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 Stable.

Key Credit Considerations

The ratings are anchored by a highly diverse earnings profile, underpinned by differentiated fee revenue streams with noninterest income historically generating 40%-50% of total revenues, which, in KBRA's view, affords the bank greater discretion to maintain a more conservative lending risk appetite. Moreover, successful integration of both bank and non-bank acquisitions over recent years has further enhanced its already prominent insurance and property management business scale, meaningfully offsetting muted mortgage banking income and promoting improved cost efficiencies over time. The bank’s substantial fee income contribution, with a greater proportion derived from activities uncorrelated to lending, have served to partly counterbalance NIM compression that has been slightly more pronounced than many peers in recent periods. The latter has been attributable to elevation in deposit costs largely within the bank’s non-legacy markets, together with a loan portfolio that contains a greater composition of fixed rate structures. However, a large composition of CDs (18% of total deposits) are scheduled to mature in the coming quarters, suggesting that deposit costs may be nearing a peak given tempered loan growth expectations. The funding profile is solid, reinforced by a low loan-to-deposit ratio (81% at 1Q24) that provides a greater degree of balance sheet flexibility, and historically limited reliance on noncore funding. TOWN also holds a defensible retail deposit base, reflecting dominant market shares in its heritage VA markets, a comparatively strong NIB deposit component (30% of total deposits at 1Q24), and granular relationships. While uninsured/uncollateralized deposit (41% of total deposits at 1Q24) tracked slightly higher than many peers, it is adequately mitigated by sufficient liquidity coverage (104%), including meaningful on-balance sheet resources. Credit quality has been strong with the NPA ratio and classified loan measures continuing to track better than most peers. Although partly attributable to a benign credit environment, solid credit performance has been underpinned by disciplined underwriting and relatively conservative concentration limits, particularly in investor office CRE (<7% of loans), as well as a market footprint anchored in industries that we view as more economically stable. Capital measures, both risk-weighted and non-risk-weighted, have been conservatively managed, particularly following acquisitions. The respectable expansions in the CET1 (12.2% at 1Q24) and TCE (9.3%) ratios over the year-ago period reflect disciplined loan growth and manageable shareholder distributions, both of which we expect to be sustained throughout 2024.

Rating Sensitivities

Sustaining better than peer through-the-cycle asset quality and earnings measures (including similar noninterest income to total revenue mix), while managing the CET1 ratio at or above 12% could lead to positive rating momentum over the medium term. Conversely, significant deterioration in asset quality, substantial and persistent earnings contraction, or a meaningful decline in the CET1 ratio, especially in conjunction with material RWA density growth, could pressure the ratings.

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