TWNE Towne Bancorp Inc (CE)

Towne Bancorp (OTCBB:TWNE), the holding company for Towne Bank of Arizona (TBA), today reported a net loss of ($9.3) million (MM) or ($5.76) per diluted share for the quarter ended June 30, 2009, compared to a loss of ($76) thousand or ($.05) per diluted share for the quarter ended June 30, 2008. The loss was primarily attributed to further deterioration in the local economy, necessitating write downs in asset values and additional provisions to the Allowance for Loan and Lease Losses (ALLL). Provision expense for the 2nd quarter of 2009 was $5.4MM, and reversals of previously accrued interest of $265 thousand for loans that were placed on non-accrual status. In addition, the Bank wrote down Other Real Estate Owned (OREO) by the amount of $2.5MM, while incurring expenses of $100 thousand on the OREO portfolio.

Highlights for the 2nd Quarter 2009

• Loans Past Due 30+ days decreased substantially to $4.7MM at 6/30/09 compared to $18.8MM at 3/31/09.
• Craig Wenner joins the Bank as Chief Financial Officer.
• Non-interest expenses increased $133 thousand for the quarter ended 6/30/09 to $1.6MM, compared to $1.5MM for the quarter ended 3/31/09, primarily due to $100 thousand related to OREO together with troubled loan expenses
• Core deposits increased to $49.3MM at 6/30 compared to $41.7MM at 3/31/09.
• Adjusted asset valuations to reflect current market conditions.

Consolidated capital levels continue to be above regulatory standards. Total risk-based capital is 11.71% as of 6/30/09. While recognizing Towne Bank of Arizona continues to have a strong equity position, given the large amount of non-performing assets and the severely troubled economic environment we are experiencing, the potential exists for further deterioration. This understanding was a critical determinant in developing our plans going forward.

At June 30, 2009, total assets decreased to $132.6 million from $142.8 million at quarter end 3/31/09. This reduction in total assets is primarily due to the Bank’s continued efforts to reduce its concentration of Commercial Real Estate loans (CRE) and Brokered Deposits used to fund those loans. The Bank reduced Brokered Deposits by $8.2 million during the quarter ended 3/31/09 or 5.1%.

Net interest income was $336 thousand at 6/30/09, compared to $635 thousand at quarter ended 3/31/09. Primary reasons for the reduction in net interest income were additions of loans to non-accrual status. The principal source of earnings for most banks is net interest income; to achieve a return to appropriate levels the Bank needs to dispose of non-earning assets or return them to a contributing status, plus reduce the cost of deposits and borrowings. The Bank is moving aggressively to address these critical issues.

Plan to Reduce Non-Performing Assets

As previously reported, borrowers and developers believed they could weather the current conditions during the first three quarters of 2008, but found following the bankruptcy of Lehman Brothers and bail-out of AIG that this was not the case. Performing loans went into past due status, ultimately transitioning into non-accruals. Towne Bank worked with borrowers wherever possible, but found in many cases that the resources required to make payments no longer existed; many of these loans ultimately were foreclosed.

This resulted in an increase of Non-Performing Assets, including OREO, and is the principal cause for the Bank’s substandard results. The accumulation of these assets negatively impacts the Bank in a number of ways. These include carrying costs such as taxes, insurance, legal, etc; interest on deposits used to fund the loans; increased costs associated with staffing and other resources required to manage and dispose of the assets; and the lack of income from these assets.

During normal business conditions, and with traditional business cycles that include down as well as up markets, a Bank can decide to hold assets waiting for the market to recover. This is because the level of problem assets is small enough that they don’t impact current or prospective earnings in a material way. The current recession is different than others going back a number of decades; it is longer and in most cases has had a more severe impact on real estate, the primary investment asset of the Bank.

