Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No. ____)

Check the appropriate box:

 

 

 

 

 

(Name of Registrant as Specified In Its Charter)

Payment of Filing Fee (Check the appropriate box):

 

 

 

 

 

 

 

 

 

To our Shareholders:

You are cordially invited to attend the Annual Meeting of our shareholders, which will be held on Tuesday, April 18, 2006 at 5:30pm eastern standard time in the lobby of Tower Bank and Trust Company, 116 East Berry Street, Fort Wayne, Indiana, 46802.

Enclosed is your proxy statement and proxy card, together with the Annual Report to Stockholders for 2005. We urge you to complete, sign, date, and return the enclosed proxy in the accompanying pre-addressed, postage paid envelope as promptly as possible, whether you plan to attend the meeting or not.

We look forward to seeing you at the Annual Meeting.

NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

To Be Held on April 18, 2006

 

All shareholders of record at the close of business on Friday, February 10, 2006 will be entitled to vote at the meeting.

 

 

The Company’s Annual Report for the year ended December 31, 2005, which includes a copy of our Annual Report on Form 10-K for the year ended December 31, 2005 as filed with the Securities and Exchange Commission (except for exhibits), is enclosed herewith.

 

This Notice and Proxy Statement are first being sent to shareholders on or about March 10, 2006.

 

 

This Proxy Statement is being furnished to shareholders of Tower Financial Corporation (the “Company”) in connection with the solicitation of proxies by our Board of Directors, to be voted at the 2006 Annual Meeting of Shareholders of the Company (the “Annual Meeting”) on Tuesday, April 18, 2005 at 5:30 p.m., Fort Wayne time, in the lobby of Tower Bank & Trust Company, 116 East Berry Street, Fort Wayne, Indiana 46802, and at any and all adjournments and postponements thereof.

 

 

Only shareholders of record at the close of business on February 10, 2006 will be entitled to vote at the 2006 Annual Meeting. As of that record date, we had 4,007,936 shares of common stock outstanding, each entitled to one vote on each matter to be acted on at the Annual Meeting. There is no cumulative voting.

 

 

You may revoke your proxy and change your vote at any time before its exercise. If you execute more than one proxy, the proxy having the latest date will revoke any earlier proxies. If you voted by proxy but attend the Annual Meeting, you will be given the opportunity to revoke your proxy and vote in person. Unless revoked, your proxy will be voted at the Annual Meeting in accordance with your instructions.

 

With respect to all shares you hold in your own name, if you do not provide instructions or send in your proxy, your shares will be voted FOR Proposal 1 (the election as directors of all nominees listed under “Election of Directors”); FOR Proposal 2 (the “Ratification of Outside Accountants”); FOR Proposal 3 (the approval of our 2006 Equity Incentive Plan); FOR Proposal 4 (the amendment of our 1998 and 2001 Stock Option and Incentive Plans to permit option exercises to be paid for in cash or by the “net exercise” method); and FOR discretionary authority to vote on any other matter to properly come before the meeting. In the election of directors (Proposal 1), you may vote “FOR” all the director nominees or your vote may be “WITHHELD” from one or more nominees. For all other proposals, you may vote “FOR” or “ABSTAIN.”

 

With respect to shares held in “street name” by a bank or brokerage firm, your bank or brokerage firm, as the record owner of your shares, is required to vote your shares in accordance with your instructions. In order to vote these shares, however, you will need to follow your bank’s or brokerage firm’s directions. Under applicable New York Stock Exchange Rules, if you do not provide your voting instructions, your bank or broker will only be able to exercise its discretion and vote your shares with respect to Proposals 1 and 2 but not with respect to Proposals 3 and 4. Therefore, your failure to instruction your bank or broker on how to vote regarding Proposals 3 and 4 would be treated as a “broker non-vote,” counted only in determining the presence of a quorum but not considered as present and entitled to vote on those proposals. Abstentions would be similarly treated.

 

If you own shares through the Tower Financial Corporation 401(k) Plan, your proxy will also serve as a voting instruction for Tower Bank & Trust Company, the administrator of the Plan, with respect to shares of Tower Financial Corporation common stock attributable to your 401(k) account as of the record date.

 

Election of directors will be determined by the vote of the holders of a plurality of the shares voting on such election. Ratification of Outside Accountants, as well as approval of the 2006 Equity Incentive Plan and the amendments to the 1998 and 2001 Stock Option and Incentive Plans will be approved if the votes cast “for” exceed those opposing each proposal.

 

You may vote in one of three ways: (1) by mail (by completing and signing the proxy card that accompanies this proxy statement); (2) by telephone (by following the “Vote by Telephone” instructions set forth on the enclosed proxy card); and (3) in person (by delivering your completed proxy card or a ballot if you attend the Annual Meeting).

 

In order for business to be conducted at the Annual Meeting with respect to a particular matter, a quorum (a majority of the shares of common stock issued, outstanding and entitled to vote, or 2,003,969 shares) must be present in person or by proxy.

 

 

The Board of Directors knows of no matters, other than those described in the attached Notice of Annual Meeting, which are to be brought before the meeting. If other matters properly come before the meeting, it is the intention of the persons named in the enclosed proxy form to vote such proxy in accordance with their judgment.

 

 

 

We will report the voting results in our quarterly report on Form 10-Q for the second quarter of 2006, which we expect to file with the Securities and Exchange Commission in August 2006.

 

 

Some banks, brokers and other nominee record holders may participate in the practice of “householding” proxy statements and annual reports. This means that only one copy of our proxy statement and Annual Report to Shareholders may have been sent to multiple shareholders in your household. We will promptly deliver a separate copy of either document to you if you contact us at the following address, telephone number or e-mail address: Tower Financial Corporation, 116 East Berry Street, Fort Wayne, Indiana 46802, telephone: 260-427-7000 or via e-mail at customer.care@towerbank.net. If you want to receive separate copies of the proxy statement or Annual Report to Shareholders in the future, or if you are receiving multiple copies and would like to receive only one copy per household, you should contact your bank, broker or other nominee record holder, or you may contact us at the above address, telephone number or e-mail address.

 

 

 

The current Board of Directors consists of twelve members. The Articles of Incorporation and By-Laws of the Company further provide that the directors shall be divided into three classes, Class I, Class II and Class III, with each class serving a staggered three-year term and with the number of directors in each class being as nearly equal as possible. Class I currently consists of only three directors (with terms expiring in 2007), Class II consists of four directors (with terms expiring in 2006) and Class III consists of five directors (with terms expiring in 2009). Four Class II directors are to be elected at the 2006 Annual Meeting.

