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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _______ to _______
Commission file number 0-23182
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]
The Issuer had $7.9 million in gross income for the year ended December
31, 1998.
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, 1998 was $7.7 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.)
<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE
PARTS II and IV of Form 10-KSB--1998 Annual Report to Stockholders.
PART III of Form 10-KSB--Proxy Statement for the 1999 Annual Meeting of
Stockholders.
1
<PAGE>
PART I
Item 1. Description of Business
- --------------------------------
General
AMB Financial Corp. (the "Company"), was formed in 1993 by American
Savings, FSB (the "Bank") under the laws of Delaware for the purpose of becoming
a savings and loan holding company. The Bank, 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.
The Bank 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 and purchase one-to
four-family residential mortgage and, to a lesser extent, non-residential,
multi-family real estate, commercial business, consumer and land loans. 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."
The Bank 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 two branch offices located in the communities of
Dyer and Hammond, Indiana. Its deposits are insured up to applicable limits by
the Federal Deposit Insurance Corporation ("FDIC"). At December 31, 1998, the
Company had total assets of $116.9 million, deposits of $79.0 million and
stockholders' equity of $13.4 million (or 11.47% 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 and,
to a lesser extent, purchasing 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, the Bank also originates and purchases non-residential real estate,
multi-family, commercial business, consumer and land loans.
2
<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,
1998 1997 1996 1995
------------------- ------------------ -------------------- -----------------
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................. $63,369 69.69% $51,567 64.71% $43,669 63.41% $38,056 68.60%
Multi-family........................ 2,446 2.69 4,010 5.03 3,259 4.73 3,419 6.16
Non-residential..................... 10,370 11.40 8,376 10.51 8,806 12.79 4,146 7.47
Construction........................ 2,522 2.77 4,450 5.59 4,406 6.40 3,194 5.76
Land................................ 1,227 1.35 1,264 1.59 217 .32 223 .40
------- ----- ------- ----- ------- ----- ------- -----
Total real estate loans......... 79,934 87.90 69,667 87.43 60,357 87.65 49,038 88.39
------- ----- ------- ----- ------- ----- ------- -----
Other Loans:
Consumer Loans:
Deposit account.................... 172 .19 165 .21 185 .27 223 .40
Credit Card........................ 414 .46 405 .51 430 .63 368 .67
Home improvement................... 10 .01 11 .01 15 .01 12 .01
Line of credit..................... 3,552 3.91 3,259 4.09 2,968 4.31 2,745 4.96
Other ............................. 1,244 1.37 1,264 1.58 1,391 2.02 673 1.21
------- ----- ------- ----- ------- ----- ------- -----
Total consumer loans............ 5,392 5.93 5,104 6.40 4,989 7.24 4,021 7.25
------- ----- ------- ----- ------- ----- ------- -----
Commercial business loans........... 5,607 6.17 4,916 6.17 3,519 5.11 2,420 4.36
------- ----- ------- ----- ------- ----- ------- -----
Total loans receivable.......... 90,933 100.00% 79,687 100.00% 68,865 100.00% 55,479 100.00%
====== ====== ======= ======
Less:
Loans in process.................... 569 1,975 910 268
Deferred fees and discounts......... 95 209 234 213
Allowance for losses................ 507 410 355 359
------- ------- ------- -------
Total loans receivable, net......... $89,762 $77,093 $67,366 $54,639
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994
-----------------------
Amount Percent
------ -------
<S> <C> <C>
Real Estate Loans:
One- to four-family................. $37,050 69.02%
Multi-family........................ 3,445 6.42
Non-residential..................... 3,971 7.40
Construction........................ 3,580 6.67
Land................................ 736 1.37
------- -----
Total real estate loans......... 48,782 90.88
------- -----
Other Loans:
Consumer Loans:
Deposit account.................... 263 .49
Credit Card........................ 316 .59
Home improvement................... 21 .04
Line of credit..................... 2,873 5.35
Other ............................. 513 .96
------- -----
Total consumer loans............ 3,986 7.43
------- -----
Commercial business loans........... 905 1.69
------- -----
Total loans receivable.......... 53,673 100.00%
======
Less:
Loans in process.................... 1,245
Deferred fees and discounts......... 248
Allowance for losses................ 331
-------
Total loans receivable, net......... $51,849
=======
</TABLE>
3
<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, 1998
1998 1997 1996 1995
------------------- ------------------ -------------------- -----------------
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............... $39,243 43.16% $38,967 48.90% $33,248 48.28% $30,512 55.00%
Multi-family...................... 688 .76 1,847 2.32 1,999 2.90 2,102 3.79
Non-residential................... 2,685 2.95 3,364 4.22 2,917 4.24 2,021 3.64
Construction...................... 1,242 1.37 2,893 3.63 --- --- --- ---
Land.............................. 338 .37 211 .27 --- --- --- ---
------- ------ ------- ------ -------- ------ -------- ------
Total real estate loans........ 44,196 48.60 47,282 59.34 38,164 55.42 34,635 62.43
------- ------ ------- ------ -------- ------ -------- ------
Consumer........................... 1,840 2.02 1,845 2.31 1,588 2.31 1,272 2.29
Commercial business................ 5,026 5.53 3,828 4.80 3,252 4.72 2,089 3.76
------- ------ ------- ------ -------- ------ -------- ------
Total fixed-rate loans......... 51,062 56.15 52,955 66.45 43,004 62.45 37,996 68.48
------- ------ ------- ------ -------- ------ -------- ------
Adjustable-Rate Loans:
Real estate:
One- to four-family............... 24,126 26.53 12,600 15.81 10,421 15.13 7,544 13.60
Multi-family...................... 1,758 1.93 2,163 2.71 1,260 1.83 1,317 2.37
Non-residential................... 7,685 8.45 5,012 6.29 5,889 8.55 2,125 3.83
Construction...................... 1,280 1.41 1,557 1.96 4,406 6.40 3,194 5.76
Land ............................. 889 .98 1,053 1.32 217 .32 223 .40
------- ------ ------- ------ -------- ------ -------- ------
Total real estate loans........ 35,738 39.30 22,385 28.09 22,193 32.23 14,403 25.96
------- ------ ------- ------ -------- ------ -------- ------
Consumer........................... 3,552 3.91 3,259 4.09 3,401 4.93 2,749 4.96
Commercial business................ 581 .64 1,088 1.37 267 .39 331 .60
------- ------ ------- ------ -------- ------ -------- ------
Total adjustable-rate loans.... 39,871 43.85 26,732 33.55 25,861 37.55 17,483 31.52
------- ------ ------- ------ -------- ------ -------- ------
Total loans receivable......... 90,933 100.00% 79,687 100.00% 68,865 100.00% 55,479 100.00%
====== ====== ======= ======
Less:
Loans in process................... 569 1,975 910 268
Deferred fees and discounts........ 95 209 234 213
Allowance for loan losses.......... 507 410 355 359
-------- -------- -------- ---------
Total loans receivable, net..... $89,762 $77,093 $67,366 $54,639
======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
1994
-----------------------
Amount Percent
------ -------
<S> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family............... $30,657 57.12%
Multi-family...................... 2,220 4.14
Non-residential................... 2,168 4.04
Construction...................... --- ---
Land.............................. --- ---
------- ------
Total real estate loans........ 35,045 65.30
-------- ------
Consumer........................... 1,108 2.06
Commercial business................ 644 1.20
-------- -------
Total fixed-rate loans......... 36,797 68.56
-------- -------
Adjustable-Rate Loans:
Real estate:
One- to four-family............... 6,393 11.91
Multi-family...................... 1,225 2.28
Non-residential................... 1,803 3.36
Construction...................... 3,580 6.67
Land ............................. 736 1.37
-------- --------
Total real estate loans........ 13,737 25.59
-------- -------
Consumer........................... 2,878 5.36
Commercial business................ 261 .49
-------- -------
Total adjustable-rate loans.... 16,876 31.44
-------- -------
Total loans receivable......... 53,673 100.00%
======
Less:
Loans in process................... 1,245
Deferred fees and discounts........ 248
Allowance for loan losses.......... 331
-------
Total loans receivable, net..... $51,849
=======
</TABLE>
4
<PAGE>
The following table illustrates the interest rate sensitivity of the
Bank's loan portfolio at December 31, 1998. 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 Consumer
--------------------- ------------------- ------------------- ------------------ --------------
Weighted Weighted Weighted Weighted Weighted
Average Average Average Average Average
Amount Rate 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> <C> <C>
1999....................... $ 2,014 8.65% $ 629 8.58% $2,096 8.69% $ 585 8.84% $4,196 9.71%
2000 to 2001............... 1,953 7.75 1,092 8.34 --- --- 387 8.32 656 8.24
2002 and 2003.............. 4,354 7.64 948 8.68 --- --- 94 7.67 487 8.10
2004 to 2008............... 13,491 7.40 1,825 8.74 --- --- 127 8.28 53 8.66
2009 to 2018............... 22,057 7.29 4,896 8.86 426 7.33 34 8.50 --- ---
2019 and following......... 19,500 7.34 3,426 8.19 --- --- --- --- --- ---
------ ------- ------ ----- ------ ---- ------ ----
Total................... $63,369 7.41 $12,816 8.59% $2,522 8.46% $1,227 8.52% $5,392 9.38%
======= ======= ====== ====== ======
<CAPTION>
Commercial
Business Total
------------------- ---------------------
Weighted Weighted
Average Average
Amount Rate Amount Rate
------- ----- --------- -----
<S> <C> <C> <C> <C>
1999....................... $2,113 8.13% $11,633 8.95%
2000 to 2001............... 1,831 8.21 5,919 8.09
2002 and 2003.............. 372 9.36 6,255 7.93
2004 to 2008............... 308 9.62 15,804 7.61
2009 to 2018............... 983 5.93 28,396 7.52
2019 and following......... ------ ---- 22,926 7.47
Total................... $5,607 7.93% $90,933 7.77%
====== =======
</TABLE>
The total amount of loans due after December 31, 1999 which have
predetermined interest rates is $44.1 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $35.2
million.
5
<PAGE>
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, 1998, based on the above, the Bank's regulatory loan-to-one
borrower limit was approximately $1.3 million. On the same date, the Bank had no
borrowers with outstanding balances in excess of this amount. As of December 31,
1998, the largest dollar amount of indebtedness to one borrower or group of
related borrowers was $1.1 million 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, 1998, $63.4 million, or 69.69%
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
$69,400 and the largest outstanding residential loan had a principal balance of
$708,000. Virtually all of the residential loans originated by the Bank are
secured by properties located in the Bank's market area. However, the Bank has
purchased a number of one-to-four family residential loans secured by properties
located elsewhere in the United States. See "- Originations, Sales and Purchases
of Loans."
Historically, the Bank 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,
the Bank 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, the Bank
has
6
<PAGE>
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.
All ARMs and balloon loans originated by the Bank are retained and
serviced by it. At December 31, 1998, the Bank had $21.0 million of fixed-rate
residential loans with less than 10 years to maturity, $11.4 million of
fixed-rate residential loans with maturities between 10 and 20 years and $6.8
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 the
Bank 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 also originates balloon payment loans normally due seven years
from date of origination and amortized over 30 years. 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, 1998, the total balance of one- to four-family ARMs was $24.1
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. The Bank 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, the Bank 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, 1998, the Bank had 28 one- to four-family
residential mortgage loans having an aggregate balance of $8.6 million with
current balances in excess of the 1998 FHLMC maximum, $227,150 ("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.
During 1998, the Bank purchased $11.5 million adjustable one- to four-family
first mortgage loans.
7
<PAGE>
Multi-Family and Non-Residential Real Estate Lending
The Bank has long made and, to a lesser extent purchased, 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, 1998, the Bank had $12.8
million in multi-family and non-residential real estate loans, representing
14.09% 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.
The Bank has originated and purchased both adjustable- and fixed-rate
multi-family and non-residential real estate loans. 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 and normally have terms up to 25 years.
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 50 miles of one or more of the Bank's offices.
8
<PAGE>
The table below sets forth by type of security property the estimated
number, loan amount and outstanding balance of the Bank's multi-family and
non-residential real estate loans at December 31, 1998.
<TABLE>
<CAPTION>
Outstanding
Number of Original Principal
Loans Loan Amount Balance
----- ----------- -------
(Dollars in Thousands)
<S> <C> <C> <C>
Multi-family................. 10 $ 3,521 $ 2,446
Office....................... 5 1,390 1,214
Retail....................... 1 1,050 1,050
Commercial building.......... 9 1,626 1,544
Auto service/repair.......... 1 244 239
Restaurants.................. 4 777 482
Hotel........................ 6 4,453 4,238
Nursing home................. 1 500 486
Other........................ 11 1,204 1,117
--- ------ -----
Total..................... 48 $14,765 $12,816
=== ======= =======
</TABLE>
At December 31, 1998, the Bank's largest multi-family and largest
non-residential real estate loans totaled $509,000 and $1.1 million,
respectively. As of December 31, 1998 one non-residential loan totaling $32,000
was 60 days or more delinquent while all others were 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, 1998, 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, 1998, the Bank had two construction loans with outstanding
aggregate balances of $372,000 (including an additional $159,000 in undisbursed
loan proceeds) secured by one- to four- family residential property to borrowers
intending to live in the properties upon
9
<PAGE>
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 a separate underwriting process.
At, December 31, 1998, the Bank had five construction loans with
outstanding aggregate balances of $448,000 (including an additional $82,000 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, 1998.
Additionally, the Bank does on occasion participate with other lenders in loans
to developers and builders to finance family housing construction. At December
31, 1998, the Bank was involved in three participation construction loans with
an outstanding aggregate balance of $1.7 million (including an additional
$323,000 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, 1998.
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.
10
<PAGE>
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, 1998, the Bank had $1.2 million in loans secured by land, or
1.35% 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, 1998, 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, 1998, the Bank's consumer loans totaled $5.4 million or 5.93% of
the Bank's gross loan portfolio.
The Bank 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, 1998, the Bank had $3.6
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, 1998,
approximately 384 credit cards had been issued, with an aggregate outstanding
loan balance of $414,000 and unused credit available of $765,000. The Bank
presently charges no annual membership fee and a fixed annual rate of interest
on these credit cards.
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
11
<PAGE>
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.
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, 1998, $310,000, or approximately
5.75% 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.
Since 1995, the Bank has purchased seasoned commercial leases million
covering various types of office/commercial equipment from another financial
institution with expertise in originating and acquiring such leases. As of
December 31, 1998, the outstanding balance on these leases was
12
<PAGE>
$1.5 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 selling institution continues to
service the leases for the Bank 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, 1998, 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 purchases loans
from third parties. In particular, the Bank may purchase loans of a type which
are not available or attractive terms in its own market area. The Bank generally
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.
The Bank occasionally sells long-term fixed-rate loans. To date, most
of the Bank's loan sales have been made on a servicing released basis. At
December 31, 1998, approximately $20.4 million of the Bank's loan portfolio was
serviced by others and the Bank did not service any 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.
13
<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,
-----------------------------------
1998 1997 1996
-------- ------- --------
<S> <C> <C> <C>
Originations by type:
Adjustable rate:
Real estate - one- to four-family.................. $ 1,979 $ 3,444 $ 4,027
- multi-family....................... --- --- ---
- non-residential.................... 1,884 1,014 2,880
- construction....................... --- 772 2,778
- land............................... 370 --- ---
Non-real estate - consumer......................... 4,261 3,565 4,485
- commercial business........... 1,608 677 158
-------- ------- --------
Total adjustable-rate....................... 10,102 9,472 14,328
-------- ------- --------
Fixed rate:
Real estate - one- to four-family.................. 10,243 7,096 8,219
- multi-family....................... --- 35 101
- non-residential.................... 1,050 160 17
- construction....................... 664 2,707 ---
- land............................... 176 192 ---
Non-real estate - consumer......................... 1,568 1,543 793
- commercial business........... 2,118 531 85
-------- ------- --------
Total fixed-rate............................ 15,819 12,264 9,215
-------- ------- --------
Total loans originated...................... 25,921 21,736 23,543
-------- ------- --------
Purchases:
Real estate - one- to four-family.................. 11,539(1) 3,797 ---
- multi-family....................... 459 491 ---
- non-residential.................... --- 500 2,079
- construction....................... 1,306 272 ---
Non-real estate - consumer......................... 483 --- 503
- commercial business........... 700 1,813 2,066
-------- ------- -------
Total loans purchased....................... 14,487 6,873 4,648
-------- ------- --------
Total additions............................. 40,408 28,609 28,191
-------- ------- --------
Total loans sold............................ --- --- ---
Principal repayments............................... 27,756 18,851 14,801
-------- ------- --------
Net before other items...................... 12,652 9,758 13,390
Increase (decrease) in other items, net.............. 17 (31) (663)
-------- ------- --------
Net increase................................ $12,669 $ 9,727 $12,727
======== ======= =======
</TABLE>
- -----------
<PAGE>
(1) Consisted primarily of conforming ARM's secured by one-to-four family
properties located out of the Bank's market area.
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 along with any required
demand letters as set forth in the loan contract are 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.
14
<PAGE>
If the delinquency is not cured by the 90th day, the customer is
normally 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 the Bank 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.
Loan Delinquencies. The following table sets forth the Bank's loan
delinquencies by type, by amount and by percentage of type at December 31, 1998.
<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)
Real Estate:
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
One- to four-family...... 7 $562 .89% 4 $314 .49% 11 $876 1.38%
Multi-family............. --- --- --- --- --- --- --- --- ---
Non-residential.......... 1 32 .31% --- --- --- 1 32 .31%
Construction............. --- --- --- --- --- --- --- --- ---
Land..................... --- --- --- --- --- --- --- --- ---
Consumer................... 8 141 2.62% 11 169 3.13% 19 310 5.75%
Commercial business........ --- --- --- --- --- --- --- --- ---
----- ------ ----- ----- ---- -----
Total................. 16 $735 .81% 15 $483 .53% 31 $1,218 1.34%
===== ==== ===== ==== ==== ======
</TABLE>
<PAGE>
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
15
<PAGE>
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, 1998, the Bank had
classified $486,000 of its loans 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, 1998,
the Bank had classified a total of $506,000 of its loans and other assets of
concern, as follows:
<TABLE>
<CAPTION>
One- to Four-
Family Multi-family Consumer Total
----- ------------ -------- ----
(In Thousands)
<S> <C> <C> <C> <C>
Substandard............ $337 $ --- $169 $506
Doubtful............... --- --- --- ---
Loss................... --- --- --- ---
---- ------- ---- ----
$337 $ --- $169 $506
==== ======= ==== ====
</TABLE>
The Bank's 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."
16
<PAGE>
<TABLE>
<CAPTION>
December 31,
-------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Non-accruing loans:
One- to four-family............................ $ 314 $ 263 $269 $318 $ 344
Multi-family................................... --- --- --- --- ---
Non-residential................................ --- --- --- --- ---
Construction................................... --- --- --- --- 109
Consumer....................................... 161 45 36 51 47
Commercial business............................ --- --- --- --- ---
----- ----- ---- ---- -------
Total....................................... 475 308 305 369 500
----- ----- ---- ---- -------
Accruing loans delinquent more than 90 days:
Consumer....................................... 8 --- --- --- ---
----- ----- ---- ---- -------
Foreclosed assets:
One- to four-family............................ 23 27 --- --- ---
Multi-family................................... --- --- --- --- ---
Non-residential................................ --- --- --- --- ---
Construction................................... --- --- --- --- ---
Consumer....................................... --- --- --- --- ---
Commercial business............................ --- --- --- --- ---
----- ----- ---- ---- -------
Total....................................... 23 27 -- --- ---
----- ----- ---- ---- -------
Total non-performing assets...................... $ 506 $ 335 $305 $369 $ 500
===== ===== ==== ==== =======
Total as a percentage of total assets............ .43% .34% .35% .53% .76%
===== ===== ===== ===== =======
</TABLE>
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $17,000.
At December 31, 1998, 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.
<PAGE>
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
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.
17
<PAGE>
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.
The following table sets forth an analysis of the Bank's allowance for
loan losses.
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------------------------
1998 1997 1996 1995 1994
---- --- ----- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Balance at beginning of period........... $ 410 $ 355 $ 360 $ 331 $ 291
Charge-offs:
One- to four-family.................... --- --- --- --- 2
Multi-family........................... --- --- --- --- ---
Non-residential........................ --- --- --- --- ---
Construction........................... --- --- --- --- ---
Consumer............................... 5 33 5 10 5
Commercial business.................... --- --- --- --- 15
------- ------- ----- ----- -----
Total charge-offs............... 5 33 5 10 22
------- ------ ----- ---- -----
Recoveries:
One- to four-family.................... --- --- --- --- ---
Multi-family........................... --- --- --- --- ---
Non-residential........................ --- --- --- --- ---
Construction........................... --- --- --- --- ---
Consumer............................... --- 14 --- --- ---
Commercial business.................... --- --- --- --- ---
------- ------ ----- ----- -------
Total recoveries................. --- 14 --- --- ---
------- ----- ----- ----- -------
Net charge-offs.......................... 5 19 5 10 22
Additions charged to operations.......... 102 74 --- 39 62
----- ----- ----- ----- -------
Balance at end of period................. $ 507 $ 410 $ 355 $ 360 $ 331
===== ===== ===== ===== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period........................ .01% .03% .01% .02% .06%
=== === === === ====
Ratio of net charge-offs during the
period to average non-performing
assets.................................. 1.70% 4.15% 1.48% 2.30% 3.96%
===== ==== ==== ==== =====
</TABLE>
18
<PAGE>
The distribution of the Bank's allowance for losses on loans at the
dates indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31
-------------------------------------------------------------------------------------------
1998 1997 1996
---------------------------- ----------------------------- -----------------------------
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)
One- to four-family..... $ 110 $63,369 69.69% $ 97 $51,567 64.71% $ 89 $43,669 63.41%
Multi-family............ 12 2,446 2.69 12 4,010 5.03 10 3,259 4.73
Non-residential......... 26 10,370 11.40 25 8,376 10.51 26 8,806 12.79
Construction and land... 19 3,749 4.12 28 5,714 7.18 23 4,623 6.72
Consumer................ 71 5,392 5.93 45 5,104 6.40 45 4,989 7.24
Commercial business..... 56 5,607 6.17 49 4,916 6.17 35 3,519 5.11
Unallocated............. 212 -- --- 154 --- --- 127 --- ---
Total.............. $ 506 $90,933 100.00% $410 $79,687 100.00% $355 $68,865 100.00%
===== ======= ====== ==== ======= ====== ==== ======= ======
<CAPTION>
December 31,
-----------------------------------------------------------
1995 1994
----------------------------- ----------------------------
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..... $ 93 $38,056 68.60% $ 89 $37,050 69.02%
Multi-family............ 10 3,419 6.16 10 3,445 6.42
Non-residential......... 13 4,146 7.47 72 3,971 7.40
Construction and land... 17 3,417 6.16 38 4,316 8.04
Consumer................ 23 4,021 7.25 29 3,986 7.43
Commercial business..... 24 2,420 4.36 9 905 1.69
Unallocated............. 180 --- --- 84 --- ---
Total.............. $360 $55,479 100.00% $ 331 $53,673 100.00%
==== ======= ====== ===== ======= ======
</TABLE>
19
<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 First American Asset Management as non-commissioned
investment adviser. The Company is also authorized by its general investment
policy to purchase investment grade municipal securities and, depending on
market conditions, may purchase such securities from time to time. The Company
also invests, to a limited degree, in equity securities of other financial
companies. At December 31, 1998, the Company did not own any securities of a
single issuer which exceeded 10% of the Company'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, 1998, the Bank's liquidity ratio (liquid assets as a percentage of
net withdrawable savings and current borrowings) was 16.06% 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. 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.
20
<PAGE>
The following table sets forth the composition of the Company's
investment securities at the dates indicated.
