Press Release

TowneBank Reports Second Quarter 2018 Earnings

Company Release - 7/26/2018 8:30 AM ET

SUFFOLK, Va., July 26, 2018 (GLOBE NEWSWIRE) -- TowneBank (the “Bank” or “Company”) (NASDAQ:TOWN) today reported record earnings for the quarter ended June 30, 2018, of $34.80 million, or $0.48 per diluted share, compared to the $26.21 million or $0.42,  per diluted share for the quarter ended June 30, 2017. Excluding acquisition-related expenses, earnings for the quarter ended June 30, 2018 were $35.51 million (non-GAAP), or $0.49 (non-GAAP) per diluted share, compared to $24.77 million (non-GAAP) or $0.40 (non-GAAP), per diluted share for the quarter ended June 30, 2017.

“We are pleased to report another record quarter, highlighted by a 14.6% increase in top-line revenue growth and a strong operating performance,” said G. Robert Aston, Jr., Executive Chairman.  “Second quarter results included strong loan growth of 16%, annualized.  Credit quality remained strong and our return on average assets was 1.32%.”

Highlights for the Second Quarter of 2018 Compared to the Second Quarter of 2017:

  • Total revenues were $137.06 million, an increase of $17.46 million, or 14.60%.
  • Loans held for investment increased $1.83 billion, or 30.69%, from June 30, 2017, and $304.81 million, or 4.08%, from March 31, 2018, or 16.37% on an annualized basis.  Excluding loans acquired in the Paragon merger of $1.43 billion, loans increased $393.40 million, or 6.61% from June 30, 2017.
  • Total deposits were $7.99 billion, an increase of $1.40 billion, or 21.16%.
  • Noninterest bearing deposits increased by 17.03%, to $2.60 billion, representing 32.50% of total deposits.
  • Annualized return on common shareholders' equity of 9.62% and annualized return of average tangible common shareholders' equity of 15.36% (non-GAAP).
  • Net interest margin of 3.69% and taxable equivalent net interest margin of 3.71% (non-GAAP).
  • Effective tax rate of 19.89% benefiting from the Tax Cuts and Jobs Act of 2017.
  • Expansion of the Towne footprint through the successful acquisition in the second quarter of Michael R. Bare, LLC, by TowneInsurance Agency, LLC.  Additionally, Towne Vacations Deep Creek, LLC, expanded its vacation offerings through merger with Deep Creek Lodging Company, LLC.  Both transactions included the retention of the acquired/merged management teams.

“In the second quarter, we capitalized on the growth opportunities afforded us by our successful Paragon merger in addition to continuing organic growth in our existing footprint.  We continue to identify market opportunities to expand our reach in North Carolina with our unique brand of Hometown Banking,” said J. Morgan Davis, President and Chief Executive Officer.

Quarterly Net Interest Income Compared to the Second Quarter of 2017:

  • Net interest income was $86.82 million compared to $69.25 million at June 30, 2017.
  • Taxable equivalent net interest margin was 3.71%, including accretion of 23 basis points, compared to 3.84%, including accretion of 31 basis points, for 2017.  Second quarter 2017 accretion income included a one-time positive adjustment of $3.89 million, or 21 basis points.
  • Total cost of deposits increased to 0.60% from 0.44% at June 30, 2017.
  • Average interest-earning assets totaled $9.44 billion at June 30, 2018 compared to $7.32 billion at June 30, 2017, an increase of 29.01%.
  • Average loans held for investment represented 80.0% of average earning assets at June 30, 2018 compared to 80.98% in the second quarter of 2017.
  • Average interest-bearing liabilities totaled $6.41 billion, an increase of $1.58 billion from prior year.

The following table sets forth an estimate of the expected effects of the aggregate acquisition accounting adjustments on pre-tax net interest income for the periods shown (in thousands):

  Discount Accretion (Premium Amortization)
  For the three months ended
  September 30, December 31, March 31, June 30,
  2018 2018 2019 2019
Assets:       
Investment Securities $(72) $(71) $(72) $(71) 
Loans 2,231  1,679  1,609  1,568  
         
Liabilities:        
Deposits 104  91  60  54  
         
Total estimated effect on net interest income $2,055  $1,517  $1,477  $1,443  
         
Note:   This information is intended for informational purposes only and is not necessarily indicative of future results.
     Actual results may differ due to factors such as changes in estimated prepayment speeds or projected credit loss rates.
 

