Version 1.

MERIT MARINE CORPORATION

January 1985 started with an opportunity for Ginny Shields, a relationship manager for
Omni Bank, N.A., and Jeff Finch, a member of the bank’s corporate-finance department, to
expand the bank’s reputation for providing financial advisory services to existing credit
customers. Shields, who had moved to Omni Bank’s regional office in Miami two months
earlier, had identified the need to restructure the balance sheet (shown in Exhibit 1, with debt
components in Exhibit 2) of Merit Marine Corporation, the Florida distributor of Olympus
brand marine products. Omni Bank was a large money-center financial institution.

Prior to phoning Jeff Finch in New York, Shields had concluded that Merit was in need
of long-term, fixed-rate financing to reduce the firm’s interest-rate sensitivity and to better
match its funding sources with its level of fixed assets. Merit’s inability to obtain reasonably
priced fixed-rate debt for $27 million in capital expenditures incurred between 1980 and 1983
had left the company relying on two-year, variable-rate financing.

Shields’s conversation with Finch concentrated on the prospects for restructuring Merit’s
balance sheet through the use of a private placement and/or an interest-rate swap. Finch was
initially skeptical of the market’s receptiveness to an offering of Merit securities based on the
firm’s size and recent performance (see earnings statements in Exhibit 3), yet he agreed to meet
with Shields on his upcoming trip to Miami.

Company Background

Located in Tampa, Florida, Merit Marine Corporation had been the exclusive Florida
distributor of Olympus brand commercial and recreational marine products since January 1976,
when John Merit, the company’s president, had acquired the assets of the Olympus Florida
franchise. In 1985, the company was closely held by John Merit and some relatives. John Merit

This case was written from field research by Peter R. Hennessy, under the supervision of Professor Robert F.
Bruner. Persons, firms, and financial data have been disguised at the request of the companies. Copyright  1985
by the University of Virginia Darden School Foundation, Charlottesville, VA. All rights reserved. To order
copies, send an e-mail to sales@dardenbusinesspublishing.com. No part of this publication may be reproduced,
stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic,
mechanical, photocopying, recording, or otherwise—without the permission of the Darden School Foundation.
Rev. 2/98.
 -2-

himself held a majority of the common shares. Merit distributed Olympus products to
independent marinas across the state and, in addition to the distribution function, ran one of the
state’s largest marinas at its headquarters in Tampa.

Since 1948, Olympus had been considered the premier manufacturer of engines and
steering mechanisms for boats ranging from pleasure crafts to large cabin cruisers. Olympus
products accounted for 90 percent of Merit’s sales in 1984, with remaining revenues generated
from sales and service provided at the firm’s Sunshine Marina. (Exhibit 4 gives the distribution
of Merit’s sales.)

Merit’s sales of Olympus products to marinas across the state were concentrated in three
product lines: drive trains, which included engines and steering mechanisms; Olympia
recreational boats; and Olympus replacement parts. Olympus differentiated itself by stressing
quality throughout the manufacturing process and by providing the highest level of service in the
industry. Through its unique distribution network, Olympus guaranteed marinas one-day
delivery of replacement parts. The formula had been successful: Olympus controlled over
one-quarter of the $5-billion marine-products market in the United States.

The previous owner of the Florida franchise, Alex Stalworth, had operated the franchise
since Olympus’s inception in 1948. Prior to selling the franchise, Stalworth had been hesitant to
make the substantial investment necessary to serve the booming recreational and commercial
boating market in Florida. As a result, beginning in 1977, Merit found it necessary to make
substantial investments in new fixed assets for the company, climaxing in 1982 with a $14-
million addition to the warehouse and the service center. While the investment had been
substantial, the new capacity would allow Merit to more than double sales. With the new facility
in place, Merit anticipated that capital expenditures over the next several years would be
approximately $3 million a year.

