West Town Bancorp, Inc. (WTWB) Announces Third Quarter 2016 Financial Results

RALEIGH, N.C., Nov. 10, 2016 /PRNewswire/ -- West Town Bancorp, Inc. (the "Company"), the holding company for West Town Bank & Trust (the "Bank"), announced today its financial results for the quarter ended September 30, 2016 and reported the Company earned net income of $837,000, or $0.58 per diluted common share, a decrease of $183,000, or 18%, as compared to financial results reported for the Bank for the quarter ended September 30, 2015.  Return on average total assets was 1.33% and return on average shareholder's equity was 12.71% for the quarter ended September 30, 2016 as compared to 2.05% and 18.07% respectively for the third quarter of 2015.  In comparison to the linked quarter ended June 30, 2016, net income increased $125,000, or 17.6%. 

Select financial highlights for 3Q 2016:

• Increase in net interest income of $704,000 or 38.4% as compared to third quarter 2015.
• Increase in net loans held for investment of $22,165,000 or 14.6% as compared to September 30, 2015.
• Increase in total deposits of $33,576,000 or 20.3% as compared to September 30, 2015.
• Total nonperforming assets ("NPAs") to total assets decreased 50 basis points from 1.76% at September 30, 2015 to 1.26% at September 30, 2016. NPAs decreased 26 basis points from 1.52% at June 30, 2016.
• The Bank's Allowance for Loan and Lease Losses ("ALLL") to loans held for investment increased 8 basis points to 1.25% as of September 30, 2016 from 1.17% one year earlier.

The Company earned $2,337,000 for the nine months ended September 30, 2016, a $698,000 or 23.0% decrease when compared to the $3,035,000 earned for the same period last year.  Return on average total assets was 1.34% and return on average shareholder's equity was 12.38% for the nine-month period as compared to 2.08% and 18.63% respectively for the nine-month period ending September 30, 2015.  Financial results for 2016 have been negatively impacted by various one-time, nonrecurring costs including $235,000 conversion costs for changing core processing systems taken in the second and third quarters, the $300,000 charge-offs taken on the sale of a legacy classified loan portfolio in the second quarter and the $139,000 tax adjustment taken in the first quarter.  Additionally, the Company has recorded over $200,000 in strategic advisory expenses during 2016. 

Eric Bergevin, President and CEO commented, "We are quite pleased with our strong balance sheet growth year over year and the resulting increase in our net interest income.  While admittedly our financial performance has been dampened by the non-recurring charges discussed above, the strategic initiatives surrounding many of these costs have strengthened our balance sheet and our operational and technology infrastructure, setting the stage for continued balance sheet growth."

STRONG LOAN AND DEPOSIT GROWTH
At September 30, 2016, the Company's total assets were $259,300,000, loans held for sale at $41,165,000, loans held for investment at $173,872,000, total deposits were $199,209,000 and total shareholder's equity was $26,629,000.  Compared with September 30, 2015, total assets increased $55,977,000 or 27.5%, loans held for sale increased $28,050,000 or 213.9%, loans held for investment increased $22,165,000 or 14.6%, total deposits increased $33,576,000 or 20.3% and total shareholder's equity increased $3,561,000 or 15.4%.

Total loan originations for the Bank across all sectors for the three months ended September 30, 2016 totaled $92,638,000, a decrease of 7% as compared to the same prior year three months of $99,560,000. The primary driver to the origination decrease was a 30% reduction in mortgage originations, mostly offset by a 166% increase in government lending originations. 

The Bank has made great strides in changing the mix of its total deposit portfolio during the last 12 months.  Interest checking deposits have increased $16,791,000 or 383.1%, total money market deposits have increased $18,676,000 or 101.0%, while retail CDs have decreased $18,108,000 or 16.1% year-over-year.  The Bank raised $20,525,000 in new brokered CDs during the third quarter of 2016 to lock in longer-term funding to fund the increased governmental lending pipeline. 

CAPITAL LEVELS
West Town Bank & Trust continued to exceed "well capitalized" requirements for each of the four primary capital levels monitored by state and federal regulators:

The book value per common share increased from $17.09 at September 30, 2015 and $17.69 at December 31, 2015 to $19.35 at September 30, 2016.

ASSET QUALITY
The Bank's nonperforming assets to total assets ratio decreased 26 basis points during the third quarter of 2016 from 1.52% at June 30, 2016 to 1.26% at September 30, 2016.  In comparison to December 31, 2015, the Bank's nonperforming assets to total assets ratio decreased 76 basis points from 2.02%. 

The Company recorded a $225,000 provision for loan losses during the third quarter of 2016, as compared to a provision of $188,000 during the same period last year.  The ratio of allowance for loan and lease losses as a percentage of total loans held for investment increased from 1.17% at September 30, 2015 to 1.25% at September 30, 2016.  Total reserves represented 91% of the non-accrual loan balances as of September 30, 2016 as compared to 55% reported a year earlier.

