TowneBank Reports Record Second Quarter Earnings

SUFFOLK, Va., July 27, 2017 (GLOBE NEWSWIRE) -- Hampton Roads based TowneBank (the “Bank” or “Company”) (NASDAQ:TOWN) today reported record financial results for the three and six months ended June 30, 2017.  Earnings for the quarter ended June 30, 2017 were $26.21 million compared to the $6.26 million for the same quarter in 2016.  Fully diluted earnings per share were $0.42 per share compared to $0.12 per share in second quarter 2016.  Earnings in the second quarter of 2016 included after-tax acquisition-related expenses of $12.26 million, mostly related to the Monarch Financial Holdings, Inc. (“Monarch”) merger, as compared to $1.09 million in the current quarter.

Excluding certain items affecting comparability, earnings for the quarter ended June 30, 2017 were $24.77 million (non-GAAP), or $0.40 (non-GAAP) per diluted share, compared to $18.52 million (non-GAAP), or $0.36 (non-GAAP) per diluted share, for the same quarter in 2016.

Earnings for the year-to-date period were $48.18 million as compared to $24.08 million earned in the same period of 2016.  Fully diluted earnings per share were $0.77 compared to $0.47 for the six months ended June 30, 2016.

Excluding certain items affecting comparability, earnings for the year-to-date period were $46.81 million (non-GAAP), or $0.75 (non-GAAP) per diluted share, as compared to the $36.72 million (non-GAAP), or $0.71 (non-GAAP) per diluted share, earned in the same period of 2016.

The Bank’s quarterly dividend was $0.14 per share resulting in total common dividends of $8.77 million.  The current dividend represents an increase of 7.7% over the dividend paid during the same quarter of 2016.

“We are pleased to announce another quarter of strong earnings with solid deposit growth and continued strong growth in both net interest income and noninterest income, while producing a return on average assets of 1.29% and a return on average tangible equity of 13.67%,” said G. Robert Aston, Jr., Chairman and Chief Executive Officer.  “In addition, we were pleased with the overwhelming response to our $250 million subordinated debt offering completed in July, which will result in increases to our risk-based capital ratios and a reduction in our CRE concentration ratio.”

The following items affected comparability of our second quarter 2017 earnings (in thousands):

The following table shows the aggregate acquisition accounting impact on net interest margin for the quarter ended June 30, 2017:

On July 17, 2017, the Company issued $250.0 million of fixed to variable rate subordinated notes due July 30, 2027.  The Company received $247.10 million after deducting discounts and issuance costs. The notes accrue interest at a fixed rate of 4.50% for the first five years until July 2022.  After this date and for the remaining five years of the notes' term, interest will accrue at a variable rate of three-month LIBOR plus 2.550%. The Company may redeem the subordinated notes in whole or in part, on or after July 30, 2022.  Subject to the speed of deployment into higher earning assets, we expect the issuance of these notes to result in a reduction of up to 12 basis points to net interest margin in third quarter 2017.

Second Quarter 2017 Performance Highlights

• Total revenues were $119.60 million, an increase of $35.34 million, or 41.95% from second quarter 2016 
  • Taxable equivalent net interest margin was 3.84%, including accretion of 31 basis points, compared to 3.33%, including accretion of 5 basis points, for 2016
  • Excluding one-time purchase accounting adjustments of $3.89 million, or 21 basis points, taxable equivalent net interest margin was 3.63%
  • Residential mortgage banking income increased $9.45 million, or 77.76%
  • Insurance segment total revenue increased 10.03% to $14.89 million
     
• Loans held for investment increased $389.11 million, or 7.00% from June 30, 2016
   
• Total deposits were $6.60 billion, an increase of $409.49 million, or 6.62%, from second quarter 2016
  • Noninterest bearing deposits increased by 13.77%, to $2.22 billion, representing 33.65% of total deposits
  • Total cost of deposits increased slightly to 0.44% from 0.42% at June 30, 2016
     
• Asset quality showed continued strength
  • Nonperforming assets declined to $35.69 million, or 0.42% of total assets compared to $36.29 million, or 0.46%, at June 30, 2016
  • Nonperforming loans were 0.16% of period end loans
  • Foreclosed property decreased to $23.25 million
     
• The Bank remained well-capitalized
  • Common equity tier 1 capital ratio of 11.98%
  • Tier 1 leverage capital ratio of 10.43%
  • Tier 1 risk-based capital ratio of 12.03%
  • Total risk-based capital ratio of 12.68%
  • Tangible book value increased to $12.81

Second Quarter 2017 Earnings Compared to Second Quarter 2016

Net income for the second quarter was $26.21 million, or $0.42 per diluted share, versus $6.26 million, or $0.12 per diluted share, in 2016, reflecting strong growth in net interest income as compared to the prior year period.  Excluding after-tax acquisition-related expenses of $12.26 million, net income for the second quarter of 2016 was $18.52 million (non-GAAP), or $0.36 per diluted share.

