<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
ANNUAL REPORT
FORM 10-KSB
(Mark One)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
- --- OF 1934
For the fiscal year ended DECEMBER 31, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ACT OF
- --- 1934
For the transition period from to
------- -------
Commission file number 000-25287
TOWER FINANCIAL CORPORATION
(Name of small business issuer)
INDIANA 35-2051170
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
116 EAST BERRY STREET, FORT WAYNE, INDIANA 46802
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (219) 427-7000
Securities registered under Section 12(b) of the Act: NONE
Securities registered under Section 12(g) of the Act:
COMMON STOCK, WITHOUT PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the registrant was required to file such reports),
and (2) has been subject to such filing requirements for the past 90 days.
Yes X No
---- ----
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and will not be contained, to the best of
registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.
----
Issuer's revenues for the fiscal year ended December 31, 1999: $3,969,585
Aggregate market value of the voting stock held by nonaffiliates of the
registrant based on the last sale price for such stock at February 15, 2000
(assuming solely for the purposes of this calculation that all directors and
executive officers of the registrant are "affiliates"): $18,521,245
Number of shares of Common Stock outstanding at February 15, 2000: 2,530,000
Portions of the following document have been incorporated by reference into this
Annual Report on Form 10-KSB.
PART OF 10-KSB INTO WHICH
IDENTITY OF DOCUMENT DOCUMENT IS INCORPORATED
Definitive Proxy Statement for the Part III
Annual Meeting of Shareholders
To be held April 18, 2000
Transitional Small Business Disclosure Format Yes No X
---- ----
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TOWER FINANCIAL CORPORATION
Fort Wayne, Indiana
Annual Report to Securities and Exchange Commission
December 31, 1999
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
GENERAL
Tower Financial Corporation (the "Company") was incorporated as an Indiana
corporation on July 8, 1998. The Company owns all of the issued and outstanding
stock of Tower Bank & Trust Company (the "Bank") and is a bank holding company
under the Federal Bank Holding Company Act of 1956, as amended. The Bank is an
Indiana chartered bank with depository accounts insured by the Federal Deposit
Insurance Corporation ("FDIC"). The Bank is a member of the Federal Reserve
System. The Bank commenced business on February 19, 1999.
The Bank provides a range of commercial and consumer banking services primarily
in Allen County, Indiana, including Fort Wayne and its suburbs. Those services
reflect the Bank's strategy of serving small- to medium-sized businesses and
individual customers. The Bank's lending strategy is focused on commercial loans
and, to a lesser extent, on consumer and residential mortgage loans. The Bank
offers a broad array of deposit products, including checking, savings, and money
market accounts, certificates of deposit and direct deposit services. During
1999, the Bank began providing personal trust services through its Investment
Management & Trust Services.
The Bank's main office is located in downtown Fort Wayne, Indiana, and serves as
the Company's corporate headquarters.
EXPANSION
The Bank opened two mortgage loan production offices during 1999, one in
Huntington, Indiana and the other in Columbia City, Indiana.
In addition, the Bank has leased space for a branch office located in the
northwest section of Fort Wayne, Indiana. The Bank currently plans to open this
branch by May 1, 2000. Plans for an additional branch to open in late 2000 are
being developed.
LENDING PRACTICES
The Bank makes loans to individuals and businesses located within its market
area. The Bank's loan portfolio at December 31, 1999 consisted of commercial
loans (79%), residential mortgage loans (9%) and personal loans (12%). The
Bank's legal lending limit under applicable federal banking regulations is
approximately $2.7 million, based on the legal lending limit of 15% of capital
and surplus.
Commercial Loans. Commercial loans are made primarily to small- and medium-sized
businesses. These loans may be secured or unsecured and are made available for
general operating purposes, acquisition of fixed assets including real estate,
equipment and machinery, financing of inventory and accounts receivable,
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as well as any other purposes considered appropriate. The Bank generally looks
to a borrower's business operations as the principal source of repayment, but
also receives, when appropriate, mortgages on real estate, security interests in
inventory, accounts receivable and other personal property and/or personal
guarantees. Approximately 17% of the Bank's commercial loans are commercial real
estate loans secured by a first lien on the commercial real estate. In addition,
commercial loans that are not mortgage loans are typically secured by a lien on
equipment, inventory and/or other assets of the commercial borrower.
Commercial real estate lending involves more risk than residential lending
because loan balances are greater and repayment is dependent upon the borrower's
operations. The Bank endeavors to reduce the risk associated with these
transactions by generally limiting its exposure to owner-operated properties of
customers with an established profitable history. In many cases, the Bank may
further reduce this risk by (i) limiting the amount of credit to any one
borrower to an amount less than the Bank's legal lending limit and (ii) avoiding
certain types of commercial real estate financing.
Residential Mortgage Loans. The Bank originates residential mortgage loans which
are generally long-term, with either fixed or variable interest rates. The
Bank's general policy, which is subject to review by management as a result of
changing market and economic conditions and other factors, is to retain all or a
portion of variable interest rate mortgage loans in its loan portfolio and to
sell all fixed rate loans in the secondary market. The Bank also offers home
equity loans. The Bank does not retain servicing rights with respect to the
majority of the residential mortgage loans that it originates. Residential real
estate loans are secured by a first lien on the real estate.
Personal Loans and Credit. The Bank makes 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. The majority of the Bank's personal loans
are home equity loans secured by a second lien on real estate. The Bank retains
substantially all of such loans.
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
jobs loss, illness and 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. The Bank has a policy of careful loan underwriting, with
a strong emphasis on the amount of the down payment, credit quality, employment
stability and monthly income. These loans are generally repaid on a monthly
repayment schedule with the payment amount tied to the borrower's periodic
income. The 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 are important to its efforts to serve the credit
needs of its customer base.
Loan Policies. Although the Bank takes a progressive and competitive approach to
lending, it stresses high quality in its loans. Because of the Bank's local
nature, management believes that quality control is achieved while still
providing prompt and personal service. The Bank is subject to written loan
policies that contain general lending guidelines and are subject to periodic
review and revision by the 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.
The Bank's loan policies include procedures for oversight and monitoring of the
Bank's lending practices and loan portfolio. The Bank seeks to make sound loans,
while recognizing that lending money involves a degree of business risk. The
Bank's loan policies are designed to assist in managing the business risk
involved in making loans. These policies provide a general framework for the
Bank's loan operations, while recognizing that not all loan activities and
procedures can be anticipated. The 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 the
Bank where appropriate.
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The 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 loan-to-value maximum 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%) and junior mortgages on residences (90%).
Regulatory and supervisory loan-to-value limits are established by the Federal
Deposit Insurance Corporation Improvement Act of 1991. The Bank's internal
loan-to-value limitations follow those limits and, in certain cases are more
restrictive than those required by the regulators.
The 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 the Bank will exceed
approximately $2.7 million. This internal limit is subject to review and
revision by the Board of Directors from time to time.
In addition, the Bank's loan policies provide guidelines for (i) personal
guarantees, (ii) environmental policy review, (iii) loans to employees,
executive officers and directors, (iv) problem loan identification, (v)
maintenance of a loan loss reserve and (vi) other matters relating to the Bank's
lending practices.
DEPOSITS AND OTHER SERVICES
Deposits. The Bank offers a broad range of deposit services, including checking,
savings, and money market accounts, certificates of deposit and direct deposit
services. Transaction accounts and certificates of deposit are tailored to the
Bank's primary market area at rates competitive with those offered in Allen
County. All deposit accounts are insured by the FDIC up to the maximum amount
permitted by law. The Bank solicits deposit accounts from individuals,
businesses, associations, financial institutions and government entities.
Other Services. The Bank offers a courier service for business customer
convenience. During 1999, the Bank began offering investment management and
trust services to its customers. The Bank has contracted with a third party
vendor to provide telephone banking effective during the first quarter of 2000.
The Bank also intends to provide computer banking through the Internet during
2000. In addition, the 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 the Bank's policies or legal lending limits.
INVESTMENTS
The principal investment of the Company is its ownership of all of the common
stock of the Bank. Funds retained by the Company from time to time may be
invested in various debt instruments, including but not limited to obligations
guaranteed by the United States, general obligations of a state or political
subdivision thereof, bankers' acceptance 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
the Company 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 the Bank or acquired for future use), the
Company has no present plans to make any such equity investments.
The 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, the Bank is prohibited from investing in equity
securities. Real estate acquired by the Bank in satisfaction of, or foreclosure
upon, loans may be held by the Bank for no longer than 10 years after the date
of acquisition without the written consent of the Indiana Department of
Financial Institutions (the "Department"). The Bank is also permitted to invest
an aggregate amount not in excess of 50% of the "sound capital" of the Bank in
such real estate and buildings
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as is necessary for the convenient transaction of its business. The Bank's board
of directors may alter the Bank's investment policy without shareholders'
approval.
FUNDING SOURCES
The Bank funded its operations from its initial capitalization with proceeds of
the Company's initial public offering and, on an ongoing basis, funds its
operation primarily with local deposits. However, the Bank also may use
alternative funding sources as needed, including advances from the Federal Home
Loan Bank, or out-of-market deposits and other forms of wholesale financing.
These alternative funding sources may be more costly than local deposits.
EFFECT OF GOVERNMENT MONETARY POLICIES
The earnings of the Company are affected by domestic economic conditions and the
monetary and fiscal policies of the United States government, its agencies and
the Federal Reserve Board. The Federal Reserve Board's monetary policies have
had, and will continue to have, an important impact on the operating results of
commercial banks through its power to implement national monetary policy in
order to, among other things, curb inflation and avoid a recession. 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. 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 the Bank.
REGULATION AND SUPERVISION
Financial institutions and their holding companies are extensively regulated
under federal and state law. Consequently, the growth and earnings performance
of the Company and the 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 the state taxing authorities.
The effect of such statutes, regulations and policies can be significant and
cannot be predicted with any high degree of certainty. Federal and state laws
and regulations generally applicable to the Company and the Bank regulate among
other things:
- the scope of business
- investment
- 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 the Company and the 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 the Bank and the public, rather than shareholders of the Bank or
the Company. Any change in government regulation may have a material adverse
effect on the business of the Company and the Bank.
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The Company. As a bank holding company, the Company is subject to regulation by
the Federal Reserve Board under the Federal Bank Holding Company Act of 1956, as
amended (the "BHCA"). Under the BHCA, the Company is subject to examination by
the Federal Reserve Board and is required to file reports of its operations and
such additional information as the Federal Reserve Board may require.
Under Federal Reserve Board policy, the Company is expected to act as a source
of financial strength to the Bank and to commit resources to support the Bank in
circumstances where the Company 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 the 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.
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 within 10 business
days after the transaction. In other cases, prior written notice to the Federal
Reserve Board will be required.
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 banks or non-bank businesses. See "Management's
Discussion and Analysis or Plan of Operations - Capital Sources."
The Bank. The Bank is an Indiana banking corporation and a member of the Federal
Reserve System. As a state-chartered, member bank, the Bank is 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. The Bank's deposit accounts are insured by the 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
- the safety and soundness of banking practices
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 the Bank, including internal controls, credit
underwriting, loan documentation and loan-to-value ratios for loans secured by
real property.
The Bank is subject to certain federal and state statutory and regulatory
restrictions on any extension of credit to the Company or its subsidiaries, on
investments in the stock or other securities of the Company or
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its subsidiaries, and on the acceptance of the stock or other securities of the
Company or its subsidiaries as collateral for loans to any person. Certain
limitations and reporting requirements are also placed on extension of credit by
the Bank to its directors and officers, to directors and officers of the Company
and its subsidiaries, to principal shareholders of the Company, 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 the Company or one of its subsidiaries or a
principal shareholder of the Company may obtain credit from banks with which the
Company maintains a correspondent relationship.
The FDIC, the Office of Thrift Supervision, the Federal Reserve Board and the
Office of the Comptroller of the Currency have published 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 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 set forth 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 state 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.
The Bank's business includes making a variety of types of loans to individuals.
In making these loans, the Bank is 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 the 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 services under the National Flood Insurance Program. In
receiving deposits, the Bank is 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 Federal Deposit Insurance Act. Violation of these laws could result in
the imposition of significant damages and fines upon the Bank, its directors and
officers.
Under the Community Reinvestment Act (the "CRA") and the implementing
regulations, the Bank has 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 the
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. The Bank's
service area initially was designated as Wayne Township in Allen County,
Indiana. The Bank's offices are located in Allen County, Huntington County and
Whitley County. The Bank's board of directors is required to review the
appropriateness of this delineation at least annually.
Recent Legislation. The Gramm-Leach-Bliley Act ("Gramm-Leach") was signed into
law on November 12, 1999 and authorizes bank holding companies that meet
specified conditions to elect to become "financial holding companies" and
thereby engage in a broader array of financial activities than previously
permitted. Such activities include selling and underwriting insurance (including
annuities), underwriting and dealing in securities, and merchant banking.
Gramm-Leach also authorizes banks to engage through "financial subsidiaries" in
certain of the activities permitted for financial holding companies. The Company
does not have any plans to pursue expanded activities under Gramm-Leach at this
time.
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COMPETITION
All phases of the business of the Bank are highly competitive. The Bank competes
with numerous financial institutions, including other commercial banks in Allen
County, Indiana, and the City of Fort Wayne. The Bank, along with other
commercial banks, competes with respect to its lending activities and competes
in attracting demand deposits. The Bank faces 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
the Bank's competitors have been in business a number of years, have established
customer bases, are larger and have larger lending limits than the Bank. The
Bank competes for loans principally through its ability to communicate
effectively with its customers and understand and meet their needs. The Bank
offers personal attention, professional service, off-site ATM capability and
competitive interest rates. Management believes that its personal service
philosophy enhances the Bank's ability to compete favorably in attracting
individuals and small- to medium-sized businesses.
EMPLOYEES
As of December 31, 1999, the Company had 37 full- and part-time employees. None
of the Company's employees is covered by a collective bargaining agreement.
Management believes that its relationship with the Bank's employees is good.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company is leasing the first and second floors of the Lincoln Tower, a
landmark building located at 116 East Berry Street in downtown Fort Wayne,
Indiana, for use as the Bank's main office and its headquarters. The
headquarters facility consists of drive-up banking windows and approximately
21,500 square feet of usable office space. The lease has an initial term of 10
years, with one renewal option for an additional 10 years. The Company believes
that this space is adequate with the ability for expansion as needed.
The Bank also leases space in Huntington, Indiana and Columbia City, Indiana for
mortgage loan production offices. The Huntington office is located at 2855
Northpark Road in the northwest part of Huntington and occupies 1,200 square
feet of space. The lease has an initial term of three years with a three year
option to renew. The Columbia City office is located at 202 West Van Buren
Street in downtown Columbia City and occupies 650 square feet of space. The
lease has an initial term of two years with a three year option to renew.
The Bank has contracted to lease a branch office location in the northwest
section of Fort Wayne at 1545 Dupont Road. The branch office will occupy 2,600
square feet of space and will also have two drive-up lanes and a drive-up ATM.
The lease has an initial term of five years and has two consecutive five year
renewal options. The lease is effective on June 1, 2000 or the date of
occupancy, whichever shall occur first.
ITEM 3. LEGAL PROCEEDINGS.
The Bank may be involved from time to time in various routine legal proceedings
incidental to its business. Neither the Company nor the Bank is engaged in any
legal proceedings that is expected to have a material adverse effect on the
results of operation or financial position of the Company or the Bank.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
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EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
Name and Position Age
<S> <C>
Donald F. Schenkel 58
Chairman of the Board, President and
Chief Executive Officer
Curtis A. Brown 44
Chief Lending Officer
Kevin J. Himmelhaver 44
Chief Financial Officer and Secretary
</TABLE>
Donald F. Schenkel is the President and Chief Executive Officer and a director
of the Company and of the Bank, positions he has held since July 1998, and was
elected the Chairman of the Board of the Company and the Bank in October 1998.
Mr. Schenkel is a native of Fort Wayne and has over 30 years of experience in
the banking industry. Prior to joining the Company, Mr. Schenkel served as First
Vice President of NBD Bank, Indiana. From 1993 to 1998, he served in the
capacities of Division Head of Retail Banking and Private Banking and
Investments for NBD Bank, Indiana.
Curtis A. Brown is the Chief Lending Officer of the Company and the Chief
Operating Officer and Chief Lending Officer of the Bank, positions he has held
since October 1998. He is a native of Fort Wayne and has over 22 years of
experience in the banking industry. 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.
Kevin J. Himmelhaver is the Chief Financial Officer and Secretary of the Company
and the Bank, positions he has held since October 1998 and November 1998,
respectively. Mr. Himmelhaver has over 20 years of banking experience in the
Fort Wayne area. From 1993 to 1998, Mr. Himmelhaver worked for Norwest Bank
Indiana, N.A., and Norwest Bank Ohio, N.A., as Senior Vice President, Chief
Financial Officer and Director.
The above information includes business experience during the past five years
for each of the Company's executive officers. Executive officers of the Company
serve at the discretion of the Board of Directors. Leonard Rifkin is the first
cousin of Irene Walters' spouse and Debra Niezer is the sister-in-law of William
Niezer, each of whom is a director of the Company. There are no other family
relationships among the directors and executive officers of the Company.
(Pursuant to General Instruction G(3) of Form 10-K, the foregoing information is
included as an unnumbered Item in Part 1 of this Annual Report in lieu of being
included in the Company's Proxy Statement for its 2000 Annual Meeting of
Shareholders.)
