TowneBank : Form 10-Q~Quarterly Report

FEDERAL DEPOSIT INSURANCE CORPORATION

Washington, D.C. 20429

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2024

FDIC Insurance Cert. Number: 35095

________________________

(Exact name of registrant as specified in its charter)

__________________________

VIRGINIA	54-1910608
(State or other jurisdiction of	(I.R.S. Employer Identification No.)
incorporation or organization)
5716 High Street, Portsmouth, Virginia	23703
(Address of principal executive offices)	(Zip Code)

[phone]

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $1.667 per share	TOWN	The Nasdaq Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes [X]No [ ]

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

[ ]

No [ ]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer ý	Accelerated filer o
Non-accelerated filer o	Smaller reporting company o
	Emerging growth company o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes [ ]

No [X]

The number of shares of the Company's common stock outstanding as of April 29, 2024, was 75,000,686 shares.

Item 1.

Item 2.

Item 3. Item 4.

__________________________

TABLE OF CONTENTS

Part I. Financial Information

Financial Statements
Glossary of Acronyms and Defined Terms	3
Consolidated Balance Sheets	5
March 31, 2024 (unaudited)
December 31, 2023 (audited)
Consolidated Statements of Income	6
Three Months Ended March 31, 2024 (unaudited)
Three Months Ended March 31, 2023 (unaudited)
Consolidated Statements of Comprehensive Income (Loss)	7
Three Months Ended March 31, 2024 (unaudited)
Three Months Ended March 31, 2023 (unaudited)
Consolidated Statements of Cash Flows	8
Three Months Ended March 31, 2024 (unaudited)
Three Months Ended March 31, 2023 (unaudited)
Consolidated Statements of Equity	9
Three Months Ended March 31, 2024 (unaudited)
Three Months Ended March 31, 2023 (unaudited)
Notes to Consolidated Financial Statements (unaudited)	10
Management's Discussion and Analysis of Financial Condition and Results of
Operations	48
Quantitative and Qualitative Disclosures About Market Risk	72
Controls and Procedures	74

Part II. Other Information

Item 1.	Legal Proceedings	75
Item 1A.	Risk Factors	75
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	75
Item 3.	Defaults Upon Senior Securities	75
Item 4.	Mine Safety Disclosures	75
Item 5.	Other Information	75
Item 6.	Exhibits	75

GLOSSARY OF ACRONYMS AND DEFINED TERMS

As used in this report, the terms "Company," "we," "us," and "our" refer to TowneBank and our consolidated subsidiaries. The following acronyms and defined terms are used in various sections of this Form 10-Q, including the Notes to Consolidated Financial Statements in Item 1 and Management's Discussion and Analysis of Financial Condition and Results of Operations in Item 2 of this Form 10-Q.

ACL	Allowance for Credit Loss
AFS	Available-for-Sale
ALCO	Asset/Liability Management Committee
AOCI	Accumulated Other Comprehensive Income (Loss)
ASC	Accounting Standard Codification
ASU	Accounting Standards Update
Basel III	Basel Committee on Banking Supervision's Capital Guidelines for U.S. Banks
BHHS	Berkshire Hathaway HomeServices
BOLI	Bank-Owned Life Insurance
bp	Basis Points
CDA	Collateral-Dependent Asset
CRE	Commercial Real Estate
EAD	Exposure at Default
ECL	Expected Credit Loss
EPS	Earnings Per Share
Farmers	Farmers Bankshares, Inc.
Farmers Bank	Farmers Bank, Windsor, Virginia
FDIC	Federal Deposit Insurance Corporation
Federal Reserve	Board of Governors of the Federal Reserve System
FHLB	Federal Home Loan Bank of Atlanta
FRB - Richmond	Federal Reserve Bank of Richmond
GAAP	Accounting Principles Generally Accepted in the United States of America
GNMA	Government National Mortgage Association
GSE	Government Sponsored Enterprise
HELOC	Residential Home Equity Lines of Credit
HTM	Held-to-Maturity
LIHTC	Low Income Housing Tax Credits
MBS	Mortgage-backed Security
N/M	Not Meaningful
OCI	Other Comprehensive Income
OREO	Other Real Estate Owned
PCD	Purchased Credit Deteriorated
PD	Probability of Default
REPO	Retail Repurchase Agreement
SCC	Virginia State Corporation Commission
SEC	Securities and Exchange Commission
SERP	Supplemental Executive Retirement Plan

3

SOFR	Secured Overnight Financing Rate
TBA	To Be Announced
TE	Taxable Equivalent
U.S.	United States
VIE	Variable Interest Entity

