<PAGE>
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission file number 0-25484
AMTRUST CAPITAL CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 35-1940250
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
20 West Fifth Street, Peru, Indiana 46970
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (765) 472-1991
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $.01 per share
(Title of Class)
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 twelve months (or for
such shorter period that the Issuer was required to file such reports), and (2)
has been subject to such requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of Issuer'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 Issuer had $5.7 million in gross income for the year ended June 30,
1997.
As of September 15, 1997, there were issued and outstanding 526,479
shares of the Issuer's Common Stock. The aggregate market value of the voting
stock held by non-affiliates of the Issuer, computed by reference to the average
of the closing bid and asked price of such stock on the Nasdaq SmallCap Market
as of September 15, 1997 was approximately $5.9 million. (The exclusion from
such amount of the market value of the shares owned by any person shall not be
deemed an admission by the Issuer that such person is an affiliate of the
Issuer.)
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-KSB--Annual Report to Stockholders for the fiscal year ended
June 30, 1997.
PART III of Form 10-KSB--Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended June 30, 1997.
================================================================================
<PAGE>
PART I
Item 1. Business
General
AmTrust Capital Corp. ("AmTrust" or the "Company") is a Delaware
corporation which was organized in 1994 by AmericanTrust Federal Savings Bank
("AmericanTrust" or the "Bank") for the purpose of becoming the savings and loan
holding company of the Bank. The Company owns all of the outstanding stock of
the Bank issued on March 28, 1995 in connection with the Bank's conversion from
the mutual to the stock form of organization (the "Conversion"). Unless the
context otherwise requires, all references herein to the Bank or the Company
include the Company and the Bank on a consolidated basis.
At June 30, 1997, the Company had total assets of $72.2 million,
deposits of $53.5 million and stockholders' equity of $7.5 million. The
executive offices of the Company are located at 20 West Fifth Street, Peru,
Indiana 46970 and its telephone number is (765) 472-1991.
The Bank, the Company's only operating subsidiary, was originally
chartered under the laws of the state of Indiana in 1886 as Peru Building and
Loan Association and converted to a federally chartered mutual savings and loan
association in 1936.
AmericanTrust is principally engaged in the business of attracting
deposits from the general public and using such deposits, together with funds
generated from operations and borrowings, to originate one- to four-family
residential loans. The Bank also originates consumer loans and, to a lesser
extent, construction loans. The Bank has in the past originated a limited number
of multi-family and commercial real estate loans. See " - Lending Activities."
In addition, the Bank also invests in mortgage-backed securities, the majority
of which are insured or guaranteed by federal agencies, and other securities.
See " - Investment Activities - Mortgage-Backed Securities" and " - Investment
Activities - Securities and Other Interest-Earning Assets."
Through its main office, one branch office, and a limited service
office (which provides all the services of a branch office with the exception of
loan origination), the Bank serves communities located in Howard and Miami
Counties, Indiana.
The Bank's operations are regulated by the Office of Thrift Supervision
(the "OTS"). The Bank is a member of the Federal Home Loan Bank System ("FHLB
System") and a stockholder in the Federal Home Loan Bank ("FHLB") of
Indianapolis. The Bank is also a member of the Savings Association Insurance
Fund ("SAIF") and its deposit accounts are insured up to applicable limits by
the Federal Deposit Insurance Corporation ("FDIC").
2
<PAGE>
Lending Activities
General. Historically, the Bank originated primarily fixed-rate one- to
four-family mortgage loans. In the mid 1980s, the Bank introduced the
origination of balloon mortgage loans for retention in its portfolio, and the
Bank securitized a portion of its fixed-rate loan portfolio and exchanged it for
adjustable-rate securities in order to increase the percentage of assets in its
portfolio with more frequent repricing or shorter maturities than traditional
long-term, fixed-rate mortgage loans. Thereafter, the Bank began originating ARM
loans and converted some of the balloon mortgages to adjustable-rate mortgage
("ARM") loans when they matured. Nevertheless, the Bank has continued to
originate fixed-rate mortgage loans in response to customer demand, which are
typically sold in the secondary market with servicing retained. Such loans are
primarily for terms of up to 30 years. The Bank still originates a limited
number of balloon loans and has purchased a small amount of leases on business
equipment. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Assets/Liability Management" in the Annual Report to
Stockholders for the fiscal year ended June 30, 1997 attached hereto as Exhibit
13 (the "Annual Report").
While the Bank primarily focuses its lending activities on the
origination of loans secured by first mortgages on owner-occupied one- to
four-family residences, it also originates consumer loans (including mobile home
loans), and to a lesser extent, construction loans. The Bank had in the past
purchased and originated a limited number of multi-family and commercial real
estate loans. See " - Multi-Family and Commercial Real Estate Lending." With the
exception of consumer loans and lease contracts, substantially all of the Bank's
loans are originated in its market area. At June 30, 1997, the Bank's loans, net
and loans held for sale totaled $50.7 million.
Notwithstanding loan sales, the Bank's loan portfolio decreased
$583,000, or 1.2%, from $51.3 million at June 30, 1996 to $50.7 million at June
30, 1997. While the real estate loan portfolio decreased, consumer loans,
including mobile home and recreational vehicle ("RV") loans increased $3.5
million from $17.1 million at June 30, 1996 to $20.6 million at June 30, 1997.
As a result, a portion of the Bank's loan portfolio represents unseasoned loans.
See "- Consumer Lending."
The President has authority to approve loans up to $214,600 (the FHLMC
loan limit). All loans in excess of $214,600 require the approval of the entire
Board of Directors.
Under OTS regulations, the Bank's loans-to-one-borrower limit is
generally limited to the greater of 15% of unimpaired capital and surplus or
$500,000. See "Regulation - Federal Regulation of Savings Associations." At June
30, 1997, the maximum amount which the Bank could have lent to any one borrower
and the borrower's related entities was $1.1 million.
3
<PAGE>
Loan Portfolio Composition. The following table sets forth information
concerning the composition of the Bank's loan portfolio (including loans held
for sale) in dollar amounts and in percentages (before deductions for loans in
process, deferred fees and discounts and allowances for losses) as of the dates
indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------
1997 1996 1995
-------------------- ------------------- --------------------
Amount Percent Amount Percent Amount Percent
-------- -------- -------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
- ------------------
One- to four-family(1)...................... $25,542 50.24% $29,476 57.58% $30,966 62.65%
Multi-family................................ 1,352 2.66 1,387 2.71 1,343 2.71
Commercial.................................. 955 1.88 1,045 2.04 1,359 2.75
Construction................................ 919 1.81 690 1.35 644 1.31
-- ------- ------ ------- ------ ------- ------
Total real estate loans............... 28,768 56.59 32,598 63.68 34,312 69.42
-- ------- ------ ------- ------ ------- ------
Other Loans:
- ------------
Consumer Loans
Deposit account.......................... 159 .31 107 .21 111 .22
Automobile............................... 890 1.75 1,118 2.18 1,005 2.03
Home equity.............................. 315 .62 258 .50 254 .51
Home improvement......................... 1,035 2.04 1,521 2.97 1,753 3.55
Mobile homes/RVs......................... 17,827 35.07 13,861 27.08 10,754 21.76
Other.................................... 351 .69 238 .47 365 .74
-- ------- ------ ------- ------ ------- ------
Total consumer loans.................. 20,577 40.48 17,103 33.41 14,242 28.81
Lease Contracts(2)......................... 1,491 2.93 1,491 2.91 871 1.77
-- ------- ------ ------- ------ ------- ------
Total other loans..................... 22,068 43.41 18,594 36.32 15,113 30.58
-- ------- ------ ------- ------ ------- ------
Total loans........................... 50,836 100.00% 51,192 100.00% 49,425 100.00%
====== ====== ======
Less:
- -----
Loans in process............................. 857 540 527
Deferred fees (costs) and discounts.......... (1,270) (1,151) (1,134)
Allowance for losses......................... 523 494 400
------- ------- -------
Total loans, net...................... $50,726 $51,309 $49,632
======= ======= =======
</TABLE>
____________________
(1) Includes $1.1 million, $1.5 million and $1.8 million of loans held for
sale at June 30, 1997, 1996 and 1995, respectively.
(2) Represents a pool of leases on office equipment.
4
<PAGE>
The following table shows the composition of the Bank's loan portfolio
(including loans held for sale) by fixed- and adjustable-rate at the dates
indicated.
<TABLE>
<CAPTION>
June 30,
-------------------------------------------------------------
1997 1996 1995
-----------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- ------- ------ ------- ------ ----------
(Dollars in Thousands)
Fixed-Rate Loans:
- -----------------
<S> <C> <C> <C> <C> <C> <C>
Real estate:
One- to four-family(1)................. $ 9,008 17.72% $ 9,523 18.60% $ 9,118 18.45%
Multi-family........................... 644 1.27 653 1.28 630 1.27
Commercial............................. --- --- 369 .72 811 1.64
Construction........................... 721 1.41 --- --- 644 1.30
------- ------ ------- ------ ------- ------
Total real estate loans............. 10,373 20.40 10,545 20.60 11,203 22.66
------- ------ ------- ------ ------- ------
Consumer................................ 20,262 39.86 16,845 32.91 13,988 28.31
Lease contracts(2)...................... 1,491 2.93 1,491 2.91 871 1.76
------- ------ ------- ------ ------- ------
Total other loans................... 21,753 42.79 18,336 35.82 14,859 30.07
------- ------ ------- ------ ------- ------
Total fixed-rate loans........... 32,126 63.19 28,881 56.42 26,062 52.73
------- ------ ------- ------ ------- ------
Adjustable-Rate Loans:
- ----------------------
Real estate:
One- to four-family(1)................. 16,534 32.53 19,953 38.98 21,848 44.20
Multi-family........................... 708 1.39 734 1.43 713 1.44
Commercial............................. 234 .46 676 1.32 548 1.11
Construction........................... 919 1.81 690 1.35 --- ---
------- ------ ------- ------ ------- ------
Total real estate loans.......... 18,395 36.19 22,053 43.08 23,109 46.75
Consumer............................... 315 .62 258 .50 254 .52
------- ------ ------- ------ ------- ------
Total adjustable-rate loans...... 18,710 36.81 22,311 43.58 23,363 47.27
------- ------ ------- ------ ------- ------
Total loans.................. 50,836 100.00% 51,192 100.00% 49,425 100.00%
======= ======= ========
Less:
- -----
Loans in process........................ 857 540 527
Deferred fees (costs) and discounts..... (1,270) (1,151) (1,134)
Allowance for losses on loans........... 523 494 400
------- ------- -------
Total loans, net.................... $50,726 $51,309 $49,632
======= ======= =======
</TABLE>
________________________
(1) Includes $1.1 million, $1.5 million and $1.8 million of fixed- and
adjustable-rate loans held for sale at June 30, 1997, 1996 and 1995,
respectively.
(2) Represents a pool of leases on office equipment.
5
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate
--------------------------------------------------------------------
Multi-family and
One- to Four-Family(1) Commercial Construction
---------------------- --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ----------- -------- ---------- -------- ----------
(Dollars in Thousands)
Due During Years
Ending June 30,
- ---------------------------
<S> <C> <C> <C> <C> <C> <C>
1998(2).................... $ 35 8.30% $644 8.39% $919 6.96%
1999....................... 93 8.17 325 9.79 --- ---
2000....................... 65 8.76 --- --- --- ---
2001 and 2002.............. 285 9.05 --- --- --- ---
2003 to 2007............... 3,009 8.47 974 8.76 --- ---
2008 to 2022............... 12,833 7.32 364 9.10 --- ---
2023 and following......... 9,222 7.80 --- --- --- ---
------- ------ ----
$25,542 7.65 $2,307 8.86 $919 6.96
======= ====== ====
Consumer Lease Contracts Total
---------------------- --------------------- --------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
-------- ----------- -------- ---------- -------- ---------
(Dollars in Thousands)
Due During Years
Ending June 30,
- --------------------------
1998(2)................... $ 455 8.99% $ 814 ---% $2,867 5.64%
1999...................... 364 11.37 117 --- 899 8.99
2000...................... 789 10.16 560 --- 1,414 6.07
2001 and 2002............. 1,425 10.44 --- --- 1,710 10.21
2003 to 2007.............. 4,697 10.25 --- --- 8,680 9.47
2008 to 2022.............. 12,840 9.72 --- --- 26,037 8.53
2023 and following........ 7 10.50 --- --- 9,229 7.80
------- ------ -------
$20,577 9.92 $1,491 --- $50,836 8.39
======= ====== =======
</TABLE>
__________________________
(1) Includes loans held for sale.
(2) Includes demand loans, loans having no stated maturity and overdraft loans.
(3) Lease contracts were all on non-accrual status.
6
<PAGE>
At June 30, 1997, the total amount of loans due after June 30, 1998
which have fixed interest rates is $30.5 million, while loans due after such
date which have floating or adjustable interest rates is $17.4 million.
All of the Bank's lending is subject to its written underwriting
standards and loan origination procedures. Decisions on loan applications are
made on the basis of detailed applications and property valuations. Properties
securing real estate loans made by AmericanTrust are generally appraised by
Board-approved independent appraisers. In the loan approval process,
AmericanTrust assesses the borrower's ability to repay the loan, the adequacy of
the proposed security, the employment stability of the borrower and the
credit-worthiness of the borrower.
The Bank requires evidence of marketable title and lien position or
appropriate title insurance (except on certain home equity loans) on all loans
secured by real property. The Bank also requires fire and extended coverage
casualty insurance in amounts at least equal to the lesser of the principal
amount of the loan or the value of improvements on the property, depending on
the type of loan. As required by federal regulations, the Bank also requires
flood insurance to protect the property securing its interest if such property
is located in a designated flood area.
Management reserves the right to change the amount or type of lending
in which it engages to adjust to market or other factors.
One- to Four-Family Residential Mortgage Lending. Residential loan
originations are generated by the Bank's marketing efforts, its present
customers, walk-in customers and referrals from real estate brokers. The Bank
has focused its lending efforts primarily on the origination of loans secured by
first mortgages on owner-occupied, single-family residences in its market area.
At June 30, 1997, the Bank's one- to four-family residential mortgage loans
totaled $25.5 million, or 50.2%, of the Bank's gross loan portfolio. In the
future, the Bank intends to utilize third-party originations as a source of one-
to four-family loan originations subject to compliance with all customary
underwriting procedures of the Bank. The loans purchased may include loans
secured by modular housing units that qualify as one- to four-family loans.
The Bank currently offers fixed-rate and adjustable-rate mortgage
loans. For the year ended June 30, 1997, the Bank originated $2.1 million of
adjustable-rate one-to four-family real estate loans. During the same period,
the Bank originated $6.3 million of fixed-rate one- to four-family real estate
loans. Substantially all of the Bank's one- to four-family residential mortgage
originations are secured by properties located in its market area.
The Bank has offered adjustable-rate mortgage loans at rates and on
terms determined in accordance with market and competitive factors. The Bank
currently originates adjustable-rate mortgage loans with terms of 15 to 30
years. The Bank currently offers one-year adjustable-rate mortgage loans with a
stated interest rate margin over the one-year Constant Maturity Treasury Index.
The Bank has utilized other indices in prior years, such as the Eleventh FHLB
District's Cost of Funds Index. The majority of these loans provided for a 1.0%
maximum annual cap and a life-time cap of 5.0% over the initial rate. Currently,
the Bank's one-year adjustable-rate mortgages generally provide for a 2.0%
annual cap and a lifetime cap of 6.0% over the initial rate.
7
<PAGE>
As a consequence of using caps, the interest rates on these loans may not be as
rate sensitive as is the Bank's cost of funds. Currently, all adjustable-rate
mortgage loans originated do not provide for a minimum interest rate.
From time to time, AmericanTrust originates adjustable-rate mortgages
which may have an initial interest rate that is lower than the sum of the
specified index plus the margin. Borrowers with adjustable-rate mortgage loans
are qualified at 2% over the initial rate. Adjustable-rate loans decrease the
risk to the Bank associated with changes in interest rates but involve other
risks, primarily because as interest rates rise, the payment by the borrower may
rise to the extent permitted by the terms of the loan, thereby increasing the
potential for default. At the same time, the market value of the underlying
property may be adversely affected by higher interest rates.
The Bank currently offers fixed-rate mortgage loans with maturities
from 15 to 30 years. The Bank also offers a balloon loan with a term of seven
years. Interest rates charged on these fixed-rate loans are priced on a regular
basis according to market conditions. See "- Originations, Purchases and Sales
of Loans and Mortgage-Backed Securities."
The Bank also originates loans with terms of 15 or 30 years pursuant to
programs sponsored by the Veteran's Administration ("VA") or the Federal Housing
Administration ("FHA"). Such loans generally carry a guarantee from the VA or
are insured by the FHA. These loans are typically sold in the secondary market
with servicing released. The Bank also offers loans for the Guaranteed Loan
Program with Rural Development (formerly Farmers Home Administration).
Currently, AmericanTrust will lend up to 95% of the lesser of the sales
price or appraised value of the security property on owner occupied one- to
four-family loans, provided that private mortgage insurance is obtained in an
amount sufficient to reduce the Bank's exposure to not more than 80% of the
appraised value or sales price, as applicable. The loan-to-value ratio on
non-owner occupied one- to four-family loans is generally 75% of the lesser of
the sales price or appraised value of the security property. Residential loans
do not include prepayment penalties, are non-assumable (other than
government-insured or guaranteed loans), and do not produce negative
amortization. Real estate loans originated by the Bank contain a "due on sale"
clause allowing the Bank to declare the unpaid principal balance due and payable
upon the sale of the security property.
The loans currently originated by the Bank are typically underwritten
and documented pursuant to the guidelines of the FHLMC. The Bank's decision to
hold or sell these loans is based on its asset liability management policy and
goals and the market conditions for mortgages at any period in time. Under
current policy, the Bank typically originates for sale all conforming fixed- and
adjustable-rate mortgage loans originated. The Bank currently retains the
servicing of the conventional loans it sells. See "- Originations, Purchases and
Sales of Loans and Mortgage-Backed Securities" for information regarding fees
received by the Bank in connection with loans serviced for others. At June 30,
1997, the Bank had $2.3 million of fixed-rate residential loans with remaining
terms of less than 10 years and $6.7 million of fixed-rate loans with remaining
terms of 10 years or more in its loan portfolio.
8
<PAGE>
Residential Construction Lending. The Bank makes construction
loans for the construction of residences (including modular homes). At June 30,
1997 the Bank's construction loan portfolio totaled $919,000 or 1.8% of its
gross loan portfolio. As of that date, all of these loans were secured by
property located within the Bank's market area.
Construction loans to individuals for their residences are structured
to be converted to permanent loans at the end of the construction phase, which
typically runs from four to six months. These construction loans have rates and
terms comparable to one- to four-family loans then offered by the Bank, except
that during the construction phase, the borrower pays interest only. The maximum
loan-to-value ratio of owner occupied single family construction loans is 95%.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans.
Construction loans are obtained primarily from walk-in customers. The
application process includes submission to the Bank of plans and costs of the
project to be constructed. These items are used as a basis to determine the
appraised value of the subject property. Loans are based on the lesser of
current appraised value or the cost of construction (land plus building).
The Bank's construction loan agreements generally provide that loan
proceeds are disbursed in increments as construction progresses. The Bank
reviews the progress of the construction of the dwelling and requires that the
dwelling be inspected by an independent appraiser before disbursements are made.
Consumer Lending. AmericanTrust currently offers a variety of secured
consumer loans, including mobile home and RV loans, home improvement and home
equity loans, automobile loans and loans secured by savings deposits. The Bank
also offers unsecured consumer loans. Except for mobile home and RV loans,
AmericanTrust currently originates substantially all of its consumer loans in
its market area. AmericanTrust originates consumer loans by extending credit
directly to the borrower. Mobile home and RV loans are originated on an indirect
basis through the acquisition of installment payment contracts from retailers
who have extended credit to their customers for the purchase of mobile homes or
RVs. At June 30, 1997, the Bank's consumer loans totaled $20.6 million, or 40.5%
of the Bank's gross loan portfolio.
The largest component of AmericanTrust's consumer loan portfolio
consists of mobile home and RV loans. At June 30, 1997, mobile home loans
totaled $4.6 million, or approximately 9.1% of the Bank's gross loan portfolio,
and RV loans totalled $13.2 million, or 26.0% of the Bank's gross loan
portfolio. In 1984, the Bank began offering mobile home loans in order to
provide affordable housing to individuals. AmericanTrust typically indirectly
originates loans secured by new and used mobile homes purchased by individuals
from dealers who meet AmericanTrust's qualifications. Pursuant to agreements
with two corporations specializing in financing and originating mobile home
loans, these companies solicit loan opportunities from dealers, receive and
process all credit applications, submit applications to AmericanTrust and assist
in the collection of delinquent accounts and resale of repossessed collateral.
When the completed loan application package is received by AmericanTrust, the
Bank independently underwrites the loan and determines whether to accept the
loan. At June 30, 1997, mobile home
9
<PAGE>
loans originated pursuant to these agreements amounted to substantially all
mobile home loans outstanding.
Mobile homes securing such loans are located primarily in Indiana.
Mobile home loans are typically made at a higher yield and for a shorter
maturity than one- to four-family residential mortgage loans. Most of the Bank's
mobile home loans have been originated with fixed rates of interest and are
generally made in amounts of up to a maximum of the lesser of 125% of the net
invoice or 90% of the appraised value or buyer's cost. The buyer's cost can
include such items as freight, itemized set-up charges, physical damage
insurance, sales tax and filing and recording fees. AmericanTrust is permitted
by regulation to make mobile home loans for terms of up to 20 years, although
most of the Bank's mobile home loans are for terms of 15 years or less. At June
30, 1997, mobile home loans totaling $42,000, or .08% of the Bank's gross loan
portfolio were 60 days or more delinquent.
In January 1994, the Bank began indirectly originating RV loans to
individuals who meet the Bank's underwriting standards, pursuant to agreements
with financing companies which are similar to the mobile home loan origination
agreements described above. At June 30, 1997, RV loans totaling $144,000 or .28%
were 60 days or more delinquent.
The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of the ability to meet existing obligations and payments on the
proposed loan. Although creditworthiness of the applicant is a primary
consideration, the underwriting process also includes a comparison of the value
of the security, if any, in relation to the proposed loan amount.
Management considers consumer lending to be an important component of
its asset/liability management strategy. Consumer loans, in particular mobile
home and RV loans, generally have intermediate terms to maturity as compared to
single family mortgage loans. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Asset/Liability Management" in
the Annual Report. As a result, AmericanTrust has increased its consumer lending
in recent periods.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, or are
secured by rapidly depreciable assets, such as automobiles or mobile homes. In
such cases, any repossessed collateral for a defaulted consumer loan may not
provide an adequate source of repayment of the outstanding loan balance as a
result of the greater likelihood of damage, loss or depreciation. Furthermore,
repossession of mobile homes and RVs can be difficult and time consuming as
compared to the repossessing other property. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Although the level of delinquencies in the Bank's consumer loan
portfolio has generally been low (approximately $170,000 or approximately .83%
of the Bank's consumer loan portfolio at June 30, 1997 was 90 days or more
delinquent), there can be no assurance that delinquencies will not increase in
10
<PAGE>
the future, particularly since many such credits, particularly loans secured by
RVs, are new and unseasoned. See "- Asset Quality - Non-Performing Assets."
