<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10 - QSB
QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended MARCH 31, 1998 Commission File Number 0000887203
TOWNE BANCORP, INC.
(Exact name of small business issuer as specified in its charter)
OHIO 34-1704637
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
610 EAST SOUTH BOUNDARY STREET, PERRYSBURG, OHIO 43551
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (419) 874-2090
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes x No
----- ----
370,761 Common shares were outstanding as of March 31, 1998.
This document contains 12 pages.
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TOWNE BANCORP, INC.
Index
Page(s)
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements 3
Item 2. Management's Discussion and Analysis 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 10
Item 2. Changes in Securities and Use of Proceeds 10
Item 3. Defaults Upon Senior Securities 10
Item 4. Submission of Matters to a Vote of Security Holders 10
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
2
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PART I
ITEM 1. FINANCIAL STATEMENTS
TOWNE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
MARCH 31, 1998 AND DECEMBER 31, 1997
(Unaudited)
<TABLE>
<CAPTION>
ASSETS 1998 1997
---- ----
<S> <C> <C>
Cash and cash equivalents:
Cash and due from banks $ 479,232 $ 1,014,289
Federal funds sold 3,618,000 3,142,000
--------------- ----------------
Total cash and cash equivalents 4,097,232 4,156,289
--------------- ----------------
Investment securities:
Available-for-sale, at market value 1,000,929 999,397
Held-to-maturity, at amortized cost 1,397,255 1,596,341
--------------- ----------------
Total investment securities 2,398,184 2,595,738
--------------- ----------------
Loans receivable, net of allowance for loan losses
of $643,572 in 1998 and $741,883 in 1997 14,092,989 13,115,066
Premises and equipment, net 2,363,753 2,401,617
Other assets 271,214 300,345
--------------- ----------------
TOTAL ASSETS $ 23,223,372 $ 22,569,055
=============== ================
LIABILITIES, RESCINDABLE COMMON STOCK
AND STOCKHOLDERS' DEFICIT
Liabilities:
Deposits $ 19,166,619 $ 17,869,056
Capital lease obligations 2,482,729 2,482,729
Accrued interest, taxes and other liabilities 310,407 350,381
--------------- ----------------
Total liabilities 21,959,755 20,702,166
--------------- ----------------
Rescindable common stock:
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 (3,224,753) (2,620,132)
Net unrealized holding gain on investment
securities available-for-sale 5,837 4,488
--------------- ----------------
Total stockholders' deficit (3,218,916) (2,615,644)
--------------- ----------------
TOTAL LIABILITIES, RESCINDABLE COMMON
STOCK AND STOCKHOLDERS' DEFICIT $ 23,223,372 $ 22,569,055
=============== ================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Interest income:
Loans $ 320,181 $ 82,008
Investment securities 37,527 50,804
Federal funds sold 49,153 70,538
-------------- ---------------
Total interest income 406,861 203,350
Interest expense - deposits 241,841 117,585
-------------- ---------------
Net interest income 165,020 85,765
Provision for loan losses 333,307 30,000
-------------- ---------------
Net interest income (expense) after
provision for loan losses (168,287) 55,765
-------------- ---------------
Non-interest income:
Service charges on deposit accounts 18,321 1,768
Other operating income 24,822 3,554
-------------- ---------------
Total non-interest income 43,143 5,322
-------------- ---------------
Non-interest expenses:
Salaries, wages and employee benefits 106,901 113,729
Occupancy expenses, including interest on
capital lease obligations 133,295 133,851
Other operating expenses 239,281 84,383
-------------- ---------------
Total non-interest expenses 479,477 331,963
-------------- ---------------
NET LOSS $ (604,621) $ (270,876)
============== ===============
NET LOSS PER SHARE $ (1.63) $ (.73)
============== ===============
AVERAGE COMMON SHARES OUTSTANDING 370,761 370,761
============== ============
</TABLE>
See notes to consolidated financial statements.
4
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TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED MARCH 31, 1998 AND 1997
(Unaudited)
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (604,621) $ (270,876)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 37,864 34,016
Provision for loan losses 333,307 30,000
Accretion of investment securities discounts,
net of premium amortization (1,097) (1,617)
Effects of changes in operating assets and liabilities:
Other assets 29,131 (54,750)
Accrued interest, taxes and other liabilities (39,974) (138,021)
-------------- ---------------
Net cash used in operating activities (245,390) (401,248)
-------------- ---------------
Cash flows from investing activities:
Proceeds from maturity of investment securities 200,000 -
Net increase in loans receivable (1,311,230) (3,659,087)
-------------- ---------------
Net cash used in investing activities (1,111,230) (3,659,087)
-------------- ---------------
Cash flows from financing activities:
Net increase in deposits 1,297,563 3,417,788
-------------- ---------------
Net decrease in cash and cash equivalents (59,057) (642,547)
CASH AND CASH EQUIVALENTS
At beginning of period 4,156,289 5,812,547
-------------- ---------------
At end of period $ 4,097,232 $ 5,170,000
============== ===============
</TABLE>
See notes to consolidated financial statements.
5
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TOWNE BANCORP, INC.
Notes to Consolidated Financial Statements
March 31, 1998
(Unaudited)
(1) Consolidated Financial Statements
The consolidated financial statements have been prepared by Towne
Bancorp, Inc. ("the Company") without audit. In the opinion of
management, all adjustments necessary to present fairly the Company's
financial position, results of operations and changes in cash flows have
been made. The financial statements include the accounts of Towne Bank
("the Bank"), the Company's wholly-owned subsidiary.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted
accounting principles have been omitted. The results of operations for
the period ended March 31, 1998 are not necessarily indicative of the
operating results for the full year.
The Independent Auditor's Report, dated March 3, 1998, on the Company's
1997 financial statements and for each of the three years in the period
ended December 31, 1997 included an explanatory paragraph for the
Company's "going concern uncertainty".
(2) 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 Federal
Reserve Bank of Cleveland ("the Federal Reserve Bank") and the Ohio
Division of Financial Institutions ("the Division"), 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
6
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(2) Regulatory Matters, Continued
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
Bank has not been able to comply with certain of the requirements of the
Order. The Bank and Company continue to be subject to regulatory
examinations and close oversight.
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 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 March 31, 1998 and December 31, 1997, the Company
is not subject to the consolidated capital requirements of the Federal
Reserve System's Bank Holding Companies Act, as amended, at March 31,
1998 and December 31, 1997. 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. As of March 31, 1998, the Bank had a
Tier I Capital ratio of 7%. 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.
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.
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.
7
<PAGE> 8
(3) 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
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 or that the
Company will proceed with 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. In view of
the matter described in Note 5, the Company will most likely not proceed
with the Rescission Offer.
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.
(4) 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.
(5) Sale of Bank
On June 11, 1998, the Company executed an agreement for the sale of the
Bank to the Exchange Bancshares, Inc. of Luckey, Ohio. The sale, subject
to regulatory approval, is expected to close on June 19, 1998.
8
<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company had total consolidated assets of $23,223,372 at March 31, 1998, an
increase of $654,317, or 2.9% over the $22,569,055 total at December 31, 1997.
The Company reported a net loss of $604,621 for the three months ended March 31,
1998. A significant portion of this loss can be attributed to the provision for
loan losses of $333,307 which, after loan charge-offs, increased the allowance
for loan losses to $643,572, or 4.4% of loans at March 31, 1998.
The Directors of Towne Bancorp have determined that the Company and the Bank
cannot continue without a capital infusion. As a result of noncompliance with
Federal and state securities laws, the Company has a contingent liability
related to the sale of common stock in the initial public offering. The
liability is approximately $4.5 million plus interest, and precludes the
possibility of raising additional capital. Because of this situation, the Board
of Directors of the Company have decided to effect the sale of Towne Bank.
9
<PAGE> 10
PART II
ITEM 1. 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 negotiated a
settlement with Mr. Eichler that resulted in a dismissal of all claims.
ITEM 2. CHANGE IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 27 - Financial Data Schedule.
(B) Reports on Form 8-K - The Registrant filed a Form 8-K dated March 25,
1998. Item 5 (Other Events) and Item 7 (Exhibits) were reported. No
financial statements were filed.
10
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
TOWNE BANCORP, INC.
--------------------------
Registrant
Date: June 17, 1998 /s/ JOHN P. WEINERT
----------------------------------- ----------------------------
John P. Weinert, Chairman
Date: June 17, 1998 /s/ DAVID L. MCGUIRE
----------------------------------- ----------------------------
David L. McGuire, Principal
Financial Manager
11
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 479,232
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 3,618,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 1,000,929
<INVESTMENTS-CARRYING> 1,397,255
<INVESTMENTS-MARKET> 0
<LOANS> 14,736,561
<ALLOWANCE> 643,572
<TOTAL-ASSETS> 23,223,372
<DEPOSITS> 19,166,619
<SHORT-TERM> 0
<LIABILITIES-OTHER> 310,407
<LONG-TERM> 2,482,729
0
0
<COMMON> 4,482,533
<OTHER-SE> (3,218,916)
<TOTAL-LIABILITIES-AND-EQUITY> 23,223,372
<INTEREST-LOAN> 320,181
<INTEREST-INVEST> 37,527
<INTEREST-OTHER> 49,153
<INTEREST-TOTAL> 406,861
<INTEREST-DEPOSIT> 241,841
<INTEREST-EXPENSE> 241,841
<INTEREST-INCOME-NET> 165,020
<LOAN-LOSSES> 333,307
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 479,477
<INCOME-PRETAX> (604,621)
<INCOME-PRE-EXTRAORDINARY> (604,621)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (604,621)
<EPS-PRIMARY> (1.63)
<EPS-DILUTED> (1.63)
<YIELD-ACTUAL> 0
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 0
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 0
<ALLOWANCE-DOMESTIC> 0
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
