TOWN - TowneBank Reports Full Year and Fourth Quarter Financial Results for 2022

SUFFOLK, Va., Jan. 26, 2023 (GLOBE NEWSWIRE) -- TowneBank ("Towne") (Nasdaq: TOWN) today reported financial results for the full year and the fourth quarter ended December 31, 2022. For the year ended December 31, 2022, earnings were $188.99 million, or $2.60 per diluted share, compared to $215.38 million, or $2.97 per diluted share, for the year ended December 31, 2021. Earnings in the fourth quarter of 2022 were $46.69 million, or $0.64 per diluted share, compared to fourth quarter 2021 earnings of $40.18 million, or $0.55 per diluted share.

"We were pleased with our results for 2022, which exceeded our expectations entering the year. We achieved an increase in total revenues despite significant headwinds in our residential mortgage business and reduced fee income related to the Paycheck Protection Program. Our credit quality remains strong and we prudently built our reserve levels in this uncertain economic environment. Once again, TowneBank enjoyed a #1 market share position for our home market in Hampton Roads. Looking ahead, our strong balance sheet, diversified business model and valuable deposit franchise should position our company to outperform in a wide range of economic environments. I wish to thank all of our nearly 2,800 team members who embrace and define our culture of caring each day," said G. Robert Aston, Jr., Executive Chairman.

Annual Highlights for 2022 Compared to 2021:

• Total revenues increased $6.61 million, or 0.97%, to $686.94 million, compared to prior year. Increases in net interest income of $59.00 million were partially offset by a $52.39 million decline in noninterest income. Net interest income increased due to a combination of strong first half 2022 organic loan growth and higher interest rates. The decrease in noninterest income was driven by a decline in residential mortgage banking income of $62.15 million, partially offset by increases in insurance commissions of $8.04 million and property management income of $2.07 million.
• Pre-provision, pre-tax, net revenues (non-GAAP) were $244.17 million, a decrease of $9.23 million, or 3.64%, driven by the decline in noninterest income and an increase in noninterest expense of $24.01 million, or 5.75%.
• Loans held for investment increased $1.29 billion, or 13.55%, from December 31, 2021. The balances at December 31, 2022 and 2021 included $4.82 million and $157.72 million, respectively, of loans originated under the Paycheck Protection Program ("PPP"). Excluding PPP loans, loans held for investment increased $1.44 billion, or 15.42%, compared to prior year.
• Interest and fee income on PPP loans declined 86.91%, or $28.91 million, to $4.36 million for the year ended December 31, 2022.
• Total deposits were $13.29 billion, a decrease of $0.28 billion, or 2.06%, compared to prior year, driven by a decline in commercial deposits and escrow balances.
• Return on average common shareholders' equity was 10.15%, and return on average tangible common shareholders' equity was 14.54% (non-GAAP).
• Net interest margin of 3.08% and taxable equivalent net interest margin of 3.10% (non-GAAP) compared to prior year net interest margin of 2.84% and taxable equivalent net interest margin of 2.86% (non-GAAP).
• Effective tax rate of 19.77% compared to 20.28% in 2021.

Highlights for Fourth Quarter 2022:

• Total revenues were $175.31 million in fourth quarter 2022, an increase from the prior year quarter of $14.88 million, or 9.28%. Increases in net interest income of $27.99 million, or 27.77%, outpaced a $13.11 million, or 21.98%, decline in noninterest income in the quarterly comparison. The primary source of the decline in noninterest income was mortgage banking income.
• Pre-provision, pre-tax, net revenues (non-GAAP) were $64.36 million, an increase of $15.87 million, or 32.74%, compared to the prior year quarter.
• Loans held for investment increased $0.23 billion, or 8.83% on an annualized basis, from September 30, 2022.
• Total deposits were $13.29 billion, a decrease of $0.12 billion, or 3.49% on an annualized basis, compared to the linked quarter September 30, 2022.
• Noninterest bearing deposits decreased 5.07%, to $5.27 billion, compared to prior year, representing 39.61% of total deposits. Compared to the linked quarter, noninterest bearing deposits decreased $0.31 billion.
• In the quarter ended December 31, 2022, annualized return on average common shareholders' equity was 10.07% and annualized return on average tangible common shareholders' equity was 14.44% (non-GAAP).
• Net interest margin was 3.51% and taxable equivalent net interest margin was 3.53% (non-GAAP) compared to the prior year quarter net interest margin of 2.70% and taxable equivalent net interest margin of 2.72% (non-GAAP).
• Effective tax rate of 19.90% compared to 18.97% in fourth quarter 2021 and 20.08% in the linked quarter.

