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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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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, 1998
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 $5.4 million in gross income for the year ended June 30,
1998.
As of September 14, 1998, there were issued and outstanding 497,454 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 OTC Electronic Bulletin
Board as of September 14, 1998 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, 1998.
PART III of Form 10-KSB--Proxy Statement for the Annual Meeting of Stockholders
for the fiscal year ended June 30, 1998.
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<PAGE>
PART I
Item 1. Business
Forward-Looking Statements
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
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, 1998, the Company had total assets of $58.1 million, deposits
of $46.9 million and stockholders' equity of $7.4 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.
2
<PAGE>
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 and three branch offices, 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").
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, 1998 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, 1998, the Bank's loans, net and loans
held for sale totaled $44.5 million, a decrease of $6.2 million or 12.2% from
$50.7 million at June 30, 1997.
3
<PAGE>
The President has authority to approve loans up to $214,000(the FHLMC loan
limit). All loans in excess of $214,000 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, 1998, the
maximum amount which the Bank could have lent to any one borrower and the
borrower's related entities was $1.1 million.
4
<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,
---------------------------------------------------------------------------------
1998 1997 1996
----------------------- ----------------------- ------------------------
Amount Percent Amount Percent Amount Percent
-------- ---------- -------- ---------- -------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family(1) ...................... $ 24,688 55.42% $ 25,542 50.24% $ 29,476 57.58%
Multi-family ................................ 1,239 2.78 1,352 2.66 1,387 2.71
Commercial .................................. 717 1.61 955 1.88 1,045 2.04
Construction ................................ 179 .40 919 1.81 690 1.35
-------- ---------- -------- ---------- -------- ----------
Total real estate loans ............... 26,823 60.21 28,768 56.59 32,598 63.68
-------- ---------- -------- ---------- -------- ----------
Other Loans:
Consumer Loans
Deposit account .......................... 162 .36 159 .31 107 .21
Automobile ............................... 1,088 2.44 890 1.75 1,118 2.18
Home equity .............................. 368 .83 315 .62 258 .50
Home improvement ......................... 1,049 2.35 1,035 2.04 1,521 2.97
Mobile homes/RVs ......................... 13,808 31.00 17,827 35.07 13,861 27.08
Other .................................... 120 .27 351 .69 238 .47
-------- ---------- -------- ---------- -------- ----------
Total consumer loans .................. 16,595 37.25 20,577 40.48 17,103 33.41
Lease Contracts(2) ......................... 1,132 2.54 1,491 2.93 1,491 2.91
-------- ---------- -------- ---------- -------- ----------
Total other loans ..................... 17,727 39.79 22,068 43.41 18,594 36.32
-------- ---------- -------- ---------- -------- ----------
Total loans ........................... 44,550 100.00% 50,836 100.00% 51,192 100.00%
========== ======== ==========
Less:
Loans in process ............................. 439 857 540
Deferred fees (costs) and discounts .......... (925) (1,270) (1,151)
Allowance for losses ......................... 518 523 494
-------- -------- --------
Total loans, net ...................... $ 44,518 $ 50,726 $ 51,309
======== ======== ========
</TABLE>
- ----------
(1) Includes $1.9 million, $1.1 million and $1.5 million of loans held for sale
at June 30, 1998, 1997 and 1996, respectively.
(2) Represents a pool of leases on office equipment.
5
<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,
------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family(1) ............... $ 10,034 22.53% $ 9,008 17.72% $9,523 18.60%
Multi-family ......................... 825 1.85 644 1.27 653 1.28
Commercial ........................... 491 1.10 721 1.41 369 .72
-------- -------- -------- -------- -------- --------
Total real estate loans ........... 11,350 25.48 10,373 20.40 10,545 20.60
-------- -------- -------- -------- -------- --------
Consumer .............................. 16,227 36.42 20,262 39.86 16,845 32.91
Lease contracts(2) .................... 1,132 2.54 1,491 2.93 1,491 2.91
-------- -------- -------- -------- -------- --------
Total other loans ................. 17,359 38.96 21,753 42.79 18,336 35.82
-------- -------- -------- -------- -------- --------
Total fixed-rate loans ......... 28,709 64.44 32,126 63.19 28,881 56.42
-------- -------- -------- -------- -------- --------
Adjustable-Rate Loans:
Real estate:
One- to four-family(1) ............... 14,654 32.89 16,534 32.53 19,953 38.98
Multi-family ......................... 414 .93 708 1.39 734 1.43
Commercial ........................... 226 .51 234 .46 676 1.32
Construction ......................... 179 .40 919 1.81 690 1.35
-------- -------- -------- -------- -------- --------
Total real estate loans ........ 15,473 34.73 18,395 36.19 22,053 43.08
Consumer ............................. 368 .83 315 .62 258 .50
-------- -------- -------- -------- -------- --------
Total adjustable-rate loans .... 15,841 35.56 18,710 36.81 22,311 43.58
-------- -------- -------- -------- -------- --------
Total loans ................ 44,550 100.00% 50,836 100.00% 51,192 100.00%
======== ======== ========
Less:
Loans in process ...................... 439 857 540
Deferred fees (costs) and discounts ... (925) 1,270) (1,151)
Allowance for losses on loans ......... 518 523 494
-------- -------- --------
Total loans, net .................. $ 44,518 $50,726 $51,309
======== ======== ========
</TABLE>
- ----------
(1) Includes $1.9 million, $1.1 million and $1.5 million of fixed- and
adjustable-rate loans held for sale at June 30, 1998, 1997 and 1996,
respectively.
(2) Represents a pool of leases on office equipment.
6
<PAGE>
The following schedule illustrates the interest rate sensitivity of the
Bank's loan portfolio at June 30, 1998. 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>
1999(2) ................................ $ 58 7.9% $ 806 8.6% $ 179 6.8%
2000 ................................... 21 9.1 -- -- -- --
2001 ................................... 45 9.3 -- -- -- --
2002 and 2003 .......................... 302 8.8 492 8.9 -- --
2004 to 2008 ........................... 3,261 8.1 379 8.7 -- --
2009 to 2023 ........................... 10,726 7.5 279 9.7 -- --
2024 and following ..................... 10,275 7.5 -- -- -- --
------- --- ------- --- ------ ---
$24,688 7.6 $ 1,956 8.9 $ 179 6.8
======= === ======= === ====== ===
<CAPTION>
Consumer Lease Contracts Total
----------------------- ------------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate (3) Amount Rate
------- -------- ------- -------- ------ --------
Due During Years
Ending June 30,
- ---------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999(2) ............................... $ 489 7.5% $ 572 --% $ 2,104 5.9%
2000 .................................. 329 10.4 560 -- 910 4.0
2001 .................................. 506 9.8 -- -- 551 9.8
2002 and 2003 ......................... 1,390 9.4 -- -- 2,184 9.2
2004 to 2008 .......................... 4,525 10.1 -- -- 8,165 9.2
2009 to 2023 .......................... 9,350 9.6 -- -- 20,355 8.5
2024 and following .................... 6 8.7 -- -- 10,281 7.5
------- -------- -------
$16,595 9.7 $ 1,132 -- $44,550 8.2
======= ======== =======
</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.
7
<PAGE>
At June 30, 1998, the total amount of loans due after June 30, 1999 which
have fixed interest rates is $28.1 million, while loans due after such date
which have floating or adjustable interest rates is $14.3 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, 1998, the Bank's one- to four-family residential mortgage loans
totaled $24.7 million, or 55.4%, 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, 1998, the Bank originated $14.0 million of
adjustable-rate one-to four-family real estate loans. During the same period,
the Bank originated $4.4 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 lifetime 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. As a consequence of using caps, the
interest rates on these loans may not be as rate sensitive as is the
8
<PAGE>
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,
1998, the Bank had $2.0 million of fixed-rate residential loans with remaining
terms of less than 10 years and $8.0 million of fixed-rate loans with remaining
terms of 10 years or more in its loan portfolio.
Residential Construction Lending. The Bank makes construction loans for the
construction of residences (including modular homes). At June 30, 1998 the
Bank's construction loan portfolio
9
<PAGE>
totaled $179,000 or .40% 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, 1998, the Bank's consumer loans totaled $16.6 million, or 37.3%
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, 1998, mobile home loans totaled $3.6
million, or approximately 8.1% of the Bank's gross loan portfolio, and RV loans
totalled $10.2 million, or 22.9% 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,
1998, mobile home loans originated pursuant to these agreements amounted to
substantially all mobile home loans outstanding.
10
<PAGE>
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, 1998, mobile
home loans totaling $60,000, or .13% 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, 1998, RV loans totaling $197,000 or .44%
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 $225,000 or approximately 1.4%
of the Bank's consumer loan portfolio at June 30, 1998 was 90 days or more
delinquent), there can be no assurance that delinquencies will not increase in
the future, particularly since many such credits, particularly loans secured by
RVs, are new and unseasoned. See "- Asset Quality - Non- Performing Assets."
11
<PAGE>
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, 1998, $2.0 million, or 4.4% 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, 1998, 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, 1998, the
book value of the Bank's lease contracts totaled $1.1 million, or 2.5% 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
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 and has initially remitted $350,000 during June
1998 under the leadership of the court-appointed Trustee. See "-Asset
Quality-Bennett Funding."
12
<PAGE>
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, 1998, the
Bank originated $14.0 million in fixed-rate loans and $4.4 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,
1998, the Bank sold $9.6 million of one- to four-family loans in the secondary
market with servicing retained, and $2.7 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, 1998, AmericanTrust was
servicing mortgage loans for others in the amount of $31.8 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.
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,
1998, the Bank had $1.1 million of lease contracts. See "- Lease Contracts." In
addition, the Bank has invested funds in mortgage-backed securities. During
13
<PAGE>
the fiscal year ended June 30, 1998, 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.
<TABLE>
<CAPTION>
Year Ended June 30,
-------------------------------------------------------------
1998 1997 1996
------------ ------------ ------------
(In Thousands)
<S> <C> <C> <C>
Originations:
One- to four-family ....................................... $ 18,422 $ 8,397 $ 15,328
Consumer .................................................. 862 8,927 7,358
-------- -------- --------
Total loans originated ............................. 19,284 17,324 22,686
-------- -------- --------
Purchases:
Lease contracts ........................................... -- -- 1,147
Multi-family and commercial ............................... -- -- 490
Mortgage-backed securities ................................ -- -- --
-------- -------- --------
Total purchased .................................... -- -- 1,637
-------- -------- --------
Sales:
One- to four-family ....................................... 12,271 6,319 12,948
Mortgage-backed securities ................................ -- --- --
-------- -------- --------
Total sales ........................................ 12,271 6,319 12,948
-------- -------- --------
Principal repayments and other:
Loans ..................................................... 13,299 11,361 9,608
Mortgage-backed securities ................................ 319 358 822
-------- -------- --------
Total principal payments ........................... 13,618 11,719 10,430
-------- -------- --------
Net increase (decrease) ............................ $ (6,605) $ (714) $ 945
======== ======== ========
</TABLE>
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
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
14
<PAGE>
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, 1998. 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 Total of Total of Total
Number Amount Loans Number Amount Loans Number Amount Loans
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family ................. 2 $ 58 .13% 6 $ 151 .34% 8 $ 209 .47%
Consumer ............................ 6 44 .10 11 225 .50 17 269 .60
Lease contracts ..................... -- -- -- 305 1,132 2.54 305 1,132 2.54
------ ------ ---- ------ ------ ---- ------ ------ ----
Total .......................... 8 $ 102 .23% 322 $1,508 3.40% 330 $1,610 3.61%
====== ====== ==== ====== ====== ==== ====== ====== ====
</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
purchased commercial lease contracts covering business equipment from BFGI, for
which BFGI acts as the servicer. At June 30, 1998, the book value of the
Company's lease contracts totaled $449,000. 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.
15
<PAGE>
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,
-------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family ...................... $ 151 $ 66 $ 66
Consumer ................................. 484 239 23
Leases ................................... 1,132 1,491 1,491
------ ------ ------
Total ................................. 1,767 1,796 1,580
Restructured loans:
Commercial real estate ................... 637 644 809
Foreclosed assets:
One- to four-family ...................... -- -- 43
Consumer ................................. 272 186 --
------ ------ ------
Total non-performing assets ................ $2,676 $2,626 $2,432
====== ====== ======
Total as a percentage of total assets ...... 4.61% 3.64% 3.38%
====== ====== ======
For the fiscal year ended June 30, 1998, gross interest income which would
have been recorded had the non-accruing and restructured loans been current in
accordance with their original terms amounted to $230,000. Interest income
received or accrued included $59,000 for the year ended June 30, 1998 on the
non-accruing loans and restructured loans.
At June 30, 1998, the Bank's non-accruing loans consisted of six loans
secured by residential real estate totaling $151,000 and 47 consumer loans
totaling $484,000. As discussed in more detail below, the Bank's interest in
restructured loans at June 30, 1998 totaled $637,000. Such loans are secured by
apartment complexes located in Indiana which were restructured in fiscal 1991
and 1992. At June 30, 1998, borrowers on each of these loans, of which the
Bank's interest had aggregate balances of $359,000 and $278,000, 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
16
<PAGE>
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, 1998. 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, 1998, the Bank's interest in this loan totalled $359,000.