 

Upon recommendation of the Nominating and Corporate Governance Committee, the Board of Directors has nominated Kathryn D. Callen, Jerome F. Henry, Jr., Debra A. Niezer and Joseph D. Ruffolo as Class II directors for three year terms expiring in 2009. Each of the nominees is currently a Class II director whose term expires in 2006. The other members of the Board, who are Class I and Class III directors, will continue in office in accordance with their previous elections until the expiration of their respective terms at the 2007 or 2008 Annual Meeting of Shareholders.

 

It is the intention of the persons named in the enclosed proxy to vote the proxy for the election of the four Class II nominees, unless you withhold authority to vote for the election of any or all of these nominees. Each of the nominees for election as director has indicated his or her willingness to serve, if elected, but in the event that any nominee at the time of the election is unable to serve or is otherwise unavailable for election, the Board, upon recommendation of the Nominating and Corporate Governance Committee, may select a substitute nominee, and in that event the persons named in the enclosed proxy intend to vote the proxy for the person so selected. If a substitute nominee is not so selected, such proxy will be voted for the election of the remaining nominees.

 

The following section provides information, as of the date of this proxy statement, about each member of the Board of Directors, including the nominees for election as Class II directors. The information presented includes information each director has given us about his or her age, all positions he or she holds, his or her principal occupation and business experience for the past five years, and the names of other publicly-held companies for which he or she serves as a director. Information about the number of shares of common stock beneficially owned by each director appears later in this proxy statement under the heading “Beneficial Stock Ownership of Directors, Executive Officers and Persons Owning More than Five Percent of the Company’s Common Stock.”

 

 

 

The following information is furnished with respect to each director and executive officer of the Company, including one executive officer of Tower Bank & Trust Company (the “Bank”), and one executive officer of our newly formed (January 1, 2006) Tower Trust Company (the “Trust Company”), each a wholly-owned subsidiary of the Company, who perform policy-making functions for the Company.

 

 

* Indicates an “independent director”

 

The business experience of each of the directors and executive officers of the Company, the Bank and the Trust Company for at least the past five years is summarized below:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Ms. Niezer is the sister-in-law of Mr. Niezer. There are no other family relationships among the directors and executive officers of the Company.

 

The following table presents information regarding the beneficial ownership of the Company’s common stock as of February 10, 2006, by: (a) all persons known to the Company to be a beneficial owner of more than five percent of the Company’s common stock, (b) the nominees for election as directors of the Company, (c) the directors of the Company whose terms of office will continue after the Annual Meeting, (d) the executive officers named in the Summary Compensation Table, and (e) all directors and executive officers of the Company as a group. Unless otherwise indicated in a footnote, each individual or group possesses sole voting and investment power with respect to the shares indicated as beneficially owned.

 

	Shares Beneficially Owned
Directors and Executive Officers	Number (1)			Percent (2)
Curtis A. Brown	42,611		(3)	1.02%
Keith E. Busse	45,405		(4)	1.08%
Michael D. Cahill	5,352		(16)	*
Kathryn D. Callen	10,500		(5)	*
Michael S. Gouloff	20,952		(7)	*
Jerome F. Henry, Jr.	172,008		(8)	4.10%
R.V. Prasad Mantravadi, M.D.	10,480			*
Debra A. Niezer	8,231		(9)	*
William G. Niezer	28,985		(10)	*
Joseph D. Ruffolo	39,552		(11)	*
Donald F. Schenkel	89,609		(12)	2.14%
Gary D. Shearer	29,168		(13)	*
John V. Tippmann, Jr.	86,775		(8)	2.07%
Irene A. Walters	15,952		(14)	*
Donald R. Willis	4,000			*
All directors and executive officers of  Company as a group (17 persons)	610,715		(15)	14.56%
*Less than 1%

	Shares Beneficially Owned
Holders of more than 5% of common stock	Number (1)			Percent (2)
Edwin Fraser	258,524		(6)	6.16%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The Audit Committee has selected Crowe Chizek and Company LLC (“Crowe”), independent registered public accountants, as our auditors for the year ending December 31, 2006. Although law does not require shareholder approval of the selection of Crowe, our Board believes that it is advisable to give shareholders an opportunity to ratify this selection. If our shareholders at the 2006 Annual Meeting do not approve this proposal, our Audit Committee will revisit their selection of Crowe for next year’s audit work.

 

Representatives of Crowe are expected to be present at the 2006 Annual Meeting, will be given an opportunity to make a statement if they desire and will respond to appropriate questions by shareholders.

 

 

 

At the Meeting, stockholders of the Company will be asked to consider a proposal to approve the Tower Financial Corporation 2006 Equity Incentive Plan (the “Equity Incentive Plan”), which has been approved by the Company’s board of directors subject to stockholder approval. The Equity Incentive Plan is a broad-based plan in which all employees of the Company and its Affiliates, as well as Non-Employee Directors, are eligible to participate.

 

The purpose of the Equity Incentive Plan is to advance the interests of the Company’s stockholders by enhancing the Company’s ability to attract, retain and motivate persons who are expected to make important contributions to the Company and its Affiliates, by providing them with both equity ownership opportunities and performance-based incentives intended to align their interests with those of the Company’s stockholders.

 

The new Equity Incentive Plan is designed to provide the Company with flexibility to select from among various equity-based compensation methods, and to be able to address changing accounting and tax rules and corporate governance practices by optimally utilizing stock options, restricted stock, unrestricted stock, stock appreciation rights and performance awards.

 

Subject to stockholder approval of the Equity Incentive Plan, the Board has determined that no further stock options will be authorized or granted under the Company’s 1998 and 2001 Stock Option and Incentive Plans (the “Existing Plans”). Except for the proposed amendments to each of those Existing Plans to permit the exercise of existing options thereunder either in cash or through a new “net exercise” feature (see Proposal 4), the Existing Plans will remain in existence but solely for purpose of honoring and administering the existing options already granted under the Existing Plans.

 

The maximum aggregate number of shares of Tower Financial Corporation common stock that may be issued under the Equity Incentive Plan is 150,000 shares.

 

 

The following is a brief description of the Equity Incentive Plan, but we urge you to read the full text of the Equity Incentive Plan, which is attached as Appendix A.

 

 

 

The Committee shall have exclusive authority to determine employees to whom awards will be granted, the timing and manner of the grant of awards, the number of shares to be subject to any award, the purchase price or exercise price and medium of payment, vesting provisions and repurchase provisions, to specify the provisions of any agreement relating to such grant or sale, the duration and purpose of leaves of absence which may be granted to optionees and grantees without constituting termination of employment for purposes of the Equity Incentive Plan, and all other discretionary determinations necessary or advisable for administration of the Equity Incentive Plan. The Committee’s discretionary determinations will be final and binding on all parties. Members of the Committee are appointed by and serve at the pleasure of the Board and may be removed by the Board at its discretion.