Sales for Merit Marine, which had increased at an annual rate of 16 percent between
1977 and 1981, dropped sharply in 1982 and 1983, as shown in Exhibit 3. The decline was a
function of a severe recession, high interest rates, and oil prices. The subsequent economic
recovery and the decline in oil prices brought a stronger market for Olympus’s products in
Florida, which allowed Merit’s 1984 sales to increase 30 percent, to $120 million.

Industry Information

Total marine-product sales were expected to decline by as much as 5 percent in 1985.

The Florida market, however, was expected to increase by 5 percent annually for the next
several years. The recreational market, which accounted for most sales of Olympus outboard
engines and Olympia boats, was highly seasonal and cyclical. Sales of stern-drive and sea-drive
engines, which were used primarily for larger recreational and commercial boats, were less
seasonal and slightly less cyclical.
 -3-

The outboard-engine market was concentrated among three major manufacturers—

Outboard Marine Corporation (Johnson and Evinrude), Brunswick (Mercury), and Olympus.
Japanese manufacturers, such as Yamaha, were just beginning to market outboard engines in the
United States. Olympus competed against Volvo, Mercury, and Chrysler in the stern-drive and
sea-drive markets. Olympia boats, on the other hand, faced a much more fragmented market;
over 20 national and regional manufacturers competed for the recreational-boat dollar.
Banking Relationship

John Merit’s relationship with Omni Bank began in 1967, when he joined Olympus’s
treasury office at the firm’s headquarters, in Zion, Illinois. When the distributorship became
available in Florida in 1976, Merit, with the help of some family financial support, purchased the
franchise from Stalworth. Omni Bank, along with Sun Coast Bank in Orlando and Ybor
National Bank in Tampa, had met Merit Marine’s credit needs since the company was purchased
in 1976. Merit had remained loyal to the bank group over the years, but he insisted on the most
attractive rates possible.

While both Omni Bank and Sun Coast had $25-million credit commitments to Merit
Marine as of January 1985, neither considered themselves Merit’s lead bank. (Merit’s credit
relationships are detailed in Exhibit 5.) At year-end 1984, Merit was fully utilizing the $25-
million revolver and had $12.7 million of the $40-million line of credit outstanding. John Merit
had intimated that lead-bank status would go to the bank that offered the most attractive rates.
Being the lead bank in the credit group would become more significant as Merit planned to
displace current bank debt with below-market-rate financing offered by Olympus Credit
Corporation to qualified dealers.

Sources of Funding

Beginning in the spring of 1984, Olympus Credit Corporation had made available to
Olympus distributors $10 million in guaranteed, short-term, floating-rate debt at the A1-P1
commercial paper rate plus 50 basis points. Olympus then announced in December that
qualified distributors would be eligible for up to $20 million in commercial-paper-based
financing, beginning in April of 1985. The prospect of having an additional $10 million in
outstandings displaced concerned Ginny Shields and heightened her determination to gain lead-
bank status.

Omni Bank had priced the $25-million commitment to Merit to achieve a target spread of
110 basis points over the bank’s cost of funds. The Merit relationship produced a net
contribution of $279,000 in 1983 and $305,000 in the first 11 months of 1984. The contribution
for 1984 included earned interest on average deposits of $1.37 million and interest income on
average outstanding debt of $14.5 million.
 -4-

Omni Bank’s loan agreement called for Merit Marine to keep compensating balances
with the bank based on the total amount of credit committed to the company. To attempt to gain
lead-bank status, Ginny Shields, in December 1984, lowered the compensating-balance
agreement from 5 percent to 2.5 percent of the total credit commitment. Next, Shields
positioned Omni Bank to act as Merit’s financial adviser with the help of the bank’s corporate-
finance department. It was apparent that Merit needed long-term, fixed-rate funding;
accomplishment of this task, however, was easier said than done. Shields had recalled a memo
(shown as Exhibit 6) that had recently been distributed to relationship managers describing the
profile of a private-placement candidate. She realized that Merit would be a borderline case.
Merit had been unsuccessful in arranging a reasonably priced mortgage in 1982. Since then, the
bank had been unable to provide long-term, fixed-rate financing at an acceptable rate because of
Merit’s questionable creditworthiness and the prevailing interest-rate environment. (Exhibits 7
and 8 show historical rates and spreads.)