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
The Company's common stock is traded on the OTC Bulletin Board section of the
Nasdaq Stock Market under the symbol TOFC. Prior to the Company's initial public
offering on January 29, 1999, there was no public market for the common stock.
As of February 15, 2000, there were 304 shareholders of record or approximately
2,750 beneficial owners of the common stock.
The prices set forth below reflect the high and low bid information for the
Company's common stock as reported on the OTC Bulletin Board by quarter during
the period from the date of the Company's initial public offering (January 29,
1999) through December 31, 1999. These quotations reflect inter-dealer prices,
without retail mark-up, mark-down or commission and may not represent actual
transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
First Quarter 11 8 1/2
Second Quarter 9 7/8 8 3/8
Third Quarter 9 3/8 8
Fourth Quarter 9 1/8 6 1/2
</TABLE>
The Company does not pay cash dividends on its common stock, and the Company
does not anticipate paying any cash dividends on the common stock in the
foreseeable future.
The Company was organized under the Indiana Business Corporation Law, which
prohibits the payment of a dividend if, after giving it effect, the Company
would not be able to pay its debts as they become due in the usual course of
business, or the Company's total assets would be less than the sum of its total
liabilities plus the amount that would be needed, if the Company 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 the Company.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF
OPERATION.
INTRODUCTION
The Company was formed as a bank holding company for the Bank. The Company was
in a development stage until the Bank commenced operations on February 19, 1999.
Prior to the opening of the Bank, the Company's principal activities related to
the organization of the Bank and the conducting of the Company's initial public
offering ("IPO"). Total proceeds to the Company from the IPO were $22,709,770
(net of offering expenses, underwriters' discounts and repayment of director
loans), of which $15,000,000 was used to initially capitalize the Bank.
The following discussion presents management's discussion and analysis of the
consolidated financial condition and results of operations of the Company as of
December 31, 1999 and 1998 and for the 12 months ended December 31, 1999 and the
period from July 8, 1998 (date of inception) through December 31, 1998. This
discussion should be read in conjunction with the Company's audited consolidated
financial statements and the related notes appearing elsewhere in this report.
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<PAGE> 11
FORWARD LOOKING STATEMENTS
The statements contained in this report that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Forward-looking statements are made based upon
management's current expectations and beliefs concerning future developments and
their potential effects upon the Company or the Bank. There can be no assurance
that future developments affecting the Company or the Bank will be those
anticipated by management. Actual results may differ materially from those
included in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, the following:
- the Company's status as a start-up company with less than two years of
operating history;
- the Company's expectation of significant losses during the first two
years of operations;
- the effect of extensive banking regulation on the Bank's ability to grow
and compete;
- the effect of changes in federal economic and monetary policies on the
Bank's ability to attract deposits, make loans and achieve satisfactory
interest spreads;
- the competitive disadvantage resulting from the Company's status as a
highly-regulated, start-up company;
- the Company's dependence on key management personnel;
- the increased risk of losses due to loan defaults caused by the Bank's
commercial loan concentration;
- the Company's dependence on a favorable local economy in the Bank's
primary service area;
- the Bank's dependence on net interest spread for profitability; and
- the Bank's ability to implement developments in technology to be
competitive.
Readers are also directed to other risks and uncertainties discussed in other
documents filed by the Company with the Securities and Exchange Commission. The
Company undertakes no obligation to update or revise any forward-looking
information, whether as a result of new information, future developments or
otherwise.
FINANCIAL CONDITION
The Company experienced significant growth during 1999. Total assets of the
Company were $103,647,067 at December 31, 1999 compared to its development stage
assets at December 31, 1998 of $396,576, an increase of $103,250,491. Other than
the initial capitalization from the IPO, the significant increase in assets was
mainly attributable to deposit growth from the commencement of bank operations.
Asset growth was reflected during each quarter of 1999. The Company anticipates
that assets will continue to increase significantly as the Bank begins its
second year of operation.
Earning Assets. The Company's loan portfolio experienced significant growth with
the commencement of the Bank's operation. Loans were $67,314,520 at December 31,
1999. The loan portfolio, which equaled 66% of earning assets at December 31,
1999, is primarily comprised of commercial loans. Commercial loans were
approximately 79% of the portfolio and represent loans to business interests
generally located within the Bank's market area. Approximately 66% of all the
loans were general commercial and industrial loans primarily secured by
inventory, receivables and equipment while 13% of the loan portfolio consisted
of commercial loans primarily secured by real estate. There are no significant
industry concentrations within the commercial portfolio. The concentration and
rapid growth in commercial credits is in keeping with the Bank's strategy of
focusing a substantial amount of efforts on commercial banking. Business banking
is an area of expertise for the Bank's management and lending team. Residential
mortgage, home equity and consumer lending, while only 21% of loans at year-end,
also experienced excellent growth. This growth should continue as the Bank
expands its distribution network during 2000 and beyond; however, the Company's
main strategy for growth and profitability is expected to come largely from the
commercial loan sector.
11
<PAGE> 12
The following table presents the maturity of total loans outstanding, as of
December 31, 1999, according to scheduled repayments of principal and based upon
repricing opportunities.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------
Within 1-5 Over 5
1 year Years Years Totals
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loan Maturities Based Upon
Contractual Maturity Dates:
Construction and development $ 1,630,930 $ 1,367,695 $ 429,905 $ 3,428,530
Residential real estate 599,681 2,750,640 3,587,691 6,938,012
Real estate - secured by nonfarm, 189,750 7,274,709 1,578,380 9,042,839
nonresidential properties
Commercial 12,092,606 22,157,131 7,437,913 41,687,650
Installment and all other 4,668,048 1,109,508 439,933 6,217,489
-----------------------------------------------------
Totals $19,181,015 $34,659,683 $13,473,822 $67,314,520
=====================================================
Loans Based Upon Repricing Opportunities:
Fixed rate loans $ 5,672,877 $21,182,804 $ 2,514,340 $29,370,021
Variable rate loans 37,944,499 37,944,499
-----------------------------------------------------
Totals $43,617,376 $21,182,804 $ 2,514,340 $67,314,520
=====================================================
</TABLE>
The Bank's credit policies establish guidelines to manage credit risk and asset
quality. These guidelines include loan review and early identification of
problem loans to provide effective loan portfolio administration. The credit
policies and procedures are meant to minimize the risk and uncertainties
inherent in lending. In following these policies and procedures, the Bank must
rely on estimates, appraisals and evaluation of loans and the possibility that
changes could occur quickly because of changing economic conditions. Identified
problem loans, which exhibit characteristics (financial or otherwise) that could
cause the loans to become nonperforming or require restructuring in the future,
are included on an internal "Watch List." Senior management reviews this list
regularly and adjusts for changing conditions. Since the inception of the Bank,
no scheduled loan payments have been 90 days or more past due, and no loans have
been placed in nonaccrual status. The Bank experienced a $491 consumer loan
charge off during 1999.
In each accounting period, the allowance for loan losses is adjusted by
management to the amount management believes is necessary to maintain the
allowance at adequate levels. Management will attempt to allocate specific
portions of the allowance for loan losses based on specifically identifiable
problem loans. Management's evaluation of the allowance is further based on
consideration of actual loss experience, the present and prospective financial
condition of borrowers, industry concentrations within the portfolio and general
economic conditions. Management believes that the present allowance is adequate,
based on the broad range of considerations listed above, and absent some of
those factors, based upon peer industry data of comparable banks.
12
<PAGE> 13
The following table illustrates the breakdown of the allowance for loan losses
by loan type.
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
12/31/99
Loan Allowance Percent of
Type Allocation Total Loans
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial and agricultural $ 377,274 74.3%
Real estate - construction 25,717 5.1
Real estate - mortgage 14,794 8.8
Installment loans to individuals 95,462 11.8
Unallocated 496,262 n/a
---------- -----
Total Loan Allowance $1,009,509 100.0%
========== ======
</TABLE>
The primary risk element considered by management with respect to each
installment and residential real estate loan is lack of timely payment.
Management has a reporting system that monitors past due loans and has adopted
policies to pursue its creditor's rights in order to preserve the Bank's
position. The primary risk elements with respect to commercial loans are the
financial condition of the borrower, the sufficiency of collateral, and lack of
timely payment. Management has a policy of requesting and reviewing periodic
financial statements from its commercial loan customers, and periodically
reviews the sufficiency of collateral and its value.
Although management considers the allowance for loan losses to be adequate to
absorb losses as they arise, there can be no assurance that charge-offs in
future periods will not exceed the allowance. Additional provisions for the
allowance are expected during 2000 as a result of anticipated increases in the
total loan portfolio. The Company only experienced one small consumer loan
charge-off during 1999.
Investment securities reflected growth during the year, amounting to $5,816,391
at December 31,1999. There were no investment securities recorded at the end of
1998. The Company maintains a securities portfolio to provide for secondary
liquidity, pledging for various borrowings and for interest rate risk
management. During 1999, the portfolio was used entirely for liquidity as these
assets were mainly held in 30-day maturity, U.S. Government Agency notes. The
portfolio will continue to be highly liquid during the near term while loan
demand remains strong and until a larger source of funds base is developed.
Since the inception of the Company, all securities have been designated as
"available for sale" as defined in Financial Accounting Standards Board No. 115
"Accounting for Certain Investments in Debt and Equity Securities." Securities
designated as available for sale are stated at fair value, with the unrealized
gains and losses, net of income tax, reported as a separate component of
stockholders' equity. The unrealized loss recorded at December 31, 1999 was
$715.
Federal funds sold, consisting of excess funds sold overnight to correspondent
banks, and interest bearing deposits with banks, consisting of short-term
certificates of deposit with banks, are used to manage daily liquidity needs and
interest rate sensitivity. These short-term assets, which recorded growth of
$27,961,887 for 1999, were $28,170,103 and $208,216 at December 31, 1999 and
December 31, 1998, respectively. At December 31, 1999, the balance of these
funds was approximately 28% of earning assets. The balance of short-term assets
and the balance as a percent of earning assets are expected to fluctuate during
the near term as the Company's balance sheet experiences continued growth.
SOURCE OF FUNDS
The Company's major source of funds is from core deposits of local businesses
and consumers within the market area. The Bank began taking deposits when it
commenced operations in February 1999 and experienced significant growth during
the year. Total deposits were $81,733,238 at December 31, 1999. There were no
deposits recorded at the end of 1998.
13
<PAGE> 14
Noninterest bearing deposits grew during the year and were $10,689,378 at
December 31, 1999. At December 31, 1999, these demand deposits amounted to
approximately 13.1% of total deposits. The balance at year-end was comprised of
$9.7 million in business checking accounts while the remaining $1.0 million were
in consumer accounts.
Interest bearing deposits also grew significantly during 1999 and were
$71,043,860 at December 31, 1999. At year-end, these deposits were comprised
approximately of 66% in money market accounts, 13% in interest bearing checking
and savings accounts, and 21% in certificates of deposit. The balance at
year-end reflected $14 million in business time accounts, $37 million in
consumer accounts and $20 million in public fund accounts.
Short term borrowings at December 31, 1999 were $210,000 and were entirely
comprised of overnight Federal funds purchased from a correspondent bank.
Stockholders' equity increased $21,793,603 during 1999 and was $21,320,179 at
December 31, 1999. There was a stockholders' deficit of $473,424 at December 31,
1998. The increase was attributable to the completion of the Company's initial
public offering. At the completion of the IPO during 1999, the Company had
issued 2,530,000 shares of common stock and redeemed one share of common stock
outstanding at December 31, 1998. The net proceeds from the sale of the stock in
the IPO was $23,469,770 after deducting offering expenses and underwriters'
discounts; $20,939,770 was recorded as additional paid-in-capital. At December
31, 1999 the Company had a balance of $2,148,876 in accumulated deficit, an
increase of $1,675,442 from 1998 which is reflective of the operating loss
generated during 1999. See "Results of Operations."
RESULTS OF OPERATIONS
Summary. As anticipated, the Company, which completed its first full year of
operation and approximately ten months of bank operations recorded a net
operating loss during 1999. The net operating loss was $1,675,442 or $.71 per
share, reflecting a mix of start-up and development costs during the first
quarter and bank operating results thereafter. The net operating loss prior to
the opening of the Bank was approximately $779,000 while the loss recorded after
the Bank commenced operations was approximately $896,000. The loss from bank
operations was mainly attributable to a non-cash charge of $1,010,000 for
provision for loan losses. Although the Company essentially recorded no loan
losses during the year, significant provisions were required as the result of
the substantial loan growth. The loan loss provisions are made in the period
loans are recorded and are immediate reductions to earnings. Loan loss
provisions are expected to continue to reduce earnings, although more
moderately, as the anticipated rate of loan growth slows relative to the size of
the Bank's loan portfolio.
Although continued significant future asset growth is anticipated, resulting in
additional large loan loss provisions, the overall earnings performance of the
Company is expected to improve. The Company did not record any tax benefit as a
result of the losses incurred and will not record income tax expense until the
net operating losses are recovered. The asset growth of the Company should
result in an increased level of net interest income, which coupled with
noninterest income, should exceed the growth and level of noninterest expense
and provision for loan losses. Anticipated profitability is reinforced by the
incremental improvement reflected in quarterly results during 1999.
The following table shows some of the key equity performance ratios for the year
ended December 31, 1999.
<TABLE>
<CAPTION>
1999
----
<S> <C>
Return on average total assets (2.96)%
Return on average equity (8.25)
Average equity to average assets 35.9
</TABLE>
14
<PAGE> 15
Net Interest Income. Net interest income, the difference between revenue
generated from earning assets and the interest cost of funding those assets, is
the Company's primary source of earnings. Interest income and interest expense
for the year ended December 31, 1999 totaled $3,681,846 and $1,393,930
respectively, providing for net interest income of $2,287,916. The net yield on
average earning assets during 1999 was 4.20%. The level of net interest income
is primarily a function of asset size, as the weighted-average interest rate
received on earning assets is greater than the weighted average interest cost of
funding sources; however, factors such as types of assets and liabilities,
interest rate risk, liquidity, and customer behavior also impact net interest
income as well as the net yield. The following table depicts the average
balance, interest earned or paid, and yield or cost of the Company's assets,
liabilities and stockholders' equity during 1999.
<TABLE>
<CAPTION>
Interest
Average Earned Yield
Balance or Paid or Cost
------- ------- -------
<S> <C> <C> <C>
ASSETS:
Loans $ 28,746,925 $ 2,368,367 8.24%
Investment securities 6,087,425 318,153 5.23
Federal funds sold 10,367,027 533,124 5.14
Interest-bearing deposits 9,332,405 462,202 4.95
------------ ------------ ----
Total interest-earning assets 54,533,782 3,681,846 6.75
Allowance for loan losses (390,586)
Other assets 2,484,457
------------
Total assets $ 56,627,653
============
LIABILITIES AND STOCKHOLDERS' EQUITY:
Interest-bearing checking $ 4,597,201 154,562 3.36
Savings 617,768 18,139 2.94
Money market 19,793,392 917,439 4.64
Certificates of deposit 5,598,305 292,042 5.22
Short term borrowings 210,986 11,748 5.57
------------ ------------ ----
Total interest-bearing liabilities 30,817,652 1,393,930 4.52
Noninterest-bearing deposits 5,199,846
Other liabilities 289,804
Stockholders' equity 20,320,351
------------
Total liabilities and stockholders' equity $ 56,627,653
============
Net Interest Income $ 2,287,916
============
Net Yield on Interest-Earning Assets 4.20%
====
</TABLE>
Interest income is primarily generated from the loan portfolio, which comprised
53% of average earning assets during 1999. The loan portfolio, with an average
yield of 8.24%, earned $2.4 million, or 64% of total interest income. The
investment securities portfolio, Federal funds sold and interest-bearing
deposits equaled 11%, 19% and 17% of average earning assets during 1999,
respectively. With an average yield of 5.23%, investment securities contributed
$318,153, or 9% of total interest income, while Federal funds sold and
interest-bearing deposits ended 1999 with a combined average yield of 5.05%, and
earned 27% of total interest income.
Interest expense is primarily generated from money market deposits, which
equaled 36% of average earning assets during 1999. Certificates of deposit, with
an average rate of 5.22%, cost $292,042, or 21% of total interest expense.
Savings deposits and interest bearing checking accounts equaled 1% and 8% of
average earning assets during 1999, respectively. With an average rate of 2.94%,
savings deposits cost $18,139, or 1% of total interest expense, while interest
bearing checking accounts cost an average rate of 3.36%, and
15
<PAGE> 16
cost $154,562, or 11% of total interest expense. Short term borrowings,
comprised of Federal funds purchased, had an average rate of 5.57% during 1999.
The Company paid $11,748 in short term interest expense, or 1% of total interest
expense.
Provision for Loan Losses. Reflecting significant loan growth, the provision for
loan losses was $1,010,000 during 1999. The allowance for loan losses as a
percentage of total loans outstanding as of December 31, 1999 was 1.50%, which
also approximately represents the average ratio for the entire year. The Company
maintains the allowance for loan losses at a level management feels is adequate
to absorb losses inherent in the loan portfolio. The evaluation is based upon
the Company's and the banking industry's historical loan loss experience, known
and inherent risks contained in the loan portfolio, composition and growth of
the loan portfolio, current and projected economic conditions and other factors.
Reflecting its focus on credit quality, the Company has only recorded one small
consumer charge-off since its inception.
Noninterest Income. Noninterest income was $287,739 during 1999. Income earned
on mortgage origination and closing fees was $216,366 during 1999, while service
charge income was $14,720 and other fee income amounted to $32,099. Income
recorded from the newly formed Investment Management & Trust Services was
$24,554 during 1999. There was no noninterest income recorded during 1998.
Noninterest Expense. Noninterest expense totaled $3,241,097 during 1999. Salary
and benefits costs were $1,886,670, while occupancy, furniture and equipment
expenses totaled $345,698. Additional large overhead expenses include costs for
professional fees and services which amounted to $378,417 and marketing and
general office expenses at $141,051 and $131,777, respectively. The majority of
the costs incurred during 1999 were for general bank operations; however,
$102,000 of professional fees and services were incurred during the first
quarter and related to the start-up and development costs of the Bank. While the
future dollar volume of noninterest expenses is anticipated to increase as a
percent of average assets, the level is expected to decline as the Company
continues to grow and operating efficiencies are realized.
Monitoring and controlling overhead expenses while providing high quality
service to customers is of the utmost importance to the Company. The efficiency
ratio, computed by dividing noninterest expense by net interest income plus
noninterest income, was 125.8% for all of 1999. This level of efficiency ratio
is high, but not out of line for a start-up bank during its first year of
operation. However, due primarily to the rapid asset growth that has translated
into increased net interest income, the efficiency ratio improved throughout
1999 and was 93.2% during the fourth quarter. The efficiency ratio should
continue to improve in the future as additional asset growth and operating
efficiencies are realized.
Income Tax Expense. Due to the net loss from operations recorded by the Company,
no provision for income tax expense was necessary during 1999. It is anticipated
that the Company will be in a taxable position in the future.
1998 Results of Operations. The Company was incorporated on July 8, 1998 as a
bank holding company to establish and own the Bank. The Bank received all
necessary regulatory approvals and began operations on February 19, 1999. During
1998, the Company expended approximately $58,000 for furniture, fixtures, and
equipment and other necessary assets, prior to commencing bank operations.
As of December 31, 1998, the Company had an accumulated deficit during the
development stage of $473,434. The deficit resulted primarily from costs related
to organizing the Bank.
CAPITAL SOURCES
Stockholders' equity is a noninterest bearing source of funds which provides
support for asset growth. Stockholders' equity was $21,320,179 and ($473,424) at
December 31, 1999 and 1998, respectively. The increase during 1999 was
attributable to the Company's successfully completing its initial public
offering whereby 2,530,000 shares were sold at $10.00 per share. Total proceeds
from the IPO were $25,300,000 less underwriters' fees and offering costs of
$1,830,230, for net proceeds of $23,469,770. The Company used $15,000,000 of the
net proceeds from the IPO to provide the initial capitalization of the Bank in
16
<PAGE> 17
February 1999. The Company's 1999 net operating loss of $1,675,442 negatively
impacted stockholders' equity.
The Company and the Bank are subject to regulatory capital requirements
administered by federal banking agencies. Failure to meet the various capital
requirements can initiate regulatory action that could have a direct material
effect on the financial statements. Since the Bank began operations, both the
Company and the Bank have been categorized as "Well Capitalized," the highest
classification contained within the banking regulations. The capital ratios of
the Bank as of December 31, 1999 are disclosed under Note 14 of the Notes to
Consolidated Financial Statements.
The ability of the Company to pay cash and stock dividends is subject to
limitations under various laws and regulations and to prudent and sound banking
practices. No cash or stock dividends were paid in 1999. The Company expects
that its earnings and those of the Bank, if any, would be retained to finance
future growth and operations. The Company does not anticipate paying any cash
dividends on the common stock in the foreseeable future.
LIQUIDITY
Liquidity is measured by the Company's ability to raise funds through deposits,
borrowed funds, capital or cash flow from the repayment of loans and investment
securities. These funds are used to meet deposit withdrawals, maintain reserve
requirements, fund loans and operate the Company. Liquidity is primarily
achieved through the growth of deposits and liquid assets such as securities
available for sale, matured securities, and Federal funds sold. Asset and
liability management is the process of managing the balance sheet to achieve a
mix of earning assets and liabilities that maximizes profitability, while
providing adequate liquidity.
The Company's liquidity strategy is to fund growth with deposits and to maintain
an adequate level of short-term and medium-term investments to meet typical
daily loan and deposit activity needs. Deposit growth was substantial during
1999 and was generated entirely from in-market sources. At December 31, 1999,
total deposits were $81,733,238 and the loan-to-deposit ratio was 82.4%. The
Company expects to continue to experience substantial loan growth. Funding for
the loan growth will continue to come from in-market sources through the
marketing of products and the development of branch locations. Should sufficient
funding from in-market sources not be enough to match the loan growth, the
Company will develop wholesale or out-of-market deposit and borrowing
capacities.
The Company has the ability to borrow money on a daily basis through
correspondent banks (Federal funds purchased), and at December 31, 1999 had
$210,000 outstanding. This type of funding is viewed by the Company as only a
secondary and temporary source of funds.
In addition to the normal loan funding and deposit flow, the Company also needs
to maintain liquidity to meet the demands of certain unfunded loan commitments
and standby letters of credit. As of December 31, 1999, the Company had a total
of $21,221,712 in unfunded loan commitments and $284,982 in unfunded standby
letters of credit. The loan commitments are lines of credit to be drawn at any
time as customers' cash needs vary. The Company monitors fluctuations in loan
balances and commitments levels and includes such data in its overall liquidity
management.
MARKET RISK ANALYSIS
The Company's primary market risk exposure is interest rate risk and, to a
lesser extent, liquidity risk. All of the Company's transactions are denominated
in U.S. dollars with no specific foreign exchange exposure. The Company has no
agricultural-related loan assets and therefore has no significant exposure to
changes in commodity prices. Any impact that changes in foreign exchange rates
and commodity prices would have on interest rates is assumed to be
insignificant.
17
<PAGE> 18
Interest rate risk is the exposure of the Company's financial condition to
adverse movements in interest rates. The Company derives its income primarily
from the excess of interest collected on its interest-earning assets over the
interest paid on its interest bearing liabilities. The rates of interest the
Company earns on its assets and owes on its liabilities generally are
established contractually for a period of time. Since market interest rates
change over time, the Company is exposed to lower profitability if it cannot
adapt to interest rate changes. Accepting interest rate risk can be an important
source of profitability and stockholder value; however, excessive levels of
interest rate risk could pose a significant threat to the Company's earnings and
capital base. Accordingly, effective risk management that maintains interest
rate risk at prudent levels is essential to the Company's safety and soundness.
Evaluating the exposure to changes in interest rates includes assessing both the
adequacy of the process used to control interest rate risk and the quantitative
level of exposure. The Company's interest rate risk management process seeks to
ensure that appropriate policies, procedures, management information and
internal controls are in place to maintain interest rate risk at prudent levels
with consistency and continuity. In evaluating the quantitative level of
interest rate risk, the Company assesses the existing and potential future
effects of changes in interest rates on its financial condition, including
capital adequacy, earnings, liquidity and asset quality.
18
<PAGE> 19
There are two interest rate risk measurement techniques which may be used by the
Company. The first, which is commonly referred to as GAP analysis, measures the
difference between the dollar amount of interest-sensitive assets and
liabilities that will be refinanced or repriced during a given time period. A
significant repricing gap could result in a negative impact to the Company's net
interest margin during periods of changing market interest rates. The following
table depicts the Company's GAP position as of December 31, 1999 (dollars in
thousands):
<TABLE>
<CAPTION>
Within Three to One to After
Three Twelve Five Five
Months Months Years Years Total
------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ASSETS:
Variable rate loans $ 37,945 $ $ $ $ 37,945
Residential real estate loans 3,257 2,416 21,183 2,514 29,370
Federal funds sold 20,848 20,848
Securities available for sale 5,245 571 5,816
Interest-bearing deposits 7,322 7,322
Allowance for loan losses (1,010) (1,010)
Other assets 3,356 3,356
------------------------------------------------------------------------
Total Assets $ 74,617 $ 2,416 $ 21,183 $ 5,431 $ 103,647
------------------------------------------------------------------------
LIABILITIES:
Interest-bearing checking $ 3,770 $ 280 $ 1,500 $ 1,875 $ 7,425
Savings accounts 39 117 620 775 1,551
Money market accounts 45,426 1,770 47,196
Time deposits 3,566 7,627 3,679 14,872
Other borrowings 210 210
Noninterest-bearing checking 10,689 10,689
Other liabilities 384 384
------------------------------------------------------------------------
Total Liabilities 53,011 9,794 5,799 13,723 82,327
Stockholders' Equity 21,320 21,320
------------------------------------------------------------------------
Total Sources of Funds $ 53,011 $ 9,794 $ 5,799 $ 35,043 $ 103,647
------------------------------------------------------------------------
Net Asset (Liability) GAP $ 21,606 $ (7,378) $ 15,384 $ (29,612) $
------------------------------------------------------------------------
CUMULATIVE GAP $ 21,606 $ 14,228 $ 29,612 $ $
------------------------------------------------------------------------
PERCENT OF CUMULATIVE GAP TO
TOTAL ASSETS 20.8% 13.7% 28.6% 0.0% 0.0%
</TABLE>
19
<PAGE> 20
A second interest rate risk measurement used is commonly referred to as net
interest income simulation analysis. The Company believes that this methodology
will provide a more accurate measurement of interest rate risk than the GAP
analysis. A simulation model assesses the direction and magnitude of variations
in net interest income resulting from potential changes in market interest
rates. Key assumptions in the model include prepayment speeds on various loan
and investment assets; cash flows and maturities of interest-sensitive assets
and liabilities; and changes in market conditions impacting loan and deposit
volume and pricing. These assumptions are inherently uncertain, subject to
fluctuation and revision in a dynamic environment; therefore, the model cannot
precisely estimate net interest income or exactly predict the impact of higher
or lower interest rates on net interest income. Actual results will differ from
simulated results due to timing, magnitude, and frequency of interest rate
changes and changes in market conditions and the Company's strategies, among
other factors.
Due to the low level of risk during the first year of operation, the Company did
not utilize simulation analysis as a tool for measuring the effects of interest
rate risk on the income statement. As growth has dictated, the Company is in the
process of assessing and acquiring simulation modeling capabilities for use in
the future.
In addition to changes in interest rates, the level of future net interest
income is also dependent on a number of other variables, including the growth,
composition and absolute levels of loans, deposits, and other earning assets and
interest-bearing liabilities; economic and competitive conditions; potential
changes in lending, investing, and deposit gathering strategies; client
preferences; and other factors.
YEAR 2000 ISSUE
The approach of the year 2000 presented potential problems to businesses that
utilize computers in their daily operations. It was anticipated that some
computer systems might not be able to properly interpret dates after December
31, 1999 because they used only two digits to indicate the year in the date.
Therefore, a date using "00" as the year might recognize the year as 1900 rather
than the year 2000.
The Company assessed the potential problems associated with the Year 2000
computer issue and developed a contingency plan. A group consisting of senior
officers and employees met periodically and provided regular reports to the
Board of Directors detailing progress with the Year 2000 issue.
There were no problems encountered by the Company as of January 31, 2000 that it
is aware of as a result of the switch to the new millennium; however, all
pertinent procedures and contingencies remain in place to counter any problems
which might arise in the future.
The Company's expense during 1999 was less than $15,000 for costs associated
with the Year 2000 project.
20
<PAGE> 21
ITEM 7. FINANCIAL STATEMENTS.
TOWER FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
At December 31, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Cash $ 2,273,592 $ 5,704
Interest Bearing Deposits 7,321,726 208,216
Federal Funds Sold 20,848,377
------------ ---------
Total Cash and Cash Equivalents 30,443,695 213,920
Securities Available for Sale at Fair Value 5,816,391
Loans 67,314,520
Allowance for Loan Losses (1,009,509) $
------------ ---------
Net Loans 66,305,011
Premises and Equipment, net 723,975 57,696
Other Assets 357,995 124,960
------------ ---------
Total Assets $103,647,067 $ 396,576
============ =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Non Interest Bearing $ 10,689,378
Interest Bearing 71,043,860 $
------------- ---------
Total Deposits 81,733,238
Short-term Borrowings 210,000
Related Party Notes Payable 760,000
Other Liabilities 383,650 110,000
------------ ---------
Total Liabilities 82,326,888 870,000
Commitments and Contingencies
STOCKHOLDERS' EQUITY
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;
2,530,000 shares issued and outstanding at December 31, 1999
and 1 share issued and outstanding at December 31, 1998 2,530,000 10
Additional Paid-In-Capital 20,939,770
Accumulated Deficit (2,148,876) (473,434)
Unrealized Loss on Securities Valuation (715)
------------ ---------
Total Stockholders' Equity 21,320,179 (473,424)
------------ ---------
Total Liabilities and Stockholders' Equity $103,647,067 $ 396,576
============ =========
</TABLE>
The following notes are an integral part of the financial statements.
21
<PAGE> 22
TOWER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the year ended December 31, 1999 and the period
from July 8, 1998 (inception) to December 31, 1998
<TABLE>
<CAPTION>
1999 1998
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
INTEREST INCOME:
Loans, including Fees $ 2,368,367 $
Securities 318,152
Interest Bearing Deposits 462,203
Federal Funds Sold 533,124
------------ -----------
Total Interest Income $ 3,681,846
INTEREST EXPENSE:
Deposits 1,382,182
Short-term Borrowings 11,748
------------ -----------
Total Interest Expense 1,393,930
NET INTEREST INCOME BEFORE PROVISION FOR LOAN LOSSES 2,287,916
PROVISION FOR LOAN LOSSES 1,010,000
------------ -----------
NET INTEREST INCOME 1,277,916
NONINTEREST INCOME:
Trust 24,554
Service Charges 14,720
Loan Fees 216,366
Other 32,099
------------ -----------
Total Noninterest Income 287,739
NONINTEREST EXPENSE:
Salary and Benefits 1,886,670 261,188
Occupancy and Equipment 345,698 19,178
Marketing 141,051 6,831
Office Expense 131,777 6,472
Loan and Professional Costs 378,417 127,066
Other 357,484 52,699
------------ -----------
Total Noninterest Expenses 3,241,097 473,434
LOSS BEFORE INCOME TAXES (1,675,442) (473,434)
PROVISION FOR INCOME TAXES
------------ -----------
NET LOSS $ (1,675,442) $ (473,434)
============= ===========
BASIC AND DILUTED LOSS PER SHARE $ (0.71) n/a
WEIGHTED AVERAGE SHARES OUTSTANDING 2,344,055 n/a
</TABLE>
The following notes are an integral part of the financial statements.
22
<PAGE> 23
TOWER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the year ended December 31, 1999 and the period
from July 8, 1998 (inception) to December 31, 1998
<TABLE>
<CAPTION>
1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Net Loss $ (1,675,442) $ (473,434)
Unrealized Loss on Securities (715)
------------ ----------
Comprehensive Loss $ (1,676,157) $ (473,434)
============ ==========
</TABLE>
The following notes are an integral part of the financial statements.
23
<PAGE> 24
TOWER FINANCIAL CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' Equity
For the year ended December 31, 1999 and the period
from July 8, 1998 (inception) to December 31, 1998
<TABLE>
<CAPTION>
LOSS ON
ADDITIONAL SECURITIES
PREFERRED COMMON PAID-IN ACCUMULATED AVAILABLE
STOCK STOCK CAPITAL DEFICIT FOR SALE TOTAL
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, JULY 8, 1998
(DATE OF INCEPTION) $ $ $ $ $ $
Issuance of Common Stock 10 10
Net Loss for 1998 (473,434) (473,434)
------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 10 (473,434) (473,424)
Issuance of Common Stock, net
of underwriters' fee and offering
costs 2,530,000 20,939,770 23,469,770
Retirement of Common Stock (10) (10)
Net Loss for 1999 (1,675,442) (1,675,442)
Unrealized Loss on Securities
Available for Sale (715) (715)
------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ $2,530,000 $20,939,770 $ (2,148,876) $ (715) $21,320,179
==========================================================================================
</TABLE>
The following notes are an integral part of the financial statements.
24
<PAGE> 25
TOWER FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the year ended December 31, 1999 and the period
from July 8, 1998 (inception) to December 31, 1998
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
NET LOSS $ (1,675,442) $ (473,434)
Adjustments to Reconcile Net Loss to Net Cash
Used in Operating Activities:
Depreciation and Amortization 113,005
Provision for Loan Losses 1,010,000
Increase in Accrued Interest Receivable and Other Assets (233,035)
Increase in Accrued Interest Payable and Other Liabilities 273,650 110,000
------------ ---------
Net Cash Used in Operating Activities (511,822) (363,434)
CASH FLOWS USED IN INVESTING ACTIVITIES:
Net Increase in Loans (67,315,011)
Purchase of Securities Available for Sale (5,817,105)
Purchase of Equipment and Leasehold Expenditures (779,285) (57,696)
------------ ---------
Net Cash Used in Investing Activities (73,911,401) (57,696)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net Increase in Deposits 81,733,238
Net Increase in Short-term Borrowings 210,000
Gross Proceeds from Issuance of Common Stock 25,300,000 10
Payment of Underwriters' Fee and Offering Costs (1,830,230)
Retirement of Common Stock (10)
Proceeds from Related Party Notes Payable 760,000
Repayment of Related Party Notes Payable (760,000)
Deferred Offering Costs (124,960)
------------ ---------
Net Cash Provided from Financing Activities 104,652,998 635,050
Net Increase in Cash and Cash Equivalents 30,229,775 213,920
Cash and Cash Equivalents, Beginning of Period 213,920
------------ ---------
Cash and Cash Equivalents, End of Period $ 30,443,695 $ 213,920
============ =========
</TABLE>
The following notes are an integral part of the financial statements.
25
<PAGE> 26
TOWER FINANCIAL CORPORATION
Notes TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.
ORGANIZATION: Tower Financial Corporation (the "Company") was
incorporated on July 8, 1998. The Company's wholly-owned subsidiary,
Tower Bank & Trust Company (the "Bank") opened on February 19, 1999
after receiving federal and state bank regulatory approvals to commence
its banking operations. Until February 19, 1999, the Company was in the
development stage and its activities were limited to the organization
of the Bank as well as the completion of its initial public stock
offering.
PRINCIPALS OF CONSOLIDATION: The accompanying consolidated financial
statements include the accounts of the Company and the Bank. All
significant intercompany accounts and transactions have been eliminated
in consolidation.
USE OF ESTIMATES: To prepare financial statements in conformity with
generally accepted accounting principles, management makes estimates
and assumptions based on available information. These estimates and
assumptions affect the amounts reported in the financial statements and
the disclosures provided, and future results could differ. The
allowance for loan losses and the fair values of financial instruments
are particularly subject to change.
CASH FLOW REPORTING: Cash and cash equivalents include cash on hand,
demand deposits with other financial institutions, short term
investments and Federal funds sold. Cash flows are reported net of
customer loan and deposit transactions, interest bearing time deposits
with other financial institutions and short-term borrowings with
maturities of 90 days or less.
SECURITIES: Securities available for sale consist of those securities
which might be sold prior to maturity due to changes in interest rates,
prepayment risks, yield and availability of alternative investments,
liquidity needs and other factors. Securities classified as available
for sale are reported at their fair value and the related unrealized
holding gain or loss is reported as a separate component of
stockholders' equity, until realized.
Premiums and discounts on securities are recognized as interest income
using the interest method over the estimated life of the security.
Gains and losses on the sale of securities available for sale are
determined based upon amortized cost of the specific security sold.
LOANS: Loans are reported at the principal balance outstanding.
Interest income is reported on the interest method. Loan fees and costs
are recorded through the income statement as incurred and not currently
amortized over the life of the loan as the effect of the two methods
does not materially differ.
ALLOWANCE FOR LOAN LOSSES: Management estimates the allowance balance
required based on past industry loan loss experience, known and
inherent risks in similar portfolios, and economic conditions.
Allocations of the allowance may be made for specific loans, but the
entire allowance is available for any loan that, in the opinion of
management should be charged-off.
Loan impairment is reported when full payment under the loan terms is
not expected. Impairment is evaluated in the aggregate for
smaller-balance loans of a similar nature such as residential mortgage
and consumer loans, and on an individual loan basis for other loans. If
a loan is impaired, a portion of the allowance is allocated so that the
loan is reported, net, at the present value of estimated future cash
flows using the loan's existing interest rate. Loans are evaluated for
impairment when payments are delayed, typically 90 days or more, or
when the Company's internal grading system indicates a doubtful
classification.
26
<PAGE> 27
PREMISES AND EQUIPMENT: Premises and equipment are stated at cost less
accumulated depreciation. Depreciation is computed using both the
straight-line method and accelerated methods over the estimated useful
lives of the respective assets. Maintenance, repairs, and minor
alterations are charged to current operations as expenditures occur and
major improvements are capitalized. These assets are reviewed for
impairment under SFAS No. 121 when events indicate the carrying amount
may not be recoverable.
STOCK OPTIONS: Compensation cost is recognized based on the excess, if
any, between the quoted market price of the Company's common stock on
the date of grant and the amount an employee must pay to acquire the
stock. Under this method, no compensation cost has been recognized for
stock option awards.
INCOME TAXES: Income tax expense is the sum of current year income tax
due or refundable and the change in deferred tax assets and
liabilities. Deferred tax assets and liabilities are the expected
future tax consequences of temporary differences between the carrying
amounts and tax bases of assets and liabilities, computed using enacted
tax rates. A valuation allowance has been established to the extent of
net deferred tax assets due to a lack of operating performance to
ensure the likelihood of recovery.
FAIR VALUES OF FINANCIAL INSTRUMENTS: Fair values of financial
instruments are estimated using relevant market information and other
assumptions. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments
and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates. The fair value estimates of
existing on- and off-balance sheet financial instruments does not
include the value of anticipated future business or the value of assets
and liabilities not considered financial instruments.
DIVIDEND RESTRICTIONS: The Company and the Bank are subject to banking
regulations which require the maintenance of certain capital levels and
positive retained earnings, which will prevent the payment of dividends
until positive retained earnings are achieved and may limit the amount
of dividends thereafter.
EARNINGS (LOSS) PER SHARE: Basic earnings (loss) per share is based on
weighted average common shares outstanding. Diluted earnings (loss) per
share further assumes the issue of any dilutive potential common
shares.
27
<PAGE> 28
Note 2 - INVESTMENT SECURITIES.
The amortized cost and fair values of investment securities available
for sale at year-end were as follows:
<TABLE>
<CAPTION>
1999
------------------------------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUES
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government Agency Debt Obligations $ 5,246,256 $ $ 715 $ 5,245,541
Federal Reserve Bank Stock 423,750 423,750
Federal Home Loan Bank Stock 147,100 147,100
------------------------------------------------------------------------
TOTAL INVESTMENT SECURITIES $ 5,817,106 $ $ 715 $ 5,816,391
========================================================================
</TABLE>
The amortized cost and fair values of debt investment securities at
year-end 1999, by contractual maturity, are shown below. The
contractual maturity is utilized below for U.S. Government agency debt
obligations. Expected maturities may differ from contractual maturities
because borrowers may have the right to call or prepay obligations with
or without call or prepayment penalties. Securities not due at a single
maturity date are shown separately.
<TABLE>
<CAPTION>
WEIGHTED
AVERAGE AMORTIZED FAIR
YIELD COSTS VALUES
---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Due in one year or less 5.56% $ 5,246,256 $ 5,245,541
Due after one year through five years
Due after five years through 15 years 6.52% 570,850 570,850
</TABLE>
There were no investment security sales during 1999 or 1998.
There were no investment securities pledged at December 31, 1999 or
December 31, 1998.
28
<PAGE> 29
Note 3 - LOANS AND ALLOWANCE FOR LOAN LOSSES.
Loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
------------------------------
BALANCE %
- -------------------------------------------------------------------------------------
<S> <C> <C>
Real Estate:
Residential $ 5,917,613 8.8%
Home Equity 2,550,904 3.8%
Commercial Real Estate 9,164,638 13.6%
Commercial 44,110,020 65.5%
Consumer 5,571,345 8.3%
------------------------------
TOTAL LOANS $ 67,314,520 100.0%
==============================
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
1999
- -----------------------------------------------------------------------------------
<S> <C>
Beginning Balance, January 1 $
Provision Charged to Operating Expense 1,010,000
Charge-offs 491
Recoveries
------------
ENDING BALANCE, DECEMBER 31 $ 1,009,509
============
</TABLE>
There were no loans classified as impaired at December 31, 1999.
29
<PAGE> 30
Note 4 - PREMISES AND EQUIPMENT, NET.
Premises and equipment at December 31, 1999 and December 31, 1998 were
as follows:
<TABLE>
<CAPTION>
1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
Leasehold Improvements $ 176,876 $
Furniture and Equipment 660,105 57,696
-----------------------------------
Subtotal 836,981 57,696
Less: Accumulated Depreciation 113,006
-----------------------------------
TOTAL PREMISES AND EQUIPMENT $ 723,975 $ 57,696
===================================
</TABLE>
Note 5 - DEPOSITS.
Deposits are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1999
-----------------------------
BALANCE %
-----------------------------------------------------------------------------------
<S> <C> <C>
Non Interest-Bearing Demand $ 11,230,983 13.7%
Interest-Bearing Checking 7,425,344 9.0%
Money Market 47,196,522 57.4%
Savings 1,550,220 1.9%
Time, under $100,000 4,044,306 4.9%
Time, $100,000 and over 10,827,468 13.1%
-----------------------------
TOTAL DEPOSITS $ 82,274,843 100.00%
=============================
</TABLE>
The following table shows the maturity distribution for certificates of
deposit at December 31, 1999.
<TABLE>
<S> <C>
2000 $ 11,193,106
2001 2,853,806
2002 789,804
2003
2004 35,058
----------------------
Total $ 14,871,774
======================
</TABLE>
30
<PAGE> 31
Note 6 - SHORT TERM BORROWINGS.
Information relating to short-term borrowings, comprised entirely of
Federal funds purchased, at December 31, 1999 is summarized below:
<TABLE>
<CAPTION>
1999
-----------------------------------------------------------------------------
<S> <C>
Outstanding Balance at Year-End $ 210,000
Average Interest Rate at Year-End 1.94%
Average Balance During the Year $ 210,986
Average Interest Rate During the Year 5.57%
Maximum Month End Balance During the Year $1,110,000
</TABLE>
Note 7 - INCOME TAXES.
As of December 31, 1999, the Company had net operating loss carry
forwards of approximately $526,000. No current benefit or deferred tax
asset is recorded as a valuation allowance reduces the gross deferred
tax asset of approximately $205,000 to zero. The net deferred tax asset
included the following amounts of deferred tax assets and liabilities
as of December 31, 1999.
<TABLE>
<S> <C>
DEFERRED TAX ASSETS
Provision for Loan Losses $ 393,700
Start-up / Pre-Opening Expenses 243,000
-----------------
Total Deferred Tax Assets $ 636,700
=================
DEFERRED TAX LIABILITIES
Depreciation $ 16,450
-----------------
Total Deferred Tax Liabilities $ 16,450
=================
<CAPTION>
1999
-----------------------------------------------------------------------------
<S> <C>
Net deferred tax asset before asset valuation $ 620,250
Valuation allowance for deferred tax assets 620,250
-----------------
NET $
=================
</TABLE>
A valuation allowance related to deferred tax assets is required when
it is considered more likely than not that all or part of the benefits
related to such assets will not be realized. Management has determined
that an allowance of $620,250 is required for 1999.
31
<PAGE> 32
Note 8 - STOCK OPTION PLAN.
On December 14, 1998 and subsequently amended on January 21, 1999,
the stockholders and Board of Directors adopted the 1998 Stock
Option and Incentive Plan (the "Plan") for officers, employees, and
directors. The maximum number of shares of common stock of the
Company which may be issued under the Plan may not exceed 310,000
and includes both incentive stock options and non-qualified
options. The exercise price for incentive stock options may not be
less than the fair market value of the shares at the time of grant,
except as granted to a 10% shareholder in which case the option
price may not be less than 110% of fair market value. The exercise
price for non-qualified stock options may not be less than the fair
market value of the shares at the time of grant. The duration of
each option may not exceed 10 years from the date of grant.
The table below details option grants made pursuant to the Plan
during 1999:
<TABLE>
<CAPTION>
1999
-------------------------------------------------------------------------------
<S> <C>
STOCK OPTIONS OUTSTANDING
Beginning of Period, January 1
Granted 307,440
Cancelled 2,010
-----------
End of Period, December 31 305,430
===========
Options Available for Grant at December 31 4,570
Options Exercisable at December 31 59,994
Minimum Exercise Price 9.000
Maximum Exercise Price 10.125
Average Exercise Price 9.969
Average Remaining Option Term 9.1 years
ESTIMATED FAIR VALUE OF STOCK OPTIONS GRANTED
Assumptions Used:
Risk-Free Interest Rate 5.4% to 6.2%
Expected Option Life 8 years
Expected Stock Volitility 34.80%
Expected Dividends None
PRO-FORMA LOSS, ASSUMING SFAS 123 FAIR VALUE
METHOD WAS USED FOR STOCK OPTIONS.
Net Loss $(1,973,672)
Basic Loss Per Share $ (0.78)
Diluted Loss Per Share $ (0.76)
</TABLE>
32
<PAGE> 33
Note 9 - RELATED PARTY TRANSACTIONS.
Noninterest bearing notes payable in the amount of $760,000 were
outstanding to certain members of the Board of Directors of the
Company at December 31, 1998. The notes were paid during the first
quarter of 1999 from the proceeds from the Company's initial public
offering.
Certain directors and executive officers of the Company, including
their immediate families and companies in which they are principal
owners, are loan customers of the Bank. At year-end 1999, the Bank
had approximately $11,300,650 in loan commitments to directors and
executive officers, of which $10,022,412 were outstanding at
December 31, 1999, as reflected in the following table.
LOAN COMMITMENTS TO DIRECTORS AND EXECUTIVE OFFICERS
<TABLE>
<CAPTION>
1999
--------------------------------------------------------------------------------
<S> <C>
Beginning Balance, January 1
New Loans $10,719,521
Repayments 697,109
--------------
Ending Balance, December 31 $10,022,412
==============
</TABLE>
During 1999, the Company and the Bank engaged in transactions with
entities controlled by their respective directors or their
affiliates. Management believes that each of these transactions was
on terms no less favorable to the Company or the Bank than those
that could be obtained from an unaffiliated third party. Of
significance, the Bank leases its headquarters facility from
Tippmann Properties, Inc., agent for John V. Tippmann, Sr. The
lease is a 10-year lease commencing on January 1, 1999 and provides
for one renewal term of 10 years at then prevailing market rates.
During 1999, the total amount paid to Tippmann by the Company and
the Bank for rent and maintenance was $148,518.
Note 10 - COMMITMENTS AND OFF-BALANCE SHEET RISK.
The Bank maintains off-balance sheet investments in the normal
course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit
and standby letters of credit. Loan commitments to extend credit
are agreements to lend to a customer as long as there is no
violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued by the Bank to
guarantee the performance of a customer to a third party.
Commitments generally have fixed expiration dates or other
termination clauses and may require payment of a fee. Since many of
the commitments are expected to expire without being drawn upon,
the total commitment amounts do not necessarily represent future
cash requirements.
The instruments involve, to varying degrees, elements of credit
risk in excess of the amount recognized, if any, in the balance
sheet. The Bank's maximum exposure to loan loss in the event of
nonperformance by the other party to the financial instrument for
commitments to extend credit and standby letters of credit is
represented by the contractual notional amount of these
instruments. The Bank uses the same credit policies in making
commitments and conditional obligations as it does for on-balance
sheet instruments. Collateral, such as accounts receivable,
33
<PAGE> 34
securities, inventory, property and equipment, is generally
obtained based on management's credit assessment of the borrower.
Fair value of the Bank's off-balance sheet instruments (commitments
to extend credit and standby letters of credit) is based on rates
currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements and the
counterparties' credit standing. At December 31, 1999, the rates on
existing off-balance sheet instruments were equivalent to current
market rates, considering the underlying credit standing of the
counterparties.
The Bank's maximum exposure to credit losses for loan commitments
and standby letters of credit outstanding at December 31, 1999 was
as follows:
<TABLE>
<CAPTION>
------------------------------------------------------------
1999
------------------------------------------------------------
<S> <C>
Commitments to Extend Credit $ 21,221,712
Standby Letters of Credit 284,982
------------
Total $ 21,506,694
============
------------------------------------------------------------
</TABLE>
Management does not anticipate any significant losses as a result
of these commitments.
The Bank has entered into various operating leases and contracts
mainly for office space and for operating systems. Future minimum
rentals under all operating leases as of December 31, 1999 are as
follows:
<TABLE>
<S> <C>
2000 $ 245,394
2001 277,095
2002 258,719
2003 283,290
2004 283,856
Thereafter 1,187,761
------------
Total $ 2,536,115
============
</TABLE>
Note 11 - EMPLOYEE BENEFIT PLANS.
The Company established a 401(k) plan effective March 1, 1999
covering substantially all of its employees. The Company made no
contribution to the plan during 1999. Any contribution to the 401(k)
plan in the future will be determined annually by management and
approved by the Board of Directors.
34
<PAGE> 35
Note 12 - FAIR VALUES OF FINANCIAL INSTRUMENTS.
The following schedule reflects the carrying values and estimated
fair values of the Company's financial instruments at December 31,
1999. Items which are not financial instruments are not shown.
<TABLE>
<CAPTION>
CARRYING FAIR
VALUES VALUES
------------------------------------------------------------------------
<S> <C> <C>
FINANCIAL ASSETS:
Cash and Cash Equivalents $ 30,443,695 $ 30,443,695
Securities Available for Sale 5,816,391 5,816,391
Loans, net 67,314,520 66,603,013
Accrued Interest Receivable 306,268 306,268
FINANCIAL LIABILITIES:
Deposits $ 81,733,238 $ 81,724,554
Short-term Borrowings 210,000 210,000
Accrued Interest Payable 132,429 132,429
</TABLE>
Estimated fair value for securities is based on quoted market
values for the individual securities or for equivalent securities.
Estimated fair value for loans is based on the rates charged at
year-end for new loans with similar maturities, applied until the
loan is assumed to reprice or be paid. Estimated fair value for
IRAs, CDs, and short-term borrowings is based on the rates at
year-end for new deposits or borrowings, applied until maturity.
Estimated fair value for other financial instruments and
off-balance sheet loan commitments is considered to approximate
carrying value.
Note 13 - INITIAL PUBLIC OFFERING.
On January 29, 1999, the Company completed an initial public
offering of its common stock during which 2,200,000 shares were
sold at $10.00 per share. On February 12, 1999, the Company
completed the sale of 330,000 common shares included in the
underwriters' overallotment option at $10.00 per share. Total
proceeds from the offering were $25,300,000 less underwriters' fees
and offering expenses of $1,830,230 for net proceeds of
$23,469,770. The Company used approximately $15,000,000 of the net
proceeds from the stock offering to provide the initial
capitalization of the Bank in February 1999.
