Towne Bancorp (CE) (USOTC:TWNE)
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Towne Bancorp (OTCBB: TWNE) reported net income of $262,000 or $0.15 per
diluted share for the year ended December 31, 2007 compared to $1.5
million or $0.83 per diluted share for fiscal 2006. Total assets were
$201.4 million at December 31, 2007, an increase of 30% from $154.9
million at December 31, 2006.
In conjunction with its earnings release, the bank announced the hiring
of a new Chief Executive Officer, and the continued modification of its
strategy to realign with its founding principles.
HIGHLIGHTS FOR FOURTH QUARTER 2007 AND FISCAL 2007
4Q 2007
Fiscal 2007
Return on Average Assets (ROA)
(1.76)
0.14
Return on Average Equity (ROE)
(9.39)
0.71
Net interest margin (NIM)
3.80
5.18
Efficiency Ratio
120.85
72.32
Nonperforming loans to total loans at period end
5.55
5.55
Reserves to loans
2.42
2.42
Tangible equity / tangible assets
18.05
18.05
For the year ended December 31, 2007, the decrease in the bank’s
net income was due, in large part, to its loan loss provision expense of
$2.1 million (compared to $1.5 million in 2006) which resulted in the
Allowance for Loan Loss Reserves (ALLL) increasing to $4.3 million, or
2.42% of loans, at year end compared to $2.2 million, or 1.44% of loans,
at December 31, 2006.
FOURTH QUARTER RESULTS
For the fourth quarter of 2007, increased provision expense combined
with higher non-interest expenses resulted in a net loss of $872,000 or
($0.50) per diluted share compared to net income of $386,000 or $0.22
per diluted share for the fourth quarter of 2006. During the fourth
quarter of 2007, the bank provided $1.5 million to its ALLL and
contingent liability reserves compared to $417,000 for the fourth
quarter of 2006. Non-interest expense increased to $2.2 million for the
fourth quarter of 2007 from $1.0 million in the year-ago period.
The decline in fourth quarter 2007 earnings also resulted from an
increase in non-interest expenses due primarily to outside professional
fees related to an external review of the loan portfolio, management
consulting fees, the executive search effort, and higher legal fees.
Similarly, for the full year 2007, non-interest expenses increased by
73% to $6.8 million for the year compared with $4.0 million for 2006.
These higher costs were offset, in part, by a 20% increase in net
interest income to $9.5 million in 2007 compared to $7.9 million in 2006.
CREDIT QUALITY
The economic slowdown in the Phoenix area, which is the primary lending
area for the bank, has resulted in weakened credit quality. The board
and management believe that the bank’s loan
portfolio is better situated than some of its competitors because of its
higher concentration of loans collateralized by commercial properties
instead of residential properties. Nevertheless, the bank’s
real estate concentrations require reduction to more appropriate levels
in order to improve the risk profile of the bank. As a result, the bank’s
growth trajectory has slowed and will continue to be controlled such
that we expect to experience a modest reduction in asset size for the
first six months of 2008 as Commercial Real Estate (CRE) loans are
replaced with Commercial and Industrial loans (C & I). In conjunction
with efforts to reconfigure the loan portfolio, management will work to
replace its primary funding source of brokered deposits with community
oriented core deposits.
During the fourth quarter of 2007, the board and management undertook a
disciplined review of the bank’s loan
portfolio and restructuring of the bank’s loan
administration. All existing loans were examined for documentation
deficiencies, underwriting weaknesses, and financial condition of the
borrower. Through this process each loan was reevaluated and
reclassified as necessary. This effort resulted in a substantially
higher loan loss provision expense in the fourth quarter of 2007.
Management believes the current Allowance for Lease and Loan Losses
(ALLL) level adequately provides for the risks in the loan portfolio.
Over the same period, the bank has been more deliberate in its approach
to all borrowers. This has resulted in some lending relationships
departing the bank and a rise in short term delinquencies while
borrowers find alternative financing. The net effect has been an
increase in nonaccrual loans to 4.99% of loans and in loans delinquent
30-89 days to 14.6%. Each loan in these categories has been examined for
risk of loan loss and accounted for in the bank’s
ALLL.
As of December 31, 2007, the bank had $8.9 million of loans on
non-accrual status. A majority of these loans have a favorable Loan to
Value ratio relative to the properties securing such loans, and many of
the properties are in the process of being sold. Unless conditions
change substantially, we believe the exposure to losses on these assets
is low. Subsequent to year-end $1.2 million of these non-accruals were
paid in full; $2.2 million is expected to be paid off or brought current
this quarter; and $0.6 million have been foreclosed and added to OREO.
