Tower Financial Corporation Reports Second Quarter Net Income of $1.4 Million

FORT WAYNE, Ind., July 26, 2012 (GLOBE NEWSWIRE) -- Tower Financial Corporation (Nasdaq:TOFC) reported net income of $1.4 million or $0.28 per diluted share for the second quarter of 2012, compared with net income of $1.1 million, or $0.22 per diluted share, reported for the first quarter of 2012 and the second quarter of 2011, respectively. Year to date earnings through the first six months of 2012 were $2.5 million, or $0.51 per diluted share, compared to $1.9 million, or $0.39 per diluted share for the first six months of 2011.

Our second quarter highlights include:

• Fifth consecutive quarter with earnings in excess of $1.0 million.
• Record "Core" quarterly earnings of $2.9 million. 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 other real estate owned ("OREO") expenses).
• Our Board of Directors approved a cash dividend for the quarter of $0.055 per share, payable on August 21, 2012 to shareholders of record on August 7, 2012.
• Our Written Agreement with the Federal Reserve Bank of Chicago was formally terminated on July 10, 2012. This allowed us to bring the deferred payments on our Trust Preferred debt current as of June 30, 2012.
• FDIC premiums were lower by $108,000 from the first quarter 2012 and $213,000 from the second quarter of 2011, as a result of assessment rate decreases.

"We continue to make solid progress on all fronts. Our ability to maintain and improve our net interest margin, improve fee income, and maintain operational discipline is reflected in our operating results," stated President and CEO, Mike Cahill. "We are making solid marked progress each quarter on our loan issues, as our watch list of loans dipped below 10% for the first time since October 2007 and we expect this momentum to continue, however we still have significant work to do in addressing known issues in this arena."

"The termination of our Written Agreement is confirmation of our success over the past couple of years. We remain focused on delivering appropriate results to our shareholders, which has been enhanced by our declaration of a quarterly dividend for the first time since it was suspended in second quarter of 2008."

Capital

The Company's regulatory capital ratios continue to remain significantly 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, 2012 was 14.9 percent compared to 14.7 percent at March 31, 2012 and 13.9 percent at December 31, 2011. Total risk-based capital at June 30, 2012 was 16.2 percent compared to 16.0 percent at March 31, 2012 and 15.2 percent at December 31, 2011. Our leverage capital grew to 11.7 percent at June 30, 2012, 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, 2012 in both dollars and percentages, compared to the minimum amounts required per regulatory standards for "well-capitalized" institutions.

Asset Quality

Our nonperforming assets were $17.0 million, or 2.6 percent of total assets as of June 30, 2012. This compares with $18.5 million at March 31, 2012 and $16.0 million at December 31, 2011. Our net charge-offs were $1.0 million for the second quarter of 2012, or 0.9 percent of average outstanding loans for the quarter. This compares to net charge-offs of $1.0 million, or 0.9 percent of average loans for the first quarter of 2012 and $1.0 million, or 0.8 percent of average loans for the second quarter of 2011. Net charge-offs during the second quarter related primarily to four loan relationships, all of which were fully reserved as of March 31, 2012. Our loan loss provision for the second quarter of 2012 was $925,000 compared to $750,000 for the first quarter of 2012 and $1.1 million for the second quarter of 2011.  

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

The two loan relationships that were classified as a TDR in the fourth quarter of 2011 were all taken to non-accrual status during the first quarter and are included in the non-accrual loan balances shown above. One new TDR was added during the second quarter of 2012 and will be included in nonperforming assets until a consistent payment history can be documented, which is typically six months.

Our delinquencies greater than 90 days have decreased by $1.5 million from the fourth quarter of 2011 and $430,000 from the first quarter 2012. The decrease in the second quarter was primarily due to a commercial loan pay-off received in the amount of $326,000 and a residential real estate loan in the amount of $328,000 moving to nonaccrual. Offsetting the decrease was the addition of a commercial loan in the amount of $152,000 that matured and wasn't renewed until after June 30, 2012 causing it to be considered delinquent at quarter end. The renewal of this loan resolved the delinquent status.

Our non-accrual commercial loan category decreased by $225,000 during the second quarter of 2012. The primary reasons for the decrease were the charge-offs of $508,000 and payments of $346,000 offset by the addition of one new loan in the amount of $629,000. At June 30, 2012, there were eleven relationships within this category, and four of those relationships comprised 63.4 percent of the total.

Our non-accrual acquisition and development category decreased by $92,000 during the second quarter of 2012. The slight decrease was due to receiving payments on the five relationships that made up this category of loans, of which two loans made up 61.8 percent of the total.

Our non-accrual commercial real estate category decreased by $567,000 during the second quarter due to a pay-off in the amount of $484,000 and a few small charge-offs totaling $71,000. This category was comprised of three relationships as of June 30, 2012.

Our non-accrual residential category increased by $533,000 during the second quarter of 2012 due to the addition of one loan from a pool of loans purchased in July 2006 and another residential real estate loan in the amount of $328,000. This category is comprised of seven relationships with two relationships making up 72.3 percent of the total.

Our non-accrual home equity category decreased by $748,000 and had no loans in it at June 30, 2012. Of the two loans that made up this category in the first quarter, one was charged-off in the amount of $338,000 and the other was resolved and returned to accruing status.

Our Other Real Estate Owned ("OREO") decreased by $316,000 during the second quarter primarily due to one sale and two partial pay-downs totaling $192,000. The remaining decrease of $124,000 was the result valuation adjustment pertaining to two pending sales that are expected to close in the third quarter.

Our classified assets, defined as substandard, non-accrual loans, impaired investments, and other real estate owned ("OREO"), increased by $1.6 million during the second quarter and totaled $30.4 million at June 30, 2012.  Our classified assets were 36.5 percent of tier 1 capital plus ALLL (classified assets ratio) as of June 30, 2012. Our classified assets ratio at March 31, 2012 was 35.2 percent and was 51.6 percent at June 30, 2011. The increase relates primarily to previously identified loans that were downgraded from criticized to substandard during the quarter. Our total "watch list" loans was $45.5 million at June 30, 2012, a decrease of $3.8 million from the first quarter and an $8.4 million decrease from December 31, 2011. Watch list loan now comprise 9.8 percent of the total loan portfolio. 

The allowance for loan losses was $9.0 million at June 30, 2012, a decrease of $77,000 from the $9.1 million reported at March 31, 2012. The quarterly decrease was the net result of loan loss provision of $925,000, offset by $1.0 million of net charge-offs. The year to date loan loss provision was $1.7 million, offset by $2.1 million in net charge-offs. The allowance for loan losses was 1.95 percent of total loans at June 30, 2012, a decrease from 2.03 percent at December 31, 2011 and from 2.46 percent at June 30, 2011. 

Balance Sheet

Company assets were $651.2 million at June 30, 2012, a decrease of $49.4, or 7.1 percent from December 31, 2011. The significant decrease stems from two large December short-term deposits that increased our balance sheet by approximately $48 million as of the end of the year. As described in our fourth quarter earnings release and annual report on form 10-K, these deposits were short-term in nature and, as expected, left the Bank by the end of January 2012. Taking these short-term deposit reductions into account, our assets decreased by approximately $1.4 million during the six months quarter of 2012. 

Our total loans at June 30, 2012 were $463.8 million, compared to $462.6 million at December 31, 2011. The increase in loans came primarily from residential mortgages, which grew by $2.6 million and commercial real estate loans, which grew by $1.5 million. These increases were offset by a decrease in home equity loans of $2.3 million and consumer loans of $738,000.   Total loans grew by $6.6 million during the second quarter, led by commercial and commercial real estate loans, which grew by $2.2 and $3.8 million respectively.

Our securities available for sale at June 30, 2012 were $122.4 million, a decrease of $6.2 million from December 31, 2011.   The decrease in the portfolio is due primarily to the acceleration in pre-payments caused by the low interest rate environment coupled with limited reinvestment opportunities. During the second quarter, we made the conscious decision to use the majority of excess funds provided by the decrease in the portfolio for reduction of brokered CD's instead of reinvestment due to the current environment. We may begin building the portfolio over the latter portion of 2012 depending on the investment and interest rate environment. Securities available for sale now comprise 18.8 percent of total assets.

Our total deposits at June 30, 2012 were $551.5 million compared to $602.0 million at December 31, 2011.  As described above, we received two large, short-term, deposits of approximately $48 million in December 2011 that increased our deposit totals. Therefore, our adjusted deposits at December 31, 2011 were approximately $554.0 million. Excluding these short-term deposits, our deposit portfolio decreased by approximately $2.5 million during the first six months of 2012. The decrease was due to the $25.0 million decrease in brokered certificates of deposit, a $14.0 million decrease in local certificates of deposits, and a $3.4 million decrease in money market accounts. These decreases were offset by an increase in interest-bearing checking accounts of $35.0 million, led by our Health Savings Accounts increases of $12.9 million and $25.0 million that was transferred from non-interest bearing checking to our new interest-bearing business checking account product; a $3.5 million increase in savings accounts, and a $1.4 million increase in non-interest bearing checking accounts. Our core deposits at June 30, 2012 were $453.7 million and comprised 82.3 percent of total deposits.   

Our borrowings were $31.0 million at June 30, 2012 and were comprised of $17.5 million in trust preferred debt and $13.5 million in fixed term borrowings from the Federal Home Loan Bank of Indianapolis ("FHLBI"). This is a slight increase from the $29.5 million in borrowings at December 31, 2011.   

Shareholders' equity was $64.9 million at June 30, 2012, an increase of 4.6 percent from the $62.1 million reported at December 31, 2011. Affecting the year to date increase in stockholders' equity was net income of $2.5 million, $18,400 of additional paid in capital from the accounting treatment for stock options and restricted stock vesting, and an increase of $365,400 in unrealized gains, net of tax, on securities available for sale. Currently, we have 4,853,136 common shares outstanding. Tangible book value at June 30, 2012 was $13.38 per common share.

Operating Statement

Our total revenue, consisting of net interest income and noninterest income, was $7.8 million for the second quarter of 2012, an increase of $400,000 from the first quarter of 2012. Second quarter of 2012 net interest income was $5.7 million, an increase of $300,000 from the first quarter of 2012. The quarter over quarter increase in our net interest income was the result of a 21 basis point improvement in our net interest margin, offset slightly by a decrease of $2.3 million decrease in average earning assets. The primary factor in the improvement to our net interest margin was a 24 basis point reduction in our cost of funds. Cost of interest-bearing deposits dropped from 0.88 percent to 0.72 percent, and our cost of borrowings dropped from 3.1 percent to 1.68 percent compared to the first quarter 2012. The improvement in our cost of interest-bearing deposits is a result of growth in our lower cost interest-bearing checking accounts and savings accounts, and the reduction of higher cost brokered CD's. The decrease in our cost of borrowings relates to our Trust Preferred debt. We had $9.0 million of debt related to TCT3 move to a floating rate in March 2012. The previous rate was fixed at 6.56 percent, while the floating rate is set at LIBOR plus 1.69 percent.

Non-interest income was $2.1 million for the second quarter of 2012, which represented 27.2 percent of total revenue. This is an increase of $110,000 from the first quarter of 2012. The increase relates primarily to an increase in mortgage brokerage fee income of $145,000 stemming from mortgage loan closings of approximately $24.4 million for the quarter. This increase was offset by a decrease of $15,000 in service charges on deposit accounts and a $22,000 decrease in trust and brokerage fee income. Decreases in these categories from the first quarter are not atypical due to certain annual fees that get charged each January. Trust and brokerage assets under management were $637.8 million as of June 30, 2012, a slight decrease of $1.8 million from March 31, 2012, but a $43.2 million increase from December 31, 2011.

Non-interest expenses were $5.0 million, a decrease of $225,000 from the first quarter of 2012. The decrease was made up primarily of reductions in FDIC premiums of $108,000 due to the lowering of our assessment rate, OREO related expenses of $82,000, and processing expenses of $52,000. The decrease in processing expense related primarily to annual charges paid in the first quarter annually due to year end processing, which includes preparation of year-end tax statements. These decreases were offset by an increase in employment expenses of $64,000, the result of $38,000 of one-time bonuses and an increase of $155,000 in profit sharing accruals related to our increased profitability. These employment expense increases were offset by savings in salary expense of $27,000 and payroll taxes of $96,000. All other expense categories remained relatively flat quarter over quarter. We expect operating expenses to remain relatively flat for the remainder of the year.   

Our effective tax rate for the second quarter was 27.5 percent, an increase from the 23.9 percent we reported for the first quarter 2012. Our non-taxable income, primarily interest on municipal bond investments and income on bank owned life insurance, remains fairly constant quarter over quarter. As a result, our effective tax rate will fluctuate up or down depending on our level of taxable income growth or decline. We expect our effective rate to remain fairly constant with the second quarter of 2012 for the remainder of this year.

ABOUT THE COMPANY

Headquartered in Fort Wayne, Indiana, Tower Financial Corporation is a financial services holding company with one subsidiary; Tower Bank & Trust Company (Tower Bank), 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 50 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, by their nature, are predictive and are based on management's beliefs, assumptions, current expectations, estimates and projections about the financial services industry, the economy, and about our company.

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, speak only as of this date, and involve risks and uncertainties related to our banking business or to general business and economic conditions that may affect our business, which may cause actual results to turn out differently. More detailed information about such risks and uncertainties may be found in our most recent Annual Report on Form 10-K, or, if applicable, in subsequently filed Forms 10-Q quarterly reports, under the captions "Forward-Looking Statements" and "Risk Factors," which 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.