Tower Financial Corporation Reports Record Quarterly Income of $1.3 Million

FORT WAYNE, Ind., Oct. 27, 2011 (GLOBE NEWSWIRE) -- Tower Financial Corporation (Nasdaq:TOFC) reported record quarterly net income of $1.3 million or $0.27 per diluted share for the third quarter of 2011, compared with net income of $1.0 million, or $0.23 per diluted share, reported for the third quarter 2010. Year to date earnings through the first nine months of 2011 were $3.2 million, or $0.66 per diluted share, compared to $2.3 million, or $0.51 per diluted share for the first nine months of 2010.

Our third quarter highlights include:

• Second consecutive quarter of record net income and seventh consecutive quarter of earnings.
   
• Record "Core" quarterly earnings of $2.5 million, compared to $2.3 million for the second quarter 2011. We define core earnings as income before taxes, loan loss provision, and unusual items not related to day to day operations (primarily securities sales and OREO ["other real estate owned"] related expenses). 
   
• Our Capital ratios continue to increase and remain well above the regulatory standards necessary to be considered "well-capitalized." As of September 30, 2011, our leverage ratio was 11.1 percent and our Total Risked Based Capital ratio was 15.3 percent, compared to regulatory requirements of 5.0 percent and 10.0 percent, respectively.
   
• Decreased Non-performing assets (NPA's) by $813,000. NPA's were 2.56 percent of total assets at September 30, 2011 compared to 2.68 percent and 4.22 percent at June 30, 2011 and December 31, 2010, respectively. Classified assets were $35.5 million at September 30, 2011, a decrease of $6.1 million, or 17.3 percent from the second quarter of 2011.
   
• Recorded $331,000 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 extremely pleased with our progress in continuing to deliver increased profitability to our shareholders, while maintaining our high level of customer service. This has enabled us in 2011 to produce our two highest quarterly earnings periods in the Company's history," said Mike Cahill, President and CEO. "We are also pleased that we have continued to increase our capital, which will provide significant resources to fund future growth, either internally or through acquisition, when the economy picks up and opportunities present themselves. I am extremely thankful for the dedicated and talented team members who have been instrumental in Tower's significant turnaround during a very difficult banking and economic environment."

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 September 30, 2011, increased to 14.0 percent, compared to 13.1 percent at December 31, 2010 and 12.7 percent at September 30, 2010. Total risk-based capital at September 30, 2011, increased to 15.3 percent, compared to 14.3 percent at December 31, 2010 and 14.0 percent at September 30, 2010. Leverage capital grew to 11.1 percent at September 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 September 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 $16.9 million, or 2.6 percent of total assets as of September 30, 2011. This compares with $ 17.7 million, or 2.7 percent of total assets at June 30, 2011 and $27.8 million, or 4.2 percent of total assets at December 31, 2010. Net charge-offs were $2.9 million for the third quarter 2011, or 2.4 percent of average loan outstandings for the quarter. This compares to net charge-offs of $1.0 million, or 0.8 percent of average loans for the second quarter 2011 and $2.2 million, or 1.7 percent of average loans for the third quarter of 2010. Of the $2.9 million in net charge-offs recorded during the third quarter, $2.5 million related to one large loan relationship. Loan loss provision through September 30, 2011 was $3.2 million compared to $3.9 million for the first nine 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 loan relationships. These two relationships 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.

Delinquencies greater than 90 days have decreased by $1.1 million from the second quarter 2011. The decrease is due to the payoff of an accruing $1.8 million loan that was discussed in previous press releases. The category consists of two commercial real estate loans totaling $435,000, four residential first mortgages totaling $221,000, and several consumer loans totaling $371,000.

Our non-accrual commercial and industrial loan category remained the same during the third quarter. One new relationship was added in the amount of $980,000, which was offset by a large payment to reduce the outstanding balance of an existing relationship by $471,000 and another relationship in the amount of $488,000 was moved to other real estate owned ("OREO"). As of September 30, 2011, there were eleven relationships within this category, with four relationships comprising 58.1 percent of the total.

Our non-accrual commercial real estate category decreased by $155,000 during the third quarter due to adding a new relationship in the amount of $230,000, offset by a pay-off on another relationship in the amount of $383,000. As of September 30, 2011, the category comprised of four relationships.

Our non-accrual acquisition and development category increased by $662,000, or 36.7 percent during the third quarter. The increase was the result of moving one large loan, totaling $1.5 million, to non-accrual status this quarter. This loan was originally $4.0 million, however a settlement was negotiated during the quarter and a charge-down of $2.5 million was recorded as part of this settlement. The proceeds on the remaining balance were collected in mid-October 2011, reducing the balance in the category to $1.0 million. Offsetting this increase was a reduction of $551,000 due to taking another property into other real estate owned.  The remaining balance is made up of two relationships.

Our non-accrual residential category decreased by 39.1 percent, or $252,000 during the quarter. This was the net result of four loans being brought to resolution. In total there are four relationships that currently comprise the balance in 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 $27.5 million, or 43.7 percent since that time. As of September 30, 2011, classified assets totaled $35.5 million and comprised 44.3 percent of Tier 1 capital plus the Allowance for Loan Losses ("ALLL").

The allowance for loan losses decreased $1.9 million during the third quarter of 2011 and was 2.14 percent of total loans at September 30, 2011, a decrease from 2.56 percent at December 31, 2010 and from 2.43 percent at September 30, 2010. The allowance for loan losses has decreased by $2.4 million from December 31, 2010, as a result of loan provision of $3.2 million, offset by $5.6 million of net charge-offs. We continue to maintain an allowance for loan loss balance at more than 100% of our non-accrual loans.

