UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
X ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For fiscal year ended December 31, 1996. Commission file number 0000887203
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
TOWNE BANCORP, INC.
(Name of small business issuer in its charter)
Ohio 34-1704637
(State of Incorporation) (I.R.S. Employer Identification No.)
610 East South Boundary, Perrysburg, Ohio 43551
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (419) 874-2090
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
None None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Without Par Value
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will 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. X
The issuer's revenues for the fiscal year ended December 31, 1996 were
$199,009.
The aggregate market value of the voting stock held by non-affiliates was
$5,287,498 as of January 31, 1997.
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date - 370,761 shares of common
stock, without par value (as of February 28, 1997).
DOCUMENTS INCORPORATED BY REFERENCE
Annual Report to Shareholders for the fiscal year ended December 31, 1996 -
PART II of Form 10-KSB.
Proxy Statement dated March 19, 1997 for the Annual Meeting of Shareholders -
PART III of Form 10-KSB.
This document contains 45 pages. The Exhibit Index is on page 9.
Transitional Small Business Disclosure Format (Check One). Yes X No
<PAGE>
INDEX
Page
PART I
Issuer elects to furnish information required by Items 6-11 of Model B of
Form 1-A.
Item 6. Description of Business 3
Item 7. Description of Property 6
Item 8. Directors, Executive Officers and Significant
Employees 6
Item 9. Remuneration of Directors and Officers 6
Item 10. Security Ownership of Management and Certain
Securityholders 6
Item 11. Interest of Management and Others in Certain
Transactions 6
PART II
Item 1. Market Price of and Dividends on the Registrant's
Common Equity and Other Stockholder Matters 7
Item 2. Legal Proceedings 7
Item 3. Changes in and Disagreements with Accountants 7
Item 4. Submission of Matters to a Vote of Security Holders 7
Item 5. Compliance with Section 16(a) of the Exchange Act 7
Item 6. Reports on Form 8-K 7
PART F/S 8
PART III
Item 1. Index to Exhibits 9
Item 2. Description of Exhibits 10
Signatures 11
<PAGE>
PART I
Issuer elects to furnish information required by Items 6-11 of Model B of Form
1-A.
ITEM 6. Description of Business
Towne Bancorp, Inc. (the "Company") was incorporated under the laws of the State
of Ohio on April 1, 1992, and is registered as a bank holding company under the
Bank Holding Company Act of 1956, as amended. The Company owns all of the
voting shares of Towne Bank (the "Bank"), an Ohio chartered bank incorporated
in 1995. The Bank is the only subsidiary of the Company, and substantially
all of the Company's operations are conducted through the Bank. The principal
offices of both the Company and the Bank are located at 610 E. South Boundary,
Perrysburg, Ohio. The Bank opened the Perrysburg office on October 15, 1996 and
the Sylvania, Ohio office on January 13, 1997. The Company and the Bank had
total consolidated assets of $12,994,091 at December 31, 1996.
The Company, through its subsidiary, the Bank, operates in one industry segment,
the commercial banking industry.
General
The Bank conducts a general banking business embracing the usual functions of
commercial, retail, and savings banking, including time, savings, money market
and demand deposits; commercial, industrial, agricultural, real estate, consumer
installment and credit card lending; safe deposit box rental; and automatic
teller machines. The Bank makes and services secured and unsecured loans to
individuals, firms and corporations. The Bank makes a variety of residential,
industrial, commercial and agricultural loans secured by real estate, including
interim construction financing.
On a parent company only basis, the Company's only source of funds is receipt
of dividends paid by the Bank subsidiary. The ability of the Bank to pay
dividends is subject to limitations under various laws and regulations, and to
prudent and sound banking principles. Generally, subject to certain minimum
capital requirements, the Bank may declare a dividend without the approval of
the State of Ohio Division of Financial Institutions, unless the total of the
dividends in a calendar year exceeds the total of the two preceding years.
Under these provisions, no amount was available for dividends at December 31,
1996, without the approval of the State of Ohio Division of Financial
Institutions. The Company's only debt service obligations relate to two capital
lease obligations. Rental payments from the Bank provide the Company with the
cash to meet the monthly debt service obligations.
Regulation and Supervision
The Company, as a registered bank holding company, is subject to regulation by
the Board of Governors of the Federal Reserve System under the Bank Holding
Company Act of 1956, as amended (the "Act"). The Act limits the activities
in which the Company and the Bank may engage to those activities that the
Federal Reserve Board finds, by order or regulation, to be so closely related
to banking or managing or controlling banks as to be a proper incident thereto.
A favorable determination by the Federal Reserve Board as to whether any such
new activity by the Company or the Bank is in the public interest, taking into
account both the likely adverse effects and the likely benefits, is also
necessary before any such activity may be engaged in. A bank holding company
is prohibited from acquiring direct or indirect ownership or control of any
company that is not a bank or bank holding company unless its business and
activities would be acceptable for the bank holding company itself. The Federal
Reserve Board, however, is
<PAGE>
ITEM 6. Description of Business, Continued
Regulation and Supervision, Continued
empowered to differentiate between activities which are initiated de novo by a
bank holding company or a subsidiary and activities commenced by acquisition of
a going concern. The Federal Reserve Board also possesses cease and desist
powers over bank holding companies and their non-bank subsidiaries for
activities that are deemed by the Board of Governors to constitute a serious
risk to the financial safety, soundness or stability of a bank holding company,
that are inconsistent with sound banking principles or that are in violation of
law. Further, under Section 106 of the 1970 Amendments to the Board's
regulations, bank holding companies and their subsidiaries are prohibited from
engaging in certain tie-in arrangements in connection with any extension of
credit or lease or sale of any property or the furnishing of services.
The Act also requires every bank holding company to obtain the prior approval
of the Federal Reserve Board before acquiring all or substantially all of the
assets of any bank, or acquiring ownership or control of any voting shares of
any other bank if, after such acquisition, it would own or control such bank.
In making such determinations, the Federal Reserve Board considers the effect
of the acquisition on competition, the financial and managerial resources of
the holding company and the convenience and needs of affected communities. The
Act prohibits acquistions relating to banks in states unless authorized by the
laws of the other state in question. On September 29, 1994, the Act was amended
by the Interstate Banking and Branching Efficiency Act of 1994, which authorized
(i) interstate bank acquisitions anywhere in the country commencing September
29, 1995 and (ii) interstate branching by acquisition and consolidation
commencing June 1, 1997 in those states that have not opted out by that date.
The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") contains provisions that directly affect thrifts, banks, thrift
holding companies, and bank holding companies. First, FIRREA abolished the
Federal Savings and Loan Insurance Corporation and required the Federal Deposit
Insurance Corporation ("FDIC") to establish two separate funds, the Bank
Insurance Fund ("BIF") to insure banks and the Savings Association Insurance
Fund ("SAIF") to insure savings and loan associations. Second, FIRREA amended
the Bank Holding Company Act of 1956 to permit bank holding companies to
acquire thift institutions; prior to FIRREA, bank holding companies were
permitted to acquire only failing thrift institutions. FIRREA also abolished
the restrictions on tandem operations of acquired thift institutions and the
in-state preference for acquistions of failing thifts. Finally, FIRREA
increased the authority of bank regulators.
The FDIC Improvement Act of 1991, which became law on December 19, 1991, revised
sections of the Federal Deposit Insurance Act affecting bank regulation, deposit
insurance and provisions for the funding of BIF. The FDIC Improvement Act also
revised bank regulatory structures embodied in several other federal banking
statutes, linked the bank regulators' authority to intervene to the
deterioration of a bank's capital level, placed limits on real estate lending
and increased audit requirements.
The Bank, as an Ohio chartered bank, is supervised by the State of Ohio Division
of Financial Institutions. The Bank is also a member of the Federal Reserve
System and subject to its supervision. As such, the Bank is subject to periodic
examinations by both the Ohio Division of Financial Institutions and the
Federal Reserve Board. These examinations are designed primarily for the
protection of the Bank's depositors and not for the Company's shareholders.
The Bank must file with the Ohio Division of Financial Institutions prescribed
periodic reports containing a full and accurate statement of its affairs.
