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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended MARCH 31, 2004
[ ] TRANSITION REPORT PURSUANT TO 13 or 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 000-25287
TOWER FINANCIAL CORPORATION
- --------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
INDIANA 35-2051170
------- ----------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
116 East Berry Street, Fort Wayne, Indiana 46802
(Address of principal executive offices)
(260) 427-7000
- --------------------------------------------------------------------------------
(Registrant's telephone number)
Indicate by check whether the Registrant (1) filed all reports required
to be filed by Section 13 or 15(d) of the Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
Indicate by check whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [ X ]
Number of shares of the issuer's common stock, without par
value, outstanding as of April 30, 2004: 3,944,394.
1
INDEX
page no.
PART I. FINANCIAL STATEMENTS
Item 1. Financial Statements
Consolidated Condensed Balance Sheets at March 31, 2004 (unaudited) and December 31, 2003......... 3
Consolidated Condensed Statements of Operations for the three months ended March 31, 2004 and
March 31, 2003 (unaudited) ...................................................................... 4
Consolidated Condensed Statements of Comprehensive Income for the three months ended March 31,
2004 and March 31, 2003 (unaudited) ............................................................. 5
Consolidated Condensed Statements of Changes in Stockholders' Equity for the three months ended
March 31, 2004 and March 31, 2003 (unaudited) ................................................... 6
Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2004 and
March 31, 2003 (unaudited) ...................................................................... 7
Notes to Consolidated Condensed Financial Statements.............................................. 8
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations............. 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................................ 17
Item 4. Controls and Procedures........................................................................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................................. 21
Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities.................. 21
Item 6. Exhibits and Reports on Form 8-K.................................................................. 21
SIGNATURES .......................................................................................................... 21
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
At March 31, 2004 and December 31, 2003
(unaudited)
MARCH 31, DECEMBER 31,
2004 2003
--------------- ---------------
ASSETS
Cash and due from banks $ 10,651,335 $ 12,708,817
Short-term investments and interest-earning deposits 6,831,961 4,017,755
Federal funds sold 10,059,037 11,115,643
--------------- ---------------
Total cash and cash equivalents 27,542,333 27,842,215
Securities available for sale, at fair value 28,287,342 24,324,935
FHLB and FRB stock 2,346,500 2,332,500
Loans 382,941,007 376,838,578
Allowance for loan losses (5,367,914) (5,259,273)
--------------- ---------------
Net loans 377,573,093 371,579,305
Premises and equipment, net 2,926,534 2,932,580
Accrued interest receivable 1,437,950 1,289,370
Other assets 5,940,069 6,168,085
--------------- ---------------
Total assets $ 446,053,821 $ 436,468,990
=============== ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Noninterest-bearing $ 48,269,308 $ 62,638,230
Interest-bearing 322,683,540 300,238,538
--------------- ---------------
Total deposits 370,952,848 362,876,768
Short-term borrowings 500,000 1,060,000
Federal Home Loan Bank (FHLB) advances 27,000,000 27,000,000
Junior subordinated debt 3,608,000 3,608,000
Accrued interest payable 332,994 278,964
Other liabilities 2,036,585 736,609
--------------- ---------------
Total liabilities 404,430,427 395,560,341
STOCKHOLDERS' EQUITY
Preferred stock, no par value, 4,000,000 shares authorized;
no shares issued and outstanding
Common stock and paid-in-capital, no par value, 6,000,000 shares authorized;
3,944,394 shares issued and outstanding at March 31, 2004 and 3,942,519
shares issued and outstanding at December 31, 2003 37,347,861 37,322,694
Retained earnings 4,041,282 3,560,844
Accumulated other comprehensive income, net of tax of
$156,167 at March 31, 2004 and $16,741 at December 31, 2003 234,251 25,111
--------------- ---------------
Total stockholders' equity 41,623,394 40,908,649
--------------- ---------------
Total liabilities and stockholders' equity $ 446,053,821 $ 436,468,990
=============== ===============
The following notes are an integral part of the financial statements.
3
TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
For the three months ended March 31, 2004 and 2003
(unaudited) (unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2003
--------------- ---------------
INTEREST INCOME:
Loans, including fees $ 4,443,650 $ 4,132,426
Securities - taxable 186,362 85,831
Securities - tax exempt 89,282 16,710
Other interest income 29,928 41,975
--------------- ---------------
Total interest income 4,749,222 4,276,942
INTEREST EXPENSE:
Deposits 1,231,220 1,330,746
Short-term borrowings 3,646 2,969
FHLB advances 163,731 144,060
Junior subordinated debt 81,180 81,765
--------------- ---------------
Total interest expense 1,479,777 1,559,540
--------------- ---------------
Net interest income 3,269,445 2,717,402
PROVISION FOR LOAN LOSSES 500,000 845,000
--------------- ---------------
Net interest income after provision
for loan losses 2,769,445 1,872,402
NONINTEREST INCOME:
Trust fees 406,832 355,960
Service charges 158,359 149,287
Loan broker fees 87,764 200,645
Net gain on sale of securities 2,910 190,766
Other fees 132,569 141,209
--------------- ---------------
Total noninterest income 788,434 1,037,867
NONINTEREST EXPENSE:
Salaries and benefits 1,531,697 1,271,715
Occupancy and equipment 336,664 303,778
Marketing 188,650 52,930
Data processing 88,519 88,879
Loan and professional costs 240,747 169,656
Office supplies and postage 92,250 70,827
Courier services 71,177 67,834
Business development 75,130 81,434
Other expense 181,957 518,545
--------------- ---------------
Total noninterest expense 2,806,791 2,625,598
--------------- ---------------
INCOME BEFORE INCOME TAXES 751,088 284,671
Income taxes expense 270,650 99,200
--------------- ---------------
NET INCOME $ 480,438 $ 185,471
=============== ===============
BASIC EARNINGS PER COMMON SHARE $ 0.12 $ 0.05
DILUTED EARNINGS PER COMMON SHARE $ 0.12 $ 0.05
Average common shares outstanding 3,943,512 3,931,319
Average common shares and dilutive
potential common shares outstanding 4,044,039 4,002,326
The following notes are an integral part of the financial statements
4
TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
For the three months ended March 31, 2004 and 2003
(unaudited) (unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2003
--------------- ---------------
Net income $ 480,438 $ 185,471
Other comprehensive income (loss):
Change in net unrealized appreciation (depreciation) on securities available
for sale, net of tax of $139,426 in 2004, and $(99,517) in 2003 209,140 (149,276)
--------------- ---------------
COMPREHENSIVE INCOME $ 689,578 $ 36,195
=============== ===============
The following notes are an integral part of the financial statements.