Quarterly Provision for Loan Losses:

  • Recorded a provision for loan losses of $3.06 million compared to $1.95 million in the prior quarter and $1.32 million one year ago, driven by strong growth in loans held for investment during the quarter.
  • Net charge-offs were $0.26 million compared to $0.38 million one year prior.  The ratio of net charge-offs to average loans on an annualized basis was 0.01% compared to 0.02% in the prior quarter and 0.03% for the second quarter of 2017.
  • The allowance for loan losses represented 0.64% of total loans compared to 0.63% at March 31, 2018 and 0.74% at June 30, 2017.  Loan loss reserve as a percentage of total loans, excluding purchased loans, decreased to 0.84%, from 0.86% at March 31, 2018, and June 30, 2017.  The allowance for loan losses was 12.64 times nonperforming loans compared to 10.40 times at March 31, 2018 and 4.58 times at June 30, 2017.

Quarterly Noninterest Income Compared to the Second Quarter of 2017:

  • Total noninterest income was $50.23 million compared to $50.34 million, a decrease of $0.11 million.  This reflects a decrease of $2.85 million in residential mortgage banking income, which was offset by an increase of $0.33 million in service charges on deposit accounts and an increase of $2.19 million in insurance commissions and other title fees primarily related to increases in commercial line commissions and the timing of revenue due to the adoption of the new accounting guidance on revenue recognition.
  • Residential mortgage banking income was $18.74 million compared to $21.59 million in second quarter 2017.  Loan volume in the current quarter was $1.01 billion, with purchases comprising $922.75 million and refinancing activity accounting for $86.04 million.  Loan volume in second quarter 2017 was $1.08 billion, with purchase activity of $961.29 million and refinancing activity of $117.23 million.  Lower volumes and continued pressure on gain on sale margin led to the decline in revenue.
  • Insurance segment total revenue increased 18.03% to $17.58 million in second quarter.  The change in the timing of revenue recognition related to the adoption of new accounting guidance resulted in an increase of insurance commission revenue for the second quarter of approximately $0.81 million.
  • Property management fee revenue decreased $1.20 million, or 22.69%, primarily related to a change in the timing of revenue recognition due to the adoption of new accounting guidance on revenue recognition.  The change in accounting guidance resulted in a decrease of property management fee income for the second quarter of approximately $0.76 million.

Quarterly Noninterest Expense Compared to the Second Quarter of 2017:

  • Total noninterest expense was $89.22 million compared to $78.12 million, an increase of $11.10 million, or 14.21%.  This reflects increases of $5.86 million in salary and benefits expense, which includes a non-recurring retirement related adjustment of $1.11 million, $1.05 million in outside processing expenses, $0.99 million in intangible amortization expense, $0.94 million in professional fees, and $0.60 million in software expense.
  • Noninterest expense included operational expenses of entities acquired subsequent to second quarter 2017 of $9.78 million, primarily in our Banking and Insurance segments.  Excluding acquired entity expenses, noninterest expense was $79.45 million for the quarter ended June 30, 2018.

Quarterly Income Taxes Compared to the Second Quarter of 2017:

  • Income tax expense was $8.64 million compared to $12.24 million, one year prior.  This represents an effective tax rate of 19.89% compared to 31.83% in the second quarter of 2017.
  • The decrease in the effective tax rate from the prior year is due to the Tax Cuts and Jobs Act of 2017, signed into law on December 22, 2017.  The reduction from 35% to 21% of the U.S. federal corporate tax rate was among the key changes to U.S. tax law, effective January 1, 2018.

Investment Securities:

  • Total investment securities were $1.16 billion compared to $1.34 billion at March 31, 2018 and $0.79 billion at June 30, 2017.  The weighted average duration of the portfolio at June 30, 2018 was 3.02 years.  The carrying value of the available-for-sale portfolio included $20.60 million of net unrealized losses compared to $17.95 million at March 31, 2018 and $2.05 million in net unrealized losses at June 30, 2017.  The carrying value of the held-to-maturity portfolio does not reflect $0.64 million in net unrealized gains compared to $0.88 million in net unrealized gains at March 31, 2018 and $2.45 million in net unrealized gains at June 30, 2017.

Loans:

  • Total loans held for investment were $7.77 billion at June 30, 2018 compared to $7.47 billion at March 31, 2018 and $5.95 billion at June 30, 2017.
        
       % Change
 Q2 Q2 Q1 Q2 18 vs. Q2 18 vs.
(dollars in thousands)2018 2017 2018 Q2 17 Q1 18
Construction and land development$989,910  $888,566  $996,159     11.41%    (0.63)%
Commercial real estate - investment related properties1,935,013  1,339,270  1,853,737  44.48% 4.38%
Commercial real estate - owner occupied1,227,072  956,333  1,164,923  28.31% 5.34%
Multifamily real estate288,043  206,894  297,085  39.22% (3.04)%
1-4 family residential real estate1,596,264  1,227,389  1,566,449  30.05% 1.90%
Commercial and industrial business loans1,440,625  1,110,822  1,328,357  29.69% 8.45%
Consumer loans and other298,029  219,787  263,441  35.60% 13.13%
Total$7,774,956  $5,949,061  $7,470,151  30.69% 4.08%
 

Asset Quality:

  • Nonperforming assets declined to $26.31 million, or 0.24% of total assets, compared to $35.69 million, or 0.42%, at June 30, 2017.
  • Nonperforming loans were 0.05% of period end loans.
  • Foreclosed property decreased to $20.13 million.