Multi-Family and Commercial Real Estate Lending. AmericanTrust has
originated and purchased a limited amount of real estate loans secured by
multi-family and non-residential properties. Properties securing these loans
included office buildings, strip malls, apartment buildings, churches and
nursing homes. At June 30, 1997, $2.3 million, or 4.5% of the Bank's gross loan
portfolio, consisted of multi-family and commercial real estate loans.
Multi-family and commercial real estate loans typically involve large
loan balances to single borrowers or groups of related borrowers. The payment
experience on such loans is typically dependent on the successful operation of
the real estate project and as such may be subject to a greater extent than
residential loans to adverse conditions in the economy generally.
Appraisals on properties securing multi-family and commercial real
estate property loans originated by the Bank generally are performed by
independent fee appraisers at the time the loan is made. Appraisals on
multi-family and commercial real estate loans are generally reviewed by the
Bank's Board of Directors. In addition, the Bank's underwriting procedures
generally require verification of the borrower's credit history, income and
financial statements, banking relationships and income projections for the
property. Personal guarantees are often required for the Bank's multi-family and
commercial real estate loans.
Loans secured by commercial real estate and multi-family properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans. At June 30, 1997, none of the Bank's
loans secured by multi-family and commercial real estate were non-accruing. See
"- Asset Quality."
In the future, the Bank may continue to consider originating or
participating in multi-family and commercial real estate lending especially in
low- and moderate-income projects in the communities it serves. Such lending may
entail additional credit risk not present in other lending ventures.
Lease Contracts. In fiscal 1993, the Bank began purchasing commercial
leases covering business equipment located principally in the various states
located throughout the Midwest and along the East Coast. At June 30, 1997, the
book value of the Bank's lease contracts totaled $1,491,000, or 2.9% of the
Bank's gross loan portfolio. In general, the leases are full-payout finance
leases in which the lease payments effectively repay the lessor for the purchase
price of the equipment, plus an acceptable yield. The leases were purchased from
a commercial lease origination firm with expertise in originating and acquiring
such leases. The Bank purchased these leases because they were available at
relatively high yields at a time when investment alternatives were generating
lower yields and because such leases have relatively short terms, consistent
with the Bank's asset/liability management strategy. Although, like other
commercial business financings, commercial leases involve higher risk than
residential mortgage loans, management believes that the purchase of such leases
is consistent with the Bank's asset/liability strategy, in light of the
comparatively higher yields, and the additional credit recourse provided by the
11
<PAGE>
seller. The leases are currently on non-accrual status due to the bankruptcy of
Bennett Funding Group, Inc. ("BFGI"), the servicer of the leases. BFGI continues
to service the lease contracts under the leadership of the court-appointed
Trustee. See "-Asset Quality-Bennett Funding."
Originations, Purchases and Sales of Loans and Mortgage-Backed Securities
Loan originations are developed from continuing business with
depositors and borrowers, soliciting realtors, builders, walk-in customers and
third-party sources.
While the Bank originates both adjustable-rate and fixed-rate loans,
its ability to originate loans to a certain extent is dependent upon the
relative customer demand for loans in its market, which is affected by the
interest rate environment, among other factors. For the fiscal year ended June
30, 1997, the Bank originated $6.3 million in fixed-rate loans and $2.1 million
in adjustable rate loans, all of which were secured by one-to-four family real
estate.
The Bank currently holds in its portfolio certain non-conforming fixed-
and adjustable-rate loans that it originates. The conforming fixed- and
adjustable-rate loans originated by the Bank are generally sold in the secondary
market, primarily to the FHLMC with servicing retained. From time to time, in
order to reduce the interest rate risk associated with these loans, the Bank
obtains forward delivery commitments from investors on loans in process. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" in the Annual Report. FHA and VA
loans are sold with servicing released. During the fiscal year ended June 30,
1997, the Bank sold $5.3 million of one- to four-family loans in the secondary
market with servicing retained, and $1.0 million servicing released.
Typically, when loans are sold, AmericanTrust retains responsibility
for collecting and remitting loan payments, making certain insurance and tax
payments on behalf of borrowers and otherwise servicing the loans, and receives
a fee for performing this service. Sales of whole loans generate income (or
loss) at the time of sale, produce future servicing income and provide funds for
additional lending and other purposes. At June 30, 1997, AmericanTrust was
servicing mortgage loans for others in the amount of $29.0 million.
The contractual right to service mortgage loans that have been
originated and sold has an economic value that results from the future income
stream of the servicing fees, the availability of the cash balances associated
with escrow funds collected monthly for real estate taxes and insurance, the
availability of the cash from monthly principal and interest payments from the
collection date to the remittance date, and the ability of the servicer to
cross-sell other products and services. The actual value of a servicing
portfolio is dependent upon such factors as the age, maturity, and prepayment
rate of the loans in the portfolio, the average dollar balance of the loans, the
location of the collateral property, the average amount of escrow funds held,
the interest rates and delinquency experience on the loans, the types of loans
and other factors.
Gains or losses on the sale of mortgage loans are recorded at the time
of the cash sale in an amount reflecting the difference between the contractual
interest rate of the loans sold and the current market rate of interest.
The Bank receives a servicing fee from FHLMC on each loan sold.
12
<PAGE>
The Bank has from time to time purchased loans or interests in loans
secured predominantly by one- to four-family real estate from other lenders.
Purchased loans must comply with the Bank's underwriting standards. At June 30,
1997, the Bank had $1.5 million of lease contracts. See "- Lease Contracts." In
addition, the Bank has invested funds in mortgage-backed securities. During the
fiscal year ended June 30, 1997, the Bank neither purchased nor sold
mortgage-backed securities. See the Notes to Consolidated Financial Statements
in the Annual Report. See "- Investment Securities."
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
Year Ended June 30,
--------------------------------
1997 1996 1995
------- -------- -------
(In Thousands)
Originations:
- -------------
One- to four-family................. $ 8,397 $15,328 $11,523
Consumer............................ 8,927 7,358 9,020
------- ------- -------
Total loans originated....... 17,324 22,686 20,543
------- ------- -------
Purchases:
- ----------
Lease contracts..................... --- 1,147 500
Multi-family and commercial......... --- 490 ---
Mortgage-backed securities.......... --- --- 3,000
------- ------- -------
Total purchased.............. --- 1,637 3,500
------- ------- -------
Sales:
- ------
One- to four-family................. 6,319 12,948 6,836
Mortgage-backed securities.......... --- --- 3,000
------- ------- -------
Total sales.................. 6,319 12,948 9,836
------- ------- -------
Principal repayments:
- ---------------------
Loans............................... 11,361 9,608 8,971
Mortgage-backed securities.......... 392 718 692
------- ------- -------
Total principal payments..... 11,753 10,326 9,663
------- ------- -------
Net increase (decrease)...... $ (748) $ 1,049 $ 4,544
======= ======= =======
Asset Quality
General. When a borrower fails to make a required payment on a loan,
the Bank attempts to cause the delinquency to be cured by contacting the
borrower. In the case of loans secured by real estate, a reminder notice is sent
to the borrower on all loans over five days delinquent. When a loan becomes 15
days delinquent, late charges are assessed and a notice of late charges is sent
to the borrower. An additional late notice is sent to the borrower if the
delinquency is not cured within 30 days of the required payment date. If the
loan becomes 60 days delinquent and the borrower has not attempted to contact
the Bank to arrange an acceptable plan to bring the loan current, the borrower
13
<PAGE>
is contacted by telephone. If the borrower contacts the Bank with a reasonable
explanation for the delinquency, the Bank generally will attempt to reach
workable accommodations with the borrower to bring the loan current. All
proposed workout arrangements are evaluated on a case by case basis, based on
the best judgement of the Bank's management, considering, among other things,
the borrower's past credit history, current financial status, cooperativeness,
future prospects and the reason for the delinquency. If the loan is in excess of
90 days delinquent, the loan will be referred to the Bank's legal counsel for
collection. In all cases, if the Bank believes that its collateral is at risk
and added delay would place the collectibility of the balance of the loan in
further question, management may refer loans for collection even sooner than the
90 days described above.
When a loan becomes delinquent 90 days or more, the Bank will place the
loan on non-accrual status and previously accrued interest income on the loan is
charged against current income. The loan will remain on a non-accrual status as
long as the loan is 90 days delinquent.
Delinquent consumer loans are handled in a similar manner as to those
described above; however, shorter time frames for each step apply due to the
type of collateral generally associated with such types of loans. See " -
Lending Activities - Consumer Lending." The Bank's procedures for repossession
and sale of consumer collateral are subject to various requirements under
Indiana consumer protection laws.
The following table sets forth the Bank's loan delinquencies by type,
by amount and by percentage of type at June 30, 1997. The amounts presented in
the table below represent the total remaining principal balances of the loans,
rather than the actual payment amounts which are overdue.
<TABLE>
<CAPTION>
Loans Delinquent For:
----------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- ---------------------------- -----------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------- ------- -------- -------- ------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family......... 8 $287 .56% 2 $ 66 .13% 10 $ 353 .69%
Consumer.................... 11 103 .20 14 170 .34 25 273 .54
Lease contracts............. --- --- --- 305 1,491 2.93 305 1,491 2.93
--- ---- --- ---- ------ ---- --- ------ ----
Total.................. 19 $390 .76% 321 $1,727 3.40% 340 $2,117 4.16%
=== ==== === ==== ====== ==== === ====== ====
</TABLE>
Real estate acquired by AmericanTrust as a result of foreclosure or by
deed in lieu of foreclosure is classified as real estate owned until it is sold.
When property is acquired, it is recorded at the lower of cost or estimated fair
value at the date of acquisition, and any write-down resulting therefrom is
charged to the allowance for losses on loans. After acquisition, all costs
incurred in maintaining the property are expensed. However, costs relating to
the development and improvement of the property are capitalized to the extent of
fair value.
Bennett Funding Group, Inc. The Company has a business relationship
with Bennett Funding Group, Inc. ("BFGI") which recently filed for Chapter 11
bankruptcy protection on March 29, 1996. From 1992 to 1995, the Company
14
<PAGE>
purchased commercial lease contracts covering business equipment from BFGI, for
which BFGI acts as the servicer. At June 30, 1997, the book value of the
Company's lease contracts totaled $817,000. In addition, the Company and
$674,000 in Short Term Dealer Contracts with Bennett Leasing Corporation ("BLC")
which was later included in the bankruptcy proceedings. Newspaper reports have
indicated that BFGI may have utilized fictitious leases in some of its business
activities. The SEC has filed a criminal and civil suit against an officer of
BFGI which alleges various fraudulent actions including the sale of the same
leases to two or more buyers. Reserves of $67,000 have been recorded for
probable losses as a result of lease prepayments. In addition, reserves of
$149,000 have been allocated to the leases for potential losses.
The Company is continuing to evaluate the allegations against BFGI and
BLC and the effect that the bankruptcy filing will have on its leases and its
security. Until the evaluation is complete, management is unable to predict with
any certainty the effects of the bankruptcy on the Company.
Non-Performing Assets. The following table sets forth the amounts and
categories of non-performing assets. Interest income on loans is accrued over
the term of the loans based upon the principal outstanding except where serious
doubt exists as to the collectibility of a loan, in which case the accrual of
interest is discontinued. For all years presented, the Bank's troubled debt
restructurings (which involve forgiving a portion of interest or principal on
any loans or making loans at a rate or with a maturity less than that customary
in the Bank's market) are included in the table below. Foreclosed assets include
assets acquired in full or partial settlement of loans. The amounts shown do not
reflect reserves set up against such assets. See "- Allowance for Losses on
Loans."
June 30,
---------------------------------------
1997 1996 1995
------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family................. $ 66 $ 66 $ ---
Commercial real estate.............. --- --- 44
Consumer............................ 239 23 46
Leases.............................. 1,491 1,491 ---
------ ------ ----
Total............................ 1,796 1,580 90
Restructured loans:
Commercial real estate.............. 644 809 826
Foreclosed assets:
One- to four-family................. --- 43 ---
Consumer............................ 186 --- ---
------ ------ ----
Total non-performing assets........... $2,626 $2,432 $916
====== ====== ====
Total as a percentage of total assets. 3.64% 3.38% 1.35%
====== ====== ====
For the fiscal year ended June 30, 1997, gross interest income which
would have been recorded had the non-accruing and restructured loans been
current in accordance with their
15
<PAGE>
original terms amounted to $224,000. Interest income received or accrued
included $55,000 for the year ended June 30, 1997 on the non-accruing loans and
restructured loans.
At June 30, 1997, the Bank's non-accruing loans consisted of two loans
secured by residential real estate totaling $66,000 and 19 consumer loans
totaling $239,000. As discussed in more detail below, the Bank's interest in
restructured loans at June 30, 1997 totaled $644,000. Such loans are secured by
apartment complexes located in Indiana which were restructured in fiscal 1991
and 1992. At June 30, 1997, borrowers on each of these loans, of which the
Bank's interest had aggregate balances of $363,000 and $281,000, respectively,
had made all required payments in accordance with the terms of the restructured
loan agreements. A description of these restructured loans is set forth below.
In 1983, the Bank purchased a 50% interest in a $711,000 loan secured
by an apartment complex located in Rochester, Indiana. In fiscal 1992, due to
chronic delinquencies on the part of the borrower, the Bank and the lead lender
agreed to restructure the loan to extend the initial term until 1997. Subsequent
to the restructuring, the borrowers continued to make payments approximately 30
days late. The loan was 30 days delinquent at June 30, 1997. The Bank is
accruing interest on this loan at the restructured interest rate. In addition,
the borrowers have not established any reserve for repairs on the property
should they become necessary. At June 30, 1997, the Bank's interest in this loan
totalled $363,000.
In 1983, the Bank originated a $724,000 loan secured by an apartment
complex located in Logansport, Indiana of which it retained 40% interest. In
fiscal 1992, due to chronic delinquencies on the part of the borrowers, the Bank
agreed to restructure the loan to extend the repayment term until 199 . At June
30, 1997, the Bank's interest in this loan totalled $281,000. On the same date,
the borrowers had made all required payments in accordance with the terms of the
modified loan agreement. The Bank is accruing interest on this loan at the
restructured interest rate.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above as of June 30, 1997, there were no other loans with
respect to which known information about the possible credit problems of the
borrowers or the cash flows of the security properties have caused management to
have concerns as to the ability of the borrowers to comply with present loan
repayment terms and which may result in the future inclusion of items in the
non-performing asset categories.
Classified Assets. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities, considered by the
OTS to be of lesser quality, as "substandard," "doubtful" or "loss." An asset is
considered "substandard" if it is inadequately protected by the current net
worth and paying capacity of the obligor or the collateral pledged, if any.
"Substandard" assets include those characterized by the "distinct possibility"
that the insured institution will sustain "some loss" if the deficiencies are
not corrected. Assets classified as "doubtful" have all of the weaknesses
inherent in those classified "substandard" with the added characteristic that
the weaknesses present make "collection or liquidation in full" on the basis of
currently existing facts, conditions and values, "highly questionable and
improbable." Assets classified as "loss" are those considered "uncollectible"
16
<PAGE>
and of such little value that their continuance as assets without the
establishment of a specific loss reserve is not warranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for losses in an
amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge-off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of its periodic reports with the OTS and
in accordance with its classification of assets policy, the Bank regularly
reviews problem loans and real estate acquired through foreclosure to determine
whether such assets require classification in accordance with applicable
regulations. On the basis of management's review of its assets, at June 30,
1997, the Bank had classified a total of $2.8 million of its assets as
substandard, $23,000 as doubtful, and $114,000 as loss. At June 30, 1997, total
classified assets comprised $2.9 million, or 38.7% of the Bank's capital, or
4.0% of the Bank's total assets.
Allowance for Losses on Loans. The allowance for losses on loans is
established through a provision for loan losses based on management's evaluation
of the risk inherent in its loan portfolio and changes in the nature and volume
of its loan activity, including those loans which are being specifically
monitored by management. Such evaluation, which includes a review of loans for
which full collectibility may not be reasonably assured, considers among other
matters, the loan classifications discussed above, the estimated fair value of
the underlying collateral, economic conditions, historical loan loss experience,
the amount of loans outstanding and other factors that warrant recognition in
providing for an adequate loan loss allowance.
Real estate properties acquired through foreclosure are recorded at the
lower of cost or fair value minus estimated cost to sell. If fair value at the
date of foreclosure is lower than the balance of the related loan, the
difference will be charged-off to the allowance for losses on loans at the time
of transfer. Valuations are periodically updated by management and if the value
declines, a specific provision for losses on such property is established by a
charge to operations.
Although management believes that it uses the information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the Bank's allowance for losses on loans will
be the result of periodic loan, property and collateral reviews and thus cannot
be predicted in advance. In addition, federal regulatory agencies, as an
integral part of the examination process, periodically review the Bank's
allowance for losses on loans. Such agencies may require the Bank to increase
the allowance based upon their judgment of the information available to them at
the time of their examination. At June 30, 1997, the Bank had a total allowance
17
<PAGE>
for losses on loans of $523,000, representing 21.4% of total non-performing
loans and 1.0% of the Bank's loans, net. See Notes to Consolidated Financial
Statements in the Annual Report.
The following table sets forth an analysis of the Bank's allowance for
losses on loans.
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------
1997 1996 1995
-------- -------- ---------
(In Thousands)
<S> <C> <C> <C>
Balance at beginning of period.................... $494 $400 $334
---- ---- ----
Charge-offs:
One- to four-family............................ --- --- 20
Consumer....................................... 4 31 2
---- ----- ----
Net charge-offs................................... 4 31 22
Provision for losses on loans .................... 33 125 88
---- ---- ----
Balance at end of period.......................... $523 $494 $400
==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period...... .01% .06% .05%
=== === ===
Ratio of net charge-offs during the period to
average non-performing assets.................... .40% 2.28% 1.85%
=== ==== ====
</TABLE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1997 1996 1995
------------------- -------------------- --------------------
Percent Percent Percent
of Loans of Loans of Loans
in Each in Each in Each
Amount of Category Amount of Category Amount of Category
Loan Loss to Total Loan Loss to Total Loan Loss to Total
Allowance Loans Allowance Loans Allowance Loans
--------- -------- --------- -------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family..................... $ 31 50.24% $ 35 57.58% $ 39 62.65%
Multi-family and commercial real estate. 63 4.54 77 4.75 139 5.46
Construction............................ --- 1.81 --- 1.35 --- 1.31
Consumer................................ 155 40.48 131 33.41 110 28.81
Lease contracts......................... 216 2.93 171 2.91 --- 1.77
Unallocated............................. 58 --- 80 --- 112 ---
---- ------ ---- ------ ---- -----
Total.............................. $523 100.00% $494 100.00% $400 100.0%
==== ====== ==== ====== ==== =====
</TABLE>
Investment Activities
General. AmericanTrust must maintain minimum levels of investments that
qualify as liquid assets under OTS regulations. Liquidity may increase or
decrease depending upon the availability of funds and comparative yields on
investments in relation to the return on loans. Historically, the Bank has
generally maintained liquid assets at levels above the minimum requirements
imposed by the OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. Cash flow projections are regularly reviewed and
18
<PAGE>
updated to assure that adequate liquidity is maintained. At June 30, 1997, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 11.3%. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations - Liquidity and
Capital Resources" in the Annual Report and "Regulation - Liquidity."
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
Generally, the investment policy of the Company and Bank, as
established by the Board of Directors, is to invest funds among various
categories of investments and maturities based upon liquidity needs,
asset/liability management policies, investment quality, marketability and
performance objectives. Subject to the policies established by the Board of
Directors, President Borst and Treasurer and Chief Financial Officer Cornish
manage and oversee the investments and objectives for the investment portfolio.
Such individuals are authorized to purchase, sell and trade securities subject
to the guidelines set forth in the investment policy. All securities
transactions are disclosed to the Board of Directors at their next regular
meeting.
Securities and Other Interest-Earning Assets. At June 30, 1997, the
Company's interest-bearing deposits with other financial institutions totaled
$1.1 million, or 1.5% of total assets, and its securities, consisting of federal
agency obligations, mutual funds which invest in adjustable-rate mortgages and
asset-backed securities, totaled $14.2 million, or 19.7% of total assets. In
addition, as of such date, the Company had a $1,050,000 investment in FHLB
stock, satisfying its requirement for membership in the FHLB of Indianapolis. It
is the Company's general policy to purchase securities which are U.S. Government
securities or federal agency obligations or other issues that are rated
investment grade. At June 30, 1997, the average term to maturity or repricing of
the securities portfolio (excluding FHLB stock) was 12.3 years.
The Company's securities, except for mortgage-backed securities,
portfolio at June 30, 1997 contained neither tax-exempt securities nor
securities of any issuer with an aggregate book value in excess of 10% of the
Company's stockholders' equity, excluding those issued by the United States
Government or its agencies.
The Company has investment securities of $183,000 that are backed by
auto receivables in four Auto Receivables Trusts. The auto receivables were
purchased between 1992 and 1994. In December 1995, Duff & Phelps Rating Co.
("Duff & Phelps") placed the Trusts on "rating watch-down" due to high vehicle
repossessions and issues concerning the charge-off of certain loan balances
against available cash reserves. On February 14, 1996 Duff & Phelps announced
the downgrade to BBB-. At June 30, 1997 all of the auto receivable pools owned
by the Company were paying as agreed.
19
<PAGE>
OTS guidelines regarding investment portfolio policy and accounting
require insured institutions to categorize securities and certain other assets
as held for "investment," "sale," or "trading." In addition, effective June 30,
1993, the Company adopted SFAS 115 which states that securities available for
sale are accounted for at fair value and securities which management has the
intent and the Company has the ability to hold to maturity are accounted for on
an amortized cost basis. The investment policy of the Company has strategies for
each type of security. See the Notes to the Consolidated Financial Statements in
the Annual Report.
20
<PAGE>
The following table sets forth the composition of the Company's
securities portfolio and other interest earning assets at the dates indicated.