NET INTEREST INCOME IMPROVES YEAR OVER YEAR
Net interest income for the three months ended September 30, 2016 was $2,536,000, an increase of $704,000 or 38.4% as compared to $1,832,000 reported for the same prior year period. The increase was fueled by an $815,000 or 35.8% increase in interest and fee income earned on the Bank's loan portfolio.  The growth in the bank's loan portfolio accounted for 82% of the increase while increased yields on the portfolio accounted for the remaining 18%.  The Company's net interest margin was 4.39%, up 30 basis points as compared to the 4.09% reported for the third quarter of 2015. 

For the nine-month period ended September 30, 2016, net interest income was $6,978,000, an increase of $1,341,000 or 23.8% as compared to the $5,637,000 reported for the same prior year period.  The increase was attributable to a $1,588,000 increase in interest and fee income earned on the Bank's loan portfolio.  In comparison to the nine month period ended September 30, 2015, the Company's yield on loans increased by 17 basis points, resulting in a net interest margin increase of 8 basis points from 4.26% to 4.34%.

NONINTEREST INCOME
Noninterest income for the three months ended September 30, 2016 was $4,251,000, a decrease of $854,000 or 16.7% as compared to the same prior year period.  The reduction was driven by a decrease in mortgage revenue of $1,184,000 which was partially offset by an increase in gains on the sale of government guaranteed loans of $122,000.  Additionally, the fair value adjustment on loan servicing rights totaled $382,000, an increase of $156,000 or 69.0% from the prior year period. 

For the nine-month period ended September 30, 2016, noninterest income declined $5,121,000 or 29.1% to $12,476,000, driven by a $6,454,000 or 49.0% reduction in mortgage revenue.  Gains on the sale of government guaranteed loans have increased by $856,000 or 27.9% during this same time period while the fair value adjustment on loan servicing rights increased $290,000 or 36.3%.

NONINTEREST EXPENSE
Noninterest expense for the three months ended September 30, 2016 totaled $5,161,000, an increase of $125,000 or 2.5% as compared to the same prior year period.  Reductions in compensation expense of $109,000, loan expense of $105,000 and advertising expense of $128,000 all due to reduced mortgage originations were offset by increases in professional fees of $238,000 and other expenses of $232,000.  The increase in professional fees were driven by litigation and strategic advisory expenses while the increase in other expenses were mainly driven by additional core conversion costs of $75,000 and OREO impairment expense of $120,000.

For the nine-month period ended September 30, 2016, noninterest expense totaled $14,657,000, a decrease of $3,090,000 or 17.4% as compared to $17,747,000 reported for the same prior year period.  The decrease is driven by a $2,861,000 or 24.6% reduction in compensation expense, an $873,000 or 43.0% reduction in loan expenses, and a $235,000 or 32.8% decrease in advertising expenses, all related to the reduction in mortgage originations and mortgage operations.   Offsetting these expense reductions are increases of professional fees totaling $658,000 and increased data service expense (related to core conversion) of $227,000.

SUMMARY OF MATERIAL LITIGATION
The Company currently has two litigation matters that are pending and for which there have been material developments:

Fangman, et al., v. Genuine Title, LLC, et al., Civil Action No. 14-cv-0081
On January 5, 2015, a group of plaintiffs filed a class action lawsuit against the Bank and approximately 18 other defendants, alleging that Genuine Title LLC, with the assistance and cooperation of three other defendants engaged in a course of conduct pursuant to which Genuine Title provided free marketing material and cash to loan officers at various banks and mortgage companies in exchange for the referral of settlement services.  The lawsuit is styled Fangman, et al., v. Genuine Title, LLC, et al., Civil Action No. 14-cv-00081, and is pending in the United States District Court for the District of Maryland.  Based on the alleged conduct, plaintiffs accuse the lender defendants, including West Town Bank & Trust, of violating Sections 8(a) and 8(b) of the Real Estate Settlement Procedures Act, 12 U.S.C. § 2607 ("RESPA").  Plaintiffs claim that they and the class they seek to represent are entitled to damages equal to three times the charges they paid for settlement services.  On average, a borrower paid approximately $1,800 in settlement services to Genuine Title (not including the underwriter's portion of the title insurance premium).  In addition to alleging violations of RESPA, plaintiffs also asserted claims for violations of the Maryland state analog to RESPA and the Maryland Consumer Protection Act, but those claims have been dismissed with prejudice.

