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Filed pursuant to Rule 424(a)
Registration No. 333-67235
THIS PRELIMINARY PROSPECTUS IS NOT YET COMPLETED. JANUARY 4, 1999
INITIAL PUBLIC OFFERING
PROSPECTUS
TOWER FINANCIAL LOGO
CORPORATION
2,000,000 SHARES OF COMMON STOCK
$10.00 PER SHARE
------------------------------------
Tower Financial Corporation
Lincoln Tower
116 East Berry Street
Fort Wayne, Indiana 46802
(219) 427-7000
The Offering:
<TABLE>
<CAPTION>
PER SHARE TOTAL
--------- -----
<S> <C> <C>
Public Price........... $10.00 $20,000,000
Underwriting
Discounts............ $ $
------ -----------
Proceeds to
Tower Financial...... $ $
====== ===========
</TABLE>
We are offering shares of common stock to fund the start-up of a new commercial
bank named Tower Bank & Trust Company. We will be the sole owner of Tower Bank,
which will have its headquarters in Fort Wayne, Indiana. Tower Bank will provide
a full range of commercial and consumer banking services for small- to
medium-sized businesses as well as individuals.
This is our initial public offering, and no public market currently exists for
our shares.
The underwriters have a 30-day option to purchase an additional 300,000 shares
to cover over-allotments.
Proposed Trading Symbol:
OTC Bulletin Board -- TOFC
------------------------------------
THIS IS A RISKY INVESTMENT. IT IS NOT A DEPOSIT OR AN ACCOUNT AND IS NOT INSURED
BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY OTHER GOVERNMENT AGENCY. YOU
SHOULD NOT INVEST IN THIS OFFERING UNLESS YOU CAN AFFORD TO LOSE YOUR ENTIRE
INVESTMENT. SOME OF THE RISKS OF THIS INVESTMENT ARE DESCRIBED UNDER THE CAPTION
"RISK FACTORS" BEGINNING ON PAGE 6.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES COMMISSION,
ANY BANK
REGULATORY AUTHORITY, NOR ANY OTHER GOVERNMENT AGENCY HAS APPROVED OR
DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------------------
MCDONALD INVESTMENTS INC.
RONEY CAPITAL MARKETS
A DIVISION OF FIRST CHICAGO CAPITAL MARKETS, INC.
JANUARY , 1999
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES, AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES, IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
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[MAP OF PROPOSED MARKET AREA]
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FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements that reflect our views
about future events and financial performance. Actual results could differ
materially from those suggested by the forward-looking statements for various
reasons, including those discussed in the "Risk Factors" section beginning on
page 6. Therefore, you should not place undue reliance on these forward-looking
statements.
-------------------------
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PROSPECTUS SUMMARY
This summary highlights information contained elsewhere in this prospectus.
It is not complete and does not contain all of the information that you should
consider before investing in the common stock. You should read the entire
prospectus carefully.
TOWER FINANCIAL AND TOWER BANK
We are not an operating company and have not engaged in any significant
business to date. We were formed to be a bank holding company owning all of the
common stock of Tower Bank. Tower Bank is being organized as an Indiana
chartered bank and member of the Federal Reserve System with depository accounts
to be insured by the Federal Deposit Insurance Corporation. Our initial primary
service area will be Allen County, Indiana, including Fort Wayne and its
suburbs. In order to complete the offering we must receive all necessary
regulatory approvals and satisfy certain conditions that are customary in
forming a bank. We expect to commence business in the first quarter of 1999.
Tower Bank's main office will be located in downtown Fort Wayne and will serve
as our corporate headquarters.
REASONS FOR STARTING TOWER BANK
The expansion of interstate banking has contributed to substantial
consolidation of the banking industry in Indiana, including our proposed market
area in Allen County. Many of Fort Wayne's locally owned or managed banks either
have been acquired by large regional bank holding companies or have been
consolidated into branches of other banks. We believe that, after consolidation,
these banks no longer offer the same level of personalized customer service.
Although the banking industry remains competitive, we believe that this
consolidation has created a favorable opportunity for a new locally owned and
managed commercial bank in our proposed market area. We want to take advantage
of this opportunity. We plan to do this by emphasizing our local ownership and
management and our strong ties and active commitment to the community. We
believe that a community bank can improve the economic development and overall
economy of its community. We believe that community residents will recognize
these benefits and that we will be successful in attracting individuals and
small- to medium-sized businesses as customers by taking an active interest in
their businesses and personal finances.
TOWER BANK'S MARKET AREA
Allen County includes the City of Fort Wayne, which is the second largest
city in Indiana based on population. As of July 1998, Allen County had
approximately 10,300 businesses and an unemployment rate of approximately 3.0%.
Allen County experienced significant growth in household income from 1990 to
1998. Allen County is also a significant banking market in the State of Indiana.
As of June 30, 1997, the latest date for which data are available, total
deposits in Allen County, including banks, thrifts and credit unions, were
approximately $4.7 billion.
MANAGEMENT
Donald F. Schenkel is the Chairman of the Board, President and Chief
Executive Officer of Tower Financial and Tower Bank. He has nearly 30 years of
banking experience. Most recently, Mr. Schenkel was with NBD Bank Indiana in
Northeast Indiana as First Vice President and, from 1993 to 1998, as the
Division Head of Retail Banking and Private Banking & Investment. From 1990 to
1993, Mr. Schenkel was Senior Vice President of INB National Bank, a regional
bank that was acquired by NBD Bank, N.A., in 1993. His positions at INB National
Bank included senior level responsibility for retail lending, commercial lending
and branch administration.
Kevin J. Himmelhaver is the Chief Financial Officer and Secretary of Tower
Financial and Tower Bank. He has nearly 20 years of banking experience in the
Fort Wayne area. Most recently, from 1993 until 1998,
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Mr. Himmelhaver worked for Norwest Bank Indiana, N.A., and Norwest Bank Ohio,
N.A., as Senior Vice President and Chief Financial Officer. He also was a
director of these banks.
Curtis A. Brown is the Chief Lending Officer of Tower Financial and the
Chief Operating Officer and Chief Lending Officer of Tower Bank. He has over 21
years of banking experience, all with INB National Bank and its successor, NBD
Bank Indiana. From 1993 until 1998, Mr. Brown was responsible for managing
corporate banking groups for NBD Bank Indiana, recently holding the positions of
First Vice President and Group Head.
We are assembling an experienced professional staff and expect to have
approximately 18 full-time employees when Tower Bank opens for business. We have
formed a board of directors with diverse backgrounds and experiences. In
addition to Mr. Schenkel, the current directors of Tower Financial and Tower
Bank are Keith Busse (business), Peter Eshelman (insurance), Michael Gouloff
(architecture), Craig Hartman (business), Jerome Henry, Jr. (business), Michael
Mirro, M.D. (physician), Debra Niezer (business), William Niezer (insurance),
Maurice O'Daniel (business), Leonard Rifkin (business), Joseph Ruffolo
(business), Larry Smith (business), John Tippmann, Sr. (real estate), Richard
Tomkinson (business) and Irene Walters (education). We believe that our officers
and directors are a significant resource to us.
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THE OFFERING
Securities Offered for Sale... Shares of common stock of Tower Financial
Corporation. For a description of these shares,
see "Description of Capital Stock" on page 36.
Number of Shares being
Offered....................... 2,000,000. In addition, the underwriters have a
30-day option to purchase up to 300,000
additional shares to cover over-allotments. For
a description of this option, see
"Underwriting" on page 40.
Price to the Public........... $10.00 per share.
Number of Shares to be
Outstanding after the
Offering...................... 2,000,000 shares will be outstanding
immediately after the offering. This number
assumes that the underwriters do not exercise
their over-allotment option and does not
include the additional 310,000 shares that are
reserved for issuance under Tower Financial's
stock option plan. For a description of this
plan, see "Executive Compensation -- 1998 Stock
Option and Incentive Plan" on page 23.
Dividend Policy............... We do not intend to pay any cash dividends in
the foreseeable future.
Use of Proceeds............... We will use the majority of the net proceeds of
the offering to capitalize Tower Bank and repay
loans incurred in organizing Tower Bank and
preparing it to begin business. We will retain
all remaining net proceeds. For further
details, see "Use of Proceeds" on page 9.
Risk Factors.................. You should read the "Risk Factors" section
beginning on page 6 before deciding to invest
in the offering.
Proposed Trading Market
and Symbol.................... OTC Bulletin Board: TOFC.
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RISK FACTORS
The common stock is a risky investment. It is not a deposit or an account
and is not insured by the FDIC or any other government agency. You should not
invest in the offering unless you can afford to lose your entire investment.
This section describes some, but not all, of the risks of purchasing the common
stock. The order in which these risks are listed does not necessarily indicate
their relative importance.
NO OPERATING HISTORY
We are a new business with no operating history. New businesses are
inherently risky investments. Because Tower Bank has not yet opened, you do not
have access to information which would be available regarding a financial
institution that has been operating for several years, such as historical
financial data.
SIGNIFICANT LOSSES EXPECTED
In order for us to be profitable, we will need to attract a large number of
customers to deposit and borrow money, among other things. This will take time.
We expect to lose money for at least two years. Based on our projections, we
expect these losses to accumulate to more than $1,750,000 before we are
profitable. Although we believe we will be profitable, it is possible that we
may never be profitable and that you will lose part or all of your investment in
the common stock.
POSSIBLE DELAY IN COMMENCING OPERATIONS
We will be unable to begin operations until we receive all required
regulatory approvals. Our receipt of the regulatory approvals is subject to
satisfying conditions customary in forming a bank, including the capitalization
of Tower Bank. We expect to satisfy these conditions and obtain all required
regulatory approvals during the first quarter of 1999, but a delay could occur.
We are presently incurring operating expenses for salaries, rent and other
items. Because we are not earning any operating revenue, we are currently
operating at a loss and will continue to do so during any period of delay.
REGULATORY LIMITATIONS ON OUR OPERATIONS
The banking industry is subject to extensive regulation by state and
federal banking authorities. Many of these regulations are intended to protect
depositors, the public or the FDIC, not shareholders. Regulatory requirements
will affect our lending practices, capital structure, investment practices,
dividend policy and many other aspects of our business. These requirements may
constrain our rate of growth. Regulations affecting financial institutions are
undergoing continuous change, and such changes could adversely affect us.
Sometimes, these changes are applied retroactively. In addition, the burden
imposed by these federal and state regulations may place banks in general, and
Tower Bank specifically, at a competitive disadvantage compared to less
regulated competitors. See "Supervision and Regulation" on page 27.
OPERATIONS AFFECTED BY FEDERAL POLICIES
Various aspects of the banking industry and our operations will be affected
by federal economic and monetary policies, which are outside our control.
Changes in federal economic and monetary policies may adversely affect Tower
Bank's ability to attract deposits, make loans and achieve satisfactory interest
spreads.
NO PLANS TO PAY DIVIDENDS
We expect to pay no dividends on the common stock in the foreseeable
future. At least initially, we will have no significant assets other than our
ownership of Tower Bank, and our only source of funds for paying dividends will
be dividends we receive from Tower Bank. Tower Bank may not generate sufficient
earnings to enable it to pay dividends to us. Even if it does, our board of
directors would not be required to pay dividends to our shareholders. Regulatory
requirements will limit our ability and Tower Bank's ability to pay dividends.
You should not buy shares in this offering if you need dividend income from this
investment. See "Dividend Policy" on page 10.
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COMPETITIVE ADVANTAGES AND DISADVANTAGES
The banking business is extremely competitive. Because we are a start-up,
most of our competitors will be larger and have greater resources than us. We
will have to overcome historical relationships to attract customers away from
our competition. We will compete with the following types of institutions:
- - other banks
- - savings banks
- - thrifts
- - credit unions
- - consumer finance companies
- - securities brokerage firms
- - mortgage brokers
- - insurance companies
- - mutual funds
- - trust companies
Some of our competitors are not regulated as extensively as we are and,
therefore, may have greater flexibility in competing for business. Some of these
competitors are subject to similar regulation but have the advantages of
established customer bases, higher lending limits, extensive branch networks,
numerous automated teller machines or other factors. While we intend to offer
competitive rates on our products, we expect to compete primarily by offering
our customers personal service and local decision-making. See "Business --
Competition" on page 15.
DEPENDENCE ON MR. SCHENKEL
Donald F. Schenkel is our Chairman of the Board, President and Chief
Executive Officer. Mr. Schenkel provides extremely valuable services to us, and
he would be difficult to replace if he were to leave. We have an employment
agreement with Mr. Schenkel and carry $1 million of key man life insurance on
his life. See "Executive Compensation" on page 22.
POTENTIAL DEFAULTS BY OUR BORROWERS
We will make various types of loans, including commercial, consumer,
residential mortgage and construction loans. We anticipate that approximately
80% of Tower Bank's loans will be commercial loans, although the actual
percentage may vary. We expect that approximately 20% of all commercial loans
will be commercial real estate loans. Commercial lending is more risky than
residential lending because loan balances are greater and the borrower's ability
to repay is contingent on the success of the borrower's operation. The risk of
loan defaults by borrowers is unavoidable in the banking industry. We will try
to limit our exposure to this risk by carefully monitoring the amount of loans
we make within specific industries and through prudent lending practices, but we
will not be able to eliminate this risk. Substantial credit losses could result
in our insolvency, which could cause you to lose your entire investment in the
common stock.
RELATIVELY LOW LENDING LIMIT
We expect that our initial lending limit will be approximately $2.25
million immediately following the offering, based upon the legal lending limit
of 15% of capital and surplus. Because this limit is based upon a percentage of
Tower Bank's capital and surplus, the limit will likely decrease until Tower
Bank is profitable. Our lending limit will be significantly less than most of
our competitors and may affect our ability to seek relationships with larger
businesses in our market area. We intend to accommodate loans in excess of our
lending limit through the sale of participations in those loans to other banks,
but we may not be able to do so.
DEPENDENCE ON LOCAL ECONOMY
We will operate in Northeast Indiana, principally the City of Fort Wayne
and Allen County. While the economy in this area generally has been good in
recent years, an economic downturn in the area would probably have a significant
negative impact on us.
PROFITABILITY AFFECTED BY INTEREST RATES GENERALLY
Our profitability will depend in substantial part on our "net interest
spread," which is the difference between the rates we receive on loans and
investments and the rates we pay for deposits and other sources of
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funds. Our net interest spread will depend on many factors that are partly or
entirely outside our control, including competition, federal economic, monetary
and fiscal policies, and economic conditions generally. Historically, net
interest spreads for other financial institutions have widened and narrowed in
response to these and other factors. Changes in interest rates will affect our
operating performance and financial condition in diverse ways. We intend to try
to minimize our exposure to interest rate risk, but we will be unable to
eliminate it.
NEED TO IMPLEMENT DEVELOPMENTS IN TECHNOLOGY
To become and remain competitive in today's banking environment, we will
need to purchase and use new technology-based products and services on an
ongoing basis. These products and services can reduce operating costs and
improve customer service. Many of our competitors will have greater resources
than us, which will give them an advantage in purchasing and using advances in
technology. Our success will depend, in part, on our ability to implement new
technologies.
POTENTIAL FLUCTUATIONS IN PRICE OF STOCK AFTER OFFERING
Because we are a start-up company and have no historic operations on which
to base the offering price, the post-offering market price of the stock is more
susceptible to fluctuations than it otherwise might be.
LIMITED TRADING MARKET EXPECTED
Presently, the common stock is not publicly traded. The underwriters have
told us that, after the offering, they intend to make a market in the common
stock and to initiate quotations on the OTC Bulletin Board. They are not
obligated to do this. As market makers on the OTC Bulletin Board, they are not
required to maintain a continuous two-sided market. While they are required to
honor firm quotations for a limited number of shares, they are free to withdraw
firm quotations at any time.
An active and liquid trading market for the common stock may not develop
even if the underwriters make a market in the stock. The trading volume of the
common stock will be limited, due to the relatively small size of the offering,
the fact that we are a start-up and have no intention to pay cash dividends in
the foreseeable future and other factors.
ANTI-TAKEOVER PROVISIONS REDUCE LIKELIHOOD THAT YOU WILL RECEIVE TAKEOVER
PREMIUM
Certain provisions of state and federal law and our Restated Articles of
Incorporation and By-Laws will make it more difficult for anyone to acquire
control of us without our board of directors' approval. See "Description of
Capital Stock -- Certain Provisions of Restated Articles of Incorporation and
By-Laws" and " -- Certain Provisions of Indiana Law" beginning on page 37 for a
discussion of some of these provisions. In many cases, shareholders receive a
premium for their shares in a change of control, and these provisions will make
it somewhat less likely that a change in control will occur or that you will
receive a premium for your shares if a change of control does occur.
RISKS RELATING TO YEAR 2000 READINESS
The "Year 2000 problem" arose because many existing computer systems use
only the last two digits to refer to a year. Therefore, these computer programs
do not properly recognize a year that begins with "20" instead of the familiar
"19." If not corrected, many computer applications and other technology-based
systems could fail or create erroneous results. The effects of this problem will
vary from system to system, and the extent of the potential impact of the Year
2000 problem is not yet known. The Year 2000 problem may adversely affect a
bank's operations and its ability to prepare financial statements. We could
experience interruptions in Tower Bank's business and significant losses if we,
or a supplier or vendor with whom we contract, are unable to achieve Year 2000
readiness before January 1, 2000. See "Business -- Year 2000 Readiness" on page
16.
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USE OF PROCEEDS
The net proceeds to Tower Financial from the sale of the 2,000,000 shares
of common stock being offered by Tower Financial are estimated to be $
($ if the underwriters' over-allotment option is exercised in full),
after deduction of the underwriting discounts, but before deducting estimated
offering expenses of $226,500.
