LEVL - Level One Bancorp Inc. reports fourth quarter 2020 net income of $8.4 million representing $1.02 diluted earnings per common share

FARMINGTON HILLS, Mich., Jan. 29, 2021 (GLOBE NEWSWIRE) -- Level One Bancorp, Inc. (“Level One”) (Nasdaq: LEVL) today reported financial results for the fourth quarter of 2020, which included net income of $8.4 million, or $1.02 diluted earnings per common share. This compares to net income of $5.2 million, or $0.67 diluted earnings per common share, in the preceding quarter and $4.7 million, or $0.60 diluted earnings per common share, in the fourth quarter of 2019.

Patrick J. Fehring, President and Chief Executive Officer of Level One, commented, "We are pleased to report strong earnings for the fourth quarter of 2020. This caps another year of quality growth at Level One. In 2020, our net income was $20.4 million with diluted earnings per common share of $2.57. This was an increase of 26.70% over the prior year net income of $16.1 million and a 25.37% increase over last year's $2.05 diluted earnings per common share. These results were achieved in the face of an extraordinarily challenging environment this past year. For their accomplishments of the past year, I want to recognize the tireless effort of the Level One team during the pandemic and the related turbulence of the economy. Highlights of our remarkable year include the following:

• The successful integration of Ann Arbor State Bank, adding a great team of bankers and a desirable market to Level One.
• Providing over $410.0 million in Paycheck Protection Program ("PPP") lending to support our clients.
• Increasing mortgage banking activities income by 181.60% to $22.2 million.
• Improving the efficiency ratio to 62.44%.
• Strengthening our balance sheet with additional capital from the offering of depositary shares of our Series B preferred stock.
• Increasing our loan loss reserves by $9.6 million to 1.29% of total loans and 1.56% of non-PPP loans.
• Increasing total deposits by 72.91%.
• Reducing non-performing assets by $634 thousand from year-end 2019."

He continued, “We are very proud of our entire team that has helped businesses complete more than 1,000 applications for the second round of PPP loans in the past two weeks that total $193.6 million. These loans will help many small businesses cope with the challenges of managing through continued slowdowns in business activity and government-mandated shutdowns."

He concluded, "We are still in an uncertain, but improving, economy and maintain cautious optimism about the future while being cognizant of the continued COVID-19 pandemic concerns. As noted, we added significant reserves to our loan loss reserves in 2020 that reflect the challenging headwinds.”

Fourth Quarter 2020 Highlights

• Net income of $8.4 million increased 60.74% from $5.2 million in the preceding quarter
• Diluted earnings per common share of $1.02 increased 52.24% compared to $0.67 in the preceding quarter, and 70.00% compared to $0.60 in the fourth quarter of 2019
• Net interest margin, on a fully taxable equivalent ("FTE") basis, was 3.27%, compared to 2.80% in the preceding quarter
• Net interest income increased $2.5 million to $19.1 million in the fourth quarter of 2020, compared to $16.6 million in the preceding quarter
• Noninterest income decreased $1.0 million to $8.1 million in the fourth quarter of 2020, compared to $9.1 million in the preceding quarter
• Provision for loan loss decreased to $1.5 million in the fourth quarter of 2020, compared to $4.3 million provision expense in the preceding quarter
• Total assets decreased 0.14% to $2.44 billion at December 31, 2020, compared to $2.45 billion at September 30, 2020
• Total loans decreased 6.53% to $1.72 billion at December 31, 2020, compared to $1.84 billion at September 30, 2020 primarily driven by PPP loan forgiveness
• Total deposits increased 1.02% to $1.96 billion at December 31, 2020, compared to $1.94 billion at September 30, 2020
• Book value per common share increased 4.49% to $25.14 per common share at December 31, 2020, compared to $24.06 per common share at September 30, 2020
• Tangible book value per common share increased 4.75% to $19.63 per common share at December 31, 2020, compared to $18.74 per common share at September 30, 2020
  

Net Interest Income and Net Interest Margin

Level One's net interest income increased $2.5 million, or 15.12%, to $19.1 million in the fourth quarter of 2020, compared to $16.6 million in the preceding quarter, and increased $6.2 million, or 48.02%, compared to $12.9 million in the fourth quarter of 2019.