<TABLE>
<CAPTION>
June 30,
--------------------------------------------------------------------------------
1997 1996 1995
-------------------------- ------------------------ ------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
----------- ------- ---------- -------- ---------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Securities
Available for sale:
Federal agency obligations.................... $ 8,309 54.4 % $8,117 52.1% $3,004 24.3%
Mortgage-backed securities.................... 2,724 17.9 2,737 17.6 511 4.1
Mutual funds.................................. 1,116 7.3 1,065 6.8 120 .9
------- ----- --------- ------- ------ -----
Subtotal.................................. 12,149 79.6 11,919 76.5 3,635 29.3
------- ----- -------- ------ ------ -----
Held to maturity:
Federal agency obligations.................... 500 3.3 500 3.2 1,000 8.1
Mortgage-backed securities.................... 1,384 9.0 1,729 11.1 4,777 38.6
Other asset-backed securities................. 183 1.2 384 2.5 2,164 17.5
------- ------ -------- ------ ------ -----
Subtotal.................................. 2,067 13.5 2,613 16.8 7,941 64.2
------- ------ -------- ------ ------ -----
FHLB stock......................................... 1,050 6.9 1,050 6.7 800 6.5
------- ----- -------- ------ ------ -----
Total securities and FHLB stock............... $15,266 100.00% $15,582 100.00% $12,376 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of securities and mortgage-
backed securities (excluding FHLB stock)....... 12.3 years 11.8 years 7.5 years
Other interest-earning assets
Interest-bearing deposits with banks............. $1,093 100.00% $618 100.00% $2,097 100.00%
====== ====== ==== ====== ====== ======
</TABLE>
21
<PAGE>
The composition and maturities of the securities portfolio, excluding
FHLB stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1997
-------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over 10
1 Year Years Years Years Total Securities
---------- ----------- ------------ ---------- --------------------------
Amortized Amortized Amortized Amortized Amortized
Cost Cost Cost Cost Cost Market Value
---------- ----------- ------------ ---------- ---------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Federal agency obligations.... $ --- $3,000 $500 $5,000 $8,500 $8,309
Mortgage-backed securities.... --- --- --- 2,792 2,792 2,724
Asset management fund......... 1,117 --- --- --- 1,117 1,116
------ ------ ---- ------ ------- -------
1,117 3,000 500 7,792 12,409 12,149
------ ------ ---- ------ ------- -------
Held to maturity:
Federal agency obligations... 500 --- --- --- 500 493
Mortgage-backed securities... --- --- --- 1,384 1,384 1,350
Asset-backed securities...... --- 183 --- --- 183 150
------ ------ ---- ------ ------- -------
500 183 --- 1,384 2,067 1,993
------ ------ ---- ------ ------- -------
Total securities.................. $1,617 $3,183 $500 $9,176 $14,476 $14,142
====== ====== ==== ====== ======= =======
Weighted average yield............ 5.4% 6.3% 6.6% 7.1% 6.7%
</TABLE>
Mortgage-Backed Securities. The Bank has a portfolio of mortgage-backed
securities and has utilized such investments to complement its mortgage lending
activities. Mortgage-backed securities can also serve as collateral for
borrowings and as a source of liquidity. At June 30, 1997, the mortgage-backed
securities totaled $4.2 million, or 5.8% of total assets. For information
regarding the carrying and market values of the Bank's mortgage-backed
securities portfolio, see the Notes to Consolidated Financial Statements in the
Annual Report.
Historically, most of the Bank's mortgage-backed securities were
long-term, fixed-rate securities. In more recent years, the Bank has begun to
purchase other types of mortgage-backed securities consistent with its
asset/liability management objectives. In this regard, the Bank emphasizes the
purchase of adjustable-rate mortgage-backed securities for asset/liability
management purposes and in order to supplement the Bank's origination of
adjustable-rate mortgage loans. At June 30, 1997, $354,000, or 8.5% of the
Bank's mortgage-backed securities, carried adjustable rates of interest.
22
<PAGE>
The following table sets forth the composition of the Bank's
mortgage-backed securities portfolio at the dates indicated.
<TABLE>
<CAPTION>
June 30,
------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
---------- ---------- --------- ------ -------- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Available for sale:
Government National Mortgage Association...... $2,792 66.9% $2,737 61.3% $ 511 9.7%
------ ---- ------ ---- ------ ---
Held to maturity:
Government National Mortgage Association...... --- --- --- --- 2,442 46.2
Federal National Mortgage Association......... 354 8.5 369 8.3 587 11.1
ASMC Acceptance Corporation................... 256 6.1 352 7.9 471 8.9
Statewide Acceptance Corporation.............. 774 18.5 1,008 22.5 1,277 24.1
------- ----- ------ ----- ------ -----
Subtotal................................. 1,384 33.1 1,729 38.7 4,777 90.3
------ ----- ------ ------ ------ -----
Total mortgage-backed securities.............. $4,176 100.00% $4,466 100.00% $5,288 100.00%
====== ====== ====== ====== ====== ======
</TABLE>
23
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at June 30, 1997.
Over 10
Years
-------
Available for sale:
Government National Mortgage Association............... $2,792
------
Held to maturity:
Federal National Mortgage Association.................. 354
ASMC Acceptance Corporation............................ 256
Statewide Acceptance Corporation....................... 774
------
Subtotal........................................ 1,384
------
Total................................................. $4,176
======
At June 30, 1997, the Bank's portfolio of mortgage-backed securities
did not contain securities of any issuer with an aggregate book value in excess
of 10% of the Company's stockholders' equity, excluding those issued by the
United States Government or its agencies, except for securities issued by
Statewide Acceptance Corp. which had an aggregate carrying value of $774,000 and
an aggregate market value of $763,000. The Statewide Acceptance Corporation
securities are securities backed by FHA Title I home improvement loans which are
generally insured by FHA up to 90% of the loan amount.
Under the OTS risk-based capital requirements, Government National
Mortgage Association ("GNMA") mortgage-backed securities have a zero percent
risk weighting and Federal National Mortgage Association ("FNMA"), FHLMC and
"AA" or higher rated mortgage-backed securities have a 20% risk weighting, in
contrast to the 50% risk weighting carried by one- to four-family performing
residential mortgage loans. At June 30, 1997, all of the Bank's mortgage-backed
securities are backed by federal agencies except for mortgage-backed securities
totaling $1.0 million.
In addition, from time to time, the Bank has purchased collateralized
mortgage obligations ("CMOs") and real estate mortgage investment conduits
("REMICs"). CMOs and REMICs are securities derived by reallocating the cash
flows from mortgage-backed securities or pools of mortgage loans in order to
create multiple classes or tranches of securities with coupon rates and average
lives that differ from the underlying collateral as a whole. The Bank invests in
these securities as an alternative to mortgage loans or mortgage-backed
securities generally to satisfy the short- to intermediate-term portion of its
asset/liability management strategy. At June 30, 1997, the Bank had no REMICs
and CMOs.
Sources of Funds
General. The Bank's primary sources of funds are deposits, payment of
principal and interest on loans, interest earned on securities and
mortgage-backed securities, interest earned on interest-bearing deposits with
other banks, FHLB advances, and other funds provided from operations, including
asset sales.
24
<PAGE>
FHLB advances are used to support lending activities and to assist in
the Bank's asset/liability management strategy. Typically, the Bank does not use
other forms of borrowings. At June 30, 1997, the Bank had total FHLB advances of
$10.9 million. See "- Borrowings" and the Notes to Consolidated Financial
Statements in the Annual Report.
Deposits. AmericanTrust offers a variety of deposit accounts having a
wide range of interest rates and terms. The Bank's deposits consist of passbook,
savings, NOW, checking, money market deposit and certificate accounts. The
certificate accounts currently range in terms from 91 days to six years.
The Bank relies primarily on advertising (including television, radio
and newspaper), competitive pricing policies and customer service to attract and
retain these deposits. Currently, AmericanTrust solicits deposits from its
market area only, does not use brokers to obtain deposits and currently, does
not engage in any type of premium, gift or promotional programs beyond the
advertising vehicles mentioned above. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition.
The Bank also serves as a depository for public funds for various
municipalities and related entities. At June 30, 1997, the amount of public
funds on deposit with the Bank was $11.2 million. These accounts are subject to
volatility depending on governmental funding needs and the Bank's desire to
attract such funds.
The Bank has become more susceptible to short-term fluctuations in
deposit flows as customers have become more interest rate conscious. The Bank
endeavors to manage the pricing of its deposits in keeping with its
asset/liability management and profitability objectives. The ability of the Bank
to attract and maintain savings accounts and certificates of deposit, and the
rates paid on these deposits, has been and will continue to be significantly
affected by market conditions.
The following table sets forth the savings flows at the Bank during the
periods indicated.
Year Ended June 30,
-------------------------------------
1997 1996 1995
--------- ---------- --------
(In Thousands)
Opening balance.................. $44,562 $50,514 $48,349
Deposits (withdrawals), net...... 6,704 (3,120) 151
Deposits sold.................... --- (5,146) ---
Interest credited................ 2,257 2,314 2,014
-------- ------- -------
Ending balance................... 53,523 44,562 50,514
-------- ------ -------
Net increase (decrease).......... $ 8,961 ($5,952) $ 2,165
======== ======== =======
Percent increase (decrease)...... 20.1% (11.8)% 4.48%
===== ===== ====
25
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------ ------------------------ -----------------------
Weighted
Percent Average Percent Percent
Amount of Total Rate Amount of Total Amount of Total
---------- --------- --------- --------- --------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
- ----------------------------------
NOW accounts(1)......................... $ 7,300 13.6% 2.3% $ 6,590 14.79% $ 7,386 14.62%
Statement savings....................... 1,871 3.5 3.3 1,986 4.45 2,270 4.49
Regular passbook........................ 3,917 7.3 3.3 3,775 8.47 3,991 7.90
90-day passbook accounts................ 1,104 2.1 3.5 1,251 2.81 1,884 3.73
Money Market Accounts................... 4,700 8.8 3.8 4,785 10.74 5,671 11.23
------- ----- ------- ----- ----- ------
Total Non-Certificates.................. 18,892 35.3 18,387 41.26 21,202 41.97
------- ----- ------- ----- ----- ------
Certificates:
- -------------
2.50 - 3.49%.......................... 54 .1 58 .13 423 .84
3.50 - 4.49%.......................... 314 .6 905 2.03 2,622 5.19
4.50 - 5.49%.......................... 12,176 22.7 8,689 19.50 4,538 8.98
5.50 - 6.49%.......................... 20,216 37.8 13,937 31.28 15,068 29.83
6.50 - 7.49%.......................... 1,671 3.1 2,163 4.85 5,392 10.68
7.50 - 8.49%.......................... 200 .4 423 .95 1,269 2.51
Total Certificates...................... 34,631 64.7 5.6 26,175 58.74 29,312 58.03
-------- ----- ------- ------ ------ ------
Total Deposits.......................... $53,523 100.00% 4.7% $44,562 100.00% $50,514 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- ----------
(1) Includes business checking accounts.
26
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of June 30, 1997.
<TABLE>
<CAPTION>
3.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
-------- -------- -------- ------- --------- -----------
Certificate accounts maturing in
quarter ending
- ---------------------------------
<S> <C> <C> <C> <C> <C> <C>
September 30, 1997............... $ 55 $10,201 $353 $--- $10,609 30.6%
December 31, 1997................ 12 6,936 760 --- 7,708 22.3
March 31, 1998................... 38 1,646 479 --- 2,163 6.2
June 30, 1998.................... 8 3,726 631 --- 4,365 12.6
September 30, 1998............... --- 1,727 197 --- 1,924 5.6
December 31, 1998................ --- 922 81 --- 1,003 2.9
March 31, 1999................... --- 429 276 --- 705 2.0
June 30, 1999.................... --- 185 642 --- 827 2.4
September 30, 1999............... --- 355 291 --- 646 1.9
December 31, 1999................ --- 207 310 --- 517 1.5
March 31, 2000................... --- 330 238 200 768 2.2
June 30, 2000.................... --- 166 257 --- 423 1.2
Thereafter....................... --- 634 2,339 --- 2,973 8.6
---- ------- ------ ---- ------- ------
Total......................... $113 $27,464 $6,854 $200 $34,631 100.00%
==== ======= ====== ==== ======= ======
Percent of total.............. .3% 79.3% 19.8% .6%
== ==== ==== ==
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of June 30, 1997.
<TABLE>
<CAPTION>
Maturity
-------------------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 Months Total
-------- -------- -------- --------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $4,105 $2,708 $6,426 $9,486 $22,725
Certificates of deposit of $100,000 or more...... 304 --- 102 300 706
Public funds (1)................................. 6,200 5,000 --- --- 11,200
------- ------- ------ ------ -------
Total certificates of deposit.................... $10,609 $ 7,708 $6,528 $9,786 $34,631
======= ======= ====== ====== =======
</TABLE>
_________________________
(1) Deposits from governmental and other public entities.
Borrowings. Although deposits are the Bank's primary source of funds,
the Bank's policy has been to utilize borrowings to support lending activities
and to assist the Bank's asset/liability management strategy when they are a
less costly source of funds, can be invested at a positive interest rate spread
or when the Bank desires additional capacity to fund loan demand.
AmericanTrust's borrowings historically have consisted of advances from
the FHLB of Indianapolis. Such advances may be made pursuant to several
different credit programs, each of which has its own interest rate and range of
maturities. Federal law limits an institution's borrowings from the FHLB to 20
times the amount paid for capital stock in the FHLB, subject to regulatory
collateral requirements. At June 30, 1997, the Bank had $1,050,000 of FHLB of
27
<PAGE>
Indianapolis stock. The Bank has the ability to purchase additional capital
stock from the FHLB. As a policy matter, however, the FHLB of Indianapolis
typically limits the amount of borrowings from the FHLB to 50% of adjusted
assets (total assets less borrowings). For additional information regarding the
term to maturity and average rate paid on FHLB advances, see the Notes to
Consolidated Financial Statements in the Annual Report.
The following table sets forth the maximum month end balance and
average balance of FHLB advances and other borrowings for the periods indicated.
Year Ended June 30,
----------------------------------
1997 1996 1995
-------- -------- -------
(Dollars in Thousands)
Maximum Balance:
- ----------------
FHLB advances................ $19,015 $20,450 $16,000
Average Balance:
- ----------------
FHLB advances................ $14,618 $12,771 $12,542
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
June 30,
-------------------------------
1997 1996 1995
---- ---- ----
(Dollars in Thousands)
FHLB advances...................................... $10,902 $19,5 $9,500
Weighted average interest rate of FHLB advances.... 6.13% 5.85% 6.98%
Service Corporation Activities
As a federally chartered savings bank, AmericanTrust is permitted by
OTS regulations to invest up to 2% of its assets, or approximately $1.4 million
at June 30, 1997, in the stock of, or loans to, service corporation
subsidiaries. As of such date, the net book value of AmericanTrust's investment
in its service corporation, Indiana Financial Service Corporation ("IFSCO") was
approximately $474,000. AmericanTrust may invest an additional 1% of its assets
in service corporations where such additional funds are used for inner-city or
community development purposes and up to 50% of its total capital in conforming
loans to service corporations in which it owns more than 10% of the capital
stock. In addition to investments in service corporations, federal associations
are permitted to invest an unlimited amount in operating subsidiaries engaged
solely in activities in which a federal association may engage.
AmericanTrust's service corporation, IFSCO, is an Indiana corporation
located in Peru, Indiana. IFSCO was organized by the Bank in 1972 and provides
mortgage banking, annuity sales, credit life and other insurance services to
customers in the Bank's primary market area. In December, 1995, IFSCO purchased
the assets of U.S. Title, Inc. Following the acquisition, IFSCO, doing business
as U.S. Title, has continued to provide the title insurance services offered by
28
<PAGE>
the former U.S. Title, Inc. For the fiscal year ended June 30, 1997, IFSCO had a
net loss of approximately $42,000.
Competition
AmericanTrust faces strong competition, both in originating real estate
loans and in attracting deposits. Competition in originating real estate loans
comes primarily from commercial banks, savings institutions, mortgage bankers
and credit unions located in the Bank's market area. Commercial banks, savings
institutions and credit unions provide vigorous competition in consumer lending.
The Bank competes for real estate and other loans principally on the basis of
the quality of services it provides to borrowers, the interest rates and loan
fees it charges, and the types of loans it originates. See "- Lending
Activities."
The Bank attracts all of its deposits through its retail banking
offices, primarily from the communities in which those retail banking offices
are located. Therefore, competition for those deposits is principally from
commercial banks, savings banks, brokerage firms and credit unions located in
these communities. The Bank competes for these deposits by offering a variety of
account alternatives at competitive rates and by providing convenient business
hours, branch locations and interbranch deposit and withdrawal privileges.
The Bank primarily serves Howard and Miami Counties, Indiana. There are
four commercial banks, one savings institution, other than AmericanTrust, and
three credit unions which compete for deposits and loans in Miami County. The
Bank estimates that its share of the savings market in Miami County is
approximately seven percent and its share of the residential mortgage market is
approximately 15%. The Bank competes with seven commercial banks, four savings
institutions and two credit unions in Howard County. The Bank's estimated market
share of deposits and residential mortgages in this county is less than one
percent.
Employees
At June 30, 1997, the Bank had a total of 28 full-time and 5 part-time
employees. The Bank's employees are not represented by any collective bargaining
group. Management considers its employee relations to be good.
Regulation
General. AmericanTrust is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Indianapolis and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System (the "Federal Reserve
Board"). As the savings and loan holding company of the Bank, the Company also
is subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
29
<PAGE>
associations. The Bank is a member of the SAIF and the deposits of the Bank are
insured by the SAIF of the FDIC. As a result, the FDIC has certain regulatory
and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, the Bank is required to file periodic reports with the OTS and is
subject to periodic examinations by the OTS and the FDIC. The last regular OTS
and FDIC examinations of the Bank were as of May 19, 1997 and March 8, 1993,
respectively. Under agency scheduling guidelines, it is likely that another
examination will be initiated in the near future. When these examinations are
conducted by the OTS and the FDIC, the examiners may require the Bank to provide
for higher general or specific loan loss reserves. All savings associations are
subject to a semi-annual assessment, based upon the savings association's total
assets, to fund the operations of the OTS. The Bank's OTS assessment for the
fiscal year ended June 30, 1997, was approximately $25,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws, and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
June 30, 1997, the Bank's lending limit under this restriction was $1.1 million.
The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, internal controls and audit systems, interest
rate risk exposure and compensation and other employee benefits. Any institution
which fails to comply with these standards must submit a compliance plan. A
failure to submit a plan or to comply with an approved plan will subject the
30
<PAGE>
institution to further enforcement action. The OTS and the other federal banking
agencies have also proposed additional guidelines on asset quality and earnings
standards. No assurance can be given as to whether or in what form the proposed
regulations will be adopted.
Insurance of Accounts and Regulation by the FDIC. AmericanTrust is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the United States Government. As insurer, the FDIC imposes deposit
insurance premiums and is authorized to conduct examinations of and to require
reporting by FDIC-insured institutions. It also may prohibit any FDIC-insured
institution from engaging in any activity the FDIC determines by regulation or
order to pose a serious risk to the FDIC. The FDIC also has the authority to
initiate enforcement actions against savings associations, after giving the OTS
an opportunity to take such action, and may terminate the deposit insurance if
it determines that the institution has engaged in unsafe or unsound practices or
is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, ranging from .23% to .31% of
deposits, based upon their level of capital and supervisory evaluation. Under
the system, institutions classified as well capitalized (i.e., a core capital
ratio of at least 5%, a ratio of Tier 1 or core capital to risk-weighted assets
("Tier 1 risk-based capital") of at least 6% and a risk-based capital ratio of
at least 10%) and considered healthy pay the lowest premium while institutions
that are less than adequately capitalized (i.e., core or Tier 1 risk-based
capital ratios of less than 4% or a risk-based capital ratio of less than 8%)
and considered of substantial supervisory concern pay the highest premium. Risk
classification of all insured institutions will be made by the FDIC for each
semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
On September 30, 1996, federal legislation was enacted that required
the SAIF to be recapitalized with a one-time assessment on virtually all
SAIF-insured institutions, such as the Bank, equal to 65.7 basis points on
SAIF-insured deposits maintained by those institutions as of March 31, 1995. The
SAIF special assessment applicable to the Bank, which was paid to the FDIC in
November 1996, was approximately $295,000. This amount was accrued by the
Company at September 30, 1996 by a charge to earnings.
As a result of the SAIF recapitalization, the FDIC has amended its
regulation concerning the insurance premiums payable by SAIF-insured
institutions. For the period October 1, 1996 through December 31, 1996, the SAIF
insurance premium for all SAIF-insured institutions that are required to pay the
Financing Corporation ("FICO") obligation, such as the Bank, was reduced to a
range of 18 to 27 basis points from 23 to 31 basis points per $100 of domestic
31
<PAGE>
deposits. The FDIC further reduced the SAIF insurance premium to a range of 0 to
27 basis points per $100 of domestic deposits, effective January 1, 1997. The
Bank qualifies for the minimum SAIF assessment.
Additionally, the FDIC has imposed a FICO assessment on SAIF-
assessable deposits for the first semi-annual period of 1997 equal to 6.48 basis
points per $100 of domestic deposits, as compared to a FICO assessment on
BIF-assessable deposits for that same period equal to 1.30 basis points per $100
of domestic deposits.
Regulatory Capital Requirements. Federally insured savings
associations, such as the Bank, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At June 30, 1997, the Bank did not have any intangible assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital.
At June 30, 1997, the Bank had tangible capital of $7.3 million, or
10.1% of adjusted total assets, which is approximately $6.2 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At June 30, 1997, the Bank
had no intangibles which were subject to these tests.
32
<PAGE>
At June 30, 1997, the Bank had core capital equal to $7.3 million, or
10.1% of adjusted total assets, which is $5.1 million above the minimum leverage
ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At June 30, 1997, the Bank had no
capital instruments that qualify as supplementary capital and $382,000 of
general loss reserves, which was less than 1.25% of risk-weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. AmericanTrust had no such
exclusions from capital and assets at June 30, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
The OTS has adopted a final rule that requires every savings
association with more than normal interest rate risk exposure to deduct from its
total capital, for purposes of determining compliance with such requirement, an
amount equal to 50% of its interest-rate risk exposure multiplied by the present
value of its assets. This exposure is a measure of the potential decline in the
net portfolio value of a savings association, greater than 2% of the present
value of its assets, based upon a hypothetical 200 basis point increase or
decrease in interest rates (whichever results in a greater decline). Net
portfolio value is the present value of expected cash flows from assets,
liabilities and off-balance sheet contracts. The rule provides for a two quarter
lag between calculating interest rate risk and recognizing any deduction from
capital. The OTS announced that it will delay the effectiveness of the rule
until it evaluates the implementation of the process by which savings
associations may appeal an interest rate risk deduction determination. It is
uncertain as to when this evaluation will be completed. Any savings association
with less than $300 million in assets and a total capital ratio in excess of 12%
is exempt from this requirement unless the OTS determines otherwise.