The anticipated sources and uses of the proceeds from the offering are as
follows:
<TABLE>
<CAPTION>
AMOUNT PERCENTAGE
------ ----------
<S> <C> <C>
Sources:
Sale of 2,000,000 shares of common stock............. $20,000,000 100%
=========== ===
Uses:
Capital contribution to Tower Bank................... $15,000,000 75%
Underwriting discounts............................... $ %
Repayment of director loans.......................... $ 760,000 4%
Working capital(1)................................... $ %
----------- ---
Total uses...................................... $20,000,000 100%
=========== ===
</TABLE>
- -------------------------
(1) A portion of the working capital will be used to pay certain expenses of the
offering, and the balance will be used for general corporate purposes and to
pay operating expenses, as well as for possible future capital contributions
to Tower Bank.
Tower Financial expects to contribute $15,000,000 of the net proceeds of
the offering to Tower Bank by purchasing all of its common stock. The purchase
of Tower Bank's common stock is intended to provide it with the capital required
by regulators to commence operations.
The anticipated uses of the net proceeds to be received by Tower Bank are
as follows:
<TABLE>
<S> <C>
Investments in loans and securities
and payment of operating expenses......................... $14,535,000
Leasehold improvements and related
architectural and engineering services.................... $ 100,000
Purchase of furniture, equipment
and other assets necessary for operations................. $ 365,000
-----------
Total uses........................................ $15,000,000
===========
</TABLE>
Tower Financial expects to incur approximately $103,000 for expenses
relating to the formation of Tower Bank, which expenses will be paid primarily
out of working capital. A portion of these organizational expenses and other
preopening and certain offering expenses were financed on an interim basis from
loans of $760,000 made to Tower Financial by members of its board of directors.
It is anticipated that these loans, which are non-interest bearing and are due
on or before March 31, 1999, will be repaid by Tower Financial promptly
following the completion of the offering. Preopening income (consisting solely
of interest earned on temporary investments) will offset some of these expenses.
The estimated $ of net proceeds to be retained by Tower Financial
(plus any net proceeds received as a result of the exercise of the underwriters'
over-allotment option) will initially be invested by Tower Financial in
investment grade securities and held by Tower Financial as working capital for
general corporate purposes and to pay operating expenses, as well as for
possible future capital contributions to Tower Bank. These funds will also be
available to finance possible acquisitions of other branches or expansion into
other lines of business closely related to banking, although Tower Financial
presently has no plans to do so.
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DIVIDEND POLICY
Tower Financial initially expects that its earnings and those of Tower
Bank, if any, will be retained to finance the growth of Tower Financial and
Tower Bank and that no cash dividends will be paid for the foreseeable future.
If and when Tower Bank becomes profitable, recovers its accumulated deficit and
adequately reserves for losses, Tower Financial may consider payment of
dividends. However, the declaration of dividends is at the discretion of the
board of directors, and there is no assurance that dividends will be declared at
any time. If and when dividends are declared, Tower Financial will be largely
dependent upon dividends received from Tower Bank for funds to pay dividends on
the common stock. It is also possible, however, that Tower Financial might, at
some time in the future, pay dividends generated from income or investments and
from other activities of Tower Financial.
As a banking corporation organized under Indiana law, Tower Bank will be
restricted as to the maximum amount of dividends it may pay to Tower Financial.
Indiana law prohibits Tower Bank from declaring or paying dividends that would
impair Tower Bank's capital or that would be greater than its undivided profits.
In addition, the prior approval of the Department of Financial Institutions of
the State of Indiana (the "Department") is required for the payment of any
dividend if the aggregate amount of all dividends paid by Tower Bank during such
calendar year, including the proposed dividend, would exceed the sum of the
retained net income of Tower Bank for the year to date and previous two years.
The Department, the Board of Governors of the Federal Reserve System (the
"Federal Reserve Board") and the Federal Deposit Insurance Corporation (the
"FDIC") are also authorized to prohibit the payment of dividends by Tower Bank
under certain circumstances. See "Supervision and Regulation -- Tower
Bank -- Dividends." Such requirements and policies may limit Tower Financial's
ability to obtain dividends from Tower Bank for its cash needs, including funds
for acquisitions, payment of dividends by Tower Financial and the payment of
operating expenses.
Tower Financial is organized under the Indiana Business Corporation Law,
which prohibits the payment of a dividend if, after giving it effect, the
corporation would not be able to pay its debts as they become due in the usual
course of business or the corporation's total assets would be less than the sum
of its total liabilities plus (unless the articles of incorporation of the
corporation permit otherwise) the amount that would be needed, if the
corporation were to be dissolved, to satisfy the preferential rights upon
dissolution of preferred shareholders. In addition, the Federal Reserve Board
may impose restrictions on dividends paid by Tower Financial. See "Supervision
and Regulation -- Tower Financial -- Dividends."
CAPITALIZATION
The following table shows the capitalization of Tower Financial as
projected immediately after the sale of the 2,000,000 shares of common stock
offered in this prospectus and the application of the estimated net proceeds.
See "Use of Proceeds."
<TABLE>
<S> <C>
Debt........................................................ $ 0
Shareholders' equity:
Preferred stock, no par value, 4,000,000 shares
authorized, none issued................................ 0
Common stock, no par value, 6,000,000 shares authorized,
2,000,000 shares issued and outstanding................ 2,000,000
Additional paid-in capital................................ (1)
Retained earnings......................................... ()
----------
Total shareholders' equity.................................. $
==========
Book value per share........................................ $
</TABLE>
- -------------------------
(1) Net of underwriting discounts and offering expenses expected to be paid by
Tower Financial of $ .
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BUSINESS
REASONS FOR STARTING TOWER BANK & TRUST COMPANY
The banking industry in Indiana, including Tower Bank's proposed primary
service area in Allen County, has been greatly affected by substantial
consolidation caused primarily by the expansion of interstate banking. Many of
Fort Wayne's locally owned or managed financial institutions have either been
acquired by large regional bank holding companies or have been consolidated into
branches of other financial institutions. In many cases, these acquisitions and
consolidations have been accompanied by fee changes, branch closings, the
dissolution of local boards of directors, management and personnel changes and,
in the perception of Tower Financial 's management, a decline in the level of
personalized customer service.
Management believes that the consolidation of the banking industry has
created an opportunity in Allen County for a new commercial bank to offer
services to customers who wish to conduct business with a bank that has
significant local ownership and is managed by senior personnel who are
well-known in the market and live in the local community. Although management
realizes that there is still substantial competition in Tower Financial's
proposed market area, Tower Financial seeks to take advantage of this
opportunity by emphasizing it's local management and strong ties and active
commitment to the community. Management believes that a community bank can help
foster the economic development of its community and create and retain wealth
within that community. Management believes that community residents will
recognize the benefits of a community bank and that Tower Bank will be
successful in attracting as customers individuals and small- to medium-sized
businesses by demonstrating an active interest in their businesses and personal
financial affairs.
STATUS OF ORGANIZATION
Tower Financial was incorporated as an Indiana corporation on July 8, 1998.
Tower Financial was formed to acquire all of Tower Bank's issued and outstanding
stock and to engage in the business of a bank holding company under the federal
Bank Holding Company Act of 1956, as amended. Tower Financial is organizing
Tower Bank as an Indiana chartered bank with depository accounts to be insured
by the FDIC and as a member of the Federal Reserve System. On December 15, 1998,
the Department issued an order approving the application to establish Tower
Bank. Tower Bank's application for FDIC deposit insurance has not yet been
approved by the FDIC. Additionally, Tower Financial's application to become a
bank holding company for Tower Bank and Tower Bank's application to become a
member of the Federal Reserve System have not yet been approved by the Federal
Reserve Board. Tower Financial expects to receive these approvals in January
1999. In each case, the approvals were or are expected to be issued subject to
the satisfaction of certain conditions that Tower Financial believes are
customary in transactions of this type, including conditions relating to
capitalization of Tower Bank and continuing capital adequacy. Tower Financial
and Tower Bank expect to satisfy such conditions and commence business in the
first quarter of 1999. See "Risk Factors -- Possible Delay in Commencing
Operations" and "Risk Factors -- Regulatory Limitations on Our Operations."
MARKET AREA
Tower Bank's primary service area will be Allen County, Indiana, including
Fort Wayne and its suburbs. According to available statistical data, Fort Wayne
is within a 250-mile radius of 17% of the total United States population. Allen
County covers 659 square miles and ranks second in population out of Indiana's
93 counties. As of July 1998, Allen County had approximately 10,300 businesses
and an unemployment rate of approximately 3.0%. Allen County experienced
significant growth in household income from 1990 to 1998.
Allen County is a significant banking market in Indiana. Total deposits in
Allen County, including banks, thrifts and credit unions, were approximately
$4.7 billion as of June 30, 1997, the latest date for which data are available.
Based on such data, from 1996 to 1997, total deposits in Allen County grew
approximately 7.3%, compared to approximately 2.5% for the State of Indiana.
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PROPOSED LENDING PRACTICES
Tower Bank expects to make loans to individuals and businesses located
within its proposed market area. Tower Bank anticipates that its loan portfolio
will consist of commercial loans (80%), residential mortgage loans (10%) and
personal loans (10%), although these percentages are approximations and the
actual percentages may vary. Tower Bank anticipates that its legal lending limit
under applicable regulations will be approximately $2.25 million immediately
following the offering, based on the legal lending limit of 15% of capital and
surplus.
COMMERCIAL LOANS. Commercial loans will be made primarily to small- and
medium-sized businesses. These loans will be both secured and unsecured and are
expected to be made available for general operating purposes, acquisition of
fixed assets including real estate, purchases of equipment and machinery,
financing of inventory and accounts receivable, as well as any other purposes
considered appropriate. Tower Bank will generally look to a borrower's business
operations as the principal source of repayment, but will also receive, when
appropriate, mortgages on real estate, security interests in inventory, accounts
receivable and other personal property and/or personal guarantees. Approximately
20% of Tower Bank's commercial loans are expected to be commercial real estate
loans secured by a first lien on the commercial real estate. In addition, Tower
Financial expects that the majority of Tower Bank's commercial loans that are
not mortgage loans will be secured by a lien on equipment, inventory and/or
other assets of the commercial borrower.
Commercial lending involves more risk than residential lending because loan
balances are greater and repayment is dependent upon the borrower's operations.
Tower Bank will attempt to minimize the risks associated with these transactions
by generally limiting its exposure to owner-operated properties of customers
with an established profitable history. In many cases, risk will be further
reduced by (1) limiting the amount of credit to any one borrower to an amount
less than Tower Bank's legal lending limit and (2) avoiding certain types of
commercial real estate financings.
RESIDENTIAL MORTGAGE LOANS. Tower Bank expects to originate residential
mortgage loans, which are generally long-term, with either fixed or variable
interest rates. Tower Bank's anticipated general policy will be to retain all or
a portion of variable interest rate mortgage loans in Tower Bank's loan
portfolio and to sell all fixed rate loans in the secondary market. This policy
is subject to review by management and may be revised as a result of changing
market and economic conditions and other factors. Tower Bank also expects to
offer home equity loans. Tower Bank does not expect to retain servicing rights
with respect to the majority of the residential mortgage loans that it
originates. Tower Financial anticipates that all of Tower Bank's residential
real estate loans will be secured by a first lien on the real estate and that
the majority of Tower Bank's personal loans will be home equity loans secured by
a second lien on real estate.
PERSONAL LOANS AND LINES OF CREDIT. Tower Bank will make personal loans and
lines of credit available to consumers for various purposes, such as the
purchase of automobiles, boats and other recreational vehicles, and the making
of home improvements and personal investments. Tower Bank expects to retain
substantially all of such loans. Depending, in part, on the level of demand
among Tower Bank's customers and other considerations, Tower Bank may consider
offering credit card services.
Consumer loans generally have shorter terms and higher interest rates than
residential mortgage loans and, except for home equity lines of credit, usually
involve more credit risk than mortgage loans because of the type and nature of
the collateral. Consumer lending collections are dependent on a borrower's
continuing financial stability and are thus likely to be adversely affected by
job loss, illness or personal bankruptcy. In many cases, repossessed collateral
for a defaulted consumer loan will not provide an adequate source of repayment
of the outstanding loan balance because of depreciation of the underlying
collateral. Tower Bank intends to underwrite its loans carefully, with a strong
emphasis on the amount of the down payment, credit quality, employment stability
and monthly income. These loans are expected generally to be repaid on a monthly
repayment schedule with the payment amount tied to the borrower's periodic
income. Tower Bank believes that the generally higher yields earned on consumer
loans will help compensate for the increased credit risk associated with such
loans and that consumer loans will be important to its efforts to serve the
credit needs of its customer base.
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LOAN POLICIES. Although Tower Bank intends to take a progressive and
competitive approach to lending, it will stress high quality in its loans.
Because of Tower Bank's local nature, management believes that quality control
should be achievable while still providing prompt and personal service. Tower
Bank will be subject to written loan policies that contain general lending
guidelines and will be subject to periodic review and revision by Tower Bank's
Loan and Investment Committee and its board of directors. These policies concern
loan administration, documentation, approval and reporting requirements for
various types of loans.
Tower Bank will seek to make sound loans while recognizing that lending
money involves a degree of business risk. Tower Bank's loan policies are
designed to assist Tower Bank in managing the business risk involved in making
loans. These policies provide a general framework for Tower Bank's loan
operations while recognizing that not all loan activities and procedures can be
anticipated. Tower Bank's loan policies instruct lending personnel to use care
and prudent decision-making and to seek the guidance of the Chief Lending
Officer or the President and Chief Executive Officer of Tower Bank where
appropriate.
Tower Bank's loan policies include procedures for oversight and monitoring
of Tower Bank's lending practices and loan portfolio. Tower Bank will have a
Loan and Investment Committee comprised initially of Mr. Schenkel, Mr. Brown and
other appropriate lending personnel. Initially, certain senior officers will
have signatory authority for loans up to $1 million, and Mr. Schenkel and Mr.
Brown will have joint authority to approve loans from $1 million to $1.5
million. These limits will be subject to review and revision by Tower Bank's
board of directors and its Loan and Investment Committee from time to time. The
Loan and Investment Committee will be responsible for approving all loans that
exceed the established limits for the senior officers.
Tower Bank's loan policies provide guidelines for loan-to-value ratios that
limit the size of certain types of loans to a maximum percentage of the value of
the collateral securing the loans, which percentage varies by the type of
collateral, including the following maximum loan-to-value ratios:
- - raw land (65%)
- - improved residential real estate lots (75%)
- - owner-occupied commercial real estate (80%)
- - non-owner-occupied commercial real estate (75%)
- - first mortgages on residences (80%)
- - junior mortgages on residences (90%)
Tower Bank expects to use credit risk insurance, principally for
residential real estate mortgages where the loan-to-value ratio exceeds 80%.
Regulatory and supervisory loan-to-value limits are established by the Federal
Deposit Insurance Corporation Improvement Act of 1991. Tower Bank's internal
loan-to-value limitations will follow those limits and, in certain cases, will
be more restrictive than those required by the regulators.
Tower Bank's loan policies also include other underwriting standards for
loans secured by liens on real estate. These underwriting standards are designed
to determine the maximum loan amount that a borrower has the capacity to repay
based upon the type of collateral securing the loan and the borrower's income.
For owner-occupied residential real estate mortgages, the monthly payments on
the loan are not to exceed 28% of the borrower's monthly income. For
owner-occupied commercial real estate mortgages, the annual payments, combined
with the borrower's other required debt payments, are not to exceed 80% of the
borrower's net annual projected cash flow. In addition, the loan policies
require that Tower Bank obtain a written appraisal by a state certified
appraiser for loans secured by real estate in excess of $250,000, subject to
certain limited exceptions. The appraiser must be selected by Tower Bank and
must be independent and licensed. For loans secured by real estate that are less
than $250,000, Tower Bank may elect to conduct an in-house real estate
evaluation. Tower Bank's loan policies also include maximum amortization
schedules and loan terms for each category of loans secured by liens on real
estate. Loans secured by commercial real estate will be subject to a maximum
term of 10 years and a maximum amortization schedule of 20 years. Loans secured
by residential real estate with variable interest rates will have a maximum term
and amortization schedule of 30 years. Tower Bank intends to sell to the
secondary market all loans secured by residential real estate with fixed
interest rates, thereby reducing the interest rate risk and credit risk to Tower
Bank. Loans secured by vacant land will be subject to a maximum term of 3 years
and a maximum amortization schedule of 10 years.
Tower Bank's loan policies also establish a limit on the aggregate amount
of loans to any one borrower. These loan policies provide that no loan shall be
granted where the aggregate liability of the borrower to Tower
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<PAGE> 14
Bank will exceed $1.5 million. This internal lending limit is subject to review
and revision by the board of directors from time to time.
In addition, Tower Bank's loan policies provide guidelines for
- - personal guarantees
- - environmental policy review
- - loans to employees, executive officers and directors
- - problem loan identification
- - maintenance of a loan loss reserve
- - other matters relating to Tower Bank's lending practices
DEPOSITS AND OTHER SERVICES
DEPOSITS. Tower Bank intends to offer a broad range of deposit products,
including checking, business checking, savings and money market accounts,
certificates of deposit and direct-deposit services. Transaction accounts and
certificates of deposit will be tailored to the primary market area at rates
competitive with those offered in Allen county. All deposit accounts will be
insured by the FDIC up to the maximum amount permitted by law. Tower Bank
intends to solicit these accounts from individuals, businesses, associations,
financial institutions and government entities.
OTHER SERVICES. Tower Bank intends to contract with a third-party vendor to
provide personal computer based at-home banking and telephonic banking within
its first quarter of operations. Tower Bank also may consider providing trust
services in the future. Management believes that Tower Bank's personalized
service approach will benefit from customer visits to Tower Bank. Tower Bank
will offer a courier service for customer convenience. In addition, Tower Bank
may establish relationships with correspondent banks and other independent
financial institutions to provide other services requested by its customers,
including loan participations where the requested loan amounts exceed Tower
Bank's policies or legal lending limits.
INVESTMENTS
The principal investment of Tower Financial will be its purchase of all of
the common stock of Tower Bank. Funds retained by Tower Financial from time to
time may be invested in various debt instruments, including but not limited to
obligations of or guaranteed by the United States, general obligations of a
state or political subdivision thereof, bankers' acceptances of deposit of
United States commercial banks, or commercial paper of United States issuers
rated in the highest category by a nationally recognized statistical rating
organization. Although Tower Financial is permitted to make limited portfolio
investments in equity securities and to make equity investments in subsidiary
corporations engaged in certain non-banking activities (which may include real
estate-related activities such as mortgage banking, community development, real
estate appraisals, arranging equity financing for commercial real estate, and
owning or operating real estate used substantially by Tower Bank or acquired for
future use), Tower Financial has no present plans to make any such equity
investment. See "Supervision and Regulation -- Tower Financial -- Investments
and Activities." Tower Financial's Board of Directors may alter Tower
Financial's investment policy without shareholder approval.
Tower Bank may invest its funds in a wide variety of debt instruments and
may participate in the federal funds market with other depository institutions.
Subject to certain exceptions, Tower Bank is prohibited from investing in equity
securities. Real estate acquired by Tower Bank in satisfaction of or foreclosure
upon loans may be held by Tower Bank for no longer than 10 years after the date
of acquisition without the written consent of the Department. Tower Bank is also
permitted to invest an aggregate amount not in excess of 50% of the "sound
capital" of Tower Bank in such real estate and buildings as is necessary for the
convenient transaction of its business. Tower Bank's Board of Directors may
alter Tower Bank's investment policy without shareholder approval.
FUNDING SOURCES
Tower Bank plans to fund its operations initially from the proceeds of this
offering and, on an ongoing basis, primarily with local deposits. However, Tower
Bank may also use alternative funding sources as needed,
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<PAGE> 15
including advances from a Federal Home Loan Bank, when eligible, and other forms
of wholesale financing. These alternative funding sources may be more costly
than local deposits.
COMPETITION
There are many thrift institutions, credit unions and bank offices located
within Tower Bank's proposed primary service area. Most are branches of larger
financial institutions which, in management's view, are managed with a
philosophy of strong centralization. Tower Bank will face competition from
thrift institutions, credit unions and other banks as well as finance companies,
insurance companies, mortgage companies, securities brokerage firms, money
market funds, trust companies and other providers of financial services. Most of
Tower Bank's competitors have been in business a number of years, have
established customer bases, are larger and have higher lending limits than Tower
Bank. Tower Bank will compete for loans principally through its ability to
communicate effectively with its customers and understand and meet their needs.
Management believes that its personal service philosophy will enhance its
ability to compete favorably in attracting individuals and small- and
medium-sized businesses. Tower Bank will actively solicit retail customers and
will compete for deposits by offering customers personal attention, professional
service, off-site ATM capability and competitive interest rates.
EMPLOYEES
Tower Bank is assembling a staff of experienced professionals and expects
to have approximately 18 full-time employees when it opens for business. In
addition to Messrs. Schenkel, Himmelhaver and Brown, these employees are
expected to include two experienced commercial lending officers, one or more
mortgage loan originators, a private banking officer, a retail banking
officer/marketing officer and additional customer service and support personnel.
OFFICE FACILITIES
Tower Bank is leasing the ground floor of the Lincoln Tower, a landmark
building located at 116 East Berry Street in downtown Fort Wayne, Indiana, for
use as Tower Bank's main office and Tower Financial's headquarters. The leased
space, which formerly was occupied by a large regional bank, consists of
approximately 13,900 usable square feet and includes drive-through banking
windows. Surface and garage parking will be available at no cost to Tower Bank's
customers. Tower Bank believes that this space will be adequate for its present
needs. The building has been leased on an arm's-length basis from one of Tower
Financial's and Tower Bank's directors. See "Related Party Transactions -- Lease
of Headquarters Building."
The lease for Tower Bank's office has an initial term of ten years
commencing on January 1, 1999, and Tower Bank has one renewal option for an
additional ten years. The lease payments are $9.75 per square foot annually for
the first two years. Rent will increase at the rate of $1.25 per square foot at
the commencement of the third, fifth and seventh years of the initial term. The
landlord will be responsible for the payment of taxes, insurance and utilities.
PLAN OF OPERATION
Tower Financial does not expect to need to raise additional funds during
the twelve months following the completion of the offering. Management has
concluded, based on current pre-opening growth projections, that Tower Bank is
likely to have adequate funds to meet its cash requirements for at least twelve
months assuming it receives the capital contribution from Tower Financial
described under "Use of Proceeds." Management expects to expend approximately
$100,000 for leasehold improvements and related architectural and engineering
services, and approximately $365,000 for furniture, fixtures, equipment and
other necessary assets, prior to commencing operations. During the first twelve
months of operation, Tower Financial does not anticipate requiring substantial
additional equipment. At this time, management expects to hire approximately ten
employees, in addition to the original 18, during the first twelve months of
operations.
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<PAGE> 16
YEAR 2000 READINESS
The approach of the year 2000 presents potential problems to businesses
that utilize computers. See "Risk Factors -- Risks Relating to Year 2000
Readiness." Tower Bank is in the process of being organized and expects that
most of its computer equipment will be acquired during the first half of 1999.
Tower Financial has contracted for information and account processing services
and reports with a reputable and experienced company that provides such services
for many financial institutions. This contract includes, and Tower Bank will
require all material contracts for equipment and services to include, assurances
that the provider's products and services will be Year 2000 ready or compliant.
"Year 2000 ready" means that the system has been reviewed and modified, if
necessary, so that it will be able to accurately process dates ending in the
Year 2000 and after. Tower Financial has appointed one of its senior officers to
oversee the Year 2000 process and to inform the board of directors on a regular
basis of the progress being made. Tower Financial intends to assess its Year
2000 readiness in the areas of processing services and reports, electronic
banking services, correspondent services and communication systems. Other
systems which could affect operations include security systems, heating,
ventilation, and air conditioning. Tower Financial intends to complete this
assessment by September 30, 1999.
Tower Bank expects to require general assurances from commercial borrowers
as to their Year 2000 readiness as part of the loan application and review
process. Additionally, Tower Bank plans to use the following steps to minimize
Year 2000 risks: (1) internal communications to keep employees knowledgable and
updated on Year 2000 readiness; (2) written communications to all loan
applicants to notify them of Tower Bank's Year 2000 readiness efforts; (3)
questionnaires to be completed by all material loan clients to make them aware
of possible Year 2000 issues applicable to them; and (4) continued dialogue with
loan clients during 1999 to review Year 2000 readiness.
Because it is starting with new equipment, Tower Financial does not expect
to incur large operating expenses to modify its systems to be Year 2000 ready.
Costs to Tower Financial related to Year 2000 readiness are estimated to be less
than $25,000. These costs may include testing of equipment and software
programs, equipment upgrades and customer education. It is difficult to predict
such costs and additional funds may be needed. The failure of Tower Financial,
its vendors or its customers to successfully address Year 2000 issues could
interfere with Tower Financial's ability to operate its business and could have
an adverse effect on its financial condition and results of operation. Tower
Financial intends to develop a contingency plan to address Year 2000 problems
that may occur after December 31, 1999, and expects to develop the plan prior to
September 30, 1999.
WHERE YOU CAN FIND MORE INFORMATION
As a result of this offering, Tower Financial will be subject to the
informational requirements of the Securities Exchange Act of 1934 (the "Exchange
Act") and will file annual, quarterly and current reports, proxy statements and
other information with the Securities and Exchange Commission (the "SEC"). You
may read and copy any reports, statements or other information that Tower
Financial files, including the Registration Statement with respect to the common
stock offered in this prospectus and all exhibits, financial statements and
schedules to the Registration Statement, at the SEC's Public Reference Room at
450 Fifth Street, N.W., Washington DC 20549. Please call the SEC at
1-800-SEC-0330 for further information on the operation of the Public Reference
Room. In addition, these materials may be inspected at the SEC's regional
offices located at Seven World Trade Center, Suite 1300, New York, NY 10048, and
CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago, IL 60661. The SEC
also maintains an Internet site that contains reports, proxy and information
statements and other public filings. The address of that site is
http://www.sec.gov.
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MANAGEMENT
DIRECTORS AND OFFICERS
The directors and executive officers of Tower Financial as of the date of
this prospectus, and their contemplated positions with Tower Bank upon
completion of the offering, are as follows:
<TABLE>
<CAPTION>
POSITION(S) WITH POSITION(S)
NAME AGE TOWER FINANCIAL WITH TOWER BANK
---- --- ---------------- ---------------
<S> <C> <C> <C>
Curtis A. Brown...................... 43 Chief Lending Officer Chief Operating Officer
and Chief Lending Officer
Keith E. Busse....................... 55 Director Director
Peter T. Eshelman.................... 45 Director Director
Michael S. Gouloff................... 51 Director Director
Craig S. Hartman..................... 44 Director Director
Jerome F. Henry, Jr.................. 48 Director Director
Kevin J. Himmelhaver................. 42 Chief Financial Officer Chief Financial Officer
and Secretary and Secretary
Michael Mirro, M.D................... 49 Director Director
Debra A. Niezer...................... 43 Director Director
William G. Niezer.................... 48 Director Director
Maurice D. O'Daniel.................. 66 Director Director
Leonard Rifkin....................... 67 Director Director
Joseph D. Ruffolo.................... 57 Director Director
Donald F. Schenkel................... 57 Chairman of the Board, Chairman of the Board,
President, Chief Executive President, Chief Executive
Officer and Director Officer and Director
Larry L. Smith....................... 50 Director Director
John V. Tippmann, Sr................. 57 Director Director
J. Richard Tomkinson................. 51 Director Director
Irene A. Walters..................... 56 Director Director
</TABLE>
Curtis A. Brown is the Chief Lending Officer of Tower Financial and the
Chief Operating Officer and Chief Lending Officer of Tower Bank, positions he
has held since October 1998. He is a native of Fort Wayne and has over 21 years
of experience in the banking industry. Mr. Brown began his career as a retail
bank manager from 1977 to 1982 with INB National Bank. From 1982 until 1993, Mr.
Brown assumed increasing responsibilities in corporate banking as an Assistant
Vice President, Vice President, First Vice President and Senior Loan Officer
with INB National Bank. INB National Bank was acquired by NBD Bank, N.A. in
1993. From 1993 until 1998, Mr. Brown managed corporate banking groups for NBD
Bank Indiana in Fort Wayne, most recently holding the positions of First Vice
President and Group Head. Mr. Brown is involved in United Way of Allen County, a
board member of Anthony Wayne Services, Inc., and a member of the Workforce
Development Council of the Greater Fort Wayne Chamber of Commerce.
Keith E. Busse is a director of Tower Financial and Tower Bank. Since
September 1993, Mr. Busse has served as Chief Executive Officer of Steel
Dynamics, Inc., a primary steel-making company headquartered in Butler, Indiana,
and formed by Mr. Busse and others in 1993. Steel Dynamics, Inc., is a
publicly-held company and a significant supplier of flat-rolled steel in the
upper Midwest that had net sales of $420 million for 1997 and employed 455
persons as of March 2, 1998. In 1997, Mr. Busse and Steel Dynamics were listed
in Business Week as being among the country's top 10 "entrepreneurs" and
entrepreneurial corporations, and Mr. Busse was named the regional winner of the
Indiana Ernst & Young Emerging Entrepreneur of the Year award. Mr. Busse is also
a director of Steel Dynamics, Inc., and Qualitech Steel Corporation. Mr. Busse
is involved in area civic and charitable organizations, including Junior
Achievement, the Leukemia Society of America and local Little League and Senior
League Baseball. He is also a board member of Bridgewater Development Company,
Fort Wayne Fury and Fort Wayne Kustom.
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Peter T. Eshelman is a director of Tower Financial and Tower Bank. Mr.
Eshelman is President and Chief Executive Officer of American Specialty
Companies, Inc., a sports and entertainment risk management company based in
Roanoke, Indiana, of which he is the majority shareholder. He has held these
positions since 1989. Mr. Eshelman is also a founding trustee of American
Specialty Foundation, a charitable foundation for educational development of
youth through sports, the Chairman of the Roanoke, Indiana, Chamber of Commerce
Beautification Committee, and serves as an appointee of Governor O'Bannon on the
State of Indiana Regulated Amusement and Safety Device Board.
Michael S. Gouloff is a director of Tower Financial and Tower Bank. Mr.
Gouloff has served as President of Schenkel Schultz Architects, a national
architectural firm known for the design of educational and correctional
facilities, since 1985 and has been employed by the firm since 1973. He is
currently a registered architect in 18 states. A Fort Wayne native, Mr. Gouloff
is an active member of the community, currently serving on the boards of
Canterbury School, Fort Wayne Country Club, Fort Wayne Airport Authority and
Parkview Hospital. Mr. Gouloff is a current Commissioner for the Hoosier Lottery
and a past Commissioner for the Indiana State Office Building Commission.
Craig S. Hartman is a director of Tower Financial and Tower Bank. Mr.
Hartman is Chairman and Chief Executive Officer of Preferred, Inc., a commercial
and industrial painting, roofing and flooring company. Mr. Hartman founded
Preferred, Inc., in 1973 at the age of 18 and has served as its Chief Executive
Officer since that time. He also serves as Chief Executive Officer of Preferred
Environmental Services, Inc., an asbestos and lead abatement company founded in
January 1991. Mr. Hartman currently is a member of the Fort Wayne Junior
Achievement board of directors, the boards of the Indiana Chamber of Commerce
and the Greater Fort Wayne Chamber of Commerce Foundation and a member of the
Indiana Chapter of the Young President's Organization. Mr. Hartman is a native
of Fort Wayne and has been involved in numerous other community organizations.
He has been recognized in the Fort Wayne community and the state as an
entrepreneur and small business person and was a delegate to The White House
Conference on Small Business in 1995.
Jerome F. Henry, Jr., is a director of Tower Financial and Tower Bank. Mr.
Henry was the founder and is the President of Midwest Pipe & Steel, Inc., a
company specializing in steel service, industrial scrap and steel brokerage. Mr.
Henry has held this position since 1975. Mr. Henry is also President of Paragon
Tube Corporation, a manufacturer of steel tubing, and Paragon Steel Trading,
Inc., a distributor of steel coils, each of which is headquartered in Fort
Wayne. He has held these respective positions since 1990 and 1995. A native of
Bloomington, Indiana, Mr. Henry has lived in Fort Wayne for 40 years. He is
involved with Big Brothers, St. Joseph Community Health Foundation and St. Anne
Home and is a member of the Urban Enterprise Zone Board.
Kevin J. Himmelhaver is the Chief Financial Officer and Secretary of Tower
Financial and Tower Bank, positions he has held since October 1998 and November
1998, respectively. Mr. Himmelhaver has nearly 20 years of banking experience in
the Fort Wayne area. From 1979 to 1993, Mr. Himmelhaver worked for Lincoln
Financial Corporation and its principal subsidiary, Lincoln National Bank &
Trust Company, in various financial positions, most recently as First Vice
President and Controller with responsibility for accounting, tax, financial
controls and office services. Lincoln Financial Corporation was acquired by
Norwest Corporation in 1993. From 1993 to 1998, Mr. Himmelhaver worked for
Norwest Bank Indiana, N.A., and Norwest Bank Ohio, N.A., a banking region of
Norwest Corporation with $2 million in assets at September 30, 1998, as Senior
Vice President and Chief Financial Officer. His responsibilities included
managing regional finance, properties and various operations groups, as well as
strategic planning, acquisitions and asset and liability management. Mr.
Himmelhaver also served as a director of Norwest Bank Indiana, N.A., and Norwest
Bank Ohio, N.A. A native of Fort Wayne, Indiana, Mr. Himmelhaver is a board
member of the Summit Club, a director and the Treasurer of Fort Wayne Aquatics,
Inc., and a 1998 graduate of Leadership Fort Wayne.
Michael Mirro, M.D., is a director of Tower Financial and Tower Bank. Dr.
Mirro has been a partner of Fort Wayne Cardiology since 1982 and has previously
served on the group's governing board. Fort Wayne Cardiology recently merged
with a multi-specialty internal medicine group to form Indiana Medical
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Associates, LLC. Dr. Mirro served as founding board chairman during the merger.
Indiana Medical Associates, LLC is a group of 46 physicians providing health
services to the entire Northeast Indiana Region. Dr. Mirro is a Fellow of the
American College of Physicians, American College of Cardiology and American
College of Chest Physicians. Recently, he served as President of the Fort
Wayne/Allen County Medical Society. Dr. Mirro is a past member of the Indiana
Medical Licensing Board. Dr. Mirro's civic interests include serving as the
Chairman of the Greater Fort Wayne Chamber of Commerce and as the past Chairman
of the Economic Development Council for that organization. His community
interests also have included serving on the Board of Trustees of the YMCA of
Greater Fort Wayne.
Debra A. Niezer is a director of Tower Financial and Tower Bank. Ms. Niezer
is the Vice President and Assistant Treasurer of AALCO Distributing Company, a
beer distributor in Fort Wayne. She has held these positions since April 1995.
From January 1989 to March 1995, Ms. Niezer served as Vice President and
Employee Benefits Officer for NBD Bank Indiana in Fort Wayne. Prior to that time
she served as Vice President and Trust Officer for First of America
Bank-LaPorte, N.A., from December 1983 to October 1988. A native of Fort Wayne,
Ms. Niezer is the past President of the Gamma Lambda Chapter of Kappa Kappa
Kappa and is the Co-Chair of Bishop Dwenger High School Saints Alive! for 1999.
William G. Niezer is a director of Tower Financial and Tower Bank. Mr.
Niezer is the President and Chief Executive Officer of Acordia of Indiana, Inc.,
an insurance broker, positions he has held since September 1997. Mr. Niezer
previously served as President and Chief Executive Officer of Acordia of
Northeast Indiana, Inc., an insurance broker and third-party administrator, from
February 1995 to September 1997 and the Director of Property & Casualty
Operations of Acordia of Northeast Indiana, Inc., from October 1994 to February
1995. Prior to that time, Mr. Niezer was the President of O'Rourke, Andrews &
Maroney, Inc., a regional insurance broker, from May 1988 to October 1994. Mr.