Level One’s net interest margin, on a FTE basis, was 3.27% in the fourth quarter of 2020, compared to 2.80% in the preceding quarter and 3.56% in the fourth quarter of 2019. The increase in the net interest margin compared to the preceding quarter was primarily a result of the forgiveness of $102.4 million of PPP loans by the U.S. Small Business Administration (“SBA”), which accelerated the recognition of related fee income, which resulted in an average yield on PPP loans of 6.21%, net of deferred fees/costs. Loan yields on non-PPP loans was 4.17% for the fourth quarter of 2020 compared to 4.35% in the preceding quarter. The decrease compared to the fourth quarter of 2019 was a result of lower yields across most interest-earning assets, mostly reflecting the impact of lower interest rates. Average loan yield decreased 71 basis points to 4.49% for the fourth quarter of 2020 from 5.20% for the fourth quarter of 2019, primarily due to the target federal funds rate dropping 150 basis points in March 2020 in response to the COVID-19 pandemic. The decrease in loan yields was accompanied by a corresponding decrease in the cost of funds, which declined 99 basis points to 0.78% in the fourth quarter of 2020, compared to 1.77% in the fourth quarter of 2019 primarily due to lower interest rates paid as a result of revised internal deposit rates, mainly driven by the decreases in the target federal funds rate. Finally, during the fourth quarter of 2020, our average cash balances of $213.5 million, which resulted primarily from excess funding under the Paycheck Protection Program Liquidity Facility ("PPPLF"), earned 0.12%, which negatively affected the net interest margin.

Noninterest Income

Level One's noninterest income decreased $1.0 million, or 11.12%, to $8.1 million in the fourth quarter of 2020, compared to $9.1 million in the preceding quarter, and increased $3.5 million, or 76.25%, compared to $4.6 million in the fourth quarter of 2019. The decrease in noninterest income compared to the preceding quarter was primarily attributable to a decrease of $434 thousand in net gains on sales of investment securities, a decrease of $315 thousand in other charges and fees, and a decrease of $298 thousand in mortgage banking activities. The decrease in net gains on sales of investment securities was due to fewer sales of investment securities during the fourth quarter of 2020. The decrease in other charges and fees was primarily due to a decrease in interest rate swap fees and lower gains on sale of other real estate owned. The decrease in the mortgage banking activities income compared to the third quarter of 2020 was primarily due to $40.1 million lower residential loan originations held for sale.

The increase in noninterest income year over year was primarily due to an increase of $4.7 million in mortgage banking activities partially offset by a decrease of $1.0 million in net gains on sales of investment securities. The increase in mortgage banking activities compared to the fourth quarter of 2019 was primarily due to $71.7 million higher residential loan originations held for sale and $70.3 million higher residential loans sold primarily as a result of higher volumes caused by the lower interest rate environment and the expansion of our mortgage banking department. The decrease in net gains on sales of securities was due to fewer securities sold in the fourth quarter of 2020 than in the fourth quarter of 2019.

Noninterest Expense

Level One's noninterest expense increased $335 thousand, or 2.21%, to $15.5 million in the fourth quarter of 2020, compared to $15.1 million in the preceding quarter, and increased $4.2 million, or 36.88%, compared to $11.3 million in the fourth quarter of 2019. The increase in noninterest expense compared to the preceding quarter was primarily attributable to an increase of $352 thousand in salary and employee benefits. The increase in salary and employee benefits compared to the third quarter of 2020 was primarily due to increases of $774 thousand in incentive compensation and $98 thousand in supplemental employee retirement plan ("SERP") expense as a result of a year-to-date true-up. This was partially offset by a $605 thousand decrease in mortgage commissions.

The increase in noninterest expense year over year was mainly attributable to increases of $3.1 million in salary and employee benefits, $412 thousand in occupancy and equipment expense, $347 thousand in data processing expense, $284 thousand in FDIC premium expense, $198 thousand in professional service fees, and $163 thousand in core deposit premium amortization. These increases were partially offset by a decrease of $220 thousand in acquisition and due diligence fees. The increase in salary and employee benefits between the periods was primarily due to increases of $1.3 million in mortgage commissions expense and $709 thousand in incentive compensation as well as an increase of 29 full-time equivalent employees attributable to the acquisition of Ann Arbor State Bank and organic growth. The increase in occupancy and equipment expense was primarily attributable to increased building rent and other expenses related to the addition of the three new branches acquired with Ann Arbor State Bank, as well as organic growth in the organization. The increase in FDIC premium expense was primarily due to the increase in assets related to the acquisition of Ann Arbor State Bank. The increase in professional service fees was primarily related to increased residential mortgage volumes as well as increased audit fees. In addition, as a result of the acquisition, Level One recorded $3.7 million of core deposit premiums, leading to the increased amortization expense on core deposit intangibles compared to the same period in the prior year. The decrease in acquisition and due diligence fees was primarily due to the majority of expenses related to the merger with Ann Arbor State Bank being incurred from the third quarter of 2019 to the first quarter of 2020.

