SUFFOLK, Va., Oct. 22, 2020 (GLOBE NEWSWIRE) -- TowneBank (NASDAQ: TOWN) today reported earnings for the quarter ended September 30, 2020 of $34.46 million, or $0.48 per diluted share, compared to $37.66 million, or $0.52 per diluted share, for the quarter ended September 30, 2019.

“Our third quarter results were highlighted by strong performance across our fee-based business lines. Total revenues exceeded $192 million despite challenges from historically low interest rates. Credit metrics remained stable reflecting our relationship-based credit culture. Once again, strong deposit growth led to TowneBank earning the top spot in Hampton Roads market share according to recently released FDIC data,” said G. Robert Aston, Jr., Executive Chairman.

Highlights for Third Quarter 2020 Compared to Third Quarter 2019:

• Total revenues were a record $192.14 million, an increase of $46.26 million, or 31.71%.
• Pre-provision, pre-tax, net revenues (non-GAAP) were $73.90 million, an increase of $27.05 million, or 57.74%.
• Loans held for investment were $9.77 billion, an increase of $1.59 billion, or 19.40%, from September 30, 2019, but a decrease of $0.03 billion, or 0.32%, from June 30, 2020. The balance at September 30, 2020 and June 30, 2020 included $1.10 billion and $1.09 billion, respectively, of loans originated under the Small Business Administration’s Paycheck Protection Program (“PPP”).
• Total deposits were $11.70 billion, an increase of $2.27 billion, or 24.02%, compared to prior year and $0.44 billion, or 3.91%, from June 30, 2020.
• Noninterest bearing deposits increased by 47.31%, to $4.46 billion, representing 38.14% of total deposits. Compared to the linked quarter, noninterest bearing deposits increased 5.63%.
• Annualized return on common shareholders' equity was 7.91% and annualized return on average tangible common shareholders' equity was 11.79% (non-GAAP).
• Net interest margin for the quarter was 2.70% and taxable equivalent net interest margin (non-GAAP) was 2.72%.
• Nonperforming assets were $28.74 million, or 0.19% of total assets, compared to $31.04 million, or 0.26%, at September 30, 2019.
• Effective tax rate of 18.53% in the quarter compared to 16.95% in the third quarter of 2019.

“Despite the many headwinds impacting the nation in 2020, our team at Towne has been working diligently behind the scenes to enhance and improve our member experience through our Towne 20.20 initiative. In early October, as part of that initiative, we implemented a new robust banking system that sets the stage for new and innovative technology, enhanced digital solutions, and a greater variety of financial services,” stated J. Morgan Davis, President and Chief Executive Officer.

Quarterly Net Interest Income Compared to Third Quarter 2019:

• Net interest income was $96.76 million compared to $91.10 million at September 30, 2019.
• Taxable equivalent net interest margin (non-GAAP) was 2.72%, including accretion of 5 basis points, compared to 3.43%, including accretion of 11 basis points, for third quarter 2019.
• Average loans held for investment, with an average yield of 4.22%, represented 68.38% of average earning assets at September 30, 2020 compared to an average yield of 5.02% and 76.35% of average earning assets in the third quarter of 2019. Excluding PPP, loan yields were 4.30% in third quarter 2020.
• Interest and fee income on PPP loans was $9.82 million in third quarter 2020, compared to $5.83 million in the linked quarter, and zero in third quarter 2019.
• Total cost of deposits decreased to 0.46% from 1.01% at September 30, 2019.
• Average interest-earning assets totaled $14.26 billion at September 30, 2020 compared to $10.60 billion at September 30, 2019, an increase of 34.49%.
• Average interest-bearing liabilities totaled $9.21 billion, an increase of $2.18 billion from prior year.
• Interest expense on the FRB PPP lending facility was $0.91 million in third quarter, compared to $0.54 million in the linked quarter, and zero in third quarter 2019.

