SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission file number 0-23182
AMB FINANCIAL CORP.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 35-1905382
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
8230 Hohman Avenue, Munster, Indiana 46321-1578
(Address of principal executive offices (Zip Code)
Issuer's telephone number, including area code: (219) 836-5870
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]
<PAGE>
The Issuer had $8.3 million in gross income for the year ended December
31, 1997.
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, computed by reference to the average of the bid and asked
price of such stock as of December 31, 1997 was $12.1 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 Registrant that such person is an affiliate of the
Registrant.)
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-KSB--1997 Annual Report to Stockholders.
PART III of Form 10-KSB--Proxy Statement for the 1998 Annual Meeting of
Stockholders.
<PAGE>
PART I
Item 1. Description of Business
General
AMB Financial Corp. (the "Company"), was formed in 1993 by American
Savings, FSB ("American Savings" or the "Bank") under the laws of Delaware for
the purpose of becoming a savings and loan holding company. American Savings,
headquartered in Munster, Indiana, was founded in 1957 as a federally chartered
institution. Its deposits are insured up to applicable limits by the FDIC. In
March 1996, the Bank converted to the stock form of organization through the
sale and issuance of 1,124,125 shares of its common stock to the Company. The
principal asset of the Company is the outstanding stock of the Bank, its wholly
owned subsidiary. The Company presently has no separate operations and its
business consists only of the business of the Bank. All references to the
Company, unless otherwise indicated, at or before March 29, 1996 refer to the
Bank.
American Savings has been, and intends to continue to be, a
community-based financial institution that offers a variety of selected
financial services to meet the needs of the community it serves. The Bank
attracts deposits from the general public and uses such deposits to originate
one-to four-family residential mortgage and, to a lesser extent,
non-residential, multi-family real estate, commercial business, consumer and
land loans in its primary market area. The Bank also invests in mortgage-backed
securities, investment securities consisting primarily of U.S. government
obligations and various types of short-term liquid assets. See "--Lending
Activities" and "--Investment Activities."
American Savings serves the financial needs of families and local
businesses in its primary market area, northwest Lake County, Indiana, through
its main office located in Munster, Indiana and three branch offices located in
the communities of Dyer, East Chicago and Hammond, Indiana. Its deposits are
insured up to applicable limits by the Federal Deposit Insurance Corporation
("FDIC"). At December 31, 1997, the Company had total assets of $99.8 million,
deposits of $71.7 million and stockholders' equity of $14.8 million (or 14.80%
of total assets).
The executive office of the Company is located at 8230 Hohman Avenue,
Munster, Indiana 46321-1578 and its telephone number at that address is (219)
836-5870.
Lending Activities
General. The principal lending activity of the Bank is originating for
its portfolio first mortgage loans secured by owner-occupied one- to four-family
residential properties located in its primary market areas. In addition, in
order to increase the yield and/or the interest rate sensitivity of its
portfolio and in order to provide more comprehensive financial services to
families and community businesses in the Bank's primary market area, American
Savings also originates and purchases non-residential real estate, multi-family,
commercial business, consumer and land loans.
<PAGE>
Loan Portfolio Composition
The following table sets forth information concerning the composition
of the Bank's loan portfolio 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>
December 31,
----------------------------------------------------------------------------------
1997 1996 1995 1994
-----------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate Loans:
One- to four-family............... $51,567 64.71% $43,669 63.41% $38,056 68.60% $37,050 69.02%
Multi-family...................... 4,010 5.03 3,259 4.73 3,419 6.16 3,445 6.42
Non-residential................... 9,315 11.69 8,806 12.79 4,146 7.47 3,971 7.40
Construction...................... 4,450 5.59 4,406 6.40 3,194 5.76 3,580 6.67
Land.............................. 325 .41 217 .32 223 .40 736 1.37
------- ------ ------- ------ ------- ------- ------ ------
Total real estate loans....... 69,667 87.43 60,357 87.65 49,038 88.39 48,782 90.88
------ ------- -------- ------- ------- ------- ------ ------
Other Loans:
Consumer Loans:
Deposit account.................. 165 .21 185 .27 223 .40 263 .49
Student.......................... 3 --- 3 .01 4 .01 5 .01
Home improvement................. 11 .01 15 .01 12 .01 21 .04
Line of credit................... 3,259 4.09 2,968 4.31 2,745 4.96 2,873 5.35
Other ........................... 1,666 2.09 1,818 2.64 1,037 1.87 824 1.54
------- ------ ------- ------ ------- ------- ------ ------
Total consumer loans.......... 5,104 6.40 4,989 7.24 4,021 7.25 3,986 7.43
------- ------ ------- ------ ------- ------- ------ ------
Commercial business loans......... 4,916 6.17 3,519 5.11 2,420 4.36 905 1.69
------- ------ ------- ------ ------- ------- ------ ------
Total loans receivable........ 79,687 100.00% 68,865 100.00% 55,479 100.00% 53,673 100.00%
====== ====== ====== ======
Less:
Loans in process.................. 1,975 910 268 1,245
Deferred fees and discounts....... 209 234 213 248
Allowance for losses.............. 410 355 359 331
------- ------- ------- -------
Total loans receivable, net....... $77,093 $67,366 $54,639 $51,849
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------
1993
---------------------
Amount Percent
<S> <C> <C>
Real Estate Loans:
One- to four-family............... $35,202 71.64%
Multi-family...................... 2,877 5.85
Non-residential................... 3,726 7.58
Construction...................... 1,161 2.36
Land.............................. 493 1.00
------- -----
Total real estate loans....... 43,459 88.43
------- -----
Other Loans:
Consumer Loans:
Deposit account.................. 111 .23
Student.......................... 16 .03
Home improvement................. 62 .13
Line of credit................... 2,642 5.38
Other ........................... 639 1.30
------- -----
Total consumer loans.......... 3,470 7.07
------- -----
Commercial business loans......... 2,211 4.50
------- -----
Total loans receivable........ 49,140 100.00%
======
Less:
Loans in process.................. 14
Deferred fees and discounts....... 233
Allowance for losses.............. 291
--------
Total loans receivable, net....... $ 48,602
========
</TABLE>
<PAGE>
The following table shows the composition of the Bank's loan portfolios
by fixed- and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------------
1997 1996 1995 1994
---------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............... $38,967 48.90% $33,248 48.28% $30,512 55.00% $30,657 57.12%
Multi-family...................... 1,847 2.32 1,999 2.90 2,102 3.79 2,220 4.14
Non-residential................... 3,364 4.22 2,917 4.24 2,021 3.64 2,168 4.04
Construction...................... 2,893 3.63 --- --- --- --- --- ---
Land.............................. 211 .27 --- --- --- --- --- ---
------- ------ ------- ------ -------- ------ ------- ------
Total real estate loans........ 47,282 59.34 38,164 55.42 34,635 62.43 35,045 65.30
------- ------ ------- ------ -------- ------ ------- ------
Consumer........................... 1,845 2.31 1,588 2.31 1,272 2.29 1,108 2.06
Commercial business................ 3,828 4.80 3,252 4.72 2,089 3.76 644 1.20
------- ------ ------- ------ -------- ------ ------- -----
Total fixed-rate loans......... 52,955 66.45 43,004 62.45 37,996 68.48 36,797 68.56
------- ------ ------- ------ -------- ------ ------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family............... 12,600 15.81 10,421 15.13 7,544 13.60 6,393 11.91
Multi-family...................... 2,163 2.71 1,260 1.83 1,317 2.37 1,225 2.28
Non-residential................... 5,951 7.47 5,889 8.55 2,125 3.83 1,803 3.36
Construction...................... 1,557 1.96 4,406 6.40 3,194 5.76 3,580 6.67
Land ............................. 114 .14 217 .32 223 .40 736 1.37
------- ------ -------- ------ ---------- ------ --------- -------
Total real estate loans........ 22,385 28.09 22,193 32.23 14,403 25.96 13,737 25.59
------- ------ ------- ------ -------- ------ ------- ------
Consumer........................... 3,259 4.09 3,401 4.93 2,749 4.96 2,878 5.36
Commercial business................ 1,088 1.37 267 .39 331 .60 261 .49
------- ------ ------- ------ -------- ------ ------- ------
Total adjustable-rate loans.... 26,732 33.55 25,861 37.55 17,483 31.52 16,876 31.44
------- ------ ------- ------ -------- ------ ------- ------
Total loans receivable......... 79,687 100.00% 68,865 100.00% 55,479 100.00% 53,673 100.00%
====== ====== ====== ======
Less:
Loans in process................... 1,975 910 268 1,245
Deferred fees and discounts........ 209 234 213 248
Allowance for loan losses.......... 410 355 359 331
------- ------- ------- -------
Total loans receivable, net..... $77,093 $67,366 $54,639 $51,849
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997
---------------------
1993
---------------------
Amount Percent
------ -------
<S> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............... $26,563 54.06%
Multi-family...................... 2,284 4.65
Non-residential................... 2,177 4.43
Construction...................... --- ---
Land.............................. --- ---
------- ------
Total real estate loans........ 31,024 63.14
------- ------
Consumer........................... 812 1.65
Commercial business................ 959 1.95
------- ------
Total fixed-rate loans......... 32,795 66.74
------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family............... 8,639 17.58
Multi-family...................... 593 1.21
Non-residential................... 1,549 3.15
Construction...................... 1,161 2.36
Land ............................. 493 1.00
------- -------
Total real estate loans........ 12,435 25.30
------- ------
Consumer........................... 2,658 5.41
Commercial business................ 1,252 2.55
------- ------
Total adjustable-rate loans.... 16,345 33.26
------- ------
Total loans receivable......... 49,140 100.00%
======
Less:
Loans in process................... 14
Deferred fees and discounts........ 233
Allowance for loan losses.......... 291
--------
Total loans receivable, net..... $48,602
=======
</TABLE>
<PAGE>
The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1997. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract requires the final payment to be made, without regard to interest rate
adjustments. The table 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 Non-residential Construction Land
------------------------ ------------------- ---------------------- ------------------
Weighted Weighted Weighted Weighted
Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During
Period Ending December 31,
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 ............. $ 1,092 9.06% $ 1,905 9.03 % $ 3,423 8.37% $ 114 10.00%
1999 to 2000 ..... 1,967 8.34 984 9.35 1,000 9.25 23 8.00
2001 and 2002 .... 4,117 8.07 1,243 8.76 -- -- 32 8.00
2003 to 2007 ..... 14,239 7.40 1,375 9.49 27 8.63 122 8.35
2008 to 2017 ..... 13,858 7.59 5,930 9.08 -- -- 34 8.75
2018 and following 16,294 7.56 1,888 8.49 -- -- -- --
Total ......... $51,567 7.63% $13,325 9.02% $ 4,450 8.57% $ 325 8.91%
<CAPTION>
Commercial
Consumer Business Total
-------------------- ------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
Due During
Period Ending December 31,
<S> <C> <C> <C> <C> <C> <C>
1998 ............. $ 3,760 10.3% $ 1,531 7.99% $ 11,825 9.12%
1999 to 2000 ..... 907 8.17 2,903 7.93 7,784 8.41
2001 and 2002 .... 437 7.95 482 9.40 6,311 8.30
2003 to 2007 ..... -- -- -- -- 15,763 7.59
2008 to 2017 ..... -- -- -- -- 19,822 8.04
2018 and following -- -- -- -- 18,182 7.66
Total ......... $ 5,104 9.72% $ 4,916 8.09% $ 79,687 8.08%
</TABLE>
<PAGE>
The total amount of loans due after December 31, 1998 which have
predetermined interest rates is $47.4 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $20.5
million.
Under federal law, the aggregate amount of loans that the Bank is
permitted to make to any one borrower is generally limited to 15% of unimpaired
capital and surplus (25% if the security for such loan has a "readily
ascertainable" value or 30% for certain residential development loans). At
December 31, 1997, based on the above, the Bank's regulatory loan-to-one
borrower limit was approximately $1.4 million. On the same date, the Bank had no
borrowers with outstanding balances in excess of this amount. As of December 31,
1997, the largest dollar amount of indebtedness to one borrower or group of
related borrowers was $898,000 in loans secured by non-residential property.
Such loans are performing in accordance with their terms.
Loan applications are initially considered and approved by Bank
officers with various levels of lending authority depending on the collateral
type and loan amount. Loans that exceed individual or combined loan officer
authority are referred to the Loan Committee. Loans greater than $500,000 must
be approved by the Board of Directors after review and preliminary approval by
the Loan Committee.
All of the Bank's lending is subject to its written underwriting
standards and to loan origination procedures. The Bank is an equal opportunity
lender. Decisions on loan applications are made on the basis of detailed
applications and property valuations (consistent with the Bank's written
appraisal policy) by qualified independent appraisers. The loan applications are
designed primarily to determine the borrower's ability to repay and the more
significant items on the application are verified through use of credit reports,
financial statements, tax returns and/or confirmations.
Generally, the Bank requires title insurance on its mortgage loans as
well as fire and extended coverage casualty insurance in amounts at least equal
to the principal amount of the loan or the value of improvements on the
property, depending on the type of loan. The Bank also requires flood insurance
to protect the property securing its interest when the property is located in a
flood plain or otherwise deemed prudent by management.
One- to Four-Family Residential Real Estate Lending
The cornerstone of the Bank's lending program has long been the
origination of long-term permanent loans secured by mortgages on owner-occupied
one- to four-family residences. At December 31, 1997, $51.6 million, or 64.71%
of the Bank's loan portfolio consisted of permanent loans on one- to four-family
residences. At that date, the average outstanding residential loan balance was
$60,100 and the largest outstanding residential loan had a principal balance of
$610,000. Virtually all of the residential loans originated by American Savings
are secured by properties located in the Bank's market area. See "-
Originations, Sales and Purchases of Loans."
<PAGE>
Historically, American Savings originated for retention in its own
portfolio 30-year fixed-rate loans secured by one- to four-family residential
real estate. Beginning in 1982, in order to reduce its exposure to changes in
interest rates, American Savings began to originate ARMs and balloon loans,
subject to market conditions and consumer preference. As a result of continued
consumer demand, particularly during periods of relatively low interest rates,
for fixed-rate loans, American Savings has continued to originate for retention
in its portfolio fixed-rate residential loans in amounts and at rates which are
monitored for compliance with the Bank's asset/liability management policy.
Currently, the Bank originates fixed-rate loans with maturities of up to 15
years for retention in it own portfolio.
All ARMs and balloon loans originated by the Bank are retained and
serviced by it. At December 31, 1997, the Bank had $19.7 million of fixed-rate
residential loans with less than 10 years to maturity, $13.1 million of
fixed-rate residential loans with maturities between 10 and 20 years and $6.2
million of fixed-rate residential loans with maturities in excess of 21 years in
its portfolio. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -Asset/Liability Management" in the Company's Annual
Report to Stockholders filed as Exhibit 13 hereto (the "Annual Report").
The Bank has offered ARM loans at rates, terms and points determined in
accordance with market and competitive factors. The Bank's current one- to
four-family residential ARMs are fully amortizing loans with contractual
maturities of up to 30 years. The interest rates on the ARMs originated by
American Savings are generally subject to adjustment at three-year intervals
based on a margin over the Three Year Treasury Securities Constant Maturity
Index. Decreases or increases in the interest rate of the Bank's ARMs are
generally limited to 5% above or below the initial interest rate over the life
of the loan. The Bank's ARMs are not convertible into fixed-rate loans, do not
contain prepayment penalties and do not produce negative amortization. ARM loans
may be assumed provided home buyers meet the Bank's underwriting standards and
the applicable fees are paid. At December 31, 1997, the total balance of one- to
four-family ARMs was $12.6 million.
The Bank evaluates both the borrower's ability to make principal,
interest and escrow payments and the value of the property that will secure the
loan. American Savings originates residential mortgage loans with loan-to-value
ratios up to 95%. On mortgage loans exceeding an 80% loan-to-value ratio at the
time of origination, American Savings will generally require private mortgage
insurance in an amount intended to reduce the Bank's exposure to 80% or less of
the appraised value of the underlying property.
As of December 31, 1997, the Bank had 21 one- to four-family
residential mortgage loans having an aggregate balance of $6.0 million with
current balances in excess of the current FHLMC maximum, $227,500 ("jumbo
loans"). The Bank's delinquency experience on its jumbo residential loans has
been similar to its experience on its other residential loans.
The Bank's residential mortgage loans customarily include due-on-sale
clauses giving the Bank the right to declare the loan immediately due and
payable in the event that, among other things, the borrower sells or otherwise
disposes of the property subject to the mortgage and the loan is not repaid.
<PAGE>
Multi-Family and Non-Residential Real Estate Lending
The Bank has long made permanent multi-family and non-residential real
estate loans in its primary market area. However, the Bank has increased these
portfolios in recent years in accordance with its asset/liability management
policy. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Asset/Liability Management" in the Annual Report. At
December 31, 1997, the Bank had $13.3 million in multi-family and
non-residential real estate loans, representing 16.72% of the Bank's gross loan
portfolio.
The Bank's multi-family loan portfolio includes loans secured by five
or more unit residential buildings located primarily in the Bank's primary
market area. The Bank's non-residential real estate loan portfolio consists of
loans on a variety of non-residential properties including retail facilities,
small office buildings and motel/hotels. During 1997, an additional
participation in an apartment complex located in Hobart, Indiana accounted for a
loan of $491,000.
The Bank has originated and purchased both adjustable- and fixed-rate
multi-family and non-residential real estate loans, although most current
originations have adjustable rates. Rates on the Bank's adjustable-rate
multi-family and non-residential real estate loans generally adjust in a manner
consistent with the Bank's one- to four-family residential ARMs. Multi-family
and non-residential real estate loans are generally underwritten in amounts of
up to 80% of the appraised value of the underlying property.
Appraisals on properties securing multi-family and non-residential real
estate loans originated by the Bank are performed by a qualified independent
appraiser at the time the loan is made. In addition, the Bank's underwriting
procedures generally require verification of the borrower's credit history,
income and financial statements, banking relationships, references and income
projections for the property. Personal guarantees are generally obtained for the
Bank's multi-family and non-residential real estate loans.
Substantially all of the multi-family residential and non-residential
real estate loans originated by the Bank are secured by properties located
within 25 miles of one or more of the Bank's offices.
<PAGE>
The table below sets forth by type of security property the estimated
number, loan amount and outstanding balance of American Savings' multi-family
and non-residential real estate loans at December 31, 1997.
<TABLE>
<CAPTION>
Outstanding
Number of Original Principal
Loans Loan Amount Balance
----- ----------- -------
Dollars in Thousands)
<S> <C> <C> <C>
Multi-family................... 17 $ 5,248 $ 4,010
Office......................... 7 1,586 1,497
Retail......................... 2 405 379
Commercial building............ 1 600 512
Auto service/repair............ 1 290 249
Restaurants.................... 3 670 440
Hotel.......................... 6 4,103 3,958
Nursing home................... 1 500 497
Other.......................... 16 1,992 1,783
---- ------ ------
Total....................... 54 $15,394 $13,325
==== ======= =======
</TABLE>
At December 31, 1997, the Bank's largest multi-family and largest
non-residential real estate loans totaled $516,000 and $1.1 million,
respectively. As of December 31, 1997 none of these loans were 60 days or more
delinquent and were otherwise performing in accordance with their terms.
Multi-family and non-residential real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effects of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family residential and non-residential real estate is
typically dependent upon the successful operation of the related real estate
project. If the cash flow from the project is reduced (for example, if leases
are not obtained or renewed), the borrower's ability to repay the loan may be
impaired. At December 31, 1997, the Bank had no multi-family loans which were 90
days or more delinquent.
Construction Lending
The Bank makes construction loans to individuals for the construction
of their primary or secondary residences and loans to builders or developers for
the construction of single-family and multi-family properties. Loans to
individuals for the construction of their residences typically run for six
months. The borrower pays interest only during the construction period.
Residential construction loans are generally underwritten pursuant to the same
guidelines used for originating permanent residential loans. At December 31,
1997, the Bank had nine construction loans with outstanding aggregate balances
<PAGE>
of $1.8 million (including an additional $518,000 in undisbursed loan proceeds)
secured by one- to four- family residential property to borrowers intending to
live in the properties upon completion of construction. Subject to future market
conditions, the Bank intends to continue its construction lending activities to
persons intending to be owner occupants.
The Bank makes loans to builders and developers to finance the
construction of residential property. Such loans generally have adjustable
interest rates based upon prime with terms from six months to one year. The
proceeds of the loan are advanced during construction based upon the percentage
of completion as determined by an independent inspector. The loan amount
normally does not exceed 80% of projected completed value for homes that have
been pre-sold to the ultimate occupant. For loans to builders for the
construction of homes not yet pre-sold, which may carry a higher risk, the
loan-to value ratio is generally limited to 75%. Whether the Bank is willing to
provide permanent takeout financing to the purchaser of the home is determined
independently of the construction loan by separate underwriting.
At, December 31, 1997, the Bank had seven construction loans with
outstanding aggregate balances of $1.7 million (including an additional $624,000
in undisbursed loan proceeds) secured by one- to four-family residential
property built on speculation.
The Bank also provides construction financing on multi-family housing.
However, there were no loans of this type outstanding as of December 31, 1997.
Additionally, the Bank does on occasion participate with other lenders in loans
to developers and builders to finance family housing construction. At December
31, 1997, the Bank was involved in one participation construction loan with an
outstanding aggregate balance of $1.0 million (including an additional $728,000
in undisbursed loan proceeds).
Construction lending generally affords the Bank an opportunity to
receive interest at rates higher than those obtainable from residential lending
and to receive higher origination and other loan fees. In addition, such loans
are generally made for relatively short terms. Nevertheless, construction
lending to persons other than owner-occupants is generally considered to involve
a higher level of credit risk than one- to four-family residential lending due
to the concentration of principal in a limited number of loans and borrowers and
the effects of general economic conditions on construction projects, real estate
developers and managers. In addition, the nature of these loans is such that
they are more difficult to evaluate and monitor. The Bank's risk of loss on a
construction loan is dependent largely upon the accuracy of the initial estimate
of the property's value upon completion of the project and the estimated cost
(including interest) of the project. If the estimate of value proves to be
inaccurate, the Bank may be confronted, at or prior to the maturity of the loan,
with a project with a value which is insufficient to assure full repayment
and/or the possibility of having to make substantial investments to complete and
sell the project. Because defaults in repayment may not occur during the
construction period, it may be difficult to identify problem loans at an early
stage. When loan payments become due, the cash flow from the property may not be
adequate to service the debt. In such cases, the Bank may be required to modify
the terms of the loan. The Bank had no non-performing construction loans
outstanding as of December 31, 1997.
<PAGE>
Land Lending
Land loans, which include vacant land and developed lots, are made to
various builders and developers with whom the Bank has had long-standing
relationships. All of such loans are secured by land zoned for residential
developments and located within the Bank's market area. Disbursements related to
acquisition and development land loans are typically based on the construction
cost estimate of an independent architect or engineer who inspects the project
in connection with significant disbursement requests. At December 31, 1997, the
Bank had $325,000 in loans secured by land, or .41% of its entire gross loan
portfolio.