Note 14 - REGULATORY MATTERS.
The Company and the Bank are subject to regulatory capital
requirements administered by federal banking agencies. Capital
adequacy guidelines and prompt corrective action regulations
involve quantitative measures of assets, liabilities and certain
off-balance sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to
qualitative judgments by regulators about components, risk
weightings, and other factors, and the regulators can lower
classifications in certain cases. Failure to meet various capital
requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
Qualitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios
(set forth in the table below) of total and Tier 1 (as defined in
the regulations) to risk-weighted assets (as defined), and of Tier
1 capital (as defined) to average assets (as defined). In addition,
as a condition to regulatory approvals of the Bank's formation, the
Bank is required to have capitalization sufficient to provide a
ratio of Tier 1 capital to total assets of not less than eight
percent (8%) and Tier 1 to average assets in excess of nine percent
(9%), all during the first three years of operation. Management
believes, as of
35
<PAGE> 36
December 31, 1999, that the Company and the Bank meet all capital
adequacy requirements to which they are subject.
As of December 31, 1999, the most recent notification from the
Federal Reserve Bank of Chicago and the Indiana Department of
Financial Institutions categorized the Bank as well capitalized
under the regulatory framework for prompt corrective action. To be
categorized as well capitalized the Bank must maintain minimum
total risk-based, Tier 1 risk-based, and Tier 1 leverage ratios as
set forth in the following table. There are no conditions or events
since that notification that management believes have changed the
Bank's category.
The following schedule presents the Bank's regulatory capital
ratios as of December 31, 1999:
<TABLE>
<CAPTION>
TOTAL TIER 1 TIER 1
RISK-BASED RISK-BASED LEVERAGE
CAPITAL CAPITAL CAPITAL
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Minimum Capital Adequacy Ratio 8.00% 4.00% 4.00%
Percent to be Well Capitalized 10.00% 6.00% 5.00%
ACTUAL % - DECEMBER 31, 1999 15.89% 14.78% 15.62%
At December 31, 1999:
Required Capital $ 7,283,859 $ 3,641,930 $ 3,446,158
Capital to be Well Capitalized 9,104,824 5,462,894 4,307,697
ACTUAL CAPITAL 14,469,875 13,460,366 13,460,366
</TABLE>
36
<PAGE> 37
Note 15 - PARENT COMPANY ONLY CONDENSED FINANCIAL STATEMENTS.
Following are condensed parent company (the Company's) financial
statements. The 1998 statements include the period from July 8,
1998 (date of inception) through December 31, 1998.
<TABLE>
<CAPTION>
CONDENSED BALANCE SHEETS
------------------------
1999 1998
---------------------------------------
<S> <C> <C>
ASSETS
Cash and Cash Equivalents $ 7,863,631 $ 213,920
Investment in Tower Bank 13,461,081
Other Assets 182,656
---------------------------------------
Total Assets $21,324,712 $ 396,576
=======================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Related Party Loans $ 760,000
Other Liabilities 3,818 110,000
Stockholders' Equity 21,320,894 (473,424)
---------------------------------------
Total Liabilities and Stockholders' Equity $21,324,712 $ 396,576
=======================================
</TABLE>
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF OPERATIONS
----------------------------------
1999 1998
---------------------------------------
<S> <C> <C>
INCOME
Interest Income $ 363,151 $
Other Income 822
---------------------------------------
Total Income 363,973
EXPENSE
Salary and Benefits 284,742 261,188
Professional 138,165 127,066
Other Expense 77,589 85,180
---------------------------------------
Total Expense 500,496 473,434
LOSS BEFORE INCOME TAX AND EQUITY IN UNDISTRIBUTED
NET LOSS OF SUBSIDIARIES (136,523) (473,434)
Income Taxes
Equity in Undistributed Net Loss of Subsidiary (1,538,919)
---------------------------------------
NET LOSS $ (1,675,442) $(473,434)
=======================================
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
CONDENSED STATEMENTS OF CASH FLOWS
----------------------------------
1999 1998
------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net Loss $ (1,675,442) $ (473,434)
Adjustments to Reconcile Net Loss To Net Cash
from Operating Activities:
Equity in Undistributed Loss of the Bank 1,538,919
Change in Other Assets 182,656 110,000
Change in Other Liabilities (106,182)
------------------------------------
Net Cash Used in Operating Activities (60,049) (363,434)
CASH FLOWS FROM INVESTING ACTIVITIES
Equipment Expenditures (57,696)
------------------------------------
Net Cash From Investing Activities (57,696)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from Related Party Notes Payable 760,000
Proceeds from Issuance of Common Stock 25,300,000 10
Payment of Underwriters' Fee and Offering Costs (1,830,230)
Retirement of Related Party Notes Payable (760,000)
Retirement of Common Stock (10)
Capital Investment into the Bank (15,000,000)
Deferred Offering Costs (124,960)
------------------------------------
Net Cash Provided From Financing Activities 7,709,760 635,050
NET INCREASE IN CASH AND CASH EQUIVALENTS 7,649,711 213,920
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 213,920
------------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 7,863,631 $ 213,920
====================================
</TABLE>
38
<PAGE> 39
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Shareholders
Tower Financial Corporation:
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of income, comprehensive income, shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of Tower Financial Corporation and its subsidiary at December 31, 1999 and 1998,
and the results of their operations and their cash flows for the year December
31, 1999 and the period from July 8, 1998 (date of inception) through December
31, 1998, ended in conformity with accounting principles generally accepted in
the United States. 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 audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, 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
audits provide a reasonable basis for the opinion expressed above.
PricewaterhouseCoopers LLP
Fort Wayne, Indiana
January 13, 2000
<PAGE> 40
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item concerning the directors and nominees for
director of the Company and concerning disclosure of delinquent filers is
incorporated herein by reference to the Company's definitive Proxy Statement for
its 2000 Annual Meeting of Shareholders, to be filed with the Commission
pursuant to Regulation 14A within 120 days after the end of the Company's last
fiscal year. Information concerning the executive officers of the Company is
included under the caption "Executive Officers of the Registrant" at the end of
Part 1 of this Annual Report. Such information is incorporated herein by
reference, in accordance with General Instruction G(3) to Form 10-K and
instruction 3 to Item 401(b) of Regulation S-K.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item concerning remuneration of the Company's
officers and directors and information concerning material transactions
involving such officers and directors is incorporated herein by reference to the
Company's definitive Proxy Statement for its 2000 Annual Meeting of Shareholders
which will be filed pursuant to Regulations 14A within 120 days after the end of
the Company's last fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item concerning the stock ownership of
management and five percent beneficial owners is incorporated herein by
reference to the Company's definitive Proxy Statement for its 2000 Annual
Meeting of Shareholders which will be filed pursuant to Regulations 14A within
120 days after the end of the Company's last fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by this Item concerning certain relationships and
related transactions is incorporated herein by reference to the Company's
definitive Proxy Statement for its 2000 Annual Meeting of Shareholders which
will be filed pursuant to Regulation 14A within 120 days after the end of the
Company's last fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
A list of exhibits required to be filed as part of this Annual Report is set
forth in the Index to Exhibits, which immediately precedes such exhibits and is
incorporated herein by reference.
(b) Reports on Form 8-K
The Company has not filed any reports on Form 8-K during the last quarter of the
period covered by this Report.
40
<PAGE> 41
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Exchange Act, the registrant caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
TOWER FINANCIAL CORPORATION
By: /s/ Donald F. Schenkel
--------------------------
Date: March 10, 2000 Donald F. Schenkel
Chairman of the Board,
President And Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Donald F. Schenkel Chairman of the Board, President, March 10, 2000
---------------------------------------- Chief Executive Officer and
Donald F. Schenkel Director (Principal Executive Officer)
/s/ Kevin J. Himmelhaver Chief Financial Officer and Secretary March 10, 2000
---------------------------------------- (Principal Financial Officer
Kevin J. Himmelhaver and Principal Accounting Officer)
/s/ Keith E. Busse Director March 10, 2000
----------------------------------------
Keith E. Busse
/s/ Peter T. Eshelman Director March 10, 2000
----------------------------------------
Peter T. Eshelman
/s/ Michael S. Gouloff Director March 10, 2000
----------------------------------------
Michael S. Gouloff
/s/ Craig S. Hartman Director March 10, 2000
----------------------------------------
Craig S. Hartman
/s/ Jerome F. Henry, Jr. Director March 10, 2000
----------------------------------------
Jerome F. Henry, Jr.
/s/ R.V. Prasad Mantravadi, M.D. Director March 10, 2000
----------------------------------------
R.V. Prasad Mantravadi, M.D.
/s/ Michael J. Mirro, M.D. Director March 10, 2000
----------------------------------------
Michael J. Mirro, M.D.
/s/ Debra A. Niezer Director March 10, 2000
----------------------------------------
Debra A. Niezer
/s/ William G. Niezer Director March 10, 2000
----------------------------------------
William G. Niezer
---------------------------------------- Director March 10, 2000
Maurice D. O'Daniel
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Leonard I. Rifkin Director March 10, 2000
----------------------------------------
Leonard I. Rifkin
/s/ Joseph D. Ruffolo Director March 10, 2000
----------------------------------------
Joseph D. Ruffolo
/s/ Larry L. Smith Director March 10, 2000
----------------------------------------
Larry L. Smith
Director March 10, 2000
----------------------------------------
John V. Tippmann, Sr.
/s/ J. Richard Tomkinson Director March 10, 2000
----------------------------------------
J. Richard Tomkinson
/s/ Irene A. Walters Director March 10, 2000
----------------------------------------
Irene A. Walters
</TABLE>
42
<PAGE> 43
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
- --- -----------
<S> <C> <C>
3.1 (1) Restated Articles of Incorporation of the Registrant
3.2 (1) By-Laws of the Registrant
10.1 (1) Lease Agreement dated October 6, 1998 between the
Registrant and Tippmann Properties, Inc.
10.2 (1) Electronic Data Processing Services Contract dated
October 1, 1998 between Registrant and Rurbanc
Data Services, Inc.
10.3* (1) 1998 Stock Option and Incentive Plan
10.4* (1) Employment Agreement dated December 1, 1998 between
the Registrant and Donald F. Schenkel
10.5* (1) Employment Agreement dated December 1, 1998 between
the Registrant and Kevin J. Himmelhaver
10.6* (1) Employment Agreement dated December 1, 1998 between
the Registrant and Curtis A. Brown
10.7 Lease Agreement dated February 16, 1999 between the
Registrant and Opal Development, Inc.
10.8 Lease Agreement dated November 1, 1999 between the
Registrant and Reiff Enterprises
10.9 Lease Agreement dated December 6, 1999 between the
Registrant and Chestnut - Dupont Partners
21 Subsidiaries of the Company
27 Financial Data Schedule
* The indicated exhibit is a management contract, compensatory plan or
arrangement required to be filed by Item 601 of Regulation S-B.
(1) The copy of this exhibit filed as the same exhibit number to the
Company's Registration Statement on Form SB-2 (Registration No.
333-67235) is incorporated herein by reference.
</TABLE>
43
<PAGE> 1
EXHIBIT 10.7
LEASE AGREEMENT
This Lease Agreement ("Lease") is made and entered into by and between OPAL
DEVELOPMENT, INC. ("Lessor") and TOWER FINANCIAL CORPORATION ("Lessee") under
the following circumstances and in consideration of the mutual terms, covenants,
and agreements set forth below:
ARTICLE I
Lease Premises and Building
Section 1. 1. Grant of Lease. Lessor does hereby lease to Lessee and Lessee does
hereby lease from Lessor, the real estate and improvements located in Huntington
County, Indiana, commonly known as Suite 105, 2855 Northpark Avenue, Huntington,
Indiana, which Suite comprises approximately 1200 square feet of an office
building development, the legal description of which and the location of said
office building, parking areas, drives, sidewalks, entrances, and all other
common areas and facilities is set forth on Exhibit "A" attached hereto and made
a part hereof, and for convenience shall hereafter be referred to as the
"Premises".
Section 1. 2. Definition of Premises. The lease of the Premises herein shall be
deemed to include the leasing of all of Lessor's rights, privileges, and
appurtenances in and to the Premises.
ARTICLE II
Term of Lease
Section 2.1. Term. Subject to the provisions of Section 2.2, the term of this
Lease shall be for three (3) years, commencing on March 1, 1999, and ending on
the 28th day of February, 2002 (hereinafter referred to as "Lease Term");
provided however, that 1) Lessee shall be given at least partial occupancy (a
minimum of two offices) of the Premises no later than February 15, 1999, while
Lessor completes remodeling of the remainder of the Premises (See Section 5.1);
and 2) the Lease Term may be terminated prior to its expiration by mutual
agreement of Lessor and Lessee.
Section 2.2. Renewal/Extension. Lessor grants Lessee the right of one renewal
term for three (3) additional years (the "Renewal Term") on the same terms and
conditions as during the Lease Term except that the monthly rental shall be
determined at the outset of this Renewal Term by adjusting the base rent of
$1,000.00 per month upward or downward, as applicable, by the percentage upward
or downward change in the Consumer Price Index for all Urban consumers, U.S.
City Average, All Items (1967 = 100), or its successor as published from time to
time by the Bureau of Labor Statistics of the United States Department of Labor
(hereinafter referred to as the "Consumer Price Index"), using the Index
published during the months of March, 1999, and January, 2002. In order to
preserve and enforce this right of renewal, Lessee shall notify Lessor no later
than six (6) months prior to expiration of the Lease Term.
<PAGE> 2
ARTICLE III
Rent, Manner of Payment, and Real Estate Taxes
Section 3.1. Rent. As rent for the Premises, Lessee agrees to pay Lessor the
sum of Twelve Thousand and No/100 Dollars($12,000.00) per annum throughout the
term of this Lease. Said rent shall be due and payable in advance in equal
monthly installments of One Thousand and No/100 Dollars ($1,000.00), commencing
on the March 1, 1999 and continuing on the first day of each succeeding month
thereafter to and including the last month of the Lease Term. The monthly
payment shall be pro rated in the event the Lease Term does not commence on the
first day of the month or end on the last day of the month. In addition to the
monthly payment, Lessee shall also be responsible for payment of "Additional
Rent" as hereinafter defined. It is agreed by Lessor and Lessee that the rent
accrues on a yearly basis in the amount designated above and is payable on a
monthly basis as heretofore set forth.
Section 3.2. The rent specified in this Lease shall be net to Lessor in each
year during the Lease Term. Accordingly, except as provided herein, Lessee shall
pay all expenses and obligations arising out of or related to the Premises which
may arise or become due during the Lease Term (hereinafter referred to as
"Additional Rent"), and Lessee shall indemnify and hold the Lessor harmless
against any such expenses and obligations. Additional Rent shall include, but is
not limited to, all taxes and assessments either levied against and/or
attributable to the Premises, or personal property located within the Premises
during the Lease Term, all bills and charges for insurance, maintenance, water,
sewage, waste disposal, gas, electricity and heating costs, which may be
assessed or charged against the Premises or any occupant thereof during the term
of this Lease or any extension thereof. The Additional Rent shall be paid by
Lessee as it becomes due and owing. Lessee, from time to time and upon request
by Lessor, shall provide Lessor with such documentation evidencing Lessee's
payment of Additional Rent.
Section 3.3. Late Payment. If the full amount of any monthly rent payment is not
received by Lessor on or before ten (10) days after the due date of each month,
then a late charge equal to five percent (5%) of the unpaid amount of each
installment shall be immediately due and payable.
Section 3.4. Place of Payment. All sums payable to Lessor shall be paid to
Lessor at 2859 Northpark Avenue, Suite 213, Huntington, Indiana 46750 or at such
other address as Lessor shall designate to Lessee in writing.
Section 3.5. Personal Property Taxes. All sums received by Lessor shall be
applied first to rent due and unpaid, second to any late charges due and unpaid
and finally to any other sums due hereunder.
<PAGE> 3
ARTICLE IV
Occupancy and Use
Section 4.1. Permitted Use. Lessee shall use the Premises for non-retail office
purposes only. Lessee shall not use the Premises for any other purpose without
the prior written consent of Lessor. Nor shall Lessee conduct any business or
activity upon or within the Premises, or any part thereof, which violates
applicable statutory or local laws or ordinances, including those which govern
the use and operation of the Premises.
Section 4.2. Insurance Rates. No use shall be made of the Premises which will
increase the existing rate of insurance upon the Premises, or cause a
cancellation of any insurance covering said Premises, or any part thereof; nor
shall Lessee sell or permit to be kept, used or sold in or about the Premises,
any article which may be prohibited by the standard form of fire insurance
policy maintained by Lessor for the Premises.
Section 4.3. Waste. Lessee shall not commit or allow to be committed any waste
or nuisance upon the Premises, nor shall Lessee operate its business within the
Premises for any illegal, improper or immoral purpose.
Section 4,4. Lessor, for himself, and for his heirs and assigns, hereby
covenants and agrees with Lessee that said Lessee, paying the rents, and keeping
and performing the covenants of this lease on his part to be kept and performed,
shall peaceably and quietly hold, occupy and enjoy said Premises during said
term, without any hindrance or molestation by Lessor or any person or persons
lawfully claiming under or through Lessor.
ARTICLE V
Acceptance of Premises
Section 5.1. The Premises shall be improved at Lessor's sole cost and expense
consistent with and pursuant to the drawings and specifications attached hereto
as Exhibit B. Lessor agrees to proceed with diligence with the remodeling and
completion of said improvements and to complete all such work no later than
March 1, 1999, subject to delays caused by strikes, acts of God, actions of
governmental authority, or any other acts or causes beyond Lessor's control. In
the event the remodeling of the Premises is not substantially completed by March
1, 1999 so as to enable Lessee to occupy and operate its business from all of
the Premises, Lessee shall be entitled to terminate this Lease without penalty
or liability to Lessor, to recover as liquidated damages from Lessor $100 per
day until such time as the remodeling is substantially complete and Lessee can
reasonably operate its business from the Premises, and/or for all other relief
available under this Lease, by law, or in equity.
Section 5.2. Lessor shall give Lessee notice when the Premises are ready for
occupancy and delivery, but said notice shall not be later than February 15,
1999. Immediately after the giving of said notice, Lessee shall have the right
to enter the Premises for the purpose of installing its fixtures
<PAGE> 4
and equipment and otherwise preparing the Premises for Lessee's occupancy,
provided Lessee shall not interfere with nor obstruct the construction
contractor in the performance and completion of the construction of the Premises
or of the building of which the Premises are a part.
Section 5.3. Lessee has the right to inspect the Premises prior to occupancy. If
Lessee does not notify Lessor to the contrary within thirty (30) days after
occupancy of the Premises (as improved by Lessor), Lessee shall be deemed to
have acknowledged that the said Premises are in satisfactory condition.
ARTICLE VI
Services, Alterations and Repairs
Section 6.1. Repairs and Services. Except as provided herein, Lessor agrees to
repair, and, if necessary, replace all heating, ventilation, and air
conditioning systems for the Premises, in a condition comparable to that
existing at the time of commencement of the Lease Term, except for damages
caused by Lessee, its employees or invitees in excess of ordinary wear and tear,
for which Lessee shall be responsible. Lessee shall pay for all ordinary
maintenance, upkeep and use for all heating, air conditioning, electricity,
water and sewer and gas for the Premises.
Section 6-2. Compliance with Laws and Regulations.
(a) Lessor shall not be liable or responsible for ensuring that any alterations,
additions, repairs, improvements, or decorations to the Premises made by Lessee
are in conformance with any federal, state, or local laws, regulations, or
ordinances, including, but not limited to, the Americans With Disabilities Act
of 1990, 42 U.S.C. ss.12101, et seq. It shall be Lessee's responsibility to
comply with all federal, state or local laws, including the Americans With
Disabilities Act, and Lessee agrees to indemnify and hold Lessor harmless from
any fines, penalties, charges, assessments, liabilities, or expenses incurred by
Lessor, or assessed against the Premises as a result of Lessee's failure to
conform alterations, additions, repairs, improvements, or decorations with any
federal, state, or local laws, regulations, or ordinances as provided in this
subparagraph.
(b) Lessee shall not be liable or responsible for ensuring that any alterations,
additions, repairs, improvements, or decorations to the Premises made by Lessor
are in conformance with any federal, state, or local laws, regulations, or
ordinances, including, but not limited to, the Americans With Disabilities Act
of 1990, 42 U.S.C. ss.12101, et seq. It shall be Lessor's responsibility to
comply with all federal, state or local laws, including the Americans With
Disabilities Act, and Lessor agrees to indemnify and hold Lessee harmless from
any fines, penalties, charges, assessments, liabilities, or expenses incurred by
Lessee, or assessed against the Premises as a result of Lessor's failure to
conform alterations, additions, repairs, improvements, or decorations with any
federal, state, or local laws, regulations, or ordinances as provided in this
subparagraph.
<PAGE> 5
(c) Lessor shall be responsible for compliance of the Americans With
Disabilities of 1990, 42 U.S.C. ss.12101, et seq. as such statutory and
regulatory provisions pertain to the Premises and the improvements thereon as
they exist as of February 15, 1999. Any alterations, additions, repairs,
improvements or decorations to the Premises which occur subsequent to February
15, 1999 shall be governed by the provisions of subparagraphs (a) and (b) above.
Section 6.3. Liens. Lessee shall have no power or authority to create any lien
or to permit any lien to attach to the Premises. In the event that a lien should
be filed against the Premises by any contractor, sub-contractor, mechanic,
laborer, or materialman retained by Lessee, then Lessee shall, within thirty
(30) days after notice of filing thereof take reasonable steps to cause the same
to be discharged of record. In addition, Lessee shall, within ten (10) business
days after request therefore by Lessor, furnish Lessor with a bond or other
indemnity satisfactory to Lessor, in order to secure removal of any such lien.
Lessee shall not affix or cause to be affixed to the Premises, including the
windows thereof, any sign, advertisement or notice without the prior written
consent of Lessor. In the absence of a written agreement to the contrary, all
alterations, repairs or improvements, except moveable trade fixtures, office
equipment and equipment of Lessee, shall be and remain the property of Lessor.
Section 6.4. Alterations to Premises. Lessor reserves the right to make
reasonable, necessary additions, deletions and modifications to the Premises
from time to time, without the consent or approval of Lessee, and no such action
shall affect this Lease in any way so long as Lessor complies with the terms and
provisions hereof.
Section 6.5. Removal of Equipment. The Lessee may, at its expense, when
surrendering the Premises, remove from the Premises any equipment considered to
be "Trade Fixtures", as that term is defined under Indiana law, (excluding
plumbing, electrical or other fixtures) attached thereto and installed by
Lessee; provided, however, that all damage and injury done to the Premises by
Lessee in this removal shall be paid for by Lessee to the Lessor. Lessee shall,
at the termination of this Lease, surrender the Premises to Lessor in as good
repair and condition as existed on the commencement of the Lease Term,
reasonable wear and tear excepted.
Section 6.6. Lessor's Access. Lessor shall have the right at any reasonable
time, and upon reasonable notice to Lessee, to enter upon the Premises to make
repairs and any alterations or other improvements as permitted or required under
this Lease. Lessee shall permit Lessor or its agent to enter upon the Premises
at all reasonable times, upon reasonable notice, for the purpose of inspecting
the same, performing any other services necessary for the purpose of maintaining
the Premises, all as contemplated herein, and for showing the Premises to
prospective tenants or purchasers thereof.
<PAGE> 6
ARTICLE VII Lessor's
Nonliability and Indemnification of Lessor
Section 7.1. Nonliability for Certain Damages. Lessor and Lessor's agents and
employees shall not be liable to Lessee for any injury to person or damage to
property caused by the Premises becoming out of repair or by defect or failure
of any structural element of the Premises or of any equipment, pipes or wiring,
or broken glass, or by the backing up of drains, or by gas, water, steam,
electricity, or oil leaking, escaping, or flowing into the Premises or adjacent
real estate, except where due to Lessor's negligence or its failure to make
repairs required to be made hereunder, only after the expiration of a reasonable
time after written notice to Lessor of the need for such repairs; nor shall
Lessor be liable to Lessee for any loss or damage that may be occasioned by or
through the acts or omissions of other persons whomsoever, excepting only duly
authorized employees and agents of Lessor.
Section 7.2. Indemnification to Lessor. To the extent lawfully allowable, Lessee
covenants to indemnify and save Lessor and/or its agents harmless from and
against any and all liability, causes of action, suits, costs, claims, or
judgments, including reasonable attorney fees, arising from injury during the
term of this Lease to persons or property within or without the Premises
occasioned wholly or in part by any act or acts, omission or omissions of
Lessee, its agents, servants, contractors, employees, visitors or licensees, but
not the negligent or willful acts or misconduct of Lessor, its agents, servants,
contractors, employees, visitors or licensees.
Section 7.3. Liability and Insurance. Lessor shall maintain fire and casualty
insurance for the full replacement value of the Premises during the Lease Term.
Lessee shall not do anything in or about the Premises which will in any way
impair or invalidate the obligation of any policy of insurance on or in
reference to the Premises. In order to ensure Lessee's abilities to perform the
covenants of Section 7.1 and 7.2 hereof during the term of this Lease, Lessee
shall keep in full force and effect, at its expense, policy or policies of
comprehensive public liability insurance with respect to the Premises and the
business of Lessee, in which Lessee shall be adequately covered under reasonable
limits of liability. Lessee shall furnish Lessor with certificates or other
acceptable evidence that such insurance is in effect, which said policies shall
cover specifically any and all contractual liability undertaking by Lessee under
the terms of this Lease. Said policies shall name Lessor and Lessee as named
insureds. Lessee shall be responsible for insuring the contents and personal
property of Lessee within or on the Premises.
Section 7.4. Waiver of Claims and Waiver of Subrogation. Each party hereby
releases the other from any liability or responsibility to such party (or anyone
claiming through or under such party by way of subrogation or otherwise) for any
loss or damage to property caused by fire or other perils normally covered by
standard fire insurance (with extended coverage endorsements), whether or not
such property is actually insured against any such loss or damage, and even if
such loss or damage shall have been caused by the fault or negligence of the
other party or its agents or employees. Fire and casualty insurance obtained by
Lessor and any insurance obtained by Lessee
<PAGE> 7
for its personal property shall contain an appropriate waiver of subrogation
clause for the benefit of Lessor and Lessee.
ARTICLE VIII
Assignment and Subletting
Section 8.1. Lessee agrees not to sell, mortgage, assign, or sublet this Lease,
or the Premises, or any part thereof, without the prior written consent of the
Lessor. Any transfer or assignment of this Lease by operation of law by the
Lessee without the prior written consent of Lessor, shall make this Lease
voidable at the option of Lessor; provided, however, (i) that Lessee may assign
this Lease to any direct or indirect subsidiary thereof and (ii) that no prior
consent shall be required from Lessor in the event of any merger of Lessee with
or into, or any sale of all or substantially all of the assets of Lessee to, any
entity which is a direct or indirect subsidiary or affiliate of Lessee or which
is a company whose securities are listed on a recognized stock exchange or
included within a recognized quotation system. Lessor may assign this Lease and
its rights hereunder without the consent of Lessee, and such assignment shall
not affect the rights of Lessee hereunder.
ARTICLE IX
Lessor's Covenants and Environmental Matters
Section 9.1. Lessor's Covenants. Lessor covenants and agrees as follows:
(a) That there are no judgments, liens or encumbrances against Lessor, or any
third party, which adversely affect Lessee's rights under this Lease, or
Lessee's ability to occupy the Premises for its intended use during the term
hereof .
(b) As long as Lessee is not in default under this Lease, Lessee shall be able
to peaceably possess the Premises subject to the terms and conditions of this
Lease.
Section 9.2. Lessee's Environmental Representations. Lessee covenants and agrees
as follows:
(a) Lessee will not cause or permit the storage, use, generation, or disposition
of any Hazardous Substance, Pollutant or Contaminant (as these terms are defined
hereafter) in, on or about the Premises in violation of any federal, state or
local statute, ordinance or regulation. Lessee will not permit the Premises to
be used or operated in a manner that may cause the Premises to be contaminated
by any Hazardous Substance, Pollutant or Contaminant in violation of any
hazardous materials law. Lessee will immediately advise Lessor in writing of (1)
any and all governmental or regulatory actions instituted, completed or
threatened pursuant to any hazardous materials laws relating to any Hazardous
Substance, Pollutant or Contaminant affecting the Premises, and (2) all claims
made or threatened by any third party against Lessee, Lessor, or the Premises
relating to damage, contribution, cost recovery, compensation, loss, or injury
resulting from any hazardous materials on or about the Premises. Without
Lessor's prior written consent, Lessee will not take any remedial action or
enter into any agreements or
<PAGE> 8
settlements in response to the presence of any Hazardous Substance, Pollutant or
Contaminant in, on, or about the Premises.
(b) "Hazardous Substance" shall mean and include any material that contains any
one or more of the following:
(i) A hazardous substance as defined in the Comprehensive Environmental
Response, Compensation and Liability Act ("CERCLA"), 42 U.S.C. ss.9601(l) as
amended, or 40 C.F.R. Part 302 as amended;
(ii) Any substance containing petroleum as that term is defined in Section 9001
of the Resource Conservation and Recovery Act, 42 U.S.C. ss.6991 or 40
C.F.R.ss.280. 1; and
(iii) Each other substance and material defined or designated as a hazardous or
toxic substance, material or waste by any federal, state or local statute,
ordinance, rule or regulation.
(c) "Pollutant or Contaminant" shall have the meaning provided in Section
1004(a)(2) of CERCLA, 42 U.S.C.ss.9604(a)(2).
(d) Lessee will be solely responsible for, and will defend, indemnify and hold
Lessor, its agents and employees, harmless from and against all claims, and
liabilities, including attorneys' fees and costs, arising out of or in
connection with Lessee's breach of its obligations in sub-paragraph (a) above.
Lessee will be solely responsible for and will defend, indemnify, and hold
Lessor, its agents, and employees harmless from and against any and all claims,
costs, and liabilities, including attorneys' fees and costs, arising out of or
in connection with the removal, cleanup, and restoration work and materials
necessary to return the Premises and any other property of whatever nature
located on the Premises to their condition existing prior to the appearance of
Hazardous Substance, Pollutant or Contaminant on the Premises, as referenced in
this Lease. Lessee's obligations under this paragraph will survive the
expiration or other termination of this Lease.
ARTICLE X
Damage by Fire or Other Casualty
Section 10.1. Lessee agrees that if, during the continuance of this Lease, the
Premises shall be so injured by fire or other casualty as to render the same
untenantable, then Lessor and Lessee shall have an option to cancel this Lease
by notice in writing to the other party, and in case of such cancellation, rent
which has been paid by Lessee in advance shall be prorated to the date of such
fire or casualty, and any portion attributable to any period following such fire
or casualty shall be returned to Lessee. If Lessor repairs such injury, the
rent, or proportionate part thereof, according to the nature and extent of
injury, shall be abated until the Premises have been repaired by Lessor.
<PAGE> 9
ARTICLE XI
Default
Section 11. 1. Default by Lessee. A default by Lessee will have occurred under
this Lease if any one or more of the following has occurred:
(a) Lessee fails to pay the full amount of any installment of rent when due and
such failure continues for a period of ten (10) days; or
(b) Lessee fails to observe or perform any other provision of this Lease for
twenty (20) days after Lessor has given Lessee written notice of the nature of
Lessee's failure; except if such performance cannot be completed within twenty
(20) days and provided Lessee commences to cure such default within that time;
or
(c) Lessee files a petition in bankruptcy, seeks the appointment of a receiver
under state law or Lessee consents to or acquiesces in such a petition or
appointment of a receiver or liquidator, or Lessee makes an assignment for the
benefit of creditors; or
(d) Lessee admits its inability to pay debts as they become due, or Lessee fails
to obtain a dismissal of any petition under the bankruptcy law or for a receiver
or liquidator under state law within thirty (30) days after the commencement of
that proceeding; or
Section 11.2. Remedies of Lessor for Default by Lessee. Upon Lessee's default,
in addition to all other rights or remedies available under law or equity,
Lessor may at Lessor's option, and pursuant to applicable law, re-enter and
retake possession of the Premises, and move Lessee's property in storage at a
public warehouse at the expense and risk of loss to Lessee; may make repairs,
changes, alterations or additions in or to the Premises which may be necessary
and convenient; may re-let the Premises, or any part thereof, on such terms,
conditions, and rentals as Lessor may deem proper; and Lessor may, at Lessor's
option, either terminate and cancel this Lease or Lessor may apply the proceeds
that may be collected from said re-letting, less the expenses of so doing, on
rent to be paid by Lessee, and hold Lessee liable for any balance that may be
due under this Lease.
Section 11.3. Lessor's Default. Should Lessor fail to perform or observe any
covenant or condition contained in this Lease, or should otherwise be in breach
of any provision of this Lease, Lessee may terminate this Lease, or may, in
addition to any other right or remedy of the Lessee at law or otherwise, perform
the same for the account of Lessor and the amount of any sums paid by Lessee for
such purpose shall be immediately paid by Lessor to Lessee. If Lessor shall fail
to immediately pay same, Lessee may deduct the amount of such sum paid in curing
Lessor's default from the rent due on the next or any succeeding rent payment
date.
Section 11.4. Attorney's Fees. Notwithstanding any other provision of this
Lease, should either party at any time terminate this Lease for material breach
or material default, the non-defaulting party may recover from the defaulting
party all damages such non-defaulting party may incur by
<PAGE> 10
reason of such breach, including reasonable attorney fees, all of which amounts
shall be immediately due and payable from the defaulting party to the
non-defaulting party.
ARTICLE XII
Lessee's Failure to Perform
Section 12.1. If Lessee shall at any time fail to make any payment, or to
perform any other act on its part to be made or performed as in this Lease
provided within twenty (20) days following written notice, then Lessor may, but
shall not be obligated to do so, and without waiving or releasing Lessee from
any such obligations, effect any such insurance coverage, pay the premiums
therefor, and make any other payment or perform any other act on the part of
Lessee to be made, done or performed as in this Lease provided, and, in
exercising such rights, or any of them, pay necessary and incidental costs and
expenses, including reasonable attorneys fees, penalties and interest. Amounts
so paid by Lessor shall be payable by Lessee to Lessor on demand or, at the
option of Lessor, may be added to any rent then due or to become due, and the
same may be collected by Lessor with all of the rights and remedies provided in
the case of default on account of nonpayment of rent.
