Tower Financial Corporation Reports Record Quarterly Income of $1.1 Million

FORT WAYNE, Ind., July 28, 2011 (GLOBE NEWSWIRE) -- Tower Financial Corporation (Nasdaq:TOFC) reported record net income of $1.1 million or $0.22 per diluted share for the second quarter of 2011, compared with net income of $514,000, or $0.12 per diluted share, reported for the second quarter 2010. Year to date earnings through the first six months of 2011 were $1.9 million, or $0.39 per diluted share, compared to $1.2 million, or $0.30 per diluted share for the first six months of 2010.

Our second quarter highlights include:

• Record net interest income of $5.7 million. Net interest margin remained strong at 3.83 percent, the same as the first quarter of 2011.
   
• Capital ratios continue to increase and remain well above the regulatory standards necessary to be considered "well-capitalized." As of June 30, 2011, our leverage ratio was 10.8 percent and our Total Risk Based Capital ratio was 14.9 percent, compared to regulatory requirements of 5.0 percent and 10.0 percent, respectively.
     
• Non-performing assets (NPA's) decreased by $5.1 million. NPA's were 2.68 percent of total assets at June 30, 2011 compared to 3.44 percent and 4.22 percent at March 31, 2011 and December 31, 2010, respectively.
     
• Recorded $397,000 of pre-tax gains on sales of investment securities through restructuring opportunities within the market allowing us to monetize some gains and reinvest the proceeds with minimal impact to the portfolio yield.

"We are very pleased to have achieved record net income, while making such significant progress in the reduction of non-performing assets. All of the hard work of my fellow team members is gaining significant traction and is resulting in continual earnings improvements and credit metrics. We continue to aggressively build capital in preparation for market expansion opportunities." stated Mike Cahill, President and Chief Executive Officer.

Capital

The Company's regulatory capital ratios continue to remain above the "well-capitalized" levels of 6 percent for Tier 1 capital and 10 percent for Total risk-based capital. Tier 1 capital at June 30, 2011, increased to 13.7 percent, compared to 13.1 percent at December 31, 2010 and 11.6 percent at June 30, 2010. Total risk-based capital at June 30, 2011, increased to 14.9 percent, compared to 14.3 percent at December 31, 2010 and 13.1 percent at June 30, 2010. Leverage capital grew to 10.8 percent at June 30, 2011, more than double the regulatory requirement of 5 percent to be considered "well-capitalized." 

The following table shows the current capital position as of June 30, 2011 in both dollars and percentages, compared to the minimum amounts required per regulatory standards for "well-capitalized" institutions. 

Asset Quality

Nonperforming assets plus delinquencies were $17.7 million, or 2.7 percent of total assets as of June 30, 2011. This compares with $ 22.9 million, or 3.4 percent of total assets at March 31, 2011 and $27.8 million, or 4.2 percent of total assets at December 31, 2010. Net charge-offs were $1.0 million for the second quarter 2011, or 0.83 percent of average loan outstandings for the quarter. This compares to net charge-offs of $1.8 million, or 1.49 percent of average loans for the first quarter 2011 and $531,000, or 0.41 percent of average loans for the second quarter of 2010. Loan loss provision through June 30, 2011 was $2.3 million compared to $2.4 million for the first six months of 2010.  

The current and historical breakdown of non-performing assets is as follows:

The non-performing troubled-debt restructured ("TDR") category consists of two loans. Both loans are new to the list and each make up approximately 50 percent of the balance. These two notes are separate parts of a larger land development project. Due to the project being primarily collateral dependent with limited activity in the last year, we renewed the matured notes and allowed a period of several months to pay interest only. One loan, totaling $2.1 million, came off the non-performing TDR list during the quarter because it continues to keep current and perform according to the modified terms.

Delinquencies greater than 90 days have decreased by $750,000 from the first quarter 2011. This category is comprised of three loan relationships. As discussed in previous press releases, included in this category is an accruing $1.8 million loan that has matured. The Bank has elected not to renew the loan and is seeking collection via legal process. The loan remains in accruing status because it is further supported by the unlimited guaranty of a third party whose guaranty is fully secured by a mortgage on a performing commercial real estate property that is unrelated to the borrower's enterprise. This loan is expected to remain technically nonperforming during the pendency of our legal collection efforts but ultimate collection from the guarantor is not currently in doubt. We expect this loan to be resolved during the third quarter of 2011.  The decrease quarter over quarter primarily pertains to one large relationship totaling $677,000, which was brought current during the second quarter.