Deposits and Borrowings:

  • Total deposits were $7.99 billion compared to $7.83 billion at March 31, 2018, and $6.60 billion at June 30, 2017.  The increase in deposits includes $1.25 billion acquired in the Paragon merger.  Loans to deposits were 97.29% compared to 95.46% at March 31, 2018 and 90.20% at June 30, 2017.
  • Non-interest bearing deposits were 32.50% of total deposits at June 30, 2018 compared to 31.99% at March 31, 2018 and 33.65% at June 30, 2017.
  • Total borrowings were $1.17 billion compared to $1.18 billion and $0.56 billion at March 31, 2018 and June 30, 2017, respectively.
        
       % Change
 Q2 Q2 Q1 Q2 18 vs. Q2 18 vs.
(dollars in thousands)2018 2017 2018 Q2 17 Q1 18
Noninterest-bearing demand$2,597,320  $2,219,406  $2,503,246     17.03%      3.76%
Interest-bearing:         
Demand and money market accounts2,987,102  2,292,978  3,001,256  30.27% (0.47)%
Savings305,334  318,714  309,077  (4.20)% (1.21)%
Certificates of deposits2,101,455  1,764,671  2,011,843  19.08% 4.45%
Total$7,991,211  $6,595,769  $7,825,422  21.16% 2.12%
 

Capital:

  • Common equity tier 1 capital ratio of 11.33%.
  • Tier 1 leverage capital ratio of 10.00%.
  • Tier 1 risk-based capital ratio of 11.36%.
  • Total risk-based capital ratio of 14.71%.
  • Book value was $20.22 compared to $19.90 at March 31, 2018 and $17.74 at June 30, 2017.
  • Tangible book value was $13.50 compared to $13.34 at March 31, 2018 and $12.81 at June 30, 2017.
       
  Q2 Q2 Q1
  2018 2017 2018
Common Equity Tier 1    11.33%    11.98%    11.65%
Tier 1 11.36% 12.03% 11.68%
Total 14.71% 12.68% 15.27%
Tier 1 Leverage Ratio 10.00% 10.43% 9.97%
          

About TowneBank:
As one of the top community banks in Virginia and North Carolina, TowneBank operates 40 banking offices serving Chesapeake, Chesterfield County, Glen Allen, Hampton, James City County, Mechanicsville, Newport News, Norfolk, Portsmouth, Richmond, Suffolk, Virginia Beach, Williamsburg, and York County in Virginia, along with Raleigh, Cary, Charlotte, Moyock, Grandy, Camden County, Southern Shores, Corolla and Nags Head in North Carolina.  Towne also offers a full range of financial services through its controlled divisions and subsidiaries that include Towne Investment Group, Towne Wealth Management, Towne Insurance Agency, Towne Benefits, TowneBank Mortgage, TowneBank Commercial Mortgage, Berkshire Hathaway HomeServices Towne Realty, Towne 1031 Exchange, LLC, and Towne Vacations.  Local decision-making is a hallmark of its hometown banking strategy that is delivered through the leadership of each group’s President and Board of Directors.  With total assets of $10.83 billion as of June 30, 2018, TowneBank is one of the largest banks headquartered in Virginia.

Non-GAAP Financial Measures:
This press release contains financial information determined by methods other than in accordance with GAAP.  The Company's management uses these non-GAAP financial measures in its analysis of the Company's performance.  These measures typically adjust GAAP performance measures to exclude the effects of the amortization of intangibles and include the tax benefit associated with revenue items that are tax-exempt, as well as adjust income available to common shareholders for certain significant activities or transactions that are infrequent in nature.  Management believes presentations of these non-GAAP financial measures provide useful supplemental information that is essential to a proper understanding of the operating results of the Company’s core businesses.  These non-GAAP disclosures should not be viewed as a substitute for operating results determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of GAAP to non-GAAP disclosures are included as tables at the end of this release.