The length and depth of this recession has made holding non-performing real estate assets for future recovery difficult and potentially imprudent. A requirement of federally insured institutions is to provide updated appraisals of value on non-performing assets on a periodic basis. This requirement is to ensure the Bank and its shareholders, together with regulators, are all aware of potential portfolio deterioration in a timely manner. An economic event such as that being currently experienced has the unintended effect of causing valuation fluctuations disproportionate to actual market conditions. During the past nine months these valuations have materially and consistently dropped in many cases to levels far below replacement cost.

The Bank previously had the option of holding some assets while maintaining a high level of capital. The recent significant reductions in value of real estate currently make this a high risk option; hence your Board and Management have decided to reduce the concentration of non-performing assets in an expeditious manner. This decision removes the potential for upside recovery due to economic improvements; however it is appropriate in today’s market.

Towne Bank has been actively working to sell OREO as it is acquired, but has found the market illiquid for the primary type of loans in our portfolio. Ironically those institutions holding single-family loans early in this downturn suffered disproportionately compared to those in commercial, land and land development. Today it is the reverse; a strong market exists for modest priced homes while commercial, land and land development, together with higher priced homes, have greater liquidity issues. Towne Bank of Arizona is largely in this latter category; commercial, land and land development with some higher priced single-family residences. Having said this, we are seeing improvements in purchaser activity on OREO plus loans on non-accrual, and we see this as an encouraging sign.

Our reason for choosing this time to market not just Real Estate Owned, but also non-performing loans, can best be explained by signs of stability in the balance of our portfolio. Up until this quarter we had seen a steady increase in loans either not performing or trending in that direction. Early this year we saw the deterioration in the portfolio moderating, enough so that our loans 30-89 days past due, the first sign of future problems, had reduced to $4.7MM at 6/30/09 compared to $18.8MM at 3/31/09. We also saw a reduction in total loans either non-performing or past due to $32.5MM at 6/30/09 from $50.7MM at quarter end 3/31/09. The reduction represents the first of this category since the period ending 6/30/08.

Our strategic objectives over the next two quarters are to: (1) reduce non-performing assets to less than 5% of total assets; (2) maintain a strong capital position for regulatory purposes; and (3) position ourselves to better withstand the turbulence in today’s market and to take advantage of opportunities that may arise. We are in discussions with a variety of parties who have expressed interest in purchasing parts of either or both the OREO or non-accrual portfolio.

Adjustments in Provisions for Allowance for Loan Losses and Asset Valuations

The Bank regularly updates its portfolio valuations with current appraisals to better reflect the dynamic market changes over the last 18 months. In many cases we believed the devaluation in assets would be very short term because of the turbulence in the local market conditions. Consistent with accepted accounting standards, we appropriately reserved for these valuation adjustments by adding to provisions for loan losses. Upon reassessment of the current market conditions, and the length and depth of this recession, we believe many of the impairments seen in these assets may last longer than originally anticipated. This being the case, we have elected to take charge-offs against the allowance for loans losses on certain loans. The effects of these accounting entries are reflected in our quarter end balances as follows:

Charge-off of loans against allowance for loan losses for the quarter ended 6/30/09 total $10.6MM. $8.1MM of the amount charged off was recognized in the provision for loan loss reserves in previous quarters. The Bank added provisions for ALLL of $5.4MM. As of June 30, 2009 the ALLL as a percentage of Total Gross Loan ratio is 5.24%.

Total past due loans have declined by $14.1MM since 3/31/09, primarily due to a reduction in 30-89 day delinquencies from $17.9MM to $4.7MM as of 6/30/09. Total OREO as of 6/30/09 is $17.9MM, an increase from $12MM as of 3/31/09.

Deposits

Core Deposits are essential for the long-term success of the Bank. This is another critical success factor for us, and one that currently involves all employees in the Bank. When one looks at highly successful federally insured institutions, they usually find a strong core deposit or customer relationship-based organization. Towne Bank of Arizona is striving to develop this type of entity. We are pleased to report a gain in core deposits for the past three months of $8.2 million to $49.3 million at 6/30/09 from $41.7 million at 3/31/09.

