HIGHLIGHTS FROM THE FIRST QUARTER OF 2011
- Net Income Impacted by Mortgage Division Restructuring and Merger Expenses: GAAP net income for the first quarter of 2011 equaled $218 thousand or $0.02 per diluted share. Net income for the first quarter of 2011 was negatively impacted by a net loss of approximately $3.3 million incurred by the American Home Bank division, which was acquired as part of the First Chester County Corporation merger and after-tax merger and restructuring expenses of $697 thousand.
- Net Interest Income Growth: The net interest margin totaled 4.22% for the first quarter of 2011 compared to 3.83% for the fourth quarter of 2010 and 3.62% for the first quarter of 2010. First quarter 2011 net interest income increased $8.1 million or 49.3% over the fourth quarter of 2010 and $12.4 million or 102.5% over the first quarter of 2010, to $24.4 million.
- Increase in Non-interest Income: Non-interest income from the banking segment increased $2.1 million to $3.8 million for the first quarter of 2011 compared to $1.7 million for the same period in 2010.
- Continued Capital Strength: The ratios of Total Capital to Risk-weighted Assets and Tier 1 Capital to Risk-weighted Assets continue to demonstrate the Company's capital strength. At March 31, 2011, the ratios of Total Capital to Risk-weighted Assets and Tier 1 Capital to Risk-weighted Assets equaled 13.38% and 11.91%, respectively. The ratio of tangible common equity to tangible assets (non-GAAP) equaled 8.83% at March 31, 2011.
HARRISBURG, Pa., April 27, 2011 (GLOBE NEWSWIRE) -- Tower Bancorp, Inc. (Nasdaq:TOBC) (the "Company"), the parent company of Graystone Tower Bank (the "Bank"), reported net income available to shareholders of $218 thousand or $0.02 per diluted share for the quarter ended March 31, 2011. Net income for the first quarter of 2011 was negatively impacted by a net loss of approximately $3.3 million incurred by the American Home Bank division, which was acquired as part of the First Chester County Corporation merger and after-tax merger and restructuring expenses of $697 thousand. Net income for the comparable period in 2010 was $1.9 million or $0.27 per diluted share.
Operating (non-GAAP) income, that is net income recognized in accordance with Generally Accepted Accounting Principles ("GAAP") adjusted for merger-related expenses, restructuring charges, and nonrecurring transactions, totaled $1.1 million or $0.10 per diluted share for the quarter ended March 31, 2011, a decrease of $883 thousand or $0.19 per diluted share when compared to the quarter ended March 31, 2010.
During the first quarter of 2011, the American Home Bank division ("AHB Division"), acquired in connection with the Company's acquisition of First Chester County Corporation ("First Chester"), incurred a net loss of $3.3 million, inclusive of $334 thousand of restructuring charges, as the Company continued to wind down and restructure the division's mortgage banking operations to better align with the Company's community banking model. As a result of these activities, the AHB Division is incurring net losses, which management does not anticipate incurring under normal operating conditions. Accordingly, management believes that separately discussing the results of the AHB Division operations provides useful information that is important to an investor's proper understanding of the results of the Company's business.
"We are encouraged by the core operating results achieved during the first quarter and are eager to realize the full extent of the anticipated cost savings and earnings growth originally expected from the First Chester acquisition," commented Andrew Samuel, Chairman and CEO. "We have successfully completed our system integration related to the First Chester acquisition during the quarter, which has further positioned our Company to build a strong franchise and drive value for our employees, shareholders, customers, and communities."
Board of Directors Declares $0.28 per Share Dividend, Payable on May 27, 2011
Mr. Samuel also reported that the Board of Directors declared a quarterly cash dividend of $0.28 per share, payable on May 27, 2011, to shareholders of record at the close of business on May 13, 2011.
Review of Balance Sheet, Credit Quality and Capital Position
Total assets at March 31, 2011, totaled $2.6 billion, representing a decrease of $131.3 million or 4.8% from December 31, 2010. Total gross loans held for investment were $2.0 billion at March 31, 2011, a decrease of $23.7 million or 1.1% compared to December 31, 2010. This decrease is the result of decreases in commercial loans, consumer loans, and residential mortgages, which decreased $10.0 million, $1.1 million, and $12.7 million, respectively. The decrease in commercial loans is due to loan amortization and pay-downs in principal exceeding originations during the quarter. During the quarter, selected commercial credits had been requested by the Company to make advanced payments to principal in order to reduce the Company risk exposure on these credits, which was a leading contributor to this net decrease. Additionally, the 1N Bank division has hired new loan officers and loan relationship managers who are now managing loan portfolios of existing loan relationships which required additional effort to foster these new relationships and, therefore, detracted from the new loan originations from that division. The decrease in residential mortgages is a product of management's strategy to actively reduce the Company's exposure to interest rate risk. Loans held for sale, representing agency-conforming residential mortgages originated for sale, decreased $106.7 million from December 31, 2010, to $40.6 million at March 31, 2011. This decrease is the direct result of the wind-down efforts at the AHB Division, accounting for $102.3 million of the decrease, coupled with an overall decrease in residential mortgage loan demand due to the soft housing market and the increasing interest rate environment.