5
TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the three months ended March 31, 2004 and 2003 (unaudited)
COMMON ACCUMULATED
STOCK AND OTHER
PAID-IN RETAINED COMPREHENSIVE
CAPITAL EARNINGS INCOME (LOSS) TOTAL
--------------- --------------- --------------- ---------------
BALANCE, JANUARY 1, 2003 $ 37,190,692 $ 1,760,778 $ 223,393 $ 39,174,863
Net income for 2003 185,471 185,471
Issuance of 1,010 shares of common
stock for stock options exercised 10,289 10,289
Change in net unrealized
appreciation (depreciation)
on securities available
for sale, net of tax of $(99,517) (149,276) (149,276)
--------------- --------------- --------------- ---------------
BALANCE, MARCH 31, 2003 $ 37,200,981 $ 1,946,249 $ 74,117 $ 39,221,347
=============== =============== =============== ===============
BALANCE, JANUARY 1, 2004 $ 37,322,694 $ 3,560,844 $ 25,111 $ 40,908,649
Net income for 2004 480,438 480,438
Issuance of 1,875 shares of common
stock for stock options exercised 22,932 22,932
Tax benefit on non-qualified
stock options 2,235 2,235
Change in net unrealized
appreciation (depreciation)
on securities available
for sale, net of tax of $139,426 209,140 209,140
--------------- --------------- --------------- ---------------
BALANCE, MARCH 31, 2004 $ 37,347,861 $ 4,041,282 $ 234,251 $ 41,623,394
=============== =============== =============== ===============
The following notes are an integral part of the financial statements.
6
TOWER FINANCIAL CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
For the three months ended March 31, 2004 and 2003
(unaudited) (unaudited)
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2004 MARCH 31, 2003
--------------- ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 480,438 $ 185,471
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 161,343 138,570
Provision for loan losses 500,000 845,000
Earnings on life insurance (8,818) (27,437)
Net gain on sale of securities (2,910) (190,766)
FHLB stock dividend (14,000)
Change in accrued interest receivable (148,580) (49,540)
Change in other assets 97,409 86,004
Change in accrued interest payable 54,030 (1,663)
Change in other liabilities 1,299,976 (945,693)
Origination of loans held for sale (8,690,900)
Proceeds from sales of loans held for sale 13,200,809
--------------- ---------------
Net cash from operating activities 2,418,888 4,549,855
CASH FLOWS FROM INVESTING ACTIVITIES:
Net change in loans (10,154,147) (19,724,718)
Purchase of securities available for sale (6,727,049) (3,341,816)
Proceeds from maturities of securities
available for sale 2,593,835 1,204,093
Proceeds from sale of securities
available for sale 501,769 3,174,780
Purchase of life insurance (3,000,000)
Proceeds from sale of participation loans 3,660,359
Purchase of equipment and leasehold
expenditures (134,784) (100,214)
--------------- ---------------
Net cash from investing activities (10,260,017) (21,787,875)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in deposits 8,076,080 23,470,681
Net change in short-term borrowings (560,000)
Gross proceeds from issuance of common stock
from exercise of stock options and tax benefits 25,167 10,289
Proceeds from FHLB advances 5,000,000
Repayment of FHLB advances (5,000,000) (2,500,000)
--------------- ---------------
Net cash from financing activities 7,541,247 20,980,970
--------------- ---------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (299,882) 3,742,950
Cash and cash equivalents, beginning of period 27,842,215 36,168,679
--------------- ---------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 27,542,333 $ 39,911,629
=============== ===============
Supplemental disclosures of cash flow information Cash paid during the year for:
Interest $ 1,425,747 $ 1,561,203
Income taxes 32,000
The following notes are an integral part of the financial statements.
7
TOWER FINANCIAL CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. ORGANIZATION: Tower Financial Corporation (the "Company") was
incorporated on July 8, 1998. The Company's wholly-owned subsidiary,
Tower Bank & Trust Company (the "Bank") opened on February 19, 1999
after receiving federal and state bank regulatory approvals to
commence its banking operations. The Company's wholly-owned special
purpose trust subsidiary, Tower Capital Trust 1 ("TCT1"), was
incorporated on November 1, 2001 for the single purpose of issuing
trust preferred securities.
b. BASIS OF PRESENTATION: The accompanying unaudited consolidated
condensed financial statements were prepared in accordance with
generally accepted accounting principles for interim periods and with
instructions for Form 10-Q and, therefore, do not include all
disclosures required by generally accepted accounting principles for
complete presentation of the Company's financial statements. In the
opinion of management, the unaudited consolidated condensed financial
statements contain all adjustments necessary to present fairly its
consolidated financial position at March 31, 2004 and its consolidated
results of operations, comprehensive income, changes in stockholders'
equity and cash flows for the three-month periods ended March 31, 2004
and March 31, 2003. The results for the period ended March 31, 2004
should not be considered as indicative of results for a full year.
These consolidated condensed financial statements should be read in
conjunction with the audited financial statements for the years ended
December 31, 2003, 2002, and 2001 and related notes included in the
Company's Annual Report on Form 10-K for the year ended December 31,
2003.
c. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated condensed
financial statements include the accounts of the Company and the Bank.
All significant intercompany accounts and transactions have been
eliminated in consolidation. As was discussed in Note 8 of the 2003
annual report, a trust (TCT1) that had previously been consolidated
with the Company prior to December 31, 2003 is now reported
separately, under the caption junior subordinated debt. The effect of
no longer consolidating the trust does not significantly change the
amounts reported as the Company's assets, liabilities, equity or
interest expense.
d. STOCK COMPENSATION: Employee compensation expense under stock options
is reported using the intrinsic value method. No stock-based
compensation cost is reflected in net income, as all options had an
exercise price equal to or greater than the market price of the
underlying common stock at date of grant. The following table
illustrates the effect on net income and earnings per share if expense
was measured using the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation.
MARCH 31,
---------------------------------
2004 2003
----------- -----------
Net income as reported $ 480,438 $ 185,471
Deduct: Stock-based compensation expense
determined under fair value-based method (28,782) (32,730)
----------- -----------
Pro forma net income $ 451,656 $ 152,741
=========== ===========
Basic earnings per share as reported $ 0.12 $ 0.05
Pro forma basic earnings per share 0.11 0.04
Diluted earnings per share as reported 0.12 0.05
Pro forma diluted earnings per share 0.11 0.04
The pro forma effects are computed using option pricing
models, with the following weighted average assumptions as the
date of grant: (No grants were made during the first quarter
2004).