The balance consists of a commercial land development loan in
foreclosure that is expected to be resolved by the end of this quarter
with no loss to the bank.
In addition, as of December 31, 2007 the bank reported $25.8 million in
loans Past Due 30 through 89 days and still accruing. This total is
primarily comprised of 20 commercial real estate loans of which $2.74
million has subsequently been brought current; $2.0 million has been
paid in full with no loss of principal or interest; $3.7 million secured
by real property that is under contract of sale and expected to be
repaid in full; $7.7 million is subject to agreements with the borrowers
to be brought current without loss of principal or interest to the bank;
the balance are in 3 land development related loans from which the bank
does not anticipate losses.
CAPITAL LEVELS
Despite operating in a difficult environment, ample capital continues to
benefit the bank. At year-end 2007, the Tier 1 leverage ratio of the
bank remained at 17.82%, the Tier 1 risk based capital ratio was 18.64%,
and the Total risk based capital ratio was 19.90%. Management believes
strong capital levels are critical during this challenging economic
period.
STRATEGY
Since its formation in 2004, the bank experienced very rapid growth in
both earnings and assets. Loan growth placed considerable strain on the
infrastructure of the bank, leading to what the board and management
believe are appropriate regulatory criticisms. The original plan for the
bank was to serve small and medium-sized businesses in the local
community. The addition of capital during 2005 caused the bank to seek
further loan growth within and outside its original lending area. This
loan growth was mainly attributable to increases in loans for the
purchase of raw land, land development, residential construction and
commercial real estate property development. To fund loan growth, the
bank relied heavily on the brokered deposit market ultimately increasing
these deposits to over 70% of total funding. The bank recognizes that
brokered deposits are an inherently unstable and expensive source of
funding for loans. Accordingly, the use of brokered deposits is an
unsustainable means of growing assets.
In October 2007, the bank commenced an effort to realign its strategy
with the principles on which it was founded, and to focus on core local
relationships. Core deposit growth has become a cornerstone of the bank’s
strategy and to that end the bank has recruited senior relationship
bankers and stepped up our marketing efforts to attract local deposit
customers. Central to this improvement in core deposits are new
technology advances led by remote capture which the bank markets under
the banner of A.S.A.P. (Access, Scan And Post). This is proving a very
useful and necessary tool in attracting new deposit relationships. The
addition of the relationship bankers together with tools such as
A.S.A.P. positions the bank to serve a broader base in an efficient and
profitable manner. Moreover, this emphasis on business customers plus
that of C & I lending will yield deeper and more lasting customer
relationships that should further augment core deposit generation.
The board of Towne Bancorp has created a Special Strategic Planning
Committee (Special Committee) to review opportunities and strategies for
the bank and its shareholders. The Special Committee is in the process
of evaluating its strategic options and management is preparing a
comprehensive business plan that is expected to be completed this
quarter. Despite the current environment, the Phoenix area’s
longer-term economic growth prospects make it an attractive market for
community banking. With our strong capital position and new management
we believe the bank is well positioned to take advantage of the unique
growth opportunities within our footprint. In that spirit, the board and
management look forward optimistically to 2008 and beyond.
MANAGEMENT CHANGES
The previously announced departure of the bank’s
founding CEO in October provided an opportunity to bring in new
leadership. The board initiated an executive search that resulted in the
selection of Patrick F. Patrick as the new President and Chief Executive
Officer of the bank. Mr. Patrick, whose banking career spans 40 years,
has a track record of successfully managing banks through both favorable
and unfavorable economic environments. Mr. Patrick has gained
familiarity with the bank through his work with the board in a
consulting capacity during the past three months. Mr. Steve Brophy, the
interim manager of the bank, commented that “Mr.
Patrick is an enormously talented individual with extraordinary depth of
banking experience, the capacity to quickly assess and manage banking
problems, and motivate those who work for him. Our bank is well served
to have Mr. Patrick to lead us into the future.”
As a result of the board’s executive search
effort, the bank expects to announce the addition of another senior
officer with strong management skills and C & I lending experience. With
these changes, the bank will have significantly enhanced its senior
management talent. According to Ron Creasman, who was elected Chairman
in October following the resignation of the previous Chairman of the
Board, “The bank’s
strong capital position was an important factor in attracting these
veteran managers.”