Net Interest Income
Net interest income increased to $69.25 million, a $21.47 million, or 44.93%, increase from the second quarter of 2016.  The primary driver was the growth in average earning assets, which increased $1.45 billion, or 24.65%, while tax-equivalent net interest margin increased to 3.84% in the current quarter from 3.33% in second quarter 2016.  Accretion income added $5.57 million, or 31 basis points, to margin in the current quarter as compared to $0.61 million, or 5 basis points, in the second quarter of 2016.  Net interest income included a cumulative one-time adjustment to accretion income of a $3.89 million, or 21 basis points, due to the effects of a reclassification of purchased revolving credits.

Noninterest Income
Noninterest income was $50.34 million for the second quarter of 2017, an increase of $13.88 million, or 38.05%, from the second quarter of 2016.  Residential mortgage banking income increased $9.45 million, or 77.76%, from the second quarter of 2016 primarily due to higher production volumes resulting from the Monarch merger.  Mortgage production was $1.08 billion in second quarter 2017, which was $486.59 million higher than second quarter 2016 production of $591.79 million.  Insurance commissions and other title fees increased $1.28 million, or 10.97%, primarily due to organic growth in property and casualty and employee benefits lines of business.  Additionally, real estate brokerage and property management income increased $1.51 million, or 24.74%, from the second quarter of 2016 primarily due to our acquisition of a resort property management company at Deep Creek Lake, Maryland (“Deep Creek”) in second quarter 2017.

Noninterest Expense
Noninterest expense increased by $6.22 million, or 8.65%, from the comparative quarter of 2016.  The primary driver was an increase of $14.74 million in salaries and benefits expense due to the addition of staff related to the Monarch acquisition, incentive compensation, and organic growth.  Also contributing were increases in occupancy expenses of $1.50 million and furniture and equipment expenses of $1.18 million, primarily related to mortgage facilities acquired in the Monarch acquisition.  Partially offsetting the increase was a reduction in acquisition-related expenses of $17.15 million.

Second Quarter 2017 Earnings Compared to First Quarter 2017
Net income for the second quarter was $26.21 million, or $0.42 per diluted share, versus $21.97 million, or $0.35 per diluted share, in first quarter 2017, reflecting the increase in net interest income and seasonal improvements in our Realty segment.

Performance Highlights

• Total revenues were $119.60 million compared to $105.17 million in the first quarter of 2017
  • Taxable equivalent net interest margin was 3.84%, including accretion of 31 basis points, compared to 3.45%, including accretion of 9 basis points, in the first quarter of 2017
  • Excluding one-time purchase accounting adjustments of $3.89 million, or 21 basis points, taxable equivalent net interest margin was 3.63%
  • Noninterest income increased $5.46 million due to seasonality in our Realty segment
     
• Total loans held for investment increased $35.98 million from March 31, 2017
• Total deposits increased $405.00 million, or 6.54%, from March 31, 2017, including an additional $175 million of brokered certificates of deposit
  • Noninterest bearing deposits increased by $166.81 million, or 8.13%

Net Interest Income
On a linked quarter basis, net interest income increased by $8.97 million or 14.88%, in second quarter 2017 versus first quarter 2017, while tax-equivalent net interest margin was 3.84% versus 3.45% for the first quarter of 2017.  The increase in net interest income was primarily due to the previously discussed increase in accretion income, combined with a seasonal increase in average balances of loans held for sale and decreased borrowing costs.  Accretion income added $5.57 million, or 31 basis points, to margin in the current quarter, as compared to $1.13 million, or 9 basis points, in the linked quarter.  Net interest income included a cumulative one-time adjustment to accretion income of a $3.89 million, or 21 basis points, due to the effects of a reclassification of purchased revolving credits.

Noninterest Income
In comparison to the first quarter of 2017, noninterest income increased $5.46 million, or 12.16%.  The increase was driven by residential mortgage banking income, which grew by $3.96 million, or 22.47%, due to a seasonal increase in mortgage production of $372.32 million, from $706.06 million in first quarter 2017 to $1.08 billion in second quarter 2017.  Additionally, real estate brokerage and property management income was higher by $2.64 million, or 52.79% due to a seasonal increase in real estate brokerage and the Deep Creek acquisition.  Partially offsetting the increase from the linked quarter was a decline in insurance commissions due to lower contingent commission revenue, which is primarily received during the first quarter of each year.