On June 30, 1997, the Bank had total risk-based capital of $7.6 million
(including $7.3 million in core capital and $382,000 in qualifying supplementary
capital) and risk-weighted assets of $45.5 million (with no covered off-balance
33
<PAGE>
sheet assets); or total capital of 16.8% of risk-weighted assets. This amount
was $4.0 million above the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability. Company shareholders do not have preemptive
rights, and therefore, if the Company is directed by the OTS or the FDIC to
issue additional shares of Common Stock, such issuance may result in the
dilution in the percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions. OTS
regulations impose various restrictions or requirements on associations with
respect to their ability to pay dividends or make other distributions of
capital. OTS regulations prohibit an association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
34
<PAGE>
The OTS utilizes a three-tiered approach to permit associations, based
on their capital level and supervisory condition, to make capital distributions
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. See "- Regulatory Capital
Requirements."
Generally, Tier 1 associations, which are associations that before and
after the proposed distribution meet their fully phased-in capital requirements,
may make capital distributions during any calendar year equal to the greater of
100% of net income for the year-to-date plus 50% of the amount by which the
lesser of the association's tangible, core or risk-based capital exceeds its
fully phased-in capital requirement for such capital component, as measured at
the beginning of the calendar year, or the amount authorized for a Tier 2
association. However, a Tier 1 association deemed to be in need of more than
normal supervision by the OTS may be downgraded to a Tier 2 or Tier 3
association as a result of such a determination. The Bank meets the requirements
for a Tier 1 association and has not been notified of a need for more than
normal supervision. Tier 2 associations, which are associations that before and
after the proposed distribution meet their current minimum capital requirements,
may make capital distributions of up to 75% of net income over the most recent
four quarter period.
Tier 3 associations (which are associations that do not meet current
minimum capital requirements) that propose to make any capital distribution and
Tier 2 associations that propose to make a capital distribution in excess of the
noted safe harbor level must obtain OTS approval prior to making such
distribution. Tier 2 associations proposing to make a capital distribution
within the safe harbor provisions and Tier 1 associations proposing to make any
capital distribution need only submit written notice to the OTS 30 days prior to
such distribution. As a subsidiary of the Company, the Bank will also be
required to give the OTS 30 days' notice prior to declaring any dividend on its
stock. The OTS may object to the distribution during that 30-day period based on
safety and soundness concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. The proposal eliminates the current tiered structure
and the safe-harbor percentage limitations. Under the proposal a savings
association may make a capital distribution without notice to the OTS (unless it
is a subsidiary of a holding company) provided that it has a CAMEL 1 or 2
rating, is not in troubled condition (as defined by regulation) and would remain
adequately capitalized (as defined in the OTS prompt corrective action
regulations) following the proposed distribution. Savings associations that
would remain adequately capitalized following the proposed distribution but do
not meet the other noted requirements must notify the OTS 30 days prior to
declaring a capital distribution. The OTS stated it will generally regard as
permissible that amount of capital distributions that do not exceed 50% of the
institution's excess regulatory capital plus net income to date during the
calendar year. A savings association may not make a capital distribution without
prior approval of the OTS and the FDIC if it is undercapitalized before, or as a
result of, such a distribution. As under the current rule, the OTS may object to
a capital distribution if it would constitute an unsafe or unsound practice. No
assurance may be given as to whether or in what form the regulations may be
adopted.
35
<PAGE>
Liquidity. All savings associations, including the Bank, are required
to maintain an average daily balance of liquid assets equal to a certain
percentage of the sum of its average daily balance of net withdrawable deposit
accounts and borrowings payable in one year or less. For a discussion of what
the Bank includes in liquid assets, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital Resources"
in the Annual Report. This liquid asset ratio requirement may vary from time to
time (between 4% and 10%) depending upon economic conditions and savings flows
of all savings associations. At the present time, the minimum liquid asset ratio
is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At June 30, 1997, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 11.3% and a short-term
liquid assets ratio of 5.2%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association to have at least 65% of its portfolio assets (as defined by
regulation) in qualified thrift investments on a monthly average for nine out of
every 12 months on a rolling basis. Such assets primarily consist of residential
housing related loans and investments. At June 30, 1997, the Bank met the test
and has always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
36
<PAGE>
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of the Bank, to assess the
institution's record of meeting the credit needs of its community and to take
such record into account in its evaluation of certain applications, such as a
merger or the establishment of a branch, by the Bank. An unsatisfactory rating
may be used as the basis for the denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in September 1996 and received a satisfactory rating.
Transactions with Affiliates. Generally, transactions between a savings
association or its subsidiaries and its affiliates are required to be on terms
as favorable to the association as transactions with non-affiliates. In
addition, certain of these transactions, such as loans to an affiliate, are
restricted to a percentage of the association's capital. Affiliates of the Bank
include the Company and any company which is under common control with the Bank.
In addition, a savings association may not lend to any affiliate engaged in
activities not permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiary is not deemed an affiliate, however;
the OTS has the discretion to treat subsidiaries of savings associations as
affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is registered with and files reports with the OTS and is subject to regulation
and examination by the OTS. In addition, the OTS has enforcement authority over
the Company and its non-savings association subsidiaries which also permits the
37
<PAGE>
OTS to restrict or prohibit activities that are determined to be a serious risk
to the subsidiary savings association.
As a unitary savings and loan holding company, the Company generally is
not subject to activity restrictions. If the Company acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of the Company and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Securities Exchange Act of 1934, as amended (the "Exchange Act").
The Company is subject to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At June 30, 1997, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
38
<PAGE>
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. The Bank is a member of the FHLB of
Indianapolis, which is one of 12 regional FHLBs, that administers the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. It makes loans to members (i.e., advances) in accordance with
policies and procedures, established by the board of directors of the FHLB,
which are subject to the oversight of the Federal Housing Finance Board. All
advances from the FHLB are required to be fully secured by sufficient collateral
as determined by the FHLB. In addition, all long-term advances are required to
provide funds for residential home financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At June 30, 1997, the Bank had $1,050,000 of FHLB stock,
which was in compliance with this requirement. In past years, the Bank has
received substantial dividends on its FHLB stock. Over the past five fiscal
years such dividends have averaged 7.81% and were 7.85% for fiscal 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank's FHLB stock may result in a corresponding
reduction in the Bank's capital.
For the fiscal year ended June 30, 1997, dividends paid by the FHLB of
Indianapolis to the Bank totaled approximately $82,000, which constitute a
$15,000 increase over the amount of dividends received in fiscal year 1996. The
$21,000 dividend received for the quarter ended June 30, 1997 reflects an
annualized rate of 7.85%, or 5 basis points less than the rate for fiscal 1996.
No assurance can be given that such dividends will continue in the future at
such levels.
Federal Regulation. For three years following the Bank's conversion to
stock form, OTS regulations prohibit any person, without the prior approval of
the OTS, from acquiring or making an offer (if opposed by the institution) to
acquire more than 10% of the stock of any converted savings institution if such
person is, or after consummation of such acquisition would be, the beneficial
owner of more than 10% of such stock. In the event that any person, directly or
indirectly, violates this regulation, the securities beneficially owned by such
person in excess of 10% shall not be counted as shares entitled to vote and
shall not be voted by any person or counted as voting shares in connection with
any matter submitted to a vote of stockholders.
Federal and State Taxation. Savings associations such as the Bank that
meet certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), are permitted to establish reserves for bad debts and to make annual
39
<PAGE>
additions thereto which may, within specified formula limits, be taken as a
deduction in computing taxable income for federal income tax purposes. The
amount of the bad debt reserve deduction is computed under the experience
method.
Under the experience method, the bad debt reserve deduction is an
amount determined under a formula based generally upon the bad debts actually
sustained by the savings association over a period of years.
Since 1987, the percentage of specially-computed taxable income that
was used to compute a savings association's bad debt reserve deduction under the
percentage of taxable income method (the "percentage bad debt deduction") was
8%. The percentage bad debt deduction thus computed was reduced by the amount
permitted as a deduction for non-qualifying loans under the experience method.
The availability of the percentage of taxable income method permitted qualifying
savings associations to be taxed at a lower effective federal income tax rate
than that applicable to corporations generally (approximately 31.3% assuming the
maximum percentage bad debt deduction). Under changes in federal tax law enacted
in August 1996, the percentage bad debt deduction has been eliminated for tax
years beginning after December 31, 1995. Accordingly, this method will not be
available to the Bank for its tax years ending June 30, 1997 and thereafter.
Under the percentage of taxable income method, the percentage bad debt
deduction could not exceed the amount necessary to increase the balance in the
reserve for "qualifying real property loans" to an amount equal to 6% of such
loans outstanding at the end of the taxable year or the greater of (i) the
amount deductible under the experience method or (ii) the amount which when
added to the bad debt deduction for "non-qualifying loans" equals the amount by
which 12% of the amount comprising savings accounts at year-end exceeds the sum
of surplus, undivided profits and reserves at the beginning of the year. Through
December 31, 1995, the 6% and 12% limitations did not restrict the percentage
bad debt deduction available to the Bank.
The federal tax legislation enacted in August 1996 also imposes a
requirement to recapture into taxable income the portion of the qualifying and
non-qualifying loan reserves in excess of the "base-year" balances of such
reserves. For the Bank, the base-year reserves are the balances as of June 30,
1988. Recapture of the excess reserves will occur over a six-year period which
could begin for the Association as early as the tax year ending June 30, 1997
(commencement of the recapture period may be delayed, however, for up to two
years provided the Bank meets certain residential lending requirements). The
Bank previously established, and will continue to maintain, a deferred tax
liability with respect to its federal tax bad debt reserves in excess of the
base-year balances; accordingly, the legislative changes will have no effect on
total income tax expense for financial reporting purposes.
Also, under the August 1996 legislation, the Bank's base-year federal
tax bad debt reserves are "frozen" and subject to current recapture only in very
limited circumstances. Generally, recapture of all or a portion of the base-year
reserves will be required if the Association pays a dividend in excess of the
greater of its current or accumulated earnings and profits, redeems any of its
stock, or is liquidated. The Bank has not established a deferred federal tax
40
<PAGE>
liability under SFAS No. 109 for its base-year federal tax bad debt reserves, as
it does not anticipate engaging in any of the transactions that would cause such
reserves to be recaptured.
The Bank and its subsidiary file consolidated federal income tax
returns on a fiscal year basis using the accrual method of accounting. The
Company intends to file consolidated federal income tax returns with the Bank
and its subsidiary. Savings associations, such as the Bank, that file federal
income tax returns as part of a consolidated group are required by applicable
Treasury regulations to reduce their taxable income for purposes of computing
the percentage bad debt deduction for losses attributable to activities of the
non-savings association members of the consolidated group that are functionally
related to the activities of the savings association member.
The Bank and its consolidated subsidiary have not been audited by the
IRS recently with respect to consolidated federal income tax returns. In the
opinion of management, any examination of still open returns (including returns
of subsidiaries and predecessors of, or entities merged into, the Bank) would
not result in a deficiency which could have a material adverse effect on the
financial condition of the Bank and its consolidated subsidiary.
Indiana Taxation. The Company and the Bank are subject to the State of
Indiana's 8.5% franchise tax on the net income of financial (including thrift)
institutions, exempting them from the current gross income, supplemental net
income and intangible taxes. Net income for franchise tax purposes will
constitute federal taxable income before net operating loss deductions and
special deductions, adjusted for certain items, including Indiana income taxes,
tax exempt interest and bad debts. Other applicable Indiana taxes include sales,
use and property taxes.
Delaware Taxation. As a Delaware holding company, the Company is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Executive Officer Who Is Not A Director
Jami L. Cornish, age 34, is Treasurer and Chief Financial Officer of
AmericanTrust and the Company, positions she has held since November 1994. Ms.
Cornish joined the Bank in 1992 and was the Bank's Controller from 1992 to 1994.
Ms. Cornish is responsible for the supervision of the Bank's accounting and loan
processing departments. Prior to joining the Bank, Ms. Cornish was employed as
Controller of Flexco Products located in Elkhart, Indiana.
Item 2. Description of Properties
The Bank conducts its business through two offices, its main office
located in Peru, Indiana and its branch office located in Kokomo, Indiana; all
locations are owned by the Bank. The Bank also operates a limited service office
located in Peru, Indiana in space leased by the Bank. In June, 1996, IFSCO
purchased a building in Kokomo, Indiana for the future use of U.S. Title. The
following table sets forth information relating to each of the Bank's offices as
of June 30, 1997. The total net book value of the Bank's premises and equipment
(including land, buildings and leasehold improvements and furniture, fixtures
41
<PAGE>
and equipment) at June 30, 1997 was approximately $1.3 million. See the Notes to
Consolidated Financial Statements in the Annual Report.
Total
Approximate Net Book Value
Date Square at
Location Acquired Footage June 30, 1997
- --------------------------- -------- ------------ --------------
Main Office:
20 West Fifth Street 1962 6,600 $244,030
Peru, Indiana 46970
Branch Offices:
1936 South Dixon Road 1994 4,000 687,360
Kokomo, Indiana 46902
Limited Service Office:
915 West Main Street Leased 158 19,778
Peru, Indiana 46970
U.S. Title Office: 1996 7,000 326,808
210 N. Main Street
Kokomo, Indiana 40901
AmericanTrust believes that its current facilities are adequate to meet
the present and foreseeable needs of the Bank and the Company.
The Bank maintains an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by the Bank at June 30, 1997 was approximately $150,000.
Item 3. Legal Proceedings
The Company and AmericanTrust are involved, from time to time, as
plaintiff or defendant in various legal actions arising in the normal course of
their businesses. While the ultimate outcome of these proceedings cannot be
predicted with certainty, it is the opinion of management, after consultation
with counsel representing AmericanTrust and the Company in the proceedings, that
the resolution of these proceedings should not have a material effect on
Company's financial condition or results of operations on a consolidated basis.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended June 30, 1997.
42
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 46 of the attached 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 4 through 20 of the attached 1997 Annual Report to Stockholders
is herein incorporated by reference.
Item 7. Financial Statements and Supplementary Data
The following information appearing in the Company's Annual Report to
Stockholders for the year ended June 30, 1997, is incorporated by reference in
this Annual Report on Form 10-KSB as Exhibit 13.
<TABLE>
<CAPTION>
Pages in
Annual
Annual Report Section Report
- --------------------- ------
<S> <C>
Report of Independent Auditors............................................................... 21
Consolidated Statement of Balance Sheet as of June 30, 1997 and 1996.......................... 22
Consolidated Statement of Income for the Years Ended June 30, 1997, 1996 and 1995............. 23
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended June 30, 1997, 1996 and 1995.................................................... 24
Consolidated Statement of Cash Flows for the Years Ended June 30, 1997, 1996 and 1995......... 25
Notes to Consolidated Financial Statements................................................... 26 to 44
</TABLE>
With the exception of the aforementioned information, the Company's
Annual Report to Stockholders for the year ended June 30, 1997, is not deemed
filed as part of this Annual Report on Form 10-KSB.
Item 8. Changes In and Disagreements With Accountants on Accounting
and Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
43
<PAGE>
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
Information concerning directors of the Registrant is incorporated
herein by reference from the Company's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held in 1997, a copy of which will be filed not
later than 120 days after the close of the fiscal year. Information concerning
the executive officer of the Registrant who is not a director is incorporated by
reference from Part I of this Form 10-KSB under the caption "Executive Officer
of the Registrant Who Is Not A Director."
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the definitive Proxy Statement for the Annual Meeting of
Stockholders to be held in 1997, a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive Proxy
Statement for the Annual Meeting of Stockholders to be held in 1997, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive Proxy Statement for the
Annual Meeting of Stockholders to be held in 1997, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
44
<PAGE>
Item 13. Exhibits and Reports on Form 8-K
- --------------------------------------------------
(a) Exhibits
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
- --------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material contracts
Form of Proposed Stock Option and Incentive Plan *
Form of Proposed Recognition and Retention Plan *
Employment Agreement with Bruce M. Borst *
11 Statement regarding computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of None
security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney None
27 Financial Data Schedule 27
28 Information from reports furnished to state insurance None
regulatory authorities
99 Additional Exhibits None
</TABLE>
____________________
* Filed as exhibits to the Company's Form S-1 registration statement
filed on December 19, 1994 (File No. 33- 87580) pursuant to Section 5
of the Securities Act of 1933. All of such previously filed documents
are hereby incorporated herein by reference in accordance with Item 601
of Regulation S-B.
(b) Reports on Form 8-K
During the quarter ended June 30, 1997, a current report on Form 8-K
was filed by the Company on April 25, 1997 to announce a $.05 per share cash
dividend.
45
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
AMTRUST CAPITAL CORP.
By: /S/ Bruce M. Borst
------------------------------------------
Bruce M. Borst, President, Chief Executive
Officer and Director
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons in the capacities and
on the dates indicated.
/s/ Bruce M. Borst
- -------------------------------------------
Bruce M. Borst, President,
Chief Executive Officer and Director
(Principal Executive and Operating Officer)
Date: September 22, 1996
/s/ Kenneth L. Hasselkus
- -------------------------
Kenneth L. Hasselkus, Director
Date: September 22, 1996
/s/ Dean H. Hartley
- -------------------------
Dean H. Hartley, Director
Date: September 22, 1996
/s/ Thomas A. Kirk
- ------------------------
Thomas A. Kirk, Director
Date: September 22, 1996
/s/ Roderic E. Daniels
- ----------------------------
Roderic E. Daniels, Director
Date: September 22, 1996
/s/ Jami L. Cornish
- ------------------------------------
Jami L. Cornish, Treasurer and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
Date: September 22, 1996
46
<PAGE>
EXHIBITS INDEX
<TABLE>
<CAPTION>
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
- --------------------------------------------------------------------------------------------
<S> <C> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws *
4 Instruments defining the rights of security holders, *
including debentures
9 Voting Trust Agreement None
10 Material contracts
Form of Proposed Stock Option and Incentive Plan *
Form of Proposed Recognition and Retention Plan *
Employment Agreement with Bruce M. Borst *
11 Statement regarding computation of per share earnings None
13 Annual Report to Security Holders 13
16 Letter regarding change in certifying accountants None
18 Letter regarding change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of None
security holders
23 Consents of Experts and Counsel 23
24 Power of Attorney None
27 Financial Data Schedule 27
28 Information from reports furnished to state insurance None
regulatory authorities
99 Additional Exhibits None
</TABLE>
<PAGE>
AmTrust Capital Corp.
Annual Report 1997
<PAGE>
AmTrust Capital Corp.
TABLE OF CONTENTS
Letter to Stockholders.......................................... 1
Selected Consolidated Financial Information..................... 2
Management's Discussion and Analysis of
Financial Condition and Results of Operations................. 4
Report of Independent Auditors.................................. 21
Consolidated Financial Statements............................... 22
Stockholder Information......................................... 45
Board of Directors and Officers................................. 47
FINANCIAL HIGHLIGHTS
June 30, 1997
-------------
(Dollars in Thousands)
Total Assets.......................................... $72,245
Total Loans........................................... 49,645
Investment Securities................................. 14,216
Deposits.............................................. 53,523
Borrowings............................................ 10,902
Net Income............................................ 134
Stockholders' Equity.................................. 7,464
Stockholders' Equity as a Percent of
Assets............................................. 10.3%
================================================================================
ANNUAL MEETING
The Annual Meeting of Stockholders of AmTrust Capital Corp. will be held on
October 20, 1997 at 9:00 a.m. at the Company's office, located at 20 West Fifth
Street, Peru, Indiana.
================================================================================
i
<PAGE>
[AMTRUST LETTERHEAD]
PRESIDENT'S LETTER TO STOCKHOLDERS
September 22, 1997
To Our Stockholders:
On behalf of your directors, officers and employees, it is my pleasure
to report to you the fiscal 1997 financial results of AmTrust Capital Corp. (the
"Company"), the parent company of AmericanTrust Federal Savings Bank
("AmericanTrust" or "Bank").
In this last year, we added $253,000 to our net worth. Per share book
value grew by more, however, because of the stock buy back that retired 5,000
shares. Net income per share was $.27 for a return on equity of 1.90%. Dividends
paid in the fiscal year totaled $.10 per share. Return on assets for the fiscal
year was .19%. AmericanTrust recorded a $170 thousand after tax charge due to
the one time FDIC pre-tax special charge of $295,000. The FDIC mandated charge
to recapitalize the SAIF fund amounted to 65.7 basis points based on the March
1995 deposits and applied to all Thrifts and Banks with SAIF insured deposits.
Fiscal 1997 was every bit as tough as we anticipated. We are not
satisfied with where we are, but we are pleased with how far we've come. In
January, AmericanTrust entered into an arrangement with a consulting firm in
order to enhance the Bank's long-term performance. This undertaking involves
three strategies to increase earnings through both revenue enhancements and
expense reductions, the decreasing of interest rate risk and a marketing plan to
grow the Bank. At the time of this printing all three plans should be before
your board of directors for final approval. Both long-term and short-term goals
will be implemented and monitored on an ongoing basis to provide stockholders
with better earnings, less risk and long-term growth.
Since our Initial Public Offering in March of 1995, our Company's stock
has appreciated more than 57% as of the close of business on June 30, 1997. Our
stock still trades at a discount to book making it an exceptional value in
today's market of record stock premiums. It will remain my focus to keep our
momentum on the upswing. Thank you for your investment and support.
Sincerely,
Bruce M. Borst
President and Chief Executive Officer
1
<PAGE>
AmTrust Capital Corp.
SELECTED CONSOLIDATED FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Financial Condition Data:
- -----------------------------------------------
Total assets......................................... $72,245 $71,892 $68,013 $58,644 $56,738
Loans held for sale.................................. 1,082 1,509 1,842 3,240 13,537
Loans, net........................................... 49,645 49,800 47,790 41,127 30,292
Investment securities available for sale............. 12,149 11,919 3,635 1,238 993
Investment securities held to maturity............... 2,067 2,613 7,941 9,182 6,018
Deposits............................................. 53,523 44,562 50,514 48,349 50,567
Total borrowings..................................... 10,902 19,500 9,500 6,250 2,500
Stockholders' equity................................. 7,464 7,211 7,637 3,591 3,136
Year Ended June 30,
-----------------------------------------------------------
1997 1996 1995 1994 1993
--------- ------ ------- ------- -------
(In Thousands)
Selected Consolidated Operations Data:
- --------------------------------------
Total interest income................................ $5,127 $4,957 $4,479 $4,124 $4,177
Total interest expense............................... 3,170 3,084 2,734 2,166 2,342
------ ------ ------ ------ ------
Net interest income.............................. 1,957 1,873 1,745 1,958 1,835
Provision for loan losses............................ 33 125 88 161 20
------ ------ ------ ------ ------
Net interest income after provision for loan losses 1,924 1,748 1,657 1,797 1,815
Gains on sales of loans and investment securities.... 175 216 195 176 223
Gain on sale of deposits............................. --- 181 --- --- ---
Gain on sale of premises and equipment............... --- 80 --- 113 ---
Other non-interest income............................ 381 370 199 199 136
------ ------ ------ ------ ------
Total non-interest income........................ 556 847 394 488 359
Total non-interest expense....................... 2,299 2,071 1,745 1,519 1,176
Income before income tax, extraordinary item ------ ------ ------ ------ ------
and cumulative effect of change in
accounting method............................ 181 524 306 766 998
Income tax expense................................... 47 191 112 296 370
Utilization of net operating loss carryforward....... --- --- --- --- 233
Cumulative effect of change in accounting method .... --- --- --- 30 ---
------ ------ ------ ------ ------
Net income....................................... $ 134 $ 333 $ 194 $ 500 $ 861
====== ====== ====== ====== ======
Net income per share............................. $ .27 $ .63(2)
</TABLE>
______________________________
(1) AmTrust Capital Corp. completed its initial public offering on March
28, 1995 and purchased all of the outstanding stock of AmericanTrust
Federal Savings Bank. As a result, the information above represents the
Bank only prior to March 28, 1995.
