽³⁾  Includes nonaccrual loans.

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

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

44

	For the nine months ended September 30,
	2018							2017
(Dollars in thousands)	Average Balance			Interest (1)		Average Rate (2)		Average Balance			Interest (1)		Average Rate (2)
Interest-earning assets:
Gross loans(3)	$	1,052,942		$	42,837	5.44	%	$	960,445		$	38,706	5.39	%
Investment securities(4):
Taxable	117,356			2,057		2.34		80,470			1,238		2.06
Tax-exempt	60,570			1,181		3.13		35,015			641		3.61
Interest-earning cash balances	27,207			382		1.88		45,760			381		1.11
Federal Home Loan Bank stock	8,303			326		5.25		8,116			267		4.38
Total interest-earning assets	$	1,266,378		$	46,783	4.96	%	$	1,129,806		$	41,233	4.92	%
Non-earning assets:
Cash and due from banks	19,577							18,828
Premises and equipment	13,150							14,897
Goodwill	9,387							9,387
Other intangible assets, net	588							819
Bank-owned life insurance	11,651							11,324
Allowance for loan losses	(11,628		)					(11,429		)
Other non-earning assets	9,132							11,681
Total assets	$	1,318,235						$	1,185,313
Interest-bearing liabilities:
Deposits:
Interest-bearing demand deposits	$	62,626		$	151	0.32	%	$	58,418		$	119	0.27	%
Money market and savings deposits	266,508			1,851		0.93		264,389			1,184		0.6
Time deposits	455,299			5,465		1.60		351,073			3,029		1.15
Borrowings	67,073			946		1.89		88,280			614		0.93
Subordinated notes	14,859			759		6.83		14,806			759		6.85
Total interest-bearing liabilities	$	866,365		$	9,172	1.42	%	$	776,966		$	5,705	0.98	%
Noninterest-bearing liabilities and shareholders' equity:
Noninterest-bearing demand deposits	311,675							295,413
Other liabilities	9,941							10,396
Shareholders' equity	130,254							102,538
Total liabilities and shareholders' equity	$	1,318,235						$	1,185,313
Net interest income				$	37,611						$	35,528
Interest spread						3.54	%						3.94	%
Net interest margin(5)						3.97							4.20
Tax equivalent effect						0.02							0.04
Net interest margin on a fully tax equivalent basis						3.99							4.24

__________________________________________________________________________

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

⁽²⁾  Average rates and yields are presented on an annual basis and include a taxable equivalent adjustment to interest income of $235 thousand and $306 thousand on tax-exempt securities for the nine months ended September 30, 2018 and 2017, respectively, using the federal corporate tax rate of 21% for the period ended September 30, 2018 and 35% for the period ended September 30, 2017.

⁽³⁾  Includes nonaccrual loans.

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

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

45

Rate/Volume Analysis

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

	For the three months ended September 30, 2018 vs 2017
	Increase (Decrease) Due to:
(Dollars in thousands)	Rate			Volume			Net Increase (Decrease)
Interest-earning assets
Gross loans	$	805		$	1,520		$	2,325
Investment securities:
Taxable	96			298			394
Tax-exempt	(16		)	205			189
Interest-earning cash balances	83			(87		)	(4		)
FHLB Stock	(27		)	—			(27		)
Total interest income	941			1,936			2,877
Interest-bearing liabilities
Interest-bearing demand deposits	11			—			11
Money market and savings deposits	207			13			220
Time deposits	655			312			967
Borrowings	218			70			288
Subordinated notes	(1		)	1			—
Total interest expense	1,090			396			1,486
Change in net interest income	$	(149	)	$	1,540		$	1,391

	For the nine months ended September 30, 2018 vs. 2017
	Increase (Decrease) Due to:
(Dollars in thousands)	Rate			Volume			Net Increase (Decrease)
Interest-earning assets
Gross loans	$	371		$	3,760		$	4,131
Investment securities:
Taxable	190			628			818
Tax-exempt	(72		)	612			540
Interest-earning cash balances	194			(193		)	1
FHLB Stock	54			6			60
Total interest income	737			4,813			5,550
Interest-bearing liabilities
Interest-bearing demand deposits	23			9			32
Money market and savings deposits	657			10			667
Time deposits	1,388			1,048			2,436
Borrowings	508			(176		)	332
Subordinated notes	(3		)	3			—
Total interest expense	2,573			894			3,467
Change in net interest income	$	(1,836	)	$	3,919		$	2,083

46

Provision for Loan Losses

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

Loans acquired in connection with acquisitions that have evidence of credit deterioration since origination and for which it is probable at the date of acquisition that we will not collect all contractually required principal and interest payments are accounted for under ASC Topic 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality, or ASC 310-30. These credit-impaired loans have been recorded at their estimated fair value on the respective acquisition date, based on subjective determinations regarding risk ratings, expected future cash flows and fair value of the underlying collateral, without a carryover of the related allowance for loan losses. At the acquisition date, the Company recognizes the expected shortfall of expected future cash flows, as compared to the contractual amount due, as a nonaccretable discount. Any excess of the net present value of expected future cash flows over the acquisition date fair value is recognized as the accretable discount, or accretable yield. We evaluate these loans semiannually to assess expected cash flows. Subsequent decreases to the expected cash flows will generally result in a provision for loan losses. Subsequent increases in cash flows result in a reversal of the provision for loan losses to the extent of prior charges or a reclassification of the difference from nonaccretable to accretable with a positive impact on interest income. As of September 30, 2018, and December 31, 2017, our remaining accretable yield was $11.2 million and $14.5 million, respectively, and our nonaccretable difference was $5.9 million and $10.1 million, respectively.

