LEVL - Level One Bancorp Inc. reports third quarter 2020 net income of $5.2 million representing $0.67 diluted earnings per common share

FARMINGTON HILLS, Mich., Oct. 30, 2020 (GLOBE NEWSWIRE) -- Level One Bancorp, Inc. (“Level One”) (Nasdaq: LEVL) today reported financial results for the third quarter of 2020, which included net income of $5.2 million, or $0.67 diluted earnings per common share. This compares to net income of $2.7 million, or $0.35 diluted earnings per common share, in the preceding quarter and $4.4 million, or $0.56 diluted earnings per common share, in the third quarter of 2019.

Patrick J. Fehring, President and Chief Executive Officer of Level One, commented, "We are pleased to report strong third quarter operating results despite being faced with the challenges of the COVID-19 pandemic. The third quarter revenue reflects the significant and continuing growth in our residential mortgage banking business, which experienced an increase in mortgage banking revenue of $1.4 million, or 25.05%, over the previous quarter. This increase is due to the continued low interest rate environment, the dedicated efforts of our team members, as well as management leveraging efficiencies in the production process to meet the unprecedented demand. Level One originated $206.8 million of residential mortgage loans during the three months ended September 30, 2020, compared to $203.6 million originated in the second quarter of 2020. Also during the quarter, our efficiency ratio declined to 58.81%, compared to 62.79% for the preceding quarter, mainly driven by the increase in mortgage banking activities included in noninterest income."

He continued, "Loan portfolio growth was solid in the third quarter with loans increasing 1.57%, and deposits increased 6.70%. To supplement its already well-capitalized financial position, the Company issued $25.0 million in Depository Shares representing interests in 7.50% Non-Cumulative Perpetual Preferred Stock in August. This additional capital will be available to the Company to support growth, increased investments, and acquisitions."

Commenting on credit quality, Mr. Fehring stated, “While net chargeoffs in the third quarter of 2020 were nominal at $78 thousand, we believe it was prudent to record a provision of $4.3 million for the quarter. This provision expense reflects the uncertainty of forecasted economic conditions as businesses and individuals face impacts of the pandemic. Overall, management believes the Bank’s reserves are appropriate, and we will continue to be diligent in our review of credit as circumstances related to the pandemic unfold.”

Mr. Fehring concluded, "I am very proud of the Level One team for their great efforts during the past two quarters in assisting our clients during these challenging times. As of September 30, 2020, Level One had $392.5 million of Paycheck Protection Program ("PPP") loans outstanding to more than 2,000 small and mid-sized businesses. Approximately 40% of these PPP loans are to new clients, which provides us an opportunity for future growth. We will continue to monitor the COVID-19 pandemic and evaluate the impact that it could have on our customers and our team members."

Third Quarter 2020 Highlights

• Net income of $5.2 million increased 92.6% from $2.7 million in the preceding quarter
• Diluted earnings per common share of $0.67 increased 91.43% compared to $0.35 in the preceding quarter, and 19.64% compared to $0.56 in the third quarter of 2019
• Net interest margin, on a fully taxable equivalent ("FTE") basis, was 2.80%, compared to 2.98% in the preceding quarter
• Noninterest income increased $1.3 million to $9.1 million in the third quarter of 2020, compared to $7.8 million in the preceding quarter
• Provision for loan loss decreased to $4.3 million of provision expense in the third quarter of 2020, compared to $5.6 million provision expense in the preceding quarter
• Total assets decreased 3.75% to $2.45 billion at September 30, 2020, compared to $2.54 billion at June 30, 2020
• Total loans increased 1.57% to $1.84 billion at September 30, 2020, compared to $1.82 billion at June 30, 2020
• Total deposits increased 6.70% to $1.94 billion at September 30, 2020, compared to $1.82 billion at June 30, 2020
• Book value per common share increased 3.22% to $24.06 per common share at September 30, 2020, compared to $23.31 per common share at June 30, 2020
• Tangible book value per common share increased 3.59% to $18.74 per common share at September 30, 2020, compared to $18.09 per common share at June 30, 2020

Net Interest Income and Net Interest Margin

Level One's net interest income increased $364 thousand, or 2.24%, to $16.6 million in the third quarter of 2020, compared to $16.2 million in the preceding quarter, and increased $3.6 million, or 27.79%, compared to $13.0 million in the third quarter of 2019.