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------
1998 1997 1996
--------------------- ------------------- ---------------------
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........................................ $ 1,334 13.52% $ 725 6.39% $ 546 5.45%
------- ------ ------- ------ ------- ------
Investment securities available for sale:
U.S. government securities......................... 5,901 59.82 8,090 71.27 8,283 82.62
Municipal obligations.............................. 102 1.03 --- --- --- ---
Government securities mutual fund.................. 134 1.36 124 1.09 656 6.54
------- ------ ------- ------ ------- ------
6,137 62.21 8,214 72.36 8,939 89.16
------- ------ ------- ------ ------- ------
Investment securities held for trade:
Thrift common stock mutual fund.................... 964 9.77 1,325 11.67 --- ---
General equity mutual fund......................... 57 0.58 --- --- --- ---
Common stock of other financial institutions....... 1,277 12.94 1,088 9.58 540 5.39
Corporate debt securities.......................... 96 .98 --- --- --- ---
------- ------ ------- ------ ------- ------
2,394 24.27 2,413 21.25 540 5.39
------- ------ ------- ------ ------- ------
Total investment securities..................... $9,865 100.00% $11,352 100.00% $10,025 100.00%
====== ====== ======= ====== ======= ======
Average remaining life of debt investment
securities.......................................... 3.9 years 1.8 years 2.3 years
Other interest-earning assets:
Interest-bearing deposits with banks............... $5,887 100.00% $ 3,119 98.21% $ 1,093 100.00%
Money market mutual fund........................... --- --- --- --- --- ---
------- ------ ------- ------ ------- ------
Total........................................... $5,887 100.00% $ 3,176 100.00% $ 1,093 100.00%
====== ====== ======= ====== ======= ======
====== ====== ======= ====== ======= ======
</TABLE>
<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, 1998
--------------------------------------------------------------------------------
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.................. $ 514 $4,435 $ 952 $ --- $5,901 $5,901
Municipal obligation........................ --- --- --- 102 102 102
Corporate debt securities................... --- --- --- 96 96 96
------- ------ ------ ------ ------ ------
Total investment securities (excluding
FHLB stock and equity securities)........... $ 514 $4,435 $ 952 $ 198 $6,099 $6,099
====== ====== ===== ===== ====== ======
Weighted average yield...................... 7.75% 5.91% 6.69% 6.85% 6.22%
</TABLE>
21
<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, 1998,
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,
---------------------------------------------------------------------
1998 1997 1996
---------------------- ------------------- ----------------------
Book % of Book % of Book % of
Value Total Value Total Value Total
(Dollars in Thousands)
Mortgage-backed securities available for sale:
<S> <C> <C> <C> <C> <C> <C>
GNMA................................... $ 489 18.46% $ 639 18.29% $ 762 18.96%
FNMA................................... 53 2.00 70 2.00 82 2.04
FHLMC.................................. 2,107 79.54 2,785 79.71 3,175 79.00
----- ----- ----- ------ ------ ------
Total mortgage-backed
securities........................ $2,649 100.00% $3,494 100.00% $4,019 100.00%
===== ====== ====== ====== ====== ======
</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,
-----------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
<S> <C> <C> <C>
Purchases:
Adjustable-rate................................ $ --- $ --- $ ---
Fixed-rate..................................... --- --- 3,034
------ ------ ------
Total purchases......................... --- --- 3,034
------ ------ ------
Sales and Repayments:
Total sales............................. --- --- ---
------ ------ ---------
Principal repayments........................... 847 570 482
---- ---- -------
Total reductions........................ (847) (570) (482)
Increase (decrease) in other items, net........ 2 45 (12)
----- ------ ---------
Net increase (decrease)................. $(845) $(525) $2,540
===== ===== ======
</TABLE>
22
<PAGE>
The following table sets forth the contractual maturities of the
Company's mortgage-backed securities at December 31, 1998. 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, 1998
Due in Balance Outstanding
1 to 5 to 10 10 to 20
5 Years Years Years Fixed Adjustable
------- ----- ----- ----- ----------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Federal Home Loan Mortgage Corporation............ $ 253 $ 156 $1,660 $2,069 $ ---
Federal National Mortgage Association............. --- --- 53 --- 53
Government National Mortgage Association.......... --- --- 482 --- 482
------ ------ ---- ------ ----
Total........................................ $ 253 $ 156 $2,195 $2,069 $ 535
===== ===== ====== ====== =====
</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.
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.
23
<PAGE>
The following table sets forth the savings flows at the Bank during the
periods indicated.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
Opening balance............................. $71,700 $ 60,411 $ 59,588
Deposits.................................... 151,006 142,882 122,369
Withdrawals................................. (143,774) (134,005) (123,874)
Sale of deposit accounts (2,703) --- ---
Interest credited........................... 2,768 2,412 2,328
------- ---------- ---------
Ending balance.............................. $78,997 $ 71,700 $ 60,411
======= ======== ========
Net increase................................ $ 7,297 $ 11,289 $ 823
======= ======== =========
Percent increase............................ 10.18% 18.69% 1.38%
===== ===== =====
</TABLE>
24
<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,
-----------------------------------------------------------------------------
1998 1997 1996
------------------------ -------------------- ----------------------
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).................. $ 794 1.01 $ 698 .97% $ 731 1.21%
Passbook Accounts 2.75%(1).................. 15,143 19.17 16,407 22.88 16,311 27.00
NOW Accounts 1.90%(1)....................... 6,610 8.37 6,560 9.15 5,981 9.90
Money Market Accounts 3.25%(1).............. 3,773 4.78 2,878 4.01 2,454 4.06
------- ------- ------- ----- ------- -------
Total Non-Certificates...................... 26,320 33.32 26,543 37.02 25,477 42.17
------ ------ ------ ----- ------- -------
Certificates:
3.01 - 4.00%.............................. --- --- 257 .36 416 .69
4.01 - 6.00%.............................. 48,242 61.07 26,232 36.59 29,691 49.15
6.01 - 8.00%.............................. 4,429 5.61 18,663 26.03 4,822 7.98
8.01 - 9.00%.............................. 6 .01 5 .01 5 .01
--------- ------- ------- ------ ------- --------
Total Certificates.......................... 52,677 66.68 45,157 62.98 34,934 57.83
-------- ------ ------- ------ ------- -------
Total Deposits.............................. $78,997 100.00% $71,700 100.00% $60,411 100.00%
======= ====== ======= ====== ======= ======
</TABLE>
- ------------------------
(1) Rates in effect at December 31, 1998.
25
<PAGE>
The following table shows rate and maturity information for the Bank's
certificates of deposit as of December 31, 1998
<TABLE>
<CAPTION>
4.01- 6.01- 8.01- Percent
6.00% 8.00% 9.00% Total of Total
-------- ------ --------- ------- -------
(Dollars in Thousands)
Certificate account maturing in quarter ending:
<S> <C> <C> <C> <C> <C>
March 31, 1999................. $10,023 $2,574 $ --- $12,597 23.91%
June 30, 1999.................. 8,159 163 --- 8,322 15.80
September 30, 1999............. 19,250 540 --- 19,790 37.57
December 31, 1999.............. 4,183 442 --- 4,625 8.78
March 31, 2000................. 1,506 225 --- 1,731 3.29
June 30, 2000.................. 857 304 --- 1,161 2.20
September 30, 2000............. 1,182 --- --- 1,182 2.24
December 31, 2000.............. 814 117 --- 931 1.77
March 31, 2001................. 278 --- --- 278 .53
June 30, 2001.................. 404 56 --- 460 .87
September 30, 2001............. 83 --- --- 83 .16
December 31, 2001.............. 252 --- --- 252 .48
Thereafter..................... 1,251 8 6 1,265 2.40
----- ------- ------ ------ -----
Total....................... $48,242 $ 4,429 $ 6 $52,677 100.00%
======= ======= ======= ======= ======
Percent of total............ 91.58% 8.41% .01% 100.00%
===== ===== ====== ======
</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,
1998.
<TABLE>
<CAPTION>
Maturity
--------------------------------------------------
Over Over
3 Months 3 to 6 6 to 12 Over
or Less Months Months 12 months Total
------- ------ ------ --------- -----
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000....... $ 9,424 $6,925 $20,408 $6,315 $43,072
Certificates of deposit of $100,000 or more...... 3,173 1,397 4,007 1,028 9,605
----- ----- ----- ----- -----
Total certificates of deposit.................... $12,597 $8,322 $24,415 $7,343 $52,677
======= ====== ======= ====== =======
</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
26
<PAGE>
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,
-------------------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Maximum Balance:
<S> <C> <C> <C>
FHLB advances........................................... $25,683 $12,000 $9,500
Securities sold under agreements to repurchase.......... --- --- ---
Other borrowings........................................ --- --- ---
Average Balance:
FHLB advances........................................... $18,663 $11,629 $3,186
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,
---------------------------------------
1998 1997 1996
---- ---- ----
(Dollars in Thousands)
<S> <C> <C> <C>
FHLB advances............................................. $21,683 $12,000 $9,500
Securities sold under agreements to repurchase............ --- --- ---
Other borrowings.......................................... --- --- ---
------- -------- -------
Total borrowings..................................... $21,683 $12,000 $9,500
======= ======= ======
Weighted average interest rate of FHLB advances........... 5.65% 5.89% 5.91%
Weighted average interest rate of securities sold
under agreements to repurchase........................... ---% ---% ---%
Weighted average interest rate of other borrowings........ ---% ---% ---%
</TABLE>
Service Corporations
As a federally chartered savings association, the Bank is permitted by
OTS regulations to invest up to 2% of its assets, or $2.3 million at December
31, 1998, in the stock of, or loans to, service corporation subsidiaries. As of
such date, the net book value of the Bank's investment in its service
corporations was approximately $50,000. The Bank 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
27
<PAGE>
permitted to invest an unlimited amount in operating subsidiaries engaged solely
in activities which a federal association may engage in directly.
The Bank 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, 1998, the Bank had an equity investment in NIFCO of $50,000. For
the year ended December 31, 1998, NIFCO recorded net income of $1,000. In the
past, Ridge Management engaged in lending and investment activity, although it
is currently essentially inactive. For the year ended December 31, 1998, Ridge
Management had no activity.
Competition
The Bank 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,
1998, the Bank estimated its market share of savings deposits in the
Gary-Hammond, Indiana MSA market area to be approximately 1.3%.
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. The Bank 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, the Bank is subject to broad
federal regulation and oversight extending to all its operations. The Bank is a
member of the FHLB of Indianapolis and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of the Bank, the Company also
is subject to federal regulation and oversight. The purpose of the regulation of
the Company and other holding companies is to protect subsidiary savings
associations. The Bank is a member of the Savings Association Insurance Fund
("SAIF"), which together with the Bank Insurance Fund (the "BIF") are
28
<PAGE>
the two deposit insurance funds administered by the FDIC, and the deposits of
the Bank are insured by the FDIC. As a result, the FDIC has certain regulatory
and examination authority over the Bank.
Certain of these regulatory requirements and restrictions are discussed
below or elsewhere in this document.
Federal Regulation of Savings Associations
The OTS has extensive authority over the operations of savings
associations. As part of this authority, the Bank is required to file periodic
reports with the OTS and is subject to periodic examinations by the OTS and the
FDIC. The last regular OTS and FDIC examinations of the Bank were as of March,
1998 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. The
Bank's OTS assessment for the fiscal year ended December 31, 1998, was $33,000.
The OTS also has extensive enforcement authority over all savings
associations and their holding companies, including the Bank and the Company.
This enforcement authority includes, among other things, the ability to assess
civil money penalties, to issue cease-and-desist or removal orders and to
initiate injunctive actions. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the
Bank is prescribed by federal laws and it is prohibited from engaging in any
activities not permitted by such laws. For instance, no savings institution may
invest in non-investment grade corporate debt securities. In addition, the
permissible level of investment by federal associations in loans secured by
non-residential real property may not exceed 400% of total capital, except with
approval of the OTS. Federal savings associations are also generally authorized
to branch nationwide. The Bank is in compliance with the noted restrictions.
The Bank's general permissible lending limit for loans-to-one-borrower
is equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 1998, the Bank's lending limit under this restriction was $1.3
million. The Bank is in compliance with the loans-to-one-borrower limitation.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, 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.
29
<PAGE>
Insurance of Accounts and Regulation by the FDIC
The Bank is a member of the SAIF, which is administered by the FDIC.
Deposits are insured up to applicable limits by the FDIC and such insurance is
backed by the full faith and credit of the United States Government. As insurer,
the FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of and to require reporting by FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FDIC. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the OTS an opportunity to take such action, and may
terminate the deposit insurance if it determines that the institution has
engaged in unsafe or unsound practices or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums, based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium, while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classifications of all insured
institutions are 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.
Effective January 1, 1997, the premium schedule for BIF and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF-insured
institutions are required to pay a Financing Corporation (FICO) assessment, in
order to fund the interest on bonds issued to resolve thrift failures in the
1980s, equal to 6.48 basis points for each $100 in domestic deposits, while
BIF-insured institutions pay an assessment equal to 1.52 basis points for each
$100 in domestic deposits. The assessment is expected to be reduced to 2.43
basis points no later than January 1, 2000, when BIF insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of BIF and SAIF deposits, will continue until the FICO bonds
mature in the year 2017.
Regulatory Capital Requirements
Federally insured savings associations, such as the Bank, are required
to maintain a minimum level of regulatory capital. The OTS has established
capital standards, including a tangible capital requirement, a leverage ratio
(or core capital) requirement and a risk-based capital requirement applicable to
such savings associations. These capital requirements must be generally as
stringent
30
<PAGE>
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, 1998, the Bank did not have any intangible
assets.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. All subsidiaries of the Bank are includable
subsidiaries.
At December 31, 1998, the Bank had tangible capital of $8.5 million, or
7.52% of adjusted total assets, which is approximately $6.8 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, 1998, the Bank had core capital equal to $8.5 million,
or 7.52% of adjusted total assets, which is $5.1 million above the minimum
leverage ratio requirement of 3% as in effect on that date.
The OTS risk-based requirement requires savings associations to have
total capital of at least 8% of risk-weighted assets. Total capital consists of
core capital, as defined above, and supplementary capital. Supplementary capital
consists of certain permanent and maturing capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 1998, the Bank had
no capital instruments that qualify as supplementary capital and $506,000 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. The Bank had $15,000 of
such exclusions from capital and assets at December 31, 1998.
31
<PAGE>
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.
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 the Bank, 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, 1998, the Bank had total capital of $9.0 million
(including $8.5 million in core capital and $506,000 in qualifying supplementary
capital) and risk-weighted assets of $63.8 million or total capital of 14.06% of
risk-weighted assets. This amount was $3.9 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
32
<PAGE>
tangible capital ratio of 2% or less) is subject to further mandatory
restrictions on its activities in addition to those applicable to significantly
undercapitalized associations. In addition, the OTS must appoint a receiver (or
conservator with the concurrence of the FDIC) for a savings association, with
certain limited exceptions, within 90 days after it becomes critically
undercapitalized. Any undercapitalized association is also subject to the
general enforcement authority of the OTS and the FDIC, including the appointment
of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Bank may have a substantial adverse effect on the Bank's operations and
profitability. Company shareholders do not have preemptive rights, and
therefore, if the Company is directed by the OTS or the FDIC to issue additional
shares of Common Stock, such issuance may result in the dilution in the
percentage of ownership of the Company.
Limitations on Dividends and Other Capital Distributions
OTS regulations impose various restrictions 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
33
<PAGE>
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity
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. Monetary penalties may be imposed for
failure to meet these liquidity requirements. In 1997 the OTS 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, 1998 was 16.06%
which exceeded the applicable requirements. The Bank has never been subject to
monetary penalties for failure to meet its liquidity requirements.
Accounting
An OTS policy statement applicable to all savings associations
clarifies and re-emphasizes that the investment activities of a savings
association must be in compliance with approved and documented investment
policies and strategies, and must be accounted for in accordance with GAAP.
Under the policy statement, management must support its classification of and
accounting for loans and securities (i.e., whether held for investment, sale or
trading) with appropriate documentation. The Bank believes it is in compliance
with these amended rules.
The OTS has adopted an amendment to its accounting regulations, which
may be made more stringent than GAAP by the OTS, to require that transactions be
reported in a manner that best reflects their underlying economic substance and
inherent risk and that financial reports must incorporate any other accounting
regulations or orders prescribed by the OTS.
Qualified Thrift Lender Test
All savings associations, including the Bank, are required to meet a
qualified thrift lender ("QTL") test to avoid certain restrictions on their
operations. This test requires a savings association to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. 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, 1998, the Bank met the test and has always met
the test since its effectiveness.
34
<PAGE>
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
that it believes are best suited to its particular community, consistent with
the CRA. The CRA requires the OTS, in connection with the examination of the
Bank, to assess the institution's record of meeting the credit needs of its
community and to take such record into account in its evaluation of certain
applications, such as a merger or the establishment of a branch, by the Bank. An
unsatisfactory rating may be used as the basis for the denial of an application
by the OTS.
The federal banking agencies, including the OTS, have recently revised
the CRA regulations and the methodology for determining an institution's
compliance with the CRA. Due to the heightened attention being given to the CRA
in the past few years, the Bank may be required to devote additional funds for
investment and lending in its local community. The Bank was examined for CRA
compliance in March 1998 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 the Bank include the Company and any
company which is under common control with the Bank. In addition, a savings
association may not lend to any affiliate engaged in activities not permissible
for a bank holding company or acquire the securities of most affiliates. The
Bank's 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
35
<PAGE>
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 the Bank or any other SAIF-insured savings association)
would become subject to such restrictions unless such other associations each
qualify as a QTL and were acquired in a supervisory acquisition.
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company. See "-
Qualified Thrift Lender Test."
The Company must obtain approval from the OTS before acquiring control
of any other SAIF-insured association. Such acquisitions are generally
prohibited if they result in a multiple savings and loan holding company
controlling savings associations in more than one state. However, such
interstate acquisitions are permitted based on specific state authorization or
in a supervisory acquisition of a failing savings association.
Federal Securities Law
The stock of the Company is registered with the SEC under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). The Company is
subject to the information, proxy solicitation, insider trading restrictions and
other requirements of the SEC under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. If
the Company meets specified current public information requirements, each
affiliate of the Company is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
36
<PAGE>
Federal Reserve System
The Federal Reserve Board requires all depository institutions to
maintain non-interest bearing reserves at specified levels against their
transaction accounts (primarily checking, NOW and Super NOW checking accounts).
At December 31, 1998, the Bank was in compliance with these reserve
requirements. The balances maintained to meet the reserve requirements imposed
by the Federal Reserve Board may be used to satisfy liquidity requirements that
may be imposed by the OTS. See "- Liquidity."
Savings associations are authorized to borrow from the Federal Reserve
Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System
The Bank is a member of the FHLB of Indianapolis, which is one of 12
regional FHLBs, that administers the home financing credit function of savings
associations. Each FHLB serves as a reserve or central bank for its members
within its assigned region. It is funded primarily from proceeds derived from
the sale of consolidated obligations of the FHLB System. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances are required to provide funds for residential home
financing.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At December 31, 1998, The Bank had $1.3 million in FHLB
stock, which was in compliance with this requirement.
In past years, the Bank has received substantial dividends on its FHLB
stock. Over the past five calendar years such dividends have averaged 7.49% and
were 8.01% for calendar year 1998.
Under federal law the FHLBs are required to provide funds for the
resolution of troubled savings associations and to contribute to low- and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
could also have an adverse effect on the value of FHLB stock in the future. A
reduction in value of the Bank' FHLB stock may result in a corresponding
reduction in its capital.
For the year ended December 31, 1998, dividends paid by the FHLB of
Indianapolis to the Bank totaled $81,200, which constitutes a $28,500 increase
from the amount of dividends received in calendar year 1997. The $26,900
dividend received for the quarter ended December 31, 1998 reflects an annualized
rate of 8.00%, or .01% below the average rate for calendar 1998.
37
<PAGE>
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' 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 1998 taxable year, the Bank is
subject to a maximum federal income tax rate of 34%.
Bad Debt Reserves. Prior to the Small Business Job Protection Act of
1996 (the "1996 Act"), the Bank was permitted to establish a reserve for bad
debts and to make annual additions to the reserve. These additions could, within
specified formula limits, be deducted in arriving at taxable income. As a result
of the 1996 Act, savings associations must now use the specific charge off
method in computing bad debt deductions beginning with their 1996 Federal tax
return, subject to the residential loan requirement provision.
Under the residential loan requirement provision, the recapture
required by the 1996 Act was suspended for each of two successive taxable years,
beginning with the Bank's 1996 taxable year, due to the fact that the Bank
originated a minimum number of certain residential loans based upon the average
of the principal amounts of such loans made by the Bank during its six previous
taxable years preceding.
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 taxable 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, 1998. As a result of
such recapture, the Bank will incur an additional tax liability of approximately
$114,000 beginning in 1998 which will be incurred 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, 1998) 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
38
<PAGE>
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.
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
The Bank 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'
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.
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 56, 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
39
<PAGE>
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 55, 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.
Daniel T. Poludniak. Mr. Poludniak, age 57, 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 the Bank in 1983, Mr. Poludniak had
twenty years experience in both local and Chicago banks.
Denise L. Knapp. Mrs. Knapp, age 51, 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, 1998, the Company had a total of 31 employees,
including four 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 Readiness Disclosure
General. The year 2000 ("Y2K") issues confronting the Company and its
suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year 1900 rather than the year
2000.
Financial institution regulators recently have increased their focus
upon Y2K compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council (the "FFIEC") has issued several interagency
statements on Y2K Project Management Awareness. These statements require
financial institutions to, among other things, examine the Y2K implications of
their reliance on vendors and with respect to date exchange and the potential
impact of the Y2K issue on their customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan to address the Y2K issue. In
addition, the federal banking regulators have issued safety and soundness
guidelines to be followed by insured depository institutions, such as the Bank,
to assure resolution of any Y2K problems. The federal banking agencies have
asserted that Y2K testing and certification is a key safety and soundness issue
in
40
<PAGE>
conjunction with regulatory exams and, thus, that an institution's failure to
address appropriately the Y2K issue could result in supervisory action,
including the reduction of the institution's supervisory ratings, the denial of
applications for approval of mergers or acquisitions or the imposition of civil
money penalties.
The Bank understands the importance of the Y2K issue, and the Bank is
currently taking steps to insure a smooth transition into the next millennium.
The Senior Management Team of the Bank has decided to follow the guidelines
established by the FFIEC for Y2K preparation. The Bank has intended to meet all
deadlines established by the FFIEC, and to-date the Bank has satisfied all
requirements.
A Steering Committee comprised of the Bank's department heads was
established in 1998 to oversee and report all the events pertaining to the Y2K
project. These individuals are under the direct supervision of the Bank's Chief
Executive Officer and prepare regular reports to the Board of Directors.
Risks. Like most financial service providers, the Y2K issue due to its
dependence on technology and date-sensitive data may significantly affect the
Company and its operations. Computer software and hardware and other equipment,
both within and outside the Company's direct control, and third parties with
whom the Company electronically or operationally interfaces (including without
limitation its customers and third party vendors) are likely to be affected. If
computer systems are not modified in order to be able to identify the year 2000,
many computer applications could fail or create erroneous results. As a result,
many calculations which rely on date field information, such as interest,
payment or due dates and other operation functions, could generate results which
are significantly misstated, and the Company could experience an inability to
process transactions, prepare statements or engage in similar normal business
activities. Likewise, under certain circumstances, a failure to adequately
address the Y2K issue could adversely affect the viability of the Company's
suppliers and creditors and the creditworthiness of its borrowers. Thus, if not
adequately addressed, the Y2K issue could result in a significant adverse impact
on the Company's operations and, in turn, its financial condition and results of
operations.
The Bank has adopted a five-phase plan to insure Y2K processing
success. Many aspects required for the plan's success have been completed, and
are currently undergoing minor improvement adjustments. The main categories of
the five-phase plan are as follows:
1. Awareness During this phase of the Bank's Y2K program the
senior management members attempted to gather information
relevant to the Bank's Y2K scenario. Information was gathered
from a variety of sources including seminars, numerous
publications and external consultants.
2. Assessment During the assessment phase of the Banks' Y2K
program each department of the Bank submitted information on
areas that presented a potential risk to the institution.