 

 

 

Except as otherwise provided in the Equity Incentive Plan, the Compensation Committee may specify in an award that upon the occurrence of a “Change in Control” of the Company, such award will immediately vest and become fully exercisable, the restrictions as to transferability of shares subject to the award will be waived, and any and all forfeiture risks or other contingencies will lapse. A Change in Control generally means the consummation of a plan of liquidation with respect to the Company, the sale or other divestiture of all or substantially all of the Company’s assets, the acquisition by any person or affiliated group of persons as defined in Section 13(d)(3) of the Securities Exchange Act of 1934 of a specified percentage of the outstanding voting power of the Company, the consummation of a consolidation or merger of the Company with another entity (subject to certain exceptions), or the replacement of the “incumbent” board of directors, or a majority of the board of directors, with persons who were not directors prior to such event or whose nomination as a director to be voted on by stockholders was not approved by at least two-thirds of the incumbent directors.

 

 

Stock options granted to Eligible Employees may be either Incentive Stock Options or Nonstatutory Stock Options. Stock options granted to Eligible Directors, however, may only be Nonstatutory Stock Options. The purchase price for the shares subject to any option granted under the Equity Incentive Plan, whether Incentive Stock Options or Nonstatutory Stock Options, shall not be less than 100% of the fair market value of the shares of common stock of the Company on the date the option is granted.

 

The purchase price for any shares purchased pursuant to exercise of an option granted under the Equity Incentive Plan must be paid in full upon exercise of the option either in cash, or, in the discretion of the Committee and upon such terms and conditions as it may approve, the exercise price may be paid by (i) transferring to the Company shares of previously acquired common stock, at their fair market value on the date of delivery, (ii) by the withholding of a sufficient number of whole shares of common stock which would otherwise be deliverable in connection with the option exercise, having an aggregate fair market value (determined as of the date of exercise) equal to the exercise price (referred to as a “net exercise”), (iii) in cash paid by a broker-dealer to whom the optionee has delivered an irrevocable notice of exercise and, if permitted, an order to sell some or all of the underlying shares (a “Cashless Exercise”), (iv) by a combination of these methods, or (v) in such other manner as the Committee may determine. The foregoing alternatives are, however, subject to any applicable limitations on loans to officers and to applicable “insiders” and other trading rules and regulations of the Securities and Exchange Commission.

 

No option shall be exercisable during the lifetime of an optionee by any other person. The Board or the Committee has the power to set the time(s) within which each option shall be exercisable and to accelerate the time(s) of exercise. Vesting of options, if deferred, may be either time-based or performance-based or both.

 

No option shall be exercisable after the earliest of the following: the expiration of six years after the date the option is granted; unless otherwise approved by the Board or the Committee, ninety days after the date the optionee’s continuous service as an employee or director with the Company and its Affiliates terminates (if termination is for any reason other than permanent disability, death, or cause), the date the optionee’s continuous service terminates if termination is for cause, or one year after the date the optionee’s continuous service terminates if termination is a result of death or permanent disability. Stock options may be granted alone or in certain circumstances in tandem with stock appreciation rights. The exercise or lapse of any number of tandem stock appreciation rights will cause a corresponding reduction in the number of shares of Common Stock then available for purchase by exercise of the related stock option.

 

To the extent the aggregate fair market value (determined as of the time the option is granted) of stock with respect to which Incentive Stock Options are exercisable by any Eligible Employee for the first time during any calendar year exceeds $100,000, the options or portions thereof will be treated as Nonstatutory Stock Options and will not be treated as Incentive Stock Options.

 

The Equity Incentive Plan prohibits the Board and Committee from doing any of the following without stockholder approval: (i) repricing or otherwise reducing the exercise price of outstanding options granted under the Equity Incentive Plan, or (ii) canceling previously granted options and issuing new options to the same optionholder at a lower exercise price.

 

 

 

 

 

 

Award criteria may include, by way of example and without limitation, targets based on revenues, earnings before interest, taxes, depreciation and amortization (“EBITDA”), operating, pre-tax or after-tax income (Company-wide or by operating unit or division), earnings per share, return on equity, return on assets, return on capital, economic value added, deposits, assets under management or under trust administration, share price performance, improvement in the Company’s attainment of expense levels, and implementing or completing critical projects or objectives, or improvement in cash flow.

 

The Board or the Committee will establish the time periods in which the performance goals are to be met. Following the completion of each performance period, the Board or the Committee shall certify in writing whether the performance objectives and other material terms of a performance award have been achieved. Participants shall have no rights as stockholders until such shares are actually received under the Equity Incentive Plan and not with respect to shares subject to the award but not actually received. Except as may be otherwise provided by the Board or the Committee, a participant’s rights in all Performance Awards shall automatically terminate upon the participant’s termination of continuous service with the Company or its subsidiaries for any reason.

 

 

In the event that a stock appreciation right is granted under the Equity Incentive Plan with a stock appreciation right exercise price less than the fair market value of the Common Stock underlying the award on the date the stock appreciation right is granted, or is otherwise determined to constitute nonqualified deferred compensation within the meaning of Section 409A of the Code, then the stock appreciation right may provide that it is exercisable at any time permitted under the governing written instrument, but subject to certain limitations.

 

 

 

 

 

The federal income tax consequences to the Company and to its Eligible Employees or Directors of various awards under the Equity Incentive Plan are complex and subject to change. The following discussion is only a summary of some of the general rules applicable to the Equity Incentive Plan, based on federal income tax laws in effect on the date of this Proxy Statement. This summary is not intended to be exhaustive and does not address all matters that may be relevant to a particular participant based upon his or her specific circumstances. The summary expressly does not discuss the income tax laws of any state, municipality or non U.S. taxing jurisdiction, or the gift, estate, excise (including the rules applicable to deferred compensation under Code § 409A), or other tax laws other than federal income tax law.

 

The following is not intended or written to be used, and cannot be used, for the purposes of avoiding taxpayer penalties. Because individual circumstances may vary, we strongly advise all participants to consult with their tax advisors concerning the tax implications and treatment of awards granted under the Equity Incentive Plan.