Quarterly Provision for Credit Losses:

• Recorded a quarterly provision for credit losses for on-balance-sheet loans of $28.26 million compared to $1.51 million one year ago and $25.99 million in the linked quarter. This increase is primarily attributable to a heavier weighting given to adverse economic forecasts in our credit loss models due to expectation of continued economic weakness driven by a number of uncertainties impacting the local and national economy. These macroeconomic forecasts were impacted by the notable weakening of small businesses in the wake of the extended COVID-19 pandemic, major layoff announcements, and the deterioration in the U.S. trade relationship with China. Expected loss estimates consider various factors including the impacts of the decreased economic activity and higher unemployment rates, customer specific credit information, and the potential mitigating benefits of government stimulus and industry wide loan modification efforts.
• Net loan recoveries were $0.33 million compared to charge-offs of $0.61 million one year prior. The ratio of net loan charge-offs (recoveries) to average loans on an annualized basis was (0.01)% in third quarter 2020 and 0.03% in third quarter 2019. The Company has proactively supported members by providing payment deferrals when needed, which, combined with government stimulus, has prevented a significant deterioration in asset quality metrics. We will continue to closely monitor credit quality as the effects of government stimulus lessen and the economic impact of the pandemic becomes clearer over time.
• Recorded a provision for credit losses on off-balance-sheet commitments of $3.50 million compared to $1.08 million in the linked quarter.
• The allowance for credit losses on loans represented 1.22% of total loans compared to 0.92% at June 30, 2020 and 0.68% at September 30, 2019. Excluding PPP loans, which are fully government guaranteed, the allowance for credit losses (non-GAAP) was 1.37%, compared to 1.04% at June 30, 2020. The allowance for credit losses on loans was 7.31 times nonperforming loans compared to 5.34 times at June 30, 2020 and 3.95 times at September 30, 2019.

Quarterly Noninterest Income Compared to Third Quarter 2019:

• Total noninterest income was $95.38 million compared to $54.78 million in 2019, an increase of $40.60 million, or 74.12%. Residential mortgage banking income increased $18.68 million and real estate brokerage and property management income increased $1.86 million. Also included in noninterest income are net gains on investment securities of $1.70 million as compared to net losses of $0.07 million in the prior year and a gain of $17.63 million on the sale of Red Sky Travel Insurance ("Red Sky"), a travel insurance joint venture.
• Residential mortgage banking recorded income of $37.53 million compared to $18.86 million in third quarter 2019. Loan volume in the current quarter was $1.79 billion, with purchase activity comprising 61.18% of that volume. Loan volume in third quarter 2019 was $0.96 billion, with purchase activity comprising 68.83%. Though still an increase over the prior year, refinancing activity has declined compared to the linked quarter. Increased volume and a continued low mortgage rate environment coupled with improved margins were the drivers of improvement compared to the prior year quarter.
• Total Insurance segment revenue increased 95.11% to $38.27 million in the third quarter due to the sale of a joint venture, organic growth, and expense control measures. The Company sold Red Sky mid-third quarter 2020. A gain on the sale of Red Sky totaling $17.63 million was recorded in other income. After distributions to noncontrolling interests, Towne retained $6.52 million of the pre-tax gain. In 2019, Red Sky contributed $4.09 million to insurance revenue, with an annual net income after noncontrolling interest of $0.94 million.
• Property management fee revenue increased 16.02%, or $1.05 million, compared to third quarter 2019. The lifting of local travel restrictions in second quarter related to COVID-19, coupled with businesses and schools continuing to operate remotely, has resulted in an extended vacation season and increased reservation activity during the quarter.

Quarterly Noninterest Expense Compared to Third Quarter 2019:

• Total noninterest expense was $101.98 million compared to $97.29 million in 2019, an increase of $4.69 million, or 4.82%. Increases in salary and benefits expense of $5.62 million, data processing expense of $0.58 million, and software expense of $0.36 million, offset the declines across most other expense categories.
• During the first three quarters of the year, the Company has been focused on its Towne 20.20 initiative which centered around our early October core conversion. This core conversion will allow the Company to provide a greater variety of financial services to our members through new technologies and enhanced digital solutions. Preparation for this conversion began in 2019 and necessitated long hours and dedication from team members, which the Company chose to recognize through one-time bonuses and vacation carry-overs of approximately $2.84 million in the quarter. Other conversion expenses in the quarter totaled $0.71 million.
• Other infrastructure enhancements and market expansion, that occurred in 2019, have resulted in generally higher levels of salary and benefits expense and software expense, while quarantines, travel restrictions, and other decreases in business activity related to COVID-19 have resulted in lower general spending.
• Write-downs related to a Company-owned building and lots in North Carolina totaled $1.06 million in the quarter.

Quarterly Income Taxes Compared to Third Quarter 2019:

• Income tax expense was $7.84 million compared to $7.68 million one year prior. This represents an effective tax rate of 18.53% compared to 16.95% in the third quarter of 2019.