Members of the Y2K Steering Committee identified the "date
sensitive" systems and assigned a risk rating to the
individual items. The areas classified as "mission critical"
receive a higher priority rating from the committee.
41
<PAGE>
3. Renovation Throughout the renovation phase of the Bank's Y2K
program, systems were replaced or upgraded to insure Y2K
compliance. The costs associated with this phase were not
material during 1998 and a substantial change in 1999 is not
expected.
4. Testing The Bank performed internal testing on all in-house
systems and some systems under the control of service
providers. Proxy tests were used to test the integrity of the
Bank's core application system. The senior management of the
Bank is currently satisfied with the progress of the test
results.
5. Contingency The Bank has begun the process of contingency
planning for all mission critical systems of the bank. Members
of the Steering Committee intend to complete the contingency
planning process prior to the FFIEC deadline in June for all
mission critical systems. Including those systems dependent
upon third party vendors or service providers.
The Company is expensing all costs associated with training and
software as those costs are incurred, and such costs are being funded through
operating cash flows. Hardware costs will be capitalized and expensed under our
fixed asset guidelines. The total cost of the Y2K conversion project for the
Company is estimated to be $65,000. Expenses of approximately $40,000 were
incurred and expensed by the Company through December 31, 1998. The Company does
not expect significant increases in future data processing costs related to Y2K
compliance. While we believe this amount will be sufficient to complete the
requirements of becoming Y2K compliant, it is an estimate. As such we will
review our budget monthly to help ensure that we have allocated sufficient
resources to this project. Any deviations to the preliminary budget will be
reported to the Board of Directors.
42
<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, 1998.
<TABLE>
<CAPTION>
Total
Owned Approximate December 31,
Year or Square 1998 Book
Location Acquired Leased Footage Value
- -------- -------- ------ ------- -----
(In Thousands)
<S> <C> <C> <C> <C>
Main Office:
8230 Hohman Avenue 1963 Owned 8,400 $72,000
Munster, Indiana
Branch Offices:
1001 Main Street 1990 Leased 2,800 86,000
Dyer, Indiana
4521 Hohman Avenue 1983 Owned 1,600 46,000
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, 1998 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, 1998, the Company submitted no
matters to a vote of security holders, through the solicitation of proxies.
43
<PAGE>
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
- ------------------------------------------------------------------
Page 49 of the Company's 1998 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 1998 Annual Report to Stockholders
is herein incorporated by reference.
Item 7. Financial Statements
- ------------------------------
Pages 17 through 48 of the Company's 1998 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 1999
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 1999 Annual
Meeting of Stockholders, a copy of which will be filed not later than 120 days
after the close of the fiscal year.
44
<PAGE>
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 1999 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 1999 Annual Meeting of Stockholders, a copy of which will be filed not
later than 120 days after the close of the fiscal year.
45
<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............................................. **
Second Executive Deferred Compensation Plan....................... 10.1
Trust Agreement for the Compensation Agreement.................... 10.2
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, 1998.
46
<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.
AMB FINANCIAL CORPORATION
Date: March 31, 1999 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, Jr. /s/ Ronald W. Borto
- ------------------------- --------------------
Clement B. Knapp, Jr., Chairman of the Board Ronald W. Borto, Director
President and Chief Executive Officer
(Principal Executive and Operating Officer)
Date: March 31, 1999 Date: March 31, 1999
/s/ Donald L. Harle /s/ John C. McLaughlin
- ------------------- ----------------------
Donald L. Harle, Director John C. McLaughlin, Director
Date: March 31, 1999 Date: March 31, 1999
/s/ John G. Pastrick /s/ Robert E. Tolley
- -------------------- --------------------
John G. Pastrick, Director Robert E. Tolley, Director
Date: March 31, 1999 Date: March 31, 1999
/s/ Daniel T. Poludniak
- -----------------------
Daniel T. Poludniak, Vice President, Treasurer
and Chief Financial Officer
(Principal Financial and Accounting Officer)
Date: March 31, 1999
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Exhibit Index
Exhibit No. Document
----------- --------
10.1 Second Executive Deferred Compensation Plan
10.2 Trust Agreement for the Compensation Agreement
13 Annual Report
21 Subsidiaries of the Registrant
23 Consent of Cobitz, VandenBerg & Fennessy
27 Financial Data Schedule
SECOND EXECUTIVE DEFERRED
COMPENSATION PLAN
AMERICAN SAVINGS, FSB
Munster, Indiana
July 1, 1998
Financial Institution Consulting Corporation
700 Colonial Road, Suite 260
Memphis, Tennessee 38117
WATS: 1-800-873-0089
FAX: (901) 684-7411
(901) 684-7400
<PAGE>
SECOND EXECUTIVE DEFERRED
COMPENSATION PLAN
This Second Executive Deferred Compensation Plan (the "Plan"),
effective as of the 1st day of July, 1998, formalizes the understanding by and
between AMERICAN SAVINGS, FSB (the "Bank"), a federal stock savings bank, and
certain eligible Executives, hereinafter referred to as "Executives," who shall
be approved by the Bank to participate in and who shall elect to become a party
to this Second Executive Deferred Compensation Plan by execution of a Second
Executive Deferred Compensation Joinder Agreement ("Joinder Agreement") in a
form provided by the Bank. AMB FINANCIAL (the "Holding Company") is a party to
this Plan for the sole purpose of guaranteeing the Bank's performance hereunder.
WITNESSETH:
WHEREAS, the Executives are employed by the Bank; and
WHEREAS, the Bank recognizes the valuable services heretofore performed
for it by such Executives and wishes to encourage continued employment of each;
and
WHEREAS, the Executives wish to be assured that they will be entitled
to a certain amount of additional compensation for some definite period of time
from and after retirement from active employment with the Bank or other
termination of employment and wish to provide their beneficiaries with benefits
from and after death; and
WHEREAS, the Bank and the Executives wish to provide the terms and
conditions upon which the Bank shall pay such additional compensation to the
Executives after retirement or other termination of employment and/or death
benefits to their beneficiaries after death; and
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WHEREAS, these Executives wish to defer a certain portion of their
compensation to be earned in the future; and
WHEREAS, the Bank and the Executives intend this Plan to be considered
an unfunded arrangement, maintained primarily to provide retirement income for
such Executives, members of a select group of management or highly compensated
employees of the Bank, for tax purposes and for purposes of the Employee
Retirement Income Security Act of 1974, as amended; and
WHEREAS, the Bank has adopted this Second Executive Deferred
Compensation Plan which controls all issues relating to the Deferred
Compensation Benefits as described herein;
NOW THEREFORE, in consideration of the mutual promises herein
contained, the parties hereto agree to the following terms and conditions:
SECTION I
DEFINITIONS
When used herein the following words and phrases shall have the
meanings below unless the context clearly indicates otherwise:
1.1 "Act" means the Employee Retirement Income Security Act of 1974, as
amended from time to time.
1.2 "Bank" means AMERICAN SAVINGS, FSB, and any successor thereto.
1.3 "Base Compensation" means regular salary compensation received from the
Bank during any calendar year, and before any salary deferral
contributions to any tax-qualified or non-qualified plan.
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1.4 "Beneficiary" means the person or persons (and their heirs) designated
as Beneficiary in the Executive's Joinder Agreement to whom the
deceased Executive's benefits are payable. If no Beneficiary is so
designated, then the Executive's Spouse, if living, will be deemed the
Beneficiary. If the Executive's Spouse is not living, then the Children
of the Executive will be deemed the Beneficiaries and will take on a
per stirpes basis. If there are no Children, then the Estate of the
Executive will be deemed the Beneficiary.
1.5 "Benefit Age" shall be the birthday on which the Executive becomes
eligible to receive benefits under the plan. Such birthday shall be
designated in the Executive's Joinder Agreement.
1.6 "Benefit Eligibility Date" shall be the date on which an Executive is
entitled to receive his Deferred Compensation Benefit. It shall be the
first day of the month following the month in which the Executive
attains the Benefit Age designated in his Joinder Agreement.
1.7 "Cause" shall mean personal dishonesty, willful misconduct, willful
malfeasance, breach of fiduciary duty involving personal benefit to the
Executive, intentional failure to perform stated duties, willful
violation of any law, rule, or regulation (other than traffic
violations or similar offenses), final cease-and-desist order, material
breach of any provision of this Plan, or gross negligence in matters of
material importance to the Bank.
1.8 "Change in Control" of the Holding Company or the Bank shall mean the
first to occur of any of the following events:
(a) Any person or entity or group of affiliate persons or entities
(other than the Holding Company) becomes a beneficial owner,
directly or indirectly, of 25% or more of Holding Company's
and/or the Bank's voting securities or all or substantially
all of the assets of Holding Company and/or the Bank.
(b) Holding Company and/or the Bank enters into a definitive
agreement which contemplates the merger, consolidation or
combination of either Holding Company
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or the Bank with an unaffiliated entity in which either or
both of the following is to occur: (i) the directors of
Holding Company and/or Bank, as applicable, immediately prior
to such merger, consolidation or combination will constitute
less than a majority of the board of directors of the
surviving, new or combined entity; or (ii) less than 75% of
the outstanding voting securities of the surviving, new or
combined entity will be beneficially owned by the stockholders
of Holding Company immediately prior to such merger,
consolidation or combination; provided, however, that if any
definitive agreement to merge, consolidate or combine is
terminated without consummation of the transaction, then no
Change in Control shall be deemed to have occurred pursuant to
this paragraph (b).
(c) Holding Company and/or the Bank enters into a definitive
agreement which contemplates the transfer of all or
substantially all of Holding Company's and/or the Bank's
assets, other than to a wholly-owned subsidiary of Holding
Company; provided, however, that if any definitive agreement
to transfer assets is terminated without consummation of the
transfer, then no Change in Control shall be deemed to have
occurred pursuant to this paragraph (c).
(d) A majority of the members of the Board of Directors of either
Holding Company or the Bank shall be persons who: (i) were not
members of such Board on the date hereof ("current members");
and (ii) were not nominated by a vote of the Board which
included the affirmative vote of a majority of the current
members on the Board at the time of their nomination ("future
designees") and (iii) were not nominated by a vote of the
Board which included the affirmative vote of a majority of the
current members and future designees, taken as a group, on the
Board at the time of their nomination.
1.9 "Children" means the Executive's children, natural and adopted.
1.10 "Code" means the Internal Revenue Code of 1986, as amended from time to
time.
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1.11 "Deferral Period" means the period of months designated in the
Executive's Joinder Agreement during which the Executive shall be
entitled to defer Base Compensation. The Deferral Period shall commence
on the date designated in the Executive's Joinder Agreement.
1.12 "Deferred Compensation Benefit" means the annuitized value (using the
Interest Factor) of the Executive's Elective Contribution Account
measured as of the Executive's Benefit Age, payable in monthly
installments throughout the Payout Period and commencing on the
Executive's Benefit Eligibility Date.
1.13 "Disability Benefit" means the monthly benefit payable to the Executive
following a determination, in accordance with Subsection 4.3, that he
is no longer able, properly and satisfactorily, to perform his duties
as an Executive.
1.14 "Effective Date" of this Plan is July 1, 1998.
1.15 "Elective Contribution" shall refer to any bookkeeping entry required
to record an Executive's voluntary monthly pre-tax deferral of Base
Compensation which shall be made in accordance with the Executive's
Joinder Agreement.
1.16 "Elective Contribution Account" shall be represented by the bookkeeping
entries required to record a Executive's Elective Contributions plus
accrued interest, equal to the Interest Factor, earned to date on such
amounts. However, neither the existence of such bookkeeping entries nor
the Elective Contribution Account itself shall be deemed to create
either a trust of any kind, or a fiduciary relationship between the
Bank and the Executive or any Beneficiary.
1.17 "Estate" means the estate of the Executive.
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1.18 "Financial Hardship" means an unforeseeable emergency resulting
from a sudden and unexpected illness or accident of the Executive or of
a dependent of the Executive, loss of the Executive's property due to
casualty, or other similarly extraordinary and unforeseeable
circumstances which arise as a result of an event not within the
control of the Executive. The circumstances that shall constitute an
unforeseeable emergency will depend upon the facts of each case, but,
in any instance, payment may not be made to the extent that such
hardship is or may be relieved (i) through reimbursement or
compensation by insurance or otherwise, (ii) by liquidation of the
Executive's assets to the extent such liquidation would not itself
cause severe financial hardship, or (iii) by cessation of deferrals
under the Plan. Examples of what are not considered to be unforeseeable
emergencies include the need to send the Executive's child to college
or the decision to purchase a home.
1.19 "Financial Hardship Benefit" means a withdrawal or withdrawals of an
amount or amounts attributable to a Financial Hardship and limited to
the extent reasonably necessary to satisfy the emergency need. If a
Financial Hardship Benefit is requested by Executive or his Beneficiary
and approved by the Bank in the exercise of its sole discretion, then
the Financial Hardship Benefit may be paid in a lump sum within thirty
(30) days of the event which triggers payment.
1.20 "Interest Factor" means monthly compounding of ten percent (10%).
1.21 "Payout Period" means the time frame during which certain benefits
payable hereunder shall be distributed. Payments shall be made in equal
monthly installments commencing on the first day of the month following
the occurrence of the event which triggers distribution and continuing
for a period of months, as designated in the Executive's Joinder
Agreement.
1.22 "Permanently and Totally Disabled" means Executive has, for at least
six (6) months, been unable to perform the services incident to his
position with the Bank as a result of accidental bodily injury or
sickness and that the status is likely to continue for an indefinite
period, as
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reasonably determined subsequent to the expiration of the six (6) month
period by a duly licensed physician selected in good faith by the Bank.
1.23 "Plan Year" shall mean the twelve (12) month period from January 1 to
December 31 of each year.
1.24 "Postponed Retirement Date" means the first day of the month coincident
with or next following the Executive's termination of employment with
the Bank occurring after reaching his Benefit Age.
1.25 "Projected Deferral" is an estimate, determined upon execution of a
Joinder Agreement, of the total amount of Base Compensation to be
deferred by the Executive during his Deferral Period (excluding any
interest accrued on such deferrals), and so designated in the
Executive's Joinder Agreement.
1.26 "Projected Deferral Compensation Benefit" is an estimate of the monthly
Deferred Compensation Benefit determined upon execution of the initial
Joinder Agreement, and based upon the Executive's deferral election
over the Deferral Period with earnings calculated using the Interest
Factor.
1.27 "Projected Survivor's Benefit" means the benefit payable to the
Beneficiary in monthly installments throughout the Payout Period, equal
to the amount designated in the Executive's Joinder Agreement, and
subject to Subsection 3. 1.
1.28 "Spouse" means the individual to whom the Executive is legally married
at the time of the Executive's death.
1.29 "Survivor's Benefit" means a stream of monthly installments payable to
the Beneficiary throughout the Payout Period. In the event a policy of
life insurance has been purchased by
8
2
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the Plan on the Executive's life, the Survivor's Benefit is equal to
the amount designated in the Joinder Agreement, and subject to
Subsection 3. 1. In the event no life insurance policy has been
purchased by the Plan on the Executive's life, the Survivor's Benefit
shall equal the annuitized value (using the Interest Factor) of the
Executive's Elective Contribution Account, payable over the Payout
Period.
1.30 "Tier One Executives" and "Tier Two Executives" shall mean those
Executives who are eligible to participate herein and who are
designated as such by the Bank. Exhibit C attached hereto sets forth
those persons who have been designated as Tier One Executives and Tier
Two Executives.
1.31 "Vested Rights" shall refer to the fact that the Executive shall at all
times be vested in the amount of any deferred Base Compensation plus
accrued interest (using the Interest Factor).
SECTION II
DEFERRED COMPENSATION
Commencing on the execution date of the Executive's Joinder Agreement
and continuing through the end of the Deferral Period, the Executive and the
Bank agree that the Executive shall be entitled to defer into his Elective
Contribution Account an amount of Base Compensation, as specified in his Joinder
Agreement, which the Executive would otherwise be entitled to receive from the
Bank for each Plan Year during the Deferral Period.
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SECTION III
PRE-RETIREMENT AND POST-RETIREMENT DEATH BENEFITS
3.1 Death Benefit Prior to Commencement of Retirement Benefits. In the
event of Executive's death prior to commencement of the Deferred
Compensation Benefit, the Bank shall pay Executive's Beneficiary a
monthly amount for the duration of the Payout Period, commencing within
thirty (30) days of Executive's death. The amount of such benefit shall
be determined as follows: (a) In the event death occurs following
retirement due to disability, the benefits payable to the Executive's
Beneficiary shall be governed by Subsection 4.3 of this Plan.
(b) In the event death occurs while Executive is in the service of
the Bank and deferring compensation pursuant to Subsection 4.5
of this Plan, the Executive's Beneficiary shall be paid the
full Survivor's Benefit designated in the Executive's Joinder
Agreement.
(c) In the event Executive completes less than one hundred percent
(100%) of the planned deferrals for any other reason not
listed above (and other than a Change In Control), Executive's
Beneficiary shall be paid a reduced Survivor's Benefit, such
amount being determined by multiplying the Survivor's Benefit
by a fraction, the numerator of which is equal to the
compensation actually deferred by the Executive and the
denominator of which is equal to the Projected Deferral.
3.2 Death During Receipt of Benefit. In the event of death of Executive
while receiving monthly benefits under Subsection 4.1 of this Plan, the
Executive's Beneficiary (or Beneficiary's estate) shall be entitled to
receive a death benefit which shall be payable for the balance of the
Payout Period, in an amount equal to the benefit payment that was being
made to Executive prior to his death.
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3.3 Additional Death Benefit - Burial Expense. In addition to the
above-described death benefits, upon the Executive's death, the
Executive's Beneficiary shall be entitled to receive a one-time lump
sum death benefit in the amount of Ten Thousand Dollars($10,000.00).
This benefit shall be provided specifically for the purpose of
providing payment for burial and/or funeral expenses of the Executive.
Such benefit shall be payable within thirty (30) days of the
Executive's death. The Executive's Beneficiary shall not be entitled to
such benefit if the Executive is removed for Cause prior to death.
3.4 Death by Reason of Suicide. In the event Executive dies by reason of
suicide within two years of the Effective Date of this Plan, the Bank
shall only be obligated to pay the balance of Executive's Elective
Contribution Account with accrued interest (using the interest factor)
to the Executive's Beneficiary. Such amount shall be paid in a lump sum
within thirty days (30) of Executive's death. All other benefits under
this Plan shall be forfeited and the Plan shall become null and void.
SECTION IV
DEFERRED COMPENSATION BENEFIT AND DISABILITY BENEFIT
4.1 Normal Retirement Benefit. Upon reaching Benefit Age, if Executive is
still covered by this Plan, the Bank shall be obligated to pay
Executive the Deferred Compensation Benefit. Such payments shall
commence on the Executive's Benefit Eligibility Date.
4.2 Postponed Retirement Benefit. The postponed retirement benefit of
Executive shall be the Deferred Compensation Benefit as set forth in
Subsection 4.1. However, the Board of Directors, in the exercise of its
sole discretion, may elect to increase benefits if retirement is
postponed past the Benefit Age designated in the Executive's Joinder
Agreement. The postponed retirement benefit shall not by paid to
Executive until the Postponed Retirement Date.
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4.3 Disability. If Executive Becomes Permanently and Totally Disabled prior
to reaching his retirement, Executive shall be entitled to receive a
monthly amount equal to the annuity value of his Elective Contribution
Account at the time of disability, with such annuity value to be
calculated over the Payout Period. Payments shall begin within thirty
days (30) of Executive becoming Permanently and Totally Disabled. In
the event Executive dies while receiving payments pursuant to this
Subsection, or after becoming eligible for such payments pursuant to
this Subsection, or after becoming eligible for such payments but
before the actual commencement of such payments, his Beneficiary shall
be entitled to receive the full Survivor's Benefit for the Payout
Period, reduced by the number of months disability payments were made.
At Executive's death, to the extent the combined disability benefits
received and Survivor's Benefits received or to be received under this
Subsection are less than the total Deferred Compensation Benefit,
Executive's Beneficiary shall be entitled to a lump sum payment to make
up the difference.
4.4 Financial Hardship Benefit. In the event the Executive suffers a
Financial Hardship, the Bank may, if the Board deems it advisable in
its sole and absolute discretion, distribute to the Executive as a
Financial Hardship Benefit any portion of the Executive's Elective
Contribution Account existing at the date such distribution is
authorized. A Financial Hardship Benefit shall be distributed at such
times as the Board shall determine, and the Executive's Elective
Contribution Account shall be reduced by the amount so distributed.
Retirement and/or death benefit payments pursuant to this Plan shall be
actuarially reduced for any Financial Hardship Benefit paid to
Executive.
4.5 Deferral of Compensation. Payment of benefits is conditioned upon the
Executive deferring receipt of the monthly Base Compensation specified
in the Joinder Agreement. If Executive does not defer the entire amount
specified in the Joinder Agreement, his benefits shall be reduced by an
actuarially determined amount. This Subsection 4.5 does not apply in
the instance of termination following a Change in Control pursuant to
Subsection 7.3.
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SECTION V
ESTABLISHMENT OF RABBI TRUST
The Bank shall establish a rabbi trust into which the Bank shall
contribute assets which shall be held therein, pursuant to the agreement which
establishes such rabbi trust. The contributed assets shall be subject to the
claims of the Bank's creditors in the event of the Bank's "Insolvency" as
defined in the agreement which establishes such rabbi trust, until the
contributed assets are paid to the Executive and his Beneficiary(ies) in such
manner and at such times as specified in this Plan. It is the intention of the
Bank to make a contribution or contributions to the rabbi trust to provide the
Bank with a source of funds to assist it in meeting the liabilities of this
Plan. The rabbi trust and any assets held therein shall conform to the terms of
the rabbi trust agreement which has been established in conjunction with this
Plan. Any contribution(s) to the rabbi trust shall be made in accordance with
the rabbi trust agreement. The amount of such contribution(s) shall be at least
equal to the Executive's Elective Contribution Account.
SECTION VI
ADJUSTMENT OF DEFERRAL AMOUNT
Deferral of the specific amount of Base Compensation designated in the
Executive's Joinder Agreement shall continue in effect pursuant to the terms of
this Plan unless and until the Executive amends his Joinder Agreement by filing
with the Administrator a Notice of Adjustment of Deferral Amount (Exhibit B of
the Joinder Agreement). A Notice of Adjustment of Deferral Amount shall be
effective if filed with the Administrator at least thirty (30) days prior to any
January1st during the Executive's Deferral Period. Such Notice of Adjustment of
Deferral Amount shall be effective commencing with the January 1st following its
filing and shall be applicable only to compensation attributable to services not
yet performed by the Executive.
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SECTION VII
TERMINATION OF EMPLOYMENT
7.1 Termination of Service Prior to Reaching Benefit Age. If, prior to
Executive reaching his Benefit Age, the Executive voluntarily
terminates employment or is terminated without Cause by the Bank
(except in the instance of termination following a Change in Control)
the Bank shall pay to the Executive the value of his Elective
Contribution Account, increased monthly by the Interest Factor, such
payments to commence the first day of the month coincident with or next
following the Executive reaching Benefit Age.
7.2 Termination of Service for Cause. Should the Executive be terminated
for Cause pursuant to the Bylaws of the Bank, he shall be entitled to
receive the balance of his Elective Contribution Account, measured as
of the date of removal. Such amount shall be paid in a lump sum within
thirty (30) days of the Executive's date of removal. All other benefits
provided for the Executive or his Beneficiary under this Plan shall be
forfeited and the Plan shall become null and void with respect to such
Executive.
7.3 Voluntary or Involuntary Termination Due to Change in Control. If a
Tier One Executive's employment with the Bank is voluntarily or
involuntarily terminated prior to the attainment of his Benefit
Eligibility Date due to a Change in Control, then commencing thirty
(30) days from the date of termination, the Executive shall be entitled
to the entire Projected Deferral Compensation Benefit, payable over the
Payout Period. If a Tier Two Executive's employment with the Bank is
voluntarily or involuntarily terminated prior to the attainment of his
Benefit Eligibility Date due to a Change in Control, then commencing on
his Benefit Eligibility Date, the Executive shall be entitled to the
entire Projected Deferral Compensation Benefit, payable over the Payout
Period.