Forward-Looking Statements:
Certain statements contained in this release constitute forward-looking statements within the meaning of U.S. federal securities laws.  These forward-looking statements speak only as of the date of this release, are based on current expectations, and involve a number of assumptions.  These include statements regarding TowneBank’s future economic performance, financial condition, prospects, growth, strategies and expectations, and objectives of management, and are generally identified by the use of words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” or “project” or similar expressions.  TowneBank intends such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and is including this statement for purposes of these safe harbor provisions. You should not place undue reliance on forward-looking statements, which are subject to assumptions that are subject to change. TowneBank’s ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain.  These forward-looking statements are subject to a number of factors and uncertainties that could cause actual results to differ from those indicated or implied in the forward-looking statements and such differences may be material.  Factors which could have a material effect on the operations and future prospects of TowneBank include but are not limited to: changes in interest rates, general economic and business conditions; legislative/regulatory changes; the monetary and fiscal policies of the U.S. government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; the quality and composition of TowneBank’s loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in TowneBank’s market area; implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; changes in the securities markets; changes in accounting principles, policies and guidelines; and other risk factors detailed from time to time in filings made by TowneBank with the Federal Deposit Insurance Corporation (the “FDIC”).  TowneBank undertakes no obligation to update or clarify these forward-looking statements, whether as a result of new information, future events or otherwise.

Media contact:
G. Robert Aston, Jr., Executive Chairman, 757-638-6780
J. Morgan Davis, President and Chief Executive Officer, 757-673-1673

Investor contact:
William B. Littreal, Chief Financial Officer, 757-638-6813


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TOWNEBANK
Selected Financial Highlights (unaudited)
(dollars in thousands, except per share data)
 
        Increase/  % Increase/
Three Months Ended June 30,2018 2017  (Decrease)  (Decrease)
           
Results of Operations:       
 Net interest income$86,823  $69,253  $17,570      25.37%
 Noninterest income50,235  50,343  (108) (0.21)%
 Total Revenue137,058  119,596  17,462  14.60%
 Acquisition-related expenses797  1,281  (484) (37.78)%
 Noninterest expenses, excluding acquisition-related expenses88,424  76,838  11,586  15.08%
 Provision for loan losses3,056  1,320  1,736  131.52%
 Income before income tax and noncontrolling interest44,781  40,157  4,624  11.51%
 Provision for income tax expense8,643  12,240  (3,597) (29.39)%
 Net income36,138  27,917  8,221  29.45%
 Net income attributable to noncontrolling interest(1,334) (1,704) 370  (21.71)%
 Net income attributable to TowneBank34,804  26,213  8,591  32.77%
 Net income available to common shareholders34,804  26,213  8,591  32.77%
 Net income per common share - basic0.48  0.42  0.06  14.29%
 Net income per common share - diluted0.48  0.42  0.06  14.29%
Period End Data:       
 Total assets$10,831,653  $8,427,042  $2,404,611  28.53%
 Total assets - tangible10,345,360  8,118,730  2,226,630  27.43%
 Earning assets9,751,972  7,590,796  2,161,176  28.47%
 Loans (net of unearned income)7,774,956  5,949,061  1,825,895  30.69%
 Allowance for loan losses49,535  44,131  5,404  12.25%
 Goodwill and other intangibles486,294  308,312  177,982  57.73%
 Nonperforming assets26,305  35,692  (9,387) (26.30)%
 Noninterest bearing deposits2,597,320  2,219,406  377,914  17.03%
 Interest bearing deposits5,393,891  4,376,363  1,017,528  23.25%
     Total deposits7,991,211  6,595,769  1,395,442  21.16%
 Total equity1,476,786  1,122,998  353,788  31.50%
 Total equity - tangible990,492  814,686  175,806  21.58%
 Common equity1,462,761  1,110,681  352,080  31.70%
 Common equity - tangible976,468  802,369  174,099  21.70%
 Book value per common share20.22  17.74  2.48  13.98%
 Book value per common share - tangible13.50  12.81  0.69  5.39%
Daily Average Balances:       
 Total assets$10,536,847  $8,180,959  $2,355,888  28.80%
 Total assets - tangible10,056,639  7,873,036  2,183,603  27.74%
 Earning assets9,442,078  7,318,667  2,123,411  29.01%
 Loans (net of unearned income), excluding nonaccrual loans7,552,983  5,926,336  1,626,647  27.45%
 Allowance for loan losses47,745  43,501  4,244  9.76%
 Goodwill and other intangibles480,208  307,923  172,285  55.95%
 Noninterest bearing deposits2,493,211  2,081,819  411,392  19.76%
 Interest bearing deposits5,230,807  4,186,319  1,044,488  24.95%
     Total deposits7,724,018  6,268,138  1,455,880  23.23%
 Total equity1,461,815  1,115,008  346,807  31.10%
 Total equity - tangible981,607  807,085  174,522  21.62%
 Common equity1,450,555  1,103,813  346,742  31.41%
 Common equity - tangible970,347  795,891  174,456  21.92%
Key Ratios: