updated 10/28/2010 9:46:11 AM ET 2010-10-28T13:46:11

FORT WAYNE, Ind., Oct. 28, 2010 (GLOBE NEWSWIRE) -- Tower Financial Corporation (Nasdaq:TOFC) reported record net income of $1.0 million or $0.22 per diluted share for the third quarter of 2010, compared with a net loss of $721,000, or $0.18 per share, reported for the third quarter 2009. Contributing to our third quarter earnings was a $575,000 after-tax gain on the sale of securities held at the holding company. This brings year to date net income to $2.3 million, or $0.51 per diluted share, compared to a year to date net loss of $4.4 million, or $1.08 per share at September 30, 2009.

Mike Cahill, President and Chief Executive Officer stated: "While our shareholders benefitted from the increase in value from our investment gains, we are most pleased that we are continuing to make progress in all operational areas during this difficult economic and banking environment. The proof of our progress is in the dramatic improvement in our financial results over a year ago. We remain resolute in our efforts to bring Tower back to an appropriate level of profitability for our shareholders. While we still have significant work to do, we are pleased with our progress thus far."

Third quarter highlights include:

  • Earnings excluding the gain on the sale of securities, were $470,000, or $0.10 per diluted share.
  • Non-performing assets decreased by $1.2 million, or 5.5 percent during the third quarter and have been reduced by $5.9 million, or 22.9 percent since September 30, 2009. The allowance for loan losses was 2.43 percent of total loans at quarter end, as we continue to aggressively record loan loss provisions in excess of charge-offs.
  • In August, the Company raised $2.9 million of capital raise through the private placement of 458,342 shares of common stock. This additional capital, along with strong third quarter earnings pushed our regulatory capital ratios even further above the "well-capitalized" thresholds. Excess capital as of September 30, 2010 was $21.3 million based on the Total Risked Based capital ratio and $35.3 million based on the Leverage ratio.
  • The net interest margin was 3.69 percent for the third quarter, a 46 basis point increase from the third quarter of 2009. The margin has held steady for 2010, with 3.72 percent reported for the second quarter 2010 and 3.66 percent for the first quarter 2010.
  • Normal operating expenses (excludes expenses related to other real estate owned – "OREO") decreased by $202,000 from the third quarter of 2009 and by $1.3 million compared to the first nine months of 2009.


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 risked-based capital. Tier 1 capital at September 30, 2010, increased to 12.7 percent, compared to 11.6 percent at June 30, 2010 and 10.9 percent at December 31, 2009. Total risked-based capital at June 30, 2010, increased to 14.0 percent, compared to 13.1 percent at June 30, 2010 and 12.5 percent at December 31, 2009. Leverage capital increased to 10.4 percent at September 30, 2010, 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, 2010 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 $20.0 million, or 3.0 percent of total assets as of September 30, 2010. This compares with $21.1 million, or 3.2 percent of total assets at June 30, 2010 and $21.1 million, or 3.0 percent of assets at December 31, 2009. Net charge-offs were $2.2 million for the second quarter 2010, bringing year to date net charge-offs to $3.5 million, or 0.9 percent of average loans. This compares to year to date net charge-offs of $5.3 million, or 1.3 percent of average loans through the first nine months of 2009. Loan loss provision through September 30, 2010 was $3.9 million compared to $9.5 million through the same nine-month period of 2009.  

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

Included in Delinquencies greater than 90 days 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. The increase from the second quarter relates to one loan relationship totaling $973,000. There are eight relationships that comprise delinquencies, with two relationships making up 85 percent of the total amount past due.

Our commercial and industrial loan category grew by $1.5 million during the third quarter. Two large relationships totaling $2.7 million were added to non-accrual status during the quarter, which were offset somewhat by the resolution of several smaller relationships. In total, seventeen relationships comprise this category, with six relationships making up $6.2 million, or 85 percent of the balance.

Our commercial real estate category was reduced by $1.1 million during the third quarter. Two loans totaling $981,000 were moved to OREO, while the third loan that made up the second quarter balance was paid off. These reductions were offset by a new relationship totaling $790,000 that was taken to non-accrual status at the end of the quarter. Our acquisition and development category was reduced by $173,000 during the third quarter as a result of payments made on each of the three loans that make up this category. Our residential category had minimal changes during the third quarter.

Trouble-debt restructured has only one relationship within the category and is subject to a pending purchase agreement which we believe will allow us to bring this to resolution during the fall of 2010.

The allowance for loan losses decreased $702,000 during the third quarter of 2010 and was 2.4 percent of total loans at September 30, 2010, a decrease from 2.50 percent at June 30, 2010 and an increase from 2.20 percent at December 31, 2009. The allowance for loan losses has increase by $418,000 from December 31, 2009, as a result of loan provision of $3.9 million, offset by $3.5 million of net charge-offs.

Balance Sheet

Company assets were $660.1 million at September 30, 2010, a decrease of $20.0 million, or 2.9 percent from December 31, 2009. The decrease in assets was primarily attributable to decreases in total loans of $32.5 million, partially offset by an increase in securities of $17.2 million. 

Total loans at September 30, 2010 were $494.8 million, compared to $527.3 million at December 31, 2009. We experienced decreases in all major loan categories with commercial and industrial loans decreasing by $16.7 million, residential mortgage loans by $9.8 million, commercial real estate by $4.0 million, consumer loans by $1.3 million and home equity loans by $0.8 million. This is indicative of limited loan demand in our markets.

Long term investments at September 30, 2010 were $111.0 million, an increase of $17.2 million from December 30, 2009.  Long-term investments now comprise 16.8 percent of total assets as we continue to expand our investment portfolio to enhance liquidity and yield opportunities in light of the planned reduction in our loan portfolio and recognition 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, 2010 were $577.1 million compared to $568.4 million at December 31, 2009, an increase of $8.7 million, or 1.5 percent. Core deposits declined by $15.4 million, led by decreases in certificates of deposit less than $100,000 of $18.1 million, non-interest bearing checking accounts balances of $6.9 million, and money market account balances of $4.2 million, which were offset by growth in interest bearing checking accounts of $10.5 million and $3.3 million in savings accounts. Certificates of deposit greater than $100,000 have decreased by $22.8 million since year end. Offsetting these decreases was in increase in brokered deposits totaling $46.9 million, which include both money market accounts and certificate of deposits. The growth in brokered deposits was purposeful as we took advantage of the favorable long term interest rate environment to lock in these favorable rates for an extended period of time. Terms for new brokered CD purchases ranged from two years to ten years, with an average life of just more than four years. The average rate on our brokered CD purchases was 1.9 percent and the average rate on brokered money market accounts was approximately 0.6 percent. Additionally, we have "put" options on $15.5 million of our longer termed, greater than five years, brokered CD's in order to provide additional flexibility to interest rate changes and funding needs. This increase in brokered deposits has also allowed us to reduce FHLB borrowings by $35.7 million since December 31, 2009. At September 30, 2010, FHLB borrowings totaled $7.5 million.

Shareholders' equity was $53.3 million at September 30, 2010, an increase of 13.7 percent from the $46.9 million reported at December 31, 2009. Affecting the increase in stockholders' equity was net income of $2.3 million, $35,000 of additional paid in capital from the FAS123R accounting treatment for stock options, $2.8 million net after expenses from the sale of 458,342 shares of common stock, and an increase of $1.3 million in unrealized gains, net of tax, on securities available for sale. Current common shares outstanding are 4,719,870.

Operating Statement

Total revenue, consisting of net interest income and noninterest income, was $8.2 million for the third quarter 2010, an increase of $906,000 from the second quarter 2010 and an increase of $2.0 million from the third quarter 2009. Third quarter 2010 net interest income was $5.6 million a slight decrease of $17,000, or 0.3 percent from the second quarter 2010 and an increase of $503,000 million, or 9.9 percent compared to the third quarter 2009. The relatively flat quarter for net interest income was attributable to a decrease of three basis points in our net interest margin, offset by an increase in average earning assets of $2.3 million. The slight compression in our margin was expected given the current interest rate environment and the limited yield opportunities available as we reinvest loan amortizations and cash flows from the securities portfolio. The third quarter 2010 net interest margin of 3.69 percent represents a 46 basis point increase from the net interest margin of 3.23 percent posted for the third quarter 2009. Year to date net interest margin through September 30, 2010 was 3.69 percent compared to 3.03 percent through the first nine months of 2009.

Non-interest income was $2.7 million for the third quarter 2010, which represented 32.3 percent of total revenue. The significant contribution to the third quarter non-interest income was the gain of $888,000, $575,000 after taxes and expenses, on the sale of some investment securities held at the parent company.  These were Z bonds related to re-REMIC bonds that were purchased in 2009. The market for these bonds increased significantly during 2010 and we made the decision to take our gains in the third quarter in order to generate capital and cash for the holding company. Excluding the extraordinary investment gain, normalized non-interest income was $1.8 million for the third quarter, which is a slight increase of $35,000 from the second quarter of 2010, but represents a $559,000 increase from the third quarter of 2009. The increase from the second quarter 2010 was due primarily to increased mortgage brokerage commissions resulting from increased activity from the low interest rate environment. All other categories remained relatively flat quarter over quarter. The large increase from the third quarter 2009 is primarily due to a $477,000 other than temporary impairment ("OTTI") charge taken in the third quarter of 2009. OTTI for the third quarter 2010 was $5,000. The remainder of the increase came from trust and brokerage fees, which were $73,000 higher than the third quarter of 2009.

Non-interest expenses were $5.4 million, a decrease of $292,000 from the second quarter of 2010 and a decrease of $118,000 from the third quarter of 2009. The primary reason for the decrease from the second quarter is the reduction of OREO expenses and valuation write-downs, which were $536,000 lower during the third quarter 2010. Excluding the OREO expenses, non-interest expenses increased quarter over quarter by $244,000. Most of the increase relates to processing expenses, which increased $217,000 during the third quarter. This increase represents the return to normal of our processing expenses, as we incurred discounted costs during the second quarter due to the migration to a new service provider. 

Employment expenses increased $134,000 from the second quarter, of which $47,000 related to commissions on increased mortgage brokerage income. The remaining increase is a result of additional salary expenses for vacant positions filled during the quarter. All other categories remained relatively flat from the second quarter of 2010. The decrease from the third quarter of 2009, relates primarily to savings in our employment expense category, which was $244,000 lower than the third quarter of 2009. Professional expenses decreased by $87,000 from the third quarter of 2009. These savings were offset by an increase in FDIC insurance premiums of $184,000. On a year to date basis, non-interest expenses through September 30, 2010 were $1.0 million less than what was recorded through the first nine months of 2009. Employment expenses make up $950,000 of the savings, while occupancy and equipment costs account for another $281,000 of savings. These savings are offset by an increase a $218,000 increase in FDIC premiums and $295,000 of increases in OREO expenses. The 2009 FDIC premiums include a special assessment of $315,000, which means that the year over year increase related to normal premiums was $533,000. Outside of any unexpected increases in FDIC premiums and losses taken on the disposition of foreclosed assets, we expect our operating expenses to remain relatively flat for the fourth quarter of 2010.


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 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


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

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