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Tower Financial Corporation (NASDAQ:TOFC) is a small-cap company founded in 1998 and headquartered in Fort Wayne, Indiana. It operates as the holding company for Tower Bank & Trust and provides commercial and consumer banking services in the metropolitan areas of Fort Wayne, Allen County, and Warsaw, Indiana. It also offers investment management and trust services, and provides securities and insurance brokerage services.

As of Friday July 19th, TOFC was trading at $14.70 with a 52 week high of $15.00, and a low of $10.20. The $0.28 dividend yields 1.9%. I believe TOFC is overlooked and undervalued, and here's why.

Fort Wayne Economic Outlook

Economic recovery in Fort Wayne has been strong since the recession ended, and the market area is likely to see that performance continue in 2013. Income growth in Fort Wayne remains strong, leading to a self-reinforcing cycle of consumer spending, business expansion and job creation. Now that housing markets appear to be strengthening, the market area faces little in the way of headwinds against continued growth.

Fort Wayne's manufacturing base is quite varied, and is not dominated by any one particular firm or niche, such as the case with auto manufacturing in other parts of the upper Midwest region. The market area also has a notable employment presence in healthcare, aerospace, insurance, telecom, transportation and education. This industrial diversity has allowed the market area to bounce back from the recession's impacts, and lays a solid foundation upon which to continue recovery in the quarters ahead. Fort Wayne's labor market continues to see a strong recovery. Year-on-year job growth in the market area has accelerated consistently since the second quarter of 2011 with broad- based job creation.

Company Highlights & Growth Potential

TOFC reported Q1, 2013 results on April 25th with the following highlights:

  • Record pre-tax earnings of $2.8 million with "core" earnings comprising $2.3 million. Core earnings are defined as income before taxes, loan loss provision, and unusual items not related to day to day operations (primarily securities sales and other real estate owned ("OREO") expenses).
  • Trust and brokerage assets under management increased approximately $41 million, or 6.0 percent, to $713 million during Q1, 2013.
  • Health Savings Accounts (HS's) grew by $18.5 million to $97.8 million or 23.3 percent during Q1, 2013 with more than 50,000 accounts.
  • Repurchased 70,000 shares of the Company's common stock at an average price of $12.32 per share during the first quarter of 2013. This brings the total shares re-purchased to 211,850 shares at an average price of $12.26 per share compared to 2013 Q1 book value of $13.60 per share.
  • Decreased sub-standard/ problem loans by $5.0 million during Q1, 2013.

TOFC is one of the nationwide leaders in providing HSA's and in all likelihood; this business component should continue to do well under the enactment of Obama Care in 2014.

Valuation Metrics

Metric

Tower Financial

KBW Regional Banking Index

P/E Ratio TTM

10.7

15.4

2013 Projected P/E Ratio

12.1

14.8

Price/Sales Ratio

1.9

1.2

Price/Cash Flow Ratio

7.6

8.4

Price/Book Value

1.0

1.8

5 Yr. Projected LTGR

30.4%

7.5%

Other Factors & Conclusion

TOFC is not followed by most analysts but I did find 2 "Buy" recommendations from independent analysts Ford and Thompson Reuters/Versus with price targets around $19. The stock is thinly traded and can have a wide bid/ask spread but it's not volatile with a relatively low 0.69 beta. For those who care, there appears to be solid technical support at $12.00.

Indications are that TOFC is undervalued and it is clearly overlooked by mainstream analysts. Its projected 30%, 5 year LTGR is 4x the sector average and it serves a robust Fort Wayne economy that is expected to thrive over the next several years, and continued improvement of the housing sector and growth in the HSA business should continue to support revenue growth. As mentioned earlier, TOFC is in the midst of a stock buyback effort which is positive. The company reports next on July 25th and I believe it will be nothing but more good news. That being said, as with any stock, there is the risk of capital loss, so conduct your own research and speak with your investment advisor about TOFC.

Source: Tower Financial: Tower Of Profits In Ft. Wayne, Indiana