Press Release

TowneBank Reports Second Quarter 2019 Earnings

Company Release - 7/25/2019 8:30 AM ET

SUFFOLK, Va., July 25, 2019 (GLOBE NEWSWIRE) -- TowneBank (the “Company”) (NASDAQ: TOWN) today reported earnings for the quarter ended June 30, 2019 of $34.64 million, or $0.48 per diluted share, compared to $34.80 million, or $0.48 per diluted share, for the quarter ended June 30, 2018.

“Our second quarter performance was highlighted by record top-line revenues coupled with strong deposit growth. We also continued to strategically invest in recruiting, technology, enhanced services, and infrastructure to support future growth," said G. Robert Aston, Jr., Executive Chairman.

Highlights for the Second Quarter of 2019 Compared to the Second Quarter of 2018:

  • Total revenues were $144.54 million, an increase of $7.48 million, or 5.46%.
  • Loans held for investment increased $351.77 million, or 4.52%, from June 30, 2018, and $21.36 million, or 0.26%, from March 31, 2019, or 1.06% on an annualized basis.
  • Total deposits were $9.27 billion, an increase of $1.28 billion, or 15.99%, compared to prior year and $0.54 billion, or 6.15% from March 31, 2019, or 24.67% on an annualized basis.  In comparison to June 30, 2018, total deposits increased 11.70% in our Hampton Roads region, 28.14% in our Richmond region, and 23.39% in our North Carolina region.
  • Noninterest bearing deposits increased by 13.60%, to $2.95 billion, representing 31.83% of total deposits.  Compared to the linked quarter, noninterest bearing deposits increased 4.86%, or 19.49% on an annualized basis.
  • Annualized return on common shareholders' equity of 8.89% and annualized return on average tangible common shareholders' equity of 14.05% (non-GAAP).
  • Net interest margin for the quarter was 3.49% and taxable equivalent net interest margin was 3.52% (non-GAAP).
  • Effective tax rate of 20.47% in the quarter compared to 19.89% in the second quarter of 2018.

“In addition to recruiting Jack Clayton as President of Business Strategies for North Carolina in the first quarter of 2019, we continued to build our production teams in Raleigh, Greensboro, and Charlotte adding Private Bankers and Treasury expertise.  We announced that Charity Volman has been appointed President of TowneBank’s newly formed Corporate Banking Group.  Joining her team are Karen Priest, Laura Morgan, and Brian Woodell, who served with her at her former bank.  In addition, Shane Stevens, was recently appointed Director of Merchant and Treasury Services.  Each of these individuals brings a wealth of experience and talent to our HomeTowne Banking platform,” stated J. Morgan Davis, President and Chief Executive Officer.

Quarterly Net Interest Income Compared to the Second Quarter of 2018:

  • Net interest income was $89.82 million compared to $86.82 million at June 30, 2018.
  • Taxable equivalent net interest margin (non-GAAP) was 3.52%, including accretion of 11 basis points, compared to 3.71%, including accretion of 23 basis points, for 2018.
  • Average loans held for investment, with an average yield of 5.08%, represented 78.27% of average earning assets at June 30, 2019 compared to an average yield of 4.97% and 79.99% of average earning assets in the second quarter of 2018.
  • Total cost of deposits increased to 0.99% from 0.60% at June 30, 2018.
  • Average interest-earning assets totaled $10.32 billion at June 30, 2019 compared to $9.44 billion at June 30, 2018, an increase of 9.26%.
  • Average interest-bearing liabilities totaled $6.95 billion, an increase of $0.55 billion from prior year.

Quarterly Provision for Loan Losses:

  • Recorded a provision for loan losses of $2.82 million compared to $3.06 million one year ago and $1.44 million in the linked quarter.
  • Net charge-offs were $1.60 million compared to $0.26 million one year prior.  The ratio of net charge-offs to average loans on an annualized basis was 0.08% compared to 0.01% in the prior quarter and 0.01% in the second quarter of 2018.  This increase was primarily attributable to the charge-off of one credit relationship.
  • The allowance for loan losses represented 0.67% of total loans compared to 0.66% at March 31, 2019 and 0.64% at June 30, 2018.  Loan loss reserve as a percentage of total loans, excluding purchased loans, was 0.81% at June 30, 2019, and March 31, 2019, compared to 0.84% at June 30, 2018.  The allowance for loan losses was 3.00 times nonperforming loans compared to 9.36 times at March 31, 2019 and 12.64 times at June 30, 2018.

Quarterly Noninterest Income Compared to the Second Quarter of 2018:

  • Total noninterest income was $54.72 million compared to $50.24 million in 2018, an increase of $4.48 million, or 8.92%.  Residential mortgage banking income was relatively flat in the quarter, while insurance commissions and other title fees increased $2.13 million, real estate brokerage and property management income increased $1.93 million, and service charges on deposit accounts increased $0.22 million.  Credit card merchant fees declined $0.78 million.
  • Credit card merchant fee income was roughly $0.90 million below normal seasonal levels in second quarter 2019 due to the impact of converting to a new processing platform that will allow us to provide additional services and capabilities.
  • Residential mortgage banking income was $18.57 million compared to $18.75 million in second quarter 2018.  Loan volume in the current quarter was $821.13 million, with purchase activity comprising 84.97% of that volume.  Loan volume in second quarter 2018 was $951.12 million, with purchase activity of 91.23%.  Lower volumes led to the decline in revenue.
  • Total Insurance segment revenue increased 14.95% to $20.20 million in the second quarter due primarily to additional commission income from insurance agencies that were acquired in November 2018 and January 2019.
  • Property management fee revenue increased 45.89%, or $1.88 million, as compared to second quarter 2018 due to increases in reservation levels.

Quarterly Noninterest Expense Compared to the Second Quarter of 2018:

  • Total noninterest expense was $96.56 million compared to $89.22 million in 2018, an increase of $7.34 million, or 8.22%.  This reflects increases of $3.94 million in salary and benefits expense, $1.29 million in professional fees, $0.86 million in occupancy expense, and $0.76 million in outside data processing expenses.
  • The increase in salary and benefits expense was attributable to the continued expansion of our functional support teams to enable us to enhance Company infrastructure and meet increased regulatory expectations related to exceeding $10 billion in assets, as well as keep pace with our growth and changing industry standards.  Specific areas of focus include: information technology, risk and compliance, accounting, and internal audit.
  • In the wake of the May 2019 tragedy in Virginia Beach, Towne's contribution of $0.50 million to "VBStrong" was included in other expenses.
  • Noninterest expense included operational expenses of $1.60 million related to insurance agencies acquired subsequent to second quarter 2018.

Quarterly Income Taxes Compared to the Second Quarter of 2018:

  • Income tax expense was $8.92 million compared to $8.64 million one year prior.  This represents an effective tax rate of 20.47% compared to 19.89% in the second quarter of 2018.

Consolidated Balance Sheet June 30, 2019 Compared to June 30, 2018

  • Total assets were $11.94 billion for the quarter ended June 30, 2019 compared to $11.16 billion at December 31, 2018 and $10.83 billion at June 30, 2018.  This increase was driven primarily by growth in cash and cash equivalents, available for sale securities, and loans held for investment.  Year-over-year, other assets increased $41.40 million due to the adoption of the leasing standard.
  • Loans held for investment increased $0.11 billion, or 1.35%, or 2.73% on an annualized basis, compared to year end 2018, and $0.35 billion, or 4.52% compared to June 30, 2018.
  • Total liabilities were $10.34 billion at June 30, 2019, an increase of $0.71 billion, or 7.39%, compared to December 31, 2018 and $0.98 billion, or 10.49%, compared to June 30, 2018.  Total deposits increased $0.90 billion over December 31, 2018 and $1.28 billion over June 30, 2018.  Total borrowings declined $0.26 billion from December 31, 2018 and $0.34 billion from June 30, 2018.

Investment Securities:

  • Total investment securities were $1.35 billion compared to $1.20 billion at March 31, 2019 and $1.16 billion at June 30, 2018.  The weighted average duration of the portfolio at June 30, 2019 was 3.1 years.  The carrying value of the available-for-sale portfolio included $19.66 million of net unrealized gains compared to $2.22 million at March 31, 2019 and $20.60 million in net unrealized losses at June 30, 2018.  The increase in net unrealized gains was primarily due to interest rate fluctuations.  The carrying value of the held-to-maturity portfolio does not reflect $1.58 million in net unrealized gains compared to $1.04 million in net unrealized gains at March 31, 2019 and $0.64 million in net unrealized gains at June 30, 2018.

Loans and Asset Quality:

  • Total loans held for investment were $8.13 billion at June 30, 2019 compared to $8.11 billion at March 31, 2019 and $7.77 billion at June 30, 2018.
  • Nonperforming assets were $34.23 million, or 0.29% of total assets, compared to $26.31 million, or 0.24%, at June 30, 2018.  This increase was primarily driven by a single commercial relationship of approximately $10 million.
  • Nonperforming loans were 0.22% of period end loans.
  • Foreclosed property decreased to $14.52 million from $20.13 million at June 30, 2018.

Deposits and Borrowings:

  • Total deposits were $9.27 billion compared to $8.73 billion at March 31, 2019 and $7.99 billion at June 30, 2018.
  • Total loans to deposits were 87.68% compared to 92.83% at March 31, 2019 and 97.29% at June 30, 2018.
  • Non-interest bearing deposits were 31.83% of total deposits at June 30, 2019 compared to 32.23% at March 31, 2019 and 32.50% at June 30, 2018.
  • Total borrowings were $0.84 billion compared to $1.03 billion and $1.17 billion at March 31, 2019 and June 30, 2018, respectively.

Capital:

  • Common equity tier 1 capital ratio of 11.58%.
  • Tier 1 leverage capital ratio of 9.86%.
  • Tier 1 risk-based capital ratio of 11.62%.
  • Total risk-based capital ratio of 14.85%.
  • Book value was $21.95 compared to $21.40 at March 31, 2019 and $20.22 at June 30, 2018.
  • Tangible book value (non-GAAP)was $15.05 compared to $14.46 at March 31, 2019 and $13.50 at June 30, 2018.

Outlook:
Management reforecasts on a quarterly basis and anticipates:

  •  Annualized loan growth to be in the low-to-mid single digits for the remainder of 2019.
  • Our quarterly noninterest expense run rate will range between $93 - $94 million for the remainder of 2019.

About TowneBank:
As one of the top community banks in Virginia and North Carolina, TowneBank operates 41 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, Greenville, Moyock, Grandy, Camden County, Southern Shores, Corolla and Nags Head in North Carolina.  TowneBank 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 $11.94 billion as of June 30, 2019, 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.  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, 757-638-681

TOWNEBANK
Selected Financial Highlights (unaudited)
(dollars in thousands, except per share data)
   
  Three Months Ended
  June 30, March 31, December 31, September 30, June 30,
 2019 2019 2018 2018 2018
Income and Performance Ratios:         
 Total Revenue$144,537  $133,854  $131,417  $137,914  $137,058 
 Net income36,242  32,082  36,440  39,252  36,138 
 Net income attributable to TowneBank34,638  31,409  35,990  38,293  34,804 
 Net income per common share - diluted0.48  0.44  0.50  0.53  0.48 
 Book value per common share21.95  21.40  21.05  20.54  20.22 
 Book value per common share - tangible (non-GAAP)15.05  14.46  14.26  13.83  13.50 
 Return on average assets1.20% 1.14% 1.28% 1.40% 1.32%
 Return on average assets - tangible (non-GAAP)1.35% 1.29% 1.43% 1.56% 1.48%
 Return on average equity8.83% 8.24% 9.44% 10.21% 9.55%
 Return on average equity - tangible (non-GAAP)13.90% 13.24% 14.91% 16.08% 15.19%
 Return on average common equity8.89% 8.30% 9.53% 10.30% 9.62%
 Return on average common equity - tangible (non-GAAP)14.05% 13.39% 15.11% 16.30% 15.36%
 Noninterest income as a percentage of total revenue37.86% 34.65% 32.12% 35.69% 36.65%
           
Regulatory Capital Ratios (1):         
 Common equity tier 111.58% 11.49% 11.51% 11.53% 11.33%
 Tier 111.62% 11.52% 11.54% 11.57% 11.36%
 Total14.85% 14.79% 14.83% 14.90% 14.71%
 Tier 1 leverage ratio9.86% 9.92% 9.87% 9.98% 10.00%
           
Asset Quality:         
 Allowance for loan losses to nonperforming loans 3.00x  9.36x  10.97x  7.25x  12.64x
 Allowance for loan losses to period end loans0.67% 0.66% 0.65% 0.64% 0.64%
 Allowance for loan losses to period end loans excluding purchased loans0.81% 0.81% 0.82% 0.82% 0.84%
 Nonperforming loans to period end loans0.22% 0.07% 0.06% 0.09% 0.05%
 Nonperforming assets to period end assets0.29% 0.22% 0.22% 0.25% 0.24%
 Net charge-offs to average loans (annualized)0.08% 0.01% 0.02% 0.03% 0.01%
           
 Nonperforming loans$18,202  $5,696  $4,749  $6,926  $3,919 
 Former bank premises1,510  2,223  2,253  2,253  2,253 
 Foreclosed property14,517  17,071  17,163  18,153  20,133 
 Total nonperforming assets$34,229  $24,990  $24,165  $27,332  $26,305 
 Loans past due 90 days and still accruing interest$415  $117  $394  $153  $22