Tower Financial Corporation Reports Annual Net Income of $5.7 Million

FORT WAYNE, Ind., Jan. 24, 2013 (GLOBE NEWSWIRE) -- Tower Financial Corporation (Nasdaq:TOFC) reported net income of $1.7 million or $0.36 per diluted share for the fourth quarter of 2012, compared with net income of $3.4 million, or $0.71 per diluted share, reported for the fourth quarter of 2011. Year to date earnings for 2012 were $5.7 million, or $1.18 per diluted share, compared to $6.6 million, or $1.36 per diluted share for 2011.

Our fourth quarter and annual highlights include:

• Our 2012 pre-tax earnings are the highest in our history. On a pre-tax basis our 2012 income was $1.9 million for the quarter and $7.4 million for the full year, compared to $966,000 for the fourth quarter of 2011 and $5.1 million for the full year. During the fourth quarter of 2011, our net income was positively impacted by the reversal of our previously established net deferred tax asset ("DTA") valuation allowance resulting in an income tax benefit of $2.5 million.
   
• Our 2012 "Core" earnings of $10.6 million represent the highest in our history. Our annual "core" earnings have exceeded $10 million for the second consecutive year. 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).
   
• Total assets grew by $34.5 million during the fourth quarter and were $684.0 million as of December 31, 2012. The growth came in our investment portfolio, which grew by $39.3 million.
   
• Trust assets under management grew by approximately $78 million, or 13 percent, during 2012 and gross revenue for Tower Trust Company exceeded $4.0 million for the first time in our history.
   
• We reinstated our dividends in 2012, which included a total of $2.7 million in dividends paid to our shareholders during the fourth quarter. The dividends came in the form of a quarterly dividend of $0.055 per share and a special dividend of $0.50 per share.
   
• The Board of Directors approved a stock repurchase program for up to 250,000 shares of our common stock. As of December 31 2012, we had repurchased 141,850 shares.

Mike Cahill, President and Chief Executive Officer of Tower Financial Corporation stated, "Last year, I noted that even in light of a record year of net income in 2011, Tower's work was not complete, and we would continue to work to improve. The 2012 results demonstrate the continued hard work by my team members. Excluding the DTA valuation in 2011, 2012 was a record year for Tower, exceeding last year's pre-tax net income by over $2 million. This increase in income allowed us to reinstate the quarterly dividend, pay a special dividend, and institute a share repurchase program in order to reward our loyal shareholders.

"I will reiterate what I said last year: we believe there is still more opportunity in the coming year for Tower. We are committed to retaining and expanding relationships with our existing clients, and we believe there are many opportunities with new clients to experience the 'Tower' difference."

"We remain committed to the tasks of improving our credit metrics and operational efficiencies to deliver the best experience to our clients, community, and shareholders."

Capital

During the fourth quarter of 2012, the Company issued dividends to its shareholders in the amount of $2.7 million. Additionally, the Company repurchased 141,850 shares of its common stock at a cost of $1.7 million. These reductions of capital along with an increase in total assets of $34.5 million caused a decrease in our regulatory capital ratios.   However, our 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 December 31, 2012 was 14.7 percent compared to 15.2 percent at September 30, 2012 and 13.9 percent at December 31, 2011. Total risk-based capital at December 31, 2012 was 15.9 percent compared to 16.5 percent at September 30, 2012 and 15.2 percent at December 31, 2011. Our leverage capital was 11.2 percent at December 31, 2012, more than double the regulatory requirement of 5 percent to be considered "well-capitalized". 

The following table provides the current capital position as of December 31, 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 $18.8 million, or 2.7 percent of total assets as of December 31, 2012. This compares with $17.2 million at September 30, 2012 and $16.0 million at December 31, 2011. Our net charge-offs were $451,000 for the fourth quarter of 2012, or 0.4 percent of average outstanding loans for the quarter. This compares to net charge-offs of $1.1 million, or 1.0 percent of average loans for the third quarter of 2012 and $1.6 million, or 1.4 percent of average loans for the fourth quarter of 2011. Net charge-offs for 2012 were $3.6 million, or 0.8 percent of average loans, compared to $7.3 million, or 1.5 percent of average loans during 2011. Our loan loss provision for the fourth quarter of 2012 was $200,000 compared to $618,000 for the third quarter of 2012 and $975,000 for the fourth quarter of 2011.  Loan loss provision for 2012 was $2.5 million compared to $4.2 million for 2011. 

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

The $1.5 million increase in our nonperforming assets relates primarily to one loan relationship totaling approximately $2.9 million that was taken to non-accrual status during the quarter. Previously this relationship was rated as substandard. This addition was offset by numerous reductions in balances and resolutions during the fourth quarter 2012, as shown in more detail on the tables below:

The following table represents the change in total relationships within the non-performing asset categories during the fourth quarter of 2012:

Our classified assets, defined as substandard, non-accrual loans, impaired investments, and OREO, decreased by $1.3 million during the fourth quarter and totaled $35.9 million at December 31, 2012. Our classified assets were 44.8 percent of tier 1 capital plus ALLL (classified assets ratio) as of December 31, 2012. Our classified assets ratio at September 30, 2012 was 44.0 percent and was 35.0 percent at December 31, 2011. Classified assets increased by $7.8 million during 2012. The increase relates primarily to previously identified loans that were downgraded from special mention to substandard during the third quarter of 2012, including one relationship totaling $5.5 million. Our total "watch list" loans was $39.4 million at December 31, 2012, a decrease of $2.1 million from the third quarter and a $14.5 million decrease from December 31, 2011. Watch list loans now comprise 8.7 percent of the total loan portfolio. The watch list comprises all non "pass" rated credits. The following table presents the watch list by risk category:

The allowance for loan losses was $8.3 million at December 31, 2012, a decrease of $250,000 from the $8.5 million reported at September 30, 2012. The quarterly decrease was the net result of loan loss provision of $200,000, offset by $450,000 of net charge-offs. The year to date loan loss provision was $2.5 million, offset by $3.6 million in net charge-offs. The allowance for loan losses was 1.84 percent of total loans at December 31, 2012, a decrease from 1.87 percent at September 30, 2012 and from 2.03 percent at December 31, 2011. 

Balance Sheet

Company assets were $684.0 million at December 31, 2012, a decrease of $16.7 million, or 2.4 percent from December 31, 2011. The significant decrease stems from two large December short-term deposits that increased our assets by approximately $48 million as of the end 2011. As described in our fourth quarter 2011 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 adjusted assets increased by approximately $31.3 million during 2012. 

Our total loans at December 31, 2012 were $450.5 million, compared to $462.6 million at December 31, 2011. The decrease of $12.1 million, or 2.6 percent, was comprised of decreases in our commercial loan, commercial real estate loan, home equity loan and consumer loan categories, which decreased by $4.4 million, $4.8 million, $1.5 million, and $2.4 million respectively. These decreases were offset by an increase of $1.3 million in residential mortgage loans. 

Our securities available for sale at December 31, 2012 were $174.4 million, an increase of $45.8 million from December 31, 2011. Securities available for sale now comprise 25.5 percent of total assets. We have been strategically increasing the size of our investment portfolio to help combat margin compression and focus on preserving our net interest income as prudently as possible. The increase in the portfolio will help preserve net interest income, but will most likely result in the further compression of our net interest margin and an increase in our overall assets. The investment purchases were primarily funded with overnight borrowings in anticipation of our January 2013 Health Savings Account funding.

Our total deposits at December 31, 2012 were $561.0 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 increased by approximately $7.0 million during 2012. Interest-bearing checking accounts increased by $55.1 million, the result of increases of $14.2 million in our Health Savings Accounts and the movement of approximately $28 million of noninterest-bearing account balances to our new interest-bearing checking account for commercial customers. As a result of this movement between accounts and the departure of the short-term deposits discussed above, non-interest bearing accounts decreased $61.6 million from December 31, 2011. Other categories reporting declines in balances during the year include in-market CD's of $20.9 million, brokered certificates of deposit of $12.4 million, and money market accounts of $7.7 million.

Our borrowings were $54.9 million at December 31, 2012 and were comprised of $17.5 million in trust preferred debt and $37.4 million in borrowings from the Federal Home Loan Bank of Indianapolis ("FHLBI"). 

Shareholders' equity was $63.7 million at December 31, 2012, an increase of 2.7 percent from the $62.1 million reported at December 31, 2011. Affecting the year to date increase in stockholders' equity was net income of $5.7 million, $292,000 of additional paid in capital from the accounting treatment for restricted stock vesting and issuance of shares related to the long-term incentive plan, treasury stock purchases of $1.7 million, shareholders dividends of $2.9 million, and an increase of $282,000 in unrealized gains, net of tax, on securities available for sale. Currently, we have 4,735,144 common shares outstanding. Tangible book value at December 31, 2012 was $13.46 per common share.

Income Statement

Our total revenue, consisting of net interest income and noninterest income, was $7.6 million for the fourth quarter of 2012, a decrease of $175,000 from the third quarter 2012. Total revenue for 2012 was $30.7 million, down by $188,000, or 0.6 percent, from the record results posted for 2011. Net interest income for the fourth quarter of 2012 was $5.5 million, a decrease of $143,000 from the third quarter of 2012, while 2012 annual net interest income was $22.2 million, a decrease of approximately $550,000, or 2.4 percent, from 2011. The quarter over quarter decrease in our net interest income was primarily the result of a 22 basis point decline in our net interest margin. This reduction in our margin came from yield compression on earning assets. Our yield on loans dropped to 4.63 percent during the fourth quarter from the 4.74 percent reported for the third quarter, while the yield on our investment portfolio dropped to 2.99 percent from 3.61 percent quarter over quarter. This was offset slightly by our continued reduction in our cost of funds, which decreased to 0.64 percent for the fourth quarter 2012 from the 0.73 percent reported for the third quarter. The reduction in net interest margin was offset by an increase of $25.3 million in average earning assets for the quarter. Total earning assets were $636.9 million at December 31, 2012, compared to $607.5 million at September 30, 2012 and $606.9 million at December 31, 2011. Due to the extended low interest rate environment and the margin compression that is impacting the entire industry, we have shifted our focus to net interest income versus the net interest margin. We expect this trend to continue as we move into 2013.

Non-interest income was $2.2 million for the fourth quarter of 2012, which represented 28.4 percent of total revenue. This is a slight decrease of $32,000 from the third quarter of 2012 and an increase of $111,000 from the fourth quarter of 2011. The quarter over quarter decrease relates primarily to a $37,000 decrease in trust and brokerage fees related primarily to brokerage volume. Mortgage loan fees were negatively impacted by a reduction of $106,000 in the fair value of rate locks on mortgage loans with the intention of selling in the secondary market. These decreases were offset by an increase of $64,000 in gains on securities sales and an increase in mortgage loan fees on closed loans of $24,000. All other fee categories remained relatively flat quarter over quarter. 

Non-interest income for 2012 was $8.5 million, an increase of 4.5 percent from the $8.2 million we reported for 2011. The $363,000 increase was primarily the net result of increases in trust & brokerage fees of $274,000, mortgage brokerage fees of $452,000, and interchange income of $113,000, offset by a reduction in gains on securities sales of $628,000. In 2012, the mortgage department topped the $100 million mark in loans closed for the first time in our history.

Non-interest expenses were $5.6 million for the fourth quarter 2012, compared to $5.0 million for the third quarter 2012 and $5.8 million for the fourth quarter 2011. The increase from the third quarter of $556,000 relates primarily to business development expenses, processing expenses and legal & professional expenses which increased by $101,000, $151,000 and $136,000 respectively. More than 50 percent, $55,000, of the increase in business development expenses relates to year-end contributions, while another $6,000 relates to annual membership dues normally paid in the fourth quarter. The remainder relates to increase business development efforts by our calling officers. Of the $151,000 increase in data processing from the prior quarter, approximately $65,000 relates to projects specific to 2012 for increasing efficiency and enhancing revenue in the future. Of the remaining increase, approximately $32,000 was related to the timing of the bulk purchase of debit cards plastics that are typically purchased once or twice a year for deployment to new and existing customers as needed. Legal & professional expenses increased from the prior quarter as a result of additional costs of approximately $55,000 associated with increased loan closings, costs of approximately $76,000 associated with miscellaneous consulting and advisory services.

Non-interest expenses for 2012 were of $20.9 million, a decrease of 3.5 percent from the $21.6 million reported for 2011.  The decrease from 2011 relates primarily to a reduction in FDIC insurance premiums of $703,000, which is a result of the termination of our formal agreement with the banking regulators. We also saw a reduction of $416,000 in OREO related expenses and $115,000 in legal expenses, related primarily to asset quality. These savings were offset by an increase of $157,000 in employment related costs, primarily for commissions on brokerage and mortgage fees, along with increases in occupancy costs associated with our increase real estate taxes on our branch network, processing costs associated with our expanding business in H.S.A. accounts, and marketing/business development expenses.

Income tax expense decreased $479,000 from the third quarter and increased from the fourth quarter of 2011 by $2.6 million. The decrease in the fourth quarter of 2012 from the prior quarter was the result of reversing the federal and state valuation allowances on the impairment previously recorded on one other-than-temporarily-impaired security. This security was sold during the fourth quarter of 2012 resulting in the reversal of the valuation allowance of approximately $375,000. In the fourth quarter of 2011, we reversed the valuation allowance on our state deferred tax asset due to the liquidation our real estate investment trust that had previously created a state net operating loss. The reversal of the state valuation allowance in 2011 created a tax benefit of $2.5 million in the fourth quarter of 2011 compared to the tax expense of $138,000 recorded in the fourth quarter of 2012. 

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.