(2) Net income per share for prior periods is not meaningful since AmTrust
Capital Corp. completed its initial offering on March 28, 1995.
2
<PAGE>
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------------------
1997 1996 1995 1994 1993
------- ------- ------- ------ -----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Dividends per share..................................... $ .10 --- --- --- ---
Dividend pay out ratio.................................. 37.03% ---% ---% ---% ---%
Performance Ratios:
Return on assets (ratio of net income to average
total assets)........................................ .19 .47 .30 .88 1.66
Return on equity capital (ratio of net income to
average equity)...................................... 1.90 4.63 4.06 14.51 31.47
Interest rate spread (average during year).............. 2.68 2.48 2.68 3.52 3.54
Net interest margin(1).................................. 2.90 2.80 2.84 3.63 3.69
Ratio of operating expense to average total assets...... 3.19 2.95 2.67 2.66 2.26
Ratio of average interest-earning assets to average
interest-bearing liabilities......................... 104.81 107.13 103.46 102.66 103.19
Quality Ratios:
Non-performing assets to total assets, at end of period(2) 3.64 3.38 1.35 2.60 2.69
Non-performing loans to total loans, at end of period(3). 4.81 4.66 1.85 3.32 3.39
Allowance for losses on loans to non-performing assets,
at end of period...................................... 19.92 20.31 43.67 21.92 12.60
Allowance for losses on loans to total loans, at end of
period................................................ 1.02 .95 .81 .75 .44
Allowance for losses on loans to non-performing loans,
at end of period...................................... 21.43 20.68 43.67 22.54 12.86
Capital Ratios:
Equity to total assets, at end of period................. 10.33 10.03 11.23 6.12 5.53
Average equity to average assets......................... 9.80 10.23 7.31 6.03 5.27
Other Data:
Number of full-service offices........................... 2 2 3 3 3
</TABLE>
__________________
(1) Net interest income divided by average interest-earning assets.
(2) Non-performing assets include non-accruing loans, accruing loans 90
days or more past due, restructured loans and real estate owned.
(3) Non-performing loans include non-accruing loans, accruing loans 90
days or more past due and restructured loans.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
AmTrust Capital Corp. (the "Company") is a Delaware corporation. Since
the Company only recently began operations, certain of the financial information
presented herein prior to March 28, 1995 relates primarily to AmericanTrust
Federal Savings Bank ("AmericanTrust" or the "Bank"), a wholly owned subsidiary
and predecessor of the Company. All references to the Company at or before March
28, 1995 refer to the Bank and its subsidiary on a consolidated basis.
The Company is significantly affected by prevailing economic conditions
as well as government policies and regulations concerning, among other things,
monetary and fiscal affairs, housing and financial institutions. Deposit flows
are influenced by a number of factors, including interest rates paid on
competing investments, account maturities and level of personal income and
savings. Lending activities are influenced by the demand for and supply of
housing lenders, the availability and cost of funds and various other items.
Sources of funds for lending activities include deposits, payments on loans and
other investments, borrowings, sale of assets and other funds provided from
operations.
Financial Condition
June 30, 1997 Compared to June 30, 1996. Total assets increased
$353,000, or .5%, to $72.2 million at June 30, 1997 from $71.9 million at June
30, 1996 due to increases in cash and other interest-bearing deposits.
Investment Securities available for sale and held to maturity decreased
$316,000 to $14.2 million at June 30, 1997 from $14.5 million at June 30, 1996.
This decrease was due to principal repayments.
Loans and loans held for sale decreased approximately $583,000, or
1.1%, to $50.7 million at June 30, 1997 compared to $51.3 million at June 30,
1996 as loan repayments and sales exceeded loan originations. During fiscal
1997, the Company originated $8.4 million of loans secured by one- to
four-family real estate (of which $6.3 million were sold in the secondary
market) and $8.9 million in consumer loans.
Advances from Federal Home Loan Bank (the "FHLB") decreased $8.6
million from $19.5 million at June 30, 1996 to $10.9 million at June 30, 1997.
The decrease was due to an increase in deposits used to repay advances.
Deposits increased $8.9 million from $44.6 million at June 30, 1996 to
$53.5 million at June 30, 1997 due primarily to an increase of $8.6 million in
public funds.
4
<PAGE>
Stockholders' equity increased to $7.5 million at June 30, 1997 from
$7.2 million at June 30, 1996. This increase was primarily a result of net
income of $134,000 and a decrease of unrealized losses on securities available
for sale of $137,000.
June 30, 1996 Compared to June 30, 1995. Total assets increased $3.9
million, or 5.7%, to $71.9 million at June 30, 1996 from $68.0 million at June
30, 1995 due to increases in net loans and investment securities.
Investment securities available for sale and held to maturity increased
$2.9 million to $14.5 million at June 30, 1996 from $11.6 million at June 30,
1995. This increase was due to purchases of investment securities of $10.0
million, which offset sales and repayments of $7.1 million. The Company utilized
funds from FHLB advances to purchase securities with maturities similar to the
FHLB advances.
Loans and loans held for sale increased approximately $1.8 million, or
3.6%, to $51.8 million at June 30, 1996 compared to $50.0 million at June 30,
1995 as loan originations exceeded loan sales and repayments. During fiscal
1996, the Company originated $15.3 million of loans secured by one- to
four-family real estate (of which $12.9 million were sold in the secondary
market) and $7.4 million in consumer loans.
Advances from FHLB increased $10.0 million from $9.5 million at June
30, 1995 to $19.5 million at June 30, 1996. The additional borrowings were
principally used to purchase investment securities with similar maturities, and
to fund $5.1 million in deposits sold in April, 1996.
Deposits decreased $5.9 million from $50.5 million at June 30, 1995 to
$44.6 million at June 30, 1996 due primarily to the sale of deposits of $5.1
million.
Stockholders' equity decreased to $7.2 million at June 30, 1996 from
$7.6 million at June 30, 1995. This decrease was a result of repurchased stock
of $535,000, and an increase in unrealized losses on securities available for
sale, net of tax, of $269,000. The decreases were partially offset by increases
of $37,000 as unearned Employee Stock Ownership Plan (the "ESOP") shares were
earned, additional paid in capital of $8,000 due to the increase in the stock
price of the earned ESOP shares, and net income of $333,000.
5
<PAGE>
Results of Operations
The Company's results of operations depend primarily on net interest
income, which is the difference between interest income from interest-earning
assets and interest expense on interest-bearing liabilities. The Company's
operations are also affected by non-interest income, such as customer deposit
service charges, gains on sales of assets and loan fees. The Company's principal
operating expenses consist of salaries and employee benefits, deposit insurance
assessments, equipment and occupancy costs, provisions for losses on loans,
advertising and promotion expenses and other general and administrative expense.
Comparison of Operating Results for Years Ended June 30, 1997 and 1996
General. Net income for the fiscal year ended June 30, 1997 decreased
$199,000 to $134,000 for fiscal 1997 from $333,000 for fiscal 1996. The decrease
was primarily a result of the one-time FDIC special assessment to recapitalize
the SAIF of $170,000, net of tax. Absent the one-time special assessment, net
income for the year would have been $304,000.
Net Interest Income. Net interest income increased from $1.9 million
for fiscal 1996 to $2.0 million for fiscal 1997.
Interest Income. Interest income for the fiscal years ended June 30,
1997 and June 30, 1996, was $5.1 million and $5.0 million, respectively. The
increase in fiscal 1997 over fiscal 1996 was due to an increase in the average
balance of interest-earning assets as well as an increase in yields on such
assets from 7.42% in fiscal 1996 to 7.61% in fiscal 1997. Average
interest-earning assets were $67.4 million and $66.8 million for the fiscal
years ended June 30, 1997 and June 30, 1996, respectively.
Interest Expense. Interest expense for fiscal 1997 and 1996, was $3.2
million and $3.1 million, respectively. The increase in interest expense of
$86,000 in fiscal 1997 over fiscal 1996 was due primarily to an increase in the
average balance of interest-bearing liabilities as cost of funds decreased from
4.94% in fiscal 1996 to 4.93% in fiscal 1997. The average balance of
interest-bearing liabilities was $64.3 million for fiscal 1997 compared to $62.3
million for fiscal 1996. The Company's cost of funds on deposits decreased to
4.54% in fiscal 1997 from 4.66% in fiscal 1996. The cost of funds on FHLB
advances also increased from 6.03% in fiscal 1996 to 6.24% in fiscal 1997. The
average balance of interest-bearing liabilities increased due to the Company's
use of FHLB advances to fund loan demand. Average FHLB advances increased from
$12.8 million during fiscal 1996 to $14.6 million in fiscal 1997.
Other Income. Other income for fiscal 1997 was $556,000 compared to
$847,000 for fiscal 1996, a decrease of $291,000. The decrease is primarily a
result of a gain of $261,000 on the sale of the Warsaw, Indiana branch building
and deposits in fiscal 1996. Other decreases included a decrease in gains on
loans held for sale of $25,000, a decrease in service charges on deposit
accounts of $21,000 and a decrease of $14,000 on loan fees. These decreases in
other income were partially offset by an increase in annuity and other
commissions of $46,000 as a result of the purchase of a title company in
December 1995.
6
<PAGE>
Other Expenses. Other expenses increased $228,000 from $2.1 million for
fiscal 1996 to $2.3 million for fiscal 1997. An increase of $45,000 was in
salaries and employee benefits due to increased expenses related to additional
employees at the title company. The primary reason for the increase in other
expenses related to an increase in FDIC premiums of $243,000 as a result of the
one-time FDIC special assessment to recapitalize the SAIF. This increase was
partially offset by savings in net occupancy expenses and data processing fees
related to the sale of the Warsaw branch facility and deposits.
Provision for Loan Losses. The Company's provision for loan losses for
the fiscal years ended June 30, 1997 and 1996 was $33,000 and $125,000,
respectively. At June 30, 1997 and 1996, the Company's allowance for losses on
loans to total loans was 1.02% and .95%, respectively. The allowance represented
21.43% and 20.68%, of non-performing loans at June 30, 1997 and 1996. The change
in the provision for loan losses is based upon the level and condition of
non-performing loans and management's evaluation of the Bank's existing loan
portfolio (including the increase in and change in the mix of such portfolio)
for losses inherent in the portfolio, reviewing existing delinquencies and
troubled loans, evaluating historical loan loss trends and considering the
interest rate environment and its impact on borrowers' continuing ability to
repay their loans. Consumer loans may entail greater risk than traditional
residential mortgage lending, particularly in the case of consumer loans which
are unsecured or are secured by rapidly depreciable assets such as automobiles
or mobile homes. At June 30, 1997 and 1996, non-performing loans were $2.44
million and $2.39 million, respectively or 4.8% and 4.7%, of total loans,
respectively. Future additions to the allowance for losses on loans are
dependent upon the performance of the loan portfolio, the economy, changes in
real estate values, interest rates and inflation.
Bennett Funding Group, Inc. The Company has a business relationship
with Bennett Funding Group, Inc. ("BFGI") which filed for Chapter 11 bankruptcy
protection on March 29, 1996. From 1992 to 1995, the Company purchased
commercial lease contracts covering business equipment from BFGI, for which BFGI
acts as the servicer. At June 30, 1997, the book value of the Company's lease
contracts totaled $817,000. In addition, the Company had $674,000 in Short Term
Dealer Contracts with Bennett Leasing Corporation ("BLC") which was later
included in the bankruptcy proceedings. Newspapers reports have indicated that
BFGI may have utilized fictitious leases in some of its business activities. The
Securities and Exchange Commission has filed a criminal and civil suit against
an officer of BFGI which alleges various fraudulent actions including the sale
of the same leases to two or more buyers. Reserves of $67,000 have been recorded
for probable losses as a result of lease prepayments. In addition, reserves of
$149,000 have been allocated to the leases for other potential losses. The
Company is continuing to evaluate the allegations against BFGI and BLC and the
effect that the bankruptcy filing will have on its leases and its security.
Until the evaluation is complete, management is unable to predict with any
certainty the effects of the bankruptcy on the Company.
Income Tax Expense. Income tax expense for the fiscal years ended June
30, 1997 and 1996 was $47,000 and $191,000, respectively. Income tax expense
decreased $144,000 from fiscal 1996 to fiscal 1997 as a result of a decrease in
pretax income.
7
<PAGE>
Comparison of Operating Results for Years Ended June 30, 1996 and 1995
General. Net income for the fiscal year ended June 30, 1996 increased
$139,000 to $333,000 for fiscal 1996 from $194,000 for fiscal 1995. The increase
was primarily due to an increase in net interest income of $128,000 and an
increase in non-interest income of $453,000. These increases in income were
partially offset by increases in the provision for loan losses of $36,000, an
increase in other expenses of $326,000 and an increase in income tax expense of
$80,000.
Net Interest Income. Net interest income increased from $1.7 million
for fiscal 1995 to $1.9 million for fiscal 1996.
Interest Income. Interest income for the fiscal years ended June 30,
1996 and June 30, 1995, was $5.0 million and $4.5 million, respectively. The
increase in fiscal 1996 over fiscal 1995 was due to an increase in the average
balance of interest-earning assets as well as an increase in yields on such
assets from 7.28% in fiscal 1995 to 7.42% in fiscal 1996.
Average interest-earning assets were $66.8 million and $61.5 million
for the fiscal years ended June 30, 1996 and June 30, 1995, respectively. The
increase in the average balance of interest-earning assets was due to increased
loan originations as well as an increase in investment securities.
Interest Expense. Interest expense for fiscal 1996 and 1995, was $3.1
million and $2.7 million, respectively. The increase in interest expense of
$350,000 in fiscal 1996 over fiscal 1995 was due primarily to an increase in the
average rate paid on interest-bearing liabilities from 4.60% in fiscal 1995 to
4.94% in fiscal 1996. The average balance of interest-bearing liabilities was
$62.3 million for fiscal 1996 compared to $59.5 million for fiscal 1995. The
Company's cost of funds on deposits increased to 4.7% in fiscal 1996 from 4.3%
in fiscal 1995. The cost of funds on FHLB advances also increased from 5.83% in
fiscal 1995 to 6.03% in fiscal 1996. The average balance of interest-bearing
liabilities increased due to the Company's use of FHLB advances to fund loan
demand, deposits sold, and purchases of mortgage-backed securities with
maturities similar to the FHLB advances. Average FHLB advances increased from
$12.5 million during fiscal 1995 to $12.8 million in fiscal 1996.
Other Income. Other income for fiscal 1996 was $847,000 compared to
$394,000 for fiscal 1995, an increase of $453,000. The increase is primarily a
result of a gain of $261,000 on the sale of the Warsaw, Indiana branch building
and $5.1 million in deposits and an increase of $76,000 in gains on sales of
mortgage loans. Other increases in fees and commissions of $171,000 were
partially offset by a decrease in gains on the sales of investment securities of
$55,000.
Other Expenses. Other expenses increased $326,000 from $1.7 million for
fiscal 1995 to $2.1 million from fiscal 1996. An increase of $101,000 was in
salaries and employee benefits due to increased expenses related to mortgage
banking activities, the addition of the limited service facility opened in
January, 1995, in Peru, Indiana, and the addition of six employees at U.S. Title
8
<PAGE>
in December, 1995. Other increases such as occupancy expenses of $39,000, data
processing of $12,000, equipment expenses of $9,000 and other expenses of
$110,000 were primarily a result of the addition of the two facilities. Legal
expenses also increased $46,000 primarily due to AmTrust becoming a public
company in March, 1995. Expenses relating to customer deposit account expense
increased $19,000 due to increased transaction costs. Deposit insurance
increased $5,000 due to a higher deposit base early in the fiscal year. A
partial offset was a decrease of $15,000 in advertising expenses.
Provision for Loan Losses. The Company's provision for loan losses for
the fiscal years ended June 30, 1996 and 1995 was $125,000 and $88,000,
respectively. At June 30, 1996 and 1995, the Company's allowance for losses on
loans to total loans was .95% and .81%, respectively. The allowance represented
20.68% and 43.67%, of non-performing loans at June 30, 1996 and 1995. The change
in the provision for loan losses is based upon the level and condition of
non-performing loans and management's evaluation of the Bank's existing loan
portfolio (including the increase in and change in the mix of such portfolio)
for losses inherent in the portfolio, reviewing existing delinquencies and
troubled loans, evaluating historical loan loss trends and considering the
interest rate environment and its impact on borrowers' continuing ability to
repay their loans. The increased provision in fiscal 1996 as compared to fiscal
1995 was primarily related to the bankruptcy of Bennett Funding Group, Inc.
Consumer loans may entail greater risk than traditional residential mortgage
lending, particularly in the case of consumer loans which are unsecured or are
secured by rapidly depreciable assets such as automobiles or mobile homes. At
June 30, 1996 and 1995, non-performing loans were $2.4 million and $916,000,
respectively or 4.7% and 1.9%, of total loans, respectively. Future additions to
the allowance for losses on loans are dependent upon the performance of the loan
portfolio, the economy, changes in real estate values and interest and
inflation.
Bennett Funding Group, Inc. The Company has a business relationship
with Bennett Funding Group, Inc. ("BFGI") which filed for Chapter 11 bankruptcy
protection on March 29, 1996. From 1992 to 1995, the Company purchased
commercial lease contracts covering business equipment from BFGI, for which BFGI
acts as the servicer. At June 30, 1996, the book value of the Company's lease
contracts totaled $817,000. In addition, the Company had $674,000 in Short Term
Dealer Contracts with Bennett Leasing Corporation ("BLC") which was later
included in the bankruptcy proceedings. Newspapers reports have indicated that
BFGI may have utilized fictitious leases in some of its business activities. The
Securities and Exchange Commission has filed a criminal and civil suit against
an officer of BFGI which alleges various fraudulent actions including the sale
of the same leases to two or more buyers. Reserves of $15,000 have been recorded
for probable losses as a result of lease prepayments. In addition, reserves of
$156,000 have been allocated to the leases for potential losses. The Company is
continuing to evaluate the allegations against BFGI and BLC and the effect that
the bankruptcy filing will have on its leases and its security. Until the
evaluation is complete, management is unable to predict with any certainty the
effects of the bankruptcy on the Company.
Income Tax Expense. Income tax expense for the fiscal years ended June
30, 1996 and 1995 was $191,000 and $112,000, respectively. Income tax expense
increased $79,000 from fiscal 1995 to fiscal 1996 as a result of an increase in
pretax income.
9
<PAGE>
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are monthly average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
<TABLE>
<CAPTION>
Year Ended June 30,
------------------------------------------------------------------------------------
1997 1996 1995
------------------------------------------------------------------------------------
Average Interest Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate Balance Paid Rate
---------- -------- ------ ----------- -------- ------ ----------- ------- ---------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Assets:
Interest-earning assets
Interest-bearing deposits with
other financial institutions $ 873 $ 55 6.30% $ 2,520 $ 132 5.24% $ 2,167 $ 105 4.85%
Loans(1)..................... 50,896 3,997 7.85 50,323 3,950 7.85 47,440 3,519 7.42
Investment securities, including
FHLB stock................ 15,618 1,075 6.88 13,988 875 6.26 11,905 855 7.18
-------- ------- ------- ------ ------- ------
Total interest-earning assets(1) 67,387 5,127 7.61 66,831 4,957 7.42 61,512 4,479 7.28
------- ------ ------
Non-interest-earning assets.... 4,598 3,370 3,788
-------- ------- -------
Total assets................ $71,985 $70,201 $65,300
======== ======= =======
Liabilities and Equity:
Interest-bearing liabilities
Savings deposits............. $11,540 400 3.47 $12,878 446 3.46 $15,272 562 3.68
NOW deposits................. 6,901 166 2.41 7,345 169 2.30 6,920 171 2.47
Certificate accounts......... 31,235 1,691 5.41 29,391 1,699 5.78 24,719 1,270 5.14
FHLB advances................ 14,618 913 6.24 12,771 770 6.03 12,542 731 5.83
------- ------- ------- ------ ------- ------
Total interest-bearing liabilities 64,294 3,170 4.93 62,385 3,084 4.94 59,453 2,734 4.60
------- ------ ------
Other liabilities............ 637 632 1,074
------- ------- -------
Total liabilities.......... 64,931 63,017 60,527
Equity......................... 7,054 7,184 4,773
------- ------- -------
Total liabilities and equity $71,985 $70,201 $65,300
======= ======= =======
Net interest income............. $1,957 $1,873 $1,745
====== ====== ======
Net interest rate spread........ 2.68 2.48 2.68
Net interest-earning assets..... $ 3,093 $4,446 $ 2,059
======= ======= =======
Net yield on average interest-
earning assets................ 2.90 2.80 2.84
Average interest-earning asset
to average interest-bearing
liabilities................... 104.81% 107.13% 103.46%
</TABLE>
_______________
(1) Calculated net of deferred loan fees, loan discounts, loans in process,
allowance for loan losses. In addition, non-accrual loans have been
included in the average balances.
10
<PAGE>
Rate/Volume Analysis of Net Interest Income
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and those due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Year Ended June 30,
----------------------------------------------------------------------
1997 vs. 1996 1996 vs. 1995
----------------------------------------------------------------------
Increase (Decrease) Total Increase (Decrease) Total
Due to Increase Due to Increase
------------------- -------------------
Volume Rate (Decrease) Volume Rate (Decrease)
------ ------ ---------- ------- ------ -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Interest-bearing deposits with other
financial institutions............... $ (100) $ 23 $ (77) $ 18 $ 9 $ 27
Loans.................................... 45 2 47 220 211 431
Securities, including FHLB stock......... 107 93 200 138 (118) 20
------ ----- ----- ----- ------ ------
Total interest-earning assets.......... $ 52 $118 170 $376 $ 102 478
====== ===== ----- ===== ====== ------
Interest-bearing liabilities:
Savings deposits......................... $ (46) $ --- $ (46) $(84) $ (32) $(116)
NOW deposits............................. (10) 7 (3) 10 (12) (2)
Certificate accounts..................... 103 (111) (8) 258 171 429
FHLB advances............................ 115 28 143 14 25 39
------ ----- ----- ---- ----- -----
Total interest-bearing liabilities..... $ 162 $ (76) 86 $198 $ 152 350
====== ===== ----- ==== ===== -----
Net interest income........................ $ 84 $ 128
===== =====
</TABLE>
11
<PAGE>
The following table presents the weighted average yields earned on
loans, investments and other interest-earning assets, and the weighted average
rates paid on savings deposits and other interest-bearing liabilities and the
resultant interest rate spreads at the dates indicated. Weighted average
balances are based on monthly balances.