Niezer is the President of the Board of Trustees of the University of St.
Francis, a member of the Allen County Plan Commission, and a board member of St.
Joseph Community Health Foundation. Mr. Niezer is a native of Fort Wayne and has
previously served on the boards of the Fort Wayne Ballet and St. Anne Home.
Maurice D. O'Daniel is a director of Tower Financial and Tower Bank. Mr.
O'Daniel is the Chairman and Chief Executive Officer of O'Daniel Automotive,
Inc., an automobile dealership with four locations in the Fort Wayne area. Mr.
O'Daniel has served in these positions since July 1979. From 1975 to 1977, Mr.
O'Daniel served on the board and loan committee of First Federal Savings & Loan
Corporation in Evansville, Indiana, and in 1995 and 1996, he was Chairman of the
Board of Northern Indiana Trust Corporation in Fort Wayne. He currently serves
as a director of St. Joseph Community Health Foundation and is Chairman of the
Junior Achievement Foundation and a member of the Greater Fort Wayne Chamber of
Commerce Economic Development Council.
Leonard Rifkin is a director of Tower Financial and Tower Bank. Mr. Rifkin
served as the Chief Executive Officer and President of OmniSource, Inc., from
1970 until 1996, when he was appointed Chairman and Chief Executive Officer,
positions he currently holds. OmniSource is a scrap metal processing, trading
and brokerage company that specializes in scrap management programs throughout
the United States and Canada. OmniSource was originally incorporated in 1943 in
Fort Wayne, Indiana, as Superior Iron & Metal and today employs 1,250 persons
and operates from 25 locations throughout the Midwest. Mr. Rifkin is also a
director of Steel Dynamics, Inc., and Qualitech Steel Corporation. His civic
involvement includes the Greater Fort Wayne Chamber of Commerce and the Fort
Wayne Philharmonic.
Joseph D. Ruffolo is a director of Tower Financial and Tower Bank. Since
1993, Mr. Ruffolo has been a member of Ruffolo Richard, LLC, a business
investment firm located in Fort Wayne. Ruffolo Richard, LLC, specializes in
management buy-outs, capital sourcing and acquisitions. From 1988 to 1993, Mr.
Ruffolo served as Chief Executive Officer and President of North American Van
Lines, a moving company. Mr. Ruffolo has resided in Fort Wayne since 1974, is a
director of Parkview Health System, Inc., and is active with the Fort Wayne
Museum of Art and the Greater Fort Wayne Chamber of Commerce.
Donald F. Schenkel is the President and Chief Executive Officer and a
director of Tower Financial and of Tower Bank, positions he has held since July
1998, and was elected the Chairman of the Board of Tower Financial and Tower
Bank in October 1998. Mr. Schenkel is a native of Fort Wayne and has nearly 30
years of
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experience in the banking industry. Most recently, Mr. Schenkel served as First
Vice President of NBD Bank Indiana, a banking corporation which had assets of
approximately $9.5 billion at June 30, 1998. NBD Bank Indiana was a subsidiary
of First Chicago NBD Corporation, a multi-bank holding company which had assets
at September 30, 1998, of approximately $117 billion. From 1993 to 1998, he
served in the capacities of Division Head of Retail Banking and Private Banking
& Investments, for NBD Bank Indiana. From 1990 to 1993, Mr. Schenkel served as
Senior Vice President of INB National Bank, a regional bank with assets of
approximately $5 billion at December 31, 1992, that was acquired by NBD Bank,
N.A., in 1993. His positions with INB National Bank included senior level
responsibility for commercial lending, retail lending and branch administration.
From 1985 to 1990, Mr. Schenkel was an executive with Northhill Corporation, a
company involved primarily in real estate development. From 1966 to 1985, Mr.
Schenkel was employed by Lincoln National Bank & Trust Company in Fort Wayne,
whose parent holding company, Lincoln Financial Corporation, was acquired by
Norwest Corporation in 1993. During this time, Mr. Schenkel held various
positions, including Senior Vice President and Secretary to the Board of
Directors. Mr. Schenkel serves as Chairman of the St. Joseph Community Health
Foundation and is a member of the Board of Trustees of the University of St.
Francis. He is also a board member of the Fort Wayne Zoological Society, Junior
Achievement and Leadership Fort Wayne.
Larry L. Smith is a director of Tower Financial and Tower Bank. Mr. Smith
has served since March 1993 as President and Chief Executive Officer of Q.C.
Onics, Inc., an automotive supplier based in Angola, Indiana. From 1988 to 1992,
Mr. Smith was employed by Navistar International Transportation Company as Vice
President of Truck Engineering. Prior to this time, Mr. Smith had a twenty-year
career with Chrysler Corporation, where he held numerous management positions in
product engineering, manufacturing and quality control. During his tenure as
Chief Engineer of Vehicle Safety Management with Chrysler Corporation, he was
appointed by the U.S. Secretary of Transportation to the National Highway
Traffic Safety Administration's Research Board on Highway Safety. Mr. Smith
previously served on the board and the Trust Committee of Summit Bank in Fort
Wayne. He has been active in numerous civic and charitable organizations in the
Fort Wayne area, such as the Greater Fort Wayne Chamber of Commerce, the Fort
Wayne Urban League, Junior Achievement, the Fort Wayne Philharmonic and the Fort
Wayne Corporate Council.
John V. Tippmann, Sr., is a director of Tower Financial and Tower Bank. Mr.
Tippmann is Chairman of the Tippmann Group, a position he has held since 1985.
The Tippmann Group, through its three subsidiaries, operates frozen/refrigerated
distribution warehouses, specializes in the design and construction of frozen
food process and cold storage facilities, and manages approximately 41 buildings
throughout the Midwest. The Tippmann Group is based in Fort Wayne, has annual
revenues of approximately $75 million, and employs approximately 400 people. Mr.
Tippmann is a native of Fort Wayne and board member of St. Joseph Community
Health Foundation, Board President of Vincent House, Inc., and the current
Chairman of Annual Bishops Appeal Fort Wayne/South Bend.
J. Richard Tomkinson is a director of Tower Financial and Tower Bank. Mr.
Tomkinson is the President and owner of Tomkinson Automotive Group. He has
served in this position since 1979. Tomkinson Automotive Group operates two Fort
Wayne area automobile dealerships. Mr. Tomkinson also is the President and
co-owner of Lincoln Graphics, Inc., a Fort Wayne graphics design and
reproduction company serving architects and construction companies in Northeast
Indiana, and Vice President and co-owner of Gallatin Highlands Corporation, a
Big Sky, Montana real estate development company. Mr. Tomkinson has been a
member of the National Auto Dealers Association since 1977.
Irene A. Walters is a director of Tower Financial and Tower Bank. Ms.
Walters is the Director of University Relations and Communications at Indiana
University-Purdue University Fort Wayne. Ms. Walters has held this position
since 1995. Prior to that time, from 1990 to 1995, Ms. Walters was the Executive
Director of the Fort Wayne Bicentennial Celebration Council. Ms. Walters has
served in leadership positions in many civic and charitable projects and has
served on numerous boards in the Fort Wayne area for over twenty-five years,
such as United Way of Allen County, the American Cancer Society, Three Rivers
Festival, Anthony Wayne Services, Inc., the McMillen Center for Health
Education, the Fort Wayne Civic Theatre, Fort Wayne Historical Society, WFWA
Channel 39, the Fort Wayne Jewish Federation, the YWCA and
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<PAGE> 21
Leadership Fort Wayne. In 1994, she received Indiana's highest civilian award,
the Sagamore of the Wabash, and in 1995 was named Fort Wayne's Citizen of the
Year by the Fort Wayne Journal-Gazette. She led Fort Wayne's award-winning
All-America City delegation in 1998 and most recently was appointed Co-Chair of
the City of Fort Wayne Millennium Celebration Commission.
Under federal law and regulations, and subject to certain exceptions, the
addition or replacement of any director or the employment, dismissal or
reassignment of a senior executive officer of Tower Bank or Tower Financial at
any time that Tower Bank is not in compliance with applicable minimum capital
requirements or is otherwise in a troubled condition, or when the Federal
Reserve Board has determined that such prior notice is appropriate, is subject
to prior notice to and disapproval by the Federal Reserve Board. In addition,
directors and officers of Tower Bank may be removed by order of the Department
under certain circumstances.
Tower Financial's By-Laws provide that the number of directors of Tower
Financial shall be eighteen. This number is subject to change from time to time
by a vote of 66 2/3% of the board of directors without shareholder approval.
There are currently two vacancies on the board. Directors of Tower Financial are
divided into three classes with staggered three-year terms. The term of the
first class will expire at the annual meeting of shareholders in 2000, and the
terms of the second and third classes will expire at the annual meetings of
shareholders in 2001 and 2002, respectively. The terms of Tower Financial's
current and proposed directors will expire as follows:
- 2000 -- Ms. Niezer and Messrs. Henry, Hartman, O'Daniel and Ruffolo;
- 2001 -- Messrs. Mirro, Niezer, Rifkin, Smith and Tippmann;
- 2002 -- Messrs. Busse, Eshelman, Gouloff, Schenkel and Tomkinson and Ms.
Walters.
It is anticipated that the entire board of directors of Tower Bank will be
elected annually by Tower Financial as its sole shareholder.
Executive officers of Tower Financial and of Tower Bank serve at the
discretion of their respective boards of directors.
Mr. Rifkin is the first cousin of Ms. Walters' spouse. Ms. Niezer is the
sister-in-law of Mr. Niezer. There are no other family relationships among any
of the directors or executive officers of Tower Financial.
COMMITTEES OF THE BOARD OF DIRECTORS
Tower Financial has an Executive Committee, an Audit Committee and a
Compensation Committee. The Executive Committee consists of Messrs. Busse,
Eshelman, Gouloff, Hartman, Ruffolo and Schenkel. The Audit Committee consists
of Messrs. Niezer and Tomkinson, Ms. Walters and Ms. Niezer, and the
Compensation Committee consists of Messrs. Busse, Eshelman, Gouloff, Hartman and
Ruffolo. The Executive Committee has authority to act on behalf of the board of
directors between meetings and, with certain exceptions, the authority to take
all actions that the full board could take. The Audit Committee is responsible
for recommending independent auditors, reviewing with the independent auditors
the scope and results of the audit engagement, establishing and monitoring Tower
Financial's financial policies and control procedures, reviewing and monitoring
the provision of non-audit services by Tower Financial's auditors and reviewing
all potential conflict of interest situations. See "Related Party Transactions."
The Compensation Committee is responsible for reviewing, determining and
establishing the salaries, bonuses and other compensation of the executive
officers of Tower Financial and for administering Tower Financial's 1998 Stock
Option Plan.
COMPENSATION OF DIRECTORS
Joseph Ruffolo and one of his affiliates have provided consulting services
to Tower Financial during 1998 relating to the establishment of Tower Financial
and Tower Bank. These services include market analysis, director sourcing, and
the development and generation of information disclosed in the applications to
the federal and state banking regulatory authorities. As compensation for these
services, on January 4, 1999, Tower Financial granted to Mr. Ruffolo options to
purchase 2,500 shares of common stock at an exercise price
21
<PAGE> 22
equal to the offering price per share shown on the cover page of this
prospectus. The options become exercisable upon the closing of the offering and
expire ten years from the date of grant.
Craig Hartman has provided services to Tower Financial to assist in its
formation. These services include the identification of potential investors and
directors and consulting services with respect to the viability of establishing
a locally-owned bank and with respect to the identity of professional advisors
to Tower Financial, including the engagement of the underwriters. As
compensation for these services, on January 4, 1999, Tower Financial granted Mr.
Hartman options to purchase 7,500 shares of common stock at an exercise price
equal to the offering price per share shown on the cover page of this
prospectus. The options become exercisable upon the closing of the offering and
expire ten years after the date of grant.
In the first year of operation, no other compensation is expected to be
paid to any directors of Tower Financial or Tower Bank for their services in
such capacities, except for options to purchase shares of common stock expected
to be granted by Tower Financial to each of the directors. See "Executive
Compensation -- 1998 Stock Option and Incentive Plan." Depending on the
structure and operation of Tower Financial, the operations of Tower Bank and
other factors, Tower Financial's and Tower Bank's Boards of Directors may
thereafter determine that reasonable fees or compensation are appropriate. In
that event, it is likely that directors of Tower Financial and Tower Bank would
receive compensation, such as meeting fees, which would be consistent with the
compensation paid to directors of financial institution holding companies and
banks of similar size.
EXECUTIVE COMPENSATION
The annual compensation (excluding benefits) for Mr. Schenkel, the Chairman
of the Board, President and Chief Executive Officer of Tower Financial and Tower
Bank, for the first year of his employment is expected to be $145,000. Tower
Financial also paid Mr. Schenkel a hiring bonus in 1998 in the amount of
$100,000 to compensate him for accrued benefits forfeited by him upon leaving
his previous employer to accept his positions with Tower Financial. Mr.
Himmelhaver, the Chief Financial Officer and Secretary of Tower Financial and
Tower Bank, is expected to be paid a salary of $105,000 for the first year of
his employment; and Mr. Brown, Chief Lending Officer of Tower Financial and
Chief Lending Officer and Chief Operating Officer of Tower Bank, is expected to
be paid a salary of $115,000 for that same period. These officers' compensation
in subsequent years will be determined by Tower Financial's and Tower Bank's
Boards of Directors. In making their determinations, it is expected that the
boards of directors will receive recommendations from their Compensation
Committees, which will be comprised of outside directors. Mr. Schenkel and the
other officers of Tower Financial and Tower Bank may participate in Tower
Financial's 1998 Stock Option and Incentive Plan. Officers of Tower Bank may
also participate in any benefit plans adopted for Tower Bank employees
generally. Pending the establishment of Tower Financial's and Tower Bank's
benefit plans for employees generally, Tower Financial has purchased life
insurance and disability insurance covering Messrs. Schenkel, Himmelhaver and
Brown. Tower Bank expects to adopt a 401(k) plan for its employees.
Tower Financial has entered into employment agreements with Messrs.
Schenkel, Himmelhaver and Brown, each for an initial term of three years with
automatic one year renewals. Each agreement provides that, if the executive's
employment is terminated by Tower Financial without cause, Tower Financial will
pay to the executive the aggregate amount of the salary he would be entitled to
receive under the agreement for the balance of the employment term, provided
that such payment will not be less than one year's salary at the then-effective
rate being paid to the executive. The agreements prohibit the officers from
competing with Tower Financial during the periods of their employment and for an
additional 24 months thereafter (twelve months if their employment is terminated
by Tower Financial without cause).
The agreements provide for initial annual salaries of $145,000, $105,000
and $115,000 for Messrs. Schenkel, Himmelhaver and Brown, respectively, each of
which may be increased from time to time by the board of directors. Mr.
Schenkel's agreement provides that he is eligible to qualify for an annual
performance bonus equal to a minimum of 30% (and up to a maximum of 100%) of his
annual salary upon compliance with goals set from time to time by the board of
directors in its sole discretion. Mr. Himmelhaver's
22
<PAGE> 23
agreement entitles him to (a) a signing bonus of $20,000, payable no later than
January 31, 1999, to compensate him from accrued benefits forfeited by him upon
leaving his previous employer to accept his positions with Tower Financial and
(b) an incentive bonus payment of $10,000 payable within 30 days after Tower
Bank commences business. Mr. Brown's agreement entitles him to an incentive
bonus payment of $25,000 payable within 30 days after Tower Bank commences
business. Tower Financial has not yet paid any such bonuses to these executives.
SUMMARY COMPENSATION TABLE
The following table shows compensation paid to Tower Financial's Chairman
of the Board, President and Chief Executive Officer for the period from
inception of Tower Financial to December 31, 1998. No other executive officer of
Tower Financial received compensation exceeding $100,000 for such period.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
-----------------------------------
OTHER ANNUAL
NAME AND POSITION SALARY BONUS COMPENSATION
----------------- ------ ----- ------------
<S> <C> <C> <C>
Donald F. Schenkel,......................................... $66,923 $100,000 $12,571(1)
Chairman of the Board,
President and Chief
Executive Officer
</TABLE>
- -------------------------
(1) Of this amount, $4,256 represents payment of a car allowance; $1,298
represents payment of health, dental and disability insurance premiums;
$1,792 represents payment of life insurance premiums; and $5,225 represents
payment of club dues.
1998 STOCK OPTION AND INCENTIVE PLAN
On December 14, 1998, the board of directors and the sole stockholder of
Tower Financial adopted the 1998 Stock Option and Incentive Plan (the "1998
Stock Option Plan"). Under the 1998 Stock Option Plan, Tower Financial may award
stock options and performance shares to employees and directors of Tower
Financial. The aggregate number of shares of common stock that may be awarded
under the 1998 Stock Option Plan is 310,000, subject to adjustment in certain
events. No individual participant may receive awards for more than 75,000 shares
in any calendar year.
The 1998 Stock Option Plan is administered by the Compensation Committee.
Subject to the terms of the 1998 Stock Option Plan, the Compensation Committee
has the sole discretion and authority to select those persons to whom awards
will be made, to designate the number of shares to be covered by each award, to
establish vesting schedules, to specify all other terms of the awards (subject
to certain restrictions) and to interpret the 1998 Stock Option Plan.
With respect to stock options under the 1998 Stock Option Plan that are
intended to qualify as "incentive stock options" under Section 422 of the
Internal Revenue Code, the option price must be at least 100% (or, in the case
of a holder of more than 10% of the common stock, 110%) of the fair market value
of a share of common stock on the date of the grant of the stock option. The
Compensation Committee will establish, at the time the options are granted, the
exercise price of options that do not qualify as incentive stock options ("non-
qualified stock options"), which may not be less than 85% of the fair market
value of a share of common stock on the date of grant. No incentive stock option
granted under the 1998 Stock Option Plan may be exercised more than ten years
(or, in the case of a holder of more than 10% of the common stock, five years)
from the date of grant or such shorter period as the Compensation Committee may
determine at the time of the grant. Non-qualified stock options may be exercised
during such period as the Compensation Committee determines at the time of
grant, which period may not be more than ten years from the date of grant. Under
the 1998 Stock Option Plan, the Compensation Committee may also make awards of
performance shares, in which case the grantee would be granted shares of common
stock, subject to Tower Financial's satisfaction of performance goals determined
by the Compensation Committee.
23
<PAGE> 24
On January 4, 1999, Tower Financial's Compensation Committee granted
options to certain employees and directors under the 1998 Stock Option Plan for
an aggregate of 90,000 shares of common stock, effective at the closing date of
the offering. Each of these options has an exercise price equal to the initial
public offering price shown on the cover page of this prospectus and has a term
of ten years. Of these option grants, non-qualified stock options to purchase
2,500 shares were granted to Joseph Ruffolo, and non-qualified stock options to
purchase 7,500 shares were granted to Craig Hartman, as compensation for
services provided to Tower Financial as described under "Management --
Compensation of Directors." These non-qualified stock options vest on the
closing date of the offering. Incentive stock options to purchase 40,000, 20,000
and 20,000 shares were granted to Messrs. Schenkel, Himmelhaver and Brown,
respectively, as compensation for services rendered in their capacities as
officers of Tower Financial and Tower Bank. These incentive stock options vest
25% a year on each of the first four anniversaries of the closing date of the
offering.
Additionally, the Compensation Committee intends to grant non-qualified
stock options to purchase an aggregate of 150,000 shares to the directors of
Tower Financial after the closing date of the offering on a pro rata basis based
upon the number of shares of common stock purchased in the offering by the
directors. See "Principal Shareholders." The Compensation Committee intends for
one-third of the shares subject to each option to vest six months, one year and
two years after the closing date of the offering. Each of the options will have
an exercise price equal to the initial public offering price set forth on the
cover page of this prospectus and will have a term of ten years.
RELATED PARTY TRANSACTIONS
Since its inception, Tower Financial has engaged in transactions with
entities controlled by its directors and their affiliates. Management believes
that each of these transactions was on terms no less favorable to Tower
Financial than those that could be obtained from an unaffiliated third party.
Tower Financial anticipates that, subsequent to the offering, it will continue
to engage in certain of these transactions if economically advantageous to Tower
Financial. Future related party transactions will be subject to the review and
approval of Tower Financial's Audit Committee, which will be composed
exclusively of outside directors, and such transactions will be on terms no less
favorable to Tower Financial than those that could be obtained from an
unaffiliated third party.
LOANS FROM DIRECTORS
Over the past several months, each of the directors of Tower Financial has
made a loan to Tower Financial to fund start-up expenses. These loans total
$760,000. Each loan is evidenced by a promissory note payable to the director,
which is non-interest bearing and is due on or before March 31, 1999. Tower
Financial intends to repay the notes promptly following the completion of the
offering.
LEASE OF HEADQUARTERS BUILDING
Tower Financial leases its headquarters facility, which contains the only
location of Tower Bank, from Tippmann Properties, Inc., agent for Director John
V. Tippmann, Sr. The lease is a ten-year lease commencing on January 1, 1999,
with annual rental payments of $9.75 per square foot for the first two years of
the lease and fixed increases at the rate of $1.25 per square foot every two
years thereafter, ending at $14.75 per square foot for the last two years of the
lease. The lease provides for one renewal of ten years at then prevailing market
rates. In the event Tower Bank does not receive its charter, Tower Financial may
terminate the lease without further obligation. Tower Financial believes that
this lease is on terms at least as favorable as could be obtained from an
unaffiliated third party. Tower Financial has paid Tippmann Properties, Inc.,
$4,879 under an interim lease for temporary office space during fiscal year
1998.
CONSULTING SERVICES
Director Joseph Ruffolo and one of his affiliates have provided consulting
services to Tower Financial during fiscal year 1998 relating to the
establishment of Tower Financial and Tower Bank. Additionally,
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<PAGE> 25
Director Craig Hartman has provided services to Tower Financial to assist in its
formation. See "Management -- Compensation of Directors."
INSURANCE
Tower Financial has obtained key man life, director and officer liability,
property, liability, automobile and worker's compensation insurance through
Acordia of Indiana, Inc., an insurance broker whose President and Chief
Executive Officer is Director William Niezer. Tower Financial paid a commission
to Acordia of Indiana, Inc., of $1,390.
OTHER
During fiscal year 1998, Tower Financial paid $6,250 to GKG Designs, an
interior design firm owned by Gretchen Gouloff, spouse of Director Michael
Gouloff, for interior design services. Additionally, Tower Financial has leased
a car from O'Daniel Automotive, Inc., a car dealership owned by Director Maurice
O'Daniel, for two years with a lease payment of $605 per month and has paid
$4,256 on the car lease during fiscal year 1998. Tower Financial has also
purchased a computer from Preferred, Inc., an affiliate of Director Craig
Hartman, for $1,600. The purchase price was determined by the parties based on
the estimated value of the computer.
BANKING TRANSACTIONS
Tower Financial anticipates that the directors and officers of Tower
Financial and Tower Bank and the companies with which they are associated will
have banking and other transactions with Tower Financial and Tower Bank in the
ordinary course of business. Any loans and commitments to lend to such
affiliated persons or entities will be made in accordance with all applicable
laws and regulations and on substantially the same terms, including interest
rates and collateral, as those prevailing at the time for comparable
transactions with unaffiliated parties of similar creditworthiness, and will not
involve more than normal risk or present other unfavorable features to Tower
Financial and Tower Bank. Transactions between Tower Financial or Tower Bank, on
one hand, and any officer, director, principal shareholder, or other affiliate
of Tower Financial or Tower Bank, on the other hand, will be on terms no less
favorable to Tower Financial or Tower Bank than could be obtained on an
arm's-length basis from unaffiliated third parties.
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<PAGE> 26
PRINCIPAL SHAREHOLDERS
Tower Financial has issued to date only one share of common stock. The
following table shows the anticipated beneficial ownership of the common stock
after the sale of the shares offered hereby by (1) each person expected by Tower
Financial to beneficially own more than 5% of the outstanding common stock, (2)
each director of Tower Financial, (3) each of Tower Financial's executive
officers and (4) all current directors and executive officers of Tower Financial
as a group. Under the Underwriting Agreement between Tower Financial and the
underwriters (the "Underwriting Agreement"), Tower Financial will direct the
underwriters to offer to sell the number of shares listed below to the directors
and executive officers listed below. All share numbers (other than shares that
may be acquired pursuant to options granted to Mr. Hartman and Mr. Ruffolo under
the 1998 Stock Option Plan) are provided based upon such directions from Tower
Financial and non-binding expressions of interest supplied by the directors and
executive officers. Depending upon their individual circumstances at the time,
each of such persons may purchase a greater or fewer number of shares than
indicated, and in fact may purchase no shares.
<TABLE>
<CAPTION>
AFTER OFFERING
------------------------------------
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS BENEFICIALLY OWNED(1) OF CLASS(2)
---------------- --------------------- -----------
<S> <C> <C>
Curtis A. Brown(3).......................................... 5,000 *
7626 Lissa Court
Fort Wayne, Indiana 46804
Keith E. Busse.............................................. 20,000 1.00%
4500 County Road 59
Butler, Indiana 46721
Peter T. Eshelman........................................... 5,000 *
142 North Main Street
Roanoke, Indiana 46783
Michael S. Gouloff.......................................... 5,000 *
111 East Wayne Street
Fort Wayne, Indiana 46802
Craig S. Hartman(4)......................................... 57,500 2.86%
4031 Transportation Drive
Fort Wayne, Indiana 46818
Jerome F. Henry, Jr......................................... 10,000 *
1702 Winter Street
Fort Wayne, Indiana 46803
Kevin J. Himmelhaver(3)..................................... 1,000 *
9119 Bradenton Road
Fort Wayne, Indiana 46835
Michael Mirro, M.D.......................................... 10,000 *
1819 Carew Street
Fort Wayne, Indiana 46805
Debra A. Niezer............................................. 1,500 *
12515 Chapelwood Place
Fort Wayne, Indiana 46845
William G. Niezer........................................... 10,000 *
1721 Magnavox Way
Fort Wayne, Indiana 46801
Maurice D. O'Daniel......................................... 15,000 *
5611 Illinois Road
Fort Wayne, Indiana 46801
</TABLE>
26
<PAGE> 27
<TABLE>
<CAPTION>
AFTER OFFERING
------------------------------------
NUMBER OF SHARES PERCENTAGE
NAME AND ADDRESS BENEFICIALLY OWNED(1) OF CLASS(2)
---------------- --------------------- -----------
<S> <C> <C>
Leonard Rifkin.............................................. 25,000 1.25%
1610 North Calhoun Street
Fort Wayne, Indiana 46802
Joseph D. Ruffolo(5)........................................ 12,500 *
200 East Main Street
Fort Wayne, Indiana 46802
Donald F. Schenkel(3)....................................... 10,000 *
10710 Country Wood Trail
Fort Wayne, Indiana 46845
Larry L. Smith.............................................. 5,000 *
1410 Wohlert Street
Angola, Indiana 46703
John V. Tippmann, Sr........................................ 20,000 1.00%
9009 Coldwater Road
Fort Wayne, Indiana 46825
J. Richard Tomkinson........................................ 10,000 *
4140 Coldwater Road
Fort Wayne, Indiana 46825
Irene A. Walters............................................ 10,000 *
2101 East Coliseum Boulevard
Fort Wayne, Indiana 46805
Directors and executive officers of Tower Financial as a
group (18 persons)........................................ 232,500 11.57%
</TABLE>
- -------------------------
* Less than one percent.
(1) Some or all of the common stock listed may be held jointly with, or for the
benefit of, spouses and children of, or various trusts established by, the
person indicated.
(2) The percentages shown are based on the 2,000,000 shares being offered
(assuming no exercise of the underwriters' over-allotment option) plus for
each person or group the number of shares that person or group has the right
to acquire within 60 days pursuant to options granted under the 1998 Stock
Option Plan.
(3) Does not include options to purchase shares that have been issued under the
1998 Stock Option Plan.
(4) The number of shares shown for Mr. Hartman includes 7,500 shares that he has
the option to acquire effective as of the completion of the offering under a
stock option granted to him under the 1998 Stock Option Plan.
(5) The number of shares shown for Mr. Ruffolo includes 2,500 shares that he has
the option to acquire effective as of the completion of the offering under a
stock option granted to him under the 1998 Stock Option Plan.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. Consequently, the growth and earnings
performance of Tower Financial and Tower Bank can be affected not only by
management decisions and general economic conditions, but also by the statutes
administered by, and the regulations and policies of, various governmental
regulatory authorities. Those authorities include, but are not limited to, the
Federal Reserve Board, the FDIC, the Department, the Internal Revenue Service
and state
27
<PAGE> 28
taxing authorities. The effect of such statutes, regulations and policies can be
significant and cannot be predicted with a high degree of certainty.
Federal and state laws and regulations generally applicable to financial
institutions and their holding companies regulate, among other things:
- - the scope of business
- - investments
- - reserves against deposits
- - capital levels relative to operations
- - lending activities and practices
- - the nature and amount of collateral for loans
- - the establishment of branches
- - mergers and consolidations
- - dividends
The system of supervision and regulation applicable to Tower Financial and Tower
Bank establishes a comprehensive framework for their respective operations and
is intended primarily for the protection of the FDIC's deposit insurance funds,
the depositors of Tower Bank and the public, rather than shareholders of Tower
Bank or Tower Financial.
Federal law and regulations, including provisions added by the Federal
Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") and regulations
promulgated thereunder, establish supervisory standards applicable to the
lending activities of Tower Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
The following references to statutes and regulations are intended to
summarize certain government regulation of the business of Tower Financial and
Tower Bank and are qualified by reference to the text of such statutes and
regulations. Any change in government regulation may have a material adverse
effect on the business of Tower Financial and Tower Bank.
TOWER FINANCIAL
GENERAL. Tower Financial is organizing Tower Bank as an Indiana chartered
bank with depository accounts to be insured by the FDIC and as a member of the
Federal Reserve System. When Tower Financial becomes the sole shareholder of
Tower Bank, it will be a bank holding company and, as such, will be required to
register with, and will be subject to regulation by, the Federal Reserve Board
under the federal Bank Holding Company Act of 1956, as amended (the "BHCA").
Under the BHCA, Tower Financial will be subject to examination by the Federal
Reserve Board and will be required to file reports of its operations and such
additional information as the Federal Reserve Board may require.
Under Federal Reserve Board policy, Tower Financial will be expected to act
as a source of financial strength to Tower Bank and to commit resources to
support Tower Bank in circumstances where Tower Financial might not do so absent
such policy. In addition, in certain circumstances, an Indiana banking
corporation may be required by order of the Department to increase the sound
capital of Tower Bank or reduce the amount of its deposits.
Any loans by a bank holding company to a subsidiary bank are subordinate in
right of payment to deposits and to certain other indebtedness of such
subsidiary bank. In the event of a bank holding company's bankruptcy, any
commitment by the bank holding company to a federal bank regulatory agency to
maintain the capital of a subsidiary bank will be assumed by the bankruptcy
trustee and entitled to a priority of payment. This priority would also apply to
guarantees of capital plans under FDICIA.
INVESTMENTS AND ACTIVITIES. Under the BHCA, bank holding companies are
prohibited, with certain limited exceptions, from engaging in activities other
than those of banking or of managing or controlling banks. They are also
prohibited from acquiring or retaining direct or indirect ownership or control
of voting shares or assets of any company which is not a bank or bank holding
company, other than subsidiary companies furnishing services to or performing
services for its subsidiaries, and other subsidiaries engaged in activities
which the Federal Reserve Board determines to be so closely related to banking
or managing or controlling banks as to be incidental to these operations. Since
September, 1995, the BHCA has permitted the Federal Reserve Board under
specified circumstances to approve the acquisition, by a bank holding company
located
28
<PAGE> 29
in one state, of a bank or bank holding company located in another state,
without regard to any prohibition contained in state law. See "Recent Regulatory
Developments."
In general, any direct or indirect acquisition by Tower Financial of any
voting shares of any bank which would result in Tower Financial's direct or
indirect ownership or control of more than 5% of any class of voting shares of
such bank, and any merger or consolidation of Tower Financial with another bank
holding company, will require the prior written approval of the Federal Reserve
Board under the BHCA. In acting on such applications, the Federal Reserve Board
must consider various statutory factors, including among others, the effect of
the proposed transaction on competition in relevant geographic and product
markets, the convenience and needs of the communities to be served and each
party's financial condition, managerial resources and record of performance
under the Community Reinvestment Act.
The merger or consolidation of Tower Bank with another bank, or the
acquisition by Tower Bank of assets of another bank, or the assumption of
liability by Tower Bank to pay any deposits in another bank, will require the
prior written approval of the primary federal bank regulatory agency of the
acquiring or surviving bank under the federal Bank Merger Act. The approval
decision is based upon a consideration of statutory factors similar to those
outlined above with respect to the BHCA. In addition, in certain such cases an
application to, and the prior approval of, the Federal Reserve Board under the
BHCA and/or the Department under the Indiana Financial Institutions Act, may be
required.
With certain limited exceptions, the BHCA prohibits bank holding companies
from acquiring direct or indirect ownership or control of voting shares or
assets of any company other than a bank, unless the company involved is engaged
solely in one or more activities which the Federal Reserve Board has determined
to be so closely related to banking or managing or controlling banks as to be
incidental to these operations. Under current Federal Reserve Board regulations,
such permissible non-bank activities include such things as mortgage banking,
equipment leasing, securities brokerage, and consumer and commercial finance
company operations. As a result of recent amendments to the BHCA, many of these
acquisitions may be effected by bank holding companies that satisfy certain
statutory criteria concerning management, capitalization, and regulatory
compliance if written notice is given to the Federal Reserve Board within 10
business days after the transaction. In other cases, prior written notice to the
Federal Reserve Board will be required.
In evaluating a written notice of such an acquisition, the Federal Reserve
Board will consider various factors, including among others the financial and
managerial resources of the notifying bank holding company and the relative
public benefits and adverse effects which may be expected to result from the
performance of the activity by an affiliate of such company. The Federal Reserve
Board may apply different standards to activities proposed to be commenced de
novo and activities commenced by acquisition, in whole or in part, of a going
concern. The required notice period may be extended by the Federal Reserve Board
under certain circumstances, including a notice for acquisition of a company
engaged in activities not previously approved by regulation of the Federal
Reserve Board. If such a proposed acquisition is not disapproved or subjected to
conditions by the Federal Reserve Board within the applicable notice period, it
is deemed approved by the Federal Reserve Board.
CAPITAL REQUIREMENTS. The Federal Reserve Board uses capital adequacy
guidelines in its examination and regulation of bank holding companies. If
capital falls below minimum guidelines, a bank holding company may, among other
things, be denied approval to acquire or establish additional banks or non-bank
businesses.
The Federal Reserve Board's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies:
- a leverage capital requirement expressed as a percentage of total assets,
- a risk-based requirement expressed as a percentage of total risk-weighted
assets, and
- a Tier 1 leverage requirement expressed as a percentage of total assets.
The leverage capital requirement consists of a minimum ratio of total capital to
total assets of 6%, with an expressed expectation that banking organizations
generally should operate above such minimum level. The risk-based requirement
consists of a minimum ratio of total capital to total risk-weighted assets of
8%, of which at least one-half must be Tier 1 capital (which consists
principally of shareholders' equity). The Tier 1
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leverage requirement consists of a minimum ratio of Tier 1 capital to total
assets of 3% for the most highly-rated companies, with minimum requirements of
4% to 5% for all others.
The risk-based and leverage standards presently used by the Federal Reserve
Board are minimum requirements, and higher capital levels will be required if
warranted by the particular circumstances or risk profiles of individual banking
organizations. Further, any banking organization experiencing or anticipating
significant growth would be expected to maintain capital ratios, including
tangible capital positions (i.e., Tier 1 capital less all intangible assets),
well above the minimum levels.