Land lending generally affords the Bank an opportunity to receive
interest at rates higher than those obtainable from residential lending. In
addition, land loans are limited to a maximum 75% loan-to-value and are made
with adjustable rates of interest and for relatively short terms. Nevertheless,
land lending is generally considered to involve a higher level of credit risk
due to the fact that funds are advanced upon the security of the land, which is
of uncertain value prior to its development. Because of the uncertainties
inherent in estimating land development costs as well as the market value on the
completed project and the effects of governmental regulation of real property,
it is relatively difficult to evaluate accurately the total funds required to
complete a development project and the related loan-to-value ratio.
As of December 31, 1997, the Bank has not experienced significant
losses in connection with its land lending. See "Delinquencies and
Non-Performing Assets."
Consumer Lending
Management believes that offering consumer loan products helps to
expand the Bank's customer base and to create stronger ties to its existing
customer base. In addition, because consumer loans generally have shorter terms
to maturity and carry higher rates of interest than do residential mortgage
loans, they can be valuable asset/liability management tools. The Bank currently
originates substantially all of its consumer loans in its market area. At
December 31, 1997, the Bank's consumer loans totaled $5.1 million or 6.40% of
the Bank's gross loan portfolio.
American Savings offers a variety of secured consumer loans, including
home equity lines of credit, home improvement loans, loans secured by savings
deposits and automobile loans. Although the Bank primarily originates consumer
loans secured by real estate, deposits or other collateral, the Bank also, on
occasion, makes unsecured personal loans.
The Bank's home equity loans are generally limited to $100,000. The
Bank uses the same underwriting standards for home equity lines of credit as it
uses for one- to four-family residential mortgage loans. The Bank's home equity
lines of credit are originated in amounts which, together with the amount of the
first mortgage, generally do not exceed 80% of the appraised value of the
property securing the loan. The interest rate for all home equity loans floats
at a stated margin over the prime rate. At December 31, 1997, the Bank had $3.3
million of home equity lines of credit and an additional $2.4 million of
additional funds committed, but undrawn, under such lines.
The Bank also offers a Visa credit card program. At December 31, 1997,
approximately 360 credit cards had been issued, with an aggregate outstanding
loan balance of $405,000 and unused credit available of $650,000. The Bank
presently charges no annual membership fee and a fixed annual rate of interest
on these credit cards.
<PAGE>
The terms of other types of consumer loans vary according to the type
of collateral, length of contract, and creditworthiness of the borrower. 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 borrower's ability to meet payments on the proposed loan along
with his existing obligations. In addition to the creditworthiness of the
applicant, the underwriting process also includes a comparison of the value of
the security, if any, in relation to the proposed loan amount. Unsecured
personal loans are made to borrowers for a variety of personal needs and are
usually limited to 20% of the borrower's net worth not to exceed $15,000, with a
minimum loan amount of $2,500.
In April 1996, the Bank purchased 151 individual consumer orthodontist
loans for a purchase price of $503,000. As of December 31, 1997, the outstanding
balance on those loans was $147,000.
Consumer loans may entail greater risk than residential mortgage loans,
particularly in the case of consumer loans which are unsecured or secured by
rapidly depreciable assets such as automobiles. In such cases, any repossessed
collateral for defaulted consumer loans may not provide adequate sources of
repayment for the outstanding loan balances as a result of the greater
likelihood of damage, loss or depreciation. 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
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. At December 31, 1997, $47,000, or approximately .92%
of the consumer loan portfolio, was 60 days or more delinquent. There can be no
assurance that delinquencies will not increase in the future.
Commercial Business Lending
In order to increase the yield and interest rate sensitivity of its
loan portfolio and in order to satisfy the demand for financial services
available to individuals and businesses in its primary market area, the Bank
maintains a portfolio of commercial business loans. Unlike residential mortgage
loans, which generally are made on the basis of the borrower's ability to make
repayment from his or her employment and other income, and which are secured by
real property whose value tends to be more easily ascertainable, commercial
business loans are generally of higher risk and typically are made on the basis
of the borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, may be dependent upon the general economic environment).
During the past five years, the Bank has originated and purchased commercial
business loans to businesses such as small retail operations, small
manufacturing concerns and professional firms. The Bank's commercial business
loans almost always include personal guarantees and are usually, but not always,
secured by business assets, such as accounts receivable, equipment, inventory
and real estate. However, the collateral securing the loans may depreciate over
time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Most of the Bank's commercial business loans have terms ranging from
six months to five years and carry adjustable interest rates. The underwriting
process for commercial business loans generally includes consideration of the
borrower's financial statements, tax returns, projections of future business
operations and inspection of the subject collateral, if any.
<PAGE>
In August 1995, the Bank purchased seasoned commercial leases for a
purchase price of $2.0 million covering manufacturing equipment for the
embroidery of garments. As of December 31, 1997, the outstanding balance on
these leases was $649,000. In November 1996, the Bank purchased a second package
of similar type leases for a purchase price of $2.1 million covering similar
equipment. The outstanding balance on these leases was $1.1 million as of
December 31, 1997. In August, 1997, the Bank purchased another package of
similar type leases for a purchase price of $1.8 million. As of December 31,
1997, the outstanding balance on these leases was $1.6 million. 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 another financial institution with
expertise in originating and acquiring such leases. The other institution
continues to service the leases for American Savings and provides limited
recourse in the event of a default by the lessor. The Bank purchased these
leases because they were available at relatively high yields at a time when
investment alternatives were generating much lower yields and because they had
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
these purchases are prudent in furtherance of the Bank's lending strategy and in
light of the higher yields, personal guarantees on most of the leases and the
limited additional credit recourse provided by the seller. These leases are
classified as loans for financial statement purposes. As of December 31, 1997,
all of such leases were performing in accordance with their terms.
Originations, Purchases and Sales of Loans
The Bank originates real estate and other loans through employees
located at each of the Bank's offices. Walk-in customers and referrals from real
estate brokers and builders are also important sources of loan originations. The
Bank occasionally utilizes the services of mortgage brokers.
In order to supplement its loan production, the Bank may purchase loans
from third parties. In general, the Bank uses the same underwriting standards in
evaluating loan purchases as it does in originating loans. The Bank will
continue to evaluate loan purchase opportunities as they arise and make
purchases in the future depending on market conditions.
From time to time the Bank sells long-term fixed-rate loans pursuant to
forward commitments. To date, most of the Bank's loan sales have been made on a
servicing released basis. At December 31, 1997, approximately $13.6 million of
American Savings' loan portfolio was serviced by others and American Savings
serviced no loans for others.
In periods of rising interest rates, the Bank's ability to originate
large dollar volumes of real estate loans may be substantially reduced or
restricted, with a resultant decrease in related fee income and operating
earnings. In addition, the Bank's ability to sell loans may substantially
decrease if potential buyers reduce their purchasing activities.
<PAGE>
The following table shows the loan origination, purchase, sale and
repayment activities of the Bank for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family ........ $ 3,444 $ 4,027 $ 3,899
- multi-family ............. -- -- --
- non-residential .......... 1,014 2,880 1,359
- construction ............. 772 2,778 1,400
- land ..................... -- -- 136
Non-real estate - consumer ............... 3,565 4,485 2,944
- commercial business . 677 158 103
-------- -------- --------
Total adjustable-rate ............. 9,472 14,328 9,841
-------- -------- --------
Fixed rate:
Real estate - one- to four-family ........ 7,096 8,219 2,588
- multi-family ............. 35 101 377
- non-residential .......... 160 17 96
- construction ............. 2,707 -- --
- land ..................... 192 -- --
Non-real estate - consumer ............... 1,543 793 1,041
- commercial business . 531 85 --
-------- -------- --------
Total fixed-rate .................. 12,264 9,215 4,102
-------- -------- --------
Total loans originated ............ 21,736 23,543 13,943
-------- -------- --------
Purchases:
Real estate - one- to four-family ........ 3,797 -- 524
- multi-family ............. 491 -- 653
- non-residential .......... 500 2,079 --
- construction ............. 272 -- 250
Non-real estate - consumer ............... -- 503 --
- commercial business . 1,813 2,066 2,013
-------- -------- --------
Total loans purchased ............. 6,873 4,648 3,440
-------- -------- --------
Total loans sold .................. -- -- --
Principal repayments ..................... 18,851 14,801 15,518
-------- -------- --------
Total reductions .................. 9,758 14,801 15,518
Increase (decrease) in other items, net .... (31) (663) 925
-------- -------- --------
Net increase ...................... $ 9,727 $ 12,727 $ 2,790
======== ======== ========
</TABLE>
<PAGE>
Delinquencies and Non-Performing Assets
Delinquency Procedures. 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, a late notice is sent on all
loans over 30 days delinquent. Another late notice is sent 60 days after the due
date. Additional written and verbal contacts are made with the borrower between
45 and 90 days after the due date.
If the delinquency is not cured by the 90th day, the customer is
provided 10 days written notice that the account will be referred to counsel for
collection and foreclosure, if necessary. A drive-by appraisal is normally
obtained at this time and a title search is ordered. A good faith effort by the
borrower at this time will defer foreclosure for a reasonable length of time
depending on individual circumstances. The Bank may agree to accept a deed in
lieu of foreclosure. If it becomes necessary to foreclose, the property is sold
at public sale and the Bank may bid on the property to protect its interest. The
decision to foreclose is made by the Senior Loan Officer after discussion with
the members of the Loan Committee.
Consumer loans are charged off if they remain delinquent for 120 days
unless the borrower and lender agree on a payment plan. If terms of the plan are
not met, they are then subject to charge off. The Bank's procedures for
repossession and sale of consumer collateral are subject to various requirements
under Indiana consumer protection laws.
Real estate acquired by American Savings 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 by foreclosure or deed in lieu of foreclosure,
it is recorded at the lower of cost or estimated fair value, less estimated
selling costs, at the date of acquisition, and any write-down resulting
therefrom is charged to the allowance for loan losses. Subsequent decreases in
the value of the property are charged to operations through the creation of a
valuation allowance. After acquisition, all costs incurred in maintaining the
property are expensed. Costs relating to the development and improvement of the
property, however, are capitalized to the extent of estimated fair value less
estimated costs to sell.
<PAGE>
Loan Delinquencies. The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at December 31, 1997.
<TABLE>
<CAPTION>
Loans Delinquent For:
-----------------------------------------------------------------
60-89 Days 90 Days and Over Total Delinquent Loans
---------- ---------------- ----------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family 6 $467 .91% 5 $263 .51% 10 $730 1.42%
Multi-family ...... -- -- -- -- -- -- -- -- --
Non-residential ... 1 17 .18 -- -- -- 1 17 .18
Construction ...... -- -- -- -- -- -- -- -- --
Land .............. -- -- -- -- -- -- -- -- --
Consumer ............ 2 2 .04 4 45 .88 6 47 .92
Commercial business . -- -- -- -- -- -- -- -- --
-- ---- --- -- ---- --- -- ---- ----
Total .......... 8 $486 .61% 9 $308 .39% 17 $794 1.00%
== ==== === == ==== === == ==== ====
</TABLE>
Classification of Assets. Federal regulations require that each savings
institution classify its own assets on a regular basis. In addition, in
connection with examinations of savings institutions, OTS and FDIC examiners
have authority to identify problem assets and, if appropriate, require them to
be classified. There are three classifications for problem assets: Substandard,
Doubtful and Loss. Substandard assets have one or more defined weaknesses and
are characterized by the distinct possibility that the savings institution will
sustain some loss if the deficiencies are not corrected. Doubtful assets have
the weaknesses of Substandard assets, with the additional characteristics that
the weaknesses make collection or liquidation in full on the basis of currently
existing facts, conditions and values questionable, and there is a high
possibility of loss. An asset classified Loss is considered uncollectible and of
such little value that continuance as an asset on the balance sheet of the
institution is not warranted. The regulations have also created a Special
Mention category, consisting of assets which do not currently expose a savings
institution to a sufficient degree of risk to warrant classification, but do
which possess credit deficiencies or potential weaknesses deserving management's
close attention. As of December 31, 1997, the Bank had not designated any assets
as special mention. Assets classified as Substandard or Doubtful require the
institution to establish prudent general allowances for loan losses. If an asset
or portion thereof is classified as Loss, the institution must either establish
specific allowances for loan losses in the amount of 100% of the portion of the
asset classified Loss, or charge off such amount. If an institution does not
agree with an examiner's classification of an asset, it may appeal this
determination to the District Director of the OTS. On the basis of management's
review of its assets, at December 31, 1997, the Bank had classified a total of
$335,000 of its loans and other assets of concern, as follows:
<PAGE>
<TABLE>
<CAPTION>
One- to Four-
Family Multi-family Consumer Total
--------------- ------------ --------- -------
(In Thousands)
<S> <C> <C> <C> <C>
Substandard......................... $290 $ --- $ 45 $335
Doubtful............................ --- --- --- ---
Loss................................ --- --- --- ---
---- ----- ---- ----
$290 $ --- $ 45 $335
==== ===== ==== ====
</TABLE>
American Savings' classified assets consist of the (i) non-performing
loans and (ii) loans and other assets of concern discussed herein. As of the
date hereof, these asset classifications are consistent with those of the OTS
and FDIC.
Non-Performing Assets. The following table sets forth the amounts and
categories of non-performing assets in the Bank's loan portfolio. Loans are
reviewed quarterly and any loan whose collectibility is doubtful is placed on
non-accrual status. Loans are placed on non-accrual status when either principal
or interest is 90 days or more past due, unless, in the judgment of management,
the loan is well collateralized and in the process of collection. Interest
accrued and unpaid at the time a loan is placed on non-accrual status is charged
against interest income. Subsequent payments are either applied to the
outstanding principal balance or recorded as interest income, depending on the
assessment of the ultimate collectibility of the loan. For all years presented,
the Bank has had no troubled debt restructurings (which involved forgiving a
portion of interest or principal on any loans or making loans at a rate
materially less than that of market rates). Foreclosed assets include assets
acquired in settlement of loans. Except as noted, the loans and foreclosed asset
amounts shown are stated without giving effect to the specific reserves which
have been established against such assets. See "- Loan Loss Reserve Analysis."
<PAGE>
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family ..................... $263 $269 $318 $344 $206
Multi-family ............................ -- -- -- -- --
Non-residential ......................... -- -- -- -- 60
Construction ............................ -- -- -- 109 242
Consumer ................................ 45 36 51 47 40
Commercial business ..................... -- -- -- -- 10
---- ---- ---- ---- ----
Total ................................ 308 305 369 500 550
---- ---- ---- ---- ----
Accruing loans delinquent more than 90 days -- -- -- -- --
---- ---- ---- ---- ----
Foreclosed assets:
One- to four-family ..................... 27 -- -- -- 12
Multi-family ............................ -- -- -- -- --
Non-residential ......................... -- -- -- -- --
Construction ............................ -- -- -- -- --
Consumer ................................ -- -- -- -- --
Commercial business ..................... -- -- -- -- --
---- ---- ---- ---- ----
Total ................................ 27 -- -- -- 12
---- ---- ---- ---- ----
Total non-performing assets ............... $335 $305 $369 $500 $570
==== ==== ==== ==== ====
Total as a percentage of total assets ..... .34% .35% .53% .76% .88%
==== ==== ==== ==== ====
</TABLE>
For the year ended December 31, 1997, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $12,000.
At December 31, 1997, there were no other loans not included on the
table or discussed above where known information about the possible credit
problems of borrowers caused management to have serious doubts as to the ability
of the borrower to comply with present loan repayment terms and which may result
in disclosure of such loans in the future.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses charged to earnings based on management's
evaluation of the risk inherent in its entire loan portfolio and changes in the
nature and volume of its loan activity. Such evaluation, which includes a review
of all loans of which full collectibility may not be reasonably assured,
considers the estimated net realizable value of the underlying collateral,
economic conditions, historical loan loss experience and other factors that
warrant recognition in providing for an adequate allowance for loan losses. In
<PAGE>
determining the general reserves under these policies, historical charge-offs
and recoveries, changes in the mix and levels of the various types of loans, net
realizable values, the current loan portfolio and current economic conditions
are considered. Management also considers the Bank's non-performing and "of
concern" assets in establishing its allowance for loan losses. The Bank's
policies have had the effect of increasing the Bank's allowance for loan losses.
As of December 31, 1997, the Bank's allowance for loan losses as a
percentage of loans and as a percentage of non-performing loans amounted to .52%
and 133.12%, respectively. In light of the level of non-performing assets to
total assets and the nature of these assets, management believes that the
allowance for loan losses is adequate. While management believes that it uses
the best information available to determine the allowance for loan losses,
unforeseen market conditions could result in adjustments to the allowance for
loan losses, and net earnings could be significantly affected, if circumstances
differ substantially from the assumptions used in making the final
determination.
<PAGE>
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period ..... $355 $360 $331 $291 $439
Charge-offs:
One- to four-family .............. -- -- -- 2 --
Multi-family ..................... -- -- -- -- 131
Non-residential .................. -- -- -- -- 264
Construction ..................... -- -- -- -- --
Consumer ......................... 33 5 10 5 13
Commercial business .............. -- -- -- 15 69
---- ---- ---- ---- ----
Total charge-offs ......... 33 5 10 22 477
---- ---- ---- ---- ----
Recoveries:
One- to four-family .............. -- -- -- -- --
Multi-family ..................... -- -- -- -- --
Non-residential .................. -- -- -- -- 154
Construction ..................... -- -- -- -- --
Consumer ......................... 14 -- -- -- 5
Commercial business .............. -- -- -- -- --
---- ---- ---- ---- ----
Total recoveries ........... 14 -- -- -- 159
---- ---- ---- ---- ----
Net charge-offs .................... 19 5 10 22 318
Additions charged to operations .... 74 -- 39 62 170
---- ---- ---- ---- ----
Balance at end of period ........... $410 $355 $360 $331 $291
==== ==== ==== ==== ====
Ratio of net charge-offs during the
period to average loans outstanding
during the period .................. .03% .01% .02% .06% .66%
==== ==== ==== ==== ====
Ratio of net charge-offs during the
period to average non-performing
assets ............................ 4.15% 1.48% 2.30% 3.96% 60.80%
==== ==== ==== ==== ====
</TABLE>
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------------------------------------------------
1997 1996 1995
--------------------------------- --------------------------------- --------------------------------
Percent Percent Percent
of Loans of Loans of Loans
Loan in Each Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- ----- --------- -------- -----
(Dollars In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family . $ 95 $49,820 62.52% $ 89 $43,669 63.41% $ 93 $38,056 68.60%
Multi-family ........ 12 4,010 5.03 10 3,259 4.73 10 3,419 6.16
Non-residential ..... 36 12,062 15.14 26 8,806 12.79 13 4,146 7.47
Construction and land 19 3,775 4.74 23 4,623 6.72 17 3,417 6.16
Consumer ............ 45 5,104 6.40 45 4,989 7.24 23 4,021 7.25
Commercial business . 49 4,916 6.17 35 3,519 5.11 24 2,420 4.36
Unallocated ......... 154 -- -- 127 -- -- 180 -- --
------- ------- ------ ------- ------- ------ ------- ------- ------
Total .......... $ 410 $79,687 100.00% $ 355 $68,865 100.00% $ 360 $55,479 100.00%
======= ======= ====== ======= ======= ====== ======= ======= ======
<CAPTION>
December 31,
-------------------------------------------------------------------------------
1994 1993
----------------------------------- -----------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- ----- --------- -------- -----
<S> <C> <C> <C> <C> <C> <C>
One- to four-family . $ 89 $37,050 69.02% $ 66 $35,202 71.64%
Multi-family ........ 10 3,445 6.42 9 2,877 5.85
Non-residential ..... 72 3,971 7.40 71 3,726 7.58
Construction and land 38 4,316 8.04 45 1,654 3.36
Consumer ............ 29 3,986 7.43 25 3,470 7.07
Commercial business . 9 905 1.69 23 2,211 4.50
Unallocated ......... 84 -- -- 52 -- --
------- ------- ------ ------- ------- ------
Total .......... $ 331 $53,673 100.00% $ 291 $49,140 100.00%
======= ======= ====== ======= ======= ======
</TABLE>
<PAGE>
Investment Activities
As part of its asset/liability management strategy, the Company invests
in U.S. government and agency obligations to supplement its lending activities.
The Company regularly uses Piper Capital Management, Inc. as non-commissioned
investment adviser. The Company has not made any investments in municipal
securities although it is authorized by its general investment policy to
purchase investment grade municipal securities and, depending on market
conditions, may purchase such securities in the future. The Company also
invests, to a limited degree, in equity securities of other financial companies.
At December 31, 1997, the Company did not own any securities of a single issuer
which exceeded 10% of the Bank's retained earnings, other than U.S. government
or federal agency obligations. See "Management's Discussion and Analysis of
Financial Condition and Results of Operation" in the Annual Report.
The Bank is required by federal regulations to maintain a minimum
amount of liquid assets that may be invested in specified securities and is also
permitted to make certain other securities investments. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations -
Liquidity and Capital" in the Annual Report. Cash flow projections are regularly
reviewed and updated to assure that adequate liquidity is provided. As of
December 31, 1997, the Bank's liquidity ratio (liquid assets as a percentage of
net withdrawable savings and current borrowings) was 16.28% as compared to the
OTS requirement of 4.0%.
All of the Company's investment and mortgage-backed securities, except
for equity securities held for trade noted above, are classified as available
for sale in accordance with SFAS 115. This was done in order for the Company to
maintain maximum flexibility when making investment decisions. Unrealized gains
and losses in available for sale securities, net of tax effect, are reported as
a separate component of stockholders' equity. The Company may elect to classify
investment securities acquired in the future as held to maturity, instead of as
available for sale, but there are no current plans to do so.
<PAGE>
The following table sets forth the composition of the Company's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------
1997 1996 1995
---------------------- ---------------------- ----------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Investment securities held to maturity:
FHLB Stock ................................. $ 725 6.39 $ 546 5.45 $ 546 7.22%
------- ------ ------- ------ ------- ------
Investment securities available for sale:
U.S. government securities ................. 8,090 71.27 8,283 82.62 6,384 84.41
Government securities mutual fund .......... 124 1.09 656 6.54 633 8.37
------- ------ ------- ------ ------- ------
8,214 72.36 8,939 89.16 7,017 92.78
Investment securities held for trade:
Common stock mutual fund(1) ................ 1,325 11.67 -- -- -- --
------- ------ ------- ------ ------- ------
Common stock of other financial institutions 1,088 9.58 540 5.39 -- --
------- ------ ------- ------ ------- ------
$ 2,413 21.25% 540 5.39 -- --
------- ------ ------- ------ ------- ------
Total investment securities ............. $11,352 100.00 $10,025 100.00 $ 7,563 100.00%
======= ====== ======= ====== ======= ======
Average remaining life of debt investment .... 1.8 years 2.3 years 2.7 years
securities
Other interest-earning assets:
Interest-bearing deposits with banks ....... $ 3,119 98.21 $ 1,093 100.00 $ 1,004 100.00%
Money market mutual fund ................... 57 1.79 -- -- -- --
------- ------ ------- ------ ------- ------
Total ................................... $ 3,176 100.00 $ 1,093 100.00 $ 1,004 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
(1) Invests primarily in Thrift Capital Securities.