<PAGE>
ITEM 6. Description of Business, Continued
Regulation and Supervision, Continued
The Bank is subject to the Community Reinvestment Act of 1977, as amended
(the "CRA"), which is designed to encourage financial institutions to give
special attention to the needs of low and moderate income areas in meeting
the credit needs of the communities in which they operate. If the CRA
regulatory evaluation of a bank's activities is less than satisfactory,
regulatory approval of proposed acquisitions, branch openings and other
applications requiring Federal Reserve Board approval may be delayed until a
satisfactory CRA evaluation is achieved. Since the Bank first opened in
October, 1996, it has not had a CRA regulatory evaluation.
Effects of Government Monetary Policy
The earnings of the Bank are affected by general and local economic conditions
and by the policies of various governmental regulatory authorities. In
particular, the Federal Reserve Board regulates money and credit conditions
and interest rates in order to influence general economic conditions, primarily
through open market acquisitions or dispositions of United States Government
securities, varying the discount rate on member bank borrowings and setting
reserve requirements against member and nonmember bank deposits. Federal
Reserve Board monetary policies have had a significant effect on the interest
income and interest expense of commercial banks and are expected to continue
to do so in the future.
Competition
The Bank has active competition in all areas of activity in which it engages.
The Bank competes for commercial and individual deposits and/or loans with other
commercial banks in northern Wood County and Lucas County in Northwestern Ohio,
as well as with savings and loan associations in the trade area, credit unions
connected with local businesses, and financial units of non-local bank holding
companies. The Bank focuses on personalized service, pricing of products,
community involvement and its local ownership and control in meeting its
competition.
Employees
The Company has no employees and conducts its business through its wholly-owned
subsidiary, the Bank.
As of December 31, 1996, the Bank employed 12 full-time employees to whom a
variety of benefits are provided and with whom the Bank believes relationships
are excellent.
<PAGE>
ITEM 7. Description of Property
The Company leases two properties under 20 year lease agreements with an
unrelated party. For financial reporting purposes, such leases are accounted
for as capital leases. The main office of the Company and Bank is maintained
at 610 East South Boundary, Perrysburg, Ohio. The second office of the Bank
is located at 6401 Monroe Street, Sylvania, Ohio. Each of the facilities were
newly constructed in 1996 and are suitable for their intended uses. Management
believes each property is adequately covered by insurance.
ITEM 8. Directors, Executive Officers and Significant Employees
Information concerning Directors and Executive Directors of the Company is
contained on pages 2, 3, 4 and 5, under the caption "Election of Directors"
in the Company's Definitive Proxy Statement, dated March 19, 1997, for the
Annual Meeting of Shareholders to be held April 23, 1997, and is incorporated
herein by reference.
There are no significant employees other than the Executive Officers.
ITEM 9. Remuneration of Directors and Officers
Members of the Board of Directors of the Company are paid $100 per meeting
attended. Members of the Board of Directors of the Bank are paid $100 per
meeting attended and $50 for each committee meeting attended.
No executive officer had paid or accrued salary or other compensation in excess
of $100,000 during the year 1996. There are no employment contracts, stock
options or bonus plans.
ITEM 10. Security Ownership of Management and Certain Securityholders
Information concerning security ownership of the Company's Directors is
contained on pages 3, 4, and 5, under the captions "Information with Respect
to Nominee" and "Information with Respect to Directors Continuing in Office
and not Standing for Re-Election", in the Company's Definitive Proxy Statement,
dated March 19, 1997, for the Annual Meeting of Shareholders to be held on
April 23, 1997, and is incorporated herein by reference.
All Directors and Executive Officers (3 persons) of the Company as a group own
6,106 shares of the Company's common stock, or 1.65%.
No shareholder owns more than 10% of the Company's common stock.
There are no options, warrants or rights issued.
ITEM 11. Interest of Management and Others in Certain Transactions
Certain directors and executive officers, including their immediate families and
companies in which they are principal owners, may at times be loan customers of
the Bank. Such loans are made in the ordinary course of business in accordance
with the Bank's normal lending policies, including the interest rate charged and
collateralization, and do not represent more than a normal collection risk.
Such loans approximated $80,000 at December 31, 1996.
<PAGE>
PART II
ITEM 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Stockholder Matters
The number of holders of record of the Company's common stock at December 31,
1996 is 734.
Information relating to dividend restrictions is contained in pages 24 and 25 in
Financial Statement Footnote No. 12 captioned "Regulatory Matters" of the 1996
Annual Report to Shareholders of Towne Bancorp, Inc. and is incorporated herein
by reference.
Other information required by this Item is contained on page 31 under the
caption "Market Price and Dividends for Common Stock" of the 1996 Annual Report
to Shareholders of Towne Bancorp, Inc. and is incorporated herein by reference.
ITEM 2. Legal Proceedings
The Company, certain officers and a former board member of the Company have been
named as defendants in a civil action in United States District Court for the
Northern District of Ohio, Western Division. The Complaint alleges a breach of
duty as a result of the failure to hire an individual, who was one of the
original organizers of the Company, as an employee. The plaintiff seeks lost
wages and punitive damages. The Company denies the charges and asserts that
the plaintiff voluntarily left the project of establishing a community owned
bank.
The Company's management is aware of no other pending or threatened litigation
in which the Company or the Bank faces potential loss or exposure which could
materially affect the consolidated financial statements.
The Company is not aware of any proceedings that a governmental authority is
contemplating.
ITEM 3. Changes in and Disagreements with Accountants
None
ITEM 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of shareholders, through the solicitation of
proxies or otherwise, during the quarter ended December 31, 1996.
ITEM 5. Compliance with Section 16(a) of the Exchange Act
None
ITEM 6. Reports on Form 8-K
There were no reports on Form 8-K filed during the quarter ended December 31,
1996.
<PAGE>
PART F/S
The following financial statements required by Item 310(a) of Regulation S-B are
contained on pages 11 through 30 of the 1996 Annual Report to Shareholders of
Towne Bancorp, Inc. and are incorporated herein by reference:
Independent Auditor's Report
Consolidated Balance Sheet - December 31, 1996
Consolidated Statements of Operations - Years ended December 31, 1996 and 1995
Consolidated Statements of Stockholders' Equity - Years ended December 31, 1996
and 1995
Consolidated Statements of Cash Flows - Years ended December 31, 1996 and 1995
Summary of Significant Accounting Policies
Notes to Consolidated Financial Statements
<PAGE>
PART III
ITEM 1. Index to Exhibits
The following documents are filed as an exhibit to this document:
Reference to
Form 1-A Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
2. Charter and By-Laws *
4. Subscription Agreement *
9. Escrow Agreements *
12. 1 Annual Report to Shareholders- 1996 Included with
this filing
12.2 Subsidiaries of the Registrant Included with
this filing
12.3 Financial Data Schedule Included with
this filing
* Indicates documents which have previously been filed as part of the Issuer's
Form 10 registration statement pursuant to Section 12(g) of the Securities
Exchange Act of 1934. All of such previously filed documents are hereby
incorporated herein by reference.
<PAGE>
ITEM 2. Description of Exhibits
Exhibit
Number Description
2 Amended Articles of Incorporation of Towne Bancorp, Inc.
4 Amended Subscription Agreement of Towne Bancorp, Inc.
9 Escrow and Subordination Agreement between Towne
Bancorp, Inc., Norman J. Rood, Jerome C. Bechstein,
Thomas L. Eichler, and the Huntington Trust Company,
N.A.
12.1 Towne Bancorp, Inc. 1996 Annual Report
12.2 Subsidiaries of the Registrant
12.3 Financial Data Schedule
<PAGE>
SIGNATURES
In accordance with 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.
TOWNE BANCORP, INC.
MARCH 27, 1997 /s/ JEROME C. BECHSTEIN
Date Jerome C. Bechstein, President and CEO
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the
dates indicated:
/s/ JEROME C. BECHSTEIN MARCH 27, 1997
Jerome C. Bechstein, President, CEO, Date
Director, and Chief Financial Officer
/s/ LOIS A. BRIGHAM MARCH 27, 1997
Lois A. Brigham, Senior Vice President, Date
Secretary and Director
/s/ JOHN P. WEINERT MARCH 27, 1997
John P. Weinert, Director Date
<PAGE>
Exhibit 12.1
TOWNE BANCORP, INC.
Annual Report
Towne Bancorp, Inc.
1996 ANNUAL REPORT
<PAGE>
PERRYSBURG SYLVANIA
610 E. South Boundary Street 6401 Monroe Street
Perrysburg, Ohio 43551-2535 Sylvania, Ohio 4350-1431
(419) 874-2090 (419) 885-5216
Fax (419) 874-4740 Fax (419) 885-5216
<PAGE>
Towne Bancorp, Inc.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
General
In, 1992, Towne Bancorp, Inc., was formed and established as a one bank holding
company. The holding company was formed by Jerome Bechstein, Lois A. Brigham,
John Weinert and others. The funding for the needed capitalization of the new
Bank was achieved by selling common shares of stock to the general public in the
communities of the Bank's service areas. The project was started with the
organizers personally funding moneys needed to support the project. The
introduction of the offering began in August, 1992.
The Company's initial offering of common stock was completed in November, 1995
with the issuance of 348,464 shares of common stock at a value of $4,355,800
($12.50 per share). The organizers of the Company had previously purchased
6,500 shares of common stock at a value of $81,250 (also, $12.50 per share).
The Company's operating subsidiary, Towne Bank is an Ohio chartered bank and
was incorporated in 1995.
Several newspaper articles explained the new Bank project and stock offering to
the community. Presentations were given by the organizers to church groups,
philanthropic organizations and service clubs. Display booths were designed
and used at local events, festivals and community fairs.
The organizers formed a networking program with various groups for the purpose
of personal calls, contacts and appointments that were arranged from the
community forum meetings. The networking groups helped sell the common shares
of stock to persons wanting to establish and open a new locally owned and
managed Bank. The networking groups in the various communities, and the
personal relationship contacts of the organizers established the needed
capitalization as well as developed the shareholder investor relationship with
the Bank personnel. The investment dollars in the new Bank were placed in a
trust department escrow savings account and paid a return to the shareholders.
The trust account was established for the purposes of processing the
capitalization funds, issuing the stock certificates and handling any stock
transfers.
Hours of research and personal interviews resulted in applications being
written, printed and submitted by the organizers for approval. The procedures
to organize a locally owned and managed Bank was completed with a State of Ohio
Charter, membership in the Federal Reserve and insured by the FDIC. The
necessary steps were taken to develop and complete the organization and opening
of the new Bank.
<PAGE>
Towne Bank, the locally owned and managed Bank, provides services to Northern
Wood County and the Western and Southern Lucas County areas as, "The Best Bank
In Town For You". The Bank was incorporated in 1995 and was founded as a new
de-novo (start-up) Bank. The Bank opened the Perrysburg office on October 15,
1996 at the 610 E. South Boundary Street, and the Sylvania office located at
6401 Monroe Street, opened on January 13, 1997, as the newest commercial bank
in the area.
The mission statement of the Bank is to service small and middle market
businesses, agricultural, retail, professional, mortgages and individual
customers. The Bank offers quality financial services through well trained
employees, state-of-the-art equipment and convenient hours, while maintaining
the highest standards of professionalism, commitment and integrity possible to
the communities. The Banks' role as a corporate citizen is very important,
striving to devote the energies and programs necessary for the total enrichment
of the communities in which the Bank serves.
The Bank has developed from the ground up, with the understanding that the
customers are the most important ingredient to success. and deserve a superior
level of service. Our competitive edge is the commitment, dedication and focus
on the customer by the management and employees. The employees are important to
the operations and are valued as individuals. The Bank will strive to enhance
their personal and professional growth as, "The Best Bank in Town for You".
The architecture of the buildings enhances system performance, reduces overall
costs and facilitates faster and easier implementation of the initial customer
banking transactions and subsequent banking relationships. The design of the
buildings provides for good customer and employees relationships, as well as
the proper usage and functions on a daily processing and handling of
transactions. The applications are designed for easy usage for both customers
and staff with the state-of-the-art equipment to be compatible with personal
productivity.
The products which the Bank offers are the normal and customary banking
services. What makes Towne Bank different is the systems used to provide the
most complete and correct documents for the customer and the Bank at the time
of origination of the accounts. The computers and software are of the most
current systems and programs available.
The Bank has hired experienced employees in the banking industry. As the Bank
grows and develops, and as additional employees are required, the Bank has
partnered with a human resource company. Their expertise will keep the Bank
informed on current personnel policy issues and requirements.
<PAGE>
The Bank offers a wide range of commercial and retail banking services.
Products are comprised of traditional bank services such as consumer loans,
commercial and individual real estate loans, agricultural, small and medium
sized business loans as well as personal loans. The Bank also offers the
standard business and individual checking accounts, money market accounts,
savings and certificate of deposit accounts. Also, the Bank has all of the
additional services, such as credit cards, access cards, safe deposit boxes,
drive-up windows, wire transfer and night depository. The Bank has implemented
operational controls as well as the necessary reporting requirements for the
continued growth of the Bank. Management is a part of the day to day operation,
with timely and local decisions made for the Bank's customers.
Financial Condition
The Company applied for regulatory approvals, recruited and hired personnel, and
performed significant financial planning relating to the formation of the Towne
Bank (the Bank). On October 11, 1996, the Company received final approval of
regulatory authorities to purchase 100 percent of the common stock of the Bank,
a Federal Reserve member bank formed under the laws of the State of Ohio and
insured by the Federal Deposit Insurance Corporation. The Company was approved
as a bank holding company by the Board of Govenors of the Federal Reserve
System, pursuant to the Bank Holding Company Act of 1956, as amended.
Currently, the Company has no other business activity other than acting as the
holding company for Towne Bank. As a result, the following discussion relates
primarily to the activities of Towne Bank. This discussion should be read in
conjunction with the Consolidated Financial Statements and accompanying Notes
included in this report.
The Company's results of operations are dependent upon the growth of the Bank
and the resulting net interest income, which is the difference ("spread")
between the interest income earned on the loans, securities, and investment
portfolio and the cost of funds, consisting of interest paid on deposits and
borrowed money. The interest rate spread is affected by regulatory, economic
and competitive factors that influence interest rates, loan demand and deposit
flow. The Company's profitability is also affected by loan fee income,
provisions for loan losses, service charges, operating expenses and income
taxes.
<PAGE>
The Company's revenues are derived primarily from interest on mortgage loans,
commercial loans, consumer loans and investment securities, as well as income
from service charges and loan origination fees. The Company's operating
expenses principally consist of employee compensation and benefits, occupancy,
and other general and administrative expenses. The Company's results of
operation are also significantly affected by general economic and competitive
conditions, particularly changes in market interest rates, governmental policies
actions of regulatory authorities.
The Company and the Bank have an office located in Perrysburg, which is located
in Wood County, Ohio. The Perrysburg office opened for business on October 15,
1996. The Bank has another office located in Sylvania, which is located in
Lucas County, Ohio. The Sylvania office of the Bank opened for business on
January 13, l997.
The Bank is a community financial institution offering a variety of services to
meet the needs of the local communities. The Bank attracts deposits from the
general public and pursues such deposits, together with other funds, to
originate one to four family residential mortgage loans and other consumer
loans. The Bank also originates residential construction, commercial business
and agricultural loans. Deposits are insured up to the maximum allowable amount
by the Federal Deposit Insurance Corporation ("FDIC"). The Bank invests in
securities issued by the U.S. government or agencies of the U.S. government,
as well as mortgage-backed securities insured or guaranteed by federal agencies.
The Company is not aware of any market or institutional trends, events or
uncertainties that are expected to have a material effect on liquidity, capital
resources or operations and any current recommendations by the regulators which
would have a material effect if implemented.
Total assets of the Company were $12,994,091 at December 31, 1996, compared to
$4,728,897 at December 31, 1995. The increase was primarily attributable to the
opening of the Bank, which resulted in deposits of $6,505,572 as of December 31,
1996. Deposits were obtained primarily from individuals and businesses in the
market area. These funds were invested in federal funds, investment securities
and loans.
Short term investments are in federal funds sold of $5,429,000 as of December
31, 1996. These funds are invested overnight with up to eleven different banks
with a Standard and Poor rating of A- or better. Investment securities were
$3,389,270 as of December 31, 1996. Securities are designated as held-to-
maturity or available-for-sale.
<PAGE>
Net loans receivable were $1,102,913 as of December 31, l996 and consisted of
real estate residential mortgages of $682,138; commercial loans of $233,015;
consumer loans of $136,810 and the balance included other loans less deferred
loan fees and the allowance for loan losses.
Net premises and equipment was $2,499,349 as of December 31, 1996. This
includes $2,500,000 relating to the capital leases of two banking offices,
equipment of $59,766 and accumulated depreciation of $60,417.
Comparison Of Results Of Operations For The Years Ended December 31, 1996 And
1995
The net loss for 1996 was $873,361, compared to net income for 1995 of $127,643.
The 1996 net loss reflects the impact of the one time costs of the new bank
start-up. The planned asset growth will reduce the net operating loss for 1997.
The continued steady growth will produce net income by the end of the second
full year of operation.
Net interest income is the largest component of income for the Company, and
consists of the difference between interest income generated on interest earning
assets and interest expense incurred on interest bearing liabilities. The
interest income is primarily affected by the volumes, interest rates and
composition of interest earning assets and interest bearing liabilities.
The provision for loan losses is based on management's regular review of the
loan portfolio, which considers factors such as prevailing general economic
conditions and considerations applicable to specific loans, such as the ability
of the borrower to repay the loan and the estimated value of the underlying
collateral, as well as changes in the size and growth of the loan portfolio.
Management believes that the allowance for loan losses as of December 31, 1996,
is adequate to absorb potential losses of the present loan portfolio; however,
future additions to the allowance may be necessary based on changes in
economic conditions. The provision for loan losses was $20,000 for 1996.
Non-interest expenses were $1,041,256 for 1996, primarily consisting of salaries
and benefits expense, occupancy expenses and other operating expenses. Salaries
and benefits reflect the hiring of personnel for the opening of the two banking
offices. Increases in occupancy expenses were due to the leasing of the two
banking offices. Other operating expenses increased because of the start-up
costs incurred in the areas of advertising, printing and supplies along with
the normal operating expenses of the Bank since it opened in October, 1996.
Also, increased expenses for professional fees and litigation costs related to
a lawsuit with a former organizer of the Company.
<PAGE>
Interest Rate Sensitivity
Interest rate sensitivity is determined by the amount of interest earning assets
and interest bearing liabilities repricing within a specific time period, and
the magnitude by which interest rates change on the various types of interest
earning assets and interest bearing liabilities. One tool used by management
to assist in the measurement of interest rate sensitivity and to monitor the
Company's liquidity position is static gap analysis. Interest rate sensitivity
management aims at achieving reasonable stability in the net interest margin
through periods of changing interest rates.
The Company's goal is to avoid a significant fluctuation in the net interest
margin and thus an adverse impact on the profitability, in periods of changing
interest rates. However, it is also necessary to analyze future interest
margins based on the repricing characteristics of the Company's earning assets
and interest bearing deposits in the varying magnitude by which interest rates
may change in each of the various earning assets and interest bearing deposit
accounts. In periods of prolonged significant interest rates declines, the
interest margin may adversely be affected when investments and loans reprice
downward more than the interest rate on interest bearing deposits, and when
fixed rate loans are refinanced in advance of their scheduled maturity.
Liquidity
In basic banking terms, liquidity relates to the ability to convert assets into
cash or to acquire deposit funds in order to meet the cash withdrawal needs of
depositors or to provide funds for borrowers. In a more complex business
environment, it also represents the availability to fund expanding operations,
allow for contingencies and provide investment opportunities for the Company.
The Company manages liquidity to meet the cash flow needs of customers, such
as borrowing and deposit withdrawals, while at the same time striving to
maximize the yield on investments and loans. To meet these cash flow
requirements and also to improve and expand service in existing markets there
must be sufficient sources of liquid funds and adequate capital. The major
sources of asset liquidity are federal funds sold and that portion of the
securities portfolio which matures within one year. These sources are
supplemented by new deposit growth and by loans that are paid during the period.
The Company has and expects to continue to have more than sufficient funds to
meet the liquidity requirements.
Capital Resources
Capital provides the foundation for future growth and expansion. The major
component of capital is the Company shareholders' equity. The adequacy of
capital can be evaluated based on guidelines established by banking regulatory
agencies. The risk-based capital requirements assign risk weights to on-and-
off balance sheet items in arriving at total risk-adjusted assets. Regulatory
capital is divided by the computed total of risk-adjusted assets to arrive at
the capital measure. The regulatory minimum total capital ratio is 8%. Due to
the issuance of over $4,480,000 in common stock and the start-up nature of the
Bank, both the Company and the Bank are well capitalized.
Future Outlook
The Company's philosophy is based on intentions to be a "family" of community
offices, which operate under the direction and supervision of the management
team and Board of Directors. The Company strives to maintain quality and
service oriented personnel, dedicated to controlled growth and sustained
profitability, together with the community banking concept in an ever changing
and increasingly competitive environment. The Company has designed the policies
regarding asset/liability management, liquidity, lending, investment strategy
and expenses control to provide steady growth in assets and earnings.
One of the goals is to increase wealth for our shareholders. We must do this
while never forgetting the value of our Bank, our responsibility to our staff,
the communities in which we serve and the high quality standards of our work.
We must always operate in an ethical way and never take the expedient path.
Another goal is to increase productivity through superior work. Building upon
the conviction that doing it better pays off, that short cuts lead to short term
earnings and that setting the highest standards drives the highest results.
The rush to mediocrity, to short-term results, and the acceptance of the lowest
common service denominator does not work. The believe in always striving for
excellence is paramount. The Company has an obligation to fulfill that
tradition. Because many other corporations and individuals may not share
these beliefs, or because they may have shorter-term financial needs, or because
they may be run for management by management, when entering into shared
relationships, the Company should not give up control. Achieving excellence
should be fun and it will be reflected in the quality of our products and
service.
<PAGE>
TOWNE
BANCORP, INC.
Perrysburg, Ohio
CONSOLIDATED
FINANCIAL STATEMENTS
December 31, 1996
TABLE OF CONTENTS
PAGE
INDEPENDENT AUDITOR'S REPORT 11
FINANCIAL STATEMENTS
Consolidated Balance Sheet 12
Consolidated Statements of Operations 13
Consolidated Statements of Stockholders' Equity 14
Consolidated Statements of Cash Flows 15
Summary of Significant Accounting Policies 16
Notes to Consolidated Financial Statements 19
<PAGE>
Independent Auditor's Report
Stockholders and Board of Directors
Towne Bancorp, Inc.
Perrysburg, Ohio
We have audited the accompanying consolidated balance sheet of Towne Bancorp,
Inc. and its subsidiary as of December 31, 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the years
ended December 31, 1996 and 1995. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these consolidated financial statements based on our
audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards 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. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statements
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Towne Bancorp, Inc.
and its subsidiary as of December 31, 1996, and the results of their operations
and their cash flows for the years ended December 31, 1996 and 1995 in
conformity with generally accepted accounting principles.
CLIFTON GUNDERSON LTD.
