UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _____________________
Commission file number 0-17379
INDIANA FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 35-1735820
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
56 Washington Street, Valparaiso, Indiana 46383
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (219) 465-6607
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)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports) and (2) has been subject to such
requirements for the past 90 days. YES [ X ] NO [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant, computed by reference to the closing price of such stock on
the Nasdaq National Market as of March 21, 1997, was $113,582,569. (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.)
As of March 21, 1997, there were issued and outstanding 4,779,737
shares of the Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II and IV of Form 10-K - Portions of the Annual Report to
Stockholders for the year ended December 31, 1996.
Part III of Form 10-K - Portions of the Proxy Statement for the Annual
Meeting of Stockholders for the year ended December 31, 1996.
PART I
Item 1. Business
General
Indiana Federal Corporation ("IFC" or the "Corporation") is a financial
services holding company organized under the laws of the State of Delaware in
1988. The Corporation's principal operating subsidiary is Indiana Federal Bank
for Savings ("Indiana Federal" or the "Bank"). Indiana Federal was organized in
1887 and has operated as a federally-chartered savings and loan association
since 1934. In 1989, IFC formed IndFed Mortgage Company to participate in
various low and moderate income housing projects. In May 1996, IFB Investment
Services Corp. ("IFB") was formed as a wholly owned subsidiary of IFC. IFB, a
registered broker/dealer, provides investment services to its clients, such as
personal investing and financial, tax and business succession planning. See
"Subsidiary Activities."
On December 12, 1994, the Corporation completed the acquisition of
American Bancorp, Inc. ("ABI"), and its wholly owned subsidiary American State
Bank ("American"), a commercial bank organized under the laws of the State of
Indiana. Upon acquisition, ABI was merged into the Corporation and American was
merged into the Bank. On January 31, 1995, the Corporation completed the
acquisition of NCB Corp. ("NCB"), and its wholly owned subsidiary NorCen Bank
("NorCen"), an Indiana state chartered savings bank, located in Culver, Indiana.
Similarly, upon acquisition, NCB was merged into the Corporation and NorCen was
merged into the Bank.
In February 1996, IFC purchased a one-third interest in Forrest
Holdings, Inc. of Oak Brook, Illinois. Forrest Holdings, Inc. owns and operates
Forrest Financial Corporation ("FFC"), a leasing company which provides
financing solutions for the acquisition of information systems, including
equipment, software, training and maintenance.
On November 14, 1996, IFC entered into an Agreement and Plan of Merger
(the "Merger Agreement") with Pinnacle Financial Services, Inc. ("Pinnacle"), a
Michigan-chartered bank holding company, pursuant to which IFC and Pinnacle will
merge (the "Merger"). As a result of the Merger, which is subject to approval by
IFC and Pinnacle shareholders and certain regulatory approvals, each share of
IFC common stock will be exchanged for one share of Pinnacle common stock. At
December 31, 1996, Pinnacle had total assets of $1.07 billion, deposits of $761
million, and shareholders' equity of $78 million. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- General" in the
Annual Report to Shareholders attached hereto as Exhibit 13 (the "Annual
Report").
The Bank, IFC's principal operating subsidiary, is primarily engaged in
the business of attracting savings deposits from the general public and
investing these funds, together with borrowings and other funds, in one- to
four-family residential real estate loans, consumer loans, income-producing
property loans, commercial business loans and agricultural real estate and
operating loans. During 1996, Indiana Federal conducted its activities from a
network of 16 full service offices located in Valparaiso and other northwest
Indiana communities. Indiana Federal also operates three loan production offices
in Highland, Mishawaka, and Valparaiso, Indiana.
The Corporation's executive offices are located at 56 Washington
Street, Valparaiso, Indiana 46383. Its telephone number is (219) 465-6607.
Unless the context otherwise requires, references herein to IFC or the
Corporation include the Corporation, the Bank and its subsidiaries on a
consolidated basis.
Lending Activities
General. The primary source of income to the Bank is interest income
from lending activities. The principal lending activity of the Bank is making
loans to enable borrowers to purchase or refinance one- to four-family
residential properties and consumer, income-producing property, commercial
business and agricultural loans. The majority of Indiana Federal's loans are
secured by first liens on real property.
In addition to interest earned on loans, the Bank receives fees for
loan originations, commitments, prepayments, modifications, late payments,
transfers due to changes of property ownership, insurance commissions and other
miscellaneous services. Loan fees vary with loan origination levels and vary
from time to time, generally depending on competitive conditions in the mortgage
market.
The Bank has authority to make or purchase real estate loans throughout
the United States. A substantial majority of the real estate loans originated by
Indiana Federal are secured by properties located in northwest Indiana. The Bank
does, however, purchase loans outside its primary market area.
The Bank originates its real estate loans through internal loan
production personnel and loan originators who work on a commission basis.
Currently a substantial portion of the Bank's loans are originated by
commissioned personnel. Once a borrower has applied for a loan, the completed
loan application package is reviewed by the Bank's salaried personnel. As part
of the loan review process, independent appraisers who are approved in
accordance with the Bank's appraisal policy, inspect and appraise the property
that will secure the loan. All appraisals are subsequently reviewed by one of
the Bank's loan underwriters. As part of the review process for real estate
loans, information is obtained concerning the income, financial condition,
employment and credit history of the borrower. All residential mortgage loans
are approved according to guidelines established by Indiana Federal's
underwriting policy. All residential mortgage loans up to $500,000 are approved
by staff underwriters. Residential mortgage loans in excess of $500,000 and up
to $1.0 million for new customers and $1.5 million for existing customers are
approved by the Management Senior Loan Committee. All loans in excess of these
amounts are approved by the Director\Senior Management Loan Committee, which
consists of the members of the Management Senior Loan Committee and two
directors on a rotating basis.
The Bank requires title insurance on all loans secured by real property
and requires fire and extended coverage casualty insurance in amounts at least
equal to the principal amount of the loan. The Bank will also require flood
insurance to protect the property securing its interests, when it is determined
that the property lies within a designated flood plain.
The following tables set forth the composition of the Bank's loan
portfolio and the relative amounts of fixed-rate and adjustable-rate loans, all
at the dates indicated.
December 31,
---------------------------------------------------------------------
1996 1995 1994
-------------------- ---------------------- ----------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
TYPE OF LOAN
Real Estate Loans:
One- to four-family residential......... $287,655 45.26% $278,680 52.34% $270,008 51.12%
Income-producing property............... 99,444 15.64 83,453 15.68 107,013 20.26
Construction, income-producing property. 8,753 1.38 6,085 1.14 12,776 2.42
Construction, one- to four-family....... 20,775 3.27 13,370 2.51 12,129 2.30
Agricultural real estate................ 11,511 1.81 12,940 2.43 10,323 1.96
-------- ------ -------- ------ -------- ------
Total real estate loans.............. 428,138 67.36 394,528 74.10 412,249 78.06
Consumer Loans:
Second mortgage loans................... 74,039 11.65 33,554 6.30 28,783 5.46
Boat loans.............................. 18,244 2.87 19,161 3.60 19,973 3.78
Recreational vehicle loans.............. 7,755 1.22 9,574 1.80 11,273 2.13
Automobile loans........................ 7,510 1.18 8,712 1.63 7,818 1.48
Deposit loans........................... 1,910 0.30 2,270 .43 1,812 .34
Mobile home loans....................... 2,117 0.33 1,717 .32 2,375 .45
Other................................... 8,551 1.35 7,774 1.46 6,460 1.22
-------- ------- -------- ------ -------- ------
Total consumer loans................. 120,126 18.90 82,762 15.54 78,494 14.86
-------- ------ -------- ------ -------- ------
Commercial business loans................ 80,670 12.69 50,028 9.40 31,539 5.97
Agricultural operating loans............. 6,652 1.05 5,096 .96 5,870 1.11
-------- ------ -------- ------ -------- ------
Loans receivable, gross................... 635,586 100.00% 532,414 100.00% 528,152 100.00%
====== ====== ======
Less:
Unearned discounts...................... 59 198 295
Undisbursed portion of loan proceeds.... 7,830 3,933 10,361
Deferred loan fees (costs).............. (1,345) (1,065) (776)
Allowance for loan losses............... 7,458 6,655 6,101
--------- -------- --------
14,002 9,721 15,981
--------- -------- --------
Loans receivable, net.................... $621,584 $522,693 $512,171
======== ======== ========
December 31,
---------------------------------------------
1993 1992
--------------------- ---------------------
Amount Percent Amount Percent
-------- ------ -------- -----
(Dollars in Thousands)
TYPE OF LOAN
Real Estate Loans:
One- to four-family residential......... $214,442 50.12% $197,809 48.43%
Income-producing property............... 117,880 27.55 130,312 31.90
Construction, income-producing property. 8,383 1.96 817 .20
Construction, one- to four-family....... 11,379 2.66 9,964 2.44
Agricultural real estate................ --- --- --- ---
-------- ------ -------- -----
Total real estate loans.............. 352,084 82.29 338,902 82.97
Consumer Loans:
Second mortgage loans................... 17,211 4.02 18,882 4.62
Boat loans.............................. 18,854 4.40 19,240 4.71
Recreational vehicle loans.............. 12,345 2.89 13,565 3.32
Automobile loans........................ 4,487 1.05 2,489 .61
Deposit loans........................... 2,652 .62 1,952 .49
Mobile home loans....................... 3,056 .71 4,013 .98
Other................................... 4,054 .95 3,770 .92
-------- ------ -------- -----
Total consumer loans................. 62,659 14.64 63,911 15.65
-------- ------ -------- ------
Commercial business loans................ 13,136 3.07 5,627 1.38
Agricultural operating loans............. --- --- --- ---
-------- ------ -------- ------
Loans receivable, gross................... 427,879 100.00% 408,440 100.00%
====== ======
Less:
Unearned discounts...................... 350 481
Undisbursed portion of loan proceeds.... 7,428 3,521
Deferred loan fees (costs).............. (79) 487
Allowance for loan losses............... 5,356 4,392
--------- --------
13,055 8,881
--------- --------
Loans receivable, net.................... $414,824 $399,559
======== ========
December 31,
-------------------------------------------------------------------------
1996 1995 1994
-------------------- ----------------------- -----------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
FIXED-RATE/ADJUSTABLE-RATE LOANS
Fixed-rate loans............................. $211,985 33.35% 174,262 32.73% $177,875 33.68%
Adjustable-rate loans(1)..................... 423,601 66.65 358,152 67.27 350,277 66.32
-------- ------ -------- ------ -------- ------
Loans receivable, gross.................... $635,586 100.00% $532,414 100.00% $528,152 100.00%
======== ====== ======== ====== ======== ======
December 31,
------------------------------------------------
1993 1992
----------------------- -----------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
FIXED-RATE/ADJUSTABLE-RATE LOANS
Fixed-rate loans............................. $173,009 40.43 $165,522 40.53%
Adjustable-rate loans(1)..................... 254,870 59.57 242,918 59.47
-------- ------ -------- ------
Loans receivable, gross.................... $427,879 100.00% $408,440 100.00%
======== ====== ======== ======
- --------------------
(1) Includes 15 and 30 year adjustable-rate loans which have fixed rates of
interest for the first five or seven years and then adjust annually
thereafter. These loans totaled approximately $98.9 million in 1996, $79.9
million in 1995, $71.3 million in 1994, $57.8 million in 1993 and $48.4
million in 1992.
The following table sets forth the contractual maturity of the Bank's
loan portfolio at December 31, 1996. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing at the next repricing date.
This table does not reflect the effects of possible prepayments or enforcement
of due-on-sale clauses.
Real Estate Loans
----------------------------------------------------
Mortgage(1) Construction Consumer Loans
---------------------- ---------------------- --------------------
Weighted Weighted Weighted
Due During Period Average Average Average
Ending December 31, Amount Rate Amount Rate Amount Rate
- ---------------------------------- -------- ------ -------- ------ -------- ------
(Dollars in thousands)
1997(2)........................... $168,898 8.32% $27,085 9.39% $33,280 9.37%
1998 - 2001....................... 165,827 7.46 2,447 9.73 55,383 9.30
2002 and following................ 63,383 8.09 497 8.55 31,463 9.55
-------- ------- --------
$398,108 7.93% $30,029 9.41% $120,126 9.38%
======== ======= ========
Commercial Total
---------------------- ----------------------
Weighted Weighted
Due During Period Average Average
Ending December 31, Amount Rate Amount Rate
- ---------------------------------- -------- ------ -------- -----
(Dollars in thousands)
1997(2)........................... $61,846 9.32% $291,109 8.75%
1998 - 2001....................... 19,992 9.08 243,649 8.03
2002 and following................ 5,485 8.53 100,828 8.57
------- --------
$87,323 9.22% $635,586 8.45%
======= ========
- ---------------------
(1) Includes one- to four-family, multi-family, commercial and agricultural
real estate loans.
(2) Includes overdraft loans which have no stated maturity.
At December 31, 1996, $166.2 million of the Bank's loans due after
December 31, 1997, had fixed interest rates, while the total amount of loans due
after such date which had adjustable interest rates was $178.2 million.
At December 31, 1996, the maximum amount Indiana Federal could have
loaned to any one borrower or group of related borrowers was approximately $7.5
million. See "-- Regulation-- Federal Regulation of Savings Associations." At
that date, the Bank had no loans or groups of loans to related borrowers with
outstanding balances in excess of this amount. At December 31, 1996, Indiana
Federal's largest loan or lending relationship outstanding totaled $7.46 million
and was secured by one- to four-family properties and a real estate development
loan in Porter County, Indiana. This loan is performing in accordance with its
loan repayment terms. At December 31, 1996, the Bank had seven other lending
relationships or loans to individuals in excess of $5.0 million. Each of these
loans was performing in accordance with its terms at December 31, 1996, except
for two loans (aggregating $2.4 million) which were part of one lending
relationship. These two loans were refinanced during February 1997 by the
borrower at another lending institution. See "-Non-accruing loan."
One- to Four-Family Residential Real Estate Lending. The Bank's primary
lending program has been the origination of loans secured by one- to four-family
residences. A substantial majority of these loans are secured by real estate
located in northwest Indiana, which includes Lake, Porter, LaPorte and St.
Joseph counties, Indiana. The Bank evaluates both the borrower's ability to make
principal and interest payments and the value of the property that will secure
the loan. Although federal law permits the Bank to make loans in amounts of up
to 100% of the appraised value of the underlying real estate, the Bank generally
makes one- to four-family residential property loans in amounts up to 95% of the
lesser of the appraised value or the contract price of the subject property.
Where loans are made in amounts which exceed 80% of the contract price or
appraised value of the underlying real estate, as the case may be, the Bank's
policy is to require private mortgage guarantee insurance on the excess. The
Bank also originates, FHA and VA guaranteed residential loans.
In order to reduce its exposure to changes in interest rates, the Bank
has deemphasized the origination of 30-year fixed-rate one- to four-family
residential mortgage loans for its own portfolio. In order to meet consumer
demand, however, the Bank continues to originate such loans for the purpose of
sale in the secondary mortgage market. The Bank has retained a limited amount of
fixed-rate residential loans consistent with its asset/liability policy. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--Asset/Liability Management" in the Annual Report. The Bank currently
underwrites and documents substantially all loans to permit their sale in the
secondary market, although a third party purchase commitment for the loan is not
required prior to origination. During 1996, the Bank originated $35.8 million of
fixed-rate one- to four-family residential mortgage loans of which $23.1 million
had terms in excess of 15 years. See "--Loan Originations, Purchases and Sales."
During the same period, the Bank sold $41.3 million of fixed-rate one- to
four-family loans, securitized another $9.8 million of fixed-rate one- to
four-family loans, and held for sale an additional $2.0 million of such loans
which were recorded at the lower of cost or market. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--Other Income" and
Note A of the Notes to the Consolidated Financial Statements in the Annual
Report.
A majority of the one- to four-family residential loans originated and
retained for portfolio during 1996 were 15 or 30 year adjustable-rate mortgage
loans ("AMLs") which have a fixed rate for the first three years then adjust
annually thereafter. The Bank also originated and retained for portfolio during
1996 some 15- or 30-year adjustable-rate loans which have a fixed rate for the
first five or seven years then adjust annually thereafter. The majority of the
Bank's portfolio of one- to four-family residential AMLs have interest rates
that adjust annually in accordance with the yields on the one-year U.S. Treasury
Constant Maturity Index. The Bank's AMLs generally limit interest rate increases
to 2% annually and have an established ceiling rate at the time the loans are
made of up to 6% over the original interest rate. To compete with other lenders
in its market area, Indiana Federal has made most of its residential AMLs at
interest rates which, for the first year, are below the fully indexed rate which
would have been applicable to these loans. These loans are subject to increased
risk of delinquency or default as the higher, fully-indexed rate of interest
subsequently comes into effect. The Bank generally underwrites such loans to
comply with secondary mortgage market agencies' standards. Most one- to
four-family real estate mortgage loans originated by the Bank contain a
"due-on-sale" clause providing that the Bank may declare the unpaid principal
balance due and payable upon the sale of the mortgaged property. It is the
Bank's policy to enforce these due-on-sale clauses to the extent permitted by
law.
At December 31, 1996, one- to four-family AMLs totaled $246.9 million
(including $98.9 million in AMLs which have a fixed rate for the first five or
seven years and $20.8 million in one- to four-family construction loans) or
80.1%, of the Banks one- to four-family residential mortgage loan portfolio
before net items. The construction loans generally adjust monthly at margins
over the Citibank prime rate. It is possible that during periods of rising
interest rates, the risk of defaults on AMLs may increase due to the upward
adjustment of interest costs to borrowers. The Bank does not make negative
amortization mortgage loans.
The Bank originates residential construction loans to individuals who
intend to occupy the premises upon completion of the construction phase. The
Bank also originates such loans to local contractors to build residential
properties for resale or for sale to a buyer under a contract to build. All
construction loans to individuals are made with a permanent loan commitment from
either the Bank or another financial institution. During 1996, residential
construction loan originations amounted to $35.1 million.
At December 31, 1996, the Bank had $20.8 million of residential
construction loans outstanding, of which $16.3 million were to building
contractors and $4.5 million were originated as combination construction and
permanent loans to individual owner-occupants. Of the $16.3 million total
residential construction loans to contractors, $5.3 million are for the
construction of homes that the contractor has pre-sold. At December 31, 1996,
the largest loan outstanding to one contractor totaled $1.5 million, of which
$1.0 million represented construction loans for residences under contract.
Construction loans afford the Bank the opportunity to charge loan
origination fees, to increase the frequency of repricing of its loan portfolio
and to earn yields higher than those obtainable on loans secured by existing
one- to four-family residential properties. The higher yields reflect the higher
risks associated with construction lending (principally, the difficulty in
evaluating accurately the total funds required to complete a project and the
post-completion value of the project). As a result, the Bank places a strong
emphasis upon the borrower's ability to repay and the experience and expertise
of the builder.
Income-Producing Property Lending. The Bank strives to maintain an
income-producing property loan portfolio in the range of 15% to 20% of total
assets, subject to market conditions. At December 31, 1996, the Bank's income
producing property loan portfolio totaled $108.2 million, or 13.08% of the
Bank's total assets and 17.02% of the Bank's loan portfolio, before net items.
See "--Loan Originations, Purchases and Sales." Indiana Federal's
income-producing property loans include loans secured by apartment buildings,
nursing homes, motels, office buildings, shopping centers, mobile home parks and
special purpose properties. The Bank's policy is generally to lend or purchase
loans secured by properties located within a 250 mile radius of its home office,
preferably in its market area of Porter County and the surrounding six counties.
At December 31, 1996, the Bank had a net book value of $10.7 million of loans
secured by properties outside of the 250 mile radius. See Note D of the Notes to
Consolidated Financial Statements for the composition of the Bank's loans
collateralized by income-producing property categorized by state. The largest of
these loans totaled $1.7 million and was secured by a hotel in Atlanta, Georgia.
At December 31, 1996, this loan was performing in accordance with its repayment
terms.
The Bank utilizes the same underwriting guidelines and criteria,
including on-site inspections by in-house staff, for all income-producing
property loans, regardless of whether the loan was originated or purchased by
the Bank. The Management Senior Loan Committee of the Bank is authorized to
review and approve income-producing property loans in amounts of up to $1.0
million for new customers and $1.5 million for existing customers while loans in
excess of such amounts require the approval of the Director\Senior Management
Loan Committee.
Most permanent income-producing property loans originated by the Bank
have carried adjustable interest rates that float with one of several indices.
The Bank will originate fixed-rate income-producing property loans only if the
funds advanced are match-funded with FHLB advances, where the Bank can
anticipate an acceptable interest rate spread. During 1996, the Bank originated
$35.3 million of income-producing property loans. At December 31, 1996, 15
income-producing property loans had net outstanding principal balances in excess
of $2.0 million, with the largest five loans having outstanding principal
balances of $5.8 million (secured by an apartment complex), $4.3 million
(secured by an office building), $3.7 million (secured by a mobile home park),
$3.1 million (secured by an office building) and $2.9 million (secured by an
office building). In addition, 54 other income producing property loans had
principal balances between $500,000 and $2.0 million. See "--Non-Performing
Assets, Loan Delinquencies and Defaults and Other Problem Loans" for a
description of the level of delinquencies the Bank has experienced to date on
its income-producing property loans.
The Corporation's subsidiary, IndFed Mortgage Company ("IndFed
Mortgage"), participates in joint ventures for the construction of
income-producing properties. At December 31, 1996, the Bank had four such loans
outstanding. These loans are for the construction of low to moderate income
apartment housing projects located in Elkhart, Rensselaer and Valparaiso,
Indiana. See "Subsidiary Activities." The total commitment for the Bank's loans
to these projects at December 31, 1996 was $6.6 million, all of which is
currently outstanding.
The Bank also originates loans to developers for the purpose of
acquiring and developing subdivisions for one- to four-family homes. At December
31, 1996, the Bank had five development loans with commitments totaling $5.3
million and outstanding principal balances totaling $5.1 million. The largest
development loan outstanding at December 31, 1996 was a $1.6 million loan for a
development project in Valparaiso, Indiana.
Income producing property loans are generally originated with
loan-to-value ratios of up to 80%. Income-producing property loan originations
generally have a term of up to 10 years with payment amounts based on
amortization schedules of 15 to 30 years. While the Bank seeks to obtain
personal guarantees or letters of credit on most loans, underwriting is
primarily based on the cash flow available from the project, after payment of
all expenses, and compliance with Indiana Federal's debt service coverage ratios
for the type of underlying income-producing property securing the loan.
Income-producing property lending affords the Bank an opportunity to
receive interest at rates higher than those generally available from one- to
four-family residential lending. Nevertheless, loans secured by such properties
are generally larger and involve a greater degree of risk than one- to
four-family residential mortgage loans. Because payments on loans secured by
income-producing property are often dependent on the successful operation or
management of the properties, repayment of such loans may be subject to adverse
conditions in the real estate market or the economy. 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.
Consumer Lending. Consumer loans are generally originated at fixed
interest rates and carry higher yields than one- to four-family residential
mortgage loans. The Bank generally makes secured consumer loans for personal,
family or household purposes, such as the financing of recreational vehicles,
boats, automobiles, second mortgage loans, mobile homes, and home improvements.
Although the Bank's home equity, home improvement and boat loans are made for
terms of up to 180 months, the actual maturities of such loans are generally
shorter. At December 31, 1996, $120.1 million, or 18.9%, of the Bank's loan
portfolio before net items was invested in consumer loans.
The Bank originates second mortgage loans consisting of home equity
lines of credit and loans at a fixed dollar amount ("closed end loans"). The
Bank's second mortgage loans are generally originated in amounts, together with
the amount of the first mortgage, of up to 90% of the appraised value of the
property securing the loan; however, home equity loans with loan-to-value ratios
in excess of 90% are generally available at higher interest rates. Closed end
loans are originated at fixed interest rates and provide for monthly repayment
of principal and interest. Home equity lines of credit are originated at an
adjustable interest rate and provide for monthly payments of principal and
interest amortized over a term of up to ten years.
In 1995, the Bank began offering credit cards directly to its
customers. At December 31, 1996, the Bank had $1.5 million of credit card loans
outstanding and $5.4 million of unused credit available under its credit card
program, compared to $1.5 million of credit card loans outstanding and $4.5
million of unused credit available at December 31, 1995.
Indiana Federal's consumer loans are originated through its branch
offices and through a network of over 40 dealers in such items as recreational
vehicles, boats, automobiles, and home improvement contractors. These dealers
and contractors are located in Indiana, Illinois, Michigan, Wisconsin, Missouri
and Kentucky. The underwriting standards employed by the Bank for consumer loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. The stability of the applicant's monthly income is determined by
verification of gross monthly income from primary employment, and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration, the underwriting process also includes a comparison
of the value of the security, if any, in relation to the proposed loan amount.
The determination of compliance with these standards is made by the Bank rather
than by a referring dealer. Indiana Federal, from time to time, will purchase
consumer loans. During 1996, Indiana Federal purchased a total of $29.8 million
of fixed-rate closed end home equity loans, without servicing rights, from a
bank in Des Moines, Iowa.
Consumer loans may entail greater risk than do residential mortgage
loans, particularly in the case of consumer loans which are unsecured, or are
secured by rapidly depreciable assets, such as automobiles. In such cases, any
repossessed collateral for a defaulted consumer loan may not provide an adequate
source of repayment of the outstanding loan balance as a result of the greater
likelihood of damage, loss or depreciation. In addition, consumer loan
collections are dependent on the borrower's continuing financial stability, and
thus are more likely to be affected by adverse personal circumstances.
Furthermore, the application of various federal and state laws, including
bankruptcy and insolvency laws, may limit the amount which can be recovered on
such loans. Although the level of delinquencies in the Bank's consumer loan
portfolio has historically been low (at December 31, 1996, $354,000, or
approximately .29% of the gross consumer loan portfolio, was 60 days or more
delinquent), there can be no assurance that delinquencies will not increase in
the future. See "Non-Performing Assets, Loan Delinquencies and Defaults and
Other Problem Loans."
Commercial Business Lending. Federally chartered savings institutions
such as Indiana Federal are authorized to make, up to a maximum of 10% of total
assets, secured and unsecured loans, issue letters of credit for commercial,
corporate, business and agricultural purposes and to engage in commercial
leasing activities.
Indiana Federal began originating commercial business loans in June
1992. At December 31, 1996, Indiana Federal had $87.3 million in commercial
business loans outstanding, representing 13.7% of the Bank's loan portfolio,
before net items, and additional commercial business loan commitments totaling
$7.2 million. The Bank's commercial business lending activities encompass loans
with a variety of purposes and security, including loans to finance accounts
receivable, inventory and equipment. Indiana Federal intends to continue to
increase its commercial business loan portfolio while maintaining its current
underwriting standards.
At December 31, 1996, the Bank had five commercial business loans with
an outstanding balance in excess of $1.0 million, one of which was paid off by
the borrower during February 1997. The largest commercial business loan
outstanding at December 31, 1996 had a balance of $2.1 million and was secured
by marketable securities. At December 31, 1996, each of the foregoing loans was
performing in accordance with its repayment terms. The Bank had seven other
commercial business loans (aggregating $4.1 million) with a net outstanding
balance in excess of $500,000 at December 31, 1996, all of which were performing
in accordance with their repayment terms.
The commercial business loan market area consists of the following
Indiana counties: Elkhart, Jasper, Lake, LaPorte, Marshall, Porter, St. Joseph
and Starke. Substantially all loans are currently being originated in Lake,
Porter and Starke counties, Indiana. The increase in the Bank's commercial
business loans during 1994 and 1995 was due primarily to the addition of $25.0
million and $19.0 million from the American and NCB acquisitions, respectively.
The increase in the commercial business lending portfolio during 1996 was a
result of the Bank's strategy to focus on growing its short-term,
higher-yielding loans.
Authority for commercial business loan approvals is granted to
qualified personnel up to $125,000 and to the Senior Vice President/Manager of
commercial business lending for loans up to $250,000. The Senior Vice
President/Manager of commercial business lending, together with two commercial
loan officers, has authority to approve loans up to $500,000. All commercial
business loans in excess of $500,000 must be approved by a majority of the
Senior Management Loan Committee, which includes the President, Chief Financial
Officer, Senior Vice President, Vice Presidents of Commercial Business Lending
and the Senior Vice President of Residential Lending. Loans that exceed $1.0
million for new customers or $1.5 million for existing customers must be
approved by a majority of the Director\Senior Management Loan Committee.
The Bank originates commercial business loans through internal loan
production personnel. Once a borrower has applied for a commercial business
loan, the complete loan application package is reviewed, including three years
of tax returns and historical operating and other financial information. A
credit report and cash flow analysis may also be reviewed depending on the
amount of the loan request. If real estate is provided as part of the underlying
collateral, the Bank may obtain, among other items, appraisals, title insurance
and an environmental survey.
Commercial business loans are generally originated with an adjustable
interest rate based on a margin over the current national prime rate or the
selected U.S. Treasury note rate. The adjustment period and the index used are
contingent on the loan amount, risk factors, term and the borrower's other
relationships with Indiana Federal. There is no limit on upward or downward
interest rate adjustments. Commercial business loans are negotiated on a case by
case basis and maturity, interest rate and other terms may vary.
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 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, is likely to be dependent upon
the general economic environment). 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 and inventory as well as
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. At December 31, 1996, $530,000, or .66%, of the Bank's
commercial business loans were non-performing loans.
Agricultural Related Lending. As a result of the American acquisition
in December 1994, the Bank acquired agricultural real estate and operating loans
and an agricultural lending department. At December 31, 1996, the Bank had
agricultural real estate loans secured by farmland of $11.5 million or 1.8% of
the Bank's gross loan portfolio. At the same date, $6.7 million or 1.0% of the
Bank's loan portfolio, before net items, consisted of secured loans related to
agricultural operations.
Agricultural real estate loans are currently originated with either an
adjustable or fixed rate of interest. Generally, adjustable rate agricultural
real estate loans provide for a one, three or five year adjustment of the
interest rate based on a margin over the corresponding U.S. Treasury security
and may have maturity terms of 20 years or less while generally providing for a
20 year amortization schedule. Fixed rate agricultural real estate loans
generally are balloon loans with terms up to five years with a 20 year
amortization schedule. The loan to value ratio on agricultural real estate loans
is generally limited to 70%. "Part-time" farms with quality primary residences
of the farmer\owner-operator located thereon may occasionally be financed up to
an 80% loan to value ratio.
Agricultural operating loans are also originated at either an
adjustable or fixed rate of interest for up to a five year term or, in the case
of livestock, upon sale. Most agricultural operating loans have terms of one
year or less. Such loans generally provide for annual payments of principal and
interest or upon maturity, if the original term is less than one year. These
loans generally provide for any proceeds from the sale of collateral be applied
to repayment of the loan.
Agricultural related lending affords the Bank the opportunity to earn
yields higher than those obtainable on one- to four-family residential lending.
Nevertheless, agricultural related lending is generally recognized as involving
a higher degree of risk than residential lending because of the typically larger
loan amount, the lengthy time period involved in the production of crops and
livestock and the increased sensitivity of these loans to changes in general
economic conditions as well as other factors outside the control of the farm
borrower which can affect the success of the borrower.
Weather presents one of the greatest risks as hail, drought, floods or
other conditions can severely limit crop yields and thus impair loan repayments
and the value of the underlying collateral. This risk can be reduced
substantially by the farmer with multi-peril crop insurance which can limit the
dollar loss caused by yield reductions. Indiana Federal requires borrowers to
obtain multi-peril crop insurance on a case by case basis.
Grain and livestock prices also present a risk as prices may decline
prior to sale resulting in the borrower's inability to cover production costs.
These risks may be reduced by the farmer with the use of futures contracts or
options to provide a "floor" below which prices will not fall.
Another risk is the uncertainty of government support programs and
other regulations. Many farmers rely on the income, in part, from support
programs to make loan payments. If these programs are discontinued or
significantly changed, farmers will have to make a number of adjustments to try
to maintain income levels sufficient to make loan payments.
In 1995, Congress eliminated farm commodity subsidy programs for feed
grains. This program, in certain years, was instrumental to farmers in
supporting grain prices and therefore farm revenues. Under the new legislation,
support for commodity prices will be decreased each year until eliminated
entirely in the year 2002. The Bank has adjusted its underwriting standards and
criteria related to agricultural lending by discounting government commodity
supports in the projected cash flows of the farm operation.
Finally, many farms are dependent on a limited number of key
individuals whose injury or death may result in an inability to successfully
operate the farm. In this regard, Indiana Federal provides an optional farm
credit life program to farm borrowers.
Loan Originations, Purchases and Sales. In order to generate servicing
income and provide funds for additional lending activities, the Bank generally
seeks to sell, in the secondary mortgage market, one- to four-family residential
fixed-rate loans which it originates. During the year ended December 31, 1996,
the Bank, consistent with its asset/liability management strategy, sold the
majority of the fixed-rate one- to four-family residential loans it originated.
All loans sold in the secondary market have been sold without recourse to the
Bank. At December 31, 1996, the Bank had $2.0 million of fixed-rate one- to
four-family residential loans held for sale which were recorded at the lower of
cost or market. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Asset/Liability Management" in the Annual Report.
Gains and losses on sales of loans and loan participations are
recognized at the time of the sale. When loans are sold, the Bank typically
retains the responsibility for collecting and remitting loan payments,
inspecting the properties securing the loans, making certain that monthly
principal and interest payments and real estate tax payments are made on behalf
of borrowers, and otherwise servicing the loans. The Bank receives a servicing
fee for performing these services. The amount of fees received by the Bank
varies but generally ranges from .25% to .375% per annum on the outstanding
principal amount of the loans serviced. The servicing fee is recognized as
income over the life of the loans. At December 31, 1996, Indiana Federal
serviced approximately $146.0 million in loans and loan participations for
others.
The Bank believes that purchases of loans and loan participations are
generally desirable primarily when there is an excess supply of funds available
or when favorable terms are available in areas outside its primary lending area
for loans which meet Indiana Federal's regular investment and underwriting
policy guidelines. Loan purchases also may be made to diversify the Bank's loan
portfolio. Loans purchased by Indiana Federal are generally serviced by the
seller. At December 31, 1996, approximately $51.0 million of the Bank's loans
receivable were serviced by others.
The table below shows the loan origination, purchase and sale activity
of the Bank during the periods indicated.
Year Ended December 31,
----------------------------------------
1996 1995 1994
--------- ---------- ----------
(Dollars in Thousands)
Loans Originated:
One- to four-family:
Fixed-rates.................................................... $ 35,816 $ 46,902 $ 27,712
Adjustable-rates(1)............................................ 82,404 69,121 102,875
Income-producing property........................................ 35,308 7,052 12,443
Consumer......................................................... 44,002 32,926 35,209
Commercial business.............................................. 47,636 36,743 20,386
Agricultural Operating........................................... 6,133 3,623 1,225
-------- -------- --------
Total loans originated....................................... $251,299 $196,367 $199,850
-------- -------- --------
Loans Purchased:
One- to four-family:
Fixed-rates.................................................... $ 11,632 $ 1,363 $ 610
Adjustable-rates............................................... --- --- ---
Income-producing property........................................ --- 962 ---
Consumer......................................................... 29,779 --- 3,916
Commercial business.............................................. --- 551 ---
-------- -------- --------
Total loans purchased........................................ 41,411 2,876 4,526
-------- -------- --------
Total loans originated and purchased......................... $292,710 $199,243 $204,376
-------- -------- --------
Loans Sold:
One- to four-family residential units:
Fixed-rates.................................................... $ 41,271 $ 32,543 $ 30,122
Income-producing property........................................ --- --- ---
-------- -------- --------
Total loans sold............................................. 41,271 32,543 30,122
-------- -------- --------
Principal repayments.............................................. 148,266 185,886 126,241
-------- -------- --------
Total loan sales and repayments.............................. 189,537 218,429 156,363
-------- -------- --------
Other net changes (2)............................................. (1,133) (557) (757)
-------- -------- --------
Net loan activity................................................. $102,040 $(19,743) $ 47,256
======== ======== ========
- ---------------------
(1) Includes 15 and 30 year AMLs which have fixed rates of interest for the
first five or seven years and then adjust annually thereafter. These
loans totaled approximately $22.1 million in 1996, $9.5 million in 1995
and $14.1 million in 1994.
(2) Consists primarily of the accretion of unearned discounts on other
loans and the provision for loan losses.
Non-Performing Assets, Loan Delinquencies and Defaults and Other
Problem Loans. When a borrower fails to make a required payment on a one- to
four-family residential mortgage loan, the Bank attempts to cause the deficiency
to be cured by contacting the borrower. A notice is mailed to the borrower after
a payment is 15 days past due and again when the loan is 45 days past due. In
addition, the Bank attempts to contact the borrower via telephone prior to the
loan being 30 days past due. Generally, if the delinquency is not cured within
60 days, the Bank issues notice of intent to foreclose on the property, and if
the deficiency is not cured within 90 days, the Bank may institute foreclosure
action. If foreclosed on, real property is sold at a public sale and may be
purchased by the Bank.
When a borrower fails to make a required payment on an income-producing
property loan, the Bank attempts to cause the deficiency to be cured by
contacting the borrower via telephone the first business day following the last
grace day pursuant to the note's payment schedule. Generally, if the payment is
not paid within five business days after contact, then a site inspection and a
personal interview with the property manager and/or owner may be performed. If
upon the interview/inspection it is found that the property or future payments
may be in jeopardy, then immediate enforcement of assignment of leases and rents
will be initiated and all legal steps will be taken to gain control of the
project. After due notice, foreclosure procedures will be initiated. If
foreclosed on, real property is sold at a public sale and may be purchased by
the Bank.
When a borrower fails to make a required payment on a consumer loan,
the Bank attempts to cause the deficiency to be cured by contacting the borrower
by written notice after a payment is 10 days past due and again when payment is
15 days past due by either written notice and/or by telephone. If the
delinquency is not cured within 60 to 90 days the Bank may take appropriate
steps to repossess the collateral securing the loan and/or file suit.
When a commercial business loan borrower fails to make a required
payment, the loan officer immediately begins to record all relevant collection
efforts. A reminder notice is sent to the borrower 15 days after the loan
becomes past due and at 30 days past due the borrower is contacted directly by a
loan officer. After the loan becomes 45 days past due, the loan file is sent to
loan review for a documentation check and the loan officer discusses the loan
with the loan officer's manager. If the loan balance becomes 60 days past due,
the loan officer reviews his course of action with his manager and sends out an
initial demand letter. If the loan becomes 70 days past due, a second demand
letter is sent. If the loan becomes 80 days past due, the loan officer prepares
a problem loan report and sends the loan file to the manager of the Commercial
Banking Department for further action. If the debtor has not filed bankruptcy at
this point, the loan officer prepares a workout proposal to be reviewed and
discussed with the Manager of the Commercial Banking Department within 15 days.
If the workout plan is successful and the debtor can make at least two
consecutive payments under the restructured obligation, the account is returned
to a commercial loan officer for handling.
The following table sets forth information concerning delinquent
mortgage and other loans at December 31, 1996. The amounts presented represent
the total remaining principal balances of the related loans (before specific
reserves for losses and net items), rather than the actual payment amounts which
are overdue, and the percentage represented of each respective type of loan.
Loans Delinquent for
30 - 59 Days 60 -89 Days 90 Days and Over
------------------------------ ----------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
Real Estate:
One- to four-family.... 93 $3,667 1.27% 8 $188 .07% 25 $1,196 .42%
Income producing(1).... 4 1,218 1.10 1 10 --- 8 4,927 4.44
Construction........... 4 447 1.51 1 220 .75 2 464 1.57
Consumer................. 63 637 .53 12 102 .08 15 252 .21
Commercial business...... 17 907 1.12 5 175 .22 14 530 .66
--- ------- --- ---- -- ------
Total ................... 181 $6,876 1.08% 27 $695 .11% 64 $7,369 1.16%
=== ====== == ==== == ======
- ------------------
(1) Includes commercial, multi-family and agricultural real estate loans.
The Office of Thrift Supervision (the "OTS") regulations provide for
the classification of loans and other assets such as debt and equity securities
considered by OTS examiners to be of lesser quality as "substandard," "doubtful"
or "loss" assets. The classification of assets regulation requires insured
institutions to classify their own assets and to establish prudent general
allowances for loan losses for assets classified "substandard" or "doubtful."
For the portion of assets classified as "loss", an institution is required to
either establish specific allowances of 100% of the amount classified or charge
off such amount. In addition, the OTS examiner has been given the discretion,
subject to approval by the principal supervisory agent, to require the
establishment of a general allowance for loan losses based on assets classified
as "substandard" and "doubtful" or the general quality of the asset portfolio of
an institution. At December 31, 1996, approximately $11.1 million, $1,100 and
$15,200 of the Bank's assets were classified by management as substandard,
doubtful and loss, respectively. At that date, $10.2 million of the Bank's
classified assets were included in non-performing assets and $900,000 were
included in other loans of concern, each as further described below.
The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan portfolio at the indicated dates (net of specific
reserves for losses and net items). Non-performing assets include those loans on
a non-accrual status, restructured loans which consist of loans where terms have
been renegotiated to provide a reduction or deferral of interest or principal
because of the borrower's inability to make payments as scheduled ("Restructured
Loans"), accruing loans contractually past due 90 days or more as to interest or
principal and repossessed assets. It is the policy of the Bank to place any one-
to four-family residential loan on non-accrual status when the loan is in excess
of 90 days past due and the loan balance exceeds 70% of the collateral value.
Income-producing property, commercial business, agricultural operating and
consumer loans are reviewed monthly to determine their status. Non-accrual loans
generally are returned to an accrual status when a loan is brought current and,
in the opinion of management, the financial position of the borrower indicates
that there no longer is any reasonable doubt as to the timely payment of
principal or interest by the borrower. Repossessed assets include assets
acquired in settlement of loans. As of December 31, 1996, there were no
concentrations of loans in any types of industry which exceeded 10% of the
Bank's total loans, that are not included as a loan category in the table below.
December 31,
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family.......................... $ --- $ --- $ --- $ --- $ 700
Income-producing property.................... 3,859 4,144 3,809 1,490 1,002
Commercial business.......................... 322 85 546 --- ---
Consumer..................................... 38 232 334 300 178
------- ------- ------- ------- -------
Total...................................... $4,219 $ 4,461 $ 4,689 $ 1,790 $ 1,880
======= ======= ======= ======= =======
Total as a percentage of total assets...... .50% .62% .65% .28% .31%
Accruing loans delinquent 90 days or more:
One- to four-family(1)....................... $1,610 $ 1,522 $ 882 $ 881 $ 375
Income-producing property.................... 298 --- --- --- ---
Commercial business.......................... 168 161 --- --- ---
Consumer..................................... 209 --- --- --- ---
Agricultural operating....................... --- 193 --- --- ---
------- ------- ------- ------- -------
Total...................................... $2,285 $ 1,876 $ 882 $ 881 $ 375
======= ======= ======= ======= =======
Total as a percentage of total assets...... .27% .26% .12% .14% .06%
Restructured loans:
One- to four-family.......................... $ 170 $ 190 $ 191 $ 193 $ 1,421
Income-producing property.................... --- --- --- 3,111 7,122
------- ------- ------- ------- -------
Total...................................... $ 170 $ 190 $ 191 $ 3,304 $ 8,543
======= ======= ======= ======= =======
Total as a percentage of total assets...... .02% .03% .03% .52% 1.42%
December 31,
1996 1995 1994 1993 1992
------- ------- ------- ------- -------
(Dollars in Thousands)
Repossessed assets:
One- to four-family.......................... $ --- $ 149 $ 59 $ 26 $ 107
Income-producing property.................... 3,383 4,265 4,734 1,320 3,394
Consumer..................................... 100 80 155 80 46
------- ------- ------- ------- -------
Total...................................... $3,483 $ 4,494 $ 4,948 $ 1,426 $ 3,547
======= ======= ======= ======= =======
Total as a percentage of total assets...... .42% .62% .69% .22% .59%
Total non-performing assets.................... $10,157 $11,021 $10,710 $ 7,401 $14,345
Percentage of non-performing assets to total
assets......................................... 1.21% 1.53% 1.49% 1.16% 2.38%
- ----------------------
(1) Includes $464,000 of construction loans.
During 1996, gross interest income would have been increased by
$473,000 if all non-accruing loans had been current in accordance with their
original terms. The amount that was included as interest income on such loans
was $298,000 for the year ended December 31, 1996. Interest on loans involved in
troubled debt restructurings that would have been recorded as income for the
year ended December 31, 1996, had the loans been current in accordance with
their original terms totaled $15,000. Interest on such loans that was actually
recorded as income for the year ended December 31, 1996, totaled $6,000.
Non-accruing loans. As of December 31, 1996, the Bank had $4.2 million
in non-accruing loans, which constituted .66% of the Bank's loan portfolio. At
such date, there were no non-accruing loans or aggregate non-accruing loans to
one borrower in excess of $150,000 in net book value, except as described below.
As of December 31, 1996, the Bank had two loans to entities related to
Cardinal Industries, Inc. ("Cardinal") secured by apartment complexes located in
Indianapolis, Indiana. These properties were previously subject to loan
modification agreements with the Bank and were classified as troubled debt
restructurings in 1993. Despite the loan modifications, these properties were
consistently delinquent and became non-performing in 1994. As of December 31,
1996, the loan balances on each of these properties were $1.3 and $1.1 million,
respectively. During February 1997, the borrower refinanced both properties with
another lender and the Bank received full payment on both loans with no
additional loan losses.
Non-accruing loans at December 31, 1996 also included a $1.5 million
(net of reserves) income-producing property loan secured by a shopping center
located in Temple Terrace, Florida. The major tenant vacated the premises in
August 1995 and as a result cash flows from the property are insufficient to
meet principal and interest payments. As of December 31, 1996, the loan was 13
months delinquent. During the first quarter of 1996, the borrower executed a
purchase contract to sell the property to a major grocery store chain. The
borrower has filed for bankruptcy and signed several extensions for the
contract. The sale of the property is expected to close in April 1997, with the
Bank being paid the outstanding balance of the loan plus accrued interest.
Accruing Loans Delinquent 90 Days or More. At December 31, 1996, the
Bank had $2.3 million in net book value of accruing loans delinquent 90 days or
more, none of which exceeded 350,000 in net book value.
Repossessed Assets. As of December 31, 1996, the Bank had $3.4 million
of repossessed assets. Substantially all of the Bank's foreclosed property at
December 31, 1996 consisted of income-producing property as discussed below.
In July 1994, the Bank foreclosed on an apartment complex located in
Gainesville, Florida. As of December 31, 1996, the Bank's net book value for the
property was $2.3 million. In February 1997, the Bank sold the property for $2.5
million. The Bank provided the purchaser with the financing for the property,
which was made at market rates and with a loan to value ratio of 80%.
Repossessed assets at December 31, 1997 also included a 63,000 square
foot shopping center located in Sturgis, Michigan. As of December 31, 1996, the
Bank's net book value in this property was $1.0 million. In February 1997, the
Bank sold the property for $1.0 million. The Bank did not provide the purchaser
with the financing for the sale.
At December 31, 1996, the Bank did not have any other income-producing
properties repossessed.
Other Loans of Concern. In addition to the non-performing assets set
forth in the table above, as of December 31, 1996, there was also an aggregate
of approximately $900,000 in net book value of loans with respect to which known
information about the possible credit problems of the borrowers or the cash
flows of the security properties have caused management to have concerns as to
the ability of the borrowers to comply with present loan repayment terms and
which may result in the future inclusion of such items in the non-performing
asset categories.
Other loans of concern at December 31, 1996 consisted solely of one
$900,000 income producing property loan (net of a $150,000 specific reserve)
secured by an apartment complex located in Lansing, Michigan. Although the loan
has always remained current, management has designated the property substandard
since cash flow from the property is insufficient to meet debt service.
Management will continue to monitor this loan.
Allowance for Loan Losses. The allowance for loan losses is established
through a provision for loan losses based on management's evaluation of the
risks inherent in its loan portfolio, changes in the nature and volume of its
loan activity and other relevant factors. Management's determination of the
adequacy of the allowance is based upon evaluation of the portfolio, past loss
experience, current economic conditions, volume, growth and composition of the
portfolio, and other relevant factors. Although management believes that it uses
the best information available to make such determinations, future adjustments
to reserves may be necessary, and net income could be significantly affected, if
circumstances differ substantially from the assumptions used in making the
initial determinations. At December 31, 1996, the Bank had an allowance for loan
losses of $7.5 million or 1.2% of total loans. See Note D of Notes to
Consolidated Financial Statements in the Annual Report.
The following table sets forth an analysis of the Bank's allowance for
loan losses for the periods indicated.
Years Ended December 31,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period..................... $6,655 $6,101 $5,356 $4,392 $3,210
------ ------ ------ ------ ------
Charge-offs:
One- to four-family .............................. --- (6) --- (8) (113)
Income-producing property......................... (21) --- --- (130) ---
Consumer loans.................................... (335) (437) (180) (167) (299)
Commercial business............................... (88) (12) --- --- ---
------ ------ ------ ------ ------
Total Chargeoffs................................ (444) (455) (180) (305) (412)
------ ------ ------ ------ ------
Recoveries:
One- to four-family............................... --- --- 1 47 37
Income-producing property......................... --- --- --- 1 16
Consumer loans.................................... 49 32 28 71 146
Commercial........................................ 83(1) 44(1) 63(1) 53(1) ---
------ ------ ------ ------ ------
Total Recoveries................................ 132 76 92 172 199
------ ------ ------ ------ ------
Net charge-offs............................... (312) (379) (89) (133) (213)
Acquired from NorCen/American...................... --- 756 655 --- ---
Provision for losses............................... 1,115 177 179 1,097 1,395
------ ------ ------ ------ ------
Balance at end of period........................... $7,458 $6,655 $6,101 $5,356 $4,392
====== ====== ====== ====== ======
Ratio of net charge-offs during the period to
average loans outstanding during the period...... .05% .06% .02% .03% .05%
- -----------------------
(1) Represents recoveries received from the State of Indiana for potential
future loan losses on loans originated by the Bank through its
participation in a small business loan capitalization program. In 1996,
recoveries received from State of Indiana were $29,000; in all other
years recoveries were for the total amounts indicated in the table.
The following table furnishes a breakdown of the allowance for loan losses at
the dates indicated.
At December 31,
----------------------------------------------------------------------------------
1996 1995 1994
------------------------ ----------------------- -----------------------
Percent of Percent of Percent of
Loan in Each Loan in Each Loan in Each
Category to Net Category to Net Category to Net
Loans Loans Loans
Amount Receivable Amount Receivable Amount Receivable
------ ---------- ------ ---------- ------ ----------
(Dollars in Thousands)
Type of Loan:
One- to four-family........ $ 434 49.75% $ 434 55.27% $ 440 54.17%
Income-producing
property.................. 3,513 15.51 3,445 16.3 3,305 21.45
Agricultural
real estate............... --- 1.85 --- 2.4 --- 2.02
Consumer.................. 1,373 19.24 878 15.72 1,246 15.19
Commercial
business................. 2,138 12.58 1,648 9.19 860 6.12
Agricultural
operating................. --- 1.07 250 .98 250 1.05
------ ------ ------ ------ ------ ------
Total................. $7,458 100.00% $6,655 100.00% $6,101 100.00%
====== ====== ====== ====== ====== ======
At December 31,
----------------------------------------------------
1993 1992
------------------------ ----------------------
Percent of Percent of
Loan in Each Loan in Each
Category to Net Category to Net
Loans Loans
Amount Receivable Amount Receivable
------ ---------- ------ ----------
(Dollars in Thousands)
Type of Loan:
One- to four-family........ $ 439 53.48% $ 367 51.06%
Income-producing
property.................. 3,304 28.62 2,810 31.87
Agricultural
real estate............... --- --- --- ---
Consumer.................. 1,305 14.81 1,100 15.69
Commercial
business................. 308 3.09 115 1.38
Agricultural
operating................. --- --- --- ---
------ ------ ------ ------
Total................. $5,356 100.00% $4,392 100.00%
====== ====== ====== ======
Investment Activities
The Bank's investment portfolio is managed by its officers in
accordance with an investment policy approved by the Board of Directors. The
Board reviews all transactions and activities in the investment portfolio on a
monthly basis. The Corporation invests primarily in short- to medium-term
investments, including United States Treasury securities, bank certificates of
deposit, federal funds, FHLB overnight funds, repurchase agreements, fixed-rate
and adjustable rate Collateralized Mortgage Obligations ("CMOs"),
mortgage-backed securities, asset-backed securities and corporate debt
obligations. All outstanding corporate debt securities are rated in one of the
top three investment grade categories by one of several generally recognized
independent rating agencies.
The following table sets forth certain information regarding the
investment portfolio of the Bank at the dates indicated by dollar amounts and as
a percentage of total assets. Dollar amounts reflect carrying value.
December 31,
-----------------------------------------------------------------------------
1996 1995 1994
--------------------- --------------------- ---------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Short-Term Investments:
Interest-bearing deposits............ $ 66 $ 178 $ 282
Federal funds loaned................. --- 5,375 200
--------- -------- --------
Total short-term investments..... 66 .01% 5,553 .77% 482 .07%
--------- -------- --------
Investment Securities:
U.S. Government and agency
securities......................... $ 35,347 $ 23,789 $ 55,122
CMOs................................. 23,834 32,942 36,614
Asset-backed bonds................... 14,309 2,080 ---
Corporate debt securities............ 11,967 12,360 13,802
Municipal obligations................ 975 1,502 2,639
--------- -------- --------
Total investment securities...... 86,432 10.33 72,673 10.07 108,177 15.23
--------- -------- --------
Mortgage-backed securities........... 43,281 5.17 26,737 3.71 29,241 4.12
-------- ----- -------- ----- -------- -----
Total investments................ $129,779 15.51% $104,963 14.55% $137,900 19.42%
======== ===== ======== ===== ======== =====
The Bank has, from time to time, acquired for investment purposes
derivative mortgage-backed securities. These derivative securities are first and
second tranches of CMOs. CMOs are securities derived by reallocating cash flows
from mortgage pass-through securities or from pools of mortgages. At December
31, 1996, the Bank had $9.6 million of fixed interest rate CMOs and $14.3
million of adjustable interest rate CMOs. These fixed and adjustable interest
rate CMOs have estimated remaining lives of 0.8 and 8.6 years, respectively. The
Bank does not purchase interest only, principal only or residual interest CMOs.
At December 31, 1996, all of the Bank's investment and mortgage-backed
securities were available for sale. Indiana Federal held no trading securities
at December 31, 1996, although, in accordance with established policies, Indiana
Federal periodically acquires securities for trading purposes. Securities
available for sale and held for trading purposes are recorded at market value.
For additional information regarding the investment and mortgage-backed
securities, see Note C to the Notes to Consolidated Financial Statements in the
Annual Report.
The amortized cost and fair values of investment and mortgage-backed
securities at the dates indicated are summarized as follows:
December 31,
----------------------------------------------------------------------------
1996 1995 1994
--------------------- ----------------------- ------------------------
Amortized Fair Amortized Fair Amortized Fair
Cost Value Cost Value Cost Value
-------- -------- ------- ------- -------- --------
(Dollars in Thousands)
U. S. Government and
agency securities.................. $35,128 $35,347 $23,041 $23,789 $ 56,175 $ 55,122
CMOs................................ 23,974 23,834 33,039 32,942 37,300 35,743
Corporate debt securities........... 12,000 11,967 12,459 12,360 13,998 13,802
Asset-backed bonds.................. 14,473 14,309 1,998 2,080 --- ---
Municipal securities................ 937 975 1,445 1,502 2,639 2,645
-------- -------- ------- ------- -------- --------
Total investment securities......... 86,512 86,432 71,982 72,673 110,112 107,312
Mortgage-backed securities......... 42,605 43,281 26,138 26,737 30,736 29,310
-------- -------- ------- ------- -------- --------
Total............................... $129,117 $129,713 $98,120 $99,410 $140,848 $136,622
======== ======== ======= ======= ======== ========
The following table shows the maturities of investment and
mortgage-backed securities (based on fair value) as of December 31, 1996, as
well as the weighted average yields on such securities. Tax-free income is not
material, accordingly, weighted average yields are not presented on a
tax-equivalent basis.
After One After Five
Within But Within But Within After
One Year Five Years Ten Years Ten Years
------------------ ------------------ ------------------ -----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in Thousands)
U.S. Government and
Agency Securities................ $ 2,529 7.88% $ 6,491 7.07% $26,327 7.09% $ --- --- %
CMOs............................... 176 5.36 3,053 5.13 --- --- 20,605 6.32
Corporate debt securities.......... 5,998 5.91 5,969 5.86 --- --- --- ---
Asset-backed bonds................. --- --- --- --- --- --- 14,309 6.98
Municipal obligations.............. 76 6.19 53 5.51 642 6.05 204 6.28
-------- ------- ------- -------
Total investment securities...... 8,779 6.47 15,566 6.22 26,969 7.06 35,118 6.59
------- ------- ------- -------
Mortgage-backed securities......... 4,346 6.18 3,307 6.38 2,308 6.60 33,320 7.23
------- ------- - ------- -------
Total ......................... $13,125 6.38% $18,873 6.25% $29,277 7.03% $68,438 6.90%
======= ======= ======= =======
Sources of Funds
General. Deposit accounts have traditionally been a principal source of
the Bank's funds for use in lending and for other general business purposes. In
addition to deposits, the Bank derives funds from loan repayments, whole loan
sales, cash flows generated from operations (which include interest credited to
deposit accounts), FHLB advances, other borrowings and reverse repurchase
agreements entered into with primary dealers, and, to a lesser extent, loan
participation sales. Scheduled loan repayments are a relatively stable source of
funds, while deposit inflows and outflows and the related cost of such funds
have varied widely. Borrowings may be used on a short-term basis to compensate
for seasonal reductions in deposits or deposit inflows at less than projected
levels and may be used on a longer term basis to support expanded lending
activities. The availability of funds from loan sales is influenced by the
general level of interest rates.
Deposit Activities. The Bank attracts both short-term and long-term
deposits from the general public by offering a wide assortment of accounts and
rates. In recent past years, the Bank has been required by market conditions to
rely increasingly on short-term accounts and other deposit alternatives that are
more responsive to market interest rates than the passbook accounts and fixed
interest rate, fixed-term certificates. In 1996, however, the Bank's one and two
year certificate of deposit products were very popular among customers as the
Bank, in an effort to attract such deposits, offered very competitive market
rates of interest. The Bank offers regular passbook accounts, checking accounts
(both interest and non-interest bearing checking accounts), various money market
accounts, fixed interest rate certificates with varying maturities, negotiated
rate $100,000 or above jumbo certificates of deposit and individual retirement
accounts. Negotiated rate $100,000 and above jumbo certificates of deposit
totaled $38.6 million or 6.8% of total deposits at December 31, 1996. The Bank
does not knowingly accept brokered deposits.
The following table sets forth the Bank's deposit flows during the
periods indicated.
Year Ended December 31,
1996 1995 1994
--------- --------- ---------
(Dollars in Thousands)
Opening balance ..................... $ 532,896 $ 510,475 $ 430,829
Net increase (decrease) in deposits . 11,483 (465) 64,637
Interest credited ................... 24,438 22,423 14,917
Increase in accrued interest payable 261 463 92
--------- --------- ---------
Ending balance ...................... $ 569,078 $ 532,896(1) $ 510,475(2)
========= ========= =========
- ---------------
(1) Substantially all of the increase in deposits is attributable to the NorCen
acquisition. See "Management's Discussion and Analysis of Financial
Condition - Liquidity" in the Annual Report.
