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Towne Bancorp Reports Fourth Quarter and Year-End 2008 Earnings, Continued Strong Capital and Improved Operations and Liquidity

^{Published on 2009-01-30 14:30:21, Last Modified on 2009-01-30 14:34:13 - Market Wire}
 

PHOENIX--([ BUSINESS WIRE ])--Towne Bancorp (OTCBB: TWNE), the holding company for Towne Bank of Arizona, today reported a net loss of $4.729 million or $(2.92) per diluted share for the quarter ended December 31, 2008, compared to a loss of $872 thousand or $(.55) per diluted share for the quarter ended December 31, 2007. For the year the Bank reported a net loss of $6.980 million or $(4.31) per diluted share, compared to earnings of $262 thousand or $0.15 per diluted share at December 31, 2007. The losses during the 4^th Quarter of 2008 are primarily due to additions to provisions for Loan and Lease Losses (ALLL) caused by extraordinary economic conditions. Provision expense for the calendar year 2008 totaled $5.491 million due to commercial real estate write-downs of $3.77 million, commercial loan charge-offs of $1.18 million and $540 thousand in additional provision due to declines in the value of Commercial Real Estate in the Bank's portfolio. In addition, there was a $1.48 million reversal of tax benefits. Together with these provisions the Bank also reversed previously accrued interest in the amount of $981 thousand.

Consolidated capital levels continue to be exceptionally high by regulatory standards. Total risk-based capital is 22.23% as of 12/31/08 while 10% is the level required to be considered Well-Capitalized.

"Results for the calendar year 2008 were well below our earlier expectations," said Patrick F. Patrick, President and CEO. While steps were taken early in the year to reduce a high concentration (and resultant exposure) in Commercial Real Estate (CRE) loans, they proved to be insufficient to meet the challenges presented in the late 3^rd and early 4^th Quarters. The significant decline in real estate values during that period caused a number of borrowers to abandon projects. Borrowers who had strong beliefs of a near-term recovery found themselves without the means to maintain loans that previously had reasonable underwriting characteristics.

The 4^th Quarter saw reductions in valuations resulting in provisions to its ALLL for a variety of properties including write-downs of CRE held in the portfolio. The Bank would prefer to not take ownership of properties; however, it does so when either there is no capacity on the part of a borrower to maintain the entity appropriately or when the borrower is working against the interest of the Bank itself. In each of these, provisions or write-downs are established consistent with standard accounting guidelines. Because of the Bank's high level of net worth the Bank is in a position to recognize diminished values while remaining a Well-Capitalized institution.

Liquidity

While reporting this loss, the Bank also had some successes. First among these is a turnaround in core deposit growth for the 4^th Quarter of 2008 in the amount of $6.72 million. Given uncertainties in the financial sector especially during the second half of the year, it was gratifying to see customers develop confidence in the Bank and its product offerings. Second are the new loans booked by our staff that will contribute to earnings going forward. The Bank continues to make progress in establishing a network of strong relationships that include core deposits and quality loans that are critical to the success of the Bank.

The Bank is participating in the FDIC's Transaction Account Guarantee Program. Under the program, through December 31, 2009, all noninterest-bearing transaction accounts are fully guaranteed by the FDIC for the entire amount in the account. This is in addition to and separate from the coverage available under the FDIC's general deposit insurance rules, of which the basic coverage was increased during the 4^th Quarter from $100,000 to $250,000 per depositor.

Relationships, particularly those of customers with multiple accounts encompassing deposits and loans, represent the core of any quality Bank. It is this customer who also makes it possible to establish and maintain appropriate liquidity. Towne has materially increased its liquidity over the second half of the year including adding new borrowing capacity in the 4^th Quarter of 2008 to meet unexpected funding needs. Why is liquidity important? It represents the ability to make new loans; meet customer cash and other needs; plus act as a safety net for emergencies. Capital is a very important component of any organization; liquidity is the key ingredient to a successful long-term Bank.

Highlights for the 4^th Quarter

• Shareholder equity remains very strong at $29.6 million and $18.27 per share.
• Total risk-based Capital of 22.23%.
• Loan Loss Reserves as a percentage of loans of 4.07%.
• Sold and closed two single-family OREO properties.
• Non-interest expense decreased to $6.5 million at 12/31/08 from $6.8 million at 12/31/07.
• New Loans Booked totaled $7.3 million during 4^th Quarter.
• Participation in the FDIC's Transaction Account Guarantee Program.

At December 31, 2008, total assets decreased to $154.8 million or 1.5% compared to $157.2 million at 3^rd Quarter end and $201.4 million at year end 2007. As has been reported previously this decline was prompted by the need to reduce a high concentration of CRE loans, especially those of a high-risk nature. During the first six months of 2008 the Bank successfully executed on this plan both to improve the balance sheet in this difficult period but also to meet regulatory requirements. Since then the Bank has been improving the loan portfolio both through the reduction in Commercial Real Estate and also through new loan production primarily in Commercial & Industrial loans.

In today's market there are opportunities to book loans into the portfolio with appropriate underwriting characteristics. We are pursuing those with programs we believe to be in the best interest of the Bank and its customers. The greatest difficulty in this regard is generating a like amount of core deposits at levels commensurate with the current low-rate environment. In some cases competitors promote higher than desirable rates in order to provide liquidity; these rates often are not sustainable from a margin perspective. Towne Bank expects to be a significant part of the local community for many years; hence our asset and liability matching will adhere to the philosophy of always targeting an acceptable net interest margin.

