TowneBank Reports Record Third Quarter Earnings

SUFFOLK, Va., Oct. 27, 2016 (GLOBE NEWSWIRE) — Hampton Roads based TowneBank (the “Bank” or “Company”) (NASDAQ:TOWN) today reported financial results for the quarter and nine months ended September 30, 2016.  Earnings for the quarter ended September 30, 2016 increased 37.63% to a record $24.18 million compared to $17.57 million for the same quarter in 2015.  Fully diluted earnings per share were $0.39 compared to $0.34 for the third quarter of 2015.  Earnings in the third quarter of 2016 included after-tax acquisition-related expenses of $0.70 million as compared to $0.16 million in the third quarter of 2015.

Excluding after-tax acquisition-related expenses, core earnings for the quarter ended September 30, 2016 were $24.88 million (non-GAAP) compared to $17.72 million (non-GAAP) for the same quarter in 2015.  Fully diluted core earnings per share, excluding after-tax acquisition-related expenses, were $0.40 (non-GAAP measure) compared to $0.35 for the third quarter of 2015.

Earnings for the year-to-date period were $48.25 million as compared to the $49.92 million earned in the same period of 2015.  Fully diluted earnings per share were $0.87 compared to $0.98 for the nine months ended September 30, 2015.  Earnings in 2016 included after-tax acquisition-related expenses of $13.34 million as compared to $0.67 million in 2015.  Earnings per share were also affected 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-to-date period were $61.60 million (non-GAAP) as compared to the $50.58 million (non-GAAP) earned in the same period of 2015.  Fully diluted earnings per share were $1.12 (non-GAAP) compared to $0.99 (non-GAAP) for the nine months ended September 30, 2015.

The Bank’s common dividend was $0.13 per share for the quarter with the common dividend totaling $8.11 million.  The current dividend represents an increase of 8.3% over the dividend paid during the same quarter of 2015 and a payout ratio of 33.3%.

“We are extremely pleased with our strong operating performance driven in part by our successful merger integration of Monarch Bank into our Towne family.  Reflective of our planned merger cost saves, our core return of average assets increased to 1.24%, producing a core return on average tangible equity of 13.23%.  On another note of significance, the June 30, 2016 release of Deposit Market Share by the FDIC for the Virginia Beach-Norfolk-Newport News, VA-NC Metropolitan Statistical Area(s) placed TowneBank in a market leading position with a 21.51% market share,” said G. Robert Aston, Jr., Chairman and Chief Executive Officer.

Third Quarter 2016 Performance Highlights

• Total revenues were a record $109.43 million, an increase of $33.45 million, or 44.03%, from third quarter 2015
  • Taxable equivalent net interest margin was 3.57%, including accretion of 17 basis points, compared to 3.40%, including accretion of 6 basis points, for third quarter 2015
  • Residential mortgage banking income increased $13.17 million, or 159.38%
  • Insurance segment total revenue increased 11.88% from third quarter 2015, to $13.22 million
     
• Core net income, excluding after-tax acquisition-related expenses, was $24.88 million, an increase of 40.36% from September 30, 2015
   
• Loans held for investment increased $1.28 billion, or 29.42%, from September 30, 2015, which included $808.14 million of loans acquired in the Monarch merger
   
• Average loans held for sale increased $349.14 million, or 264.07% from September 30, 2015
   
• Total deposits were $6.15 billion, an increase of $1.36 billion, or 28.39%, from third quarter 2015, which included $1.06 billion of deposits acquired in the Monarch merger
  • Noninterest bearing deposits increased by 36.54%, to $1.97 billion and represent 32.12% of total deposits
  • Total cost of deposits decreased to 0.38% from 0.41% at September 30, 2015
     
• Asset quality showed continued strength
  • Nonperforming assets declined to $34.22 million, or 0.44% of total assets compared to $47.99 million, or 0.78%, at September 30, 2015
  • Nonperforming loans were 0.20% of period end loans
  • Foreclosed property decreased 42.08% to $22.88 million
     
• The Bank remained well-capitalized
  • Common equity tier 1 capital ratio of 11.74%
  • Tier 1 leverage capital ratio of 10.18%
  • Tier 1 risk-based capital ratio of 11.81%
  • Total risk-based capital ratio of 12.42%

Net Interest Income
Net interest income increased to $62.60 million, a $16.94 million, or 37.08%, increase from the third quarter of 2015.  The primary driver was the increase in average earning assets, which increased $1.65 billion, or 29.47%, from third quarter 2015.  Additionally, tax-equivalent net interest margin increased to 3.57% in the current quarter as compared to 3.40% in third quarter 2015.  Accretion income added $2.63 million, or 17 basis points, to margin in the current quarter as compared to $0.68 million, or 6 basis points, in the third quarter of 2015.