Level One’s net interest margin, on a FTE basis, was 2.80% in the third quarter of 2020, compared to 2.98% in the preceding quarter and 3.59% in the third quarter of 2019. This decrease in the net interest margin compared to the preceding quarter and third quarter of 2019 was primarily a result of lower yields across most interest-earning assets, mostly reflecting the impact of lower interest rates. Average loan yield decreased 36 basis points to 3.98% for the third quarter of 2020, compared to 4.34% for the preceding quarter, and decreased 143 basis points from 5.41% for the third 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 health crisis, as well as decreasing 75 basis points in the second half of 2019. Another contributing factor to the decrease in loan yields was the impact of the PPP loans originated during the second and third quarters of 2020, which had a yield of 2.99%, net of deferred fees/costs, compared to the non-PPP loans, which had a yield of 4.60%. The decrease in loan yields was accompanied by a corresponding decrease in the cost of funds, which declined 21 basis points to 0.88% in the third quarter of 2020, compared to 1.09% in the preceding quarter and decreased 110 basis points from 1.98% in the third quarter of 2019. Finally, during the third quarter of 2020, our average cash balances of $259.3 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 increased $1.3 million, or 17.15%, to $9.1 million in the third quarter of 2020, compared to $7.8 million in the preceding quarter, and increased $5.2 million, or 134.78%, compared to $3.9 million in the third quarter of 2019. The increase in noninterest income compared to the preceding quarter was primarily attributable to an increase of $1.4 million in mortgage banking activities and an increase of $309 thousand in other charges and fees, partially offset by a decrease of $465 thousand in net gains on sales of investment securities. The increase in the mortgage banking activities income compared to the second quarter of 2020 was primarily due to $54.9 million higher residential loan originations held for sale as a result of low interest rates continuing during the third quarter of 2020. The increase in other charges and fees was primarily due to an increase in interest rate swap fees partially offset by lower gains on sale of other real estate owned. The decrease in net gain on sales of investment securities was due to fewer sales of investment securities during the third quarter of 2020.

The increase in noninterest income year over year was primarily due to increases of $4.8 million in mortgage banking activities and $283 thousand in net gains on sales of investment securities. The increase in mortgage banking activities compared to the third quarter of 2019 was primarily due to $98.2 million higher residential loan originations held for sale and $66.9 million higher residential loans sold primarily as a result of higher volumes caused by the lower rate environment. The increase in net gain on sales of securities was due to higher gains realized on securities sold in the third quarter of 2020 than those sold in the third quarter of 2019.

Noninterest Expense

Level One's noninterest expense remained flat at $15.1 million in the third quarter of 2020, compared to the preceding quarter, and increased $3.6 million, or 31.09%, compared to $11.5 million in the third quarter of 2019. The increase in noninterest expense year over year was mainly attributable to increases of $2.3 million in salary and employee benefits, $475 thousand in occupancy and equipment expense, $417 thousand in FDIC expense (included in "other expense" on the income statement), $343 thousand in professional fees, $183 thousand in data processing expense, and $163 thousand in core deposit premium amortization. These increases were partially offset by a decrease of $302 thousand in acquisition and due diligence fees. The increase in salary and employee benefits between the periods was primarily due to an increase of $1.6 million in mortgage commissions expense as well as an increase of 37 full-time equivalent employees, mainly attributable to the acquisition of Ann Arbor State Bank as well as 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 in addition to credits received during the third quarter of 2019. The increase in professional service fees was primarily related to increased residential mortgage volumes as well as increased legal fees. The increase in data processing expense was due to increased costs of loan systems. As a result of the acquisition, the Company recorded $3.7 million of core deposit premiums, leading to the increased amortization expense on core deposit intangibles 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 third quarter of 2020 was 58.81%, compared to 62.79% for the preceding quarter and 68.50% in the third quarter of 2019. The decrease in the efficiency ratio year over year was primarily driven by the $4.8 million increase in mortgage banking activities included in noninterest income explained above.

Income Tax Expense

Level One's income tax provision was $1.1 million, or 17.66% of pretax income, in the third quarter of 2020, as compared to $643 thousand, or 19.11% of pretax income, in the preceding quarter and $914 thousand, or 17.17% of pretax income, in the third quarter of 2019. The increase in income tax provision compared to the preceding quarter and year over year was primarily as a result of increased income before income taxes.

