TowneBank Reports 30.6% Increase in First Quarter Earnings

SUFFOLK, Va., April 27, 2015 (GLOBE NEWSWIRE) -- Hampton Roads based TowneBank (the "Bank") (Nasdaq:TOWN) reported record earnings of $14.54 million for the quarter ended March 31, 2015, a 30.61% increase, or $3.41 million, over the $11.13 million reported for the comparative period in 2014. Fully diluted earnings per share were $0.29 per share compared to $0.31 per share for the comparative period of 2014. First quarter earnings per share reflect the issuance of 15.55 million new common shares issued in conjunction with the acquisition of Franklin Financial Corporation (FRNK) ("Franklin") on January 2, 2015. "The benefits of this merger are reflected in our operating results for the quarter that produced a 1.01% return on average assets and a 10.27% return on average tangible equity," said G. Robert Aston, Jr., Chairman and Chief Executive Officer. "Tangible book value ended the quarter at $11.73 compared to $11.00 in the 2014 comparative period and $11.09 in the linked quarter. The merger also provided an estimated $50 million of additional equity that will provide for approximately $500 million of asset growth in future periods," added Aston.

The Bank's common dividend was $0.11 per share for the quarter with the common dividend totaling $5.66 million. The current dividend represents an increase of 10.0% over the dividend paid during the same quarter of 2014.

"In addition to our strong financial performance in the first quarter of 2015, we set the stage for the continuation of the Towne growth story with the Franklin acquisition and our expansion into the Richmond, Virginia metro market," added Aston. "Importantly, our operations team has successfully completed the entire integration and systems conversion process including full implementation of all estimated cost saves and combined balance sheet restructuring. In addition, we have assembled a strong team of Richmond hometown bankers and have begun implementing our branding and market development strategies that resulted in $33.6 million of new loan originations in Richmond during the quarter."

First Quarter 2015 Performance Highlights

• Total revenues were $72.37 million, an increase of $14.45 million, or 24.95%, compared to the first quarter of 2014
  • Taxable equivalent net interest margin was 3.52%, including accretion of 0.08%, compared to 3.44% for first quarter 2014
  • Residential mortgage banking income increased 66.79% from first quarter 2014 to $8.44 million on production volume of $318.42 million
  • Insurance commissions increased 21.94% to $11.05 million
  • Noninterest income was 39.82% of total revenue in first quarter 2015
• Return on average assets of 1.01%, increased from 0.96% for first quarter 2014
• Loans held for investment increased $657.91 million, or 20.12%, from March 31, 2014 with organic growth of $190.60 million, an increase of 5.83%
  • Commercial and industrial loans increased by $36.25 million, or 7.32%, with organic growth of $19.59 million
  • Owner occupied commercial real estate loans increased $19.64 million, or 2.61% with organic growth of $13.21 million
  • Income producing commercial real estate loans increased $310.70 million, or 48.24% with organic growth of $83.61 million
  • Construction and development loans increased $49.55 million, or 10.55% with organic growth of $1.70 million
  • Consumer and other loans increased $40.33 million, or 83.30% through organic growth
• Total deposits were $4.51 billion, an increase of $823.91 million, or 22.38%, from the first quarter of 2014
  • Noninterest bearing deposits increased by 15.70%, to $1.26 billion
  • Average interest-bearing deposit costs were 0.55%, up 2 basis points from the prior year
  • Noninterest bearing deposits were 28.0% of total deposits compared to 29.61% at March 31, 2014
  • Total cost of deposits increased to 0.40% from 0.38% at March 31, 2014 reflective of a richer mix of savings deposits acquired in the Franklin merger
• Asset quality showed continued strength
  • Nonperforming assets were $58.74 million, or 1.01% of total assets compared to 1.10% at March 31, 2014
  • Nonperforming loans decreased 35.82% to $7.05 million
  • Foreclosed property increased to $51.70 million, including $14.30 million acquired in the Franklin merger
  • Performing troubled debt restructurings decreased $10.96 million
  • Low credit costs as provision for loan losses was $0.32 million for first quarter 2015
• Strategic acquisitions
  • On February 1, 2015, acquired Lackey Saunders Co., Inc. and Gloucester Southside Insurance Agency, Inc., independent insurance agencies
  • On January 2, 2015, completed the acquisition of Franklin and its wholly owned subsidiary, Franklin Federal Savings Bank, based in Richmond, Virginia
• The Bank remained well-capitalized
  • Common equity tier 1 capital ratio of 13.09%
  • Tier 1 leverage capital ratio of 10.99%
  • Tier 1 risk-based capital ratio of 13.20%
  • Total risk-based capital ratio of 13.96%
  • Capital ratios were not significantly impacted by Basel III capital rules, which became effective on January 1, 2015
  • Tangible book value increased to $11.73
• On January 7, 2015, the Company redeemed in full its $76.46 million of Preferred Stock issued to the U.S. Treasury under the Small Business Lending Fund.
  • Capital structure of shareholders' equity is now 100% common equity
  • Liquidity ratio in excess of 21%