The provision for loan losses was $619 thousand for the three months ended September 30, 2018, compared to $194 thousand for the three months ended September 30, 2017. The increase in provision for loan losses was primarily due to a $246 thousand additional provision due to new loan originations and a $226 thousand increase in net charge-offs, partially offset by a decrease of $66 thousand in specific reserves on impaired loans.

The provision for loan losses was $463 thousand for the nine months ended September 30, 2018, compared to $460 thousand for the nine months ended September 30, 2017. The small increase in the provision for loan losses was primarily due to $626 thousand additional provision due to net loan growth and $367 thousand greater net charge-offs between the two periods, partially offset by $463 thousand less impairment on purchased credit impaired loans and $527 thousand less specific reserves on impaired loans individually evaluated. The decrease in provision on purchased credit impaired loans was primarily due to improvements in cash flow expectations resulting from our semi-annual re-estimation process. Our total nonaccrual loans decreased to $12.9 million at September 30, 2018 compared to $14.0 million at December 31, 2017.

Noninterest Income

The following table presents noninterest income for the three and nine months ended September 30, 2018 and 2017.

	For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	2018		2017		2018		2017
Noninterest income
Service charges on deposits	$	655	$	607	$	1,915	$	1,905
Net gain on sale of securities	—		118		—		176
Mortgage banking activities	754		548		1,394		1,260
Net gain on sale of commercial loans	—		—		11		146
Other charges and fees	515		668		1,428		1,618
Total noninterest income	$	1,924	$	1,941	$	4,748	$	5,105

Noninterest income remained consistent at $1.9 million for the three months ended September 30, 2018 and September 30, 2017.

47

Noninterest income decreased $357 thousand to $4.7 million for the nine months ended September 30, 2018, compared to $5.1 million for the same period in 2017. The decrease in noninterest income was primarily due to a decrease in net gain on sale of securities by $176 thousand, a decrease in gains on real estate owned of $156 thousand (included in "other charges and fees" in the table above), and a decrease in net gain on sale of commercial loans of $135 thousand. This was partially offset by an increase in mortgage banking activities of $134 thousand. The decrease in the gain on sale of securities was due to the lack of sale opportunities at acceptable prices. The decrease in net gain on sale of commercial loans was primarily due to the lack of SBA loan sale opportunities during the nine months ended September 30, 2018, compared to the same period in 2017. The Company's investment in the mortgage banking division is expected to result in higher mortgage banking income in the future.

Noninterest Expense

The following table presents noninterest expense for the three and nine months ended September 30, 2018 and 2017.

	For the three months ended September 30,				For the nine months ended September 30,
(Dollars in thousands)	2018		2017		2018		2017
Noninterest expense
Salary and employee benefits	$	6,888	$	5,413	$	19,013	$	16,003
Occupancy and equipment expense	1,173		1,106		3,293		3,130
Professional service fees	494		603		1,231		1,683
Marketing expense	264		289		697		768
Printing and supplies expense	127		137		343		371
Data processing expense	565		492		1,512		1,384
Other expense	943		1,291		3,205		3,520
Total noninterest expense	$	10,454	$	9,331	$	29,294	$	26,859

Noninterest expenses increased $1.2 million to $10.5 million for the three months ended September 30, 2018, as compared to $9.3 million for the same period in 2017. The increase in noninterest expense was primarily due to an increase in salary and employee benefits of $1.5 million, partially offset by a decrease in professional service fees of $109 thousand. The increase in salary and employee benefits between the periods resulted from an increase of 33 full-time equivalent employees, which includes the expansion of the mortgage team. The decrease in professional services fees was primarily due to lower legal fees and consulting fees between the periods.

Noninterest expenses increased $2.4 million to $29.3 million for the nine months ended September 30, 2018, as compared to $26.9 million for the same period in 2017. The increase in noninterest expense was primarily due to an increase in salary and employee benefits of $3.0 million, partially offset by a decrease in professional service fees of $452 thousand. The increase in salary and employee benefits between the periods resulted from an increase of 25 full-time employees, which includes the expansion of the mortgage team. The decrease in professional services fees was primarily due to lower legal fees and other professional fees between the periods.

Income Taxes and Tax-Related Items

During the three months ended September 30, 2018, we recognized income tax expense of $665 thousand on $3.9 million of pre-tax income, resulting in an effective tax rate of 17.0%, compared to the same period in 2017, in which we recognized an income tax expense of $1.3 million on $4.1 million of pre-tax income, resulting in an effective tax rate of 30.8%.

During the nine months ended September 30, 2018, we recognized income tax expense of $2.2 million on $12.6 million of pre-tax income resulting in an effective tax rate of 17.2%, compared to the same period in 2017, in which we recognized an income tax expense of $4.4 million on $13.3 million of pre-tax income, resulting in an effective tax rate of 33.1%.