"From a strategic perspective, we were pleased to close the Farmers Bank transaction earlier this month. We also focused on building out our footprint and investing in our teams through talent acquisition across all business lines during 2022. As we look ahead to 2023, we expect to continue expanding our impressive suite of noninterest income businesses. We continue to prioritize liquidity and responsible balance sheet growth as we serve our members, shareholders and communities," said William I. Foster, III, President and Chief Executive Officer.

Quarterly Net In terest Income:

• Net interest income was $128.78 million compared to $100.79 million for the quarter ended December 31, 2021. This increase was driven by higher interest rates and increases in loan and investment securities balances, partially offset by increased deposit costs.
• Taxable equivalent net interest margin (non-GAAP) was 3.53%, including purchase accounting accretion of 1 basis point, compared to 2.72%, including purchase accounting accretion of 2 basis points and PPP interest and fees of 7 basis points, for fourth quarter 2021.
• On an average basis, loans held for investment with a yield of 4.60%, which represented 73.41% of earning assets in the fourth quarter of 2022, compared to a yield of 4.05%, which represented 63.28% of earning assets in the fourth quarter of 2021.
• Total cost of deposits increased to 0.60% from 0.30% in the linked quarter and 0.16% at December 31, 2021.
• Rising funding costs negatively impacted profitability in our residential mortgage banking business.
• Average interest-earning assets totaled $14.58 billion at December 31, 2022 compared to $14.81 billion at December 31, 2021, a decrease of 1.57%.
• Average interest-bearing liabilities totaled $8.26 billion, a decrease of $0.01 billion, or 0.08%, compared to the prior year.
  

Quarterly Provision for Credit Losses:

• The quarterly provision for credit losses for on-balance-sheet loans was an expense of $6.22 million in the current quarter and $3.29 million in the linked quarter, compared to a provision benefit of $1.18 million one year ago.
• In the linked quarter comparison, fourth quarter 2022 included an increase in the allowance for credit losses on loans of $3.32 million that was driven by loan growth and a modest weakening in the macroeconomic forecast scenarios used by management to assist in estimating credit losses.
• Net charge-offs were $2.90 million, driven primarily by a fraud-related charge-off of a single credit relationship, compared to net recoveries of $0.06 million one year prior. The ratio of net charge-offs (recoveries) to average loans on an annualized basis was 0.11% in fourth quarter 2022, zero in fourth quarter 2021, and (0.01)% in the linked quarter.
• The allowance for credit losses on loans represented 1.03% of total loans compared to 1.02% at September 30, 2022 and 1.12% at December 31, 2021. The allowance for credit losses on loans was 17.67 times nonperforming loans compared to 20.48 times at September 30, 2022 and 17.75 times at December 31, 2021.

Quarterly Noninterest Income:

• Total noninterest income was $46.52 million compared to $59.63 million in 2021, a decrease of $13.11 million, or 21.98%. Increased insurance commissions were offset by a decline in residential mortgage banking income.
• Residential mortgage banking income was $7.37 million compared to $20.95 million in fourth quarter 2021. Loan volume in the current quarter was $0.46 billion, with purchase activity comprising 95.08%. Loan volume in fourth quarter 2021 was $1.15 billion, with purchase activity of 79.36%. Loan volume in the linked quarter was $0.69 billion, with purchase activity of 93.20%. Increases in mortgage rates and limited housing inventory have contributed to a significant decline in production and refinance activity.
• Gross margins on residential mortgages declined 49 basis points from 3.42% in fourth quarter 2021 to 2.93% in the current quarter.
• Real estate commissions were negatively impacted by a combination of increased mortgage loan rates and low inventories.
• Property management fee revenue decreased 14.76%, or $1.34 million, as compared to fourth quarter 2021, which is more comparable to lower pre-pandemic reservation levels.
• Total insurance segment revenue increased $1.84 million, or 11.87%, to $17.32 million in the fourth quarter of 2022. This increase is attributable to higher property and casualty commissions compared to the prior year quarter.

