Tower Financial Corporation Reports First Quarter Net Income of $2.0 Million

FORT WAYNE, Ind., April 25, 2013 (GLOBE NEWSWIRE) -- Tower Financial Corporation (Nasdaq:TOFC) reported net income of $2.0 million or $0.43 per diluted share for the first quarter of 2013, compared with net income of $1.1 million, or $0.22 per diluted share, reported for the first quarter of 2012.

Our first quarter highlights include:

• Record pre-tax earnings of $2.8 million with "core" earnings comprising $2.3 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).
• Increased trust and brokerage assets under management by approximately $41 million, or 6.0 percent, to $713 million during the first quarter of 2013.
• Health Savings Accounts ("HSAs") grew by $18.5 million, or 23.3 percent during the first quarter of 2013 and were $97.8 million as of March 31, 2013 with more than 50,000 accounts.
• Repurchased 70,000 shares of the Company's common stock at an average price of $12.32 per share during the first quarter of 2013. This brings the total shares repurchased under our program announced December 10, 2012 to 211,850 shares at an average price of $12.26 per share compared to our quarter end book value of $13.60 per share.
• Decreased classified assets by $5.0 million during the first quarter of 2013.

Mike Cahill, President and Chief Executive Officer of Tower Financial Corporation stated, "It is always gratifying to have a record quarter, and to have the highest pre-tax earnings in our company's history is something we are very proud of. We continue to work hard in this challenging low interest rate environment to find ways to improve our shareholders' value, while maintaining focus on our clients."

Capital

During the first quarter of 2013, our tier 1 capital increased by $700,000 as a result of net income for the quarter in the amount of $2.0 million offset by the payment of dividends and repurchasing common stock. During the quarter, we issued dividends to our shareholders in the amount of $328,000, or $0.07 per common diluted share, and repurchased 70,000 shares of common stock at a cost of $862,000. The increase in tier 1 capital resulted in an increase in our regulatory capital ratios to 15.0 percent for tier 1 capital and 16.3 percent for total risk based capital at March 31, 2013. 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 was 14.7 percent at December 31, 2012 and 14.7 percent at March 31, 2012. Total risk-based capital was 15.9 percent at December 31, 2012 and 16.0 percent at March 31, 2012. Our leverage capital was 11.3 percent at March 31, 2013, more than double the regulatory requirement of 5 percent to be considered "well-capitalized".

The following table provides the current capital position as of March 31, 2013 in both dollars and percentages, compared to the minimum amounts required per regulatory standards for "well-capitalized" institutions.

Asset Quality

Our nonperforming assets were $17.1 million, or 2.5 percent of total assets as of March 31, 2013. This compares with $18.8 million at December 31, 2012 and $18.5 million at March 31, 2012. Our net charge-offs were $350,000, or 0.3 percent of average loans outstanding, for the first quarter of 2013 compared to $451,000, or 0.4 percent of average outstanding loans, for the fourth quarter of 2012. Net charge-offs for the first quarter of 2012 were $1.1 million, or 0.9 percent of average loans outstanding. During the first quarter of 2013, our loan loss provision/(benefit) resulted in income in the amount of $275,000 compared to an expense of $200,000 for the fourth quarter of 2012 and an expense of $750,000 for the first quarter of 2012.

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

The $1.6 million decrease in nonperforming assets was due to reclassifying a commercial TDR loan in the amount of $1.2 million from nonperforming to performing status during the first quarter of 2013. This loan continues to be classified as a TDR and evaluated for impairment, but was moved to performing as a result of a proven payment history per regulatory guidelines. The remaining decrease was the result of two large commercial loan payments totaling $842,000 and a commercial loan charge-off in the amount of $468,000. Subsequent to the end of the first quarter of 2013, we received $2.5 million in April 2013 to pay-off one commercial loan and one acquisition and development loan classified as nonaccrual at March 31, 2013.

When a loan has deteriorated to the point that it is classified as impaired and/or placed on nonaccrual status, a specific reserve or charge-off is recommended utilizing one of three impairment measurement methods (present value of expected cash flows, fair value of collateral, or observable market price). A charge-off will be taken in the place of a specific reserve at the point when facts and recent events support a reliable estimate of the extent and probability of loss. Our ALLL to nonaccrual ratio has decreased as a result of approximately $5.0 million in charge-offs over approximately the past five years on several long-standing nonaccrual relationships to get to the remaining nonaccrual loan balance of $14.6 million at March 31, 2013.