 

Code Section 162(m) generally denies a tax deduction to any publicly held corporation for compensation that exceeds one million dollars paid to certain senior executives in a taxable year, subject to an exception for “performance based compensation” as defined in the Code and subject to certain transition provisions. The Company currently has structured the Equity Incentive Plan and stock option and stock appreciation rights grants to senior executive officers that may be subject to Section 162(m) in a manner that is intended to satisfy the performance-based compensation exception. However, the Company reserves the authority to award non-deductible compensation as it deems appropriate. In addition, notwithstanding the Company’s efforts, ambiguities and uncertainties regarding the application and interpretation of Section 162(m) make it impossible to provide assurance that performance-based compensation will, in fact, satisfy the requirements for deductibility under Section 162(m). Thus, Section 162(m) could limit the deductibility of compensation related to the exercise of options granted under the Equity Incentive Plan.

 

 

The taxable income resulting from the exercise of a nonstatutory stock option or a stock appreciation right will constitute wages subject to withholding, and the Company will be required to make whatever arrangements are necessary to ensure that funds equaling the amount of tax required to be withheld are available for payment, including the deduction of required withholding amounts from the participant’s other compensation and requiring payment of withholding amounts as part of the exercise price.

 

 

In the event of a disposition of shares acquired upon exercise of an incentive stock option, the tax consequences depend upon how long the employee has held the shares. If the employee does not dispose of the shares within two years after the incentive stock option was granted, or within one year after the incentive stock option was exercised and shares were purchased, then the participant will recognize a long-term capital gain or loss. The Company is not entitled to any deduction under these circumstances. If the optionee fails to satisfy either of the foregoing holding periods, then he or she must recognize ordinary income in the year of disposition (referred to as a “disqualifying disposition”). The amount of such ordinary income generally is determined under the rules applicable to nonstatutory options based on the Spread at the date of exercise. Any gain in excess of the amount taxed as ordinary income may be entitled to be treated as capital gains. The Company, in the year of the disqualifying disposition, is entitled to a deduction equal to the amount of ordinary income recognized by the optionee.

 

The Spread under an incentive stock option is treated as an adjustment in computing alternative minimum taxable income (“AMTI”) for the year of exercise.

 

 

 

If stock is not subject to a “substantial risk of forfeiture,” the recipient normally will recognize taxable ordinary income equal to the value of the stock in the year in which the stock is granted, less the amount paid for that stock. If the stock is subject to a “substantial risk of forfeiture,” the recipient normally will recognize taxable ordinary income as and when the “substantial risk of forfeiture” lapses, in the amount of the fair market value of the shares no longer subject to the “substantial risk of forfeiture,” less the amount paid for the stock. Upon disposition of the stock, the recipient will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for the stock plus any amount recognized as ordinary income upon grant or vesting of the stock. The gain or loss may be long or short-term depending on how long the recipient held the stock.

 

A recipient of stock subject to a “substantial risk of forfeiture” may, however, make a timely election under Code Section 83(b) to recognize ordinary income in the year the recipient purchases the restricted stock, rather than waiting until the “substantial risk of forfeiture” lapses. If the stock recipient makes a Section 83(b) election, the recipient will be required to recognize as ordinary income in the year the recipient purchases the stock the difference, if any, between the fair market value of the stock on the purchase date and the purchase price paid. If the stock recipient makes a Section 83(b) election, the recipient will not be required to recognize any income when the “substantial risk of forfeiture lapses.” Subject to the requirement of reasonableness, the provisions of Section 162(m) of the Code and the satisfaction of a tax reporting obligation, we will generally be entitled to a business expense deduction equal to the taxable ordinary income realized by the stock recipient.

 

 

In the event that a grant or award under the Equity Incentive Plan is granted with an exercise price less than the fair market value of the Common Stock subject to the grant or award on the grant date (regardless of whether or not such exercise price is intentionally or unintentionally priced at less than fair market value, or such grant is materially modified and deemed a new grant at a time when the fair market value exceeds the exercise price) or is otherwise determined to constitute nonqualified deferred compensation within the meaning of Section 409A of the Code (a “409A Award”), then the following additional conditions shall apply to such grant or award and shall supersede any contrary provision of the Equity Incentive Plan:

 

 

 

 

 

Approval of the proposal to ratify and approve the Equity Incentive Plan requires the affirmative vote of the holders of a majority of the shares of common stock of the Company present, or represented, and entitled to vote at the Meeting.

 

 

 

Subject to the approval of the Company’s shareholders, the Company’s Board has approved an amendment to both the Tower Financial Corporation 1998 Stock Option and Incentive Plan (the “1998 Plan”) and the 2001 Stock Option and Incentive Plan (the “2001 Plan”), under which an identical amendment would be adopted to each of the Plans to enable existing optionholders, with the approval of the Compensation Committee, to pay the exercise price for optioned shares either in cash or by directing the Company to withhold a sufficient number of whole shares of the Company’s common stock, which would otherwise be deliverable by the Company upon exercise, having an aggregate fair market value, determined as of the date of exercise, equal to the exercise price (as well as any applicable withholding or employment tax required by law to be paid over as a result of such exercise).

 

Under both the existing 1998 Plan and the 2001 Plan, payment of the exercise price for the shares underlying an exercised option may only be paid for in cash. The proposed amendment to each of the Plans would make a single change to the last sentence in the section captioned “Payment of Exercise Price” to add the highlighted language in the amended section, as follows:

 

 

 

 

Both the 1998 Plan and the 2001 Plan are identical, except for the number of shares authorized as options under each Plan. The 1998 Plan authorized the issuance of options for 310,000 shares and the 2001 Plan authorized the issuance of options for 125,000 shares, for an aggregate of 435,000 originally authorized shares. Options for all 435,000 shares have been granted, and no remaining options are available for grant under either of these Plans. Moreover, the Company’s Board has agreed that no further authorization to issue additional shares under either the 1998 Plan or the 2001 Plan will be sought or permitted.

 

As of this date, options for 352,296 of the originally authorized 435,000 shares are still existing and unexercised and, by their terms, are scheduled to expire at various times between December 13, 2008 and November 1, 2015. Officers and directors hold these options in amounts ranging from 250 shares to 60,969 shares and may be exercised at any time.

 

 

The Company’s average daily trading volume during February 2006 was 2,348 shares, which is a relatively “thin” market and one that could be adversely affected by a supply/demand share imbalance if there were to be a substantial amount of shares sold at once or within a relatively short period of time, for cash, in connection with one or more “exercise and sell” transactions relating to the existing 352,296 options.

 

An exercise and hold transaction would have no effect upon the market for the Company’s shares. But an “exercise and sell” transaction, in a situation where an officer or director holding a substantial number of options that are both “in the money” and are nearing expiration, where for financial or other reasons a sale of all or a substantial portion of the underlying shares is necessary, could adversely affect the market.