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 1999. At June
30, 1998, the Bank's interest in this loan totalled $278,000. 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, 1998, 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"
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
17
<PAGE>
applicable regulations. On the basis of management's review of its assets, at
June 30, 1998, the Bank had classified a total of $2.6 million of its assets as
substandard, $23,000 as doubtful, and $114,000 as loss. At June 30, 1998, total
classified assets comprised $2.8 million, or 39.5% of the Bank's capital, or
4.8% 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, 1998, the Bank had a total allowance
for losses on loans of $518,000, representing 21.5% of total non-performing
loans and 1.2% 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.
Year Ended June 30,
----------------------
1998 1997 1996
(In Thousands)
Balance at beginning of period ...................... $523 $494 $400
---- ---- ----
Charge-offs:
One- to four-family .............................. 7 -- --
Consumer ......................................... 90 4 31
---- ---- ----
Net charge-offs ..................................... 97 4 31
Provision for losses on loans ....................... 92 33 125
---- ---- ----
Balance at end of period ............................ $518 $523 $494
==== ==== ====
Ratio of net charge-offs during the period to
average loans outstanding during the period ........ .20% .01% .06%
==== ==== ====
18
<PAGE>
Ratio of net charge-offs during the period to
average non-performing assets ...................... 4.00% .40% 2.28%
==== ==== ====
The distribution of the Bank's allowance for losses on loans at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
June 30,
----------------------------------------------------------------------------
1998 1997 1996
----------------------------------------------------------------------------
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 ............................... $ 23 55.42% $ 31 50.24% $ 35 57.58%
Multi-family and commercial real estate ........... 63 4.39 63 4.54 77 4.75
Construction ...................................... -- .40 -- 1.81 -- 1.35
Consumer .......................................... 135 37.25 155 40.48 131 33.41
Lease contracts ................................... 216 2.54 216 2.93 171 2.91
Unallocated ....................................... 81 -- 58 -- 80 --
---- ------ ---- ------ ---- ------
Total ........................................ $518 100.00% $523 100.00% $494 100.00%
==== ====== ==== ====== ==== ======
</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
updated to assure that adequate liquidity is maintained. At June 30, 1998, the
Bank's liquidity ratio (liquid assets as a percentage of net withdrawable
savings deposits and current borrowings) was 8.83%. 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,
19
<PAGE>
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, 1998, the
Company's interest-bearing deposits with other financial institutions totaled
$1.1 million, or 1.9% of total assets, and its securities, consisting of federal
agency obligations, mutual funds which invest in adjustable-rate mortgages and
asset-backed securities, totaled $5.5 million, or 9.5% of total assets. In
addition, as of such date, the Company had a $1.1 million 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, 1998, the average term to maturity or repricing of
the securities portfolio (excluding FHLB stock) was 14.1 years.
The Company's securities, except for mortgage-backed securities, portfolio
at June 30, 1998 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 $77,000 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, 1998 all of the auto receivable pools owned
by the Company were paying as agreed.
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,
----------------------------------------------------------------
1998 1997 1996
----------------- --------------------- ------------------
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 ............................... $ 499 7.6% $ 8,309 54.4% $ 8,117 52.1%
Mortgage-backed securities ............................... 2,726 41.7 2,724 17.9 2,737 17.6
Mutual funds ............................................. 1,125 17.2 1,116 7.3 1,065 6.8
------- ----- ------- ----- ------- -----
Subtotal ............................................. 4,350 66.5 12,149 79.6 11,919 76.5
------- ----- ------- ----- ------- -----
Held to maturity:
Federal agency obligations ............................... -- -- 500 3.3 500 3.2
Mortgage-backed securities ............................... 1,063 16.3 1,384 9.0 1,729 11.1
Other asset-backed securities ............................ 77 1.2 183 1.2 384 2.5
------- ----- ------- ----- ------- -----
Subtotal ............................................. 1,140 17.5 2,067 13.5 2,613 16.8
------- ----- ------- ----- ------- -----
FHLB stock .................................................... 1,050 16.0 1,050 6.9 1,050 6.7
------- ----- ------- ----- ------- -----
Total securities and FHLB stock .......................... $ 6,540 100.0% $15,266 100.0% $15,582 100.0%
======= ===== ======= ===== ======= =====
Average remaining life of securities and mortgage-
backed securities (excluding FHLB stock) .................. 14.1 years 12.3 years 11.8 years
Other interest-earning assets
Interest-bearing deposits with banks ........................ $ 1,099 100.0% $ 1,093 100.0% $ 618 100.0%
======= ===== ======= ===== ======= =====
</TABLE>
21
<PAGE>
The composition and maturities of the securities portfolio, excluding FHLB
stock, are indicated in the following table.
<TABLE>
<CAPTION>
June 30, 1998
-------------------------------------------------------------------------
Less Than 5 to 10 Over 10
1 Year Years Years Total Securities
--------- --------- --------- -------------------------
Amortized Amortized Amortized Amortized
Cost Cost Cost Cost Market Value
--------- --------- --------- --------- -------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Available for sale:
Federal agency obligations ..................... $ -- $ 500 $ -- $ 500 $ 499
Mortgage-backed securities ..................... -- -- 2,717 2,717 2,726
Asset management fund .......................... 1,071 -- -- 1,071 1,125
------ ------ ------ ------ ------
1,071 500 2,717 4,288 4,350
------ ------ ------ ------ ------
Held to maturity:
Mortgage-backed securities .................... -- -- 1,063 1,063 1,053
Asset-backed securities ....................... 77 -- -- 77 42
------ ------ ------ ------ ------
77 -- 1,063 1,140 1,095
------ ------ ------ ------ ------
Total securities ................................... $1,148 $ 500 $3,780 $5,428 $5,445
====== ====== ====== ====== ======
Weighted average yield ............................. 6.55% 6.57% 7.10% 7.03% 7.03%
</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, 1998, the mortgage-backed
securities totaled $3.8 million, or 6.5% 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, 1998, $330,000, or 8.7% 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,
------------------------------------------------------------------------
1998 1997 1996
-------------------- ---------------------- ---------------------
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 .......... $2,726 71.9% $2,724 66.3% $2,737 61.3%
------ ----- ------ ----- ------ -----
Held to maturity:
Federal National Mortgage Association ............. 330 8.7 354 8.6 369 8.3
ASMC Acceptance Corporation ....................... 164 4.4 256 6.2 352 7.9
Statewide Acceptance Corporation .................. 569 15.0 774 18.9 1,008 22.5
------ ----- ------ ----- ------ -----
Subtotal ..................................... 1,063 28.1 1,384 33.7 1,729 38.7
------ ----- ------ ----- ------ -----
Total mortgage-backed securities .................. $3,789 100.0% $4,108 100.0% $4,466 100.0%
====== ===== ====== ===== ====== =====
</TABLE>
23
<PAGE>
The following table sets forth the contractual maturities of the Bank's
mortgage-backed securities at June 30, 1998.
Over 10
Years
Available for sale:
Government National Mortgage Association ................ $2,726
------
Held to maturity:
Federal National Mortgage Association ................... 330
ASMC Acceptance Corporation ............................. 164
Statewide Acceptance Corporation ........................ 569
------
Subtotal ......................................... 1,063
------
Total .................................................. $3,789
======
At June 30, 1998, 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.
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, 1998, all of the Bank's mortgage-backed securities
are backed by federal agencies except for mortgage-backed securities totaling
$733,000.
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, 1998, 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.
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.
24
<PAGE>
At June 30, 1998, the Bank had total FHLB advances of $3.1 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, 1998, the amount of public
funds on deposit with the Bank was $9.1 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,
---------------------------------------
1998 1997 1996
--------- --------- ----------
(In Thousands)
Opening balance .................... $ 53,523 $ 44,562 $ 50,514
Deposits (withdrawals), net ........ (8,442) 6,704 (3,120)
Deposits sold ...................... -- -- (5,146)
Interest credited .................. 1,800 2,257 2,314
-------- -------- --------
Ending balance ..................... 46,881 53,523 44,562
-------- -------- --------
Net increase (decrease) ............ $ 6,641 $ 8,961 ($ 5,952)
======== ======== ========
Percent increase (decrease) ........ 12.4% 20.1% (11.8)%
======== ======== ========
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,
--------------------------------------------------------------------------------
1998 1997 1996
--------------------------------- ---------------------- ---------------------
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)................................. $ 7,733 16.5% 2.0% $ 7,300 13.6% $ 6,590 14.8%
Statement savings............................... 1,653 3.5 2.8 1,871 3.5 1,986 4.5
Regular passbook................................ 3,805 8.1 2.8 3,917 7.3 3,775 8.5
90-day passbook accounts........................ 748 1.6 2.9 1,104 2.1 1,251 2.8
Money Market Accounts........................... 3,883 8.3 3.5 4,700 8.8 4,785 10.7
------- ------ ------- ----- ---------- ------
Total Non-Certificates.......................... 17,822 38.0 8,892 35.3 18,387 41.3
------- ----- ------- ----- --------- ------
Certificates:
2.50 - 3.49%.................................. -- -- 54 .1 58 .1
3.50 - 4.49%.................................. -- -- 314 .6 905 2.0
4.50 - 5.49%.................................. 8,195 17.5 12,176 22.7 8,689 19.5
5.50 - 6.49%.................................. 19,364 41.3 20,216 37.8 13,937 31.3
6.50 - 7.49%.................................. 1,320 2.8 1,671 3.1 2,163 4.9
7.50 - 8.49%.................................. 200 .4 200 .4 423 1.0
-------- ------ -------- ------ -------- -------
Total Certificates.............................. 29,059 62.0 5.6 34,631 64.7 26,175 58.7
-------- ------ -------- ------ --------- -----
Total Deposits.................................. $46,881 100.0% 4.5% $53,523 100.0% $44,562 100.0%
======= ===== ======= ===== ======= =====
</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, 1998.
<TABLE>
4.00- 6.00- 8.00- Percent
5.99% 7.99% 9.99% Total of Total
----- ----- ----- ----- --------
Certificate accounts maturing in
quarter ending
- --------------------------------
<S> <C> <C> <C> <C> <C>
September 30, 1998 ................................... $13,012 $ 201 $--- $13,213 45.5%
December 31, 1998 .................................... 2,344 82 -- 2,426 8.3
March 31, 1999 ....................................... 1,854 283 -- 2,137 7.3
June 30, 1999 ........................................ 1,030 652 -- 1,682 5.8
September 30, 1999 ................................... 874 303 -- 1,177 4.0
December 31, 1999 .................................... 1,086 288 -- 1,374 4.7
March 31, 2000 ....................................... 614 220 200 1,034 3.6
June 30, 2000 ........................................ 420 264 -- 684 2.4
September 30, 2000 ................................... 475 207 -- 682 2.4
December 31, 2000 .................................... 202 127 -- 329 1.1
March 31, 2001 ....................................... 90 256 -- 346 1.2
June 30, 2001 ........................................ 135 667 -- 802 2.8
Thereafter ........................................... 523 2,650 -- 3,173 10.9
------- ------- ----- ------- -----
Total ............................................. $22,659 $ 6,200 $ 200 $29,059 100.0%
======= ======= ===== ======= =====
Percent of total .................................. 78.0% 21.4 % . 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, 1998.
<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 .............. $ 3,653 $ 2,323 $ 3,719 $ 8,782 $18,477
Certificates of deposit of $100,000 or more ............. 461 103 100 818 1,482
Public funds (1) ........................................ 9,100 -- -- -- 9,100
------- ------- ------- ------- -------
Total certificates of deposit ........................... $13,214 $ 2,426 $ 3,819 $ 9,600 $29,059
======= ======= ======= ======= =======
</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, 1998, the Bank had $1.1 million of FHLB of
Indianapolis stock.
27
<PAGE>
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,
---------------------------------------
1998 1997 1996
--------- --------- -------
(Dollars in Thousands)
Maximum Balance:
FHLB advances ................ $14,412 $19,015 $20,450
Average Balance:
FHLB advances ................ $10,586 $14,618 $12,771
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
June 30,
--------------------------------------
1998 1997 1996
----------- --------- ---------
(Dollars in Thousands)
FHLB advances ............. $ 3,070 $ 10,902 $ 19,500
Weighted average interest.. 6.41% 6.13% 5.85%
rate of FHLB advances
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 $1.2 million at
June 30, 1998, 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
$485,000. 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
the
28
<PAGE>
former U.S. Title, Inc. For the fiscal year ended June 30, 1998, IFSCO had a net
loss of approximately $4,000.
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, 1998, the Bank had a total of 26 full-time and four 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
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.
29
<PAGE>
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 examination of the
Bank was as of March 31, 1997. 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, 1998, 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, 1998, 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
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.
30
<PAGE>
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 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.
In order to equalize the deposit insurance premium schedules for BIF and
SAIF insured institutions, the FDIC imposed a one-time special assessment on all
SAIF-assessable deposits pursuant to federal legislation passed on September 30,
1996. The Company's special assessment, which was $295,000, was paid in November
1996, and expensed in the fiscal year ended June 30, 1997. Effective January 1,
1997, the premium schedule for BIF and SAIF insured institutions ranged from 0
to 27 basis points. However, SAIF-insured institutions are required to pay a
Financing Corporation (FICO) assessment, in order to fund the interest on bonds
issued to resolve thrift failures in the 1980s, equal to 6.48 basis points for
each $100 in domestic deposits, while BIF-insured institutions pay an assessment
equal to 1.52 basis points for each $100 in domestic deposits. The assessment is
expected to be reduced to 2.43 no later than January 1, 2000, when BIF insured
institutions fully participate in the assessment. These assessments, which may
be revised based upon the level of BIF and SAIF deposits will continue until the
bonds mature in the year 2017.