7.4 Termination or Suspension Resulting from Regulatory Actions. Pursuant
to 12 C.F.R. Sec. 563.39(b), the following conditions shall apply to
this Plan:
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(a) The Bank's board of directors may terminate the Executive's
employment at any time, but any termination by the Bank's
board of directors other than termination for Cause, shall not
prejudice the Executive's right to compensation or other
benefits under the contract. The Executive's benefit shall be
limited to the lump sum payout described in Section 7.2 in the
event he is terminated for Cause.
(b) If the Executive is suspended and/or temporarily prohibited
from participating in the conduct of the Bank's affairs by a
notice served under Section 8(e)(3) or (g)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1818(e)(3) and (g)(1)) the
Bank's obligations under the Plan shall be suspended (except
as to the Executive's Vested Rights) as of the date of
termination of service unless stayed by appropriate
proceedings. If the charges in the notice are dismissed, the
Bank may in its discretion (i) pay the Executive all or part
of the compensation withheld while its contractual obligations
under this Plan were suspended and (ii) reinstate (in whole or
in part) any of its obligations which were suspended.
(c) If the Executive is removed and/or permanently prohibited from
participating in the conduct of the Bank's affairs by an order
issued under Section 8(e)(4) or (g)(1) of the Federal Deposit
Insurance Act (12 U.S.C. 1818(e)(4) or (g)(1)), all
obligations of the Bank under the Plan shall terminate as of
the effective date of the order, but the Executive's Vested
Rights shall not be affected.
(4) If the Bank is in default (as de fined in Section 3(x)(1) of
the Federal Deposit Insurance Act), all obligations under the
Plan shall terminate as of the date of default, but this
paragraph shall not affect any Vested Rights of the
contracting parties.
(5) All non-Vested rights/obligations under the Plan shall be
terminated, except to the extent determined that continuation
of the Plan is necessary for the continued operation of the
Bank:
(i) by the Executive or his designee at the time
the Federal Deposit Insurance corporation or
the Resolution Trust Corporation enters into
an agreement to provide assistance to or on
behalf of the Bank under the authority
contained in Section 13(c) of the Federal
Deposit Insurance Act; or
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(ii) by the Executive or his designee, at the
time the Executive or his designee approves
a supervisory merger to resolve problems
related to operation of the Bank or when the
Bank is determined by the Executive to be in
an unsafe or unsound condition.
SECTION VIII
BENEFICIARY DESIGNATION
The Executive shall make an initial designation of primary and
secondary Beneficiaries upon execution of his Joinder Agreement and shall have
the right to change such designation, at any subsequent time, by submitting to
the Administrator in substantially the form attached as Exhibit A to the Joinder
Agreement, a written designation of primary and secondary Beneficiaries. Any
Beneficiary designation made subsequent to execution of the Joinder Agreement
shall become effective only when receipt thereof is acknowledged in writing by
the Administrator.
SECTION IX
EXECUTIVE'S RIGHT TO ASSETS
The rights of the Executive, any Beneficiary, or any other person
claiming through the Executive under this Plan, shall be solely those of an
unsecured general creditor of the Bank. The Executive, the Beneficiary, or any
other person claiming through the Executive, shall only have the right to
receive from the Bank those payments so specified under this Plan. The Executive
agrees that he, his Beneficiary, or any other person claiming through him shall
have no rights or interests whatsoever in any asset of the Bank, including any
insurance policies or contracts which the Bank may possess or obtain to
informally fund this Plan. Any asset used or acquired by the Bank in connection
with the liabilities it has assumed under this Plan, unless expressly provided
herein, shall not be deemed to be held under any trust for the benefit of the
Executive or his Beneficiaries, nor shall any asset be considered security for
the performance of the obligations of the Bank. Any such asset shall be and
remain, a general, unpledged, and unrestricted asset of the Bank.
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SECTION X
RESTRICTIONS UPON FUNDING
The Bank shall have no obligation to set aside, earmark or entrust any
fund or money with which to pay its obligations under this Plan. The Executive,
his Beneficiaries or any successor in interest to him shall be and remain simply
a general unsecured creditor of the Bank in the same manner as any other
creditor having a general claim for matured and unpaid compensation. The Bank
reserves the absolute right in its sole discretion to either purchase assets to
meet its obligations undertaken by this Plan or to refrain from the same and to
determine the extent, nature, and method of any such asset purchases. Should the
Bank decide to purchase assets such as life insurance, mutual funds, disability
policies or annuities, the Bank reserves the absolute right, in its sole
discretion, to terminate such assets at any time, in whole or in part. At no
time shall the Executive be deemed to have any lien, right, title or interest in
or to any specific investment or to any assets of the Bank. If the Bank elects
to invest in a life insurance, disability or annuity policy upon the life of the
Executive, then the Executive shall assist the Bank by freely submitting to a
physical examination and by supplying such additional information necessary to
obtain such insurance or annuities.
SECTION XI
ALIENABILITY AND ASSIGNMENT PROHIBITION
Neither the Executive nor any Beneficiary under this Plan shall have
any power or right to transfer, assign, anticipate, hypothecate, mortgage,
commute, modify or otherwise encumber in advance any of the benefits payable
hereunder, nor shall any of said benefits be subject to seizure for the payment
of any debts, judgments, alimony or separate maintenance owed by the Executive
or his Beneficiary, nor be transferable by operation of law in the event of
bankruptcy, insolvency or otherwise. In the event the Executive or any
Beneficiary attempts assignment, communication, hypothecation, transfer or
disposal of the benefits hereunder, the Bank's liabilities shall forthwith cease
and terminate, with respect to such Executive or Beneficiary.
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SECTION XII
ACT PROVISIONS
12.1 Named Fiduciary and Administrator. The Bank shall be the Named
Fiduciary and Administrator (the "Administrator") of this Plan. As
Administrator, the Bank shall be responsible for the management,
control and administration of the Plan as established herein. The
Administrator may delegate to others certain aspects of the management
and operational responsibilities of the Plan, including the employment
of advisors and the delegation of ministerial duties to qualified
individuals.
12.2 Claims Procedure and Arbitration. In the event that benefits under this
Plan are not paid to the Executive (or to his Beneficiary in the case
of the Executive's death) and such claimants feel they are entitled to
receive such benefits, then a written claim must be made to the
Administrator within sixty (60) days from the date payments are
refused. The Administrator shall review the written claim and, if the
claim is denied, in whole or in part, they shall provide in writing,
within ninety (60) days of receipt of such claim, their specific
reasons for such denial, reference to the provisions of this Plan or
the Joinder Agreement upon which the denial is based, and any
additional material or information necessary to perfect the claim. Such
writing by the Administrator shall further indicate the additional
steps which must be undertaken by claimants if an additional review of
the claim denial is desired.
If claimants desire a second review, they shall notify the
Administrator in writing within sixty (60) days of the first claim
denial. Claimants may review this Plan, the Joinder Agreement or any
documents relating thereto and submit any issues and comments, in
writing, they may feel appropriate. In its sole discretion, the
Administrator shall then review the second claim and provide a written
decision within sixty (30) days of receipt of such claim. This decision
shall state the specific reasons for the decision and shall include
reference to specific provisions of this Plan or the Joinder Agreement
upon which the decision is based.
18
<PAGE>
If claimants disagree with the decision of the Administrator, nothing
herein shall serve to preclude them from seeking any and all remedies
available at law.
SECTION XIII
MISCELLANEOUS
13.1 No Effect on Employment Rights. Nothing contained herein will confer
upon the Executive the right to be retained in the employment of the
Bank nor limit the right of the Bank to discharge or otherwise deal
with the Executive without regard to the existence of the Plan.
13.2 State Law. The Plan is established under, and will be construed
according to, the laws of the state of Indiana, to the extent that such
laws are not preempted by the Act and valid regulations published
thereunder.
13.3 Severability. In the event that any of the provisions of this Plan or
portion thereof, are held to be inoperative or invalid by any court of
competent jurisdiction, then: (1) insofar as is reasonable, effect will
be given to the intent manifested in the provisions held invalid or
inoperative, and (2) the validity and enforceability of the remaining
provisions will not be affected thereby.
13.4 Incapacity of Recipient. In the event the Executive is declared
incompetent and a conservator or other person legally charged with the
care of his person or Estate is appointed, any benefits under the Plan
to which such Executive is entitled shall be paid to such conservator
or other person legally charged with the care of his person or Estate.
Except as provided above in this paragraph, when the Bank's Board of
Directors, it its sole discretion, determines than an Executive is
unable to manage his financial affairs, the Board may direct the Bank
to make distributions to any person for the benefit of such Executive.
19
<PAGE>
13.5 Unclaimed Benefit. The Executive shall keep the Bank informed of his
current address and the current address of his Beneficiaries. The Bank
shall not be obligated to search for the whereabouts of any person. If
the location of an Executive is not made known to the Bank within three
years after the date on which any payment of the Executive's Deferred
Compensation Benefit may be made, payment may be made as though the
Executive had died at the end of the three-year period. If, within one
additional year after such three-year period has elapsed, or, within
three years after the actual death of the Executive, the Bank is unable
to locate any Beneficiary of the Executive, then the Bank may fully
discharge its obligation by payment to the Estate.
13.6 Limitations on Liability. Notwithstanding any of the preceding
provisions of the Plan, neither the Bank, nor individual acting as an
employee or agent of the Bank, or as a member of the Board of Directors
shall be personally liable to the Executive, former Executive, or any
other person for any claim, loss, liability or expense incurred in
connection with this Plan.
13.7 Gender. Whenever in this Plan words are used in the masculine or neuter
gender, they shall be read and construed as in the masculine, feminine
or neuter gender, whenever they should so apply.
13.8 Effect on Other Corporate Benefit Plans. Nothing contained in this Plan
shall affect the right of the Executive to participate in or be covered
by any qualified or non-qualified pension, profit sharing, group, bonus
or other supplemental compensation or fringe benefit agreement
constituting a part of the Bank's existing or future compensation
structure.
13.9 Recovery of Estate Taxes. If the Executive's gross estate for federal
estate tax purposes includes any amount determined by reference to and
on account of this Plan, and if the Beneficiary is other than the
Executive's estate, then the Executive's estate shall be entitled to
recover from the Beneficiary receiving such benefit under the terms of
the Deferred
20
<PAGE>
Compensation Benefit an amount by which (x) the total estate tax due by
Executive's estate, exceeds (y) the total estate tax which would have
been payable if the value of such benefit had not been included in the
Executive's gross estate. If there is more than one person receiving
such benefit the right of recovery shall be against each such person.
In the event any Beneficiary has a liability hereunder, such
Beneficiary may petition the Bank for a lump sum payment in an amount
not to exceed the Beneficiary's liability hereunder.
13.10 Inurement. This Plan shall be binding upon and shall inure to the
benefit of the Bank, its successors and assigns, and the Executive, his
successors, heirs, executors, administrators, and Beneficiaries.
13.11 Source of Payments. All payments provided in this Plan shall be timely
paid in cash or check from the general funds of the Bank or the assets
of the rabbi trust. The Holding Company guarantees payment and
provision of all amounts and benefits due to the Executives and, if
such amounts and benefits are not timely paid or provided by the Bank,
or a rabbi trust, such amounts and benefits shall be paid or provided
by the Holding Company.
13.12 Modification of Benefit Eligibility Date. In the event that an
Executive desires to modify his Benefit Eligibility Date or Payout
Period with respect to future Elective Contributions, the Executive may
do so at the time and in the manner that the Executive is entitled to
adjust his Elective Contribution, pursuant to Section VI of the Plan.
In the event that an Executive desires to modify his Benefit
Eligibility Date or Payout Period with respect to amounts accrued in
his Elective Contribution Account the Executive may do so, provided,
however, that any such modification is made no later than twenty-four
(24) months prior to the date of both (i) the Executive's existing
Benefit Eligibility (at the time of such modification) and (ii) the
Executive's Benefit Eligibility Date, as modified.
21
<PAGE>
13.13 Headings. Headings and sub-headings in this Plan are inserted for
reference and convenience only and shall not be deemed a part of this
Plan.
13.14 Disclosure. Each Executive shall receive a copy of his Plan and the
Administrator will make available, upon request, a copy of the rules
and regulations that govern this type of Plan.
SECTION XIV
NON-COMPETITION AFTER NORMAL RETIREMENT
14.1 Non-Compete Clause. The Executive expressly agrees that, as
consideration for the agreements of the Bank contained herein and as a
condition to the performance by the Bank of its obligations hereunder,
throughout the entire period beginning with the Effective Date of this
Plan and continuing until the final payment is made to Executive, as
provided herein, he will not, without the prior written consent of the
Bank, engage in, become interested, directly or indirectly, as a sole
proprietor, as a partner in a partnership, or as a substantial
shareholder in a corporation, nor become associated with, in the
capacity of an employee, director, officer, principal, agent, trustee
or in any other capacity whatsoever, any enterprise conducted in the
trading area of the business of the Bank which enterprise is, or may
deemed to be, competitive with any business carried on by the Bank as
of the date of the termination of the Executive's employment or his
retirement.
This Subsection 14.1 shall not apply to an Executive who voluntarily or
involuntarily terminates employment following a Change in Control. No
benefits received or to be received pursuant to Subsection 7.3 shall be
affected by this Subsection 14. 1.
14.2 Breach. In the event of any breach by the Executive of the agreements
and covenants contained herein, the Board of Directors of the Bank
22
<PAGE>
shall direct that any unpaid balance of any payments to the Executive
under this Plan be suspended, and shall thereupon notify the Executive
of such suspensions, in writing. Thereupon, if the Board of Directors
of the Bank shall determine that said breach by the Executive has
continued for a period of one (1) month following notification of such
suspension, all rights of the Executive and his Beneficiaries under
this Plan, including rights to further payments hereunder, shall
thereupon terminate, except for that portion of the Executive's
deferred compensation plus accrued interest that remains unpaid at the
time of such determination.
SECTION XV
AMENDMENT/REVOCATION
This Plan shall not be amended, modified or revoked at any time, in
whole or part, without the mutual written consent of the Executive and the Bank,
and such mutual consent shall be required even if the Executive is no longer
employed by the Bank.
SECTION XVI
EXECUTION
16.1 This Plan sets forth the entire understanding of the parties hereto
with respect to the transactions hereby contemplated.
16.2 This Plan shall be executed in triplicate, each copy of which, when so
executed and delivered, shall be an original, but all three copies
shall together constitute one and the same instrument. Remainder of
page intentionally left blank.
23
<PAGE>
IN WITNESS WHEREOF, the Bank and the Holding Company have caused this
Plan to be executed on the day and date first above written.
ATTEST: AMERICAN SAVINGS, FSB
/s/Denise L. Knapp By: /s/Clement B. Knapp
- ----------------- -------------------
Denise L. Knapp Clement B. Knapp
Secretary Title: President
ATTEST: AMB FINANCIAL
/s/Denise L. Knapp By: /s/Clement B. Knapp
- ------------------ -------------------
Denise L. Knapp Clement B. Knapp
Title: President
24
<PAGE>
SECOND EXECUTIVE DEFERRED COMPENSATION JOINDER AGREEMENT
BENEFICIARY DESIGNATION
The Executive, under the terms of the Second Executive Deferred
Compensation Plan executed by American Savings Bank, of Munster, Indiana, dated
_________________, 19__, hereby designates the Following Beneficiary to receive
any guaranteed payments or death benefits under such Plan, following his death:
PRIMARY BENEFICIARY: ___________________________
SECONDARY BENEFICIARY:_________________________
This Beneficiary Designation hereby revokes any prior Beneficiary
Designation which may have been in effect.
Such Beneficiary Designation is revocable.
DATE: ____________________, 19__
----------------------------- ----------------------------
(WITNESS) EXECUTIVE
- -----------------------------
(WITNESS)
<PAGE>
Exhibit A
SECOND EXECUTIVE DEFERRED COMPENSATION JOINDER AGREEMENT
NOTICE OF ADJUSTMENT OF DEFERRAL AMOUNT
TO: Bank
Attention:
I hereby give notice of my election to adjust the amount of my
compensation deferral in accordance with my Second Executive Deferred
Compensation Joinder Agreement, dated the ____day of ______19__. This
notice is submitted thirty (30) days prior to January 1st, and shall
become effective January 1st, as specified below. Adjust deferral as
of: January 1st, 19_
Previous Deferral Amount ___________per month
New Deferral Amount ___________per month
(to discontinue deferral, enter $O)
-------------------------------
EXECUTIVE
--------------------------------
DATE
ACKNOWLEDGED
BY:_____________________________
TITLE:__________________________
---------------------------------
DATE
<PAGE>
Exhibit B
DESIGNATION OF TIER ONE AND TIER TWO EXECUTIVES
FOR THE SECOND EXECUTIVE DEFERRED COMPENSATION PLAN
The following executives are designated as Tier One Executives:
Clement B. Knapp
Louis A. Green
Daniel T. Poludniak
Denise L. Knapp
The following Executives are designated as Tier Two Executives:
Michael Mellon
Todd C. Williams
<PAGE>
Exhibit C
27
AMERICAN SAVINGS, FSB
TRUST FOR THE
DIRECTOR DEFERRED COMPENSATION AGREEMENTS,
THE INDEPENDENT CONTRACTOR'S DEFERRED COMPENSATION
AGREEMENT,
THE RESTATED EXECUTIVE DEFERRED COMPENSATION AGREEMENTS,
AND THE
SECOND EXECUTIVE DEFERRED COMPENSATION AGREEMENT
AMERICAN SAVINGS, FSB
Munster, Indiana
JULY l, 1998
Financial Institution Consulting Corporation
700 Colonial Road, Suite 260
Memphis, Tennessee 38117
WATTS: 1-800-873-0089
FAX: (901) 684-7411
(901) 684-7400
<PAGE>
AMERICAN SAVINGS, FSB
TRUST FOR THE
DIRECTOR DEFERRED COMPENSATION AGREEMENTS,
THE INDEPENDENT CONTRACTOR'S DEFERRED COMPENSATION
AGREEMENT,
THE RESTATED EXECUTIVE DEFERRED COMPENSATION AGREEMENTS,
AND THE
SECOND EXECUTIVE DEFERRED COMPENSATION AGREEMENT
This Trust Agreement, effective as of the lst day of July, 1998, is by
and between AMERICAN SAVINGS, FSB, a federal stock savings bank, (hereinafter
referred to as "Bank"), and HOME FEDERAL SAVINGS BANK, a banking corporation
with its principal place of business in the State of Indiana (hereinafter
referred to as "Trustee").
WITNESETH:
WHEREAS, Bank has adopted Director Deferred Compensation Agreements,
and an Independent Contractor's Deferred Compensation Agreements (hereinafter
referred to as "Benefit Plans"), such Benefit Plans have been made effective as
of the lst day of December, 1992, and constitute non-qualified deferred
compensation plans, copies of which are attached hereto as Exhibit A and B; the
Bank has also adopted Restated Executive Deferred Compensation Agreements, and a
Second Executive Deferred Compensation Plan, such Benefit Plans have been made
effective as of the lst day of July, 1998, and constitute non-qualified deferred
compensation plans, copies of which are attached hereto as Exhibit C and D.
<PAGE>
WHEREAS, Bank has incurred or expects to incur liability under the
terms of the Benefit Plans with respect to the individual(s) participating in
such Benefit Plans;
WHEREAS, Bank wishes to establish a trust (hereinafter referred to as
("Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Bank's creditors in the event of Bank's Insolvency, as
herein defined, until paid to Benefit Plan participants, and their beneficiaries
in such manner and at such times as specified in the Benefit Plans;
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the
Benefit Plans as unfunded plans, maintained primarily for the purpose of
providing deferred compensation for a select group of management or highly
compensated employees, for purposes of Title I of the Employee Retirement Income
Security Act of 1974, as amended;
WHEREAS, it is the intention of Bank to make contributions to the Trust
to provide itself with a source of funds to assist it in the meeting of its
liabilities under the Benefit Plans (hereinafter referred to as
"Contributions");
NOW, THEREFORE, the parties do hereby establish the Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
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<PAGE>
SECTION I
ESTABLISHMENT OF TRUST
(a) Bank hereby deposits with Trustee in trust, assets which shall
become the principal of the Trust to be held, administered and
disposed of by Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Bank is
the grantor, within the meaning of subpart E, part 1,
subchapter J, chapter 1, subtitle A of the Internal Revenue
Code of 1986, as amended, and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be
held separate and apart from other funds of Bank and shall be
used exclusively for the uses and purposes of Benefit Plan
participants and general creditors as herein set forth.
Benefit Plan participants and their beneficiaries shall have
no preferred claim on, or any beneficial ownership interest
in, any assets of the Trust. Any rights created under the
Benefit Plans and this Trust Agreement shall be mere unsecured
contractual rights of Benefit Plan participants and their
beneficiaries against Bank. Any assets held by the Trust will
be subject to the claims of Bank's general creditors under
federal and state law in the event of Insolvency, as defined
in Section III(a) herein.
(e) The Trustee shall be accountable for all property and
Contributions received, but the Trustee shall have no duty to
see that the Contributions received are sufficient to provide
for the retirement, disability, or death benefits, nor shall
the Trustee be obligated to enforce or collect any
Contribution from the Bank. Notwithstanding the foregoing, in
the event of a Change in Control (as defined in Article XIII),
the
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<PAGE>
Trustee shall have the right to monitor, enforce and/or
collect any Contributions due and owing from the Bank or to
give notice of any default in making Contributions to any
person.
(f) Within 75 (seventy-five) days following the end of each
calender year, Bank shall, if necessary, be required to
irrevocably deposit additional cash or other property to the
Trust in an amount sufficient to pay each Benefit Plan
participant or beneficiary the benefits payable pursuant to
the terms of the Benefit Plan as of the close of such calendar
year(s).
(g) Upon (i) a Change in Control, (ii) the death of a Benefit Plan
participant, or (iii) termination of employment with respect
to a Benefit Plan participant, following a Change in Control,
Bank shall as soon as possible, but in no event longer than
seventy-five (75) days following such event, make an
additional irrevocable contribution to the Trust in an amount
that is sufficient to pay each Benefit Plan participant or
beneficiary the benefits to which such Benefit Plan
participants or his/her beneficiaries would be entitled
pursuant to the terms of the Benefit Plan as of the date such
event occurred.
SECTION II
PAYMENTS TO PLAN PARTICIPANTS AND THEIR BENEFICIARIES
(a) Bank shall deliver to Trustee a schedule (the "Payment
Schedule") that indicates the amounts payable in respect of
each Benefit Plan participant (and his or her beneficiaries),
that provides a formula or other instructions acceptable to
Trustee for determining the amounts so payable, the form in
which such amount is to be paid (as
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<PAGE>
provided for or available under the Benefit Plan), and the
time of commencement for payment of such amounts. Except as
otherwise provided herein, Trustee shall make payments to the
Benefit Plan participants and their beneficiaries in
accordance with such Payment Schedule. The Trustee shall, in
accordance with the written instructions of the Bank, or in
the event of a Change in Control of the Bank, the written
instructions of the Benefits Determiner (both of which are
defined in Section XIII ), withhold and report any federal,
state or local taxes that may be required to be withheld and,
reported with respect to the payment of benefits pursuant to
the terms of the Benefit Plan and shall pay amounts withheld
to the appropriate taxing authorities. In addition, the
Trustee shall be authorized to pay any federal, state or local
taxes to any governmental body that presents a tax deficiency
notice to the Trustee with respect to income or assets of the
Trust. The Bank shall deliver to the Trustee each year a
schedule which specifies the amount of taxes to be withheld,
if any, with respect to benefit payments to be made hereunder.
Trustee shall be entitled to rely conclusively on the written
instructions of Bank, or in the event of a Change in Control,
the Benefits Determiner, as to all tax reporting and
withholding requirements.
(b) The entitlement of a Benefit Plan participant or his or her
beneficiaries to benefits under the Benefit Plan shall be
determined by Bank or such party (other than the Trustee) as
it shall designate under the Benefit Plan, and any claim for
such benefits shall be considered and reviewed under the
procedures set out in the Benefit Plan.
(c) Bank may make payment of benefits directly to Benefit Plan
participants or their beneficiaries as they become due under
the terms of the Benefit Plan. Bank shall
-5-
<PAGE>
notify Trustee of its decision to make payment of benefits
directly, prior to the time amounts are payable to
participants or their beneficiaries. In addition, if the
principal of the Trust, and any earnings thereon, are not
sufficient to make payments of benefits in accordance with the
terms of the Benefit Plan, Bank shall make the balance of each
such payment as it falls due. Trustee shall notify Bank if and
when such principal and earnings are not sufficient to
discharge obligations currently due under the Payment Schedule
and shall have no further obligation hereunder to anyone
interested in the Trust.
(d) In the event of a Change in Control, Trustee shall rely on the
written direction of the Benefits Determiner who shall confirm
the accuracy of the Payment Schedule or who shall deliver to
Trustee a new Payment Schedule upon which Trustee may rely.
SECTION III
TRUSTEE RESPONSIBILITY REGARDING PAYMENTS TO
TRUST BENEFICIARY WHEN BANK IS INSOLVENT
(a) Trustee shall cease payment of benefits to Benefit Plan
participants and their beneficiaries if the Bank is Insolvent.
Bank shall be considered "Insolvent" for purposes of this
Trust Agreement if (i) Bank states to it in writing that it is
unable to pay its debts as they become due, or (ii) Bank is
subject to a pending proceeding as a debtor under the United
States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided
in Section I(d) hereof, the principal and income of the Trust
shall be subject to claims of general creditors of Bank under
federal and state law as set forth below.
-6-
<PAGE>
(1) The Board of Directors and the Chief Executive
Officer of Bank shall have the duty to inform Trustee
in writing of Bank's Insolvency. If a person claiming
to be a creditor of Bank alleges in writing to
Trustee that Bank has become Insolvent, Trustee shall
determine whether Bank is Insolvent and, pending such
determination, Trustee shall discontinue payment of
benefits to Benefit Plan participants or their
beneficiaries.
(2) Unless Trustee has actual knowledge of Bank's
Insolvency, or has received notice from Bank or a
person claiming to be a creditor alleging that Bank
is Insolvent, Trustee shall have no duty to inquire
whether Bank is Insolvent. Trustee may in all events
rely on such evidence concerning Bank's solvency as
may be furnished to Trustee and that provides Trustee
with a reasonable basis for making a determination
concerning Bank's solvency. Trustee shall have no
liability for any payments to Benefit Plan
participants or their beneficiaries after the
occurrence of an Insolvency but prior to its actual
knowledge thereof.
(3) If at any time Trustee has determined that Bank is
Insolvent, Trustee shall discontinue payments to
Benefit Plan participants or their beneficiaries and
shall hold the assets of the Trust for the benefit of
Bank's general creditors. Nothing in this Trust
Agreement shall in any way diminish any rights of
Benefit Plan participants or their beneficiaries to
pursue their rights as general creditors of Bank with
respect to benefits due under the Benefit Plans or
otherwise.
(4) Trustee shall resume the payment of benefits to
Benefit Plan participants or
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<PAGE>
their beneficiaries in accordance with Section 11 of
this Trust Agreement only after Trustee has
determined that Bank is not (or is no longer)
Insolvent.
(c) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant
to Section III(b) hereof and subsequently resumes such
payments, the first payment following such discontinuance
shall include the aggregate amount of all payments due to
Benefit Plan participants or their beneficiaries under the
terms of the Benefit Plans for the period of such
discontinuance, less the aggregate amount of any payments made
to Benefit Plan participants or their beneficiaries by Bank in
lieu of the payments provided for hereunder during any such
period of discontinuance.
SECTION IV
PAYMENTS TO BANK
Except as provided in Sections III or XII hereof, Bank shall have no
right or power to direct Trustee to return to Bank or to divert to others any of
the Trust assets before all payment of benefits have been made to Benefit Plan
participants and their beneficiaries pursuant to the terms of the Benefit Plans.
SECTION V
TRUSTEE'S POWERS
(a) All rights associated with assets of the Trust shall be
exercised by Trustee, and shall in no event be exercisable by
or rest with Benefit Plan participants. Bank shall have the
right at anytime, and from time to time in its sole
discretion, to substitute assets,
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<PAGE>
acceptable to the Trustee, of equal fair market value for any
asset held by the Trust. This right is exercisable by the Bank
in a nonfiduciary capacity without the approval or consent of
any person in a fiduciary capacity.
(b) Subject to the foregoing, Trustee shall have the following
powers and authority in the administration of the assets of
the Trust, in addition to those vested in it elsewhere in this
Trust Agreement or by law:
(i) Subject to investment guidelines issued by Bank, to
invest and reinvest the assets of the Trust, without
distinction between principal and income, in any kind
of property, real, personal or mixed, tangible or
intangible, and in any kind of investment, security
or obligation suitable for the investment of Trust
assets, including federal, state and municipal
tax-free obligations and other tax-free investment
vehicles, insurance policies and annuity contracts,
and any common trust fund, group trust, pooled fund,
or other commingled investment fund maintained by the
Trustee or any other bank or entity for trust
investment purposes in which the Trust is eligible to
invest and the provisions governing such fund shall
be part of the Trust Agreement as though fully
restated herein;
(ii) To purchase, and maintain as owner, a life insurance
policy or policies with respect to participants;
provided, however, that the Trustee shall not be
required to purchase or take any action under a life
insurance policy or policies with respect to
participants unless directed to do so by the Bank,
which shall designate the face amount of said policy
or policies, the terms of the policy or policies and
the insurance company.
-9-
<PAGE>
(iii) To sell for cash or on credit, to grant options,
convert, redeem, exchange for other securities or
other property, or otherwise to dispose of, any
security or other property at any time held except
that the Trustee shall have no right or obligation to
take any action with respect to any insurance
contract or policy unless so directed by the Bank, or
in the event of a Change in Control, by the Benefits
Determiner;
(iv) At the direction of the Bank, to settle, compromise
or submit to arbitration, any claims, debts or
damages, due or owning to or from the Trust, to
commence or defend suits or legal proceedings and to
represent the Trust in all suits or legal proceedings
provided, however, the Trustee shall not be expected
or required to undertake any of the foregoing unless
there are sufficient assets in the Trust with which
to do so, or the Trustee has received assurances by a
party to this Trust, satisfactory to the Trustee, of
the payment or reimbursement of the expenses
connected therewith;
(v) To exercise any conversion privilege (other than
conversion privileges with respect to any insurance
policy, which shall be exercised only upon direction
of the Bank, or in the event of a Change in Control,
by the Benefits Determiner) and/or subscription right
available in connection with securities or other
property at any time held, to oppose or to consent to
the reorganization, consolidation, merger or
readjustment of the finances of any corporation, bank
or association or to the sale, mortgage, pledge or
lease of the property of any corporation, bank or
association any of the securities of which may at any
time be held and to do any act with reference
thereto,
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<PAGE>
including the exercise of options, the making of
agreement or subscription, which may be deemed
necessary or advisable in connection therewith, and
to hold and retain any securities or other properties
so acquired;
(vi) To hold cash uninvested for a reasonable period of
time under the circumstances without liability for
interest, pending investment thereof or the payment
of expenses or making distributions therewith;
(vii) To form corporations and to create trusts to hold
title to any securities or other property, all upon
such terms and conditions as may be deemed advisable;
(viii) To employ suitable agents and counsel and to pay
their reasonable expenses and compensation;
(ix) To register any securities held hereunder in the name
of the Trustee or in the name of a nominee with or
without the addition of words indicating that such
securities are held in a fiduciary capacity and to
hold any securities in bearer form and to combine
certificates representing such securities with
certificates of the same issue held by Trustee in
other fiduciary or representative capacities, or to
deposit securities in any qualified central
depository where such securities may be held in bulk
in the name of the nominee of such depository with
securities deposited by other depositors, or deposit
securities issued by the United States Government, or
any agency or instrumentalities thereof, with a
Federal Reserve Bank;
(x) To make, execute and deliver, as trustee, any and all
conveyances, contracts, waivers, releases or other
instruments in writing necessary or proper for the
-11-
<PAGE>
accomplishment of any of the foregoing powers;
(xi) To have any and all other powers or authority, under
the laws of the state in which the Trustee's
principal executive offices are located, relevant to
performance in the capacity as Trustee; and
(xii) To settle, compromise or submit to arbitration, any
claims, debts or damages, due or owing to or from the
Trust, to commence or defend suits or legal
proceedings and to represent the Trust in all suits
or legal proceedings; provided, however, the Trustee
shall not be expected or required to undertake any of
the foregoing unless there are sufficient assets in
the Trust with which to do so, or the Trustee has
received assurances by a party to this Trust,
satisfactory to the Trustee, of the payment or
reimbursement of the expenses connected therewith.
SECTION VI
DISPOSITION OF INCOME
During the term of this Trust, all income received by the Trust, net of
distributions, expenses and taxes, shall be accumulated and reinvested.
SECTION VII
ACCOUNTING BY TRUSTEE
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between Bank
and Trustee. Within ninety (90) days following the close of each
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<PAGE>
calendar year and within sixty (60) days after the removal or resignation of
Trustee, Trustee shall deliver to Bank a written account of its administration
of the Trust during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting forth all
investments, receipts, disbursements and other transactions effected by it,
including a description of all securities and investments purchased and sold
with the cost or net proceeds of such purchases or sales (accrued interest paid
or receivable being shown separately), and showing all cash, securities and
other property held in the Trust at the end of such year or as of the date of
such removal or resignation, as the case may be.
SECTION VIII
RESPONSIBILITY OF TRUSTEE
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however,
that Trustee shall incur no liability to any person for any action
taken pursuant to a direction, request or approval given by Bank which
is contemplated by, and in conformity with, the terms of the Benefit
Plans or this Trust and is given in writing by Bank. In the event of a
dispute between Bank and a party, Trustee may apply at the expense of
the Trust to a court of competent jurisdiction located in the State of
Indiana to resolve the dispute.
(b) If Trustee undertakes or defends any litigation arising in connection
with this Trust, except where it is finally determined by a court of
competent jurisdiction that the Trustee breached its duties under this
Agreement, Bank agrees to indemnify Trustee against Trustee's costs,
expenses and liabilities (including, without limitation, attorneys'
fees and expenses) relating
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<PAGE>
thereto and to be primarily liable for such payments. If Bank does not
pay such costs, expenses and liabilities in a reasonably timely manner,
Trustee may obtain payment from the Trust.
(c) Trustee may consult with legal counsel (who may also be counsel for
Bank generally) with respect to any of its duties or obligations
hereunder and charge their fees to the Trust if they are not paid in a
timely manner by Bank.
(d) Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals to assist it in performing
any of its duties or obligations hereunder.
(e) Trustee shall have, without exclusion, all powers conferred on trustees
by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is acquired or held at
the direction of Bank as an asset of the Trust, Trustee shall have no
power to name a beneficiary of the policy other than the Trust, to
assign the policy other than to a successor trustee, or to loan to any
person (including Bank) the proceeds of any borrowing against such
policy.
(f) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that
could give this Trust the objective of carrying on a business and
dividing the gains therefrom, within the meaning of section 301.7701-2
of the Procedure and Administrative Regulations promulgated pursuant to
the Internal Revenue Code.
(g) Trustee shall be entitled to conclusively rely upon any written notice,
direction, instruction, certificate or other communication believed by
it to be genuine and to be signed by the proper person or persons.
(h) Nothing contained in this Trust Agreement shall require Trustee to risk
or expend its own
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<PAGE>
funds in the performance of its duties hereunder. In the acceptance and
performance of its duties hereunder, Trustee acts solely as trustee of
the Trust and not in its individual capacity, and all persons, other
than Bank, having any claim against Trustee related to this Trust
Agreement or the actions or agreements of Trustee contemplated hereby
shall look solely to the Trust for the payment or satisfaction thereof,
except to the extent that Trustee has engaged in willful misconduct or
gross negligence, or Trustee has willfully breached its obligation
under this Trust Agreement.
(i) Trustee shall not be responsible for determining whether a Change in
Control (as hereinafter defined) has occurred. Bank will notify Trustee
of the occurrence of a Change in Control, and Trustee shall be entitled
to rely conclusively upon such notification for all purposes of a
Change in Control hereunder without any liability or further duty with
respect thereto.
(j) Any amendment or amendments that are or may be made to the Benefit
Plan(s) shall not increase the Trustee's duties hereunder without the
express written consent of the Trustee.
SECTION IX
COMPENSATION AND EXPENSES OF TRUSTEE
Bank shall pay all administrative and Trustee's fees and expenses. If
not paid by Bank, the fees and expenses shall be paid from the Trust.
SECTION X
RESIGNATION AND REMOVAL OF TRUSTEE
(a) Trustee may resign at any time by written notice to Bank, which shall
be effective sixty (60) days after receipt of such notice unless Bank
and Trustee agree otherwise, whether or not a
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<PAGE>
successor has been appointed and qualifies. Trustee shall pay or
deliver property to the successor trustee or Bank (in further trust,
pending the appointment of a successor) as the case may be, at the end
of such period.
(b) Trustee may be removed by Bank on sixty (60) days notice to Trustee or
upon shorter notice accepted by Trustee. A successor trustee may be
removed by Bank on ninety (90) days notice to such successor trustee or
upon shorter notice accepted by the successor trustee.
(c)(1) If, at the time of a Change in Control (as defined herein), the then
acting trustee is an individual or entity, not independent of the Bank,
the Board of Directors of the Bank, as in existence immediately prior
to the Change in Control, shall designate an independent third party
with corporate trustee powers to act as successor trustee and upon such
appointment, the trustee acting prior to such Change in Control shall
resign. The successor trustee appointed by the Board of Directors may
not be removed by the Bank for two (2) years following the date of such
Change in Control.
(2) If, at the time of a Change in Control (as defined in Section XIII),
the trustee is, other than serving as trustee hereunder, an independent
party with respect to the Bank, Trustee may not be removed by Bank for
two (2) years following the date of such Change in Control. Such
trustee also may not be removed by Bank in anticipation of a Change in
Control.
(d) If Trustee resigns at any time following a Change in Control, or if
Trustee is removed by Bank at any time following the expiration of the
two (2) year period (as described in Subpart (c) above) following a
Change in Control, the President of the Bank, as in existence
immediately prior to a Change in Control, or in the event such person
is deceased, the Benefits Determiner, shall select a successor trustee
in accordance with the provisions of
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<PAGE>
XI(a) hereof and such selection shall be made on or before the
effective date of Trustee's resignation or removal. In all other
instances of resignation or removal, Bank shall select a successor
trustee in accordance with the provisions of XI(a) hereof, with such
selection being made on or before the effective date of Trustee's
resignation or removal.
(e) Upon resignation or removal of Trustee and appointment of a successor
trustee, all assets shall subsequently be promptly transferred to the
successor trustee, in accordance with subsection (a) hereof.
(f) If Trustee resigns or is removed under paragraph (a), (b), or (d) of
this Section X, a successor shall be appointed in accordance with
Section XI hereof, with such selection being made on or before the
effective date of resignation or removal. If no such appointment has
been made, Bank or Trustee (as applicable) may apply to a court of
competent jurisdiction for appointment of a successor or for
instructions. Should the Trustee be required to apply to a court of
competent jurisdiction for such purpose, all expenses of Trustee in
connection with the proceeding shall be allowed as administrative
expenses of the Trust.
SECTION XI
APPOINTMENT OF SUCCESSOR
(a) If Trustee resigns or is removed pursuant to the provisions of Section
X hereof, Bank may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers
under state law, to serve as successor trustee hereunder. The
appointment of a successor trustee shall be effective when accepted in
writing by the new trustee. The new trustee shall have all of the
rights and powers of the former trustee, including ownership rights in
the Trust assets. The former trustee shall execute any
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<PAGE>
instrument necessary or reasonably requested by the successor trustee
to evidence the transfer.
(b) The successor trustee need not examine the records and acts of any
prior Trustee and may retain or dispose of existing Trust assets,
subject to Sections VII and VIII hereof The successor trustee shall not
be responsible for and Bank shall indemnify and defend the successor
trustee from any claim or liability resulting from any action or
inaction of any prior trustee or from any other past event, or any
condition existing at the time it becomes successor trustee.
SECTION XII
AMENDMENT OR TERMINATION
(a) This Trust Agreement may be amended by a written instrument executed by
Trustee and Bank. Notwithstanding the foregoing, no such amendment
shall conflict with the terms of the Benefit Plan or shall make the
Trust revocable.
(b) The Trust shall not terminate until Benefit Plan participants and their
beneficiaries are no longer entitled to any benefits pursuant to the
terms any Benefit Plan. The Trust shall not terminate until the earlier
of the following: (i) all Benefit Plan participants and their
beneficiaries are no longer entitled to any benefits pursuant to the
terms of the Benefit Plan or (ii) all Benefit Plan participants and
their beneficiaries are no longer entitled to any lump sum burial or
disability benefits pursuant to the terms of the Benefit Plans and the
Bank has fully complied with all provisions of the Benefit Plan. Upon
termination of the Trust any assets remaining in the Trust shall be
returned to Bank. Notwithstanding the foregoing, if at any time prior
to the termination of the Trust pursuant to the provisions set forth
herein,
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<PAGE>
the Trust has distributed its entire corpus, the Trust shall terminate
unless within sixty (60) days of notification to the Bank by Trustee
that all assets of the Trust have been distributed, the Bank makes
additional contributions to the Trust for purposes of paying the
benefits set forth herein.
(c) Upon written approval of Benefit Plan participants or beneficiaries
entitled to payment of benefits pursuant to the ten-ns of the Benefit
Plan, Bank may terminate this Trust prior to the time all benefit
payments under the Benefit Plan have been made. All assets in the Trust
at termination shall, after payment of all amounts due to Trustee and
all fees, taxes, expenses chargeable to the Trust, be returned to Bank.
(d) Section(s) I (one), II (two), VI (six), X (ten) and XII (twelve) of
this Trust Agreement may not be amended by Bank (i) in anticipation of
or (ii) for two (2) years following a Change of Control, as defined
herein.
SECTION XIII
MISCELLANEOUS
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating
the remaining provisions hereof.
(b) Benefits payable to Benefit Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at
law or in equity), alienated, pledged, encumbered or subjected to
attachment, garnishment, levy, execution or other legal or equitable
process.
(c) This Trust Agreement shall be governed by and construed in accordance
with the laws of the State of Indiana. Nothing in this Trust Agreement
shall be construed to subject the Trust to
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<PAGE>
the Employee Retirement Income Security Act of 1974, as amended.
(d) For purposes of this Trust,"Change in Control" of the Holding Company
(defined herein in subsection (j)) or the Bank shall mean the first to
occur of any of the following events:
(1) Any person or entity or group of affiliate persons or entities
(other than the Holding Company) becomes a beneficial owner,
directly or indirectly, of 25% or more of the Holding
Company's and/or the Bank's voting securities or all or
substantially all of the assets of Holding Company and/or the
Bank.
(2) Holding Company and/or the Bank enters into a definitive
agreement which contemplates the merger, consolidation or
combination of either Holding Company or the Bank with an
unaffiliated entity in which either or both of the following
is to occur: (i) the directors of Holding Company and/or Bank,
as applicable, immediately prior to such merger, consolidation
or combination will constitute less than a majority of the
board of directors of the surviving, new or combined entity;
or (ii) less than 75% of the outstanding voting securities of
the surviving, new or combined entity will be beneficially
owned by the stockholders of Holding Company immediately prior
to such merger, consolidation or combination; provided,
however, that if any definitive agreement to merge,
consolidate or combine is terminated without consummation of
the transaction, then no Change in Control shall be deemed to
have occurred pursuant to this paragraph (2).
(3) Holding Company and/or the Bank enters into a definitive
agreement which contemplates the transfer of all or
substantially all of Holding Company's and/or the Bank's
assets, other than to a wholly-owned subsidiary of Holding
Company; provided, however, that if any definitive agreement
to transfer assets is terminated
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<PAGE>
without communication of the transfer, then no Change in
Control shall be deemed to have occurred pursuant to this
paragraph (3).
(4) A majority of the members of the Board of Directors of either
Holding Company or the Bank shall be persons who: (i) were not
members of such Board on the date hereof ("current members");
and (ii) were not nominated by a vote of the Board which
included the affirmative vote of a majority of the current
members on the Board at the time of their nomination ("future
designees") and (iii) were not nominated by a vote of the
Board which included the affirmative vote of a majority of the
current members and future designees, taken as a group, on the
Board at the time of their nomination.
(e) The Bank shall be required to notify the Trustee of a Change in Control
or imminent Change in Control (for these purposes, a Change in Control
shall be imminent if it shall occur within sixty (60) days from the
date of said notice). The Trustee shall not be charged with actual
knowledge of a Change in Control until it has received notice, in
writing, of such Change in Control or imminent Change in Control.
(f) Every direction or notice authorized hereunder shall be deemed
delivered to the Bank or the Trustee as the case may be:
(i) on the date it is personally delivered to the Bank or the
Trustee at its respective principal executive offices, or
(ii) three (3) business days after it is sent by registered or
certified mail, postage prepaid, addressed to the Bank, the
Trustee or the benefits determiner at such principal executive
offices.
(g) The Trustee shall be fully protected in relying upon a certification of
an authorized
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<PAGE>
representative of the Bank with respect to any instruction, direction
or approval of the Bank required or permitted hereunder, and protected
also in relying upon the certification until a subsequent certification
is filed with the Trustee. The Trustee shall be fully protected in
acting upon any instrument, certificate, or paper believed by it to be
genuine and to be signed or presented by the proper person or persons,
and the Trustee shall be under no duty to make any investigation or
inquiry as to any statement contained in any such writing, but may
accept the same as conclusive evidence of the trust and accuracy
contained therein.
(h) The Bank has appointed Financial Institution Consulting Corporation as
the 'Benefits Determiner" to determine the manner and amount of
payments to be made to the participant and/or the beneficiary under the
Agreement in the event of any dispute. In the event that the Benefits
Determiner fails to act or resigns, a successor benefits determiner
shall be:
(i) selected by the Bank, if no Change in Control has occurred at
the Bank, or,
(ii) selected jointly by the participant (or beneficiary, if the
participant is deceased) and the Trustee, if a Change in
Control has occurred at the Bank.
(i) Communications under this Trust Agreement shall be in writing and shall
be sent to the following addresses:
Trustee: Home Federal Savings Bank
501 Washington St.
Columbus, Indiana 47202-0408
Attention: David L. Fisher, Vice President
and Senior Trust Officer
Telecopier: (812) 3784663
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<PAGE>
Bank: American Savings Bank, FSB
8230 Hohman Ave
P.O. Box 3198
Munster, Indiana 46321-0198
Attention: Clement Knapp, President
Telecopier: (219) 836-5883
(j) "Holding Company" shall mean AMB Financial, located in Munster,
Indiana.
(k) This Trust Agreement may be executed in any number of counterparts,
each of which shall be deemed to be an original, but all of which shall
together constitute only one agreement.
[Remainder of Page Intentionally Left Blank]
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<PAGE>
IN WITNESS WHEREOF, this instrument has been executed as of the day and
year first above written.
ATTEST: AMERICAN SAVINGS, FSB
By:
Secretary Title:
ATTEST: AMERICAN SAVINGS, FSB
By:
Secretary Title:
ATTEST: AMERICAN SAVINGS, FSB
______________________, Secretary Title:
================================================================================
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 . . . . . . . . . . . . . . . . . . . . . 17
Consolidated Financial Statements . . . . . . . . . . . . . . . . . . 18
Stockholder Information . . . . . . . . . . . . . . . . . . . . . . . 49
Corporate Information . . . . . . . . . . . . . . . . . . . . . . . . 50
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 1998 Annual Report.
American Savings, FSB (the Bank), the wholly owned subsidiary of AMB Financial
Corp., had a good year. Assets of the Bank increased approximately $17 million
to $114 million. Loans increased $13 million. Deposits increased $7.5 million.