<PAGE>
The composition and maturities of the investment securities portfolio,
excluding FHLB stock and equity securities are indicated in the following table.
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------------------------------------
Less Than 1 to 5 5 to 10 Over
1 Year Years Years 10 Years Total Investment Securities
Book Value Book Value Book Value Book Value Book Value Fair Value
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
U.S. government securities.................. $3,376 $4,336 $ 378 $ --- $8,090 $8,090
------ ------ ------- ------- ------ ------
Total investment securities (excluding
FHLB stock and equity securities)........... $3,376 $4,336 $ 378 $ --- $8,090 $8,090
====== ====== ======= ======= ====== ======
Weighted average yield...................... 5.90% 6.29% 7.01% --% 6.16%
</TABLE>
<PAGE>
Mortgage-Backed Securities. The Company purchases mortgage-backed
securities from time to time to supplement residential loan production. The type
of securities purchased is based upon the Bank's asset/liability management
strategy and balance sheet objectives. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -Asset/Liability Management" in
the Annual Report. In connection with SFAS 115, the Bank's mortgage-backed
securities are held in its available for sale portfolio in order to retain
investment flexibility and accordingly are included in its financial statements
at fair value.
All of the Company's mortgage-backed securities at December 31, 1997,
are backed by federal agencies or government corporations. Accordingly,
management believes that the Company's mortgage-backed securities are generally
resistant to credit problems.
The following table sets forth the composition of the Company's
mortgage-backed securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------------------
1997 1996 1995
---- ---- ----
Book % of Book % of Book % of
Value Total Value Total Value Total
----- ----- ----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Mortgage-backed securities available
for sale:
GNMA................................... $ 639 18.29% $ 762 18.96% $ 932 63.02%
FNMA................................... 70 2.00 82 2.04 98 6.63
FHLMC.................................. 2,785 79.71 3,175 79.00 449 30.35
----- ------ ------ ------ ------- ------
Total mortgage-backed
securities........................ $ 3,494 100.00% $4,019 100.00% $ 1,479 100.00%
======= ====== ====== ====== ======= ======
</TABLE>
<PAGE>
The following table shows mortgage-backed and related securities
purchase, sale and repayment activities of the Company for the periods
indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Purchases:
Adjustable-rate................................ $ --- $ --- $ ---
Fixed-rate..................................... --- 3,034 ---
------ ------ -----
Total purchases......................... --- 3,034 ---
------ ------ -----
Sales and Repayments:
Total sales............................. --- --- ---
------ --------- -----
Principal repayments........................... 570 482 208
---- ------- ----
Total reductions........................ (570) (482) (208)
Increase (decrease) in other items, net........ 45 (12) 94
------ --------- ----
Net increase (decrease)................. $(525) $2,540 $(114)
===== ====== ======
</TABLE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1997. These securities are
anticipated to be repaid in advance of their contractual maturities as a result
of mortgage loan payments. The amounts set forth below represent principal
balances only and do not include premiums, discounts and fair value adjustments.
<TABLE>
<CAPTION>
December 31,
1997
1 to 3 to 5 5 to 10 10 to 20 Over 20 Balance
3 Years Years Years Years Years Outstanding
------- ----- ----- ----- ----- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation.. $38 $423 $186 $ 2,112 $ --- $ 2,759
Federal National Mortgage Association... --- --- --- --- 69 69
Government National Mortgage Association --- --- --- --- 623 623
--- ---- ----- ------- ----- -------
Total.............................. $38 $423 $186 $ 2,112 $ 692 $ 3,451
=== ==== ==== ======= ===== =======
</TABLE>
Sources of Funds
General. The Bank's primary sources of funds are deposits, borrowings,
amortization and prepayment of loan principal, maturities of investment
securities, short-term investments and funds provided from operations.
<PAGE>
Deposits. American Savings offers a variety of deposit accounts having
a wide range of interest rates and terms. The Bank's deposits consist of
passbook accounts, demand and NOW accounts, and money market and certificate
accounts. The Bank relies primarily on advertising, competitive pricing policies
and customer service to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
The variety of deposit accounts offered by the Bank has allowed it to
be competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. The Bank has become more susceptible to short-term fluctuations
in deposit flows, as customers have become more interest rate conscious. The
Bank manages the pricing of its deposits in keeping with its asset/liability
management, profitability and growth objectives. Based on its experience, the
Bank believes that its passbook, demand and NOW accounts are relatively stable
sources of deposits as compared to certificate deposits. However, the ability of
the Bank to attract and maintain all deposits, 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.
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
1997 1996 1995
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............. $ 60,411 $ 59,588 $ 58,281
Deposits.................... 142,882 122,369 108,637
Withdrawals................. (134,005) (123,874) (109,462)
Interest credited........... 2,412 2,328 2,132
--------- -------- --------
Ending balance.............. $ 71,700 $ 60,411 $ 59,588
======== ======== ========
Net increase................ $ 11,289 $ 823 $ 1,307
======== ========= =========
Percent increase............ 18.69% 1.38% 2.24%
===== ===== =====
</TABLE>
<PAGE>
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs offered by the Bank as of the dates
indicated.
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------
1997 1996 1995
----------------------------------------------------------------------------
Percent Percent Percent
Amount of Total Amount of Total Amount of Total
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Transactions and Savings Deposits:
Commercial Demand 0.00%(1).................. $ 698 .97% $ 731 1.21% $ 821 1.38%
Passbook Accounts 3.00%(1).................. 16,407 22.88 16,311 27.00 16,798 28.19
NOW Accounts 2.25%(1)....................... 6,560 9.15 5,981 9.90 5,801 9.74
Money Market Accounts 3.25%(1).............. 2,878 4.02 2,454 4.06 2,678 4.49
------- ------ ------- ------- -------- ------
Total Non-Certificates...................... 26,543 37.02 25,477 42.17 26,098 43.80
------ ----- ------- ------- ------ ------
Certificates:
2.00 - 3.99%.............................. 258 .36 416 .69 1,399 2.35
4.00 - 5.99%.............................. 25,966 36.21 29,691 49.15 21,952 36.83
6.00 - 7.99%.............................. 18,928 26.40 4,822 7.98 10,094 16.94
8.00 - 9.99%.............................. 5 .01 5 .01 45 .08
--------- -------- -------- -------- --------- -------
Total Certificates.......................... 45,157 62.98 34,934 57.83 33,490 56.20
------- ------ ------- ------- -------- ------
Total Deposits.............................. $ 71,700 100.00% $60,411 100.00% $59,588 100.00%
======== ====== ======= ====== ======= ======
</TABLE>
- ------------------------
(1) Rates in effect at December 31, 1997.
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1997
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- 8.00- Percent
3.99% 5.99% 7.99% 9.99% Total of Total
----- ----- ---- ---- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
Certificate account maturing
in quarter ending:
March 31, 1998................. $139 $ 7,856 $ 415 $ --- $ 8,410 18.62%
June 30, 1998.................. 50 7,030 4,007 --- 11,087 24.55
September 30, 1998............. 64 3,873 9,763 --- 13,700 30.34
December 31, 1998.............. 5 2,924 316 --- 3,245 7.19
March 31, 1999................. --- 1,011 2,561 --- 3,572 7.91
June 30, 1999.................. --- 1,065 155 --- 1,220 2.70
September 30, 1999............. --- 386 519 --- 905 2.00
December 31, 1999.............. --- 562 426 --- 988 2.19
March 31, 2000................. --- 242 219 --- 461 1.02
June 30, 2000.................. --- 307 334 --- 641 1.42
September 30, 2000............. --- 288 --- --- 288 .64
December 31, 2000.............. --- 122 113 --- 235 .52
Thereafter..................... --- 300 100 5 405 .90
------ --------- ------- ----- ------ --------
Total....................... $258 $25,966 $18,928 $ 5 $45,157 100.00%
==== ======= ======= ===== ======= ======
Percent of total............ .57% 57.50% 41.92% .01%
==== ===== ===== ===
</TABLE>
The following table indicates the amount of the Bank's certificates of
deposit and other deposits by time remaining until maturity as of December 31,
1997.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $6,611 $ 9,424 $14,298 $7,526 $37,859
Certificates of deposit of $100,000 or more...... 1,799 1,664 2,646 1,189 7,298
------- ------- -------- ------ --------
Total certificates of deposit.................... $8,410 $11,088 $16,944 $8,715 $45,157
====== ======= ======= ====== =======
</TABLE>
<PAGE>
Borrowings. American Savings' other available sources of funds include
advances from the FHLB of Indianapolis and other borrowings. As a member of the
FHLB of Indianapolis, the Bank is required to own capital stock in the FHLB of
Indianapolis and is authorized to apply for advances from the FHLB of
Indianapolis. Each FHLB credit program has its own interest rate, which may be
fixed or variable, and range of maturities. The FHLB of Indianapolis may
prescribe the acceptable uses for these advances, as well as limitations on the
size of the advances and repayment provisions. During recent years, the Bank has
utilized short-term borrowings (most of which have maturities of 12 to 36
months) in order to fund loan demand. See --"Management Discussion and Analysis
- - Asset/Liability Management."
The following table sets forth the maximum month-end balance and
average balance of FHLB advances, securities sold under agreements to repurchase
and other borrowings for the periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Maximum Balance:
FHLB advances........................................... $12,000 $9,500 $3,000
Securities sold under agreements to repurchase.......... --- --- ---
Other borrowings........................................ --- --- ---
Average Balance:
FHLB advances........................................... $11,629 $3,186 $1,567
Securities sold under agreements to repurchase.......... --- --- ---
Other borrowings........................................ --- --- ---
</TABLE>
The following table sets forth certain information as to the Bank's
borrowings at the dates indicated.
<TABLE>
<CAPTION>
December 31,
---------------------------------------
1997 1996 1995
------- ------ ------
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances............................................. $12,000 $9,500 $3,000
Securities sold under agreements to repurchase............ --- --- ---
Other borrowings.......................................... --- --- ---
------- ------ ------
Total borrowings..................................... $12,000 $9,500 $3,000
======= ====== ======
Weighted average interest rate of FHLB advances........... 5.89% 5.91% 6.16%
Weighted average interest rate of securities sold
under agreements to repurchase........................... ---% ---% ---%
Weighted average interest rate of other borrowings........ ---% ---% ---%
</TABLE>
<PAGE>
Service Corporations
As a federally chartered savings association, American Savings is
permitted by OTS regulations to invest up to 2% of its assets, or $1.9 million
at December 31, 1997, in the stock of, or loans to, service corporation
subsidiaries. As of such date, the net book value of American Savings'
investment in its service corporations was approximately $50,000. American
Savings may invest an additional 1% of its assets in service corporations where
such additional funds are used for inner-city or community development purposes.
In addition to investments in service corporations, federal institutions are
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal association may engage in directly.
American Savings has one wholly owned subsidiary service corporation,
NIFCO, Inc. ("NIFCO"), and one second tier subsidiary service corporation, Ridge
Management, Inc. ("Ridge Management") which is owned by NIFCO. NIFCO sells
annuities and securities to the Bank's customers and to the general public. At
December 31, 1997, the Bank had an equity investment in NIFCO of $50,000. For
the year ended December 31, 1997, NIFCO recorded net income of $6,000. In the
past, Ridge Management engaged in lending and investment activity, although it
is currently essentially inactive. For the year ended December 31, 1997, Ridge
Management had no activity.
Competition
American Savings faces strong competition both in originating real
estate loans and in attracting deposits. Competition in originating loans comes
primarily from other savings institutions, credit unions, commercial banks and
mortgage bankers who also make loans secured by real estate located in the
Bank's primary market area. The Bank competes for loans principally on the basis
of the interest rates and loan fees it charges, the types of loans it originates
and the quality of services it provides to borrowers.
The Bank attracts all of its deposits through its branch offices,
primarily from the communities in which those branch offices are located;
therefore, competition for those deposits is principally from other savings
institutions, commercial banks, securities firms, money market and mutual funds
and credit unions located in the same communities. The ability of the Bank to
attract and retain deposits depends on its ability to provide an investment
opportunity that satisfies the requirements of investors as to rate of return,
liquidity, risk, convenient locations and other factors. The Bank competes for
these deposits by offering a variety of deposit accounts at competitive rates,
convenient business hours and a customer oriented staff. As of December 31,
1997, the Bank estimated its market share of savings deposits in the
Gary-Hammond, Indiana MSA market area to be approximately 0.9%.
The authority to offer money market deposits, and expanded lending and
other powers authorized for savings institutions by federal legislation has
resulted in increased competition for both deposits and loans between savings
institutions and other financial institutions such as commercial banks.
Regulation
General. American Savings is a federally chartered savings association,
the deposits of which are federally insured and backed by the full faith and
credit of the United States Government. Accordingly, American Savings is subject
to broad federal regulation and oversight extending to all its operations.
<PAGE>
American Savings 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 ("Federal Reserve Board"). As the savings and loan holding company of
American Savings, 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. American Savings is a
member of the Savings Association Insurance Fund ("SAIF"), which together with
the Bank Insurance Fund (the "BIF") are the two deposit insurance funds
administered by the FDIC, and the deposits of American Savings are insured by
the FDIC. As a result, the FDIC has certain regulatory and examination authority
over American Savings.
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, American Savings is required to file
periodic reports with the OTS and is subject to periodic examinations by the OTS
and the FDIC. The last regular OTS and FDIC examinations of the Bank were as of
August, 1996 and November, 1991, respectively. Under agency scheduling
guidelines, it is likely that another examination will be initiated in the near
future. When these examinations are conducted by the OTS and the FDIC, the
examiners may require the Bank to provide for higher general or specific loan
loss reserves. All savings associations are subject to semi-annual assessments,
based upon the savings association's total assets, to fund the operations of the
OTS. American Savings' OTS assessment for the fiscal year ended December 31,
1997, was $29,000.
The OTS also has extensive enforcement authority over all savings
associations and their holding companies, including American Savings 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
American Savings 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. American Savings 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
December 31, 1997, the Bank's lending limit under this restriction was $1.4
million. American Savings is in compliance with the loans-to-one-borrower
limitation.
<PAGE>
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, asset quality, earnings standards, 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.
Insurance of Accounts and Regulation by the FDIC
American Savings 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 SAIF or the BIF. 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 is made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
For the first six months of 1995, the assessment schedule for BIF
members and SAIF members ranged from .23% to .31% of deposits. As is the case
with the SAIF, the FDIC is authorized to adjust the insurance premium rates for
banks that are insured by the BIF of the FDIC in order to maintain the reserve
ratio of the BIF at 1.25% of BIF insured deposits. As a result of the BIF
reaching its statutory reserve ratio the FDIC revised the premium schedule for
BIF insured institutions to provide a range of .04% to .31% of deposits. The
revisions became effective in the third quarter of 1995. In addition, the BIF
rates were further revised, effective January 1996, to provide a range of 0% to
.27%. The SAIF rates, however, were not adjusted. At the time the FDIC revised
<PAGE>
the BIF premium schedule, it noted that, absent legislative action (as discussed
below), the SAIF would not attain its designated reserve ratio until the year
2002. As a result, SAIF insured members would continue to be generally subject
to higher deposit insurance premiums than BIF insured institutions until, all
things being equal, the SAIF attained its required reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$389,000 was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected the Bank's results of
operations for the year ended December 31, 1996. As a result of the special
assessment, American Savings' deposit insurance premiums were reduced to .0648
based upon its current risk classification and the new assessment schedule for
SAIF insured institutions. These premiums are subject to change in future
periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as the Bank. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions are anticipated to be about a
6.5% basis points assessment on SAIF deposits and 1.5 basis points on BIF
deposits until BIF insured institutions participate fully in the assessment.
Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be generally as
stringent as the comparable capital requirements for national banks. The OTS is
also authorized to impose capital requirements in excess of these standards on
individual associations on a case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 1997, the Bank did not have any intangible
assets.
<PAGE>
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. All subsidiaries of the Bank are includable
subsidiaries.
At December 31, 1997, American Savings had tangible capital of $9.5
million, or 9.76% of adjusted total assets, which is approximately $8.0 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 December 31, 1997, American Savings had core capital equal to $9.5
million, or 9.76% of adjusted total assets, which is $6.6 million above the
minimum leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1997, American
Savings had no capital instruments that qualify as supplementary capital and
$410,000 of general loss, 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. American Savings had
$15,000 of such exclusions from capital and assets at December 31, 1997.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination
unless insured to such ratio by an insurer approved by the FNMA or FHLMC.
<PAGE>
OTS regulations also require that 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 will not become effective until the OTS
evaluates the process by which savings associations may appeal an interest rate
risk deduction determination. It is uncertain as to when this evaluation may be
completed. Any savings association, such as American Savings, 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 December 31, 1997, American Savings had total capital of $9.9
million (including $9.5 million in core capital and $410,000 in qualifying
supplementary capital) and risk-weighted assets of $53.4 million or total
capital of 18.51% of risk-weighted assets. This amount was $5.6 million above
the 8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
<PAGE>
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on American Savings' 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 on savings associations
with respect to their ability to make distributions of capital, which include
dividends, stock redemptions or repurchases, cash-out mergers and other
transactions charged to the capital account. OTS regulations also prohibit a
savings 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.
Generally, savings associations, such as the Bank, that before and
after the proposed distribution meet their 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 capital
requirement for such capital component, as measured at the beginning of the
calendar year, or 75% of its net income for the most recent four quarter period.
However, an association deemed to be in need of more than normal supervision by
the OTS may have its dividend authority restricted by the OTS. The Bank may pay
dividends in accordance with this general authority.
Savings associations proposing to make any capital distribution need
only submit written notice to the OTS 30 days prior to such distribution.
Savings associations that do not, or would not meet their current minimum
capital requirements following a proposed capital distribution, however, must
obtain OTS approval prior to making such distribution. The OTS may object to the
distribution during that 30-day notice period based on safety and soundness
concerns. See "Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. 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 of
supervisory concern, 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.
<PAGE>
Liquidity
The Bank is required to maintain an average daily balance of specified
liquid assets equal to a monthly average of not less than a specified percentage
of its net withdrawable deposit accounts plus short-term borrowings. This
liquidity requirement is subject to change from time to time by the OTS to any
amount within the range of 4% to 10% depending upon economic conditions and the
savings flows of member institutions. During 1997, OTS regulations also required
each savings institution to maintain an average daily balance of short-term
liquid assets of at least 1% of the total of its net withdrawable deposit
accounts and borrowings payable in one year or less. Monetary penalties may be
imposed for failure to meet these liquidity requirements. The OTS has recently
lowered the liquidity requirement from 5% to 4% and eliminated the 1% short term
liquid asset requirement. The Bank's liquidity ratio for December 31, 1997 was
16.28% which exceeded the applicable requirements. The Bank has never been
subject to monetary penalties for failure to meet its liquidity requirements.
Qualified Thrift Lender Test
All savings associations, including American Savings, 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. As an alternative, the savings association may maintain 60% of its assets
in those assets specified in Section 7701(a)(19) of the Internal Revenue Code.
Under either test, such assets primarily consist of residential housing related
loans and investments. At December 31, 1997, the Bank met the test and has
always met the test since its effectiveness.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest itself 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
<PAGE>
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
American Savings, 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 December 1995 and received a rating of satisfactory.
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 American Savings include the Holding
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 subsidiaries are not deemed affiliates, 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 required to register
and file 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 American Savings 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.
<PAGE>
If American Savings fails the QTL test, the Company must obtain the
approval of the OTS prior to continuing after such failure, directly or through
its other subsidiaries, any business activity other than those approved for
multiple savings and loan holding companies or their subsidiaries. In addition,
within one year of such failure the Company must register as, and will become
subject to, the restrictions applicable to bank holding companies. The
activities authorized for a bank holding company are more limited than are the
activities authorized for a unitary or multiple savings and loan holding
company. See "- Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1997, American Savings 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
American Savings 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.
<PAGE>
As a member, American Savings is required to purchase and maintain
stock in the FHLB of Indianapolis. At December 31, 1997, American Savings had
$725,000 in FHLB stock, which was in compliance with this requirement. In past
years, American Savings has received substantial dividends on its FHLB stock.
Over the past five calendar years such dividends have averaged 7.56% and were
7.99% for calendar year 1997.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of American Savings' FHLB stock may result in a corresponding
reduction in its capital.
For the year ended December 31, 1997, dividends paid by the FHLB of
Indianapolis to American Savings totaled $52,700, which constitutes a $10,000
increase from the amount of dividends received in calendar year 1996. The
$14,600 dividend received for the quarter ended December 31, 1997 reflects an
annualized rate of 8.00%, or .01% above the average rate for calendar 1997.
Federal and State Taxation
General. The Company and the Bank report their income on a consolidated
basis and the accrual method of accounting, and are subject to federal income
taxation in the same manner as other corporations with some exceptions,
including particularly the Bank's reserve for bad debts discussed below. The
following discussion of tax matters is intended only as a summary and does not
purport to be a comprehensive description of the tax rules applicable to the
Bank or the Company. The Bank has not been audited by the IRS since 1996, which
covered the tax years through 1995. For its 1997 taxable year, the Bank is
subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. For fiscal years beginning prior to December 31,
1995, thrift institutions which qualified under certain definitional tests and
other conditions of the Internal Revenue Code of 1986 (the "Code") were
permitted to use certain favorable provisions to calculate their deductions from
taxable income for annual additions to their bad debt reserve. A reserve could
be established for bad debts on qualifying real property loans (generally
secured by interests in real property improved or to be improved) under (i) the
Percentage of Taxable Income Method (the "PTI Method") or (ii) the Experience
Method. The reserve for nonqualifying loans was computed using the Experience
Method.
The Small Business Job Protection Act of 1996 (the "1996 Act"), which
was enacted on August 20, 1996, requires savings institutions to recapture
(i.e., take into income) certain portions of their accumulated bad debt
reserves. The 1996 Act repeals the reserve method of accounting for bad debts
effective for tax years beginning after 1995. Thrift institutions that would be
treated as small banks are allowed to utilize the Experience Method applicable
to such institutions, while thrift institutions that are treated as large banks
(those generally exceeding $500 million in assets) are required to use only the
specific charge-off method. Thus, the PTI Method of accounting for bad debts is
no longer available for any financial institution.
<PAGE>
A thrift institution required to change its method of computing
reserves for bad debts will treat such change as a change in method of
accounting, initiated by the taxpayer, and having been made with the consent of
the IRS. Any Section 481(a) adjustment required to be taken into income with
respect to such change generally will be taken into income ratably over a
six-taxable year period, beginning with the first taxable year beginning after
1995, subject to the residential loan requirement.
Under the residential loan requirement provision, the recapture
required by the 1996 Act will be suspended for each of two successive taxable
years, beginning with the Bank's 1996 taxable year, in which the Bank originates
a minimum of certain residential loans based upon the average of the principal
amounts of such loans made by the Bank during its six taxable years preceding
its current taxable year.
Under the 1996 Act, for its current and future taxable years, the Bank
is not permitted to make additions to its tax bad debt reserves. In addition,
the Bank is required to recapture (i.e., take into income) over a six year
period the excess of the balance of its tax bad debt reserves as of December 31,
1995 other than its supplemental reserve for losses on loans, if any, over the
balance of such reserves as of December 31, 1987. As a result of such recapture,
the Bank will incur an additional tax liability of approximately $114,000 which
is generally expected to be taken into income beginning in 1998 over a six-year
period.