ARTICLE XIII Mortgages of Lessor
Section 13.1. Lessor's Right to Mortgage. Lessor shall have the right to
mortgage, pledge or otherwise encumber the Premises and assign this Lease as
additional security for any such mortgage, pledge or encumbrance. This Lease
shall be subject and subordinate to the lien of any present or future mortgage,
pledge or encumbrance which Lessor may place upon the Premises and to all terms,
conditions and provisions thereof, to all advances made and to any renewals,
extensions, or modifications thereof. If this Lease is in full force and effect
and there are no defaults hereunder on the part of Lessee, Lessee's right to
possession of the Premises and Lessee's rights arising out of this Lease shall
not be affected or disturbed by the mortgagee or other secured party in the
exercise of any of its rights under the mortgage, pledge or encumbrance or any
note or other evidence of indebtedness secured thereby.
ARTICLE XIV Miscellaneous Provisions
Section 14.1. Waiver. Any waiver by Lessor of the breach of any term, covenant
and condition herein contained shall not be deemed to be a general waiver of
such term, condition, or covenant, or any subsequent breach of the same, or any
other term, covenant or condition herein contained. A subsequent acceptance of
rent by Lessor shall not be deemed to be a waiver of any preceding breach of
Lease by Lessee of any term, condition or covenant of this Lease, other than the
failure of Lessee to pay the particular rental so accepted, regardless of
Lessor's knowledge of such preceding breach at the time of acceptance of such
rent.
Section 14.2. Force Majeure. Lessor or Lessee, as the case may be, shall not be
responsible or liable for loss or damage by reasons of acts of God, fire, flood
and other natural causes, war, embargoes, labor disputes, acts of sabotage,
riots, accidents, voluntary or mandatory compliance with any governmental act,
regulation or request, shortage of labor or materials, vandalism, lockouts,
shortage of fuel, power or water or any other cause or causes beyond the control
of the
<PAGE> 11
appropriate party. In the event of any of the aforesaid conditions, the time for
performance of obligations hereunder shall be extended proportionately for a
reasonable period of time.
Section 14.3. Lessor agrees Lessee may terminate this Lease, without penalty or
liability, provided that Lessee agrees to rent from Lessor equal or comparable
space with terms commensurate with this Lease.
Section 14.4. Governing Law. This Lease has been executed under and shall be
governed by the laws of the State of Indiana.
Section 14.5. Successors in Interest - The terms and conditions of this Lease
shall be binding upon and inure to the benefit of Lessor and Lessee and their
successors and assigns.
Section 14.6. Notices. All notices and demands which may, or are required, to be
given by either party to the other hereunder shall be in writing and shall be
sent by United States certified or registered mail, postage prepaid, addressed:
IF TO LESSEE:
Tower Bank Financial Corporation c/o Kevin Patrick, Vice President 116 E. Berry
Street Fort Wayne, Indiana 46802
With a copy to:
Michael P. O'Hara
Barrett & McNagny 215 E. Berry Street P. 0. Box 2263
Fort Wayne, Indiana 46801
IF TO LESSOR:
Opal Development, Inc.
c/o Dennis Opal, President
2859 Northpark Avenue, Suite 213 Huntington, Indiana 46750
or to such other firm or to such other place as Lessor may from time to time
designate in writing.
Section 14.7. Consent. Any consent or approval required of Lessor herein shall
not be unreasonably withheld.
IN WITNESS WHEREOF, the parties hereto have executed this Lease this 16th day of
February, 1999.
"LESSOR" - OPAL DEVELOPMENT, INC. By: /S/ Dennis Opal Its: President
"LESSEE" - TOWER FINANCIAL CORPORATION By: /S/ Curtis A. Brown Its: Chief
Operating Officer
<PAGE> 12
EXHIBIT A
Legal Description
Legal Description of 2855 Northpark Ave., Suite 105, Unit A5:
North Park Professional Village Lot "A", 1.16 acres, Pt Tracts 3 - 17 & 18 Res.
10 Sec. T28N, R9E
Parcel ID Number: #0140770900
<PAGE> 1
EXHIBIT 10.8
COMMERCIAL LEASE
This lease is made between Reiff Enterprises of 1901 West Business 30, Columbia
City, IN 46725, herein called Lessor, and Tower Bank & Trust Company of 116 East
Berry Street, Fort Wayne, IN 46802, herein called Lessee.
Lessee hereby offers to lease from Lessor the premises situated in the city of
Columbia City, County of Whitley, State of Indiana, described as Northwest
Center, Unit B, see attachments A, B, and C, upon the following TERMS and
CONDITIONS:
1. Term and Rent. Lessor demises the above premises for a term of two years
commencing on or about November 1 1999, and terminating on or about
November 1, 2001, or sooner as provided herein at the annual rental of
$8,352.00 (Eight thousand, three hundred fifty-two dollars) payable in
equal installments of $696.00 (Six hundred ninety-six dollars) in advance
on the first day of each month for that month's rental, during the term of
this lease. All rental payments shall be made to Lessor, at the address
specified above.
2. Use. Lessee shall use and occupy the premises for office space. The
premises shall be used for no other purpose. Lessor represents that the
premises may lawfully be used for such purpose.
3. Building Specifications and Design. As built.
4. Care and Maintenance of Premises. Lessor is to provide to the Lessee an
office space in the Northwest Center, Unit B, see attachments A, B, and C.
The entire building will maintain a smoke free environment.
Lessor would provide and pay for the following:
-Building insurance.
-Maintenance of the building.
-Maintenance of the HVAC and plumbing system.
Lessee would provide and pay for the following:
-Damage to the doors and glass of the unit caused by break-ins.
-Damage to the building or property caused by the employees or
customers of Lessee.
-The cost of a janitorial service for unit.
-A janitorial service will be selected by the Lessor to
maintain the commons area and sidewalks. The cost of this
service would be shared by the Lessees' of the building based
on the percentage of floor space rented by the Lessee. The
billing of this service would be billed to the Lessor and the
Lessor would bill each Lessee for their share on a monthly
basis.
-The utilities for the commons area will be shared on the same
basis as the janitorial work. This would consist of gas,
electric, and water bills.
-A pad is provided for a Dumpster and the bill will be shared
on the same basis as the janitorial bill.
-The Lessee is to assist in keeping the building clean.
-Lessees occupying the building at that particular time will
share snow removal cost.
-The Lessee is to assist in keeping the landscape and green
areas clean of debris.
Use of the commons area:
-The units will share men and women's handicap accessible
restrooms.
-Locksets will be installed to keep all units inaccessible
except for the employees of that individual unit.
-Restroom supplies and restroom cleaning will be by a
janitorial service.
5. Alterations. Lessee shall not, without first obtaining the written consent
of Lessor make any alterations, additions, or improvements, in, to, or
about the premises.
6. Ordinances and Statutes. Lessee shall comply with all statutes, ordinances,
and requirements of all municipal, state and federal authorities now in
force, or which may hereafter be in force, pertaining to the premises,
occasioned by or affecting the use thereof by the Lessee.
7. Assignments and Subletting. Lessee shall not assign this lease or sublet
any portion of the premises without prior written consent of the Lessor,
which shall not be unreasonably withheld. Any such assignment or subletting
without consent shall be void and, at the option of the Lessor, may
terminate this lease.
7. Utilities. A separate electric meter is in place for each unit. The
electric meter cost will be paid by the Lessee. The Lessee would be
responsible for the cost of gas and electric bills for Unit B as well as
the share of the gas, water, and electric bills for the commons area.
<PAGE> 2
9. Entry and Inspection. Lessee shall permit Lessor or Lessor's agents to
enter upon the premises at reasonable times and upon Reasonable notice, for
the purpose of inspecting the same, and will permit Lessor at any time
within (60) days prior to the expiration of this lease, to place upon the
premises any usual "To Let" or "For Lease" signs, and permit persons
desiring to lease the same to inspect the premises thereafter.
10. Possession. If Lessor is unable to deliver possession of the premises at
the commencement hereof, Lessor shall not be liable for any damage caused
thereby, nor shall this lease be void or voidable, but Lessee shall not be
liable for any rent until possession is delivered.
11. Indemnification of Lessor. Lessor shall not be liable for any damage or
injury to Lessee, or any other person, or to any property, occurring on the
demised premises or any part thereof, and Lessee agrees to hold Lessor
harmless from any claims for damages, no matter how caused.
12. Insurance. Lessee, at his expense, shall maintain plate glass and public
liability insurance including bodily injury and property damage insuring
Lessee and Lessor with minimum coverage as follows:
Dual limits each occurrence $300,000.00 (three hundred thousand
dollars) and aggregate $600,000.00 (six hundred thousand dollars).
Lessee shall provide Lessor with a Certificate of Insurance showing
Lessor as additional insured. The Certificate shall provide for a
ten-day written notice to Lessor in the event of cancellation or
material change of coverage. To the maximum extent permitted by
insurance policies, which may be owned by Lessor or Lessee, Lessee
and Lessor, for the benefit of each other, waive any and all rights
of subrogation, which might otherwise exist. Lessor does not provide
Content Insurance for Lessee equipment, supplies, or customers
property.
13. Eminent Domain. If the premises or any part thereof or any estate therein,
or any other part of the building materially affecting Lessee's use of the
premises, shall be taken by eminent domain, this lease shall terminate on
the date when title vests pursuant to such taking. The rent, and any
additional rent, shall be apportioned as of the termination date, and any
rent paid for any period beyond that date shall be repaid to Lessee. Lessee
shall not be entitled to any part of the award for such taking or any
payment in lieu thereof, but Lessee may file a claim for any taking of
fixtures and improvements owned by Lessee, and for moving expenses.
14. Destruction of Premises. In the event of partial destruction of the
premises during the term hereof, from any cause, Lessor shall forthwith
repair the same, provided that such repairs can be made within sixty (60)
days under existing governmental laws and regulations, but such partial
destruction shall not terminate this lease, except that Lessee shall be
entitled to a proportionate reduction of rent while such repairs are being
made, based upon the extent to which the making of such repairs shall
interfere with the business of Lessee on the premises. If such repairs
cannot be made within said sixty (60) days, Lessor, at his option, may make
the same within a reasonable time, this lease continuing in effect with the
rent proportionately abated as aforesaid, and in the event that Lessor
shall not elect to make such repairs which cannot be made within sixty (60)
days, this lease may be terminated at the option of either party. In the
event that the building in which the demised premises may be situated is
destroyed to an extent of not less than one-third of the replacement costs
thereof, Lessor may elect to terminate this lease whether the demised
premises be injured or not. A total destruction of the building in which
the premises may be situated shall terminate this lease.
15. Lessor's Remedies on Default. If Lessee defaults in the payment of rent, or
any additional rent, or defaults in the performance of any of the other
covenants or conditions hereof, Lessor may give Lessee notice of such
default and if Lessee does not cure any such default with 10 days, after
the giving of such notice (or if such other default is of such nature that
it cannot be completely cured within such period, if Lessee does not
commence such default), then Lessor may terminate this lease on not less
than 30 days notice to Lessee. On the date specified in such notice the
term of this lease shall terminate, and Lessee shall then quit and
surrender the premises to Lessor, but Lessee shall remain liable as
hereinafter provided. If this lease shall have been so terminated by
Lessor, Lessor may at any time thereafter resume possession of the premises
by any lawful means and remove Lessee or other occupants and their effects.
No failure to enforce any term shall be deemed a waiver.
16. Security Deposit. Lessee shall deposit with Lessor on the first day of
occupancy the sum of $0.00 (Zero dollars) as security for the performance
of Lessee's obligations under this lease, including without limitation the
surrender of possession of the premises to Lessor as herein provided. If
Lessor applies any part of the deposit to cure any default of Lessee,
Lessee shall on demand deposit with Lessor the amount so applied so that
Lessor shall have the full deposit on hand at all times during the term of
this lease.
17. Attorney's Fees. In case suit should be brought for recovery of the
premises, or for any sum due hereunder, or because of any act which may
arise out of the possession of the premises, by either party, the
prevailing party shall be entitled to all costs incurred in connection with
such action, including a reasonable attorney's fee.
<PAGE> 3
18. Waiver. No failure of Lessor to enforce any term hereof shall be deemed to
be a waiver.
19. Notices. Any notice, which either party may or is required to give, shall
be given by mailing the same, postage prepaid, to Lessee at the premises,
or Lessor at the address specified above, or at such other places as may be
designated by the parties from time to time.
20. Heirs, Assigns, Successors. This lease is binding upon and inures to the
benefit of the heirs, assigns and successors in interest to the parties.
21. Option to Renew. Provided that Lessee is not in default in the performance
of this lease, Lessee shall have the option to renew the lease for an
additional term of 36 months commencing at the expiration of the initial
lease term. All of the terms and conditions of the lease shall apply during
the renewal term except that the monthly rent shall be negotiated 60 days
before this lease expires. The option shall be exercised by written notice
given to Lessor not less than 60 days prior to the expiration of the
initial lease term. If notice is not given in the manner provided herein
within the time specified, this option shall expire.
22. Subordination. This lease is and shall be subordinated to all existing and
future liens and encumbrances against the property.
23. Entire Agreement. The foregoing constitutes the entire agreement between
the parties and may be modified only by a writing signed by both parties.
The following Exhibits, if any have been made a part of this lease before
the parties' execution hereof.
Signed this 1st day of November, 1999
By Lessee: /S/ Curtis A. Brown (Chief Operating Officer) d/b/a/ Tower Bank &
Trust Company
By Lessor: /S/ Jerry Reiff (Owner) Reiff Enterprises
<PAGE> 1
EXHIBIT 10.9
SHOPPING CENTER LEASE
This Lease is entered into by and between CHESTNUT-DUPONT PARTNERS, an
Indiana general partnership, hereinafter called "Landlord", and TOWER BANK,
hereinafter called "Tenant."
1) DESCRIPTION OF THE PREMISES. The Leased Premises are located in
Northbrook Village in an area depicted on the plot plan attached and marked
Exhibit "A." The Leased Premises contain approximately 2,600 square feet of
office space and three drive-up lanes and carry the address of 1545 West
Dupont Road.
2) TERM. The term of this lease shall be sixty (60) months, shall commence
on the 1st day of June 2000 and shall terminate on the 3lst day of May
2005.
3) RENT. The per square foot rental rate for the leased premises at the
inception of the lease is $10.34 per square foot. Tenant shall pay as total
rent the following:
06/01/00 - 05/31/01 $2,241.00 per month
06/01/01 - 05/31/02 $2,286.00 per month
06/01/02 - 05/31/03 $2,332.00 per month
06/0l/03 - 05/31/04 $2,378.00 per month
06/01/04 - 05/31/05 $2,426.00 per month
This lease shall commence and rental payments shall be made beginning with
the earlier of the date Tenant is open for business to the public or June
1, 2000.
Payments are due in advance on the first day of each month at 803 South
Calhoun Street, Suite 400, Fort Wayne, Indiana 46802, made payable to
Chestnut-Dupont Partners. Rental payments not received by Landlord by the
15th day of the month in which the payment is due shall be assessed a late
charge of 2% of the delinquent payment.
4) OPERATING EXPENSES - Landlord shall be responsible for payment of the
following operating expenses which shall not become a part of prorata
Common Area Maintenance:
Structural Maintenance
Roof Maintenance
Landlord shall be responsible for payment of the following operating
expenses which shall become a part of the prorata Common Area Maintenance:
Real Estate Taxes
Exterior Maintenance
Parking Lot Maintenance
Snow Removal
Insurance
Grounds Maintenance
Northbrook Village Assn Dues
Trash Service
<PAGE> 2
Tenant shall be responsible for direct payment of the following operating
expenses:
Electricity
Water
Interior Maintenance
Cleaning Service
Natural Gas
Telephone Service
HVAC Maintenance
5) COMMON AREA MAINTENANCE. Landlord agrees to maintain parking areas,
sidewalks, and driveways; to keep the common areas reasonably clear of snow
and debris; and to provide for proper supervision of such areas as
necessary and adequately illuminate the parking and sidewalk areas during
business hours at night.
Tenant agrees to pay upon demand, in addition to the rent set forth herein,
a prorata share of the cost of operation of the common areas of the 32,000
square foot building known as Northbrook Village. Tenant is responsible for
8.13% of the Common Area Maintenance expense, which amount is estimated to
be $542.00 per month for the year 2000. Commencing January 2001 and
continuing each year thereafter, Landlord shall submit a recap of the prior
year of Common Area Maintenance expense as well as a budget for the
upcoming year. Should the prior year's estimates not be sufficient to cover
the actual expense, Tenant shall pay his prorata share of said shortfall.
If the estimates for the prior year were greater than the actual expenses,
said amount shall be carried forward for Common Area Expenses for the
upcoming year. Any amount payable by Tenant under this paragraph shall be
payable within 30 days after receipt.
6) CONSTRUCTION, ALTERATION AND ACCEPTANCE. Landlord will complete
construction at Landlord's expense, the store unit comprising the Leased
Premises according to plans and specifications as set forth in a contract
with Felderman Design/Build and dated January 26, 1999. The description of
the interior space of the Leased Premises is further described on Exhibit
"B" attached hereto and made a part hereof. Upon tenant completing the
tenant finish and taking occupancy, there shall be no material alterations
to the Leased Premises without the express written consent of Landlord.
7) POSSESSION AND USE. Tenant covenants that the premises shall be used
for financial services and shall not be used or permitted to be used
for any other purpose.
Tenant shall not use the common area of the shopping area or walks adjacent
to the Leased Premises for any display or storage of merchandise or use
such common area in any way that would interfere with the use of such areas
by the public or others without the express written consent of Landlord.
The premises shall not be used for any unlawful purpose or unlawful acts
committed thereon. Tenant shall not commit or permit waste or damage to the
premises. Tenant shall not use or permit the use of the leased property for
any purpose which, in the reasonable opinion of Landlord, would adversely
affect the then value or character of the leased property. Tenant will
comply with and obey all laws, regulations or orders of any governmental
authority, directions of the management, and building rules and
regulations.