The efficiency ratio, which is a measure of operating expenses as a percentage of net interest income and noninterest income, for the fourth quarter of 2020 was 56.81%, compared to 58.81% for the preceding quarter and 64.55% in the fourth quarter of 2019. The decrease in the efficiency ratio year over year was primarily driven by the additional income provided by the acquisition of Ann Arbor State Bank without adding a proportional amount of expense as well as the increase in mortgage banking income net of commissions as a result of higher loan volumes.

Income Tax Expense

Level One's income tax provision was $1.8 million, or 18.05% of pretax income, in the fourth quarter of 2020, as compared to $1.1 million, or 17.66% of pretax income, in the preceding quarter and $975 thousand, or 17.24% of pretax income, in the fourth quarter of 2019.

Loan Portfolio

Total loans were $1.72 billion at December 31, 2020, a decrease of $120.4 million, or 6.53%, from $1.84 billion at September 30, 2020, and up $495.9 million, or 40.40%, from $1.23 billion at December 31, 2019. The decrease in total loans compared to September 30, 2020 was primarily due to a decrease of $122.4 million in our commercial and industrial loan portfolio, $102.4 million of which were PPP loans that were forgiven. The growth in total loans compared to December 31, 2019 was primarily due to $290.1 million of PPP loans that were originated during the second and third quarters of 2020 and new loan growth during the year ended December 31, 2020. The acquisition of Ann Arbor State Bank also contributed $224.1 million of loans as of the merger date of January 2, 2020. The loan growth mentioned above was partially offset by a net decrease of $18.3 million due to loan payoffs and lower line of credit usage.

Investment Securities

The investment securities portfolio grew $49.2 million, or 19.41%, to $302.7 million at December 31, 2020, from $253.5 million at September 30, 2020, and up $121.8 million, or 67.34%, from $180.9 million at December 31, 2019. The increase in the investment securities portfolio compared to September 30, 2020 was primarily due to the purchase of $56.9 million of investment securities, offset in part by $2.6 million of sales, calls, or maturity of investment securities. The increase in investment securities compared to December 31, 2019 was primarily due to the purchase of $140.1 million of securities between the two dates using the excess cash balances generated by the payoffs of PPP loans as well as the acquisition of Ann Arbor State Bank, which contributed $47.4 million of investment securities.

Deposits

Total deposits increased to $1.96 billion at December 31, 2020, compared to $1.94 billion at September 30, 2020, and increased $827.9 million, or 72.91%, from $1.14 billion at December 31, 2019. The growth in deposits compared to December 31, 2019 was primarily due to $563.1 million of organic deposit growth as a result of customers increasing their liquidity. In addition, the acquisition of Ann Arbor State Bank contributed $264.8 million in deposits as of the merger date of January 2, 2020. Total deposit composition at December 31, 2020 consisted of 38.03% of demand deposit accounts, 31.57% of savings and money market accounts and 30.40% of time deposits.

Borrowings

Total debt outstanding was $230.3 million at December 31, 2020, a decrease of $31.1 million, or 11.90%, from $261.4 million at September 30, 2020, and down $26.3 million, or 10.25%, from $256.7 million at December 31, 2019. The decrease in debt outstanding compared to September 30, 2020 was primarily due to a decrease of $34.1 million in PPPLF Federal Reserve Bank ("FRB") borrowings. The decrease in total borrowings compared to December 31, 2019 was primarily due to decreases of $60.0 million in short-term FHLB advances and $5.0 million in fed funds sold, partially offset by an increase of $36.2 million in long-term FHLB advances, of which $11.0 million was acquired through the Ann Arbor State Bank acquisition.