 

Given the number of unexercised options, most of them relating back to the earliest days of the Company’s existence, the Board believes that providing a mechanism, through the proposed amendment, to enable an optionholder to exercise his or her options, in whole or in part, by utilizing the spread or the “in the money” value (equal to the difference between the fair market value of the Company’s shares on the date of exercise and the exercise price), and to permit the Company, subject to Committee approval, to withhold a sufficient number of whole shares of common stock (which would otherwise be deliverable to the optionholder) having an aggregate fair market value equal to the exercise price, would provide an alternative to minimize the potential market impact of the so-called “share overhang” problem, and, additionally, would minimize the dilutive effect of issuing the additional shares.

 

Special tax rules apply, not only with respect to the option shares received from the Company, but also with respect to the tax treatment of the shares surrendered, where the optionee pays all or part of the option exercise price by tendering shares of the Company’s common stock owned by the optionee, or if the Company, in connection with a “Net Exercise” transaction, withholds shares in full or partial payment for shares covered by an option. These rules are especially complex, and the employee should consult with his or her tax advisor prior to engaging in this kind of transaction.

 

 

 

The Board of Directors has the responsibility for establishing broad corporate policies and reviewing our overall performance, rather than day-to-day operations. The Board’s primary responsibility is to oversee the management of the Company and, in so doing, to serve the best interests of the Company and its shareholders.

 

Subject to oversight by the Nominating and Corporate Governance Committee, the Board selects, evaluates and provides for the succession of executive officers, and the Board nominates for election at the Annual Meeting of Shareholders persons to serve as directors of Tower Financial Corporation, as well as appoints individuals to fill any vacancies on the Board. The Board also reviews and approves corporate objectives and strategies, and evaluates significant policies and proposes a major commitment of corporate resources. Management keeps the directors informed of Company activity through regular reports and presentations at Board and committee meetings.

 

During 2005, the Board of Directors met eleven times. During 2005, each of our directors who served as a director during 2005 attended 75% or more of the total number of meetings of the Board and the committees of which each such director was a member during the period of time in which he or she served on such committees, except for John V. Tippmann, Sr., who attended 70% of the board meetings. Mr. Tippmann does not serve on any committee’s of the board. Twelve of the Company’s fourteen directors who served as directors during 2004 attended the Company’s 2005 Annual Meeting of Shareholders.

 

The Board of Directors has a standing Audit Committee, Compensation Committee, and a Nominating and Corporate Governance Committee. Each committee has a charter that has been approved by the Board. Each committee must review the appropriateness of its charter and perform a self-evaluation at least annually. Mr. Donald Schenkel is the only director who is also an employee of the Company, and he does not participate in any meeting at which his compensation is evaluated and determined. All members of all committees are “non-employee” directors.

 

 

The Audit Committee met 10 times during 2005 and all members of the Audit Committee attended at least 75% of the Audit Committee meetings. The responsibilities of our Audit Committee and its activities during 2005 are described in the Report of the Audit Committee set forth in this proxy statement.

 

The Board of Directors has adopted a written charter for the Audit Committee, a copy of which is posted on the Company’s website at www.towerbank.net.

 

 

 

 

 

 

The Company has adopted a Code of Business Conduct and Ethics (the "Code") that applies to all of the Company's directors, officers and employees, including its principal executive officer, principal financial officer, principal accounting officer and controller. The Code is posted on the Company's website at www.towerbank.net. The Company intends to disclose any amendments to the Code by posting such amendments on its website. In addition, any waivers of the Code for directors or executive officers of the Company will be disclosed in a report on Form 8-K.

 

 

The Board of Directors of the Company has implemented a process whereby shareholders may send communications to the Board's attention. Any shareholder desiring to communicate with the Board, or one or more specific members thereof, should communicate in a writing addressed to Tower Financial Corporation, Board of Directors, c/o Secretary, 116 East Berry Street, Fort Wayne, Indiana 46802. The Secretary of the Company has been instructed by the Board to promptly forward all such communications to the specified addressees thereof.

 

 

Section 16(a) of the Securities Exchange Act of 1934 requires the Company’s executive officers and directors, and persons who own more than 10% of the Company’s common stock, to file reports of ownership with the Securities and Exchange Commission. Such persons also are required to furnish the Company with copies of all Section 16(a) forms they file.

 

Based solely on its review of copies of such forms received by it, or written representations from certain reporting persons that no filings were required for those persons, the Company believes that during 2005 all Section 16 filing requirements were met.

 

 

The Audit Committee of the Board of Directors is responsible for providing independent, objective oversight of Tower Financial Corporation’s accounting functions and internal controls. Management has the primary responsibility for the financial statements and the reporting process, including the system of internal controls. The Audit Committee oversees our financial reporting process on behalf of the Board, reviews our financial disclosures, and meets privately, outside the presence of management, with our independent auditors to discuss our internal accounting control policies and procedures.

 

In fulfilling its oversight responsibilities, the Audit Committee reviewed and discussed with management, and recommended to the Board of Directors (and the Board of Directors approved) the inclusion of the audited consolidated financial statements in the Annual Report on Form 10-K, for filing with the Securities and Exchange Commission, as well as the quarterly financial statements included in the Company’s Forms 10-Q during 2005, including the specific disclosures in the section entitled “Management Discussion and Analysis of Financial Condition and Results of Operations.” These discussions also addressed the quality, not just the acceptability, of the accounting principles, the reasonableness of significant judgments, and the clarity of disclosures in the financial statements.

 

The Audit Committee also selects and appoints our independent auditors, reviews the performance of the independent auditors in the annual audit and in assignments unrelated to the audit, and reviews and approves the independent auditors’ fees.

 

The Audit Committee has discussed with the Company’s independent auditors, Crowe Chizek and Company LLC, the matters required to be discussed by Statement on Auditing Standards No. 61, Communication with Audit Committees, as amended, by the Auditing Standards Board of the American Institute of Certified Public Accountants. The Audit Committee has also received and reviewed the written disclosures and the letter from Crowe required by Independence Standard No.1, Independence Discussions with Audit Committees, as amended, by the Independence Standards Board, and has discussed with the auditors the auditors’ independence.

 

The Audit Committee has also considered whether the provision of services by Crowe not related to the audit of the financial statements referred to above is compatible with maintaining Crowe’s independence.

 

The Audit Committee also approved the selection and engaged the services of Crowe Chizek and Company LLC as our independent auditors for the Company’s fiscal year ending December 31, 2006.

 

William G. Niezer, Chairman

Keith E. Busse

Kathryn D. Callen

Jerome F. Henry, Jr.

 

The foregoing Audit Committee Report shall not be deemed to be incorporated by reference in any previous or future documents filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates the report by reference in any such document.