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
31
<PAGE>
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, 1998, the Bank did not
include any intangible assets in the capital calculation.
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, 1998, the Bank had tangible capital of $7.0 million, or 12.0%
of adjusted total assets, which is approximately $6.1 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, 1998, the Bank
did not include any intangible assets which were subject to these tests.
At June 30, 1998, the Bank had core capital equal to $7.0 million, or 12.0%
of adjusted total assets, which is $5.3 million above the minimum leverage ratio
requirement of 4% 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, 1998, the Bank had no
capital instruments that qualify as supplementary capital and $381,000 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, 1998.
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
32
<PAGE>
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, 1998, the Bank had total risk-based capital of $7.4 million
(including $7.0 million in core capital and $381,000 in qualifying supplementary
capital) and risk-weighted assets of $39.0 million (with no covered off-balance
sheet assets); or total capital of 19.0% of risk-weighted assets. This amount
was $4.3 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
33
<PAGE>
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.
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
34
<PAGE>
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.
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, 1998, the Bank was in compliance with both
requirements, with an overall liquid asset ratio of 8.8% and a short-term liquid
assets ratio of 4.9%.
Accounting. An OTS policy statement applicable to all savings associations
clarifies and reemphasizes 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.
35
<PAGE>
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, 1998, 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
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
36
<PAGE>
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
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.
37
<PAGE>
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, 1998, 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 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, 1998, the Bank had $1.1 million 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 7.33% and were 8.06% for fiscal 1998.
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, 1998, dividends paid by the FHLB of
Indianapolis to the Bank totaled approximately $85,000, which constitute a
$2,000 increase over the amount of dividends received in fiscal year 1997. The
$21,000 dividend received for the quarter ended June 30, 1998 reflects an
annualized rate of 8.0%, or 15 basis points more than the rate for fiscal 1997.
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,
38
<PAGE>
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
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, 1998 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. The
Bank began to recaputure excess reserves of $103,000 starting in the fiscal year
ended June 30, 1997, in the amount of $17,200 per year. 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.
39
<PAGE>
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
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 files a
consolidated federal income tax return 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
Deborah Huff, age 48, is Treasurer and Chief Financial Officer of
AmericanTrust and the Company, positions she has held since joining the Bank in
July 1998. Ms. Huff is responsible for the supervision of the Bank's accounting
department and will assume supervisory duties of the loan processing department
in early fiscal year 1999. Prior to joining the Bank, Ms. Huff, a CPA, was
employed as Corporate Controller and Secretary of Nixon Newspapers, Inc.,
located in Peru, Indiana.
40
<PAGE>
Item 2. Description of Properties
The Bank conducts its business through three offices, its main office
located in Peru, Indiana and two branch offices located in Kokomo, Indiana; all
locations are owned 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, 1998. The
total net book value of the Bank's premises and equipment (including land,
buildings and leasehold improvements and furniture, fixtures and equipment) at
June 30, 1998 was approximately $1.8 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, 1998
- --------------------------------------------------------------------------------
Main Office:
20 West Fifth Street 1962 6,600 $260,628
Peru, Indiana 46970
Branch Offices:
1936 South Dixon Road 1994 4,000 656,540
Kokomo, Indiana 46902
2531 North Washington Street 1997 3,000 560,668
Kokomo, Indiana 46902
U.S. Title Office: 1996 7,000 316,967
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, 1998 was approximately $125,000.
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.
41
<PAGE>
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, 1998.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 45 of the attached 1998 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 5 through 19 of the attached 1998 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, 1998, 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 Auditor............................................................. 20
Consolidated Statement of Balance Sheet as of June 30, 1998 and 1997...................... 21
Consolidated Statement of Income for the Years Ended June 30, 1998, 1997
and 1996............................................................................... 22
Consolidated Statement of Changes in Stockholders' Equity for the
Years Ended June 30, 1998, 1997 and 1996................................................. 23
Consolidated Statement of Cash Flows for the Years Ended June 30, 1998, 1997
and 1996................................................................................. 24
Notes to Consolidated Financial Statements.................................................. 25 to 43
</TABLE>
With the exception of the aforementioned information, the Company's Annual
Report to Stockholders for the year ended June 30, 1998, is not deemed filed as
part of this Annual Report on Form 10-KSB.
42
<PAGE>
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.
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 1998, 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 1998, 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 1998, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
43
<PAGE>
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 1998, a copy of which will be filed
not later than 120 days after the close of the fiscal year.
<TABLE>
<CAPTION>
Item 13. Exhibits and Reports on Form 8-K
(a) Exhibits
Reference to
Regulation Prior Filing or
S-B Exhibit Exhibit Number
Number Document Attached Hereto
- --------------- --------------------------------------------------------- ---------------
<S> <C>
2 Plan of acquisition, reorganization, arrangement, None
liquidation or succession
3(a) Articles of Incorporation *
3(b) By-Laws 3(b)
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, 1998, the Company filed: (1) a Form 8-K
dated April 27, 1998, announcing a stock repurchase program and (2) a Form 8-K
dated May 19, 1998, announcing a branch purchase.
44
<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.
Date: October 13, 1998 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 /s/ Kenneth L. Hasselkus
- ---------------------------- ------------------------------------
Bruce M. Borst, President, Kenneth L. Hasselkus, Director
Chief Executive Officer and Director
(Principal Executive and Operating Officer)
Date: October 13, 1998 Date: October 13, 1998
/s/ Dean H. Hartley /s/ Thomas A. Kirk
- ---------------------------- ------------------------------------
Dean H. Hartley, Director Thomas A. Kirk, Director
Date: October 13, 1998 Date: October 13, 1998
0.
/s/ Roderic E. Daniels /s/ Deborah M. Huff
- ---------------------------- ------------------------------------
Roderic E. Daniels, Director Deborah M. Huff, Treasurer and Chief
Financial Officer
(Principal Financial and Accounting
Officer)
Date: October 13, 1998 Date: October 13, 1998
45
AMTRUST CAPITAL CORP.
BY-LAWS
ARTICLE I
STOCKHOLDERS
Section 1. Annual Meeting.
An annual meeting of the stockholders, for the election of directors to
succeed those whose terms expire and for the transaction of such other business
as may properly come before the meeting, shall be held at such place, on such
date, and at such time as the Board of Directors shall each year fix.
Section 2. Special Meetings.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, special meetings of stockholders of the Corporation
may be called only by the Board of Directors pursuant to a resolution adopted by
a majority of the total number of directors which the Corporation would have if
there were no vacancies on the Board of Directors (hereinafter the "Whole
Board").
Section 3. Notice of Meetings.
Written notice of the place, date, and time of all meetings of the
stockholders shall be given, not less than ten (10) nor more than sixty (60)
days before the date on which the meeting is to be held, to each stockholder
entitled to vote at such meeting, except as otherwise provided herein or
required by law (meaning, here and hereinafter, as required from time to time by
the Delaware General Corporation Law or the Certificate of Incorporation of the
Corporation).
When a meeting is adjourned to another place, date or time, written notice
need not be given of the adjourned meeting if the place, date and time thereof
are announced at the meeting at which the adjournment is taken; provided,
however, that if the date of any adjourned meeting is more than thirty (30) days
after the date for which the meeting was originally noticed, or if a new record
date is fixed for the adjourned meeting, written notice of the place, date and
time of the adjourned meeting shall be given in conformity herewith. At any
adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
Section 4. Quorum.
At any meeting of the stockholders, the holders of at least one-third of
all of the shares of the stock entitled to vote at the meeting, present in
person or by proxy, shall constitute a quorum for all purposes, unless or except
to the extent that the presence of a larger number may be required by law. Where
a separate vote by a class or classes is required, a majority of the shares of
such class or classes, present in person or represented by proxy, shall
constitute a quorum entitled to take action with respect to that vote on that
matter.
<PAGE>
If a quorum shall fail to attend any meeting, the chairman of the meeting
or the holders of a majority of the shares of stock entitled to vote who are
present, in person or by proxy, may adjourn the meeting to another place, date
or time.
If a notice of any adjourned special meeting of stockholders is sent to all
stockholders entitled to vote thereat, stating that it will be held with those
present constituting a quorum, then except as otherwise required by law, those
present at such adjourned meeting shall constitute a quorum, and all matters
shall be determined by a majority of the votes cast at such meeting.
Section 5. Organization.
Such person as the Board of Directors may have designated or, in the
absence of such a person, the President of the Corporation or, in the
President's absence, such person as may be chosen by the holders of a majority
of the shares entitled to vote who are present, in person or by proxy, shall
call to order any meeting of the stockholders and act as chairman of the
meeting. In the absence of the Secretary of the Corporation, the secretary of
the meeting shall be such person as the chairman appoints.
Section 6. Conduct of Business.
(a) The chairman of any meeting of stockholders shall determine the order
of business and the procedure at the meeting, including such regulation of the
manner of voting and the conduct of discussion as seem to him or her in order.
(b) At any annual meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting (i) by or at the
direction of the Board of Directors or (ii) by any stockholder of the
Corporation who is entitled to vote with respect thereto and who complies with
the notice procedures set forth in this Section 6(b). For business to be
properly brought before an annual meeting by a stockholder, the stockholder must
have given timely notice thereof in writing to the Secretary of the Corporation.
To be timely, a stockholder's notice must be received at the principal executive
offices of the Corporation no later than sixty (60) days from the Corporation's
fiscal year end. A stockholder's notice to the Secretary shall set forth as to
each matter such stockholder proposes to bring before the annual meeting (i) a
brief description of the business desired to be brought before the annual
meeting and the reasons for conducting such business at the annual meeting, (ii)
the name and address, as they appear on the Corporation's books, of the
stockholder who proposed such business, (iii) the class and number of shares of
the Corporation's capital stock that are beneficially owned by such stockholder
and (iv) any material interest of such stockholder in such business.
Notwithstanding anything in these By-laws to the contrary, no business shall be
brought before or conducted at an annual meeting except in accordance with the
provisions of this Section 6(b). The officer of the Corporation or other person
presiding over the annual meeting shall, if the facts so warrant, determine and
declare to the meeting that business was not properly brought before the meeting
in accordance with the provisions of this Section 6(b) and, if he or she should
so determine, he shall so declare to the meeting and any such business so
determined to be not properly brought before the meeting shall not be
transacted.
At any special meeting of the stockholders, only such business shall be
conducted as shall have been brought before the meeting by or at the direction
of the Board of Directors.
(c) Only persons who are nominated in accordance with the procedures set
forth in these By-laws shall be eligible for election as directors. Nominations
of persons for election to the Board
2
<PAGE>
of Directors of the Corporation may be made at a meeting of stockholders at
which directors are to be elected only (i) by or at the direction of the Board
of Directors or (ii) by any stockholder of the Corporation entitled to vote for
the election of directors at the meeting who complies with the notice procedures
set forth in this Section 6(c). Such nominations, other than those made by or at
the direction of the Board of Directors, shall be made by timely notice in
writing to the Secretary of the Corporation. To be timely, a stockholder's
notice shall be delivered or mailed to and received at the principal executive
offices of the Corporation not less than 30 days prior to the date of the
meeting; provided, however, that in the event that less than 40 days' notice of
the date of the meeting is given or made to stockholders, notice by the
stockholder to be timely must be so received not later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed. Such stockholder's notice shall set forth (i) as to each
person whom such stockholder proposes to nominate for election or re-election as
a director, all information relating to such person that is required to be
disclosed in solicitations of proxies for election of directors, or is otherwise
required, in each case pursuant to Regulation 14A under the Securities Exchange
Act of 1934, as amended (including such person's written consent to being named
in the proxy statement as a nominee and to serving as a director if elected);
and (ii) as to the stockholder giving the notice: (x) the name and address, as
they appear on the Corporation's books, of such stockholder and (y) the class
and number of shares of the Corporation's capital stock that are beneficially
owned by such stockholder. At the request of the Board of Directors, any person
nominated by the Board of Directors for election as a director shall furnish to
the Secretary of the Corporation that information required to be set forth in a
stockholder's notice of nomination which pertains to the nominee. No person
shall be eligible for election as a director of the Corporation unless nominated
in accordance with the provisions of this Section 6(c). The officer of the
Corporation or other person presiding at the meeting shall, if the facts so
warrant, determine that a nomination was not made in accordance with such
provisions and, if he or she should so determine, he or she shall so declare to
the meeting and the defective nomination shall be disregarded.
Section 7. Proxies and Voting.
At any meeting of the stockholders, every stockholder entitled to vote may
vote in person or by proxy authorized by an instrument in writing (or as
otherwise permitted under applicable law) by the stockholder or his duly
authorized attorney-in-fact filed in accordance with the procedure established
for the meeting. Proxies solicited on behalf of the management shall be voted as
directed by the stockholder or in the absence of such direction, as determined
by a majority of the Board of Directors. No proxy shall be valid after eleven
months from the date of its execution except for a proxy coupled with an
interest.
Each stockholder shall have one (1) vote for every share of stock entitled
to vote which is registered in his or her name on the record date for the
meeting, except as otherwise provided herein or in the Certificate of
Incorporation of the Corporation or as required by law.
All voting, including on the election of directors but excepting where
otherwise required by law, may be by a voice vote; provided, however, that upon
demand therefore by a stockholder entitled to vote or his or her proxy, a stock
vote shall be taken. Every stock vote shall be taken by ballot, each of which
shall state the name of the stockholder or proxy voting and such other
information as may be required under the procedure established for the meeting.