The Federal Reserve Board's regulations provide that the foregoing capital
requirements will generally be applied on a bank-only (rather than a
consolidated) basis in the case of a bank holding company with less than $150
million in total consolidated assets. On a pro forma basis, because Tower
Financial will not have any debt outstanding and assuming the issuance and sale
by Tower Financial of the 2,000,000 shares of common stock offered in this
prospectus at $10.00 per share, Tower Financial's leverage capital ratio,
risk-based capital ratio and Tier 1 leverage ratio immediately after the
offering, in each case as calculated on a consolidated basis and a bank-only
basis under the Federal Reserve Board's capital guidelines, would exceed the
minimum requirements.
FDICIA requires the federal bank regulatory agencies biennially to review
risk-based capital standards to ensure that they adequately address interest
rate risk, concentration of credit risk and risks from non-traditional
activities and, since adoption of the Riegle Community Development and
Regulatory Improvement Act of 1994 (the "Riegle Act"), to do so taking into
account the size and activities of depository institutions and the avoidance of
undue reporting burdens. See "Recent Regulatory Developments." In 1995, the
agencies adopted regulations requiring as part of the assessment of an
institution's capital adequacy the consideration of (a) identified
concentrations of credit risks, (b) the exposure of the institution to a decline
in the value of its capital due to changes in interest rates and (c) the
application of revised conversion factors and netting rules on the institution's
potential future exposure from derivative transactions.
In addition, the agencies in September 1996, adopted amendments to their
respective risk-based capital standards to require banks and bank holding
companies having significant exposure to market risk arising from, among other
things, trading of debt instruments, (1) to measure that risk using an internal
value-at-risk model conforming to the parameters established in the agencies'
standards and (2) to maintain a commensurate amount of additional capital to
reflect such risk. The new rules were adopted effective January 1, 1997, with
compliance mandatory from and after January 1, 1998.
DIVIDENDS. Tower Financial is a corporation separate and distinct from
Tower Bank. Most of Tower Financial's revenues will be received by it in the
form of dividends or interest paid by Tower Bank. Tower Bank is subject to
statutory restrictions on its ability to pay dividends. See "-- Tower
Bank -- Dividends." The Federal Reserve Board has issued a policy statement on
the payment of cash dividends by bank holding companies. In the policy
statement, the Federal Reserve Board expressed its view that a bank holding
company should not pay cash dividends exceeding its net income or which could
only be funded in ways that weakened the bank holding company's financial
health, such as by borrowing. Additionally, the Federal Reserve Board possesses
enforcement powers over bank holding companies and their non-bank subsidiaries
to prevent or remedy actions that represent unsafe or unsound practices or
violations of applicable statutes and regulations. Among these powers is the
ability in appropriate cases to proscribe the payment of dividends by banks and
bank holding companies. The Federal Reserve Board and the Department possess
similar enforcement powers over Tower Bank. It is also unlawful for any insured
depository institution to pay a dividend at a time when it is in default of
payment of any assessment to the FDIC. The "prompt corrective action" provisions
of FDICIA impose further restrictions on the payment of dividends by insured
banks which fail to meet specified capital levels and, in some cases, their
parent bank holding companies.
In addition to the restrictions on dividends imposed by the Federal Reserve
Board, the Indiana Business Corporation Law imposes certain restrictions on the
declaration and payment of dividends by Indiana corporations such as Tower
Financial. See "Dividend Policy."
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TOWER BANK
GENERAL. Upon completion of its organization, Tower Bank will be an Indiana
banking corporation, and a member of the Federal Reserve System. As a
state-chartered, member bank, Tower Bank will be subject to the examination,
supervision, reporting and enforcement jurisdiction of the Department, as the
chartering authority for Indiana banks, and the Federal Reserve Board, as the
primary federal bank regulatory agency for state-chartered, member banks. Tower
Bank's deposit accounts will be insured by Tower Bank Insurance Fund ("BIF") of
the FDIC, which has supervision, reporting and enforcement jurisdiction over BIF
insured banks. These agencies, and federal and state law, extensively regulate
various aspects of the banking business including, among other things:
- - permissible types and amounts of loans
- - investments and other activities
- - capital adequacy
- - branching
- - interest rates on loans and on deposits
- - the maintenance of non-interest bearing reserves on deposit accounts
- - the safety and soundness of banking practices
DEPOSIT INSURANCE. As an FDIC-insured institution, Tower Bank will be
required to pay deposit insurance premium assessments to the FDIC. Under FDICIA,
the FDIC adopted a risk-based assessment system under which all insured
depository institutions are placed into one of nine categories and assessed
insurance premiums based upon their level of capital and supervisory evaluation.
Institutions classified as well-capitalized (as defined by the FDIC) and not
exhibiting financial, operational or compliance weaknesses pay the lowest
premium. Institutions that are less than well-capitalized (as defined by the
FDIC) and exhibit such weaknesses in a moderately severe to unsatisfactory
degree pay the highest premium. Risk classification of all insured institutions
is made by the FDIC for each semi-annual assessment period.
The FDIC is required to establish semi-annual assessment rates so as to
maintain the ratio of each deposit insurance fund to total estimated insured
deposits at not less than 1.25%. Currently, the FDIC has established a schedule
of BIF insurance assessments ranging from 0% of deposits for institutions in the
highest category to .27% of deposits for institutions in the lowest category.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC determines, after a hearing, that the institution or its
directors have engaged or are engaging in unsafe or unsound practices, or have
violated any applicable law, regulation, order or any condition imposed in
writing by, or written agreement with, the FDIC, or if the institution is in an
unsafe or unsound condition to continue operations. The FDIC may also suspend
deposit insurance temporarily during the hearing process for a permanent
termination of insurance if the institution has no tangible capital.
CAPITAL REQUIREMENTS. The Federal Reserve Board has established the
following minimum capital standards for state-chartered, member banks, such as
Tower Bank: a leverage requirement consisting of a minimum ratio of Tier 1
capital to total assets of 3% for the most highly-rated banks with minimum
requirements of 4% to 5% for all others, and a risk-based capital requirement
consisting of a minimum ratio of total capital to total risk-weighted assets of
8%, at least one-half of which must be Tier 1 capital. Tier 1 capital consists
principally of shareholders' equity. In addition, the Federal Reserve Board has
adopted requirements for each state-chartered, member bank whose "trading
activity" (the sum of "trading assets and liabilities") as shown on its most
recent Consolidated Report of Condition and Income ("Call Report") exceeds
either 10% or more of its total assets or $1 billion, (1) to measure its market
risk using an internal value-at-risk model conforming to the FDIC's capital
standards, and (2) to maintain a commensurate amount of additional capital to
reflect such risk.
The capital requirements described above are minimum requirements. Higher
capital levels will be required if warranted by the particular circumstances or
risk profiles of individual institutions. As a condition to the regulatory
approvals of Tower Bank's formation, Tower Bank will be required to have an
initial capitalization sufficient to provide a ratio of Tier 1 capital to total
estimated assets of at least 8% at the end of the third year of operation.
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The Federal Deposit Insurance Act (the "FDIA") establishes five capital
categories, and the federal bank regulatory agencies, as directed by the FDIA,
have adopted, subject to certain exceptions, the following minimum requirements
for each of such categories:
<TABLE>
<CAPTION>
TOTAL RISK-BASED TIER 1 RISK-BASED
CAPITAL RATIO CAPITAL RATIO LEVERAGE RATIO
---------------- ----------------- --------------
<S> <C> <C> <C>
Well capitalized.......................... 10% or above 6% or above 5% or above
Adequately capitalized.................... 8% or above 4% or above 4% or above
Undercapitalized.......................... Less than 8% Less than 4% Less than 4%
Significantly undercapitalized............ Less than 6% Less than 3% Less than 3%
Critically undercapitalized............... -- -- A ratio of tangible
equity to total assets
of 2% or less
</TABLE>
Subject to certain exceptions, these capital ratios are generally
determined on the basis of Call Reports submitted by each depository institution
and the reports of examination of the appropriate federal bank regulatory
agency.
Among other things, the FDIA requires the federal bank regulatory agencies
to take prompt corrective action in respect of depository institutions that do
not meet minimum capital requirements. The scope and degree of regulatory
intervention is linked to the capital category to which a depository institution
is assigned. Depending upon the capital category to which an institution is
assigned, the regulators' corrective powers include:
- requiring the submission of a capital restoration plan
- placing limits on asset growth and restrictions on activities
- requiring the institution to issue additional capital stock (including
additional voting stock) or to be acquired
- restricting transactions with affiliates
- restricting the interest rate the institution may pay on deposits
- ordering a new election of directors of the institution
- requiring that senior executive officers or directors be dismissed
- prohibiting the institution from accepting deposits from correspondent
banks
- requiring the institution to divest certain subsidiaries
- prohibiting the payment of principal or interest on subordinated debt
- ultimately, appointing a receiver for the institution
In general, a depository institution may be reclassified to a lower
category than is indicated by its capital position if the appropriate federal
depository institution regulatory agency determines the institution to be
otherwise in an unsafe or unsound condition or to be engaged in an unsafe or
unsound practice. This could include a failure by the institution, following
receipt of a less-than-satisfactory rating on its most recent examination
report, to correct the deficiency.
DIVIDENDS. As a banking corporation organized under Indiana law, Tower Bank
will be restricted as to the maximum amount of dividends it may pay to Tower
Financial. Indiana law prohibits Tower Bank from declaring or paying dividends
that would impair Tower Bank's capital or that would be greater than its
undivided profits. In addition, the prior approval of the Department is required
for the payment of any dividend if the aggregate amount of all dividends paid by
Tower Bank during such calendar year, including the proposed dividend, would
exceed the sum of the retained net income of Tower Bank for the year to date and
previous two years.
The FDIA generally prohibits a depository institution from making any
capital distribution (including payment of a dividend) or paying any management
fee to its holding company if the depository institution
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would thereafter be undercapitalized. The FDIC may prevent an insured bank from
paying dividends if the bank is in default of payment of any assessment due to
the FDIC. In addition, payment of dividends by a bank may be prevented by the
applicable federal regulatory authority if such payment is determined, by reason
of the financial condition of such bank, to be an unsafe and unsound banking
practice. As described above, the Federal Reserve Board has issued a policy
statement providing that bank holding companies and insured banks should
generally only pay dividends out of current operating earnings.
INSIDER TRANSACTIONS. Tower Bank is subject to certain federal and state
statutory and regulatory restrictions on any extensions of credit to Tower
Financial or its subsidiaries, on investments in the stock or other securities
of Tower Financial or its subsidiaries, and on the acceptance of the stock or
other securities of Tower Financial or its subsidiaries as collateral for loans
to any person. Certain limitations and reporting requirements are also placed on
extensions of credit by Tower Bank to its directors and officers, to directors
and officers of Tower Financial and its subsidiaries, to principal shareholders
of Tower Financial, and to "related interests" of such directors, officers and
principal shareholders. In addition, such legislation and regulations may affect
the terms upon which any person becoming a director or officer of Tower
Financial or one of its subsidiaries or a principal shareholder of Tower
Financial may obtain credit from banks with which Tower Bank maintains a
correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. On July 10, 1995, the FDIC, the Office of
Thrift Supervision, the Federal Reserve Board and the Office of the Comptroller
of the Currency published final guidelines implementing the FDICIA requirement
that the federal banking agencies establish operational and managerial standards
to promote the safety and soundness of federally insured depository
institutions. The guidelines, which took effect on August 9, 1995, establish
standards for internal controls, information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
and compensation, fees and benefits. In general, the guidelines prescribe the
goals to be achieved in each area, and each institution will be responsible for
establishing its own procedures to achieve those goals. If an institution fails
to comply with any of the standards included in the guidelines, the
institution's primary federal bank regulator may require the institution to
submit a plan for achieving and maintaining compliance. The preamble to the
guidelines states that the agencies expect to require a compliance plan from an
institution whose failure to meet one or more of the standards is of such
severity that it could threaten the safe and sound operation of the institution.
Failure to submit an acceptable compliance plan, or failure to adhere to a
compliance plan that has been accepted by the appropriate regulator, would
constitute grounds for further enforcement action. Effective October 1, 1996,
the agencies expanded the guidelines to establish asset quality and earnings
standards. As before, the expanded guidelines make each depository institution
responsible for establishing its own procedures to meet such goals.
STATE BANK ACTIVITIES. Under FDICIA, as implemented by final regulations
adopted by the FDIC, FDIC-insured state banks are prohibited, subject to certain
exceptions, from making or retaining equity investments of a type, or in an
amount, that are not permissible for a national bank. FDICIA, as implemented by
FDIC regulations, also prohibits FDIC-insured state banks and their
subsidiaries, subject to certain exceptions, from engaging as principal in any
activity that is not permitted for a national bank or its subsidiary,
respectively, unless the bank meets, and continues to meet its minimum
regulatory capital requirements and the FDIC determines the activity would not
pose a significant risk to the deposit insurance fund of which the bank is a
member. Impermissible investments and activities must be divested or
discontinued within certain time frames set by the FDIC in accordance with
FDICIA. These restrictions are not currently expected to have a material impact
on the operations of Tower Bank.
CONSUMER BANKING. Tower Bank's business will include making a variety of
types of loans to individuals. In making these loans, Tower Bank will be subject
to state usury and regulatory laws and to various federal statutes, such as the
Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Truth in
Lending Act, the Real Estate Settlement Procedures Act and the Home Mortgage
Disclosure Act, and the regulations promulgated thereunder, which prohibit
discrimination, specify disclosures to be made to borrowers regarding credit and
settlement costs and regulate the mortgage loan servicing activities of Tower
Bank, including the maintenance and operation of escrow accounts and the
transfer of mortgage loan servicing. The Riegle Act imposed new escrow
requirements on depository and non-depository mortgage lenders and servicers
under the
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National Flood Insurance Program. See "Recent Regulatory Developments." In
receiving deposits, Tower Bank will be subject to extensive regulation under
state and federal law and regulations, including the Truth in Savings Act, the
Expedited Funds Availability Act, the Bank Secrecy Act, the Electronic Funds
Transfer Act, and the FDIA. Violation of these laws could result in the
imposition of significant damages and fines upon Tower Bank, its directors and
officers.
MONETARY POLICIES. The commercial banking business is affected not only by
general economic conditions but also by the monetary policies of the Federal
Reserve Board. The instruments of monetary policy employed by the Federal
Reserve Board include open market operations in United States Government
securities, changes in the discount rate on member bank borrowing and changes in
reserve requirements against deposits held by all federally insured banks.
Federal Reserve Board monetary policies have had a significant effect on the
operating results of commercial banks in the past and are expected to continue
to do so in the future. In view of changing conditions in the national economy
and in the money markets, as well as the effect of actions by monetary fiscal
authorities, including the Federal Reserve Board, no prediction can be made as
to possible future changes in interest rates, deposit levels, loan demand or the
business and earnings of Tower Bank.
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act (the
"CRA") and the implementing regulations, Tower Bank will have a continuing and
affirmative obligation to help meet the credit needs of its local community,
including low and moderate-income neighborhoods, consistent with the safe and
sound operation of the institution. The CRA requires the board of directors of
financial institutions, such as Tower Bank, to adopt a CRA statement for each
assessment area that, among other things, describes its efforts to help meet
community credit needs and the specific types of credit that the institution is
willing to extend. Tower Bank's service area initially was designated as Wayne
Township in Allen County, Indiana. Tower Bank's office will be located in Allen
County. Tower Bank's Board of Directors is required to review the
appropriateness of this delineation at least annually.
RECENT REGULATORY DEVELOPMENTS
In 1994, the Congress enacted two major pieces of banking legislation, the
Riegle Act and the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994 (the "Riegle-Neal Act"). The Riegle Act addressed such varied issues as
the promotion of economic revitalization of defined urban and rural "qualified
distressed communities" through special purpose "Community Development Financial
Institutions," the expansion of consumer protection with respect to certain
loans secured by a consumer's home and reverse mortgages, and reductions in
compliance burdens regarding Currency Transaction Reports, in addition to reform
of the National Flood Insurance Program, the promotion of a secondary market for
small business loans and leases, and mandating specific changes to reduce
regulatory impositions on depository institutions and holding companies.
The Riegle-Neal Act substantially changed the geographic constraints
applicable to the banking industry. Effective September 29, 1995, the
Riegle-Neal Act allows bank holding companies to acquire banks located in any
state in the United States without regard to geographic restrictions or
reciprocity requirements imposed by state law, but subject to certain
conditions, including limitations on the aggregate amount of deposits that may
be held by the acquiring holding company and all of its insured depository
institution affiliates. Effective June 1, 1997 (or earlier if expressly
authorized by applicable state law), the Riegle-Neal Act allows banks to
establish interstate branch networks through acquisitions of other banks,
subject to certain conditions, including certain limitations on the aggregate
amount of deposits that may be held by the surviving bank and all of its insured
depository institution affiliates. The establishment of de novo interstate
branches or the acquisition of individual branches of a bank in another state
(rather than the acquisition of an out-of-state bank in its entirety) is allowed
by the Riegle-Neal Act only if specifically authorized by state law. The
legislation allowed individual states to "opt-out" of certain provisions of the
Riegle-Neal Act by enacting appropriate legislation prior to June 1, 1997.
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In 1996, Indiana authorized out-of-state banks to establish branch offices
in Indiana. The Indiana Financial Institutions Act now permits, in appropriate
circumstances,
(A) with the approval of the Department:
- the acquisition of all or substantially all of the assets of an
Indiana-chartered bank by an FDIC-insured bank, savings bank or
savings association located in another state,
- the acquisition by an Indiana-chartered bank of all or substantially
all of the assets of an FDIC-insured bank, savings bank or savings
association located in another state,
- the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located in
other states having laws permitting such consolidation, with the
resulting organization chartered by Indiana, and
- the organization of a branch in Indiana by FDIC-insured banks located
in other states, the District of Columbia or U.S. territories or
protectorates having laws permitting an Indiana-chartered bank to
establish a branch in such jurisdiction, and
(B) upon written notice to the Department:
- the acquisition by an Indiana-chartered bank of one or more branches
(not comprising all or substantially all of the assets) of an
FDIC-insured bank, savings bank or savings association located in
another state, the District of Columbia, or a U.S. territory or
protectorate,
- the establishment by Indiana-chartered banks of branches located in
other states, the District of Columbia, or U.S. territories or
protectorates, and
- the consolidation of one or more Indiana-chartered banks and
FDIC-insured banks, savings banks or savings associations located in
other states, with the resulting organization chartered by one of such
other states, and
(C) the sale by an Indiana-chartered bank of one or more of its branches
(not comprising all or substantially all of its assets) to an
FDIC-insured bank, savings bank or savings association located in a
state in which an Indiana-chartered bank could purchase one or more
branches of the purchasing entity.
