Tower Financial Corporation Reports Earnings of $0.14 Per Share

FORT WAYNE, Ind., July 22, 2010 (GLOBE NEWSWIRE) -- Tower Financial Corporation (Nasdaq:TOFC) reported net income of $629,000 or $0.14 per diluted share for the second quarter of 2010, compared with a net loss of $4.1 million, or $1.00 per share, reported for the second quarter 2009. This brings year to date net income to $1.3 million, or $0.31 per diluted share, compared to a year to date net loss of $3.7 million, or $0.90 per share at June 30, 2009.

Second quarter highlights include:

• The net interest margin grew for the fifth consecutive quarter. The net interest margin for the second quarter was 3.73 percent, a 7 basis point improvement from the first quarter 2010, and a 71 basis point improvement from the second quarter 2009. 
• The Company's regulatory capital ratios continue to remain significantly above "well-capitalized" levels. Excess capital as of June 30, 2010 is $17.0 million based on the Total Risked Based capital ratio and $30.0 million based on the Leverage ratio.
• Non-accrual loans decreased by $3.6 million, or 25.9 percent during the second quarter and have been reduced by $8.7 million, or 45.5 percent since June 30, 2009.
• Normal operating expenses (excludes expenses related to OREO and special one-time industry wide FDIC assessment) decreased by $134,000 from the first quarter 2010 and $415,000 from the second quarter of 2009.

Mike Cahill, President and CEO of Tower Financial Corporation stated: "In the past year, we have continued to aggressively address our core earnings drivers such as net interest margin and operating expenses, and focus on increasing the speed of resolution of our asset quality issues. These efforts combined with maintaining robust capital levels are beginning to produce consistent results. The progress made over the past year has been significant with regard to almost all of our operating and earning components. I am grateful to my fellow team members for their efforts and accomplishments to date; however, we still have more work ahead of us in order to deliver the appropriate results to our shareholders. The regulatory and economic climate does not look to be helpful to the banking community at large over the second half of 2010. There will be a squeeze on net interest margins, increased regulatory costs and fees, decreases in certain areas of fee revenue, and continued low demand for lending related to business investment. However, we believe we are poised to consistently improve over the next 12 months, despite this difficult operating environment."

Capital

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 June 30, 2010, increased to 11.6 percent, compared to 11.1 percent at March 31, 2010 and 10.9 percent at December 31, 2009. Total risked-based capital at June 30, 2010, increased to 13.1 percent, compared to 12.7 percent at March 31, 2010 and 12.5 percent at December 31, 2009. Leverage capital increased to 9.5 percent at June 30, 2010, well above the regulatory requirement of 5 percent to be considered "well-capitalized". 

The following table shows the current Capital position as of June 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 $20.9 million, or 3.2 percent of total assets as of June 30, 2010. This compares with $23.6 million, or 3.5 percent of total assets at March 31, 2010 and $20.6 million, or 3.0 percent of assets at December 31. Net charge-offs were $532,000 compared to $789,000 for the first quarter 2010 and $4.5 million for the fourth quarter 2009.  

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

The OREO balance includes several properties for which purchase agreements totaling $815,000 have been signed and $650,000 in pending sales from an auction conducted in early June. We expect to receive the funds for these transactions early in the third quarter. Upon collection, the pending sales proceeds will reduce the balance in OREO by approximately $1.4 million. Losses on these unfunded sales transactions totaled approximately $228,000 and have been reflected in the June 30, 2010 operating statement. Had these sales close prior to quarter end, our nonperforming assets at June 30, 2010 would have been $19.9 million, or 3.0 percent of total assets.

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 Acquisition and Development category was reduced by $3.5 million during the second quarter. One relationship totaling $2.2 million was foreclosed on and taken into the OREO category, while another relationship was resolved and upgraded back to accruing status. The remaining categories remained relatively static during the quarter.

Trouble-debt restructured has only two relationships within the category, of which one relationship makes up $1.8 million, or 95.0 percent of the balance. This property has a purchase agreement in place which, upon closing, will allow us to bring this to final resolution in the fall of 2010. 

The allowance for loan losses increased $568,000 during the second quarter of 2010 and was 2.5 percent of total loans at June 30, 2010, an increase from 2.32 percent at March 31, 2010 and 2.20 percent at December 31, 2009. The year to date increase was the net result of a reduction in loan outstandings of $17.7 million, net charge-offs of $1.3 million, and loan loss provision of $2.4 million. This increased provisioning was primarily driven by a deliberate focus by management on reserve building, recognition of valuation changes in the marketplace related to underperforming assets and the collateral value backing these assets, and current economic factors in our markets.