Balance Sheet

Company assets were $659.7 million at September 30, 2011, a slight decrease of $200,000, or 0.03 percent from December 31, 2010. While the decrease in total assets was minimal, total loans decreased by $16.0 million, or 3.3 percent. The excess cash provided from this reduction was used to increase the long-term investment portfolio by $11.1 million and the purchase of $3.0 million in additional bank owned life insurance ("BOLI"). 

Total loans at September 30, 2011 were $470.9 million, compared to $488.7 at June 30, 2011 and $486.9 million at December 31, 2010. The year to date decrease in loans came primarily from the Commercial and Industrial portfolio, which has declined by $13.0 million. Home equity loans have decreased by $3.5 million, Consumer loans have decreased by $1.9 million, and Commercial Real Estate loans have decreased by $500,000. These loan decreases are offset by growth of $2.9 million in our Residential Mortgage portfolio.  While quality new loan opportunities remain difficult to find, the majority of our decrease in the overall portfolio has been purposeful as we continue to work diligently at improving our asset quality, as reflected in the $13.3 million reduction in "classified loans" during the first nine months of 2011.

Long term investments at September 30, 2011 were $121.3 million, an increase of $364,000 from June 30, 2011 and an increase of $11.1 million from December 31, 2010.   Sales within the investment portfolio generated $331,000 of income during the third quarter. Long-term investment now comprise 18.4 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 September 30, 2011 were $565.9 million compared to $547.9 million at June 30, 2011 and $576.4 million at December 31, 2010.  The year to date decrease in deposits has come almost entirely in our in-market certificates of deposit products and money market accounts. In-market certificates of deposit have decreased by $19.5 million during the first nine months of 2011, while money market accounts have decreased by $5.9 million. These decreases have been offset by increases of $7.9 million in interest-bearing checking accounts, $6.3 million in brokered certificates of deposits, and $1.1 million in non-interest bearing checking accounts. The large decrease in certificates of deposit is a reflection of the low interest rate environment. Core deposits at September 30, 2011 were $423.5 million and comprised 74.8 percent of total deposits. Our cost of interest-bearing deposits was 1.09 percent for the third quarter 2011, a reduction from the 1.15 percent posted for the second quarter 2011.

Borrowings were $29.5 million at September 30, 2011 and were comprised of $17.5 million in Trust Preferred debt and $12.0 million in fixed term borrowings from the FHLB.

Shareholders' equity was $58.1 million at September 30, 2011, an increase of 3.8 percent from the $56.0 million reported at June 30, 2011 and an increase of 9.3 percent from the $53.1 million reported at December 31, 2010. Affecting the year to date increase in stockholders' equity was net income of $3.2 million, $35,000 of additional paid in capital from the accounting treatment for stock options, and an increase of $1.7 million 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 $8.1 million for the third quarter 2011, an increase of $263,000 from the second quarter 2011 and a decrease of $181,000 from the third quarter 2010.  Third quarter 2011 net interest income was $5.7 million a slight decrease of $37,000, or 0.7 percent from the second quarter 2011 and an increase of $104,000, or 1.9 percent compared to the third quarter 2010. The small decrease from the second quarter 2011 was attributable to a decrease of $4.7 million in average earnings assets and a three basis point decrease in our net interest margin. Our net interest margin for the third quarter was 3.80 percent, compared to 3.83 percent for both the first and second quarters of 2011. The decrease in our net interest margin related primarily to a decrease in our earning asset yield of eight basis points, which was 4.80 percent for the third quarter compared to 4.88 percent for the second quarter. We are experiencing a decrease in the overall yield of our investment portfolio due to the low interest rate environment as we reinvest cash flows and maturities from the existing portfolio. The decrease in our earning asset yield was offset by a decrease in our cost of funds of four basis points. Cost of funds was 1.22 percent for the third quarter 2011 compared to 1.26 percent for the second quarter 2011.   Our cost of funds has decreased 0.28 percent compared to the third quarter of 2010.

Non-interest income was $2.4 million for the third quarter 2011, which represented 28.8 percent of total revenue. This is an increase of $300,000 from the second quarter 2011 and a decrease of $285,000 from the second quarter of 2010. The increase from the second quarter came primarily from an increase in Mortgage Banking income, which increased by 231.5 percent to $530,000 for the third quarter. $230,000 of this increase relates to the accounting treatment for the fair value of rate locks on mortgage loans originated for sale that have not yet closed. The remainder of the increase comes from an increase in financing volume generated from the low interest rate environment. The increase was offset by a slight decrease in trust fees of $15,000, and a charge of $23,000 for Other Than Temporary Impairment ("OTTI") on an investment security. The decrease from the third quarter 2010 related primarily to gains on security sales, which were $892,000 for the third quarter 2010 compared to $331,000 for the third quarter 2010.   Trust fees also declined from the third quarter of 2011 due to a decline in assets under management caused by the downturn in the stock market. All other fee categories remain relatively flat quarter over quarter.

Non-interest expenses were $5.4 million, an increase of $115,000 from the second quarter 2011 and an increase of $58,000 from the third quarter of 2010. The primary cause of the increase from the second quarter was a one-time extraordinary loss of $113,000 and an increase in Other Real Estate Owned ("OREO") expenses of $115,000. These one-time costs were offset by a reduction in FDIC premiums of $88,000.   All other expense categories remained relatively flat quarter over quarter. We expect normal operating expenses to remain relatively flat over the remainder of the year. While the increase from the third quarter 2010 was minimal, we experienced a reduction in FDIC premiums of $279,000, which was offset by an increase in employment related expenses. The increase in employment expenses relates to annual salary increases, the addition of ten new team members, and the costs associated with our annual incentive programs. The increase due to the incentive programs is $158,000, of which $122,000 relates to one-time programs for 2011 only. 

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.