The decrease in income tax rate for the three and nine months ended September 30, 2018, compared to the same periods in 2017, primarily resulted from the decrease in the federal corporate income tax rate as a result of the enactment of the TCJA on December 22, 2017. Please refer to Note 8 - Income Taxes in the Notes to the Consolidated Statements for a reconciliation between expected and actual income tax expense for the three and nine months ended September 30, 2018 and 2017.

48

Financial Condition

Total assets were $1.45 billion at September 30, 2018 and $1.30 billion at December 31, 2017. Total assets increased by $145.0 million between these two dates primarily due to increases of $80.1 million in gross loans, $48.1 million in securities available-for-sale, $14.2 million in cash and cash equivalents, and $4.8 million in mortgage loans held for sale. The increase in loans was primarily driven by the growth in our commercial real estate, commercial and industrial, and residential real estate portfolios. The increase in securities available-for-sale reflects management's decision to invest in liquid assets while retaining accessibility to the funds for potential liquidity needs. The increase in cash and cash equivalents was primarily due to a $10.1 million increase in cash balances held with the Federal Reserve Bank.

Investment Securities

The following table presents the fair value of the Company's investment securities portfolio, all of which were classified as available-for-sale as of September 30, 2018 and December 31, 2017:

(Dollars in thousands)	September 30, 2018		December 31, 2017
Securities available-for-sale:
U.S. government sponsored entities and agencies	$	2,327	$	—
State and political subdivision	70,203		53,224
Mortgage-backed securities: residential	9,857		8,431
Mortgage-backed securities: commercial	12,182		9,819
Collateralized mortgage obligations: residential	19,576		19,221
Collateralized mortgage obligations: commercial	32,039		20,557
U.S. Treasury	22,967		23,573
SBA	16,080		12,616
Asset backed securities	3,863		—
Corporate bonds	9,957		3,528
Total securities available-for-sale	$	199,051	$	150,969

The composition of our investment securities portfolio reflects our investment strategy of maintaining an appropriate level of liquidity for both normal operations and potential acquisitions while providing an additional source of revenue. The investment portfolio also provides a balance to interest rate risk and credit risk in other categories of the balance sheet, while providing a vehicle for the investment of available funds, furnishing liquidity, and supplying securities to pledge as collateral. At September 30, 2018, total investment securities were $199.1 million, or 13.7% of total assets, compared to $151.0 million, or 11.6% of total assets, at December 31, 2017. The $48.1 million increase in securities available for sale from December 31, 2017 to September 30, 2018, primarily reflected increases in obligations of state and political subdivisions, collateralized mortgage obligations: commercial, corporate bonds, SBA securities and asset backed securities. Securities with a carrying value of $41.3 million and $36.5 million were pledged at September 30, 2018 and December 31, 2017, respectively, to secure borrowings and deposits.

As of September 30, 2018, the Company held 50 tax-exempt state and local municipal securities totaling $36.2 million backed by the Michigan School Bond Loan Fund. Other than the aforementioned investments, at September 30, 2018 and December 31, 2017, there were no holdings of securities of any one issuer, other than the U.S. Government and its agencies, in an amount greater than 10% of shareholders' equity.

The securities available for sale presented in the following table are reported at amortized cost and by contractual maturity as of September 30, 2018 and December 31, 2017. Actual timing may differ from contractual maturities if borrowers have the right to call or prepay obligations with or without call or prepayment penalties. Additionally, residential mortgage-backed securities and collateralized mortgage obligations receive monthly principal payments, which are not reflected below. The yields below are calculated on a tax equivalent basis.

49

	September 30, 2018
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Securities available-for-sale:
U.S. government sponsored agency obligations	$	—	—	%	$	—	—	%	$	2,401	3.08	%	$	—	—	%
State and political subdivision	181		2.05		6,300		2.24		14,817		2.95		50,119		3.46
Mortgage-backed securities: residential	—		—		252		1.23		194		2.37		9,967		2.64
Mortgage-backed securities: commercial	—		—		6,166		2.22		5,025		2.82		1,471		3.46
CMO: residential	33		4.32		—		—		860		2.05		19,004		3.04
CMO: commercial	—		—		8,899		2.80		10,482		2.96		13,646		2.57
U.S. Treasury	—		—		24,239		1.48		—		—		—		—
SBA	—		—		—		—		1,722		2.89		14,547		1.10
Asset backed securities	—		—		—		—		—		—		3,870		2.79
Corporate Bonds	999		2.14		7,592		2.87		1,486		3.16		—		—
Total securities available-for-sale	$	1,213	2.18	%	$	53,448	2.07	%	$	36,987	2.93	%	$	112,624	2.88	%

	December 31, 2017
	One year or less				One to five years				Five to ten years				After ten years
(Dollars in thousands)	Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield		Amortized Cost		Average Yield
Securities available-for-sale:
State and political subdivision	$	318	2.56	%	$	5,034	2.20	%	$	13,922	2.76	%	$	33,677	3.33	%
Mortgage-backed securities: residential	—		—		—		—		525		1.45		8,164		2.34
Mortgage-backed securities: commercial	—		—		2,837		1.87		7,042		2.57		—		—
CMO: residential	56		2.75		—		—		429		3.09		18,819		2.70
CMO: commercial	—		—		1,896		1.59		5,474		2.66		13,509		2.41
U.S. Treasury	—		—		24,283		1.32		—		—		—		—
SBA	—		—		—		—		—		—		12,644		1.94
Corporate Bonds	—		—		3,039		2.26		506		2.95		—		—
Total securities available-for-sale	$	374	2.59	%	$	37,089	1.57	%	$	27,898	2.68	%	$	86,813	2.75	%

Loans

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

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

Commercial and industrial loans include financing for commercial purposes in various lines of businesses, including manufacturing, service industry and professional service areas. Commercial and industrial loans are generally secured with the assets of the company and/or the personal guarantee of the business owners.