Asset Quality

Nonaccrual loans were $18.8 million, or 1.09% of total loans, at December 31, 2020, a decrease of $450 thousand from nonaccrual loans of $19.3 million, or 1.04% of total loans, at September 30, 2020, and an increase of $287 thousand from nonaccrual loans of $18.5 million, or 1.51% of total loans, at December 31, 2019.

Level One had no other real estate owned assets at December 31, 2020 and September 30, 2020, compared to $921 thousand at December 31, 2019. Nonperforming assets, consisting of nonaccrual loans and other real estate owned, as a percentage of total assets were 0.77% at December 31, 2020, compared to 0.79% at September 30, 2020, and 1.23% at December 31, 2019.

Performing troubled debt restructured loans, which are not reported as nonaccrual loans but rather as part of impaired loans, were $978 thousand at December 31, 2020, $1.1 million at September 30, 2020, and $906 thousand at December 31, 2019. Loans to borrowers who are in financial difficulty and who have been granted concessions that may include interest rate reductions, forbearance agreements, and principal deferral or reduction, are categorized as troubled debt restructured loans. In accordance with bank regulatory guidance, troubled debt restructurings do not include short-term modifications made on a good-faith basis in response to the COVID-19 pandemic to borrowers who were current prior to any relief. As of December 31, 2020, there were $19.8 million of loans that remained on a COVID-related deferral of which $11.4 million of loans had payments deferred greater than six months.

Net chargeoffs in the fourth quarter of 2020 were $496 thousand, or 0.11% of average loans on an annualized basis, compared to $78 thousand of net chargeoffs, or 0.02% of average loans on an annualized basis, for the preceding quarter and $181 thousand of net chargeoffs, or 0.06% of average loans on an annualized basis, in the fourth quarter of 2019. The increase in net chargeoffs during the fourth quarter of 2020 compared to the third quarter of 2020 was due primarily to increases of $357 thousand in commercial loan chargeoffs and $176 thousand in residential loan chargeoffs. The increase in net chargeoffs year over year was primarily due to commercial loan chargeoffs.

Level One's provision for loan losses in the fourth quarter of 2020 was a provision expense of $1.5 million, compared to $4.3 million in the preceding quarter and $548 thousand in the fourth quarter of 2019. The decrease in the provision expense quarter over quarter was primarily due to a decrease of $1.9 million in general reserves as a result of a larger reserve increase in the third quarter of 2020 related to the impact of the COVID-19 pandemic on the loan portfolio, as well as a $997 thousand decrease in specific reserves, partially offset by an increase in net chargeoffs of $418 thousand. The increase in the provision expense year over year was primarily due to an increase in general reserves of $1.3 million as a result of trends in delinquencies and nonaccrual loans as a result of the COVID-19 pandemic, as well as an increase of $315 thousand in net chargeoffs. This was partially offset by a $410 thousand decrease in specific reserves. The Company will continue to evaluate the fluid situation in regard to the COVID-19 pandemic and will take further action to appropriately record additional provision for loan losses should there be any indications of a decrease in the credit quality of our portfolio as a result of the COVID-19 pandemic.

The allowance for loan losses was $22.3 million, or 1.29% of total loans, at December 31, 2020, compared to $21.3 million, or 1.15% of total loans, at September 30, 2020, and $12.7 million, or 1.03% of total loans, at December 31, 2019. Excluding $290.1 million and $392.5 million of PPP loans, the allowance for loan losses as a percentage of total loans was 1.56% in the fourth quarter of 2020, compared to 1.46% in the preceding quarter (See section entitled "GAAP Reconciliation of Non-GAAP Financial Measures" for further details). The allowance for loan losses as a percentage of total loans increased primarily due to the trends in delinquencies and nonaccrual loans as well as the stress on the commercial and industrial and commercial real estate owner occupied portfolios, primarily in the restaurant and transportation industries, as a result of the COVID-19 pandemic. As of December 31, 2020, the allowance for loan losses as a percentage of nonaccrual loans was 118.50%, compared to 110.32% at September 30, 2020, and 68.40% at December 31, 2019. The Company will re-evaluate the appropriateness of the allowance for loan losses in future quarters as needed.