FDIC regulations impose limitations (and in certain cases, prohibitions) on
(1) certain "golden parachute" severance payments by troubled depository
institutions and their affiliated holding companies to institution-affiliated
parties (primarily directors, officers, employees, or principal shareholders of
the institution), and (2) certain indemnification payments by a depository
institution or its affiliated holding company, regardless of financial
condition, to institution-affiliated parties. The FDIC regulations impose
limitations on indemnification payments which could restrict, in certain
circumstances, payments by Tower Financial or Tower Bank to their respective
directors or officers otherwise permitted under the Indiana Business Corporation
Law or the Indiana Financial Institutions Act, respectively. See "Description of
Capital Stock -- Indemnification of Directors and Officers."
The Omnibus Consolidated Appropriations Act, 1997 ("OCCA"), was enacted
September 30, 1996. It amended many of the principal federal laws regulating
banks and bank holding companies. As part of the projected conversion or closure
of all thrift institutions in the United States, OCCA modified existing laws (a)
to impose a special, one-time assessment on all deposits insured by the Savings
Association Insurance Fund ("SAIF") of the FDIC to bring the SAIF reserves to
the statutory minimum ratio of 1.25% of all SAIF-insured deposits, (b) to permit
the financing corporation to impose (in the same manner as regular FDIC
insurance assessments) assessments upon commercial banks to fund repayment of
its bonds which had been issued to pay for losses resulting from widespread
failures of thrift institutions during the 1980's, (c) to prohibit shifting
deposits from SAIF insurance to BIF insurance and (d) to merge, prospectively,
the BIF and SAIF into a single deposit insurance fund. There can be no assurance
whether or when the merger of the BIF and SAIF will in fact occur.
OCCA also amended the BHCA (a) to eliminate the requirement of prior
written notice to the Federal Reserve Board by well-capitalized and well-managed
bank holding companies meeting certain statutory
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<PAGE> 36
criteria wishing to engage de novo (or in certain cases through acquisition) in
a non-banking activity already permitted by order or regulation of the Federal
Reserve Board, (b) to shorten to 12 business days the prior written notice to
the Federal Reserve Board required from well-managed and well-capitalized bank
holding companies meeting such criteria for other acquisitions of non-banking
companies engaged in non-banking activities so permitted and (c) to eliminate
the opportunity for a hearing on applications to the Federal Reserve Board for
permission to engage in non-banking activities (other than the acquisition of a
savings association).
Among the other changes made by OCCA, the statute (a) increased the number
of banks exempted from compliance with the record-keeping and reporting
requirements of the Home Mortgage Disclosure Act and eligible for an 18-month
cycle of regulatory examinations by increasing the total assets cut-off in each
case, (b) simplified the disclosure requirements for residential mortgage loans
by harmonizing the requirements of the Truth-in-Lending Act and Real Estate
Settlement Procedures Act, (c) substantially re-wrote the Fair Credit Reporting
Act and (d) expanded the authority of the Federal Reserve Board under the
Consumer Leasing Act and directed the Board to issue model disclosure forms for
use in leasing personal property.
DESCRIPTION OF CAPITAL STOCK
All material provisions of the common stock are summarized in this
prospectus. However, the following description of Tower Financial's capital
stock does not purport to be complete and is subject in all respects to
applicable Indiana law and to the provisions of Tower Financial's Restated
Articles of Incorporation and By-Laws, copies of which have been filed as
exhibits to the Registration Statement of which this prospectus is a part.
The authorized capital stock of Tower Financial consists of 6,000,000
shares of common stock and 4,000,000 shares of preferred stock. Upon completion
of the offering, and assuming no exercise of the underwriters' over-allotment
option, there will be 2,000,000 shares of common stock issued and outstanding
and no shares of preferred stock issued and outstanding. An additional 90,000
shares of common stock will be issuable upon exercise of outstanding options
granted under the 1998 Stock Option Plan. See "Executive Compensation -- 1998
Stock Option and Incentive Plan." Immediately prior to the offering, only one
share of common stock is outstanding.
COMMON STOCK
Each holder of common stock will be entitled to one vote per share of
record on all matters to be voted upon by the stockholders. Holders will not
have cumulative voting rights in the election of directors or any other matter.
Subject to the preferential rights of the holders of any preferred stock that
may at the time be outstanding, each share of common stock will entitle the
holder thereof to an equal and ratable right to receive dividends when, if and
as declared from time to time by the board of directors out of legally available
funds. Tower Financial does not anticipate paying cash dividends in the
foreseeable future. See "Dividend Policy."
In the event of the liquidation, dissolution or winding up of Tower
Financial, the holders of common stock will be entitled to share ratably in all
assets remaining after payments to creditors and after satisfaction of the
liquidation preference, if any, of the holders of any preferred stock that may
at the time be outstanding. Holders of common stock will have no preemptive or
redemption rights and will not be subject to further calls or assessments by
Tower Financial. All of the shares of common stock to be issued and sold in the
offering will be, immediately upon consummation of the offering, validly issued,
fully paid and nonassessable.
PREFERRED STOCK
The authorized preferred stock is available for issuance from time to time
at the discretion of the board of directors without shareholder approval. The
board of directors has the authority to prescribe for each series of preferred
stock it establishes the number of shares in that series, the number of votes
(if any) to which the shares in that series are entitled, the consideration for
the shares in that series, and the designations, powers, preferences and other
rights, qualifications, limitations or restrictions of the shares in that
series. Depending
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upon the rights prescribed for a series of preferred stock, the issuance of
preferred stock could have an adverse effect on the voting power of the holders
of common stock and could adversely affect holders of common stock by delaying
or preventing a change in control of Tower Financial, making removal of the
present management of Tower Financial more difficult or imposing restrictions
upon the payment of dividends and other distributions to the holders of common
stock.
AUTHORIZED BUT UNISSUED SHARES
Indiana law does not require shareholder approval for any issuance of
authorized shares. Authorized but unissued shares may be used for a variety of
corporate purposes, including future public or private offerings to raise
additional capital or to facilitate corporate acquisitions. One of the effects
of the existence of authorized but unissued shares may be to enable the board of
directors to issue shares to persons friendly to current management, which
issuance could render more difficult or discourage an attempt to obtain control
of Tower Financial by means of a merger, tender offer, proxy contest or
otherwise, and thereby protect the continuity of Tower Financial's management
and possibly deprive the shareholders of opportunities to sell their shares of
common stock at prices higher than prevailing market prices.
CERTAIN PROVISIONS OF RESTATED ARTICLES OF INCORPORATION AND BY-LAWS
Certain provisions of Tower Financial's Restated Articles of Incorporation
and By-Laws may delay or make more difficult unsolicited acquisitions or changes
of control of Tower Financial. Such provisions could have the effect of
discouraging third parties from making proposals involving an unsolicited
acquisition or change in control of Tower Financial, although such proposals, if
made, might be considered desirable by a majority of Tower Financial's
shareholders. Such provisions may also have the effect of making it more
difficult for third parties to cause the replacement of the current management
of Tower Financial without the concurrence of the board of directors. These
provisions include:
- the division of the Board of Directors into three classes serving
"staggered" terms of office of three years (see "Management -- Directors
and Officers");
- the availability of authorized but unissued shares of stock for issuance
from time to time at the discretion of the board of directors (see "--
Authorized But Unissued Shares");
- provisions allowing the removal of directors only for cause and only upon
a 66 2/3% shareholder vote taken at a meeting called for that purpose;
- provisions requiring the participation of 80% of the voting power of the
outstanding common stock in order for the shareholders to demand the
calling of a special meeting of shareholders; and
- requirements for advance notice for raising business or making
nominations at shareholders' meetings.
Tower Financial's By-Laws establish an advance notice procedure with regard
to business to be brought before an annual or special meeting of shareholders of
Tower Financial and with regard to the nomination of candidates for election as
directors, other than by or at the direction of the board of directors. Although
Tower Financial's By-Laws do not give the board of directors any power to
approve or disapprove shareholder nominations for the election of directors or
proposals for action, they may have the effect of precluding a contest for the
election of directors or the consideration of shareholder proposals if the
established procedures are not followed, and of discouraging or deterring a
third party from conducting a solicitation of proxies to elect its own slate of
directors or to approve its proposal without regard to whether consideration of
such nominees or proposals might be harmful or beneficial to Tower Financial and
its shareholders.
CERTAIN PROVISIONS OF INDIANA LAW
The Indiana Business Corporation Law (the "IBCL") applies to Tower
Financial as an Indiana corporation. Under certain circumstances, the following
provisions of the IBCL may delay, prevent or make more difficult unsolicited
acquisition or changes of control of Tower Financial. Such provisions also may
have the effect of preventing changes in the management of Tower Financial. It
is possible that such provisions could make it more difficult to accomplish
transactions which shareholders may otherwise deem to be in their best
interests.
37
<PAGE> 38
CONTROL SHARE ACQUISITIONS. Under Sections 23-1-42-1 to 23-1-42-11 of the
IBCL, an "acquiring person" who makes a "control share acquisition" in an
"issuing public corporation" may not exercise voting rights on any "control
shares" unless such voting rights are conferred by a majority vote of the
disinterested shareholders of the issuing corporation at a special meeting of
such shareholders held upon the request and at the expense of the acquiring
person. In the event that control shares acquired in a control share acquisition
are accorded full voting rights and the acquiring person acquires control shares
with a majority or more of all voting power, all shareholders of the issuing
corporation have dissenters' rights to receive the fair value of their shares.
Under the IBCL, "control shares" means shares acquired by a person that,
when added to all other shares of the issuing public corporation owned by that
person or in respect to which that person may exercise or direct the exercise of
voting power, would otherwise entitle that person to exercise voting power of
the issuing public corporation in the election of directors within any of the
following ranges (a) one-fifth or more but less than one-third; (b) one-third or
more but less than a majority; or (c) a majority or more. "Control share
acquisition" means, subject to certain exceptions, the acquisition, directly or
indirectly, by any person of ownership of, or the power to direct the exercise
of voting power with respect to, issued and outstanding control shares. Shares
acquired within 90 days or under a plan to make a control share acquisition are
considered to have been acquired in the same acquisition. "Issuing public
corporation" means a corporation which is organized in Indiana, has 100 or more
shareholders, its principal place of business, its principal office or
substantial assets within Indiana and either (a) more than 10% of its
shareholders resident in Indiana, (b) more than 10% of its shares owned by
Indiana residents or (c) 10,000 shareholders resident in Indiana.
The above provisions do not apply if, before a control share acquisition is
made, the corporation's articles of incorporation or by-laws (including a board
adopted by-law) provide that they do not apply. Tower Financial's Restated
Articles of Incorporation and By-Laws do not exclude Tower Financial from the
restrictions imposed by such provisions.
CERTAIN BUSINESS COMBINATIONS. Sections 23-1-43-1 to 23-1-43-23 of the IBCL
restrict the ability of a "resident domestic corporation" to engage in any
combinations with an "interested shareholder" for five years after the
interested shareholder's date of acquiring shares unless the combination or the
purchase of shares by the interested shareholder on the interested shareholder's
date of acquiring shares is approved by the board of directors of the resident
domestic corporation before that date. If the combination was not previously
approved, the interested shareholder may effect a combination after the
five-year period only if such shareholder receives approval from a majority of
the disinterested shares or the offer meets certain fair price criteria. For
purposes of the above provisions, "resident domestic corporation" means an
Indiana corporation that has 100 or more shareholders. "Interested shareholder"
means any person, other than the resident domestic corporation or its
subsidiaries, who is (1) the beneficial owner, directly or indirectly, of 10% or
more of the voting power of the outstanding voting shares of the resident
domestic corporation or (2) an affiliate or associate of the resident domestic
corporation and at any time within the five-year period immediately before the
date in question was the beneficial owner of 10% or more of the voting power of
the then outstanding shares of the resident domestic corporation. The above
provisions do not apply to corporations that so elect in an amendment to their
articles of incorporation approved by a majority of the disinterested shares.
Such an amendment, however, would not become effective until 18 months after its
passage and would apply only to stock acquisitions occurring after its effective
date. Tower Financial's Restated Articles of Incorporation do not exclude Tower
Financial from the restrictions imposed by such provisions.
DIRECTORS' DUTIES AND LIABILITY. Under Section 23-1-35-1 of the IBCL,
directors are required to discharge their duties: (a) in good faith; (b) with
the care an ordinarily prudent person in a like position would exercise under
similar circumstances; and (c) in a manner the directors reasonably believe to
be in the best interests of Tower Financial. However, the IBCL also provides
that a director is not liable for any action taken as a director, or any failure
to act, unless the director has breached or failed to perform the duties of the
director's office and the action or failure to act constitutes willful
misconduct or recklessness. The exoneration from liability under the IBCL does
not affect the liability of directors for violations of the federal securities
laws.
38
<PAGE> 39
Section 23-1-35-1 of the IBCL also provides that a board of directors, in
discharging its duties, may consider, in its discretion, both the long-term and
short-term best interests of the corporation, taking into account, and weighing
as the directors deem appropriate, the effects of an action on the corporation's
shareholders, employees, suppliers and customers and the communities in which
offices or other facilities of the corporation are located and any other factors
the directors consider pertinent. If a determination is made with the approval
of a majority of the disinterested directors of the board, that determination is
conclusively presumed to be valid unless it can be demonstrated that the
determination was not made in good faith after reasonable investigation. Once
the board has determined that the proposed action is not in the best interests
of the corporation, it has no duty to remove any barriers to the success of the
action, including a rights plan. Section 23-1-35-1 specifically provides that
certain judicial decisions in Delaware and other jurisdictions, which might be
looked upon for guidance in interpreting Indiana law, including decisions that
propose a higher or different degree of scrutiny in response to a proposed
acquisition of the corporation, are inconsistent with the proper application of
that section.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Tower Financial Restated Articles of Incorporation provide that, to the
extent not inconsistent with applicable law, Tower Financial shall indemnify
each of its directors, officers, employees and agents against all liability and
reasonable expense that may be incurred by him or her in connection with or
resulting from any claim in which he or she may become involved by reason of the
fact that he or she is or was a director, officer, employee or agent of Tower
Financial or by reason of any action taken or not taken by him or her in any
such capacity, if such person is wholly successful with respect to the claim or,
if not wholly successful, then if such person is determined to have acted in
good faith, in what he or she reasonably believed to be the best interests of
Tower Financial (or at least not opposed to its best interests) and, in
addition, with respect to a criminal claim, is determined to have had reasonable
cause to believe that his or her conduct was lawful or had no reasonable cause
to believe that his or her conduct was unlawful.
FDIC regulations impose limitations on indemnification payments which could
restrict, in certain circumstances, payments by Tower Financial or Tower Bank to
their respective directors or officers otherwise permitted or required under the
IBCL or Tower Financial Restated Articles of Incorporation.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers and controlling persons of Tower Financial under the provisions
discussed above or otherwise, Tower Financial has been advised that, in the
opinion of the SEC, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the common stock is State Street Bank
& Trust Company, Boston, Massachusetts.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to the offering, Tower Financial has one share of common
stock outstanding, which is held by a member of the board of directors. This
share of common stock shall be redeemed concurrently with the completion of the
offering. Upon completion of the offering, Tower Financial expects to have
2,000,000 shares of common stock outstanding (plus any additional shares sold
upon the underwriters' exercise of their over-allotment option), all of which
will have been registered with the SEC under the Securities Act and will be
eligible for resale without registration under the Securities Act unless they
were acquired by directors, executive officers or other affiliates of Tower
Financial (collectively, "Affiliates"). Affiliates of Tower Financial generally
will be able to sell shares of the common stock only in accordance with the
limitations of Rule 144 under the Securities Act.
39
<PAGE> 40
In general, under Rule 144 as currently in effect, an affiliate (as defined
in Rule 144) of Tower Financial may sell shares of common stock within any
three-month period in an amount limited to the greater of 1% of the outstanding
shares of Tower Financial's common stock or the average weekly trading volume in
Tower Financial's common stock during the four calendar weeks preceding such
sale. Sales under Rule 144 are also subject to certain manner-of-sale
provisions, notice requirements and the availability of current public
information about Tower Financial.
Tower Financial and the directors and executive officers of Tower Financial
and Tower Bank (who are expected to hold an aggregate of approximately 222,500
shares after the offering, excluding the shares that they have the right to
acquire pursuant to options granted to them under Tower Financial's 1998 Stock
Option Plan) have agreed, or will agree, that they will not issue, offer for
sale, sell, transfer, grant options to purchase or otherwise dispose of or
register with the SEC any shares of common stock (or any securities convertible
into or exercisable for shares of common stock), without the prior written
consent of the underwriters, for a period of 180 days from the date of this
prospectus, except that (a) Tower Financial may issue shares upon the exercise
of options under Tower Financial's 1998 Stock Option Plan and (b) the directors
and officers may give common stock owned by them to others who have agreed in
writing to be bound by the same agreement.
As of January 4, 1999, Tower Financial had outstanding options to purchase
an aggregate of 90,000 shares of its common stock at an exercise price equal to
the initial public offering price of the common stock, as specified on the cover
page of this prospectus, under Tower Financial's 1998 Stock Option Plan. See
"Executive Compensation -- 1998 Stock Option and Incentive Plan."