Residential real estate loans represent loans to consumers for the purchase or refinance of a residence. These loans are generally financed over a 15- to 30-year term and, in most cases, are extended to borrowers to finance their primary residence with both fixed-rate and adjustable-rate terms. Real estate construction loans are also offered to consumers who wish to build their own homes and are often structured to be converted to permanent loans at the end of the construction phase, which is

50

typically twelve months. Residential real estate loans also include home equity loans and lines of credit that are secured by a first- or second-lien on the borrower's residence. Home equity lines of credit consist mainly of revolving lines of credit secured by residential real estate.

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

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

	As of September 30,		As of December 31,
(Dollars in thousands)	2018		2017		2016		2015		2014
Commercial real estate:
Non-owner occupied	$	362,450	$	343,420	$	322,354	$	240,161	$	170,923
Owner occupied	190,131		168,342		169,348		146,487		97,974
Total commercial real estate	552,581		511,762		491,702		386,648		268,897
Commercial and industrial	397,060		377,686		342,069		254,808		202,942
Residential real estate	164,356		144,439		118,730		116,734		91,252
Consumer	1,002		1,036		892		1,528		1,060
Total loans	$	1,114,999	$	1,034,923	$	953,393	$	759,718	$	564,151

Total loans were $1.11 billion at September 30, 2018, an increase of $80.1 million from December 31, 2017. The total increase in loans of $80.1 million was primarily due to an increase in commercial real estate loans of $40.8 million, an increase in residential real estate loans of $19.9 million, and an increase in commercial and industrial loans of $19.4 million. In general, we target a loan portfolio mix of approximately one-half commercial real estate, approximately one-third commercial and industrial loans and one-sixth a mix of residential real estate and consumer loans. As of September 30, 2018, approximately 49.6% of our loans were commercial real estate, 35.6% were commercial and industrial, and 14.8% were residential real estate and consumer loans.

We originate both fixed and adjustable rate residential real estate loans conforming to the underwriting guidelines of the Federal National Mortgage Association (FNMA) or the Federal Home Loan Mortgage Corporation, as well as home equity loans and lines of credit that are secured by first or junior liens. Most of our fixed rate residential loans, along with some of our adjustable rate mortgages, are sold to other financial institutions with which we have established a correspondent lending relationship. The Company is in the process of establishing a direct relationship with FNMA and hopes to begin locking and selling loans to FNMA in late 2018.

Loan Maturity/Rate Sensitivity

The following table shows the contractual maturities of our loans as of September 30, 2018.

(Dollars in thousands)	One year or less		After one but within five years		After five years		Total
September 30, 2018
Commercial real estate	$	47,269	$	363,283	$	142,029	$	552,581
Commercial and industrial	163,297		139,581		94,182		397,060
Residential real estate	7,174		5,089		152,093		164,356
Consumer	305		485		212		1,002
Total Loans	$	218,045	$	508,438	$	388,516	$	1,114,999
Sensitivity of loans to changes in interest rates:
Fixed interest rates			$	380,643	$	144,738
Floating interest rates			127,795		243,778
Total			$	508,438	$	388,516

51

Summary of Impaired Assets and Past Due Loans

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

A loan is categorized as a troubled debt restructuring if a concession is granted, such as to provide for the reduction of either interest or principal, due to deterioration in the financial condition of the borrower. Typical concessions include reduction of the interest rate on the loan to a rate considered lower than the current market rate, forgiveness of a portion of the loan balance, extension of the maturity date, and/or modifications from principal and interest payments to interest-only payments for a certain period. Loans are not classified as TDRs when the modification is short-term or results in only an insignificant delay or shortfall in the payments to be received.

Credit Quality Indicators:

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

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

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

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

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

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

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Total classified and criticized loans as of September 30, 2018 compared to December 31, 2017 were as follows:

(Dollars in thousands)	September 30, 2018		December 31, 2017
Classified loans:
Substandard	$	22,297	$	18,286
Doubtful	150		82
Total classified loans	$	22,447	$	18,368
Special mention	15,469		16,609
Total classified and criticized loans	$	37,916	$	34,977

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

	As of September 30,		As of December 31,
(Dollars in thousands)	2018		2017		2016		2015		2014
Nonaccrual loans
Commercial real estate	$	4,559	$	2,257	$	147	$	141	$	343
Commercial and industrial	5,763		9,024		13,389		309		656
Residential real estate	2,546		2,767		1,498		1,177		880
Consumer	5		—		—		—		—
Total nonaccrual loans(1)	12,873		14,048		15,034		1,627		1,879
Other real estate owned	—		652		258		81		320
Total nonperforming assets	12,873		14,700		15,292		1,708		2,199
Performing troubled debt restructurings
Commercial real estate	1,511		—		290		—		—
Commercial and industrial	574		961		1,018		1,069		794
Residential real estate	365		261		207		279		194
Total performing troubled debt restructurings	2,450		1,222		1,515		1,348		988
Total impaired assets, excluding ASC 310-30 loans	$	15,323	$	15,922	$	16,807	$	3,056	$	3,187
Loans 90 days or more past due and still accruing	$	354	$	440	$	377	$	883	$	980

______________________________________________________

⁽¹⁾  Nonaccrual loans include nonperforming troubled debt restructurings of $6.3 million, $6.4 million, $5.8 million, $564 thousand and $636 thousand, at the respective dates indicated above.

