<PAGE> 1
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, 1998
COMMISSION FILE NUMBER 0000887203
TOWNE BANCORP, INC.
(Exact name of Registrant as specified in its charter)
Ohio 34-1704637
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
16967 BG Road W, Bowling Green, Ohio 43402
(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 No X
--- ---
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 $1,025,168.
There is no market for the Registrant's voting stock. The aggregate market
value of the voting stock held by non-affiliates of the Registrant, is
indeterminate as of March 20, 1999, due to the limited number of transactions in
the Registrant's voting stock.
As of March 20, 1999, 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 1999 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> 2
INDEX
<TABLE>
<CAPTION>
Page
----
PART I
<S> <C> <C>
ITEM 1. Description of Business........................................................... 3
ITEM 2. Description of Business Property.................................................. 11
ITEM 3. Legal Proceedings................................................................. 11
ITEM 4. Submission of Matters to a Vote of Security Holders............................... 12
PART II
ITEM 5. Market for Common Equity and Related Stockholder Matters.......................... 12
ITEM 6. Management's Discussion and Analysis of Operations................................ 12
ITEM 7. Financial Statements.............................................................. 13
ITEM 8. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.......................................... 13
PART III
ITEM 9. Directors, Executive Officers, Promoters and Control Persons,
Compliance with Section 16(a) of the Exchange Act............................ 13
ITEM 10. Executive Compensation............................................................ 13
ITEM 11. Security Ownership of Certain Beneficial Owners and Management.................... 13
ITEM 12. Certain Relationships and Related Transactions.................................... 13
ITEM 13. Exhibits and Reports on Form 8-K.................................................. 14
SIGNATURES............................................................................................ 15
</TABLE>
<PAGE> 3
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Towne Bancorp, Inc. (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 principal offices of the Company
are located at 16967 BG Rd. West, Bowling Green, Ohio. The Company had total
assets of $729,471 at December 31, 1998.
Until June 1998, the Company owned all of the voting shares of Towne Bank
(Bank), an Ohio-chartered bank organized in 1995.
On June 11, 1998, the Company signed a definitive Agreement that provided for a
capital infusion of $2,000,000 into Towne Bank, the wholly-owned subsidiary of
the Company, by Exchange Bancshares, Inc. (EBI), Luckey, Ohio. The Company and
EBI also joined the execution of a separate Merger Agreement by and between
Towne Bank and The Exchange Bank, a wholly-owned subsidiary of EBI, dated as of
June 19, 1998. The transactions contemplated under the Agreement and the Merger
Agreement were consummated effective as of June 19, 1998, after receipt of
approval from the Ohio Division of Financial Institutions and the Federal
Reserve Bank of Cleveland. Pursuant to the terms of the Agreement and the Merger
Agreement, the Company, as the sole shareholder of Towne Bank, received cash in
the amount of $825,420 on June 19, 1998. A gain of $184,866 resulted from the
sale.
Under the terms of the Agreement and the Merger Agreement, an additional
$275,140 was deposited with Exchange Bank, as escrow agent, to be held for a
period of six months. At the end of such six-month period, assuming there has
been no demonstrated breach of the representations and warranties of the
Agreement or Merger Agreement by the Company or Towne Bank, the $275,140 held in
escrow will be released to the Company. It is not probable that the $275,140
will be received by the Company.
Substantially all operations of the Company were conducted through the bank. The
Company has had no operations since the sale of the bank.
GENERAL
The Company was formed by Jerome Bechstein, John Weinert and others. The initial
capitalization of the 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 Company is regulated by federal and state banking agencies. As a result, it
is subject to periodic examinations by the agencies and is required to comply
with various regulatory matters.
- 3 -
<PAGE> 4
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 1. DESCRIPTION OF BUSINESS - CONTINUED
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 (Act). The Act limits the activities in which
the Company may engage to those activities that the Federal Reserve Boards
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 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. 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.
EMPLOYEES
The Company has no employees.
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.
- 4 -
<PAGE> 5
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 1. DESCRIPTION OF BUSINESS - CONTINUED
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, 1998 and 1997,
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>
1998
----------------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
------------- -------------- ----------
ASSETS
INTEREST-EARNING ASSETS
<S> <C> <C> <C>
Loans (Notes 1, 2, and 3) $ 14,296,755 617,534 4.32 %
Investment securities (Notes 1 and 4) 2,496,961 64,783 2.59
Deposit in bank 358,632 11,843 3.30
Federal funds sold (Note 1) 3,380,000 65,393 1.93
------------- --------------
Total interest-earning assets 20,532,348 759,553 3.70 %
-------------- ========
NON-INTEREST EARNING ASSETS
Cash and due from banks 513,249 --
Bank premises and equipment, net 2,382,685 --
Other assets 285,780 --
Less allowance for loan losses (692,728)
-------------
Total $ 23,021,334 $ 759,553
============= ==============
LIABILITIES, RESCINDABLE COMMON STOCK
AND STOCKHOLDERS' DEFICIT
INTEREST-BEARING LIABILITIES (Note 1)
Deposits $ 17,386,748 386,756 2.22 %
------------- -------------- --------
Total interest-bearing liabilities 17,386,748 386,756 2.22 %
------------- -------------- ========
NON-INTEREST-BEARING LIABILITIES
Capital lease obligations (Notes 1 and 5) 2,482,729 --
Demand deposits (Note 1) 1,131,090 --
Other liabilities 225,385 --
------------- --------------
Total non-interest-bearing liabilities 3,839,204 0
RESCINDABLE COMMON STOCK 4,482,533 --
STOCKHOLDERS' DEFICIT (3,231,628) --
------------- --------------
Total $ 22,476,857 386,756
============= --------------
Net interest income $ 372,797
==============
Net yield on interest-earning assets 1.82 %
========
</TABLE>
<PAGE> 6
<TABLE>
<CAPTION>
1997
---------------------------------------------
AVERAGE YIELD/
BALANCE INTEREST RATE
------------- ------------- ---------
<S> <C> <C>
$ 7,451,760 $ 786,825 10.56%
3,257,245 190,828 5.86
-- -- --
3,502,898 188,131 5.37
------------- -------------
14,211,903 1,165,784 8.20%
------------- ========
882,409
2,433,582
277,833
(79,397)
$ 17,726,330 $ 1,165,784
============= =============
$ 10,743,631 $ 593,393 5.52%
-- -- --
------------- -------------
10,743,631 593,393 5.52%
========
2,511,332 --
1,163,663 --
267,422 --
------------- -------------
3,942,417 --
4,482,533 --
(1,442,251) --
------------- -------------
$ 17,726,330 593,393
============= -------------
$ 572,391
4.03%
========
</TABLE>
- 5 -
<PAGE> 7
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 1. DESCRIPTION OF BUSINESS - CONTINUED
DISTRIBUTION OF ASSETS, LIABILITIES, RESCINDABLE COMMON STOCK AND STOCKHOLDERS'
DEFICIT; INTEREST RATES AND INTEREST DIFFERENTIAL - CONTINUED
NOTES:
(1) Since the Bank was held by the Company for only 5 1/2 months in 1998,
average balances applicable to Bank for 1998 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 $34,087 in 1998,
and $106,310 in 1997.