Capital

Total shareholders’ equity was $215.3 million at December 31, 2020, an increase of $5.9 million, or 2.80%, compared with $209.5 million at September 30, 2020 primarily as a result of an increase in retained earnings. Total shareholders' equity increased $44.6 million, or 26.14%, from $170.7 million at December 31, 2019 attributable to the issuance of preferred stock in the third quarter of 2020 as well as an increase in retained earnings.

Recent Developments

Fourth Quarter Common Stock Dividend : On December 16, 2020, Level One’s Board of Directors declared a quarterly cash dividend of $0.05 per share. This dividend was paid on January 15, 2021, to stockholders of record at the close of business on December 31, 2020.

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

Level One's Response to the COVID-19 Pandemic : Level One has taken comprehensive steps to help our customers, team members and communities during the current COVID-19 pandemic health crisis. For our customers, we have provided loan payment deferrals and offered fee waivers, among other actions. We have helped our consumer and small business customers by deferring loan payments and waiving fees. From January 18 through January 27, 2021, Level One received 1,044 new PPP loan applications, for a total amount of $193.6 million of funding, of which 756 applications were for loans $150,000 or below.

We are continuing to enable the vast majority of our main office team members to work remotely each day. We have also taken significant actions to help ensure the safety of our team members whose roles require them to come into the office, which includes the development, implementation and communication of a comprehensive return to office plan. We are currently serving customers through our drive-thrus and by appointment only for in-person services. We will continue to evaluate this fluid situation and take additional actions as necessary.

About Level One Bancorp, Inc.

Level One Bancorp, Inc. is the holding company for Level One Bank, a full-service commercial and consumer bank headquartered in Michigan with assets of approximately $2.44 billion as of December 31, 2020. It operates sixteen banking centers throughout southeast Michigan and west Michigan. Level One Bank's success has been recognized both locally and nationally as the U.S. Small Business Administration's (SBA) "Community Lender of the Year" and "Export Finance Lender of the Year" and one of S&P Global's Top 10 "Best-Performing Community Banks" in the nation. Level One's commercial division provides a menu of products including lines of credit, term loans, leases, commercial mortgages, SBA loans, export-import financing, and a full suite of treasury management and private banking services. The consumer division offers personal savings and checking accounts and a complete array of consumer loan products including residential mortgages, home equity loans, auto loans, and credit card services. Level One Bank offers a variety of online banking services and a robust mobile banking application for individuals and businesses. Level One Bank offers the sophistication of a big bank, the heart of a community bank, and the spirit of an entrepreneur. For more information, visit www.levelonebank.com .

Forward-Looking Statements

This release contains "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995 that reflect management’s current views of future events and operations. These forward-looking statements are based on the information currently available to the Company as of the date of this release. Forward-looking statements generally can be identified by the use of forward-looking terminology such as "will," "propose," "may," "plan," "seek," "expect," "intend," "estimate," "anticipate," "believe," "continue" or similar technology. It is important to note that these forward-looking statements are not guarantees of future performance and involve risk and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic, including its potential effects on the economic environment, our customers and our operations, as well as any changes to federal, state or local government laws, regulations or orders in connection with the pandemic, the ability of the Company to implement its strategy and expand its lending operations, changes in interest rates and other general economic, business and political conditions, including changes in the financial markets, changes in benchmark interest rates used to price loans and deposits including the expected elimination of LIBOR, as well as other risks described in the Company's filings with the Securities and Exchange Commission. The Company does not undertake any obligation to update or revise any forward-looking statements to reflect changes in assumptions, the occurrence of unanticipated events, or otherwise.

⁽¹⁾ See section entitled "GAAP Reconciliation of Non-GAAP Financial Measures" below.
⁽²⁾ Presented on a tax equivalent basis using a 21% tax rate.

⁽¹⁾ Includes nonaccrual loans.
⁽²⁾ For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
⁽³⁾ Average rates and yields are presented on an annual basis and includes a taxable equivalent adjustment to interest income of $140 thousand, $144 thousand, and $117 thousand on tax-exempt securities for the three months ended December 31, 2020, September 30, 2020, and December 31, 2019, respectively, and $574 thousand and $453 thousand for the year ended December 31, 2020 and December 31, 2019, respectively, and using a federal income tax rate of 21%.
⁽⁴⁾ Net interest margin represents net interest income divided by average total interest-earning assets.

GAAP Reconciliation of Non-GAAP Financial Measures

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

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