 

 

The Company incurred the following fees for services performed by Crowe in fiscal years 2005 and 2004.

 

 

 

 

 

 

For fiscal 2005, pre-approved non-audit services included only those services described above for "Audit-Related Fees," "Tax Fees," and "All Other Fees." The aggregate amount of all such non-audit services constitutes approximately 39% of the total amount of fees paid by the Company to Crowe.

 

 

The Company seeks to establish compensation at a level that will attract, motivate, and retain experienced executive officers that can increase shareholder value, deliver competitive products and services to customers, and provide leadership for employees. Salaries are intended to be competitive and reflect factors such as individual performance, level of responsibility, and prior experience. Incentive compensation and stock option awards are intended to align the interests of Senior officers and Executives with those of the shareholders of the Company and to reward performance that increases shareholder value.

 

The Board of Directors approves incentive compensation plans and equity-based plans for the Senior officers and Executives of the Company, based upon recommendations made by the Compensation Committee. The Compensation Committee reviews and approves annual salary compensation, annual incentive opportunity levels, long-term incentive opportunity levels, and any special or supplemental benefits for the executive officers.

 

Senior Officer and Executive compensation includes the following elements:

 

 

Annual salaries for the Company’s Chairman, President and Chief Executive Officer, its Executive Vice President and Chief Lending Officer, its Chief Financial Officer and the Bank’s Senior Vice President and Trust Officer increased in 2005. During the seven-year time period in which the Company has been operating, growth in asset levels and net income have been significant, and the salary granted these four executives during these years recognizes the contribution these individuals have made to the success of the organization. Senior officer and Executive salaries and incentive compensation are also based in part on information derived from industry compensation studies performed by compensation consultants. In 2004 and 2005, the Compensation Committee engaged Clark Consulting to prepare a study of all officers and board compensation. Compensation information is also taken from proxy materials filed with the Securities and Exchange Commission by other comparable financial institutions. This information is analyzed by management and presented to the Compensation Committee.

 

Senior officers and Executive bonuses are also determined by the Compensation Committee and are based on the same criteria, as is the incentive compensation for all other officers. At the beginning of each calendar year, the Compensation Committee establishes specific financial objectives, which generally represent improvement over prior year’s net income and earnings per share for purposes of the incentive compensation payable for such calendar year. The amount of incentive compensation is determined by establishing a trigger or threshold level that must be achieved before any incentive compensation is payable, a target or budget level, and a maximum level. The incentive compensation awarded to named senior officers and executive officers is based upon the Company’s actual financial performance results as compared to the predetermined threshold, target, and maximum levels. The incentive compensation opportunity set for the Company’s Chairman, President and Chief Executive Officer in 2005 was 40% of his base salary.

 

Respectfully submitted by the Compensation Committee:

 

Michael S. Gouloff, Chairman

Debra A. Niezer

Joseph D. Ruffolo

 

The foregoing Compensation Committee Report shall not be deemed to be incorporated by reference in any previous or future documents filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates the report by reference in any such document.

 

 

The members of the Compensation Committee during 2005 were Michael S. Gouloff, Debra A. Niezer, and Joseph D. Ruffolo. As stated below under “Related Party Transactions - Banking Transactions,” from time to time the Bank makes loans to the Company’s directors, including members of the Compensation Committee, and their families or related entities, provided, however, that all such loans are predicated upon arm’s-length application of lending and credit practices applicable to non-related party loans. No Compensation Committee member has any other relationship requiring disclosure as an interlocking executive officer or director or otherwise under the rules of the Securities and Exchange Commission.

 

 

 

The following table sets forth certain information regarding compensation paid or accrued for the years ended December 31, 2005, 2004 and 2003, to the Company’s chief executive officer and each of the Company’s four other most highly compensated executive officers (the “Named Executive Officers”), based on salaries and bonuses earned during 2005, including one executive officer of the Bank, who performs policy-making functions for the Company.

 

 

 

On January 17, 2006, the Company entered into a new employment agreement with Donald F. Schenkel, the Company’s Chairman, President and Chief Executive Officer, which replaced Mr. Schenkel’s prior employment agreement dated January 1, 2002 and previously amended on January 29, 2004. The initial term of Mr. Schenkel’s new agreement is three (3) years, through December 31, 2008. However, the term of employment will automatically renew for up to two additional one-year extensions, unless either party gives notice that the term not be extended.

 

Mr. Schenkel’s compensation during the initial term consists of a base salary of $270,000, which may be increased (but not decreased) during the term, at the discretion and upon the recommendation of the Compensation Committee, together with a performance-based or a discretionary bonus, upon the recommendation of the Compensation Committee to the Board of Directors, of not less than 20% nor more than 100% of Mr. Schenkel’s base salary.

 

The new Employment Agreement contemplates that if, during the initial or extended term, Mr. Schenkel wishes to reduce the level of his day-to-day responsibilities and to continue his duties as an active but non-CEO Chairman, he may do so, in coordination with the Board of Directors, but at a base salary reduced to 65% of the then applicable base salary.

 

The Company also on January 17, 2006, amended and restated the Tower Financial Corporation Supplemental Executive Retirement Plan, or “SERP,” under which Mr. Schenkel is the sole current participant, which was originally entered into in January 2002 and amended and restated in 2004. The amended and restated SERP, which provides unfunded monthly lifetime retirement benefits, increases the retirement benefit level from 35% of Mr. Schenkel’s highest annual base salary to 65% of his highest annual base salary, once he reaches Normal Retirement Age. Normal Retirement Age as defined under the SERP is age 70. If Mr. Schenkel were to retire prior to age 70, then the SERP benefit factor would be reduced as follows:

If Mr. Schenkel dies either prior to, or while receiving benefits under the SERP, his surviving spouse shall receive a death benefit in a lump sum amount equal to the amount of the remaining SERP benefit accrued on the books of the Company as of the date of the participants death. The estimated present value of the accrued benefits under the SERP is approximately $1,810,000.

 

Mr. Schenkel is also eligible to participate in such of the Company’s deferred compensation, 401(k), health insurance and stock option, restricted stock or other equity-based incentive plans that may be adopted by the Company from time to time, although the Board, in the exercise of its discretion, may amend or terminate any such plan.

 

During the term of Mr. Schenkel’s Employment Agreement, the Company, through a Company-owned life insurance policy on Mr. Schenkel’s life, is required to provide Mr. Schenkel with a life insurance death benefit, payable to Mr. Schenkel’s designated beneficiary, in an amount not less than Eight Hundred Fifty Thousand Dollars ($850,000). Upon termination of Mr. Schenkel’s employment or upon his retirement, Mr. Schenkel has the right but not the obligation, upon written notice to the Company, to purchase such life insurance policy for an amount, payable in cash to the Company, equal to the cash surrender value of the policy.

