<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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)
P. O. Box 806, Perrysburg, Ohio 43552
(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (419) 352-5601
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
periods 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
------- ------
370,761 common shares were outstanding as of September 30, 1998.
This document contains 11 pages.
<PAGE> 2
TOWNE BANCORP, INC.
INDEX
PAGE(S)
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS....................................3-7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS.................... 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS....................................... 9
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS............... 9
ITEM 3. DEFAULTS UPON SENIOR SECURITIES......................... 9
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS..... 9
ITEM 5. OTHER INFORMATION....................................... 9
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................ 9
SIGNATURES................................................................ 10
<PAGE> 3
PART I
ITEM 1. FINANCIAL STATEMENTS
TOWNE BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1998 AND DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
ASSETS
CASH AND CASH EQUIVALENTS
Cash and due from banks $ 775,834 $ 1,014,289
Federal funds sold --- 3,142,000
---------------- ---------------
Total cash and cash equivalents 775,834 4,156,289
---------------- ---------------
INVESTMENT SECURITIES
Available-for-sale, at market value --- 999,397
Held-to-maturity, at amortized cost --- 1,596,341
---------------- ---------------
Total investment securities --- 2,595,738
---------------- ---------------
Loans receivable, net of allowance for loan losses
of $1,596,725 in 1997 --- 13,115,066
Premises and equipment, net --- 2,401,617
Other assets --- 300,345
---------------- ---------------
Total assets $ 775,834 $ 22,569,055
================ ===============
LIABILITIES, RESCINDABLE COMMON STOCK
AND STOCKHOLDERS' DEFICIT
LIABILITIES
Deposits $ --- $ 17,869,056
Capital lease obligations --- 2,482,729
Accrued interest, taxes and other liabilities 66,050 350,381
---------------- ---------------
Total liabilities 66,050 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 (3,772,749) (2,620,132)
Net unrealized holding gain on investment
securities available-for-sale --- 4,488
---------------- ---------------
Total stockholders' deficit (3,772,749) (2,615,644)
---------------- ---------------
Total liabilities, rescindable common stock and stockholders' deficit $ 775,834 $ 22,569,055
================ ===============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 4
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
AND COMPREHENSIVE INCOME
FOR THE THREE MONTHS AND NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS NINE MONTHS
ENDED SEPTEMBER 30, ENDED SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
INTEREST INCOME
Loans $ --- $ 231,958 $ 617,534 $ 472,654
Investment securities 6,057 46,582 71,443 148,416
Federal funds sold --- 24,588 65,393 146,117
------------- ------------- ------------- -------------
Total interest income 6,057 303,128 754,370 767,187
Interest expense-deposits --- 146,958 386,756 388,767
------------ ------------- ------------- -------------
Net interest income 6,057 156,170 367,614 378,420
Provision for loan losses --- 30,000 739,610 90,000
------------- ------------- ------------- -------------
Net interest income (expense)
after provision for loan losses 6,057 126,170 (371,996) 288,420
------------- ------------- ------------- -------------
NON-INTEREST INCOME
Service charges on deposit accounts --- 3,311 36,740 7,956
Net gain on sale of bank --- --- 184,866 ---
Other operating income --- 4,894 44,009 18,595
------------- ------------- ------------- -------------
Total non-interest income --- 8,205 265,615 26,551
------------- ------------- ------------- -------------
NON-INTEREST EXPENSES
Salaries, wages and employee benefits --- 102,533 224,013 334,550
Occupancy expenses, including
interest on capital lease obligations --- 173,832 453,150 352,423
Other operating expenses 64,383 164,307 599,720 491,558
------------- ------------- ------------- -------------
Total non-interest expenses 64,383 440,672 1,276,883 1,178,531
------------- ------------- ------------- -------------
Loss before extraordinary item (58,326) (306,297) (1,383,264) (863,560)
Extraordinary item, net of tax --- --- 230,646 ---
------------- ------------- ------------- -------------
Net loss $ (58,326) $ (306,297) $ (1,152,618) $ (863,560)
============= ============== ============== ==============
Comprehensive income (loss) $ (58,326) $ (302,364) $ (1,157,106) $ (862,234)
============= ============= ============= =============
PER SHARE
Loss before extraordinary item $ (.16) $ (.83) $ (3.11) $ (2.33)
============= ============= ============= =============
Net loss $ (.16) $ (.83) $ (3.11) $ (2.33)
============= ============= ============= =============
Comprehensive loss $ (.16) $ (.82) $ (3.12) $ (2.33)
============= ============= ============= =============
Average common shares outstanding 370,761 370,761 370,761 370,761
============= ============= ============= =======
</TABLE>
See notes to consolidated financial statements.