Every vote taken by ballot shall be counted by an inspector or inspectors
appointed by the chairman of the meeting.
3
<PAGE>
All elections shall be determined by a plurality of the votes cast, and
except as otherwise required by law or as provided in the Certificate of
Incorporation, all other matters shall be determined by a majority of the votes
cast.
Section 8. Stock List.
The officer who has charge of the stock transfer books of the Corporation
shall prepare and make, in the time and manner required by applicable law, a
list of stockholders entitled to vote and shall make such list available for
such purposes, at such places, at such times and to such persons as required by
applicable law. The stock transfer books shall be the only evidence as to the
identity of the stockholders entitled to examine the stock transfer books or to
vote in person or by proxy at any meeting of stockholders.
Section 9. Consent of Stockholders in Lieu of Meeting.
Subject to the rights of the holders of any class or series of preferred
stock of the Corporation, any action required or permitted to be taken by the
stockholders of the Corporation must be effected at a duly called annual or
special meeting of stockholders of the Corporation and may not be effected by
any consent in writing by such stockholders.
Section 10. Inspectors of Election
The Board of Directors shall, in advance of any meeting of stockholders,
appoint one or more persons as inspectors of election, to act at the meeting or
any adjournment thereof and make a written report thereof, in accordance with
applicable law.
ARTICLE II
BOARD OF DIRECTORS
Section 1. General Powers, Number and Term of Office.
The business and affairs of the Corporation shall be managed by or under
the direction of the Board of Directors. The number of directors shall be as
provided for in the Certificate of Incorporation. The Board of Directors shall
annually elect a Chairman of the Board and a President from among its members
and shall designate, when present, either the Chairman of the Board or the
President to preside at its meetings.
The directors, other than those who may be elected by the holders of any
class or series of preferred stock, shall be divided into three classes, as
nearly equal in number as reasonably possible, with the term of office of the
first class to expire at the conclusion of the first annual meeting of
stockholders, the term of office of the second class to expire at the conclusion
of the annual meeting of stockholders one year thereafter and the term of office
of the third class to expire at the conclusion of the annual meeting of
stockholders two years thereafter, with each director to hold office until his
or her successor shall have been duly elected and qualified. At each annual
meeting of stockholders, commencing with the first annual meeting, directors
elected to succeed those directors whose terms expire shall be elected for a
term of office to expire at the third succeeding annual meeting of
4
<PAGE>
stockholders after their election, with each director to hold office until his
or her successor shall have been duly elected and qualified.
Section 2. Vacancies and Newly Created Directorships.
Subject to the rights of the holders of any class or series of preferred
stock then outstanding, newly created directorships resulting from any increase
in the authorized number of directors or any vacancies in the Board of Directors
resulting from death, resignation, retirement, disqualification, removal from
office or other cause may be filled only by a majority vote of the directors
then in office, though less than a quorum, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders at which the
term of office of the class to which they have been elected expires, and until
such director's successor shall have been duly elected and qualified. No
decrease in the number of authorized directors constituting the Board shall
shorten the term of any incumbent director.
Section 3. Regular Meetings.
Regular meetings of the Board of Directors shall be held at such place or
places, on such date or dates, and at such time or times as shall have been
established by the Board of Directors and publicized among all directors. A
notice of each regular meeting shall not be required.
Section 4. Special Meetings.
Special meetings of the Board of Directors may be called by one-third (1/3)
of the directors then in office (rounded up to the nearest whole number) or by
the President and shall be held at such place, on such date, and at such time as
they or he or she shall fix. Notice of the place, date, and time of each such
special meeting shall be given to each director by whom it is not waived by
mailing written notice not less than five (5) days before the meeting or by
telephoning or by facsimile transmission of the same not less than twenty-four
(24) hours before the meeting. Unless otherwise indicated in the notice thereof,
any and all business may be transacted at a special meeting.
Section 5. Quorum.
At any meeting of the Board of Directors, a majority of the authorized
number of directors then constituting the Board shall constitute a quorum for
all purposes. If a quorum shall fail to attend any meeting, a majority of those
present may adjourn the meeting to another place, date, or time, without further
notice or waiver thereof.
5
<PAGE>
Section 6. Participation in Meetings By Conference Telephone.
Members of the Board of Directors, or of any committee thereof, may
participate in a meeting of such Board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 7. Conduct of Business.
At any meeting of the Board of Directors, business shall be transacted in
such order and manner as the Board may from time to time determine, and all
matters shall be determined by the vote of a majority of the directors present,
except as otherwise provided herein or required by law. Action may be taken by
the Board of Directors without a meeting if all members thereof consent thereto
in writing, and the writing or writings are filed with the minutes of
proceedings of the Board of Directors.
Section 8. Powers.
The Board of Directors may, except as otherwise required by law, exercise
all such powers and do all such acts and things as may be exercised or done by
the Corporation, including, without limiting the generality of the foregoing,
the unqualified power:
(1) To declare dividends from time to time in accordance with law;
(2) To purchase or otherwise acquire any property, rights or privileges on such
terms as it shall determine;
(3) To authorize the creation, making and issuance, in such form as it may
determine, of written obligations of every kind, negotiable or
non-negotiable, secured or unsecured, and to do all things necessary in
connection therewith;
(4) To remove any officer of the Corporation with or without cause, and from
time to time to devolve the powers and duties of any officer upon any other
person for the time being;
(5) To confer upon any officer of the Corporation the power to appoint, remove
and suspend subordinate officers, employees and agents;
(6) To adopt from time to time such stock, option, stock purchase, bonus or
other compensation plans for directors, officers, employees and agents of
the Corporation and its subsidiaries as it may determine;
(7) To adopt from time to time such insurance, retirement, and other benefit
plans for directors, officers, employees and agents of the Corporation and
its subsidiaries as it may determine; and,
(8) To adopt from time to time regulations, not inconsistent with these
By-laws, for the management of the Corporation's business and affairs.
6
<PAGE>
Section 9. Compensation of Directors.
Directors, as such, may receive, pursuant to resolution of the Board of
Directors, fixed fees and other compensation for their services as directors,
including, without limitation, their services as members of committees of the
Board of Directors.
Section 10. Age Limitation.
Other than directors serving in fiscal 1994, no person 72 years of age
shall be eligible for election, reelection, appointment, or reappointment to the
Board of the Corporation. No Director shall serve as such beyond the annual
meeting of the Corporation in the year which the Director becomes 75. This age
limitation does not apply to Emeritus Directors or Advisory Directors.
Section 11. Qualifications.
Any member of the Board of Directors shall, in order to qualify as such, be
domiciled in or have his or her primary place of business located in the
Counties of Miami, Cass or Howard in the State of Indiana.
ARTICLE III
COMMITTEES
Section 1. Committees of the Board of Directors.
The Board of Directors, by a vote of a majority of the Board of Directors,
may from time to time designate committees of the Board, with such lawfully
delegable powers and duties as it thereby confers, to serve at the pleasure of
the Board and shall, for those committees and any others provided for herein,
elect a director or directors to serve as the member or members, designating, if
it desires, other directors as alternate members who may replace any absent or
disqualified member at any meeting of the committee. Any committee so designated
may exercise the power and authority of the Board of Directors to declare a
dividend, to authorize the issuance of stock or to adopt a certificate of
ownership and merger pursuant to Section 253 of the Delaware General Corporation
Law if the resolution which designated the committee or a supplemental
resolution of the Board of Directors shall so provide. In the absence or
disqualification of any member of any committee and any alternate member in his
or her place, the member or members of the committee present at the meeting and
not disqualified from voting, whether or not he or she or they constitute a
quorum, may by unanimous vote appoint another member of the Board of Directors
to act at the meeting in the place of the absent or disqualified member.
Section 2. Conduct of Business.
7
<PAGE>
Each committee may determine the procedural rules for meeting and
conducting its business and shall act in accordance therewith, except as
otherwise provided herein or required by law. Adequate provision shall be made
for notice to members of all meetings; one-third (1/3) of the members shall
constitute a quorum unless the committee shall consist of one (1) or two (2)
members, in which event one (1) member shall constitute a quorum; and all
matters shall be determined by a majority vote of the members present. Action
may be taken by any committee without a meeting if all members thereof consent
thereto in writing, and the writing or writings are filed with the minutes of
the proceedings of such committee.
Section 3. Nominating Committee.
The Board of Directors may appoint a Nominating Committee of the Board,
consisting of not less than three (3) members, one of which shall be the
President if, and only so long as, the President remains in office as a member
of the Board of Directors. The Nominating Committee shall have authority (a) to
review any nominations for election to the Board of Directors made by a
stockholder of the Corporation pursuant to Section 6(c)(ii) of Article I of
these By-laws in order to determine compliance with such By-law and (b) to
recommend to the Whole Board nominees for election to the Board of Directors to
replace those directors whose terms expire at the annual meeting of stockholders
next ensuing.
ARTICLE IV
OFFICERS
Section 1. Generally.
(a) The Board of Directors as soon as may be practicable after the annual
meeting of stockholders shall choose a President, a Secretary and a Treasurer
and from time to time may choose such other officers as it may deem proper. The
President shall be chosen from among the directors. Any number of offices may be
held by the same person.
(b) The term of office of all officers shall be until the next annual
election of officers and until their respective successors are chosen, but any
officer may be removed from office at any time by the affirmative vote of a
majority of the authorized number of directors then constituting the Board of
Directors.
(c) All officers chosen by the Board of Directors shall each have such
powers and duties as generally pertain to their respective offices, subject to
the specific provisions of this Article IV. Such officers shall also have such
powers and duties as from time to time may be conferred by the Board of
Directors or by any committee thereof.
Section 2. President.
The President shall be the chief executive officer and, subject to the
control of the Board of Directors, shall have general power over the management
and oversight of the administration and operation of the Corporation's business
and general supervisory power and authority over its policies and affairs. The
President shall see that all orders and resolutions of the Board of Directors
and of any committee thereof are carried into effect.
8
<PAGE>
Each meeting of the stockholders and of the Board of Directors shall be
presided over by the President or, in his absence, by such officer or other
person as is chosen at the meeting. In the Secretary's absence, the Treasurer of
the Corporation or such officer as has been designated by the Board of Directors
or, in the Secretary's absence, such officer or other person as is chosen by the
person presiding, shall act as secretary of each such meeting.
Section 3. Vice President.
The Vice President or Vice Presidents, if any, shall perform the duties and
exercise the powers usually incident to their respective offices and/or such
other duties and powers as may be properly assigned to them from time to time by
the Board of Directors, the Chairman of the Board or the President. The Board of
Directors may designate one or more Vice Presidents as Executive Vice President
or Senior Vice President.
Section 4. Secretary.
The Secretary or an Assistant Secretary shall issue notices of meetings,
shall keep their minutes, shall have charge of the seal and the corporate books,
shall perform such other duties and exercise such other powers as are usually
incident to such offices and/or such other duties and powers as are properly
assigned thereto by the Board of Directors, the Chairman of the Board or the
President.
Section 5. Treasurer.
The Treasurer shall have charge of all monies and securities of the
Corporation, other than monies and securities of any division of the Corporation
which has a treasurer or financial officer appointed by the Board of Directors,
and shall keep regular books of account. The funds of the Corporation shall be
deposited in the name of the Corporation by the Treasurer with such banks or
trust companies or other entities as the Board of Directors from time to time
shall designate. The Treasurer shall sign or countersign such instruments as
require the Treasurer's signature, shall perform all such duties and have all
such powers as are usually incident to such office and/or such other duties and
powers as are properly assigned to the Treasurer by the Board of Directors, the
Chairman of the Board or the President, and may be required to give bond,
payable by the Corporation, for the faithful performance of the Treasurer's
duties in such sum and with such surety as may be required by the Board of
Directors. The Treasurer shall perform the duties of the President in the
President's absence or during the President's disability to act.
Section 6. Assistant Secretaries and Other Officers.
The Board of Directors may appoint one or more assistant secretaries and
one or more assistants to the Treasurer, or one appointee to both such
positions, which officers shall have such powers and shall perform such duties
as are provided in these By-laws or as may be assigned to them by the Board of
Directors, the Chairman of the Board or the President.
9
<PAGE>
Section 7. Action with Respect to Securities of Other Corporations
Unless otherwise directed by the Board of Directors, the President or any
officer of the Corporation authorized by the President shall have power to vote
and otherwise act on behalf of the Corporation, in person or by proxy, at any
meeting of stockholders of or with respect to any action of stockholders of any
other corporation in which this Corporation may hold securities and otherwise to
exercise any and all rights and powers which this Corporation may possess by
reason of its ownership of securities in such other Corporation.
ARTICLE V
STOCK
Section 1. Certificates of Stock.
Each stockholder shall be entitled to a certificate signed by, or in the
name of the Corporation by, the President or a Vice President, and by the
Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer,
certifying the number of shares owned by him or her. Any or all of the
signatures on the certificate may be by facsimile.
Section 2. Transfers of Stock.
Transfers of stock shall be made only upon the transfer books of the
Corporation kept at an office of the Corporation or by transfer agents
designated to transfer shares of the stock of the Corporation. Except where a
certificate is issued in accordance with Section 4 of Article V of these
By-laws, an outstanding certificate for the number of shares involved shall be
surrendered for cancellation before a new certificate is issued therefore.