4

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED BALANCE SHEETS

		March 31,			December 31,
(Dollars in thousands)		2024			2023
		(unaudited)			(audited)
ASSETS
Cash and due from banks	$	75,802	$	85,584
Interest-bearing deposits at FRB - Richmond		926,635			939,356
Federal funds sold and interest-bearing deposits in financial institutions		98,673			103,417
Total Cash and Cash Equivalents		1,101,110			1,128,357
Securities available for sale, at fair value (amortized cost of $2,376,323 and $2,292,963, and allowance		2,204,101			2,129,342
for credit losses of $1,382 and $1,498 at March 31, 2024 and December 31, 2023, respectively)
Securities held to maturity, at amortized cost (fair value $298,513 and $462,656 at March 31, 2024 and		312,510			477,592
December 31, 2023, respectively)
Less: Allowance for credit losses		(82)			(84)
Securities held to maturity, net of allowance for credit losses		312,428			477,508
Other equity securities		13,661			13,792
FHLB stock		12,139			21,372
Total Securities		2,542,329			2,642,014
Mortgage loans held for sale		150,727			149,987
Loans, net of unearned income and deferred costs		11,452,343			11,329,021
Less: Allowance for credit losses on loans		(125,835)			(126,461)
Net Loans		11,326,508			11,202,560
Premises and equipment, net		342,569			337,598
Goodwill		457,619			456,335
Other intangible assets, net		68,758			64,634
BOLI		279,293			277,445
Other assets		615,324			576,109
TOTAL ASSETS	$	16,884,237		$	16,835,039
LIABILITIES AND EQUITY
Deposits:
Noninterest-bearing demand	$	4,194,132	$	4,342,701
Interest-bearing:
Demand and money market accounts		6,916,701			6,757,619
Savings		326,179			336,492
Certificates of deposit		2,689,062			2,456,394
Total Deposits		14,126,074			13,893,206
Advances from the FHLB		3,775			203,958
Subordinated debt, net		256,011			255,796
Repurchase agreements and other borrowings		31,198			32,826
Total Borrowings		290,984			492,580
Other liabilities		401,307			393,375
TOTAL LIABILITIES		14,818,365			14,779,161
Preferred stock:
Authorized and unissued shares - 2,000,000		-			-
Common stock, $1.667 par value : 150,000,000 shares; authorized 74,990,437 and 74,893,462
shares issued at March 31, 2024 and December 31, 2023, respectively		125,009			124,847
Capital surplus		1,114,038			1,112,761
Retained earnings		937,065			921,126
Common stock issued to deferred compensation trust, at cost; 1,008,276 and 1,004,717 shares at
March 31, 2024 and December 31, 2023, respectively		(20,915)			(20,813)
Deferred compensation trust		20,915			20,813
Accumulated other comprehensive income (loss)		(126,586)			(118,762)
TOTAL SHAREHOLDERS' EQUITY		2,049,526			2,039,972
Noncontrolling interest		16,346			15,906
TOTAL EQUITY		2,065,872			2,055,878
TOTAL LIABILITIES AND EQUITY	$	16,884,237		$	16,835,039

The accompanying notes are an integral part of these financial statements.

5

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF INCOME (unaudited)

		Three Months Ended
		March 31,
(Dollars in thousands, except per share data)		2024			2023
INTEREST INCOME:
Loans, including fees	$	150,974	$	132,768
Investment securities		19,996			18,375
Interest-bearing deposits in financial institutions and federal funds sold		14,234			10,649
Mortgage loans held for sale		1,716			1,604
Total interest income		186,920			163,396
INTEREST EXPENSE:
Deposits		78,388			33,934
Advances from the FHLB		2,438			2,992
Subordinated debt, net		2,236			2,169
Repurchase agreements and other borrowings		640			923
Total interest expense		83,702			40,018
Net interest income		103,218			123,378
PROVISION FOR CREDIT LOSSES		(877)			11,670
Net interest income after provision for credit losses		104,095			111,708
NONINTEREST INCOME:
Residential mortgage banking income, net		10,477			9,372
Insurance commissions and other income, net		25,539			22,823
Property management income, net		16,773			15,535
Real estate brokerage income, net		-			1,791
Service charges on deposit accounts		3,061			2,851
Credit card merchant fees, net		1,551			1,545
BOLI		1,842			1,672
Other income		4,567			5,177
Net gain (loss) on investment securities		74			-
Total noninterest income		63,884			60,766
NONINTEREST EXPENSE:
Salaries and employee benefits		71,377			69,420
Occupancy		9,422			9,064
Furniture and equipment		4,478			4,244
Amortization - intangibles		3,246			3,524
Software		6,100			5,624
Data processing		3,916			3,353
Professional fees		3,180			3,011
Advertising and marketing		4,582			4,401
Other expenses		19,290			21,756
Total noninterest expense		125,591			124,397
Income before income tax expense and noncontrolling interest		42,388			48,077
Provision for income tax expense		7,261			9,599
Net income	$	35,127		$	38,478
Net income attributable to noncontrolling interest		(440)			(145)
Net income attributable to TowneBank	$	34,687		$	38,333
Per common share information
Basic earnings	$	0.46	$	0.52
Diluted earnings	$	0.46	$	0.52

The accompanying notes are an integral part of these financial statements.