-4-
<PAGE> 5
TOWNE BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998 AND 1997
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS
ENDED SEPTEMBER 30,
-------------------
1998 1997
------------- -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (1,152,618) $ (863,560)
Adjustment to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 75,841 111,807
Provision for loan losses 739,610 90,000
Net gain on sale of bank (184,866) ---
Gain on termination of capital lease obligations (230,646) ---
Accretion of investment securities discounts,
net of premium amortization (2,704) (2,965)
Effects of changes in operating assets and liabilities:
Other assets (266,516) (198,167)
Accrued interest, taxes and other liabilities (284,330) (91,843)
------------- -------------
Net cash used in operating activities (1,306,229) (954,728)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of bank 825,420 ---
Proceeds from maturity of investment securities 2,598,442 200,000
Net decrease (increase) in loans receivable 12,375,456 (9,214,430)
Other (4,488) (44,262)
------------- -------------
Net cash provided by (used in) investing activities 15,794,830 (9,058,692)
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net (increase) decrease in deposits (17,869,056) 6,765,924
Principal payments on capital lease --- (17,271)
------------- -------------
Net cash provided by (used in) financing activities (17,869,056) 6,748,653
-------------- -------------
Net decrease in cash and cash equivalents (3,380,455) (3,264,767)
CASH AND CASH EQUIVALENTS
At beginning of period 4,156,289 5,812,547
------------- -------------
At end of period $ 775,834 $ 2,547,780
============= =============
</TABLE>
See notes to consolidated financial statements.
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<PAGE> 6
TOWNE BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(UNAUDITED)
NOTE 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, through June 19, 1998 when the Bank was sold.
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 September 30, 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." Since that time, the Company has sold its only
subsidiary on June 19, 1998.
The proceeds of the transaction will be used to pay ongoing
expenses of the Company including its proposed liquidation and
dissolution. The Board of Directors of the Company plans to
liquidate the Company as soon as practical following a resolution
of pending litigation. All remaining assets of the Company, if
any, will be distributed to its shareholders at such time.
NOTE 2 - REGULATORY MATTERS
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 unsafe and unsound banking practices 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.
Because the Bank was sold on June 19, 1998, the Company no longer
has adequate sources of funds to pay dividends.
NOTE 3 - CONTINGENT LIABILITIES - RESCINDABLE COMMON STOCK AND RELATED
CLASS ACTION LAWSUITS
The Company, as a result of federal and state securities law
compliance matters, has a contingent liability related to the sale
of common stock in its initial public offering. 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.
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<PAGE> 7
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.
In the third quarter of 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.
NOTE 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 requested that the Company 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 will
have a material adverse affect on the Company.
NOTE 5 - SALE OF BANK
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 a 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 (6) months. At the end of
such six (6) 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.
NOTE 6 - EXTRAORDINARY ITEM
On June 18, 1998, capital lease obligations were extinguished when
a third party purchaser bought the Bank's two branches and
terminated the related lease agreements with the Company. This
transaction resulted in an extraordinary gain of $230,646.