Quarterly Noninterest Expense:

• Total noninterest expense was $111.14 million compared to $110.47 million, an increase of $0.67 million, or 0.61%. This reflects increases in software expenses of $1.10 million, occupancy expenses of $0.88 million, and professional fees of $0.88 million offset by a decrease of $3.51 million in salary and benefits expense.
• Lower salaries and benefits compared to fourth quarter 2021 were driven by reductions in incentive income and employee benefit costs, partially offset by increases in annual base salaries.
• Higher costs associated with our core banking platform drove the increase in software expense.
• The increase in occupancy expense was driven by lower tenant income in 2022 and relocation expenses related to moving our mortgage division.

Consolidated Balance Sheet Highlights:

• Total assets were $15.85 billion at December 31, 2022, a decrease of 3.15%, compared to $16.36 billion at December 31, 2021. The decrease was driven by a decline in deposits.
• Loans held for investment increased $1.29 billion, or 13.55%, compared to year end 2021 and $0.23 billion compared to the linked quarter.
• Average loans held for investment, excluding PPP loans, were $10.69 billion in fourth quarter 2022, an increase of $1.52 billion, or 16.56%, compared to prior year.
• Mortgage loans held for sale decreased $0.26 billion, or 71.44%, compared to prior year and $0.06 billion, or 37.99%, compared to the linked quarter.
• Total deposits decreased $0.28 billion, or 2.06%, compared to December 31, 2021 and $0.12 billion, or 0.88%, compared to the linked quarter.
• Total loans held for investment to total deposits were 81.20% compared to 78.73% at September 30, 2022 and 70.03% at December 31, 2021.
• Total borrowings decreased $0.16 billion, or 34.00%, from prior year.
  

Investment Securities:

• Total investment securities were $2.41 billion compared to $2.45 billion at September 30, 2022 and $1.98 billion at December 31, 2021. The weighted average duration of the portfolio at December 31, 2022 was 3.5 years. The carrying value of the AFS debt securities portfolio included $191.05 million in net unrealized losses, related to rising rates, at December 31, 2022 compared to $17.54 million in net unrealized gains at December 31, 2021.
  

Loans and Asset Quality:

• Total loans held for investment were $10.79 billion at December 31, 2022 compared to $10.56 billion at September 30, 2022 and $9.51 billion at December 31, 2021.
• Nonperforming assets were $6.83 million, or 0.04% of total assets, compared to $10.56 million, or 0.06% of total assets, at December 31, 2021.
• Nonperforming loans were 0.06% of period end loans at both December 31, 2022 and 2021.
• Foreclosed property decreased to $0.56 million from $4.58 million at December 31, 2021.

Deposits and Borrowings:

• Total deposits were $13.29 billion compared to $13.41 billion at September 30, 2022 and $13.57 billion at December 31, 2021.
• Noninterest-bearing deposits were 39.61% of total deposits at December 31, 2022 compared to 41.56% at September 30, 2022 and 40.86% at December 31, 2021. Noninterest-bearing deposits have declined the last two quarters driven by declines in noninterest-bearing escrow balances.
• Total borrowings were $0.32 billion compared to $0.48 billion at December 31, 2021.
  

Capital:

• Common equity tier 1 capital ratio of 11.92%.
• Tier 1 leverage capital ratio of 9.87%.
• Tier 1 risk-based capital ratio of 12.04%.
• Total risk-based capital ratio of 14.80%.
• Book value per share was $25.73 compared to $25.08 at September 30, 2022 and $26.13 at December 31, 2021.
• Tangible book value per share (non-GAAP) was $18.84 compared to $18.17 at September 30, 2022 and $19.15 at December 31, 2021.

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 40 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 $15.85 billion as of December 31, 2022, 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, tangible book value per common share, 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 credit worthiness 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 disasters, terrorist acts 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, 2021 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, President and 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) December 31, 2022, December 31, 2021, and September 30, 2022 balances include average PPP balances of $10.60 million, $199.74 million, and $18.68 million and related interest and fee income of $0.12 million, $3.85 million, and $0.62 million, respectively.
(3) December 31, 2021 loan balance includes previously excluded average nonaccrual loans of $7.69 million.
(4) Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities. Fully tax equivalent.
(5) Net interest margin is net interest income expressed as a percentage of average earning assets. Fully tax equivalent.
(6) Non-GAAP.