Press Release

TowneBank Reports Full Year and Fourth Quarter Financial Results for 2016

Company Release - 1/26/2017 8:30 AM ET

SUFFOLK, Va., Jan. 26, 2017 (GLOBE NEWSWIRE) -- Hampton Roads based TowneBank (the “Bank” or “Company”) (NASDAQ:TOWN) today reported financial results for the full year and the fourth quarter ended December 31, 2016.

Record Earnings for Full Year 2016

The Bank reported record annual earnings of $67.25 million for the year ended December 31, 2016, as compared to the $62.38 million reported in 2015, representing a 7.80% increase.  Fully diluted earnings per share were $1.18 per share compared to $1.22 per share for 2015.  Earnings per share were affected in 2016 by the issuance of 10.49 million new common shares in conjunction with the acquisition of Monarch Financial Holdings, Inc. (“Monarch”) on June 24, 2016.

Excluding after-tax acquisition-related expenses, core earnings for the year ended December 31, 2016 were $80.15 million (non-GAAP) compared to $63.24 million (non-GAAP) in 2015.  Fully diluted core earnings per share, excluding after-tax acquisition-related expenses, were $1.41 (non-GAAP measure) compared to $1.24 (non-GAAP measure) for 2015.

The Bank’s quarterly dividend was increased to $0.13 per share beginning in the second quarter of 2016 resulting in total dividends of $0.51 per share for 2016, an increase of 8.5% over 2015.  On an annualized basis, the current annual dividend rate is $0.52 per share.

“We are pleased to announce our 17th consecutive year of record annual earnings,” said G. Robert Aston, Jr., Chairman and Chief Executive Officer.  “We finished 2016 with revenue growth of $76.37 million, or 25.65%, over 2015, while producing a core return on average assets of 1.11% and a core return on average tangible equity of 11.73%.”

2016 Performance Highlights

  • Total revenues were $374.10 million, an increase of $76.37 million, or 25.65% from 2015
    - Taxable equivalent net interest margin was 3.50%, including accretion of 11 basis points, compared to 3.45%, including accretion of 9 basis points, for 2015
    - Residential mortgage banking income increased $24.58 million, or 71.85%
    - Insurance segment total revenue increased 14.67% to $54.51 million

  • Core net income, excluding after-tax acquisition-related expenses, was $80.15 million, an increase of 26.75% from 2015
     
  • Loans held for investment increased $1.29 billion, or 28.50%, from December 31, 2015 with organic growth of $479.69 million, or 10.61%, excluding $808.14 million of loans acquired in the Monarch merger
     
  • Total deposits were $6.04 billion, an increase of $1.12 billion, or 22.82%, from 2015.  The increase included $1.06 billion deposits acquired in the Monarch merger
    - Noninterest bearing deposits increased by 39.77%, to $1.95 billion, representing 32.27% of total deposits
    - Total cost of deposits remained steady at 0.40% at December 31, 2016 and 2015
     
  • Asset quality showed continued strength
    - Nonperforming assets declined to $37.60 million, or 0.47% of total assets compared to $43.09 million, or 0.68%, at December 31, 2015
    - Nonperforming loans were 0.23% of period end loans
    - Foreclosed property decreased to $21.01 million

  • Strategic acquisitions
    - On January 14, 2016, the Company acquired Oak Island Accommodations, Inc., an independent resort property management company in coastal North Carolina
    - On June 24, 2016, the Company completed the acquisition of Monarch and its wholly-owned bank subsidiary, Monarch Bank, headquartered in Chesapeake, Virginia

  • Banking centers
    - On September 15, 2016, the Company opened a new regional headquarters in the Gateway Plaza in downtown Richmond, Virginia
    - On December 9, 2016, the Company consolidated its banking office in the Port Warwick area of Newport News, Virginia into the banking office in the Oyster Point area of Newport News, Virginia

  • The Bank remained well-capitalized
    - Common equity tier 1 capital ratio of 11.75%
    - Tier 1 leverage capital ratio of 10.44%
    - Tier 1 risk-based capital ratio of 11.82%
    - Total risk-based capital ratio of 12.44%

Fourth Quarter 2016 Earnings Compared to Fourth Quarter 2015

Net income for the fourth quarter was $19.0 million, or $0.31 per diluted share, versus $12.47 million, or $0.24 per diluted share, in 2015, reflecting strong growth in net interest income as compared to the prior year period.

Performance Highlights

  • Total revenues were $101.67 million, a $30.26 million, or 42.37%, increase from fourth quarter 2015
    - Taxable equivalent net interest margin was 3.64%, including accretion of 11 basis points, compared to 3.36%, including accretion of 9 basis points. in fourth quarter 2015
    - Noninterest income increased 57.57% primarily due to merger-related growth in our residential mortgage banking business

Net Interest Income
Net interest income increased to $62.15 million, a $15.82 million, or 34.15%, increase from fourth quarter 2015.  The primary driver was the growth in average earning assets, which increased $1.50 billion, or 25.80%, while tax-equivalent net interest margin increased to 3.64% in the current quarter from 3.36% in fourth quarter 2015.  Accretion income added $2.34 million, or 15 basis points, to margin in the current quarter as compared to $1.22 million, or 9 basis points, in the fourth quarter of 2015.  The Company expects decreases in BOLI income and accretion income to negatively impact tax-equivalent net interest margin by approximately 7 basis points and 8 basis points, respectively. 

