<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
_____________________
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
Commission File Number 0000887203
TOWNE BANCORP, INC.
(Exact name of registrant as specified in its charter)
Ohio 34-1704637
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
610 East South Boundary
Perrysburg, Ohio 43551
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (419) 874-2090
___________________
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common stock, without par value
Check whether the registrant (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 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 Registrant's revenues for its most recent fiscal year are $1,218,550.
There is a very limited market for the Registrant's voting stock. The
aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on a limited number of transactions, was $5,281,784 as of
February 28, 1998.
As of February 28, 1998, there were issued and outstanding 370,761 shares
of Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of Registrant's Proxy Statement for the 1998 Annual Meeting of
Stockholders are incorporated by reference in Part III.
Portions of Registrant's Form S-2 Registration Statement, dated January 5,
1998 (Registration No. 333-43741) are incorporated by reference in Item 13
- Part III of Form 10-KSB.
Transitional Small Business Disclosure Format (check one) Yes No X
--- ---
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE
PART I
<S> <C> <C>
ITEM 1. Description of Business . . . . . . . . . . . . . . . . . . 3
ITEM 2. Description of Property . . . . . . . . . . . . . . . . . . 14
ITEM 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . 14
ITEM 4. Submission of Matters to a Vote of Security Holders . . . . 14
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters. . 15
ITEM 6. Management's Discussion and Analysis of Operations. . . . . 15
ITEM 7. Financial Statements. . . . . . . . . . . . . . . . . . . . 20
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure. . . . . . . . . . 20
PART III
ITEM 9. Directors, Executive Officers, Promoters and
Control Persons, Compliance with Section 16(a)
of the Exchange Act. . . . . . . . . . . . . . . . . . 20
ITEM 10. Executive Compensation. . . . . . . . . . . . . . . . . . . 20
ITEM 11. Security Ownership of Certain Beneficial
Owners and Management. . . . . . . . . . . . . . . . . 20
ITEM 12. Certain Relationships and Related Transactions. . . . . . . 20
ITEM 13. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . 21
SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
</TABLE>
-2-
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Towne Bancorp, Inc. (the "Company") was organized 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 organized in
1995. The Bank is the only subsidiary of the Company, and except for the
leasing of the Bank's two offices and certain equipment by the Company to the
Bank, 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 Company had total consolidated assets
of $22,569,055 at December 31, 1997.
The Company, through its subsidiary, the Bank, operates in one industry segment,
the commercial banking industry.
GENERAL
The Company was formed by Jerome Bechstein, John Weinert and others. The
initial capitalization of the new Bank was achieved through the purchase of
6,500 shares by the organizers at a per share price of $12.50 ($81,250) and by
selling shares to the general public in the communities of the Bank's service
areas. The offering began in August 1992 and was completed in November 1995
with the issuance of 348,464 shares at a per share price of $12.50 ($4,355,800).
The Bank provides services in the State of Ohio to Northern Wood County and the
Western and Southern Lucas County areas. The Bank was founded as a new de-novo
(start-up) Bank. The Bank opened the Perrysburg office on October 15, 1996 at
the 610 East South Boundary Street location, and the Sylvania office, located at
6401 Monroe Street, opened on January 13, 1997, as the newest commercial bank in
the area.
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 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, and
commercial loans secured by real estate, including interim construction
financing.
The Company and Bank are regulated by federal and state banking agencies. As a
result, they are subject to periodic examinations by the agencies and are
required to comply with various regulatory matters. As a result of a June 30,
1997 Joint Report of Examination issued by the Ohio Division of Financial
Institutions and the Federal Reserve Bank of Cleveland, the Board of Directors
of the Bank on November 12, 1997 authorized the acceptance of a Memorandum of
Understanding (the "Memorandum") between the Bank and the regulatory agencies.
Under the Memorandum, which was effective November 14, 1997, the Bank agreed to
develop a capital plan, upgrade its budgeting process, assess its management
structure and board oversight, hire an experienced chief lending officer,
establish loan review procedures, provide periodic reporting to the regulators
and other matters.
As a result of an additional examination in December, 1997 by the regulatory
agencies, the Board of Directors of the Bank authorized on January 30, 1998, the
acceptance of a Cease and Desist Order (the "Order") between the Bank and the
regulatory agencies. Under the Order, which was effective February 4, 1998, the
Bank agreed to comply with each and every provision of the Order, many of which
are in the Memorandum described above. The major items agreed to under the
Order which were not in the Memorandum, are as follows: the Bank will retain an
independent bank management consulting firm to conduct a complete management
review of the Bank's personnel and operating policies; restrictions are placed
on the Bank's quarterly asset growth, except for any increases resulting from
the Company's approved capital plan; the Bank will not declare or pay any
dividends without the approval of the Federal Reserve Bank; the Bank will
maintain a ratio of Tier I Capital to total assets of at least 10% until the
Superintendent of the Ohio Division of Financial Institutions advises the Bank
the level is no longer necessary; the Board of Directors and chief lending
officer will approve all loans over $5,000; the Bank will develop an internal
loan review reporting process; a budget analysis of overhead and other costs
will be prepared, with semi-annual revisions as necessary; and the placement of
restrictions on future transactions with the Company. See BUSINESS RISKS -
RECENT ACTION BY OHIO DIVISION AND FEDERAL RESERVE BANK OF CLEVELAND.
-3-
<PAGE>
On a parent company only basis, the Company's primary source of funds is the
receipt of dividends paid by the Bank subsidiary. However, as a result of the
Cease and Desist Order described above, the Bank cannot pay any dividends
without the approval of the Federal Reserve. No dividend payments by the Bank
to the Company are expected for at least the next five years.
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 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 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 the affected communities.
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. As previously
discussed, the Bank is subject to a cease and desist order which was effective
February 4, 1998. 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 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 its shareholders. The Bank must file with the
Ohio Division of Financial Institutions prescribed periodic reports containing a
full and accurate statement of its affairs.
The Company and the Bank are also 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. As of this date, the Bank has not
received the results of any CRA examination. .
The Company and the 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 the 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. As a result of the
previously described Order, the Bank must also maintain a ratio of Tier I
Capital to total assets of at least 10% until the Ohio Division of Financial
Institutions advises the Bank the level is no longer necessary. As of March 31,
1998, the Bank had a Tier I Capital ratio of approximately 7.65%. See BUSINESS
RISKS - RECENT ACTION BY OHIO DIVISION AND FEDERAL RESERVE BANK OF CLEVELAND and
Note 14 - Regulatory Matters - of Notes to Consolidated Financial Statements.
-4-
<PAGE>
EFFECTS OF GOVERNMENT MONETARY POLICY
The operations 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, including the Bank, and are
expected to continue to do so in the future.
COMPETITION
The Bank has active competition in all areas in which it engages. The Bank
competes for commercial and individual deposits and/or loans with other
commercial banks in Lucas and Northern Wood counties in Northwestern Ohio, as
well as with savings and loan associations in the trade area, credit unions
connected with local businesses, brokerage firms, mutual funds, 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. The mission statement of the Bank is to
service small and middle market businesses, agricultural, retail, professional,
mortgages and individual customers. The Bank's 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.
EMPLOYEES
The Company has no employees and conducts its business through its wholly-owned
subsidiary, the Bank.
As of December 31, 1997, the Bank employed 10 full-time employees to whom it
provides a variety of benefits and with whom it believes relationships are good.
On March 16, 1998, the Bank announced the resignations of Jerome C. Bechstein,
President and Lois A. Brigham, Sr. Vice President and Secretary. Both will
continue to serve on the Bank's Board of Directors and will continue to serve as
officers and directors of the Company. The Bank hired a new President on March
28, 1998.
STATISTICAL DISCLOSURES
The following pages present various statistical disclosures required for bank
holding companies. The information represents only domestic information since
the Company has no foreign operations or foreign loans.
-5-
<PAGE>
DISTRIBUTION OF ASSETS, LIABILITIES, RESCINDABLE COMMON STOCK AND STOCKHOLDERS'
DEFICIT; INTEREST RATES AND INTEREST DIFFERENTIAL
The following table sets forth, for the years ended December 31, 1997 and 1996,
the distribution of assets, liabilities, rescindable common stock and
stockholders' deficit, including interest amounts and average rates of major
categories of interest-earning assets and interest-bearing liabilities:
<TABLE>
<CAPTION>
1997 1996(1)
----------------------------------- --------------------------
AVERAGE YIELD/ AVERAGE YIELD/
ASSETS BALANCE INTEREST RATE BALANCE INTEREST RATE
------- -------- ---- ------- -------- ----
Interest-earning assets:
<S> <C> <C> <C> <C> <C> <C>
Loans (2) (3) $ 7,451,760 $ 786,825 10.56 $ 114,969 $ 13,614 11.84%
Investment securities (4) 3,257,245 190,828 5.86 356,501 19,982 5.61
Deposit in bank (5) -- -- -- 2,403,695 110,570 4.60
Federal funds sold 3,502,898 188,131 5.37 904,699 52,789 5.83
------------ ----------- ------------ --------
Total interest-earning assets 14,211,903 1,165,784 8.20 3,779,864 196,955 5.21
------------ ----------- ---- ------------ -------- ----
---- ----
Non-interest earning assets:
Cash and due from banks 882,409 202,003
Bank premises and equipment, net 2,433,582 2,002,357
Other assets 277,833 73,430
Less allowance for loan losses (79,397) (1,685)
------------ -----------
Total $ 17,726,330 1,165,784 $ 6,055,969 196,955
------------ ----------- ------------ --------
------------ ----------- ------------ --------
LIABILITIES, RESCINDABLE
COMMON STOCK AND
STOCKHOLDERS' DEFICIT
Interest-bearing liabilities:
Deposits $ 10,743,631 $ 593,393 5.52 $ 733,578 $ 42,233 5.76%
Organizer advances (6) -- -- -- 6,634 481 7.25
------------ ----------- ------------ --------
Total interest-bearing liabilities 10,743,631 593,393 5.52 740,212 42,714 5.77
------------ ----------- ---- ------------ -------- ----
---- ----
Non-interest bearing liabilities:
Capital lease obligations (7) 2,511,332 -- 1,214,940 --
Demand deposits 1,163,663 -- 68,253 --
Other liabilities 267,422 -- 270,296 --
------------ ----------- ------------ --------
Total non interest-bearing
liabilities 3,942,417 -- 1,553,489 --
------------ ----------- ------------ --------
Rescindable common stock 4,482,533 -- 4,386,739 --
------------ ----------- ------------ --------
Stockholders' deficit (1,442,251) -- (624,471) --
------------ ----------- ------------ --------
Total $ 17,726,330 593,393 $ 6,055,969 42,714
------------ ----------- ------------ --------
------------ ------------
Net interest income $ 572,391 $154,241
----------- --------
----------- --------
Net yield on interest-earning assets 4.03% 4.08%
---- ----
---- ----
</TABLE>
NOTES:
(1) Since Bank was open for only 2-1/2 months in 1996, average balances
applicable to Bank for 1996 have been adjusted to an annual basis in order
to compute the effective yield/rate.
(2) Included in loan interest income are loan fees of $106,310 in 1997 and
$3,164 in 1996.
(3) The Bank has no non-accrual loans for the periods reported above.
(4) All taxable investments.
(5) Deposit in bank represents the Company's common stock proceeds received
from bank escrow account in November, 1995.
(6) During start-up period, Company organizers advanced funds to Company to pay
for various costs. Advances required interest at 7.25%.
(7) Interest expense on capital lease obligations is reported in occupancy
expense for financial reporting purposes. Such interest amounted to
$286,870 in 1997 (11.42%) and $142,774 in 1996 (11.75%).
- 6 -
<PAGE>
The following table sets forth a summary of the 1997 changes in interest income
and interest expense resulting from changes in volume and changes in rate. A
summary of the 1996 changes in interest income and interest expense is not
provided since the Bank began operations on October 15, 1996 and all changes
resulted from changes in volume.
<TABLE>
<CAPTION>
1997 COMPARED TO 1996
INCREASE (DECREASE) DUE
TO VOLUME/RATE (1)
------------------------------------
VOLUME RATE NET
---------- ----------- ----------
Interest income:
<S> <C> <C> <C>
Loans $ 774,685 $ (1,474) $ 773,211
Investment securities 169,902 944 170,846
Deposit in bank (110,570) - (110,570)
Federal funds sold 139,198 (3,856) 135,342
--------- -------- ---------
Total interest-earning assets 973,215 (4,386) 968,829
--------- -------- ---------
Interest expense:
Deposits 552,584 (1,424) 551,160
Organizer advances (481) - (481)
--------- -------- ---------
Total interest expense 552,103 (1,424) 550,679
--------- -------- ---------
Net interest income $ 421,112 $ (2,962) $ 418,150
--------- -------- ---------
--------- -------- ---------
</TABLE>
NOTE:
(1) The change in interest income and interest expense due to changes in
both volume and rate, which cannot be segregated, has been allocated
proportionately to the absolute dollar change due to volume and the
change due to rate.
- 7 -
<PAGE>
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at
December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
U.S. Treasury securities $ 900,933 $ 1,096,419
Obligations of U.S. Government agencies
and corporations 1,598,805 2,196,851
Other security 96,000 96,000
----------- -----------
Total $ 2,595,738 $ 3,389,270
----------- -----------
----------- -----------
</TABLE>
All amounts are presented on the basis of Statement of Financial Accounting
Standards No. 115.
There are no investment securities of an "issuer" where the aggregate carrying
value of such securities exceeded 10% of the combined total of rescindable
common stock and stockholders' deficit. Also, there are no tax-exempt
investment securities at December 31, 1997 and 1996.
The following table sets forth the maturities of investment securities at
December 31, 1997 and the weighted average yields of such securities:
<TABLE>
<CAPTION>
AFTER ONE
WITHIN BUT WITHIN
ONE YEAR FIVE YEARS
-------- ----------
AMOUNT YIELD AMOUNT YIELD
------ ----- ------ -----
<S> <C> <C> <C> <C>
U.S. Treasury securities $ 99,856 5.49% $ 801,077 5.91%
Obligations of U.S. Government agencies
and corporations 899,211 5.73% 699,594 6.22%
--------- ---- ----------- ----
Total $ 999,067 5.71% $ 1,500,671 6.05%
--------- ---- ----------- ----
--------- ---- ----------- ----
</TABLE>
The above table excludes the other security investment of $96,000, which
represents the Bank's investment in Federal Reserve Bank stock and which has no
stated maturity.
LOAN PORTFOLIO--TYPES OF LOANS
The amounts of gross loans outstanding at December 31, 1997 and 1996 are shown
in the following table according to types of loans:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Commercial $ 5,549,125 $ 233,015
Real estate:
Residential mortgage 6,336,594 623,993
Construction - 76,040
Consumer 2,022,164 194,955
------------ ----------
Total $ 13,907,883 $1,128,003
------------ ----------
------------ ----------
</TABLE>
Commercial loans are those made for commercial, industrial, and professional
purposes to sole proprietorships, partnerships, corporations, and other business
enterprises. The loans involve certain risks relating to changes in local and
national economic conditions and the resulting effect on the borrowing entities.
Real estate - residential mortgage loans are secured wholly or substantially by
a lien on real property. Real estate - mortgage loans generally pose the least
risk exposure to the Bank.
- 8 -
<PAGE>
Real estate - construction loans are made to finance land development prior to
erecting new structures and the construction of new buildings or additions to
existing buildings. Real estate - construction loans pose more risk than real
estate - residential mortgage loans, but generally afford adequate security upon
completion of the construction project.
Consumer loans are made to individuals for household, family, and other personal
expenditures. These often include the purchase of vehicles or furniture,
educational expenses, medical expenses, taxes, or vacation expenses. Consumer
loans may be secured, other than by real estate, or unsecured, generally
requiring repayment on an installment repayment schedule. Consumer loans pose
relatively higher risk and are also influenced by local and national economic
conditions. There are no foreign loans and no lease financing receivables.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES
The following table shows the amount of commercial loans outstanding as of
December 31, 1997 which, based on the contract terms for repayments of
principal, are due in the periods indicated. Also, the amounts due after one
year are classified according to their sensitivity to changes in interest rates.
<TABLE>
<CAPTION>
MATURING
--------
WITHIN AFTER ONE AFTER
ONE BUT WITHIN FIVE
YEAR FIVE YEARS YEARS TOTAL
---- ---------- ----- -----
<S> <C> <C> <C> <C>
Commercial $ 4,103,909 $1,445,216 $ - $ 5,549,125
----------- ---------- ------- -----------
----------- ---------- ------- -----------
</TABLE>
<TABLE>
<CAPTION>
INTEREST
SENSITIVITY
-----------
FIXED VARIABLE
RATE RATE
---- ----
<S> <C> <C>
Due after one but within five years $ 364,085 $ 1,081,131
Due after five years - -
--------- -----------
$ 364,085 $ 1,081,131
--------- -----------
--------- -----------
</TABLE>
The above maturity information is based on the contract terms at December 31,
1997 and does not include any possible "rollover" at maturity date. In the
normal course of business, the Bank considers and acts upon the borrower's
request for renewal of a loan at maturity. Evaluation of such a request
includes a review of the borrower's credit history, the collateral securing the
loan, and the purpose for such request.
RISK ELEMENTS
The following table presents information concerning the amount of loans at
December 31, 1997 and 1996, which contain certain risk elements:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Loans accounted for on a nonaccrual basis (1) $ - $ -
Loans contractually past due 90 days or more as to
principal or interest payments 103,887 -
Loans whose terms have been renegotiated to provide a reduction
or deferral of interest or principal because of a deterioration
in the financial position of the borrower - -
--------- -------
Total $ 103,887 $ -
--------- -------
--------- -------
</TABLE>
NOTE: Loans are placed on nonaccrual status when, in the opinion of
management, full collection of principal and interest is unlikely.
Interest is then recognized on a cash basis where future collections
of principal are probable.
- 9 -
<PAGE>
In addition to the loan amounts identified above, there were approximately
$3,896,000 of potential problem loans at December 31, 1997, none of which relate
to any concentrated risk elements common to all the loans. While these loans
are all currently performing, management has serious doubts about the ability of
the borrowers to continue to comply with all of their present loan repayment
terms without some modification or restructuring of the loans.
As of December 31, 1997, there was no concentration of loans, excluding loan
commitments, that exceeded 10% of total loans.
SUMMARY OF LOAN LOSS EXPERIENCE
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following table shows the daily average loan balances, for the periods
indicated, and changes in the allowance for loan losses for such years:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1997 1996
---- ----
<S> <C> <C>
Daily average amount of loans $7,451,760 $ 114,969
---------- ---------
---------- ---------
Allowance for loan losses at beginning of year $ 20,000 $ -
Loan charge-offs - -
Recoveries of loans previously charged-off - -
Additions to allowance charged to expense 721,883 20,000
---------- ---------
Allowance for loan losses at end of year $ 741,883 $ 20,000
---------- ---------
---------- ---------
</TABLE>
NOTE:
The determination of the balance of the allowance for loan losses is based
upon 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 require current recognition in estimating possible
loan losses.
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table allocates the allowance for loan losses as of December 31,
1997 and 1996 to each loan category. The allowance has been allocated to the
categories of loans noted according to the amount deemed to be reasonably
necessary to provide for the possibility of losses being incurred based on
specific credit analyses and the proration of the unallocated allowance to the
loan categories based on potential loss experience:
<TABLE>
<CAPTION>
1997 1996
---- ----
PERCENTAGE PERCENTAGE
OF LOANS TO OF LOANS TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
--------- ----------- --------- -----------
<S> <C> <C> <C> <C>
Commercial $ 338,644 39.9% $ 10,000 20.7%
Real estate - mortgage 370,711 45.6 10,000 55.3
Real estate - construction - - - 6.7
Consumer 32,528 14.5 - 17.3
--------- ----- -------- -----
Total $ 741,883 100.0% $ 20,000 100.0%
--------- ----- -------- -----
--------- ----- -------- -----
</TABLE>
- 10 -
<PAGE>
DEPOSITS
The average daily amount of deposits (all in domestic offices) and average rates
paid on such deposits is summarized for the years 1997 and 1996 in the following
table:
<TABLE>
<CAPTION>
1997 1996
---- ----
AVERAGE AVERAGE AVERAGE AVERAGE
BALANCE RATE PAID BALANCE RATE PAID
------- --------- ------- ---------
<S> <C> <C> <C> <C>
Non-interest bearing demand deposits $ 1,163,663 - % $ 68,253 - %
Interest-bearing demand deposits 753,380 2.50 36,956 2.34
Savings, including Money Market
deposits 849,451 3.09 49,692 3.76
Time deposits 9,140,800 6.00 646,930 6.10
----------- ---------
Total $11,907,294 $ 801,831
----------- ---------
----------- ---------
</TABLE>
Since the Bank did not commence operations until October, 1996, average balance
amounts for 1996 have been adjusted to an annual basis in order to compute the
average rate paid.
Maturities of time deposits of $100,000 or more outstanding at December 31, 1997
are summarized as follows:
<TABLE>
<S> <C>
3 months or less $ 864,525
Over 3 through 6 months 1,901,413
Over 6 through 12 months 1,477,787
Over 12 months 1,445,090
-----------
Total $ 5,688,815
-----------
-----------
</TABLE>
RETURN ON EQUITY AND ASSETS
The ratio of net loss to average total assets and average stockholders' equity,
and certain other ratios, for the periods noted are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1997 1996
---- ----
<S> <C> <C>
Percentage of net loss to:
Average total assets (10.4)% (14.4)%
Average stockholders' equity:
Including rescindable common stock (60.5)% (23.2)%
Excluding rescindable common stock (127.5)% (139.9)%
Percentage of average stockholders' equity
to average total assets:
Including rescindable common stock 17.2% 62.1%
Excluding rescindable common stock (8.1)% (10.3)%
</TABLE>
- 11 -
<PAGE>
BUSINESS RISKS
Except for the historical information contained herein, the matters discussed in
this Form 10-KSB include certain forward-looking statements within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), which are intended to be covered
by the safe harbors created thereby. Those statements include, but may not be
limited to, all statements regarding the intent, belief and expectations of the
Company and its management, such as statements concerning the Company's future
profitability. Investors are cautioned that all forward-looking statements
involve risks and uncertainties including, without limitation, factors detailed
from time to time in the Company's filings with the Securities and Exchange
Commission. Although the Company believes that the assumptions underlying the
forward-looking statements contained herein are reasonable, any of the
assumptions could be inaccurate. The failure to comply with the requirements of
the Cease and Desist Order, including the failure of the Bank to hire a chief
lending officers will have an adverse impact on the Bank's future operations.
Therefore, there can be no assurance that the forward-looking statements
contained herein are reasonable, and any of the assumptions could be inaccurate.
Therefore, there can be no assurance that the forward-looking statements
included in this Form 10-KSB will prove to be accurate, and in light of the
significant uncertainties inherent in the forward-looking statements included
herein, the inclusion of such information should not be regarded as a
presentation by the Company or any other person that the objectives and plans of
the Company will be achieved.
LACK OF PROFITABLE OPERATIONS; ABILITY TO CONTINUE AS GOING CONCERN.
The Company only recently began operations through the Bank with the opening
of the Perrysburg branch on October 15, 1996 and the Sylvania branch on
January 13, 1997. As anticipated by management of the Company, the Bank has
not attracted as of this time sufficient deposits and made sufficient loans
to achieve an operating profit. The Company has incurred operating losses in
the aggregate amount of $2,620,132 through December 31, 1997, which exceed
original projections. The Company will continue to incur operating losses
until a sufficient level of assets has been achieved by the Bank to support
its fixed operating expenses on the quality of the Bank's loan portfolio has
improved. As a result of these significant losses, the contingent liability
relating to the Rescission Offer, and other matters, the Company's
independent auditors have stated that these matters raise substantial doubt
about the Company's ability to continue as a going concern. See Consolidated
Financial Statements - Independent Auditors' Report.
HOLDING COMPANY STRUCTURE; GOVERNMENT REGULATION AND POLICIES. The Company
is a single-bank holding company, the profitability of which is entirely
dependent on the profitability of the Bank and the upstream payment of dividends
from the Bank to the Company. Under state and federal banking law, the payment
of dividends by the Company and the Bank is subject to capital adequacy
requirements. The inability of the Bank to generate profits and pay such
dividends to the Company, or regulatory restrictions on the payment of such
dividends to the Company even if earned, would have an adverse effect on the
financial condition and results of operations of the Company. The "Order," as
described below, prohibits the Bank from paying dividends without the approval
of the Federal Reserve Bank. No dividend payments from the Bank to the Company
are expected for the next five years.
As a bank holding company, the Company is subject to regulation,
examination and supervision by the Board of Governors of the Federal Reserve
System. The Bank is an Ohio-chartered, federally-insured bank, which is also a
member of the Federal Reserve System and is subject to both state and federal
regulations, including comprehensive regulation, examination and supervision by
the Ohio Division of Financial Institutions (the "Ohio Division"), the Federal
Reserve System and the FDIC. These regulations are primarily intended to
protect depositors and may impose limitations on the Company which may not be in
the best interests of its stockholders. Regulations now affecting the Company
and the Bank may be changed at any time, and the interpretation of those
regulations by examining authorities is also subject to change. Legislative
proposals are made from time to time which, if enacted, could adversely affect
banking corporations generally, including the Company. It is not possible to
predict whether any such initiatives will be successful, or what would be the
precise effect of such initiatives on the Company if enacted. There can be no
assurance that future changes in the regulations or in the interpretation
thereof will not adversely affect the business of the Company or the Bank.
Changes in the government's monetary, fiscal, housing finance or tax policies
may also adversely affect the business of the Company or the Bank.
RECENT ACTION BY THE OHIO DIVISION AND THE FEDERAL RESERVE BANK OF
CLEVELAND. On January 30, 1998, the Bank executed a Cease and Desist Order
Issued Upon Consent Pursuant to the Federal Deposit Insurance Act, as Amended
and Section 1121.32 of the Ohio Revised Code (the "Order"), which was issued by
the Ohio Division of Financial Institutions (the "Division") and the Federal
Reserve Bank of Cleveland (the "Federal Reserve Bank"). The Order was
effective February 4, 1998. In summary, the Order required that the Bank: (a)
within 30 days employ a chief lending officer; (b)
- 12 -
<PAGE>
within 10 days retain an independent bank management consultant, who will submit
a written report to the Bank's board of directors within thirty days of the date
the consultant is retained; (c) within 30 days of the receipt of the
consultant's report submit a written management plan to the Division and the
Federal Reserve Bank; (d) within 30 days submit a written plan for attaining and
maintaining an adequate capital position; (e) obtain written approval from the
Division and the Federal Reserve Bank prior to declaring or paying any
dividends; (f) adhere to certain loan approval policies; (g) within 30 days
achieve and maintain an adequate valuation reserve for loan losses; (h) within
60 days submit a written record for determining and maintaining loan loss
reserves; (i) within 60 days submit written loan review procedures; (j) within
60 days provide the Division and Federal Reserve Bank with certain information
regarding loans in excess of $25,000; (k) within 60 days submit a written plan
for improving earnings for 1998 and 1999; (l) within 30 days submit a written
funds management plan; and (m) within 60 days initiate a compliance program
designed to ensure compliance with the Order, and thereafter, within thirty days
of the end of each quarter submit a report of actions taken to comply with the
Order. The Order will remain in effect until stayed, modified or terminated by
the Division and the Federal Reserve Bank.
The Order followed a Memorandum of Understanding among the Bank, the
Division and the Federal Reserve Bank, dated as of November 14, 1997, which
addressed many of the same matters included in the Order. While there can be
no assurance that the Bank will be able to satisfy all of the requirements of
the Order within the specified time periods, the Bank has satisfied some of the
requirements of the Order and continues to work on the remaining
requirements. Requested extensions of terms with certain provisions have
been verbally denied by the Federal Reserve Bank.
SECURITIES AND EXCHANGE COMMISSION REQUEST FOR INFORMATION. The Company
has received an informal inquiry from the Securities and Exchange Commission,
Midwest Regional Office, Division of Enforcement (the "SEC") regarding the offer
and sale of the 370,761 common shares. In connection with the informal inquiry,
the SEC has asked the Company to furnish certain documents relating to the
offering. The Company intends to fully cooperate with the informal inquiry. In
the event the SEC determines that there is a basis for an enforcement action and
elects to pursue such an action against the Company, its officers or directors,
the defense costs associated with, and any resulting judgements from, any
enforcement action could have a material adverse affect on the Company.
RESCISSION OFFER AND POSSIBLE VIOLATIONS OF SECURITIES LAW. The Company
sold 370,761 shares of its common stock, without par value (the "Shares") during
a period from 1992 through 1996 at prices ranging from $12.50 to $14.50 per
Share. The Company may have a contingent liability to its shareholders as a
result of potential violations of applicable federal and state securities laws
in connection with the sale of the Shares. On January 5, 1998, the Company
filed a Registration Statement on Form S-2 with the Securities and Exchange
Commission (the "Registration Statement"), whereby the Company intends to
provide purchasers of the Shares an opportunity to rescind their purchase (the
"Rescission Offer"). If the conditions to the Rescission Offer are satisfied,
the Company will repay shareholders who accept the offer to rescind the amounts
they paid to the Company for their Shares together with interest thereon from
the date of their respective purchases through the date of repayment by the
Company. The purpose of the Rescission Offer is to remove or reduce to the
extent possible any contingent liabilities that the Company may have resulting
from such potential federal and state securities law violations. There can be
no assurance that the Rescission Offer will ultimately be declared effective by
the SEC. The Rescission Offer does not preclude any individual shareholder from
pursuing claims against the Company or its officers or directors. In the event
that a large number of shareholders accept the Rescission Offer and the Company
is unable to raise sufficient funds to repurchase such Shares, the Company's
financial position could be adversely affected if a large number of shareholders
elect to pursue claims against the Company or its officers or directors.
Furthermore, the Rescission Offer does not prevent any government agency from
asserting violations of the securities laws in a proceeding against the Company
or its officers or directors, and the Company's financial position will also be
adversely affected if any such claims are asserted and pursued.
FUNDING OF THE RESCISSION OFFER. If the Rescission Offer is accepted by
the beneficial owners of more than a small number of Shares, the Company will be
unable to make payment for the Shares without additional funds from the sale of
the Company's securities on a best-efforts basis pursuant to a subsequent public
offering or additional funds from other third party sources. Furthermore, in
the event of non-payment by the Company, a shareholder may choose to commence
suit for the balance in order to receive payment and to preserve his or her
rights assuming that relevant statutes of limitation have not expired. The cost
to defend and/or settle any such claims could have a material adverse effect on
the financial position of the Company. There is no assurance that the Company
will be able to raise sufficient funds to fund the Rescission Offer through the
subsequent offering. Further, the Bank cannot declare and pay dividends to the
Company for the purpose of funding the Rescission Offer.
- 13 -
<PAGE>
POTENTIAL IMPACT OF CHANGES IN INTEREST RATES. The Company's results of
operations are dependent to a large degree on net interest income, the
difference between interest income from loans and investments and interest
expense on deposits and borrowings. One common measurement of interest rate
risk, known as the interest rate gap, is the difference between interest-earning
assets and interest-bearing liabilities repricing or maturing within various
time frames, expressed as a percentage of total assets. At December 31, 1997,
the Company had a cumulative interest rate gap of negative 80.12% for one year.
As a result of this negative interest rate gap position, the rate of increase in
the costs associated with the Company's deposits could be expected to increase
more rapidly than the rate of increase in the Company's income from loans and
investments in a period of rising interest rates. Consequently, a significant
increase in market rates of interest could adversely affect net interest income.
Conversely, a significant decrease in market rates of interest could result in
increased net interest income.
NO ASSURANCE OF PUBLIC MARKET. There is presently no public market for the
Shares. No assurance can be given that a public market will develop in the
future. Accordingly, shareholders may be required to the hold the Shares for an
indefinite period of time.
DEPENDENCE ON THE BANK. The financial health of the Company is directly
related to the financial health of its subsidiary bank. The financial health of
the subsidiary bank may be adversely affected by detrimental changes in federal
or state laws, the national monetary and fiscal policies and international,
national and/or local economic conditions. Such laws, policies or conditions
could have material and adverse effects upon the Bank.
COMPETITION. Banking institutions operate in a highly competitive
environment. The Company competes with other commercial banks, credit unions,
savings institutions, finance companies, mortgage companies, mutual funds, and
other financial institutions, most of which have substantially greater financial
resources than the Company. Certain of these competitors offer products and
services that are not offered by the Company and certain competitors are not
subject to the same extensive laws and regulations as the Company.
ANTITAKEOVER PROVISIONS. The Articles of Incorporation of the Company
contain provisions which would discourage the acquisition of control of the
Company. The number of Shares purchased now or in the future by the Company's
management may have a similar effect. These factors may have an adverse effect
upon the value of the Shares acquired hereunder.
ITEM 2. 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 Street, 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 use. Management
believes each property is adequately covered by insurance.
ITEM 3. LEGAL PROCEEDINGS
The Company, certain officers and a former board member of the Company have been
named as defendants in a civil action initiated by Thomas Eichler, a former
officer and director of the Company. The complaint was filed in the 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 Mr.
Eichler as an employee of the Company. The complaint seeks compensatory damages
in the nature of lost wages and punitive damages. The Company has denied the
claims and believes, subject to execution of the necessary documents, that it
has negotiated a settlement with Mr. Eichler that will result in a dismissal of
all claims.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On November 29, 1997, the Company held a special meeting of shareholders
pursuant to notice sent only to those shareholders who were the sole
shareholders of the Company's common stock immediately prior to the close of the
public offering and the issuance of the shares sold in the public offering. At
that meeting, a majority of the common shares held
- 14 -
<PAGE>
by those shareholders were voted in favor of the Second Amended and Restated
Articles of Incorporation of the Company, the sole purpose of which was to
increase the authorized capital stock of the Company to 800,000 common shares,
without par value. The Second Amended and Restated Articles of Incorporation
were filed at the direction of the Company's directors on December 23, 1997.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company has a contingent liability related to the sale of common stock in
its initial public offering, as a result of possible defects in its registration
with the Securities and Exchange Commission and various state securities
authorities. Information relating to this matter is discussed in Financial
Statement Footnote 8 captioned "Common Stock (Subject to Rescission Offer)" and
Footnote 19 captioned "Contingent Liabilities" of the 1997 Consolidated
Financial Statements of Towne Bancorp, Inc. and is incorporated herein by
reference.
The number of holders of record of the Company's common stock at December 31,
1997 is 741 .
Information relating to dividend restrictions is described under BUSINESS RISKS,
above, and in Financial Statement Footnote No. 14 captioned "Regulatory Matters"
of the 1997 Consolidated Financial Statements of Towne Bancorp, Inc. and is
incorporated herein by reference.
There is no established public trading market for the Company's Common Stock.
Solely on the basis of transactions which the Company has knowledge, the
transaction price for shares of the Company's Common Stock for the first
quarter 1996 was $12.50 and $14.50 for each subsequent quarterly period during
1997 and 1996.
No dividends have been declared or paid by the Company on its Common Stock.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
OVERVIEW
The principal assets of the Company are its ownership of the Bank and its
interest as lessee in two capital lease agreements for properties leased to the
Bank. Accordingly, the Company's results of operations are primarily dependent
upon the results of operations of the Bank. As discussed elsewhere, the Company
has incurred significant net losses since it opened its Bank and the Bank is
operating under a Cease and Desist order, which has a significant adverse impact
on its ability to operate.
The Company applied for regulatory approvals, recruited and hired personnel, and
performed significant financial planning relating to the formation of the Bank.
On October 15, 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 ("FDIC"). The Company was approved as
a bank holding company by the Board of Governors 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 the Bank. As a result, the following discussion relates primarily to the
activities of the Bank.
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 FDIC. The Bank invests in securities issued by the U.S. government or
agencies of the U.S. government, as well as mortgage-
- 15 -
<PAGE>
backed securities insured or guaranteed by federal agencies.
The Bank's profitability depends primarily on its net interest income, which is
the difference between interest income generated from interest-earning assets
(i.e., loans and investments) less the interest expense incurred on
interest-bearing liabilities (i.e., deposits and borrowed funds). Net interest
income is affected by the relative amounts of interest-earning assets and
interest-bearing liabilities, and the interest rates paid on these balances.
Additionally, the Bank's profitability is affected by such factors as the level
of non-interest income and expenses, the provision for loan losses, and the
inability to provide any income tax benefit for its net operating losses.
Non-interest income consists primarily of service charges and other fees and
income from the sale of loans. Non-interest expenses consist of compensation
and benefits, occupancy-related expenses, FDIC deposit insurance premiums, and
other operating expenses.
Management's discussion and analysis of operations and related financial data
are presented herein to assist investors in understanding the consolidated
financial condition and results of operations of the Company as of and for the
years ended December 31, 1997, 1996 and 1995. This discussion should be read in
conjunction with the consolidated financial statements and related footnotes
presented elsewhere in this report. Also in reading such discussion, it must be
remembered that the Bank is a start-up bank with only 2 1/2 months of operation
in 1996.
FORWARD-LOOKING STATEMENTS
In the following pages, management presents an analysis of the Companys
financial condition as of December 31, 1997, and the results of operations for
the year ended December 31, 1997 as compared to prior periods. In addition to
this historical information, the following discussion contains forward-looking
statements that involve risks and uncertainties. Economic circumstances, the
Company's operations and the Companys actual results could differ significantly
from those discussed in the forward-looking statements. Some of the factors
that could cause or contribute to such differences are discussed herein but also
include changes in the economy and interest rates in the nation and in the
Company's general market area.
Without limiting the foregoing, some of the forward-looking statements
include the following:
Management's establishment of an allowance for loan losses, and its
statements regarding the adequacy of such allowance for loan losses.
Management's belief that the allowance for loan losses is adequate.
FINANCIAL CONDITION
SUMMARY
The Company had total consolidated assets of $22,569,055 at December 31, 1997,
an increase of $9,574,964, or 73.7% over the $12,994,091 total at December 31,
1996. The increase was funded through an increase in deposits.
Net loans receivable were $13,115,066 at 1997 year-end, an eleven times increase
over 1996's net loans of $1,102,913. Total deposits were $17,869,056 at
December 31, 1997 or an increase of 274.7% from 1996's total deposits of
$6,505,572.
The Company reported a net loss of $1,838,908 for the year ended December 31,
1997. A significant portion of this loss can be attributed to an increase of
$701,883 in the allowance for loan losses increasing from $20,000 at December
31, 1996 to $721,883 at December 31, 1997. The losses for 1997 and 1996 also
reflect the start-up nature of the Bank and the significant occupancy and other
operating expenses. Management is aware of the need to control cost and plans
to accomplish specific costs saving measures throughout 1998. Net income of
$127,643 was reported for 1995 and resulted
- 16 -
<PAGE>
from the net interest income from the common stock escrow account, which was
released to the Company in November 1995.
COMPARISON OF RESULTS OF OPERATIONS FOR 1997 AND 1996 FISCAL
NET INTEREST INCOME
Net interest income, which represents the revenue generated from earning assets
in excess of the interest cost of funding those assets, is Towne's principal
source of income. Net interest income is influenced by market interest rate
levels and the volume and mix of earning assets and interest-bearing
liabilities. Many external factors affect net interest income and typically
include the strength of customer loan demand, customer preferences for
individual deposit account products, competitors' loan and deposit product
offerings, the national and local economic climates, and Federal Reserve
monetary policy.
Net interest income in 1997 increased $418,150 to $572,391 or 271.1% above
1996's level of $154,241. This followed a decrease of $20,341 in 1996 or 11.7%
over 1995's net interest income of $174,582. Net interest yield on interest
earning assets stood at 4.03% for 1997 and 4.08% for 1996.
PROVISION FOR LOAN LOSSES AND THE ALLOWANCE FOR LOAN LOSSES
The Bank has adopted a loan policy which establishes a framework to manage both
credit risk and asset quality. Management monitors the following factors to
determine the adequacy of the allowance for loan losses delinquency trends: the
status of non-performing loans, current and historical trends in loans
charged-off, existing local and national economic conditions, and changes in the
volume and mix of the various loan categories. Even though management uses all
available information to provide for loan losses, future additions to the
allowance may be required as changes occur in economic conditions and specific
borrower circumstances. Also, various regulatory agencies that periodically
review the allowance for possible loan losses may require the Bank to charge-off
specific loans or recognize additions to the allowance based on the information
available to them at the time of their examinations.
The 1997 provision for loan losses appearing in the Consolidated Statements of
Operations totalled $721,883. This provision compares to $20,000 expensed in
1996. Nonaccrual loans were $0 at December 31, 1997 and 1996. A substantial
increase in potential problem loans during the latter part of 1997 resulted in
an additional provision for loan losses in the fourth quarter of 1997. Most of
the 1997 increase in potential problem loans, which aggregate approximately
$4,000,000 at December 31, 1997, is attributable to poor asset quality loans.
Asset quality trends will continue to be monitored closely to ensure adequate
provisions are calculated and expensed throughout 1998.
The Bank adopted the provisions of Financial Accounting Standards Board
Statement No. 114, "Accounting by Creditors for Impairment of a Loan" (which was
subsequently amended by Statement No. 118). Statement 114 defines an impaired
loan as one which, based on the most current information available, leads the
Bank to a determination that it is probable that the borrower will be unable to
make payments according to the contractual terms of the loan agreement. The
Bank must then measure the investment in the impaired loan based upon the
observable market price of the loan, the fair value of the underlying collateral
(if the loan is collateral dependent), or the present value of the expected
future cash flows discounted at the loan's effective interest rate. At December
31, 1997, the Bank had a recorded investment in impaired loans of approximately
$3,117,000.
NON-INTEREST INCOME
Non-interest income in 1997 increased $50,712 to $52,766, from 1996's total of
$2,054.
Service charges on deposit accounts for 1997 increased $21,319 or 13 times
1996's total of $1,535. Other operating income for 1997 increased $29,393, from
1996's of $519 . Other operating income includes credit card merchant
- 17 -
<PAGE>
fees, safe deposit box fees, commissions from the sale of credit life insurance
on loan products, fee from the sale of official checks and money orders, and
other miscellaneous fee income items.
NON-INTEREST EXPENSES
Non-interest expenses in 1997 increased by $700,926 to $1,742,182 or 67.3% above
1996's total of $1,041,256. This follows an increase of $1,025,917 in 1996,
from 1995's total of $15,339.
Salaries, wages and employee benefits increased $89,862 or 25.6% in 1997,
reflecting a full year of employee salaries as compared to 1996, which reflected
the hiring of employees in anticipation of the Bank's opening. Occupancy
expense increased $270,910 in 1997 due to a full year of operations. Other
operating expenses increased $340,154 or 73.6% in 1997 after increasing $450,386
in 1996. Other operating expenses include professional fees, litigation and
settlements, credit card processing and franchise fees, third party computer
processing fees, miscellaneous employee expenses, fidelity and liability
insurance, director and committee fees, loan origination and collection
expenses, dues and subscriptions, ATM network fees, correspondent bank service
charges, and charitable donations.
FEDERAL INCOME TAXES
Due to accumulated net losses, the Company is not able to provide any income tax
benefit for such losses. A federal income tax credit of $31,600 for 1996
reflects the reversal of the accrual for federal income taxes of $31,600 for
1995.
INVESTMENT SECURITIES
The investment portfolio is maintained in a manner to enhance net income,
provide for liquidity, and diversify financial risk. In accordance with
Financial Accounting Standards Board Statement No. 115, the Bank classifies
securities as either held-to-maturity (those investments with the intention to
be held until maturity) or available-for-sale. Held-to-maturity securities are
reported at amortized cost, while available-for-sale securities are reported at
their fair values (with the net unrealized holding gain or loss reported as a
separate component of stockholders' deficit).
The Bank's investment portfolio is comprised primarily of U.S. Treasury and U.S.
Government Agency obligations. The carrying value of such investment totalled
$2,499,738 at December 31, 1997, compared to $3,293,270 at December 31, 1996.
The Bank also invests in stock of the Federal Reserve Bank of Cleveland. The
carrying value of this investment was $96,000 at December 31, 1997 and 1996.
TOTAL LOANS
Total loans at 1997 year-end increased by 12,799,880 over year-end 1996's of
$1,128,003. Loan growth averaged over a million dollars a month and all
categories grew as the Bank had its first full year of operations in 1997.
However, the asset quality of loans suffered since the Bank has not been able to
hire a chief lending officer.
TOTAL DEPOSITS AND OTHER INTEREST-BEARING LIABILITIES.
Deposits and other interest-bearing liabilities serve as the primary source of
cash flows to fund loan demand. Total deposits for the year 1997 increased by
$11,363,484 over the year end 1996's balance of $6,505,572. The increase in
deposits was primarily in certificates of deposits and was due, in large
measure, to the advertising of an eighteen month certificate of deposit, which
paid an interest rate which was slightly higher than market rates.
- 18 -
<PAGE>
CAPITAL
Capital provides the foundation for future growth and expansion. The Company's
capital structure in adversely impacted by the contingency relating to the
Company's rescindable common stock. Excluding rescindable common stock, the
Company's stockholders' deficit as of December 31, 1997 increased $1,836,655
over 1996's total deficit of $778,989. The Bank's capital structure is subject
to minimum capital ratios established by the Federal Reserve Board and the State
of Ohio Division of Financial Institutions. To be considered "well capitalized"
by the regulators an institution must have a Tier 1 risk-based capital ratio of
at least 6% and a total risk-based capital ratio of at least 10%.
LIQUIDITY
The Company's primary sources of liquidity are derived from its core deposit
base and stockholders' equity position. Secondary liquidity is provided by
managing the investment portfolio.
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 withdrawals needs of
depositors or to provide funds for borrowers. In the more complex business
environment, it also represents the availability current assets to fund
expanding operations, to provide for contingencies and to take advantage of
investment opportunities.
The Company maintains a portion of its assets in liquid form to meet anticipated
customer loan demands and to fund possible customer deposit account withdrawals,
while at the same time striving to maximize the yield on investments and loans.
At December 31, 1997, liquid assets in the form of cash, due from banks, and
federal funds sold totalled $4,156,289 or 18.4% of total assets. These liquid
assets, in addition to a staggered maturity schedule within the investment
portfolio, new deposit growth and cash flows from loan repayments, provide
adequate liquidity for day-to-day operations. However, the continuation of
operating losses, restrictions of the previously mentioned Cease and Desist
Order and the effects of the Rescission Offer will have an adverse impact on the
Company's liquidity.
INTEREST RATE SENSITIVITY
Interest rate sensitivity measures the potential net income exposure that
could result from changes in market interest rates. The Company, as with all
financial institutions, assumes interest rate risk as an integral part of its
operations. The difference between the repricing assets and repricing
liabilities within each category is commonly referred to as "interest rate
gap" analysis. The Company has adopted an asset/liability management policy
that provides for a framework to quantify and monitor the interest rate risk,
to reduce the inherent risk associated with changing interest rate, to
provide for liquidity needs, and to maximize net income by effectively
managing net interest yield.
The Company is in a liability-sensitive position, or negative gap position,
in the less-than-one-year period with $2,146,000 more liabilities than assets
repricing during the period, or (80.12)%. In a rising rate environment, a
negative gap position would result in decreased net interest income. In a
declining rate environment, a negative gap position would result in an
increase in net interest income.
YEAR 2000 ISSUE
The Company has reviewed all of the current computer applications, both in-house
and those provided by outside vendors, with respect to the year 2000 issue. The
Company has been assured that the applications are substantially compliant.
Management believes that the cost of making any minor modifications to the
applications will not result in a significant cost.
- 19 -
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The Consolidated Financial Statements of the Company, together with the reports
thereon of Clifton Gunderson LTD., are set forth on pages F-1 through F-28
hereof.
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 is included in the Company's Proxy
Statement relating to the Company's 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 10. EXECUTIVE COMPENSATION
The Information required by this Item is included in the Company's Proxy
Statement relating to the Company's 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Information required by this Item is included in the Company's Proxy
Statement relating to the Company's 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Information required by this Item is included in the Company's Proxy
Statement relating to the Company's 1998 Annual Meeting of Stockholders and is
incorporated herein by reference.
- 20 -
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as an exhibit to this document:
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
*3(a) Second Amended and Restated Articles of Incorporation
of Towne Bancorp (Incorporated by reference to Exhibit
4.1 to the Registration Statement on Form S-2 -
Registration No. 333-43741)
*3(b) Code of Regulations of Towne Bancorp, Inc.
(Incorporated by reference to Exhibit 3.3 to the
Registration Statement on Form S-1 - Registration No.
33-47504) filed on May 4, 1992)
*10(a) Lease by and between Carol A. Hass, Trustee and Towne
Bancorp, Inc., dated September 18, 1995, relating to the
East South Boundry Street office. (Incorporated by
reference to Exhibit 4.1 to the Registration Statement
on Form S-2 - Registration No. 333-43741)
*10(b) Lease by and between Carol A. Mockensturm Hass, Trustee
and Towne Bancorp, Inc., dated August 29, 1996,
relating to 6401 Monroe Street. (Incorporated by
reference to Exhibit 4.1 to the Registration Statement
on Form S-2 - Registration No. 333-43741)
21 Subsidiaries of the Registrant
24.0 Power of Attorney
27.0 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K
None
- ---------------------------
* Incorporated by reference as indicated.
- 21 -
<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.
April 14, 1998 /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 Date April 14, 1998
- --------------------------------------- --------------
Jerome C. Bechstein, President, CEO,
Director, and Chief Financial Officer
*LOIS A. BRIGHAM Date April 14, 1998
- --------------------------------------- --------------
Lois A. Brigham, Senior Vice President,
Secretary and Director
*JOHN P. WEINERT Date April 14, 1998
- --------------------------------------- --------------
John P. Weinert, Director
By: /s/ JEROME C. BECHSTEIN Date April 14, 1998
----------------------------------- --------------
Jerome C. Bechstein, Attorney - in
- fact for each of the persons
indicated
- 22 -
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
INDEPENDENT AUDITOR'S REPORT . . . . . . . . . . . . . . . . . . . . . . . .F-2
FINANCIAL STATEMENTS
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . . . . . .F-3
Consolidated Statements of Operations . . . . . . . . . . . . . . . . .F-4
Consolidated Statements of Stockholders' Deficit. . . . . . . . . . . .F-5
Consolidated Statements of Cash Flows . . . . . . . . . . . . . . . . .F-6
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . .F-7
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Stockholders and Board of Directors
Towne Bancorp, Inc.
Perrysburg, Ohio
We have audited the accompanying consolidated balance sheets of Towne Bancorp,
Inc. and its subsidiary as of December 31, 1997 and 1996, and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the three years in the period ended December 31, 1997. 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 statement 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, 1997 and 1996 and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997, in conformity with generally accepted accounting principles.
The financial statements as of and for each of the two years in the period ended
December 31, 1996 have been restated to reflect the contingent liability
disclosed in Note 19.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the consolidated
financial statements, the Company has incurred substantial losses since its bank
subsidiary began operations in October, 1996 and as described in Note 14 is
under severe operating restrictions as a result of recent examinations by the
Federal Reserve Bank of Cleveland and Ohio Division of Financial Institutions.
Also, as discussed in Note 19 to the consolidated financial statements, the
Company has a contingent liability related to the sale of common stock in its
initial public offering, as a result of federal and state securities law
compliance matters. On January 5, 1998, the Company filed a Registration
Statement with the Securities and Exchange Commission regarding its efforts to
address this latter matter, which includes an offer to purchase the shares held
by shareholders if they desire to sell their shares. It is uncertain if the
Securities and Exchange Commission will approve the Registration Statement and
allow the rescission offer to proceed. Even if the rescission offer proceeds,
the number of responses from shareholders who desire to have the Company
purchase their shares and the resulting impact on the Company's capital
structure cannot be determined at this time.
The possible material and pervasive effect of the matters discussed in the
preceding paragraph, raise substantial doubt about the Company's ability to
continue as a going concern. Management's plans in regard to these matters are
discussed in Notes 1 and 19 to the consolidated financial statements. The
consolidated financial statements do not include any adjustments that might
result from the outcome of these uncertainties.
/s/ Clifton Gunderson LTD.
Toledo, Ohio
March 3, 1998, except as to Note 21
which is as of April 6, 1998
F-2
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1997 AND 1996
<TABLE>
<CAPTION>
ASSETS 1997 1996
------------ ------------
<S> <C> <C>
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 1,014,289 $ 383,547
Federal funds sold 3,142,000 5,429,000
------------ ------------
Total cash and cash equivalents 4,156,289 5,812,547
------------ ------------
INVESTMENT SECURITIES
Available-for-sale, at market value 999,397 1,396,103
Held-to-maturity, at amortized cost, market value of
$1,596,726 in 1997 and $1,987,064 in 1996 1,596,341 1,993,167
------------ ------------
Total investment securities 2,595,738 3,389,270
------------ ------------
LOANS RECEIVABLE, net of allowance for loan losses
of $741,883 in 1997 and $20,000 in 1996 13,115,066 1,102,913
PREMISES AND EQUIPMENT, net 2,401,617 2,499,349
OTHER ASSETS 300,345 190,012
------------ ------------
TOTAL ASSETS $ 22,569,055 $ 12,994,091
------------ ------------
------------ ------------
LIABILITIES, RESCINDABLE COMMON STOCK
AND STOCKHOLDERS' DEFICIT
LIABILITIES
Deposits:
Interest-bearing $ 16,777,595 $ 5,931,153
Non-interest bearing 1,091,461 574,419
------------ ------------
Total deposits 17,869,056 6,505,572
Capital lease obligations 2,482,729 2,500,000
Accrued interest, taxes and other liabilities 350,381 284,975
------------ ------------
Total liabilities 20,702,166 9,290,547
------------ ------------
RESCINDABLE COMMON STOCK (see Notes 1, 8, 14 and 19)
Common stock, without par value. Authorized
800,000 shares; issued and outstanding
370,761 shares 4,482,533 4,482,533
------------ ------------
STOCKHOLDERS' DEFICIT
Accumulated deficit (2,620,132) (781,224)
Net unrealized holding gain on investment
securities available-for-sale 4,488 2,235
------------ ------------
Total stockholders' deficit (2,615,644) (778,989)
------------ ------------
TOTAL LIABILITIES, RESCINDABLE COMMON
STOCK AND STOCKHOLDERS' DEFICIT $ 22,569,055 $ 12,994,091
------------ ------------
------------ ------------
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying notes to consolidated financial statements.
F-3
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
INTEREST INCOME
Loans $ 786,825 $ 13,614 $ -
Investment securities:
U.S. Treasury securities 63,554 8,010 -
Obligations of U.S. Government agencies
and corporations 121,514 11,972 -
Federal reserve stock 5,760 - -
Deposits in other bank, escrow account - 110,570 358,819
Federal funds sold 188,131 52,789 -
Total interest income 1,165,784 196,955 358,819
----------- ----------- -----------
INTEREST EXPENSE
Deposits 593,393 42,233 -
Common stock, escrow account - - 172,369
Organizer advances - 481 11,868
----------- ----------- -----------
Total interest expense 593,393 42,714 184,237
----------- ----------- -----------
Net interest income 572,391 154,241 174,582
PROVISION FOR LOAN LOSSES 721,883 20,000 -
----------- ----------- -----------
Net interest income (expense) after
provision for loan losses (149,492) 134,241 174,582
----------- ----------- -----------
NON-INTEREST INCOME
Service charges on deposit accounts 22,854 1,535 -
Other operating income 29,912 519 -
----------- ----------- -----------
Total non-interest income 52,766 2,054 -
----------- ----------- -----------
NON-INTEREST EXPENSES
Salaries, wages and employee benefits 440,748 350,886 -
Occupancy expenses, including interest on
capital lease obligations 499,080 228,170 3,525
Other operating expenses 802,354 462,200 11,814
----------- ----------- -----------
Total non-interest expenses 1,742,182 1,041,256 15,339
----------- ----------- -----------
Income (loss) before federal
income taxes (1,838,908) (904,961) 159,243
PROVISION (CREDIT) FOR FEDERAL
INCOME TAXES - (31,600) 31,600
----------- ----------- -----------
NET INCOME (LOSS) $(1,838,908) $ (873,361) $ 127,643
----------- ----------- -----------
----------- ----------- -----------
NET INCOME (LOSS) PER SHARE (Note 19) $ (4.96) $ (2.38) $ 2.73
----------- ----------- -----------
----------- ----------- -----------
AVERAGE COMMON SHARES
OUTSTANDING (Note 19) 370,761 366,689 46,728
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying notes to consolidated financial statements.
F-4
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
RETAINED NET
EARNINGS UNREALIZED
(ACCUMULATED HOLDING
DEFICIT) GAIN TOTAL
-------- ---- -----
<S> <C> <C> <C>
BALANCE AT DECEMBER 31, 1994 $ (35,506) $ - $ (35,506)
Net income for 1995 127,643 - 127,643
----------- -------- -----------
BALANCE AT DECEMBER 31, 1995 92,137 - 92,137
Net loss for 1996 (873,361) - (873,361)
Change in net unrealized holding gain for 1996 - 2,235 2,235
----------- -------- -----------
BALANCE AT DECEMBER 31, 1996 (781,224) 2,235 (778,989)
Net loss for 1997 (1,838,908) - (1,838,908)
Change in net unrealized holding gain for 1997 - 2,253 2,253
----------- -------- -----------
BALANCE AT DECEMBER 31, 1997 $(2,620,132) $ 4,488 $(2,615,644)
----------- -------- -----------
----------- -------- -----------
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying notes to consolidated financial statements.
F-5
<PAGE>
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(1,838,908) $ (873,361) $ 127,643
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization 155,869 66,209 4,226
Interest expense - common stock,
escrow account - - 167,983
Provision for loan losses 721,883 20,000 -
Accretion of investment securities discounts,
net of premium amortization (4,215) (300) -
Expenses paid directly by organizers - 6,511 6,603
Effects of changes in operating assets
and liabilities:
Other assets (119,275) (129,795) (74,364)
Accrued interest, taxes and
other liabilities 65,406 (24,440) 309,415
----------- ----------- -----------
Net cash provided by (used in)
operating activities (1,019,240) (935,176) 541,506
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of premises under
sale-leaseback agreement - 1,496,510 -
Proceeds from maturity of investment securities:
Available-for-sale 400,000 - -
Held-to-maturity 400,000 - -
Purchases of investment securities:
Available-for-sale - (1,393,750) -
Held-to-maturity - (1,992,985) -
Net increase in loans receivable (12,734,036) (1,122,913) -
Additions to premises and equipment (49,195) (892,446) (663,830)
----------- ----------- -----------
Net cash used in investing activities (11,983,231) (3,905,584) (663,830)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 11,363,484 6,505,572 -
Proceeds from issuance of common stock - 316,421 4,187,817
Principal payments on capital lease obligations (17,271) - -
Purchase of common stock - (111,784) -
Repayment of advances from organizers, net - (49,349) (73,200)
----------- ----------- -----------
Net cash provided by
financing activities 11,346,213 6,660,860 4,114,617
----------- ----------- -----------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS (1,656,258) 1,820,100 3,992,293
CASH AND CASH EQUIVALENTS
At beginning of year 5,812,547 3,992,447 154
----------- ----------- -----------
At end of year $ 4,156,289 $ 5,812,547 $ 3,992,447
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
These consolidated financial statements should be read only in connection with
the accompanying notes to consolidated financial statements.
F-6
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 1 - OPERATING RESULTS, CONTINGENCIES AND RELATED MATTERS
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's bank subsidiary began
operations on October 15, 1996 when it opened its Perrysburg office, followed by
the opening of its Sylvania office on January 13, 1997. While initial operating
losses were expected, the size of the Company's net losses has exceeded original
projections because of a number of factors, including the following: larger
pre-opening expenses than anticipated as a result of delays in getting necessary
regulatory approvals, litigation settlements as described in Note 9, a
significant provision for loan losses in 1997, significant legal and consulting
fees for litigation and regulatory matters, and growth in assets and deposits
not meeting planned levels. These and other matters have resulted in a 1997 net
loss of $1,838,908 and an accumulated deficit of $2,620,132 as of December 31,
1997.
As described in Note 14, the Bank is subject to severe operating restrictions as
a result of recent examinations by the federal and state banking agencies.
Also, as described in Notes 8 and 19, the Company has a contingent liability
regarding the original issuance of its common stock.
The Company has retained an independent bank management consulting firm to
assist in an evaluation of present personnel needs, hiring of a chief lending
officer, a review and analysis of all overhead costs, an evaluation of all
leasing arrangements, a review of the viability of continuing to operate two
locations and the preparation of a revised operating budget for 1998 and beyond.
The consulting firm is also assisting in the preparation of a capital plan to
deal with the matter described in Note 19 and the reduction in equity resulting
from the operating losses.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 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.
F-7
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 years ended December 31, 1997, 1996 and 1995 approximated $25,000 for
each year.
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.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable are stated at their outstanding principal amount, adjusted for
deferred loan fees 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 accrual of interest on a loan is discontinued when the loan becomes 90 days
delinquent and, in management's opinion, collection of interest is doubtful.
When interest accrual is discontinued, all unpaid accrued interest is reversed.
Interest income is subsequently recognized only to the extent cash payments are
received.
The determination of the balance of the allowance for loan losses is based upon
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 require 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 the Bank to recognize additions to the allowance based on their
judgments about information available to them at the time of their examination.
F-8
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
Premises primarily consists of two capital leases which are being amortized on
the straight-line method over the 20 year term of the leases. Equipment and the
remaining cost of premises are 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 9.
ADVERTISING COSTS
All advertising costs are expensed as incurred.
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.
INCOME PER SHARE
Net income (loss) per share is computed based on the weighted average number of
shares of common stock outstanding during each year. Under Financial Accounting
Standards Board's Statement No. 128, "Earnings Per Share", which was effective
in 1997, this computation is referred to as "basic earnings per share". The
adoption of Statement No. 128 in 1997 had no impact on the previously reported
net income (loss) per share for 1996 or 1995.
F-9
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and market value of investment securities as of December 31,
1997 and 1996 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
---- ----- ------ -----
<S> <C> <C> <C> <C>
1997
Available-for-sale:
U.S. Treasury securities $ 400,598 $ 3,340 $ - $ 403,938
Obligations of U.S. Government
agencies and corporations 498,311 1,148 - 499,459
Federal Reserve Bank of
Cleveland stock 96,000 - - 96,000
----------- ------- ------- -----------
Total available-for-sale 994,909 4,488 - 999,397
----------- ------- ------- -----------
Held-to-maturity:
U.S. Treasury securities 496,995 14 (259) 496,750
Obligations of U.S. Government
agencies and corporations 1,099,346 1,115 (485) 1,099,976
----------- ------- ------- -----------
Total held-to-maturity 1,596,341 1,129 (744) 1,596,726
----------- ------- ------- -----------
TOTAL $ 2,591,250 $ 5,617 $ (744) $ 2,596,123
----------- ------- ------- -----------
----------- ------- ------- -----------
1996
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
----------- ------- ------- -----------
----------- ------- ------- -----------
</TABLE>
F-10
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 3 - INVESTMENT SECURITIES (CONTINUED)
The amortized cost and market value of investment securities at December 31,
1997, 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.
<TABLE>
<CAPTION>
AVAILABLE-FOR-SALE HELD-TO-MATURITY
-------------------- ------------------
AMORTIZED MARKET AMORTIZED MARKET
COST VALUE COST VALUE
---- ----- ---- -----
<S> <C> <C> <C> <C>
Due in one year or less $ 199,558 $ 199,750 $ 799,317 $ 798,726
Due after one year through
five years 699,351 703,647 797,024 798,000
Other security having no
maturity date 96,000 96,000 - -
--------- --------- ----------- -----------
TOTAL $ 994,909 $ 999,397 $ 1,596,341 $ 1,596,726
--------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable at December 31, 1997 and 1996 consist of the following:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Commercial $ 5,549,125 $ 233,015
Real estate - residential mortgage 6,336,594 623,993
Real estate - construction - 76,040
Consumer 2,022,164 194,955
----------- -----------
13,907,883 1,128,003
Less: Deferred loan fees (50,934) (5,090)
Allowance for loan losses (741,883) (20,000)
----------- -----------
NET LOANS RECEIVABLE $13,115,066 $ 1,102,913
----------- -----------
----------- -----------
</TABLE>
Fixed rate loans approximated $3,886,000 and $160,000 at December 31, 1997 and
1996, respectively.
A loan is considered an impaired loan when management determines that it is
probable the borrower will be unable to make payments according to the
contractual terms of the loan agreement. At December 31, 1997, the recorded
investment in impaired loans approximated $3,117,000 (the Bank had no impaired
loans as of or during the year ended December 31, 1996). Impaired loans with a
balance of approximately $2,837,000 have a related allowance for loan losses of
$252,000 at December 31, 1997 and impaired loans with a balance of approximately
$280,000 have no allowance for loan losses. The following is a summary of the
activity in the allowance for loan losses of impaired loans, which is part of
the Bank's overall allowance for loan losses, for the year ended December 31,
1997:
<TABLE>
<S> <C>
Balance at beginning of year $ -
Provision charged to operations
252,000
---------
BALANCE AT END OF YEAR $ 252,000
---------
---------
</TABLE>
F-11
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR
LOAN LOSSES (CONTINUED)
The average recorded investment in impaired loans for the year ended December
31, 1997 was approximately $390,000. Such average reflects the fact that most
of the loans became impaired during the last quarter of 1997. Interest income
on impaired loans is accrued based on the principal amounts outstanding. The
accrual of interest is discontinued when an impaired loan becomes 90 days
delinquent unless it is well collateralized and in the process of collection.
Interest income recognized during the time that the loans were impaired, all
which remained on an accrual basis, for the year ended December 31, 1997
approximated $38,800.
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 amounted to $9,680 and $80,000 at December 31, 1997 and 1996,
respectively. The following is a summary of activity during 1997 and 1996 for
such loans:
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING ADDITIONS REPAYMENTS AT END
---------- --------- ---------- ------
<S> <C> <C> <C> <C>
1997 $ 80,000 $ 9,680 $ 80,000 $ 9,680
-------- -------- -------- --------
-------- -------- -------- --------
1996 $ - $ 80,000 $ - $ 80,000
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
The following represents a summary of the activity in the allowance for loan
losses for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Balance at beginning of year $ 20,000 $ -
Provision charged to operations 721,883 20,000
--------- --------
BALANCE AT END OF YEAR $ 741,883 $ 20,000
--------- --------
--------- --------
</TABLE>
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Premises:
Capital leases $ 2,500,000 $ 2,500,000
Other 87,463 53,856
----------- -----------
2,587,463 2,553,856
Equipment 21,498 5,910
----------- -----------
2,608,961 2,559,766
Accumulated depreciation and amortization 207,344 60,417
----------- -----------
PREMISES AND EQUIPMENT, NET $ 2,401,617 $ 2,499,349
----------- -----------
----------- -----------
</TABLE>
F-12
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 5 - PREMISES AND EQUIPMENT (CONTINUED)
Depreciation and amortization of premises and equipment amounted to $146,927 in
1997 and $60,417 in 1996 (none in 1995), including $125,000 in 1997 and $60,417
in 1996 relating to capital leases.
NOTE 6 - DEPOSITS
Interest-bearing deposits at December 31, 1997 and 1996 include individual
deposits of $100,000 and over which amounted to approximately $5,689,000 and
$1,923,000, respectively. Interest expense on deposits of $100,000 or more
amounted to approximately $203,000 for 1997 and $11,000 for 1996 (none in 1995).
At December 31, 1997, the scheduled maturities of certificates of deposit and
other time accounts are as follows:
<TABLE>
<S> <C>
1998 $ 9,547,020
1999 4,293,230
2000 100,000
2001 423,574
2002 123,391
------------
TOTAL $ 14,487,215
------------
------------
</TABLE>
NOTE 7 - 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%.
F-13
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 7 - CAPITAL LEASE OBLIGATIONS (CONTINUED)
The balance due on the capital lease obligations amounted to $2,482,729 and
$2,500,000 at December 31, 1997 and 1996, respectively. See Note 12 with
respect to additional information on capital lease obligations. Accrued
interest payable on capital lease obligations of $20,915 and $21,774,
respectively, is included in the December 31, 1997 and 1996 consolidated balance
sheets. Interest expense relating to the capital lease obligations of $286,870
in 1997 and $142,774 in 1996 and amortization of capitalized lease premises of
$125,000 in 1997 and $60,417 in 1996 are included in occupancy expenses in the
consolidated statements of operations.
NOTE 8 - COMMON STOCK (SUBJECT TO RESCISSION OFFER)
The information in this footnote should be read in connection with Note 19. As
described in Note 19, on January 5, 1998 the Company filed a Registration
Statement with the Securities and Exchange Commission as a result of federal and
state securities law compliance matters regarding the public offering of the
common stock, resulting in a possible rescission offer to its shareholders.
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.
In addition to the federal and state securities law compliance matters in the
original registration statement, the shares sold by the Company in connection
with its public offering were issued prior to the filing of the amendment to the
Company's Amended Articles of Incorporation, which would have increased the
Company's authorized common stock from 13,000 shares to 800,000 shares. On
November 29, 1997, the Company held a special meeting of those shareholders who
were the sole shareholders of the Company's common stock immediately prior to
the issuance of the shares sold in the public offering. At that meeting, a
majority of the common shares held by those shareholders were voted in favor of
the Second Amended and Restated Articles of Incorporation of the Company, the
sole purpose of which was to increase the authorized capital stock of the
Company to 800,000 common shares, without par value. The Second Amended and
Restated Articles of Incorporation were filed at the direction of the Company's
Board of Directors on December 23, 1997 with the Secretary of the state of Ohio.
It is anticipated that the Company will seek ratification from the shareholders
of all actions taken in connection with the increase of its authorized capital
stock to 800,000 common shares at the 1998 annual meeting of shareholders.
F-14
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 8 - COMMON STOCK (SUBJECT TO RESCISSION OFFER) (CONTINUED)
The following represents a summary of the activity in common stock for the years
ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
COMMON STOCK
------------
SHARES AMOUNT
------ ------
<S> <C> <C>
BALANCE AT DECEMBER 31, 1994 6,500 $ 81,250
Issuance of common stock 348,464 4,355,800
Stock issuance costs - (146,105)
------- -----------
BALANCE AT DECEMBER 31, 1995 354,964 4,290,945
Issuance of common stock 23,650 316,421
Purchase of common stock (7,853) (111,784)
Stock issuance costs - (13,049)
------- -----------
BALANCE AT DECEMBER 31, 1996 AND 1997 370,761 $ 4,482,533
------- -----------
------- -----------
</TABLE>
NOTE 9 - 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 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Advertising, printing, and supplies $ 74,498 $ 111,667 $ 4,707
Professional fees, litigation and settlements 279,250 172,348 -
Equipment rent 141,335 54,079 -
Insurance 39,459 41,675 -
Outside services 123,312 43,521 -
Franchise and other taxes 62,653 7,686 -
Directors fees 17,750 4,500 -
Automobile allowances 14,624 - -
Other expenses 49,473 26,724 7,107
--------- --------- --------
TOTAL OTHER OPERATING EXPENSES $ 802,354 $ 462,200 $ 11,814
--------- --------- --------
--------- --------- --------
</TABLE>
Professional fees, litigation and settlements includes provisions for litigation
settlements of $73,300 in 1997 and $115,000 in 1996.
NOTE 10 - 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 amounted to $5,969 for
1997 and $2,861 for 1996 (none in 1995).
F-15
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 11 - 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 (none in 1997).
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:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Expected tax using statutory tax rate of 34% $(625,200) $(307,700) $ 54,100
Impact of the following:
Increase in the valuation allowance for
deferred tax assets 619,000 272,800 -
Surtax exemption and other items, net 6,200 3,300 (22,500)
--------- --------- --------
TOTAL $ - $ (31,600) $ 31,600
--------- --------- --------
--------- --------- --------
</TABLE>
The tax effects of temporary differences that give rise to deferred tax assets
at December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Net operating loss carryforwards $ 392,400 $ 38,100
Allowance for loan losses 249,400 6,600
Pre-opening costs 141,200 178,800
Capital leases 64,300 27,900
Accrued expenses and other 44,500 21,400
--------- ---------
891,800 272,800
Less valuation allowance 891,800 272,800
--------- ---------
TOTAL DEFERRED TAX ASSETS, NET OF VALUATION ALLOWANCE $ - $ -
--------- ---------
--------- ---------
</TABLE>
At December 31, 1997, the Company has net operating loss carryforwards
approximating $1,154,000, which are available to reduce future regular federal
taxable income. Such carryforwards expire in 2011 ($112,000) and 2012
($1,042,000).
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 uncertainty if the deferred tax assets will be realized, a valuation
allowance of $891,800 and $272,800 was established at December 31, 1997 and
1996, respectively, 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 1996 consolidated balance sheet. Such amount was received in
1997.
F-16
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 12 - LEASE COMMITMENTS
At December 31, 1997, future minimum lease payments were as follows:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
------ ------
<S> <C> <C>
Year ending December 31:
1998 $ 305,000 $ 143,614
1999 317,496 143,614
2000 329,296 143,614
2001 329,296 52,932
2002 329,296 -
Thereafter 4,476,651 -
----------- -----------
Total minimum lease payments 6,087,035 $ 483,774
-----------
-----------
Less amount representing interest 3,604,306
-----------
PRESENT VALUE OF MINIMUM CAPITAL LEASE PAYMENTS $ 2,482,729
-----------
-----------
</TABLE>
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 1997, 1996 and 1995, rent expense under various operating lease agreements
and other short-term lease arrangements approximated $141,300, $73,500, and
$3,500, respectively.
NOTE 13 - 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, 1997:
Commitments to extend credit $ 5,325,000
-----------
-----------
Included in the commitments to extend credit is $2,800,000 relating to a
commitment made by the Bank to a customer which was to be in participation with
another institution. Since a participation arrangement was not obtained, this
commitment represents a violation of the Bank's legal lending limits.
Management is in process of trying to correct this matter.
F-17
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 13 - FINANCIAL INSTRUMENTS WITH OFF-BALANCE
SHEET RISK (CONTINUED)
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 14 - REGULATORY MATTERS
The Company and Bank are regulated by federal and state banking agencies. As a
result, they are subject to periodic examinations by the agencies and are
required to comply with various regulatory matters. As a result of a June 30,
1997 Joint Report of Examination issued by the Ohio Division of Financial
Institutions ("the Division") and the Federal Reserve Bank of Cleveland ("the
Federal Reserve Bank"), the Board of Directors of the Bank on November 12, 1997
authorized the acceptance of a Memorandum of Understanding between the Bank and
the regulatory agencies. Under the Memorandum, which was effective November 14,
1997, the Bank agreed to develop a capital plan, upgrade its budgeting process,
assess its management structure and board oversight, hire an experienced chief
lending officer, establish loan review procedures, provide periodic reporting to
the regulators and other matters.
As a result of an additional examination in December, 1997 by the regulatory
agencies, the Board of Directors of the Bank authorized on January 30, 1998, the
acceptance of a Cease and Desist Order ("the Order") between the Bank and the
regulatory agencies. Under the Order, which was effective February 4, 1998, the
Bank agreed to comply with each and every provision of the Order, many of which
are in the Memorandum of Understanding described above. The Order requires that
the Bank: (a) within 30 days employ a chief lending officer; (b) within 10 days
retain an independent bank management consultant, who will submit a written
report to the Bank's board of directors within thirty days of the date the
consultant is retained; (c) within 30 days of the receipt of the consultant's
report submit a written management plan to the Division and the Federal Reserve
Bank; (d) within 30 days submit a written plan for attaining and maintaining an
adequate capital position; (e) obtain written approval from the Division and the
Federal Reserve Bank prior to declaring or paying any dividends; (f) adhere to
certain loan approval policies; (g) within 30 days achieve and maintain an
adequate valuation reserve for loan losses; (h) within 60 days submit a written
record for determining and maintaining loan loss reserves; (i) within 60 days
submit written loan review procedures; (j) within 60 days provide the Division
and Federal Reserve Bank with certain information regarding loans in excess of
$25,000; (k) within 60 days submit a written plan for improving earnings for
1998 and 1999; (l) within 30 days submit a written funds management plan; and
(m) within 60 days initiate a compliance program designed to ensure compliance
with the Order, and thereafter, within thirty days of the end of each quarter
submit a report of actions taken to comply with the Order. The Order will
remain in effect until stayed, modified or terminated by the Division and the
Federal Reserve Bank. See Note 21 for additional information regarding the
above matter.
F-18
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 - REGULATORY MATTERS (CONTINUED)
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 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. As the Company's consolidated assets are less
than $150 million and it does not meet other specified criteria at December 31,
1997 and 1996, the Company is not subject to the consolidated capital
requirements of the Federal Reserve System's Bank Holding Companies Act, as
amended, at December 31, 1997 or 1996. However, as a part of the Company's
initial approval as a bank holding company, the Federal Reserve Bank did require
the following: 1) no dividends are to be paid by the Company during its first
three years of operations; 2) no borrowings by the Company will be permitted
during the Company's first three years of operations; and 3) the Bank will
maintain a 10% Tier 1 Capital (to total assets) ratio for its first three years
of operations. In addition, the Federal Reserve Bank may place additional
capital or other requirements on the Company as the Federal Reserve Bank deems
necessary from time to time.
Quantitative 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 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, 1997, that the Bank meets all
capital adequacy requirements to which it is subject.
The actual regulatory capital amounts and ratios of the Bank as of December 31,
1997 and 1996, are presented in the following table. Since the Company is not
subject to consolidated capital requirements, such actual amounts, actual
ratios, the regulatory requirements regarding capital adequacy guidelines, and
the regulatory framework for prompt corrective action apply to Bank-only
regulatory capital components (as defined) and are not intended to present the
regulatory capital amounts or ratios of the Company.
<TABLE>
<CAPTION>
TO BE
FOR "WELL CAPITALIZED"
CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------ ---------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1997:
Total Capital (to Risk
Weighted Assets) GREATER THAN GREATER THAN
Bank $ 2,140 17.2 $ 993 OR EQUAL TO 8.0 $ 1,241 OR EQUAL TO 10.0%
Tier I Capital (to Risk
Weighted Assets) GREATER THAN GREATER THAN
Bank 1,977 15.9 496 OR EQUAL TO 4.0 745 OR EQUAL TO 6.0
Tier I Capital (to
Average Assets) GREATER THAN GREATER THAN
Bank 1,977 10.4 760 OR EQUAL TO 4.0 951 OR EQUAL TO 5.0
</TABLE>
F-19
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 14 - REGULATORY MATTERS (CONTINUED)
<TABLE>
<CAPTION>
TO BE
FOR "WELL CAPITALIZED"
CAPITAL UNDER PROMPT
ADEQUACY CORRECTIVE
ACTUAL PURPOSES ACTION PROVISIONS
------------ ---------------- ---------------------
AMOUNT RATIO AMOUNT RATIO AMOUNT RATIO
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
(DOLLARS IN THOUSANDS)
AS OF DECEMBER 31, 1996:
Total Capital (to Risk
Weighted Assets) GREATER THAN GREATER THAN
Bank $ 3,480 33.0 $ 843 OR EQUAL TO 8.0 $ 1,053 OR EQUAL TO 10.0%
Tier I Capital (to Risk
Weighted Assets) GREATER THAN GREATER THAN
Bank 3,460 32.9 421 OR EQUAL TO 4.0 632 OR EQUAL TO 6.0
Tier I Capital (to
Average Assets) GREATER THAN GREATER THAN
Bank (*) 3,460 41.9 330 OR EQUAL TO 4.0 412 OR EQUAL TO 5.0
</TABLE>
* 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, 1997, 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.
See Note 21 for additional information regarding capital matters.
F-20
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 15 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as of
December 31, 1997 and 1996 and for each of the three years in the period ended
December 31, 1997 are as follows:
<TABLE>
<CAPTION>
BALANCE SHEETS 1997 1996
---- ----
<S> <C> <C>
ASSETS:
Cash on deposit in subsidiary bank $ 247,735 $ 448,599
Investment in subsidiary 2,007,020 3,461,721
Premises under capital lease, net 2,314,583 2,439,583
Other asset - refundable federal income taxes - 22,290
----------- -----------
TOTAL ASSETS $ 4,569,338 $ 6,372,193
----------- -----------
----------- -----------
LIABILITIES:
Capital lease obligations $ 2,482,729 $ 2,500,000
Accrued interest and other liabilities 219,720 168,649
----------- -----------
Total liabilities 2,702,449 2,668,649
----------- -----------
RESCINDABLE COMMON STOCK 4,482,533 4,482,533
----------- -----------
STOCKHOLDERS' DEFICIT:
Accumulated deficit (2,620,132) (781,224)
Net unrealized holding gain on securities
available-for-sale 4,488 2,235
----------- -----------
Total stockholders' deficit (2,615,644) (778,989)
----------- -----------
TOTAL LIABILITIES, RESCINDABLE COMMON STOCK
AND STOCKHOLDERS' DEFICIT $ 4,569,338 $ 6,372,193
----------- -----------
----------- -----------
</TABLE>
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Interest income $ - $ 110,570 $ 358,819
Interest expense - 481 184,237
------------ ------------ ------------
Net interest income - 110,089 174,582
------------ ------------ ------------
Occupancy expenses, net 108,054 199,452 3,525
Other operating expenses 273,900 275,084 11,814
------------ ------------ ------------
Total non-interest expenses 381,954 474,536 15,339
------------ ------------ ------------
Income (loss) before federal
income taxes and equity
in net loss of subsidiary (381,954) (364,447) 159,243
Provision (credit) for federal income taxes - (31,600) 31,600
------------ ------------ ------------
Income (loss) before equity in
net loss of subsidiary (381,954) (332,847) 127,643
Equity in net loss of subsidiary (1,456,954) (540,514) -
------------ ------------ ------------
NET INCOME (LOSS) $ (1,838,908) $ (873,361) $ 127,643
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
F-21
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 15 - CONDENSED PARENT COMPANY FINANCIAL
INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(1,838,908) $ (873,361) $ 127,643
Adjustments to reconcile net income (loss)
to net cash provided by (used in)
operating activities:
Depreciation and amortization 125,000 65,543 4,226
Interest expense - common stock,
escrow account - - 167,983
Equity in net loss of subsidiary 1,456,954 540,514 -
Expenses paid directly by organizers - 6,511 6,603
Decrease (increase) in other assets 22,290 (84,907) (74,364)
Increase (decrease) in accrued
interest and other liabilities 51,071 (115,512) 309,415
----------- ----------- -----------
Net cash provided by (used in)
operating activities (183,593) (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
Principal payments on capital lease
obligations (17,271) - -
Purchase of common stock - (111,784) -
Repayment of advances from
organizers, net - (49,349) (73,200)
----------- ----------- -----------
Net cash provided by (used in)
financing activities (17,271) 155,288 4,114,617
----------- ----------- -----------
Increase (decrease) in cash (200,864) (3,543,848) 3,992,293
CASH AT BEGINNING OF YEAR 448,599 3,992,447 154
----------- ----------- -----------
CASH AT END OF YEAR $ 247,735 $ 448,599 $ 3,992,447
----------- ----------- -----------
----------- ----------- -----------
</TABLE>
F-22
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
<TABLE>
<CAPTION>
NOTE 15 - CONDENSED PARENT COMPANY FINANCIAL
INFORMATION (CONTINUED)
STATEMENTS OF CASH FLOWS 1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES:
Cash paid during the year for:
Interest $ 287,729 $ 122,886 $ 10,463
---------- ---------- ----------
---------- ---------- ----------
Federal income taxes $ - $ 23,474 $ -
---------- ---------- ----------
---------- ---------- ----------
Non-cash investing activities:
Change in net unrealized holding
gain on available-for-sale
investment securities $ 2,253 $ 2,235 $ -
---------- ---------- ----------
---------- ---------- ----------
Non-cash 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 $ -
---------- ---------- ----------
---------- ---------- ----------
Stock issuance costs charged
to surplus $ - $ 13,049 $ 146,105
---------- ---------- ----------
---------- ---------- ----------
Stock issuance costs paid directly
by organizers $ - $ 6,438 $ 23,597
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-23
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 16 - 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, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------ ----- ------ -----
<S> <C> <C> <C> <C>
Financial assets:
Cash and cash equivalents $ 4,156,289 $ 4,156,289 $ 5,812,547 $ 5,812,547
Investment securities 2,595,738 2,596,123 3,389,270 3,383,167
Loans receivable, net 13,115,066 13,104,294 1,102,913 1,102,913
Accrued interest receivable 86,205 86,205 46,970 46,970
------------ ------------ ------------ ------------
TOTAL $ 19,953,298 $ 19,942,911 $ 10,351,700 $ 10,345,597
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
Financial liabilities:
Deposits $ 17,869,056 $ 17,905,375 $ 6,505,572 $ 6,516,714
Capital lease obligations 2,482,729 2,482,729 2,500,000 2,500,000
Accrued interest, taxes
and other liabilities 350,381 350,381 284,975 284,975
------------ ------------ ------------ ------------
Total financial
liabilities 20,702,166 20,738,485 9,290,547 9,301,689
Rescindable common stock 4,482,533 4,482,533 4,482,533 4,482,533
------------ ------------ ------------ ------------
TOTAL $ 25,184,699 $ 25,221,018 $ 13,773,080 $ 13,784,222
------------ ------------ ------------ ------------
------------ ------------ ------------ ------------
</TABLE>
The Bank also has unrecognized financial instruments at December 31, 1997 and
1996. These financial instruments relate to commitments to extend credit. The
contract amount of such financial instruments total approximately $5,325,000 and
$578,000 at December 31, 1997 and 1996, respectively. Such amounts are 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.
F-24
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 16 - FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 1996 loans were made in the period October to
December 1996 and there had not been a change in interest rates, carrying value
of loans receivable approximated fair value at December 31, 1996.
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.
RESCINDABLE COMMON STOCK:
The fair value of rescindable common stock is considered to be the carrying
amount since the Company's Rescission Offer (as described in Note 19) will
include an offer to repurchase the shares for the initial price paid to the
Company by each shareholder, plus interest.
OTHER FINANCIAL INSTRUMENTS:
The fair value of accrued interest receivable and accrued interest, taxes and
other liabilities 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 represent commitments at
existing rates.
NOTE 17 - FUTURE CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" in June 1997.
Statement 130 establishes standards for reporting and display of comprehensive
income (as defined) in a full set of general-purpose financial statements.
Statement 130 will require classification of items of other comprehensive income
by their nature in a financial statement and display of the accumulated balance
of other comprehensive income separately from retained earnings (accumulated
deficit) and surplus in the equity section of the balance sheet. Statement 130
is effective for fiscal years beginning after December 15, 1997 and requires
reclassification of financial statements for earlier periods provided for
comparative purposes.
Management does not believe the application of Statement 130 will materially
affect the Company's consolidated financial statements.
F-25
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 18 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Consolidated supplemental cash flow disclosures consisted of the following for
the years ended December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Cash paid during the year for:
Interest, including $287,729 in 1997
and $121,000 in 1996 relating to
capital lease obligations $ 855,891 $ 148,484 $ 10,463
---------- ---------- ----------
---------- ---------- ----------
Federal income taxes $ - $ 23,474 $ -
---------- ---------- ----------
---------- ---------- ----------
Non-cash investing activities:
Change in net unrealized holding gain on
available-for-sale investment securities $ 2,253 $ 2,235 $ -
---------- ---------- ----------
---------- ---------- ----------
Non-cash financing activities:
Capital lease obligations $ - $2,500,000 $ -
---------- ---------- ----------
---------- ---------- ----------
Common stock issued in lieu
of paying interest $ - $ - $ 167,983
---------- ---------- ----------
---------- ---------- ----------
Stock issuance costs charged to surplus $ - $ 13,049 $ 146,105
---------- ---------- ----------
---------- ---------- ----------
Stock issuance costs paid directly
by organizers $ - $ 6,438 $ 23,597
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
NOTE 19 - CONTINGENT LIABILITY - RESCINDABLE COMMON STOCK
The Company has a contingent liability related to the sale of common stock in
its initial public offering, as a result of federal and state securities law
compliance matters. Notification of these securities law compliance matters was
first received from the Securities and Exchange Commission in a letter dated
February 4, 1997. The maximum contingent liability would be the full purchase
price of all 370,761 shares sold by the Company, or approximately $4,500,000,
plus interest. The Company has retained special securities law counsel to
advise it with respect to the matter. As a result, the Company filed a
Registration Statement with the Securities and Exchange Commission on January 5,
1998 to address this matter. However, no assurance can be made that the
Securities and Exchange Commission will approve the Registration Statement.
If the Registration Statement becomes effective, the Company will offer (the
"Rescission Offer") to purchase shares of the Company's common stock from those
shareholders of the Company who purchased the shares directly from the Company
from 1992 through 1996, subject to the terms and conditions set forth in the
Rescission Offer. The Company will offer to repurchase the shares for the
initial price paid to the Company by each shareholder, plus interest at a rate
that varies based on a shareholder's state of residence at the time when the
shares were purchased.
F-26
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 19 - CONTINGENT LIABILITY - RESCINDABLE COMMON
STOCK (CONTINUED)
The Company will make the Rescission Offer to reduce or eliminate any contingent
liability resulting from potential claims by shareholders arising as a result of
possible violations of the Securities Act of 1933, as amended, and state
securities laws in connection with the initial sale of the shares by the
Company. A shareholder rejecting the Rescission Offer will keep his shares.
There can be no assurance that the Rescission Offer will ultimately be declared
effective by the Securities and Exchange Commission. The Rescission Offer does
not preclude any individual shareholder from pursuing claims against the Company
or its officers or directors. In the event that a large number of shareholders
accept the Rescission Offer and the Company is unable to raise sufficient funds
to repurchase such shares, the Company's financial position could be adversely
affected if a large number of shareholders elect to pursue claims against the
Company or its officers or directors. Furthermore, the Rescission Offer does
not prevent any government agency from asserting violations of the securities
laws in a proceeding against the Company or its officers or directors, and the
Company's financial position will also be adversely affected if any such claims
are asserted and pursued.
As a result of this matter, the common stock issued and outstanding has been
reported in the consolidated balance sheets as "rescindable common stock". Such
amount is reported after liabilities but before stockholders' deficit. The
financial statements as of and for each of the two years in the period ended
December 31, 1996 have been restated to reflect this presentation.
The Rescission Offer, if allowed, will be subject to a number of conditions,
including the availability of sufficient funds to purchase all shares tendered
and regulatory approval. The Company will attempt to fund the purchase of any
shares tendered under the Rescission Offer with the proceeds of a new public
offering of shares or the obtaining of additional funds from a private placement
of securities. No specific arrangements are in place at this time and no
assurance can be made as to the ability of the Company to secure such additional
funds. Because of the Cease and Desist Order described in Note 14, the initial
three year prohibition against dividends contained in the regulatory approval of
the Bank's charter, and due to the lack of retained earnings from which to pay
dividends, the Bank is not currently permitted to pay any dividends to the
Company. Also as described in Note 14, the Company is not currently permitted
to have any borrowings.
If the Company is unable to have the Registration Statement declared effective
by the Securities and Exchange Commission, which is required in order to make
the Rescission Offer, or if the Company is unable to fund the repurchase of the
shares tendered in acceptance of the Rescission Offer, then, in either event,
the Company will be required to defend the lawsuits, if any, brought by
shareholders of the Company to rescind their purchases of common stock from the
Company. The Company's legal counsel believes that the Company will have
defenses in any such lawsuit, including, among others, a statue of limitations
defense. No assurance can be made as to the possibility of success of any such
defense, or the ability of the Company to pay the cost of defending such
actions.
Whether the Company proceeds with the Rescission Offer or not, the Company will
need significant additional financial resources to continue as a going concern.
At this time, no plans exist which provide any assurance that the Company will
be able to obtain such resources to satisfy the material adverse effect of the
contingency described in this Note.
F-27
<PAGE>
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997, 1996 AND 1995
NOTE 20 - CONTINGENT LIABILITY - OTHER
The Company has received an informal inquiry from the Securities and Exchange
Commission, Midwest Regional Office, Division of Enforcement regarding the
initial public offering of the Company's common shares. In connection with the
informal inquiry, the Division of Enforcement has asked the Company to furnish
certain documents relating to the offering. The Company intends to fully
cooperate with the informal inquiry. In the event the Division of Enforcement
determines that there is a basis for an enforcement action and elects to pursue
such an action against the Company, its officers or directors, the defense costs
associated with, and any resulting judgments from, any enforcement action could
have a material adverse affect on the Company.
NOTE 21 - SUBSEQUENT EVENTS (UNAUDITED)
In March 1998, the Federal Reserve Bank of Cleveland announced to the Board of
Directors of the Company that it and the Ohio Division of Financial Institutions
would be commencing an inspection of the Company. Results of the inspection
have not been issued as of March 31, 1998.
As the result of the resignation of the Bank's President and Senior Vice
President - Secretary in March 1998, the Bank is currently negotiating
resignation and severance agreements with each individual. The impact of such
agreements, if executed, on the Bank's financial statements and the Company's
consolidated financial statements cannot currently be determined.
As of April 6, 1998, the Bank has been unable to comply with certain of the
requirements of the Cease and Desist Order described in Note 14. Requested
extensions of time to comply with certain provisions have been verbally denied
by the Federal Reserve Bank.
As of March 31, 1998, the Bank Tier I Capital ratio was less than the required
10% ratio described in Note 14.
This information is an integral part of the accompanying
consolidated financial statements.
F-28
<PAGE>
TOWNE BANCORP, INC.
FORM 10-KSB FOR THE
YEAR ENDED
DECEMBER 31, 1997
EXHIBIT INDEX
<PAGE>
EXHIBIT
NUMBER DOCUMENT
<TABLE>
<CAPTION>
Exhibit
Number Description
------ -----------
<S> <C>
*3(a) Second Amended and Restated Articles of Incorporation of Towne
Bancorp (Incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-2 - Registration No. 333-43741)
*3(b) Code of Regulations of Towne Bancorp, Inc. (Incorporated by reference
to Exhibit 3.3 to the Registration Statement on Form S-1 -
Registration No. 33-47504) filed on May 4, 1992)
10(a) Lease by and between Carol A. Hass, Trustee and Towne Bancorp, Inc.,
dated September 18, 1995, relating to the East South Boundry Street
office. (Incorporated by reference to Exhibit 4.1 to the
Registration Statement on Form S-2 - Registration No. 333-43741)
10(b) Lease by and between Carol A. Mockensturm Hass, Trustee and Towne
Bancorp, Inc., dated August 29, 1996, relating to 6401 Monroe Street.
(Incorporated by reference to Exhibit 4.1 to the Registration
Statement on Form S-2 - Registration No. 333-43741)
21 Subsidiaries of the Registrant
24.0 Power of Attorney
27.0 Financial Data Schedule
</TABLE>
- ---------------------------
* Incorporated by reference as indicated.
<PAGE>
EXHIBIT 21
TOWNE BANCORP, INC.
SUBSIDIARIES OF THE REGISTRANT
<TABLE>
<CAPTION>
STATE OF PERCENTAGE OF
SUBSIDIARY INCORPORATION SECURITIES
---------- ------------- ----------
OWNED
-----
<S> <C> <C>
Towne Bank (1) Ohio 100%
</TABLE>
(1) The subsidiary's principal office is located in Perrysburg, Ohio.
<PAGE>
POWER OF ATTORNEY
Each of the undersigned officers and/or directors of Towne Bancorp, Inc., an
Ohio corporation (the "Corporation"), hereby appoints Jerome C. Bechstein as his
or her true and lawful attorney-in-fact, in his or her name and on his or her
behalf, and in any and all capacities stated below, and to cause to be filed
with the Securities and Exchange Commission, the Corporation's Annual Report on
Form 10-KSB (the "Annual Report") for the fiscal year ended December 31, 1997,
and likewise to sign and file any amendments, including post-effective
amendments, to the Annual Report, hereby granting unto such attorney the full
power and authority to do and perform in the name and on behalf of the
undersigned, and in any and all such capacities, every act and thing whatsoever
necessary to be done in and about the premises as fully as the undersigned could
or might do in person, hereby granting to such attorney-in-fact full power of
substitution and revocation, and hereby ratifying all that such attorney-in-fact
or his substitute may do by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney in
counterparts if necessary, effective as of April 14, 1998.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Jerome C. Bechstein Chief Executive Officer, April 14, 1998
--------------------------- President and Director
Jerome C. Bechstein (Principal Executive Officer and
Chief Accounting Officer)
/s/ Lois Brigham Senior Vice President, April 14, 1998
--------------------------- Secretary and Director
Lois Brigham
/s/ John Weinert Director April 14, 1998
---------------------------
John Weinert
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 1,014,289 383,547
<SECURITIES> 2,595,738 3,389,270
<RECEIVABLES> 13,115,066 1,102,913
<ALLOWANCES> 741,883 20,000
<INVENTORY> 0 0
<CURRENT-ASSETS> 300,345 190,012
<PP&E> 2,401,617 2,499,349
<DEPRECIATION> 0 0
<TOTAL-ASSETS> 22,569,055 12,994,091
<CURRENT-LIABILITIES> 20,702,166 9,290,547
<BONDS> 4,482,533 4,482,533
0 0
0 0
<COMMON> 0 0
<OTHER-SE> (2,615,644) (778,989)
<TOTAL-LIABILITY-AND-EQUITY> 22,569,055 12,994,091
<SALES> 0 0
<TOTAL-REVENUES> 1,218,550 199,009
<CGS> 0 0
<TOTAL-COSTS> 0 0
<OTHER-EXPENSES> 1,742,182 1,041,256
<LOSS-PROVISION> 721,883 20,000
<INTEREST-EXPENSE> 593,393 42,714
<INCOME-PRETAX> (1,838,908) (873,361)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (1,838,908) (873,361)
<EPS-PRIMARY> (4.96) (2.38)
<EPS-DILUTED> 0 0
</TABLE>