Noninterest Expense
Noninterest expense increased by $7.87 million, or 11.20%, from the first quarter of 2017.  The primary drivers were increases in salaries and benefits expenses of $4.63 million and acquisition-related expenses of $1.29 million.  Salaries and benefits expenses were higher due to the accrual of expenses related to our profit sharing plan, which requires the achievement of certain performance thresholds and a targeted level of earnings, combined with the effects of the Deep Creek acquisition.

Segment Results

Second Quarter 2017 Compared to Second Quarter 2016

Banking
Net income for the three months ended June 30, 2017 for the Banking segment was $21.55 million, increasing $20.26 million from comparative 2016, as net interest income climbed by $19.55 million primarily due to the increase in earning assets from the Monarch merger and increased accretion income.  Also contributing to the variance was a decrease in the provision for loan losses of $0.78 million and an increase in noninterest income of $1.76 million, which included increases in wealth management income, service charges and credit card merchant fees.  Additionally, noninterest expenses declined by $8.0 million, as the decrease in acquisition-related expenses of $17.32 million was partially offset by increases in personnel costs and other expenses.

Realty
For the three months ended June 30, 2017, the Realty segment net income was $3.20 million as compared to $3.77 million in second quarter 2016.  The variance was driven by increased noninterest expenses of $13.56 million primarily due to an increase in mortgage operational expenses related to the merger with Monarch, including an increase in personnel costs of $7.97 million.  The decrease was mostly offset by an increase in residential mortgage banking income of $9.24 million, or 73.98%, due to higher production volumes resulting from the Monarch merger.  Additionally, net interest and other income increased by $2.06 million as higher production volume led to higher average mortgage loans held for sale.

Insurance
The Insurance segment had net income of $1.46 million for the three months ended June 30, 2017, an increase of $0.26 million compared to second quarter 2016.  The increase in net income was primarily driven by organic growth in property and casualty insurance and employee benefit insurance lines.

Second Quarter 2017 Compared to First Quarter 2017

Banking
Earnings increased by $3.58 million, or 19.92% from the first quarter of 2017 as an increase in net interest income of $7.99 million was partially offset by increases in personnel costs of $3.18 million and acquisition-related expenses of $0.58 million.  Additionally, there was also a decrease of $1.22 million in the provision for loan losses.

Realty
Net income in the Realty segment increased by $2.28 million from the linked quarter ended March 31, 2017.  The increase was primarily a result of a seasonal increase in residential mortgage banking income of $3.96 million and real estate brokerage income of $0.88 million.

Insurance
Net income decreased $1.61 million from the first quarter of 2017 driven by a reduction in contingency and bonus revenue of $2.59 million.  Contingent commissions are seasonal in nature and are primarily received during the first quarter of each year.  Additionally, commissions from travel insurance decreased by $0.47 million but were offset by an increases in property and casualty commissions of $0.81 million and employee benefits commissions of $0.31 million.

Balance Sheet

At June 30, 2017, total Bank assets reached $8.43 billion, an increase of $0.49 billion, or 6.12%, over June 30, 2016.

Loans

The Bank’s loan portfolio ended the period at $5.95 billion representing an increase of 7.00%, or $389.11 million, from the prior year, and an increase of $35.98 million, or 0.61%, from March 31, 2017.

Deposits

The Bank continued to experience solid deposit growth with total deposits increasing to $6.60 billion, up $0.41 billion, or 6.62%, from June 30, 2016.  The Bank saw continued growth in noninterest-bearing demand deposits, which ended the quarter at $2.22 billion, a 13.77% increase from the prior year.  Noninterest-bearing deposits represented 33.65% of total deposits at June 30, 2017.

Capital Ratios

The Bank’s total equity at June 30, 2017 rose to $1.12 billion, an increase of $61.45 million, or 5.79%, from June 30, 2016.  Total risk-based capital remained strong as common equity Tier 1, Tier 1 capital, total risk-based capital, and Tier 1 leverage capital ratios were 11.98%, 12.03%, 12.68%, 10.43%, respectively.  All ratios exceed the current regulatory standards for well capitalized status.

Asset Quality

Continued strength in credit quality contributed to the Bank's financial results as net charge-offs totaled $0.38 million in the second quarter of 2017 compared to $0.24 million in the second quarter of 2016 and $1.35 million in the linked quarter.  Total nonperforming assets were $35.69 million, or 0.42%, of Bank assets at June 30, 2017, as compared to $36.29 million, or 0.46%, at June 30, 2016, and $35.81 million, or 0.44%, at March 31, 2017.  The allowance for loan losses was $44.13 million, increased from $39.62 million at June 30, 2016 and $43.20 million at March 31, 2017.