8
MARCH 31,
------------------
2004 2003
---- ----
Risk-free interest rate None 3.15%
Expected option life None 5.5 years
Expected stock price volatility None 25.86%
Dividend yield None None
e. EFFECT OF NEWLY ISSUED BUT NOT YET EFFECTIVE ACCOUNTING STANDARDS:
THERE ARE NO NEWLY ISSUED BUT NOT YET effective accounting standards
issued by the Financial Accounting Standard Board that would
materially affect the Company's financial position or results of
operations.
f. RECLASSIFICATIONS: Certain items from the prior period financial
statements were reclassified to conform to the current presentation.
NOTE 2 - EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted earnings
per common share for the three-month periods ended March 31, 2004 and 2003.
THREE MONTHS
ENDED MARCH 31,
------------------------------
2004 2003
---------- ----------
BASIC
Net income $ 480,438 $ 185,471
---------- ----------
Weighted average common shares outstanding 3,943,512 3,931,319
---------- ----------
Basic earnings per common share $ 0.12 $ 0.05
DILUTED
Net income $ 480,438 $ 185,471
---------- ----------
Weighted average common shares outstanding 3,943,512 3,931,319
Add: dilutive effect of assumed stock option exercises 100,527 71,007
---------- ----------
Weighted average common shares and dilutive
potential common shares outstanding 4,044,039 4,002,326
---------- ----------
Diluted earnings per common share $ 0.12 $ 0.05
NOTE 3 - STOCK OPTION PLANS
Options to buy stock are granted to directors, officers and employees under
the 1998 and 2001 Stock Option and Incentive Plans (the "Plans"), which
together provide for issuance of up to 435,000 shares of common stock of
the Company. The exercise price of stock options granted under the Plans
may not be less than the market price at the date of grant. The maximum
option term is ten years. Option vesting occurs over various periods of
time ranging from immediate to four years.
At March 31, 2004, options for 389,603 shares were outstanding to certain
officers, employees and directors. The options were granted at the market
price on the dates of the grant in a range from $7.625 to $13.55 per share.
Of the total options outstanding, options for 321,338 shares were vested
and exercisable at March 31, 2004. During the first quarter of 2004, no
options were granted, 1,875 options were exercised and 8,875 non-vested
options were forfeited. During the first quarter of 2003, there were 33,250
options granted at a price of $13.35 per share and 1,010 options were
exercised.
NOTE 4 - CONTINGENCY LOSS
During 2003 the Company discovered losses in its mortgage operations as a
result of unauthorized mortgage loans and improper mortgage transactions
and other unreconciled activity in a mortgage operating account. During
2003, the Company recorded total pretax charges of $965,000 of which
$600,000 was recorded through the provision for loan losses and $365,000
was recorded as additions to other expense. The Company had previously
recorded a $428,000 addition to other expense
9
during the fourth quarter of 2002 as audit results showed stale-dated
receivables existed in the mortgage operating account. Further
investigation by the Company in 2003 uncovered unauthorized loans and
improper mortgage activity in the operating account.
An employee of the Company was terminated as a result this investigation,
and management made appropriate changes to internal controls during 2003.
During 2002 and 2003, a total of $1,393,000 was recorded to address these
identified issues excluding any professional expenses needed to
investigate, document and support our insurance claim. While the
investigation into this matter is concluding, the Company believes it has
identified the majority of the losses and it is attempting to recover such
losses through collection efforts and fidelity bond insurance.
The majority of the losses detailed above were recorded in the first
quarter of 2003 totaling pretax charges of $720,000. The first quarter 2003
charges were recorded as a $445,000 addition to the provision for loan
losses for unauthorized mortgage loans and a $275,000 addition to other
expense.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following presents management's discussion and analysis of the consolidated
financial condition of the Company as of March 31, 2004 and December 31, 2003
and results of operations for the three-month periods ended March 31, 2004 and
March 31, 2003. This discussion should be read in conjunction with the Company's
unaudited consolidated condensed financial statements and the related notes
appearing elsewhere in this report and the Company's Annual Report on Form 10-K
for the year ended December 31, 2003.
FORWARD-LOOKING STATEMENTS
This report includes "forward-looking statements." All statements regarding the
Company's expected financial position, business and strategies are
forward-looking statements and the Company intends for them to be covered by the
safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995. The words "anticipates," "believes,"
"estimates," "seeks," "expects," "plans," "intends," and similar expressions, as
they relate to the Company, the Bank or its management, are intended to identify
forward-looking statements. Although the Company believes that the expectations
reflected in these forward-looking statements are reasonable and has based these
expectations on its beliefs as well as assumptions it has made, these
expectations may prove to be incorrect. Important factors that could cause
actual results to differ materially from the Company's expectations include,
without limitation, the following:
- the effect of extensive banking regulation on the Bank's ability to
grow and compete;
- the effect of changes in federal economic and monetary policies on the
Bank's ability to attract deposits, make loans and achieve
satisfactory interest spreads;
- the competitive disadvantage resulting from the Company's status as a
highly regulated, start-up company;
- the Company's dependence on key management personnel;
- the increased risk of losses due to loan defaults caused by the Bank's
commercial loan concentration;
- the Company's dependence on a favorable local economy in the Bank's
primary service area;
- the Bank's dependence on net interest spread for profitability;
- the Bank's ability to implement developments in technology to be
competitive;
- failure of a significant number of borrowers to repay their loans;
- general changes in economic conditions, including interest rates and
real estate values; and
- restrictions imposed on the Company by regulators or regulations of
the banking industry.
Readers are also directed to other risks and uncertainties discussed in other
documents filed by the Company with the Securities and Exchange Commission. The
Company undertakes no obligation to update or revise any forward-looking
information, whether as a result of new information, future developments or
otherwise.
10
CRITICAL ACCOUNTING POLICIES
A comprehensive discussion of the Company's critical accounting policies is
disclosed in our Annual Report on Form 10-K for the year ended December 31,
2003. There have been no material changes in the information regarding our
critical accounting policies since December 31, 2003.