Balance Sheet

Company assets were $658.4 million at June 30, 2010, a decrease of $21.7 million, or 3.2 percent from December 31, 2009. The decrease in assets was primarily attributable to decreases in loans held for sale of $2.1 million, loans of $17.7 million, and cash of $7.5 million. These changes were offset by an increase in long term investments of $5.5 million.

Total loans at June 30, 2010 were $509.7 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 $8.1 million, Residential mortgage loans by $4.9 million, Commercial Real Estate by $2.3 million, Consumer loans by $1.9 million and Home Equity loans by $0.5 million. 

Long term investments at June 30, 2010 were $99.5 million, an increase of $5.5 million.  Long-term investment now comprise 15.1 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 June 30, 2010 were $565.0 million compared to $568.4 million at December 31, 2009, a decrease of $3.4 million, or 0.6 percent. Core deposits declined by $18.0 million, led by decreases in certificates of deposit less than $100,000 of $16.4 million, non-interest bearing checking accounts balances of $10.0 million, and money market account balances of $4.4 million. These decreases were offset by growth in our health savings account balances of $9.9 million and $2.8 million in savings accounts. Certificates of deposit greater than $100,000 decreased by $12.8 million. Offsetting these decreases was in increase in brokered CD's totaling $27.4 million. The growth in brokered CD's was purposeful as we took advantage of the favorable rate environment to lock in low 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 six years. The average rate on our brokered CD purchases was 2.9 percent.

Shareholders' equity was $49.0 million at June 30, 2010, an increase of 4.5 percent from the $46.9 million reported at December 31, 2009. Affecting the increase in stockholders' equity was net income of $1.3 million, $23,000 of additional paid in capital from the FAS123R accounting treatment for stock options, and an increase of $755,000 in unrealized gains, net of tax, on securities available for sale. Period-end common shares outstanding were 4,090,432.

Operating Statement

Total revenue, consisting of net interest income and noninterest income, was $7.3 million for the second quarter 2010, an increase of $170,000 from the first quarter 2010 and an increase of $910,000 from the second quarter 2009.  Second quarter 2010 net interest income was $5.6 million an increase of $34,000, or 0.6 percent from the first quarter 2010 and an increase of $775,000 million, or 16.1 percent compared to the second quarter 2009. The increase in net interest income from the first quarter 2010 was the result of a 7 basis point improvement in our net interest margin, offset by a $13.8 million reduction in average earning assets. Net interest margin for the second quarter was 3.73 percent marking the fifth consecutive quarterly increase.  Overall, our margin has increased by 88 basis points from its low point in the first quarter of 2009.

Noninterest income accounted for approximately 23.7 percent of total revenue. For the second quarter, noninterest income was $1.7 million, an increase of $136,000, or 8.5 percent from the first quarter 2010 and an increase of $135,000 from the second quarter 2009. The increase from the first quarter 2010 came primarily from increases in Loan brokerage fees, Purchased Receivables fees, and Debit/ATM card interchange fees. Trust and brokerage fees were relatively flat quarter over quarter. Trust assets under management at June 30, 2010 were $600 million, compared to $614 million at March 31, 2010 and $558 million at June 30, 2009. Brokerage assets under management were $142 million at June 30, 2010, compared to $146 million at March 31, 2010 and $106 million at June 30, 2009. The relatively flat performance in assets under management was due to negative market fluctuations offsetting the addition of new accounts.

Non-interest expenses were $5.5 million, an increase of $564,000 from the first quarter of 2010 and a decrease of $1.0 million from the second quarter of 2009. The increase from the first quarter was comprised entirely of $754,000 in expense related to OREO properties. Approximately $228,000 of the OREO expenses related to losses on disposition, while the remainder related to valuation write-downs on the rest of the OREO portfolio. OREO expenses were $56,000 for the first quarter 2010 and $1.0 million for the second quarter 2009. Not counting OREO expenses, operating expenses decreased by $134,000 from the first quarter 2010 and $730,000 from the second quarter 2009. The decrease from the first quarter 2010 relates primarily to employment expenses, which were down by $95,000. The decrease from the second quarter 2009 relates primarily to a decrease of $353,000 in employment expenses, a decrease of $211,000 in processing costs, and a decrease of $189,000 in FDIC premiums. The decrease in processing costs relates to credits associated with migrating our core processing system to a new provider during the first quarter of 2010. The decrease in FDIC premiums relates to the special assessment of $315,000 that was charged to all banks in the second quarter of 2009. Normal premiums are up by $126,000. 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 remainder of 2010.

ABOUT THE COMPANY

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

FORWARD-LOOKING STATEMENTS

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 enforecement; 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