TOWN - TowneBank Reports Second Quarter 2023 Earnings

SUFFOLK, Va., July 27, 2023 (GLOBE NEWSWIRE) -- TowneBank ("Towne") (NASDAQ: TOWN) today reported earnings for the quarter ended June 30, 2023 of $41.72 million, or $0.56 per diluted share, compared to $46.55 million, or $0.64 per diluted share, for the quarter ended June 30, 2022. Excluding acquisition-related items and the gain on sale of Berkshire Hathaway HomeServices ("BHHS") Towne Realty, core earnings (non-GAAP) for the quarter ended June 30, 2023 were $38.66 million, or $0.52 per diluted share, compared to $46.60 million, or $0.64 per diluted share, for the quarter ended June 30, 2022.

"We continue to emphasize strong levels of on balance sheet liquidity, deposit growth, and prudent loan growth in the current environment. Our performance during the quarter delivered success on each of these important initiatives. Our HomeTowne Bankers generated nearly $170 million in deposit growth, or 5% on an annualized basis, which demonstrates the strength of our main street banking model. In addition, we increased reserve levels and grew tangible book value during the quarter. While earnings will likely remain under pressure in the short run, we believe our conservative approach to balance sheet management will position our Company to benefit from opportunities despite a challenging operating environment," said G. Robert Aston, Jr., Executive Chairman.

Highlights for Second Quarter 2023:

• Total revenues were $181.57 million, an increase of $14.59 million, or 8.74%, compared to second quarter 2022. In addition to a $4.27 million increase in net interest income, noninterest income increased $10.32 million, driven by the $8.83 million gross gain on the sale of BHHS Towne Realty.
• Loans held for investment were $11.21 billion, increases of $0.78 billion, or 7.50%, compared to June 30, 2022, and $34.23 million, or 0.31%, compared to March 31, 2023, 1.23% on an annualized basis. Towne completed the acquisition of Farmers Bankshares, Inc. and its wholly owned subsidiary, Farmers Bank, in January 2023. Excluding loans acquired in the first quarter, total loans would have increased $0.50 billion, or 4.84%, compared to June 30, 2022.
• Total deposits were $13.77 billion, a decline of $229.45 million, or 1.64%, compared to second quarter 2022. Excluding $514.57 million in acquired deposits, total deposits would have decreased $744.02 million, or 5.32%, in the yearly comparison. In comparison to March 31, 2023, total deposits increased 1.24%, or $168.53 million, 4.97% on an annualized basis.
• Noninterest bearing deposits decreased 16.57%, to $4.77 billion, compared to second quarter 2022 and represented 34.68% of total deposits. Compared to the linked quarter, noninterest bearing deposits decreased 5.81%.
• Annualized return on common shareholders' equity was 8.52% compared to 10.03% in second quarter 2022. Annualized return on average tangible common shareholders' equity (non-GAAP) was 12.48% compared to 14.37% in second quarter 2022.
• Net interest margin was 2.98% for the quarter and taxable equivalent net interest margin (non-GAAP) was 3.01% compared to the prior year quarter net interest margin of 2.88% and taxable equivalent net interest margin (non-GAAP) of 2.89%.
• The effective tax rate of 18.41% in the quarter compared to 19.32% in second quarter 2022 and 20.03% in the linked quarter.

"We were pleased to announce the formation of BHHS RW Towne Realty, Inc during the quarter. Beyond the financial merits of the transaction, this combination brings two market-leading real estate brokerage operations together, each having distinct core competencies which will deliver unparalleled capabilities in Hampton Roads. The transaction also highlights TowneBank’s proven approach to growing scale in our fee-based businesses whether organic, via acquisitions or by creating strategic partnerships," stated William I. Foster III, President and Chief Executive Officer.