Net Interest Income

Net interest income increased to $43.56 million, an $8.36 million, or 23.77%, increase from the first 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 $988.74 million, or 22.98%, from the first quarter of 2014. The increase was augmented by an 8 basis point widening of the tax-equivalent net interest margin to 3.52% in the current quarter from 3.44% in the first quarter of 2014. Accretion income added $0.78 million, or 8 basis points, to margin in the current quarter.

On a linked quarter basis, net interest income increased $6.42 million or 17.28%, in first quarter 2015 versus the fourth quarter of 2014, while tax-equivalent net interest margin was 3.52% versus 3.35% for the fourth quarter of 2014.

Noninterest Income

Noninterest income, excluding gains or losses on investment securities, was $28.77 million for the first quarter of 2015, an increase of $6.04 million, or 26.58%, from the first quarter of 2014. The majority of the increase from the comparative period in 2014 is attributable to residential mortgage banking income, which increased $3.38 million, or 66.79%, from the first quarter of 2014 primarily due to increased production volumes and improved pricing and margins. Mortgage production was $318.42 million in the first quarter of 2015, which was $114.66 million greater than first quarter 2014. Also contributing to the increase were insurance commissions, which increased $1.99 million, or 21.94%, 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.

In comparison to the fourth quarter of 2014, noninterest income, excluding gains or losses on investment securities, increased $6.37 million, or 28.42%. Residential mortgage banking income increased by $1.92 million, or 29.43%, from the fourth quarter of 2014 despite a slight decrease in mortgage production of $2.88 million due to improvements in pricing and an increase in the value of rate lock commitments. Purchase closed volume was 76% of total production versus 24% refinance activity for first quarter 2015. Real estate brokerage and property management income increased due to a seasonal increase related to our resort property management business. Our North Carolina-based property management business, which was sold to a third party on April 1, 2015, generated $1.80 million in management fee revenue in first quarter 2015. Additionally, insurance commissions increased due to the current year agency acquisitions and higher contingent commission revenue, which is mostly received during the first quarter of each year.

Noninterest Expense

Noninterest expense increased by $9.36 million, or 22.78%, from the comparative quarter of 2014. Driving the increase were operating expenses of $2.88 million related to the Franklin merger. Additionally, operating expenses increased $2.56 million due to our insurance and resort property management acquisitions in first quarter of 2015 and in 2014.

Noninterest expense increased by $1.48 million, or 3.02%, from the fourth quarter of 2014. Driving the increase were the additional operating expenses related to the first quarter 2015 acquisitions combined with the effect of a fourth quarter 2014 reversal of $0.90 million, pre-tax, in previously accrued employee incentive compensation unearned for the full 2014 year. These factors more than offset the decrease in acquisition-related expenses from the linked quarter.

Segment Results

Banking

Net income for the three months ended March 31, 2015 for the Banking segment was $11.11 million, increasing $2.07 million, or 22.92%, from the comparative 2014 quarter. The increase in earnings was driven by an increase in net interest income of $8.28 million, primarily due to the increase in earning assets from the Franklin merger. The increase in net interest income was partially offset by an increase in noninterest expense related to the Franklin merger combined with increases in charitable contributions and marketing expenses.