Toledo, Ohio
February 13, 1997
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED BALANCE SHEET
December 31, 1996
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 383,547
Federal funds sold 5,429,000
Total cash and cash equivalents 5,812,547
INVESTMENT SECURITIES
Available-for-sale, at market value 1,396,103
Held-to-maturity, at amortized cost, market
value of $1,987,064 1,993,167
Total investment securities 3,389,270
LOANS RECEIVABLE, net of allowance for loan
losses of $20,000 1,102,913
PREMISES AND EQUIPMENT, net 2,499,349
OTHER ASSETS 190,012
TOTAL ASSETS $ 12,994,091
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits:
Demand accounts $ 515,413
Savings accounts 317,278
Certificates of deposit and other time
accounts 5,672,881
Total deposits 6,505,572
Capital lease obligations 2,500,000
Accrued interest, taxes and other liabilities 284,975
Total liabilities 9,290,547
STOCKHOLDERS' EQUITY
Common stock, without par value. Authorized
800,000 shares issued and outstanding
370,761 shares at stated value 370,761
Surplus 4,111,772
Accumulated deficit (781,224)
Net unrealized holding gain on investment
securities available-for-sale 2,235
Total stockholders' equity 3,703,544
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 12,994,091
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 1996 and 1995
1996 1995
INTEREST INCOME
Interest and fees on loans $ 13,614 $ -
Interest and dividends on investment
securities:
U.S. Treasury securities 8,010 -
Obligations of U.S. Government
agencies and corporations 11,972 -
Interest on deposits in other bank,
escrow account 110,570 358,819
Interest on federal funds sold 52,789 -
Total interest income 196,955 358,819
INTEREST EXPENSE
Deposits 42,233 -
Common stock, escrow account - 172,369
Organizer advances 481 11,868
Total interest expense 42,714 184,237
Net interest income 154,241 174,582
PROVISION FOR LOAN LOSSES 20,000 -
Net interest income after provision
for loan losses 134,241 174,582
NON-INTEREST INCOME
Service charges on deposit accounts 1,535 -
Other operating income 519 -
Total non-interest income 2,054 -
NON-INTEREST EXPENSES
Salaries, wages and employee benefits 350,886 -
Net occupancy expenses, including
capital lease interest 228,170 3,525
Other operating expenses 462,200 11,814
Total non-interest expenses 1,041,256 15,339
Income (loss) before federal
income taxes (904,961) 159,243
PROVISION (CREDIT) FOR FEDERAL
INCOME TAXES (31,600) 31,600
NET INCOME (LOSS) $ (873,361) $ 127,643
NET INCOME (LOSS) PER SHARE $ (2.38) $ 2.73
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 1996 and 1995
Retained Net
earnings unrealized
Common stock (accumulated holding
Shares Amount Surplus deficit) gain
BALANCE AT
DECEMBER 31, 1994 6,500 $ 6,500 $ 74,750 $ (35,506) $ -
Issuance of common
stock 348,464 348,464 4,007,336 - -
Deferred selling
costs charged
to surplus - - (146,105) - -
Net income for
1995 - - - 127,643 -
BALANCE AT
DECEMBER 31,
1995 354,964 354,964 3,935,981 92,137 -
Issuance of
common stock 23,650 23,650 292,771 - -
Purchases of
common stock (7,853) (7,853) (103,931) - -
Deferred selling costs
charged to surplus - - (13,049) - -
Net loss for 1996 - - - (873,361) -
Change in net
unrealized holding
gain for 1996 - - - - 2,235
BALANCE AT
DECEMBER 31,
1996 370,761 $ 370,761 $ 4,111,772 $ (781,224) $ 2,235
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1996 and 1995
1996 1995
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (873,361) $ 127,643
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation and amortization 66,209 4,226
Interest expense - common stock, escrow account - 167,983
Provision for loan losses 20,000 -
Accretion of investment securities discounts, net of
premium amortization (300) -
Expenses paid directly by organizers 6,511 6,603
Increase in other assets (129,795) (74,364)
Increase (decrease) in accrued interest, taxes
and other liabilities (24,440) 309,415
Net cash provided by (used in)
operating activities (935,176) 541,506
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of premises under
sale-leaseback agreement 1,496,510 -
Purchases of investment securities:
Available-for-sale (1,393,750) -
Held-to-maturity (1,992,985) -
Net increase in loans receivable (1,122,913) -
Additions to premises and equipment (892,446) (663,830)
Net cash used in investing activities (3,905,584) (663,830)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 6,505,572 -
Proceeds from issuance of common stock 316,421 4,187,817
Purchase of common stock (111,784) -
Repayment of advances from organizers, net (49,349) (73,200)
Net cash provided by financing
activities 6,660,860 4,114,617
INCREASE IN CASH AND CASH EQUIVALENTS 1,820,100 3,992,293
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR 3,992,447 154
CASH AND CASH EQUIVALENTS AT
END OF YEAR $ 5,812,547 $ 3,992,447
<PAGE>
TOWNE BANCORP, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1996
Towne Bancorp, Inc. ("the Company") was incorporated on April 1, 1992 in the
state of Ohio. The Company is a bank holding company and has one wholly-owned
subsidiary, Towne Bank ("the Bank"). The Company, through its subsidiary,
operates in one industry segment, the commercial banking industry. The Bank,
an Ohio chartered bank, was organized in 1995 and has offices in Perrysburg
and Sylvania, Ohio. The Perrysburg office was opened in October 1996 and the
Sylvania office opened in January 1997. The Bank's primary market areas are
northern Wood County and Lucas County. The Bank's customers are predominantly
small and middle-market businesses and individuals.
Significant accounting policies followed by the Company in preparing its
consolidated financial statements are presented below.
USE OF ESTIMATES IN PREPARING FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during each reporting period.
The most significant areas involving the use of management's estimates and
assumptions are the allowance for loan losses and depreciation and amortization
of premises and equipment. Actual results could differ from those estimates.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany balances and
transactions have been eliminated in consolidation.
CASH AND CASH EQUIVALENTS
The Bank is required to maintain certain daily reserve balances on hand in
accordance with Federal Reserve Board requirements. The average reserve balance
for the period ended December 31, 1996 approximated $25,000.
For purposes of the statements of cash flows, cash and cash equivalents include
cash on hand, amounts due from banks and federal funds sold which mature
overnight or within three days.
INVESTMENT SECURITIES
The Bank's investment securities are designated as held-to-maturity or available
- -for-sale. Securities designated as held-to-maturity are carried at their
amortized cost. All other securities are classified as available-for-sale.
Securities designated as available-for-sale are carried at market value, with
unrealized gains and losses on such securities recognized as a separate
component of stockholders' equity. The Bank has no trading securities.
Premiums and discounts are recognized in interest income using the interest
method over the period to maturity. Gains and losses on sales of investment
securities are accounted for on a completed transaction basis, using the
specific identification method, and are included in non-interest income.
<PAGE>
TOWNE BANCORP, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1996
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are stated at their outstanding principal amount, adjusted
for loan fees and costs and net of an allowance for loan losses. Interest is
accrued as earned based upon the daily outstanding principal balance.
Loan origination fees and certain direct origination costs are capitalized and
recognized as an adjustment of the yield of the related loan.
The determination of the balance of the allowance for loan losses is based on
an analysis of the loan portfolio and reflects an amount which, in management's
judgment, is adequate to provide for possible loan losses. Such analysis is
based on the character of the loan portfolio, value of any underlying
collateral, current economic conditions, and such other factors as management
believes requires current recognition in estimating possible loan losses.
Various regulatory agencies, as part of their examination process, will
periodically review the Bank's allowance for loan losses. Such agencies may
require Bank to recognize additions to the allowance based on their judgments
about information available to them at the time of their examination.
PREMISES AND EQUIPMENT
Premises and equipment are stated at cost, less accumulated depreciation and
amortization. Routine maintenance and repairs are charged to expense as
incurred, and expenditures which materially increase values or extend useful
lives are capitalized. Upon the sale or disposition of the assets, the
difference between the depreciated cost and proceeds is charged or credited to
income.
The cost of premises, which is recorded under two capital leases, is being
amortized on the straight-line method over the 20 year term of the leases.
Equipment is depreciated based on the estimated useful lives of the individual
assets, ranging from 3 to 7 years, using the straight-line method.
ORGANIZATIONAL COSTS, STOCK OFFERING COSTS AND
PRE-OPENING EXPENSES
Certain costs incurred in organizing the Company, as well as costs incurred to
organize the Bank were deferred and are being amortized to expense on the
straight-line method over a five-year period. All costs related to the
issuance of the Company's common stock were initially deferred and subsequently
charged against surplus upon issuance of the shares.
Most other expenses incurred prior to the opening of the Bank were charged
against operations, except for certain pre-opening expenses of the Bank which
were deferred. Substantially all deferred pre-opening expenses were
subsequently charged to expense when the Bank opened its Perrysburg office
in October 1996, as described in Note 7.
<PAGE>
TOWNE BANCORP, INC.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
December 31, 1996
FEDERAL INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which those temporary differences are expected
to be recovered or settled. The effect on deferred tax assets and liabilities
of a change in tax rates is recognized in income in the period that includes
the enactment date. The deferred tax asset is subject to a valuation allowance
provided for that portion of the asset for which it is more likely than not that
it will not be realized.
The Company and the Bank are not currently subject to state and local income
taxes.
PER SHARE DATA
Income (loss) per share is computed based on the weighted average number of
shares of common stock outstanding during each year (366,689 in 1996 and
46,728 in 1995).
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 1 - INVESTMENT SECURITIES
The amortized cost and market value of investment securities as of December 31,
1996 are as follows:
Gross Gross
Amortized unrealized unrealized Market
cost gains losses value
Available-for-sale:
U.S. Treasury securities $ 600,425 $ 1,659 $ - $ 602,084
Obligations of U.S. Government
agencies and corporations 697,443 1,256 680 698,019
Federal Reserve Bank of
Cleveland stock 96,000 - - 96,000
Total available-for-sale 1,393,868 2,915 680 1,396,103
Held-to-maturity:
U.S. Treasury securities 494,335 - 1,838 492,497
Obligations of U.S. Government
agencies and corporations 1,498,832 - 4,265 1,494,567
Total held-to-maturity 1,993,167 - 6,103 1,987,064
Total $ 3,387,035 $ 2,915 $ 6,783 $ 3,383,167
The amortized cost and market value of investment securities at December 31,
1996, by contractual maturity, are shown below. Actual maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Available-for-sale Held-to-maturity
Amortized Market Amortized Market
cost value cost value
Due in one year or less $ 399,734 $ 399,940 $ 200,396 $ 200,328
Due after one year through
five years 898,134 900,163 1,792,771 1,786,736
Other security having no
maturity date 96,000 96,000 - -
Total $ 1,393,868 $ 1,396,103 $ 1,993,167 $ 1,987,064
NOTE 2 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable at December 31, 1996 consist of the following:
Commercial $ 233,015
Real estate - residential mortgage 682,138
Real estate - construction 76,040
Consumer 136,810
1,128,003
Less: Deferred loan fees (5,090)
Allowance for loan losses (20,000)
Net loans receivable $ 1,102,913
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 2 - LOANS RECEIVABLE AND ALLOWANCE
FOR LOAN LOSSES (CONTINUED)
Fixed rate loans approximated $160,000 at December 31, 1996. The Bank had no
impaired loans at December 31, 1996.
The following represents a summary of the activity in the allowance for loan
losses for the year ended December 31, 1996:
Balance at beginning of year $ -
Provision charged to operations 20,000
Balance at end of year $ 20,000
Certain directors and executive officers, including their immediate families and
companies in which they are principal owners, may at times be loan customers of
the Bank. Such loans are made in the ordinary course of business in accordance
with the Bank's normal lending policies, including the interest rate charged and
collateralization, and do not represent more than a normal collection risk.
Such loans approximated $80,000 at December 31, 1996. The following is a
summary of activity during 1996 for such loans:
Balance at Balance
beginning Additions Repayments at end
$ - $ 80,000 $ - $ 80,000
NOTE 3 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 1996:
Premises - capital leases $ 2,500,000
Equipment 59,766
2,559,766
Accumulated depreciation and amortization 60,417
Premises and equipment, net $ 2,499,349
Depreciation and amortization of premises and equipment amounted to $60,417 in
1996 (none in 1995). All of the accumulated depreciation and amortization at
December 31, 1996 related to the premises - capital leases. See Note 5 for
details of capital leases.
NOTE 4 - DEPOSITS
Time deposits at December 31, 1996 include individual deposits of $100,000 and
over which amounted to approximately $1,923,000. Interest expense on time
deposits of $100,000 or more amounted to approximately $11,000 for 1996.
At December 31, 1996, the scheduled maturities of certificates of deposit and
other time accounts are as follows:
1997 $ 666,352
1998 4,609,800
2001 396,729
Total $ 5,672,881
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 5 - CAPITAL LEASE OBLIGATIONS
In September 1995, the Company entered into a lease agreement with the lessor
agreeing to construct a banking facility in Perrysburg, Ohio to be used by the
Company's subsidiary. The lessor agreed to pay a maximum of $1,000,000, with
any excess costs to be paid by the Company. Upon completion of the facility
in February 1996, the Company accepted possession of the facilities and recorded
a capital lease obligation amounting to $1,000,000. Under the terms of the
lease agreement, the Company has agreed to make monthly payments of $8,500
through February 1999, and monthly payments of $9,417, subject to periodic
inflationary increases, through February 2016. The lease also requires a
$25,000 payment at the end of each lease year (as defined). For financial
reporting purposes, interest has been imputed at the annual rate of 12.10%.
In August 1996, the Company received $1,496,510 from the sale of land and a
banking facility under construction in Sylvania, Ohio. There was no gain or
loss recognized on the sale. Immediately following the sale, the Company
entered into a lease agreement with the purchaser of the property and recorded
a capital lease obligation amounting to $1,500,000. Under the terms of the
lease agreement, the Company has agreed to make monthly payments of $12,000
through September 1999, and monthly payments of $13,107, subject to periodic
inflationary increases, through September 2016. The lease also requires a
$34,000 payment at the end of each lease year (as defined). For financial
reporting purposes, interest has been imputed at the annual rate of 10.97%.
The balance due on the capital lease obligations remained $2,500,000 at December
31, 1996 since the payments stipulated in the lease agreements were not
sufficient to cover imputed interest. Accrued interest payable of $21,774 is
included in the December 31, 1996 consolidated balance sheet.
Interest expense of $142,774 and amortization of capitalized lease premises of
$60,417 is included in net occupancy expenses in the 1996 consolidated statement
of operations.
NOTE 6 - STOCKHOLDERS' EQUITY
The organizers of the Company purchased a total of 6,500 shares of common stock,
without par value, at $12.50 per share. In July 1992, the Company initiated a
public offering of its common stock, also at $12.50 per share. Over a period of
approximately three years, the organizers actively sought, without compensation,
subscriptions to purchase the common shares of the Company. All subscription
payments were deposited with a bank escrow agent and the subscribers earned
interest on amounts paid at an amount equal to the passbook savings rate of
the escrow agent. A significant portion of the interest earned by the
subscribers was ultimately paid through the issuance of additional shares of
the Company's common stock.
In November 1995, the initial offering of the common stock was completed and the
escrow agent issued 348,464 shares at a value of $4,355,800, including $167,983
of accrued interest expense due the subscribers. Since such date, additional
shares have been issued and purchased at various prices per share.
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 7 - NON-INTEREST EXPENSES
Upon the opening of the Perrysburg office in October 1996, $311,191 of deferred
pre-opening expenses, principally salaries, wages and employee benefits and
outside services incurred in 1996, were charged to operations.
The following is a summary of other operating expenses for 1996 and 1995:
1996 1995
Advertising, printing, and supplies $ 111,667 $ 4,707
Professional fees, litigation and
settlements 172,348 -
Equipment rent 54,079 -
Insurance 41,675 -
Outside services 42,479 -
Other expenses 39,952 7,107
Total other operating expenses $ 462,200 $ 11,814
NOTE 8 - FEDERAL INCOME TAXES
The provision (credit) for federal income taxes for the years ended December
31, 1996 and 1995 amounted to ($31,600) and $31,600, respectively. The actual
provision (credit) for income taxes attributable to income (loss) from
operations differed from the amounts computed by applying the U.S. federal
income tax rate of 34% to income (loss) before federal income taxes as a
result of the following:
1996 1995
Expected tax using statutory tax rate of 34% $ (307,700) $ 54,100
Impact of the following:
Increase in the valuation allowance for
deferred tax assets 272,800 -
Surtax exemption and other items, net 3,300 (22,500)
Total $ (31,600) $ 31,600
The tax effects of temporary differences that give rise to deferred tax assets
at December 31, 1996 are presented below:
Net operating loss carryforward $ 119,800
Allowance for loan losses 6,800
Pre-opening costs 101,400
Capital leases 27,900
Accrued expenses and other 16,900
272,800
Less valuation allowance 272,800
Total deferred tax assets, net of valuation allowance $ -
At December 31, 1996, the Company has a net operating loss carryforward
approximating $352,500, which is available to reduce future regular federal
taxable income. Such carryforward expires in 2011.
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 8 - FEDERAL INCOME TAXES (CONTINUED)
In assessing the realization of deferred tax assets, management considers
whether it is more likely than not that some portion or all of the deferred tax
assets will not be realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the periods in
which those temporary differences become deductible or are available.
Due to the start-up nature of the Company's operations and the uncertainty as
to when the operations will generate future taxable income, a valuation
allowance of $272,800 was established at December 31, 1996 to eliminate all
deferred tax assets.
Refundable federal income taxes, resulting from a carryback claim for taxes
paid in 1995, amounted to $22,290 at December 31, 1996, and is included in
other assets in the consolidated balance sheet.
NOTE 9 - RETIREMENT PLAN
Employees of the Bank who meet certain eligibility requirements may elect to
participate in a 401(k) plan administered by Great Lakes Pension Services.
Under the Plan, the Bank matches a percentage of employee contributions up
to limits specified in the Plan. The Bank's contribution for 1996 amounted
to $2,861.