 

In the event of termination by Mr. Schenkel’s death or disability or by the Company for “cause” (as those terms are defined), the Company is required to pay Mr. Schenkel or his estate a lump-sum equal to any earned but unpaid base salary to the date of death or termination and, at the discretion of the Compensation Committee, any pro rata bonus for the calendar year in which the death or termination occurred. If the Company terminates Mr. Schenkel without cause, the Company is required to pay Mr. Schenkel the present value, discounted at 6%, of his unpaid base salary for the balance of his then-remaining term and, at the discretion of the Compensation Committee, any pro rata portion of the bonus for the partial calendar year to the date of termination.

 

The Employment Agreement prohibits Mr. Schenkel from competing with the Company during the period of his employment and for a minimum of eighteen months thereafter.

 

 

The Company also has an employment agreement, effective April 25, 2002, with Curtis A. Brown, the Executive Vice President and Chief Lending Officer of the Bank, which specifies an initial term of three (3) years, with automatic three-year renewals, unless earlier terminated. Mr. Brown’s current base salary is $175,000, and he was granted incentive compensation during 2005 of $78,160. He is also eligible to participate in the Company’s deferred compensation, 401(k), health insurance and stock option, restricted stock or other equity-based incentive plans that may be adopted by the Company from time to time, subject to the Company’s right, in the exercise of its discretion, to amend or terminate any such plan. In the event of termination by the executive with “good reason” or by the Company without cause (as those terms are defined), the Company is obligated to pay Mr. Brown a lump sum equal to the greater of two times his base salary at the then effective rate or his base salary at the then effective rate for the remaining term of the agreement. In the event of a change in control, if Mr. Brown’s employment is terminated within a specified period subsequent to the change in control, either by the new company without cause or by Mr. Brown for good reason, Mr. Brown would be entitled to receive a lump sum severance benefit of 2.99 times his base salary and an average bonus payment calculated at 2.99 times the three year average of the bonuses awarded Mr. Brown under the Company’s incentive plans for the last three completed calendar years prior to the termination. The agreement prohibits Mr. Brown from competing with the Company during the period of his employment and for a minimum of two years thereafter.

 

The Company also entered into an employment agreement effective April 25, 2002, with Gary D. Shearer, Executive Vice President and Trust Officer of the Bank, for an initial term of two (2) years, with automatic two-year renewals, unless earlier terminated. Mr. Shearer’s current base salary is $137,500, and, during 2005, he was granted incentive compensation of $55,960. He is also eligible to participate in such of the Company’s deferred compensation, 401(k), health insurance and stock option, restricted stock or other equity-based incentive plans that may be adopted from time to time, subject to the Company’s right to amend or terminate such plans. In the event Mr. Shearer terminates his employment for good reason or the Company terminates Mr. Shearer’s employment without cause (as those terms are defined), the Company is required to pay Mr. Shearer a lump sum equal to two times his base salary at the then effective rate. In the event of a change in control, if the new company terminates Mr. Shearer’s employment without cause or he terminates for good reason, within a specified period subsequent to the change in control, Mr. Shearer will be entitled to receive a lump sum severance payment of two years base salary and an average bonus payment calculated at two times the three-year average of the bonuses awarded him under the Company’s incentive plans for the last three completed calendar years prior to termination.

 

On June 1, 2004, the Company entered into an agreement with Michael D. Cahill, the Company’s Executive Vice President and Chief Financial Officer. The agreement only addresses compensation to be paid to Mr. Cahill upon his termination and does not address any other terms of employment. In the event that the Company terminates Mr. Cahill’s employment without cause (as such term is defined), the Company will pay Mr. Cahill a lump sum equal to 18 months’ base salary at the then effective rate being paid to him. Mr. Cahill’s current base salary is $160,000, and during 2005 he received incentive compensation of $72,000.

 

 

Certain highly compensated employees, as defined in the Internal Revenue Code, are eligible to participate in an unfunded non-qualified deferred compensation plan (the "Deferred Compensation Plan"), effective January 1, 2002. An employer contribution may be made on behalf of each of the participants, in the sole discretion of the Compensation Committee, not to exceed 20% of bonuses otherwise payable under the Company's bonus program. The Deferred Compensation Plan also allows for employee deferrals, but this feature has not been effectuated. Employer contributions are 100% vested at the end of the third year after the Plan Year for which the contributions was made.

 

The declared interest rate for 2005 on deferred amounts is 4%, compounded quarterly. The rate for 2006 has been set at 4.33%, compounded quarterly. Distributions are made upon termination of employment. Messrs. Brown, Shearer, Cahill, Schenkel, Jaggers, and two other Bank officers are participants under the Deferred Compensation Plan.

 

Mr. Schenkel is the only participant under the SERP. The estimated present value of the accrued benefit under the SERP, payable to Mr. Schenkel in monthly installments for life upon retirement at normal retirement age, is approximately $1,810,000.

 

 

Each non-employee director received an annual retainer of $2,000 and an attendance fee of $300 per each board meeting and $250 for each committee meeting attended in 2005. The Company paid an additional retainer of $1,250, $1,000, and $750 to the chairman of audit committee, compensation committee, and corporate governance committee, respectively. Additionally, the Company paid an annual retainer of $750 to each non-employee, non-chairman member of the compensation committee. For the year ended December 31, 2005, total directors fees paid were $123,879.

 

On January 1, 2002, the Board of Directors adopted the Deferred Compensation Plan for Non-Employee Directors (the “Directors Deferred Plan”). The Directors Deferred Plan allows each non-employee director to defer payment of director fee and attendance fee compensation earned during each quarter. A director must make an election whether or not to participate in the Directors Deferred Plan. The Board of Directors administers the Directors Deferred Plan. Prior to 2006,deferred balances in the plan accrued interest at 4%. The interest rate is subject to change from time to time by the Compensation Committee of the Board of Directors. The rate for 2006 has been set at 4.33%, compounded quarterly and was determined using the average rate for five-year treasuries as reported by the Wall Street Journal during the last week of 2005. The interest rate will be adjusted annually using this described methodology. The Directors Deferred Plan allows for payments of deferred compensation upon the earlier of 10 years from the time a director becomes a participant in the plan or retirement from the Board, in a lump sum amount or a maximum of four installment payments. Those directors participating in the Directors Deferred Plan are Callen, Gouloff, Henry, Mantravadi, D. Niezer, W. Niezer, Ruffolo, Smith, Tippmann, and Walters. Of the directors fees paid during 2005, $104,996 was deferred under the Directors Deferred Plan.