During the nine months ended September 30, 2018 and 2017, the Company recorded $380 thousand and $75 thousand, respectively, of interest income on nonaccrual loans and performing TDRs excluding PCI loans.

In addition to nonperforming and impaired assets, the Company had purchased credit impaired loans accounted for under ASC 310-30 which amounted to $9.1 million, $9.7 million, $11.6 million, $17.6 million and $24.9 million at the respective dates indicated in the table above.

The trend in impaired assets was relatively flat between December 31, 2017 and September 30, 2018. Commercial and industrial nonaccrual loans decreased significantly, which was partially offset by an increase in commercial real estate nonaccrual loans. There was also an increase in commercial real estate performing TDRs partially offset by a decrease in commercial and industrial performing TDRs.

Allowance for Loan Losses

We maintain the allowance for loan losses at a level we believe is sufficient to absorb probable 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

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material estimates, all of which may be susceptible to significant change. The allowance is increased by provisions charged to expense and decreased by actual charge-offs, net of recoveries.

Purchased Loans

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

Originated Loans

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

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

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

The allowance for our nonimpaired loans, which includes commercial and industrial and commercial real estate 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 internal credit risk ratings and historical loss data. 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.

As our operating history is limited and we have grown rapidly, the historical loss estimates for loans prior to 2017 were based primarily on the actual historical loss experienced by our peer banks combined with a small factor representing our own loss history. Starting in 2017, the Company modified its methodology on historical loss analysis to incorporate and fully rely on the Company's own historical loss data, which did not have a material impact. The historical loss estimates are established by loan type including commercial and industrial and commercial real estate. In addition, consideration is given to borrower rating migration experience and trends, industry concentrations and conditions, changes in collateral values of properties securing loans and trends with respect to past due and nonaccrual amounts.

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

	For the three months ended September 30,						For the nine months ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
Balance at beginning of period	$	11,465		$	11,404		$	11,713		$	11,089
Loan charge-offs:
Commercial real estate	—			—			(112		)	—
Commercial and industrial	(237		)	(38		)	(995		)	(139		)
Residential real estate	—			(3		)	(47		)	(86		)
Consumer	(8		)	—			(23		)	—
Total loan charge-offs	(245		)	(41		)	(1,177		)	(225		)
Recoveries of loans previously charged-off:
Commercial real estate	23			2			25			16
Commercial and industrial	8			16			814			179
Residential real estate	19			55			51			110
Consumer	1			—			1			1
Total loan recoveries	51			73			891			306
Net (charge-offs)/recoveries	(194		)	32			(286		)	81
Provision for loan losses	619			194			463			460
Balance at end of period	$	11,890		$	11,630		$	11,890		$	11,630
Allowance for loan losses as a percentage of period-end loans	1.07			1.19			1.07			1.19
Net charge-offs/(recoveries) to average loans	0.07			(0.01		)	0.07			(0.01		)

Our allowance for loan losses was $11.9 million, or 1.1% of loans, at September 30, 2018 compared to $11.7 million, or 1.1% of loans at December 31, 2017, and $11.6 million, or 1.2% of loans, at September 30, 2017. The $177 thousand increase in the allowance for loan losses during the nine months ended September 30, 2018 was primarily due to a $811 thousand increase in general reserves related to net loan growth, partially offset by a $534 thousand decrease in specific reserves related to impaired loans.

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

(Dollars in thousands)	Allocated Allowance		Percentage of loans in each category to total loans
September 30, 2018
Balance at end of period applicable to:
Commercial real estate	$	5,117	49.6	%
Commercial and industrial	5,669		35.6	%
Residential real estate	1,097		14.7	%
Consumer	7		0.1	%
Total loans	$	11,890	100.0	%
December 31, 2017
Balance at end of period applicable to:
Commercial real estate	$	4,852	49.4	%
Commercial and industrial	5,903		36.5	%
Residential real estate	950		14.0	%
Consumer	8		0.1	%
Total loans	$	11,713	100.0	%
December 31, 2016
Balance at end of period applicable to:
Commercial real estate	$	4,124	51.5	%
Commercial and industrial	5,932		35.9	%
Residential real estate	1,030		12.5	%
Consumer	3		0.1	%
Total loans	$	11,089	100.0	%
December 31, 2015
Balance at end of period applicable to:
Commercial real estate	$	3,299	50.9	%
Commercial and industrial	3,256		33.5	%
Residential real estate	1,307		15.4	%
Consumer	28		0.2	%
Total loans	$	7,890	100.0	%
December 31, 2014
Balance at end of period applicable to:
Commercial real estate	$	2,404	47.6	%
Commercial and industrial	1,930		36.0	%
Residential real estate	1,218		16.2	%
Consumer	37		0.2	%
Total loans	$	5,589	100.0	%