The investment portfolio increased $105.4 million or 102.6% from December 31, 2010, to $208.1 million at March 31, 2011, which represents approximately 7.95% of the total assets. Following the First Chester acquisition, the Company liquidated a majority of the investment holdings acquired from First Chester which were not consistent with the credit quality criteria and investment strategies of the Company. The increase during the first quarter of 2011 is the direct result of completing the investment portfolio restructuring following the First Chester merger. Consistent with the Company's historic investment strategy, the investment portfolio consists mostly of agency CMO's, Agency mortgage backed securities, agency securities, and highly rated general obligation municipal bonds.
As previously disclosed, goodwill associated with the First Chester acquisition, which occurred on December 10, 2010, had been recorded based on preliminary fair values as of December 31, 2010. During the first quarter of 2011, the Company recognized an increase of $1.3 million to goodwill due to measurement period adjustments related to the fair value of loans, other real estate owned and contingent liabilities.
Total deposits at March 31, 2011, were $2.2 billion, representing a decrease of $72.0 million, or 3.1%, from December 31, 2010. This decrease is mainly attributable to the strategic run-off of money market deposits and time deposits of $51.5 million and $37.2 million, respectively. These decreases were partially offset by $16.8 million in growth of transaction and savings accounts, which is the result of the Company's strategy on generating low cost deposit accounts. The decreases in money market and time deposits were the result of management's focus on lowering the cost of deposits through decreases in money market interest rates and allowing higher cost short term time deposits to mature without renewal. As of March 31, 2011, total non-reciprocal brokered deposits represented 6.7% of total deposits. The Company's deposit mix continued to be weighted heavily in lower cost demand, savings and money market accounts, which comprised 62.1% of total deposits at March 31, 2011, compared to 61.7% at December 31, 2010. The average cost of deposits decreased by 70 basis points from 1.50% for the quarter ended March 31, 2010 to 0.80% for the quarter ended March 31, 2011. At March 31, 2011, the Company had a weighted average cost of deposits of 1.03% exclusive of amortization from purchase accounting adjustments.
The provision for loan losses was $1.7 million during the first quarter of 2011 compared to $4.1 million for the fourth quarter of 2010 and $1.5 million for the first quarter of 2010. The fourth quarter 2010 provision included a specific reserve of $2.5 million that was placed on a $5.0 million commercial credit. As disclosed previously, the borrower has agreed to refinance the loan with additional collateral and cash flows. Although the process is not progressing as timely as initially anticipated, it is our current expectation that this new financing structure will be completed late in the second quarter or early third quarter of 2011, subject to bankruptcy court approval. The Company recorded $587 thousand in charge-offs during the first quarter down from $2.8 million recognized during the fourth quarter of 2010. The annualized rate of net charge-offs to average loans for the first quarter of 2011 was 0.11%.
During the first quarter of 2011, non-performing assets increased $19.3 million over the fourth quarter of 2010. The main cause of this change is a $14.4 million increase in commercial non-accrual loans primarily related to the addition of two large credits. These two credits have been included in the Company's specific reserve analysis as of March 31, 2011 and, as such, management believes that there is a proper amount reserved against any expected future losses. The larger of these two credits with outstanding amounts due of approximately $10.5 million has been restructured and is in a current status as of March 31, 2011. After several months of continued demonstrated performance in accordance with the restructured terms, management anticipates that this credit would be eligible to be restored to a performing status. Acquired loans deemed to be impaired at the time of purchase in accordance with Accounting Standard Codification 310-30-30, previously known as Statement of Position (SOP) 03-3, "Accounting for Certain Loans Acquired in a Transfer," have been recorded at their fair value based on anticipated future cash flows at the time of acquisition and are considered to be performing loans as the Company expects to fully collect the new carrying value (i.e. fair value) of the loans. For these loans acquired through the First Chester merger, the Company recorded a reduction of $30.3 million to their carrying value to record them at fair value at the time of acquisition. As such, these loans have been excluded from non-performing assets for all periods discussed.
While non-performing assets were up at the end of the first quarter, management remains pleased with the overall performance of the Company's credit portfolio. Non-performing assets to total assets at the end of the first quarter were 1.65%. Although the first quarter allowance for loan loss to non performing loans is lower than the industry average at 38.17%, nearly half of the loan portfolio has been marked to market through purchase accounting within the past two years in connection with the First National Bank of Greencastle and First National Bank of Chester County acquisitions. When including general credit fair value adjustments recorded on the loan portfolio and the allowance for loan loss, the adjusted (non-GAAP) allowance for loan losses to non-performing loans is 87.16% at March 31, 2011.