This earnings report reflects the challenges of financial institutions across the country, and more specifically the Sun Belt, where there have been substantial declines in asset valuations. Towne Bank has been fortunate in that its healthy capital levels have allowed it to remain well capitalized throughout this downturn. That notwithstanding, the Bank’s accumulation of non-performing assets has risen to unsustainable levels, and the Bank is committed to reducing these significantly over the next two quarters. There appears to be some renewed interest in buyers in the area for these products, but in addition we will be exploring alternative strategies to dispose of these assets to more appropriately configure the Bank’s balance sheet and allow for improved earnings going forward.

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 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)

2nd Qtr2009

 

2nd Qtr2008

 

2009 Change

 

1st Qtr2009

Jun 2009

 

Jun 2008

 

Dec 2008

    Net interest income $ 336 $ 1,511 -77.74 % $ 635 $ 971 $ 3,148 $ 5,119 Provision for loan losses $ 5,400 $ 0 n/a $ 1,973 $ 7,373 $ 0 $ 9,590 Total non-interest income ($2,620 ) $ 11 -24681.77 % ($492 ) ($3,112 ) ($16 ) ($134 ) Total non-interest expense $ 1,649 $ 1,645 0.21 % $ 1,516 $ 3,165 $ 3,243 $ 6,617 Federal and state taxes $ 0 ($48 ) 100.00 % $ 0 $ 0 ($43 ) $ 24 Net income ($9,332 ) ($76 ) -12222.48 % ($3,347 ) ($12,679 ) ($69 ) ($11,246 )     Selected Balance Sheet Data (unaudited) Jun 2009 Mar 2009

2nd Quarter2009 Change

Dec 2008

YTD 2009Change

Jun 2008

Year OverYear Change

  Total assets $ 132,622 $ 142,828 ($10,206 ) $ 150,607 ($17,985 ) $ 171,252 ($38,630 ) Net loans $ 94,038 $ 111,664 ($17,625 ) $ 113,823 ($19,785 ) $ 141,831 ($47,792 ) Total deposits $ 113,187 $ 114,075 ($888 ) $ 118,431 ($5,245 ) $ 128,165 ($14,978 ) Total borrowings $ 6,000 $ 6,000 $ 0 $ 6,000 $ 0 $ 6,000 $ 0 Total equity cap $ 12,756 $ 22,055 ($9,299 ) $ 25,350 ($12,594 ) $ 36,340 ($23,584 ) Book value per share $ 7.87 $ 13.61 ($5.74 ) $ 15.85 ($7.98 ) $ 22.72 ($14.85 )     QUARTER       YEAR-TO-DATE Selected ratios (unaudited)

2nd Qtr2009

2nd Qtr2008

1st Qtr2009

    Jun 2009 Jun 2008 Dec 2008   Net interest margin 0.98 % 3.50 % 1.54 % 1.37 % 3.43 % 3.00 % Return on avg assets -25.81 % -0.17 % -22.47 % -16.90 % -0.07 % -6.48 % Return on avg equity -168.05 % -0.83 % -105.80 % -90.20 % -0.38 % -31.36 % Efficiency ratio -72.21 % 108.11 % 343.53 % -147.84 % 103.56 % 132.75 % Net charge-offs to total loans 10.69 % 0.10 % 2.54 % 16.41 % 0.17 % 4.31 % ALLL to gross loans % 5.24 % 2.89 % 7.15 % 5.24 % 2.89 % 7.15 % NPA to total assets 33.41 % 8.17 % 15.87 % 33.41 % 8.17 % 15.87 %   Per share data (unaudited) Net income per share ($5.76 ) ($0.05 ) ($5.55 ) ($7.82 ) ($0.04 ) ($6.94 ) Net income per share (diluted) ($5.76 ) ($0.05 ) ($5.55 ) ($7.82 ) ($0.04 ) ($6.94 ) Average shares outstanding 1,621,024 1,599,639 1,621,024 1,621,024 1,599,639 1,621,024