The increase in earnings of $3.92 million, or 54.43% from the fourth quarter of 2014 was primarily driven by increases in net interest income of $6.49 million, which was also due to the increase in earning assets related to the Franklin merger and other income of $0.36 million combined with decreases in other expenses of $1.71 million, as acquisition-related expense decreased $2.83 million.

Realty

For the three months ended March 31, 2015, the Realty segment had net income of $1.65 million, an increase of $1.67 million compared to the first quarter of 2014. Contributing to the improvement was an increase in residential mortgage banking income of $3.40 million, or 66.35%. Also contributing to the improvement was an increase in property management fees of $0.54 million, or 24.95%.

Net income in the Realty segment increased by $1.88 million from the linked quarter ended December 31, 2014. Residential mortgage banking income increased $1.88 million, or 28.38% and seasonal increases in resort property management business led to increased fees of $1.75 million in the linked quarter comparison. Total noninterest expenses increased by 5.97%, or $0.59 million, compared to the linked quarter.

Insurance

The Insurance segment had net income of $1.78 million for the three months ended March 31, 2015, a decrease of $0.34 million as compared to the first quarter of 2014. The decline was primarily caused by an increase of $0.47 million due to a combination of higher acquisition-related expenses and a one-time reclassification of expenses between segments in the prior year. The insurance agency acquisitions in first quarter 2015 and second quarter 2014 resulted in additional commissions and fee revenue of $1.47 million and additional $1.46 million of noninterest expenses.

Net income increased $1.51 million from the fourth quarter of 2014. The improvement from the linked quarter was driven by an increase in contingency and bonus revenue of $2.46 million. Contingent commissions are seasonal in nature and are mostly received during the first half of each year. The acquisition of two insurance agencies in first quarter 2015 accounted for an increase in commission and fee revenue of $0.42 million and an increase in noninterest expenses of $0.32 million and resulted in $0.18 million of acquisition-related expenses.

Balance Sheet

At March 31, 2015, total Bank assets reached $5.83 billion, an increase of $1.05 billion, or 22.06%, over March 31, 2014.

Loans

The Bank's loan portfolio ended the period at $3.93 billion representing an increase of 20.12%, or $657.91 million, from the prior year and an increase of 15.60%, or $530.01 million, from December 31, 2014.  Organic growth, including the effect of loan transfers to OREO, in first quarter 2015 was $66.72 million, or 7.84% on an annualized basis. Included in this growth were originations of $33.62 million in our Richmond market. In addition, acquired loan balances were impacted by accelerated prepayments during the quarter.

Deposits

The Bank continued to experience solid deposit growth with total deposits increasing to $4.51 billion, up $823.91 million, or 22.38%, from March 31, 2014. The increase was mostly due to the $682.95 million of deposits acquired in the Franklin merger. Organic growth in total deposits was $185.13 million, or 5.03%, from March 31, 2014. The Bank saw continued growth in noninterest bearing demand deposits, which ended the quarter at $1.26 billion, a 15.70% increase from March 31, 2014. Noninterest deposits represented 28.00% of total deposits at March 31, 2015. The slight percentage decline was a result of the funding mix in the acquired Franklin deposits.

Capital Ratios

The Bank's total equity at March 31, 2015 rose to $791.58 million, an increase of $198.17 million, or 33.40%, from March 31, 2014. Common equity increased 54.18%, or $275.19 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. 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 13.96%, 13.20%, 10.99%, 13.09%, 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 $7.05 million from $10.98 million, at March 31, 2014 and increased from $6.74 million at December 31, 2014. Net charge-offs were $0.33 million in the first quarter of 2015 compared to $1.17 million in the first quarter of 2014 and $0.26 million in the linked quarter. Total nonperforming assets were $58.74 million, or 1.01%, of Bank assets, including foreclosed property of $14.30 million acquired in the Franklin merger, at March 31, 2015, as compared to $52.49 million, or 1.10%, at March 31, 2014, and $41.86 million, or 0.84%, at December 31, 2014.

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 $5.83 billion as of March 31, 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.