Section 3. Record Date.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting of stockholders, or to receive payment of
any dividend or other distribution or allotment of any rights or to exercise any
rights in respect of any change, conversion or exchange of stock or for the
purpose of any other lawful action, the Board of Directors may fix a record
date, which record date shall not precede the date on which the resolution
fixing the record date is adopted and which record date shall not be more than
sixty (60) nor less than ten (10) days before the date of any meeting of
stockholders, nor more than sixty (60) days prior to the time for such other
action as hereinbefore described; provided, however, that if no record date is
fixed by the Board of Directors, the record date for determining stockholders
entitled to notice of or to vote at a meeting of stockholders shall be at the
close of business on the day next preceding the day on which notice is given or,
if notice is waived, at the close of business on the day next preceding the day
on which the meeting is held, and, for determining stockholders entitled to
receive payment of any dividend or other distribution or allotment of rights or
to exercise any rights of change, conversion or exchange of stock or for any
other purpose, the record date shall be at the close of business on the day on
which the Board of Directors adopts a resolution relating thereto.
10
<PAGE>
A determination of stockholders of record entitled to notice of or to vote
at a meeting of stockholders shall apply to any adjournment of the meeting;
provided, however, that the Board of Directors may fix a new record date for the
adjourned meeting.
Section 4. Lost, Stolen or Destroyed Certificates.
In the event of the loss, theft or destruction of any certificate of stock,
another may be issued in its place pursuant to such regulations as the Board of
Directors may establish concerning proof of such loss, theft or destruction and
concerning the giving of a satisfactory bond or bonds of indemnity.
Section 5. Regulations.
The issue, transfer, conversion and registration of certificates of stock
shall be governed by such other regulations as the Board of Directors may
establish.
ARTICLE VI
NOTICES
Section 1. Notices.
Except as otherwise specifically provided herein or required by law, all
notices required to be given to any stockholder, director, officer, employee or
agent shall be in writing and may in every instance be effectively given by hand
delivery to the recipient thereof, by depositing such notice in the mail,
postage paid, by sending such notice by prepaid telegram or mailgram or by
sending such notice by facsimile machine or other electronic transmission. Any
such notice shall be addressed to such stockholder, director, officer, employee
or agent at his or her last known address as the same appears on the books of
the Corporation. The time when such notice is received, if hand delivered, or
dispatched, if delivered through the mail, by telegram or mailgram or by
facsimile machine or other electronic transmission, shall be the time of the
giving of the notice.
Section 2. Waivers.
A written waiver of any notice, signed by a stockholder, director, officer,
employee or agent, whether before or after the time of the event for which
notice is to be given, shall be deemed equivalent to the notice required to be
given to such stockholder, director, officer, employee or agent. Neither the
business nor the purpose of any meeting need be specified in such a waiver.
ARTICLE VII
MISCELLANEOUS
Section 1. Facsimile Signatures.
In addition to the provisions for use of facsimile signatures elsewhere
specifically authorized in these By-laws, facsimile signatures of any officer or
officers of the Corporation may be used whenever and as authorized by the Board
of Directors or a committee thereof.
11
<PAGE>
Section 2. Corporate Seal.
The Board of Directors may provide a suitable seal, containing the name of
the Corporation, which seal shall be in the charge of the Secretary. If and when
so directed by the Board of Directors or a committee thereof, duplicates
12
AmTrust Capital Corp.
SELECTED CONSOLIDATED FINANCIAL INFORMATION(1)
<TABLE>
<CAPTION>
June 30,
---------------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------------
(In Thousands)
Selected Consolidated Financial Condition Data:
<S> <C> <C> <C> <C> <C>
Total assets ................................................. $58,069 $72,245 $71,892 $68,013 $58,644
Loans held for sale .......................................... 1,944 1,082 1,509 1,842 3,240
Loans, net ................................................... 42,574 49,645 49,800 47,790 41,127
Investment securities available for sale ..................... 4,350 12,149 11,919 3,635 1,238
Investment securities held to maturity ....................... 1,140 2,067 2,613 7,941 9,182
Deposits ..................................................... 46,881 53,523 44,562 50,514 48,349
Total borrowings ............................................. 3,070 10,902 19,500 9,500 6,250
Stockholders' equity ......................................... 7,431 7,464 7,211 7,637 3,591
</TABLE>
<TABLE>
<CAPTION>
Year Ended June 30,
---------------------------------------------------------
1998 1997 1996 1995 1994
---------------------------------------------------------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Selected Consolidated Operations Data:
Total interest income ............................................... $4,658 $5,127 $4,957 $4,479 $4,124
Total interest expense .............................................. 2,851 3,170 3,084 2,734 2,166
------ ------ ------ ------ ------
Net interest income ............................................. 1,807 1,957 1,873 1,745 1,958
Provision for loan losses ........................................... 92 33 125 88 161
------ ------ ------ ------ ------
Net interest income after provision for loan losses ............. 1,715 1,924 1,748 1,657 1,797
Gains on sales of loans and investment securities ................... 284 175 216 195 176
Gain on sale of deposits ............................................ -- -- 181 -- --
Gain on sale of premises and equipment .............................. -- -- 80 -- 113
Other non-interest income ........................................... 430 381 370 199 199
------ ------ ------ ------ ------
Total non-interest income ....................................... 714 556 847 394 488
Total non-interest expense ...................................... 2,172 2,299 2,071 1,745 1,519
------ ------ ------ ------ ------
Income before income tax and cumulative effect of
change in accounting method ................................. 257 181 524 306 766
Income tax expense .................................................. 119 47 191 112 296
Cumulative effect of change in accounting method .................... -- -- -- -- 30
------ ------ ------ ------ ------
Net income ...................................................... $ 138 $ 134 $ 333 $ 194 $ 500
====== ====== ====== ====== ======
Basic earnings per share ........................................ $ .29 $ .27 $ .63(2)
Diluted earning per share ....................................... $ .28 $ .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,
-------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Dividends per share .............................................. $ .20 $ .10 -- -- --
Dividend pay out ratio ........................................... 68.97% 37.03% --% --% --%
Performance Ratios:
Return on assets (ratio of net income to average
total assets) ................................................. .21 .19 .47 .30 .88
Return on equity capital (ratio of net income to
average equity) ............................................... 1.94 1.90 4.63 4.06 14.51
Interest rate spread (average during year) ....................... 2.66 2.68 2.48 2.68 3.52
Net interest margin(1) ........................................... 2.90 2.90 2.80 2.84 3.63
Ratio of operating expense to average total assets ............... 3.23 3.19 2.95 2.67 2.66
Ratio of average interest-earning assets to average
interest-bearing liabilities .................................. 105.19 104.81 107.13 103.46 102.66
Quality Ratios:
Non-performing assets to total assets, at end of period(2) ........ 4.61 3.64 3.38 1.35 2.60
Non-performing loans to total loans, at end of period(3) .......... 5.34 4.81 4.66 1.85 3.32
Allowance for losses on loans to non-performing assets,
at end of period ............................................... 19.35 19.92 20.31 43.67 21.92
Allowance for losses on loans to total loans, at end of
period ......................................................... 1.15 1.02 .95 .81 .75
Allowance for losses on loans to non-performing loans,
at end of period ............................................... 21.54 21.43 20.68 43.67 22.54
Capital Ratios:
Equity to total assets, at end of period .......................... 12.80 10.33 10.03 11.23 6.12
Average equity to average assets .................................. 10.63 9.80 10.23 7.31 6.03
Other Data:
Number of full-service offices .................................... 3 2 2 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
Forward-Looking Statements
When used in this filing and in future filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to changes in economic
conditions in the Company's market area, changes in policies by regulatory
agencies, fluctuations in interest rates, demand for loans in the Company's
market area and competition, all or some of which could cause actual results to
differ materially from historical earnings and those presently anticipated or
projected.
The Company wishes to caution readers not to place undue reliance on any
such forward-looking statements, which speak only as of the date made, and
advises readers that various factors, including regional and national economic
conditions, substantial changes in levels of market interest rates, credit and
other risks of lending and investment activities and competitive and regulatory
factors, could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from those
anticipated or projected.
The Company does not undertake, and specifically disclaims any obligation,
to update any forward-looking statements to reflect occurrences or unanticipated
events or circumstances after the date of such statements.
Introduction
AmTrust Capital Corp. (the "Company"), a Delaware corporation, is the
parent company of AmericanTrust Federal Savings Bank ("AmericanTrust" or the
"Bank"). The Bank, through its main office and three branches, serves
communities located in Howard and Miami counties, Indiana.
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.
4
<PAGE>
Financial Condition
June 30, 1998 Compared to June 30, 1997. Total assets decreased $14.1
million, or 19.6%, to $58.1 million at June 30, 1998 from $72.2 million at June
30, 1997 primarily due to decreases in investments and loans.
Investment Securities available for sale and held to maturity decreased
$8.7 million to $5.5 million at June 30, 1998 from $14.2 million at June 30,
1997. This decrease was due to principal repayments and maturities.
Loans and loans held for sale decreased approximately $6.2 million, or
12.2%, to $44.5 million at June 30, 1998 compared to $50.7 million at June 30,
1997 as loan repayments and sales exceeded loan originations. During fiscal
1998, the Company originated $18.4 million of loans secured by one- to
four-family real estate (of which $12.3 million were sold in the secondary
market) and $2.2 million in consumer loans. The Bank is no longer purchasing
indirect consumer loans. All consumer loan originations are obtained directly by
Bank personnel.
Bank premises and equipment (net of accumulated depreciation) increased
approximately $517,000 from $1.2 million at June 30, 1997 to $1.7 million at
June 30, 1998. This increase is attributable to various office equipment and
computer upgrades and to the opening of a new banking location, increasing the
full service locations from two to three.
Advances from Federal Home Loan Bank (the "FHLB") decreased $7.8 million
from $10.9 million at June 30, 1997 to $3.1 million at June 30, 1998. The
decrease was accomplished through the use of investment principal repayments and
maturities.
Deposits decreased $6.6 million from $53.5 million at June 30, 1997 to
$46.9 million at June 30, 1998 due primarily to decreases of $2.1 million in
public funds and $4.5 million in core deposits. As part of its strategic plan,
the Bank was less aggressive in retail core deposit pricing in order to reduce
cost of savings deposit expense.
Stockholders' equity decreased to $7.4 million at June 30, 1998 from $7.5
million at June 30, 1997. This net decrease of $33,000 was a result of net
income of $138,000, a decrease of unrealized losses on securities available for
sale of $194,000 and an increase of $169,000 from employee benefit and stock
option plans offset by purchases of treasury stock of $430,000 and dividends of
$104,000.
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.
5
<PAGE>
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.
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.
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, 1998 and 1997
General. Net income for the fiscal year ended June 30, 1998 increased
$4,000 to $138,000 for fiscal 1998 from $134,000 for fiscal 1997.
Net Interest Income. Net interest income decreased from $2.0 million for
fiscal 1997 to $1.8 million for fiscal 1998.
Interest Income. Interest income for the fiscal years ended June 30, 1998
and June 30, 1997, was $4.7 million and $5.1 million, respectively. The decrease
in fiscal 1998 from fiscal 1997 was due to a decrease in the average balance of
interest-earning assets as well as a decrease in yields on such assets from
7.61% in fiscal 1997 to 7.48% in fiscal 1998. Average interest-earning assets
were $62.3 million and $67.4 million for the fiscal years ended June 30, 1998
and June 30, 1997, respectively.
Interest Expense. Interest expense for fiscal 1998 and 1997, was $2.9
million and $3.2 million, respectively. The decrease in interest expense of
$319,00 in fiscal 1998 from fiscal 1997 was due primarily to a decrease in the
average balance of interest-bearing liabilities as well as a decrease in cost of
funds from 4.93% in fiscal 1997 to 4.81% in fiscal 1998. The average balance of
interest-bearing liabilities was $59.2 million for fiscal 1998 compared to $64.3
million for fiscal
6
<PAGE>
1997. The Company's cost of funds on deposits decreased to 4.50% in fiscal 1998
from 4.54% in fiscal 1997. The cost of funds on FHLB advances increased from
6.24% in fiscal 1997 to 6.27% in fiscal 1998. The average balance of
interest-bearing liabilities decreased due to the Company's payment of FHLB
advances. Average FHLB advances decreased from $14.6 million during fiscal 1997
to $10.6 million in fiscal 1998. Interest bearing deposits also decreased from
$49.7 million in fiscal 1997 to $48.7 million in fiscal 1998 as a result of a
less aggressive pricing structure.
Other Income. Other income for fiscal 1998 was $714,000 compared to
$556,000 for fiscal 1997, an increase of $158,000. The increase is primarily a
result of an increase in gains on the sale of loans of $109,000. Other increases
included an increase in service charges on deposit accounts of $23,000 and an
increase of $17,000 on annuity and other commissions. A restructuring of service
fee charges and price increases accounted for the service fee increase.
Other Expenses. Other expenses decreased $126,000 from $2.3 million for
fiscal 1997 to $2.2 million for fiscal 1998. A decrease in FDIC premiums of
$329,000 as a result of the one-time FDIC special assessment to recapitalize the
SAIF in 1997 was partially offset by increases to salaries, occupancy, data
processing and advertising costs associated with opening a third full-service
branch.
Provision for Loan Losses. The Company's provision for loan losses for the
fiscal years ended June 30, 1998 and 1997 was $92,000 and $33,000, respectively.