NOTE 10 - LEASE COMMITMENTS
At December 31, 1996, future minimum lease payments were as follows:
Capital Operating
leases leases
Year ending December 31:
1997 $ 305,000 $ 143,614
1998 305,000 143,614
1999 317,496 143,614
2000 329,296 143,614
2001 329,296 52,932
Thereafter 4,805,947 -
Total minimum lease payments 6,392,035 $ 627,388
Less amount representing interest 3,892,035
Present value of minimum capital
lease payments $ 2,500,000
In addition to the minimum lease payments on the capital lease agreements,
the Company is responsible for real estate taxes and insurance for the
properties.
For 1996 and 1995, rent expense under various operating lease agreements and
other short-term lease arrangements approximated $73,500 and $3,500,
respectively.
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 11 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments are loan commitments to extend credit and involve, to
varying degrees, elements of credit risk in excess of the amounts recognized
in the consolidated balance sheet. The contract amount of these instruments
reflects the extent of involvement the Bank has in these financial instruments.
The Bank's exposure to credit loss in the event of the nonperformance by the
other party to the financial instruments for loan commitments to extend credit
is represented by the contractual amounts of these instruments. The Bank uses
the same credit policies in making loan commitments as it does for on-balance
sheet loans.
Financial instruments whose contract amount represents credit risk approximated
the following amounts at December 31, 1996:
Commitments to extend credit $ 578,000
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. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amount does not necessarily
represent future cash requirements. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained if
deemed necessary by the Bank upon extension of credit is based on management's
credit evaluation of the customer. Collateral held varies but may include
accounts receivable; inventory; property, plant, and equipment; and income-
producing commercial properties.
NOTE 12 - REGULATORY MATTERS
The Company and Bank are subject to various regulatory capital requirements
administered by federal and state banking agencies. Failure to meet minimum
capital requirements can initiate certain mandatory, and possibly additional
discretionary, actions by regulators that, if undertaken, could have a direct
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the
Company and Bank must meet specific capital guidelines that involve quantitative
measures of assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The capital amounts and
classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the Company and Bank to maintain minimum amounts and ratios (set forth
in the table below) of total and Tier I capital (as defined in the regulations)
to risk-weighted assets (as defined), and of Tier I capital to average assets
(as defined). Management believes, as of December 31, 1996, that the Company
and Bank meet all capital adequacy requirements to which it is subject.
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 12 - REGULATORY MATTERS (CONTINUED)
As of December 31, 1996, the Company and Bank are classified as "well
capitalized" under the regulatory framework for prompt corrective action. To
be categorized as "well capitalized", the minimum total risk-based, Tier I
risk-based and Tier I leverage ratios as set forth in the table must be
maintained.
The actual capital amounts and ratios of the Company and Bank as of December 31,
1996 are also presented in the table.
To be
For "well capitalized"
capital under prompt
adequacy corrective
Actual purposes action provisions
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
As of December 31, 1996:
Total Capital (to Risk
Weighted Assets)
Consolidated $ 3,722 > 28.6% $ 1,040 > 8.0% $ 1,299 > 10.0%
Bank 3,480 > 33.0 843 > 8.0 1,053 > 10.0
Tier I Capital (to Risk
Weighted Assets)
Consolidated 3,702 > 28.5 520 > 4.0 780 > 6.0
Bank 3,460 > 32.9 421 > 4.0 632 > 6.0
Tier I Capital (to
Average Assets)
Consolidated 3,702 > 45.4 326 > 4.0 408 > 5.0
Bank (*) 3,460 > 41.9 330 > 4.0 412 > 5.0
* Average assets of Bank determined for period October 15, 1996 to
December 31, 1996.
On a parent company only basis, the Company's only source of funds are dividends
paid by the Bank. The ability of the Bank to pay dividends is subject to
limitations under various laws and regulations, and to prudent and sound
banking principles. Generally, subject to certain minimum capital requirements,
the Bank may declare a dividend without the approval of the State of Ohio
Division of Financial Institutions, unless the total dividends in a calendar
year exceed the total of its net profits for the year combined with its
retained profits of the two preceding years. Under these provisions, no amount
was available for dividends at December 31, 1996. without the need to obtain
the approval of the State of Ohio Division of Financial Institutions.
The Board of Governors of the Federal Reserve System generally considers it to
be an unsafe and unsound banking practice for a bank holding company to pay
dividends except out of current operating income, although other factors such
as overall capital adequacy and projected income may also be relevant in
determining whether dividends should be paid. The Company does not anticipate
the paying of any dividends until the Bank has increased its assets to the point
of being profitable.
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 13 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of
December 31, 1996 and for the years ended December 31, 1996 and 1995 are as
follows:
BALANCE SHEET
Assets:
Cash $ 448,599
Investment in subsidiary 3,461,721
Premises under capital lease, net 2,439,583
Other asset - refundable federal income taxes 22,290
Total assets $ 6,372,193
Liabilities:
Capital lease obligations $ 2,500,000
Accrued interest and other liabilities 168,649
Total liabilities 2,668,649
Stockholders' equity:
Common stock 370,761
Surplus 4,111,772
Accumulated deficit (781,224)
Net unrealized holding gain on securities available-
for-sale 2,235
Total stockholders' equity 3,703,544
Total liabilities and stockholders' equity $ 6,372,193
STATEMENTS OF OPERATIONS 1996 1995
Interest income $ 110,570 $ 358,819
Interest expense 481 184,237
Net interest income 110,089 174,582
Net occupancy expenses 199,452 3,525
Other operating expenses 275,084 11,814
Total non-interest expenses 474,536 15,339
Income (loss) before federal income
taxes (364,447) 159,243
Provision (credit) for federal income
taxes (31,600) 31,600
Income (loss) before equity in
net loss of subsidiary (332,847) 127,643
Equity in net loss of subsidiary (540,514) -
Net income (loss) $ (873,361) $ 127,643
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 13 - CONDENSED PARENT COMPANY FINANCIAL
INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS 1996 1995
Operating activities:
Net income (loss) $ (873,361) $ 127,643
Adjustments:
Depreciation and amortization 65,543 4,226
Interest expense - common stock, escrow account - 167,983
Equity in net loss of subsidiary 540,514 -
Expenses paid directly by organizers 6,511 6,603
Increase in other assets (84,907) (74,364)
Increase (decrease) in other liabilities (115,512) 309,415
Net cash provided by (used in) operating
activities (461,212) 541,506
Investing activities:
Investment in subsidiary (3,855,000) -
Proceeds from sale-leaseback agreement 1,496,510 -
Additions to premises and equipment (879,434) (663,830)
Net cash used in investing activities (3,237,924) (663,830)
Financing activities:
Proceeds from issuance of common stock 316,421 4,187,817
Purchase of common stock (111,784) -
Repayment of advances from organizers, net (49,349) (73,200)
Net cash provided by financing activities 155,288 4,114,617
Increase (decrease) in cash (3,543,848) 3,992,293
Cash at beginning of year 3,992,447 154
Cash at end of year $ 448,599 $ 3,992,447
Supplemental Disclosures:
Cash paid during the year for:
Interest $ 122,886 $ 10,463
Federal income taxes $ 23,474 $ -
Non-cash investing and financing activities:
Capital lease obligations $ 2,500,000 $ -
Common stock issued in lieu of paying
interest $ - $ 167,983
Assets transferred to the Bank as part of
capitalization $ 145,000 $ -
Transfer pre-opening costs and related
payable to Bank $ 25,254 $ -
Deferred selling costs charged to surplus $ 13,049 $ 146,105
Deferred selling costs paid directly by
organizers $ 6,438 $ 23,597
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of the Bank's principal financial
instruments, as defined by the Financial Accounting Standards Board's Statement
of Financial Accounting Standards No. 107, "Disclosures About Fair Value of
Financial Instruments", are as follows at December 31, 1996:
Carrying Fair
amount value
Financial assets:
Cash and cash equivalents $ 5,812,547 $ 5,812,547
Investment securities 3,389,270 3,383,167
Loans receivable, net 1,102,913 1,102,913
Accrued interest receivable 46,970 46,970
Total $ 10,351,700 $ 10,345,597
Financial liabilities:
Deposits $ 6,505,572 $ 6,516,714
Capital lease obligations 2,500,000 2,500,000
Accrued interest, taxes and other expenses 284,975 284,975
Total $ 9,290,547 $ 9,301,689
The Bank also has unrecognized financial instruments at December 31, 1996.
These financial instruments relate to commitments to extend credit. The
contract amount of such financial instruments total approximately $578,000 at
December 31, 1996. Such amount is also considered to be the estimated fair
value.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments shown above:
Cash and cash equivalents:
Because of the short maturity of cash equivalents, the carrying amount reported
in the consolidated balance sheet approximates fair value.
Investment securities:
The fair value of investment securities is determined based on quoted market
prices of the individual securities or, if not available, estimated fair value
was obtained by comparison to other known securities with similar risk and
maturity characteristics. Such value does not consider possible tax
ramifications or estimated transaction costs.
Loans receivable:
Fair value for loans receivable was estimated for portfolios of loans with
similar financial characteristics. For adjustable rate loans, which re-price
at least annually and generally possess low risk characteristics, the carrying
amount is a reasonable estimate of fair value. For fixed rate and other loans
the fair value is estimated based on estimated discounted cash flows using
current interest rates. Such computations consider weighted average rates and
terms of the portfolio, and are adjusted for credit and interest rate risk
inherent in the loans. Since all loans were made in the period of October to
December 1996 and there has not been a change in interest rates, carrying
value approximates fair value.
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Deposit liabilities:
The fair value of core deposits, including demand deposits, savings accounts,
and certain money market deposits, is the amount payable on demand. The fair
value of fixed-maturity certificates of deposit and other time accounts is
estimated using the rates offered at year end for deposits of similar remaining
maturities. The estimated fair value does not include the benefit that results
from the low-cost funding provided by the deposit liabilities compared to the
cost of borrowing funds in the market.
Other financial instruments:
The fair value of accrued interest receivable and accrued interest, taxes and
other expenses is determined to be the carrying amount.
The fair value of capital lease obligations is determined to be the carrying
amount since the interest rates on such amounts are considered to be reasonably
close to current rates.
The fair value of commitments to extend credit is determined to be the contract
amount since these financial instruments generally repre at existing rates.
NOTE 15 - FUTURE CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." Statement 125 becomes
effective for transactions occurring after December 31, 1996, except that
certain provisions of Statement 125 have been deferred by Statement 127.
Statement 125 distinguishes transfers of financial assets that are sales from
transfers that are secured borrowings. A transfer of financial assets in which
the transferor surrenders control over those assets is accounted for as a
sale to the extent that consideration other than beneficial interests in the
transferred assts is received in exchange. Statement 125 also establishes
standards on the initial recognition and measurment of servicing assets and
other retained interests and servicing liabilities, and their subsequent
measurement.
Statement 125 also requires that debtors reclassify financial assets pledged
as collateral and that secured parties recognize those assets and their
obligation to return them in certain circumstances in which the secured party
has taken control of those assets. In addition, Statement 125 requires that
a liability be derecognized only if the debtor is relieved of its obligation
through payment to the creditor or by being legally released from being the
primary obligor under the liability either judicially or by the creditor.
Management does not believe the application of Statement 125 to transactions
of the Bank will materially affect the Company's consolidated financial position
and results of operations.
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1996
NOTE 16 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Consolidated supplemental cash flow disclosures consisted of the following for
the years ended December 31, 1996 and 1995:
1996 1995
Cash paid during the year for:
Interest, including $121,000 in 1996 relating to
capital lease obligations $ 148,484 $ 10,463
Federal income taxes $ 23,474 $ -
Non-cash investing and financing activities:
Capital lease obligations $ 2,500,000 $ -
Common stock issued in lieu of paying interest $ - $ 167,983
Deferred selling costs charged to surplus $ 13,049 $ 146,105
Deferred selling costs paid directly by
organizers $ 6,438 $ 23,597
Change in net unrealized holding gain on
available-for-sale investment securities $ 2,235 $ -
NOTE 17 - CONTINGENT LIABILITIES
In the normal course of business, the Company and its subsidiary may be involved
in various legal actions, but in the opinion of management and its legal
counsel, the ultimate disposition of such matters is not expected to have a
material adverse effect on the consolidated financial statements.
<PAGE>
Description Of The Company
Towne Bancorp, Inc. (the "Company"), a single bank holding company, was
incorporated in April 1992. The Company's initial offering of its common
stock was completed in November 1995 with the issuance of 348,464 shares of
common stock at a value of $4,355,800 ($12.50 per share). The organizers of
the Company had previously purchased 6,500 shares of common stock at a value
of $81,250 (also $12.50 per share). The Company's operating subsidiary, Towne
Bank (the "Bank"), is an Ohio chartered bank and was incorporated in 1995.
The Bank offers a range of commercial and retail banking services through the
two offices located in Perrysburg and Sylvania, Ohio. The Perrysburg office
was opened in October 1996 and the Sylvania office opened in January 1997.
Products are comprised of traditional banking services such as consumer,
commercial and real estate loans, personal and business checking accounts,
savings accounts and time deposit accounts.
Market Price And Dividends For Common Stock
There is no established public trading market for the Company's Common Stock.
Solely on the basis of transactions which the Company has been involved, the
ranges of transaction prices for shares of Company's Common Stock for each
quarterly period during 1996 and 1995 were as follows:
1996 1995
First Quarter $12.50 N/A
Second Quarter 14.50 N/A
Third Quarter 14.50 N/A
Fourth Quarter 14.50 $12.50
No dividends have been declared by the Company on the common stock.
Properties
As of December 31, 1996, the Company leased both of the facilities. The
location in Perrysburg, Ohio has approximately 5,000 square feet, a lease
expiration date of February, 2016 and is used as a financial institution.
The location in Sylvania, Ohio has approximately 7,000 square feet, a lease
expiration date of September, 2016, and is used as a financial institution.
<PAGE>
CORPORATE INFORMATION
TOWNE BANCORP, INC.
DIRECTORS & MANAGEMENT
Jerome C. Bechstein Director President and CEO
Lois A. Brigham Director and Secretary Senior Vice President
John P. Weinert Director Retired
TOWNE BANK
DIRECTORS & MANAGEMENT
Jerome C. Bechstein Lois A. Brigham
Director Director and Secretary
President and CEO Senior Vice President
Douglas J. Kelley John P. Weinert
Chief Financial Officer Director
Retired
Sister Ruth Marie Kachelek Charles Oswald
Director Director
General Counsel, Owner and President
Sisters Of St. Francis Appliance Center
<PAGE>
GENERAL LEGAL COUNSEL
Barkan & Robon
Toledo, Ohio
INDEPENDENT AUDITORS
Clifton Gunderson Ltd.
Toledo, Ohio
TRANSFER AGENT
Huntington Trust Company
Stock Transfer Department
Huntington Center
Columbus, Ohio
ANNUAL MEETING
The annual meeting of the stockholders of Towne Bancorp, Inc., will be held at
3:30 p.m. on April 23, 1997 at the Phoenix Lodge, Perrysburg, Ohio.
AVAILABILITY OF MORE INFORMATION
To obtain a copy of the Corporation's 1996 annual report, Form 10 KSB, filed
with the Securities and Exchange Commission, please write to:
Ms. Lois A. Brigham, Secretary
Towne Bancorp, Inc.
610 E. South Boundary Street
Perrysburg, Ohio 43551-2535
<PAGE>
Exhibit 12.2
TOWNE BANCORP, INC.
Subsidiaries of the Registrant
State of Percentage of
Subsidiary Incorporation Securities Owned
Towne Bank (1) Ohio 100%
(1) The subsidiary's principal office is located in Perrysburg, Ohio.
<PAGE>
Exhibit 12.3
<TABLE>
<S> <C>
12/31/96
[CASH] 383547
<FED FUNDS SOLD> 5429000
<INVESTMENTS-AVAILABLE-FOR-SALE> 1396103
<INVESTMENTS-HELD-FOR-MATURITY> 1993167
[LOANS] 1122913
[ALLOWANCE] (20000)
<OTHER ASSETS> 2689361
<TOTAL ASSETS> 12994091
[DEPOSITS] 6505572
[LIABILITIES-OTHER] 2784975
[COMMON] 370761
<OTHER-CAPITAL> 3332783
<TOTAL LIABILITIES AND EQUITY 12994091
[INTEREST-LOAN] 13614
[INTEREST-INVEST] 183341
[INTEREST-EXPENSE] 42714
[INTEREST-INCOME-NET] 154241
[LOAN-LOSSES] 20000
<INCOME-OTHER> 2054
<EXPENSES-OTHER> 1041256
[INCOME-PRETAX] (904961)
[CHANGES] (31600)
[NET-INCOME] (873361)
[EPS-PRIMARY] (2.38)
[EPS-DILUTED] (2.38)
</TABLE>