Distributions. Under the 1996 Act, if the Bank makes "non-dividend
distributions" to the Company, such distributions will be considered to have
been made from the Bank's unrecaptured tax bad debt reserves (including the
balance of its reserves as of December 31, 1987) to the extent thereof, and then
from the Bank's supplemental reserve for losses on loans, to the extent thereof,
and an amount based on the amount distributed (but not in excess of the amount
of such reserves) will be included in the Bank's income. Non-dividend
distributions include distributions in excess of the Bank's current and
accumulated earnings and profits, as calculated for federal income tax purposes,
distributions in redemption of stock, and distributions in partial or complete
liquidation. Dividends paid out of the Bank's current or accumulated earnings
and profits will not be so included in the Bank's income.
The amount of additional taxable income triggered by a non-dividend is
an amount that, when reduced by the tax attributable to the income, is equal to
the amount of the distribution. Thus, if the Bank makes a non-dividend
distribution to the Company, approximately one and one-half times the amount of
such distribution (but not in excess of the amount of such reserves) would be
includable in income for federal income tax purposes, assuming a 35% federal
corporate income tax rate. The Bank does not intend to pay dividends that would
result in a recapture of any portion of its bad debt reserves.
Under the residential loan requirement provision, the recapture Bank's
1996 required by the 1996 Act will be suspended for each of two successive
taxable years, beginning with the Bank's 1996 taxable year, in which the Bank
originates a minimum of certain residential loans based upon the average of the
principal amounts of such loans made by the Bank during its six taxable years
preceding its current taxable year.
<PAGE>
Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax on
the net income of financial (including thrift) institutions. Taxable income for
franchise tax purposes will constitute federal taxable income before net
operating loss deductions and special deductions, adjusted for certain items,
including the addition of Indiana income taxes, property 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 exempt
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 Holding Company is also
subject to an annual franchise tax imposed by the State of Delaware.
Competition
American Savings faces strong competition both in originating real
estate loans and in attracting deposits. Competition in originating loans comes
primarily from commercial banks, credit unions, mortgage bankers and other
savings institutions, which also make loans secured by real estate located in
the Bank's market area. American Savings competes for loans principally on the
basis of the interest rates and loan fees it charges, the types of loans it
originates and the quality of services it provides to borrowers.
Competition for those deposits is principally from commercial banks,
credit unions, mutual funds, securities firms and other savings institutions
located in the same communities. The ability of the Bank to attract and retain
deposits depends on its ability to provide an investment opportunity that
satisfies the requirements of investors as to rate of return, liquidity, risk,
convenient locations and other factors. The Bank competes for these deposits by
offering competitive rates, convenient business hours and a customer oriented
staff.
Executive Officers
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company. Except
as otherwise indicated, the persons named have served as officers of the Company
since it became the holding company of the Bank and all positions described
below are with the Bank. There are no arrangements or understandings between the
persons named and any other person pursuant to which such officers were
selected.
Clement B. Knapp, Jr. Mr. Knapp, age 55, has served as Chairman of the
Board, President and Chief Executive Officer of the Bank since 1977 and has
acted in all of such capacities with the Company since its incorporation in
1993. Since joining the Bank in 1968 he has served in various capacities and
attended many banking schools and seminars. He is a graduate of Georgetown
University and Indiana University Indianapolis Law School. Mr. Knapp is also
active in several community organizations. Mr. Knapp is the husband of Denise L.
Knapp, Secretary of the Bank.
Louis A. Green. Mr. Green, age 54, joined the Bank in 1967. He has had
various positions including Controller and Vice President. Mr. Green was
appointed as Senior Vice President of the Bank in 1985 and of the Company in
1993 and is responsible for coordinating the Bank's loan activities. Prior to
joining the Bank, Mr. Green was an accountant in the Chicago Office of Ernst and
Ernst. He is also an active member in several trade and community organizations.
<PAGE>
Daniel T. Poludniak. Mr. Poludniak, age 56, has been Vice President,
Treasurer and Chief Financial Officer of the Bank since 1983 and the Company
since 1993. As Chief Financial Officer of the Bank, Mr. Poludniak is responsible
for the establishment and supervision of the accounting and data processing
activities of the Bank. Prior to joining American Savings in 1983, Mr. Poludniak
had twenty years experience in both local and Chicago banks.
Denise L. Knapp. Mrs. Knapp, age 50, was appointed as the Secretary of
the Bank in 1987 and of the Company in 1993. She has also served as a loan
officer since 1985 and as the Dyer branch manager since 1989. Since joining the
Bank in 1975, Mrs. Knapp has served in various capacities and is a member of
several executive committees of the Bank. Mrs. Knapp is also active in several
charitable organizations in the area. Mrs. Knapp is the wife of President Knapp.
Employees
At December 31, 1997, the Company had a total of 32 employees,
including 5 part-time employees. The Company's employees are not represented by
any collective bargaining group.
Management considers its employee relations to be good.
Year 2000 Compliance
The Company utilizes and is dependent upon data processing systems and
software to conduct its business. The data processing systems and software
include those developed and maintained by the Company's third-party data
processing vendor and purchased software which is run on in-house computer
networks. In 1997, the Company initiated a review and assessment of all hardware
and software to confirm that it will function properly in the year 2000. To
date, those vendors which have been contacted have indicated that their hardware
or software is or will be Year 2000 compliant in time frames that meet
regulatory requirements. The costs associated with the compliance efforts are
not expected to have a significant impact on the Company's ongoing results of
operations.
<PAGE>
Item 2. Description of Property
The Company conducts its business at its main office located in
Munster, Indiana. The following table sets forth information relating to each of
the Company's properties as of December 31, 1997.
<TABLE>
<CAPTION>
Total
Owned Approximate December 31,
Year or Square 1997 Book
Location Acquired Leased Footage Value
- -------- -------- ------ ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Main Office:
8230 Hohman Avenue 1963 Owned 8,400 $75,000
Munster, Indiana
Branch Offices:
1001 Main Street 1990 Leased 2,800 94,000
Dyer, Indiana
3801 Main Street 1994 Owned 2,900 33,000
East Chicago, Indiana
4521 Hohman Avenue 1983 Owned 1,600 54,000
Hammond, Indiana
</TABLE>
The Company believes that its current facilities are adequate to meet
the present and foreseeable needs of the Bank and the Company, subject to
possible future expansion.
The Company 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 Company at December 31, 1997 was $106,000.
Item 3. Legal Proceedings
The Company is involved from time to time as plaintiff or defendant in
various legal actions arising in the normal course of business. While the
ultimate outcome of these proceedings cannot be predicted with certainty, it is
the opinion of management, after consultation with counsel representing the
Company in the proceedings, that the resolution of these proceedings should not
have a material effect on the Company's results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the quarter ended December 31, 1997, the Company submitted no
matters to a vote of security holders, through the solicitation of proxies.
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Page 43 of the Company's 1997 Annual Report to Stockholders is herein
incorporated by reference.
Item 6. Management's Discussion and Analysis or Plan of Operation
Pages 5 through 16 of the Company's 1997 Annual Report to Stockholders
is herein incorporated by reference.
Item 7. Financial Statements
Pages 18 through 49 of the Company's 1997 Annual Report to Stockholders
are herein incorporated by reference.
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 in
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 9. Directors and 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 1998
Annual Meeting of Stockholders, a copy of which will be filed not later than 120
days after the close of the fiscal year.
Item 10. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Company's definitive Proxy Statement for the 1998 Annual
Meeting of Stockholders, 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 Company's definitive
Proxy Statement for the 1998 Annual Meeting of Stockholders, a copy of which
will be filed not later than 120 days after the close of the fiscal year.
Item 12. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Company's definitive Proxy Statement
for the 1998 Annual Meeting of Stockholders, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
<PAGE>
PART IV
Item 13. Exhibits and Reports on 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Reference to
Prior Filing
Regulation or Exhibit
S-K Exhibit Number Attached
Number Document Hereto
------ -------- ------
<S> <C> <C>
2 Plan of Purchase, Sale, Reorganization, Arrangement, Liquidation None
or Succession.....................................................
3 Articles of Incorporation and Bylaws.............................. *
4 Instruments defining the rights of security holders,
including indentures:
Common Stock Certificate......................................... *
9 Voting Trust Agreement............................................ None
10 Material contracts:
1996 Stock Option and Incentive Plan.............................. ***
Recognition and Retention Plan.................................... ***
Employee Stock Ownership Plan..................................... *
Employee Severance Compensation Plan.............................. *
Employment Agreements............................................. **
11 Statement re computation of per share earnings.................... None
13 Annual Report to Security Holders for the last fiscal year, Form
10-Q or 10QSB or quarterly report to security holders............. 13
16 Letter on change in certifying accountant......................... *
18 Letter on Change in Accounting Principles......................... None
21 Subsidiaries of Registrant........................................ 21
22 Published Report Regarding Matters Submitted to Vote.............. None
23 Consent of Experts and Counsel.................................... 23
24 Power of Attorney................................................. Not required
27 Financial Data Schedule........................................... 27
99 Additional Exhibits............................................... None
</TABLE>
- --------------------
* Filed on December 29, 1995 as exhibits to the Registrant's Registration
Statement No. 33-80991 on Form S-1. All of such previously filed
documents are hereby incorporated herein by reference in accordance
with Item 601 of Regulation S-B.
** Filed on December 29, 1995 as Exhibits 10.2 and 10.3 to the
Registrant's Registration Statement No. 33- 80991 on Form S-1. All of
such previously filed documents are hereby incorporated by reference in
accordance with Item 601 of Regulation S-B.
*** Filed on September 12, 1996, under Schedule 14A, as appendices to
definitive proxy materials. All of such previously filed documents are
hereby incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
<PAGE>
(b) Reports on Form 8-K:
No reports on Form 8-K have been filed during the three-month period
ended December 31, 1997.
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
Registrant caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
<PAGE>
AMB FINANCIAL CORPORATION
Date: March 30, 1998
By: /s/Clement B. Knapp, Jr.,
-------------------------
Clement B. Knapp, Jr.,
Chairman of the Board
President and Chief Executive
Officer
(Duly Authorized Representative)
Pursuant to the requirements of the Securities Exchange Act of 1934,
this Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/Clement B. Knapp /s/Ronald W. Borto
- ------------------- ----------------------------
Clement B. Knapp Ronald W. Borto
President and Chief Executive Officer Director
(Principal Executive and Operating Officer)
Date: March 30, 1998 Date: March 30, 1998
/s/Donald L. Harle /s/John C. McLaughlin
- ------------------ ---------------------
Donald L. Harle John C. McLaughlin
Director Director
Date: March 30, 1998 Date: March 30, 1998
/s/John G. Pastrick /s/Robert E. Tolley
- ------------------- --------------------
John G. Pastrick John G. Pastrick
Director Director
Date: March 30, 1998 Date: March 30, 1998
/s/Daniel T. Poludniak
- ----------------------
Daniel T. Poludniak
Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 30, 1998
<PAGE>
Exhibit Index
Exhibit No. Document
----------- --------
13 Annual Report
21 Subsidiaries of the Registrant
23 Consent of Cobitz, VandenBerg & Fennessy
27 Financial Data Schedule
Exhibit 13
Annual Report
<PAGE>
Table of Contents
President's Message .......................................................2
Selected Consolidated Financial Information ...............................3
Management's Discussion and Analysis of Financial
Condition and Results of Operations .....................................5
Independent Auditors' Report .............................................16
Consolidated Financial Statements ........................................17
Stockholder Information ..................................................50
Corporate Information ....................................................51
1
<PAGE>
President's Message
to Our Stockholders
On behalf of the Board of Directors, Officers and Employees of AMB Financial
Corp., and its wholly owned subsidiary, American Savings, FSB., I am pleased to
present our 1997 Annual Report.
AMB Financial Corp., trading on the NASDAQ (Small Cap) Stock Market under the
symbol "AMFC", closed at $15.875 on December 31, 1997 an increase of
approximately 20% over the $13.25 price on December 31, 1996. Earnings for the
year ended December 31, 1997 were $1,023,000 or $1.12 per basic share.
The Bank set goals for 1997 to enhance shareholder value, increase deposit and
lending volume and improve operating ratios. The Bank experienced strong loan
growth of $9.7 million (14.4%), deposit growth of $11.3 million (18 7%) and
total asset growth of $13.7 million (15.9%) in 1997. Our basic strategy for
increasing shareholder value is evidenced by our performance ratios. After
eliminating the 1996 special deposit insurance premium, our return on average
assets increased to 1 07% (27.4%), return on average equity increased to 7.06%
(40.6%), operating expense to average assets ratio dropped to 2.80% (8.8%) and
efficiency ratio decreased to 60.28% (14.2%).
We are continually working to develop goals and long-term strategies to increase
profitability, minimize risk, control expenses and enhance shareholder value.
Our primary focus continues to be directed towards enhancing shareholder equity
value while remaining a viable, independent banking concern, serving the needs
of the residents and businesses in Northwest Indiana.
Our financial performance and stock performance is available on our web site at
http://www.ambfinancial.com. Any comments on improving this site are actively
solicited.
The entire staff of AMB Financial Corp. appreciates your commitment and support,
and we look forward to a long and profitable relationship.
Sincerely,
Clement B. Knapp, Jr.
President
2
<PAGE>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
At December 31,
-----------------------------------------------------------
1997 1996 1995 1994 1993
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $99,796 $86,102 $69,788 $65,536 $65,130
Loans receivable, net 77,093 67,366 54,639 51,849 48,602
Investment securities 8,214 8,939 7,017 6,316 7,281
Mortgage-backed securities 3,494 4,019 1,479 1,593 2,362
Trading account securities 2 413 539 -- -- --
Deposits 71,700 60,411 59,588 58,281 59,086
Borrowed funds 12,000 9,500 3,000 1,000 --
Stockholder's equity 14,770 15,170 6,314 5,633 5,393
<CAPTION>
Year Ended December 31,
-----------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Operating Data:
Total interest income $ 7,156 $ 5,957 $ 5,222 $ 4,837 $ 4,915
Total interest expense 3,793 2,955 2,686 2,209 2,240
------- ------- ------- ------- -------
Net interest income 3,363 3,002 2,536 2,628 2,675
Provision for loan losses 74 -- 39 62 169
------- ------- ------- ------- -------
Net interest income after provision
for loan losses 3,289 3,002 2,497 2,566 2,506
------- ------- ------- ------- -------
Non-interest income:
Fees and service charges 349 263 203 224 199
Commission income 78 57 59 23 69
Gain on sale of securities 58 53 -- 59 19
Unrealized gain on investments 531 46 -- -- --
Gain on sale of real estate owned 5 28 2 178 --
Other 81 64 76 89 93
------- ------- ------- ------- -------
Total non-interest income 1,102 511 340 573 380
------- ------- ------- ------- -------
Non-interest expense:
Compensation and benefits 1,294 1,129 909 886 880
Office occupancy and equipment expense 353 334 328 347 340
Data processing 336 295 248 210 207
Federal deposit insurance 41 130 134 134 116
SAIF special assessment -- 389 -- -- --
Stock conversion expenses -- -- -- 332 --
Provision for loss on REO -- -- -- -- 147
Other 669 580 595 608 588
------- ------- ------- ------- -------
Total non-interest expense 2,693 2,857 2,214 2,517 2,278
------- ------- ------- ------- -------
Income before income taxes 1,698 656 623 622 608
Income tax provision 675 214 236 239 228
------- ------- ------- ------- -------
Net income 1,023 442 387 383 380
------- ------- ------- ------- -------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------
1997 1996 1995 1994 1993
---------------------------------------------------
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
Return on average assets (1)
Return on average stockholders' 7.06 3.28 6.40 6.74 7.24
equity(2)
Average stockholders' equity to
average assets 15.10 16.78 8.76 8.61 8.20
Stockholders' equity to total assets 14.77 17.62 9.05 8.60 8.28
Interest rate spread during period 3.14 3.37 3.84 4.11 4.30
Net interest margin (3) 3.71 3.97 4.03 4.25 4.45
Operating expenses to average assets (4) 2.80 3.56 3.29 3.31 3.33
Efficiency ratio (5) 60.28 70.23 76.99 73.72 70.19
Non-performing assets to total assets 0.33 0.35 0.53 0.76 0.88
Allowance for loan losses to non performing loans 133.12 116.27 97.43 66.00 52.15
Allowance for loan losses to loans
receivable, net 0.53 0.53 0.66 0.62 0.55
Ratio of average interest-earning
assets to average interest-bearing 1.14x 1.16x 1.04x 1.04x 1.04x
liabilities
Number of full-service offices 4 4 4 4 4
</TABLE>
(1) Return on average assets for 1996 would have been .84% without the SAIF
special assessment.
(2) Return on average stockholders' equity for 1996 would have been 5.02%
without the SAIF special assessment.
(3) Calculation is based upon net interest income before provision for loan
losses divided by interest earning assets.
(4) For purposes of calculating this ratio, operating expenses for 1993 exclude
the provision for losses on real estate owned and for 1994 exclude the
write-off of stock conversion expenses. The 1996 ratio would have been
3.07% without the SAIF special assessment.
(5) Non-interest expense, excluding the provision for loss on real estate owned
in 1993, the write-off of stock conversion expenses in 1994 and the SAIF
special assessment in 1996, divided by net interest income plus other
income except for gains and losses on securities available for sale.
4
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
General
AMB Financial Corp. (the "Company") is the unitary thrift holding
company for American Savings FSB, (the "Bank"), a federally chartered savings
bank and a wholly-owned subsidiary of the Holding Company. Collectively, the
Holding Company and the Bank are referred to herein as the "Company." On March
29, 1996, the Bank converted from a mutual savings bank to a stock savings bank
(the "Conversion"). Concurrent with the Conversion, the Company sold 1,124,125
shares of its common stock in a subscription and community offering at a price
of $10.00 per share.
The Company's primary market area consists of the northwest portion of
Lake County, Indiana. Business is conducted from its main office at 8230 Hohman
Avenue, Munster, Indiana, as well as three full-service banking offices located
in Dyer, East Chicago and Hammond, Indiana. The Bank is a community-oriented
savings institution whose business primarily consists of accepting deposits from
customers within its market area and investing those funds in mortgage loans
secured by one-to four-family residences. To a lesser extent, funds are invested
in multi-family, commercial real estate, consumer, commercial business,
construction, construction and land loans. The Company also invests in
mortgage-backed and other investment securities.
The Company's results of operations are primarily dependent on net
interest income, which is the difference between the interest income on its
interest-earning assets, such as loans and securities, and the interest expense
on its interest-bearing liabilities, such as deposits and borrowings. Net
interest income depends upon the volume of interest earning assets and
interest-bearing liabilities and the interest rate earned or paid on them,
respectively. Non-interest income primarily consists of service charges, fees on
deposit and loan products and, on occasion, securities gains. The Company's
non-interest expenses primarily consist of employee compensation and benefits,
occupancy and equipment expenses, federal deposit insurance costs, data
processing service fees and other operating expenses.
The Company's results of operations are significantly affected by
general economic and competitive conditions (particularly changes in market
interest rates), government policies, changes in accounting standards and
actions of regulatory agencies. Future changes in applicable laws, regulations
or government policies may have a material impact on the Company. Lending
activities are influenced by the demand for and supply of housing, competition
among lenders, the level of interest rates and the availability of funds.
Deposit flows and costs of funds are influenced by prevailing market interest
rates (including rates on non-deposit investment alternatives), account
maturities, and the levels of personal income and savings in the Company's
market area.
Operating Strategy
The Company's basic mission is to maintain its focus as an independent,
community-oriented financial institution serving customers in its primary market
area. The Board of Directors has sought to accomplish this mission through an
operating strategy designed to maintain capital in excess of regulatory
requirements and manage, to the extent practical, the Company's loan
delinquencies and vulnerability to changes in interest rates. The key components
of the Company's operating strategy are to: (i) focus its lending operations on
the origination of loans secured by one-to-four-family residential real estate;
(ii) supplement its one-to-four-family residential lending activities with
multi-family,
5
<PAGE>
commercial real estate, consumer, commercial business, construction and land
loans; (iii) augment its lending activities with investments in mortgage-backed
and other securities; (iv) emphasize adjustable rate and/or short and medium
duration assets; (v) build and maintain its regular savings, transaction, money
market and club accounts; and (vi) increase, at a managed pace, the volume of
the Company's assets and liabilities.
Comparison of Financial Conditions at December 31, 1997 and 1996.
Total assets of the Company increased $13.7 million in the year ending
December 31, 1997, from $86.1 million in 1996 to $99.8 million in 1997. This
increase of 15.9% was primarily attributable to the Company's loan growth. The
Company's asset growth was funded by an increase in savings deposits of $11.3
million and additional advances from the FHLB of Indianapolis in the amount of
$2.5 million.
Cash and cash equivalents increased by $3.1 million at December 31,
1997 as excess funds received from the deposit growth were retained in
anticipation of loan funding and for general liquidity purposes.
Investment securities available for sale decreased $700,000 to $8.2
million at December 31, 1997 as a result of investment sales of $4.0 million and
$750,000 in proceeds from maturing securities offset by $4.0 million in new
purchases. These sales were from a medium term U.S. Government mutual fund while
the new purchases were primarily in the same fund and to a lesser extent, in
medium term U.S. Treasury notes.
Loans receivable increased to $77.1 million at December 31, 1997, a
$9.7 million or 14.4% increase, as new loan originations of both residential and
non-residential loans of $19.9 million and loan purchases of $6.9 million
exceeded loan repayments of $16 9 million (See note 5 of the Notes to
Consolidated Financial Statements). Although loan originations and purchases
were slightly lower than during 1996, the Company continues to remain focused on
an aggressive lending effort as evidenced by the better than 40% increase in
loans receivable over the last two years.
Total deposits at December 31, 1997 increased by $11.3 million, or
18.7%, due to net deposit receipts of $8.9 million and interest credited of $2.4
million. The deposit growth was primarily attributable to the Company's
continued aggressive advertising and competitive rates with regards to special
certificate promotions (primarily 9, 11, and 14 month terms) during 1997.
Borrowed funds, which consist of FHLB of Indianapolis advances,
increased $2.5 million to $12.0 million at December 31, 1997. The increase in
borrowed funds was utilized to fund loam production during the year. Most of the
new borrowings were at maturity terms of three years.
Stockholders' equity decreased $400,000 to $14.8 million at December
31, 1997 form $15.2 million at December 31, 1996. This decrease was primarily
due to the buyback of treasury stock in the amount of $1.5 million and the
declaration of dividends on stock of $230,000, which was offset by net income of
$1.0 million, an increase of $41,000 in the unrealized gain on securities
available for sale and normal amortization of RRP and ESOP benefits of $204,000.
6
<PAGE>
Analysis of Net Interest Income
Net interest income represents the difference between interest earned
on interest-earning assets and interest paid on interest-bearing liabilities.
Net interest income is affected by the relative amounts of interest-earning
assets and interest-bearing liabilities, and the interest rates earned or paid
on them.