<TABLE>
<CAPTION>
Year Ended June 30,
-----------------------------------------
1997 1996 1995 1994
-----------------------------------------
<S> <C> <C> <C> <C>
Weighted average yield on:
Interest-bearing deposits with other financial institutions.... 6.30% 5.24% 4.85% 4.24%
Loans.......................................................... 7.85 7.85 7.42 7.86
Securities, including FHLB stock............................... 6.88 6.26 7.18 7.26
Combined weighted average yield on interest-earning
assets................................................... 7.61 7.42 7.28 7.64
Weighted average rate paid on:
Savings deposits............................................... 3.47 3.46 3.68 3.27
NOW deposits................................................... 2.41 2.30 2.47 2.84
Certificate accounts........................................... 5.41 5.78 5.14 5.10
FHLB advances.................................................. 6.24 6.03 5.83 3.96
Combined weighted average rate paid on interest-
bearing liabilities...................................... 4.93 4.94 4.60 4.12
Spread........................................................... 2.68 2.48 2.68 3.52
</TABLE>
Asset/Liability Management
The Company is subject to interest rate risk to the extent that its
interest-bearing liabilities reprice on a different basis than its
interest-earning assets. OTS regulations provide a Net Portfolio Value ("NPV")
approach to the quantification of interest rate risk. In essence, this approach
calculates the difference between the present value of liabilities, expected
cash flows from assets and cash flows from off balance sheet contracts. Under
OTS regulations, an institution's "normal" level of interest rate risk in the
event of an immediate and sustained 200 basis point change in interest rates is
a decrease in the institution's NPV in an amount not exceeding 2% of the present
value of its assets. Thrift institutions with greater than "normal" interest
rate exposure must take a deduction from their total capital available to meet
their riskbased capital requirement. The amount of that deduction is one-half of
the difference between (a) the institution's actual calculated exposure to the
200 basis point interest rate increase or decrease (whichever results in the
greater pro forma decrease in NPV) and (b) its "normal" level of exposure which
is 2% of the present value of its assets. Regulations do exempt all institutions
under $300 million in assets and risk-based capital exceeding 12% from reporting
information to calculate exposure and making any deductions from risk-based
capital. At June 30, 1997, the Bank's total assets were $72.2 million and
risk-based capital was 16.8% and the Bank would have been exempt from
calculating or making any risk-based capital reduction.
The Bank's management feels interest-rate risk is an important factor
and makes all reports necessary to the OTS to calculate interest-rate risk on a
voluntary basis. At June 30, 1997, 2%
12
<PAGE>
of the present value of the Bank's assets was approximately $1.4 million which
was less than the greatest decrease in NPV resulting from a 200 basis point
change in interest rates. As a result, the Bank would have been required to make
a deduction from total capital in calculating its risk- based capital
requirement had this rule been in effect on such date and had the Bank not been
exempt from reporting on such date. Based on June 30, 1997, net NPV information
the amount of the Bank's deduction from capital, had it been subject to
reporting, would have been approximately $450,000.
It has been and continues to be a priority of the Board of Directors
and management to manage interest rate risk and thereby limit any negative
effect of changes in interest rates on the NPV. The Bank's Interest Rate Risk
Policy, established by the Board of Directors, promulgates acceptable limits on
the amount of change in NPV given certain changes in interest rates. Specific
strategies have included the sale of most long-term, fixed-rate loans to reduce
the average maturity of the Bank's interest-earning assets and the use of FHLB
advances to lengthen the effective maturity of its interest-bearing liabilities.
Presented below, as of June 30, 1997, is an analysis of the Bank's
estimated interest rate risk as measured by changes in NPV for instantaneous and
sustained parallel shifts in interest rates, up and down 300 basis points in 100
point increments, compared to the limits set by the Board. Assumptions used in
calculating the amounts in this table are those assumptions utilized by the OTS
in assessing the interest risk of the thrifts it regulates. Based upon
assumptions at June 30, 1997, the NPV of the Bank's assets was $69.2 million.
NPV is calculated by the OTS for the purposes of interest rate risk assessment
and should not be considered as an indicator of value of the Bank.
<TABLE>
<CAPTION>
Assumed
Change in At June 30, 1997 At June 30, 1996
Interest Rates Board Limit ------------------------------------ -----------------------------------
(Basis Points) % Change in NPV $ Change in NPV % Change in NPV $ Change in NPV % Change in NPV
- -------------- --------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C> <C>
+300 -57 -3,571 -82 -1,891 -27
+200 -46 -2,340 -54 -1,171 -17
+100 -35 -1,128 -26 -518 -7
0 0 0 0 0 0
-100 -35 956 22 +309 +4
-200 -46 1,825 42 +459 +7
-300 -57 2,906 67 +702 +10
</TABLE>
In the event of a 300 basis point change in interest rate based upon
estimates as of June 30, 1997, the Bank would experience a 67% increase in NPV
in declining rate environment and a 82% decrease in NPV in a rising rate
environment. During periods of rising rates, the value of monetary assets and
liabilities decline. Conversely, during periods of falling rates, the value of
monetary assets and liabilities increase. However, the amount of change in value
of specific assets and liabilities due to changes in rates is not the same in a
rising rate environment as in a falling rate environment (i.e., the amount of
value increase under a specific rate decline may not equal the amount of value
decrease under an identical upward rate movement). Based upon the NPV
methodology, the increased level of interest rate risk experienced by the Bank
in recent periods was due to the increased use of relatively short-term FHLB
advances to fund its investment in
13
<PAGE>
loans with substantially longer maturities than the advances and the Bank's use
of an interest rate which lags behind market rates to adjust the interest rate
on its ARM loans originated prior to June 1995. In June 1995, the Bank changed
the interest rate index it utilized for its ARM products. To the extent that the
Bank continues to use liabilities with shorter terms to maturity than the assets
in which it invests, the Bank will continue to experience increased levels of
interest rate risk in a rising interest rate environment.
In evaluating the Bank's exposure to interest rate risk, certain
shortcomings, inherent in the method of analysis presented in the foregoing
table must be considered. For example, although certain assets and liabilities
may have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
Liquidity and Capital Resources
Liquidity refers to the ability of a financial institution to generate
sufficient cash to fund current loan demand, meet savings deposit withdrawals
and pay operating expenses. The Company's primary sources of funds are deposits,
proceeds from principal and interest payments on loans (both scheduled and
prepayments) and investment and mortgage-backed securities. The Company attempts
to price its deposits to meet asset/liability objectives discussed above,
consistent with local market conditions. While maturities and scheduled
amortization of loans and mortgage-backed securities are a predictable source of
funds, deposit flows and mortgage prepayments are greatly influenced by market
interest rates, economic conditions and competition. In a period of declining
interest rates, it is anticipated that mortgage prepayments would increase. As a
result, these proceeds from mortgage prepayments would be invested in lower
yielding loans or other investments thus reducing interest income. In contrast,
in a period of rising interest rates, it is anticipated that mortgage
prepayments would decrease thereby reducing the proceeds from such prepayments
that would be available for investment in higher yielding loans or investments
which would have the effect of increasing interest income.
The Company's most liquid asset is cash. At June 30, 1997, 1996 and
1995, cash totaled $1.5 million, $1.1 million and $1.1 million, respectively.
The level of cash is dependent on the Company's operating, financing and
investing activities. These activities are discussed below for the fiscal years
ended June 30, 1997, 1996 and 1995.
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996. During
the fiscal year ended June 30, 1997, cash increased $386,000 and
interest-earning deposits increased $415,000. In addition, interest-bearing
deposits increased $9.0 million and FHLB advances decreased $8.6 million. The
increase in deposits was used to repay advances.
14
<PAGE>
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995. During
the fiscal year ended June 30, 1996, cash decreased $1,000 and interest-earning
deposits decreased $1.5 million. In addition, FHLB advances increased $10.0
million. These funds were used to fund the $5.1 million deposit sale, increase
loans and to purchase investment securities.
The primary investing activity of the Company is the origination of
mortgage and consumer loans and the purchase of mortgage-backed securities and
other securities. During the fiscal years ended June 30, 1997, 1996 and 1995,
the Company originated mortgage loans of $8.4 million, $15.3 million and $11.5
million, respectively. The Company originated $8.9 million, $7.3 million and
$9.0 million, respectively, of consumer loans during fiscal 1997, 1996 and 1995.
During its year ended June 30, 1995, mortgage-backed securities purchased
were$3.0 million.
Liquidity management for the Company is both a daily and long-term
function of the Company's management strategy. The Company adjusts its
investments in liquid assets based upon management's assessment of (i) expected
loan demand, (ii) projected purchases of investment and mortgage-backed
securities, (iii) expected deposit flows, (iv) yields available on
interest-bearing deposits, and (v) liquidity of its asset/liability management
program. Excess funds are generally invested in short-term investments such as
short-term deposits and U.S. Agency obligations. In the event that the Company
should require funds beyond its ability to generate them internally, it has the
ability to borrow funds from the FHLB of Indianapolis. Such borrowings, which
must be collateralized, are limited by federal law to 20 times the amount paid
for capital stock of the FHLB and are typically limited by FHLB policy to 50% of
the Company's adjusted assets (total assets less borrowings). At June 30, 1997,
the Company had $10.9 million in outstanding advances from the FHLB of
Indianapolis and $1.0 million of FHLB stock. The Company has the ability to
purchase additional stock from the FHLB which would be necessary for the Company
to increase its FHLB borrowings.
At June 30, 1997, the Company had outstanding loan commitments of
$947,000. The Company anticipates that it will have sufficient funds available
to meet its current loan commitments. Certificates of deposit which are
scheduled to mature in one year or less from June 30, 1997 totaled $24.8
million. Management believes that a significant portion of such deposits will
remain with the Company.
The Bank is required to maintain minimum levels of liquid assets as
defined by OTS regulations. This requirement, which may be varied at the
direction of the OTS depending upon economic conditions, is based upon a
percentage of deposits and short-term borrowings. The required ratio at June 30,
1997 was 5%. The Bank's liquidity ratios were 11.3% and 9.3%, respectively, at
June 30, 1997 and June 30, 1996.
15
<PAGE>
As a federally chartered savings bank, the Bank is required to maintain
a minimum level of regulatory capital. At June 30, 1997, the Bank exceeded all
of its capital requirements on a fully phased-in basis. The following table sets
forth AmericanTrust's compliance with its capital requirements at June 30, 1997.
At June 30, 1997
-----------------
Amount(1) Percent
------ -------
Tangible Capital:
Capital level....................... $7,260 10.1%
Requirement......................... 1,083 1.5
------ ----
Excess.............................. $6,177 8.6%
====== ====
Core Capital:
Capital level....................... $7,260 10.1%
Requirement(2)...................... 2,165 3.0
------ ----
Excess.............................. $5,095 7.1%
====== ====
Risk-Based Capital:
Capital level....................... $7,642 16.8%
Requirement(3)...................... 3,640 8.0
------ ----
Excess.............................. $4,002 8.8%
====== ====
_____________________________
(1) Tangible and core capital levels are shown as a percentage of adjusted
total assets; risk-based capital levels are shown as a percentage of
risk-weighted assets.
(2) In April 1991, the OTS proposed a core capital requirement for savings
associations comparable to the requirement for national banks that
became effective December 31, 1990. The proposal calls for an OTS core
capital requirement of at least 3% of total adjusted assets for thrifts
that receive the highest supervisory rating for safety and soundness,
with a 4% to 5% core capital requirement for all other thrifts.
(3) Includes $382,000 of general valuation allowances.
Impact of New Accounting Standards and Changes in Federal Tax Law
Accounting for Mortgage Servicing Rights. During 1995, the Financial
Accounting Standards Board ("FASB") issued Statement of Financial Accounting
Standard ("SFAS") No. 122 entitled Accounting for Mortgage Servicing Rights.
SFAS No. 122 pertains to mortgage banking enterprises and financial institutions
that conduct operations that are substantially similar to the primary operations
of a mortgage banking enterprises. SFAS No. 122 eliminates the accounting
distinction between mortgage servicing rights that are acquired through loan
origination activities and those acquired through purchase transactions. Under
SFAS No. 122, if a mortgage banking enterprise sells or securitizes loans and
retains the mortgage servicing rights, the enterprise must allocate the total
cost of the mortgage loans to the mortgage servicing rights and the loans
(without the rights) based on their relative fair values if it is practicable to
estimate those fair values. If it is not practicable, the entire cost should be
allocated to the mortgage loans and no cost should be allocated to the mortgage
servicing rights. An entity would measure impairment of mortgage service rights
and loans based on the excess of the carrying amount of the mortgage servicing
rights portfolio over the fair value of that portfolio.
16
<PAGE>
SFAS No. 122 is to be applied prospectively in fiscal years beginning
after December 15, 1995, to transactions in which an entity acquires mortgage
servicing rights and to impairment evaluations of all capitalized mortgage
servicing rights. The adoption of SFAS No. 122 on July 1, 1996 did not have a
significant impact on financial condition and results of operations.
Accounting for Stock-Based Compensation. The FASB has issued SFAS No.
123, Accounting for Stock-Based Compensation. This Statement establishes a fair
value based method of accounting for stock-based compensation plans. The FASB
encourages all entities to adopt this method for accounting for all arrangements
under which employees receive shares of stock or other equity instruments of the
employer, or the employer incurs liabilities to employees in amounts based on
the price of its stock.
Due to the extremely controversial nature of this project, the
Statement permits a company to continue the accounting for stock-based
compensation prescribed in Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees. If a company elects that option which
the Company did during fiscal year ended June 30, 1997, pro forma disclosures of
net income (and EPS, if presented) are required in the footnotes as if the
provisions of this Statement had been used to measure stock-based compensation.
The disclosure requirements of Opinion No. 25 have been superseded by
the disclosure requirements of this Statement.
Once an entity adopts that fair value based method for accounting for
these transactions, that election cannot be reversed.
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. Statement No. 125 entitled Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,
breaks new ground in resolving long-standing questions about whether
transactions should be accounted for as secured borrowings or as sales. The
Statement provides consistent standards for distinguishing transfers of
financial assets that are sales from transfers that are considered secured
borrowings.
A transfer of financial assets in which the transferor surrenders
control over those assets is accounted for as a sale to the extent that
consideration other than beneficial interests in the transferred assets is
received in exchange. The transferor has surrendered control over transferred
assets only if all of the following conditions are met:
o The transferred assets have been isolated from the transferor
- put presumptively beyond the reach of the transferor and its
creditors, even in bankruptcy or other receivership.
o Each transferee obtains the right - free of conditions that
constrain it from taking advantage of that right - to pledge
or exchange the transferred assets, or the transferee is a
qualifying special-purpose entity and the holders of
beneficial
17
<PAGE>
interest in that entity have the right - free of conditions
that constrain them from taking advantage of that right - to
pledge or exchange those interests.
o The transferor does not maintain effective control over the
transferred assets through an agreement that both entitles and
obligates the transferor to repurchase or redeem them before
their maturity, or an agreement that entitles the transferor
in repurchase or redeem transferred assets are not readily
obtainable.
This Statement provides detailed measurement standards for assets and
liabilities included in these transactions. It also includes implementation
guidance for assessing isolation of transferred assets and for accounting for
transfers of partial interest, servicing of financial assets, securitization,
transfers or sales type and direct financing lease receivables, securities
lending transactions, repurchase agreements, "wash sales," loan syndications and
participation, risk participation in banker's acceptances, factoring
arrangements, transfers of receivables with recourse and extinguishment of
liabilities.
The Statements supersedes FASB Statements No. 76, Extinguishment of
Debt, and No. 77, Reporting by Transferors for Transfers of Receivables with
Recourse, and No. 122, Accounting for Mortgage Servicing Rights and amends FASB
Statement No. 115, Accounting for Certain Investments in Debt and Equity
Securities, in addition to clarifying or amending a number of other statements
and technical bulletins.
This Statement is effective for transfers and servicing of financial
assets and extinguishment of liabilities occurring after December 31, 1996 and
is to be applied prospectively. Earlier or retroactive application is not
permitted. The adoption of SFAS No. 125 during 1997 did not have a significant
impact on financial condition or results of operations.
In February 1997, the FASB issued SFAS No. 128, Earnings per Share,
establishing standards for computing and presenting earnings per share ("EPS")
and applies to entities with publicly held common stock or potential common
stock, as well as any other entity that chooses to present EPS in its financial
statements.
This Statement simplifies the current standards of APB Opinion No. 15,
Earnings per Share, and makes them comparable to international EPS standards. It
eliminates the presentation of primary EPS and requires presentation of basic
EPS (the principal difference being that common stock equivalents are not
considered in the computation of basic EPS). It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all entities
with complex capital structures and requires a reconciliation of the numerator
and denominator of the basic EPS computation of the numerator and denominator of
the diluted EPS computation.
Basic EPS includes no dilution and is computed by dividing income
available to common stockholders by the weighted-average number of common shares
outstanding for the period. Diluted EPS reflects the potential dilution that
could occur if the potential common shares were exercised or converted into
common stock or resulted in the issuance of common stock that then
18
<PAGE>
shared in the earnings of the entity. Diluted EPS is computed similarly to that
of fully diluted EPS pursuant to Opinion No. 15.
The Statement is effective for financial statements issued for periods
ending after December 15, 1997, including interim periods. Earlier application
is not permitted. The Statement requires restatement of all prior-period EPS
data presented.
In February 1997, the FASB issued SFAS No. 129, Disclosure of
Information about Capital Structure, continuing the current requirements to
disclose certain information about an entity's capital structure found in APB
Opinion No. 10, Omnibus Opinion -- 1966, Opinion No. 15, and SFAS No. 47,
Disclosure of Long-Term Obligations. It consolidates specific disclosure
requirements from those standards. SFAS No. 129 is effective for our financial
statements issued for periods ending after December 15, 1997, including interim
periods.
In June 1997, the FASB issued SFAS No. 130, Reporting Comprehensive
Income, establishing standards for reporting and display of comprehensive income
and its components (revenues, expenses, gains and losses) in a full set of
general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. This Statement does not
require a specific format for that financial statement but requires that an
enterprise display an amount representing total comprehensive income for the
period in that financial statement.
SFAS No. 130 will also require the Company to (a) classify items of
other comprehensive income by their nature in a financial statement and (b)
display the accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section of a
statement of financial position.
The Statement is effective for fiscal years beginning after December
15, 1997. Reclassification of financial statements for earlier periods provided
for comparative purposes is required.
In June 1997, the FASB issued SFAS No. 131, Disclosures about Segments
of an Enterprise and Related Information, establishing standards for the way
public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about operating segments in interim financial reports issued to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas and major customers. This Statement
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, but retains the requirement to report information about major
customers. It amends SFAS No. 94, Consolidation of All Majority-Owned
Subsidiaries, to remove the special disclosure requirements for previously
unconsolidated subsidiaries.
SFAS No. 131 requires that a public business enterprise report
financial and descriptive information about its reportable operating segments.
Operating segments are components of an
19
<PAGE>
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. Generally, financial
information is required to be reported on the basis that it is used internally
for evaluating segment performance and deciding how to allocate resources to
segments.
This Statement requires that a public business enterprise report a
measure of segment profit or loss, certain specific revenue and expense items
and segment assets. It requires reconciliations of total segment revenues, total
segment profit or loss, total segment assets and other amounts disclosed for
segments to corresponding amounts in the enterprise's general-purpose financial
statements. This statement also requires that a public business enterprise
report descriptive information about the way that the operating segments were
determined, the products and services provided by the operating segments,
differences between the measurements used in reporting segment information and
those used in the enterprise's general-purpose financial statements and changes
in the measurement of segment amounts from period to period.
SFAS No. 131 is effective for financial statements for periods
beginning after December 15, 1997. In the initial year of application,
comparative information for earlier years is to be restated. This Statement need
not be applied to interim financial statements in the initial year of its
application, but comparative information for interim periods in the initial year
of application is to be reported in financial statements for interim periods in
the second year of application.
Impact of Inflation and Changing Prices
The Company's Consolidated Financial Statements and Notes have been
prepared in accordance with generally accepted accounting principles, which
require the measurement of financial position and operating results in terms of
historical dollars without consideration for changes in the relative purchasing
power of money over time due to inflation. The impact of inflation can be found
in the increased cost of the Company's operations. Nearly all the assets and
liabilities of the Company are financial, unlike most industrial companies. As a
result, the Company's performance is directly impacted by changes in interest
rates, which are indirectly influenced by inflationary expectations. The
Company's ability to match the financial assets to the financial liabilities in
its asset/liability management will tend to minimize the change of interest
rates on the Company's performance. Changes in investment rates do not
necessarily move to the same extent as changes in the price of goods and
services.
20
<PAGE>
Independent Auditor's Report
To the Stockholders and
Board of Directors
AmTrust Capital Corp.
Peru, Indiana
We have audited the consolidated balance sheet of AmTrust Capital Corp.
and subsidiary as of June 30, 1997 and 1996, and the related consolidated
statements of income, changes in stockholders' equity and cash flows for
each of the three years in the period ended June 30, 1997. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements described above
present fairly, in all material respects, the consolidated financial
position of AmTrust Capital Corp. and subsidiary as of June 30, 1997 and
1996, and the results of their operations and their cash flows for each
of the three years in the period ended June 30, 1997, in conformity with
generally accepted accounting principles.