About TowneBank:
As one of the top community banks in Virginia and North Carolina, TowneBank operates 37 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 Wealth Management, Towne Insurance Agency, Towne Benefits, TowneBank Mortgage, TowneBank Commercial Mortgage, Berkshire Hathaway HomeServices Towne Realty, Towne 1031 Exchange, LLC, and Towne 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 $8.43 billion as of June 30, 2017, TowneBank is one of the largest banks headquartered in Virginia.

On April 27, 2017, TowneBank announced the signing of a definitive agreement to acquire Paragon Commercial Corporation (“Paragon”) and its wholly-owned bank subsidiary, Paragon Commercial Bank.  Founded in Raleigh, North Carolina in 1999, Paragon Commercial Bank provides banking services through highly responsive professionals, an extensive courier service, online and mobile technologies, free worldwide ATM access and a select number of strategically placed offices in Raleigh, Cary and Charlotte, North Carolina.  Pending customary regulatory and shareholder approvals, the merger is scheduled to close in January 2018. Based on financial data as of March 31, 2017, the combined company would have total assets of $9.7 billion, gross loans of $7.1 billion and total deposits of $7.5 billion.

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 its 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:
Certain statements contained in this release constitute forward-looking statements within the meaning of U.S. federal securities laws.  These forward-looking statements speak only as of the date of this release, are based on current expectations, and involve a number of assumptions. These include statements regarding TowneBank’s future economic performance, financial condition, prospects, growth, strategies and expectations, and objectives of management, and are generally identified by the use of words such as “believe,” “expect,” “intend,” “anticipate,” “estimate,” or “project” or similar expressions.  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. You should not place undue reliance on forward-looking statements, which are subject to assumptions that are subject to change. TowneBank’s ability to predict results, or the actual effect of future plans or strategies, is inherently uncertain. These forward-looking statements are subject to a number of factors and uncertainties that could cause actual results to differ from those indicated or implied in the forward-looking statements and such differences may be material.  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 System; the quality and composition of TowneBank’s loan and securities portfolios; demand for loan products; deposit flows; competition; demand for financial services in TowneBank’s market area; implementation of new technologies and the ability to develop and maintain secure and reliable electronic systems; changes in the securities markets; changes in accounting principles, policies and guidelines; TowneBank’s ability to complete and successfully integrate the business of Paragon Commercial Bank in the expected timeframe, if at all, and to achieve expected revenue synergies and cost savings from the merger; and 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:
This communication does not constitute an offer to sell or the solicitation of an offer to buy any securities or a solicitation of any vote or approval.  In connection with the merger, Paragon will file with the Securities and Exchange Commission (“SEC”) a preliminary proxy statement. Paragon will deliver a definitive proxy statement/prospectus to its stockholders seeking approval of the merger and related matters.  In addition, each of TowneBank and Paragon may file other relevant documents concerning the proposed merger with the FDIC and SEC.

Paragon, TowneBank and their respective directors and executive officers may be deemed to be participants in the solicitation of proxies from Paragon’s stockholders in connection with the proposed merger.  Information about the directors and executive officers of Paragon and TowneBank and other persons who may be deemed participants in the solicitation, including their interests in the merger, will be included in the definitive proxy statement/prospectus when it becomes available. Additional information about Paragon’s executive officers and directors can be found in Paragon’s final prospectus filed with the SEC on June 17, 2016.  Additional information regarding TowneBank’s executive officers and directors can be found in TowneBank’s definitive proxy statement in connection with its 2017 Annual Meeting of Stockholders filed with the FDIC on April 21, 2017.  You may obtain free copies of each document from Paragon by directing a request by telephone or mail to Paragon Commercial Corporation, 3535 Glenwood Avenue, Raleigh, North Carolina 27612, Attention: Investor Relations (telephone: (919) 788-7770), or by accessing Paragon’s website at https://www.paragonbank.com under “About Us-Investor Relations.”  You may obtain free copies of each document from TowneBank 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 and Paragon’s websites is not, and shall not be deemed to be, a part of this release or incorporated into other filings either company makes with the FDIC or SEC. 

(1) Interest spread is the average yield earned on earning assets less the average rate paid on interest-bearing liabilities.  Fully tax equivalent.
(2) Net interest margin is net interest income expressed as a percentage of average earning assets.  Fully tax equivalent.

(1) Interest spread is the average yield earned on earning assets less the average rate paid on interest bearing liabilities.  Fully tax equivalent.
(2) Net interest margin is net interest income expressed as a percentage of average earning assets.  Fully tax equivalent.