6

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)

		Three Months Ended
		March 31,
(Dollars in thousands)		2024			2023
Net income	$	35,127	$	38,478
Other comprehensive income (loss)
Unrealized gains (losses) on securities
Unrealized holding gains (losses) arising during the period		(8,643)			25,341
Tax effect		1,882			(5,608)
Realized (gains) losses reclassified into earnings		(74)			-
Tax effect		16			-
Net unrealized gains (losses)		(6,819)			19,733
Pension and postretirement benefit plans
Prior service costs		-			(330)
Tax effect		-			73
Actuarial gain (loss)		(907)			28
Tax effect		198			(6)
Amortization of prior service costs		165			208
Tax effect		(36)			(46)
Amortization of net actuarial (gain) loss		(543)			(581)
Tax effect		118			129
Change in retirement plans, net of tax		(1,005)			(525)
Other comprehensive income (loss), net of tax		(7,824)			19,208
Comprehensive income (loss)	$	27,303	$	57,686
Comprehensive income attributable to noncontrolling interest
	(440)			(145)
Comprehensive income (loss) attributable to TowneBank	$	26,863	$	57,541

The accompanying notes are an integral part of these financial statements.

7

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

		Three Months Ended
(Dollars in thousands)		March 31,
OPERATING ACTIVITIES:		2024			2023
Net income	$	35,127		$	38,478
Adjustments to reconcile net income to net cash used for operating activities:
Net amortization of securities		2,375			1,757
Investment securities gains		(74)			-
Depreciation, amortization, and other intangible amortization		8,717			8,411
Amortization of debt issuance costs		155			155
Provision for credit losses		(877)			11,670
BOLI		(1,842)			(1,672)
Deferred income tax expense		313			351
Share-based compensation expense		1,853			5,216
Originations of mortgage loans held for sale		(427,193)			(417,696)
Proceeds from sales of mortgage loans held for sale		439,942			374,979
Gain on sales of mortgage loans held for sale		(13,489)			(12,105)
Loss on sale and write-down of foreclosed assets		-			76
Changes in:
Interest receivable		(853)			(1,894)
Other assets		(3,072)			7,245
Interest payable		1,485			2,916
Other liabilities		(4,000)			(38,735)
Net cash from (used for) operating activities		38,567			(20,848)
INVESTING ACTIVITIES:
Purchase of available-for-sale securities		(187,430)			-
Purchase of other securities		-			(321)
Sale of available-for-sale securities		48,688			-
Net change in FHLB stock		9,233			(20,220)
Proceeds from maturities, calls, and prepayments of available-for-sale securities		53,108			23,829
Proceeds from maturities, calls, and prepayments of held-to-maturity securities		165,056			175
Proceeds from maturities, calls, and prepayments of other securities		132			-
Net increase in loans		(125,260)			(104,734)
Net change in investment in LIHTC		(23,071)			(21,296)
Purchase of premises and equipment		(10,404)			(12,992)
Proceeds from sales of premises and equipment		370			277
Proceeds from sales of foreclosed assets		1,546			1,032
Investment from noncontrolling interest in consolidated joint ventures		-			276
Acquisition of business, net of cash acquired		(10,075)			17,776
Net cash used for investing activities		(78,107)			(116,198)
FINANCING ACTIVITIES:
Net change in deposit accounts		232,868			(210,664)
Net change in short-term borrowings		(201,628)			454,464
Repayment of long-term borrowings		(183)			(235)
Purchase of noncontrolling interest		-			(13)
Cash dividends paid		(18,764)			(16,798)
Net cash from financing activities		12,293			226,754
Change in cash and cash equivalents		(27,247)			89,708
Cash and cash equivalents at beginning of year		1,128,357			1,152,830
Cash and cash equivalents at end of period	$	1,101,110		$	1,242,538
Supplemental cash flow information:
Cash paid for interest	$	82,217	$	37,102
Cash paid for income taxes	$	(581)	$	461
Noncash financing and investing activities:
Transfer from loans to foreclosed property	$	1,418	$	947
Net unrealized gains (losses) on available-for-sale securities, net of tax	$	(6,819)	$	19,733
Common stock issued in connection with business acquisitions	$	-	$	59,604

The accompanying notes are an integral part of these financial statements.