FINANCIAL CONDITION
The Company continued to experience growth in the first quarter of 2004. Total
assets of the Company were $446.1 million at March 31, 2004 compared to total
assets at December 31, 2003 of $436.5 million. The 2.2% increase in assets was
mainly due to an increase in loans and was supported in part by an $8.1 million
inflow of funds from deposit growth at the Bank during the first quarter of
2004. While assets increased during the first quarter of 2004, the rate of
growth was less in the first quarter of 2004 than the substantial growth
experienced during most of the quarters since the Bank began operations. The
growth during previous quarters was also a result of deposit growth at the Bank.
Management believes that the smaller growth levels reflected during the last few
quarters have been a result of a lagging local economy. As the Bank enters its
sixth year of operation, the Company anticipates that, in the near-term, assets
will increase at a volume similar to our more recent historical trends as the
economy improves and as we continue to market our institution, products and
banking expertise, deliver a high level of customer service and develop our
branch network.
Cash and Investments. Cash and cash equivalents, which include federal funds
sold, were $27.5 million at March 31, 2004, a $0.3 million, or 1.1%, decrease
from $27.8 million at December 31, 2003. Securities available for sale were
$28.3 million at the end of the first quarter of 2004, an increase of $4.0
million from December 31, 2003. The net decrease in cash and cash equivalents
during the first quarter of 2004 was reflective of the cash needs of the Bank
relative to loan growth, the purchase of investments and normal daily liquidity
activity. The increase in securities available for sale was a result of planned
purchases of investments to continue to diversify the earning assets, net of a
sale of an investment and normal payment, maturity and call activity for the
Bank's investment portfolio during the first quarter of 2004.
Loans. Total loans were $382.9 million at March 31, 2004 reflecting a 1.6%
increase from total loans of $376.8 million at December 31, 2003. Loan growth in
the first quarter of 2004 occurred in the mortgage and commercial real estate
portfolios. The mix of the loan portfolio has not materially changed since
year-end as the total of commercial and commercial real estate loans remained
approximately 79.2% of the portfolio at March 31, 2004 and at December 31, 2003.
Management believes that the aggregate loan growth during the first quarter of
2004 was the result of the Bank's lending experience and client demand in our
local markets.
The following table summarizes the composition of the loan portfolio at the
dates indicated:
MARCH 31, 2004 DECEMBER 31, 2003
--------------------- --------------------
BALANCE % BALANCE %
------------- ----- ------------- -----
Commercial $ 194,316,745 50.8% $ 198,063,494 52.6%
Commercial real estate 108,698,574 28.4% 100,309,154 26.6%
Residential real estate 42,199,844 11.0% 40,648,402 10.8%
Home equity 26,264,960 6.9% 25,943,402 6.9%
Consumer 11,135,137 2.9% 11,593,808 3.1%
------------- ----- ------------- -----
Total loans 382,615,260 100.0% 376,558,260 100.0%
Net deferred loan costs 325,747 280,318
Allowance for loan losses (5,367,914) (5,259,273)
------------- -------------
Net loans $ 377,573,093 $ 371,579,305
============= =============
Nonperforming Assets. Nonperforming assets include nonperforming loans and other
real estate owned (OREO). Nonperforming loans include loans past due over 90
days and still accruing and all nonaccrual loans. Nonperforming assets have
increased from $2.0 million, or 0.45% of total assets, at December 31, 2003 to
$2.1 million, or 0.47% of total assets, at March 31, 2004. The increase in
nonperforming assets was mainly attributable to the carrying value of several
loans, totaling $676,546, which were recorded as nonaccrual loans during the
first three months of 2004 that were offset by $564,738 of nonperforming assets,
that were restructured, worked out or charged off. Total impaired loans at March
31, 2004 were $6,933,101 and included all nonaccrual loans in addition to one
commercial credit of $537,519 recorded as a troubled debt restructuring and one
commercial real estate
11
credit of $4,381,526 where the borrower of which has sought bankruptcy
protection. At this time, management believes it has allocated adequate specific
allowances for these risks of $1.6 million. Impaired loans at December 31, 2003
were $2,155,504 with specific allowances for these risks of $807,000. The
commercial OREO property of $80,000 held at December 31, 2003 was sold during
the first quarter of 2004.
The following table summarizes the Company's nonperforming assets at the dates
indicated:
MARCH 31, DECEMBER 31,
2004 2003
---- ----
Loans past due over 90 days and still accruing $ 102,598 $ 290,375
Nonaccrual loans 2,014,057 1,614,447
---------- ----------
Total nonperforming loans $2,116,655 $1,904,822
Other real estate owned 80,000
---------- ----------
Total nonperforming assets $2,116,655 $1,984,822
========== ==========
Nonperforming assets to total assets 0.47% 0.45%
Nonperforming loans to total loans 0.55% 0.51%
Nonperforming assets to total assets 0.47% 0.45%
Allowance for Loan Losses. In each quarter the allowance for loan losses is
adjusted by management to the amount management believes is necessary to
maintain the allowance at adequate levels. The allowance consists of three
allocations: identified specific allocation, a percentage allocation based on
loss history for different loan groups, and unallocated. Management will
allocate specific portions of the allowance for loan losses based on
specifically identifiable problem loans. Problem loans are identified through a
loan risk rating system and monitored through watchlist reporting. Specific
reserves are determined for each identified problem loan based on delinquency
rates, collateral and other risk factors specific to that problem loan.
Management's evaluation of the allowance for different loan groups is based on
consideration of actual loss experience, the present and prospective financial
condition of borrowers, industry concentrations within the loan portfolio and
general economic conditions, and absent some of those factors, based upon peer
industry data of comparable banks. The unallocated allowance is maintained to
recognize the imprecision of estimation and measuring loss when evaluating loss
allocations for individual loans or pools of loans.
The allowance for loan losses at March 31, 2004 was $5.4 million or 1.40% of
total loans outstanding, a slight increase over $5.3 million, or 1.40%, at
December 31, 2003. The provision for loan losses during the first quarter of
2003 was $500,000 compared to $845,000 in the first quarter of 2003.