Noninterest Income
Noninterest income, excluding gains or losses on investment securities, was $39.51 million for the fourth quarter of 2016, an increase of $14.43 million, or 57.55%, from the fourth quarter of 2015.  Residential mortgage banking income increased $10.84 million, or 149.43%, from the fourth quarter of 2015 primarily due to higher production volumes resulting from the Monarch merger.  Mortgage production was $1.01 billion in fourth quarter 2016, which was $652.47 million higher than fourth quarter 2015 production of $353.52 million.  Insurance commissions and other title fees increased $0.83 million, or 9.18%, primarily due to increases in commercial lines and travel insurance commissions combined with increased title income.  Also contributing to the increase, other income was higher by $1.63 million primarily due to a rise in BOLI income of $0.87 million combined with an increase in loan service fees and income from Towne Investment Group.

Noninterest Expense
Noninterest expense increased by $20.09 million, or 38.09%, from the fourth quarter of 2015.  The primary driver was an increase of $12.24 million in salaries and benefits expense due to the addition of staff resulting from the Monarch acquisition, combined with the addition of staff resulting from the acquisition of a resort property management company in Oak Island, North Carolina ("Oak Island") in first quarter 2016.  Also contributing were increases in occupancy expenses of $1.73 million and furniture and equipment expenses of $0.99 million primarily related to mortgage facilities acquired in the Monarch acquisition.

Fourth Quarter 2016 Earnings Compared to Third Quarter 2016
Net income for the fourth quarter was $19.0 million, or $0.31 per diluted share, versus $24.18 million, or $0.39 per diluted share, in third quarter 2016, reflecting the seasonality in our Insurance and Realty segments.

Performance Highlights

  • Total revenues were $101.67 million compared to $109.43 million in the third quarter of 2016
    - Taxable equivalent net interest margin was 3.64%, including accretion of 11 basis points, compared to 3.57%, including accretion of 17 basis points, in the third quarter of 2016
    - Noninterest income, excluding gains on investment securities, decreased $7.31 million due to seasonality in our Insurance and Realty segments 

  • Total loans held for investment increased $155.58 million, or 2.75%, from September 30, 2016

Net Interest Income
On a linked quarter basis, net interest income decreased slightly by $0.45 million or 0.73%, in fourth quarter 2016 versus third quarter 2016, while tax-equivalent net interest margin was 3.64% versus 3.57% for the third quarter of 2016.  The decrease in net interest income was primarily due to seasonally lower loans held for sale average balances combined with an increase in FHLB borrowings and lower accretion income.  Accretion income added $2.34 million, or 15 basis points, to margin in the current quarter, as compared to $2.63 million, or 17 basis points, in the linked quarter.

Noninterest Income
In comparison to the third quarter of 2016, noninterest income, excluding gains or losses on investment securities, decreased $7.31 million, or 15.61%.  Residential mortgage banking income decreased by $3.33 million, or 15.56%, from the third quarter of 2016 primarily due to a seasonal decrease in mortgage production of $240.70 million, from $1.25 billion in third quarter 2016 to $1.01 billion in fourth quarter 2016.  A seasonal decrease in policy renewals led to the decrease in net insurance commissions, while decreases in real estate brokerage and property management income from the linked quarter also reflected the seasonal nature of those businesses.

Noninterest Expense
Noninterest expense increased by $1.90 million, or 2.68%, from the third quarter of 2016.  The primary driver was an increase in salaries and benefits expenses of $2.57 million, partially offset by a decrease in acquisition-related expenses of $1.68 million, which was primarily due to a fourth quarter 2016 change in estimate of previously accrued expenses related to the disposal of acquired facilities.

Noninterest Income      % Change
 Q4 Q4 Q3 Q4 16 vs. Q4 16 vs.
(dollars in thousands)2016 2015 2016 Q4 15 Q3 16
Residential mortgage banking income, net$18,096  $7,255  $21,430  149.43% (15.56)%
Insurance commissions and other title fees and income, net9,823  8,997  11,258  9.18% (12.75)%
Real estate brokerage and property management, net2,925  2,438  6,647  19.98% (56.00)%
Service charges on deposit accounts2,535  2,254  2,552  12.47% (0.67)%
Credit card merchant fees, net1,135  767  1,365  47.98% (16.85)%
Other income4,998  3,368  3,569  48.40% 40.04%
Subtotal before gain on investment securities39,512  25,079  46,821  57.55% (15.61)%
Net gain on investment securities6      N/M N/M
Total noninterest income$39,518  $25,079  $46,821  57.57% (15.60)%