8

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONSOLIDATED STATEMENT OF EQUITY

																	Common Stock			Accumulated
															Deferred			Issued to					Non-
(Dollars in thousands, except per share	Common			Common				Capital			Retained					Deferred			Other
								Compensation		Compensation		Comprehensive		controlling			Total
data)	Shares				Stock				Surplus			Earnings			Trust			Trust		Income (Loss)			Interests
Balance, January 1, 2024	74,893,462	$	124,847	$	1,112,761	$	921,126	$	20,813	$	(20,813)	$	(118,762)	$	15,906	$	2,055,878
Net income	-				-				-			34,687			-			-			-			440			35,127
Other comprehensive income (loss), net of	-				-				-			-			-			-			(7,824)			-			(7,824)
taxes
Cash dividends declared on common stock	-				-				-			(18,748)			-			-			-			-			(18,748)
($0.25 per share)
Directors' deferred compensation	-				-				-			-			102			(102)			-			-			-
Issuance of common stock - stock	96,975				162				1,277			-			-			-			-			-			1,439
compensation plans
Balance, March 31, 2024	74,990,437	$	125,009	$	1,114,038	$	937,065	$	20,915	$	(20,915)	$	(126,586)	$	16,346	$	2,065,872
																	Common Stock			Accumulated
															Deferred			Issued to					Non-
(Dollars in thousands, except per share	Common				Common				Capital			Retained					Deferred			Other
									Compensation		Compensation		Comprehensive		controlling			Total
data)	Shares				Stock				Surplus			Earnings			Trust			Trust			Loss			Interests
Balance, January 1, 2023	72,841,379	$	121,426	$	1,052,262	$	840,777	$	18,974	$	(18,974)	$	(140,505)	$	14,797	$	1,888,757
Net income	-				-				-			38,333			-			-			-			145			38,478
Other comprehensive income (loss), net of	-				-				-			-			-			-			19,208			-			19,208
taxes
Cash dividends declared on common stock	-				-				-			(17,205)			-			-			-			-			(17,205)
($0.23 per share)
Investment of noncontrolling interest in	-				-				-			-			-			-			-			276			276
consolidated joint ventures
Directors' deferred compensation	-				-				-			-			(135)			135			-			-			-
Issuance of common stock - acquisitions	1,897,019				3,162				56,442			-			-			-			-			-			59,604
Issuance of common stock - stock	66,033				94				696			-			-			-			-			-			790
compensation plans
Purchase of noncontrolling interest	-				-				(13)			-			-			-			-			-			(13)
Balance, March 31, 2023	74,804,431	$	124,682	$	1,109,387	$	861,905	$	18,839	$	(18,839)	$	(121,297)	$	15,218	$	1,989,895

The accompanying notes are an integral part of these financial statements.

9

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Basis of Presentation

The accompanying unaudited Consolidated Financial Statements of TowneBank have been prepared in accordance with the instructions to Form 10-Q and, therefore, do not include all of the disclosures and notes necessary for a complete presentation of financial position, results of operations, and cash flow activity required in accordance with GAAP. In the opinion of management, the financial statements reflect all adjustments of a normal, recurring nature that are necessary for a fair presentation for the periods presented as required by Regulation S-X, Rule 10-01, of the SEC. These statements should be read in conjunction with the Company's 2023 audited Consolidated Financial Statements and the 2023 Annual Report on Form 10-K. Results of operations for the three-month period ended March 31, 2024, are not necessarily indicative of the results of operations for the full year or any other interim periods.

Recent accounting pronouncements:

Accounting standards adopted in current year

Standard	Summary of guidance	Effects on financial statements
Topic 323 - Investments - Equity	Permits reporting entities to elect to	Effective for periods beginning after
Method and Joint Ventures -	account for their tax equity	December 15, 2023, including interim
Accounting for Investments in Tax	investments, regardless of the tax	periods within those fiscal years.
Credit Structures Using the	credit program from which the income
Proportional Amortization Method	tax credits are received, using the	The adoption of this pronouncement
ASU 2023-02	proportional amortization method if	did not have a material impact on the
certain conditions are met.	Company's Consolidated Financial
Issued March 2023		Statements.
Topic 842 - Leases, Common	Requires entities to classify and	Effective for periods beginning after
Control Arrangements	account for leases with related parties	December 15, 2023, including interim
ASU 2023-01	on the basis of legally enforceable	periods within those fiscal years.
terms and conditions of the
Issued March 2023	arrangement.	The adoption of this pronouncement
		did not have a material impact on the
		Company's Consolidated Financial
		Statements.

10