Deposits

Total deposits were $1.13 billion at September 30, 2018 and $1.12 billion at December 31, 2017, representing 86.9% and 93.9% of total liabilities at each date, respectively. The increase in deposits of $9.9 million was due to increases of $43.0 million in demand deposits and $17.9 million in time deposits, partially offset by a decrease of $51.0 million in money market and savings deposits. Our average interest-bearing deposit costs were 1.27% and 0.86% for the nine months ended September 30, 2018 and 2017, respectively. The increase in interest-bearing deposit costs between the two periods was impacted by the changing mix of deposit types, as well as by the increase in overnight market rates, as measured by the targeted federal funds rate. The federal fund rate targets rose 0.75% during 2017 and 0.75% during the nine months ended September 30, 2018, with additional increases expected in future periods, subject to economic conditions.

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

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September 30, 2018 and December 31, 2017, the Company had approximately $109.1 million and $87.8 million in brokered deposits, respectively.

For periods prior to September 30, 2018, Certificate of Deposit Account Registry Service (CDARS) and reciprocal money market accounts were considered to be brokered deposits by regulatory authorities and were reported as such on quarterly Call Reports. With the passage of The Economic Growth, Regulatory Relief and Consumer Protection Act in May 2018, these items are no longer considered brokered deposits. Included in the brokered deposits total at December 31, 2017 were $3.3 million in CDARS customer deposit accounts.

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

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

	Three Months Ended September 30, 2018
(Dollars in thousands)	Average Balance		Percent		Average Rate
Noninterest-bearing demand deposits	$	329,459	30.0	%	—	%
Interest-bearing demand deposits	60,022		5.4		0.34
Money market and savings deposits	249,595		22.6		0.99
Time deposits	463,373		42.0		1.82
Total deposits	$	1,102,449	100.0	%	1.02	%
	Nine Months Ended September 30, 2018
(Dollars in thousands)	Average Balance		Percent		Average Rate
Noninterest-bearing demand deposits	$	311,675	28.5	%	—	%
Interest-bearing demand deposits	62,626		5.7		0.32
Money market and savings deposits	266,508		24.2		0.93
Time deposits	455,299		41.6		1.60
Total deposits	$	1,096,108	100.0	%	0.91	%

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

(Dollars in thousands)	September 30, 2018
Maturing in:
3 months or less	$	65,742
3 months to 6 months	71,970
6 months to 1 year	121,147
1 year or greater	36,050
Total	$	294,909

Borrowings

Total debt outstanding at September 30, 2018 was $161.4 million, an increase of $98.7 million from $62.7 million at December 31, 2017. The increase in total borrowings was primarily due to an increase of $90.0 million in FHLB advances and $8.7 million in securities sold under repurchase agreements. Total borrowings increased primarily because loan growth was faster than deposit growth.

At September 30, 2018, FHLB advances were secured by a blanket lien on $368.5 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of $11.4 million. At December 31, 2017, FHLB advances

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were secured by a blanket lien on $316.5 million of real estate-related loans, and repurchase agreements were secured by securities with a fair value of $2.5 million.

As of September 30, 2018, the Company had $15.0 million of subordinated notes outstanding, and debt issuance costs of $118 thousand related to these subordinated notes. The notes bear a fixed interest rate of 6.375% per annum, payable semi-annually through December 15, 2020. The notes will bear a floating interest rate of three-month LIBOR plus 477 basis points payable quarterly after December 15, 2020 through maturity. The notes mature December 15, 2025, and the Company has the option to redeem or prepay any or all of the subordinated notes without premium or penalty any time after December 15, 2020 or at any time in the event of certain changes that affect the deductibility of interest for tax purposes or the treatment of the notes as Tier 2 Capital.

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

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
FHLB Line of Credit
Average daily balance	$	3,026		$	45		$	4,085		$	2,347
Weighted-average rate	2.40		%	1.40		%	2.06		%	0.91		%
Amount outstanding at period end	$	—		$	—		$	—		$	—
Maximum month-end balance	$	37,081		$	—		$	37,081		$	20,551
Securities sold under agreements to repurchase
Average daily balance	$	9,824		$	707		$	4,413		$	806
Weighted-average rate	2.34		%	0.30		%	2.34		%	0.30		%
Amount outstanding at period end	$	10,021		$	896		$	10,021		$	896
Maximum month-end balance	$	10,276		$	896		$	10,761		$	1,085
FHLB Advances
Average daily balance	$	71,054		$	74,140		$	47,077		$	33,224
Weighted-average rate	2.14		%	1.13		%	1.94		%	0.92		%
Amount outstanding at period end	$	125,000		$	62,000		$	125,000		$	62,000
Maximum month-end balance	$	125,000		$	72,000		$	125,000		$	120,000

Capital Resources

Shareholders' equity is influenced primarily by earnings, dividends, sales of 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 $37.5 million to $145.5 million at September 30, 2018 as compared to $108.0 million at December 31, 2017. The increase in shareholders' equity was primarily impacted by the issuance of 1,150,765 shares of common stock in our initial public offering, which resulted in net proceeds of $29.0 million, as well as $10.4 million of net income generated during the nine months ended September 30, 2018. These increases in shareholders' equity were partially offset by a $3.2 million increase in accumulated other comprehensive losses due to increases in unrealized losses on available for sale securities.

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

	Three months ended September 30,						Nine months ended September 30,
(Dollars in thousands)	2018			2017			2018			2017
Balance at beginning of period	$	143,445		$	104,206		$	107,960		$	96,571
Net income	3,255			2,835			10,435			8,908
Other comprehensive income (loss)	(986		)	(223		)	(3,174		)	890
Initial public offering of 1,150,765 shares of common stock, net of issuance costs	—			—			29,030			—
Common stock dividend paid/declared	(465		)	—			(662		)	—
Exercise of stock options	12			—			1,269			151
Stock-based compensation expense	198			167			601			465
Balance at end of period	$	145,459		$	106,985		$	145,459		$	106,985

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

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

During the first quarter of 2015, regulations implementing the Basel III regulatory capital framework and the Dodd-Frank Wall Street Reform and Consumer Protection Act became effective, certain provisions of which are subject to a multi-year phase-in period. These rules modified the calculation of the various capital ratios, added a new ratio, common equity tier 1, and revised the adequately and well capitalized thresholds. When fully phased in on January 1, 2019, the rules will require the Company to maintain a capital conservation buffer of common equity capital that exceeds by more than 2.5% the minimum risk-weighted assets ratios. The capital conservation buffer requirement was 1.875% as of September 30, 2018 and 1.25% as of December 31, 2017, which is reflected in the table below.

At September 30, 2018, the Company and the Bank met all the capital adequacy requirements to which they were subject.

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

	Capital Adequacy Regulatory Requirement		Capital Adequacy Regulatory Requirement + Capital Conservation Buffer(1)		Well Capitalized Regulatory Requirement		Actual Capital Ratio
September 30, 2018
Common equity tier 1 to risk-weighted assets:
Consolidated	4.50	%	6.38	%			11.75	%
Bank	4.50	%	6.38	%	6.50	%	12.00	%
Tier 1 capital to risk-weighted assets:
Consolidated	6.00	%	7.88	%			11.75	%
Bank	6.00	%	7.88	%	8.00	%	12.00	%
Total capital to risk-weighted assets:
Consolidated	8.00	%	9.88	%			13.99	%
Bank	8.00	%	9.88	%	10.00	%	13.00	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	4.00	%	4.00	%			10.31	%
Bank	4.00	%	4.00	%	5.00	%	10.62	%
December 31, 2017
Common equity tier 1 to risk-weighted assets:
Consolidated	4.50	%	5.75	%			9.10	%
Bank	4.50	%	5.75	%	6.50	%	10.29	%
Tier 1 capital to risk-weighted assets:
Consolidated	6.00	%	7.25	%			9.10	%
Bank	6.00	%	7.25	%	8.00	%	10.29	%
Total capital to risk-weighted assets:
Consolidated	8.00	%	9.25	%			11.55	%
Bank	8.00	%	9.25	%	10.00	%	11.37	%
Tier 1 capital to average assets (leverage ratio):
Consolidated	4.00	%	4.00	%			7.92	%
Bank	4.00	%	4.00	%	5.00	%	8.96	%

_______________________________________________________________________________

⁽¹⁾  Reflects the capital conservation buffer of 1.875% and 1.25% applicable during 2018 and 2017, respectively.

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Contractual Obligations and Off-Balance Sheet Arrangements

Contractual Obligations.    In the ordinary course of our operations, we enter into certain contractual obligations. Total contractual obligations at September 30, 2018 were $629.8 million, an increase of $117.0 million, from $512.8 million at December 31, 2017. The increase of $117.0 million was primarily due to an increase of $98.7 million in short-term borrowings and $17.9 million in time deposits. The following tables present our contractual obligations as of September 30, 2018 and December 31, 2017.

	Contractual Maturities as of September 30, 2018
(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	1,066	$	1,803	$	1,421	$	2,811	$	7,101
Short-term borrowings	135,021		—		—		—		135,021
Long-term borrowings	—		—		11,462		—		11,462
Subordinated notes	—		—		—		14,882		14,882
Time deposits	404,985		53,640		2,740		—		461,365
Total	$	541,072	$	55,443	$	15,623	$	17,693	$	629,831

	Contractual Maturities as of December 31, 2017
(Dollars in thousands)	Less Than One Year		One to Three Years		Three to Five Years		Over Five Years		Total
Operating lease obligations	$	925	$	1,576	$	1,095	$	3,103	$	6,699
Short-term borrowings	36,319		—		—		—		36,319
Long-term borrowings	—		—		11,514		—		11,514
Subordinated notes	—		—		—		14,844		14,844
Time deposits	345,817		88,757		8,878		—		443,452
Total	$	383,061	$	90,333	$	21,487	$	17,947	$	512,828

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 enter into forward commitments for the future delivery of mortgage loans when interest rate lock commitments are entered into in order to economically hedge the effect of changes in interest rates resulting from our commitments to fund the loans. These commitments to fund mortgage loans (interest rate lock commitments) to be sold into the secondary market and forward commitments for the future delivery of mortgage loans to third party investors are considered derivatives.