Investment Securities

The investment securities portfolio grew $36.4 million, or 16.74%, to $253.5 million at September 30, 2020, from $217.2 million at June 30, 2020, and up $48.3 million, or 23.53%, from $205.2 million at September 30, 2019. The increase in the investment securities portfolio compared to June 30, 2020 was primarily due to the purchase of $44.5 million of investment securities, offset in part by $6.4 million of sales, calls, or maturity of investment securities. The increase in the investment securities compared to September 30, 2019 was primarily due to the acquisition of Ann Arbor State Bank, which contributed $47.4 million of investment securities, with additional organic growth and sales of investment securities since the completion of the merger in January 2020.

Loan Portfolio

Total loans were $1.84 billion at September 30, 2020, an increase of $28.5 million, or 1.57%, from $1.82 billion at June 30, 2020, and up $675.0 million, or 57.74%, from $1.17 billion at September 30, 2019. The growth in total loans compared to June 30, 2020 was primarily due to organic growth in our commercial loan portfolio as well as our residential real estate loan portfolio, $3.9 million of which were PPP loans. The growth in total loans compared to September 30, 2019 was primarily due to $392.5 million of PPP loans that were originated during the second and third quarters of 2020. The acquisition of Ann Arbor State Bank also contributed $224.1 million of loans as of the merger date of January 2, 2020. In addition to the PPP loans and the acquired loan portfolio, we had $117.7 million of organic loan growth in our commercial loan portfolio and our residential real estate loan portfolio. The loan growth mentioned above was partially offset by $59.3 million of loan runoff during the nine months ended September 30, 2020.

Deposits

Total deposits were $1.94 billion at September 30, 2020, an increase of $122.1 million, or 6.70%, from $1.82 billion at June 30, 2020, and increased $748.9 million, or 62.69%, from $1.19 billion at September 30, 2019. The increase in deposits compared to June 30, 2020  was primarily due to organic growth in our money market and savings deposits. The growth in deposits compared to September 30, 2019 was primarily due to $484.1 million of organic deposit growth. 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 September 30, 2020 consisted of 38.48% of demand deposit accounts, 30.64% of savings and money market accounts and 30.88% of time deposits.

Borrowings

Total debt outstanding was $261.4 million at September 30, 2020, a decrease of $238.2 million, or 47.68%, from $499.6 million at June 30, 2020, and an increase of $134.6 million, or 106.09%, from $126.8 million at September 30, 2019. The decrease in debt outstanding compared to June 30, 2020 was primarily due to a decrease of $236.3 million in Federal Reserve Bank ("FRB") borrowings, with $34.1 million remaining outstanding at the FRB under the PPPLF. The increase in total borrowings compared to September 30, 2019 was primarily due to increases of $81.0 million in long-term FHLB advances, $34.1 million in FRB borrowings, and $30.0 million in subordinated notes, partially offset by a decrease of $10.0 million in fed funds sold. The increase in debt outstanding, as well as the issuance of new subordinated notes during the fourth quarter of 2019 reflected management's efforts to fund the liquidity needs of Level One.

Asset Quality

Nonaccrual loans were $19.3 million, or 1.04% of total loans, at September 30, 2020, an increase of $11.0 million from nonaccrual loans of $8.3 million, or 0.46% of total loans, at June 30, 2020, and an increase of $7.8 million from nonaccrual loans of $11.5 million, or 0.98% of total loans, at September 30, 2019. The increase in nonaccrual loans compared to the preceding quarter was primarily due to five commercial loan relationships and two residential loan relationships totaling $11.4 million moving to nonaccrual status. The increase in nonaccrual loans year over year was primarily due to the same factors mentioned in the preceding sentence, partially offset by $1.1 million of nonaccrual loans transferred to other real estate owned and $914 thousand of nonaccrual loans paid down or charged off.

Level One had no other real estate owned assets at September 30, 2020, compared to $61 thousand at June 30, 2020 and $373 thousand at September 30, 2019. Nonperforming assets, consisting of nonaccrual loans and other real estate owned, as a percentage of total assets were 0.79% at September 30, 2020, compared to 0.33% at June 30, 2020, and 0.78% at September 30, 2019.

Performing troubled debt restructured loans, which are not reported as nonaccrual loans but rather as part of impaired loans, were $1.1 million at September 30, 2020 and June 30, 2020, and $914 thousand at September 30, 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.

