TWNE Towne Bancorp Inc (CE)

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