The Bank reported net income of $745,000, representing approximately .7% return
on assets. We anticipate that the Bank will continue its growth focus for the
next several years.
AMB Financial Corp., the holding company, did not have a good year. The holding
company has a trading portfolio of approximately $2.5 million. This portfolio
consists of stock and mutual funds, primarily invested in thrift and bank
stocks. As most of you are aware 1998 was not a good year for thrift and bank
stocks. As a result, the holding company booked a loss of approximately $771,000
in this portfolio. I would like to emphasize that this is an unrealized loss.
Accounting rules require us to report the current market value of securities
held in our trading portfolio. If we had liquidated our entire portfolio on
December 31, 1998, we would have realized an actual loss of approximately
$164,000. We believe that the stocks and funds in our trading portfolio are
solid investments, and will perform better in the future. The stock market is,
however, subject to fluctuation, and so is our portfolio.
I believe that our company is pursuing the proper strategies to remain an
independent and viable banking organization. We plan to continue to serve the
needs of our local residents and businesses, and hope for continued financial
success.
Our financial performance and stock performance is available on our web site at
http://www.ambfinancial.com. Our web site has other convenient services, and I
urge you to visit it.
The entire staff of AMB Financial Corp. appreciates your commitment and support,
and we look forward to a long and profitable relationship.
Sincerely,
/s/Clement B. Knapp, Jr.
- ------------------------
Clement B. Knapp, Jr
President
2
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
At December 31,
--------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
-------- -------- -------- -------- --------
(In thousands)
<S> <C> <C> <C> <C> <C>
Selected Financial Data:
Total assets $116,913 $ 99,796 $ 86,102 $ 69,788 $ 65,536
Loans receivable, net 89,762 77,093 67,366 54,639 51,849
Investment securities 6,137 8,214 8,939 7,017 6,316
Mortgage-backed securities 2,649 3,494 4,019 1,479 1,593
Trading securities 2,394 2,413 539 - - - - - -
Deposits 78,997 71,700 60,411 59,588 58,281
Borrowed funds 23,074 12,000 9,500 3,000 1,000
Stockholder's equity 13,413 14,770 15,170 6,314 5,633
<CAPTION>
For the Year Ended December 31
1998 1997 1996 1995 1994
--------------------------------------------------------
Selected Operating Data: (In thousands)
<S> <C> <C> <C> <C> <C>
Total interest income $ 7,969 $ 7,120 $ 5,957 $ 5,222 $ 4,837
Total interest expense 4,570 3,793 2,955 2,686 2,209
------- ------- ------- ------- -------
Net interest income 3,399 3,327 3,002 2,536 2,628
Provision for loan losses 102 74 0 39 62
------- ------- ------- ------- -------
Net interest income after provision for loan losses 3,297 3,253 3,002 2,497 2,566
------- ------- ------- ------- -------
Non-interest income:
Fees and service charges 450 349 263 203 224
Commission income 55 78 57 59 23
Gain on sale of securities 68 58 53 -- 59
Unrealized gain (loss) on investments (771) 561 46 -- --
Gain on sale of deposits 27 -- -- -- --
Gain (loss) on sale of real estate owned (2) 5 28 2 178
Loss from investment in joint venture (11) -- -- -- --
Other 123 81 64 76 89
------- ------- ------- ------- -------
Total non-interest income (61) 1,132 511 340 573
------- ------- ------- ------- -------
Non-interest expense:
Compensation and benefits 1377 1,294 1,129 909 886
Office occupancy and equipment expenses 309 353 334 328 347
Data processing 368 336 295 248 210
Federal deposit insurance premiums 45 41 130 134 134
SAIF special assessment -- -- 389 -- --
Stock conversion expenses -- -- -- -- 332
Loss on disposition of fixed assets 29 -- -- -- --
Other 751 662 580 595 608
------- ------- ------- ------- -------
Total non-interest expense 2,879 2,686 2,857 2,214 2,517
------- ------- ------- ------- -------
Income before income taxes 357 1,698 656 623 622
Income tax provision 152 675 214 236 239
------- ------- ------- ------- -------
Net income 205 1,023 442 387 383
------- ------- ------- ------- -------
</TABLE>
3
<PAGE>
<TABLE>
<CAPTION>
At or For the Year Ended December 31,
1998 1997 1996 1995 1994
------ ------ ------ ----- -----
<S> <C> <C> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
Return on average assets (1) 0.18% 1.07% 0.55% 0.57% 0.58%
Return on average stockholders' equity(2) 1.46 7.06 3.28 6.40 6.74
Average stockholders' equity to
average assets 12.61 15.10 16.78 8.76 8.61
Stockholders' equity to total assets 11.47 14.80 17.62 9.05 8.60
Interest rate spread during period 2.86 3.10 3.37 3.84 4.11
Net interest margin (3) 3.29 3.67 3.97 4.03 4.25
Operating expenses to average assets (4) 2.59 2.80 3.56 3.29 3.31
Efficiency ratio (5) 87.41 60.28 70.23 76.99 73.72
Non-performing assets to total assets 0.43 0.34 0.35 0.53 0.76
Allowance for loan losses to non-
performing loans 104.87 133.12 116.27 97.43 66.00
Allowance for loan losses to loans
receivable, net 0.56 0.53 0.53 0.66 0.62
Ratio of average interest-earning
assets to average interest-bearing liabilities 1.10x 1.14x 1.16x 1.04x 1.04x
Number of full-service offices 3 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 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 write-off of stock conversion expenses
in 1994 and the SAIF special assessment in 1996, divided by net interest
income plus 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 two
full-service banking offices located in Dyer, 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 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 and to a lesser degree, non-interest income and
non-interest expense. 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 (loss)
primarily consists of service charges, fees on deposit and loan products
and, on occasion, securities gains or losses. 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
<PAGE>
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 consumer,
commercial business, commercial real estate, construction and land loans;
(iii) augment its lending activities with investments in purchased loans,
mortgage-backed and other securities; (iv) emphasize adjustable rate
and/or short and medium duration assets when market conditions permit (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.
5
<PAGE>
Comparison of Financial Condition at December 31, 1998 and 1997.
Total assets of the Company increased $17.1 million to $116.9
million as of December 31, 1998, from $99.8 million as of December 31, 1997.
This increase of 17.1% was primarily the result of an increase in savings
deposits of $7.3 million and additional advances from the FHLB of Indianapolis
in the amount of $9.7 million, which were used to fund mortgage loans for the
Company's loan portfolio.
Cash and cash equivalents increased by $3.4 million at December
31, 1998 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 $2.1 million
to $6.1 million at December 31, 1998 as a result of investment sales of $2.8
million and $2.9 million in proceeds from maturing securities offset by $3.5
million in new purchases. The $2.8 million of security sales in the current year
were short term U.S. Treasury notes that were replaced with longer duration U.S.
Treasury securities in anticipation of lower interest rates.
Loans receivable increased to $89.8 million at December 31, 1998,
a $12.7 million or 16.5% increase, as new loan originations of both residential
and non-residential loans of $27.2 million and loan purchases of $13.3 million
exceeded loan repayments of $27.8 million (See note 5 of the Notes to
Consolidated Financial Statements). The Company continues to remain focused on
an aggressive lending effort as evidenced by the better than 33% increase in
loans receivable over the last two years.
Total deposits at December 31, 1998 increased by $7.3 million, or
10.2%, due to net deposit receipts of $4.5 million and interest credited of $2.8
million. The deposit growth was primarily attributable to the Company's
continued aggressive advertising and competitive rates with regards to special
certificate promotions (primarily 13, 14, and 17 month terms) during 1998. In
addition, $2.7 million of deposits were sold to a local institution in
connection with the closing of the East Chicago branch.
Borrowed funds, which consist primarily of FHLB of Indianapolis
advances increased $11.1 million to $23.1 million at December 31, 1998. The
increase in borrowed funds was utilized to fund loan production during the year.
Most of the new borrowings were at maturity terms of 3 years.
Stockholders' equity decreased $1.4 million to $13.4 million at
December 31, 1998 from $14.8 million at December 31, 1997. This decrease was
primarily due to the buyback of treasury stock in the amount of $1.6 million and
the payment of dividends on common stock of $244,000, which was offset by net
income of $205,000 an increase of $43,000 in the unrealized gain on securities
available for sale and normal amortization of RRP and ESOP benefits of $260,000.
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.
<PAGE>
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.
6
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31
(Dollars in thousands)
---------------------------------------------------------------------------------------
1998 1997
----------------------------------------- ----------------------------------------
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) 86,033 7,027 8.17% 71,473 6,003 8.40%
Mortgage-backed securities 3,033 204 6.73% 3,783 258 6.82%
Investment securities 9,198 444 4.83% 10,494 583 5.56%
Interest-bearing deposits 4,072 213 5.23% 4,135 223 5.39%
FHLB stock 1,013 81 8.00% 658 53 8.05%
-------- ------ ---- ------- ------ ----
Total interest-earning assets $103,349 $7,969 7.71% $90,543 $7,120 7.86%
Interest-Bearing Liabilities
Passbook accounts 15,841 453 2.86% 16,407 489 2.98%
Demand and NOW accounts 10,028 221 2.20% 9,642 233 2.42%
Certificate accounts 49,707 2,800 5.63% 42,051 2,378 5.66%
Borrowings 18,663 1096 5.87% 11,629 693 5.96%
-------- ------ ---- ------- ------ ----
Total interest-bearing liabilities $ 94,239 $4,570 4.85% $79,729 $3,793 4.76%
-------- ------ ---- ------- ------ ----
Net interest income $3,399 $3,327
====== ======
Net interest rate spread 2.86% 3.10%
==== ====
Net earning assets $ 9,110 $10,814
======== =======
Net yield on average
interest-earning assets 3.29% 3.67%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.10x 1.14x
==== ====
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
For the Year Ended December 31
(Dollars in thousands)
-------------------------------------------
1996
-------------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
<S> <C> <C> <C>
Interest-Earning Assets
Loans receivable (1) 59,165 4,949 8.36%
Mortgage-backed securities 3,396 230 6.77%
Investment securities 8,565 521 6.08%
Interest-bearing deposits 3,876 214 5.52%
FHLB stock 546 43 7.88%
------- ------ ----
Total interet-earning assets $75,548 $5,957 7.89%
Interest-Bearing Liabilities
Passbook accounts 16,490 510 3.09%
Demand and NOW accounts 9,258 226 2.44%
Certificate accounts 36,389 2,025 5.56%
Borrowings 3,186 194 6.09%
------- ------ ----
Total interest-bearing liabilities $65,323 $2,955 4.52%
------- ------ ----
Net interest income $3,002
======
Net interest rate spread 3.37%
Net earning assets $10,225
=======
Net yield on average
interest-earning assets 3.97%
====
Average interest-earning assets to
average interest-bearing liabilities 1.16x
=====
</TABLE>
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for losses.
7
<PAGE>
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.
<TABLE>
<CAPTION>
For the Year Ended
------------------
December 31,
------------
1998 Compared to 1997 1997 Compared to 1996
Increase (Decrease) Increase (Decrease)
------------------- -------------------
Due to 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 (165) 1,223 (34) 1,024 21 1,029 4 1,054
Mortgage-backed
securities (4) (51) 1 (54) 1 27 28
Investment securities (76) (72) 9 (139) (45) 117 (10) 62
Interest-bearing deposit (7) (3) (10) (5) 14 9
FHLB Stock 28 28 1 9 10
------ ------ ------ ------ ------ ------ ------ ------
Totals (252) 1,125 (24) 849 (27) 1,196 (6) 1,163
------ ------ ------ ------ ------ ------ ------ ------
Interest-bearing liabilities:
Passbook accounts (20) (17) 1 (36) (19) (2) (21)
Demand and Now
accounts (20) 9 (1) (12) (2) 9 7
Certificate accounts (9) 433 (2) 422 33 315 5 353
Borrowed funds (10) 419 (6) 403 (4) 514 (11) 499
------ ------ ------ ------ ------ ------ ------ ------
Totals (59) 844 (8) 777 8 836 (6) 838
------ ------ ------ ------ ------ ------ ------ ------
Net change in net
interest income 72 325
------ ------
</TABLE>
<PAGE>
Comparison of Operating Results for the Years Ended December 31, 1998 and 1997.
Net Income. The Company's net income for the year ended December 31, 1998 was
$205,000 as compared to $1.0 million for the same period in 1997, a decrease of
$818,000. This decrease was due primarily to a decrease in non-interest income
of $1.2 million, an increase in non-interest expense of $193,000, and an
increase in loan loss provision of $28,000, offset by an increase in net
interest income of $72,000, and a decrease in income taxes of $523,000.
Interest Income. Total interest income for the year ended December 31, 1998
increased $849,000 or 11.9%, as compared to the prior year. The increase in
interest income was the result of an increase in average interest-earning assets
of $12.8 million, partially offset by a decrease in the average asset yield to
7.71% from 7.86%. Interest income on loans increased $1.0 million as a result of
a $14.6 million increase in average loan receivable, offset by 23 basis point
decrease in the average yield of the loan portfolio. Interest income on both
mortgage-backed and investment securities declined as a result of decreases in
the average balance of both securities as well as declines in the average yield.
The lack of additional purchase activity in these investments is a result of the
Company's ability and strategy to originate and purchase loans for its own
investment portfolio.
8
<PAGE>
Interest Expense. Total interest expense for the year ended December 31, 1998
increased $777,000, or 20.5% to $4.6 million as compared to $3.8 million in the
prior year. Deposit interest increased by $374,000, primarily as a result of the
$7.5 million increase in the average balance of deposit accounts and to a lesser
extent, by a 5 basis point increase in the average cost of deposits. The average
certificate of deposit base increased by $7.7 million in 1998 as the Bank
offered special certificate promotions. Interest expense on borrowed funds
increased $393,000, to $1.1 million as the average balance of borrowed funds
increased $7.0 million to $18.7 million for the year ended December 31, 1998.
This increase was primarily 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.
A provision of $102,000 was recorded during the year ended December 31, 1998
while a provision of $74,000 was recorded in the comparable 1997 period. The
increase in the provision for losses on loans was due to the continuing 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 regulatory requests for additional provisions for loan losses during the
year ended December 31 1998 or 1997. Net charge offs for the year ended December
31, 1998 amounted to less than $5,000. 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 decreased $1.2 million
for the year ended December 31, 1998 compared with the previous year. The
decrease was directly related to an unrealized loss on trading securities of
$771,000 recorded in 1998 compared to a $561,000 unrealized gain recorded in the
prior year. The decline in income from unrealized gains and losses on trading
securities is a reflection of the erosion in the value of community bank and
thrift stock prices during the second half of 1998. Although the stock market
appears to have generally recovered from its late summer declines, the Company's
trading portfolio, which consists primarily of equity investments in community
and regional financial institutions, has yet to experience any sustained
turnaround. Non-interest income also declined due to a decrease of $22,000 in
commissions from the sale of various financial products by the Bank's wholly
owned subsidiary NIFCO, and an $11,000 loss from investment in a low income
housing joint venture, offset by an increase of $101,000 in loan and deposit
related fees, a $10,000 increase on the sale of investment securities, and a
$27,000 profit from the sale of the East Chicago deposit accounts.
<PAGE>
Non-Interest Expense. The Company's non-interest expense increased $193,000 to
$2.9 million for the year ended December 31, 1998 compared to $2.7 million for
the previous year. The increase was primarily the result of increased staffing
costs of $83,000 due in part to normal salary and benefit increases and the
payment of a bonus in the first quarter of 1998 totaling $44,000, increased data
processing costs of $33,000 due to increased transaction charges and to a lesser
extent Y2K expenditures, a loss of $29,000 on the disposition of the closed East
Chicago branch office, and an increase in other operating expenses of $117,000
due to the expanded product offerings and growth in customer activity levels.
Among the increased expenses were bank correspondent and courier fees,
telephone, insurance, meetings, and professional service fees. This was offset
by decrease in advertising costs of $39,000, and a decrease in occupancy and
equipment expense of $44,000.
9
<PAGE>
Provision for Income Taxes. Tax expense for the year ended December 31, 1998
decreased $523,000 to $152,000 compared to $675,000 for the comparable year in
1997. Income taxes decreased primarily as a result of decrease in pre-tax
income.
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 $442,000 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 in
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.
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. 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 regulatory 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.
<PAGE>
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.
10
<PAGE>
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 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.
Qualitative 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 risk inherent in the asset/liability 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 in interest rates and to manage the ratio of interest rate sensitive
assets to interest rate sensitive liabilities within 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 risk 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.
<PAGE>
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"), can provide high enough returns to justify the increased
exposure to sudden 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.
11
<PAGE>
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, 1998, adjustable-rate loans represented $39.9 million, or 43.85%
of the total loan portfolio. At December 31, 1998, the Company had $794,000 of
adjustable-rate mortgage-backed pass-through securities or securities with
anticipated lives of five years or less. Second, a significant portion of the
Company's other debt securities (primarily U.S. Government and agency
securities) are intermediate-term instruments with $4.9 million of such
securities contractually maturing within five years of December 31, 1998. Third,
the Company has 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, 1998, the Company had $15.1
million of regular savings accounts, $3.8 million of money market accounts and
$7.4 million of NOW, checking and club accounts. Overall, these accounts
comprised 33.2% of the Company's total deposit base. Fourth, 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,
One approach used by management to qualify interest rate risk is
the net portfolio value ("NPV") analysis. 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 31,1998, 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 in the table, the Company's NPV is more sensitive to rising rates
than declining rates. From an 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 in the event of a rate
increase would increase more rapidly than the yield on its assests because the
Company's deposits generally have shorter periods to repricing.
<TABLE>
<CAPTION>
INTEREST RATE SENSITIVITY OF NET PORTFOLIO VALUE
Assumed NPV as % of Present
Change in Interest Rates Net Portfolio Value Value of Assets
------------------------ ----------------------------------------- ------------------------
(Basis Points) $ Amount $ Change % Change % Ratio Bp Change
-------------- -------- -------- -------- ------- ---------
<S> <C> <C> <C> <C> <C>
+400 9,186 -2,872 -24 8.41 -192
+300 10,205 -1,853 -15 9.17 -116
+200 11,093 -965 -8 9.79 -53
+100 11,739 -319 -3 10.19 -13
12,058 10.32
-100 12,095 37 10.22 -10
-200 11,969 -89 -1 9.99 -33
-300 11,899 -159 -1 9.79 -53
-400 11,517 -541 -4 9.35 -97
</TABLE>
12
<PAGE>
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 interests rate
scenarios. It was also assumed that delinquency rates would 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 and purchase of real estate and other loans, and the purchase of
mortgage-backed and other securities. During the years ended December 31, 1998,
and 1997, the Company's disbursements for loan originations totaled $27.2
million, and $19.9 million respectively and loan purchases totaled $13.3 million
and $6.9 million respectively. For the years ended December 31, 1998, and 1997,
there were no purchases of mortgage-backed securities while purchases of other
securities totaled $3.5 million and $4.0 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, 1998, and 1997, the Company
experienced net increases in deposits (including the effect of interest
credited) of $7.3 million and $11.3 million respectively. The increase in fiscal
1998 reflects a concerted effort to increase the deposit base through marketing
local special rate certificates for periods of 13 through 17 months. Also,
during the year ended December 31, 1998, the Company sold deposit accounts from
a branch location totaling $2.7 million. Proceeds from FHLB advances were $15.7
million in fiscal 1998, and $7.0 million in fiscal 1997. FHLB advances of $6.0
million and $4.5 million were repaid in fiscal 1998 and 1997 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, 1998, the Company's borrowing limit
from the FHLB of Indianapolis was approximately $31.2 million, with unused
borrowing capacity of $8.6 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 ratio is currently 4.0%. At December 31, 1998 and 1997, the Company's
liquidity ratio was 16.1%, and 16.3% respectively.
<PAGE>
The Company's most liquid assets are cash and cash equivalents,
which include highly 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, 1998 and 1997, cash and cash
equivalents totaled $9.1 million and $5.7 million, respectively.
At December 31, 1998, the Company had outstanding loan
origination commitments of $2.9 million, undisbursed construction loans in
process of $569,000, and approved but unused lines of credit
13
<PAGE>
extended to customers of $5.2 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, 1998 totaled $45.3 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 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, 1998 with
tangible and leverage capital ratios of 7.52% and a total risk-based capital
ratio of 14.06%. 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 1998 the Bank paid a dividend of
$1.9 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
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 related data 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 Derivative Instruments and for Hedging Activities.
In June 1998, the FASB issued Statement of Financial Accounting Standards No.
133 ("SFAS No. 133"), entitled "Accounting for Derivative Instruments and for
Hedging Activities." SFAS No. 133 provides a comprehensive and consistent
<PAGE>
standard for the recognition and measurement of derivatives and hedging
activities. The statement requires all derivatives to be recorded on the balance
sheet at fair value and establishes special accounting for the following three
different types of hedges: hedges of changes in the fair value of assets,
liabilities or firm commitments (referred to as fair value hedges); hedges of
the variable cash flows of forecasted transactions (cash flow hedges); and
hedges of foreign currency exposures of net investments in foreign operations.
Though the accounting treatment and criteria for each of the three types of
hedges is unique, they all result in recognizing offsetting changes in value or
cash flow of both the hedge and the hedged item in earnings in the same period.
Changes in the fair value of derivatives that do not meet the criteria of one of
these three categories of hedges are included in earnings in the period of the
change. SFAS No. 133 is effective for years beginning after June 15, 1999, but
companies can early adopt as of the
14
<PAGE>
beginning of any fiscal quarter that begins after June 1998. Management does not
believe that adoption of SFAS No. 133 will have a material impact on the
Company's consolidated financial condition or results of operations.
Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise.
In October 1998, the FASB issued Statement of Financial Accounting Standards No.
134, "Accounting for Mortgage-Backed Securities Retained after the
Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise"
(SFAS No. 134"), which is effective for the first fiscal quarter after December
15, 1998. This statement amends SFAS No. 65 "Accounting for Certain Mortgage
Banking Activities." This statement revises the accounting for retained
securities and beneficial interests. Management does not believe that adoption
of SFAS No. 134 will have a material impact on the Company's consolidated
financial condition or results of operations.
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.
Year 2000 Readiness Disclosure
General. The year 2000 ("Y2K") issues confronting the Company and
its suppliers, customers, customers' suppliers and competitors centers on the
inability of computer systems to recognize the year 2000. Many existing computer
programs and systems originally were programmed with six digit dates that
provided only two digits to identify the calendar year 1900 rather than the year
2000.
Financial institution regulators recently have increased their
focus upon Y2K compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council ("FFIEC") has issued several interagency
statements on Y2K Project Management Awareness. These statements require
financial institutions to, among other things, examine the Y2K implications of
their reliance on vendors and with respect to data exchange and the potential
impact of the Y2K issue on their customers, suppliers and borrowers. These
statements also require each federally regulated financial institution to survey
its exposure, measure its risk and prepare a plan to address the Y2K issue. In
addition, the federal banking regulators have issued safety and soundness
guidelines to be followed by insured depository institutions, such as the Bank,
to assure resolution of any Y2K problems. The federal banking agencies have
asserted that Y2K testing and certification is a key safety and soundness issue
in conjunction with regulatory exams and, thus, that an institution's failure to
address appropriately the Y2K issue could result in supervisory action,
including the reduction of the institution's supervisory ratings, the denial of
applications for approval of mergers or acquisitions or the imposition of civil
money penalties.
American Savings, FSB understands the importance of the Year 2000
(Y2K) issue, and the bank is currently taking steps to insure a smooth
transition into the next millenium. The Senior Management Team of the bank has
decided to follow the guidelines established by the Federal Financial
Institutions Examination Council (FFIEC) for Y2K preparation. The bank has
intended to meet all deadlines established by the FFIEC, and to-date the bank
has satisfied all requirements.
A Steering Committee comprised of the bank's department heads
was established in 1998 to oversee and report all the events pertaining to the
Y2K project. These individuals are under the direct supervision of the bank's
CEO and prepare regular reports to the Board of Directors.