Shields thought that while Merit did not need additional debt, the firm did need to limit
its exposure to fluctuations in interest rates by fixing the interest rate on $10 million to $15
million in debt. After discussions with John Merit, it was evident that a rate in excess of 12
percent would be unacceptable.

Alternatives

On January 8, 1985, Jeff Finch and Ginny Shields visited with John Merit in Tampa.
The three discussed Merit Marine’s funding needs and the possibility of fixing interest payments
through an interest-rate swap and/or a private placement. (See Exhibit 9 for external-funds
requirements.)

Finch was uncertain whether institutional investors would be interested in privately

placed debt of Merit’s quality. However, he suggested the alternative and pointed out that,
under present market conditions, the shorter the maturity, the lower the interest rate. Finch then
introduced the concept of an interest-rate swap as a means of effectively fixing interest payments
on existing floating-rate debt. Merit was initially unreceptive to the swap alternative, mainly
because of a lack of understanding of the offer. Upon returning to New York, Finch requested
the right to approach a small number of private investors to see how receptive the market might
be to Merit’s debt. After speaking with institutional investors, Finch concluded that three
alternatives existed to help restructure Merit’s capital base. (See Exhibit 10 for pro forma
assumptions.)

The first proposal was to fix for three years the interest payments on $10 million in
existing debt, using an interest-rate swap funded with the commercial-paper-based debt supplied
by Olympus Credit Corporation. If additional interest payments needed to be fixed in the future,
a subsequent swap could be arranged as additional commercial-paper-based debt would be
available to Merit in April 1985. Omni Bank would arrange with Merit to swap interest
 -5-

payments on $10 million of the commercial-paper-based, floating-rate debt, which cost Merit the
A1-P1 paper rate plus 50 basis points. The bank would pay Merit the six-month LIBOR and, in
return, Merit would pay a fixed rate equal to the current three-year Treasury note rate plus 108
basis points. Historical six-month LIBOR was 102 basis points higher than the 30-day, A1-P1
commercial-paper rate. Merit’s effective interest rate under this proposal would vary to the
extent that the spread between LIBOR and the commercial paper rate was different from the
historical spread of 102 basis points. A larger spread would lower Merit’s effective interest rate,
while a smaller spread would increase the overall rate. Omni Bank’s compensation in the
transaction would amount to approximately 25 basis points per year. The bank’s compensation,
which was included in the 108-basis-point spread, was higher than normal because the rate Omni
Bank could offer Merit through an interest-rate swap was at least 3 percent lower than
bank-funded, fixed-rate debt.

The second alternative considered was a $10-million, three-year private placement at a

fixed rate of 12 percent. The debt would be placed with an insurance company that had an
appetite for high-yielding, noninvestment-grade bonds. The 12 percent coupon represented a
125-basis-point premium over an A-rated private placement and a 75-basis-point premium over
a BBB placement. Interest would be paid quarterly and the principal would be repaid at the end
of three years. Because the institutional investor would be matching the transaction with similar
term liabilities, there would be no option for Merit to prepay the commitment. This option
would leave the commercial-paper debt available to support working-capital needs and would
allow Merit to enter into an interest-rate swap if additional interest payments needed to be fixed.

The final alternative combined the same private placement as in the second alternative
with a 10-year, $15-million adjustable-rate private placement with a three-year option to fix for
a term of three years. If the option to fix were exercised, the remaining term of the loan would
be three years from the date of exercise. The principal on the second placement would also be
repaid in full upon maturity. The variable-rate note would be set at the 91-day Treasury rate
plus 200 basis points, while the rate if Merit chose to fix would be 122 percent of three-year
Treasuries. The variable-rate note could not be repaid prior to June 30, 1986. Between June 30,
1986, and March 31, 1988, there would be no prepayment penalty, while prepayment after
March 31, 1988, would incur a 5 percent penalty. If Merit exercised the fixed-rate option, no
prepayment would be allowed during the three-year period. Omni Bank’s compensation on the
private-placement package would be 1 percent of the first $10 million and .5 percent of any
additional debt placed.