PENDING REGULATORY ACTION
Because of regulatory criticism during the bank’s
examination in 2007, the board anticipates formal regulatory action
pursuant to which the bank would commit to address loan concentration,
the use of brokered deposits and other issues. The bank is working
closely with the regulatory authorities and is developing a business
plan that details the resolution of all concerns. Although the bank is
already aggressively addressing the issues which gave rise to the
criticism, the changes necessary to effectuate significant reductions in
the use of brokered deposits and reductions in real estate
concentrations will take time. Commenting on the bank’s
regulatory relationship, Mr. Patrick noted that “regulatory
authorities exist for our collective benefit and we appreciate their
efforts. We expect to have a detailed business plan by the end of this
quarter that will demonstrate more clearly our plans going forward
including our continued growth in both earnings and assets over the next
three years.”
FORWARD LOOKING STATEMENTS
This press release 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 this press release. Specific risks and uncertainties,
among others, associated with forward-looking statements in this press
release 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,”
“anticipated,” “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.
ABOUT TOWNE BANCORP
Towne Bancorp is a bank holding company with $201 million assets at
December 31, 2007, with one wholly owned bank subsidiary, Towne Bank of
Arizona. Through its full-service community bank branch together with a
loan production facility, Towne Bank of Arizona offers commercial
banking services including real estate, construction, and commercial
loans to small and medium-sized businesses in the greater Phoenix area.
Additional information regarding Towne Bancorp is available via the
Internet at http://www.townebankaz.com.
(All dollars in thousands except per share data)
QUARTER
YEAR-TO-DATE
Selected Income Statement Data (unaudited)
4th Qtr 2007
4th Qtr 2006
2007 Change
Dec 2007
Dec 2006
2007 Change
Net interest income
$
1,878
$
2,131
-11.89
%
$
9,456
$
7,889
19.86
%
Provision for loan losses
$
1,008
$
417
141.76
%
$
2,130
$
1,454
46.46
%
Total non-interest income
($49
)
$
8
-720.33
%
$
2
$
11
-82.19
%
Total non-interest expense
$
2,210
$
1,016
117.55
%
$
6,840
$
3,959
72.77
%
Federal and state taxes
($517
)
$
320
-261.46
%
$
227
$
1,033
-78.04
%
Net income
($872
)
$
386
-325.89
%
$
262
$
1,454
-82.02
%
Selected Balance Sheet Data (unaudited)
Dec 2007
Sep 2007
4th Quarter2007 Change
Dec 2006
YTD 2007Change
Dec 2006
Year Over Year Change
Total assets
$
201,417
$
201,817
($400
)
$
154,945
$
46,472
$
154,945
$
46,472
Net loans
$
172,693
$
178,898
($6,205
)
$
147,924
$
24,769
$
147,924
$
24,769
Total deposits
$
152,843
$
157,971
($5,127
)
$
118,448
$
34,395
$
118,433
$
34,410
Total borrowings
$
11,020
$
6,020
$
5,000
$
85
$
10,935
$
85
$
10,935
Total equity cap
$
36,347
$
37,033
($686
)
$
35,553
$
794
$
35,562
$
785
Book value per share
$
22.72
$
23.15
($0.43
)
$
22.42
$
0.31
$
22.42
$
0.30
QUARTER
YEAR-TO-DATE
Selected ratios (unaudited)
4th Qtr 2007
4th Qtr 2006
2007 Change
Dec 2007
Dec 2006
2007 Change
Net interest margin
3.80
%
5.87
%
-35.36
%
5.18
%
6.34
%
-18.30
%
Return on avg assets
-1.76
%
1.06
%
-264.96
%
0.14
%
1.16
%
-87.76
%
Return on avg equity
-9.39
%
4.35
%
-315.99
%
0.71
%
4.18
%
-82.97
%
Efficiency ratio
120.85
%
47.48
%
154.51
%
72.32
%
50.11
%
44.31
%
Net charge-offs to total loans
0.01
%
0.00
%
n/a
0.01
%
0.01
%
5.12
%
ALLL to gross loans %
2.42
%
1.44
%
67.72
%
2.42
%
1.44
%
67.72
%
NPA to total assets
4.88
%
0.69
%
606.73
%
4.88
%
0.69
%
606.73
%
Per share data (unaudited)
Net income per share
($0.55
)
$
0.24
$
0.16
$
0.92
Net income per share (diluted)
($0.50
)
$
0.22
$
0.15
$
0.83
Average shares outstanding
1,599,639
1,586,002
1,599,639
1,586,002