Tenant shall not use any advertising media in or about the Leased Premises
that shall be deemed objectionable to the Landlord, other tenants or the
public, including, without limiting the generality thereof, loudspeakers,
phonographs, or radio broadcasts in a manner to be heard outside the Leased
Premises. Tenant shall not conduct any auction, fire, or bankruptcy sale in
the Leased Premises, install any exterior lighting or plumbing fixtures,
shades, awnings, or any exterior decorations or painting; or make any
changes in the storefront or exterior of the Leased Premises without the
previous written consent of Landlord.
<PAGE> 3
8) HOLDOVER - If Tenant shall occupy said premises, with or without the
consent of the Landlord, after the expiration of this Lease and option, if
exercised, and rent is accepted from Tenant, such occupancy and payment
shall be construed as an extension of this Lease for the term of one (1)
month only from the date of such expiration, and occupation thereafter
shall operate to extend this Lease but one (1) month at a time, unless
other terms of such extension are endorsed hereon in writing and signed by
the parties hereto. Monthly rental during any holdover period shall be one
hundred twenty-five percent (125%) of the monthly rent payable by Tenant
the month prior to the expiration of the Lease as well as Common Area
Maintenance expense referred to in Paragraph 5 above.
9) SURRENDER OF PREMISES - Tenant may, at any time, prior to or upon the
termination of this Lease or any renewal or extension thereof, remove from
the leased premises, all materials, equipment, and property of any sort or
nature installed by Tenant in the premises, provided that such property is
removed without substantial injury to the premises, and further provided
that no property shall be removed which was paid for by Landlord either
through actual installation, or from the granting of a Tenant finish
allowance. Any such property not removed by the expiration date of the
lease or renewals or extensions thereof, shall become the property of
Landlord. -
10) ASSIGNMENT OR SUBLETTING - This Lease shall not be assigned nor the
leased premises underlet, in whole or in part, nor shall said premises or
any part thereof be used by any parties other than the Tenant and its
employees, without the written consent of Landlord, which consent shall not
be unreasonably withheld, and if such consent be given, the Tenant shall
nevertheless remain primarily liable to perform all covenants and
conditions hereof and to guarantee such performance by its assignee or
sub-tenant.
11) RIGHTS RESERVED TO LANDLORD - Landlord reserves, and shall at all times
have the right to reenter the premises in any emergency and also to inspect
the same, and to alter, improve, remodel or repair the premises and any
portion of the real estate of which the premises are a part, without
abatement of rent and without incurring any liability to Tenant; therefore,
Tenant hereby waives, as against Landlord, any claim for damages for any
injury or inconvenience to or interference with Tenant's business, any loss
of occupancy or quiet enjoyment of the premises, and any other loss
occasioned thereby. Notwithstanding the foregoing, for security reasons,
Landlord shall not enter the premises without an employee or representative
of Tenant present.
12) DAMAGE BY FIRE OR OTHER CASUALTY - If, during the term of this Lease,
the real estate is so damaged by fire or other casualty that the real
estate or the premises are rendered unfit for occupancy, as determined by
Landlord and Tenant, and Landlord gives Tenant written notice to that
effect, then this Lease shall cease and terminate from the date of such
damage. In such case, Tenant shall pay the rent apportioned to the time of
damage and shall immediately surrender the premises to the Landlord upon
Landlord's request therefor. If, following damage to the premises for cause
other than by Tenant's acts or omissions to act, Landlord gives Tenant
written notice that it has determined that such damage can be repaired
within ninety (90) days from the date of damage, Landlord, if it so elects,
may enter and repair, and this Lease shall not be affected except that the
rent shall be apportioned and suspended while such repairs are being made
until the premises are again suitable for occupancy. If, however, such
damage is caused by Tenant's acts or failure to act, and Landlord elects,
in accordance with this paragraph, to repair, then Tenant's obligation to
pay rent shall not be suspended, nor shall such rent be apportioned but
Tenant shall be obligated to pay the full rent reserved in accordance with
the terms of this Lease during such period of repair.
13) SUBORDINATION - This Lease and Tenant's rights hereunder shall be
subject and subordinate at all times in lien and priority to any first
mortgage or other primary encumbrance now or hereafter placed upon or
affecting the Premises, and to any second mortgage or encumbrance with the
consent of the first mortgagee, and to all renewals, modifications,
consolidations and extensions thereof, without the necessity of any further
instrument or act on the part of Tenant. Tenant shall execute and deliver
upon demand any further instrument or instruments confirming the
subordination of this Lease to the lien of any such first mortgage or to
the lien of any other mortgage if requested to do so by Landlord with the
consent of the first mortgagee, and any further
<PAGE> 4
instrument or instruments of attornment that may be desired by any such
mortgagee or Landlord. Notwithstanding the foregoing, any mortgagee may at
any time subordinate its mortgage to this Lease, without Tenant's consent,
by giving notice in writing to Tenant, and thereupon this Lease shall be
deemed prior to such mortgage without regard to their respective dates of
execution and delivery, and in that event such mortgages shall have the
same rights with respect to this Lease as though this Lease had been
executed prior to the execution and delivery of the mortgage and had been
assigned to such mortgagee.
14) LIABILITY INSURANCE - Tenant agrees to protect and save Landlord
harmless from any claims for injuries to property or person resulting from
accident or other happenings on the premises, and Tenant shall provide,
maintain, and pay the cost of liability insurance insuring Landlord and
Tenant, as their respective interests may appear, against any and all
claims which may be established or made against Landlord for property
damage and for damages which may result from the death of or injury to any
person or persons who may be in the demised premises during the said term,
which said insurance shall be in the amount of One Hundred Thousand Dollars
($100,000.00) for property damage, and in the amount of at least Two
Hundred Fifty Thousand Dollars ($250,000.00) for the death of or injury to
one (1) person, and in the amount of at least Five Hundred Thousand Dollars
($500,000.00) for the death of or injury to two (2) or more persons.
15) CASUALTY INSURANCE - Landlord shall maintain, at all times during the
term of this Lease and any period of renewal, with respect to the leased
premises, insurance, including so-called "extended coverage" insurance,
insuring the building and the leased premises against loss or damage by
fire and the elements in an amount at all times equal to but not less than
eighty percent (80%) of the full insurable value of the building and
improvements and appurtenances thereto (other than for those improvements
to be installed by Tenant hereunder) with responsible insurance companies
authorized to transact such business in the State of Indiana. Tenant, under
no circumstances, shall be liable or responsible for the making of repairs
or replacements to such building or the leased premises as a result of
damage caused by any of the hazards covered by such policy provisions
during the term hereof or any renewal of such term. Provided, however,
notwithstanding the above and foregoing, in no event shall Landlord be
required to carry fire and extended coverage insurance upon those
improvements in the leased premises installed and made by Tenant nor shall
Landlord be required to carry such fire and extended coverage insurance
upon any of the personal property or contents of the Tenant at the leased
premises.
Each of the Landlord and Tenant hereby releases the other to the extent of
its insurance coverage, from any and all liability for any loss or damage
caused by fire or any of the extended coverage casualties, even if such
fire or other casualty shall be brought about by the fault or negligence of
the other party, or any persons claiming under it, provided, however, that
the reciprocal waivers herein contained shall not apply to any damage
resulting from the intentional act of the released party.
16) DEFAULTS AND REMEDIES - If Tenant shall allow the rental to be in
arrears more than ten (10) days after written notice from Landlord, or
shall remain in default under any other condition of this lease for a
period of twenty (20) days after written notice from Landlord, or should
any person other than Tenant secure possession of the Leased Premises or
any part thereof, by reason of any receivership, bankruptcy proceedings, or
other operation of law in any manner whatsoever, Landlord may, at its
option, without notice to Tenant, terminate this lease, or in the
alternative, Landlord may reenter and take possession of the Leased
Premises and remove all persons and property therefrom, without being
deemed guilty of any manner of trespass, and relet the Leased Premises or
any part thereof, for all or any part of the remainder of said lease term,
to a party satisfactory to Landlord, and at such rental as Landlord may
with reasonable diligence be able to secure. Should Landlord be unable to
relet after reasonable efforts to do so, or should such rental be less than
the rental Tenant was obligated to pay under this lease, or any renewal
thereof, plus the expense of reletting, the total amount of such deficiency
shall become immediately due and owing, and Tenant shall pay the total
amount of said deficiency to Landlord.
The termination of this lease by reason of a default by the Tenant shall
not affect the obligation to pay rental and all other obligations under
this lease. Such obligations shall continue until the Leased Premises have
been relet to another tenant on terms as favorable to the Landlord as this
lease. If by due diligence the Landlord is
<PAGE> 5
unable to relet the Leased Premises on terms as favorable to the Landlord
as this lease, then the Tenant shall be liable for any deficiency or other
damages. This paragraph shall be binding whether the termination is
affected by judicial process or otherwise.
All rights and remedies of Landlord and Tenant under this lease shall be
cumulative, and none shall exclude any other right or remedy at law. Such
rights and remedies may be exercised and enforced concurrently and whenever
and as often as occasion therefore arises. In addition to expenses arising
under this paragraph, Tenant shall be responsible for the payment of
reasonable attorneys fees in enforcing these provisions.
17) NOTICES - All notices and demands which may or are required to be given
by either party to the other hereunder shall be in writing and shall be
sent by United States certified or registered mail, addressed to Landlord
at 803 South Calhoun Street, Suite 400, Fort Wayne, Indiana 46802; and
addressed to Tenant at the address shown for the leased premises or such
other address as Tenant may provide to Landlord.
18) SIGNAGE. Tenant shall be permitted signage and logo affixed to the
building provided that it conforms to the Northbrook Village Tenant
Exterior Sign Criteria attached as Exhibit "C" and is approved in writing
by Landlord. Tenant shall not affix to or upon the exterior of the Leased
Premises any other signs, banners, or awnings except with the prior written
consent of Landlord.
19) OPTION TO RENEW. Provided Tenant is not in default hereunder and that
this Lease is in full force and effect at the time, Tenant shall have two
consecutive five-year options to renew the term hereof. Each option shall
automatically renew unless notice is given in writing by Tenant to Landlord
at least six (6) months prior to the last day of the initial term or first
renewal term as the case may be that they elect not to renew. Upon such
renewal, the terms and conditions hereof shall remain in full force and
effect, except the monthly rental at the beginning of the first renewal
term shall be $2,618 and shall continue to escalate at the rate of 8% on
each anniversary date of the lease during the first renewal term and 2% on
each anniversary date of the lease during the second renewal term.
20) REGULATORY APPROVAL - The effectiveness of this lease is contingent
upon Tenant receiving regulatory approval from both State and Federal
regulatory agencies. Provided approval is received prior to the
commencement of this Lease, this contingency shall be waived and be of no
further force and effect.
21) RIGHT OF FIRST REFUSAL - Tenant shall be granted the right of first
refusal to lease the fourth drive-up lane which currently serves the
adjacent building. Prior to Landlord signing any lease or granting any
renewal options, Tenant shall be notified and have 30-days within which to
notify Landlord of their desire to lease or not to lease the fourth
additional day.
IN WITNESS WHEREOF, the parties have executed this document on the date(s)
indicated below.
CHESTNUT-DUPONT PARTNERS, an Indiana general partnership
BY: /S/ Donald B. Steininger, General Partner Date: December 9, 1999
"Landlord"
TOWER BANK & TRUST COMPANY
BY: /S/ Kevin J. Himmelhaver, Chief Financial Officer Date: December 6,
1999 "Tenant"
<PAGE> 6
Exhibit "A"
Proposed Footprint Building II (diagram)
2,600 Square Feet Tower Bank
Felderman Construction, Northbrook Village
<PAGE> 7
Exhibit "B"
Northbrook Village Scope of Description between Base Building and
Tenant Finish12/31/98
<TABLE>
<CAPTION>
Item Base Building Tenant Finish
<S> <C> <C>
PERIMETER WALLS
Stud Framing Yes No
Drywall - Taped & Finished Yes No
Windows Yes No
Elec. Outlets @ 12' o.c. - Conduit
& Box to above ceiling Yes No
Wall Covering/Paint No Yes
Single Entry Doors Yes No
Window Sills No Yes
Wall Base/Vinyl Base No Yes
RESTROOMS - ONE UNISEX - INSIDE OF RESTROOM ONLY
Stud Framing Yes No
Drywall - Taped & Finished Yes No
Wall Covering/Paint Yes No
Acoustical Ceiling Yes No
Wall Base/Vinyl Base Yes No
Floor Covering/VCT Yes No
Base Cabinet & Countertop Yes No
Plumbing
Fixtures Yes No
Vanity Yes No
HVAC
Equipment & Capacity Yes No
Distribution Ductwork No Yes
Exhaust Fan Yes No
Electrical - Lights & Power Yes No
DEMISING WALLS
Stud Framing Yes No
Drywall - Taped Finished Yes No
Wall Covering/Paint No Yes
Elec. Outlets @ 12' o.c. - Conduit &
Box to above ceiling Yes No
Wall Base/Vinyl Base No Yes
TYPICAL RETAIL AREA
Floor Covering No Yes
Acoustical Ceiling No Yes
HVAC
Equipment - Roof top unit &
Controls Yes No
Distribution Ductwork No Yes
Electric Water Heater Yes No
Electrical
Switch gear & Meter Yes No
100 to 600 amp - PDP Yes No
Power distribution No Yes
Temporary lighting Yes No
Light Fixtures No Yes
Concrete slab Yes No
EXTERIOR FEATURES
Wall Packs at rear of building Yes No
Soffit lighting under front canopy Yes No
</TABLE>
<PAGE> 8
Exhibit "C"
NORTHBROOK VILLAGE
TENANT EXTERIOR SIGN CRITERIA
A. General Notes
These criteria have been established for the purpose of assuring an
outstanding shopping center and for the mutual benefit of all tenants.
Conformance will be strictly enforced. Any installed non-conforming or
unapproved signs must be brought into conformance at the expense of the
tenant. The Landlord is to administer and interpret the criteria.
1. All signs and graphics are subject to approval of the Landlord and the
Allen County Department of Planning Services.
2. Each tenant shall submit or cause to be submitted to the Landlord for
approval before fabrication at least three copies of detailed drawings
indicating the location, size, layout, design and color of the proposed
signs, including all lettering and graphics.
3. All signs shall be constructed and installed at tenant's expense.
4. Tenant shall be fully responsible for the operations of tenant's sign
contractors.
5. All signs and their installation shall comply with all local building
and electric codes.
6. Electric service to all signs shall be on tenant's meter and shall not
be a part of common area operating costs.
7. Tenant shall be responsible for the fulfillment of all requirements of
these criteria.
B. Design and Construction Requirements
The following specifications shall govern the construction and installation
of tenant signage.
1. All signs are to be in the form of individual illuminated channel
letters mounted on a raceway.
2. Uppercase letters shall not exceed 30" in height and lowercase letters
shall not exceed 18" in height.
3. No sign shall have more than two lines of copy.
4. No part of any sign shall be located outside the 48" band which is in
the center of the 60" fascia of the building.
5. Individual tenant logo only may be installed on the face of the tower
within the fascia band.
6. Letter spread: Not to exceed length of 75% of storefront and shall be a
minimum of 2'0" from lease line. For example, a storefront measuring
40' can have a sign length not to exceed 30'; a storefront measuring
15' can have a sign length not to exceed 11'.
7. All letters shall be fabricated using full welded construction.
8. Interior of letters shall be painted a reflective white.
9. All letters are to be primed with self-etching primer and painted with
automotive enamel.
10. All penetrations of the building structure shall be neatly sealed in a
watertight condition.
11. All secondary wiring shall be housed in sealtite waterproof conduit.
12. The colors of the lighted channel letters shall be uniform.
Letter faces - Any primary color with no two adjacent signs the
same color
Neon color - #8300 white
Trim Cap - Gold
Letter sidewalls - Same as letter face
Raceway - Muslin 3034 to match fascia
13. All visible fasteners shall be painted to match the background.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
Tower Bank & Trust Company, an Indiana banking corporation, is the only
subsidiary of the Company.
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS OF TOWER FINANCIAL CORPORATION FOR
THE TWELVE MONTHS ENDED DECEMBER 31, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> OTHER
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 2,273,592
<INT-BEARING-DEPOSITS> 7,321,726
<FED-FUNDS-SOLD> 20,848,377
<TRADING-ASSETS> 1,081,970
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 5,816,391
<LOANS> 67,314,520
<ALLOWANCE> (1,009,509)
<TOTAL-ASSETS> 103,647,067
<DEPOSITS> 81,733,238
<SHORT-TERM> 210,000
<LIABILITIES-OTHER> 383,650
<LONG-TERM> 0
0
0
<COMMON> 2,530,000
<OTHER-SE> 18,790,179
<TOTAL-LIABILITIES-AND-EQUITY> 103,647,067
<INTEREST-LOAN> 2,368,367
<INTEREST-INVEST> 318,152
<INTEREST-OTHER> 995,327
<INTEREST-TOTAL> 3,681,846
<INTEREST-DEPOSIT> 1,382,182
<INTEREST-EXPENSE> 1,393,930
<INTEREST-INCOME-NET> 2,287,916
<LOAN-LOSSES> 491
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 3,241,097
<INCOME-PRETAX> (1,675,442)
<INCOME-PRE-EXTRAORDINARY> (1,675,442)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,675,442)
<EPS-BASIC> (0.71)
<EPS-DILUTED> (0.71)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (1,010,000)
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