(3) The Bank has no non-accrual loans for the periods reported above.
(4) All taxable investments.
(5) Interest expense on capital lease obligations is reported in occupancy
expense for financial reporting purposes. Such interest amounted to
$286,570 in 1997 (11.42%).
The following table sets forth a summary of the 1998 and 1997 changes in
interest income and interest expenses resulting from changes in volume and
changes in rate.
<TABLE>
<CAPTION>
1998 COMPARED TO 1997
INCREASE (DECREASE) DUE TO VOLUME AND RATE
-----------------------------------------------------------
1998 1997 (1)
------------- -----------------------------------------
NET (2) VOLUME RATE NET
------------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ (169,291) $ 774,685 $ (1,474) $ 773,211
Investment securities (126,045) 169,902 944 170,846
Deposit in bank 11,843 (110,570) -- (110,570)
Federal funds sold (122,738) 139,198 (3,856) 135,342
------------- ------------- ----------- -------------
Total interest-
earning assets (406,231) 973,215 (4,386) 968,829
------------- ------------- ----------- -------------
INTEREST EXPENSE
Deposits (206,637) 552,584 (1,424) 551,160
Organizer advances -- (481) - (481)
------------- ------------- ----------- -------------
Total interest expense (206,637) 552,103 (1,424) 550,679
------------- ------------- ----------- -------------
Net interest income $ (199,594) $ 421,112 $ (2,962) $ 418,150
============= ============= =========== =============
</TABLE>
(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.
(2) Due to the sale of the bank in June 1998, substantially all changes
in interest income and expense between 1998 and 1997 are related to
decreases in volume.
- 6 -
<PAGE> 8
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 1. DESCRIPTION OF BUSINESS - CONTINUED
INVESTMENT PORTFOLIO
The following table sets forth the carrying amount of investment securities at
December 31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
U.S. Treasury securities $ -- $ 900,933
Obligations of U.S. Government agencies
and corporations -- 1,598,805
Other security -- 96,000
----------------- -----------------
Total $ 0 $ 2,595,738
================= =================
</TABLE>
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, 1998 and 1997.
LOAN PORTFOLIO - TYPES OF LOANS
The amounts of gross loans outstanding at December 31, 1998 and 1997 are shown
in the following table according to types of loans:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Commercial $ -- $ 5,549,125
Real estate:
Residential mortgage -- 6,336,594
Consumer -- 2,022,164
----------------- -----------------
Total $ 0 $ 13,907,883
================= =================
</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
credit risk exposure to the bank.
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.
- 7 -
<PAGE> 9
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 1. DESCRIPTION OF BUSINESS - CONTINUED
RISK ELEMENTS
The following table presents information concerning the amount of loans at
December 31, 1998 and 1997, which contain certain risk elements:
<TABLE>
<CAPTION>
1998 1997
----------------- -----------------
<S> <C> <C>
Loans accounted for on a nonaccrual basis $ -- $ --
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>
SUMMARY OF LOAN LOSS EXPERIENCE
ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
The following table shows the daily average loan balance, and changes in the
allowance for loan losses for the year ended December 31, 1997. Information for
1998 is not presented due to the sale of the bank in June 1998.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1997
<S> <C>
Daily average amount of loans $ 7,451,760
=================
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
-----------------
Allowance for loans losses at end of year $ 741,883
=================
</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.
- 8 -
<PAGE> 10
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 1. DESCRIPTION OF BUSINESS - CONTINUED
ALLOCATION OF ALLOWANCE FOR LOAN LOSSES
The following table allocates to each loan category the allowance for loan
losses as of December 31, 1998 and 1997. 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 analysis and the proration of the unallocated allowance to the
loan categories based on potential loss experience:
<TABLE>
<CAPTION>
1998 1997
------------------------- -----------------------------------
PERCENTAGE PERCENTAGE
OF LOANS TO OF LOANS TO
ALLOWANCE TOTAL LOANS ALLOWANCE TOTAL LOANS
<S> <C> <C> <C> <C>
Commercial $ -- -- % $ 338,644 39.9%
Real estate - mortgage -- -- 370,711 45.6
Consumer -- -- 32,528 14.5%
-------------- --------- -------------- -------------
Total $ 0 0 % $ 741,883 100.0%
============== ============ ============== =============
</TABLE>
DEPOSITS
The average daily amount of deposits (all domestic offices) and average rates
paid on such deposits is summarized for the year 1997 in the following table:
<TABLE>
<CAPTION>
1997
--------------------------------
AVERAGE AVERAGE
BALANCE RATE PAID
--------------- -----------
<S> <C> <C>
Non-interest bearing demand deposits $ 1,163,663 -- %
Interest-bearing demand deposits 753,380 2.50
Savings, including Money Market
deposits 849,451 3.09
Time deposits 9,140,800 6.00
--------------
Total $ 11,907,294
==============
</TABLE>
Due to the sale of the bank in June 1998, amounts related to 1998 deposits are
not presented.