 

Each director of the Company currently serves as a director of the Bank. In such capacity, non-employee directors of the Bank received an annual retainer of $2,000 and an attendance fee of $250 per Bank board meeting and Bank committee meeting attended in 2005. Additionally, the non-employee members of the Banks Loan and Investment Committee received an annual retainer of $1,000 each.

 

 

On December 14, 1998, the Board of Directors and the Company’s then sole stockholder adopted the 1998 Stock Option and Incentive Plan (the “1998 Stock Option Plan”). Under the 1998 Stock Option Plan, the Company may award incentive and non-qualified stock options and performance shares to employees and directors of the Company and the Bank. The aggregate number of shares of common stock that may be awarded under the 1998 Stock Option Plan is 310,000, subject to adjustment in certain events. No individual participant may receive awards for more than 75,000 shares in any calendar year. As of December 31, 2005, options to purchase 235,171 shares of common stock were outstanding under the 1998 Stock Option Plan.

 

On April 17, 2001, the Board of Directors and the shareholders of the Company adopted the 2001 Stock Option and Incentive Plan (the “2001 Stock Option Plan” and together with the 1998 Stock Option Plan, the “Stock Option Plans”). Under the 2001 Stock Option Plan, the Company may award incentive and non-qualified stock options and performance shares to employees and directors of the Company and the Bank. The aggregate number of shares of common stock that may be awarded under the 2001 Stock Option Plan is 125,000, subject to adjustment in certain events. No individual participant may receive awards for more than 75,000 shares in any calendar year. As of December 31, 2005, options to purchase 117,125 shares of common stock were outstanding under the 2001 Stock Option Plan.

 

All authorized options under both the 1998 Stock Option Plan and under the 2001 Stock Option Plan have now been granted, and no further options may be granted under either or both of these Plans. Both of these Plans will continue in existence so long as there are unexercised stock options issued and outstanding under one or the other of the Plans.

 

The Compensation Committee administers the Stock Option Plans. With respect to stock options under the Stock Option Plans that are intended to qualify as “incentive stock options” under Section 422 of the Internal Revenue Code, the option price had to be at least 100% (or, in the case of a holder of more than 10% of the common stock, 110%) of the fair market value of a share of common stock on the date of the grant of the stock option. The Compensation Committee established, at the time the options were granted, the exercise price of options that did not qualify as incentive stock options (“non-qualified stock options”), which was not permitted to be less than 100% of the fair market value of a share of common stock on the date of grant. No incentive stock option granted under the Stock Option Plans may be exercised more than 10 years (or, in the case of a holder of more than 10% of the common stock, five years) from the date of grant or such shorter period as the Compensation Committee may determine at the time of the grant. Under each Stock Option Plan, the Compensation Committee may also make awards of performance shares, in which case the grantee would be awarded shares of common stock, subject to the Company’s satisfaction of performance goals determined by the Compensation Committee.

 

The following table provides information with respect to options granted by the Company under the Stock Option Plans during the year ended December 31, 2005 to the Named Executive Officers:

 

The following table provides information on the exercise of stock options during the year ended December 31, 2005 by the Named Executive Officers and the value of unexercised options at December 31, 2005:

 

The Company established a 401(k) plan effective March 1, 1999 covering substantially all of its employees. The 401(k) plan allows employees to contribute up to 15% of their compensation. The Company may match a portion of the employees’ contributions and provides investment choices for the employees, including investment in common stock of the Company. In 2005, the Company made matching contributions to the plan totaling $130,000 which was 50% of each participant’s contribution up to a maximum of 6% of each participant’s compensation. Matching contributions are vested equally over a six-year period. The Board of Directors and management approve Company matching contributions to the 401(k) plan annually.

 

 

The following table gives information about the Company’s common stock that may be issued upon the exercise of options, warrants, and rights under all of the Company’s existing equity compensation plans as of December 31, 2005.

 

 

Set forth below is a line graph comparing the yearly percentage change in the cumulative total shareholder return on the Company’s Common Stock (based on the last reported sales price of the respective year) with the cumulative total return of the Nasdaq Stock Market Index (United States stocks only) and the Nasdaq Bank Stocks Index from January 29, 1999 (the date of the Company’s initial public offering) through December 31, 2005. The following information is based on an investment of $100 on January 29, 1999 in the Company’s Common Stock at the market close on that day, the Nasdaq Stock Market Index and the Nasdaq Bank Stocks Index, with dividends reinvested where applicable.

 

The comparisons shown in the graph below are based on historical data and the Company cautions that the stock price performance shown in the graph below is not indicative of, and is not intended to forecast, the potential future performance of the Company’s Common Stock.

 

 

The foregoing Performance Graph shall not be deemed to be incorporated by reference in any previous or future documents filed by the Company with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent that the Company specifically incorporates the graph by reference in any such document.

 

 

Related party transactions are subject to the review and approval of the Company’s Audit Committee, which is composed exclusively of independent directors.

 

 

Directors and officers of the Company and the Bank and the companies with which they are associated have banking and other transactions with the Company and the Bank in the ordinary course of business. Any loans and commitments to lend to such affiliated persons or entities are made in accordance with all applicable laws and regulations and on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unaffiliated parties of similar creditworthiness and may not involve more than normal risk or present other unfavorable features to the Company and the Bank. Management believes that all transactions between the Company or the Bank on one hand, and any officer, director, principal shareholder, or other affiliate of the Company or the Bank on the other hand, are on terms no less favorable to the Company or the Bank than could be obtained on an arm’s-length basis from unaffiliated third parties. As of December 31, 2005, the Bank had 70 outstanding loans to the directors and executive officers of the Company and the Bank totaling $14,447,317 and an aggregate amount under commitment, including these outstanding loans, totaling $19,916,288.

 

 

 

 

 

A proposal submitted by a shareholder for the 2007 Annual Meeting of Shareholders must be sent to the Secretary of the Company, 116 East Berry Street, Fort Wayne, Indiana, 46802, and received by November 10, 2006 in order to be eligible to be included in the Company's Proxy Statement for the meeting.

 

 

 

The specific requirements of these advance notice and eligibility provisions are set forth in Section 1.4 and Section 1.5 of the Company’s By-Laws, a copy of which is available upon request. Such requests and any shareholder proposals should be sent to the Secretary of the Company at the principal executive offices of the Company.

 

 

The Board of Directors does not know of any other matters to be brought before the Annual Meeting. If other matters are presented upon which a vote may properly be taken, it is the intention of the persons named in the proxy to vote the proxies in accordance with their best judgment.