Quarterly Net Interest Income:

• Net interest income was $113.61 million compared to $109.34 million for the quarter ended June 30, 2022. The increase was driven by higher earning asset yields that were mostly offset by increased deposit costs.
• Tax-equivalent net interest margin (non-GAAP) was 3.01%, including purchase accounting accretion of 4 basis points, compared to 2.89%, including purchase accounting accretion of 3 basis points, for second quarter 2022.
• On an average basis, loans held for investment, with a yield of 5.00%, represented 73.24% of earning assets at June 30, 2023 compared to a yield of 3.99% and 66.91% of earning assets in the second quarter of 2022.
• Total cost of deposits increased to 1.46% from 0.16% for the quarter ended June 30, 2022. Interest expense on deposits increased $43.10 million, or 773.34%, over the prior year quarter driven, primarily, by the increase in rate.
• Higher mortgage rates, increased funding costs, and low home sale inventory, have adversely impacted our residential mortgage banking business.
• Average interest-earning assets totaled $15.31 billion at June 30, 2023 compared to $15.24 billion at June 30, 2022, an increase of 0.40%.
• Average interest-bearing liabilities totaled $9.68 billion, an increase of $0.92 billion, or 10.56% from prior year. Average short term FHLB borrowings were $802.75 million during the quarter.

Quarterly Provision for Credit Losses:

• The quarterly provision for credit losses was an expense of $3.56 million compared to $0.06 million one year ago and $11.67 million in the linked quarter.
• The allowance for credit losses on loans in second quarter 2023, compared to the linked quarter, increased $3.51 million. The increase in the allowance was driven by loan growth and changes in our portfolio composition, combined with changes to the macroeconomic forecast scenarios utilized in our models.
• Net loan charge-offs were $9 thousand in the quarter compared to net recoveries of $80 thousand in the prior year quarter and $3.87 million in the linked quarter. The ratio of net charge-offs to average loans on an annualized basis was zero percent in second quarter 2023 and 2022, and 0.14% in the linked quarter.
• The allowance for credit losses on loans represented 1.10% of total loans at June 30, 2023, 1.00% at June 30, 2022, and 1.07% at March 31, 2023. The allowance for credit losses on loans was 18.09 times nonperforming loans compared to 18.94 times at June 30, 2022 and 12.87 times at March 31, 2023.

Quarterly Noninterest Income:

• Total noninterest income was $67.96 million compared to $57.64 million in 2022, an increase of $10.32 million, or 17.90%, $8.83 million of which was attributable to the gross gain on the sale of BHHS Towne Realty.
• Residential mortgage banking income was $11.36 million compared to $13.18 million in second quarter 2022. Loan volume decreased to $616.50 million in second quarter 2023 from $837.81 million in 2022. The prolonged increase in mortgage rates has resulted in refinance activities dropping to 3.68% of total mortgage production volume, a historic low.  Residential purchase activity comprised 96.32% of production volume in the second quarter of 2023 compared to 92.27% in the prior year quarter.
• Gross margins on residential mortgage sales increased 4 basis points from 2.92% in second quarter 2022 to 2.96% in the current quarter.
• Total net insurance commissions increased $2.75 million, or 13.94%, to $22.50 million in second quarter 2023 compared to 2022. This resulted from increases in property and casualty commissions, which were driven by organic growth and commissions from a recent acquisition.
• Property management fee revenue increased 27.99%, or $2.65 million, to $12.10 million in second quarter 2023 compared to 2022. Reservation income increased compared to the prior year due to higher rental inventories and income from a recent acquisition.

Qua rterly Noninterest Expense:

• Total noninterest expense was $125.23 million compared to $108.73 million in 2022, an increase of $16.50 million, or 15.18%. Increases in salaries and employee benefits of $2.55 million, acquisition-related expenses of $2.95 million, FDIC and other insurance of $2.53 million, software expense of $1.41 million, and professional fees of $1.41 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 Bankshares, Inc. acquisition.
• FDIC and other insurance increased due to a combination of timing and increased assessments in 2023.
• Software and professional fee expenses increased due to a number of ongoing projects related to recent acquisitions and our loan portfolio.