Noninterest Income
Noninterest income, excluding gains or losses on investments, was $46.82 million for the third quarter of 2016, an increase of $17.25 million, or 58.35%, from the third quarter of 2015.  Residential mortgage banking income increased $13.17 million, or 159.38%, from third quarter 2015 primarily due to higher production volumes resulting from the Monarch merger.  Mortgage production was $1.25 billion in the third quarter of 2016, which was $811.86 million greater than third quarter 2015.  Insurance commissions and other title fees increased $1.55 million, or 15.94%, primarily due to insurance agency acquisitions in 2015, combined with an increase in commercial lines and travel insurance commissions.  Additionally, real estate brokerage and property management income increased $1.30 million, or 24.27%, from the third quarter of 2015 due to the acquisition of a resort property management company in Oak Island, North Carolina (“Oak Island”) in first quarter 2016.

Noninterest Expense
Noninterest expense increased by $21.03 million, or 42.13%, from the comparative quarter of 2015.  The primary driver was an increase of $11.59 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 acquisitions in our Insurance and Realty segment businesses.  Also contributing were increases in occupancy expenses of $1.95 million and furniture and equipment expenses of $0.99 million primarily related to facilities acquired in the Monarch acquisition.

Third Quarter 2016 Earnings Compared to Second Quarter 2016

Core net income for the third quarter, excluding after-tax acquisition-related expenses of $0.70 million, was $24.88 million, or $0.40 per diluted share, versus $18.52 million, or $0.36 per diluted share, excluding after-tax acquisition-related expenses of $12.26 million, for second quarter 2016.

Performance Highlights

• Record revenues of $109.43 million, a $25.17 million, or 29.88%, increase from second quarter 2016
  • Taxable equivalent net interest margin was 3.57%, including accretion of 17 basis points, compared to 3.36%, including accretion of 5 basis points, for second quarter 2016
  • Noninterest income increased $10.35 million primarily due to merger-related growth in our residential mortgage banking business
     
• Loans held for investment increased $91.69 million, or 1.65%, from June 30, 2016
   
• Noninterest bearing deposits increased by $23.58 million, or 1.21% during the quarter
   
• Nonperforming assets decreased 5.69% during the quarter

Net Interest Income
On a linked quarter basis, net interest income increased by $14.82 million, or 31.02%, in third quarter 2016 versus second quarter 2016, while tax-equivalent net interest margin was 3.57%, an increase of 21 basis points from second quarter 2016.  Accretion income added $2.63 million, or 17 basis points, to margin in the current quarter, as compared to $0.61 million, or 5 basis points, in the linked quarter.

Noninterest Income
In comparison to the second quarter of 2016, noninterest income, excluding gains and losses on investment securities, increased $10.35 million, or 28.39%.  Residential mortgage banking income increased by $9.28 million, or 76.41%, from the second quarter of 2016 as the Monarch merger was the primary driver of an increase in mortgage production of $654.89 million.  Additionally, real estate brokerage and property management income increased due to seasonal improvements in our resort property management businesses.  Partially offsetting the increase from the linked quarter was a decline in insurance commissions due to a seasonal decrease in renewals.

Noninterest Expense
Noninterest expense decreased by $0.97 million, or 1.34%, from the second quarter of 2016.  Driving the decrease was a decline in acquisition-related expenses of $17.47 million.  The decrease was mostly offset by increases in personnel and occupancy expenses due to the addition of staff and facilities resulting from the Monarch merger.

Segment Results

The following table presents our segment results:

Third Quarter 2016 Compared to Third Quarter 2015

Banking
Net income for the three months ended September 30, 2016 for the Banking segment was $18.28 million as compared to $14.15 million in the comparative 2015 quarter, as net interest income climbed by $14.17 million due to the increase in earning assets related to the Monarch merger.  Average loan balances saw an increase of $1.28 billion.  Partially offsetting the increase was an increase in noninterest expenses of $6.92 million and an increase in the loan loss provision.