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,
1998 1997
----------------- -----------------
<S> <C> <C>
Percentage of net loss to:
Average total assets (5.4) % (10.4) %
Average stockholders' equity:
Including rescindable common stock (98.6) % (60.5) %
Excluding rescindable common stock (38.2) % (127.5) %
Percentage of average stockholders' equity to average total
assets:
Including rescindable common stock 5.4 % 17.2 %
Excluding rescindable common stock (14.0) % (8.1) %
</TABLE>
- 9 -
<PAGE> 11
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 1. DESCRIPTION OF BUSINESS - CONTINUED
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 (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. 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 GOING CONCERN
The Company does not conduct operations and is not a going concern. Since the
sale of the Bank in June 1998, the Company's only activities have been obtaining
legal and other professional services for matters related to litigation and
reporting requirements.
HOLDING COMPANY STRUCTURE; GOVERNMENT REGULATION AND POLICIES
As a bank holding company, the Company is subject to regulation, examination and
supervision by the Board of Governors of the Federal Reserve System. 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 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 assurance that future changes in the
regulations or in the interpretation thereof will not adversely affect the
business of the Company. Changes in the government's monetary, fiscal, housing
finance or tax policies may also adversely affect the business of the Company.
RESCISSION OFFER AND POSSIBLE VIOLATIONS OF SECURITIES LAW
The Company sold 370,761 shares of its common stock, without par value (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 violation 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
(Regulation Statement), whereby the Company intends to provide purchasers of the
Shares an opportunity to rescind their purchase (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
- 10 -
<PAGE> 12
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 1. DESCRIPTION OF BUSINESS - CONTINUED
RESCISSION OFFER AND POSSIBLE VIOLATIONS OF SECURITIES LAW - CONTINUED
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
The Company is unable to fund the rescission offer due to a lack of available
funds.
ANTI-TAKEOVER 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 BUSINESS PROPERTY
All property held by the Company was disposed of in connection with the June 19,
1998 sale of the bank.
ITEM 3. LEGAL PROCEEDINGS
The Company has negotiated a settlement with Thomas Eichler, a former officer
and director of the Company, who filed a complaint against the Company. In
connection with the settlement, all claims were dismissed and the Company
accrued a $40,000 liability due to Mr. Eichler.
The Company is a party to certain lawsuits. In 1998, two class action lawsuits
were filed in the U.S. District Court for the Northern District of Ohio, Western
Division, against the Company, its directors, its corporate stock transfer
agent, and (in one suit) its Directors and Officers insurer. The suits allege
violation of various Federal and State laws in connection with the Company's
offering of common stock. The suits request unspecified damages and costs.
In one of the class action lawsuits, the presiding judge ordered the freezing
of the Company's bank account, with $125,000 allocated to Huntington Trust Co.,
N.A. (a defendant in the suit), on an indicated claim. After obtaining court
approval, monies from the frozen account can be withdrawn to pay current
operating expenses.
Also in connection with one of the class action lawsuits, the Company filed a
cross claim against its casualty insurance carrier for breach of contract for
denying and voiding directors' and officers' liability insurance and tail
coverage. The Company seeks reinstatement of coverage, and compensatory and
punitive damages of $100,000 and $10,000,0000, respectively. The insurance
carrier refunded the Company approximately $100,000 of premiums paid to it by
the Company, however, the Company returned the money to the insurance carrier
and intends to vigorously pursue the cross claim.
The Company has agreed to indemnify its directors and officers for costs assumed
by them in connection with such lawsuits. The Company intends to vigorously
defend itself in connection with these lawsuits. The Company does not plan to
liquidate until the lawsuits are settled.
- 11 -
<PAGE> 13
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART I CONTINUED
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company may have 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 1998
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,
1998 is 741.
Information relating to dividend restrictions is described under Business Risks
above, and in Financial Statement Footnote 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 of which the Company has knowledge, the
transaction price for shares of the Company's Common Stock was $14.50 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
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, 1998 (unaudited), 1997 (audited), and 1996 (audited).
This discussion should be read in conjunction with the consolidated financial
statements and related footnotes presented elsewhere in this report. See Item 7
for explanation of inclusion of unaudited financial statements for 1998.
FINANCIAL CONDITION - SUMMARY
The Company had total consolidated assets of $729,471 at December 31, 1998, a
decrease of $21,839,584 or 96.8% from the $22,569,055 total at December 31,
1997. The Company sold its bank subsidiary on June 19, 1998, as described in
Note 1 of the Notes to Consolidated Financial Statements included in Item 7.
The Company reported a net loss of $1,233,318 and $1,838,908 for the years ended
December 31, 1998 and 1997, respectively. A significant portion of this loss can
be attributed to the provision for loan losses.
The Company is a party to certain lawsuits. In 1998, two class action lawsuits
were filed in the U.S. District Court for the Northern District of Ohio, Western
Division, against the Company, its directors, its corporate stock transfer
agent, and (in one suit) its Directors and Officers insurer. The suits allege
violation of various Federal and State laws in connection with the Company's
offering of common stock. The suits request unspecified damages and costs.
The Company has agreed to indemnify its directors and officers for costs assumed
by them in connection with such lawsuits. The Company intends to vigorously
defend itself in connection with these lawsuits. The Company does not plan to
liquidate until the lawsuits are settled.