GAAP requires that expected credit losses associated with loans obtained in an acquisition be reflected at fair value as of each respective acquisition date and prohibits the carryover of the acquired entity's allowance for loan losses. Accordingly, the Company's management believes that presentation of the adjusted (non-GAAP) allowance for loan losses, consisting of the allowance for loan losses plus the credit fair value adjustment on loans purchased in merger transactions, is useful for investors to understand the complete allowance that is recorded as a representation of future expected losses over the Company's loan portfolio. The details of this calculation and reconciliation of GAAP and non-GAAP measures are provided in the Selected Financial Data tables found later in this release.
Income Statement Review
Net income for the first quarter of 2011 equaled $218 thousand, which is a decrease of $1.7 million as compared to the first quarter of 2010. When compared to the first quarter of 2010, operating (non-GAAP) income, representing net income adjusted for merger expenses, restructuring charges and nonrecurring transactions, decreased $883 thousand or ($0.19) per diluted share for the first quarter 2011 to $1.1 million or $0.10 per diluted share. Operating (non-GAAP) income excludes $161 thousand in after-tax merger expenses and $754 thousand in after-tax restructuring charges for the first quarter of 2011. Included in both net income and operating (non-GAAP) income for the quarter ended March 31, 2011, are the results of operations for the AHB Division. During the fourth quarter of 2010, the Company initiated plans to wind down the operations of the AHB Division which resulted in a significant decrease in revenue generating activities by that division. As a result of the decreased activities, the AHB Division incurred a $3.3 million net loss during the first quarter of 2011. Included in this net loss are $334 thousand in pre-tax restructuring charges.
Net interest income for the first quarter of 2011 increased $12.4 million or 102.5% from $12.0 million for the first quarter of 2010 to $24.4 million for the first quarter of 2011. When compared to the first quarter of 2010, the net interest margin increased 60 basis points from 3.62% to 4.22%. Average investments decreased $17.5 million and average loans increased $1.0 billion, when compared to the first quarter of 2010, while the average rate received on interest earning assets decreased by 5 basis points. The Company anticipates further growth of the investment portfolio but, at a more moderate rate, during the remainder of the calendar year. The average balance of interest-bearing liabilities for the first quarter of 2011 increased by $872.9 million but the effect on interest expense was partially offset by the reduction in the average rate paid by 70 basis points compared to the first quarter of 2010. Exclusive of the amortization of purchase accounting fair value adjustments, the yield on interest earning assets would have been 4.97%, the cost of interest bearing liabilities would have been 1.39%, and net interest margin would have been 3.76%.
Non-interest income was $5.2 million for the first quarter of 2011, which represents 0.79% of average assets on an annualized basis. When compared to the first quarter of 2010, non-interest income increased by $3.3 million or 164.9%, primarily due to increases in service charges on deposit accounts of $369 thousand, other service charge income of $1.3 million, and gains on sale of mortgage loans held for sale of $1.2 million. These increases are the result of an increased asset and deposit base in addition to the additional fee income generated by the wealth management function acquired in the First Chester acquisition and the increased gains on sales of mortgages held for sale by the AHB Division.
Non-interest expense increased $17.8 million or 181.3% to $27.6 million for the first quarter of 2011 from $9.8 million for the first quarter of 2010. The Company experienced increases in all categories of non-interest expense. The largest increases in non-interest expenses occurred in salaries and benefits expense, occupancy expenses, professional service fees, merger expenses, and restructuring charges. The rising costs in these areas can be attributed to costs incurred to support branch network expansion, balance sheet growth, costs associated with the integration of the operations of the acquired First Chester County Corporation, and the restructuring of the AHB Division. Total non-interest expenses directly attributable to the 1N Bank and AHB Division locations accounted for $8.1 million of the variance from the first quarter of 2010. During the quarter, the Company incurred $1.4 million in merger and restructuring expenses, which is an increase of $1.3 million over the first quarter of 2010. The Company did not realize the full extent of the anticipated cost savings related to the integration of First Chester since the operating systems were not combined until February of 2011 and a significant portion of the wind down of the AHB Division operations, including the reduction in staffing levels, did not occur until the end of March 2011.
Income tax expense for the quarter ended March 31, 2011, was $146 thousand, which resulted in an effective tax rate of 29.9%, a decrease in the effective tax rate from 31.2% for the same period of 2010. The decrease in effective rate is mostly attributable to increases in non-taxable income from the appreciation in the cash surrender value of bank owned life insurance.