The following table represents the change in principal loan balances within the non-performing asset categories during the first quarter of 2013:

The following table represents the change in total relationships within the non-performing asset categories during the first quarter of 2013:

Our classified assets, defined as substandard, non-accrual loans, impaired investments, and OREO, decreased by $5.0 million during the first quarter and totaled $30.9 million at March 31, 2013 compared to $35.9 million at December 31, 2012. Our classified assets were 38.1 percent of tier 1 capital plus ALLL (classified assets ratio) as of March 31, 2013 compared to 44.3 percent at December 31, 2012. The decrease represents pay-offs or pay downs from five commercial lending relationships in the amount of $2.1 million and improvements in two commercial lending relationship warranting upgrades to non-classified, pass-rated loans in the amount of $2.0 million. Our total "watch list" loans were $34.6 million at March 31, 2013 compared to $39.4 million at December 31, 2012, a decrease of $4.8 million. Watch list loans now comprise 7.7 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:

Additionally, as mentioned earlier, we received payoffs in April 2013 for one commercial loan and one commercial real estate loan included in the Doubtful/Loss category totaling $2.5 million. These transactions would reduce our classified assets ratio to 35.0 percent.

The allowance for loan losses was $7.7 million at March 31, 2013, a decrease of $625,000 from the $8.3 million reported at December 31, 2012. The quarterly decrease was primarily the result of one commercial loan charge-off in the amount of $468,000. Also impacting the allowance during the quarter was a loan loss provision credit of $275,000 and $122,000 of recoveries. The allowance for loan losses was 1.74 percent of total loans at March 31, 2013, a decrease from 1.84 percent at December 31, 2012 and from 1.99 percent at March 31, 2012. 

Balance Sheet

Our assets were $679.1 million at March 31, 2013, a decrease of $4.9 million, or 0.7 percent from December 31, 2012. The decrease is the result of a $9.8 million decrease in net loans offset by an increase in available-for-sale securities in the amount of $2.8 million. Deposits increased $24.3 million, or 4.3 percent, to $585.3 million at March 31, 2013. The increase was primarily derived from our HSAs, which increased by $18.5 million. The growth in deposits resulted in a decrease in short-term borrowings in the amount of $25.9 million.

Our total loans at March 31, 2013 were $440.1 million, compared to $450.5 million at December 31, 2012. The decrease in total loans of $10.4 million, or 2.3 percent, was comprised of decreases in our residential real estate loan, commercial real estate loan, and home equity loan categories, which decreased by $4.8 million, $2.2 million, and $1.8 million, respectively. The lending environment continues to be challenging as business customers are using excess cash reserves to pay down loan balances.

Our securities available for sale at March 31, 2013 were $177.2 million, an increase of $2.8 million from December 31, 2012. Securities available for sale now comprise 26.1 percent of total assets. We have been strategically increasing the size of our investment portfolio to help preserve our net interest income as prudently as possible. Since March 31, 2012, securities available for sale have increased $48.1 million. The increase in the portfolio will help maintain net interest income, but will most likely result in the further compression of our net interest margin and an increase in our overall assets. 

Our total deposits at March 31, 2013 were $585.3 million compared to $561.0 million at December 31, 2012. HSAs continue to be the primary driver of deposit growth with an increase of $18.5 million from December 31, 2012. As expected in January of 2013, we received annual employer-funded contributions to HSAs, which is the primary reason for the increase in this deposit category annually. 

Also impacting the increase in total deposits was the increase in brokered certificates of deposit in the amount of $9.0 million. This deposit category was strategically increased to fund the remaining portion of the $25.0 million municipal bond leverage strategy. As described in our 2012 Annual Report filed on Form 10-K, this strategy was implemented in the fourth quarter of 2012 to help supplement net interest income. This strategy will provide approximately $250,000 annually to our net interest income, but will cause a decrease in net interest margin. Offsetting the increases in HSAs and brokered certificates of deposit was a decrease in money market accounts in the amount of $6.5 million.

Our borrowings were $26.0 million at March 31, 2013 and were comprised of $17.5 million in trust preferred debt and $8.5 million in borrowings from the Federal Home Loan Bank of Indianapolis ("FHLBI"). This represents a decrease of $28.9 million from our borrowings at the FHLBI at December 31, 2012, as we utilized excess cash from loan pay downs and deposit growth to reduce our borrowings.