In making a recommendation to Merit, Finch had to consider a number of issues. First,

Merit Marine could look forward to the possibility of very strong cash flow over the next several
years because of a low level of planned capital expenditures and a likelihood of increased sales.
In addition, Merit had been concentrating on speeding receivables and reducing the level of
inventory carried. Finch knew that if too much of Merit’s debt was fixed for too long a period,
the firm would incur a prepayment penalty if cash flow was sufficient to reduce outstanding
long-term debt.
 -6-

A second issue that concerned Finch involved the permanence of the commercial-
paper-based, floating-rate debt. If those funds became unavailable during the life of the swap,
Merit would have to fund the swap with prime-based debt and would incur the additional interest
expense between the prime rate and the commercial-paper rate plus 50 basis points.

While the rate structure at three years met the 12 percent level that Merit set as his
threshold, Finch was concerned whether the three-year term was appropriate for the company or
whether a longer maturity was needed.

While Finch considered these alternatives, Shields was faced with a dilemma regarding
the profitability of the relationship (see Exhibit 11 for account profitability). Shields wondered
whether her initiative to position Omni Bank as Merit’s financial adviser might move the bank
into the lead position in a credit group that had no outstandings. If Finch were to place the $10
million to $25 million in institutional debt, Merit would reduce its bank debt by a like amount;
as a result, Omni Bank would stand to lose $10 million in outstandings. The decision to pursue
the private-placement option would be a function of whether Shields felt that Merit’s condition
was evident enough that if Omni Bank did not fix the firm’s interest payments, another
institution would. In such a case, Omni Bank would lose not only the interest income from the
debt that would be assumed by another lender, but also the fees that would have been generated
from a swap or private placement. One incentive for Shields to provide corporate-finance
services in this situation was the fact that her division would be credited with a shadow profit
equal to 60 percent of the fee generated by the corporate-finance department.
 -7-

Exhibit 1

MERIT MARINE CORPORATION

Consolidated Balance Sheet

for the Years Ended December 31
(in thousands of dollars)

1980 1981 1982 1983 1984

Assets
Cash 8,385 3,997 3,635 3,692 4,127
Net receivables 27,068 27,414 16,175 22,100 26,435
Inventories 33,877 27,059 22,094 25,201 21,347
Net rental equipment 25,335 21,672 16,510 27,604 28,976
Prepaid expenses 64 88 17 85 108

Total current assets 94,729 80,230 58,431 78,682 80,993

Investments 117 0 0 0 0
Net PP & E 6,125 7,503 20,969 24,565 23,204
Other assets 406 301 132 867 579

Total assets 101,377 88,034 79,532 104,114 104,776

Liabilities
Notes payable 66,143 27,738 36,877 35,879 31,122
Current portion LTD 691 20,107 195 97 101
Accounts payable 3,847 2,918 4,973 4,480 4,558
Accrued expenses 3,491 3,116 2,160 3,027 2,824
Dividends payable 0 78 77 77 77
Deferred income 0 0 0 0 170
Taxes payable 495 834 964 698 2,788

Total current
liabilities 74,667 54,791 45,246 44,258 41,640

Long term debt 2,158 3,665 3,503 28,398 28,083

Deferred income taxes 0 0 477 981 1,994
Total liabilities 76,825 58,456 49,226 73,637 71,717
Stockholders’ equity
Preferred stock 0 1,290 1,290 1,290 1,290
Common stock 1,000 1,000 1,000 1,000 1,000
Additional paid in
Capital 8,178 12,487 12,487 12,487 12,487
Treasury stock 0 (1,367) (1,367) (1,367) (1,367)
Retained earnings 15,374 16,168 16,896 17,067 19,649