-7-
<PAGE> 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
The Company had total consolidated assets of $775,834 at September
30, 1998, a decrease of $21,793,221 compared to $22,569,055 at
December 31, 1997. The Company sold its bank subsidiary on June
19, 1998 as described in Note 5 of the Notes to Consolidated
Financial Statements included in Item 1.
The Company reported a net loss for the nine months ended
September 30, 1998. A significant portion of this loss in the
first half related to the provision for loan losses.
The Company is a party to certain lawsuits. In the third quarter
of 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.
Safe Harbor Statement Under the Private Securities Litigation
Reform Act of 1995
The Company cautions that any forward-looking statements (as such
term is defined in the Private Securities Litigation Reform Act of
1995) including, but not limited to, statements regarding the
Company's operations during the pendancy of litigation and the
amount of working capital needed to fund operations contained in
this report, or made by management of the Company, involves risks
and uncertainties, and are subject to change based on various
important factors. The following factors, among others, in some
cases have affected, and in the future could affect, the Company's
financial performance and actual results, and could cause actual
results for fiscal 1998 and beyond to differ materially from those
expressed or implied in any such forward-looking statements:
greater than anticipated costs associated with pending litigation,
additional claims, which could result in increased defense costs
and future capital needs. Actual results may differ materially
from management expectations.
-8-
<PAGE> 9
PART II
ITEM 1. 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 the third quarter of
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.
ITEM 2. CHANGES 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
Any shareholder proposal submitted outside the processes of Rule
14a-8 under the Securities Exchange Act of 1934 for presentation to
the Company's 1999 Annual Meeting of Shareholders will be considered
untimely for purposes of Rules 14a-4 and 14a-5 if notice thereof is
not received by the Company within a reasonable time before the date
of the Company's 1999 Annual Meeting of Shareholders. Shareholders
may expect that the Company will schedule its 1999 Annual Meeting of
Shareholders in May or June of 1999.
In October 1998, Jerome Bechstein, former Towne Bank president and
chief executive officer and current president and chief executive
officer of the Company, and Lois Brigham, former executive vice
president, voluntarily signed an order with the Federal Reserve
System Board, that prohibits Mr.
Bechstein and Ms. Brigham from any future banking employment.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibit 27 - Financial data schedule.
(B) None.
-9-
<PAGE> 10
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
Dated March 9, 1999 /s/ John P. Weinert
------------------------------------------
John P. Weinert, Chairman
Dated March 9, 1999 /s/ Jerome C. Bechstein
------------------------------------------
Jerome C. Bechstein, President and CEO
-10-
<PAGE> 11
Exhibit Index
-------------
Exhibit No. Description
- ----------- -----------
27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-08-1998
<PERIOD-END> SEP-30-1998
<CASH> 775,834
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 0
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 0
<ALLOWANCE> 0
<TOTAL-ASSETS> 775,834
<DEPOSITS> 0
<SHORT-TERM> 0
<LIABILITIES-OTHER> 66,050
<LONG-TERM> 0
0
0
<COMMON> 4,482,533
<OTHER-SE> (3,772,742)
<TOTAL-LIABILITIES-AND-EQUITY> 775,834
<INTEREST-LOAN> 617,534
<INTEREST-INVEST> 71,443
<INTEREST-OTHER> 65,393
<INTEREST-TOTAL> 754,370
<INTEREST-DEPOSIT> 386,756
<INTEREST-EXPENSE> 386,756
<INTEREST-INCOME-NET> 367,614
<LOAN-LOSSES> 739,610
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 1,276,883
<INCOME-PRETAX> (1,383,364)
<INCOME-PRE-EXTRAORDINARY> (1,383,264)
<EXTRAORDINARY> 230,646
<CHANGES> 0
<NET-INCOME> (1,152,618)
<EPS-PRIMARY> (3.11)
<EPS-DILUTED> (3.12)<F1>
<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
<FN>
<F1>EPS - Comprehensive
</FN>
</TABLE>