/s/ Geo. S. Olive & Co. LLC
Indianapolis, Indiana
July 29, 1997
21
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks ............................ $ 1,514,563 $ 1,128,289
Interest-bearing deposits .......................... 1,093,288 617,842
Investment securities
Available for sale ............................... 12,148,535 11,919,170
Held to maturity ................................. 2,067,249 2,612,885
------------ ------------
Total investment securities .................. 14,215,784 14,532,055
Mortgage loans held for sale ....................... 1,081,538 1,508,611
Loans .............................................. 50,167,394 50,294,720
Allowance for loan losses .......................... (522,743) (494,375)
------------ ------------
Net loans .................................... 49,644,651 49,800,345
Premises and equipment ............................. 1,277,976 1,124,519
Federal Home Loan Bank of Indianapolis stock ....... 1,050,000 1,050,000
Cash surrender value--life insurance policies ...... 1,135,038 1,100,203
Interest receivable ................................ 376,812 378,648
Deferred income tax benefit ........................ 204,193 326,650
Current income tax refundable ...................... 196,299 22,105
Other assets ....................................... 455,320 302,400
------------ ------------
Total assets ................................. $ 72,245,462 $ 71,891,667
============ ============
Liabilities
Deposits ........................................... $ 53,522,701 $ 44,561,525
Advances from Federal Home Loan Bank of Indianapolis 10,901,738 19,500,036
Interest payable ................................... 85,254 83,030
Other liabilities .................................. 272,256 535,787
------------ ------------
Total liabilities ............................ 64,781,949 64,680,378
------------ ------------
Commitments and Contingencies
Stockholders' Equity
Preferred stock, $.01 par value
Authorized and unissued--350,000 shares
Common stock, $.01 par value
Authorized--1,750,000 shares
Issued--580,064 shares ........................... 5,801 5,801
Paid-in capital .................................... 4,193,137 4,178,218
Retained earnings--substantially restricted ........ 4,249,256 4,167,860
Unearned ESOP shares--34,804 and 39,445 shares ..... (278,430) (315,554)
Treasury stock at cost--53,585 and 52,205 shares ... (553,086) (535,299)
Net unrealized loss on securities available for sale (153,165) (289,737)
------------ ------------
Total stockholders' equity ................... 7,463,513 7,211,289
------------ ------------
Total liabilities and stockholders' equity ... $ 72,245,462 $ 71,891,667
============ ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans receivable ................................... $3,997,135 $3,949,769 $3,519,243
Investment securities, including dividends ......... 1,074,817 875,140 854,897
Deposits with financial institutions ............... 55,128 131,645 104,479
---------- ---------- ----------
Total interest income ........................ 5,127,080 4,956,554 4,478,619
---------- ---------- ----------
Interest Expense
Deposits ........................................... 2,257,431 2,314,154 2,002,968
Advances from Federal Home Loan Bank of Indianapolis 912,693 769,631 730,517
---------- ---------- ----------
Total interest expense ....................... 3,170,124 3,083,785 2,733,485
---------- ---------- ----------
Net Interest Income ................................... 1,956,956 1,872,769 1,745,134
Provision for loan losses .......................... 32,652 124,683 88,249
---------- ---------- ----------
Net Interest Income After Provision for Losses on Loans 1,924,304 1,748,086 1,656,885
---------- ---------- ----------
Other Income
Service charges on deposit accounts ................ 76,847 98,091 75,891
Gains on sale of
Investment securities ............................ 15,436 70,131
Loans held for sale .............................. 174,974 200,274 124,683
Deposits ......................................... 180,613
Bank premises .................................... 80,322
Loan fees and service charges ...................... 77,455 91,024 56,101
Annuity and other commissions ...................... 144,052 98,291 16,604
Other income ....................................... 82,278 83,181 50,332
---------- ---------- ----------
555,606 847,232 393,742
---------- ---------- ----------
Other Expenses
Salaries and employee benefits ..................... 915,164 869,743 768,468
Net occupancy expenses ............................. 124,753 152,818 113,791
Equipment expenses ................................. 107,881 97,914 88,900
Data processing fees ............................... 106,589 117,178 104,968
Deposit insurance expense .......................... 360,563 117,208 111,946
Legal fees ......................................... 53,269 65,395 19,216
Customer deposit account expense ................... 53,524 66,599 47,625
Advertising and promotion .......................... 41,599 50,123 65,957
Printing and office supplies ....................... 48,463 59,688 57,468
Other expenses ..................................... 487,013 474,809 366,763
---------- ---------- ----------
2,298,818 2,071,475 1,745,102
---------- ---------- ----------
Income Before Income Tax .............................. 181,092 523,843 305,525
Income tax expense ................................. 46,798 191,085 111,520
---------- ---------- ----------
Net Income ............................................ $ 134,294 $ 332,758 $ 194,005
========== ========== ==========
Net Income Per Share .................................. $ .27 $ .63
Weighted Average Shares Outstanding ................... 491,287 527,669
</TABLE>
See notes to consolidated financial statements.
23
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Consolidated Statement of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Common Stock
----------------------- Paid-in Retained Unearned
Shares Amount Capital Earnings ESOP Shares
- ------------------------------------------- ----------- ----------- ------------ -------------- --------------
<S> <C> <C> <C> <C> <C>
Balances, July 1, 1994 $3,641,097
Net income for 1995 194,005
Common stock issued in conversion, net
of costs 580,064 $5,801 $4,168,357
Contribution for unearned ESOP shares $(371,240)
ESOP shares earned 1,740 18,562
Net change in unrealized loss on
securities available for sale
----------- ----------- ------------ -------------- --------------
Balances, June 30, 1995[OBJECT OMITTED] 580,064 5,801 4,170,097 3,835,102 (352,678)
Net income for 1996 332,758
Purchase of common stock
ESOP shares earned 8,121 37,124
Net change in unrealized loss on
securities available for sale
----------- ----------- ------------ -------------- --------------
Balances, June 30, 1996 580,064 5,801 4,178,218 4,167,860 (315,554)
Net income for 1997 134,294
Dividends ($.10 per share) (52,898)
Purchase of common stock
ESOP shares earned 14,919 37,124
RRP shares earned
Net change in unrealized loss on
securities available for sale
----------- ----------- ------------ -------------- --------------
Balances, June 30, 1997 580,064 $5,801 $4,193,137 $4,249,256 $(278,430)
=========== =========== ============ ============== ==============
</TABLE>
24
<PAGE>
<TABLE>
<CAPTION>
Net Unrealized
Loss on
Treasury Stock Securities
------------------------- Available
Shares Amount For Sale Total
- ------------------------------------------- ------------- ----------- ----------------- -------------
<S> <C> <C> <C> <C>
Balances, July 1, 1994 $(50,198) $3,590,899
Net income for 1995 194,005
Common stock issued in conversion, net
of costs 4,174,158
Contribution for unearned ESOP shares (371,240)
ESOP shares earned 20,302
Net change in unrealized loss on
securities available for sale 29,011 29,011
------------- ----------- ----------------- -------------
Balances, June 30, 1995[OBJECT OMITTED] (21,187) 7,637,135
Net income for 1996 332,758
Purchase of common stock (52,205) $(535,299) (535,299)
ESOP shares earned 45,245
Net change in unrealized loss on
securities available for sale (268,550) (268,550)
------------- ----------- ----------------- -------------
Balances, June 30, 1996 (52,205) (535,299) (289,737) 7,211,289
Net income for 1997 134,294
Dividends ($.10 per share) (52,898)
Purchase of common stock (5,000) (56,250) (56,250)
ESOP shares earned 52,043
RRP shares earned 3,620 38,463 38,463
Net change in unrealized loss on
securities available for sale 136,572 136,572
------------- ----------- ----------------- -------------
Balances, June 30, 1997 (53,585) $(553,086) $(153,165) $7,463,513
============= =========== ================= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $ 134,294 $ 332,758 $ 194,005
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Provision for loan losses 32,652 124,683 88,249
Premium and discount amortization, net (289) 8,101 272
Depreciation and amortization 107,520 94,183 82,186
Gains on sales of securities (15,436) (70,131)
Gain on sale of deposits (180,613)
Gain on disposal of bank premises (80,322)
Deferred income tax 32,881 (51,495) 11,897
Current income tax refundable (174,194)
Loans originated for sale (5,892,481) (12,488,882) (10,476,355)
Proceeds from sales and paydowns on loans held for sale 6,494,528 13,022,131 8,511,086
Gains on sales of loans held for sale (174,974) (200,274) (124,683)
ESOP shares earned 52,043 45,245 20,302
RRP compensation expense 38,463
Change in
Interest receivable and other assets (151,084) (128,500) (169,807)
Cash surrender value of life insurance policies (34,835) (46,696) (44,536)
Interest payable and other liabilities (261,307) 257,372 (92,054)
------------ ------------ ------------
Net cash provided (used) by operating activities 203,217 692,255 (2,069,569)
------------ ------------ ------------
Investing Activities
Net change in interest-bearing deposits (475,446) 1,479,592 (1,503,001)
Purchases of securities available for sale (50,441) (10,439,338) (9,007,914)
Payments on securities available for sale 1,444,868 12,645
Proceeds from sales of securities available for sale 3,748,088 6,724,726
Purchases of securities held to maturity (500,000)
Payments on securities held to maturity 593,149 1,852,206 1,725,884
Net change in loans 123,042 (2,134,989) (3,262,860)
Proceeds from disposal of bank premises 200,000
Purchase of premises and equipment (260,977) (177,056) (605,083)
Purchase of FHLB of Indianapolis stock (250,000) (408,200)
Purchase of life insurance policies (109,010)
------------ ------------ ------------
Net cash used by investing activities (70,673) (4,385,639) (6,823,803)
------------ ------------ ------------
Financing Activities
Net change in deposits 8,961,176 (5,772,323) 2,165,133
Proceeds from FHLB advances 38,716,570 41,300,000 5,500,000
Repayment of FHLB advances (47,314,868) (31,299,964) (2,250,000)
Sale of common stock, net of costs 3,802,918
Purchase of common stock (56,250) (535,299)
Dividends paid (52,898)
------------ ------------ ------------
Net cash provided by financing activities 253,730 3,692,414 9,218,051
------------ ------------ ------------
Net Change in Cash 386,274 (970) 324,679
Cash and Due From Banks, Beginning of Year 1,128,289 1,129,259 804,580
------------ ------------ ------------
Cash and Due From Banks, End of Year $ 1,514,563 $ 1,128,289 $ 1,129,259
============ ============ ============
Additional Cash Flows and Supplementary Information
Interest paid $ 3,192,068 $ 3,058,401 $ 2,695,818
Income tax paid 283,711 127,350 384,836
Mortgage loans transferred from held for sale 3,488,366
Common stock issued to ESOP leveraged with an employer loan 371,240
</TABLE>
See notes to consolidated financial statements
25
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Nature of Operations and Summary of Significant Accounting Policies
The accounting and reporting policies of AmTrust Capital Corp. ("Company") and
its wholly owned subsidiary, AmericanTrust Federal Savings Bank ("Bank") and
the Bank's wholly owned subsidiary, Indiana Financial Service Corporation
("IFSCO"), conform to generally accepted accounting principles and reporting
practices followed by the thrift industry. The more significant of the
policies are described below.
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 the reporting period.
Actual results could differ from those estimates.
The Company is a thrift holding company whose principal activity is the
ownership and management of the Bank. The Bank operates under a federal thrift
charter and provides full banking services. As a federally-chartered thrift,
the Bank is subject to regulation by the Office of Thrift Supervision ("OTS")
and the Federal Deposit Insurance Corporation.
The Bank generates mortgage and consumer loans and receives deposits from
customers located primarily in Miami and Howard counties. The Bank's loans are
generally secured by specific items of collateral including real property and
consumer assets. Although the loan portfolio is diversified, a significant
portion of the loan portfolio is comprised of mortgage loans.
IFSCO provides annuity sales, credit life insurance, and title insurance
services to customers in the Bank's market areas.
Consolidation--The consolidated financial statements include the accounts of
the Company, the Bank, and IFSCO after elimination of all material
intercompany transactions and accounts.
Investment Securities--Debt securities are classified as held to maturity when
the Bank has the positive intent and ability to hold the securities to
maturity. Securities held to maturity are carried at amortized cost.
Debt securities not classified as held to maturity are classified as available
for sale. Securities available for sale are carried at fair value with
unrealized gains and losses reported separately through stockholders' equity,
net of tax.
26
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Amortization of premiums and accretion of discounts are recorded using the
interest method as interest income from securities. Realized gains and losses
are recorded as net security gains (losses). Gains and losses on sales of
securities are determined on the specific-identification method.
Mortgage servicing rights on originated loans are capitalized by allocating
the total cost of the mortgage loans between the mortgage servicing rights and
the loans based on their relative fair values. Capitalized servicing rights
are amortized in proportion to and over the period of estimated servicing
revenues.
Mortgage loans held for sale are recorded at the lower of aggregate cost or
market value. Net unrealized losses are recognized through a valuation
allowance by charges to income.
Loans are carried at the principal amount outstanding. A loan is impaired
when, based on current information or events, it is probable that the Bank
will be unable to collect all amounts due (principal and interest) according
to the contractual terms of the loan agreement. Payments with insignificant
delays not exceeding 90 days outstanding are not considered impaired. Certain
nonaccrual and substantially delinquent loans may be considered to be
impaired. The Bank considers its investment in one-to-four family residential
loans, consumer loans and lease contracts to be homogeneous and therefore
excluded from separate identification for evaluation of impairment. Interest
income is accrued on the principal balances of loans. The accrual of interest
on impaired and nonaccrual loans is discontinued when, in management's
opinion, the borrower may be unable to meet payments as they become due. When
interest accrual is discontinued, all unpaid accrued interest is reversed when
considered uncollectible. Interest income is subsequently recognized only to
the extent cash payments are received. Certain loan fees and direct costs are
being deferred and amortized as an adjustment of yield on the loans over the
contractual lives of the loans. When a loan is paid off or sold, any
unamortized loan origination fee or cost balance is credited to income.
Allowance for loan losses is maintained to absorb loan losses based on
management's continuing review and evaluation of the loan portfolio and its
judgment as to the impact of economic conditions on the portfolio. The
evaluation by management includes consideration of past loss experience,
changes in the composition of the portfolio, the current condition and amount
of loans outstanding, and the probability of collecting all amounts due.
Impaired loans are measured by the present value of expected future cash
flows, or the fair value of the collateral of the loan, if collateral
dependent.
The determination of the adequacy of the allowance for loan losses is based on
estimates that are particularly susceptible to significant changes in the
economic environment and market conditions. Management believes that as of
June 30, 1997, the allowance for loan losses is adequate based on information
currently available. A worsening or protracted economic decline in the area
within which the Company operates would increase the likelihood of additional
losses due to credit and market risks and could create the need for additional
loss reserves.
27
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Premises and equipment are carried at cost net of accumulated depreciation.
Depreciation is computed using the straight-line method based on the estimated
useful lives of the assets. Maintenance and repairs are expensed as incurred
while major additions and improvements are capitalized. Gains and losses on
dispositions are included in current operations.
Federal Home Loan Bank stock is a required investment for institutions that
are members of the Federal Home Loan Bank ("FHLB") system. The required
investment in the common stock is based on a predetermined formula.
Treasury stock is stated at cost. Cost is determined by the first-in,
first-out method.
Income tax in the consolidated statement of income includes deferred income
tax provisions or benefits for all significant temporary differences in
recognizing income and expenses for financial reporting and income tax
purposes. The Company files consolidated income tax returns with its
subsidiaries.
Earnings per share have been computed based upon the weighted average common
shares outstanding during the period subsequent to the Bank's conversion to a
stock savings bank on March 28, 1995. Unearned Employee Stock Ownership Plan
("ESOP") shares have been excluded from the computation of average common
shares outstanding. Common stock equivalents, consisting of shares issuable
under employee benefit plans, were not included since their effect on dilution
was insignificant. Net income per share for the year ended June 30, 1995 is
not meaningful.
Conversion
The Bank converted from a mutual federal savings bank to a stock federal
savings bank on March 28, 1995, and issued all of its common stock to the
Company. Concurrently with the conversion, the Company issued 580,064 shares
of Company common stock, with $.01 par value, at $8.00 per share. Net proceeds
of the Company's stock issuance, after costs, were approximately $4 million.
Restriction on Cash
The Bank is required to maintain reserve funds in cash and/or on deposit with
the Federal Reserve Bank. The reserve required at June 30, 1997, was $64,000.
28
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Investment Securities
1997
---------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ------------------------------------------------ ---------------- ---------------- ------------------ ----------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 8,500 $191 $ 8,309
Mortgage-backed securities 2,792 68 2,724
Mutual funds 1,117 1 1,116
---------------- ---------------- ------------------ ----------------------
Total available for sale 12,409 260 12,149
---------------- ---------------- ------------------ ----------------------
Held to maturity
Federal agencies 500 7 493
Mortgage-backed securities 1,384 34 1,350
Asset-backed securities 183 33 150
---------------- ---------------- ------------------ ----------------------
Total held to maturity 2,067 74 1,993
---------------- ---------------- ------------------ ----------------------
Total investment securities $14,476 $0 $334 $14,142
================ ================ ================== ======================
1996
---------------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ------------------------------------------------ ---------------- ---------------- ------------------ ----------------------
Available for sale
Federal agencies $ 8,498 $381 $ 8,117
Mortgage-backed securities 2,841 104 2,737
Mutual funds 1,067 2 1,065
---------------- ---------------- ------------------ ----------------------
Total available for sale 12,406 487 11,919
---------------- ---------------- ------------------ ----------------------
Held to maturity
Federal agencies 500 21 479
Mortgage-backed securities 1,729 72 1,657
Asset-backed securities 384 22 362
---------------- ---------------- ------------------ ----------------------
Total held to maturity 2,613 115 2,498
---------------- ---------------- ------------------ ----------------------
Total investment securities $15,019 $0 $602 $14,417
================ ================ ================== ======================
</TABLE>
29
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The amortized cost and fair value of securities held to maturity and available
for sale at June 30, 1997, by contractual maturity, are shown below. Expected
maturities will differ from contractual maturities because issuers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
1997
------------------------------------------------------------------
Available for Sale Held to Maturity
------------------------------- ----------------------------------
Amortized Fair Amortized Fair
Maturity Distribution at June 30 Cost Value Cost Value
- --------------------------------------------------------- --------------- --------------- ----------------- ----------------
<S> <C> <C> <C> <C>
Less than one $ 500 $ 493
One to five years $ 3,000 $ 2,968
Five to ten years 500 482
After ten years 5,000 4,859
--------------- --------------- ----------------- ----------------
8,500 8,309 500 493
Mortgage-backed securities 2,792 2,724 1,384 1,350
Other asset-backed securities 183 150
Mutual funds 1,117 1,116
--------------- --------------- ----------------- ----------------
Totals $12,409 $12,149 $2,067 $1,993
=============== =============== ================= ================
</TABLE>
Securities with a carrying value of $8,146,000 and $11,709,000 were pledged at
June 30, 1997 and 1996 to secure FHLB advances.
There were no sales of securities for the year ended June 30, 1997. Proceeds
from sales of securities available for sale during 1996 and 1995 were
$3,748,000 and $6,725,000. Gross gains of $15,000 and $70,000 for the years
ended June 30, 1996 and 1995 were realized on those sales.
On December 19, 1995, the Company transferred certain securities from held to
maturity to available for sale in accordance with a transition
reclassification allowed by the Financial Accounting Standards Board. Such
securities had a carrying value of $3,463,000 and a fair value of $3,529,000.
30
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Loans Receivable
June 30 1997 1996
- ------------------------------------------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Loans at June 30
Real estate mortgage loans--1 to 4 family dwellings $24,460 $27,968
Real estate mortgage loans--other 2,307 2,432
Consumer loans 20,577 17,103
Construction loans 919 690
Lease contracts 1,491 1,491
---------------- ---------------
Total loans 49,754 49,684
---------------- ---------------
Undisbursed portion of loans (857) (540)
Unearned interest (25) (72)
Deferred loan fees and costs, net 1,295 1,223
---------------- ---------------
413 611
---------------- ---------------
$50,167 $50,295
================ ===============
<CAPTION>
Year Ended June 30 1997 1996 1995
- --------------------------------------------------------------------------------- ------------- -------------- -------------
<S> <C> <C> <C>
Allowance for loan losses
Balances, July 1 $494 $400 $334
Provision for loan losses 33 125 88
Recoveries on loans 5
Loans charged off (9) (31) (22)
------------- -------------- -------------
Balances, June 30 $523 $494 $400
============= ============== =============
Nonperforming loans at June 30
Nonaccruing loans $1,796 $1,580 $90
Restructured loans 644 809 826
</TABLE>
Additional interest income of approximately $169,000, $26,000 and $30,000 for
1997, 1996 and 1995 would have been recorded had income on nonaccruing and
restructured loans been considered collectible and accounted for on the
accrual basis under their original terms.
31
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank has a business relationship with Bennett Funding Group, Inc. ("BFGI")
which filed for Chapter 11 bankruptcy protection on March 29, 1996. From 1992
to 1995, the Bank purchased commercial lease contracts covering business
equipment from BFGI, for which BFGI acts as servicer. At June 30, 1997, the
book value of the Bank's lease contracts totaled $817,000. In addition, the
Bank had $674,000 in Short Term Dealer Contracts with Bennett Leasing
Corporation ("BLC") which were later included in the bankruptcy proceedings.
Newspaper reports have indicated that BFGI may have utilized fictitious leases
in some of its business activities. The Securities and Exchange Commission has
filed a criminal and civil suit against an officer of BFGI which alleges
various fraudulent actions including the sale of the same leases to two or
more buyers. An allowance for loan losses of $216,000 has been allocated for
potential losses on leases. The leases are currently on non-accrual status.
BFGI continues to service the lease contracts under the conservatorship of the
court-appointed Trustee. The Company is continuing to evaluate the allegations
against BFGI and BLC and the effect that the bankruptcy filing will have on
its leases and its collateral. Until the evaluation is complete, management is
unable to predict with any certainty the effects of the bankruptcy on the
Bank.
Information on impaired loans is summarized below.
June 30 1997
- ------------------------------------------------------------------------------
Total impaired loans (no allowance is required) $280
====================
Year Ended June 1997
- ------------------------------------------------------------------------------
Average balance of impaired loans $282
Interest income recognized on impaired loans 14
Cash-basis interest included above 12
32
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Premises and Equipment
June 30 1997 1996
- ------------------------------------------------ --------------- --------------
Land $ 173 $ 173
Buildings and land improvements 1,060 902
Furniture and equipment 768 665
--------------- --------------
Total cost 2,001 1,740
Accumulated depreciation (723) (615)
--------------- --------------
Net $1,278 $1,125
=============== ==============
Deposits
June 30 1997 1996
- ------------------------------------------------ --------------- --------------
Noninterest bearing $ 451 $ 794
Interest-bearing demand 6,849 5,796
Savings deposits 11,592 11,797
Certificates and other time deposits
of $100,000 or more 13,287 4,755
Other certificates and time deposits 21,344 21,420
-------------- ----------------
Total deposits $53,523 $44,562
============== ================
Certificates and other time deposits maturing in years ending June 30
1998 $24,845
1999 4,459
2000 2,354
2001 1,675
2002 627
Thereafter 671
----------------
$34,631
================
33
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Advances From Federal Home Loan Bank of Indianapolis
<TABLE>
<CAPTION>
1997 1996
---------------------------------- ---------------------------------
Weighted Weighted
Average Average
June 30 Amount Rate Amount Rate
- ------------------------------------------------- ---------------- ----------------- ---------------- ----------------
<S> <C> <C> <C> <C>
Maturities in years ending June 30
1997 $13,817 5.61%
1998 $ 6,900 5.97%
1999 1,630 5.97 1,900 5.92
2006 2,372 6.71 3,783 6.71
---------------- ----------------
$10,902 6.13 $19,500 5.85%
================ ================
</TABLE>
The terms of a security agreement with the FHLB require the Bank to pledge as
collateral for advances specific qualifying first mortgage loans in an amount
of approximately $17,115,000, securities in an amount of $8,146,000, and all
stock in the FHLB. Advances are subject to restrictions or penalties in the
event of prepayment.