Total stockholders’
equity 24,552 29,578 30,306 30,477 33,059

Total liabilities and

equity 101,377 88,034 79,532 104,114 104,776
 -8-

Exhibit 2
MERIT MARINE CORPORATION
Debt Components
(in thousands of dollars)

(1) (2) (3) (4) (5) (6) (7) (8) (9)

Total Total
Short-Term Floating Non-interest Long-Term Floating Fixed Long-Term Total
Debt Rate Bearing Debt Rate Rate CPLTD Portion Debt
Year (Col. 2+3) (Col 5+6 or (Col. 1+4)
Col. 7+8)
1984 31,122 22,5891 8,533 28,184 27,263 921 101 28,083 59,3061
1983 35,879 15,200 20,679 28,495 26,468 2,027 97 28,398 64,374
1982 36,877 30,706 6,171 3,698 2,196 1,502 195 3,503 40,575
1981 27,738 27,221 517 23,772 22,713 1,385 20,107 3,665 51,510
1980 66,143 64,859 1,284 2,849 1,693 1,156 691 2,158 68,992

___________________________________________
1
Includes $9,866,000 in commercial-paper-based debt from Olympus Credit Corp.

Maturing portion of long-term debt and notes payable are as follows:

Year Amount
1985 31,223
1986 25,595
1987 195
1988 317
1989 308
 -9-

Exhibit 3

MERIT MARINE CORPORATION

Consolidated Statement of Earnings

for the Years Ended December 31
(in thousands of dollars)

1980 1981 1982 1983 1984

Net sales 129,891 130,012 89,112 85,492 120,472

Cost of sales 101,869 101,2921 66,7481 64,5901 94,9991

Gross profit 28,022 28,720 22,364 20,902 25,473

Selling, general and admin. 19,353 22,662 19,630 19,505 18,860

Operating profit 8,669 6,058 2,734 1,397 6,613

Int. Income & earned discount 5,158 6,712 4,537 3,144 5,007
Interest (expense) (9,102) (11,042) (5,413) (4,066) (6,493)
Other, Net (expense) (361) (723) (403) (874) (92)

Profit before taxes 4,364 1,005 1,455 (399) 5,035

Income taxes 2,280 114 650 (647) 2,376

Net earnings 2,084 891 805 248 2,659

____________________________________________
1
Liquidation of LIFO layers caused cost of goods sold to be lower by the following amounts: 1981, $474,000;
1982, $417,000; 1983, $344,000; 1984, $358,000.
 -10-

Exhibit 4

MERIT MARINE CORPORATION

Distribution of Sales
for the Years Ended December 31
(in thousands of dollars)

1980 1981 1982 1983 1984

Total sales 129,891 130,012 89,112 85,492 120,472

Olympus products 118,201 119,611 75,745 74,378 108,425

Drive train 52,008 56,217 32,570 30,495 45,538
Olympia boats 28,368 27,511 16,664 17,107 29,275
Replacement parts 37,824 35,883 26,511 26,776 33,612

Merit Marina 11,690 10,401 13,367 11,114 12,047

Sales
Boats & accessories 3,858 3,224 3,876 3,223 3,614
Gas 4,676 4,264 5,079 4,112 4,698

Service 3,156 2,912 4,411 3,779 3,735

 -11-

Exhibit 5

MERIT MARINE CORPORATION

Banking Relationships

Total available short-term and long-term notes payable to banks and Olympus Credit Corp.
aggregated $75,000,000 at December 31, 1985.

Compensating-balance agreement on bank lines amounts to 5 percent.