The following table presents, for the periods indicated, the total
dollar amounts 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 averages balances are monthly average balances and include
non-accruing loans. Management does not believe that the use of month-end
balances instead of daily average balances has caused any material differences
in the information presented.
<TABLE>
<CAPTION>
Year Ended December 31
(Dollars in thousands)
--------------------------------------------------------------------------
1997 1996
--------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest-Earning Assets
Loans receivable (1) 71,473 6,003 5.40% 59,165 4,949 8.36%
Mortgage-backed securities 3,783 257 8.79% 3,396 230 6.77%
Investment securities 10,494 620 5.91% 8,565 521 6.08%
Interest-bearing deposits 4,135 223 5.39% 3,876 214 5.52%
FHLB stock 658 53 8.05% 546 43 7.88%
--------------------------------------------------------------------------
Total interest-earning assets $90,543 $ 7,156 7.90% $75,548 $ 5,957 7.89%
--------------------------------------------------------------------------
Interest-Bearing Liabilities
Passbook accounts 16,407 488 2.97% 16,490 510 3.09%
Demand and NOW accounts 9,642 233 2.42% 9,258 226 2.44%
Certificate accounts 42,051 2,378 5.66% 36,389 2,025 5.56%
Borrowings 11,629 693 5.96% 3,186 194 6.09%
--------------------------------------------------------------------------
Total interest-bearing liabilities $79,729 $ 3,792 4.76% $65,323 2,955 4.52%
======= ------- ---- ======= ----- ----
Net interest income $ 3,364 $3,002
======= ======
Net interest rate spread 3.14% 3.37%
==== ====
Net earning assets $10,814 $10,225
======= =======
Net yield on average
interest-earning assets 3.71% 3.97%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.14x 1.16x
==== ====
<PAGE>
<CAPTION>
Year Ended December 31
(Dollars in thousands)
-------------------------------------
1995
-------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
-------------------------------------
<S> <C> <C> <C>
Interest-Earning Assets
Loans receivable (1) 53,107 4,570 8.61%
Mortgage-backed securities 1,587 106 6.68%
Investment securities 6,383 418 6.55%
Interest-bearing deposits 1,369 85 6.21%
FHLB stock 546 43 7.88%
-------------------------------------
Total interest-earning assets $62,992 $ 5,222 8.29%
-------------------------------------
Interest-Bearing Liabilities
Passbook accounts 16,597 544 3.28%
Demand and NOW accounts 8,969 245 2.73%
Certificate accounts 33,240 1,799 5.41%
Borrowings 1,567 98 6.25%
-------------------------------------
Total interest-bearing liabilities $60,373 2,686 4.45%
======= ----- ----
Net interest income $2,536
======
Net interest rate spread 3.84%
====
Net earning assets $ 2,619
=======
Net yield on average
interest-earning assets 4.03%
====
Average interest-earning assets to
average interest-bearing liabilities 1.04x
====
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for losses.
The table below presents the extent to which changes in interest rates
and changes in the volume of interest-earning assets and interest-bearing
liabilities have affected the Company s interest income and interest expense
during the period indicated. Information is provided in each category with
respect to (i) changes attributable to changes in rate (changes in rate
multiplied by prior volume), (ii) changes attributable to changes in volume
(changes in volume multiplied by prior rate), (iii) changes attributable to the
combined impact of volume and rate (changes in the rate multiplied by the
changes in the volume), and (iv) the net change. The changes attributable to the
combined impact of volume and rate have been allocated proportionately to the
changes due to volume and the changes due to rate.
7
<PAGE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 Compared to 1996 1996 Compared to 1995
Increase (Decrease) Due to Increase (Decrease) Due to
-------------------------- --------------------------
Rate/ Rate/
Rate Volume Volume Net Rate Volume Volume Net
---- ------ ------ --- ---- ------ ------ ---
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest-earning assets:
Loans Receivable, net 21 1,029 4 1,054 (128) 522 (15) 379
Mortgage-backed
securities 1 26 -- 27 1 121 2 124
investment securities (15) 117 (3) 99 (30) 143 (10) 103
interest-bearing deposit (5) 14 -- 9 (10) 156 (17) 129
FHLB Stock 1 9 -- 10 -- -- -- --
--- ----- ---- ----- ---- ---- ---- ----
Totals 3 1,195 1 1,199 (167) 942 (40) 735
--- ----- ---- ----- ---- ---- ---- ----
Interest-bearing liabilities:
Passbook accounts (20) (2) -- (22) (31) (3) -- (34)
Demand and Now
accounts (2) 9 -- 7 (26) 8 (1) (19)
Certificate accounts 33 315 5 353 51 107 5 226
Borrowed funds (4) 514 (11) 499 (2) 101 (3) 96
--- ----- ---- ----- ---- ---- ---- ----
Totals 7 836 (6) 837 (8) 114 1 269
--- ----- ---- ----- ---- ---- ---- ----
Net change in net
interest income 362 466
--- ---
</TABLE>
Comparison of Operating Results for the Years Ended December 31,1997 and 1996.
Net Income. The Company's net income for the year ended December 31, 1997 was
$1.0 million as compared to S442,000 for the same period in 1996, an increase of
$581,000. This increase was due primarily to an increase in net interest income
of $361,000, an increase in non-interest income of $587,000, and a decrease m
non-interest expense of $167,000, offset by an increase of $74,000 in provision
for loan losses and an increase of $461,000 in tax provisions . Net income for
the year ended December 31, 1996 was reduced by a one-time special assessment of
$389,000 ($234,000 after taxes) imposed by federal legislation to recapitalize
the Savings Association insurance Fund ("SAIF").
Interest Income. Total interest income for the year ended December 31, 1997
increased $1.2 million or 20.1%, as compared to the prior year. The increase in
interest income was the result of an increase in average interest earning assets
of $15.0 million. The increase in average interest-earning assets was the result
of a $12.3 million increase in the average balance of loans receivable, a
$387,000 increase in the average balance of mortgage-backed securities, a $1.9
million increase in the average balance of investment securities, a $259,000
increase in the average balance of interest-bearing deposits, and a $ 112,000
increase in the average balance of FHLB stock. These increases reflect the
Company's investment of net proceeds from an increase in the average balance of
interest-bearing liabilities, as well as a full year of investment of the
proceeds of the Company's March 31,1996 stock offering. During the year ended
December 31, 1997, the average yield on interest earning assets increased
slightly to 7.90% from 7.89% during the year ended December 31, 1996.
8
<PAGE>
Interest Expense. Total interest expense for the year ended December 31, 1997
increased $837,000, or 28 3% to $3.8 million as compared to $3.0 million in the
prior year. Deposit interest increased by $338,000, primarily as a result of the
$6.0 million increase in the average balance of deposit accounts and the .11%
increase in the cost of deposits. The average certificate deposit base increased
by $5.7 million in 1997 as the Bank offered special premium rates. Interest
expense on borrowed funds increased $499,000, to $693,000 for the year ended
December 31, 1997. The average balance of borrowed funds increased $8.4 million
to $11.6 million for the year ended December 31, 1997. This increase was due to
funding requirements for new mortgage loans and to a lesser extent for normal
operating liquidity.
Provision for Loan Losses. The determination of the allowance for loan losses
involves material estimates that are susceptible to significant change in the
near term. The allowance for loan losses is maintained at a level deemed
adequate to provide for losses through charges to operating expense. The
allowance is based upon past loss experience and other factors which, in
management's judgment, deserve current recognition in estimating losses. Such
other factors considered by management include growth and composition of the
loan portfolio, the relationship of the allowance for losses to outstanding
loans, and economic conditions.
Provision of $74,000 was recorded during the year ended December 31, 1997 while
no provision was recorded in the comparable 1996 period. The increase in the
provision for losses on loans was due to the growth in the loan portfolio and is
based upon management's review of the loan portfolio by property type and
delinquency status. There were no significant individual loans which contributed
to the increase in the allowance, and there were no regulato r requests for
additional provisions for loan losses during the year ended December 31 1997 or
1996 The Bank will continue to review its allowance for loan losses and make
future provisions as economic and regulatory conditions dictate. Although the
Bank maintains its allowance for loan losses at a level that it considers to be
adequate to provide for losses, there can be no assurance that future losses
will not exceed estimated amounts or that additional provisions for loan losses
will not be required in future periods.
Non-Interest Income. The Company's non-interest income increased $591,000 to
$1.1 million for the year ended December 31, 1997 compared to $511,000 for the
previous year. The increase was due primarily to an increase in unrealized gains
on investment securities available for trade of $485,000, due primarily to the
effect of favorable market conditions on a thrift equity fund in which the
Company has an interest, a gain of $36,000 on the sale of investment securities
held for trade, and an increase in deposit related fees of $86,000 due to
general increases in many service fee categories.
Non-Interest Expense. The Company's non-interest expense decreased $164,000 to
$2.7 million for the year ended December 31, 1997 compared to $2.9 million for
the previous year. The decrease was primarily the result of a $390,000 charge,
reflected in the 1996 period, for the special insurance assessment imposed by
the FDIC to recapitalize the SAIF. As a result of the recapitalization of the
SAIF, quarterly insurance premiums decreased by $89,000 as compared to the prior
year period. This decrease in cost was partially offset by an increase in
staffing costs of $165,000 during the year due to normal salary and benefit
increases and increases in the expense recognition of the ESOP and the RRP, and
an increase in advertising costs of $44,000 associated with the marketing of the
special certificate of deposit program and loan solicitations. The ESOP expense
increased because of the increase of the stock price as well as the maintenance
of the plan for an entire year rather than nine months as was the case for 1996.
The RRP expense increased because that plan was not implemented until October of
1996. In addition data processing costs increased $40,000 associated with the
servicing and maintenance of the new ATM machines and increased debit card
activity, and other operating expenses increased $80,000 primarily
9
<PAGE>
reflecting increased expenses relating to operations as a public company for the
full year.
Provision for Income Taxes. Tax expense for the year ended December 31, 1997
increased $461,000 to $675,000 compared to $214,000 for the comparable year in
1996. Income taxes increased primarily as a result of increased income before
taxes.
Comparison of Operating Results for the Years Ended December 31,1996 and 1995.
Net Income. The Company's net income for the year ended December 31, 1996 was
$442,000 as compared to $387,000 for the same period in 1995, an increase of
$55,000. This increase was due primarily to an increase in net interest income
of $465,000, and an increase in non-interest income of $171,000, offset in part
by an increase in non-interest expense of $642,000. Net income for the year
ended December 31, 1996 was reduced by a one-time special assessment of $390,000
($234,000 after taxes) imposed by federal legislation to recapitalize the
Savings Association Insurance Fund ("SAIF").
Interest Income. Total interest income for the year ended December 31, 1996
increased $735,000, or 14.1%, as compared to the prior year. The increase in
interest income was the result of an increase in average interest-earning assets
of $12.6 million. The increase in average interest-earning assets was the result
of a $6.1 million increase in the average balance of loans receivable, a $1.8
million increase in the average balance of mortgage-backed securities, a $2.2
million increase in the average balance of investment securities and a $2.5
million increase in the average balance of interest-bearing deposits. These
increases reflect the Company's investment of net proceeds received from the
stock conversion as well as from an increase in the average balance of
interest-bearing liabilities. During the year ended December 31, 1996, the
average yield on interest-earning assets declined to 7.89% from 8.29% during the
year ended December 31, 1995. The decline in yield on average interest earning
assets was due primarily to a higher proportion of lower yielding investments
acquired as a result of investing the stock conversion proceeds.
Interest Expense. Total interest expense for the year ended December 31, 1996
increased $270,000, or 10% to $3.0 million as compared to $2.7 million in the
prior year. Deposit interest increased by $ 173,000, primarily as a result of
the $3.3 million increase in the average balance of deposit accounts and the
.04% increase in the cost of savings. The average certificate deposit base
increased by $3.1 million in 1996 as the Bank offered limited special premium
rates and solicited new public funds. Interest expense on borrowed funds
increased $97,000, or double to $194,000 for the year ended December 31, 1996.
The average balance of borrowed funds increased $1.6 million to $3.2 million for
the year ended December 31, 1996. This increase was due to funding requirements
for new mortgage loans and to a lesser extent for normal operating liquidity.
Provision for Loam Losses. No provision for loan losses was recorded during the
year ended December 31, 1996 while a $39,000 provision was recorded in the
comparable 1995 period. The decrease in the provision for losses on loans was
due to the continued low level of past due and problem loans. The Bank will
continue to review its allowance for loan losses and make future provisions as
economic and regulatory conditions dictate. Although the Bank maintains its
allowance for loan losses at a level that it considers to be adequate to provide
for losses, there can be no assurance that future losses will not exceed
estimated amounts or that additional provisions for loan losses will not be
required in future periods.
Non-Interest Income. TheCompany'snon-interest income increased $173,000 to
$511,000 for the year
10
<PAGE>
ended December 31, 1996 compared to $340,000 for the previous year. The increase
was due primarily to an increase in loan fees of $29,000 resulting from higher
loan volume, an increase in deposit related fees of $30,000 due to general
increases in many service fee categories, gains on the sale of investment
securities available for sale of $53,000, an unrealized gam on securities held
for trade of $46,000, and gain on sale of real estate owned of $26,000, offset
by a decrease in other operating income of $12,000.
Non-Interest Expense. The Company's non-interest expense increased $642,000 to
$2.8 million for the year ended December 31, 1996 compared to $2.2 million for
the previous year. The increase primarily resulted from a $389,000 charge for
the amount of the special insurance assessment to recapitalize the SAIF.
Staffing costs also increased $220,000 during the year due to salary and benefit
increases of $ 103,000, the expense recognition of the ESOP of $ 101,000 and the
RRP of $ 16,000. In addition there was approximately $94,000 of expenses
relating to operations as a public company which did not occur in the previous
year.
Provision for Income Taxes. Tax expense for the year ended December 31, 1996
decreased $22,000 to $214,000 compared to $236,000 for the comparable year in
1995. Income taxes decreased by $32,000 primarily as a result of a decrease in
the effective tax rates between the periods.
Quantitative and Quantitative Disclosure of Market Risk
The principal objectives of the Company's interest rate risk management
activities are to: (i) define an acceptable level of risk based on the Company's
business focus, operating environment, capital and liquidity requirements, and
performance objectives; (ii) quantify and monitor the amount of interest rate
nsk mherent in the asset11iability structure; and (iii) modify the Company's
asset/liability structure, as necessary, to manage interest rate risk and
maintain net interest margins in changing rate environments. Management seeks to
reduce the vulnerability of the Company's operating results to changes m
interest rates and to manage the ratio of interest rate sensitive assets to
interest rate sensitive liabilities with specified maturities or repricing
periods. The Company does not currently engage in the use of off-balance sheet
derivative instruments to control interest rate risk. Even though such activity
may be permitted with the approval of the Board of Directors, management does
not intend to engage in such activity in the immediate future.
Notwithstanding the Company's interest rate nsk management activities, the
potential for changing interest rates is an uncertainty that could have an
adverse effect on the earnings and net asset value of the Company. When
interest-bearing liabilities mature or reprice more quickly than
interest-earning assets in a given period, a significant increase in market
interest rates could adversely affect net interest income. Similarly, when
interest earning assets mature or reprice more quickly than interest-bearing
liabilities and net asset value, falling interest rates could result in a
decrease in net interest income and net asset value. Finally, a flattening of
the "yield curve" (i.e., a narrowing of the spread between long- and short-term
interest rates), could adversely impact net interest income to the extent that
the Company's assets have a longer average term than its liabilities.
In managing the Company's asset/liability position, the Board and
management attempt to manage the Company's interest rate risk while enhancing
net interest margins. However, the Board of Directors continues to believe that
the increased net interest income resulting from a mismatch in the maturity of
the Company's asset and liability portfolios can, during periods of declining or
stable interest rates and periods in which there is a substantial positive
difference between long- and short-term interest rates (i.e., a "positively
sloped yield curve"), provide high enough returns to justify the increased
exposure to sudden
11
<PAGE>
and unexpected increases in interest rates. As a result, the Company's results
of operations and net portfolio values remain significantly vulnerable to
increases in interest rates and to fluctuations in the difference between long-
and short-term interest rates.
Consistent with its asset/liability management philosophy, the Company
has taken several steps to manage its interest rate risk. First, the Company
maintains a portfolio of interest rate sensitive adjustable-rate loans. At
December 31, 1997, adjustable-rate loans represented $26.7 million or 33.55% of
the total loan portfolio. Second, most of the mortgage-backed securities
purchased by the Company in recent years had adjustable interest rates and/or
short or intermediate effective terms to maturity, At December 31, 1997, the
Company had $700,000 of adjustable-rate mortgage-backed pass-through securities,
with anticipated lives of five years or less. Third, a significant portion of
the Company's other debt securities (primarily U.S. Government and agency
securities) are short- or intermediate-term instruments with $7.7 million of
such securities contractually maturing within five years of December 31, 1997.
Fourth, the Company bas a substantial amount of regular savings, transaction,
money market and club accounts which may be less sensitive to changes in
interest rates than certificate accounts. At December 31, 1997, the Company bad
$16.4 million of regular savings accounts, $2.9 million of money market accounts
and $7.3 million of NOW, checking and club accounts. Overall, these accounts
comprised 37.0% of the Company's total deposit base.
One approach used by management to quantify interest rate risk is the net
portfolio value ("NPV") methodology used by the OTS as part of its capital
regulations. NPV is generally considered to be the present value of the
difference between expected incoming cash flows on interest-earning and other
assets and expected incoming cash flow on interest-earning and other assets and
expected outgoing cash flows on interest-bearing and other liabilities. The
application attempts to quantify interest rate risk as the change in the NPV
which would result form a theoretical 200 basis point (1 basis point equals
.01% change in market interest rates.
Presented below, as of December 31, 1997, is an analysis of the Bank's interest
rate risk as measured by changes in NPV for instantaneous and sustained parallel
shifts of 100 basis points in market interest rates. As illustrated m the table,
NPV is more sensitive to rising rates than declining rates. From am overall
perspective, such difference in sensitivity occurs principally because, as rates
rise, borrowers do not prepay fixed rate loans as quickly as they do when
interest rates are declining. Also, the interest the Company would pay on its
deposits would increase rapidly because the Company's deposits generally have
shorter periods to repricing.
12
<PAGE>
<TABLE>
<CAPTION>
Change in Interest Rates Estimated NPV Estimated Increase (Decrease) in NPV
(Basis Points) Amount Amount Percent
-------------- ------ ------ -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
+400 $ 8,229 $(4,958) (38)
+300 9,591 (3,596) (27)
+200 10,942 (2,245) (17)
+100 12,196 (991) ( 8)
--- 13,187
-100 13,877 690 5
-200 14,419 1,232 9
-300 15,108 1,921 15
-400 16,033 2,846 22
</TABLE>
Certain assumptions utilized by the OTS in assessing the interest rate
risk of thrift institutions were employed in preparing the preceding table.
These assumptions relate to interest rates, loan prepayment rates, deposit decay
rates, and the market values of certain assets under the various interest rate
scenarios. It was also assumed that delinquency rates will not change as a
result of changes in interest rates although there can be no assurance that this
will be the case. Even if interest rates change in the designated amounts, there
can be no assurance that the Bank's assets and liabilities would perform as set
forth above. in addition a change in U.S. Treasury rates in the designated
amounts accompanied by a change in the shape of the Treasury yield curve would
cause significantly different changes to the NPV than indicated above.
Other types of market risk, such as foreign currency exchange risk and
commodity price risk, do not arise in the normal course of the Company's
business activities.
Liquidity and Capital Resources
The Company's primary sources of funds are deposits, principal and
interest payments on loans and securities and, to a lesser extent, borrowings
and proceeds from the sale of loans and securities. While maturities and
scheduled amortization of loans and securities provide an indication of the
timing of the receipt of funds, other sources of funds such as loan prepayments
and deposit inflows are less predictable due to the effects of changes in
interest rates, economic conditions and competition.
The primary investing activities of the Company are the origination of
real estate and other loans, and the purchase of mortgage-backed and other
securities. During the years ended December 31, 1997, and 1996, the Company's
disbursements for loan originations totaled $19.9 million, and $22.9 million
respectively. For the years ended December 31, 1997, and 1996, purchases of
mortgage-backed securities totaled $0 and $3.0 million, respectively, and
purchases of other securities totaled $4.0 million and $3.1 million,
respectively. These activities were funded primarily by net deposit inflows,
borrowings and principal repayments on loans and securities.
For the years ended December 31, 1997, and 1996, the Company
experienced net increases in deposits (including the effect of interest
credited) of $11.3 million, and $800,000 respectively. The increase in fiscal
1997 reflects a concerted effort to increase the deposit base through marketing
local
13
<PAGE>
special rate certificates for periods of 9 through 21 months. The nominal
increase in fiscal 1996 reflected relatively flat market interest rates,
customer preference for alternative investments, and deposits withdrawn to
purchase stock in the Conversion. Proceeds from FHLB advances were $7.0 million
in fiscal 1997, and $8.5 million in fiscal 1996. FHLB advances of $4.5 million
and $2.0 million were repaid in fiscal 1997 and 1996 respectively.
The Company may borrow funds from the FHLB of Indianapolis subject to
certain limitations. Based on the level of qualifying collateral available to
secure advances at December 31, 1997, the Company's borrowing limit from the
FHLB of Indianapolis was approximately $30.0 million, with unused borrowing
capacity of $ 18.0 million at that date.
The Company is required to maintain an average daily balance of liquid
assets as a percentage of net withdrawable deposit accounts plus short-term
borrowings as defined by OTS regulations. The minimum required liquidity
liquidity ratio is currently 4.0%. At December 31, 1997 and 1996, the Company's
liquidity ratio was 16.3%, and 15.4% respectively.
The Company's most liquid assets are cash and cash equivalents, which
include mainly liquid short-term investments (such as money market mutual funds)
that are readily convertible to known amounts of cash. The level of these assets
is dependent on the Company's operating, financing and investing activities
during any given period. At December 31, 1997 and 1996, cash and cash
equivalents totaled $5.7 million and $2.6 million, respectively.
At December 31, 1997, the Company had outstanding loan origination
commitments of $95,000, undisbursed construction loans in process of $2.0
million and approved but unused lines of credit extended to customers of $4.3
million. The Company anticipates that it will have sufficient funds available to
meet its current loan origination and other commitments. Certificates of deposit
scheduled to mature in one year or less from December 31, 1997 totaled $36.4
million. Based on the Company's most recent experience and pricing strategy,
management believes that a significant portion of such deposits will remain with
the Company.
The OTS regulations require savings associations, such as the Bank, to
meet two minimum capital standards: a leverage ratio requirement of 3 - 4% of
core capital to such adjusted total assets; and a risk-based capital ratio
requirement of 8% of core and supplementary capital to total risk-based assets.
The Bank satisfied these minimum capital standards at December 31, 1997 with
tangible and leverage capital ratios of 9.76% and a total risk-based capital
ratio of 18.51%. In determining the amount of risk-weighted assets for purposes
of the risk-based capital requirement, a savings bank must compute its
risk-based assets by multiplying its assets and certain off-balance sheet items
by risk-weights, which range from 0% for cash and obligations issued by the
United States Government or its agencies to 100% for consumer and commercial
loans, as assigned by the OTS capital regulations. These capital requirements,
which are applicable to the Bank only, do not consider additional capital held
at the Company level, and require certain adjustments to stockholder's equity to
arrive at the various regulatory capital amounts.
The Bank may not declare or pay cash dividends on or repurchase any of
its shares of common stock if the effect thereof would cause equity to be
reduced below applicable regulatory capital requirements or the amount required
to be maintained for the liquidation account established in connection with the
Conversion. In September 1997 the Bank paid a dividend of $2.5 million to the
Company. Unlike the Bank, the Company is not subject to OTS regulatory
restrictions on the payment of dividends to its shareholders; however, it is
subject to the requirements of Delaware law. Delaware law
14
<PAGE>
generally limits dividends to an amount equal to the excess of the net assets of
the Company (the amount by which total assets exceed total liabilities) over its
statutory capital, or if there is no such excess, to its profits for the current
and/or immediately preceding fiscal year.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements and Notes thereto presented
herein have been prepared in accordance with GAAP, which require the measurement
of financial position and operating results in terms of historical dollars
without considering the changes in the relative purchasing power of money over
time due to inflation. The impact of inflation is reflected in the increased
cost of the Company's operations. Unlike industrial companies, nearly all of the
assets and liabilities of the Company are monetary in nature. As a result,
interest rates have a greater impact on the Company's performance than do the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or to the same extent as the price of goods and services.
Impact of New Accounting Standards
Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities. In December 1996, the FASB issued Statement of
Financial Accounting Standards No. 127 ("SFAS 127"), "Deferral of the Effective
Date of Certain Provisions of FASB Statement No. 125". The statement delays for
one year the implementation of SFAS 125, as it relates to (1) secured borrowings
and collateral and (2) for the transfers of financial assets that are part of
repurchase agreements, dollar-rolls, securities lending and similar
transactions. The Company has adopted portions of SFAS 125 (those not deferred
by SFAS 127) effective January 1, 1997. Adoption of these portions did not have
a significant effect on the Company's financial condition or results of
operations. Based on its review of SFAS 125, management does not believe that
adoption of the portions of SFAS 125 which have been deferred by SFAS 127 will
have a material effect on the Company.
Reporting Comprehensive Income. In June 1997, the FASB issued Statement
of Financial Accounting Standards No. 130, "Reporting Comprehensive income"
("SFAS 130"). This statement establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains, losses) in a
full set of general-purpose financial statements. SFAS 130 is effective for
fiscal years beginning after December 15, 1997. The Company has not yet
determined the impact of adopting this statement.
Disclosures About Segments of an Enterprise and Related Information.
In June 1997, the FASB issued Statement of Financial Accounting Standards No.
131, "Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131 ") which becomes effective for fiscal years beginning after December
15, 1997. SFAS 131 establishes standards for the way that public business
enterprises report information about operating segments and requires enterprises
to report selected information about operating segments in interim financial
reports. The Company has not yet determined the impact of adopting this
statement.
15
<PAGE>
The foregoing does not constitute a comprehensive summary of all material
changes or developments affecting the manner in which the Company keeps its
books and records and performs its financial accounting responsibilities. It is
intended only as a summary of some of the recent pronouncements made by the FASB
which are of particular interest to financial institutions.
16
<PAGE>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Audited Financial Statements
December 31, 1997
<PAGE>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Contents
Independent Auditors' Report....................................................
Consolidated Statements of Financial Condition,
as of December 31, 1997 and 1996..............................................
Consolidated Statements of Income, years ended
December 31, 1997, 1996 and 1995..............................................
Consolidated Statements of Changes in Stockholders' Equity,
three years ended December 31, 1997...........................................
Consolidated Statements of Cash Flows, years ended
December 31, 1997, 1996 and 1995..............................................
Notes to Consolidated Financial Statements......................................
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AMB Financial Corp.
We have audited the consolidated statements of financial condition of
AMB Financial Corp. and subsidiaries as of December 31, 1997 and 1996 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ending December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatements. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
consolidated financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of AMB
Financial Corp. and subsidiaries at December 31, 1997 and 1996, and the results
of their operations and their cash flows for each of the three years in the
period ending December 31, 1997, in conformity with generally accepted
accounting principles.
/s/Cobitz, Vandenberg & Fennessy
- --------------------------------
Cobitz, Vandenberg & Fennessy
February 13, 1998
Palos Hills, Illinois
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
1997 1996
----------- ----------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 2,510,527 1,473,962
Interest-bearing deposits 3,176,428 1,093,405
-------------- --------------
Total cash and cash equivalents 5,686,955 2,567,367
Investment securities, available for sale, at fair value (note 2) 8,213,614 8,938,937
Investment securities held for trade (note 3) 2,412,967 539,500
Mortgage-backed securities, available for sale, at fair value (note 4) 3,494,035 4,018,835
Loans receivable (net of allowance for loan losses:
1997 - $410,383; 1996 - $354,631) (note 5) 77,093,229 67,365,632
Real estate owned 27,481 -
Stock in Federal Home Loan Bank of Indianapolis 725,400 545,600
Office properties and equipment - net (note 6) 471,730 510,603
Accrued interest receivable (note 7) 533,509 452,955
Prepaid expenses and other assets (note 8) 1,136,860 1,162,631
-------------- ---------
Total assets 99,795,780 86,102,060
============== =============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 9) 71,700,126 60,410,997
Borrowed money (note 10) 12,000,000 9,500,000
Advance payments by borrowers for taxes and insurance 383,237 312,213
Other liabilities (note 11) 942,134 708,993
-------------- --------------
Total liabilities 85,025,497 70,932,203
-------------- --------------
Stockholders' Equity:
Preferred stock, $.01 par value: authorized
100,000 shares; none outstanding - -
Common stock, $.01 par value: authorized 1,900,000 shares;
1,124,125 shares issued and 963,798 shares outstanding at December 31, 1997
and 1,067,919 shares outstanding at December 31, 1996 11,241 11,241
Additional paid-in capital 10,717,068 10,657,746
Retained earnings, substantially restricted 7,357,250 6,564,204
Unrealized gain on securities available for sale, net of income taxes 71,061 30,386
Treasury stock, at cost (160,327 and 56,206 shares at December 31, 1997 and 1996) (2,223,051) (724,718)
Common stock acquired by Employee Stock Ownership Plan (719,440) (809,370)
Common stock awarded by Recognition and Retention Plan (443,846) (559,632)
-------------- --------------
Total stockholders' equity (notes 15 and 16) 14,770,283 15,169,857
-------------- --------------
Commitments and contingencies (notes 18 and 19)
Total liabilities and stockholders' equity $ 99,795,780 86,102,060
============== ==============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31,
---------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 6,003,470 4,949,491 4,569,803
Interest on mortgage-backed securities 257,542 230,175 106,224
Interest on investment securities 619,754 520,663 417,849
Interest on interest-bearing deposits 222,787 214,295 85,422
Dividends on Federal Home Loan Bank stock 52,699 42,694 42,972
------------- --------- ---------
Total interest income 7,156,252 5,957,318 5,222,270
------------- --------- ---------
Interest expense:
Interest on deposits 3,099,417 2,760,774 2,587,591
Interest on borrowings 693,214 194,431 97,925
------------- --------- ---------
Total interest expense 3,792,631 2,955,205 2,685,516
------------- --------- ---------
Net interest income before provision for loan losses 3,363,621 3,002,113 2,536,754
Provision for loan losses (note 5) 74,243 - 39,384
------------- --------- ---------
Net interest income after provision for loan losses 3,289,378 3,002,113 2,497,370
------------- --------- ---------
Non-interest income:
Loan fees and service charges 98,180 97,576 68,700
Commission income 77,811 57,491 58,699
Unrealized gain on trading securities - net 531,197 46,484 -
Gain on sale of investment securities held for trade 36,066 - -
Gain on sale of investment securities 22,264 52,617 -
Gain on sale of real estate owned 4,908 27,821 1,960
Deposit related fees 250,788 165,114 134,653
Other income 80,994 63,700 75,587
------------- --------- ---------
Total non-interest income 1,102,208 510,803 339,599
------------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31,
---------------------------------------------------
1997 1996 1995
----------- ----------- -----------
<S> <C> <C> <C>
Non-interest expense:
Staffing costs (notes 12 and 13) 1,294,221 1,128,341 908,837
Advertising 126,016 79,967 104,100
Occupancy and equipment expenses (note 6) 353,116 334,286 328,432
Data processing 335,555 295,258 247,764
Federal deposit insurance premiums (note 17) 41,400 129,639 134,316
SAIF special assessment (note 17) - 389,255 -
Other 543,351 499,731 491,137
------------- --------- ---------
Total non-interest expense 2,693,659 2,856,477 2,214,586
------------- --------- ---------
Income before income taxes 1,697,927 656,439 622,383
Income taxes (note 14) 674,874 214,286 235,700
------------- --------- ---------
Net income $ 1,023,053 442,153 386,683
============= ======= =======
Earnings per share -
Primary $ 1.12 .43 N/A
Diluted $ 1.10 .43 N/A
Dividends declared on common stock $ .25 .12 N/A
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Three Years Ended December 31, 1997
Unrealized
Gain (Loss)
on
Additional Securities
Common Paid-in Retained Available Treasury Acquired Awarded
Stock Capital Earnings For Sale Stock by ESOP by RRP
----- ------- -------- -------- ----- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 $ - - 5,856,099 (223,557) - - -
Net income 386,683
Adjustment of securities
available for sale to fair value,
net of tax effect 294,278
------- ---------- --------- -------- ---------- -------- --------
Balance at December 31, 1995 - - 6,242,782 70,721 - - -
Net income 442,153
Adjustment of securities
available for sale to fair value,
net of tax effect (40,335)
Net proceeds of common stock
issued in stock conversion 11,241 10,646,866 (899,300)
Purchase of treasury stock
(56,206 shares) (724,718)
Purchase of stock for RRP (578,929)
Amortization of award of RRP stock 19,297
Contribution to fund ESOP loan 10,880 89,930
Dividends declared on common stock (120,731)
------- ---------- --------- -------- ---------- -------- --------
Balance at December 31, 1996 11,241 10,657,746 6,564,204 30,386 (724,718) (809,370) (559,632)
Net income 1,023,053
Adjustment of securities
available for sale to fair value,
net of tax effect 40,675
Purchase of treasury stock
(104,121 shares) (1,498,333)
Tax benefit related to vested RRP stock 17,000
Amortization of award of RRP stock 115,786
Contribution to fund ESOP loan 42,322 89,930
Dividends declared on common stock (230,007)
------- ---------- --------- -------- ---------- -------- --------
Balance at December 31, 1997 $11,241 10,717,068 7,357,250 71,061 (2,223,051) (719,440) (443,846)
======= ========== ========= ====== ========== ======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Total
----------
<S> <C>
Balance at December 31, 1994 5,632,542
Net income 386,683
Adjustment of securities
available for sale to fair value,
net of tax effect 294,278
-----------
Balance at December 31, 1995 6,313,503
Net income 442,153
Adjustment of securities
available for sale to fair value,
net of tax effect (40,335)
Net proceeds of common stock
issued in stock conversion 9,758,807
Purchase of treasury stock
(56,206 shares) (724,718)
Purchase of stock for RRP (578,929)
Amortization of award of RRP stock 19,297
Contribution to fund ESOP loan 100,810
Dividends declared on common stock (120,731)
-----------
Balance at December 31, 1996 15,169,857
Net income 1,023,053
Adjustment of securities
available for sale to fair value,
net of tax effect 40,675
Purchase of treasury stock
(104,121 shares) (1,498,333)
Tax benefit related to vested RRP stock 17,000
Amortization of award of RRP stock 115,786
Contribution to fund ESOP loan 132,252
Dividends declared on common stock (230,007)
-----------
Balance at December 31, 1997 14,770,283
==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
---------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income ..................................................... $ 1,023,053 442,153 386,683
Items not requiring (providing) cash:
Depreciation .................................................. 153,426 139,808 132,848
Amortization of cost of stock benefit plans ................... 205,716 120,107 --
Amortization of premiums and accretion of discounts ........... 1,858 (434) (5,778)
Net gain on sale of securities ................................ (58,330) (52,617) --
Net gain on sale of real estate owned ......................... (4,908) (27,821) (1,960)
Provision for loan losses ..................................... 74,243 -- 39,384
Unrealized gain on securities held for trade .................. (531,197) (46,484) --
Purchase of trading account securities ........................ (1,987,144) (493,016) --
Proceeds from sale of trading account securities .............. 680,940 -- --
Increase (decrease) in deferred income on loans ............... (25,349) 23,507 (34,771)
Increase (decrease) in accrued and deferred income taxes ...... 347,337 (50,221) 204,700
Increase in accrued interest receivable ....................... (80,554) (66,322) (49,731)
Increase (decrease) in accrued interest payable ............... (8,163) 24,739 28,784
Increase in deferred compensation ............................. 79,320 71,069 63,068
Other, net .................................................... (188,048) 41,548 2,572
------------- ------------- -------------
Net cash provided by (for) operating activities .................. (317,800) 126,016 765,799
------------- ------------- -------------
Cash flows from investing activities:
Proceeds from sales of investment securities .................. 4,014,689 132,617 --
Proceeds from maturities of investment securities ............. 750,000 1,000,000 500,000
Purchase of investment securities ............................. (3,996,048) (3,056,153) (798,004)
Proceeds from repayments of mortgage-backed securities ........ 569,678 481,548 207,673
Purchase of mortgage-backed securities ........................ -- (3,034,420) --
Purchase of Federal Home Loan Bank stock ...................... (179,800) -- --
Purchase of loans ............................................. (6,872,966) (4,647,821) (3,439,588)
Loan disbursements ............................................ (19,852,423) (22,901,235) (14,920,478)
Loan repayments ............................................... 16,884,296 14,800,656 15,517,663
Proceeds from sale of real estate owned ....................... 102,702 25,823 49,183
Property and equipment expenditures, net ...................... (114,553) (41,467) (120,181)
------------- ------------- -------------
Net cash provided for investing activities ....................... (8,694,425) (17,240,452) (3,003,732)
------------- ------------- -------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years Ended December 31,
---------------------------------------------------------
1997 1996 1995
------------- ------------- -------------
<S> <C> <C> <C>
Cash flows from financing activities:
Net proceeds from sale of common stock ........................ -- 9,758,807 --
Deposit receipts .............................................. 142,882,643 122,368,827 108,637,226
Deposit withdrawals ........................................... (134,005,401) (123,874,056) (109,461,879)
Interest credited to deposits ................................. 2,411,887 2,328,069 2,132,233
Proceeds from borrowed money .................................. 7,000,000 8,500,000 3,000,000
Repayment of borrowed money ................................... (4,500,000) (2,000,000) (1,000,000)
Increase (decrease) in advance payments
by borrowers for taxes and insurance ...................... 71,024 (12,283) 52,705
Purchase of treasury stock .................................... (1,498,333) (724,718) --
Purchase of RRP stock ......................................... -- (578,929) --
Dividends paid on common stock ................................ (230,007) (120,731) --
------------- ------------- -------------
Net cash provided by financing activities ........................ 12,131,813 15,644,986 3,360,285
------------- ------------- -------------
Net change in cash and cash equivalents .......................... 3,119,588 (1,469,450) 1,122,352
Cash and cash equivalents at beginning of year ................... 2,567,367 4,036,817 2,914,465
------------- ------------- -------------
Cash and cash equivalents at end of year ......................... $ 5,686,955 2,567,367 4,036,817
============= ============= =============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest ..................................................... $ 3,800,794 2,930,466 2,656,732
Income taxes ................................................. 310,609 265,709 131,000
Non-cash investing activities:
Transfer of loans to real estate owned ....................... $ 113,496 -- 48,463
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1) Summary of Significant Accounting Policies
AMB Financial Corp. (the "Company") is a Delaware corporation
incorporated on November 23, 1993 for the purpose of becoming the
savings and loan holding company for American Savings, FSB (the
"Bank"). On March 29, 1996, the Bank converted from a mutual to a stock
form of ownership, and the Company completed its initial public
offering, and, with a portion of the net proceeds acquired all of the
issued and outstanding capital stock of the Bank (the "Conversion").
The accounting and reporting policies of the Company and its
subsidiaries conform to generally accepted accounting principles and to
general practice within the thrift industry. 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 revenue and expenses during the
reporting period. Actual results could differ from those estimates. The
following is a description of the more significant policies which the
Bank follows in preparing and presenting its consolidated financial
statements.
Principles of Consolidation
The accompanying consolidated financial statements consist of the
accounts of the Company, and its wholly owned subsidiary, American
Savings FSB, the Bank's wholly owned subsidiary, NIFCO, Inc. and the
wholly owned subsidiary of NIFCO, Inc., Ridge Management, Inc.
Significant intercompany balances and transactions have been eliminated
in consolidation.
Investment Securities and Mortgage-Backed Securities, Available for
Sale
Investment securities and mortgage-backed securities available for sale
are recorded in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115 "Accounting for Certain Investments in Debt
and Equity Securities". SFAS 115 requires the use of fair value
accounting for securities available for sale or trading and retains the
use of the amortized cost method for investments the
Company has the positive intent and ability to hold to maturity.
SFAS 115 requires the classification of debt and equity securities into
one of three categories: held to maturity, available for sale, or
trading. Held to maturity securities are measured at amortized cost.
Unrealized gains and losses on trading securities are included in
income. Unrealized gains and losses on available for sale securities
are excluded from income and reported net of taxes as a separate
component of stockholders' equity.
<PAGE>
1) Summary of Significant Accounting Policies (continued)
The Company has currently designated all of its investment securities
and mortgage-backed securities as available for sale, and has recorded
these investments at their current fair values. Unrealized gains and
losses are recorded in a valuation account which is included, net of
income taxes, as a separate component of stockholders' equity. Gains
and losses on the sale of securities are determined using the specific
identification method and are reflected in earnings when realized.
Investment Securities Held For Trade
Trading account securities are carried at fair value, and net
unrealized gains and losses are reflected in the consolidated
statements of income.
Loans Receivable and Related Fees
Loans are stated at the principal amount outstanding, net of loans in
process, deferred fees and the allowance for losses. Interest on loans
is credited to income as earned and accrued only if deemed collectible.
Loans are placed on nonaccrual status when, in the opinion of
management, the full timely collection of principal or interest is in
doubt. As a general rule, the accrual of interest is discontinued when
principal or interest payments become 90 days past due or earlier if
conditions warrant. When a loan is placed on nonaccrual status,
previously accrued but unpaid interest is charged against current
income.
Loan origination fees are being deferred in accordance with SFAS No. 91
"Accounting for Nonrefundable Fees and Costs Associated with
Originating or Acquiring Loans and Initial Direct Costs of Leases".
This statement requires that loan origination fees and direct loan
origination costs for a completed loan be netted and then deferred and
amortized into interest income as an adjustment of yield.
The Company has adopted the provisions of SFAS No. 114 "Accounting by
Creditors for Impairment of a Loan" and SFAS No. 118 "Accounting by
Creditors for Impairment of a Loan - Income Recognition and
Disclosures" which impose certain requirements on the measurement of
impaired loans. These statements apply to all loans that are identified
for evaluation except for large groups of smaller-balance homogeneous
loans that are collectively evaluated for impairment. These loans
include, but are not limited to, credit card, residential mortgage and
consumer installment loans. Substantially all of the Company's lending
is excluded from the provisions of SFAS 114 and SFAS 118.
Under these statements, of the remaining loans which are evaluated for
impairment (a loan is considered impaired when, based on current
information and events, it is probable that a creditor will be unable
to collect all amounts due according to the contractual terms of the
loan agreement), there were no material amounts of loans which met the
definition of an impaired loan during the year ended December 31, 1997
and no loans to be evaluated for impairment at December 31, 1997.
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Allowance for Loan Losses
The determination of the allowance for loan losses involves material
estimates that are susceptible to significant change in the near term.
The allowance for loan losses is maintained at a level adequate to
provide for losses through charges to operating expense. The allowance
is based upon past loss experience and other factors which, in
management's judgement, deserve current recognition in estimating
losses. Such other factors considered by management include growth and
composition of the loan portfolio, the relationship of the allowance
for losses to outstanding loans and economic conditions.
Management believes that the allowance is adequate. While management
uses available information to recognize losses on loans, future
additions to the allowance may be necessary based on changes in
economic conditions. In addition, various regulatory agencies, as an
integral part of their examination process, periodically review the
Bank's allowance for losses. Such agencies may require the Bank to
recognize additions to the allowance based on their judgements about
information available to them at the time of their examination.
Real Estate Owned
Real estate acquired through foreclosure or deed in lieu of foreclosure
is carried at the lower of fair value minus estimated costs to sell or
the related loan balance at the date of foreclosure. Valuations are
periodically performed by management and an allowance for loss is
established by a charge to operations if the carrying value of a
property exceeds its fair value minus estimated costs to sell.
Depreciation and Amortization
Depreciation of office properties and equipment is accumulated on the
straight line basis over estimated lives of the various assets. The
cost of leasehold improvements is amortized using the straight line
method over the term of the lease.
Income Taxes
The Company files a consolidated federal income tax return with the
Bank. The provision for federal and state taxes on income is based on
earnings reported in the financial statements. Deferred income taxes
arise from the recognition of certain items of income and expense for
tax purposes in years different from those in which they are recognized
in the consolidated financial statements. Deferred tax assets and
liabilities are recognized for the estimated future tax consequences
attributable to differences between the financial statement carrying
amount of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using tax rates
in effect for the year in which those temporary differences are
expected to be recovered or settled. The effect of deferred tax assets
and liabilities of a change in tax rates is recognized in income for
the period that includes the enactment date.
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Consolidated Statements of Cash Flows
For the purposes of reporting cash flows, the Company has defined cash
and cash equivalents to include cash on hand, amounts due from
depository institutions, interest-bearing deposits in other financial
institutions and federal funds sold.
Earnings per Share
The Company computes its earnings per share (EPS) in accordance with
SFAS No. 128 "Earnings per Share". This statement simplifies the
standards for computing EPS previously found in Accounting Principles
Board Opinion No. 5 "Earnings per Share" and makes them comparable to
international EPS standards. It replaces the presentation of primary
EPS with a presentation of basic EPS and fully diluted EPS with diluted
EPS.
Basic EPS, unlike primary EPS, excludes 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
securities or other contracts to issue common stock were exercised or
converted into common stock or resulted in the issuance of common stock
that then shared in the earnings of the entity.
The following presentation illustrates basic and diluted EPS in
accordance with the provisions of SFAS 128:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------
1997 1996
----------- -----------
<S> <C> <C>
Weighted average number of common shares
outstanding used in basic EPS calculation .... 995,455 1,111,025
Reduction for common shares not yet
released by Employee Stock Ownership Plan .... (80,937) (83,935)
----------- -----------
Total weighted average common shares outstanding
for basic computation ........................ 914,518 1,027,090
Add common stock equivalents for shares issuable
under Stock Option Plans ..................... 13,206 --
----------- -----------
Weighted average number of shares outstanding
adjusted for common stock equivalents ........ 927,724 1,027,090
=========== ===========
Net income ..................................... $ 1,023,053 442,153
Basic earnings per share ....................... $ 1.12 .43
Diluted earnings per share ..................... $ 1.10 .43
</TABLE>
<PAGE>
1) Summary of Significant Accounting Policies (continued)
EPS for prior periods has been restated to comply with the provisions
of SFAS 128. EPS information for the year ended December 31, 1995 is
not meaningful because the Company was not a public company until March
29, 1996.