15
<PAGE>
Risks. Like most financial service providers, the Y2K issue due
to its dependence on technology and date-sensitive data may significantly affect
the Company and its operations. Computer software and hardware and other
equipment, both within and outside the Company's direct control, and third
parties with whom the Company electronically or operationally interfaces
(including without limitation its customers and third party vendors) are likely
to be affected. If computer systems are not modified in order to be able to
identify the year 2000, many computer applications could fail or create
erroneous results. As a result, many calculations which rely on date field
information, such as interest, payment or due dates and other operation
functions, could generate results which are significantly misstated, and the
Company could experience an inability to process transactions, prepare
statements or engage in similar normal business activities. Likewise, under
certain circumstances, a failure to adequately address the Y2K issue could
adversely affect the viability of the Company's suppliers and creditors and the
creditworthiness of its borrowers. Thus, if not adequately addressed, the Y2K
issue could result in a significant adverse impact on the Company's operations
and, in turn, its financial condition and results of operations.
The bank has adopted a five-phase plan to insure Y2K processing
success. Many aspects required for the plan's success have been completed, and
are currently undergoing minor improvement adjustments. The main categories of
the five-phase plan are as follows:
1. Awareness During this phase of the American Savings Y2K
programs the senior management members attempted to gather
information relevant to the bank's Y2K scenario. Information
was gathered from a variety of sources including seminars,
numerous publications and external consultants.
2. Assessment During the assessment phase of the bank's Y2K
program each department of the bank-submitted information on
areas that presented a potential risk to the institution.
Members of the Y2K Steering Committee identified the "date
sensitive" systems and assigned a risk rating to the
individual items. The areas classified as "mission critical"
receive a higher priority rating from the committee.
3. Renovation Through out the renovation phase of bank's Y2K
program systems were replaced or upgraded to insure Y2K
compliance. The cost associated with this phase were not
material during 1998 and a substantial change in 1999 is not
expected.
4. Testing American Savings performed internal testing on all
in-house systems and some systems under the control of
service providers. Proxy tests were used to test the
integrity of the banks core application system. The senior
management of the bank is currently satisfied with the
progress of the test results.
5. Contingency American Savings has begun the process of
contingency planning for all mission critical systems of the
bank. Members of the Steering Committee intend to complete
the contingency planning process prior to the FFIEC deadline
in June for all mission critical systems. Including those
systems dependent upon third party vendors or service
providers.
<PAGE>
The Company is expensing all cost associated with training and
software as those costs are incurred, and such costs are being funded through
operating cash flows. Hardware cost will be capitalized and expensed under our
fixed asset guidelines. The total cost of the Y2K conversion project for the
Company is estimated to be $65,000. Expenses of approximately $40,000 were
incurred and expensed by the Company through December 31, 1998. The Company does
not expect significant increases in future data processing costs related to Y2K
compliance. While we believe this amount will be sufficient to complete the
requirements of becoming Y2K compliant, it is an estimate. As such we will
review our budget monthly to help ensure that we have allocated sufficient
resources to this project. Any deviations to the preliminary budget will be
reported to the Board of Directors.
16
<PAGE>
{LETTERHEAD COBITZ, VANDENBERG & FENNESSY}
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, 1998 and 1997, and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for each of the three years in the period ending December 31, 1998.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the 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, 1998 and 1997, and the results
of their operations and their cash flows for each of the three years in the
period ending December 31, 1998, in conformity with generally accepted
accounting principles.
/s/Cobitz, Vandenberg & Fennessy
- --------------------------------
Cobitz, Vandenberg & Fennessy
January 29, 1999
Palos Hills, Illinois
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31,
-------------------------------
1998 1997
------------- ------------
<S> <C> <C>
Assets
Cash and amounts due from depository institutions $ 3,210,234 2,510,527
Interest-bearing deposits 5,887,182 3,176,428
------------ ------------
Total cash and cash equivalents 9,097,416 5,686,955
Investment securities, available for sale, at fair value (note 2) 6,137,219 8,213,614
Trading securities (note 3) 2,394,130 2,412,967
Mortgage-backed securities, available for sale, at fair value (note 4) 2,649,380 3,494,035
Loans receivable (net of allowance for loan losses:
1998 - $506,534, 1997 - $410,383) (note 5) 89,762,417 77,093,229
Real estate owned 23,369 27,481
Investment in limited partnership (note 6) 1,380,925 -
Stock in Federal Home Loan Bank of Indianapolis 1,334,200 725,400
Office properties and equipment - net (note 7) 427,823 471,730
Accrued interest receivable (note 8) 594,942 533,509
Prepaid expenses and other assets (note 9) 3,111,101 1,136,860
------------ ------------
Total assets 116,912,922 99,795,780
============ ============
Liabilities and Stockholders' Equity
Liabilities:
Deposits (note 10) 78,997,215 71,700,126
Borrowed money (note 11) 21,683,000 12,000,000
Note payable 1,391,454 -
Advance payments by borrowers for taxes and insurance 567,098 383,237
Other liabilities (note 12) 861,325 942,134
------------ ------------
Total liabilities 103,500,092 85,025,497
------------ ------------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Financial Condition
December 31,
-------------------------------
1998 1997
------------- ------------
<S> <C> <C>
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 869,829 shares outstanding at December 31, 1998 and 963,798 shares
outstanding at December 31, 1997 11,241 11,241
Additional paid-in capital 10,771,799 10,717,068
Retained earnings, substantially restricted 7,317,519 7,357,250
Accumulated other comprehensive income, net of income taxes 113,856 71,061
Treasury stock, at cost (254,296 and 160,327 shares at December 31, 1998 and 1997) (3,844,015) (2,223,051)
Common stock acquired by Employee Stock Ownership Plan (629,510) (719,440)
Common stock awarded by Recognition and Retention Plan (328,060) (443,846)
------------ ------------
Total stockholders' equity (notes 16 and 17) 13,412,830 14,770,283
------------ ------------
Commitments and contingencies (notes 18 and 19)
Total liabilities and stockholders' equity $ 116,912,922 99,795,780
============= ============
</TABLE>
See accompanying notes to consolidated financial statements.
18
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Interest income:
Interest on loans $ 7,027,445 6,003,470 4,949,491
Interest on mortgage-backed securities 204,014 257,542 230,175
Interest on investment securities 443,942 583,012 520,663
Interest on interest-bearing deposits 212,488 222,787 214,295
Dividends on Federal Home Loan Bank stock 81,208 52,699 42,694
----------- --------- ---------
Total interest income 7,969,097 7,119,510 5,957,318
----------- --------- ---------
Interest expense:
Interest on deposits 3,474,206 3,099,417 2,760,774
Interest on borrowings 1,096,056 693,214 194,431
----------- --------- ---------
Total interest expense 4,570,262 3,792,631 2,955,205
----------- --------- ---------
Net interest income before provision for loan losses 3,398,835 3,326,879 3,002,113
Provision for loan losses (note 5) 102,047 74,243 -
----------- --------- ---------
Net interest income after provision for loan losses 3,296,788 3,252,636 3,002,113
----------- --------- ---------
Non-interest income:
Loan fees and service charges 143,640 98,180 97,576
Commission income 55,416 77,811 57,491
Unrealized gain (loss) on trading securities - net (771,172) 560,809 46,484
Gain on sale of trading securities 24,086 36,066 -
Gain on sale of investment securities 44,204 22,264 52,617
Gain (loss) on sale of real estate owned (1,696) 4,908 27,821
Gain on sale of deposit accounts (note 10) 27,033 - -
Loss from limited partnership (note 6) (10,529) - -
Deposit related fees 305,896 250,788 165,114
Other income 122,530 80,994 63,700
----------- --------- ---------
Total non-interest income (60,592) 1,131,820 510,803
----------- --------- ---------
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Income
Years Ended December 31,
------------------------------------------------
1998 1997 1996
----------- --------- ---------
<S> <C> <C> <C>
Non-interest expense:
Staffing costs (notes 13 and 14) 1,376,916 1,294,221 1,128,341
Advertising 98,036 126,016 79,967
Occupancy and equipment expenses (note 7) 309,385 353,116 334,286
Data processing 368,335 335,555 295,258
Professional fees 167,386 131,373 138,199
Federal deposit insurance premiums 45,112 41,400 129,639
SAIF special assessment - - 389,255
Loss on disposition of fixed assets (note 7) 28,798 - -
Other 485,415 404,848 361,532
----------- --------- ---------
Total non-interest expense 2,879,383 2,686,529 2,856,477
----------- --------- ---------
Income before income taxes 356,813 1,697,927 656,439
Income taxes (note 15) 152,171 674,874 214,286
----------- --------- ---------
Net income $ 204,642 1,023,053 442,153
=========== ========= =========
Earnings per share -
Basic $ .24 1.12 .43
Diluted $ .24 1.10 .43
Dividends declared on common stock $ .29 .25 .12
</TABLE>
See accompanying notes to consolidated financial statements.
19
<PAGE>
<TABLE>
<CAPTION>
AMB FINANCIAL CORP.
AND SUBSIDIARIES
Consolidated Statements of Changes in Stockholders' Equity
Three Years Ended December 31, 1998
Accumulated Common
Additional Other Stock
Common Paid-in Retained Comprehensive Treasury Acquired
Stock Capital Earnings Income Stock by ESOP
----- ------- -------- ------ ----- -------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $ - - 6,242,782 70,721 - -
Comprehensive income:
Net income 442,153
Other comprehensive income, net of tax:
Unrealized holding loss during the year (88,335)
Add: reclassification adjustment of
losses included in net income 48,000
--------- -------
Total comprehensive income 442,153 (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
Amortization of award of RRP stock
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)
Comprehensive income:
Net income 1,023,053
Other comprehensive income, net of tax:
Unrealized holding gain during the year 54,600
Less: reclassification adjustment of gains
included in net income (13,925)
--------- -------
Total comprehensive income 1,023,053 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
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)
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Comprehensive income:
Net income 204,642
Other comprehensive income, net of tax:
Unrealized holding gain during the year 49,076
Less: reclassification adjustment of
gains included in net income (6,281)
--------- ------
Total comprehensive income 204,642 42,795
Purchase of treasury stock
(93,969 shares) (1,620,964)
Amortization of award of RRP stock
Contribution to fund ESOP loan 54,731 89,930
Dividends declared on common stock (244,373)
------ ---------- --------- ------ ---------- --------
Balance at December 31, 1998 $ 11,241 10,771,799 7,317,519 113,856 (3,844,015) (629,510)
========== ========== ========= ======= ========== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common
Stock
Acquired
by RRP Total
------ -----
<S> <C> <C>
Balance at December 31, 1995 - 6,313,503
Comprehensive income:
Net income 442,153
Other comprehensive income, net of tax:
Unrealized holding loss during the year (88,335)
Add: reclassification adjustment of
losses included in net income 48,000
----------
Total comprehensive income 401,818
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) (578,929)
Amortization of award of RRP stock 19,297 19,297
Contribution to fund ESOP loan 100,810
Dividends declared on common stock (120,731)
----------- ----------
Balance at December 31, 1996 (559,632) 15,169,857
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Common
Stock
Acquired
by RRP Total
------ -----
<S> <C> <C>
Comprehensive income:
Net income 1,023,053
Other comprehensive income, net of tax:
Unrealized holding gain during the year 54,600
Less: reclassification adjustment of gains
included in net income (13,925)
----------
Total comprehensive income 1,063,728
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 115,786 115,786
Contribution to fund ESOP loan 132,252
Dividends declared on common stock (230,007)
----------- ----------
Balance at December 31, 1997 (443,846) 14,770,283
Comprehensive income:
Net income 204,642
Other comprehensive income, net of tax:
Unrealized holding gain during the year 49,076
Less: reclassification adjustment of
gains included in net income (6,281)
----------
Total comprehensive income 247,437
Purchase of treasury stock
(93,969 shares) (1,620,964)
Amortization of award of RRP stock 115,786 115,786
Contribution to fund ESOP loan 144,661
Dividends declared on common stock (244,373)
----------
Balance at December 31, 1998 (328,060) 13,412,830
=========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
20
<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 $ 204,642 1,023,053 442,153
Items not requiring (providing) cash:
Depreciation 136,566 153,426 139,808
Amortization of cost of stock benefit plans 205,716 205,716 120,107
Amortization of premiums and accretion of discounts 13,773 1,858 (434)
Net gain on sale of securities (68,290) (58,330) (52,617)
Net (gain) loss on sale of real estate owned 1,696 (4,908) (27,821)
Provision for loan losses 102,047 74,243 -
Loss on disposition of fixed assets 28,798 - -
Loss from limited partnership 10,529 - -
Gain on sale of deposits (27,033) - -
Unrealized (gain) loss on trading securities 771,172 (560,809) (46,484)
Purchase of trading securities (852,648) (1,957,532) (493,016)
Proceeds from sale of trading securities 124,399 680,940 -
Increase (decrease) in deferred income on loans (76,687) (25,349) 23,507
Increase (decrease) in accrued and deferred income taxes (591,282) 347,337 (50,221)
Increase in accrued interest receivable (61,433) (80,554) (66,322)
Increase (decrease) in accrued interest payable 24,206 (8,163) 24,739
Increase in deferred compensation 61,581 79,320 71,069
Other, net (8,354) (188,048) 41,548
------------- ----------- -----------
Net cash provided by (for) operating activities (602) (317,800) 126,016
------------- ----------- -----------
Cash flows from investing activities:
Proceeds from sales of investment securities 2,793,760 4,014,689 132,617
Proceeds from maturities of investment securities 2,875,000 750,000 1,000,000
Purchase of investment securities (3,492,968) (3,996,048) (3,056,153)
Proceeds from repayments of mortgage-backed securities 847,014 569,678 481,548
Purchase of mortgage-backed securities - - (3,034,420)
Purchase of Federal Home Loan Bank stock (608,800) (179,800) -
Purchase of life insurance policies (1,515,000) - -
Purchase of loans (14,487,063) (6,872,966) (4,647,821)
Loan disbursements (25,987,142) (19,852,423) (22,901,235)
Loan repayments 27,756,288 16,884,296 14,800,656
Proceeds from sale of real estate owned 25,785 102,702 25,823
Property and equipment expenditures, net (121,457) (114,553) (41,467)
------------- ----------- ------------
Net cash provided for investing activities (11,914,583) (8,694,425) (17,240,452)
------------- ----------- ------------
</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 151,006,489 142,882,643 122,368,827
Deposit withdrawals (143,773,817) (134,005,401) (123,874,056)
Sale of deposit accounts (2,676,263) - -
Interest credited to deposits 2,767,713 2,411,887 2,328,069
Proceeds from borrowed money 15,683,000 7,000,000 8,500,000
Repayment of borrowed money (6,000,000) (4,500,000) (2,000,000)
Increase (decrease) in advance payments by
borrowers for taxes and insurance 183,861 71,024 (12,283)
Purchase of treasury stock (1,620,964) (1,498,333) (724,718)
Purchase of RRP stock - - (578,929)
Dividends paid on common stock (244,373) (230,007) (120,731)
------------- ----------- ------------
Net cash provided by financing activities 15,325,646 12,131,813 15,644,986
------------- ----------- ------------
Net change in cash and cash equivalents 3,410,461 3,119,588 (1,469,450)
Cash and cash equivalents at beginning of year 5,686,955 2,567,367 4,036,817
------------- ----------- ------------
Cash and cash equivalents at end of year $ 9,097,416 5,686,955 2,567,367
============= =========== ============
Supplemental disclosure of cash flow information:
Cash paid during the year for:
Interest $ 4,546,056 3,800,794 2,930,466
Income taxes 739,521 310,609 265,709
Non-cash investing activities:
Transfer of loans to real estate owned $ 23,369 113,496 -
</TABLE>
See accompanying notes to consolidated financial statements.
21
<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.
Industry Segments
-----------------
The Company operates principally in the banking industry through its
subsidiary bank. As such, substantially all of the Company's revenues,
net income, identifiable assets and capital expenditures are related to
banking operations.
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
<PAGE>
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.
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.
22
<PAGE>
1) Summary of Significant Accounting Policies (continued)
Trading Securities
------------------
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.
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, 1998
and no loans to be evaluated for impairment at December 31, 1998.
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.
<PAGE>
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.
23
<PAGE>
1) Summary of Significant Accounting Policies (continued)
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.
Investment in Limited Partnership
---------------------------------
The investment in limited partnership is recorded using the equity
method of accounting. Losses due to impairment are recorded when it is
determined that the investment no longer has the ability to recover its
carrying amount. The benefits of low income housing tax credits
associated with the investment are accrued when earned.
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.
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.
24
<PAGE>
1) Summary of Significant Accounting Policies (continued)
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,
------------------------------------------------
1998 1997 1996
------- ------- ---------
<S> <C> <C> <C>
Weighted average number of common shares
outstanding used in basic EPS calculation 917,240 995,455 1,111,025
Reduction for common shares not yet
released by Employee Stock Ownership Plan (71,944) (80,937) (83,935)
------- ------- ---------
Total weighted average common shares
outstanding for basic computation 845,296 914,518 1,027,090
Add common stock equivalents for shares
issuable under Stock Option Plans 20,693 13,206 -
-------- -------- ---------
Weighted average number of shares outstanding
adjusted for common stock equivalents 865,989 927,724 1,027,090
======= ======= =========
Net income $ 204,642 1,023,053 442,153
Basic earnings per share $ .24 1.12 .43
Diluted earnings per share $ .24 1.10 .43
</TABLE>
EPS for prior periods has been restated to comply with the provisions
of SFAS 128.
25
<PAGE>
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, 1998
-----------------
United States Government securities $ 5,770,284 137,421 7,106 5,900,599
Municipal securities 99,562 2,684 - 102,246
Marketable equity securities 129,087 5,287 - 134,374
------------ ------- ----- ---------
$ 5,998,933 145,392 7,106 6,137,219
============ ======= ====== =========
December 31, 1997
-----------------
United States Government securities $ 8,021,870 75,027 7,580 8,089,317
Marketable equity securities 122,371 1,926 - 124,297
------------ ------- ----- ---------
$ 8,144,241 76,953 7,580 8,213,614
============ ======= ===== =========
</TABLE>
The contractual maturity of the above investments is summarized as
follows:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- -----------------------------
Amortized Fair Amortized Fair
Term to Maturity Cost Value Cost Value
---------------- ---------- --------- --------- ---------
<S> <C> <C> <C> <C>
Due in one year or less $ 500,000 513,565 3,374,816 3,375,440
Due after one year through five years 4,349,143 4,434,592 4,285,115 4,335,968
Due after five years through ten years 921,141 952,442 361,939 377,909
Due after ten years 99,562 102,246 - -
Marketable equity securities 129,087 134,374 122,371 124,297
--------- --------- --------- ---------
$5,998,933 6,137,219 8,144,241 8,213,614
========= ========= ========= =========
</TABLE>
<PAGE>
During the current year, the Company sold securities realizing gross
proceeds of $2,793,760, with gross gains of $44,493 and gross losses of
$289 realized on those sales. Proceeds from sales of investment
securities available for sale during the years ended December 31, 1997
and 1996 were $4,014,689 and $132,617 with gross gains of $26,113 and
$52,617 and gross losses of $3,849 and $-0- realized on those sales.
The change in net unrealized gains and losses during the current year
of $68,913, net of the tax effect of $27,565, resulted in a $41,348
credit to stockholders' equity.
26
<PAGE>
3) Trading Securities
------------------
Trading securities are accounted for at their current fair values.
Trading securities at December 31, 1998 consists of equity securities
(thrift common stock mutual fund investment with a carrying value of
$963,654, an equity mutual fund with a carrying value of $57,128 and
common stock with a carrying value of $1,277,098) and debt securities
with a carrying value of $96,250. Trading securities at December 31,
1997 also 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 adjustment of these
securities to their current fair values has resulted in a net
unrealized loss of $771,172 for the year ended December 31, 1998 and a
net unrealized gain of $577,681 and $46,484 for the years ended
December 31, 1997 and 1996. Proceeds from sales of trading securities
during the years ended December 31, 1998 and 1997 were $124,399 and
$680,940 with gross gains of $24,086 and $37,410 and gross losses of
$-0- and $1,344 realized on those sales. There were no sales of trading
securities during the year ended December 31, 1996.
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, 1998
-----------------
Participation Certificates:
FHLMC - Fixed rate $2,057,661 50,070 600 2,107,131
FNMA - Adjustable rate 52,356 749 - 53,105
GNMA - Adjustable rate 487,888 3,207 1,951 489,144
---------- ------ ------ ---------
$2,597,905 54,026 2,551 2,649,380
========== ====== ====== =========
Weighted average interest rate 6.78%
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<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%
</TABLE>
There were no sales of mortgage-backed securities available for sale
during the years ended December 31, 1998, 1997 and 1996. The change in
net unrealized gains and losses during the current year of $2,412, net
of the tax effect of $965, resulted in a $1,447 credit to stockholders'
equity.
27
<PAGE>
5) Loans Receivable
----------------
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,
------------------------------
1998 1997
------------ -----------
<S> <C> <C>
Mortgage loans:
One-to-four family $ 63,368,978 51,566,329
Multi-family 2,446,043 4,010,299
Nonresidential 10,370,172 8,375,953
Construction 2,522,279 4,450,189
Land 1,226,881 1,264,206
----------- -----------
Total mortgage loans 79,934,353 69,666,976
------------ -----------
Other loans:
Loans on deposit accounts 171,604 164,636
Equity lines of credit 3,552,371 3,258,776
Other consumer 1,667,732 1,681,178
------------ -----------
Total other loans 5,391,707 5,104,590
------------ -----------
Commercial business loans 5,607,204 4,915,827
------------ -----------
Total loans receivable 90,933,264 79,687,393
------------ -----------
Less:
Loans in process 569,028 1,974,655
Deferred loan fees, premiums and discounts - net 95,285 209,126
Allowance for loan losses 506,534 410,383
------------ -----------
Loans receivable, net $ 89,762,417 77,093,229
============ ===========
Weighted average interest rate 7.77% 8.08%
==== ====
</TABLE>
<PAGE>
Activity in the allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1998 1997 1996
--------- -------- --------
<S> <C> <C> <C>
Balance, beginning of year $ 410,383 354,631 359,535
Provision for loan losses 102,047 74,243 -
Charge-offs (5,896) (32,942) (4,954)
Recoveries - 14,451 50
--------- -------- --------
Balance, end of year $ 506,534 410,383 354,631
========= ======== ========
</TABLE>
Delinquent loans (loans having monthly payments past due ninety days or
more and non-accruing) at December 31, 1998 and 1997 amounted to
approximately $475,000 and $308,000 respectively.
For the years ended December 31, 1998 and 1997, gross interest income
which would have been recorded had the non-accruing loans been current
in accordance with their original terms amounted to approximately
$17,000 and $12,000 respectively.
Loans to directors and executive officers aggregated approximately
$340,000 and $201,000 at December 31, 1998 and 1997 respectively. Such
loans are made on substantially the same terms as those for other loan
customers.