Revolving Credit Agreement

Total: $25 million

Consisting of
Sun Coast Bank, N.A. $10 million
Omni Bank $10 million
Ybor National Bank $ 5 million

Rate: Prime

Average Usage: 90 percent

Borrowing Base: 75 percent of qualified current assets plus $15 million for headquarters
until mortgaged

Maturity: December 31, 1986, or 13 months from demand

Covenants: Working capital $28 million

Current ratio 1.5:1.0
Total liabilities to net worth 3.0:1.0
Tangible net worth $27 million

Unsecured Lines of Credit

Total: $40 million

Consisting of:
Sun Coast Bank, N.A. $15 million
Omni Bank $15 million
Ybor National Bank $10 million

Rate: Prime

Purpose: Finance inventory and receivables

 -12-

Exhibit 6

MERIT MARINE CORPORATION

TO: Relationship Managers

FROM: Capital Markets Division

SUBJECT: Private Placement Candidate Profile

The purpose of this profile is to provide the Relationship Managers with a brief
description of the conditions under which a given company may or may not be a likely candidate
for a private placement.

A. Is there a need?

1. The need to restructure the balance sheet in some way

a. Interest-rate risk management
b. Match funding

2. The identification of a significant cash need in the future

a. Impending refinancing
b. Capital expenditures
c. Merger or acquisition financing
d. Improving quality of financing

B. Can a private placement be done?Cminimum financial criteria

1. Sales greater than $75 million

2. Tangible equity greater than $25 million
3. Long-term debt/capital less than 50%
4. No losses in last three years
5. Pretax interest coverage greater than 1.2 ×

C. Can the bank get the deal?

1. What is the bank’s relationship with the client?

2. Is there a competing party trying to get the same business?
 -13-

Exhibit 7

MERIT MARINE CORPORATION

Rate Structure
(as of January 23, 1985)

A-Rated1 Baa-Rated2 Ba-Rated2

LIBOR1 Private Private Private
Maturity Treasuries Swaps Placements Placements Placements

3 10.10 T + 108 T + 70 T + 95 T + 120

5 10.61 T + 80 T + 75 T + 100 T + 125

7 10.88 T + 65 T + 80 T + 105 T + 130

10 11.00 T + 60 T + 90 T + 115 T + 140

31-day Prime
Commercial 6-Month Rate
Paper (A1-P1) LIBOR (CBR)3

8.01 8.75 10.50

10 year average prime rate = 11.71% (std. dev. = 4.32%)

Average spreads:

LIBOR over A1 - P1 commercial paper = 1.02%4

Prime Rate over LIBOR = 1.465%4
Prime Rate over 91-day Treasury Bills = 3.849% (std. dev. = 1.681%)5

________________________________________
1
Spreads are disguised from actual quoted rates. Relative difference between options is valid.
2
Nonquoted rate. Reflects average premium paid for less than A-rated private placements. Actual rates would be on
negotiated basis.
3
Corporate borrowing rate—approximates prime rate.
4
Average spread between 1/79 and 11/84.
5
Average spread between 1/80 and 12/84.
 -14-

Exhibit 8

MERIT MARINE CORPORATION

Interest Rates

1-Month
91-Day Commercial 10-Year 30-Year
Prime1 T-bills Paper T-Notes T-Notes

1985
January 23 10.5 7.69 8.01 11.0 11.45

1984
January 11.0 8.93 9.23 11.67 11.75
February 11.0 9.03 9.35 11.84 11.95
March 11.5 9.44 9.81 12.32 12.38
April 12.0 9.69 10.17 12.63 12.65
May 12.5 9.90 10.38 13.41 13.43
June 13.0 9.94 10.82 13.56 13.44
July 13.0 10.13 11.06 13.36 13.21
August 13.0 10.49 11.19 12.72 12.54
September 13.0 10.41 11.11 12.52 12.29
October 12.75 9.97 10.05 12.16 11.98
November 12.0 8.79 9.01 11.57 11.56
December 11.25 8.16 8.39 11.50 11.52

1983
July 10.50 9.12 9.15 11.38 11.40
August 11.0 9.39 9.41 11.85 11.82
September 11.0 9.05 9.19 11.65 11.63
October 11.0 8.71 9.03 11.54 11.58
November 11.0 8.71 9.10 11.69 11.75
December 11.0 8.96 9.56 11.83 11.88

_______________________________________________
1
Average for 10 money-center banks; weekly close in 1985; monthly average in 1984 and 1983.