Our non-accrual commercial and industrial loan category decreased by $1.7 million during the second quarter. No new relationships were added and six relationships totaling $1.6 million were resolved. As of June 30, 2011, there were eleven relationships within this category, with two relationships comprising 61.0 percent of the total.

Our non-accrual commercial real estate category increased by $123,000 during the second quarter, the result of adding a new relationship in the amount of $582,000 and charging down another relationship by $300,000. The charge-off was done as a result of a purchase agreement secured on the property, with the charge-down bringing the loan amount down to the sales price, less anticipated closing costs. As of June 30, 2011, the category comprised of four relationships.

Our non-accrual acquisition and development category decreased by $1.5 million, or 45 percent during the second quarter. The decrease was primarily the result of a large paydown of one relationship of $1.9 million offset by the addition of a non-accrual relationship of $551,000. As of June 30, 2011, the category was comprised of four relationships.

Our non-accrual residential category had minimal changes during the quarter. This was the net result of two loans being brought to resolution, but were replaced by two additional loans of similar size. In total there are eight relationships that comprise this category.

Classified assets are comprised of substandard and non-accrual loans, along with impaired investments and OREO. Classified assets reached their peak at the end of the second quarter of 2009 at $63.0 million. We have made steady progress to reduce these assets by $21.4 million, or 34.0 percent since that time. As of June 30, 2011, classified assets totaled $41.6 million and comprised 51.6 percent of Tier 1 capital plus the Allowance for Loan Losses ("ALLL").

The allowance for loan losses decreased $109,000 during the second quarter of 2011 and was 2.46 percent of total loans at June 30, 2011, a decrease from 2.56 percent at December 31, 2010 and from 2.50 percent at June 30, 2010. The allowance for loan losses has decreased by $472,000 from December 31, 2010, as a result of loan provision of $2.3 million, offset by $2.8 million of net charge-offs.

Balance Sheet

Company assets were $661.0 million at June 30, 2011, an increase of $1.1 million, or 0.2 percent from December 31, 2010. While the increase in total assets was minimal, we utilized $12.3 million of excess cash to increase our long-term investments by $10.8 million and purchase $3.0 million in additional bank owned life insurance ("BOLI"). 

Total loans at June 30, 2011 were $488.7 million, compared to $489.2 at March 31, 2011 and $486.9 million at December 31, 2010. The year to date increase in loans came primarily from the Commercial Real Estate and Residential Mortgage categories, which grew by $6.7 and $4.2 million respectively. This growth was offset by a reduction in Commercial and Industrial, Home Equity and Consumer loan outstandings of $5.3 million, $1.6 million and $2.1 million respectively. The large decrease in Commercial and Industrial loans relates primarily to disposal of classified and non-performing loans.

Long term investments at June 30, 2011 were $120.9 million, a decrease of $2.7 million from March 31, 2011 and an increase of $10.8 million from December 31, 2010.  The decrease quarter over quarter was the result of some security sales to take advantage of some fluctuation in the marketplace in which we were able to see at a gain and reinvest with minimal impact to the long-term portfolio yield. Sales within the investment portfolio generated $397,000 of income during the second quarter. Long-term investment now comprise 18.3 percent of total assets as we continue to expand our investment portfolio to enhance liquidity and yield opportunities in light of fewer lending opportunities in the local economy. This is a continued purposeful change in asset allocation driven by profitability and liquidity targets, current economic conditions, and capital management guidelines.

Total deposits at June 30, 2011 were $547.9 million compared to $575.5 million at March 31, 2011 and $576.4 million at December 31, 2010.  The year to date decrease in deposits of $28.5 million, or 4.9 percent is made up of a reduction in core deposits of $18.8 million and in non-core (Jumbo and Brokered certificates of deposits) of $9.7 million. The decrease in core deposits was led by a reduction in Money Market accounts of $10.9 million, non-Jumbo (less than $100,000) certificates of deposit of $6.7 million, and non-interest bearing accounts of $5.7 million. These decreases were offset by an increase in interest bearing checking accounts of $6.5 million, primarily in our Health Savings Account project. The decrease in total deposits was offset by an increase of $26.5 million in short-term low interest rate Federal Home Loan Bank borrowings.

