TOWN - TowneBank Reports First Quarter 2023 Earnings

SUFFOLK, Va., April 27, 2023 (GLOBE NEWSWIRE) -- TowneBank ("Towne") (NASDAQ: TOWN) today reported earnings for the quarter ended March 31, 2023 of $38.33 million, or $0.52 per diluted share, compared to $45.59 million, or $0.63 per diluted share, for the quarter ended March 31, 2022. Excluding acquisition-related items, core earnings (non-GAAP) for the quarter ended March 31, 2023 were $46.30 million, or $0.62 per diluted share, compared to $45.63 million, or $0.63 per diluted share, for the quarter ended March 31, 2022.

"The quarter presented unexpected industry challenges which highlighted our prudent approach to conservative balance sheet management and growth. Our capital, liquidity and core funding has been a foundational pillar of our Company since inception and remains strong in the current environment. We expect our proven business model, which emphasizes diverse revenues and deep relationships, will provide opportunities to position Towne to successfully navigate volatile market conditions," said G. Robert Aston, Jr., Executive Chairman.

Highlights for First Quarter 2023:

• Total revenues were $184.14 million, an increase of $18.73 million, or 11.32%, compared to first quarter 2022. An increase in net interest income of $24.17 million was partially offset by a $5.44 million decline in noninterest income, primarily related to the decline in residential mortgage banking income.
• Pre-provision, pre-tax, net revenues (non-GAAP) were $59.60 million, an increase of $4.23 million, or 7.65%, compared to the prior year quarter.
• Towne successfully completed the acquisition of Farmers Bankshares, Inc. and its wholly owned subsidiary Farmers Bank ("Farmers"), in January 2023. Included in that acquisition were $277.89 million in loans, $244.89 million in securities, and $514.57 million in deposits.
• Loans held for investment were $11.17 billion, an increase of $1.26 billion, or 12.76%, compared to March 31, 2022, and $379.18 million, or 3.51%, compared to December 31, 2022. Excluding loans acquired in the quarter, total loans increased $0.99 billion, or 9.96%, compared to prior year and $101.29 million, or 3.81% on an annualized basis, compared to the linked quarter.
• Total deposits were $13.60 billion, a marginal decrease of $173.67 million, or 1.26%, compared to prior year but an increase of $303.91 million, or 2.29%, from December 31, 2022. Excluding $514.57 million in acquired deposits, total deposits decreased $688.24 million, or 5.00%, compared to prior year and $210.66 million, or 6.43% on an annualized basis compare to the linked quarter.
• Noninterest bearing deposits decreased 8.37%, to $5.07 billion, compared to prior year and represented 37.28% of total deposits. Compared to the linked quarter, noninterest bearing deposits decreased 3.72%.
• Annualized return on common shareholders' equity was 8.05% compared to 9.81% in first quarter 2022. Annualized return on average tangible common shareholders' equity (non-GAAP) was 11.83% compared to 14.08% in first quarter 2022.
• Net interest margin was 3.36% for the quarter and taxable equivalent net interest margin (non-GAAP) was 3.39% compared to the prior year quarter net interest margin of 2.67% and taxable equivalent net interest margin (non-GAAP) of 2.69%.
• Effective tax rate of 20.03% in the quarter compared to 19.77% in first quarter 2022 and 19.90% in the linked quarter.
  

"We were pleased to close the Farmers Bank partnership during the quarter and recently completed the systems conversion. Additionally, the growth in tangible book value during the quarter evidenced our well-structured approach to this transaction. Tougher economic conditions could present additional opportunities for us to grow both organically and through acquisition across our various lines of business. Our commitment to being a strong community asset in the markets we serve is unwavering, especially in challenging environments," stated William I. Foster III, President and Chief Executive Officer.