Consolidated Balance Sheet Highlights:

• Total assets were $14.80 billion for the quarter ended September 30, 2020, a decrease of $0.78 billion, or 5.04%, compared to $15.58 billion at June 30, 2020. Total assets increased $2.77 billion, or 23.08%, from $12.02 billion at September 30, 2019. The year-over-year increase was driven primarily by growth in cash and cash equivalents and loans held for investment tied to PPP lending activities.
• Loans held for investment increased $1.59 billion, or 19.40%, compared to prior year but decreased $0.03 billion compared the linked quarter. Excluding PPP loans of $1.10 billion in the third quarter, and $1.09 billion in the second quarter of 2020, loans held for investment increased $484.60 million, or 5.92%, compared to prior year, but declined $44.47 million, or 0.51%, compared to the linked quarter.
• Mortgage loans held for sale increased $212.30 million, or 46.48%, compared to the prior year and $58.65 million, or 9.61%, compared to the linked quarter.
• Total deposits increased $2.3 billion, or 24.02%, compared to the prior year and $0.44 billion, or 3.91%, compared to the linked quarter.
• Total borrowings increased $0.37 billion, or 54.23%, from prior year but decreased $1.29 billion, or 55.39%, compared to the linked quarter. During the third quarter of 2020, the Company repaid $1.11 billion in borrowings under the FRB PPP lending facility, which had initially been used to facilitate funding of the PPP loans. Additionally, we restructured our FHLB borrowing facilities for future reductions in borrowing costs of approximately $2.66 million over the life of those borrowings.

Investment Securities:

• Total investment securities were $1.38 billion compared to $1.36 billion at June 30, 2020 and $1.41 billion at September 30, 2019. The weighted average duration of the portfolio at September 30, 2020 was 4.1 years. The carrying value of the AFS debt securities portfolio included $61.43 million in net unrealized gains compared to $19.73 million in net unrealized gains at December 31, 2019. During the third quarter of 2020, we sold $81.8 million in AFS debt securities at a gain of $1.70 million to reposition the portfolio.

Loans and Asset Quality:

• Total loans held for investment were $9.77 billion at September 30, 2020 compared to $9.80 billion at June 30, 2020 and $8.18 billion at September 30, 2019.
• Nonperforming assets were $28.74 million, or 0.19% of total assets, compared to $31.04 million, or 0.26%, at September 30, 2019.
• Nonperforming loans were 0.17% of period end loans, unchanged from September 30, 2019.
• Foreclosed property decreased to $11.70 million from $15.52 million at September 30, 2019.
• Expected loss estimates are subject to change based on continuing review of models and assumptions, portfolio performance, changes in forecasted macroeconomic conditions and loan mix which could result in material changes to the reserve in future periods.

Deposits and Borrowings:

• Total deposits were $11.70 billion compared to $11.26 billion at June 30, 2020 and $9.44 billion at September 30, 2019.
• Total loans to deposits were 83.47% compared to 87.01% at June 30, 2020 and 86.70% at September 30, 2019.
• Non-interest bearing deposits were 38.14% of total deposits at September 30, 2020 compared to 37.52% at June 30, 2020 and 32.11% at September 30, 2019.
• Total borrowings were $1.04 billion compared to $2.33 billion at June 30, 2020 and $0.67 billion at September 30, 2019.

Capital:

• Common equity tier 1 capital ratio of 11.75%.
• Tier 1 leverage capital ratio of 8.89%.
• Tier 1 risk-based capital ratio of 11.91%.
• Total risk-based capital ratio of 15.33%.
• Book value was $23.83 compared to $23.50 at June 30, 2020 and $22.38 at September 30, 2019.
• Tangible book value (non-GAAP) was $17.06 compared to $16.68 at June 30, 2020 and $15.44 at September 30, 2019.

About TowneBank:
As one of the top community banks in Virginia and North Carolina, TowneBank operates 42 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 Raleigh, Cary, Charlotte, Greensboro, Greenville, Moyock, Grandy, Camden County, Southern Shores, Corolla, Duck and Nags Head in North Carolina. TowneBank also offers a full range of financial services through its controlled divisions and subsidiaries that include Towne Investment Group, 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 $14.80 billion as of September 30, 2020, TowneBank is one of the largest banks headquartered in Virginia.