- 12 -
<PAGE> 14
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART II CONTINUED
ITEM 7. FINANCIAL STATEMENTS
The Company sold its only operating subsidiary, the bank, on June 19, 1998.
Since the sale of the bank, the Company's only source of income has been, and
continues to be, interest income. The proceeds from the sale of the bank are
being used to pay ongoing expenses pending the dissolution and liquidation of
the Company. The Company intends to dissolve and liquidate as soon as
practicable following resolution of pending lawsuits. Accordingly, management
believes that the expense associated with an audit of the Company's financial
statements outweighs the corresponding benefit that would be derived by the
Company's shareholders from having audited financial statements included in
this Form 10-KSB.
The consolidated financial statements of the Company are set forth on pages F-1
through F-24. The 1998 consolidated financial statements are unaudited. The 1997
and 1996 financial statements were audited by independent auditors and they
expressed an unqualified opinion on them in their report dated March 3, 1998.
However, they also included an explanatory paragraph in the report that
disclosed matters that raised substantial doubt about the Company's ability to
continue as a going concern. The financial statements included no adjustments
that might result from the outcome of these uncertainties. The 1997 independent
auditors' report is at page F-2 of the Company's 1997 Form 10-KSB.
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 1999 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 related to the Company's 1999 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 related to the Company's 1999 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 related to the Company's 1999 Annual Meeting of Stockholders, and is
incorporated herein by reference.
- 13 -
<PAGE> 15
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
PART III CONTINUED
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
The following documents are filed as an exhibit to this document:
EXHIBIT
NUMBER DESCRIPTION
-------- -----------------------------------------------------------
*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)
24.0 Power of Attorney
27.0 Financial Data Schedule
(b) Reports on Form 8-K
None
*Incorporated by reference as indicated.
- 14 -
<PAGE> 16
TOWNE BANCORP, INC.
FORM 10-KSB
FOR THE YEAR ENDED DECEMBER 31, 1998
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.
/s/ Jerome C. Bechstein
--------------------------------------
Jerome C. Bechstein, President and CEO
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Registrant in the capacities and on the dates
indicated:
/s/ Jerome C. Bechstein March 31, 1999
- - -------------------------------------------------- -----------------------
Jerome C. Bechstein, President, CEO, Date
Director, and Chief Financial Officer
/s/ Lois A. Brigham March 31, 1999
- - -------------------------------------------------- -----------------------
Lois A. Brigham, Senior Vice President, Date
Secretary and Director
/s/ John P. Weinert March 31, 1999
- - -------------------------------------------------- -----------------------
John P. Weinert, Director Date
By: /s/ Jerome C. Bechstein March 31, 1999
---------------------------------------------- -----------------------
Jerome C. Bechstein, Attorney- Date
in-fact for each of the persons indicated
- 15 -
<PAGE> 17
TOWNE BANCORP, INC.
CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
F-1
<PAGE> 18
CONTENTS
PAGE
-----------
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 - F-24
F-2
<PAGE> 19
TOWNE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1998 (UNAUDITED) AND 1997 (AUDITED)
<TABLE>
1998 1997
---------------- ---------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 729,471 $ 1,014,289
Federal funds sold -- 3,142,000
---------------- ---------------
Total cash and cash equivalents 729,471 4,156,289
---------------- ---------------
INVESTMENT SECURITIES
Available-for-sale, at market value -- 999,397
Held-to-maturity, at amortized cost, market value of
$0 in 1998 and $1,598,726 in 1997 -- 1,596,341
---------------- ---------------
Total investment securities 0 2,595,738
---------------- ---------------
Loans receivable, net of allowance for loan losses
of $0 in 1998 and $741,883 in 1997 -- 13,115,066
Premises and equipment, net -- 2,401,617
Other assets -- 300,345
---------------- ---------------
Total assets $ 729,471 $ 22,569,055
================ ===============
LIABILITIES, RESCINDABLE COMMON STOCK
AND STOCKHOLDERS' DEFICIT
LIABILITIES
Deposits:
Interest-bearing $ -- $ 16,777,595
Non-interest bearing -- 1,091,461
---------------- ---------------
Total deposits 0 17,869,056
Capital lease obligations -- 2,482,729
Accrued interest, taxes and other liabilities 109,204 350,381
---------------- ---------------
Total liabilities 109,204 20,702,166
---------------- ---------------
RESCINDABLE COMMON STOCK (Notes 1, 8, 12, and 17)
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 (3,862,266) (2,620,132)
Net unrealized holding gain on investment
securities available-for-sale -- 4,488
---------------- ---------------
Total stockholders' deficit (3,862,266) (2,615,644)
---------------- ---------------
Total liabilities, rescindable common stock
and stockholders' deficit $ 729,471 $ 22,569,055
================ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 20
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED),
AND 1996 (AUDITED)
<TABLE>
<CAPTION>
1998 1997 1996
------------- -------------- -------------
INTEREST INCOME
<S> <C> <C> <C>
Loans $ 617,534 $ 786,825 $ 13,614
Investment securities 76,626 190,828 19,982
Deposits in other bank, escrow account -- -- 110,570
Federal funds sold 65,393 188,131 52,789
------------- -------------- -------------
Total interest income 759,553 1,165,784 196,955
INTEREST EXPENSE
Deposits 386,756 593,393 42,233
Common stock, escrow account -- -- --
Organizer advances -- -- 481
------------- -------------- -------------