Net chargeoffs in the third quarter of 2020 were $78 thousand, or 0.02% of average loans on an annualized basis, compared to $1.5 million of net chargeoffs, or 0.34% of average loans on an annualized basis, for the preceding quarter and $30 thousand of net chargeoffs, or 0.01% of average loans on an annualized basis, in the third quarter of 2019. The decrease in net chargeoffs during the third quarter of 2020 compared to the second quarter of 2020 was due primarily to a $1.3 million chargeoff during the second quarter of 2020 on a $7.9 million nonaccrual loan relationship that was subsequently sold.

Level One's provision for loan losses in the third quarter of 2020 was a provision expense of $4.3 million, compared to $5.6 million of provision expense in the preceding quarter and a provision benefit of $16 thousand in the third quarter of 2019. The decrease in the provision expense quarter over quarter was primarily due to a $1.4 million decrease in net chargeoffs and a slight decrease in both general reserves and reserves on purchase credit impaired loans, partially offset by a new $498 thousand specific reserve on one commercial loan relationship. The increase in the provision expense year over year was primarily due to an increase in general reserves of $3.3 million as a result of the uncertainty surrounding the impact of  the COVID-19 pandemic on the loan portfolio, as well as a $794 thousand increase 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 $21.3 million, or 1.15% of total loans, at September 30, 2020, compared to $17.1 million, or 0.94% of total loans, at June 30, 2020, and $12.3 million, or 1.05% of total loans, at September 30, 2019. Excluding $392.5 million and $388.3 million of PPP loans, the allowance for loan losses as a percentage of total loans was 1.46% in the third quarter of 2020, compared to 1.20% 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 as a result of the uncertainty surrounding the impact of  the COVID-19 pandemic on the loan portfolio. As of September 30, 2020, the allowance for loan losses as a percentage of nonaccrual loans was 110.32%, compared to 206.37% at June 30, 2020, and 107.46% at September 30, 2019. The Company will  re-evaluate the appropriateness of the allowance for loan losses in future quarters as needed.

Capital

Total shareholders’ equity was $209.5 million at September 30, 2020, an increase of $29.2 million, or 16.20%, compared with $180.3 million at June 30, 2020, primarily as a result of the issuance of preferred stock in the third quarter of 2020. Total shareholders' equity increased $41.5 million, or 24.71%, from $168.0 million at September 30, 2019 attributable to the issuance of preferred stock in the third quarter of 2020 as well as an increase in retained earnings.

Recent Developments

Third Quarter Common Stock Dividend : On September 16, 2020, Level One’s Board of Directors declared a quarterly cash dividend of $0.05 per share. This dividend was paid on October 15, 2020, to stockholders of record at the close of business on September 30, 2020.

Preferred Stock Public Offering and First Cash Dividend: On August 10, 2020, the Company sold 1,000,000 depositary shares, each representing 1/100th interest in a share of 7.50% Non-Cumulative Perpetual Preferred Stock, Series B. The aggregate offering price for the shares sold by the Company was $25.0 million, and after deducting $1.6 million of underwriting discounts and offering expenses paid to third parties, the Company received total net proceeds of $23.4 million.

On October 21, 2020, Level One’s Board of Directors declared a quarterly cash dividend of $47.92 per share on its 7.50% Non-Cumulative Preferred Stock, Series B. Holders of depositary shares will receive $0.4792 per depositary share. The dividend is payable on November 15, 2020, to shareholders of record at the close of business on October 31, 2020.

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. Through September 30, 2020, we have helped our consumer and small business customers by deferring loan payments and waiving fees on $416.3 million of non-PPP loans ($388.9 million of commercial balances and $27.4 million of consumer balances). As of September 30, 2020, we had $16.3 million of loans that had an outstanding payment deferral. To support our communities, we have made charitable donations, including one to a local health system, in order to help support the frontline workers impacted by the COVID-19 pandemic.

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. In addition, while our branches have reopened to serve our clients, we will continue to be diligent in our efforts to follow all CDC guidelines in order to ensure the health and safety of our clients and team members. 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 $2.45 billion as of September 30, 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.

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, as well as net income and diluted earnings per common share excluding acquisition and due diligence fees. 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:

⁽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 includes a taxable equivalent adjustment to interest income of $144 thousand, $154 thousand, and $118 thousand on tax-exempt securities for the three months ended September 30, 2020, June 30, 2020, and September 30, 2019, respectively, using a federal income tax rate of 21%.
⁽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.