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 are supported by stable operating performance and a sustainable, diversified, and resilient earnings base. A key distinguishing factor is the bank’s robust and well-diversified revenue profile, driven by substantial noninterest income. Historically, this component has comprised 35%–40% of total revenues, (roughly 1.8% of average assets), with a mix of insurance income (39% of total noninterest income), property management fees (20%), and mortgage banking (19%) representing the largest contributors. In KBRA’s view, this revenue composition provides the bank with increased flexibility to maintain a conservative risk posture in its lending activities. Additionally, TOWN has demonstrated a strong track record of successfully integrating both bank and non-bank acquisitions. These efforts have meaningfully expanded its already significant insurance and property management platforms, helping to offset subdued mortgage banking income and driving improvements in operational efficiency over time.

TOWN’s NIM expanded meaningfully in 1Q25, reaching 3.09%, a 40 bp increase over the same quarter in the prior year. This improvement was driven by a combination of favorable deposit repricing following the 100 bp rate cut last year, along with stable loan yield. In 1Q25, the cost of deposits declined by 36 bps on a sequential basis, outpacing the more modest 3 bp decrease in average loan yields. Additionally, the expansion in NIM has been supported by the short-duration securities portfolio, which has seen yields steadily rise from 2.64% in 2023 to 3.09% in 2024, and further to 3.20% in 1Q25. Over the past three years, profitability metrics have generally trailed those of rated peers; however, the most recent ROA of 1.18% as of 1Q25 improving from 0.94% in 2024 is now closely in line with peer averages. The bank maintains a strong funding profile, supported by a conservative loan-to-deposit ratio of 80% as of 1Q25, which enhances overall balance sheet flexibility. A key strength lies in TOWN’s defensible and granular retail deposit base, underpinned by leading market share positions in its legacy Virginia markets. The bank also benefits from a healthy level of NIB deposits, which accounted for 30% of total deposits in 1Q25.

TOWN’s hallmark is its exceptional asset quality, driven by a disciplined underwriting approach and a private banking-focused operating model tailored to high-net-worth borrowers and sponsors with long-standing relationships. This strength is further supported by a well-diversified and granular loan portfolio, as well as proactive and robust credit administration practices. Despite the bank’s long track record of prudent capital management, the recent acquisitions are expected to meaningfully impact regulatory capital with proforma CET1 of ~ 11.0%. With that said, TOWN has historically managed capital rather consistently (CET1 ratio has generally ranged from 12% - 13%), and the bank expects to rebuild capital closer to historical levels with solid profitability trends.

Rating Sensitivities

The successful execution of its pending bank acquisition, to include the rebuild of capital post-merger towards rated peer levels along with sustained solid earnings, benefitting from continued low credit costs and outsized fee revenues could result in upward rating momentum. Meaningful sustained earnings weakness relative to peers pressured by higher reserve build related to unexpected asset quality deterioration, deviation from conservative capital management, and a shift away from measured growth could lead to reevaluation of ratings.

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