Realty
For the three months ended September 30, 2016, the Realty segment had net income of $4.82 million compared to $2.35 million for the third quarter of 2015.  The current quarter results were driven by an increase in residential mortgage banking income of $13.16 million, or 154.15%, due to higher production volumes resulting from the Monarch merger.  Additionally, property management fees increased by $1.02 million, or 30.39%, primarily due to our purchase of Oak Island in January 2016.  The increase in revenue was partially offset by an increase in operational expenses related to the merger with Monarch.

Insurance
The Insurance segment had net income of $1.09 million for the three months ended September 30, 2016, an increase of $0.01 million as compared to the third quarter of 2015.  Insurance agencies acquired in 2015 contributed additional revenue, net of commission expense, of $0.97 million in third quarter 2016.  Contributing to the increase was an improvement in commercial lines commissions and commissions from travel insurance.  The acquired agencies resulted in additional noninterest expenses of $0.95 million, primarily related to personnel expenses.

Third Quarter 2016 Compared to Second Quarter 2016

Banking
The increase in earnings from $1.29 million in the second quarter of 2016 was driven by an increase in net interest income of $12.03 million due to the growth in earning assets resulting from the Monarch merger, combined with a decrease in noninterest expenses of $11.31 million and a decrease in the loan loss provision of $0.41 million.  The decrease in noninterest expenses resulted from a decrease in acquisition-related expenses of $17.16 million, partially offset by an increase in personnel costs of $3.39 million.

Realty
Net income in the Realty segment increased by $1.05 million from the linked quarter ended June 30, 2016.  The increase resulted primarily from the merger-driven growth in residential mortgage banking income of $9.20 million.  Also contributing was a seasonal increase in our resort property management business.

Insurance
Net income decreased $0.12 million from the second quarter of 2016.  The variance from the linked quarter was a result of a drop in contingency and bonus revenue of $0.40 million, combined with a seasonal decrease in travel insurance commissions of $0.24 million.  Contingent commissions are seasonal in nature and are mostly received during the first quarter of each year.  The seasonal decrease in revenue was partially offset by a decline in operating expenses during the current quarter.

Balance Sheet

At September 30, 2016, total Bank assets reached $7.83 billion, an increase of $1.66 billion, or 26.83%, over September 30, 2015.

Loans

The Bank’s loan portfolio ended the period at $5.65 billion representing an increase of 29.42%, or $1.28 billion, from the prior year and an increase of 1.65%, or $91.69 million, from June 30, 2016.  In addition to organic growth, the increase in loans from the prior year is related to the acquisition of $808.14 million loans in the Monarch merger on June 24, 2016.

Deposits

The Bank continued to experience solid deposit growth with total deposits increasing to $6.15 billion, up $1.36 billion, or 28.39%, from September 30, 2015.  Growth in total deposits includes $1.06 billion of deposits acquired in the Monarch merger.  The Bank saw continued growth in noninterest bearing demand deposits, which ended the quarter at $1.97 billion, a 36.54% increase from September 30, 2015.  Noninterest deposits represented 32.12% of total deposits at September 30, 2016.

Capital Ratios

The Bank’s total equity at September 30, 2016 rose to $1.08 billion, an increase of $262.81 million, or 32.20%, from September 30, 2015.  Total risk-based capital remained strong as common equity Tier 1, Tier 1 capital, total risk-based capital, and Tier 1 leverage capital ratios were 11.74%, 11.81%, 12.42%, and 10.18%, respectively.  All ratios exceed the current regulatory standards for well capitalized status.

Asset Quality

Continued strength in credit quality contributed to the Bank’s financial results as net charge-offs remained low at $0.65 million in the third quarter of 2016 compared to $0.07 million in the third quarter of 2015 and $0.24 million in the linked quarter.  Total nonperforming assets were $34.22 million, or 0.44%, of Bank assets at September 30, 2016, as compared to $47.99 million, or 0.78%, at September 30, 2015, and $36.29 million, or 0.46%, at June 30, 2016.  The allowance for loan losses was $40.66 million, increased from $37.35 million at September 30, 2015 and $39.62 million at June 30, 2016.

About TowneBank:
As one of the top community banks in Virginia and North Carolina, TowneBank operates 38 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, Towne 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 $7.83 billion as of September 30, 2016, 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.  TowneBank’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 TowneBank’s  market areas; TowneBank’s implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; changes in the securities markets; and 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.

(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.