Level One Bancorp (FRMEP) 8-KResults of Operations and Financial Condition

For Immediate Release

Patrick J. Fehring, Chief Executive Officer of Level One, commented, "We are excited about the opportunities before us as the economy recovers from the effects of the pandemic. Level One is well positioned in attractive markets with a stronger balance sheet, liquidity to support lending activities, and a growing team of talented bankers. During the second quarter of 2021, Level One Bank experienced loan growth (excluding a decrease of $146.5 million in Paycheck Protection Program ("PPP") loans) of $60.0 million, or 16.5% annualized. As the economy has fully reopened, Level One has been well positioned to meet the credit needs of the communities we serve as evidenced by the growth in business and retail loans. Additionally, during the quarter our credit quality metrics remained sound as we have worked closely with our clients as they navigate the economic recovery."

He continued, "I am pleased to report a solid second quarter for Level One with earnings of $7.0 million, or $0.84 diluted earnings per common share. This quarter’s results compare favorably to second quarter 2020 earnings of $2.7 million, or $0.35 diluted earnings per common share. Earnings for the first six months of 2021 were $15.9 million, or $1.94 diluted earnings per common share, compared with earnings of $6.8 million, or $0.88 diluted earnings per common share, for the first six months of 2020."

He concluded, "Finally, the Level One team worked diligently to implement the second round of PPP loans. Our participation in the second round of the PPP program provided over $234 million in loans to 1,531 small business in our communities. When combined with the first round of PPP in 2020, Level One Bank funded over $651 million in PPP loans. With these loans, the Level One Bank has provided both small businesses and their team members protection from the economic challenges of the COVID-19 pandemic."

Level One's net interest income increased $459 thousand, or 2.40%, to $19.6 million in the second quarter of 2021, compared to $19.2 million in the preceding quarter, and increased $3.4 million, or 20.84%, compared to $16.2 million in the second quarter of 2020. The increase in net interest income compared to the preceding quarter was primarily due to a decrease of $296 thousand in interest expense on deposits and an increase of $145 thousand of interest income on investment securities. The increase in net interest income compared to the second quarter of 2020 was primarily due to increases of $988 thousand of interest income on loans as a result of the accelerated recognition of fees on PPP loans that were forgiven and $354 thousand of interest income on investment securities due to the increased volumes of investment securities. In addition, between the second quarter of 2020 and the second quarter of 2021, interest expense on deposits decreased $1.8 million and interest expense on borrowed funds decreased $168 thousand. The decrease in interest expense on deposits was primarily due to lower interest rates paid as a result of revised internal deposit rates, mainly driven by a decrease in the target federal funds rate.

Level One’s net interest margin, on a FTE basis, was 3.30% in the second quarter of 2021, compared to 3.33% in the preceding quarter and 2.98% in the second quarter of 2020. The increase in the net interest margin year over year was primarily a result of a decrease in the cost of interest-bearing liabilities, which declined 54 basis points to 0.55% in the second quarter of 2021, compared to 1.09% in the second quarter of 2020 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.

Level One's noninterest income decreased $3.0 million, or 40.56%, to $4.3 million in the second quarter of 2021, compared to $7.3 million in the preceding quarter, and decreased $3.5 million, or 44.94%, compared to $7.8 million in the second quarter of 2020. The decrease in noninterest income compared to the preceding quarter was primarily attributable to a decrease of $3.1 million in mortgage banking activities partially offset by an increase of $145 thousand in other charges and fees. The decrease in the mortgage banking activities income compared to the preceding quarter was primarily due to $78.2 million lower residential loan originations held for sale and $89.4 million lower residential loans sold primarily as a result of the increase in interest rates and secondary market pricing. The increase in other charges and fees was primarily due to increases in bank owned life insurance interest income and interest rate swap fees.

The decrease in noninterest income in the second quarter of 2021 compared to the same period in 2020 was primarily due to decreases of $3.0 million in mortgage banking activities and $899 thousand in net gains on sales of investment securities. This was partially offset by increases of $252 thousand in service charges on deposits and $157 thousand in other charges and fees. The decrease in mortgage banking activities compared to the second quarter of 2020 was primarily due to $55.5 million lower residential loan originations held for sale and $40.4 million lower residential loans sold primarily as a result of the increase in interest rates and secondary market pricing. The decrease in net gains on sales of investment securities was due to no securities sold in the second quarter of 2021. The increase in service charges on deposits was primarily due to higher transaction volumes and deposit balances. The increase in other charges and fees was primarily due to increases in Visa Rebate income, interest rate

swap fees, and bank owned life insurance interest income. These were partially offset by a decrease in gains on sale of other real estate owned.

Level One's noninterest expense decreased $551 thousand, or 3.64%, to $14.6 million in the second quarter of 2021, compared to $15.1 million in the preceding quarter, and decreased $495 thousand, or 3.28%, compared to $15.1 million in the second quarter of 2020. The decrease in noninterest expense compared to the preceding quarter was primarily attributable to decreases of $570 thousand in salary and employee benefits, $167 thousand in data processing expense, and $138 thousand in loan processing expense. These decreases were partially offset by increases of $286 thousand in other expense and $148 thousand in marketing expense. The decrease in salary and employee benefits compared to the first quarter of 2021 was primarily due to decreases of $591 thousand in mortgage commissions; $223 thousand in social security, Medicare and employment taxes related to the decrease in mortgage commissions; and $124 thousand in incentive compensation. This was partially offset by a $307 thousand increase in salary expense primarily due to an increase in full-time equivalent employees. The decrease in data processing expense was primarily due to a decrease in PPP loan volumes run through the loan processing system used for PPP loans. The decrease in loan processing expense was primarily due to a collection fee on a nonaccrual loan in the first quarter of 2020. The increase in other expense was primarily due to the provision on unfunded commitments. The increase in marketing expense was primarily due to an increase in advertising efforts.

The decrease in noninterest expense in the second quarter of 2021 compared to the same period in 2020 was mainly attributable to decreases of $246 thousand in salary and employee benefits, $176 thousand in acquisition and due diligence fees, and $167 thousand in professional service fees. These decreases were partially offset by an increase of $147 thousand in data processing expense. The decrease in salary and employee benefits between the periods was primarily due to decreases of $914 thousand in mortgage commissions expense partially offset by a $339 thousand increase in incentive compensation and a $206 thousand increase in salaries expense. The decrease in acquisition and due diligence fees was primarily due to certain post-merger integration costs incurred in the second quarter of 2020, following the acquisition of Ann Arbor State Bank. The decrease in professional service fees was primarily related to decreased residential mortgage volumes. The increase in data processing fees was primarily due to the new loan processing system used for PPP loans.

The efficiency ratio, which is a measure of operating expenses as a percentage of net interest income and noninterest income, was 60.93% for the second quarter of 2021, compared to 57.27% for the preceding quarter and 62.79% in the second quarter of 2020.

Level One's income tax provision was $1.8 million, or 20.82% of pretax income, in the second quarter of 2021, as compared to $2.1 million, or 18.78% of pretax income, in the preceding quarter and $643 thousand, or 19.11% of pretax income, in the second quarter of 2020.

Total loans were $1.78 billion at June 30, 2021, a decrease of $86.4 million, or 4.64%, from $1.86 billion at March 31, 2021, and down $40.1 million, or 2.21%, from $1.82 billion at June 30, 2020. The decrease in total loans compared to March 31, 2021 was primarily due to $160.3 million of PPP loans forgiven by the SBA during the second quarter partially offset by a net increase of $60.0 million, or 16.5% annualized growth, in the remainder of the loan portfolio and $17.5 million of PPP loan originations from the second round of PPP funding. The decrease in total loans compared to June 30, 2020, was primarily due to a $129.0 million net decrease in PPP loans (originated and forgiven) which was partially offset by a net increase of $88.9 million in the remainder of the loan portfolio.

The investment securities portfolio grew $30.2 million, or 8.72%, to $376.5 million at June 30, 2021, from $346.3 million at March 31, 2021, and up $159.3 million, or 73.34%, from $217.2 million at June 30, 2020. The increase in the investment securities portfolio compared to March 31, 2021 was primarily due to the purchase of $36.6 million of investment securities, offset in part by $3.4 million of sales, calls, or maturity of investment securities. The increase in investment securities compared to June 30, 2020, was primarily due to the purchase of $197.0 million of securities between the two dates using the excess cash balances generated by the payoffs of PPP loans, partially offset by $37.7 million of sales, calls, or maturity of investment securities and principal pay downs.

Total deposits were $2.03 billion at June 30, 2021, a decrease of $62.2 million, or 2.97%, from $2.09 billion at March 31, 2021, and up $210.5 million, or 11.55%, from $1.82 billion at June 30, 2020. The decrease in deposits compared to March 31, 2021 was primarily due to runoff related to deposit pricing opportunities. The growth in deposits compared to June 30, 2020 was primarily due to organic deposit growth as a result of customers increasing their liquidity due to PPP loan proceeds and government stimulus payments. Total deposit composition at June 30, 2021 consisted of 43.18% of demand deposit accounts, 30.98% of savings and money market accounts and 25.84% of time deposits.

Total debt outstanding was $212.3 million at June 30, 2021, a decrease of $18.8 million, or 8.14%, from $231.0 million at March 31, 2021, and down $287.3 million, or 57.50%, from $499.6 million at June 30, 2020. The decrease in debt outstanding compared to March 31, 2021 was primarily due to the redemption of $15.0 million of subordinated notes. The decrease in total borrowings compared to June 30, 2020 was primarily due to a decrease of $270.4 million in Federal Reserve Bank borrowings used for liquidity related to PPP loans as well as the redemption of the subordinated notes discussed above. The Company would have paid approximately $721 thousand per year in interest on the redeemed subordinated notes.

Nonaccrual loans were $13.7 million, or 0.77% of total loans, at June 30, 2021, a decrease of $1.7 million from nonaccrual loans of $15.4 million, or 0.83% of total loans, at March 31, 2021, and an increase of $5.4 million from nonaccrual loans of $8.3 million, or 0.46% of total loans, at June 30, 2020. The decrease in nonaccrual loans compared to the prior quarter-end was primarily due to $2.1 million of paydowns on four commercial loan relationships partially offset by two commercial loan relationships moving to nonaccrual status totaling $726 thousand. The increase in nonaccrual loans compared to June 30, 2020 was primarily due to seven commercial loan relationships totaling $7.6 million being transferred to nonaccrual status, partially offset by a $2.9 million paydown of one commercial loan relationship.

Nonperforming assets, consisting of nonaccrual loans and other real estate owned, as a percentage of total assets were 0.55% at June 30, 2021, compared to 0.60% at March 31, 2021, and 0.33% at June 30, 2020.

Performing troubled debt restructured loans, which are not reported as nonaccrual loans but rather as part of impaired loans, were $765 thousand at June 30, 2021 and March 31, 2021, and $1.1 million at June 30, 2020. 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 June 30, 2021, there were $7.5 million of loans that remained on a COVID-related deferral compared to $22.2 million as of March 31, 2021. As of June 30, 2021, $7.4 million of those loans had payments deferred greater than six months compared to $10.7 million as of March 31, 2021.

Net recoveries in the second quarter of 2021 were $26 thousand, or 0.01% of average loans on an annualized basis, compared to $17 thousand of net recoveries for the preceding quarter and $1.5 million of net charge-offs, or 0.34% of average loans on an annualized basis, in the second quarter of 2020. The change between the second quarter of 2021 and the second quarter of 2020 was primarily due to a $1.3 million charge-off on one commercial loan relationship in the second quarter of 2020.

Level One's provision for loan losses in the second quarter of 2021 was a provision expense of $540 thousand, compared to $265 thousand in the preceding quarter and $5.6 million in the second quarter of 2020. The increase in the provision expense quarter over quarter was primarily due to an increase of $533 thousand in general reserves as a result of an increase in loan volumes excluding PPP loans, partially offset by a decrease in specific reserves of $254 thousand. The decrease in the provision expense in the second quarter of 2021 compared to the same period in 2020 was primarily due to a decrease in general reserves of $3.2 million resulting from an adjustment of the economic qualitative factors in the second quarter of 2020, a decrease of $1.5 million in net charge-offs due to the charge-off mentioned above in the second quarter of 2020 as well as a $259 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 or decrease the level of the provision for loan losses should there be any indications of significant changes in the credit quality of our portfolio as a result of the COVID-19 pandemic.

The allowance for loan losses was $23.1 million, or 1.30% of total loans, at June 30, 2021, compared to $22.6 million, or 1.21% of total loans, at March 31, 2021, and $17.1 million, or 0.94% of total loans, at June 30, 2020. Excluding PPP loans of $259.3 million, $405.8 million, and $388.3 million as of these dates respectively, the allowance for loan losses as a percentage of total loans was 1.53% as of June 30, 2021, compared to 1.55% as of March 31, 2021 and 1.20% as of June 30, 2020 (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 compared to June 30, 2020, 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 uncertainty surrounding the COVID-19 pandemic. As of June 30, 2021, the allowance for loan losses as a percentage of nonaccrual loans was 168.64%, compared to 146.95% at March 31, 2021, and 206.37% at June 30, 2020. The Company will continue to evaluate the appropriateness of the allowance for loan losses in future quarters as needed.

Total shareholders’ equity was $225.4 million at June 30, 2021, an increase of $8.2 million, or 3.79%, compared with $217.2 million at March 31, 2021 primarily as a result of increases in retained earnings and accumulated other comprehensive income. Total shareholders' equity increased $45.1 million, or 25.05%, from $180.3 million at June 30, 2020, attributable to an increase in retained earnings as well as the issuance of preferred stock in the third quarter of 2020.

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 protocols necessary for those who return. As of March 31, 2021, we opened branches for walk in services. We will continue to evaluate this fluid situation and take additional actions as necessary.

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," "annualized" 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 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, and changes in tax laws, regulations and guidance, 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.