Quarterly Net Interest Income:

• Net interest income was $123.38 million compared to $99.20 million for the quarter ended March 31, 2022. The increase was driven by higher earning asset yields and increases in loan and investment securities balances, partially offset by increased deposit costs.
• Tax-equivalent net interest margin (non-GAAP) was 3.39%, including purchase accounting accretion of 3 basis points, compared to 2.69%, including purchase accounting accretion of 6 basis points for first quarter 2022.
• On an average basis, loans held for investment, with a yield of 4.88%, represented 74.61% of earning assets at March 31, 2023 compared to a yield of 4.01% and 64.26% of earning assets in the first quarter of 2022.
• Total cost of deposits increased to 1.02% from 0.15% for the quarter ended March 31, 2022. Interest expense on deposits increased $29.04 million, or 593.38%, over the prior year quarter driven, primarily, by the increase in rate. Management expects continued pressure on the cost of deposits.
• Rising funding costs continued to negatively impact profitability in our residential mortgage banking business.
• Average interest-earning assets totaled $14.87 billion at March 31, 2023 compared to $15.05 billion at March 31, 2022, a decrease of 1.14%.
• Average interest-bearing liabilities totaled $8.91 billion, an increase of $352.08 million, or 4.11% from prior year. Average short term FHLB borrowings were $263.33 million during the quarter.
  

Quarterly Provision for Credit Losses:

• The quarterly provision for credit losses was an expense of $11.67 million compared to a provision benefit of $1.45 million one year ago and an expense of $6.07 million in the linked quarter. The provision includes an initial provision for credit losses of $4.01 million related to loans and commitments acquired in the Farmers transaction.
• The allowance for credit losses on loans in first quarter 2023, compared to the linked quarter, increased $9.19 million, $5.05 million of which resulted from the January 2023 acquisition of Farmers. In addition to the initial loan provision discussed above, acquisition accounting for the purchased loan portfolio included an increase in our allowance of $1.38 million on acquired loans with purchase credit deteriorated loan marks. Additional allowance increases were driven by loan growth, changes in our portfolio composition and updates in the macroeconomic forecast scenarios.
• Net loan charge-offs were $3.87 million, driven primarily by the charge-off of a single credit relationship, compared to $0.13 million one year prior and $2.90 million in the linked quarter. The ratio of net charge-offs to average loans on an annualized basis was 0.14% in first quarter 2023, 0.01% in first quarter 2022, and 0.11% in the linked quarter.
• The allowance for credit losses on loans represented 1.07% of total loans at March 31, 2023, 1.05% at March 31, 2022, and 1.03% on December 31, 2022. The allowance for credit losses on loans was 12.87 times nonperforming loans compared to 21.52 times at March 31, 2022 and 17.67 times at December 31, 2022.

Quarterly Noninterest Income:

• Total noninterest income was $60.77 million compared to $66.21 million in 2022, a decrease of $5.44 million, or 8.22%.
• Residential mortgage banking income was $9.37 million compared to $14.64 million in first quarter 2022. Loan volume decreased to $416.22 million in first quarter 2023 from $819.99 million in 2022. The prolonged increase in mortgage rates has resulted in refinance activities dropping to 5% of total mortgage production volume, the lowest level since second quarter 2018. Residential purchase activity comprised 94.99% of production volume in the first quarter of 2023 compared to 77.93% in the prior year quarter.
• Gross margins on residential mortgages increased 10 basis points from 3.01% in first quarter 2022 to 3.11% in the current quarter.
• Total net insurance commissions increased $3.75 million, or 19.66%, to $22.82 million in first quarter 2023 compared to 2022. This resulted from increases in property and casualty commissions, which were driven by organic growth, higher contingency income, and commissions from two recent acquisitions.
• Property management fee revenue decreased 9.40%, or $1.61 million, to $15.54 million in first quarter 2023 compared to 2022. Reservation income is down compared to the prior year due to decreased bookings at our property management locations.
• Real estate brokerage income declined driven by a 29.04% decline in sale volume. The combination of higher mortgage loan rates and continued low home sales inventories impacted income in first quarter 2023.