Reclassification
Certain 1995 and 1996 amounts have been reclassified to conform with
the 1997 presentation.
2) Investment Securities, Available for Sale
Investment securities available for sale are recorded at fair value in
accordance with SFAS 115. This portfolio is summarized as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
December 31, 1997
United States Government
securities ............... $8,021,870 75,027 7,580 8,089,317
Marketable equity securities 22,371 1,926 -- 124,297
---------- ---------- ---------- ----------
$8,144,241 76,953 7,580 8,213,614
========== ========== ========== ==========
December 31, 1996
United States Government
securities .............. $8,260,086 54,019 30,752 8,283,353
Marketable equity securities 632,085 23,499 -- 655,584
---------- ---------- ---------- ----------
$8,892,171 77,518 30,752 8,938,937
========== ========== ========== ==========
</TABLE>
<PAGE>
2) Investment Securities, Available for Sale (continued)
The contractual maturity of the above investments is summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
-------------------------- -------------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Due in one year or less .... $3,374,816 3,375,440 749,722 750,920
Due after one year through
five years .............. 4,285,115 4,335,968 7,284,914 7,306,020
Due after five years through
ten years ............... 361,939 377,909 225,450 226,413
Marketable equity securities 122,371 124,297 632,085 655,584
---------- ---------- ---------- ----------
$8,144,241 8,213,614 8,892,171 8,938,937
========== ========== ========== ==========
</TABLE>
Proceeds from sales of investment securities available for sale during
the year ended December 31, 1997 were $4,014,689 with gross gains of
$26,113 and gross losses of $3,849 realized on those sales. Proceeds
from sales of investment securities available for sale during the year
ended December 31, 1996 were $132,617 with gross gains of $52,617
realized on those sales. There were no sales of investment securities
available for sale during the year ended December 31, 1995. The change
in net unrealized gains and losses during the current year of $22,607,
net of the tax effect of $9,042, resulted in a $13,565 credit to
stockholders' equity.
3) Investment Securities Held for Trade
Investment securities held for trade are accounted for at their current
fair values. Investment securities held for trade at December 31, 1997
consists of equity securities (thrift common stock mutual fund
investment with a carrying value of $1,324,494 and common stock with a
carrying value of $1,088,473). The investment securities held for trade
at December 31, 1996 consists of common stock equity securities. The
adjustment of these securities to their current fair values has
resulted in a net unrealized gain of $577,681 as of December 31, 1997
and a net unrealized gain of $46,484 as of December 31, 1996. Proceeds
from sales of investment securities held for trade during the year
ended December 31, 1997 were $680,940 with gross gains of $37,410 and
gross losses of $1,344 realized on those sales. There were no sales of
investment securities held for trade during the year ended December 31,
1996.
<PAGE>
4) Mortgage-Backed Securities, Available for Sale
Mortgage-backed securities available for sale are recorded at fair
value in accordance with SFAS 115. This portfolio is summarized as
follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1997
Participation Certificates:
FHLMC - Fixed rate $2,745,886 40,333 630 2,785,589
FNMA - Adjustable rate 68,573 362 -- 68,935
GNMA - Adjustable rate 630,513 8,998 -- 639,511
---------- ---------- ---------- ----------
$3,444,972 49,693 630 3,494,035
========== ========== ========== ==========
Weighted average interest rate 6.88%
December 31, 1996
Participation Certificates:
FHLMC - Fixed rate ........ $3,177,901 2,743 5,293 3,175,351
FNMA - Adjustable rate ... 81,640 231 -- 81,871
GNMA - Adjustable rate ... 755,414 7,053 854 761,613
---------- ---------- ---------- ----------
$4,014,955 10,027 6,147 4,018,835
========== ========== ========== ==========
Weighted average interest rate 6.87%
</TABLE>
There were no sales of mortgage-backed securities available for sale
during the years ended December 31, 1997, 1996 and 1995. The change in
net unrealized gains and losses during the current year of $45,183, net
of the tax effect of $18,073, resulted in a $27,110 credit to
stockholders' equity.
<PAGE>
5) Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
1997 1996
----------- -----------
<S> <C> <C>
Mortgage loans:
One-to-four family ........................... $51,566,329 43,668,728
Multi-family ................................. 4,010,299 3,259,173
Nonresidential ............................... 9,314,953 8,806,316
Construction ................................. 4,450,189 4,405,490
Land ......................................... 325,206 216,899
----------- -----------
Total mortgage loans ....................... 69,666,976 60,356,606
----------- -----------
Other loans:
Loans on deposit accounts .................... 164,636 185,224
Equity lines of credit ....................... 3,258,776 2,968,265
Other consumer ............................... 1,681,178 1,835,654
----------- -----------
Total other loans .......................... 5,104,590 4,989,143
----------- -----------
Commercial business loans ...................... 4,915,827 3,519,034
----------- -----------
Total loans receivable ..................... 79,687,393 68,864,783
----------- -----------
Less:
Loans in process ............................. 1,974,655 910,045
Deferred loan fees, premiums and discounts-net 209,126 234,475
Allowance for loan losses .................... 410,383 354,631
----------- -----------
Loans receivable, net .......................... $77,093,229 67,365,632
=========== ===========
Weighted average interest rate ................. 8.08% 8.10%
=========== ===========
</TABLE>
<PAGE>
5) Loans Receivable (continued)
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
--------- ---------- ---------
<S> <C> <C> <C>
Balance, beginning of year ..... $ 354,631 359,535 330,458
Provision for loan losses ...... 74,243 -- 39,384
Charge-offs .................... (32,942) (4,954) (10,457)
Recoveries ..................... 14,451 50 150
--------- --------- ---------
Balance, end of year ........... $ 410,383 354,631 359,535
========= ========= =========
</TABLE>
Delinquent loans (loans having monthly payments past due ninety days or
more and non-accruing) at December 31, 1997 and 1996 amounted to
approximately $308,000 and $305,000 respectively.
For the years ended December 31, 1997 and 1996, gross interest income
which would have been recorded had the non-accruing loans been current
in accordance with their original terms amounted to approximately
$12,000 and $23,000 respectively.
Loans to directors and executive officers aggregated approximately
$201,000 and $220,000 at December 31, 1997 and 1996 respectively. Such
loans are made on substantially the same terms as those for other loan
customers.
<PAGE>
6) Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cost:
Land - Munster $ 40,669 40,669
Hammond .... 33,300 33,300
East Chicago 5,000 5,000
Building - Munster .... 409,419 408,360
Hammond .... 43,030 241,890
East Chicago 40,447 36,637
Leasehold improvements - Dyer .. 148,096 148,096
Furniture and equipment ........ 791,425 682,881
---------- ----------
1,711,386 1,596,833
Less accumulated depreciation:
Building - Munster .... 375,366 366,494
Hammond .... 222,748 204,640
East Chicago 12,732 8,839
Leasehold improvements - Dyer .. 54,101 46,587
Furniture and equipment ........ 574,709 459,670
---------- ----------
1,239,656 1,086,230
Net book value ................. $ 471,730 510,603
========== ==========
</TABLE>
Depreciation of office properties and equipment for the years ended
December 31, 1997, 1996 and 1995 amounted to $153,426, $139,808 and
$132,848 respectively.
The Bank has entered into a lease agreement for its office location in
Dyer, Indiana. The lease, which expires in 2000, carries an option to
extend for three successive renewals of five years each. Rent is
payable monthly and adjusted annually based on the consumer price
index. Monthly rent at December 31, 1997 amounted to $3,086 including
utilities. The Bank is responsible for its proportionate share of real
estate taxes and assessments and for maintaining public liability
insurance covering the premises. Rent expense for the years ended
December 31, 1997, 1996 and 1995 amounted to $36,815, $35,028 and
$34,552 respectively.
<PAGE>
7) Accrued Interest Receivable
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------
1997 1996
--------- ---------
<S> <C> <C>
Investment securities ...................... $ 102,343 114,069
Mortgage-backed securities ................. 19,928 23,297
Loans receivable ........................... 423,274 354,680
Allowance for uncollected interest ......... (12,036) (39,091)
--------- ---------
$ 533,509 452,955
========= =========
</TABLE>
8) Prepaid Expenses and Other Assets
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
---------- ----------
<S> <C> <C>
Prepaid insurance premiums ............................ $ 45,430 54,783
Other prepaid expenses ................................ 51,787 28,244
Cash surrender value of life insurance policies (a) ... 976,771 930,353
Deferred federal and state income tax benefit - net (b) -- 124,150
Miscellaneous ......................................... 62,872 25,101
---------- ----------
$1,136,860 1,162,631
========== ==========
</TABLE>
(a) The Board of Directors has approved a non-qualified retirement
income plan which will provide pre-retirement death benefits,
post-retirement death benefits, and retirement benefits to
senior management and the Board of Directors. The Bank has
purchased life insurance policies on all individuals covered
under the plan. The Bank is the owner and beneficiary of each
policy.
<PAGE>
8) Prepaid Expenses and Other Assets (continued)
(b) The approximate tax effect of temporary differences that give
rise to the Company's net deferred tax asset at December 31,
1996 under SFAS 109 is as follows:
<TABLE>
<CAPTION>
Assets Liabilities Net
------ ----------- ---
<S> <C> <C> <C>
Loan fees deferred for
financial reporting purposes ................. $ 41,700 -- 41,700
Accelerated book depreciation .................. 1,500 -- 1,500
Deferred compensation .......................... 96,200 -- 96,200
Nondeductible incentive plan expense ........... 7,710 -- 7,710
Bad debt reserves established for
financial reporting purposes ................. 141,850 -- 141,850
Increases to tax bad debt reserves
since January 1, 1988 ........................ -- (125,950) (125,950)
Unrealized gain on securities available for sale -- (20,260) (20,260)
Unrealized gain on trading account securities .. -- (18,600) (18,600)
--------- --------- ---------
$ 288,960 (164,810) 124,150
========= ========= =========
</TABLE>
9) Deposits
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Passbook accounts ........................ $16,407,366 16,311,084
Demand deposits and NOW accounts ......... 7,257,897 6,712,053
Money market accounts .................... 2,877,385 2,454,249
----------- -----------
26,542,648 25,477,386
Certificates of deposit:
Jumbo .................................. 7,190,175 5,696,748
7-91 days .............................. 1,166,480 1,115,737
6-11 months ............................ 16,653,468 7,100,476
12-29 months ........................... 11,657,512 11,153,781
30 months and over ..................... 6,848,888 8,142,683
IRA and Keogh .......................... 1,640,955 1,724,186
----------- -----------
$71,700,126 60,410,997
=========== ===========
</TABLE>
<PAGE>
9) Deposits (continued)
The weighted average rate on deposit accounts at December 31, 1997 and
1996 was 4.65% and 4.38% respectively.
A summary of certificates of deposit by maturity is as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------
1997 1996
----------- -----------
<S> <C> <C>
Within 12 months ................... $36,441,807 25,692,560
12 months to 24 months ............. 6,685,024 6,657,443
24 months to 36 months ............. 1,625,298 2,025,883
36 months to 48 months ............. 235,807 541,980
Over 48 months ..................... 169,542 15,745
----------- -----------
Total .............................. $45,157,478 34,933,611
=========== ===========
</TABLE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1997 1996 1995
---------- --------- ---------
<S> <C> <C> <C>
Passbook accounts ........... $ 488,273 509,836 543,561
NOW accounts ................ 143,687 137,192 143,032
Money market accounts ....... 89,355 88,853 101,801
Certificates of deposit ..... 2,378,102 2,024,893 1,799,197
---------- ---------- ----------
Total ....................... $3,099,417 2,760,774 2,587,591
========== ========== ==========
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $10,500,000 and $7,200,000 at December 31,
1997 and 1996, respectively. Deposits in excess of $100,000 are not
insured by the Federal Deposit Insurance Corporation.
<PAGE>
10) Borrowed Money
Borrowed money consists of advances from the Federal Home Loan Bank of
Indianapolis and is summarized as follows:
<TABLE>
<CAPTION>
Interest December 31,
Maturity Date Rate 1997 1996
-------------- ---- ----------- ----------
<S> <C> <C> <C>
June 5, 1997 6.50 $ - 1,000,000
October 20, 1997 5.79 - 1,500,000
November 3, 1998 5.87 3,000,000 3,000,000
December 7, 1998 5.80 3,000,000 3,000,000
December 6, 1999 5.94 1,000,000 1,000,000
May 17, 2000 5.85 3,000,000 -
July 25, 2000 6.11 2,000,000 -
---------- ---------
$12,000,000 9,500,000
========== =========
Weighted average interest rate 5.89% 5.91%
==== ====
</TABLE>
The Bank is required to maintain qualifying collateral for the Federal
Home Loan Bank of Indianapolis representing approximately 170 percent
of current Bank credit. At December 31, 1997, the Bank met this
requirement. Assets which are eligible collateral for meeting the 170%
coverage requirement include one-to-four family whole mortgage loans,
government and agency securities including mortgage-backed securities
insured or guaranteed by FHLMC, FNMA and GNMA, and high rated private
mortgage-backed securities. The mortgage loans must not include
participations, construction loans, loans which are not in the clear
title of the institution, conventional mortgages with more than 30
years remaining to maturity, loans for more than 90% of the appraised
value unless there is private or federal insurance, mortgages which are
more than 60 days delinquent, or loans upon which any employee of the
institution or the FHLB is personally liable.
In connection with the Company's initial public offering, the Bank
established an Employee Stock Ownership Plan (ESOP). The ESOP was
funded by the proceeds from a loan from the Company. The loan carries
an interest rate of 6.07% and matures in the year 2006. The loan is
secured by the shares of the Company purchased with the loan proceeds.
The Bank has committed to make contributions to the ESOP sufficient to
allow the ESOP to fund the debt service requirements of the loan. At
December 31, 1997, the balance of this loan amounted to $719,440.
<PAGE>
11) Other Liabilities
Other liabilities include the following:
<TABLE>
<CAPTION>
December 31,
1997 1996
-------- --------
<S> <C> <C>
Accrued interest on deposits ............................ $ 61,374 76,018
Accrued interest on borrowings .......................... 31,431 24,950
Accrued bonus ........................................... -- 25,000
Accrued audit and accounting fees ....................... 19,200 16,775
Accrued real estate and personal property taxes ......... 52,500 52,500
Accrued federal and state income tax .................... 255,853 48,489
Accrued pension ......................................... 10,852 27,500
Deferred federal and state income tax liability - net (a) 25,938 --
Deferred compensation (see note 12) ..................... 319,839 240,519
Miscellaneous accounts payable .......................... 165,147 197,242
-------- --------
$942,134 708,993
======== ========
</TABLE>
(a) The approximate tax effect of temporary differences that give
rise to the Company's net deferred tax liability at December
31, 1997 under SFAS 109 is as follows:
<TABLE>
<CAPTION>
Assets Liabilities Net
--------- --------- ---------
<S> <C> <C> <C>
Loan fees deferred for
financial reporting purposes ................. $ 45,475 -- 45,475
Accelerated book depreciation .................. 16,900 -- 16,900
Deferred compensation .......................... 127,935 -- 127,935
Nondeductible incentive plan expense ........... 7,720 -- 7,720
Bad debt reserves established
for financial reporting purposes ............. 164,155 -- 164,155
Increases to tax bad debt reserves
since January 1, 1988 ........................ -- (114,490) (114,490)
Unrealized gain on securities available for sale -- (47,375) (47,375)
Unrealized gain on trading account securities .. -- (231,073) (231,073)
Other .......................................... 4,815 -- 4,815
--------- --------- ---------
$ 367,000 (392,938) (25,938)
========= ========= =========
</TABLE>
12) Benefit Plans
The Bank participates in a non-contributory qualified defined benefit
pension plan which covers all full-time employees having a minimum of
twelve months of service, and who are at least twenty-one years of age.
The present funding policy is to make the minimum annual contribution
as required by applicable regulations.
<PAGE>
12) Benefit Plans (continued)
The following table sets forth the plan's funded status and amounts
recognized in the Bank's consolidated financial statements at December
31.
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Projected benefit obligation (actuarial present value
of projected benefits attributed to employee service
to date based on future compensation levels) ....... $ 913,624 895,838
Plan assets at fair value ............................. 1,000,646 804,260
----------- -----------
Plan assets (less than) in excess of projected
benefit obligation ................................. 87,022 (91,578)
Unrecognized prior service cost ....................... 84,337 89,023
Unrecognized net (gain) loss .......................... (273,295) (121,723)
Unrecognized net transition obligation ................ 91,084 96,778
----------- -----------
Net pension liability included in accrued expenses .... $ (10,852) (27,500)
=========== ===========
</TABLE>
Included in the projected benefit obligation is an amount called the
accumulated benefit obligation. The accumulated benefit obligation
represents the actuarial present value of benefits attributed to
employee service and compensation levels to date. At December 31, 1997,
the accumulated benefit obligation was $751,900. The vested portion was
$749,604.
Net pension expense for the years ended December 31, 1997, 1996 and
1995 is being accounted for per SFAS No. 87, "Employers' Accounting for
Pensions" and includes the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1997 1996 1995
--------- --------- ----------
<S> <C> <C> <C>
Service cost ................... $ 30,648 42,713 37,924
Interest cost .................. 66,579 63,953 45,828
Actual return on assets ........ (142,938) (87,097) (121,520)
Net amortization and deferral .. 98,758 33,052 78,492
--------- --------- ---------
Net pension expense ............ $ 53,047 52,621 40,724
========= ========= =========
</TABLE>
The discount rate used in determining the actuarial present value of
the projected benefit obligation at the beginning of the year to
determine the net periodic pension cost and at the end of the year for
the present value of the benefit obligation during 1997 and 1996 was
7.5% and during 1995 was 6.0%. The expected long-term rate of return on
assets was 9.0% during 1997 and 1996 and 7.0% during 1995, and the rate
of increase in future compensation was 3.5% in 1997, 1996, and 1995.
<PAGE>
12) Benefit Plans (continued)
The Bank has established a non-qualified 401(k) Plan for officers of
the Bank. The Plan provides participating officers the opportunity to
defer up to 6% of their salary over the next five years into a tax
deferred accumulation for future retirement. The Bank will match up to
50% (3% of salary) of this deferral. In addition, the Bank established
a Director Deferral Plan which provides participating directors with
the opportunity to defer all or a portion of their fees over the next
five years. Deferred amounts are credited with interest from the Bank
at the rate of 10% per year.
Contributions by the Bank to the 401(k) Plan, including interest on
accumulated funds was $36,282, $29,178 and $22,253 for the years ended
December 31, 1997, 1996 and 1995 respectively.
13) Director, Officer and Employee Plans
Stock Option Plan. On October 23, 1996, the stockholders of the Company
approved the AMB Financial Corp. 1996 Stock Option and Incentive Plan.
This is an incentive stock option plan for the benefit of the
directors, officers and employees of the Company and its affiliates.
The number of options on shares of common stock authorized under the
Plan is 112,412, equal to 10.0% of the total number of shares issued in
the Conversion. As of October 23, 1996, 100,042 options were granted at
$12.75 per share, exercisable at a rate of 20% per year commencing
October 23, 1997, and expiring ten years from the date of grant. The
following is an analysis of the stock option activity for each of the
years in the three year period ended December 31, 1997 and the stock
options outstanding at the end of the respective periods.
<TABLE>
<CAPTION>
Exercise Price
Number ----------------------
Options of Options Per Share Total
------- ---------- --------- -----
<S> <C> <C> <C>
Outstanding at December 31, 1995 ... 0
Granted ............................ 100,042 $ 12.75 $1,275,535
Exercised .......................... 0
Forfeited .......................... 0
Outstanding at December 31, 1996 ... 100,042 12.75 1,275,535
Granted ............................ 0
Exercised .......................... 0
Forfeited .......................... 0
Outstanding at December 31, 1997 ... 100,042 $ 12.75 $1,275,535
========== ========= ==========
Exercisable at December 31, 1997 ... 20,008 $ 12.75 $ 255,102
========== ========= ==========
Options available for future
grants at December 1997 .......... 12,370
==========
</TABLE>
<PAGE>
13) Director, Officer and Employee Plans (continued)
The Company has elected to follow Accounting Principles Board Opinion
No. 25 "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options. Under APB
25, because the exercise price of the Company's employee stock options
equals the market price of the underlying stock on the date of grant,
no compensation expense is recognized.
The Company implemented SFAS No. 123 "Accounting for Stock-Based
Compensation" during 1996. The Company will retain its current
accounting method for its stock-based compensation plans. This
statement will only result in additional disclosures for the Company,
and as such, its adoption did not, nor is it expected to have, a
material impact on the Company's financial condition or its results of
operations.
The following summarizes the pro forma net income as if the fair value
method of accounting for stock-based compensation plans had been
utilized for the years ended December 31, 1997 and 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1997 1996
<S> <C> <C>
Net income (as reported) .................... $ 1,023,053 442,153
Pro forma net income ........................ 956,839 431,117
Diluted earnings per share (as reported) .... 1.10 .43
Pro forma diluted earnings per share ........ 1.03 .42
</TABLE>
The pro forma results presented above may not be representative of the
effects reported in pro forma net income for future years.
The fair value of the option grants for the years ended December 31,
1997 and 1996 was estimated on the date of grant using the Black
Scholes option value model, with the following assumptions: dividend
yield of approximately 2.00%, expected volatility of 20%, risk free
interest rate of 6.10% and an expected life of approximately 10 years.
Employee Stock Ownership Plan. In conjunction with the Conversion, the
Bank formed an Employee Stock Ownership Plan ("ESOP"). The ESOP covers
substantially all employees with more than one year of employment and
who have attained the age of 18. The ESOP borrowed $899,300 from the
Company and purchased 89,930 common shares issued in the Conversion.
The Bank will make scheduled discretionary cash contributions to the
ESOP sufficient to service the amount borrowed. In accordance with
generally accepted accounting principles, the unpaid balance of the
ESOP loan, which is comparable to unearned compensation, is reported as
a reduction of stockholders' equity. Total contributions by the Bank to
the ESOP which were used to fund principal and interest payments on the
ESOP debt totaled $139,741 and $132,084 for the years ended December
31, 1997 and 1996.
<PAGE>
13) Director, Officer and Employee Plans (continued)
On November 22, 1993, the AICPA issued Statement of Position No. 93-6,
"Employers' Accounting for Employee Stock Ownership Plans" ("SOP
93-6"). SOP 93-6 provides guidance for accounting for all ESOPs. SOP
93-6 requires that the issuance or sale of treasury shares to the ESOP
be reported when the issuance or sale occurs and that compensation
expense be recognized for shares committed to be released to directly
compensate employees equal to the fair value of the shares committed.
In addition, SOP 93-6 requires that leveraged ESOP debt and related
interest expense be reflected in the employer's financial statements.