Total interest expense 386,756 593,393 42,714
------------- -------------- -------------
Net interest income 372,797 572,391 154,241
PROVISION FOR LOAN LOSSES 739,610 721,883 20,000
------------- -------------- -------------
Net interest income (expense)
after provision for loan losses (366,813) (149,492) 134,241
------------- -------------- -------------
NON-INTEREST INCOME
Service charges on deposit accounts 36,740 22,854 1,535
Net gain on sale of bank 184,866 -- --
Other operating income 44,009 29,912 519
------------- -------------- -------------
Total non-interest income 265,615 52,766 2,054
------------- -------------- -------------
NON-INTEREST EXPENSES
Salaries, wages and employee benefits 224,013 440,748 350,886
Occupancy expenses, including interest on
capital lease obligations 453,150 499,080 228,170
Other operating expenses 694,420 802,354 462,200
------------- -------------- -------------
Total non-interest expenses 1,371,583 1,742,182 1,041,256
------------- -------------- -------------
Loss before federal income taxes (1,472,781) (1,838,908) (904,961)
CREDIT FOR FEDERAL INCOME TAXES -- -- (31,600)
------------- -------------- -------------
Loss before extraordinary item (1,472,781) (1,838,908) (873,361)
Extraordinary item, net of tax 230,647 -- --
------------- -------------- -------------
Net loss $ (1,242,134) $ (1,838,908) $ (873,361)
============= ============== =============
Comprehensive loss $ (1,246,622) $ (1,836,655) $ (871,126)
============= ============== =============
PER SHARE
Loss before extraordinary item $ (3.97) $ (4.96) $ (2.38)
============ ============== ==============
Net loss (Note 17) $ (3.35) $ (4.96) $ (2.38)
============ ============== ==============
Comprehensive loss $ (3.36) $ (4.95) $ (2.38)
============ ============== ==============
AVERAGE COMMON SHARES OUTSTANDING (Note 17) 370,761 370,761 366,689
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 21
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
<TABLE>
<CAPTION>
RETAINED NET
EARNINGS UNREALIZED
(ACCUMULATED HOLDING
DEFICIT) GAIN TOTAL
------------- -------------- -------------
<S> <C> <C> <C>
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)
Net loss for 1998 (1,242,134) -- (1,242,134)
Change in net unrealized holding gain for 1998 -- (4,488) (4,488)
------------- -------------- -------------
BALANCE AT DECEMBER 31, 1998 $ (3,862,266) $ 0 $ (3,862,266)
============= ============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 22
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
<TABLE>
<CAPTION>
1998 1997 1996
--------------- ---------------- ---------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,242,134) $ (1,838,908) $ (873,361)
Adjustment to reconcile net loss to net cash
used in operating activities:
Gain on termination of capital lease obligations (230,646) -- --
Depreciation and amortization 75,841 155,869 66,209
Provision for loan losses 739,610 721,883 20,000
Accretion of investment securities discounts,
net of premium amortization (2,704) (4,215) (300)
Expenses paid directly by organizers -- -- 6,511
Gain on sale of bank (184,866) -- --
Effects of changes in operating assets and liabilities:
Other assets (266,516) (119,275) (129,795)
Accrued interest, taxes and other liabilities (241,177) 65,406 (24,440)
--------------- ---------------- ----------------
Net cash provided by (used in)
operating activities (1,352,592) (1,019,240) (935,176)
--------------- ---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of premises -- -- 1,496,510
Proceeds from sale of bank 825,420 -- --
Proceeds from maturity of investment securities:
Available-for-sale -- 400,000 --
Held-to-maturity -- 400,000 --
Sales (purchases) of investment securities:
Available-for-sale 999,397 -- (1,393,750)
Held-to-maturity 1,599,045 -- (1,992,985)
Net decrease (increase) in loans receivable 12,375,456 (12,734,036) (1,122,913)
Unrealized holding gain on available for-sale securities (4,488) -- --
Additions to premises and equipment -- (49,195) (892,446)
--------------- ---------------- ----------------
Net cash provided by (used in)
investing activities 15,794,830 (11,983,231) (3,905,584)
--------------- ---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (increase) decrease in deposits (17,869,056) 11,363,484 6,505,572
Proceeds from issuance of common stock -- -- 316,421
Principal payments on capital lease obligations -- (17,271) --
Purchase of common stock -- -- (111,784)
Repayment of advances from organizers, net -- -- (49,349)
--------------- ---------------- ----------------
Net cash provided by (used in)
financing activities (17,869,056) 11,346,213 6,660,860
--------------- ---------------- ---------------
Increase (decrease) in cash and cash equivalents (3,426,818) (1,656,258) 1,820,100
CASH AND CASH EQUIVALENTS
At beginning of year 4,156,289 5,812,547 3,992,447
--------------- ---------------- ----------------
At end of year $ 729,471 $ 4,156,289 $ 5,812,547
=============== ================ ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE> 23
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 1 - OPERATING RESULTS, CONTINGENCIES AND RELATED MATTERS
Towne Bancorp, Inc. (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 (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 1998 net loss of $1,242,134 and an
accumulated deficit of $3,862,266 as of December 31, 1998.
As discussed below, the Company sold its only operating
subsidiary, the bank, on June 19, 1998. Since the sale of the
bank, the Company's only source of income has been, and continues
to be, interest income. The proceeds from the sale of the bank
are being used to pay ongoing expenses pending the dissolution
and liquidation of the Company. The Company intends to dissolve
and liquidate as soon as practicable following resolution of
pending lawsuits. Accordingly, management believes that the
expense associated with an audit of the Company's financial
statements outweighs the corresponding benefit that would be
derived by the Company's shareholders from having audited
financial statements included in its Form 10-KSB.
On June 11, 1998, the Company signed a definitive Agreement that
provided for a capital infusion of $2,000,000 into Towne Bank, the
wholly-owned subsidiary of the Company, by Exchange Bancshares,
Inc. (EBI), Luckey, Ohio. The Company and EBI also joined the
execution of a separate Merger Agreement by and between Towne Bank
and The Exchange Bank, a wholly-owned subsidiary of EBI, dated as
of June 19, 1998. The transactions contemplated under the
Agreement and the Merger Agreement were consummated effective as
of June 19, 1998, after receipt of approval from the Ohio Division
of Financial Institutions and the Federal Reserve Bank of
Cleveland. Pursuant to the terms of the Agreement and the Merger
Agreement, the Company, as the sole shareholder of Towne Bank,
received cash in the amount of $825,420 on June 19, 1998. A gain
of $184,866 resulted from the sale.
Under the terms of the Agreement and the Merger Agreement, an
additional $275,140 was deposited with Exchange Bank, as escrow
agent, to be held for a period of six months. At the end of such
six-month period, assuming there has been no demonstrated breach
of the representations and warranties of the Agreement or Merger
Agreement by the Company or Towne Bank, the $275,140 held in
escrow will be released to the Company. It is not probable that
the $275,140 will be received by the Company.
As described in Notes 8 and 17, the Company has a contingent
liability regarding the original issuance of its common stock.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 area involving the use of
management's estimates and assumptions is depreciation and
amortization of premises and equipment, and the reserve for loan
losses. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For the 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.
F-7
<PAGE> 24
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
INVESTMENT SECURITIES
The Company'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 Company 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.
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.
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, Ohio office in October 1996,
as described in Note 9.
ADVERTISING COSTS
All advertising costs are expenses 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.
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 (FASB)
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.
F-8
<PAGE> 25
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 3 - INVESTMENT SECURITIES
The amortized cost and market value of investment securities as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
----------- ------- -------- -------------
<S> <C> <C> <C> <C>
1998
Available-for-sale:
U.S. Treasury securities $ -- $ -- $ -- $ --
Obligations of U.S. Government
agencies and corporations -- -- -- --
Federal Reserve Bank of
Cleveland stock -- -- -- --
----------- ------- -------- -------------
Total available-for-sale 0 0 0 0
Held-to-maturity:
U.S. Treasury securities -- -- -- --
Obligations of U.S. Government
agencies and corporations -- -- -- --
----------- ------- -------- -------------
Total held-to-maturity 0 0 0 0
----------- ------- -------- -------------
Total $ 0 $ 0 $ 0 $ 0
=========== ======= ======== =============
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 0 999,397
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
=========== ======= ======== =============
</TABLE>
F-9
<PAGE> 26
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
December 31, 1998 (Unaudited), 1997 (Audited), and 1996 (Audited)
NOTE 4 - LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans receivable at December 31, 1998 and 1997 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
------ -------------
<S> <C> <C>
Commercial $ -- $ 5,549,125
Real estate - residential mortgage -- 6,336,594
Real estate - construction -- --
Consumer -- 2,022,164
------ -------------
Total loans receivable 0 13,907,883
Deferred loan fees -- (50,934)
Allowance for loan losses -- (741,883)
------ -------------
Net loans receivable $ 0 $ 13,115,066
====== =============
</TABLE>
Fixed rate loans approximated $0 and $3,886,000 at December 31, 1998
and 1997, respectively.
The following represents a summary of the activity in the allowance for
loan losses for the year ended December 31, 1997:
<TABLE>
<S> <C>
Balance at beginning of year $ 20,000
Provision charged to operations 721,883
------------
Balance at end of year $ 741,883
============
</TABLE>
Due to the bank sale in June 1998, no loan loss activity has been
presented for the year ended December 31, 1998.
NOTE 5 - PREMISES AND EQUIPMENT
The following is a summary of premises and equipment at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
1998 1997
---------- ----------
<S> <C> <C>
Premises:
Capital leases $ -- $2,500,000
Other -- 87,463
---------- ----------
Total premises 0 2,587,463
Equipment -- 21,498
---------- ----------
Total equipment and premises 0 2,608,961
Accumulated depreciation and amortization -- 207,344
---------- ----------
Premises and equipment, net $ 0 $2,401,617
========== ==========
</TABLE>
F-10
<PAGE> 27
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 6 - DEPOSITS
Interest-bearing deposits at December 31, 1998 and 1997 amounted to
approximately $0 and $5,689,000, respectively. Interest expense on
deposits of $100,000 or more amounted to approximately $203,000 for
1997.
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 payment 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%.
On June 18, 1998 the capital lease obligations were extinguished when a
third-party purchaser bought the Bank and terminated the lease
agreements with the Company. The transactions resulted in an
extraordinary gain of $230,646.
NOTE 8 - COMMON STOCK (SUBJECT TO RESCISSION OFFER)
The information in this footnote should be read in connection with Note
17. As described in Note 17, 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.
F-11
<PAGE> 28
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 8 - COMMON STOCK (SUBJECT TO RESCISSION OFFER) - CONTINUED
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 Restate 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.
The following represents a summary of the activity in common stock for
the years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
COMMON STOCK
--------------------------
SHARES AMOUNT
--------- -------------
<S> <C> <C>
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, 1997, AND 1998 370,761 $ 4,482,533
========= =============
</TABLE>
F-12
<PAGE> 29
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
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 expense for 1998, 1997
and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
-------------- ------------- -------------
<S> <C> <C> <C>
Advertising, printing, and supplies $ 36,017 $ 74,498 $ 111,667
Professional fees, litigation and
settlements 347,829 279,250 172,348
Equipment rent 85,151 141,335 54,079
Insurance 62,241 39,459 41,675
Outside services 129,486 123,312 43,521
Franchise and other taxes 13,368 62,653 7,686
Directors' fees -- 17,750 4,500
Automobile allowances 1,400 14,624 --
Other expenses 18,928 49,473 26,724
------------- ------------- -------------
Total other operating expenses $ 694,420 $ 802,354 $ 462,200
============= ============= =============
</TABLE>
Professional fees, litigation and settlements includes provisions for
litigation settlements of $73,300 in 1997.