Qua rterly Noninterest Expense:

• Total noninterest expense was $124.40 million compared to $109.38 million in 2022, an increase of $15.02 million, or 13.73%. Increases in salaries and employee benefits of $5.46 million, acquisition-related expenses of $5.91 million, software expense of $1.13 million, and charitable contributions of $1.03 million were the primary sources of the increase.
• Salaries and benefits expense increases were driven by annual base salary adjustments that went into effect July 2022 and an increase in the year-over-year number of employees, primarily related to the Farmers acquisition.
• Software expense increased due to a number of ongoing projects related to recent acquisitions, our loan portfolio and mortgage.
  

Consolidated Balance Sheet Highlights:

• Total assets were $16.73 billion for the quarter ended March 31, 2023, an $0.89 billion increase compared to $15.85 billion at December 31, 2022. Total assets increased $63.89 million, or 0.38%, from $16.67 billion at March 31, 2022.
• Loans held for investment increased $1.26 billion, or 12.76%, compared to prior year and $379.18 million, or 3.51%, compared to the linked quarter. Excluding loans acquired in the quarter, total loans increased $0.99 billion, or 9.96%, compared to prior year and $101.29 million, or 3.81% on an annualized basis, compared to the linked quarter.
• Mortgage loans held for sale decreased $77.46 million, or 33.01%, compared to prior year but increased $54.82 million, or 53.57%, compared to the linked quarter.
• Excluding $0.51 billion in acquired deposits, total deposits decreased $0.69 billion, or 5.00%, compared to prior year and $0.21 billion, or 1.58%, compared to the linked quarter.
• Total borrowings increased $178.31 million, or 28.40%, over prior year and $488.24 million, or 153.53%, compared to the linked quarter. FHLB advances increased $474.82 million in the quarter.
  

Investment Securities:

• Total investment securities were $2.67 billion compared to $2.41 billion at December 31, 2022 and $2.30 billion at March 31, 2022. The weighted average duration of the portfolio at March 31, 2023 was 3.6 years. The carrying value of the available for sale debt securities portfolio included net unrealized losses of $165.71 million at March 31, 2023, compared to $191.05 million at December 31, 2022 and $70.32 million at March 31, 2022, related to rising rates rather than credit quality issues.
  

Loans and Asset Quality:

• Total loans held for investment were $11.17 billion at March 31, 2023 compared to $10.79 billion at December 31, 2022 and $9.91 billion at March 31, 2022.
• Nonperforming assets were $9.89 million, or 0.06% of total assets, compared to $5.39 million, or 0.03%, at March 31, 2022.
• Nonperforming loans were 0.08% of period end loans compared to 0.05% at March 31, 2022.
• Foreclosed property increased marginally to $563.85 thousand from $560.15 thousand at March 31, 2022.

Deposits and Borrowings:

• Total deposits were $13.60 billion compared to $13.29 billion at December 31, 2022 and $13.77 billion at March 31, 2022.
• Total loans held for investment to deposits were 82.17% compared to 81.20% at December 31, 2022 and 71.95% at March 31, 2022.
• Noninterest-bearing deposits were 37.28% of total deposits at March 31, 2023 compared to 39.61% at December 31, 2022 and 40.17% at March 31, 2022.
• Total borrowings were $0.81 billion compared to $0.32 billion at December 31, 2022 and $0.63 billion at March 31, 2022.

Capital:

• Common equity tier 1 capital ratio of 11.68%.
• Tier 1 leverage capital ratio of 9.86%.
• Tier 1 risk-based capital ratio of 11.80%.
• Total risk-based capital ratio of 14.55%.
• Book value per common share was $26.40 compared to $25.73 at December 31, 2022 and $25.61 at March 31, 2022.
• Tangible book value per common share (non-GAAP) was $19.04 compared to $18.84 at December 31, 2022 and $18.67 at March 31, 2022.

About TowneBank:
Founded in 1999, TowneBank is a company built on relationships, offering a full range of banking and other financial services, with a focus of serving others and enriching lives. Dedicated to a culture of caring, Towne values all employees and members by embracing their diverse talents, perspectives, and experiences.