Noninterest Expense      % Change
 Q4 Q4 Q3 Q4 16 vs.  Q4 16 vs.
(dollars in thousands)2016 2015 2016 Q4 15 Q3 16
Salaries and benefits$43,071  $30,826  $40,497  39.72% 6.36%
Occupancy expense6,885  5,156  6,656  33.53% 3.44%
Furniture and equipment3,378  2,390  3,199  41.34% 5.60%
Acquisition-related expenses(707) 285  969  (348.07)% (172.96)%
Other expenses20,207  14,086  19,612  43.45% 3.03%
Total noninterest expense$72,834  $52,743  $70,933  38.09% 2.68%
          

Segment Results

        $ Change
(in thousands) Q4 Q4 Q3 Q4 16 vs. Q4 16 vs.
Segment Net Income (Loss) 2016 2015 2016 Q4 15 Q3 16
Banking $17,931  $12,219  $18,276  $5,712  $(345)
Realty 673  6  4,815  $667  $(4,142)
Insurance 392  241  1,085  $151  $(693)
Total net income $18,996  $12,466  $24,176  $6,530  $(5,180)

Fourth Quarter 2016 Compared to Fourth Quarter 2015

Banking
Net income for the three months ended December 31, 2016 for the Banking segment was $17.93 million, increasing $5.71 million, or 46.75%, from comparative 2015, as net interest income climbed by $13.77 million due to the increase in earning assets from the Monarch merger.  Also contributing to the variance was an increase in noninterest income of $2.33 million.  These factors were partially offset by increases in the provision for loan losses and noninterest expenses.

Realty
For the three months ended December 31, 2016, the Realty segment increased net income to $0.67 million from $0.01 million for fourth quarter 2015.  The improvement was driven by an increase in residential mortgage banking income of $10.93 million, or 146.81%, due to higher production volumes resulting from the Monarch merger and net interest income increased by $2.05 million as higher production volume led to higher average mortgage loans held for sale.  These improvements were partially offset by an increase in operational expenses related to the merger with Monarch.

Insurance
The Insurance segment had net income of $0.39 million for the three months ended December 31, 2016, an increase of $0.15 million compared to fourth quarter 2015.  The increase in net income was driven by higher property and casualty insurance commission income combined with a decrease in salaries and benefits expenses.

Fourth Quarter 2016 Compared to Third Quarter 2016

Banking
Earnings decreased slightly by $0.35 million, or 1.89% from the third quarter of 2016 as increases in net interest income and noninterest income were overcome by higher personnel costs of $3.26 million, primarily related to performance based staff incentives and employee benefits expenses.  Also, loan growth in the quarter led to an increase of $0.11 million in the provision for loan losses.

Realty
Net income in the Realty segment decreased by $4.14 million from the linked quarter ended September 30, 2016, due to due to historically seasonal decreases in the Bank's mortgage, real estate brokerage, and resort property management businesses.

Insurance
Net income decreased $0.69 million from the third quarter of 2016 due to the historically seasonal decrease in fourth quarter policy renewals.  The seasonal decrease in revenue was partially offset by a decline in operating expenses during the current quarter.

Balance Sheet

At December 31, 2016, total Bank assets reached $7.97 billion, an increase of $1.68 billion, or 26.64%, over December 31, 2015.

Loans

       % Change
 Q4 Q4 Q3 Q4 16 vs. Q4 16 vs.
(dollars in thousands)2016 2015 2016 Q4 15 Q3 16
Construction and land development$826,027  $598,875  $820,453  37.93% 0.68%
Commercial real estate - investment related properties1,322,466  1,004,393  1,283,619  31.67% 3.03%
Commercial real estate - owner occupied928,846  780,000  905,870  19.08% 2.54%
Multifamily real estate222,791  167,371  206,623  33.11% 7.82%
1-4 family residential real estate1,215,823  973,331  1,208,001  24.91% 0.65%
Commercial and industrial business loans1,089,539  857,036  1,033,797  27.13% 5.39%
Consumer loans and other201,729  138,387  193,279  45.77% 4.37%
Total$5,807,221  $4,519,393  $5,651,642  28.50% 2.75%

The Bank’s loan portfolio ended the period at $5.81 billion representing an increase of 28.50%, or $1.29 billion, from December 31, 2015, and an increase of $155.58 million, or 2.75%, from September 30, 2016.  In addition to organic growth, the increase in loans from the prior year is related to loans acquired in the Monarch merger on June 24, 2016.

Deposits

       % Change
 Q4 Q4 Q3 Q4 16 vs. Q4 16 vs.
(dollars in thousands)2016 2015 2016 Q4 15 Q3 16
Noninterest-bearing demand$1,947,312  $1,393,264  $1,974,395  39.77% (1.37)%
Interest-bearing: