TowneBank Reports Second Quarter Earnings

SUFFOLK, Va., July 24, 2015 (GLOBE NEWSWIRE) -- Hampton Roads based TowneBank (the “Bank”) (NASDAQ:TOWN) reported record earnings of $17.81 million for the quarter ended June 30, 2015, a 52.54% increase, or $6.14 million, over the $11.68 million reported for the comparative period in 2014.  Fully diluted earnings per share were $0.35 per share compared to $0.33 per share for the comparative period of 2014.   Earnings for the year-to-date period increased 41.84% to $32.35 million as compared to the $22.81 million earned in the same period of 2014.  For the year-to-date period, fully diluted earnings per share were $0.63 per share, down slightly from $0.64 per share in comparative 2014.  Earnings per share were affected in 2015 by the issuance of 15.55 million new common shares in conjunction with the acquisition of Franklin Financial Corporation (“Franklin”) on January 2, 2015.

The Bank’s common dividend was $0.12 per share for the quarter with the common dividend totaling $6.19 million.  The current dividend represents an increase of 9.1% over the dividend paid during the same quarter of 2014.

“We are pleased to report record earnings for the quarter, as we continue to build on the momentum started earlier this year with the Franklin acquisition and our entry into the Richmond, Virginia market,” said G. Robert Aston, Jr., Chairman and Chief Executive Officer.  “Our operating results reflect the benefits of the merger as revenue increased $16.15 million, or 26.12%, from the second quarter of 2014 while producing a return on average assets of 1.21% and a return on average tangible equity of 11.77%.

“We have continued to position ourselves for growth and success in the Richmond, Virginia metro market,” added Aston.  “The strong team of Richmond hometown bankers we assembled combined with a comprehensive marketing campaign designed to introduce the market to our unique brand has resulted in $66.7 million of new loan originations in Richmond since the merger.”

Second Quarter 2015 Performance Highlights

• Total revenues were $77.97 million, an increase of $16.15 million, or 26.12%, compared to the second quarter of 2014
  • Taxable equivalent net interest margin was 3.52%, including accretion of 0.10%, compared to 3.43% for second quarter 2014
  • Residential mortgage banking income increased 32.53% from second quarter 2014 to $10.25 million on production volume of $466.23 million
  • Insurance commissions increased 11.15% to $9.88 million
  • Noninterest income was 42.43% of total revenue in second quarter 2015
     
• Return on average assets of 1.21%, increased from 0.97% for second quarter 2014
   
• Loans held for investment increased $758.93 million, or 21.88%, from June 30, 2014 with organic growth of $299.11 million, an increase of 8.62%
  • Commercial and industrial loans increased by $74.10 million, or 11.25%, with organic growth of $58.97 million
  • Owner occupied commercial real estate loans increased $22.61 million, or 3.06% with organic growth of $6.70 million
  • Income producing commercial real estate loans increased $338.91 million, or 52.22% with organic growth of $119.95 million
  • Construction and development loans increased $66.44 million, or 13.63% with organic growth of $22.24 million
  • Consumer and other loans increased $55.81 million, or 108.90% through organic growth
     
• Total deposits were $4.69 billion, an increase of $890.82 million, or 23.47%, from the second quarter of 2014
  • Noninterest bearing deposits increased by 13.34%, to $1.36 billion
  • Average interest-bearing deposit costs were 0.55%, up 4 basis points from the prior year
  • Noninterest bearing deposits were 29.09% of total deposits compared to 31.69% at June 30, 2014
  • Total cost of deposits increased to 0.39% from 0.36% at June 30, 2014 reflective of a greater mix of savings deposits acquired in the Franklin merger
     
• Asset quality showed continued strength
  • Nonperforming assets were $53.61 million, or 0.89% of total assets compared to 1.02% at June 30, 2014
  • Nonperforming loans decreased 0.61% to $7.46 million
  • Foreclosed property increased to $46.15 million, including $10.33 million acquired in the Franklin merger
  • Performing troubled debt restructurings decreased $8.79 million
  • Provision for loan losses was $1.72 million for second quarter 2015
     
• The Bank remained well-capitalized
  • Common equity tier 1 capital ratio of 12.93%
  • Tier 1 leverage capital ratio of 11.14%
  • Tier 1 risk-based capital ratio of 13.04%
  • Total risk-based capital ratio of 13.80%
  • Tangible book value increased to $12.00

Net Interest Income

Net interest income increased to $44.88 million, an $8.35 million, or 22.84%, increase from the second quarter of 2014.  The primary driver of the increase was the significant increase in earning assets from the Franklin merger along with the restructuring of the Franklin balance sheet.  Average earning assets increased $994.38 million, or 22.53%, from the second quarter of 2014.  Augmenting the increase was a 9 basis point widening of the tax-equivalent net interest margin to 3.52% in the current quarter from 3.43% in the second quarter of 2014.  Accretion income added $1.08 million, or 10 basis points, to margin in the current quarter.

On a linked quarter basis, net interest income increased $1.33 million or 3.05%, in second quarter 2015 versus first quarter 2015, while tax-equivalent net interest margin was unchanged from the first quarter of 2015 at 3.52%.

Noninterest Income

Noninterest income, excluding gains or losses on investment securities, was $32.97 million for the second quarter of 2015, an increase of $7.62 million, or 30.06%, from the second quarter of 2014.  The majority of the increase from the comparative period in 2014 is attributable to residential mortgage banking income, which increased $2.52 million, or 32.53%, from the second quarter of 2014 primarily due to increased production volumes and improved pricing and margins.  Mortgage production was $466.23 million in the second quarter of 2015, which was $131.35 million greater than second quarter 2014.  Also contributing to the increase were insurance commissions, which increased $0.99 million, or 11.15%, primarily due to the acquisition of two insurance agencies in February 2015 and one agency in May 2014.  The increase in real estate brokerage and property management income was driven by the acquisition of a resort property management company in Hilton Head, South Carolina in fourth quarter 2014 and was partially offset by the sale of our North Carolina-based property management business on April 1, 2015, which generated management fee revenue of $0.97 million in second quarter 2014.  The Bank recognized a gain of $1.36 million on the sale, which was recorded in other noninterest income, partially offset by expenses of $0.24 million recorded in noninterest expense.

In comparison to the first quarter of 2015, noninterest income, excluding gains or losses on investment securities, increased $4.20 million, or 14.60%.  Residential mortgage banking income increased by $1.81 million, or 21.41%, from the first quarter of 2015 as mortgage production increased by $147.81 million.  Real estate brokerage and property management income increased due to a seasonal increase related to our resort property management business.  The increase was offset by the sale of our North Carolina-based property management business, which generated $1.80 million in management fee revenue in first quarter 2015.  The sale resulted in a gain of $1.36 million, which was recorded in other noninterest income  Insurance commissions decreased due to lower contingent commission revenue, which is mostly received during the first quarter of each year.

Noninterest Expense

Noninterest expense increased by $4.40 million, or 9.85%, from the comparative quarter of 2014.  Driving the increase were operating expenses of $2.51 million related to the Franklin merger.  Additionally, operating expenses increased $2.13 million due to our insurance and resort property management acquisitions in first quarter of 2015 and in 2014.

Noninterest expense decreased by $1.37 million, or 2.72%, from the first quarter of 2015.  Driving the decrease were salary and benefits expenses, which decreased by $1.14 million due to lower payroll taxes and employee incentive compensation combined with a decrease in costs related to foreclosed properties.

Segment Results

Banking
Net income for the three months ended June 30, 2015 for the Banking segment was $13.07 million, increasing $4.15 million, or 46.51%, from the comparative 2014 quarter.  The increase in earnings was driven by an increase in net interest income of $8.02 million, primarily due to the increase in earning assets acquired in the Franklin merger.  The increase in net interest income was partially offset by an increase in the loan loss provision driven by loan growth and the reclassification of industrial revenue bonds from investment securities to loans, as shown below, combined with an increase in noninterest expense related to the Franklin merger and increases in charitable contributions, marketing expenses, and the opening of a new banking office in May 2015.

The increase in earnings of $1.96 million, or 17.64% from the first quarter of 2015 was primarily driven by an increase in revenue due to a combination of higher net interest income of $0.89 million, which was primarily due to loan growth, and an increase in other income of $1.05 million driven by a gain of $0.57 million on the sale of land owned by the Bank.  Also contributing to the increase in earnings was a decrease in noninterest expenses of $2.07 million as personnel costs, foreclosed property expenses and outside processing costs all saw decreases.  The increase was partially offset by an increase in the loan loss provision as discussed above.

Realty
For the three months ended June 30, 2015, the Realty segment had net income of $3.73 million, an increase of $2.29 million compared to the second quarter of 2014.  Contributing to the improvement was an increase in residential mortgage banking income of $2.64 million, or 33.77%.  Also contributing to the improvement was an increase in property management fees of $1.22 million, or 86.67%.  Additionally, second quarter results included a gain of $1.36 million on the sale of our North Carolina-based property management business, partially offset by expenses of $0.24 million.

Net income in the Realty segment increased by $2.08 million from the linked quarter ended March 31, 2015.  The increase resulted from a combination of higher residential mortgage banking income of $1.94 million, a seasonal increase in real estate brokerage income of $0.70 million, and the gain on the sale of our North Carolina-based property management business.  The improvement in earnings was partially offset by a decrease in property management fees of $0.07 million due to the sale of our North Carolina-based property management business, which generated $1.80 million in management fee revenue in first quarter 2015, and an increase in noninterest expenses of $0.55 million.

Insurance
The Insurance segment had net income of $1.02 million for the three months ended June 30, 2015, a decrease of $0.31 million as compared to the second quarter of 2014.  Contributing to the decline were increases in personnel costs related to 401(k) expenses, acquisition-related expenses, and legal fees.  The insurance agency acquisitions in first quarter 2015 and second quarter 2014 resulted in additional commissions and fee revenue of $0.98 million and additional $0.94 million of noninterest expenses.

Net income decreased $0.77 million from the first quarter of 2015.  The decline from the linked quarter was driven by a decrease in contingency and bonus revenue of $2.14 million, which offset a seasonal increase in property and casualty commission income of $1.06 million.  Contingent commissions are seasonal in nature and are mostly received during the first quarter of each year.

Balance Sheet

At June 30, 2015, total Bank assets reached $6.06 billion, an increase of $1.15 billion, or 23.33%, over June 30, 2014.

Loans

The Bank’s loan portfolio ended the period at $4.23 billion representing an increase of 21.88%, or $758.93 million, from the prior year and an increase of 3.23%, or $132.43 million, from March 31, 2015.  Organic growth in 2015, including the effect of loan transfers to OREO, was $208.90 million, or 11.66% on an annualized basis.  Included in this growth were new originations of $66.70 million in our Richmond market.

Deposits

The Bank continued to experience solid deposit growth with total deposits increasing to $4.69 billion, up $890.82 million, or 23.47%, from June 30, 2014.  The increase was mostly due to the deposits acquired in the Franklin merger.  Organic growth in total deposits was $143.47 million, or 7.46% on an annualized basis, from December 31, 2014.  The Bank saw continued growth in noninterest bearing demand deposits, which ended the quarter at $1.36 billion, a 13.34% increase from June 30, 2014.  Noninterest deposits represented 29.09% of total deposits at June 30, 2015.  The slight percentage decline from June 30, 2014 was a result of the funding mix in the acquired Franklin deposits.

Capital Ratios

(a) Basel III rules became effective January 1, 2015, with transitional provisions.  All prior year data is based on Basel I rules

The Bank’s total equity at June 30, 2015 rose to $802.89 million, an increase of $198.08 million, or 32.75%, from June 30, 2014.  Common equity increased 52.83%, or $274.48 million, as the Bank issued common stock in the amount of $238.66 million in the Franklin merger and redeemed in full its $76.46 million of outstanding Non-Cumulative Convertible Preferred Stock, Series C issued to the U.S. Treasury under the Small Business Lending Fund during first quarter 2015.  Total risk-based capital remained strong as total risk-based capital, Tier 1 capital, Tier 1 leverage ratios, and common equity Tier 1 capital ratios were 13.80%, 13.04%, 11.14%, 12.93%, respectively.  All ratios exceed the current regulatory standards for well capitalized status.

Asset Quality

Continued improvements in credit quality contributed to the Bank's financial results as nonperforming loans decreased to $7.46 million from $7.50 million, at June 30, 2014 and increased from $7.05 million at March 31, 2015.  Net charge-offs were $0.34 million in the second quarter of 2015 compared to $0.92 million in the second quarter of 2014 and $0.33 million in the linked quarter.  Total nonperforming assets were $53.61 million, or 0.89%, of Bank assets, including foreclosed property of $10.33 million originally acquired in the Franklin merger, at June 30, 2015, as compared to $49.91 million, or 1.02%, at June 30, 2014, and $58.74 million, or 1.01%, at March 31, 2015.  The allowance for loan losses was $37.29 million, increased from $35.79 million at June 30, 2014 and $35.91 million at March 31, 2015.  A reclassification of industrial revenue bonds from investment securities to loans during second quarter 2015 was responsible for $0.80 million of the increase, while loan growth drove the remainder of the increase.  The total allowance for loan losses, including purchased loans, was 0.88% of loans held for investment at June 30, 2015, compared to 1.03% at June 30, 2014 and 0.88% at March 31, 2015.  The allowance for loan losses on originated loans was 1.00% of originated loans held for investment at June 30, 2015, compared to 1.04% at June 30, 2014 and 1.00% at March 31, 2015.  The allowance for loan losses was 5.0 times nonperforming loans held for investment, compared to 4.77 at June 30, 2014 and 5.10 times at March 31, 2015.

About TowneBank:
As one of the top community banks in Virginia and North Carolina, TowneBank operates 36 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 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 Insurance Agency, TFA Benefits, TowneBank Mortgage, TowneBank Commercial Mortgage, Berkshire Hathaway HomeServices Towne Realty, Towne 1031 Exchange, LLC, and Beach Properties of Hilton Head. 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 $6.06 billion as of June 30, 2015, 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 their 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.  Since the presentation of these GAAP performance measures and their impact differ between companies, 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:
Statements made in this release, other than those concerning historical financial information, may be considered forward-looking statements, which speak only as of the date of this release and are based on current expectations and involve a number of assumptions. 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. The Company’s ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. 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; the quality and composition of the loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in the companies’ respective market areas; implementation of new technologies; ability to develop and maintain secure and reliable electronic systems; changes in the securities markets; changes in accounting principles, policies and guidelines; mergers and acquisitions; and other risk factors detailed from time to time in filings made by TowneBank with 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. 

(1) Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.  Fully tax equivalent.
(2) Net interest margin is net interest income expressed as a percentage of average earning assets.  Fully tax equivalent.

(1) Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.  Fully tax equivalent.
(2) Net interest margin is net interest income expressed as a percentage of average earning assets.  Fully tax equivalent.

(1) As derived from the audited consolidated financial statements for December 31, 2014.