Level One Bank's goal from the beginning was to make a topsy-turvy market work in its favor — and did it ever pick one.
The bank opened its doors in Farmington Hills, Mich., an upscale northwest suburb of Detroit, in October 2007. Despite their avowed strategy, the principals say they had no idea how bad things would get in the industry and in their unemployment-scarred state in particular.
So far, their seemingly crazy timing has paid off. Level One has assets of $200 million, has acquired a failed bank and has been profitable for the past three quarters.
Its keys to success have been an adherence to a strategy of courting customers disenchanted with their current bank, and the willingness to adapt to the changed banking landscape.
"It was scary to get going when we did," said Patrick J. Fehring, chief executive and president of the bank and its parent company, Level One Bancorp Inc. "We always thought there were going to be great opportunities for us, and it has turned out to be a great time to be a de novo."
Level One's success in its formative years has enticed existing investors to double down and has attracted new backers. Earlier this month the bank announced that it had raised $13.1 million of fresh capital, enough to help it at least double its size over the next few years. It sold 1.6 million shares at $8 per share, a slight premium to its book value, Fehring said.
In normal times, it was common for growing de novos to garner a second round of capital. These days nothing is certain, yet analysts said investors are compelled by success stories. Essentially, everyone likes a winner.
"With capital right now, there is more demand than supply," said Terry Keating, managing director at Amherst Partners in Chicago. "If I am an investor considering my options, what do I do? Invest in the walking dead where my money is going to go toward cleaning up problems, or do I invest in a de novo that has a lot of potential?"
John C. Donnelly, managing director of Donnelly Penman & Partners, oversaw the capital-raising effort. In an interview, Donnelly said the $13.1 million of capital was not only a positive development for Level One, but for the banking industry of Michigan.
"This is a sign of life in an area that hasn't had a lot of good news to share over the last few years," Donnelly said. "What makes it even more significant is that wasn't just a friends and family deal. It got the attention of a few institutional investors."
Level One's business plan called for it to capitalize on the disruption in the upscale northwest suburbs of Detroit. At the time, much was changing — Comerica Inc., then the state's largest bank, moved its headquarters from Detroit to Dallas. ABN Amro Holding NV sold LaSalle Bank Corp. to Bank of America Corp. And Level One capitalized on those changes.
Keating said Level One likely will continue to find growth opportunities in southeast Michigan, but he's curious to see how its strategy of growing in a shrinking market will play out in the future. "They are going to have great opportunities to grow as so many of the banks in that market are stuck in the weeds," he said. "But I wonder how it will do in the long term, given Detroit's shrinking market?"
So far Level One seems confident in its approach. Fehring said that while the bank has had robust loan demand, fulfilling that demand required creativity given tightening credit underwriting standards. So Level One turned to guarantee programs offered by the Small Business Administration and Department of Agriculture.
"Those programs have allowed us to extend credit to our borrowers, while hedging our risk," Fehring said. "But when we started we were not doing any of that."
Fehring said between 15% and 20% of the loans it originates have some sort of government guarantee.
Rick Maroney, managing director and principal of Austin Associates LLC in Toledo, has worked with Level One, but was not involved in the capital-raising effort. "Finding quality loans has been difficult," Maroney said. "But utilizing a tool like the SBA or the USDA guarantee gives them a leg up over lenders."
Meanwhile, the interest rate environment called for Level One to tinker with its strategy. Within its first nine months of business, the prime rate slid from more than 8% to 3.25%, cutting into the revenue stream. So Level One ramped up its loan volume, yet also closely monitored its cost structure. It delayed entering some businesses. "Dealing with those surprises is part of the thrill of starting a new bank," Fehring joked.
The bank turned its first profit in the fourth quarter of 2009, earning $67,000. For this year's first quarter it had earnings of $1.9 million, eclipsing the $1.8 million full-year loss it reported for 2009. Fehring said this year's second quarter was also profitable.
More growth is on the horizon, Fehring said, and that is why Level One sought additional capital. As a de novo, regulators require it to have a leverage ratio of 8%. At the end of the second quarter, that ratio stood at about 8.5%.
The fresh capital and the capital it expects to generate through earnings will help it meet the next benchmark of hitting $450 million in assets over the next few years. From there, the company expects to provide its shareholders with some liquidity by going public.
Organic growth will continue to be the focus, Fehring said, as the bank views itself as an oasis of credit in a desert of banks unable to lend because of capital constraints caused by souring credit.
It also seeks to make acquisitions, both assisted and traditional. In April 2009, Level One acquired the $184 million-asset Michigan Heritage Bank, also in Farmington Hills, from the Federal Deposit Insurance Corp. Fehring said he is interested in more such deals.
With open banks, Fehring said Level One is interested only in "clean" banks that fit in the company's targeted market of Detroit's northwest suburbs. He isn't interested in snagging a struggling institution — even at a bargain.
"We don't have the expertise to do a turnaround," he said.
These few years with his first de novo have already taught Fehring, a 26-year banking veteran and former president of Fifth Third Bank's Eastern Michigan division, a great deal about the business.
"I learned that I didn't know quite as much about banking as I thought I did," he said. "It has been a bit more difficult than I was expecting."