NOTE 10 - FEDERAL INCOME TAXES
The provision (credit) for federal income taxes for the years ended
December 31, 1997 and 1996 amounted to $0 and $(31,600), respectively.
The actual provision (credit) for income taxes attributable to income
(loss) from operations differed from the amounts computed by applying
the U.S. federal income tax rate of 34% to income (loss) before
federal income taxes as a result of the following:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C> <C>
Expected tax using statutory tax
rate of 34% $ (419,300) $ (625,200) $ (307,700)
Impact of the following:
Increase in the valuation allowance
for deferred tax assets 413,100 619,000 272,800
Surtax exemption and other items, net 6,200 6,200 3,300
------------- ------------- -------------
Total $ 0 $ 0 $ (31,600)
============= ============= =============
</TABLE>
F-13
<PAGE> 30
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 10 - FEDERAL INCOME TAXES - CONTINUED
The tax effects of temporary differences that give rise to deferred
tax assets at December 31, 1998 and 1997 are presented below:
<TABLE>
<CAPTION>
1998 1997
------------- -------------
<S> <C> <C>
Net operating loss carryforwards $ 647,020 $ 392,400
Allowance for loan losses 253,000 249,400
Other 398,080 250,000
------------- -------------
Total 1,298,100 891,800
Less valuation allowance 1,298,100 891,800
------------- -------------
Total deferred tax assets,
net of valuation allowance $ -- $ --
============= =============
</TABLE>
At December 31, 1998, the Company had net operating loss carryforwards
approximating $1,903,000, which were available to reduce future
regular federal taxable income. Such carryforwards expire in 2011
($112,000), 2012 ($1,042,000), and 2013 (749,000).
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.
NOTE 11 - LEASE COMMITMENTS
For 1997 and 1996, rent expense under various operating lease
agreements and other short-term lease arrangements approximated
$141,300, and $73,500, respectively. At December 31, 1998, there were
no outstanding lease commitments.
NOTE 12 - REGULATORY MATTERS
The Company is regulated by federal and state banking agencies. As a
result, it is subject to periodic examinations by the agencies and is
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 (Division) and the Federal Reserve Bank of
Cleveland (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.
F-14
<PAGE> 31
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 12 - REGULATORY MATTERS - CONTINUED
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 (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
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 19 for additional information regarding the
above matter.
F-15
<PAGE> 32
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 13 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION
A summary of condensed financial information of the parent company as
of December 31, 1998 and 1997, and for each of the three years in the
period ended December 31, 1998, are as follows:
BALANCE SHEETS
<TABLE>
<CAPTION>
1998 1997
----------- -----------
ASSETS
<S> <C> <C>
Cash on deposit:
In subsidiary bank $ -- $ 247,735
In other bank 729,471 --
Investment in subsidiary -- 2,007,020
Premises under capital lease, net -- 2,314,583
Other asset - refundable federal
income taxes -- --
----------- -----------
Total assets $ 729,471 $ 4,569,338
=========== ===========
LIABILITIES, RESCINDABLE COMMON STOCK
AND STOCKHOLDERS' DEFICIT
LIABILITIES
Capital lease obligations $ -- $ 2,482,729
Accrued interest and other liabilities 109,204 219,720
----------- -----------
Total liabilities 109,204 2,702,449
RESCINDABLE COMMON STOCK 4,482,533 4,482,533
STOCKHOLDERS' DEFICIT
Accumulated deficit (3,862,266) (2,620,132)
Net unrealized holding gain on
securities available-for-sale -- 4,488
----------- -----------
Total stockholders' deficit (3,862,266) (2,615,644)
----------- -----------
Total liabilities, rescindable common
stock and stockholders' deficit $ 729,471 $ 4,569,338
=========== ===========
</TABLE>
F-16
<PAGE> 33
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 13 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION - CONTINUED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
Interest income $ 11,843 $ -- $ 110,570
Interest expense -- -- 481
----------- ----------- -----------
Net interest income 11,843 -- 110,089
Gain on sale of subsidiary 184,866 -- --
Extraordinary item - extinguishment
of debt 230,646
----------- ----------- -----------
Total non-interest income 415,512 0 0
Occupancy expenses, net 81,300 108,054 199,452
Other operating expenses 226,212 273,900 275,084
----------- ----------- -----------
Total non-interest expenses 307,512 381,954 474,536
----------- ----------- -----------
Income (loss) before federal
income taxes and equity
in net loss of subsidiary 119,843 (381,954) (364,447)
Provision (credit) for federal income taxes -- -- (31,600)
----------- ----------- -----------
Income (loss) before equity
in net loss of subsidiary 119,843 (381,954) (332,847)
Equity in net loss of subsidiary (1,361,977) (1,456,954) (540,514)
----------- ----------- -----------
Net income (loss) $(1,242,134) $(1,838,908) $ (873,361)
=========== =========== ===========
</TABLE>
F-17
<PAGE> 34
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 13 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION - CONTINUED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
1998 1997 1996
----------- ----------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $(1,242,134) $(1,838,908) $ (873,361)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation and amortization 62,501 125,000 65,543
Gain on termination of capital lease
obligations (230,646) -- --
Gain on sale of subsidiary (184,866) -- --
Equity in net loss of subsidiary 1,361,977 1,456,954 540,514
Expenses paid directly by organizers -- -- 6,511
Decrease (increase) in other assets -- 22,290 (84,907)
Increase (decrease) in accrued
interest and other liabilities (110,516) 51,071 (115,512)
----------- ----------- -----------
Net cash used in operating activities (343,684) (183,593) (461,212)
INVESTING ACTIVITIES
Proceeds from sale of bank 825,420 -- --
Investment in subsidiary -- -- (3,855,000)
Proceeds from sale-leaseback agreement -- -- 1,496,510
Additions to premises and equipment -- -- (879,434)
----------- ----------- -----------
Net cash provided by (used in)
investing activities 825,420 0 (3,237,924)
FINANCING ACTIVITIES
Proceeds from issuance of common stock -- -- 316,421
Principal payments on capital lease
obligations -- (17,271) --