Our shareholders' equity was $63.5 million at March 31, 2013, a decrease of 0.4 percent from the $63.7 million reported at December 31, 2012. The primary reason for the decrease was a decrease in the unrealized gains, net of tax, on our investment portfolio in the amount of $1.1 million from December 31, 2012. Additionally, we paid a dividend in the amount of $0.07 per common share, or $328,000, and repurchased 70,000 shares of our common stock at average price of $12.32 per share during the first quarter of 2013, or $862,000. Offsetting the decreases in shareholders' equity was net income of $2.0 million. Currently, we have 4,665,144 common shares outstanding. Tangible book value at March 31, 2013 was $13.60 per common share, an increase of 1.0 percent from the $13.46 reported at December 31, 2012.

Income Statement

Our total revenue, consisting of net interest income and noninterest income, was $7.8 million for the first quarter of 2013 compared to $7.6 million for the fourth quarter of 2012 and $7.4 million for the first quarter of 2012. The $141,000 increase from the fourth quarter of 2012 was the result of an increase in noninterest income of $527,000 offset by a decrease in net interest income of $386,000.

Net interest income decreased during the first three months of 2013 as a result of a decrease in the net interest margin from the three-month period ending December 31, 2012. The primary driver of the decrease was a decrease in average loan balances coupled with a decrease in loan yield from 4.63 percent at December 31, 2012 to 4.40 percent at March 31, 2013. Local competition continues to drive loan rates lower due to a lack of borrowing demand compounded by an abundance of lending institutions in our marketplace.  Interest income from long-term investments only increased $17,000, or 1.8 percent, from the fourth quarter of 2012 due to an increase in average long-term investments of $19.4 million offset by a decrease in the tax equivalent investment yield from 2.99 percent at December 31, 2012 to 2.91 percent at March 31, 2013. The loss of interest income was offset by our continued reduction in our cost of funds, which decreased to 0.58 percent for the first quarter of 2013 from the 0.64 percent reported for the fourth quarter of 2012. Due to the extended low interest rate environment and the margin compression that is impacting the entire industry, we continue to focus on net interest income versus the net interest margin. We expect this trend to continue as we move through 2013.

Noninterest income was $2.7 million compared to $2.2 million for the fourth quarter of 2012 and $2.0 million for the first quarter of 2012. Driving the increase in noninterest income was an increase in the gain on sale of securities, which increased $335,000 from the amount reported in this category during the fourth quarter of 2012. These gains were taken early in the quarter as a result of the sold securities either being recently downgraded or no longer required to be pledged as collateral. In addition to the gains on securities available for sale, we experienced increases in trust and brokerage fees of $96,000 and net debit card interchange income of $73,000 from the fourth quarter of 2012. Our trust and brokerage fee income increased as a result of an increase of $40.6 million in trust and brokerage assets under management from December 31, 2012 to March 31, 2013. Net debit card interchange income increased as a direct result of an increase in debit cards outstanding from March 31, 2012 by 15,000 and from December 31, 2012 by 3,600. The other income category also increased from the first quarter of 2012 and the fourth quarter of 2012 primarily due to an increase in foreign exchange transaction fees and letter of credit activity. These fees are not recurring and will vary based on the needs of our customers. 

Noninterest expenses were $5.2 million for the first quarter of 2013, compared to $5.6 million for the fourth quarter of 2012 and $5.2 million for the first quarter of 2012. The decrease in the first quarter of 2013 from the fourth quarter of 2012 was primarily due to decreases in Other Real Estate Owned ("OREO") expenses of $210,000 and loan and professional costs of $185,000. OREO expenses continue to decrease as the number of properties in this category decrease. The market prices of these properties have also stabilized resulting in fewer write-downs to fair value compared to the last couple of years. Our loan and professional costs have also decreased compared to the fourth quarter of 2012 as a result of decreases in accounting fees and expenses related to bad debt collections. Offsetting these decreases was an increase of $97,000 in salaries and benefits expenses from the fourth quarter of 2012 to the first quarter of 2013. This increase was the result of an increase in the profit sharing accrual, which is directly impacted by the improvement in our quarterly earnings. Also during the first quarter, we experienced a fraud loss of $176,000 related to cashier's checks, which is expected to be partially or fully recovered during the second or third quarter of 2013. All other expenses remained relatively flat from the prior quarter.

Income tax expense increased $693,000 in the first quarter of 2013 from the fourth quarter of 2012 and $490,000 from the first quarter of 2012. The income tax expense recorded in the fourth quarter of 2012 was lower than the first quarter of 2013 as a 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. The reversal of the valuation allowance lowered the effective tax rate for the fourth quarter of 2012 to 7.4 percent compared to the effective tax rates during the first quarter of 2013 and the first quarter of 2012 of 29.3 percent and 23.9 percent, respectively. 

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.