The parties have been engaged in discovery since December 2015.  On July 11, 2016, the named plaintiffs moved for class certification, asking the court to certify a class of all borrowers of West Town Bank & Trust who received and paid for settlement services provided by Genuine Title between January 1, 2009 and December 31, 2014.  Through its investigation, the Bank identified approximately 269 borrowers who meet this definition.  On September 5, 2016, the Bank moved for summary judgment on the RESPA claim asserted by one of the two sets of named plaintiffs, and on September 12, 2016, the Bank filed its opposition to class certification.  Both plaintiffs' motion for class certification and the Bank's motion for summary judgment are fully briefed.  The court heard argument on plaintiffs' motion for class certification on October 26, 2016.  On November 8, 2016, the court granted plaintiffs' motion and certified a class on the RESPA claims.  West Town Bank & Trust vigorously disputes that the named plaintiffs' RESPA claims are appropriate for class treatment and intends to request the right to appeal the decision certifying the class to the United States Court of Appeals for the Fourth Circuit ("Fourth Circuit").  That request is due fourteen (14) days after entry of the order certifying the class, and West Town anticipates receiving a decision on the request sometime in late December 2016 or January 2017.

The ultimate outcome is unknown at this time and a reasonably possible loss cannot be estimated.  However, applying the same settlement terms to the Bank as those agreed to by the majority of the other lenders in this case who have reached class-wide settlements would result in a potential class settlement in the amount of approximately $1.1 million (inclusive of attorney's fees and settlement administration costs).  However, if West Town Bank & Trust is granted the right to appeal and convinces the Fourth Circuit to reverse class certification, the value of this case is potentially reduced to the named plaintiffs' individual claims, which are no more than $11,000 in the aggregate, plus attorney's fees.

Solomon Hess, LLC v West Town Bank & Trust, Civil Action No.  16-cv-04851
On May 2, 2016, Solomon Hess, LLC filed a civil lawsuit raising two breach of contract and two tort claims against West Town Bank & Trust.  Solomon Hess alleges that it paid nearly $600,000 to purchase the SBA-guaranteed portion of a $5,000,000 SBA 7a loan in the secondary loan market.  The lawsuit is styled Solomon Hess, LLC v West Town Bank & Trust, Civil Action No. 16-cv-04851, and is pending in the United States District Court for the Northern District of Illinois.  In its complaint, the plaintiff alleges the Bank knew or reasonably should have known that the SBA borrowers were likely to default on their loan and seeks to recover the premium it paid to the Bank, the fees it paid to the SBA, the fees it paid to the secondary loan broker and its costs and attorney's fees.  West Town Bank & Trust moved to dismiss the complaint raising a number of arguments, including failure of parties determined to resolve their dispute.  Under industry practice in the secondary loan market, a lender typically restores the premium it received (which is typically less SBA and broker fee and in this case approximately $481,500) when there is a payment default within the first 90 days after the loan is closed.  Although the SBA borrowers in this case had a payment default significantly more than 90 days after the loan was made, the parties still decided to resolve the litigation with the Bank through a settlement whereby West Town Bank & Trust will restore a portion of the premium Solomon Hess paid for the SBA-guaranteed portion of the loan.  The parties presently are in the process of memorializing their agreement but it is anticipated that a portion of the net premium received by the Bank will be returned through multiple loan sales/settlements with Solomon Hess at a discounted or no premium being paid for the loans and expected to be completed within the next year.  The court will retain jurisdiction over the case to enforce the terms of the settlement once it is memorialized.

About West Town Bancorp, Inc.
West Town Bancorp, Inc. is the holding company for West Town Bank & Trust, a North Riverside, IL based state-chartered bank. The Bank provides banking services through its offices in Illinois and North Carolina and also maintains loan production offices in North Carolina, New York, Maryland, Pennsylvania, Florida, Idaho and New Jersey. Its primary deposit products are checking, savings, and time certificate accounts, and its primary lending products are residential mortgage, commercial, and installment loans. Additionally, the Bank engages in mortgage banking activities and, as such, originates and sells one-to-four family residential mortgage loans in multiple states. The Bank's primary regulator is the Illinois Department of Financial and Professional Regulation and FDIC.

For more information, visit www.westtownbank.com.

This release contains certain forward-looking statements with respect to the financial condition, results of operations and business of the Company. These forward-looking statements involve risks and uncertainties and are based on the beliefs and assumptions of management of the Company and on the information available to management at the time that these disclosures were prepared. These statements can be identified by the use of words like "expect," "anticipate," "estimate" and "believe," variations of these words and other similar expressions. Readers should not place undue reliance on forward-looking statements as a number of important factors could cause actual results to differ materially from those in the forward-looking statements. Factors that could cause a difference include, among others: changes in the national and local economies or market conditions; the outcome of ongoing litigation, including any potential settlement or appeal; changes in interest rates, deposit flows, loan demand and asset quality, including real estate and other collateral values; changes in banking regulations and accounting principles, policies or guidelines; and the impact of competition from traditional or new sources. These and other factors that may emerge could cause decisions and actual results to differ materially from current expectations. The Company assumes no obligation to revise, update, or clarify forward looking statements to reflect events or conditions after the date of this release. 

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SOURCE West Town Bancorp, Inc.

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