Consolidated Balance Sheet Highlights:

• Total assets were $17.23 billion for the quarter ended June 30, 2023, a $494.60 million increase compared to $16.73 billion at March 31, 2023. Total assets increased $361.04 million, or 2.14%, from $16.86 billion at June 30, 2022.
• Loans held for investment increased $0.78 billion, or 7.50%, compared to prior year and $34.23 million, or 0.31%, compared to the linked quarter, 1.23% on an annualized basis. Excluding loans acquired in the prior quarter, total loans would have increased $0.50 billion, or 4.84%, compared to prior year.
• Mortgage loans held for sale increased $17.79 million, or 8.40%, compared to prior year and $72.34 million, or 46.03%, compared to the linked quarter.
• Excluding $514.57 million in acquired deposits, total deposits would have decreased $744.02 million, or 5.32%, compared to second quarter 2022. In the linked quarter comparison, total deposits increased $168.53 million, or 4.97%, on an annualized basis.
• Total borrowings increased $459.58 million, or 76.59%, over second quarter 2022 and $253.33 million, or 31.42%, compared to the linked quarter. FHLB advances, which are included in total borrowings, increased $249.82 million in the quarter.

Investment Securities:

• Total investment securities were $2.61 billion compared to $2.67 billion at March 31, 2023 and $2.48 billion at June 30, 2022. The weighted average duration of the portfolio at June 30, 2023 was 3.4 years. The carrying value of the available for sale debt securities portfolio included net unrealized losses of $195.98 million at June 30, 2023, compared to $165.71 million at March 31, 2023 and $120.41 million at June 30, 2022, related to market valuation adjustments due to rising interest rates.

Loans and Asset Quality:

• Total loans held for investment were $11.21 billion at June 30, 2023 compared to $11.17 billion at March 31, 2023 and $10.43 billion at June 30, 2022.
• Nonperforming assets were $9.35 million, or 0.05% of total assets, compared to $6.06 million, or 0.04%, at June 30, 2022.
• Nonperforming loans were 0.06% of period end loans compared to 0.05% at June 30, 2022.
• Other real estate owned increased to $2.52 million from $0.56 million at June 30, 2022, $1.78 million of which is former bank premises acquired in the Farmers transaction.

Deposits and Borrowings:

• Total deposits were $13.77 billion compared to $13.60 billion at March 31, 2023 and $14.00 billion at June 30, 2022.
• Total loans held for investment to deposits was 81.41% compared to 82.17% at March 31, 2023 and 74.49% at June 30, 2022.
• Noninterest-bearing deposits were 34.68% of total deposits at June 30, 2023 compared to 37.28% at March 31, 2023 and 40.89% at June 30, 2022.
• Total borrowings were $1.06 billion compared to $0.81 billion at March 31, 2023 and $0.60 billion at June 30, 2022.

Capital:

• Common equity tier 1 capital ratio of 11.99%.
• Tier 1 leverage capital ratio of 9.85%.
• Tier 1 risk-based capital ratio of 12.11%.
• Total risk-based capital ratio of 14.88%.
• Book value per common share was $26.36 compared to $26.40 at March 31, 2023 and $25.48 at June 30, 2022.
• Tangible book value per common share (non-GAAP) was $19.31 compared to $19.04 at March 31, 2023 and $18.58 at June 30, 2022.

BHHS Towne Realty
Effective April 27, 2023, the Company transferred its ownership interest in BHHS Towne Realty, which was formerly a subsidiary of TowneBank to BHHS RW Towne Realty, LLC, in exchange for a minority interest in that company.

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 affiliated companies that include Towne Wealth Management, Towne Insurance Agency, Towne Benefits, TowneBank Mortgage, TowneBank Commercial Mortgage, Berkshire Hathaway HomeServices RW Towne Realty, Towne 1031 Exchange, LLC, and Towne Vacations. With total assets of $17.23 billion as of June 30, 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, 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.

(1) Yields and interest income are presented on a taxable-equivalent basis using the federal statutory 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.