Purchase of common stock -- -- (111,784)
Repayment of advances from
organizers, net -- -- (49,349)
----------- ----------- -----------
Net cash provided by (used in)
financing activities 0 (17,271) 155,288
----------- ----------- -----------
Increase (decrease) in cash 481,736 (200,864) (3,543,848)
Cash at beginning of year 247,735 448,599 3,992,447
----------- ----------- -----------
Cash at end of year $ 729,471 $ 247,735 $ 448,599
=========== =========== ===========
</TABLE>
F-18
<PAGE> 35
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 13 - CONDENSED PARENT COMPANY FINANCIAL INFORMATION - CONTINUED
STATEMENTS OF CASH FLOWS - CONTINUED
<TABLE>
<CAPTION>
1998 1997 1996
-------------- -------------- ----------
<S> <C> <C> <C>
SUPPLEMENTAL DISCLOSURES
Cash paid during the year for:
Interest $ -- $ 287,729 $ 122,886
============== ============== ==========
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 $ (2,482,729) $ -- $2,500,000
============== ============== ==========
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
============== ============== ==========
Stock issuance costs paid directly
by organizers $ -- $ -- $ 6,438
============== ============== ==========
</TABLE>
F-19
<PAGE> 36
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 14 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount and estimated fair value of the Bank's principal
financial instruments, as defined by the Financial Accounting
Standards Board's Statement No. 107, Disclosure About Fair Value of
Financial Instruments, were as follows at December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
------------------------- -------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
FINANCIAL ASSETS
Cash and cash equivalents $ 729,471 $ 729,471 $ 4,156,289 $ 4,156,289
Investment securities -- -- 2,595,738 2,596,123
Loans receivable, net -- -- 13,115,066 13,104,294
Accrued interest receivable -- -- 86,205 86,205
----------- ----------- ----------- -----------
Total $ 729,471 $ 729,471 $19,953,298 $19,942,911
=========== =========== =========== ===========
FINANCIAL LIABILITIES
Deposits $ -- $ -- $17,869,056 $17,905,375
Capital lease obligations -- -- 2,482,729 2,482,729
Accrued interest, taxes
and other liabilities 109,204 109,204 350,381 350,381
----------- ----------- ----------- -----------
Total financial liabilities 109,204 109,204 20,702,166 20,738,485
RESCINDABLE COMMON STOCK 4,482,533 4,482,533 4,482,533 4,482,533
----------- ----------- ----------- -----------
Total $ 4,591,737 $ 4,591,737 $25,184,699 $25,221,018
=========== =========== =========== ===========
</TABLE>
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-20
<PAGE> 37
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 14 - 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.
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 17) 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 15 - FUTURE CHANGE IN ACCOUNTING PRINCIPLE
The Financial Accounting Standards Board issued Statement No. 130,
Reporting Comprehensive Income, in June 1997. Statement No. 130
establishes standards for reporting and display of comprehensive
income (as defined) in a full set of general-purpose financial
statements. Statement No. 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. Statements No. 130 is
effective for fiscal years beginning after December 15, 1997 and
requires reclassification of financial statements for earlier periods
provided for comparative purposes.
The application of Statement No. 130 did not materially affect the
Company's consolidated financial statements.
F-21
<PAGE> 38
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 16 - SUPPLEMENTAL CASH FLOW DISCLOSURES
Consolidated supplemental cash flow disclosures consisted of the
following for the years ended December 31, 1998, 1997, and 1996:
<TABLE>
<CAPTION>
1998 1997 1996
------------- ------------- -------------
<S> <C> <C>
Cash paid during the year for:
Interest, including $287,729 in
1997 and $121,000 in 1996
related to capital lease
obligations $ $ 855,891 $ 148,484
============= ============= =============
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
============= ============= =============
Stock issuance costs charged
to surplus $ $ -- $ 13,049
============= ============= =============
Stock issuance costs paid
directly by organizers $ $ -- $ 6,438
============= ============= =============
</TABLE>
NOTE 17 - 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 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 declare the
Registration Statement effective.
F-22
<PAGE> 39
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
DECEMBER 31, 1998 (UNAUDITED), 1997 (AUDITED), AND 1996 (AUDITED)
NOTE 17 - CONTINGENT LIABILITY - RESCINDABLE COMMON STOCK - CONTINUED
If the Registration Statement were to becomes effective, the Company
would offer (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. However,
the Company would be unable to fund the Rescission Offer due to a lack
of available funds.
The Company intended to 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 would 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 would be
adversely affected if a large number of shareholders elect to pursue
claims 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 Rescission Offer, if allowed, would 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.
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 statute 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.
F-23
<PAGE> 1
EXHIBIT 24
POWER OF ATTORNEY
Each of the undersigned officers and/or directors of Towne Bancorp, Inc., an
Ohio corporation (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 (Annual Report) for the fiscal year ended December 31, 1998, 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
substitutes may do by virtue hereof.
IN WITNESS WHEREOF, the undersigned have executed this Power of Attorney in
counterparts if necessary, effective as of March 31, 1999.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Jerome C. Bechstein Chief Executive Officer, President March 31, 1999
- - ------------------------- and Director (Principal Executive --------------
Jerome C. Bechstein Officer and Chief Accounting Officer)
/s/ Lois Brigham Senior Vice President, March 31, 1999
- - ------------------------- Secretary and Director --------------
Lois Brigham
/s/ John Weinert Director March 31, 1999
- - ------------------------- --------------
John Weinert
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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