The table below summarizes the allowance allocations by type as of the indicated
dates:
March 31, 2004 December 31, 2003
-------------- -----------------
Specific allocations $3,331,000 $3,287,000
Loan pool percentage allocations 1,857,000 1,862,000
Unallocated 179,914 110,273
---------- ----------
Total allowance for loan losses $5,367,914 $5,259,273
========== ==========
In general, the addition to the allowance during the first quarter of 2004 was
directly attributable to the amount of loan growth and net charge-off activity
during the period and also attributable to risk factors, such as watchlist
directed specific allocations as well as peer bank loss experience. Net
charge-offs for the first quarter of 2004 were $391,359 compared to $512,139 for
the first quarter of 2003. These charge-offs were attributable to several
commercial loans for the period ended March 31, 2004. Nonperforming loans
increased during the first quarter of 2004 by $211,833 and were $2.1 million at
March 31, 2004. The first quarter 2003 charge-offs included $445,000 for the
unauthorized mortgage loans problem. As a result of the increased level of
nonperforming loans at March 31, 2004, and some deterioration of credit due to
the current weakened economy, specific allocations of the loss allowance
increased $44,000 from December 31, 2003. The amount of the allowance allocated
for loan pools declined during the first quarter as a net result of increased
loans outstanding, which was more than offset by a decrease in loss experience
percentages mainly for commercial loans.
Management considers the allowance for loan losses at March 31, 2004 to be
adequate; however, there can be no assurance that charge-offs in future periods
will not exceed the allowance. Additional provisions for the allowance are
expected during 2004 as a result of anticipated increases in the total loan
portfolio.
12
The following table summarizes changes in the Company's allowance for loan
losses for the periods indicated:
2004 2003
---- ----
Beginning balance, January 1 $ 5,259,273 $ 4,745,672
Provision charged to operating expense 500,000 845,000
Charge-offs (396,128) (515,342)
Recoveries 4,769 3,203
----------- -----------
Ending balance, March 31 $ 5,367,914 $ 5,078,533
=========== ===========
Net charge-offs to average loans (annualized) 0.42% 0.62%
Other Assets. The $228,016 decrease in other assets was mainly attributable to
the $405,891 reduction of the tax assets in the first quarter of 2004 net of
other asset increases.
Deposits. Total deposits were $371.0 million at March 31, 2004 compared to total
deposits at December 31, 2003 of $362.9 million. Deposit growth has been
significant since the Bank commenced operations, resulting from new and existing
deposit accounts established from the business, consumer and the municipal
sectors. Deposit growth during the first quarter of 2004 was reflected mainly in
time deposits under $100,000 and time deposits $100,000 and over. Growth was
approximately $11.1 million in time deposits under $100,000 and $25.9 million in
time deposits $100,000 and over. Money market accounts decreased by $12.9
million during the quarter mostly attributable to a decrease in public funds
accounts while noninterest bearing demand deposits also reflected a decrease of
$14.3 million. The majority of the growth during the first quarter of 2004 was
from brokered CD accounts. While the vast majority of overall deposit funding
had previously come from the local market, growth in the first quarter of 2004
was generated from brokered CDs over $100,000 which grew during the first
quarter by $29.9 million and reached $55.1 million at March 31, 2004 or 14.8% of
the total deposit portfolio. The amount of brokered CDs at December 31, 2003 was
$25.2 million. This increase in brokered deposits was a result of a significant
amount of public funds withdrawn and a need for funding to cover growth, over
what could be generated quickly in the local market.
The following table summarizes the Company's deposit balances at the dates
indicated:
MARCH 31, 2004 DECEMBER 31, 2003
---------------------------------- -----------------------------------
BALANCE % BALANCE %
------------ ----- ------------ ------
Noninterest-bearing demand $ 48,269,308 13.0% $ 62,638,230 17.3%
Interest-bearing checking 21,519,703 5.8% 23,543,523 6.5%
Money market 85,334,848 23.0% 98,250,351 27.1%
Savings 10,966,685 3.0% 10,575,908 2.9%
Time, under $100,000 74,078,739 20.0% 63,028,461 17.4%
Time, $100,000 and over 130,783,565 35.2% 104,840,295 28.8%
------------ ----- ------------ -----
Total deposits $370,952,848 100.0% $362,876,768 100.0%
============ ===== ============ =====
Borrowings. Short-term borrowings at March 31, 2004 declined to $500,000 from
$1.1 million at December 31, 2003, which were entirely comprised of overnight
federal funds purchased from one correspondent bank. In addition to federal
funds purchased, the Company also had borrowings in the amount of $27.0 million
in Federal Home Loan Bank ("FHLB") advances at both March 31, 2004 and December
31, 2003. Two of the FHLB advances mature in 2011, and each of these have
quarterly call features. One of the remaining advances is a short-term daily
variable rate advance and the other six are bullet advances and mature in a
range from June 2004 through March 2006.
Other Liabilities. Other liabilities increased $1.3 from year-end 2003. The
increase in other liabilities was primarily related to the increase in payables
at March 31, 2004 due to investments trades made but not settled at quarter end.
13
RESULTS OF OPERATIONS
Results of operations for the three-month period ended March 31, 2004 reflected
net income of $480,438, or $0.12 per diluted share. This reflected a $294,967,
or 159.0%, increase over 2003's first quarter net income of $185,471. Net income
per diluted share for first quarter of 2003 was $0.05. The operating results for
the three-month period ended March 31, 2004 were favorable compared to the same
period in 2003 primarily because earning assets grew providing significantly
higher net interest income and the provision for loan losses was lower in part
due to a higher provision for loan losses in 2003 relating to previously
disclosed unauthorized mortgage loan activity. This was offset partially by
lower noninterest income and higher noninterest expense, which will be discussed
below in more detail.
The increase in total revenue for the first quarter of 2004 as compared to the
prior year was positive, as total revenue, defined as net interest income plus
total noninterest income, increased 8.0%. For the three-month period ended March
31, 2004, net interest income increased 20.3% while total noninterest income
decreased 24.0% from the same period one year ago primarily due to lower loan
broker fee income and gain on sale of securities.
MARCH 31,
--------------------
PERFORMANCE RATIOS 2004 2003
- -------------------------- ---- ----
Return on average assets * 0.44% 0.20%
Return on average equity * 4.67% 1.90%
Net interest margin * 3.17% 3.04%
Efficiency ratio 69.19% 69.92%
* annualized
Net Interest Income. Interest income for the three-month periods ended March 31,
2004 and 2003 was $4.7 million and $4.3 million, respectively, while interest
expense for each of those periods was $1.5 million in 2004 and $1.6 million in
2004, resulting in net interest income of $3.3 million for the first quarter of
2004 and $2.7 million for the first quarter of 2003. The increase during each
quarter of 2004 and 2003 in net interest income was reflective of the general
growth in loans and other earning assets during those periods. The net interest
margin for the first quarter of 2004 was 3.17%, while the net interest margin
for the first quarter of 2003 was 3.04%. The increase in net interest margin was
mainly due to a 22 basis point rate spread improvement attributable to a 40
basis point decrease in funding costs since March 31, 2003. The yield on earning
assets fell only 18 basis points during the same period. The margin also
benefited from certain one-time deferred fees during the first quarter of 2004
that added approximately four basis points.
The following table reflects the average balance, interest earned or paid, and
yield or cost of the Company's assets, liabilities and stockholders' equity at
and for the dates indicated:
14
AT AND FOR THE THREE MONTH PERIOD ENDED
---------------------------------------
MARCH 31, 2004 MARCH 31, 2003
-------------- --------------
INTEREST ANNUALIZED INTEREST ANNUALIZED
AVERAGE EARNED YIELD AVERAGE EARNED YIELD
($ IN THOUSANDS) BALANCE OR PAID OR COST BALANCE OR PAID OR COST
- ---------------- ------- ------- ------- ------- ------- -------
ASSETS
Short-term investments and
interest-earning deposits $ 3,222 $ 9 1.12% $ 4,112 $ 8 0.75%
Federal funds sold 11,728 21 0.72% 13,530 34 1.03%
Securities - taxable 16,519 187 4.55% 9,791 86 3.57%
Securities - tax exempt (1) 8,770 119 5.46% 1,998 25 5.14%
Loans held for sale - - 0.00% 1,337 22 6.73%
Loans 377,936 4,444 4.73% 333,206 4,110 5.00%
--------- ------ --------- -------
Total interest-earning assets 418,175 4,780 4.60% 363,974 4,285 4.78%
Allowance for loan losses (5,320) (4,849)
Cash and due from banks 12,185 9,201
Other assets 12,345 7,396
--------- ---------
Total assets $ 437,385 $ 375,722
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest-bearing checking $ 21,376 $ 18 0.34% $ 16,537 $ 23 0.57%
Savings 10,872 8 0.30% 8,910 17 0.78%
Money market 93,432 205 0.88% 95,511 291 1.24%
Certificates of deposit 183,994 1,001 2.19% 149,551 1,000 2.71%
Short-term borrowings 1,364 4 1.18% 1,060 3 1.14%
FHLB advances 27,000 164 2.44% 21,083 144 2.77%
Junior subordinated debt 3,608 81 9.03% 3,608 82 9.22%
--------- ------ --------- -------
Total interest-bearing liabilities 341,646 1,481 1.74% 296,260 1,560 2.14%
Noninterest-bearing checking 51,438 38,804
Other liabilities 2,931 1,207
Stockholders' equity 41,370 39,451
--------- ---------
Total liabilities and stockholders' equity $ 437,385 $ 375,722
========= =========
NET INTEREST INCOME $3,299 $ 2,725
====== =======
RATE SPREAD 2.86% 2.64%
NET INTEREST INCOME AS A PERCENT
OF AVERAGE EARNING ASSETS 3.17% 3.04%
==== ====
(1) Computed on a tax equivalent basis for tax exempt securities using a 34%
statutory tax rate.
Provision for Loan Losses. A provision for loan losses was recorded in the
amount of $500,000 during the first quarter of 2004 as compared to $845,000 for
the first quarter of 2003. The provision recorded for the first quarter of 2004
was directly related to the growth in the loan portfolio, risk factors inherent
in the loan portfolio and recorded charge-offs mainly attributable to commercial
loans. The allowance for loan losses at March 31, 2004 totaled $5.4 million and
was 1.40% of total loans outstanding on that date. Total net charge-offs for the
three-month period ended March 31, 2004 were $391,359 and were $512,139 during
the same period a year ago. At March 31, 2004, nonperforming loans amounted to
$2.1 million of which $102,598 was still accruing but past due 90 days or more.
Nonperforming loans at March 31, 2003 were $1.4 million of which $28,142 was
still accruing but past due 90 days or more.
Noninterest Income. Noninterest income was $788,434 during the first quarter of
2004. This was a $249,433, or 24.0%, decrease compared to the first quarter of
2003. The decrease in noninterest income from the comparable period was
reflected primarily in two categories; loan brokered service fees, which
decreased $112,881 to $87,764 and net gain on sale of securities, which
decreased $187,856 to $2,910. These categories decreased due to lower loan
origination volume in 2004 compared to 2003 and due to significantly less sales
of investments in the first quarter of 2004 compared to 2003. Trust services fee
income increased $50,872 to $406,832 for the three-month period ended March 31,
2004, reflective of more assets under management and a 6.1% growth in service
charge revenue generally reflective of a growth in and development of deposit
accounts.
Noninterest Expense. Noninterest expense was $2.8 million for the first quarter
of 2004 while noninterest expense for the three-month period ended March 31,
2003 was $2.6 million. The main components of noninterest expense for the first
quarter of 2004
15
were salaries and benefits of $1.5 million, occupancy and equipment costs of
$336,664, and loan and professional costs in the amount of $240,747 and
represent mainly infrastructure costs were for human resource needs to operate
the Bank, rent expense and equipment depreciation. The 20.4% increase in
salaries and benefits reflects 16% growth in FTE's as part of our expansion
activities throughout the last twelve months. Excluding personnel expenses,
noninterest expenses declined 5.8%, largely reflecting a $336,588 or 64.9%
decline in other expenses. The $275,000 charge for the unauthorized mortgage
activities that was taken during the first quarter of 2003 accounted for the
majority of the 2004 improvement in other expense compared to the prior year.
The Company's $135,720, or 256.4%, increase in marketing expense reflects timing
differences for the annual report costs, as well as costs for the introduction
of a new deposit product during the first quarter of 2004.
Income Taxes. During the quarters ended March 31, 2004 and 2003, the Company
recorded $270,650 and $99,200, respectively, in income taxes expense. The
effective tax rate recorded was 36.0% for 2004 as compared to 34.8% for 2003.
The increased effective tax rate in 2004 was mainly from less BOLI revenue being
recorded during 2004, a result of income accrual adjustments.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity. The Company's general liquidity strategy is to fund growth with
deposits and to maintain an adequate level of short- and medium-term investments
to meet typical daily loan and deposit activity needs. Strong deposit growth was
realized during the first quarter of 2004, as it has been each quarter since
1999. Deposits have been generated mainly from in-market sources; however, since
2001 the Company has expanded its funding base to include national, non-brokered
certificates of deposit, during 2003 brokered CDs, borrowings from the FHLB and
trust preferred securities and, beginning with the second quarter of 2003,
brokered CDs. In the aggregate these out-of-market deposits and borrowings
represented $125.0 million, or 31.1% of the Company's total funding, at March
31, 2004. Total deposits at March 31, 2004 were $371.0 million and the loan to
deposit ratio was 103.2%. Total borrowings at March 31, 2004 were $31.1 million.
The Company expects to continue to experience loan growth and that funding for
the loan growth will continue to come from in-market sources, as funds are
available through the marketing of products and the development of branch
locations. Additionally, the Company and the Bank will continue to develop and
use wholesale, out-of-market deposits and borrowing capacities and use them to
augment our interest rate sensitivity strategy and liquidity capabilities and to
diversify the funding base of the Bank.
Capital Resources. Stockholders' equity is a noninterest-bearing source of
funds, which provides support for asset growth. Stockholders' equity was $41.6
million and $40.9 million at March 31, 2004 and December 31, 2003, respectively.
Affecting the increase in stockholders' equity during the first quarter of 2004
was $480,438 in net income, $25,167 from the exercise of 1,875 stock options net
of tax benefit and a $209,140 decrease in the unrealized appreciation of
securities available for sale, net of tax.
The ability of the Company to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. The Company has paid no cash or stock dividends in any year thus far.
The Company expects that its future earnings and those of the Bank, if any,
would be retained to finance future growth and operations. The Company does not
anticipate paying any cash dividends on the common stock in the foreseeable
future.
The following table summarizes the capital ratios of the Company and the Bank at
the dates indicated:
March 31, 2004 March 31, 2003
-------------- --------------
Well- Minimum Well- Minimum
Actual Capitalized Required Actual Capitalized Required
------ ----------- -------- ------ ----------- --------
THE COMPANY
Leverage capital 10.26% 5.00% 4.00% 11.35% 5.00% 4.00%
Tier 1 risk-based 11.31% 6.00% 4.00% 11.92% 6.00% 4.00%
Total risk-based 12.52% 10.00% 8.00% 13.17% 10.00% 8.00%
THE BANK
Leverage capital 8.73% 5.00% 4.00% 9.49% 5.00% 4.00%
Tier 1 risk-based 9.63% 6.00% 4.00% 9.97% 6.00% 4.00%
Total risk-based 10.88% 10.00% 8.00% 11.22% 10.00% 8.00%
COMMITMENTS AND OFF-BALANCE SHEET RISK
The Bank maintains off-balance-sheet investments in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit.
16
These instruments involve, to varying degrees, elements of credit risk in excess
of the amount recognized, if any, in the balance sheet. The Bank's maximum
exposure to loan loss in the event of nonperformance by the other party to the
financial instruments for commitments to extend credit and standby letters of
credit is represented by the contractual notional amount of these instruments.
Such financial instruments are recorded when they are funded. Fair value of the
Bank's off-balance-sheet instruments (commitments to extend credit and standby
letters of credit) is based on rates currently charged to enter into similar
agreements, taking into account the remaining terms of the agreements and the
counterparties' credit standing. At March 31, 2004, the rates on existing
off-balance-sheet instruments were equivalent to current market rates,
considering the underlying credit standing of the counterparties.
Tabular disclosure of the Company's contractual obligations as of the end of our
latest fiscal year was provided in our Annual Report on Form 10-K for the year
ended December 31, 2003. On March 24, 2004, the Company signed an addendum to
its original operating lease with Tippmann Properties, Inc, for additional space
at its headquarters location with a remaining term through December 31, 2013 and
total aggregate rental payments through the remainder of the term of $5.7
million.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company's primary market risk exposure is interest rate risk and,
to a lesser extent, liquidity risk. All of the Company's transactions are
denominated in U.S. dollars with no specific foreign exchange exposure. The
Company has no agricultural-related loan assets and therefore has no significant
exposure to changes in commodity prices. Any impact that changes in foreign
exchange rates and commodity prices would have on interest rates is assumed to
be insignificant.
Interest rate risk is the exposure of the Company's financial condition to
adverse movements in interest rates. The Company derives its income primarily
from the excess of interest collected on its interest-earning assets over the
interest paid on its interest-bearing liabilities. The rates of interest the
Company earns on its assets and owes on its liabilities generally are
established contractually for a period of time. Since market interest rates
change over time, the Company is exposed to lower profitability if it cannot
adapt to interest rate changes. Accepting interest rate risk can be an important
source of profitability and stockholder value; however, excessive levels of
interest rate risk could pose a significant threat to the Company's earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to the Company's safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Company's interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information and
internal controls are in place to maintain interest rate risk at prudent levels
with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Company assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity and overall asset quality.
There are two interest rate risk measurement techniques, which may be used by
the Company. The first, which is commonly referred to as GAP analysis, measures
the difference between the dollar amount of interest-sensitive assets and
liabilities that will be refinanced or repriced during a given time period. A
significant repricing gap could result in a negative impact to the Company's net
interest margin during periods of changing market interest rates.
The following table depicts the Company's GAP position as of March 31, 2004:
17
RATE SENSITIVITY ANALYSIS
WITHIN THREE TO ONE TO AFTER
THREE TWELVE FIVE FIVE
($ IN THOUSANDS) MONTHS MONTHS YEARS YEARS TOTAL
- ---------------- ------ ------ ----- ----- -----
ASSETS
Federal funds sold, short-term
investments and interest-
earning deposits $ 16,891 $ $ $ $ 16,891
Securities available for sale 1,111 4,013 5,971 17,192 28,287
FHLBI and FRB stock 2,347 2,347
Fixed rate loans 7,095 27,919 60,499 35,451 130,964
Variable rate loans 251,651 251,651
Allowance for loan losses (5,368)
Other assets 21,282
--------- ------------ ------------ ------------ ------------
Total assets $ 276,748 $ 31,932 $ 66,470 $ 54,990 $ 446,054
--------- ------------ ------------ ------------ ------------
LIABILITIES
Interest-bearing checking $ 21,520 $ $ $ $ 21,520
Savings accounts 10,967 10,967
Money market accounts 85,335 85,335
Time deposits < $100,000 9,246 41,751 23,082 74,079
Time deposits $100,000 and over 41,903 58,480 30,400 130,783
Short-term borrowings 500 500
FHLB advances 8,000 - 12,500 6,500 27,000
Junior subordinated debt 3,608 3,608
Noninterest-bearing checking 48,269
Other liabilities 2,370
--------- ------------ ------------ ------------ ------------
Total liabilities 177,471 100,231 65,982 10,108 404,431
STOCKHOLDERS' EQUITY 41,623
--------- ------------ ------------ ------------ ------------
Total sources of funds $ 177,471 $ 100,231 $ 65,982 $ 10,108 $ 446,054
--------- ------------ ------------ ------------ ------------
Net asset (liability) GAP $ 99,277 $ (68,299) $ 488 $ 44,882 $
--------- ------------ ------------ ------------ ------------
CUMULATIVE GAP $ 99,277 $ 30,978 $ 31,466 $ 76,348 $
--------- ------------ ------------ ------------ ------------
PERCENT OF CUMULATIVE GAP TO
TOTAL ASSETS 22.3% 6.9% 7.1% 17.1%
A second interest rate risk measurement used is commonly referred to as net
interest income simulation analysis. A simulation model assesses the direction
and magnitude of variations in net interest income resulting from potential
changes in market interest rates. Key assumptions in the model include
prepayment speeds on various loan and investment assets; cash flows and
maturities of interest-sensitive assets and liabilities; and changes in market
conditions impacting loan and deposit volume and pricing. These assumptions are
inherently uncertain, subject to fluctuation and revision in a dynamic
environment; therefore, a model cannot precisely estimate net interest income or
exactly predict the impact of higher or lower interest rates on net interest
income. Actual results will differ from simulated results due to timing,
magnitude, and frequency of interest rate changes and changes in market
conditions and the Company's strategies, among other factors.
As growth has dictated, the Company began utilizing simulation analysis as a
tool for measuring the effects of interest rate risk on the income statement at
the end of 2003.
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of other variables, including the growth,
composition and absolute levels of loans, deposits, and other earning assets and
interest-bearing liabilities; economic and competitive conditions; potential
changes in lending, investing, and deposit gathering strategies; client
preferences; and other factors.
The following table provides information about the Company's financial
instruments used for purposes other than trading that are rate sensitive to
changes in interest rates as of March 31, 2004. It does not provide when these
items may actually reprice. For loans receivable, securities, and liabilities
with contractual maturities, the table presents principal cash flows and related
weighted-average interest rates by contractual maturities as well as the
Company's historical experience of the impact of interest rate fluctuations on
the prepayment of loans and mortgage backed securities. For core deposits
(demand deposits, interest-bearing checking, savings, and money market deposits)
that have no contractual maturity, the table presents principal cash flows and,
as applicable related weighted-average interest rates based upon the Company's
historical experience, and management's judgment as
18
applicable, concerning their most likely withdrawal behaviors. The current
historical interest rates for core deposits have been assumed to apply for
future periods in this table as the actual interest rates that will need to be
paid to maintain these deposits are not currently known. Weighted average
variable rates are based upon contractual rates existing at the report date.
PRINCIPAL AMOUNT MATURING IN:
-----------------------------
FAIR VALUE
($ in thousands) 03/31/05 03/31/06 03/31/07 03/30/08 03/30/09 THEREAFTER TOTAL 3/31/2004
-------- -------- -------- -------- -------- ---------- ----- ---------
Rate sensitive assets:
Fixed interest rate loans $ 35,016 $ 12,180 $ 10,854 $ 13,284 $ 24,179 $ 35,451 $ 130,964 $ 130,697
Average interest rate 5.17% 6.43% 6.32% 6.41% 5.11% 5.70% 5.68%
Variable interest rate loans 76,634 42,021 41,197 35,462 25,191 31,146 251,651 251,651
Average interest rate 4.25% 4.20% 4.26% 4.19% 4.26% 4.37% 4.25%
Fixed interest rate securities 5,124 4,662 394 744 171 17,192 28,287 28,287
Average interest rate 3.84% 3.71% 3.97% 4.41% 4.40% 4.42% 4.19%
Other interest bearing assets 16,891 16,891 16,891
Average interest rate 1.70% 1.70%
Rate sensitive liabilities:
Interest bearing checking 21,520 21,520 21,520
Average interest rate 0.34% 0.34%
Savings accounts 10,967 10,967 10,967
Average interest rate 0.28% 0.28%
Money market accounts 85,335 85,335 85,535
Average interest rate 0.84% 0.96%
Time deposits 151,381 43,074 2,786 6,765 631 225 204,862 205,596
Average interest rate 1.87% 2.34% 3.85% 4.23% 3.57% 4.07% 2.08%
Fixed interest rate
borrowings 6,000 12,500 10,108 28,608 31,030
Average interest rate 2.22% 2.35% 5.41% 3.32%
Variable interest rate
borrowings 2,500 2,500 2,500
Average interest rate 1.23% 1.07%
19
ITEM 4. CONTROLS AND PROCEDURES
We maintain a set of disclosure controls and procedures, which are designed to
ensure that information required to be disclosed by us in the reports filed by
us under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. As of March 31, 2004, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chairman, President and Chief Executive Officer and our Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures pursuant to Rule 13a-14 of the Exchange Act.
Based on that evaluation, our Chairman, President and Chief Executive Officer
and our Chief Financial Officer concluded that our disclosure controls and
procedures are effective.
There was no change in our internal control over financial reporting during the
first quarter of our 2004 fiscal year that has materially affected, or is
reasonably likely to materially affect, our internal control over financial
reporting.
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and the Bank may be involved from time to time in various
routine legal proceedings incidental to its business. Neither the
Company nor the Bank is engaged in any legal proceeding that is
expected to have a material adverse effect on the results of
operations or financial position of the Company or the Bank.
ITEM 2. CHANGES IN SECURITIES, USING PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
31.1 Rule 13a-14(a) /15-14(a) Certification of Chief
Executive Officer.
31.2 Rule 13a-14(a) /15-14(a) Certification of Chief
Financial Officer.
32.1 Certification of Chief Executive Officer pursuant to
18 U.S.C. Section 1350.
32.2 Certification of Chief Financial Officer pursuant to
18 U.S.C. Section 1350.
(b) Reports on Form 8-K
On February 3, 2004, we furnished a current report on Form 8-K
dated January 30, 2004 to report, under Item 12 of Form 8-K,
our results of operations for the fiscal year ended December
31, 2003.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
TOWER FINANCIAL CORPORATION
Dated: May 12, 2004 /s/ Donald F. Schenkel
---------------------------------------------
Donald F. Schenkel, Chairman of the Board,
President and Chief Executive Officer
Dated: May 12, 2004 /s/ Kevin J. Himmelhaver
-----------------------------------------------
Kevin J. Himmelhaver, Executive Vice President,
Chief Financial Officer and Secretary
21