Net interest income decreased to $687 thousand or 162 basis points of net interest margin for the quarter ended December 31, 2008 compared to the period ended September 30, 2008. The primary reason for the decline was the reversal of $554 thousand of interest income. Absent the effect of the reversals, net interest margin would have been 3.24%.

Non-interest expenses declined to $6.5 million for the year ended December 31, 2008 from $6.8 million for the year ended December 2007. Controllable operating expenses were generally well managed with salary expenses declining $350 thousand during the year, reflecting continuing efforts to improve our processes and efficiency. Unfortunately, collection and legal costs, including charges related to acquired real estate, remain high. In addition, FDIC insurance expense increased significantly as a result of higher assessment rates associated with the Bank's Order. Although we anticipate collection costs will continue to be above historical levels, we expect continued expense discipline will be a positive factor going forward.

In the 4^th Quarter, the Corporation reversed $1.48 million in a tax benefit and wrote off a $3.3 million deferred tax asset. The Corporation also recognized a tax receivable of $1.83 million.

Credit Quality

The 4^th Quarter of 2008 proved to be one of the more difficult seen in our industry for many decades. Beginning in September of 2008 events unfolded that created great uncertainty in the minds and actions of all involved in the financial sector. Possibly as a result of this, we found borrowers who historically had worked hand-in-hand with lenders to jointly solve a variety of problems deciding to step away and try to preserve whatever assets they had remaining. This created an environment where developers offered properties back to the Bank in exchange for a cancelling of the debt; some walking away from assets that could or would have been used to maintain the loans. The Bank is working with those who are helping to preserve assets while taking a more aggressive line against those who are using the economic environment to their own advantage.

The most significant positive regarding credit quality is that most of the loans in the Bank have been addressed in one way or another during the past year. As a result and considering the current conditions, the Bank added to the provision for loan loss as previously reported; an important step in times of uncertainty.

Loans past due 30+ days decreased to $17.8 million at December 31, 2008 compared to $23.1 million at September 30, 2008. At September 30 we expected a more significant decline in this number due to applications and agreements with borrowers; however, events surrounding that period caused several borrowers to change their minds about continuing. We still expect to see improvements in this area but are disappointed at the delay.

Loans on non-accrual saw an increase to $20.9 million at December 31, 2008 compared to $14.3 million at September 30, 2008. This increase was primarily due to the addition of commercial development loans in the state of Arizona. The number of properties on non-accrual totaled 22 at year end December 31, 2008 compared to 17 at the end of the September 30, 2008 quarter. Among these the categories include 3 single-family lots; 9 residential land developments; 3 single-family homes; 2 small multi-family; 1 warehouse and commercial land development.

OREO

Other Real Estate Owned (OREO) increased to $12.2 million at December 31, 2008 compared to $6.1 million at September 30, 2008. This category is composed of 9 residential lots; one warehouse; 4 residential land developments; 3 single-family homes, 2 of which are expected to be complete in February 2009; and 2 commercial land developments. The Bank is listing properties expeditiously with the intent to return these investments to earning status as soon as possible. In limited cases where properties are felt to have value not realizable in the current market, the property will be held waiting for improvements in economic conditions. In these cases an analysis is used to determine appropriate actions. For all loans entering OREO the Bank writes the property down against potential exposure to loss at the time of foreclosure or deed-in-lieu of foreclosure.

Capital Levels

Despite this difficult environment, the Bank continues to operate with a strong capital position more than double that considered necessary to be a well-capitalized bank for regulatory purposes. Our strong capital position provides us the flexibility to deal with tactical issues in the short term and also enhances our strategic options as we look to take advantage of market opportunities going forward. Our total-risked based capital level at year end December 31, 2008 was 22.23%, a significant cushion over the 10% regarded as well-capitalized by regulatory guidelines.

Goals

As with many financial institutions, a significant part of the increase in loans transitioning from performing status to that of problem asset is due to the extraordinary effects of the current economic environment. Despite the increase in these assets during the latter part of the year we feel that with our strong capital level we are uniquely equipped to resolve our issues, grow our customer base and continue to build a first-class team of employees to serve our customers. For these reasons Towne Bank continues to look for opportunities that will allow us to take advantage of what we view as a unique opportunity for growth in our marketplace. In that regard members of the Board of Directors and Management have been acquiring stock in Towne Bancorp and as of 12/31/08 own approximately 22% of the outstanding shares of the Corporation.

Forward Looking Statement

This document contains statements that are forward-looking in nature and, as such, these statements are subject to risks and uncertainties that may cause actual results to vary materially from those discussed in the document. Specific risks and uncertainties, among others, associated with forward-looking statements in the document include credit risks in the bank's loan portfolio and the ability of the bank to recover on non-performing loans; liquidity risks relating to deposit growth, funding costs and the bank's need for brokered deposits that could adversely affect future net income; risks relating to expected formal regulatory actions and the resolution of such concerns; and economic and market risks relating to disruptions in the financial markets and the impact of the current decline in the real estate market in the bank's market area. Forward-looking statements include those identified by the use of the words "expect", "anticipate", "plan" and similar words of prospective meaning. The reader should not place undue reliance on such forward-looking statements, and the company undertakes no obligation to update such statements.