We maintain an allowance to cover probable losses inherent in our financial instruments with off-balance sheet risk. At September 30, 2018, the allowance for off-balance sheet risk was $29 thousand, and included in "Other liabilities" on our consolidated balance sheets.

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

	September 30, 2018				December 31, 2017
(Dollars in thousands)	Fixed Rate		Variable Rate		Fixed Rate		Variable Rate
Commitments to make loans	$	16,273	$	2,325	$	5,041	$	8,837
Unused lines of credit	14,121		213,270		12,407		189,787
Unused standby letters of credit	3,705		232		3,584		1,411

Of the total unused lines of credit of $227.4 million at September 30, 2018, $40.0 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 September 30, 2018, we had liquid assets of $235.5 million, compared to $178.1 million at December 31, 2017. Liquid assets include cash and due from banks, federal funds sold, interest-bearing deposits with banks and unencumbered securities available-for-sale.

The Bank is a member of the FHLB, which provides short- and long-term funding to its members through advances collateralized by real estate-related assets and other select collateral, most typically in the form of debt securities. The actual borrowing capacity is contingent on the amount of collateral available to be pledged to the FHLB. As of September 30, 2018, we had $135.0 million of outstanding borrowings from the FHLB. The advances were secured by a blanket lien on $368.5 million of real estate-related loans as of September 30, 2018. Based on this collateral and the Company's holdings of FHLB stock, the Company is eligible to borrow up to an additional $78 million. In addition, the Bank can borrow up to $117.0 million through the unsecured lines of credit it has established with nine other banks, as well as $5.0 million through a secured line with the Federal Reserve Bank.

We also maintain relationships with correspondent banks which could provide funds on short notice, if needed. In addition, because the Bank is "well capitalized," it can accept wholesale deposits up to approximately $577.6 million based on current policy limits. Management believed that we had adequate resources to fund all of our commitments as of September 30, 2018.

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

	September 30, 2018		December 31, 2017
Investment securities available-for-sale to total assets	13.76	%	11.60	%
Loans to total deposits	98.65	%	92.37	%
Interest-earning assets to total assets	96.43	%	95.80	%
Interest-bearing deposits to total deposits	66.35	%	71.00	%

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

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

Interest Rate Risk

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

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

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

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

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

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

The estimated impact on our net interest income as of September 30, 2018 and December 31, 2017, assuming immediate parallel moves in interest rates is presented in the table below.

	September 30, 2018				December 31, 2017
Change in rates	Following 12 months		Following 24 months		Following 12 months		Following 24 months
+400 basis points	10.0	%	9.8	%	14.3	%	13.7	%
+300 basis points	7.9	%	7.8	%	11.7	%	11.4	%
+200 basis points	5.6	%	5.6	%	8.5	%	8.5	%
+100 basis points	3.1	%	3.2	%	4.7	%	4.8	%
-100 basis points	(1.8	)%	(1.7	)%	(4.9	)%	(5.4	)%

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

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

The table below presents the change in our economic value of equity as of September 30, 2018 and December 31, 2017, assuming immediate parallel shifts in interest rates.

Change in rates	September 30, 2018		December 31, 2017
+400 basis points	(36.0	)%	(34.6	)%
+300 basis points	(27.2	)%	(25.6	)%
+200 basis points	(17.9	)%	(16.5	)%
+100 basis points	(8.2	)%	(7.4	)%
-100 basis points	7.7	%	7.3	%

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ITEM 4. CONTROLS AND PROCEDURES

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

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

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 1A. RISK FACTORS

There have been no material changes from the risk factors previously disclosed in the “Risk Factors” section included in the Form S-1, as amended, filed with the SEC on April 12, 2018.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

Unregistered Sales of Equity Securities

None.

Use of Proceeds from Registered Securities

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

There has been no material change in the planned use of proceeds from our initial public offering as described in our prospectus filed with the SEC on April 20, 2018 pursuant to Rule 424(b)(4) under the Securities Act. On April 25, 2018, the Company contributed $20.0 million of the net proceeds of the initial public offering to the Bank.

Issuer Purchases of Equity Securities

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

ITEM 5. OTHER INFORMATION

None.

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ITEM 6. EXHIBITS

Exhibit No.	Description
31.1	Chief Executive Officer’s Certifications required by Rule 13(a)-14(a) – filed herewith.
31.2	Chief Financial Officer’s Certifications required by Rule 13(a)-14(a) – filed herewith.
32.1	Chief Executive Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.
32.2	Chief Financial Officer Certifications pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 – filed herewith.
101	Financial information from the Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2018, formatted in XBRL interactive data files pursuant to Rule 405 of Regulation S-T: (i) Consolidated Balance Sheets; (ii) Consolidated Statements of Income; (iii) Consolidated Statements of Comprehensive Income; (iv) Consolidated Statements of Changes in Shareholders’ Equity; (v) Consolidated Statements of Cash Flows; and (vi) Notes to the Consolidated Financial Statements – filed herewith.

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SIGNATURES

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

	Level One Bancorp, Inc.
Date: November 9, 2018	By:	/s/	Patrick J. Fehring
			Patrick J. Fehring
			President and Chief Executive Officer
			(principal executive officer)
Date: November 9, 2018	By:	/s/	David C. Walker
			David C. Walker
			Executive Vice President and Chief Financial Officer
			(principal financial officer)

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