At June 30, 1998 and 1997, the Company's allowance for losses on loans to total
loans was 1.15% and 1.02%, respectively. The allowance represented 21.54% and
21.43%, of non-performing loans at June 30, 1998 and 1997. 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, 1998 and 1997, non-performing loans were $2.40
million and $2.44 million, respectively or 5.3% and 4.8%, 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, 1998, the book value of the Company's lease
contracts totaled $449,000. 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. BFGI
continues to service the lease contracts and
7
<PAGE>
has initially remitted $350,000 during June 1998 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 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,
1998 and 1997 was $119,000 and $47,000, respectively. Income tax expense
increased $72,000 from fiscal 1997 to fiscal 1998 as a result of an increase in
pretax income.
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
7.47% 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.
8
<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.
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,
--------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------------- ---------------------------- --------------------------
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 .... $1,083 $61 5.63% $873 $55 6.30% $2,520 $132 5.24%
Loans(1) .......................... 47,727 3,653 7.65 50,896 3,997 7.85 50,323 3,950 7.85
Investment securities, including
FHLB stock ..................... 13,530 944 6.98 15,618 1,075 6.88 13,988 875 6.26
------- ----- ------- ----- ------- -----
Total interest-earning assets(1) . 62,340 4,658 7.47 67,387 5,127 7.61 66,831 4,957 7.42
----- ----- -----
Non-interest-earning assets ......... 4,905 4,598 3,370
------- ------- -------
Total assets ..................... $67,245 $71,985 $70,201
======= ======= =======
Liabilities and Equity:
Interest-bearing liabilities
Savings deposits .................. 10,827 332 3.07 $11,540 400 3.47 $12,878 446 3.46
NOW deposits ...................... 7,602 140 1.84 6,901 166 2.41 7,345 169 2.30
Certificate accounts .............. 30,251 1,715 5.67 31,235 1,691 5.41 29,391 1,699 5.78
FHLB advances ..................... 10,587 664 6.27 14,618 913 6.24 12,771 770 6.03
------- ----- ------- ----- ------- -----
Total interest-bearing liabilities 59,267 2,851 4.81 64,294 3,170 4.93 62,385 3,084 4.94
----- ----- -----
Other liabilities ................. 831 637 632
------- ------- -------
Total liabilities ............... 60,098 64,931 63,017
Equity .............................. 7,147 7,054 7,184
------- ------- -------
Total liabilities and equity .... $67,245 $71,985 $70,201
======= ======= =======
Net interest income .................. 1,807 $1,957 $1,873
----- ===== =====
Net interest rate spread ............. 2.66 2.68 2.48
Net interest-earning assets .......... $3,073 $3,093 $4,446
======= ======= =======
Net yield on average interest-
earning assets ..................... 2.90 2.90 2.80
Average interest-earning assets
to average interest-bearing
liabilities ........................ 105.19% 104.81% 107.13%
</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,
---------------------------------------------------------------------
1998 vs. 1997 1997 vs. 1996
---------------------------------- ---------------------------------
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............... $ 12 $ (6) $ 6 $(100) $ 23 $ (77)
Loans.................................... (243) (101) (344) 45 2 47
Securities, including FHLB stock......... (146) 15 (131) 107 93 200
----- ------ ----- ----- ----- -----
Total interest-earning assets.......... $(377) $ (92) (469) $ 52 $ 118 170
===== ====== ----- ===== ===== -----
Interest-bearing liabilities:
Savings deposits......................... $ (22) $ (46) $ (68) $ (46) $ -- $ (46)
NOW deposits............................. 13 (39) (26) (10) 7 (3)
Certificate accounts..................... (56) 80 24 103 (111) (8)
FHLB advances............................ (253) 4 (249) 115 28 143
----- ------ ----- ----- ----- -----
Total interest-bearing liabilities..... $(318) $ (1) (319) $ 162 $ (76) 86
===== ====== ----- ===== ===== -----
Net interest income........................ $(150) $ 84
===== =====
</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,
----------------------------------------
1998 1997 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average yield on:
Interest-bearing deposits with other financial institutions.... 5.63% 6.30% 5.24% 4.85%
Loans.......................................................... 7.65 7.85 7.85 7.42
Securities, including FHLB stock............................... 6.98 6.88 6.26 7.18
Combined weighted average yield on interest-earning
assets................................................... 7.47 7.61 7.42 7.28
Weighted average rate paid on:
Savings deposits............................................... 3.07 3.47 3.46 3.68
NOW deposits................................................... 1.84 2.41 2.30 2.47
Certificate accounts........................................... 5.67 5.41 5.78 5.14
FHLB advances.................................................. 6.27 6.24 6.03 5.83
Combined weighted average rate paid on interest-
bearing liabilities...................................... 4.81 4.93 4.94 4.60
Spread........................................................... 2.66 2.68 2.48 2.68
</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 risk-based 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, 1998, the Bank's total assets were $58.4 million and
risk-based capital was 19.0% 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, 1998, 2% of the present value of the Bank's assets
was approximately $1.2 million which was more than the greatest decrease in NPV
resulting from a 200 basis point change in interest rates. As a result, the Bank
would not have been required to make a deduction from total capital in
calculating its risk-
12
<PAGE>
based capital requirement had this rule been in effect on such date and had the
Bank not been exempt from reporting on such date.
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, 1998, 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, 1998, the NPV of the Bank's assets was $58.4 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, 1998 At June 30, 1997
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 -1,639 -22 -3,571 -82
+200 -46 -967 -13 -2,340 -54
+100 -35 -395 -5 -1,128 -26
0 0 0 0 0 0
-100 -35 341 5 956 22
-200 -46 673 9 1,825 42
-300 -57 1,274 17 2,906 67
</TABLE>
In the event of a 300 basis point change in interest rate based upon
estimates as of June 30, 1998, the Bank would experience a 17% increase in NPV
in a declining rate environment and a 22% 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 decreased level of interest rate risk experienced by the Bank
during fiscal year 1998 was a result of several agency bonds with long-term
maturity being called and, thus, shortening asset maturities.
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
13
<PAGE>
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, 1998, 1997 and
1996, cash totaled $1.8 million, $1.5 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, 1998, 1997 and 1996.
Year Ended June 30, 1998 Compared to Year Ended June 30, 1997. During the
fiscal year ended June 30, 1998, cash increased $262,000 and interest-earning
deposits increased $6,000. In addition, interest-bearing deposits decreased
$11.0 million and FHLB advances decreased $7.8 million, paid from investment
principal proceeds. The decrease in interest bearing deposits was the result of
a less aggressive pricing strategy.
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.
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, 1998, 1997 and 1996,
the Company originated mortgage loans of $18.4 million, $8.4 million and $15.3
million, respectively. The Company originated $2.2 million, $8.9 million and
$7.3 million, respectively, of consumer loans during fiscal 1998, 1997 and 1996.
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
14
<PAGE>
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, 1998, the Company had $3.1 million in
outstanding advances from the FHLB of Indianapolis and $1.1 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, 1998, the Company had outstanding loan commitments of $1.1
million. 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, 1998 totaled $19.5 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, 1998 was 5%.
The Bank's liquidity ratios were 8.83% and 11.3%, respectively, at June 30, 1998
and June 30, 1997.
15
<PAGE>
As a federally chartered savings bank, the Bank is required to maintain a
minimum level of regulatory capital. At June 30, 1998, 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, 1998.
At June 30, 1998
-----------------------
Amount(1) Percent
--------- -------
Tangible Capital:
Capital level ............................ $7,023 12.1%
Requirement .............................. 870 1.5
------ ----
Excess ................................... $6,153 10.6%
====== ====
Core Capital:
Capital level ............................ $7,023 12.0%
Requirement(2) ........................... 1,749 4.0
------ ----
Excess ................................... $5,274 9.0%
====== ====
Risk-Based Capital:
Capital level ............................ $7,404 19.0%
Requirement(3) ........................... 3,118 8.0
------ ----
Excess ................................... $4,286 11.0%
====== ====
- ----------
(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
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 shared in the
16
<PAGE>
earnings of the entity. Diluted EPS is computed similarly to that of fully
diluted EPS pursuant to
Opinion No. 15.
The Company adopted the statement on January 1, 1998, and as required by
the statement restated all prior period EPS data presented in this Annual Report
to Stockholders.
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 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.
17
<PAGE>
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.
Impact of the Year 2000
The Company has conducted a comprehensive review of its computer systems to
identify applications that could be affected by the "Year 2000" issue, and has
developed an implementation plan to address the issue. The Company's data
processing is performed primarily in-house; however software and hardware
utilized is under maintenance agreements with third party vendors, consequently
the Company is very dependent on those vendors to conduct its business. The
Company has already contacted each vendor to request time tables for year 2000
compliance and expected costs, if any, to be passed along to the Company. To
date, the Company has been informed that its primary service providers
anticipate that all reprogramming efforts will be completed by December 31,
1999, allowing the Company adequate time for testing. Certain other vendors have
not yet responded, however, the Company will pursue other options if it appears
that these vendors will be unable to comply. Management does not expect these
costs to have a significant impact on its financial position or results of
operations however, there can be no assurance that the vendors systems will be
2000 compliant, consequently the Company could incur incremental costs to
convert to another vendor. The Company has identified certain of its hardware
and software equipment that will not be Year 2000 compliant and intends to
purchase new equipment and software prior to March 31, 1999. These capital
expenditures are expected to total approximately $250,000.
18
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Consolidated Financial Statements
June 30, 1998, 1997 and 1996
19
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Table of Contents
Page
- --------------------------------------------------------------------------------
Financial Statements
Independent auditor's report 1
Consolidated balance sheet 2
Consolidated statement of income 3
Consolidated statement of changes in stockholders' equity 4
Consolidated statement of cash flows 5
Notes to consolidated financial statements 6
20
<PAGE>
[OLIVE LETTERHEAD]
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, 1998 and 1997, 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, 1998. 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, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended June 30, 1998, in conformity with generally accepted accounting
principles.
Olive LLP
Indianapolis, Indiana
July 23, 1998, except for Note 15
as to which the date is
July 24, 1998
21
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Consolidated Balance Sheet
<TABLE>
<CAPTION>
June 30 1998 1997
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Cash and due from banks $ 1,776,692 $ 1,514,563
Interest-bearing deposits 1,099,107 1,093,288
Investment securities
Available for sale 4,349,636 12,148,535
Held to maturity 1,139,995 2,067,249
----------------------------
Total investment securities 5,489,631 14,215,784
Mortgage loans held for sale 1,944,088 1,081,538
Loans 43,091,521 50,167,394
Allowance for loan losses (517,653) (522,743)
----------------------------
Net loans 42,573,868 49,644,651
Premises and equipment 1,794,803 1,277,976
Federal Home Loan Bank of Indianapolis stock 1,050,000 1,050,000
Cash surrender value--life insurance policies 1,296,746 1,135,038
Interest receivable 257,754 376,812
Deferred income tax benefit 66,575 204,193
Current income tax refundable 123,735 196,299
Other assets 595,610 455,320
----------------------------
Total assets $ 58,068,609 $ 72,245,462
============================
Liabilities
Deposits
Noninterest bearing $ 699,043 $ 451,252
Interest bearing 46,182,445 53,071,449
----------------------------
Total deposits 46,881,488 53,522,701
Advances from Federal Home Loan Bank of Indianapolis 3,070,405 10,901,738
Interest payable 101,259 85,254
Other liabilities 584,079 272,256
----------------------------
Total liabilities 50,637,231 64,781,949
----------------------------
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 4,236,559 4,193,137
Retained earnings--substantially restricted 4,284,019 4,249,256
Unearned employee stock ownership plan ("ESOP")
shares--27,594 and 34,804 shares (220,752) (278,430)
Treasury stock at cost--76,610 and 53,585 shares (915,583) (553,086)
Net unrealized gain (loss) on securities available for sale 41,334 (153,165)
------------ ------------
Total stockholders' equity 7,431,378 7,463,513
------------ ------------
Total liabilities and stockholders' equity $ 58,068,609 $ 72,245,462
============ ============
</TABLE>
See notes to consolidated financial statements.