TowneBank operates over 45 banking offices throughout Hampton Roads and Central Virginia, as well as Northeastern and Central North Carolina – serving as a local leader in promoting the social, cultural, and economic growth in each community. Towne offers a competitive array of business and personal banking solutions, delivered with only the highest ethical standards. Experienced local bankers providing a higher level of expertise and personal attention with local decision-making are key to the TowneBank strategy. TowneBank has grown its capabilities beyond banking to provide expertise through its controlled divisions and subsidiaries that include 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. With total assets of $16.73 billion as of March 31, 2023, TowneBank is one of the largest banks headquartered in Virginia.

Non-GAAP Financial Measures :
This press release contains certain financial measures determined by methods other than in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Such non-GAAP financial measures include the following: fully tax-equivalent net interest margin, core operating earnings, core net income, tangible book value per common share, pre-provision, pre-tax net revenues, total risk-based capital ratio, tier one leverage ratio, tier one capital ratio, and the tangible common equity to tangible assets ratio. Management uses these non-GAAP financial measures to assess the performance of TowneBank’s core business and the strength of its capital position. Management believes that these non-GAAP financial measures provide meaningful additional information about TowneBank to assist investors in evaluating operating results, financial strength, and capitalization. The non-GAAP financial measures should be considered as additional views of the way our financial measures are affected by significant charges for credit costs and other factors. These non-GAAP financial measures should not be considered as a substitute for operating results determined in accordance with GAAP and may not be comparable to other similarly titled measures of other companies. The computations of the non-GAAP financial measures used in this presentation are referenced in a footnote or in the appendix to this presentation.

Forward-Looking Statements:
This press release contains certain forward-looking statements as defined by the Private Securities Litigation Reform Act of 1995. Forward-looking statements are not historical facts, but instead represent only the beliefs, expectations, or opinions of TowneBank and its management regarding future events, many of which, by their nature, are inherently uncertain. Forward-looking statements may be identified by the use of such words as: "believe," "expect," "anticipate," "intend," "plan,” "estimate," or words of similar meaning, or future or conditional terms, such as "will," "would," "should," "could," "may," "likely," "probably," or "possibly." These statements may address issues that involve significant risks, uncertainties, estimates, and assumptions made by management. Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include competitive pressures in the banking industry that may increase significantly; changes in the interest rate environment that may reduce margins and/or the volumes and values of loans made or held as well as the value of other financial assets held; changes in the creditworthiness of customers and the possible impairment of the collectability of loans; general economic conditions, either nationally or regionally, that may be less favorable than expected, resulting in, among other things, a deterioration in credit quality and/or a reduced demand for credit or other services; unusual and infrequently occurring events, such as weather-related or natural disasters, acts of war or terrorism, or public health events (such as the COVID-19 pandemic); changes in the legislative or regulatory environment, including changes in accounting standards and tax laws, that may adversely affect our business; costs or difficulties related to the integration of the businesses we have acquired may be greater than expected; expected cost savings associated with pending or recently completed acquisitions may not be fully realized or realized within the expected time frame; cybersecurity threats or attacks, the implementation of new technologies, and the ability to develop and maintain reliable electronic systems; our competitors may have greater financial resources and develop products that enable them to compete more successfully; changes in business conditions; changes in the securities market; and changes in our local economy with regard to our market area. Any forward-looking statements made by us or on our behalf speak only as of the date they are made or as of the date indicated, and we do not undertake any obligation to update forward-looking statements as a result of new information, future events, or otherwise. For additional information on factors that could materially influence forward-looking statements included in this report, see the "Risk Factors" in TowneBank’s Annual Report on Form 10-K for the year ended December 31, 2022 and related disclosures in other filings that have been, or will be, filed by TowneBank with the Federal Deposit Insurance Corporation.

Media contact:
G. Robert Aston, Jr., Executive Chairman, 757-638-6780
William I. Foster III, Chief Executive Officer, 757-417-6482

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

(1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory tax rate of 21%.
(2) Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities. Fully tax equivalent.
(3) Net interest margin is net interest income expressed as a percentage of average earning assets. Fully tax equivalent.
(4) Non-GAAP.