TWNE Towne Bancorp Inc (CE)

Towne Bancorp (OTCBB: TWNE), the holding company for Towne Bank of Arizona, today reported a net loss of ($3.347) million (MM) or ($2.06) per diluted share for the quarter ended March 31, 2009, compared to earnings of $7 thousand or $0.00 per diluted share for the quarter ended March 31, 2008. The loss was primarily attributed to deteriorations in the local economy necessitating additional provisions to the Allowance for Loan and Lease Losses (ALLL) which now totals 8.5% of total loans. Provision expense for the 1st quarter of 2009 was $2.0MM; and reversals previously accrued interest of $212 thousand for loans that were placed on non-accrual status. In addition, the Bank wrote down OREO by the amount of $501 thousand while incurring expenses of $206 thousand on the OREO portfolio.

Highlights for the 1st Quarter 2009

• Shareholder equity remains strong at $22.1 million and 17.9% risk-based capital or $13.61 per share.
• Loan Loss Reserves as a percentage of loans increased to 8.5%.
• Non-interest expenses decreased to $1.5 million for the quarter ended 3/31/09 compared to $1.9 million for the quarter ended December 31, 2008.
• Michael Morano joined the Bank as Chief Credit Officer

Consolidated capital levels continue to be robust by regulatory standards. Total risk-based capital is 17.9% as of 3/31/09 while 10% is the level required to be considered Well-Capitalized.

At March 31, 2009, total assets decreased to $142.8 million (or 5.5 %) from $150.6 million at year end 2008. This reduction in total assets is primarily due to the Bank�s determination to reduce its concentration of Commercial Real Estate loans (CRE) and brokered deposits used to fund those loans. Even though assets are declining the Bank continues to entertain quality loan opportunities to build lasting relationships and provide credit to our local community.

Net interest income was $635 thousand for the quarter ended March 31, 2009. During the quarter, the bank reversed $212 thousand of interest income, or 58 basis points of net interest margin. In addition, approximately $400 thousand in additional lost interest income is attributable to loans on non-accrual.

Non-interest expense declined to $1.5MM at March 31, 2009 compared to 1.9MM for the quarter ended December 31, 2008. Even with the expense reductions the total amount is higher than normal for a Bank our size, but nonetheless appropriate for one working to reduce a high level of non-performing assets. As these assets are disposed expense ratios should decline commensurately. In addition to costs associated with non-performing loans, all banks will be subject to a substantial increase in costs associated with FDIC insurance for the foreseeable future. The exact amount of the increase is yet to be determined but will have an impact on Towne Bank of Arizona as well as all other banks.

Economy

The six-month period between the end of the 3rd quarter of 2008 and the early second quarter of 2009 has seen the greatest disruption in valuations over the longest period of my nearly five decades in banking. The reductions in value have caused significant stress on the balance sheets of many banks across the U.S. but particularly in sun-belt states such as Arizona. As evidenced by this report, Towne Bank of Arizona has failed to escape the consequences of these declines.

In times like these bankers must fully understand and appropriately address the weaknesses in their portfolio and the economy in general. The first step in this process is to identify problem assets and to obtain reappraisals for those where a significant decline in value is suspected. This report reflects our systematic efforts to fairly value assets with current appraisals and to make adequate provisions for losses where necessary. This is a continuous process and the numbers reported reflect our efforts in this area. Because the Bank continues to benefit from a high level of net worth, we are able to recognize diminished values while remaining a Well-Capitalized institution by regulatory standards.

Although the sun-belt states tend to be the first to experience the impact of economic slowdowns they often are the first to emerge. Whether the current gains in the stock market are a temporary blip or an indicator that things are going to improve cannot be known. What is known is that we have been left with a significant number of troubled assets to address � and that is our primary goal for the immediate future.

The additions to our ALLL and adjustments to our OREO are the direct result of deterioration in property values in the market area of the Bank during the 1st Quarter. Calendar year 2008 through the 1st quarter of 2009 saw material stresses in all types of real estate valuations in the metropolitan area of Phoenix. Due to these stresses, together with the receipt of government capital in the form of �TARP� advances, some larger financial institutions disposed of OREO at whatever price was offered. These distress sales had a negative impact on properties in the surrounding areas and required the Bank to conduct reappraisals; which in a number of cases resulted in lower valuations requiring additional provisions for losses greater than previously recognized or expected. Notwithstanding the diminutions of value, sale activity has increased in the Phoenix metropolitan area reducing the overhang of unsold properties. Current sales are concentrated in low to moderately priced housing and should be a precursor to improved real estate market activity overall.

The Bank has been fortunate in not seeing an increase in OREO during this quarter, however, the coming period may see an increase in this category with several credits experiencing increased levels of stress. The Bank is protecting itself through acceleration of loans in cases where this is the best option for recovery.

While the Bank will be reporting a very high level of non-performing loans by historic standards, we are encouraged by the fact that with few exceptions none of the troubled credits were unknown to the Bank at the beginning of 2008. The Bank believed these credits could withstand the economic downturn with careful monitoring and assistance. Since then, the economic stress in the 3rd and 4th quarters of 2008 effectively eliminated borrowers� cushions resulting in the Bank reporting the increases reflected in this report.

More specifically, the Lehman Brothers bankruptcy and surrounding financial turmoil beginning in September of last year generated severe disruptions in a variety of real estate markets. During this time, many of the Bank�s customers who appeared able to ride out problems, determined they could not under post-September, 2008 conditions. These loans are, in large part, the assets now being reported as non-performing.