Source: Federal Reserve Bulletin (vols. 69–71).

 -15-

Exhibit 9

MERIT MARINE CORPORATION

External-Funds Requirements
(in thousands of dollars)

1983 1984

Net Sales 85,492 120,472

Sources of funds
Net income 248 2,659
Depreciation 1,388 1,650
Deferred Taxes 504 672

Total 2,140 4,981

Uses of funds
Net capital expenditures 4,984 289
Cash dividends (perf. stock) 77 77
Reduction in long-term debt 105 315
Inc. in net working capital 21,239 4,929
Increase in other assets 735 (289)

Total 27,140 5,321

External Funds required 25,000 340

Capitalization
Short-term debt 35,879 31,122
Long-term debt 28,495 28,184

Total debt 64,374 59,306

Shareholders= equity 30,477 33,059

Total 94,851 92,365

Short-term debt/Capitalization 37.8% 33.7%

Total debt/Capitalization 67.9% 64.2%

Net working capital/Sales 40.3% 32.4%

 -16-

Exhibit 10

MERIT MARINE CORPORATION

Pro Forma Assumptions

1985 1986 1987 1988

Change in net sales 5% 5% 5% 5%

Net income/sales 2.4% 2.4% 2.4% 2.4%

Depreciation expense (000) 1,700 1,734 1,847 1,755

Increase in deferred taxes (000) 1,022 805 704 592

Dividends (000) 77 77 77 77

Increase in other assets (000) 300 300 300 300

Capital expenditures (000) 3,000 3,000 3,000 3,000

Net working capital/sales .31 .30 .29 .28

 -17-

Exhibit 11
MERIT MARINE CORPORATION
Account Profitability
Ginny Shields’s Division Omni Bank
Type Amount Usage Rate Income 1985 1985 Income 1986 1986 Income 1985 1985 Income 1986 1986
($ millions) ($thousands) ROA ($thousands) ROA ($thousands) ROA ($thousands) ROA

Scenario 1: No change in revolver, 2 1/2% compensating balance, $2.0mm LOC

Revolver $10.0 $10.0 1.1% $110 $110
Line of Credit (LOC) $12.0 $2.0 1.1% 22 22
Compensating Balance $22.0 2.5% 10.0% 55 55
Total $187 1.56% $187 1.56% $187 1.56% $187 1.56%

Scenario 2: $25-million private placement, 2 1/2% compensating balance, $2.0mm LOC

Revolver
Fees-Private Placement 0.175 60.0% 105
Line of Credit (LOC) $12.0 $2.0 1.1% 22 22
Compensating Balance $12.00 2.5% 10.0% 30 30
TOTAL $157 7.85% $ 52 2.6% $227 11.35% $ 52 2.6%

Scenario 3: $10-million private placement, 2 1/2% compensating balance, $2.0mm LOC

Revolver $6.0 $6.0 1.1% 66 66
Fees-Private Placement 0.1 60.0% 60
Line of Credit (LOC) $12.0 $2.0 1.1% 22 22
Compensating Balance $18.00 2.5% 10.0% 45 45
TOTAL $193 2.41% $133 1.66% $233 2.91% $133 1.66%

Scenario 4: $10-million swap, 2 1/2% compensating balance, $2.0mm LOC

Revolver $10.0 $10.0 1.1% 110 110
Fees-Swap 10.0 .250% 25 25
Line of Credit (LOC) $12.0 $2.0 1.1% 22 22
Compensating Balance $12.0 2.5% 10.0% 55 55
TOTAL $212 1.77% $212 1.77% $212 1.77% $212 1.77%

Scenario 5: No change and revolver is displaced by private mortgage.

Revolver
Line of Credit (LOC) $12.0 $2.0 1.1% 22 22
Compensating Balance $22.00 2.5% 10.0% 30 30
TOTAL $ 52 2.6% $ 52 2.6% $ 52 2.6% $52 2.6%