Shareholders' equity was $56.0 million at June 30, 2011, an increase of 2.9 percent from the $54.4 million reported at March 31, 2011 and an increase of 5.4 percent from the $53.1 million reported at December 31, 2010. Affecting the year to date increase in stockholders' equity was net income of $1.9 million, $23,500 of additional paid in capital from the accounting treatment for stock options, and an increase of $990,000 in unrealized gains, net of tax, on securities available for sale. Current common shares outstanding are 4,852,761.

Operating Statement

Total revenue, consisting of net interest income and noninterest income, was $7.8 million for the second quarter 2011, an increase of $500,000 from the first quarter 2011 and an increase of $422,000 from the second quarter 2011.  Second quarter 2011 net interest income was $5.7 million, an increase of $78,000, or 1.4 percent from the first quarter 2011 and an increase of $124,000, or 2.2 percent compared to the second quarter 2010. The increase from the first quarter was attributable to an increase in average earning assets of $2.5 million. The second quarter 2011 net interest margin was 3.83 percent and represents a 11 basis point increase from the net interest margin of 3.72 percent posted for the second quarter 2010. The increase in our margin has come primarily from a reduction in cost of funds, which was 1.26 percent for the second quarter, compared to 1.28 percent for the first quarter 2011 and 1.64 percent for the second quarter 2010. Yields on earning assets declined to 4.88 percent from 4.91 percent in the first quarter 2011 and 5.12 percent in the second quarter 2010.

Non-interest income was $2.1 million for the second quarter 2011, which represented 26.6 percent of total revenue. This is an increase of $425,000 from the first quarter 2011 and an increase of $338,000 from the second quarter of 2010. The increase from the first quarter is primarily from gains on sales of securities, which were $397,000 for the quarter, compared with $59,000 in the first quarter 2011 and $42,000 in the second quarter 2010. We recorded only $1,000 of Other Than Temporary Impairment ("OTTI") charges during the first quarter, compared to $125,000 in the first quarter 2011 and $14,000 in the second quarter 2010. The OTTI charge related to one security with a current book value of $386,000. We experienced a slight decrease of $71,000, or 8.0 percent, in our Trust and Brokerage fee income from the first quarter of 2011 due primarily to one-time annual fees that are collected each January. All other fee categories remained relatively flat quarter over quarter.

Non-interest expenses were $5.3 million, an increase of $200,000 from the first quarter 2011 and a decrease of $350,000 from the second quarter of 2010. The majority of the increase in expenses quarter over quarter related to one-time accruals of $125,000 related to incentive plans. Other expense increases occurred in Legal and Professional, Data Processing, Business Development, and Marketing, which were offset by a decrease in FDIC premiums of $157,000. Beginning in the third quarter of 2011, we expect a further reduction in FDIC premiums of approximately $125,000 per quarter. The estimated savings is based on our current deposit balances and will vary depending on growth or contraction in the portfolio. We expect all other expense categories to remain relatively flat throughout the remainder of 2011.

ABOUT THE COMPANY

Headquartered in Fort Wayne, Indiana, Tower Financial Corporation is a financial services holding company with one subsidiary; Tower Bank & Trust Company, a community bank headquartered in Fort Wayne. Tower Bank provides a wide variety of financial services to businesses and consumers through its six full-service financial centers in Fort Wayne, and one in Warsaw, Indiana. Tower Bank has a wholly-owned subsidiary, Tower Trust Company, which is a state-chartered wealth services firm doing business as Tower Private Advisors. Tower Bank also markets under the HSA Authority brand, which provides Health Savings Accounts to clients in 48 states. Tower Financial Corporation's common stock is listed on the NASDAQ Global Market under the symbol "TOFC." For further information, visit Tower's web site at www.towerbank.net.

FORWARD-LOOKING STATEMENTS

This news release contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about the Corporation and the Bank.

These forward-looking statements are intended to be covered by the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Actual results and outcomes may differ materially from what may be expressed or forecasted in the forward-looking statements. Future factors include changes in banking regulation; changes in governmental and regulatory policy or enforcement; changes in the national and local economy; changes in interest rates and interest-rate relationships; demand for products and services; the degree of competition by traditional and non-traditional competitors; changes in tax laws; changes in prices; the impact of technological advances; the outcomes of contingencies, trends in customer behavior and their ability to repay loans; changes in local real estate values; and other factors, including various risk factors identified and described in the Corporation's Annual Report on Form 10-K, quarterly reports of Form 10-Q and in other periodic reports we file from time to time with the Securities and Exchange Commission. These reports are available on the Commission's website at www.sec.gov, as well as on our website at www.towerbank.net.