Credit Quality

The very difficult 4th quarter period of 2008 continued into the 1st quarter of 2009. Borrowers who could no longer keep loans current either filed bankruptcy or asked the Bank to take deeds-in-lieu of foreclosure. The Bank has attempted to work closely with borrowers where a good faith effort had been demonstrated to preserve both the contractual terms of a loan as well as the property. With a limited number of others the Bank is either considering or pursuing action against those who would attempt to use the current economic environment to their personal advantage.

In one sense some clarity has been found in the portfolio of the Bank. As we reported in the last quarter, we are seeing few new assets entering non-performing status. That is the good news. The bad news is that others have persisted stubbornly and could migrate from 30-89 days past due to non-accrual; or from non-accrual to OREO. Some months ago, the Bank hired individuals specifically to stem this adverse migration as well as to dispose of properties acquired by the Bank.

Loans past due 30+ days increased slightly to $18.8MM at 3/31/09 compared to $17.8MM at 12/31/08. The Bank anticipates that in excess of $10MM of these will be brought current by the borrowers.

Loans on non-accrual saw a substantial increase to $31.9MM at March 31, 2009 from $20.9MM at 12/31/08. This increase was primarily due to the addition of two CRE loans in Arizona. These are attractive properties where the developers have experienced a variety of setbacks. Of loans on non-accrual the Bank anticipates either taking a deed-in-lieu or completing foreclosure on approximately half during this coming quarter.

OREO

Other Real Estate Owned (OREO) remains unchanged at $12.2MM during the just concluded quarter. The Bank currently owns 19 properties ranging from individual lots, to a warehouse and land. Each is currently on the market listed with local brokers. The Bank monitors the local market in an attempt to reach buyers as well as secure the best possible return to the Company.

CAPITAL LEVELS

Despite this difficult economic environment, the Bank continues to operate with a strong capital position significantly higher than considered necessary to be a well-capitalized bank for regulatory purposes. Our total-risked based capital level at quarter end March 31, 2009 was 17.9%, a significant cushion over the 10% regarded as well-capitalized by regulatory guidelines.

The Board of Directors and Management of Towne Bancorp recognize the difficult economic environment yet also believes in the direction the Bank has moved during the present economic crisis. As a result, ownership by the board and management has increased to over 25% of the outstanding shares of Towne Bancorp.

FORWARD-LOOKING STATEMENT

This document 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 the document. Specific risks and uncertainties, among others, associated with forward-looking statements in the document 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,� �anticipate,� �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.

(All dollars in thousands except per share data) � � � � � � � � QUARTER YEAR-TO-DATE

Selected Income Statement Data (unaudited)

�

1st Qtr 2009

1st Qtr 2008

2009 Change

4th Qtr 2008

Mar 2009

Mar 2008

Dec 2008

� Net interest income $ 635 $ 1,637 -61.22 % $ 589 $ 635 $ 1,637 $ 5,119 Provision for loan losses $ 1,973 $ 0 n/a $ 6,237 $ 1,973 $ 0 $ 9,590 Total non-interest income ($492 ) ($27 ) -1723.69 % ($41 ) ($492 ) ($27 ) ($134 ) Total non-interest expense $ 1,516 $ 1,598 -5.13 %

$

1,881

$ 1,516 $ 1,598 $ 6,617 Federal and state taxes $ 0 $ 5 -100.00 % $ 1,426 $ 0 $ 5 $ 24 Net income ($3,347 ) $ 7 -47102.25 % ($8,996 ) ($3,347 ) $ 7 ($11,246 ) �

Selected Balance Sheet Data (unaudited)

�

Mar 2009

Dec 2008

1st Quarter2009 Change

Dec 2008

YTD 2009Change

Mar 2008

Year OverYear Change

� Total assets $ 142,828 $ 150,607 ($7,779 ) $ 150,607 ($7,779 ) $ 180,370 ($37,543 ) Net loans $ 111,664 $ 113,823 ($2,159 ) $ 113,823 ($2,159 ) $ 156,837 ($45,174 ) Total deposits $ 114,075 $ 118,431 ($4,357 ) $ 118,431 ($4,357 ) $ 132,076 ($18,001 ) Total borrowings $ 6,000 $ 6,000 $ 0 $ 6,000 $ 0 $ 11,000 ($5,000 ) Total equity cap $ 22,055 $ 25,350 ($3,296 ) $ 25,350 ($3,296 ) $ 36,480 ($14,425 ) Book value per share $ 13.61 $ 15.64 ($2.03 ) $ 15.64 ($2.03 ) $ 22.50 ($8.90 ) � � QUARTER YEAR-TO-DATE

Selected ratios (unaudited)

�

1st Qtr 2009

1st Qtr 2008

4th Qtr 2008

Mar 2009

Mar 2008

Dec 2008

� Net interest margin 1.74 % 3.37 % 1.54 % 1.74 % 3.37 % 3.00 % Return on avg assets -8.60 % 0.01 % -22.47 % -8.60 % 0.01 % -6.48 % Return on avg equity -39.28 % 0.08 % -105.80 % -39.28 % 0.08 % -31.36 % Efficiency ratio 1061.75 % 99.26 % 343.53 % 1061.75 % 99.26 % 132.75 % Net charge-offs to total loans 0.32 % 0.06 % 2.54 % 4.65 % 0.06 % 4.31 %

ALLL to grossloans %

8.52 % 2.60 % 7.15 % 8.52 % 2.60 % 7.15 % NPA to total assets 26.97 % 11.46 % 15.87 % 26.97 % 11.46 % 15.87 % � Per share data (unaudited) � Net income per share ($2.06 ) $ 0.00 ($5.55 ) ($2.06 ) $ 0.00 ($6.94 ) Net income per share (diluted) ($2.06 ) $ 0.00 ($5.55 ) ($2.06 ) $ 0.00 ($6.94 ) Average shares outstanding 1,621,024 1,599,639 1,621,024 1,621,024 1,599,639 1,621,024