Loan Servicing
Mortgage loans serviced for others are not included in the accompanying
consolidated balance sheet. The unpaid principal balances of mortgage loans
serviced for others totaled $29,025,000 at June 30, 1997; $27,887,000 at June
30, 1996; and $21,962,000 at June 30, 1995.
On July 1, 1996, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 122, Accounting for Mortgage Servicing Rights. This
Statement requires the capitalization of retained mortgage servicing rights on
originated or purchased loans by allocating the total cost of the mortgage
loans between the mortgage servicing rights and the loans (without the
servicing rights) based on their relative fair values. SFAS No. 122 was
superseded during 1996 by SFAS No. 125, Accounting for Transfers and Servicing
of Financial Assets and Extinguishment of Liabilities. SFAS No. 125 (as did
SFAS No. 122) requires the assessment of impairment of capitalized mortgage
servicing rights and requires that impairment be recognized through a
valuation allowance based on the fair value of those rights. The aggregate
fair value of capitalized mortgage servicing rights at June 30, 1997
approximates carrying value.
Year Ended June 30 1997
- -------------------------------------------------------------------------
Mortgage Servicing Rights
Servicing rights capitalized $53
Amortization of servicing rights (5)
================
Balances, end of year $48
================
34
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Income Tax
Year Ended June 30 1997 1996 1995
- ---------------------------------------------------------------------------------- ------------- ------------- -------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $ 9 $182 $ 73
State 5 61 28
Deferred
Federal 27 (36) 8
State 6 (16) 3
------------- ------------- -------------
Total income tax expense $47 $191 $112
============= ============= =============
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $62 $178 $104
Non-taxable income (12) (17) (21)
Non-deductible expenses 9 9 6
Effect of state income taxes 7 30 20
Other (19) (9) 3
------------- ------------- -------------
Actual tax expense $47 $191 $112
============= ============= =============
Effective income tax rate 25.8% 34.0% 36.5%
============= ============= =============
</TABLE>
The tax expense related to securities gains and losses was $6,174, and $28,282
for 1996 and 1995.
35
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
A cumulative deferred tax asset of $204,000 and $327,000 is included in the
balance sheet at June 30, 1997 and 1996. The components of the asset are as
follows at:
June 30 1997 1996
- ------------------------------------------------------ ------------- -----------
Differences in depreciation methods $(72) $ (50)
Differences in accounting for loan losses 172 156
Deferred compensation 59 45
Indiana franchise taxes (9) (11)
FHLB stock dividends (20) (20)
Allowance for accrued interest 12 17
Deferred loan fees (30) (17)
Unrealized losses on securities available for sale 103 193
Mortgage servicing rights (21)
Other 10 14
------------- -----------
$204 $327
============= ===========
Assets $356 $425
Liabilities (152) (98)
------------- -----------
$204 $327
============= ===========
No valuation allowance was required at June 30, 1997 or June 30, 1996.
Retained earnings include approximately $1,014,000 for which no deferred
income tax liability has been recognized. This amount represents an allocation
of income to bad debt deductions for tax purposes only. Reduction of amounts
so allocated for purposes other than tax bad debt losses including redemption
of bank stock or excess dividends, or loss of "bank status" would create
income for tax purposes only, which income would be subject to the
then-current corporate income tax rate. The unrecorded deferred income tax
liability on the above amount was approximately $400,000.
36
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Commitments and Contingent Liabilities
In the normal course of business there are outstanding commitments and
contingent liabilities, such as commitments to extend credit, which are not
included in the accompanying financial statements. The Bank's exposure to
credit loss in the event of nonperformance by the other party to the financial
instruments for commitments to extend credit is represented by the contractual
or notional amount of those instruments. The Bank uses the same credit
policies in making such commitments as it does for instruments that are
included in the consolidated balance sheet.
Financial instruments whose contract amount represents credit risk at June 30
were as follows:
<TABLE>
<CAPTION>
1997 1996
- ----------------------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
Mortgage loan commitments
At variable rates $76 $182
At fixed rates ranging from 8.375 to 8.625% and 8.25 to 8.875% at June 30, 1996 and
1995 105 208
Mandatory commitments to sell loans to investors with interest rates ranging from 8.25%
to 9.25% 258 495
Consumer loan commitments 766 1,294
Loans sold with recourse 2,507 2,965
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. Since many of the commitments are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements. The Bank evaluates each
customer's credit worthiness on a case-by-case basis. The amount of collateral
obtained, if deemed necessary by the Bank upon extension of credit, is based
on management's credit evaluation. Collateral held varies, but may include
residential real estate, income-producing commercial properties, or other
assets of the borrower.
The Company and Bank are also subject to claims and lawsuits which arise
primarily in the ordinary course of business. It is the opinion of management
that the disposition or ultimate determination of such possible claims or
lawsuits will not have a material adverse effect on the consolidated financial
position of the Company or Bank.
37
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Restriction on Dividends
The Company is not subject to any regulatory restriction on the payment of
dividends to its stockholders.
The OTS regulations provide that a savings association which meets fully
phased-in capital requirements (those in effect on December 31, 1994) and is
subject only to "normal supervision" may pay out, as a dividend, 100 percent
of net income to date over the calendar year and 50 percent of surplus capital
existing at the beginning of the calendar year without supervisory approval,
but with 30 days prior notice to the OTS. Any additional amount of capital
distributions would require prior regulatory approval. A savings association
failing to meet current capital standards may only pay dividends with
supervisory approval.
At the time of conversion, a liquidation account was established in an amount
equal to the Bank's net worth as reflected in the latest statement of
condition used in its final conversion offering circular. The liquidation
account is maintained for the benefit of eligible deposit account holders who
maintain their deposit account in the Bank after conversion. In the event of a
complete liquidation (and only in such event), each eligible deposit account
holder will be entitled to receive a liquidation distribution from the
liquidation account in the amount of the then current adjusted subaccount
balance for deposit accounts then held, before any liquidation distribution
may be made to stockholders. Except for the repurchase of stock and payment of
dividends, the existence of the liquidation account will not restrict the use
or application of net worth. The initial balance of the liquidation account
was $3,625,000.
At June 30, 1997, total stockholder's equity of the Bank was $7,182,000, of
which approximately $2,090,000 was available for the payment of dividends.
Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies. Failure to meet minimum capital requirements can
initiate actions by the regulatory agencies that, if undertaken, could have a
material effect on the Company's financial statements. Under capital adequacy
guidelines and the regulatory framework for prompt corrective action, the Bank
must meet specific capital guidelines that involve quantitative measures of
the Bank's assets, liabilities, and certain off-balance-sheet items as
calculated under regulatory accounting practices. The Bank's capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings, and other factors.
At June 30, 1997, the management of the Bank believes that it meets all
capital adequacy requirements to which it is subject and the most recent
notification from its regulatory agency categorized the Bank as well
capitalized under the regulatory framework for prompt corrective action. There
have been no conditions or events since that notification that management
believes have changed this categorization.
38
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
1997
-----------------------------------------------------------------------------
Required for Adequate To Be Well
Actual Capital (1) Capitalized (1)
-----------------------------------------------------------------------------
June 30 Amount Ratio Amount Ratio Amount Ratio
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total risk-based capital (1) (to risk-weighted
assets) $7,642 16.8% $3,640 8.0% $4,550 10.0%
Core capital (1) (to adjusted tangible assets) 7,260 10.1% 2,165 3.0% 4,330 6.0%
Core capital (1) (to adjusted total assets) 7,260 10.1% 2,167 3.0% 3,609 5.0%
</TABLE>
(1) As defined by regulatory agencies
The Bank's tangible capital at June 30, 1997 was $7,260,000, which amount was
10.1% of tangible assets and exceeded the required ratio of 1.5%.
Employee Benefit Plans
The Bank participates in a noncontributory multi-employer pension plan
covering all qualified employees. The plan is administered by the trustees of
the Pentegra Group (formerly the Financial Institutions Retirement Fund).
There is no separate valuation of benefits nor segregation of plan assets
specifically for the Bank because the plan is a multi-employer plan and
separate actuarial valuations are not made with respect to each employer, nor
are the plan assets so segregated. However, as of June 30, 1995, the latest
actuarial valuation, the total plan assets exceeded the actuarially determined
value of total vested benefits. Pension expense is recognized in the amount of
calculated contributions (which have not been required since July, 1987).
The Bank has a supplemental retirement plan and deferred compensation
arrangements for the benefit of certain officers. These arrangements are
funded by life insurance contracts which have been purchased by the Bank. The
Bank's expense for the plan was $5,800, $4,800 and $4,200 for the years ended
June 30, 1997, 1996 and 1995.
The Bank also has deferred compensation arrangements with certain directors
whereby, in lieu of currently receiving fees, the directors or their
beneficiaries will be paid benefits for an established period following the
director's retirement or death. These arrangements are funded by life
insurance contracts which have been purchased by the Bank. The Bank's expense
for the plan was $34,100, $32,500 and $28,000 for the years ended June 30,
1997, 1996 and 1995.
39
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Company has an ESOP covering substantially all employees of the Bank. The
ESOP acquired 46,405 shares at $8.00 per share in the conversion with funds
provided by a loan from the Company. Accordingly, the $371,240 of stock
acquired by the ESOP is shown as a reduction to stockholders' equity. Unearned
ESOP shares totaled 34,804 at June 30, 1997 and had a fair value of $439,401.
Shares are released to participants proportionately as the loan is repaid.
Dividends on allocated shares are recorded as dividends and charged to
retained earnings. Dividends on unallocated shares, which will be distributed
to participants, are treated as compensation expense. Compensation expense is
recorded equal to the fair market value of the stock when contributions, which
are determined annually by the Board of Directors of the Bank, are made to the
ESOP. The expense under the ESOP was $52,043 and $45,245 for the years ended
June 30, 1997 and 1996. At June 30, 1997, the ESOP had 13,498 allocated shares
and 32,439 suspense shares.
In connection with the Bank's conversion, the Company established a
Recognition and Retention Plan ("RRP"). Effective on October 23, 1995, awards
of grants for 23,202 shares were issued to various directors, officers and
employees of the Bank. These awards generally are to vest and be earned by the
recipient at a rate of 20 percent per year, commencing October 23, 1996. The
expense under the RRP was $61,075 for the year ended June 30, 1997.
Stock Option Plan
Under the Bank's incentive stock option plan, which is accounted for in
accordance with Accounting Principles Board Opinion ("APB") No. 25, Accounting
for Stock Issued to Employees, and related interpretations, the Bank grants
selected executives and other key employees stock option awards which vest and
become fully exercisable at the end of 5 years of continued employment. A
total of 58,006 common shares have been reserved for issuance under the plan.
Effective on October 23, 1995, the Bank authorized the grant of options for up
to 47,957 shares of the Bank's common stock. The exercise price of each
option, which has a 10-year life, was equal to the market price of the Bank's
stock on the date of grant; therefore, no compensation expense was recognized.
Although the Bank has elected to follow APB No. 25, SFAS No. 123 requires pro
forma disclosures of net income and earnings per share as if the Bank had
accounted for its employee stock options under that Statement. The fair value
of each option grant was estimated on the grant date using an option-pricing
model with the following assumptions:
<TABLE>
<CAPTION>
1997 1996
--------------------------------
<S> <C> <C>
Risk-free interest rates 6% 6%
Dividend yields 2% 2%
Volatility factors of expected market price of common stock 13% 13%
Weighted-average expected life of the options 8 years 8 years
</TABLE>
40
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Under SFAS No. 123, compensation cost is recognized in the amount of the
estimated fair value of the options and amortized to expense over the options'
vesting period. The pro forma effect on net income and earnings per share of
this statement are as follows:
1997 1996
--------------------------------
Net income As reported $134,294 $332,758
Pro forma 112,496 310,960
Earnings per share As reported .27 .63
Pro forma .23 .59
The following is a summary of the status of the Bank's stock option plan and
changes in that plan as of and for the years ended June 30, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------
Weight- Weighted-
Average Average
Options Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 46,629 $10.50
Granted 47,957 $10.50
Forfeited/expired (3,248) 10.50 (1,328) 10.50
================== ================
Outstanding, end of year 43,381 10.50 46,629 10.50
================== ================
Options exercisable at year end 9,326
Weighted-average fair value of options granted
during the year $2.81
</TABLE>
As of June 30, 1997, the 43,381 options outstanding have an exercise price of
$10.50 and a remaining contractual life of 9 years.
Fair Values of Financial Instruments
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument:
Cash And Due From Banks--The fair value of cash and due from banks
approximates carrying value.
Interest-bearing Deposits--The fair value of interest-bearing time deposits
approximates carrying value.
Investment Securities--Fair values are based on quoted market prices.
41
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Loans--For both short-term loans and variable-rate loans that reprice
frequently and with no significant change in credit risk, fair values are
based on carrying values. The fair values for certain mortgage loans,
including one-to-four family residential, are based on quoted market prices of
similar loans sold in conjunction with securitization transactions, adjusted
for differences in loan characteristics. The fair value for other loans, are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality.
FHLB Stock--Fair value of FHLB stock is based on the price at which it may be
resold to the FHLB.
Interest Receivable/Payable--The fair values of interest receivable/payable
approximate carrying values.
Deposits--The fair values of noninterest-bearing, interest-bearing demand and
savings accounts are equal to the amount payable on demand at the balance
sheet date. Fair values for fixed-rate certificates of deposit are estimated
using a discounted cash flow calculation that applies interest rates currently
being offered on certificates to a schedule of aggregated expected monthly
maturities on such time deposits.
FHLB Advances--The fair value of these borrowings are estimated using a
discounted cash flow calculation, based on current rates for similar debt.
The estimated fair values of the Company's financial instruments are as
follows:
<TABLE>
<CAPTION>
1997 1996
------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- --------------------------------------------------------- ---------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
Assets
Cash and due from banks $1,515 $1,515 $1,128 $1,128
Interest-bearing deposits 1,093 1,093 618 618
Investment securities available for sale 12,149 12,149 11,919 11,919
Investment securities held to maturity 2,067 1,993 2,613 2,498
Loans including loans held for sale, net 50,726 49,540 51,803 49,995
Stock in FHLB 1,050 1,050 1,050 1,050
Interest receivable 377 377 379 379
Liabilities
Deposits 53,523 53,488 44,562 44,626
FHLB advances 10,902 10,857 19,500 19,487
Interest payable 85 85 83 83
</TABLE>
42
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Financial Information (Parent Company Only)
Presented below is condensed financial information as to financial position,
results of operations and cash flows of the Company:
Condensed Balance Sheet
<TABLE>
<CAPTION>
June 30 1997 1996
- ---------------------------------------------------------- ---------------- ---------------
<S> <C> <C>
Assets
Cash on deposit $ 233 $ 44
Investment in subsidiary 7,182 7,139
Other assets 73 29
---------------- ---------------
Total assets $ 7,488 $ 7,212
================ ===============
Liabilities $ 24 $ 1
Stockholders' Equity 7,464 7,211
---------------- ---------------
Total liabilities and stockholders' equity $ 7,488 $ 7,212
================ ===============
</TABLE>
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1997 1996 1995
- --------------------------------------------------------------------------------- ---------------- ------------ ------------
<S> <C> <C> <C>
Income
Dividend income from subsidiary $300
Interest income 24 $27 $ 8
---------------- ------------ ------------
324 27 8
Other expenses 143 87 5
---------------- ------------ ------------
Income (loss) before income tax and equity in undistributed income of subsidiary
181 (60) 3
Income tax benefit 46 21
---------------- ------------ ------------
Income (loss) before equity in undistributed income of subsidiary
227 (39) 3
Equity in undistributed income (distribution in excess of income) of subsidiary
(93) 372 191
---------------- ------------ ------------
Net Income $134 $333 $194
================ ============ ============
</TABLE>
43
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Condensed Statement of Cash Flows
Year Ended June 30 1997 1996 1995
- ----------------------------------------------------------------------------------- -------------- ------------ ------------
<S> <C> <C> <C>
Operating Activities
Net income $134 $333 $194
Adjustments to reconcile net income to net cash provided
(used) by operating activities
164 (349) (178)
-------------- ------------ ------------
Net cash provided (used) by operating activities 298 (16) 16
-------------- ------------ ------------
Financing Activities
Purchase of common stock (56) (535)
Net proceeds from issuance of stock 4,174
Capital contribution to Bank (3,224)
Contribution for unearned ESOP shares (371)
Dividends (53)
-------------- ------------ ------------
Net cash provided (used) by financing activities (109) (535) 579
-------------- ------------ ------------
Net Increase (Decrease) in Cash 189 (551) 595
Cash at Beginning of Year 44 595
-------------- ------------ ------------
Cash at End of Year $233 $ 44 $595
============== ============ ============
</TABLE>
44
<PAGE>
STOCKHOLDER INFORMATION
Corporate Office
20 West Fifth Street
Peru, Indiana 46970
Annual Meeting
The Annual Meeting of Stockholders will be held at 9:00 a.m., Peru,
Indiana time on October 20, 1997 at the Company's office located at 20 West
Fifth Street, Peru, Indiana.
Annual Report on Form 10-KSB
A copy of AmTrust Capital Corp.'s Annual Report on Form 10-KSB as filed
with the Securities and Exchange Commission may be obtained without charge upon
written request to Jami L. Cornish, AmTrust Capital Corp., 20 West Fifth Street,
Peru, Indiana 46970, or by calling (765) 472-1991.
Registrar/Transfer Agent
Communications regarding change of address, transfer of stock and lost
certificates should be sent to:
American Securities Transfer, Inc.
1825 Lawrence Street
Denver, Colorado 80202-1817
####
Accountants
Geo. S. Olive & Co. LLC
201 North Illinois Street
Indianapolis, Indiana 46204-1904
Local Counsel
James Berkshire, Esquire
16 East 5th Street
Peru, Indiana 46970
Special Counsel
Silver, Freedman & Taff, L.L.P.
Suite 700 East Tower
1100 New York Avenue, NW
Washington, DC 20005-3934
45
<PAGE>
Stock Listing
AmTrust Capital Corp.'s common stock is traded over the counter and is
listed on the Nasdaq Small-Cap System under the symbol "ATSB." At September 15,
1997, there were 526,479 shares of AmTrust Capital Corp. common stock issued and
outstanding and there were approximately 300 holders of record. The price range
of the common stock for each quarter since the common stock began trading on
March 28, 1995 was as follows:
STOCK PRICE DIVIDENDS
FISCAL 1997 HIGH LOW PER SHARE
- ---------------------- ------ ------ ---------
First Quarter......... $ 9.50 $ 8.50 $ N/A
Second Quarter........ 10.625 8.75 N/A
Third Quarter......... 12.375 10.00 .05
Fourth Quarter........ 12.75 11.50 .05
STOCK PRICE DIVIDENDS
FISCAL 1996 HIGH LOW PER SHARE
- ---------------------- ------ ------ ---------
First Quarter......... $10.50 $ 8.25 $ N/A
Second Quarter........ 10.75 9.75 N/A
Third Quarter......... 11.25 10.25 N/A
Fourth Quarter........ 10.75 8.50 N/A
The stock price information set forth in the table above was provided by the
National Association of Securities Dealers, Inc. High, low and closing prices
and daily trading volume are reported in most major newspapers. The closing
price of AmTrust Capital Corp.'s common stock on September 15, 1997 was $12.875.
Market Makers
Capital Resources, Inc.
Rodman & Renshaw, Inc.
Mayer & Schweitzer, Inc.
McDonald & Company Securities, Inc.
Dividends
The Company began paying a cash dividend during the third quarter of
fiscal 1997. The Board of Directors considers the payment of cash dividends,
dependent on the results of operations and financial condition of the Company,
tax considerations, industry standards, economic conditions, regulatory
restrictions, general business practices and other factors. The Company's
ability to pay dividends is dependent on the dividend payments it receives from
its subsidiary, AmericanTrust, which are subject to regulations and the Bank's
continued compliance with all regulatory capital requirements. See Notes to the
Consolidated Financial Statements for information regarding limitations of the
Bank's ability to pay dividends to the Company.
46
<PAGE>
AmTrust Capital Corp.
and
AmericanTrust Federal Savings Bank
Directors
Kenneth L. Hasselkus
Chairman of the Board of the Company and
the Bank, Retired Chief Engineer, Motion
Control, Inc.
Bruce M. Borst
President and Chief Executive Officer of the
Company and the Bank
Dean H. Hartley
Farmer
Thomas A. Kirk
Certified Public Accountant
Roderic E. Daniels
Retired Manager of CR Metals
Executive Officers
Bruce M. Borst
President and Chief Executive Officer
Jami L. Cornish
Treasurer and Chief Financial Officer
47
<PAGE>
EXHIBIT 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
------ ---------- --------- ------------
<S> <C> <C> <C>
AmTrust Capital Corp. AmericanTrust 100% Federal
Federal Savings
Bank
AmericanTrust Federal Indiana Financial 100% Indiana
Savings Bank Service Corporation
</TABLE>
<PAGE>
EXHIBIT 23 - CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
----------------------------------------------------------------
We hereby consent to the incorporation by reference to Registration Statements
on Form S-8, File Numbers 333-16273 and 333-16207, of our report dated July 29,
1997, on the consolidated financial statements of AmTrust Capital Corp., which
report is incorporated by reference in the Annual Report on Form 10-KSB of
AmTrust Capital Corp.
/s/ Geo. S. Olive & Co. LLC
Indianapolis, Indiana
September 22, 1997
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
AMTRUST CAPITAL CORP. AND SUBSIDIARY All
All numbers in thousands except per share data.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 1,515
<INT-BEARING-DEPOSITS> 1,093
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,149
<INVESTMENTS-CARRYING> 2,067
<INVESTMENTS-MARKET> 0
<LOANS> 50,167
<ALLOWANCE> 523
<TOTAL-ASSETS> 72,245
<DEPOSITS> 53,523
<SHORT-TERM> 9,222
<LIABILITIES-OTHER> 357
<LONG-TERM> 1,680
0
0
<COMMON> 6
<OTHER-SE> 7,458
<TOTAL-LIABILITIES-AND-EQUITY> 72,245
<INTEREST-LOAN> 3,997
<INTEREST-INVEST> 1,075
<INTEREST-OTHER> 55
<INTEREST-TOTAL> 5,127
<INTEREST-DEPOSIT> 2,257
<INTEREST-EXPENSE> 913
<INTEREST-INCOME-NET> 1,957
<LOAN-LOSSES> 33
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,299
<INCOME-PRETAX> 181
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 47
<CHANGES> 0
<NET-INCOME> 134
<EPS-PRIMARY> .27
<EPS-DILUTED> .27
<YIELD-ACTUAL> 7.61
<LOANS-NON> 2,440
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 2,440
<ALLOWANCE-OPEN> 494
<CHARGE-OFFS> 4
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 523
<ALLOWANCE-DOMESTIC> 523
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 523
</TABLE>
