TowneBank Reports Third Quarter Earnings

SUFFOLK, Va., Oct. 23, 2014 (GLOBE NEWSWIRE) -- Hampton Roads based TowneBank (the "Bank") (Nasdaq:TOWN) reported earnings of $12.13 million for the quarter ended September 30, 2014, a 16.39% increase, or $1.71 million, over the $10.42 million reported for the comparative period in 2013. Earnings for the year-to-date period increased 8.87% to $34.93 million as compared to the $32.09 million earned in the same period last year.

Net income available to common shareholders increased 31.47% to $11.93 million after preferred dividend payments of $191,000. Fully diluted earnings per share increased 21.43% to $0.34 per share compared to $0.28 per share for the comparative period of 2013. For the nine-month period ended September 30, 2014, fully diluted earnings per share increased 12.64% to $0.98 from $0.87 in the comparative prior year period.

The Bank's common dividend was $0.11 per share for the quarter with the common dividend totaling $3.91 million. The current dividend represents an increase of 10.0% over the dividend paid during the same quarter of 2013.

Third Quarter 2014 Performance Highlights

• Total revenues were $63.18 million, an increase of $3.89 million, or 6.56%, compared to the third quarter of 2013
  • Taxable equivalent net interest margin was 3.32% compared to 3.53% for the third quarter of 2013
  • Residential mortgage banking income increased 16.85% from the third quarter of 2013 to $7.86 million on production volume of $362.54 million
  • Insurance commissions increased 18.51% to $8.86 million
• Loan growth continued as total loans held for investment increased $150.33 million, or 4.69%, from September 30, 2013
  • Commercial and industrial loans increased by $27.94 million, or 6.15%
  • Owner occupied commercial real estate loans decreased $17.40 million, or 2.27%
  • Income producing commercial real estate loans increased $95.18 million, or 15.70%
  • Construction and development loans increased $13.64 million, or 2.95%
  • Consumer and other loans increased $14.05 million, or 29.12%
• Total deposits were $3.85 billion, an increase of $368.47 million, or 10.58%, from the third quarter of 2013
  • Noninterest bearing deposits increased by 17.72%, to $1.25 billion
  • Average interest-bearing deposit costs were 0.52%, unchanged from the prior year
  • Noninterest bearing deposits were 32.36% of total deposits compared to 30.40% at September 30, 2013
• Asset quality showed continued improvement
  • Nonperforming assets were $43.80 million, a decrease of 21.21% from third quarter 2013
  • Nonperforming loans decreased 57.22% to $5.85 million
  • Foreclosed property decreased by 9.46% to $37.95 million
• The Bank remained well-capitalized
  • Tier 1 leverage capital ratio of 10.04%
  • Tier 1 risk-based capital ratio of 12.88%
  • Total risk-based capital ratio of 13.84%

Net Interest Income

Net interest income increased to $36.87 million, a $715,000, or 1.98%, increase from the third quarter of 2013. The primary driver of the increase was growth in average earning assets of $373.44 million, which

was partially offset by a 21 basis point narrowing of the tax-equivalent net interest margin to 3.32% in the current quarter from 3.53% in the third quarter of 2013.

On a linked quarter basis, net interest income increased $329,000 or 0.90%, in third quarter 2014 versus the second quarter, while tax-equivalent net interest margin was 3.32% versus 3.43% for the second quarter of 2014.

Noninterest Income

Noninterest income, excluding gains or losses on investment securities, was $26.27 million for the third quarter of 2014, an increase of $3.28 million, or 14.28%, from the third quarter of 2013. A large portion of the increase from the comparative period in 2013 is attributable to insurance commissions, which increased $1.38 million, or 18.51%, due to the acquisition of two insurance agencies in 2013 and one agency in May 2014. Also contributing to the increase, residential mortgage banking income increased $1.13 million, or 16.85%, from the third quarter of 2013 primarily due to improved pricing and margins. Mortgage production was $362.54 million in the third quarter of 2014, which was $25.78 million less than third quarter 2013. The variance in other income was driven by an increase in gains on foreclosed property sales of $360,000, combined with a variance of $350,000 related to losses on low income housing tax credit investments that are currently included in the provision for income tax expense using the proportional amortization method due to a change in accounting principle adopted during the first quarter of 2014.

In comparison to the second quarter of 2014, noninterest income, excluding gains or losses on investment securities, increased $923,000, or 3.64%. Residential mortgage banking income increased slightly by $123,000, or 1.59%, from the second quarter of 2014 primarily due to an increase in mortgage production of $27.66 million. Real estate brokerage and property management income increased due to a seasonal increase related to our resort property management business while insurance commissions were essentially flat from the linked quarter period. The increase in other income was primarily due to an increase in gains on foreclosed property sales of $269,000, combined with an increase of $184,000 related to production from the Towne Investment Group.