Developments Regarding the American Home Bank Division
As previously disclosed, the Company had initiated a plan during the fourth quarter of 2010 to wind down the operations of the AHB Division, which generates residential mortgage loans for the purpose of selling those loans to the secondary market. During March of 2011, the Company substantially completed the wind down of the operations of the AHB division with the completion of the wind down and restructuring anticipated to occur by the end of the second quarter of 2011. The AHB Division incurred a net loss of approximately $3.3 million for the first quarter of 2011. The Company expects further operating losses will occur during the second quarter of 2011 as the wind down is finalized, but at a significantly lower level than experienced in the first quarter of 2011. The Company believes that it recognized the majority of the anticipated restructuring and wind down costs during the fourth quarter of 2010 and the first quarter of 2011.
The financial information contained on the following pages provides more detail on the Company's performance for the quarter-ended March 31, 2011, as compared to the quarter-ended December 31, 2010, and the quarter-ended March 31, 2010. Additionally, the following pages provide detail on the Company's financial condition as of March 31, 2011, as compared to December 31, 2010. Persons seeking additional information should refer to the Company's periodic reports as filed with the Securities and Exchange Commission (SEC).
A conference call will be held at 10 a.m. (ET) on Wednesday, April 27, 2011, to discuss the Company's financial results.The conference call will be broadcast live through the Company's website at www.towerbancorp.com, by clicking on the link to the webcast, Confirmation Code: 59587388. Participants using the webcast option are encouraged to log on 10 minutes ahead of the scheduled starting time for the call. There will also be a call in option available by dialing 877-878-1863. A password is not necessary. A webcast replay will be available on the Company's website for 30 days following the call. A call-in replay option will also be available beginning April 27, 2011 at 1:00 p.m. (ET), through April 29, 2011, 11:59 p.m. (ET) at 800-642-1687, Passcode: 59587388.
Supplemental Information – Explanation of Non-GAAP Financial Measures
This press release contains financial information determined by methods other than in accordance with GAAP. These measures include tangible assets, tangible common equity, operating income and performance and capital ratios derived from the foregoing. Tangible assets and tangible common equity are derived by reducing the balance of assets and equity, respectively, by the amount of GAAP reported goodwill and other intangible assets. Operating income is calculated by adjusting net income available to common shareholders for merger-related expenses and other nonrecurring transactions that occurred during the period presented, since such expenses are considered by management to be "non-operating" in nature. The Company calculates the return on average tangible equity by excluding the balance of intangible assets and their related amortization expense from the calculation of return on average equity. The Company believes the presentation of these non-GAAP financial measures provide useful supplemental information that is essential to an investor's proper understanding of the operating results of the Company's core businesses. The Company's management uses these non-GAAP financial measures in their analysis of the Company's performance. These non-GAAP disclosures should not be viewed as a substitute for financial measures determined in accordance with GAAP, nor are they necessarily comparable to non-GAAP performance measures that may be presented by other companies. Reconciliations of GAAP to non-GAAP measures are included as tables at the end of this release.
About Tower Bancorp, Inc.
Tower Bancorp, Inc. is the parent company of Graystone Tower Bank, a full-service community bank operating 49 branch offices in central and southeastern Pennsylvania and Maryland through three divisions, Graystone Bank, Tower Bank, and 1N Bank. With total assets of approximately $2.6 billion, Tower Bancorp's unparalleled competitive advantage is its employees and a strong corporate culture paired with a clear vision that provides customers with uncompromising service and individualized solutions to every financial need. Tower Bancorp's common stock is listed on the NASDAQ Global Select Market under the symbol "TOBC." More information about Tower Bancorp and its divisions can be found on the internet at www.yourtowerbank.com, www.graystonebank.com and .
The Tower Bancorp, Inc. logo is available at http://www.globenewswire.com/newsroom/prs/?pkgid=7686
Safe Harbor for Forward-Looking Statements
This document contains forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. Actual results and trends could differ materially from those set forth in such statements due to various risks, uncertainties and other factors. Such risks, uncertainties and other factors that could cause actual results and experience to differ from those projected include, but are not limited to, the following: ineffectiveness of the company's business strategy due to changes in current or future market conditions; the effects of competition, and of changes in laws and regulations, including industry consolidation and development of competing financial products and services; interest rate movements; changes in credit quality; inability to achieve merger-related synergies; difficulties in integrating distinct business operations, including information technology difficulties; volatilities in the securities markets; and deteriorating economic conditions, and other risks and uncertainties, including those detailed in Tower Bancorp, Inc.'s filings with the Securities and Exchange Commission (SEC). The statements included herein are valid only as of the date hereof and Tower Bancorp, Inc. disclaims any obligation to update this information.
Selected Financial Highlights
CONTACT: Media Contact: Andrew Samuel 717.724.2800 Investor Relations Contact: Brent Smith 717.724.4666