Prior practice was to recognize compensation expense based on the
amount of the employer's contributions to the ESOP. SOP 93-6 is
effective for fiscal years beginning after December 31, 1992. The
application of SOP 93-6 results in fluctuations in compensation expense
as a result of changes in the fair value of the Company's common stock;
however, any such compensation expense fluctuations will result in an
offsetting adjustment to additional paid-in capital. For the years
ended December 31, 1997 and 1996, additional compensation expense of
$42,322 and $10,880 was recognized as a result of implementation of
this accounting principle.
Recognition and Retention Plan. On October 23, 1996, the stockholders
of the Company approved the AMB Financial Corp. 1996 Recognition and
Retention Plan ("RRP"). This plan was established to award shares to
directors and to employees in key management positions in order to
provide them with a proprietary interest in the Company in a manner
designed to encourage such employees to remain with the Company. The
number of shares authorized under the Plan is 44,965, equal to 4.0% of
the total number of shares issued in the Conversion. These shares were
purchased in the open market during the quarter ended December 31, 1996
at a total cost of $578,929. As of October 23, 1996, 43,616 shares were
awarded and will vest at a rate of 20% per year commencing October 23,
1997, while 1,349 shares were reserved for future awards.
The $578,929 contributed to the RRP is being amortized to compensation
expense as the plan participants become vested in those shares. For the
years ended December 31, 1997 and 1996, $115,786 and $19,297 have been
amortized to expense. The unamortized cost, which is comparable to
deferred compensation, is reflected as a reduction of stockholders'
equity.
14) Income Taxes
The Company has adopted SFAS No. 109 which requires a change from the
deferred method to the liability method of accounting for income taxes.
Under the liability method, deferred income taxes are recognized for
the tax consequences of "temporary differences" by applying statutory
tax rates applicable to future years to differences between the
financial statement carrying amounts and tax bases of existing assets
and liabilities.
Among the provisions of SFAS 109 which will impact the Bank is the tax
treatment of bad debt reserves. SFAS 109 provides that a deferred tax
asset is to be recognized for the bad debt reserve established for
financial reporting purposes and requires a deferred tax liability to
<PAGE>
14) Income Taxes (continued)
be recorded for increase in the tax bad debt reserve since January 1,
1988, to effective date of certain changes made by the Tax Reform Act
of 1986 to the calculation of savings institutions' bad debt deduction.
Accordingly, retained earnings at December 31, 1997 includes
approximately $1,950,000 for which no deferred federal income tax
liability has been recognized.
The provision for income taxes consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Current ................... $551,901 249,696 249,650
Deferred (benefit) ........ 122,973 (35,410) (13,950)
-------- -------- --------
$674,874 214,286 235,700
======== ======== ========
</TABLE>
A reconciliation of the statutory federal income tax rate to effective
income tax rate is as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ....... 34.0% 34.0% 34.0%
State income taxes ...................... 5.9 5.0 5.8
Other ................................... (.2) (6.4) (1.9)
---- ---- ----
Effective income tax rate ............... 39.7% 32.6% 37.9%
==== ==== ====
</TABLE>
Deferred income tax expense (benefit) consists of the following tax
effects of timing differences:
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
Loan fees ................................... $ (3,775) 29,500 12,200
Depreciation ................................ (15,400) (7,900) (2,300)
Deferred compensation ....................... (31,745) (28,400) (25,300)
Book loan loss provision (in excess of)
less than tax deduction ................... (33,765) 1,500 6,400
Unrealized gain on trading account securities 212,473 18,600 --
Other, net .................................. (4,815) (48,710) (4,950)
--------- --------- ---------
$ 122,973 (35,410) (13,950)
========= ========= =========
</TABLE>
<PAGE>
15) Regulatory Capital Requirements
Capital regulations require the Bank to have a minimum regulatory
tangible capital ratio equal to 1.5% of total adjusted assets, a
minimum 3.0% core capital ratio and an 8.0% risk-based capital ratio.
For purposes of the regulation, the core and tangible capital of
American Savings, FSB is defined as stockholders' equity, adjusted for
unrealized gains and losses on securities available for sale (other
than unrealized losses in equity securities), net of taxes. Adjusted
total assets are the Bank's total assets as determined under generally
accepted accounting principles, adjusted for unrealized gains and
losses on securities available for sale, net of taxes.
In determining compliance with the risk-based capital requirement, the
Bank is allowed to use both core capital and supplementary capital
provided the amount of supplementary capital used does not exceed the
Bank's core capital. Supplementary capital of American Savings, FSB is
defined to include all of the Bank's general loss allowances. In
addition, certain exclusions from capital and assets are required to be
made for the purpose of calculating total capital, in addition to the
adjustments required for calculating core capital. Such exclusions
consist of equity investments as defined by regulation. The risk-based
capital requirement is measured against risk-weighted assets which
equals the sum of each asset and the credit-equivalent amount of each
off-balance sheet item after being multiplied by an assigned risk
weight.
At December 31, 1997 and 1996, the Bank's regulatory equity capital was
as follows:
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
----------- ----------- -----------
<S> <C> <C> <C>
December 31, 1997
Stockholders' equity ............. $ 9,563,406 9,563,406 9,563,406
Unrealized gain on securities
available for sale, net of taxes (71,061) (71,061) (71,061)
General loss allowances .......... -- -- 410,383
Direct equity investments ........ -- -- (15,000)
----------- ----------- -----------
Regulatory capital computed ...... 9,492,345 9,492,345 9,887,728
Minimum capital requirement ...... 1,459,000 2,919,000 4,274,000
----------- ----------- -----------
Regulatory capital excess ..... $ 8,033,345 6,573,345 5,613,728
=========== =========== ===========
Computed capital ratio ........... 9.76% 9.76% 18.51%
Minimum capital ratio ............ 1.50 3.00 8.00
----------- ----------- -----------
Regulatory capital excess ..... 8.26% 6.76% 10.51%
=========== =========== ===========
</TABLE>
<PAGE>
15) Regulatory Capital Requirements (continued)
A reconciliation of the Bank's equity capital at December 31, 1997 is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity ....................................... $ 14,770,283
Less Company stockholders' equity not available
for regulatory capital ................................... (5,206,877)
Stockholders' equity of the Bank ........................... $ 9,563,406
============
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
------------ ------------ ------------
<S> <C> <C> <C>
December 31, 1996
Stockholders' equity ............ $ 11,192,355 11,192,355 11,192,355
Unrealized gain on securities
available for sale, net of taxes (30,386) (30,386) (30,386)
General loss allowances ......... -- -- 354,631
Direct equity investments ....... -- -- (15,000)
------------ ------------ ------------
Regulatory capital computed ..... 11,161,969 11,161,969 11,501,600
Minimum capital requirement ..... 1,280,000 2,561,000 3,701,000
------------ ------------ ------------
Regulatory capital excess .... $ 9,881,969 8,600,969 7,800,600
============ ============ ============
Computed capital ratio .......... 13.08% 13.08% 24.86%
Minimum capital ratio ........... 1.50 3.00 8.00
------------ ------------ ------------
Regulatory capital excess .... 11.58% 10.08% 16.86%
============ ============ ============
</TABLE>
A reconciliation of the Bank's equity capital at December 31, 1996 is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity ....................................... $ 15,169,857
Less Company stockholders' equity not available
for regulatory capital ................................... (3,977,502)
Stockholders' equity of the Bank ........................... $ 11,192,355
============
</TABLE>
<PAGE>
16) Stockholders' Equity
As part of the Conversion, the Bank established a liquidation account
for the benefit of all eligible depositors who continue to maintain
their deposit accounts in the Bank after conversion. In the unlikely
event of a complete liquidation of the Bank, each eligible depositor
will be entitled to receive a liquidation distribution from the
liquidation account, in the proportionate amount of the then current
adjusted balance for deposit accounts held, before distribution may be
made with respect to the Bank's capital stock. The Bank may not declare
or pay a cash dividend to the Company on, or repurchase any of, its
capital stock if the effect thereof would cause the retained earnings
of the Bank to be reduced below the amount required for the liquidation
account. Except for such restrictions, the existence of the liquidation
account does not restrict the use or application of retained earnings.
In addition, the Bank may not declare or pay cash dividends on or
repurchase any of its shares of common stock if the effect thereof
would cause stockholders' equity to be reduced below applicable
regulatory capital maintenance requirements or if such declaration and
payment would otherwise violate regulatory requirements.
Unlike the Bank, the Company is not subject to these regulatory
restrictions on the payment of dividends to its stockholders. However,
the Company's source of funds for future dividends may depend upon
dividends received by the Company from the Bank.
17) SAIF Special Assessment and its Impact on SAIF Insurance Premiums
The deposits of American Savings, FSB, are presently insured by the
Savings Association Insurance Fund ("SAIF"), which together with the
Bank Insurance Fund ("BIF"), are the two insurance funds administered
by the Federal Deposit Insurance Corporation ("FDIC"). Financial
institutions which are members of the BIF were experiencing
substantially lower deposit insurance premiums because the BIF had
achieved its required level of reserves while the SAIF had not yet
achieved its required reserves. In order to help eliminate this
disparity and any competitive disadvantage due to disparate deposit
insurance premium schedules, legislation to recapitalize the SAIF was
enacted in September 1996.
The legislation required a special one-time assessment of 65.7 cents
per $100 of SAIF insured deposits held by the Bank at March 31, 1995.
The one-time special assessment resulted in a charge to earnings of
approximately $390,000 during the year ended December 31, 1996. The
after-tax effect of this one-time charge to earnings totaled $234,000.
The legislation was intended to fully recapitalize the SAIF fund so
that commercial bank and thrift deposits would be charged the same FDIC
premiums beginning January 1, 1997. As of such date, deposit insurance
premiums for highly rated institutions, such as the Bank, have been
substantially reduced.
The Bank, however, will continue to be subject to an assessment to fund
repayment of the Financing Corporation's ("FICO") obligations. The FICO
assessment for SAIF insured institutions will be 6.48 cents per $100 of
deposits while BIF insured institutions will pay 1.52 cents per $100 of
deposits until the year 2000 when the assessment will be imposed at the
same rate on all FDIC insured institutions.
<PAGE>
18) Financial Instruments with Off-Balance Sheet Risk
The Bank is a party to various transactions with off-balance sheet risk
in the normal course of business. These transactions are primarily
commitments to originate loans and to extend credit on previously
approved unused lines of credit. These financial instruments carry
varying degrees of credit and interest-rate risk in excess of amounts
recorded in the consolidated financial statements.
Commitments to originate mortgage loans of $95,000 at December 31, 1997
represent amounts which the Bank plans to fund within the normal
commitment period of 60 to 90 days. The $95,000 commitment is a fixed
rate commitment at 7.05%. Because the credit worthiness of each
customer is reviewed prior to extension of the commitment, the Bank
adequately controls its credit risk on these commitments, as it does
for loans recorded on the balance sheet. The Bank conducts all of its
lending activities in the Northwest Indiana area. Management believes
the Bank has a diversified loan portfolio and the concentration of
lending activities in these local communities does not result in an
acute dependency upon economic conditions of the lending region.
The Bank has approved, but unused, home equity lines of credit of
approximately $2,350,000 at December 31, 1997. Approval of lines of
credit is based upon underwriting standards that generally do not allow
total borrowings, including the line of credit, to exceed 75% of the
estimated fair value of the customer's home. In addition, the Bank has
approved but unused equity lines of credit on various construction and
commercial projects of approximately $1,300,000 at December 31, 1997.
The Bank also has approved but unused credit card lines of credit of
approximately $650,000.
19) Contingencies
The Bank is, from time to time, a party to certain lawsuits in the
ordinary course of its business, wherein it enforces its security
interest. Management, based upon discussions with legal counsel,
believes that the Company and the Bank are not engaged in any legal
proceedings of a material nature at the present time.
20) Subsequent Event
On January 29, 1998, the Company declared a quarterly cash dividend of
$.07 per share, totaling $67,466, payable February 26, 1998 to
shareholders of record as of February 12, 1998.
21) Disclosures About the Fair Value of Financial Instruments
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is
practicable to estimate that value:
Cash and cash equivalents: For cash and interest-bearing deposits, the
carrying amount is a reasonable estimate of fair value.
Investment securities: Fair values for securities held to maturity,
available for sale or held for trade are based on quoted market prices
as published in financial publications or on quotes from third-party
brokers.
<PAGE>
21) Disclosures About the Fair Value of Financial Instruments (continued)
Mortgage-backed securities: Fair values for mortgage-backed securities
are based on the lower of quotes received from various third-party
brokers.
Loans receivable: The fair values of fixed-rate one-to-four family
residential mortgage loans are based on quoted market prices of similar
loans sold in conjunction with securitization transactions. The fair
values for other fixed and adjustable rate mortgage loans are estimated
using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms and collateral to borrowers
of similar credit quality.
Deposit liabilities: The fair value of demand deposits, savings
accounts and money market deposits is the amount payable on demand at
the reporting date. The fair value of fixed maturity certificates of
deposit is estimated by discounting the future cash flows using the
rates currently offered for deposits of similar original maturities.
Borrowed money: Rates currently available to the Company for debt with
similar terms and remaining maturities are used to estimate fair value
of existing debt.
21) Disclosures About the Fair Value of Financial Instruments (continued)
The estimated fair value of the Company's financial instruments as of
December 31, 1997 and 1996 are as follows:
<TABLE>
<CAPTION>
December 31, 1997
----------------------------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents .................... $ 5,686,955 5,686,955
Investment securities, available for sale .... 8,213,614 8,213,614
Investment securities held for trade ......... 2,412,967 2,412,967
Mortgage-backed securities, available for sale 3,494,035 3,494,035
Loans receivable ............................. 77,093,229 78,919,000
Financial liabilities:
Deposits ..................................... $71,700,126 71,838,000
Borrowed money ............................... 12,000,000 11,920,560
</TABLE>
<PAGE>
21) Disclosures About the Fair Value of Financial Instruments (continued)
<TABLE>
<CAPTION>
December 31, 1996
----------------------------
Carrying Fair
Amount Value
------ -----
<S> <C> <C>
Financial assets:
Cash and cash equivalents ..........................$ 2,567,367 2,567,367
Investment securities, available for sale .......... 8,938,937 8,938,937
Investment securities held for trade ............... 539,500 539,500
Mortgage-backed securities, available for sale ..... 4,018,835 4,018,835
Loans receivable ................................... 67,365,632 66,956,000
Financial liabilities:
Deposits ...........................................$60,410,997 60,514,400
Borrowed money ..................................... 9,500,000 9,390,630
</TABLE>
22) Condensed Parent Company Only Financial Statements
The following condensed statement of financial condition, as of
December 31, 1997 and 1996 and condensed statements of income and cash
flows for the year ended December 31, 1997 and the period from March
29, 1996 to December 31, 1996 for AMB Financial Corp. should be read in
conjunction with the consolidated financial statements and the notes
thereto.
<PAGE>
22) Condensed Parent Company Only Financial Statements (continued)
<TABLE>
<CAPTION>
Statement of Financial Condition
December 31,
--------------------------------
1997 1996
------------ ------------
<S> <C> <C>
Assets
Cash and cash equivalents .............. $ 287,378 551,371
Investment securities held for trade ... 2,412,967 539,500
Loans receivable ....................... 2,726,824 2,930,177
Equity investment in the Bank .......... 10,144,323 11,960,459
Prepaid expenses and other assets ...... 1,458 --
------------ ------------
15,572,950 15,981,507
Liabilities and Stockholders' Equity
Liabilities:
Accrued taxes and other liabilities .... 221,750 43,546
------------ ------------
Stockholders' Equity:
Common stock ........................... 11,241 11,241
Additional paid-in capital ............. 10,649,606 10,646,866
Retained earnings ...................... 7,357,250 6,564,204
Treasury stock ......................... (2,223,051) (724,718)
Common stock awarded by RRP ............ (443,846) (559,632)
------------ ------------
Total stockholders' equity ........... 15,351,200 15,937,961
------------ ------------
$ 15,572,950 15,981,507
============ ============
</TABLE>
<PAGE>
22) Condensed Parent Company Only Financial Statements (continued)
<TABLE>
<CAPTION>
Statement of Income
Period from
Year Ended March 29, 1996
December 31, to December 31,
1997 1996
------------ -----------
<S> <C> <C>
Interest income .................................... $ 198,035 207,053
Gain on sale of investment securities held for trade 36,066 --
Unrealized gain on securities held for trade ....... 531,197 46,484
Non-interest expense ............................... (208,294) (159,960)
----------- -----------
Net income before income taxes
and equity in earnings of subsidiaries ........... 557,004 93,577
Provision for income taxes ......................... (217,815) (40,048)
----------- -----------
Net income before equity in earnings of subsidiaries 339,189 53,529
Equity in earnings of subsidiaries ................. 683,864 302,801
----------- -----------
Net income ....................................... $ 1,023,053 356,330
=========== ===========
</TABLE>
<PAGE>
22) Condensed Parent Company Only Financial Statements (continued)
<TABLE>
<CAPTION>
Statement of Cash Flows
Period from
Year Ended March 29, 1996
December 31, to December 31,
1997 1996
----------- ------------
<S> <C> <C>
Operating activities:
Net income .......................................... $ 1,023,053 356,330
Equity in earnings of the Bank ...................... (683,864) (302,801)
Amortization of cost of stock benefit plan .......... 115,786 19,297
Gain on sale of investment securities held for trade (36,066) --
Unrealized gain on securities held for trade ........ (531,197) (46,484)
Purchase of trading account securities .............. (1,987,144) (493,016)
Proceeds from sale of trading account securities .... 680,940 --
Increase in other assets ............................ (1,458) --
Increase in accrued taxes and other liabilities ..... 180,944 43,546
----------- -----------
Net cash provided for operating activities ............ (1,239,006) (423,128)
----------- -----------
Investing activities:
Purchase of capital stock of the Bank ............... -- (5,329,053)
Loan disbursements .................................. (2,000,000) (3,733,530)
Loan repayments ..................................... 2,203,353 803,353
----------- -----------
Net cash provided by (for) investing activities ....... 203,353 (8,259,230)
----------- -----------
Financing activities:
Net proceeds from sale of common stock .............. -- 10,658,107
Purchase of treasury stock .......................... (1,498,333) (724,718)
Purchase of RRP stock ............................... -- (578,929)
Dividends received from Bank ........................ 2,500,000
Dividends paid on common stock ...................... (230,007) (120,731)
----------- -----------
Net cash provided by investing activities ............. 771,660 9,233,729
----------- -----------
Net increase (decrease) in cash and cash equivalents .. (263,993) 551,371
Cash and cash equivalents at beginning of period ...... 551,371 --
----------- -----------
Cash and cash equivalents at end of period ............ $ 287,378 551,371
=========== ===========
</TABLE>
<PAGE>
AMB Financial Corp.
Stockholder Information
Annual Meeting
The annual meeting of stockholders will be held at 10:30 a.m., on April 22,
1998, at the Company's corporate office, located at 8230 Hohman Avenue, Munster,
Indiana.
Stock Listing
The Company' s stock is trading over the counter, on the NASDAQ Small Cap Market
under the symbol "AMFC".
Price Range of Common Stock and Dividends
The table below shows the range of high and low bid prices and dividends paid in
fiscal 1997. These prices do not represent actual transactions and do not
include retail markups, markdowns or commissions.
Quarter Ended High Low Dividends
------------- ---- --- ---------
March 31, 1997 14-3/8 13-9/32 $0.06
June 30, 1997 15 14-3/8 $0.06
September 30, 1997 15-3/4 14-1/2 $0.06
December 31, 1997 17-3/4 15-3/8 $0.07
The Board of Directors will consider the payment of future cash dividends based
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. See Note 16 of the
Notes to the Consolidated Financial Statements for information regarding
limitations of the Bank's ability to pay dividends to the Company.
As of December 31, 1997, the Company had 203 stockholders of record and 963,798
outstanding shares of common stock.
Shareholder General Inquiries Transfer Agent
Clement B. Knapp, Jr., President Registrar & Transfer Co.
AMB Financial Corp. 10 Commerce Drive
8230 Hohman Ave. Cranford, New Jersey 07016
Munster, Indiana 46321 (800) 456-0596
(219) 836-5870
<PAGE>
AMB Financial Corp.
Corporate Information
Corporate Office
AMB Financial Corp. Telephone (219-836-5870
8230 Hohman Avenue Fax (219) 836-5870
Munster, IN 46321 Web site ambfinancial.com
Directors of the Board AMB Financial Corp.
Officers
Clement B. Knapp, Jr. Clement B. Knapp, Jr.
President since 1977. Chairman of the Board, President
and Chief Executive Officer
Ronald W. Borto Louis A. Green
Director since 1986. Senior Vice-President
Donald L. Harle Daniel T. Poludniak
Director since 1995. Vice-President, Treasurer and
Chief Financial Officer
John C. McLaughlin
Director since 1979. Denise L. Knapp
Corporate Secretary
John G. Pastrick
Director since 1979.
Robert E. Tolley
Director since 1987.
Independent Auditors Corporate Counsel / Local
Cobitz, VandenBerg & Fennessy Abrahamson, Reed & Adley.
9944 S. Roberts Road Suite 202 Attorneys at Law
Palos Hills, IL 60465 200 Russell Street
Hammond, IN 46320
Corporate Counsel / Washington DC
Silver, Freedman & Taff, L.L.P.
1100 New York Ave., N.W.
Washington, DC 20005-3934
<PAGE>
Annual And Other Report The Company is required to file an annual report on Form
10-KSB with the Securities and Exchange Commission. Copies of the Form 10-KSB,
annual report and the Company's quarterly reports may be obtained without charge
by contacting:
Leslie Mullins
AMB Financial Corp.
8230 Hohman Avenue
Munster, Indiana 46321
(219)836-5870
Exhibit 21
Subsidiary of the Registrant
<PAGE>
<TABLE>
<CAPTION>
SUBSIDIARY OF THE REGISTRANT
Percentage of State of Incorporation
Parent Subsidiary Ownership or Organization
------ ---------- --------- ---------------
<S> <C> <C> <C>
AMB Financial Corp. American Savings, FSB 100% Federal
American Savings, FSB NIFCO, Inc. 100% Indiana
NIFCO, Inc. Ridge Management, Inc. 100% Indiana
</TABLE>
Exhibit 23
Consent of Cobitz, VandenBerg & Fennessy
<PAGE>
[Letterhead of Cobitz, VandenBerg & Fennessy]
INDEPENDENT AUDITOR'S CONSENT
We hereby consent to the incorporation by reference and use of our
report, dated February 13, 1998 on the consolidated financial statements of AMB
Financial Corp. which appears in AMB Financial Corp.'s Annual Report of
Shareholders and Form 10-KSB for the year ended December 31, 1997.
/s/ Cobitz, VandenBerg & Fennessy
-----------------------------
Cobitz, VandenBerg & Fennessy
March 27, 1998
Palos Hills, Illinois
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE YEAR ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 2,510,527
<INT-BEARING-DEPOSITS> 3,176,428
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<LOANS> 77,093,229
<ALLOWANCE> 410,383
<TOTAL-ASSETS> 99,795,780
<DEPOSITS> 71,700,126
<SHORT-TERM> 12,000,000
<LIABILITIES-OTHER> 1,325,371
<LONG-TERM> 0
11,241
0
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<NET-INCOME> 1,023,053
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