Noninterest Expense

Noninterest expense increased by $775,000, or 1.79%, from the comparative quarter of 2013. Driving the increase was the Company incurring $1.09 million of nonrecurring merger expense in the third quarter of 2014 related to the acquisition of Southern Insurance Agency, Inc. in the second quarter of 2014 and the proposed merger with Franklin Financial Corporation. These merger expenses were included in the other noninterest expense category. Occupancy expense increased 10.72% as the opening of two new banking offices in the second half of 2013 and one new banking office in June 2014 led to additional expenses. These increases were partially offset by a decrease in salaries and benefits expense of 2.19% driven by previously announced cost-control initiatives launched by the Company in the first quarter of 2014.

Noninterest expense decreased by $514,000, or 1.15%, from the second quarter of 2014. Driving the decline was a decrease in other noninterest expense of 3.83%, or $494,000, as the previously mentioned increase in merger expenses was more than offset by a decrease in foreclosed property expense of $1.61 million. Salaries and benefits expense decreased 0.97%, while occupancy expense increased 5.12%.

Segment Results

Banking

Net income for the three months ended September 30, 2014 for the Banking segment was $9.57 million, increasing $649,000, or 7.28%, from the comparative 2013 quarter. The increase in earnings was primarily driven by an increase in net interest income of $824,000, an increase in noninterest income of $867,000, and a decrease in personnel expenses of $507,000. These factors were partially offset by increases in the provision for loan losses and nonrecurring merger related expenses.

The increase in earnings of $650,000, or 7.29% from the second quarter of 2014 was primarily driven by increases in net interest income of $293,000 and noninterest income of $505,000 combined with decreases in personnel expenses of $844,000 and foreclosed property expenses of $1.61 million. These factors were partially offset by increases in the provision for loan losses and the aforementioned nonrecurring merger related expenses.

Realty

For the three months ended September 30, 2014, the Realty segment had net income of $1.53 million, an increase of $1.07 million compared to the third quarter of 2013. Contributing to the improvement was an increase in residential mortgage banking income of $1.09 million. Also contributing to the improvement was a decrease in noninterest expense of $1.06 million, or 9.93%, primarily related to continued cost management measures.

Net income in the Realty segment increased by $98,000 from the linked quarter ended June 30, 2014. Residential mortgage banking income increased $107,000 and seasonal increases in resort property management fees for Corolla Classic Vacations increased total revenues by $301,000 in the linked quarter comparison. Total noninterest expenses increased by 4.87%, or $445,000, compared to the linked quarter.

Insurance

The Insurance segment had net income of $1.03 million for the three months ended September 30, 2014, essentially flat as compared to the third quarter of 2013. An increase in commissions and fees from the comparative 2013 period was impacted by three insurance agency acquisitions, which contributed additional commission and fee income of $1.11 million. The increase in income was offset by an increase of $944,000 in noninterest expenses related to the acquisitions of insurance agencies.

Net income decreased $299,000, or 22.58%, from the second quarter of 2014. The decline from the linked quarter was driven by a decrease in contingency and bonus revenue of $444,000. Contingent commissions are seasonal in nature and are mostly received during the first half of each year. The insurance agency acquisition in the second quarter of 2014 accounted for an increase in commission and fee income of $330,000 and an increase in noninterest expenses of $326,000.

Balance Sheet

At September 30, 2014, total Bank assets reached $4.97 billion, an increase of $401.54 million, or 8.78%, over September 30, 2013.

Loans

The Bank's loan portfolio ended the period at $3.36 billion representing an increase of 4.69%, or $150.33 million, from the prior year and an increase of 0.95%, or $31.68 million, from June 30, 2014.

Deposits

The Bank continued to experience solid deposit growth with total deposits increasing to $3.85 billion, up $368.47 million, or 10.58%, from September 30, 2013. The Bank saw continued growth in noninterest bearing demand deposits, which ended the quarter at $1.25 billion, a 17.72% increase from September 30, 2013. Noninterest deposits represented 32.36% of total deposits at September 30, 2014.