22
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Consolidated Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest Income
Loans receivable $3,652,724 $3,997,135 $3,949,769
Investment securities, including dividends 943,926 1,074,817 875,140
Deposits with financial institutions 61,708 55,128 131,645
------------------------------------
Total interest income 4,658,358 5,127,080 4,956,554
------------------------------------
Interest Expense
Deposits 2,187,280 2,257,431 2,314,154
Advances from Federal Home Loan Bank of Indianapolis 663,727 912,693 769,631
------------------------------------
Total interest expense 2,851,007 3,170,124 3,083,785
------------------------------------
Net Interest Income 1,807,351 1,956,956 1,872,769
Provision for loan losses 92,284 32,652 124,683
------------------------------------
Net Interest Income After Provision for Losses on Loans 1,715,067 1,924,304 1,748,086
------------------------------------
Other Income
Service charges on deposit accounts 99,981 76,847 98,091
Gains on sale of
Investment securities 15,436
Loans held for sale 283,611 174,974 200,274
Deposits 180,613
Bank premises 80,322
Loan fees and service charges 60,784 77,455 91,024
Annuity and other commissions 160,992 144,052 98,291
Other income 108,858 82,278 83,181
-------------------------------------
714,226 555,606 847,232
------------------------------------
Other Expenses
Salaries and employee benefits 982,195 915,164 869,743
Net occupancy expenses 149,113 124,753 152,818
Equipment expenses 118,454 107,881 97,914
Data processing fees 118,508 106,589 117,178
Deposit insurance expense 31,295 360,563 117,208
Legal fees 22,672 53,269 65,395
Customer deposit account expense 26,381 53,524 66,599
Advertising and promotion 55,117 41,599 50,123
Printing and office supplies 54,886 48,463 59,688
Bank fees 60,006 49,290 71,875
Repossession expense 66,268 18,200 738
Other expenses 487,555 419,523 402,196
------------------------------------
2,172,450 2,298,818 2,071,475
------------------------------------
Income Before Income Tax 256,843 181,092 523,843
Income tax expense 118,511 46,798 191,085
------------------------------------
Net Income $ 138,332 $ 134,294 $ 332,758
====================================
Basic Earnings per share $.29 $.27 $.63
Diluted Earnings per share .28 .27 .63
</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, 1995 580,064 $ 5,801 $4,170,097 $3,835,102 $(352,678)
Net income for 1996 332,758
Purchase of common stock
ESOP shares earned 8,121 37,124
Net change in unrealized gain (loss) on
securities available for sale
-----------------------------------------------------------------------------------
Balances, June 30, 1996 580,064 5,801 4,178,218 4,167,860 (315,554)
Net income for 1997 134,294
Dividends ($.10 per share) (52,898)
Purchase of common stock
ESOP shares earned 14,919 37,124
Recognition and retention plan ("RRP")
shares earned
Net change in unrealized gain (loss) on
securities available for sale
-----------------------------------------------------------------------------------
Balances, June 30, 1997 580,064 5,801 4,193,137 4,249,256 (278,430)
Net income for 1998 138,332
Dividends ($.20 per share) (103,569)
Purchase of common stock
ESOP shares earned 45,400 57,678
RRP shares earned (890)
Options exercised (1,088)
Net change in unrealized gain (loss) on
securities available for sale
-----------------------------------------------------------------------------------
Balances, June 30, 1997 580,064 5,801 4,236,559 4,284,019 $(220,752)
===================================================================================
<CAPTION>
Net Unrealized
Gain (Loss) on
Treasury Stock Securities
------------------------ Available
Shares Amount For Sale Total
--------------------------------------------------------------
<S> <C> <C> <C> <C>
Balances, July 1, 1995 $ (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 gain (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 ($.10 per share) (52,898)
Purchase of common stock (5,000) (56,250) (56,250)
ESOP shares earned 52,043
Recognition and retention plan ("RRP")
shares earned 3,620 38,463 38,463
Net change in unrealized gain (loss) on
securities available for sale 136,572 136,572
--------------------------------------------------------------
Balances, June 30, 1997 (53,585) (553,086) (153,165) 7,463,513
Net income for 1998 138,332
Dividends ($.20 per share) (103,569)
Purchase of common stock (29,220) (429,523) (429,523)
ESOP shares earned 103,078
RRP shares earned 3,295 35,488 34,598
Options exercised 2,900 31,538 30,450
Net change in unrealized gain (loss) on
securities available for sale 194,499 194,499
--------------------------------------------------------------
Balances, June 30, 1998 (76,610) $ (915,583) $ 41,334 $ 7,431,378
==============================================================
</TABLE>
See notes to consolidated financial statements.
24
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Activities
<S> <C> <C> <C>
Net income $ 138,332 $ 134,294 $ 332,758
Adjustments to reconcile net income to net cash provided (used) by
operating activities
Provision for loan losses 92,284 32,652 124,683
Premium and discount amortization, net 134 (289) 8,101
Depreciation and amortization 131,782 107,520 94,183
Gains on sales of securities (15,436)
Gain on sale of deposits (180,613)
Gain on disposal of bank premises (80,322)
Loss on disposal of equipment 1,644
Deferred income tax 14,108 32,881 (51,495)
Current income tax refundable 72,564 (174,194)
Loans originated for sale (13,230,652) (5,892,481) (12,488,882)
Proceeds from sales and paydowns on loans held for sale 12,555,342 6,494,528 13,022,131
Gains on sales of loans held for sale (283,611) (174,974) (200,274)
ESOP shares earned 103,078 52,043 45,245
RRP compensation expense 34,598 38,463
Change in
Interest receivable and other assets 75,139 (151,084) (128,500)
Cash surrender value of life insurance policies (52,698) (34,835) (46,696)
Interest payable and other liabilities 323,980 (261,307) 257,372
------------------------------------------------
Net cash provided (used) by operating activities (23,976) 203,217 692,255
------------------------------------------------
Investing Activities
Net change in interest-bearing deposits (5,819) (475,446) 1,479,592
Purchases of securities available for sale (60,071) (50,441) (10,439,338)
Payments on securities available for sale 8,075,682 1,444,868
Proceeds from sales of securities available for sale 3,748,088
Payments on securities held to maturity 926,710 593,149 1,852,206
Net change in mutual fund 105,555
Net change in loans 6,978,499 123,042 (2,134,989)
Proceeds from disposal of bank premises 200,000
Purchase of premises and equipment (650,253) (260,977) (177,056)
Purchase of FHLB of Indianapolis stock (250,000)
Purchase of life insurance policies (109,010) (109,010)
------------------------------------------------
Net cash provided (used) by investing activities 15,261,293 (70,673) (4,385,639)
------------------------------------------------
Financing Activities
Net change in deposits (6,641,213) 8,961,176 (5,772,323)
Proceeds from FHLB advances 28,200,000 38,716,570 41,300,000
Repayment of FHLB advances (36,031,333) (47,314,868) (31,299,964)
Exercise of options 30,450
Purchase of common stock (429,523) (56,250) (535,299)
Dividends paid (103,569) (52,898)
------------------------------------------------
Net cash provided (used) by financing activities (14,975,188) 253,730 3,692,414
------------------------------------------------
Net Change in Cash 262,129 386,274 (970)
Cash and Due From Banks, Beginning of Year 1,514,563 1,128,289 1,129,259
------------------------------------------------
Cash and Due From Banks, End of Year $ 1,776,692 $ 1,514,563 $ 1,128,289
================================================
Additional Cash Flows and Supplementary Information
Interest paid $ 2,835,002 $ 3,192,068 $ 3,058,401
Income tax paid 36,038 283,711 127,350
Capitalized mortgage servicing rights 96,371
</TABLE>
See notes to consolidated financial statements.
25
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 1 -- 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 in a single significant business
segment. 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.
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.
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 loans held for sale are recorded at the lower of aggregate cost or
market value. Net unrealized losses, if any, are recognized through a valuation
allowance by charges to income based on the difference between estimated sales
proceeds and aggregate cost.
26
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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, 1998, 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.
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.
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.
Treasury stock is stated at cost. Cost is determined by the first-in, first-out
method.
Stock options are granted for a fixed number of shares to employees with an
exercise price equal to the fair value of the shares at the date of grant. The
Company accounts for and will continue to account for stock option grants in
accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees,
and, accordingly, recognizes no compensation expense for the stock option
grants.
27
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 and potential common shares. Unearned ESOP shares have been
excluded from the computation of average common shares and potential common
shares outstanding.
Note 2 -- Investment Securities
<TABLE>
<CAPTION>
1998
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale
Federal agencies $ 500 $ 1 $ 499
Mortgage-backed securities 2,717 $ 15 6 2,726
Mutual funds 1,071 55 1 1,125
------------------------------------------------------------
Total available for sale 4,288 70 8 4,350
------------------------------------------------------------
Held to maturity
Mortgage-backed securities 1,063 5 15 1,053
Other asset-backed securities 77 35 42
------------------------------------------------------------
Total held to maturity 1,140 5 50 1,095
------------------------------------------------------------
Total investment securities $5,428 $ 75 $ 58 $5,445
============================================================
1997
------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
June 30 Cost Gains Losses Value
- ----------------------------------------------------------------------------------------------------------
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
Other asset-backed securities 183 33 150
------------------------------------------------------------
Total held to maturity 2,067 74 1,993
------------------------------------------------------------
Total investment securities $14,476 $ 0 $ 334 $14,142
============================================================
</TABLE>
28
<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, 1998, 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>
Available for Sale Held to Maturity
----------------------------------------------------------
Amortized Fair Amortized Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Less than one
One to five years
Five to ten years $ 500 $ 499
After ten years
-----------------------------------------------------------
500 499
Mortgage-backed securities 2,717 2,726 $1,063 $1,053
Other asset-backed securities 77 42
Mutual funds 1,071 1,125
-----------------------------------------------------------
Totals $4,288 $4,350 $1,140 $1,095
===========================================================
</TABLE>
Securities with a carrying value of $314,314 and $8,146,000 were pledged at June
30, 1998 and 1997 to secure FHLB advances.
There were no sales of securities for the years ended June 30, 1998 and 1997.
Proceeds from sales of securities available for sale during 1996 were
$3,748,000. Gross gains of $15,000 for the year ended June 30, 1996 were
realized on those sales.
Note 3 -- Loans Allowance
<TABLE>
<CAPTION>
June 30 1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Loans at June 30
Real estate mortgage loans--1 to 4 family dwellings $22,744 $24,460
Real estate mortgage loans--other 1,956 2,307
Consumer loans 16,595 20,577
Construction loans 179 919
Lease contracts 1,132 1,491
--------------------------------
Total loans 42,606 49,754
--------------------------------
Undisbursed portion of loans (439) (857)
Unearned interest (16) (25)
Deferred loan fees and costs, net 941 1,295
--------------------------------
486 413
--------------------------------
$43,092 $50,167
================================
</TABLE>
29
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Allowance for loan losses
Balances, July 1 $ 523 $ 494 $ 400
Provision for loan losses 92 33 125
Recoveries on loans 5
Loans charged off (97) (9) (31)
-----------------------------------------------
Balances, June 30 $ 518 $ 523 $ 494
===============================================
June 30 1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Impaired and other nonperforming loans at June 30
Total impaired (no allowance is required) $ 278 $ 280
Nonaccruing 1,767 1,796 $ 1,580
Restructured 359 363 809
Other information on impaired loans:
Year Ended June 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
Average balance of impaired loans $ 279 $ 282
Interest income recognized on impaired loans 27 14
Cash-basis interest included above 25 12
</TABLE>
Additional interest income of approximately $171,000, $169,000 and $26,000 for
1998, 1997 and 1996 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.
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, 1998 and 1997, the book
value of the Bank's lease contracts totaled $449,000 and $817,000. In addition,
the Bank had $674,000 at June 30, 1998 and 1997 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 and has
initially remitted $350,000 during June 1998 under the conservatorship of the
court-appointed Trustee. The Bank is continuing to pursue collection of the
remaining balance of the contracts. 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.
30
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank has entered into transactions with certain directors, executive
officers, significant stockholders and their affiliates or associates (related
parties). Such transactions were made in the ordinary course of business on
substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the same time for comparable transactions
with other customers, and did not, in the opinion of management, involve more
than normal credit risk or present other unfavorable features.
The aggregate amount of loans, as defined, to such related parties were as
follows:
- --------------------------------------------------------------------------------
Balances, July 1, 1997 $470
New loans, including renewals 451
Payments, etc., including renewals (331)
------------
Balances, June 30, 1998 $590
============
Note 4 -- Premises and Equipment
June 30 1998 1997
- --------------------------------------------------------------------------------
Land $ 173 $ 173
Buildings and land improvements 1,477 1,060
Furniture and equipment 1,000 768
----------------------------
Total cost 2,650 2,001
Accumulated depreciation (855) (723)
----------------------------
Net $1,795 $1,278
============================
31
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 5 -- Deposits
June 30 1998 1997
- --------------------------------------------------------------------------------
Noninterest bearing $ 699 $ 451
Interest-bearing demand 7,034 6,849
Savings deposits 10,089 11,592
Certificates and other time deposits of $100,000 or more 10,798 13,287
Other certificates and time deposits 18,261 21,344
-----------------
Total deposits $46,881 $53,523
=================
Certificates and other time deposits maturing in
years ending June 30
1999 $19,459
2000 4,277
2001 2,172
2002 849
2003 1,960
Thereafter 342
-------
$29,059
=======
Note 6 -- Advances From Federal Home Loan Bank of Indianapolis
1998 1997
--------------------- ------------------------
Weighted Weighted
Average Average
June 30 Amount Rate Amount Rate
- ----------------------------------------- ------------------------
Maturities in years
ending June 30
1998 $ 6,900 5.97%
1999 $ 1,390 6.04% 1,630 5.97
2006 1,680 6.71 2,372 6.71
----- -----
$ 3,070 6.41 $10,902 6.13
======= ======= ====
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 $4,668,000, securities in an amount of approximately $314,000, and
all stock in the FHLB. Advances are subject to restrictions or penalties in the
event of prepayment.
32
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 7 -- 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 $31,833,000 at June 30, 1998; $29,025,000 at June
30, 1997; and $27,887,000 at June 30, 1996.
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, 1998 approximates carrying value.
Year Ended June 30 1998 1997
- --------------------------------------------------------------------------------
Mortgage servicing rights
Balance, beginning of year $ 48
Servicing rights capitalized 96 $53
Amortization of servicing rights (29) (5)
---------------------------
Balances, end of year $115 $48
===========================
33
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 8 -- Income Tax
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income tax expense
Currently payable
Federal $ 72 $ 9 $182
State 33 5 61
Deferred
Federal 14 27 (36)
State 6 (16)
-----------------------------------------
Total income tax expense $119 $47 $191
=========================================
Reconciliation of federal statutory to actual tax expense
Federal statutory income tax at 34% $ 87 $62 $178
Non-taxable income (25) (12) (17)
Non-deductible expenses 20 9 9
Effect of state income taxes 21 7 30
Other 16 (19) (9)
-----------------------------------------
Actual tax expense $119 $47 $191
=========================================
Effective income tax rate 46.1% 25.8% 34.0%
=========================================
</TABLE>
The tax expense related to securities gains was $6,174 for 1996.