Prior to the offering, there has been no public trading market for the
common stock, and no predictions can be made as to the effect, if any, that
sales of shares or the availability of shares for sale will have on the
prevailing market price of the common stock after completion of the offering.
Nevertheless, sales of substantial amounts of common stock in the public market
could have an adverse effect on prevailing market prices.
UNDERWRITING
Subject to the terms and conditions included in the Underwriting Agreement,
the form of which has been filed as an exhibit to the Registration Statement of
which this prospectus forms a part, Roney Capital Markets, a division of First
Chicago Capital Markets, Inc., and McDonald Investments Inc. (the
"Underwriters"), have severally agreed to purchase from Tower Financial, and
Tower Financial has agreed to sell to each of the Underwriters, the respective
number of shares of common stock as shown opposite its name below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITER OF SHARES
----------- ---------
<S> <C>
Roney Capital Markets, a division of First Chicago Capital
Markets, Inc..............................................
McDonald Investments Inc....................................
---------
Total.................................................. 2,000,000
=========
</TABLE>
The Underwriting Agreement provides that the Underwriters' obligations to
pay for and accept delivery of the common stock are subject to certain
conditions precedent and that the Underwriters are committed to purchase all of
those shares of common stock if any shares are purchased.
The Underwriting Agreement provides that, except in certain limited cases,
Tower Financial will reimburse the Underwriters for all accountable
out-of-pocket expenses incurred by them in the proposed purchase and sale of the
common stock, up to a maximum of $50,000. Tower Financial has advanced $20,000
to the Underwriters as part of this expense reimbursement. The Underwriting
Agreement provides that, upon completion of the offering, the Underwriters will
credit the out-of-pocket expenses reimbursed against the underwriting discount.
It also provides that, in the event the Underwriter Agreement is terminated and
the accountable out-of-pocket expenses to be reimbursed are less than $20,000,
the Underwriters will pay the difference to Tower Financial.
40
<PAGE> 41
Tower Financial and the Underwriters have agreed that the Underwriters will
purchase the 2,000,000 shares of Common Stock offered hereunder at a price to
the public of $10.00 per share less underwriting discounts of $ per share.
The Underwriters propose to offer the common stock to select dealers who are
members of the National Association of Securities Dealers, Inc., at a price of
$10.00 per share less a concession not in excess of $ per share. The
Underwriters may allow, and such dealers may reallow, concessions not in excess
of $ per share to certain other brokers and dealers. After the commencement
of the offering, the public offering price, the concession and the reallowance
may be changed.
Tower Financial and the executive officers and directors of Tower Financial
have agreed to be subject to certain lock-up restrictions as described above in
"Shares Eligible for Future Sale."
The Underwriters have informed Tower Financial that the Underwriters do not
intend to make sales to any accounts over which the Underwriters exercise
discretionary authority.
Tower Financial has granted the Underwriters an option, exercisable within
30 days after the date of the offering, to purchase up to 300,000 shares of
common stock from Tower Financial to cover over-allotments, if any, at the same
price per share as is to be paid by the Underwriters for the other shares
offered in this prospectus. The Underwriters may purchase the shares only to
cover over-allotments, if any, relating to the offering. If the Underwriters
exercise the over-allotment option in full, the total price to the public,
underwriting discounts and proceeds to Tower Financial will be approximately
$23,000,000, $ and $ , respectively.
The common stock being offered is a new issue of securities with no prior
established trading market. The Underwriters have advised Tower Financial that,
upon completion of the offering, they intend to make a market in the common
stock, although they are not obligated to do so. Making a market in securities
involves maintaining bid and ask quotations and being able, as principal, to
effect transactions in reasonable quantities at those quoted prices, subject to
various securities laws and other regulatory requirements. The development of a
public trading market depends, however, upon the existence of willing buyers and
sellers, the presence of which is not within the control of Tower Financial,
Tower Bank or any market-maker. The Underwriters may discontinue market-making
at any time without notice. No assurance can be given as to the liquidity of the
trading market for the common stock offered in this prospectus.
In offering the common stock, the Underwriters may engage in stabilizing
transactions and short covering transactions on the OTC Bulletin Board in
accordance with Regulation M of the Exchange Act. Stabilizing transactions
involve bids to purchase the common stock in the open market for the purpose of
pegging, fixing or maintaining the price of the common stock. Short-covering
transactions involve purchases of the common stock in the open market after the
distribution has been completed in order to cover short positions. Such
stabilizing transactions and short-covering transactions may cause the price of
the common stock to be higher than it would otherwise be in the absence of such
transactions. Such activities, if commenced by the Underwriters, may be
discontinued at any time.
The Underwriting Agreement contains indemnity provisions between the
Underwriters and Tower Financial and the controlling persons thereof against
certain liabilities, including liabilities arising under the Securities Act.
Tower Financial is generally obligated to indemnify the Underwriters and their
respective controlling persons in connection with losses or claims arising out
of any untrue statement of a material fact contained in this prospectus or in
related documents filed with the SEC or with any state securities administrator,
or out of any omission of certain material facts from such documents.
Prior to this offering, there has been no public market for the common
stock. Accordingly, the public offering price for the common stock was
determined by negotiations among Tower Financial and the Underwriters. This
price is not based upon earnings or any history of operations and should not be
construed as indicative of the present or anticipated future value of the common
stock. Several factors were considered in determining the initial offering price
of the common stock, among them the size of the offering, the initial public
offering prices of similar start-up bank holding companies, the Underwriters'
experience in dealing with initial public offerings for financial institutions
and the general condition of the equity securities market. There can be no
assurance, however, that the prices at which the common stock will sell in the
public market after
41
<PAGE> 42
this offering will not be lower than the price at which the shares of common
stock are sold by the Underwriters.
Mr. Craig Hartman, a director of Tower Financial, has provided consulting
services to Tower Financial that included identifying the Underwriters for this
offering. See "Management -- Compensation of Directors" and "Related Party
Transactions -- Consulting Services."
The following table shows the fees and expenses Tower Financial will incur
in the offering of the common stock, other than underwriting discounts and
commissions. Except for the SEC's registration fee and the NASD filing fee, all
amounts shown are estimates and assume the sale of 2,000,000 shares of common
stock.
<TABLE>
<S> <C>
Registration Fee............................................ $ 6,394
NASD Filing Fee............................................. 2,800
Printing and Mailing Expenses............................... 40,000
Legal Fees and Expenses..................................... 125,000
Accounting Fees and Expenses................................ 25,000
Blue Sky Fees and Expenses.................................. 12,050
Registrar and Transfer Agent Fees and Expenses.............. 3,000
Premium for Director and Officer Liability Insurance........ 9,300
Miscellaneous............................................... 2,956
--------
Total.................................................. $226,500
========
</TABLE>
LEGAL PROCEEDINGS
Neither Tower Bank nor Tower Financial is a party to any pending legal
proceeding or aware of any threatened legal proceeding where Tower Financial or
Tower Bank may be exposed to any material loss.
LEGAL MATTERS
The legality of the common stock offered in this prospectus will be passed
upon for Tower Financial by Baker & Daniels. Certain legal matters will be
passed upon for the Underwriters by Honigman Miller Schwartz and Cohn.
EXPERTS
The balance sheet as of October 31, 1998 and statements of operations,
stockholder's deficit, and cash flows for the period July 8, 1998 (date of
inception) through October 31, 1998, of Tower Financial included in this
prospectus have been included in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
ADDITIONAL INFORMATION
Tower Financial has filed a Registration Statement on Form SB-2 under the
Securities Act to register the common stock with the SEC. This prospectus is a
part of that Registration Statement. As allowed by SEC rules, this prospectus
does not contain all the information that interested persons can find in the
Registration Statement or the exhibits and schedules to the Registration
Statement. For further information about Tower Financial or the common stock
offered in this prospectus, interested persons should read the Registration
Statement and the exhibits, financial statements and schedules to the
Registration Statement.
42
<PAGE> 43
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Accountants........................... F-2
Financial Statements:
Balance Sheet............................................. F-3
Statement of Operations................................... F-4
Statement of Changes in Stockholder's Deficit............. F-5
Statement of Cash Flows................................... F-6
Notes to Financial Statements............................. F-7
</TABLE>
F-1
<PAGE> 44
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Tower Financial Corporation:
In our opinion, the accompanying balance sheet and the related statements
of operations, changes in stockholder's deficit and cash flows present fairly,
in all material respects, the financial position of Tower Financial Corporation
(a development stage company) at October 31, 1998, and the results of its
operations and cash flows for the period from July 8, 1998 (date of inception)
to October 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management, our responsibility is to express an opinion on these financial
statements based on our audit. We conducted our audit of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
Fort Wayne, Indiana
November 11, 1998, except for Note 6
for which the date is December 14, 1998
F-2
<PAGE> 45
TOWER FINANCIAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
As of October 31, 1998
<TABLE>
<S> <C>
ASSETS
Cash........................................................ $ 12,007
Interest bearing deposits in bank........................... 475,000
---------
Total cash and cash equivalents........................ 487,007
Equipment, at cost.......................................... 11,512
Deferred offering costs..................................... 73,850
---------
Total assets........................................... $ 572,369
=========
LIABILITIES AND STOCKHOLDER'S DEFICIT
Liabilities:
Accounts payable and accrued expenses..................... $ 139,102
Accounts payable and accrued expenses -- related
parties................................................ 24,187
Related party notes payable............................... 750,000
---------
Total liabilities...................................... 913,289
Commitments and contingencies
Stockholder's deficit:
Preferred stock, no par value, 4,000,000 shares
authorized; no shares issued and outstanding...........
Common stock, no par value, 6,000,000 shares authorized; 1
share subscribed.......................................
Additional paid-in capital................................
Deficit accumulated during the development stage.......... (340,920)
---------
Total stockholder's deficit............................ (340,920)
---------
Total liabilities and stockholder's deficit............ $ 572,369
=========
</TABLE>
The following notes are an integral part of the financial statements.
F-3
<PAGE> 46
TOWER FINANCIAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF OPERATIONS
For the period from July 8, 1998 (date of inception) to October 31, 1998
<TABLE>
<S> <C>
Operating expenses:
Salaries and benefits expense............................. $ 199,660
Professional fees......................................... 114,857
Other expenses............................................ 26,403
---------
Total operating expenses............................... 340,920
---------
Net loss............................................... $(340,920)
=========
</TABLE>
The following notes are an integral part of the financial statements.
F-4
<PAGE> 47
TOWER FINANCIAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDER'S DEFICIT
For the period from July 8, 1998 (date of inception) to October 31, 1998
<TABLE>
<CAPTION>
DEFICIT
ACCUMULATED
ADDITIONAL DURING THE
PREFERRED COMMON PAID-IN DEVELOPMENT
STOCK STOCK CAPITAL STAGE TOTAL
--------- ------ ---------- ----------- -----
<S> <C> <C> <C> <C> <C>
Balance at inception (July 8, 1998).... $ $ $ $ $
Issuance of common stock............... 10 10
Common stock subscription.............. (10) (10)
Net loss............................... (340,920) (340,920)
--------- ---- --------- --------- ---------
Balance, October 31, 1998.............. $ $ $ $(340,920) $(340,920)
========= ==== ========= ========= =========
</TABLE>
The following notes are an integral part of the financial statements.
F-5
<PAGE> 48
TOWER FINANCIAL CORPORATION
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CASH FLOWS
For the period from July 8, 1998 (date of inception) to October 31, 1998
<TABLE>
<S> <C>
Cash flows from operating activities
Net loss.................................................. $(340,920)
Adjustments to reconcile net loss to net cash used in
operating activities:
Increase in accounts payable and accrued expenses...... 163,289
---------
Net cash used in operating activities................ (177,631)
---------
Cash flows from investing activities
Equipment expenditures.................................... (11,512)
---------
Net cash used in investing activities................ (11,512)
---------
Cash flows from financing activities
Proceeds from related party notes payable................. 750,000
Deferred offering costs................................... (73,850)
---------
Net cash provided from financing activities.......... 676,150
---------
Net increase in cash and cash equivalents................... 487,007
Cash and cash equivalents, beginning of period..............
---------
Cash and cash equivalents, end of period.................... $ 487,007
=========
</TABLE>
The following notes are an integral part of the financial statements.
F-6
<PAGE> 49
TOWER FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
a. ORGANIZATION: Tower Financial Corporation ("Tower Financial") was
incorporated on July 8, 1998. Tower Financial's activities to date have
been limited to the organization of Tower Bank & Trust Company ("Tower
Bank"), as well as preparation for a common stock offering estimated to
be $20,000,000 (the "offering"). A substantial portion of the proceeds
of the offering will be used by Tower Financial to provide initial
capitalization of Tower Bank. The start-up of Tower Bank is contingent
upon receiving the approval of various banking regulatory authorities
and also a successful completion of the offering.
b. NATURE OF BUSINESS: Tower Bank intends to offer a full range of
commercial and consumer banking services primarily within Allen County,
Indiana.
c. USE OF ESTIMATES: The preparation of financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the
financial statements and accompanying notes. Actual results could differ
from those estimates.
d. CASH AND CASH EQUIVALENTS: Tower Financial considers all highly liquid
investment instruments, including investments with maturities of three
months or less at acquisition, to be cash equivalents. At October 31,
1998 cash equivalents consisted of certificates of deposit aggregating
$400,000.
e. DEFERRED OFFERING COSTS: Deferred offering costs consist of professional
fees incurred in connection with the registration of Tower Financial's
common stock. These costs will be charged against the stock proceeds or,
if the offering is not successful, charged to operations at that time.
f. INCOME TAXES: Tower Financial utilizes the liability method of
accounting for deferred income taxes. Under this method, deferred tax
assets and liabilities are determined based on the difference between
the financial statement and tax bases of assets and liabilities using
enacted tax rates in effect for the year in which the differences are
expected to reverse.
2. NOTES PAYABLE RELATED PARTIES:
Non-interest bearing notes payable in the amount of $750,000 are
outstanding to members of the Board of Directors of Tower Financial. The notes
are to be paid with proceeds received from the offering and are to be repaid on
or before March 31, 1999.
3. LEASE COMMITMENT:
Tower Financial has a lease commitment with a related party company owned
by a director for space to be used as Tower Financial's main office effective
January 1, 1999. The lease term is for ten years at rents ranging from
approximately $11,300 to $17,100 per month with an option to extend for one
successive ten year period. Tower Financial incurred rent expense of
approximately $3,900 to this related party for temporary space through October
31, 1998.
Future minimum commitments for the following calendar years are
approximately:
<TABLE>
<S> <C>
1999........................................................ $135,400
2000........................................................ 135,400
2001........................................................ 152,800
2002........................................................ 152,800
2003........................................................ 170,200
--------
Total.................................................. $746,600
========
</TABLE>
F-7
<PAGE> 50
TOWER FINANCIAL CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
4. INCOME TAXES:
At October 31, 1998 Tower Financial had net operating loss carryforwards of
approximately $341,000. No deferred tax asset is recorded, as a valuation
allowance reduces the gross deferred tax asset of approximately $136,000 to
zero.
5. OTHER:
Tower Financial has entered into a letter of employment with its
president/chief executive officer whereby Tower Financial has deposited in
escrow a certificate of deposit in the amount of $200,000 which will be
disbursed to the president in the event that Tower Bank does not receive all
required regulatory approvals to commence business. In addition, certain members
of management are entitled to incentive bonuses aggregating $35,000 upon
commencement of Tower Bank's business operations.
Tower Financial has entered into a five year contract with a data
processing company to outsource Tower Financial's data processing effective
February 1, 1999. The contract contains automatic renewal options and fees are
primarily based on the volume of transactions subject to certain minimum monthly
amounts.
6. SUBSEQUENT EVENT:
On December 14, 1998, the stockholder and Board of Directors adopted the
1998 Stock Option and Incentive Plan (the "Plan") for officers, employees and
non-employee directors. The maximum number of shares which may be issued under
the Plan shall not exceed 310,000 and will include both incentive stock options
and non-qualified options. The exercise price for incentive stock options will
not be less than the fair market value of the shares at the time of grant,
except as granted to a 10% shareholder where the option price will not be less
than 110% of fair market price. The exercise price for non-qualified stock
options will not be less than 85% of the fair market value at the time of grant.
The duration of each option may not exceed ten years from the date of grant.
The Board intends to grant a total of 240,000 options to certain officers
and directors of Tower Financial effective upon successful completion of the
offering. The option price will be the initial public offering price.
F-8
<PAGE> 51
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NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN
AUTHORIZED. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE IN THIS
OFFERING SHALL UNDER ANY CIRCUMSTANCES IMPLY THAT THE INFORMATION IN THIS
PROSPECTUS IS CORRECT AS OF ANY SUBSEQUENT DATE. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SECURITIES DESCRIBED IN THIS PROSPECTUS OR AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO BUY SUCH SECURITIES IN ANY CIRCUMSTANCES
IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Forward-Looking Statements............ 2
Prospectus Summary.................... 3
Risk Factors.......................... 6
Use of Proceeds....................... 9
Dividend Policy....................... 10
Capitalization........................ 10
Business.............................. 11
Management............................ 17
Executive Compensation................ 22
Related Party Transactions............ 24
Principal Shareholders................ 26
Supervision and Regulation............ 27
Description of Capital Stock.......... 36
Shares Eligible for Future Sale....... 39
Underwriting.......................... 40
Legal Proceedings..................... 42
Legal Matters......................... 42
Experts............................... 42
Additional Information................ 42
Index to Financial Statements......... F-1
</TABLE>
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UNTIL , 1999 (90 DAYS AFTER THE EFFECTIVE DATE OF THE
OFFERING), ALL DEALERS THAT EFFECT TRANSACTIONS IN THESE SECURITIES, WHETHER OR
NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
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2,000,000 SHARES
TOWER FINANCIAL LOGO
CORPORATION
COMMON STOCK
----------------------------
PROSPECTUS
----------------------------
RONEY CAPITAL MARKETS
A division of FIRST CHICAGO CAPITAL MARKETS, INC.
MCDONALD INVESTMENTS INC.
January , 1999
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