28
<PAGE>
6) Investment in Limited Partnership
---------------------------------
The investment in limited partnership of $1,380,925 at December 31,
1998 represents a 39.60% equity in Pedcor Investments 1997 - XXXI
("Pedcor"), a limited partnership organized to build, own and operate a
56 unit apartment complex. The Bank has recorded its equity in the
losses of Pedcor in the amount of $10,529 for the nine months ended
December 31, 1998. Condensed financial statements for Pedcor are as
follows:
<TABLE>
<CAPTION>
December 31,
1998
-----------
Condensed statement of financial condition
<S> <C>
Assets
Cash $ 1,800
Construction in progress 2,561,817
Land 112,000
Other 501
-----------
Total assets 2,676,118
Liabilities
Notes payable - Bank 983,000
Notes payable - Other 1,500,191
Other liabilities 219,516
-----------
Total liabilities 2,702,707
Partners' equity (26,589)
Total liabilities and partners' equity $ 2,676,118
===========
<CAPTION>
Nine Months
Ended
December 31,
1998
--------
Condensed statement of operations
<S> <C>
Total revenues $ 8,278
Total expenses 34,867
--------
Net loss $(26,589)
========
</TABLE>
<PAGE>
7) Office Properties and Equipment
-------------------------------
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
---------- -----------
<S> <C> <C>
Cost:
Land - Munster $ 40,669 40,669
Hammond 33,300 33,300
East Chicago - 5,000
Building - Munster 417,151 409,419
Hammond 243,030 243,030
East Chicago - 40,447
Leasehold improvements - Dyer 148,096 148,096
Furniture and equipment 905,150 791,425
---------- ----------
1,787,396 1,711,386
Less accumulated depreciation:
Building - Munster 385,442 375,366
Hammond 229,916 222,748
East Chicago - 12,732
Leasehold improvements - Dyer 61,603 54,101
Furniture and equipment 682,612 574,709
---------- ----------
1,359,573 1,239,656
Net book value $ 427,823 471,730
========== =========
</TABLE>
Depreciation of office properties and equipment for the years ended
December 31, 1998, 1997 and 1996 amounted to $136,566, $153,426 and
$139,808 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, 1998 amounted to $3,176 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, 1998, 1997 and 1996 amounted to $37,372, $36,815 and
$35,028 respectively.
During the year ended December 31, 1998, the Bank disposed of its East
Chicago facility. The property was donated at no cost to a local non
profit organization. The net book value of the property at the date of
donation amounted to $28,798 and has been recorded as a loss. All
personal property associated with the office has been transferred to
other office locations.
<PAGE>
8) Accrued Interest Receivable
---------------------------
Accrued interest receivable is summarized as follows:
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
-------- --------
<S> <C> <C>
Investment securities $ 74,596 102,343
Mortgage-backed securities 14,796 19,928
Loans receivable 529,930 423,274
Allowance for uncollected interest (24,380) (12,036)
-------- --------
$594,942 533,509
======== ========
</TABLE>
30
<PAGE>
9) Prepaid Expenses and Other Assets
---------------------------------
Prepaid expenses and other assets consist of the following:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- ---------
<S> <C> <C>
Prepaid insurance premiums $ 31,853 45,430
Prepaid pension cost 58,463 -
Other prepaid expenses 55,076 51,787
Cash surrender value of life insurance policies (a) 2,584,902 976,771
Deferred federal and state income tax benefit - net (b) 322,487 -
Miscellaneous 58,320 62,872
----------- ---------
$ 3,111,101 1,136,860
=========== =========
</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.
During the current year, the Board of Directors approved a
second non-qualified retirement plan for officers of the Bank
with benefits similar to the first plan. An additional
purchase of life insurance policies was authorized at a cost
of $1,515,000.
(b) The approximate tax effect of temporary differences that give
rise to the Company's net deferred tax asset at December 31,
1998 under SFAS 109 is as follows:
<TABLE>
<CAPTION>
Assets Liabilities Net
------ ----------- ---
<S> <C> <C> <C>
Loan fees deferred for financial
reporting purposes $ 24,272 - 24,272
Accelerated book depreciation 30,818 - 30,818
Deferred compensation 152,568 - 152,568
Nondeductible incentive plan expense 8,176 - 8,176
Bad debt reserves established for
financial reporting purposes 202,614 - 202,614
Increases to tax bad debt reserves
since January 1, 1988 - (95,406) (95,406)
Unrealized gain on securities available for sale - (75,905) (75,905)
Unrealized loss on trading account securities 65,598 - 65,598
Other 9,752 - 9,752
------------- -------- -------
$ 493,798 (171,311) 322,487
============= ======== =======
</TABLE>
31
<PAGE>
10) Deposits
--------
Deposit accounts are summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
Passbook accounts $15,142,805 16,407,366
Demand deposits and NOW accounts 7,404,328 7,257,897
Money market accounts 3,772,914 2,877,385
----------- -----------
26,320,047 26,542,648
Certificates of deposit by interest rate:
3.01 - 4.00 - 257,275
4.01 - 5.00 9,036,391 1,158,030
5.01 - 6.00 39,205,712 25,073,809
6.01 - 7.00 3,821,708 18,005,398
7.01 - 8.00 607,698 657,764
8.01 - 9.00 5,659 5,202
----------- -----------
$78,997,215 71,700,126
=========== ===========
</TABLE>
The weighted average rate on deposit accounts at December 31, 1998 and
1997 was 4.48% and 4.65% respectively.
During the current year, the Bank closed its East Chicago facility and
sold the related deposit accounts to Citizens Financial Services. In
the transaction, the Bank sold approximately $2,700,000 of deposit
accounts at a one percent premium, realizing a profit of $27,033.
A summary of certificates of deposit by maturity is as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------
1998 1997
----------- ----------
<S> <C> <C>
Within 12 months $45,333,909 36,441,807
12 months to 24 months 5,005,048 6,685,024
24 months to 36 months 1,072,985 1,625,298
36 months to 48 months 882,676 235,807
Over 48 months 382,550 169,542
----------- ----------
Total $52,677,168 45,157,478
=========== ==========
</TABLE>
<PAGE>
Interest expense on deposits consists of the following:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
---------- --------- ---------
<S> <C> <C> <C>
Passbook accounts $ 453,324 488,273 509,836
NOW accounts 127,794 143,687 137,192
Money market accounts 93,611 89,355 88,853
Certificates of deposit 2,799,477 2,378,102 2,024,893
---------- --------- ---------
Total $3,474,206 3,099,417 2,760,774
========== ========= =========
</TABLE>
The aggregate amount of deposit accounts with a balance of $100,000 or
greater was approximately $13,100,000 and $10,500,000 at December 31,
1998 and 1997, respectively. Deposits in excess of $100,000 are not
insured by the Federal Deposit Insurance Corporation.
32
<PAGE>
11) Borrowed Money
--------------
Borrowed money consists of advances from the Federal Home Loan Bank of
Indianapolis and is summarized as follows:
<TABLE>
<CAPTION>
December 31,
Interest --------------------------------
Maturity Date Rate 1998 1997
-------------- -------- ----------- ---------
<S> <C> <C> <C>
November 3, 1998 5.87 $ - 3,000,000
December 7, 1998 5.80 - 3,000,000
December 6, 1999 5.94 1,000,000 1,000,000
December 7, 1999 5.05 2,000,000 -
January 18, 2000 5.53 1,000,000 -
May 17, 2000 5.85 3,000,000 3,000,000
July 25, 2000 6.11 2,000,000 2,000,000
January 22, 2001 5.56 1,000,000 -
May 21, 2001 5.90 2,000,000 -
August 24, 2001 5.71 3,000,000 -
January 21, 2003 5.68 1,000,000 -
September 15, 2003 5.26 4,000,000 -
May 15, 2009 5.93 983,000 -
July 15, 2015 5.91 700,000 -
----------- -----------
$21,683,000 12,000,000
=========== ==========
Weighted average interest rate 5.65% 5.89%
==== ====
</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, 1998, 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, 1998, the balance of this loan amounted to $629,510.
33
<PAGE>
12) Other Liabilities
-----------------
Other liabilities include the following:
<TABLE>
<CAPTION>
December 31,
---------------------------
1998 1997
--------- -------
<S> <C> <C>
Accrued interest on deposits $ 62,559 61,374
Accrued interest on borrowings 54,452 31,431
Accrued bonus 45,000 -
Accrued audit and accounting fees 15,325 19,200
Accrued real estate and personal property taxes 47,900 52,500
Accrued federal and state income tax 41,526 255,853
Accrued pension cost - 10,852
Deferred federal and state income tax liability - net (a) - 25,938
Deferred compensation (see note 13) 381,420 319,839
Miscellaneous accounts payable 213,143 165,147
-------- -------
$ 861,325 942,134
========= =======
</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>
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>
34
<PAGE>
13) 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.
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>
1998 1997
----------- ---------
<S> <C> <C>
Projected benefit obligation (actuarial present value
of projected benefits attributed to employee service
to date based on future compensation levels) $(1,141,297) (913,624)
Plan assets at fair value 1,156,980 1,000,646
----------- ---------
Plan assets in excess of projected benefit obligation 15,683 87,022
Unrecognized prior service cost 79,651 84,337
Unrecognized net (gain) loss (122,261) (273,295)
Unrecognized net transition obligation 85,390 91,084
----------- ---------
Prepaid (accrued) pension cost $ 58,463 (10,852)
=========== =========
</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, 1998,
the accumulated benefit obligation was $955,981. The vested portion was
$954,101.
Net pension expense for the years ended December 31, 1998, 1997 and
1996 is being accounted for per SFAS No. 87, "Employers' Accounting for
Pensions" and includes the following components:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------------
1998 1997 1996
-------- ------- -------
<S> <C> <C> <C>
Service cost $ 40,233 30,648 42,713
Interest cost 67,636 66,579 63,953
Actual return on assets (98,391) (142,938) (87,097)
Net amortization and deferral 2,780 98,758 33,052
-------- ------- -------
Net pension expense $ 12,258 53,047 52,621
======= ======= =======
</TABLE>
<PAGE>
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 1998, 1997 and 1996
was 7.5%. The expected long-term rate of return on assets was 9.0%
during 1998, 1997 and 1996, and the rate of increase in future
compensation was 3.5% in 1998, 1997 and 1996.
The Bank has established two non-qualified 401(k) Plan for officers of
the Bank. Both Plans provide participating officers the opportunity to
defer up to 6% of their salary into a tax deferred accumulation for
future retirement. Under the first Plan, the Bank was authorized to
match up to 50% (3% of salary) of this deferral. This Bank match ceased
as of December 31, 1997 and under the second Plan, there is no Bank
matching contribution. In addition, the Bank has also established a
Director Deferral Plan which provides participating directors with the
opportunity to defer all or a portion of their fees over a
predetermined period. All deferred non-qualified 401(k) Plan
contributions and deferred director fees 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 $34,798, $36,282 and $29,178 for the years ended
December 31, 1998, 1997 and 1996 respectively.
35
<PAGE>
14) 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, 1998 and the stock
options outstanding at the end of the respective periods.
<TABLE>
<CAPTION>
Exercise Price
-------------------------------
Options Number 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
Granted 0
Exercised 0
Forfeited 0
------- -------- -----------
Outstanding at December 31, 1998 100,042 $ 12.75 $ 1,275,535
======= ======== ===========
Exercisable at December 31, 1998 40,016 $ 12.75 $ 510,204
======= ======== ===========
Options available for future
grants at December 1998 12,370
=======
</TABLE>
<PAGE>
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.
36
<PAGE>
14) Director, Officer and Employee Plans (continued)
------------------------------------------------
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, 1998, 1997 and 1996:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------
1998 1997 1996
---------- --------- -------
<S> <C> <C> <C>
Net income (as reported) $ 204,642 1,023,053 442,153
Pro forma net income 138,428 956,839 431,117
Diluted earnings per share (as reported) .24 1.10 .43
Pro forma diluted earnings per share .16 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,
1998, 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 $134,207, $139,741 and $132,084 for the years ended
December 31, 1998, 1997 and 1996 respectively.
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, 1998, 1997 and 1996, additional compensation expense
of $54,731, $42,322 and $10,880 was recognized as a result of
implementation of this accounting principle.
37
<PAGE>
14) Director, Officer and Employee Plans (continued)
------------------------------------------------
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, 1998, 1997 and 1996, $115,786, $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.
38
<PAGE>
15) 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
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, 1998 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,
---------------------------------------------
1998 1997 1996
--------- ------- --------
<S> <C> <C> <C>
Current $ 529,126 551,901 249,696
Deferred (benefit) (376,955) 122,973 (35,410)
--------- ------- -------
$ 152,171 674,874 214,286
========= ======= =======
</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 6.0 5.9 5.0
Other 2.6 (.2) (6.4)
----- ---- ----
Effective income tax rate 42.6% 39.7% 32.6%
===== ==== ====
</TABLE>
<PAGE>
Deferred income tax expense (benefit) consists of the following tax
effects of timing differences:
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------------
1998 1997 1996
--------- -------- -------
<S> <C> <C> <C>
Loan fees $ 21,203 (3,775) 29,500
Depreciation (13,918) (15,400) (7,900)
Deferred compensation (25,089) (31,745) (28,400)
Book loan loss provision (in excess of)
less than tax deduction (38,459) (33,765) 1,500
Recapture of bad debt reserve (19,084) - -
Unrealized gain on trading account securities (296,671) 212,473 18,600
Other, net (4,937) (4,815) (48,710)
--------- -------- -------
$(376,955) 122,973 (35,410)
========= ======== =======
</TABLE>
39
<PAGE>
16) Regulatory Capital Requirements
-------------------------------
The Bank is subject to various regulatory capital requirements
administered by the federal banking agencies. Failure to meet minimum
total requirements can initiate certain mandatory and possible
additional discretionary actions by regulators that, if undertaken,
could have a direct material effect on the Bank's financial statements.
Under capital adequacy guidelines and the regulatory framework for
prompt correction action, the Bank must meet specific capital
guidelines that involve quantitative measures of the Bank's assets,
liabilities, and certain off-balance-sheet items as calculated under
regulatory accounting practices. The Bank's capital amounts and
classification are also subject to quantitative judgments by the
regulators about components, risk weightings, and other factors.
Quantitative measures established by regulation to ensure capital
adequacy require the Bank to maintain minimum amounts and ratios, set
forth in the table below of the total risk-based, tangible and core
capital, as defined in the regulations. Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy
requirements to which it is subject.
The Bank, according to federal regulatory standards, is
well-capitalized under the regulatory framework for prompt corrective
action. To be categorized as adequately capitalized, the Bank must
maintain minimum total risk-based, tangible, and core ratios as set
forth in the table. There are no conditions or events since that
notification that management believes have changed the institution's
category.
At December 31, 1998 and 1997, the Bank's regulatory equity capital was
as follows:
<TABLE>
<CAPTION>
To Be Well-
Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Provisions
----------------------- ---------------------- -----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
December 31, 1998
Tangible $ 8,481,608 7.52% $ 1,691,000 1.50% $ 2,819,000 2.50%
Core 8,481,608 7.52 3,383,000 3.00 5,638,000 5.00
Risk-based 8,973,142 14.06 5,104,000 8.00 6,380,000 10.00
December 31, 1997
Tangible $ 9,492,345 9.76% $ 1,459,000 1.50% $ 2,432,000 2.50%
Core 9,492,345 9.76 2,919,000 3.00 4,864,000 5.00
Risk-based 9,887,728 18.51 4,274,000 8.00 5,342,000 10.00
</TABLE>
40
<PAGE>
16) Regulatory Capital Requirements (continued)
-------------------------------------------
<TABLE>
<CAPTION>
Tangible Core Risk-based
Capital Capital Capital
----------- --------- ----------
<S> <C> <C> <C>
December 31, 1998
-----------------
Stockholders' equity $ 8,595,464 8,595,464 8,595,464
Unrealized gain on securities
available for sale, net of taxes (113,856) (113,856) (113,856)
General loss allowances - - 506,534
Direct equity investments - - (15,000)
----------- --------- ----------
Regulatory capital computed $ 8,481,608 8,481,608 8,973,142
=========== ========= =========
</TABLE>
A reconciliation of the Bank's equity capital at December 31, 1998 is
as follows:
<TABLE>
<CAPTION>
<S> <C>
Stockholders' equity $13,412,830
Less Company stockholders' equity not available
for regulatory capital (4,817,366)
Stockholders' equity of the Bank $ 8,595,464
==========
<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
=========== ========= =========
</TABLE>
<PAGE>
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
============
</TABLE>
41
<PAGE>
17) 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.
42
<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 $2,864,700 at December 31,
1998 represent amounts which the Bank plans to fund within the normal
commitment period of 60 to 90 days. Of this amount, $2,396,700 are in
fixed rate commitments with rates ranging from 6.50% to 9.50% and
$468,000 are in adjustable rate commitments. 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 $2,430,000 at December 31, 1998. 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 $2,000,000 at December 31, 1998.
The Bank also has approved but unused credit card lines of credit of
approximately $765,000.
The Bank is currently participating with several local financial
institutions in credit enhancement agreements with in state
municipalities to guarantee the repayment on municipal revenue bonds.
The Bank has accepted credit risk on these various municipal projects
in the amount of $1,750,000. These credit enhancements are in
cooperation with the Federal Home Loan Bank of Indianapolis ("FHLB")
and have pledging requirements as part of the qualifying collateral
agreement with FHLB.
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 28, 1999, the Company declared a quarterly cash dividend of
$.08 per share, totaling $69,586, payable February 26, 1999 to
shareholders of record as of February 12, 1999.
43
<PAGE>
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.
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.
44
<PAGE>
21) Disclosures About the Fair Value of Financial Instruments (continued)
---------------------------------------------------------------------
The estimated fair value of the Company's financial instruments as of
December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------
Carrying Fair
Amount Value
------------ ----------
<S> <C> <C>
Financial assets:
Cash and cash equivalents $ 9,097,416 9,097,416
Investment securities, available for sale 6,137,219 6,137,219
Trading securities 2,394,130 2,394,130
Mortgage-backed securities, available for sale 2,649,380 2,649,380
Loans receivable 89,762,417 91,079,000
Financial liabilities:
Deposits $ 78,997,215 79,302,000
Borrowed money 21,683,000 21,854,490
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
Trading securities 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>
45
<PAGE>
22) Condensed Parent Company Only Financial Statements
--------------------------------------------------
The following condensed statement of financial condition, as of
December 31, 1998 and 1997 and condensed statements of income and cash
flows for the years ended December 31, 1998 and 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.
<TABLE>
<CAPTION>
Statement of Financial Condition
--------------------------------
December 31,
------------------------------
1998 1997
------------ -------------
<S> <C> <C>
Assets
------
Cash and cash equivalents $ 406,803 287,378
Trading securities 2,394,130 2,412,967
Loans receivable 1,723,471 2,726,824
Equity investment in the Bank 8,988,925 10,144,323
Prepaid expenses and other assets 335,245 1,458
------------ -------------
13,848,574 15,572,950
============ =============
Liabilities and Stockholders' Equity
------------------------------------
Liabilities:
------------
Accrued taxes and other liabilities 42,283 221,750
------------ -----------
Stockholders' Equity:
Common stock 11,241 11,241
Additional paid-in capital 10,649,606 10,649,606
Retained earnings 7,317,519 7,357,250
Treasury stock (3,844,015) (2,223,051)
Common stock awarded by RRP (328,060) (443,846)
----------- -----------
Total stockholders' equity 13,806,291 15,351,200
------------ ----------
$ 13,848,574 15,572,950
============ ==========
</TABLE>
46
<PAGE>
22) Condensed Parent Company Only Financial Statements (continued)
--------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Income
-------------------
Period from
March 29, 1996
Years Ended December 31, to December 31,
1998 1997 1996
--------- --------- ---------------
<S> <C> <C> <C>
Net interest income $ 152,693 161,293 207,053
Gain on sale of trading securities 24,086 36,066 -
Unrealized gain (loss) on trading securities (771,172) 560,809 46,484
Non-interest expense (270,859) (201,164) (159,960)
--------- --------- --------
Net income (loss) before income taxes and
equity in earnings of subsidiaries (865,252) 557,004 93,577
Benefit from (provision for) income taxes 325,292 (217,815) (40,048)
--------- --------- --------
Net income (loss) before equity
in earnings of subsidiaries (539,960) 339,189 53,529
Equity in earnings of subsidiaries 744,602 683,864 302,801
--------- --------- --------
Net income $ 204,642 1,023,053 356,330
========= ========= ========
</TABLE>
47
<PAGE>
22) Condensed Parent Company Only Financial Statements (continued)
--------------------------------------------------------------
<TABLE>
<CAPTION>
Statement of Cash Flows
-----------------------
Period from
March 29, 1996
Years Ended December 31, to December 31,
1998 1997 1996
------------ ---------- -------------
<S> <C> <C> <C>
Operating activities:
Net income $ 204,642 1,023,053 356,330
Equity in earnings of the Bank (744,602) (683,864) (302,801)
Amortization of cost of stock benefit plan 115,786 115,786 19,297
Gain on sale of trading securities (24,086) (36,066) -
Unrealized (gain) loss on trading securities
held for trade 771,172 (560,809) (46,484)
Purchase of trading securities (852,648) (1,957,532) (493,016)
Proceeds from sale of trading securities 124,399 680,940 -
Increase in other assets (333,787) (1,458) -
Increase (decrease) in accrued
taxes and other liabilities (179,467) 180,944 43,546
--------- ---------- ----------
Net cash provided for operating activities (918,591) (1,239,006) (423,128)
--------- --------- ----------
Investing activities:
Purchase of capital stock of the Bank - - (5,329,053)
Loan disbursements (4,000,000) (2,000,000) (3,733,530)
Loan repayments 5,003,353 2,203,353 803,353
--------- --------- ----------
Net cash provided by (for) investing activities 1,003,353 203,353 (8,259,230)
--------- ---------- ----------
Financing activities:
Net proceeds from sale of common stock - - 10,658,107
Purchase of treasury stock (1,620,964) (1,498,333) (724,718)
Purchase of RRP stock - - (578,929)
Dividends received from Bank 1,900,000 2,500,000 -
Dividends paid on common stock (244,373) (230,007) (120,731)
---------- ---------- -----------
Net cash provided by investing activities 34,663 771,660 9,233,729
----------- ---------- -----------
Net increase (decrease) in cash
and cash equivalents 119,425 (263,993) 551,371
Cash and cash equivalents at
beginning of period 287,378 551,371 -
----------- ---------- -----------
Cash and cash equivalents at end of period $ 406,803 287,378 551,371
=========== ========== ===========
</TABLE>
48
<PAGE>
AMB Financial Corp.
Stockholder Information
Annual Meeting
The annual meeting of stockholders will be held at 10:30 a.m., on April
28, 1999, 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 1998. These prices do not represent actual transactions
and do not include retail markups, markdowns or commissions.
Quarter Ended High Low Dividends
------------- ---- --- ---------
March 31, 1998 . . . . . 17.875 16.25 $0.07
June 30, 1998 . . . . . 19.625 17.25 $0.07
September 30, 1998 . . . 18.25 14.125 $0.07
December 31, 1998 . . . 14.50 11.00 $0.08
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, 1998, the Company had 360 stockholders of record and
869,829 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
49
<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
50
<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:
Dawn L. Behrens
AMB Financial Corp.
8230 Hohman Avenue
Munster, Indiana 46321
(219) 836-5870
51
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 January 29, 1999 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, 1998.
/s/ Cobitz, VandenBerg & Fennessy
---------------------------------
Cobitz, VandenBerg & Fennessy
March 24, 1999
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, 1998 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-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 3,210,234
<INT-BEARING-DEPOSITS> 5,387,182
<FED-FUNDS-SOLD> 500,000
<TRADING-ASSETS> 2,394,130
<INVESTMENTS-HELD-FOR-SALE> 8,786,599
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 89,762,417
<ALLOWANCE> 506,534
<TOTAL-ASSETS> 116,912,922
<DEPOSITS> 78,977,215
<SHORT-TERM> 3,000,000
<LIABILITIES-OTHER> 1,428,423
<LONG-TERM> 18,683,000
0
0
<COMMON> 11,241
<OTHER-SE> 13,410,589
<TOTAL-LIABILITIES-AND-EQUITY> 116,912,922
<INTEREST-LOAN> 7,027,445
<INTEREST-INVEST> 941,652
<INTEREST-OTHER> 0
<INTEREST-TOTAL> 7,969,097
<INTEREST-DEPOSIT> 3,474,206
<INTEREST-EXPENSE> 4,570,262
<INTEREST-INCOME-NET> 3,398,835
<LOAN-LOSSES> 102,047
<SECURITIES-GAINS> (702,882)
<EXPENSE-OTHER> 2,879,383
<INCOME-PRETAX> 356,813
<INCOME-PRE-EXTRAORDINARY> 356,813
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 204,642
<EPS-PRIMARY> .24
<EPS-DILUTED> .24
<YIELD-ACTUAL> 3.29
<LOANS-NON> 475,000
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 410,383
<CHARGE-OFFS> 5,896
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 506,534
<ALLOWANCE-DOMESTIC> 506,534
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