Capital Ratios

The Bank's total equity at September 30, 2014 rose to $613.41 million, an increase of $36.00 million, or 6.23%, from September 30, 2013. Common equity increased 7.07%, or $34.83 million, as the Bank's 8% Series A Preferred Stock mandatorily converted on September 1, 2013 into 3.19 million shares of TowneBank common stock, reflecting a conversion price of $18.02 per share of common stock. Total risk-based capital remained strong as total risk-based capital, Tier 1 capital, Tier 1 leverage ratios, and Tier 1 common capital ratios were 13.84%, 12.88%, 10.04%, 10.61%, 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 $5.85 million from $13.68 million, at September 30, 2013 and $7.50 million at June 30, 2014. Net charge-offs were $602,000 in the third quarter of 2014 compared to $804,000 in the third quarter of 2013 and $925,000 in the linked quarter. Total nonperforming assets were $43.80 million, or 0.88%, of Bank assets at September 30, 2014, as compared to $55.60 million, or 1.22%, at September 30, 2013, and $49.91 million, or 1.02%, at June 30, 2014.

Pending Merger

On July 15, 2014, the Company announced the signing of a definitive agreement to acquire Franklin Financial Corporation ("Franklin") and its wholly owned subsidiary, Franklin Federal Savings Bank, based in Richmond, Virginia. At June 30, 2014, Franklin had total consolidated assets of $1.11 billion, consolidated gross loans of $543.79 million, and total consolidated deposits of $684.51 million. The Bank anticipates closing the transaction in the first quarter of 2015, subject to customary closing conditions, including the receipt of regulatory and stockholder approvals.

"We are pleased with our third quarter results as we continue to deliver solid growth in net income and earnings per share despite an increase in costs related to our pending acquisition of Franklin and the continued challenging low rate environment. We remain excited about the opportunity to expand our business to the Richmond market and we look forward to providing this community with the exquisite service to which our existing members have become accustomed. I am proud of the hard work of our employees and directors as we continue to strive to create value for our shareholders and for the communities we serve," said G. Robert Aston, Jr., Chairman and Chief Executive Officer.

About TowneBank:

As one of the top community banks in Virginia and North Carolina, TowneBank operates 28 banking offices serving Chesapeake, Hampton, Newport News, Norfolk, Portsmouth, Suffolk, Virginia Beach, Williamsburg, James City County and York County in Virginia along with Moyock, Grandy, Camden, Southern Shores, Corolla and Kill Devil Hills 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, Prudential Towne Realty, Towne 1031 Exchange, LLC, and Corolla Classic Vacations. 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 $4.97 billion as of September 30, 2014, TowneBank is one of the largest banks headquartered in Virginia.

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. These include statements as to the anticipated benefits of the merger with Franklin, including future financial and operating results, cost savings and enhanced revenues that may be realized from the merger as well as other statements of expectations regarding the merger and any other statements regarding future results or expectations. 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, and the resulting company after the merger, include but are not limited to: (1) the businesses of TowneBank and Franklin may not be integrated successfully or such integration may be more difficult, time-consuming or costly than expected; (2) expected revenue synergies and cost savings from the merger or other pending or recently completed acquisitions may not be fully realized or realized within the expected timeframe; (3) revenues following the merger may be lower than expected; (4) customer and employee relationships and business operations may be disrupted by the merger; (5) the ability to obtain required regulatory and stockholder approvals, and the ability to complete the merger on the expected timeframe may be more difficult, time-consuming or costly than expected; (6) 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, the implementation of new technologies, the ability to develop and maintain secure and reliable electronic systems, changes in the securities markets, and accounting principles, policies and guidelines, and (7) other risk factors detailed from time to time in filings made by TowneBank with the Federal Deposit Insurance Corporation (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.

Additional Information About the Merger and Where to Find It:

In connection with the proposed merger with Franklin, TowneBank has filed with the FDIC a preliminary proxy statement/prospectus. TowneBank will deliver a definitive proxy statement to its stockholders seeking their approval of the merger and related matters. In addition, TowneBank may file other relevant documents concerning the proposed merger with the FDIC.

Investors and stockholders are urged to read the definitive joint proxy statement/prospectus when available and any other relevant documents to be filed with the FDIC in connection with the proposed merger because they will contain important information. Free copies of the definitive joint proxy statement/prospectus when available also may be obtained by directing a request by telephone or mail to TowneBank, 6001 Harbour View Boulevard, Suffolk, Virginia 23425, Attention: Investor Relations (telephone: (757) 638-6794), or by accessing TowneBank's website at https://townebank.com under "Investor Relations." The information on TowneBank's website is not, and shall not be deemed to be, a part of this release or incorporated into other filings TowneBank makes with the FDIC.

TowneBank and its directors and executive officers may be deemed to be participants in the solicitation of proxies from the stockholders of TowneBank in connection with the merger. Information about the directors and executive officers of TowneBank is set forth in the proxy statement for TowneBank's 2014 annual meeting of stockholders filed with the FDIC on April 18, 2014. Additional information regarding the interests of these participants and other persons who may be deemed participants in the merger may be obtained by reading the definitive joint proxy statement/prospectus regarding the merger when it becomes available.