34
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
A cumulative net deferred tax asset is included in other assets. The components
of the asset are as follows:
June 30 1998 1997
- --------------------------------------------------------------------------------
Assets
Allowance for loan losses $171 $172
Deferred compensation 85 59
Accounting for accrued expenses 15
Allowance for accrued interest 15 12
Unrealized losses on securities available for sale 103
Other 2 10
---------------------
Total assets 288 356
---------------------
Liabilities
Depreciation 81 72
State income tax 7 9
Mortgage servicing rights 49 21
Loan fees 41 30
FHLB stock dividends 20 20
Unrealized gain on securities 20
Other 3
---------------------
Total liabilities 221 152
---------------------
$ 67 $204
=====================
No valuation allowance was required at June 30, 1998 or June 30, 1997.
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.
35
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 9 -- 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:
1998 1997
- --------------------------------------------------------------------------------
Mortgage loan commitments $35 $181
Consumer loan commitments 726 766
Mandatory commitments to sell loans to investors
with interest rates ranging from 7.63% to 12.45% 322 258
Loans sold with recourse 1,938 2,507
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.
36
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 10 --Dividends and Capital Restrictions
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, 1998, total stockholder's equity of the Bank was $6,877,000, of
which approximately $2,498,000 was available for the payment of dividends.
Note 11 -- Regulatory Capital
The Bank is subject to various regulatory capital requirements administered by
the federal banking agencies and is assigned to a capital category. The assigned
capital category is largely determined by three ratios that are calculated
according to the regulations: total risk adjusted capital, Tier 1 capital, and
Tier 1 leverage ratios. The ratios are intended to measure capital relative to
assets and credit risk associated with those assets and off-balance sheet
exposures of the entity. The capital category assigned to an entity can also be
affected by qualitative judgments made by regulatory agencies about the risk
inherent in the entity's activities that are not part of the calculated ratios.
There are five capital categories defined in the regulations, ranging from well
capitalized to critically undercapitalized. Classification of a bank in any of
the undercapitalized categories can result in actions by regulators that could
have a material effect on a bank's operations. At June 30, 1998 and 1997, the
Bank is categorized as well capitalized and met all subject capital adequacy
requirements. There are no conditions or events since June 30, 1998 that
management believes have changed the Bank's classification.
37
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The Bank's actual and required capital amounts and ratios are as follows:
<TABLE>
<CAPTION>
1998
-----------------------------------------------------------------------
Required for To Be Well
Actual Adequate 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) $7,404 19.0% $3,118 8.0% $3,898 10.0%
Core capital(1) (to adjusted tangible assets) 7,023 12.1% 1,740 4.0% 3,480 6.0%
Core capital(1) (to adjusted total assets) 7,023 12.0% 1,749 4.0% 2,914 5.0%
- ----------
(1) As defined by regulatory agencies
The Bank's tangible capital at June 30, 1998 was $7,023,000, which amount was
12.0% of tangible assets and exceeded the required ratio of 1.5%.
<CAPTION>
1997
-----------------------------------------------------------------------
Required for To Be Well
Actual Adequate 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 4.0% 4,330 6.0%
Core capital(1) (to adjusted total assets) 7,260 10.1% 2,167 4.0% 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%.
Note 12-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, 1997, 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 $6,500, $5,800 and $4,800 for the years ended June 30,
1998, 1997 and 1996.
38
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
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 $43,000, $34,100 and $32,500 for the years ended June 30, 1998, 1997 and
1996.
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 was reflected as a reduction to stockholders' equity. Unearned ESOP
shares totaled 27,594 and 34,804 at June 30, 1998 and 1997 and had a fair value
of $394,925 at June 30, 1998 and $439,401 at June 30, 1997. 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 $103,078, $52,043 and $45,245 for the years ended June 30, 1998, 1997 and
1996. At June 30, 1998 and 1997, the ESOP had 19,259 and 13,498 allocated shares
and 27,146 and 32,439 suspense shares.
The Bank has 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 shares, once earned, are issued from Treasury stock. The expense under
the RRP was $34,598 and $61,075 for the years ended June 30, 1998 and 1997.
Note 13 -- 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 at a
rate of 20 percent per year and become fully exercisable at the end of five
years of continued employment. A total of 58,006 common shares have been
reserved for issuance under the plan. The exercise price of each option granted
to date, which has a ten-year life, has been equal to the market price of the
Bank's stock on the date of grant; therefore, no compensation expense has been
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:
1998 1997 1996
--------------------------------
Risk-free interest rates 5.81% 6% 6%
Dividend yields 1.45% 2% 2%
Volatility factors of expected
market price of common stock 15.7% 13% 13%
Weighted-average expected life of the options 8 years 8 years 8 years
39
<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:
1998 1997 1996
--------------------------------
Net income As reported $138,332 $134,294 $332,758
Pro forma 118,138 112,496 310,960
Basic earnings per share As reported .29 .27 .63
Pro forma .25 .23 .59
Diluted earnings per share As reported .28 .27 .63
Pro forma .24 .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, 1998, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Weighted- Weighted- Weighted-
Average Exercise Average Exerci Average Exerci
Options Shares Price Shares Price Shares Exercise Price
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding, beginning of year 43,381 $ 10.50 46,629 $ 10.50
Granted 1,000 16.19 47,957 $ 10.50
Exercised (2,900) 10.50
Forfeited/expired (4,350) 10.50 (3,248) 10.50 (1,328) 10.50
--------- ------- ---------
Outstanding, end of year 37,131 10.65 43,381 10.50 46,629 10.50
========= ======= =========
Options exercisable at year end 14,940 9,326
Weighted-average fair value of
options granted during the year $ 4.84 $ 2.81
</TABLE>
As of June 30, 1998, 36,131 options outstanding have an exercise price of $10.50
and a remaining contractual life of eight years and 1,000 options outstanding
have an exercise price of $16.19 and a remaining contractual life of 10 years.
40
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Note 14 -- Earnings Per Share
Earnings per share (EPS) were computed as follows:
<TABLE>
<CAPTION>
Year Ended June 30, 1998
----------------------------------------------------
Weighted Average
Income Shares Per-Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
<S> <C> <C> <C>
Income available to common stockholders $138 480,208 $.29
Effect of Dilutive Securities
Stock options and awards 11,426
------------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $138 491,634 $.28
===================================================
Year Ended June 30, 1997
----------------------------------------------------
Weighted Average
Income Shares Per-Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $134 491,287 $.27
Effect of Dilutive Securities
Stock options and awards 2,633
------------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $134 493,920 $.27
====================================================
Year Ended June 30, 1996
----------------------------------------------------
Weighted Average
Income Shares Per-Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
Basic Earnings Per Share
Income available to common stockholders $333 527,669 $.63
Effect of Dilutive Securities
Stock options and awards
------------------------------
Diluted Earnings Per Share
Income available to common stockholders and assumed conversions $333 527,669 $.63
====================================================
</TABLE>
41
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Options to purchase 46,629 shares of common stock at $10.50 per share were
outstanding at June 30, 1996 but were not included in the computation of diluted
EPS because the options' exercise price was greater than the average market
price of the common shares.
Note 15-Subsequent Event
On July 24, 1998, the Bank acquired a branch facility. This acquisition added
approximately $11,000,000 of deposits to the Bank's customer base.
Note 16-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.
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.
42
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
The estimated fair values of the Company's financial instruments are as follows:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -------------------------------------------------------------------------------------------------------------------------------
Assets
<S> <C> <C> <C> <C>
Cash and due from banks $ 1,777 $ 1,777 $ 1,515 $ 1,515
Interest-bearing deposits 1,099 1,099 1,093 1,093
Investment securities available for sale 4,350 4,350 12,149 12,149
Investment securities held to maturity 1,140 1,095 2,067 1,993
Loans including loans held for sale, net 44,518 43,414 50,726 49,540
Stock in FHLB 1,050 1,050 1,050 1,050
Interest receivable 258 258 377 377
Liabilities
Deposits 46,881 46,993 53,523 53,488
FHLB advances 3,070 3,075 10,902 10,857
Interest payable 101 101 85 85
</TABLE>
Note-17 -- 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
June 30 1998 1997
- --------------------------------------------------------------------------------
Assets
Cash on deposit $ 242 $ 233
Investment in subsidiary 7,093 7,182
Other assets 117 73
-----------------------
Total assets $7,452 $7,488
=======================
Liabilities $ 21 $ 24
Stockholders' Equity 7,431 7,464
-----------------------
Total liabilities and stockholders' equity $7,452 $7,488
=======================
43
<PAGE>
AMTRUST CAPITAL CORP. AND SUBSIDIARY
Notes to Consolidated Financial Statements
(Table Dollar Amounts in Thousands)
Condensed Statement of Income
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Income
Dividend income from subsidiary $500 $300
Interest income 23 24 $ 27
----------------------------------------------
523 324 27
Other expenses 122 143 87
----------------------------------------------
Income (loss) before income tax and equity in undistributed income of subsidiary 401 181 (60)
Income tax benefit 21 46 21
----------------------------------------------
Income (loss) before equity in undistributed income of subsidiary 422 227 (39)
Equity in undistributed income (distribution in excess of income) of subsidiary (284) (93) 372
----------------------------------------------
Net Income $138 $134 $333
==============================================
</TABLE>
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Year Ended June 30 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Operating Activities
Net income $138 $134 $333
Adjustments to reconcile net income to net cash provided
(used) by operating activities 375 164 (349)
-------------------------------------------------
Net cash provided (used) by operating activities 513 298 (16)
-------------------------------------------------
Financing Activities
Purchase of common stock (430) (56) (535)
Exercise of options 30
Dividends (104) (53)
-------------------------------------------------
Net cash used by financing activities (504) (109) (535)
-------------------------------------------------
Net Increase (Decrease) in Cash 9 189 (551)
Cash at Beginning of Year 233 44 595
-------------------------------------------------
Cash at End of Year $242 $233 $ 44
=================================================
</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 19, 1998 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 Deborah M. Huff, 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
Olive LLP
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 on the OTC Electronic Bulletin
Board under the symbol "ATSB." At September 14, 1998, there were 497,454 shares
of AmTrust Capital Corp. common stock issued and outstanding and there were
approximately 200 holders of record. The price range of the common stock for
each quarter and dividends per share were as follows:
STOCK PRICE DIVIDENDS
FISCAL 1998 HIGH LOW PER SHARE
----------- ---- --- ---------
First Quarter........... $13.875 $12.75 $.05
Second Quarter.......... 14.25 13.75 .05
Third Quarter........... 15.109 15.109 .05
Fourth Quarter.......... 15.75 14.25 .05
STOCK PRICE DIVIDENDS
FISCAL 1998 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
Market Makers
Capital Resources, Inc.
Rodman & Renshaw, Inc.
Mayer & Schweitzer, Inc.
McDonald & Company Securities, Inc.
Tucker Anthony, Inc.
Dividends
The Company began paying a cash dividend during the third quarter of
fiscal 1997 and continued each quarter of fiscal 1998. 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
Deborah M. Huff
Treasurer and Chief Financial Officer
47
EXHIBIT 21
SUBSIDIARIES OF THE REGISTRANT
State of
Percentage Incorporation
of or
Parent Subsidiary Ownership Organization
AmTrust Capital Corp. AmericanTrust 100% Federal
Federal Savings
Bank
AmericanTrust Federal Indiana Financial 100% Indiana
Savings Bank Service Corporation
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 23,
1998, except for Note 15 as to which the date is July 24, 1998, 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/ Olive LLP
Indianapolis, Indiana
October 12, 1998
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED JUNE 30, 1998 AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,777
<INT-BEARING-DEPOSITS> 1,099
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 4,350
<INVESTMENTS-CARRYING> 1,140
<INVESTMENTS-MARKET> 1,095
<LOANS> 45,036
<ALLOWANCE> (518)
<TOTAL-ASSETS> 58,069
<DEPOSITS> 46,881
<SHORT-TERM> 0
<LIABILITIES-OTHER> 687
<LONG-TERM> 3,070
6
0
<COMMON> 0
<OTHER-SE> 7,425
<TOTAL-LIABILITIES-AND-EQUITY> 58,069
<INTEREST-LOAN> 3,653
<INTEREST-INVEST> 944
<INTEREST-OTHER> 61
<INTEREST-TOTAL> 4,658
<INTEREST-DEPOSIT> 2,187
<INTEREST-EXPENSE> 2,851
<INTEREST-INCOME-NET> 1,807
<LOAN-LOSSES> 92
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,172
<INCOME-PRETAX> 257
<INCOME-PRE-EXTRAORDINARY> 257
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 138
<EPS-PRIMARY> 0.29
<EPS-DILUTED> 0.28
<YIELD-ACTUAL> 2.90
<LOANS-NON> 1,767
<LOANS-PAST> 0
<LOANS-TROUBLED> 637
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> (523)
<CHARGE-OFFS> 97
<RECOVERIES> 0
<ALLOWANCE-CLOSE> (518)
<ALLOWANCE-DOMESTIC> (518)
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> (81)
</TABLE>
