KBRA Affirms Ratings for TowneBank

KBRA affirms the deposit and senior unsecured debt ratings of A-, the subordinated debt rating of BBB+, and the short-term deposit and debt ratings of K2 for Portsmouth, Virginia-based TowneBank (NASDAQ: TOWN, "the bank"). The Outlook for all long-term ratings is Stable.

Key Credit Considerations

The ratings reflect TOWN’s high-quality banking franchise, underpinned by its longstanding market presence, experienced management team, and conservative, relationship-driven business model that emphasizes sustainable profitability and prudent risk management. TOWN also holds strong competitive positions across several key growth markets, further enhanced by recent wholebank acquisitions. These market share positions reflect the strength of TOWN’s franchise and support its ability to generate and retain core deposits across both established and expansion markets. TOWN maintains its leading deposit franchise in its legacy Hampton Roads market, ranking first with an approximate 34% market share. TOWN’s funding profile, which is supported by a strong core deposit franchise, with noninterest-bearing deposits representing approximately 30% of total deposits is a rating strength.

Over the past year, TOWN completed three strategic bank acquisitions, collectively adding approximately $3.8 billion in assets: Village Bank expanded its Richmond market footprint, Old Point Financial enhanced scale in the legacy Hampton Roads market and expanded trust services, and Dogwood State Bank significantly broadened TOWN's presence across the Carolinas. In our view, TOWN has demonstrated a strong track record of successfully integrating both bank and non-bank acquisitions. While TOWN was notably acquisitive over the past year, we expect management’s primary focus going forward to return to organic growth initiatives.

The ratings are further supported by TOWN’s consistent earnings performance (ROA between 0.9% - 1.0%) in each of the last three years, supported by a comparatively sizable, diversified and resilient fee revenue stream, with noninterest income accounting for +30% of total revenues which compares favorably with peers. Against a favorable backdrop, we remain constructive on TOWN’s earnings performance outlook, supported by expected mid-single-digit loan growth, continued NIM expansion and the benefits from recent acquisitions. These factors should support sustained profitability that compares favorably with similarly rated peers.

Superior and consistent asset quality remains a hallmark of TOWN’s franchise, as demonstrated by minimal NCOs and low credit costs throughout the bank's history. This performance reflects TOWN's disciplined underwriting standards and private banking-focused business model, which emphasizes long-standing relationships with high-net-worth clients and sponsor-backed borrowers. Asset quality is further supported by a well-diversified and granular loan portfolio, proactive risk management, and robust credit administration practices. The SBA portfolio acquired through the Dogwood acquisition is not expected to be a meaningful driver of future loan growth. Consistent with this view, we expect TOWN’s overall credit costs to remain low, supported by TOWN’s strong credit culture.

As good stewards of capital, TOWN has historically maintained a CET1 ratio above 12%, consistent with similarly rated peers. Following the three acquisitions completed within the past year, capital levels moderated to approximately 11.4%. However, stronger earnings, increased scale, and anticipated operating synergies are expected to support capital generation, with management targeting a return to historical capital levels within a reasonable timeframe. On April 3, 2026 , TOWN completed the sale of its Resort Property Management segment for $250 million, generating an estimated gain of ~ $195 million after deal-related costs. Subsequently, on April 23, 2026, TOWN announced a special dividend totaling roughly $65 million, representing about 33% of the estimated $195 million gain. Capital has also benefited from this sale which further strengthened capital levels.

Rating Sensitivities

Sustained strong profitability relative to rated peers, coupled with a rebuild of capital toward historical levels in the 12.5%–13.0% range, could support positive rating momentum driven by increased scale from recent acquisitions, anticipated operating synergies, solid underlying fundamentals, continued low credit costs, and the comparatively large, diversified, and resilient fee revenue stream. Meaningful earnings deterioration relative to peers, particularly if driven by elevated reserve builds resulting from unexpected credit weakening, or a deviation from the historically conservative capital management practices, could result in negative rating pressure.

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