(2) Substantially all of the increase in deposits is attributable to the
American acquisition. See "Management's Discussion and Analysis of Financial
Condition - Liquidity" in the Annual Report.
The following table sets forth the Bank's certificates of deposit of
$100,000 and more outstanding at December 31, 1996.
Certificates
of Deposit
------------
3 months or less.................................................. $36,135
Over 3 months through 6 months.................................... 8,319
Over 6 months through 12 months................................... 9,729
Over 12 months.................................................... 8,461
-------
Total.................................................... $62,644
=======
The following table sets forth the Bank's major deposit categories by
average balances, interest paid and average rate for the periods indicated.
1996 1995 1994
-------------------------- --------------------------- ---------------------------
Average Average Average
Balance Interest Rate Balance Interest Rate Balance Interest Rate
-------- ------- ---- -------- ------- ---- -------- ------- ----
(Dollars in Thousands)
Non-interest bearing checking
accounts................... $30,035 $ --- ---% $ 27,267 $ --- ---% $ 9,826 $ --- ---%
NOW accounts.................. 50,792 1,086 2.13 50,741 1,079 2.13 39,028 751 1.92
Passbook savings.............. 56,583 1,621 2.86 46,121 1,332 2.89 28,895 764 2.64
Money market accounts......... 78,916 2,397 3.04 91,763 2,619 2.85 118,336 3,510 2.97
Certificates.................. 337,413 19,334 5.73 316,992 17,393 5.47 237,821 11,454 4.82
-------- -------- -------- ------- ------- -------
Total deposits.............. $553,739 $24,438 4.41% $532,884 $22,423 4.21% $433,906 $16,479 3.80%
======== ======= ======== ======= ======== =======
The following table sets forth the Bank's deposit flows by type of
account, including interest credited, during the periods indicated. The
composition of the Bank's deposits by type of account and average interest rate
is set forth in Note F of Notes to Consolidated Financial Statements in the
Annual Report.
Increase (Decrease)
Year Ended December 31,
1996 1995 1994
-------- -------- --------
(Dollars in Thousands)
Non-interest bearing checking accounts ..... $ 3,425 $ 5,581 3,758
NOW checking accounts ...................... (1,690) 6,399 66
Passbook and statement accounts ............ 12,052 2,062 (235)
Money market accounts ...................... 1,125 (26,540) (18,334)
Jumbo certificates ......................... 7,838 (6,021) 17,342
Six month certificates ..................... 7,676 (4,879) 2,350
Twelve month certificates .................. 22,430 11,377 (3,456)
Twenty-four month certificates ............. 15,580 (5,427) 12,166
Thirty-six month certificates .............. (4,033) (14,397) (4,256)
Forty-eight month certificates ............. (2,102) 792 170
Sixty month certificates ................... (1,404) 698 (1,031)
Seventy-two month certificates ............. (533) 581 (703)
Eighty-four month certificates ............. (15) 185 551
Ninety-six month certificates .............. (1,280) (1,417) (2,676)
Other term certificates .................... (23,148) 52,964 10,299
-------- -------- --------
35,921 21,958 16,011
Accrued Interest Payable ................... 261 463 91
-------- -------- --------
Total ...................................... $ 36,182 $ 22,421 $ 16,102
======== ======== ========
The following table sets forth, by nominal interest rate categories,
the composition of deposits at the Bank at the dates indicated.
December 31,
-------------
1996 1995 1994
----- ------ -----
(Dollars in Thousands)
0.00% - 2.99%.................................... $231,555 $213,611 $205,892
3.00% - 4.99%.................................... 6,607 27,542 144,008
5.00% - 6.99%.................................... 326,027 281,444 145,798
7.00% - 8.99%.................................... 2,269 7,940 12,882
9.00% - 10.99%................................... --- --- ---
11.00% - 12.99%................................... --- --- ---
Accrued interest payable. 2,620 2,359 1,895
-------- -------- --------
Total........................................... $569,078 $532,896 $510,475
======== ======== ========
The following table sets forth by nominal interest rate categories the
amounts of deposits maturing during the twelve month period ending on December
31 of the years indicated.
Amounts Maturing in
2000 and
1997 1998 1999 Thereafter Total
-------- ------- ------ ------- --------
(Dollars In Thousands)
0.00% - 2.99%......................... $231,424 $ 28 $ --- $ 103 $231,555
3.00% - 4.99%......................... 4,547 731 691 638 6,607
5.00% - 6.99%......................... 255,455 49,758 9,044 11,770 326,027
7.00% - 8.99%......................... 760 1,168 90 251 2,269
9.00% - 10.99%......................... --- --- --- --- ---
-------- ------- ------ ------- --------
Accrued interest payable................ 2,620 --- --- --- 2,620
-------- ------- ------ ------- --------
Total.............................. $494,806 $51,685 $9,825 $12,762 $569,078
======== ======= ====== ======= ========
Management believes that the variety of accounts offered by the Bank
has allowed it to be competitive in obtaining funds and to respond with
flexibility (by paying rates of interest more closely approximating market rates
of interest) to, although not eliminating, the threat of disintermediation (the
flow of funds away from depository institutions such as savings institutions
into direct investment vehicles such as government and corporate securities).
Indiana Federal will also occasionally offer a promotion or a more competitive
interest rate to attract new deposits. During recent years, the Bank has become
increasingly subject to short-term fluctuations in deposit flows, as customers
have become more interest rate conscious. Therefore, the ability of the Bank to
attract and maintain deposits, and the cost of its funds, has been and will
continue to be significantly affected by money market conditions.
Borrowings. Apart from deposits, the Bank's principal source of funds
in recent years has been FHLB advances. As a Federal Home Loan Bank (the "FHLB")
member, the Bank is required to own capital stock in the FHLB and is authorized
to apply for advances from the FHLB. Each Federal Home Loan Bank credit program
has its own interest rate, which may be fixed or variable, and range of
maturities. The FHLB may prescribe the acceptable uses to which these advances
may be put, as well as limitations on the size of the advances and repayment
provision. In addition, the Bank periodically enters into reverse repurchase
agreements and purchases federal funds which are accounted for as borrowings.
The Bank's borrowings as of recent dates are set forth in Note G of the
Notes to Consolidated Financial Statements in the Annual Report. The following
table sets forth, at the dates and during the periods indicated, the maximum
balance and the weighted average rate paid thereon for each type of borrowing.
December 31,
1996 1995 1994
-----------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars In Thousands)
At Date Ended:
FHLB borrowings................................ $163,465 5.96% $104,348 5.87% $ 80,096 6.18%
Repurchase agreements.......................... 9,131 5.60 9,408 5.39 51,763 6.13
Other borrowings............................... 20,000 7.31 --- --- 5,975 6.75
-------- -------- --------
Total...................................... $192,596 6.08% $113,756 5.83% $137,834 6.19%
======== ======== ========
During Period Ended:
Maximum amount of borrowings outstanding:
FHLB borrowings............................... $163,465 $109,944 $133,402
Repurchase agreements......................... 27,769 52,961 52,311
Other borrowings.............................. 20,000 15,000 13,450
-------- -------- --------
Total...................................... $211,234 $177,905 $199,163
======== ======== ========
Average borrowings outstanding:
FHLB borrowings............................... $111,790 5.83% $ 99,210 6.16% $ 77,496 5.67%
Repurchase agreements......................... 11,374 5.27 18,188 5.17 26,110 4.95
Other borrowings.............................. 5,341 5.64 6,033 6.22 3,946 4.99
-------- -------- --------
Total...................................... $128,505 5.77% $123,431 6.02% $107,552 5.47%
======== ======== ========
Trust and Private Banking Division
On December 15, 1994, the OTS granted regulatory authorization for
Indiana Federal to exercise full trust powers. At December 31, 1996, the Bank
had $22.9 million of assets managed by its Trust Department.
The Trust and Private Banking Division operates primarily in the
Northwestern Indiana area, consisting of Lake and Porter counties, with
additional smaller markets in Marshall, Starke, and St. Joseph counties. The
Private Banking Group provides services for the banking needs of high net worth
individuals in these areas.
The Trust and Private Banking Division originates business through
internal account managers, utilizing asset management, qualified retirement
plans, investment and insurance products, escrow accounts, and living and
testamentary trusts. Guardianship and other fiduciary powers are available. The
Trust and Private Banking Division activities generate primarily fee- based
income which can vary depending upon the size of the individual holdings.
A Trust Committee, consisting of the Chairman of the Board, President,
Chief Operating Officer, Chief Financial Officer, the Vice President of
Commercial Lending, and a Board Member, establishes and reviews all functions of
the Trust Department. Meeting on a monthly basis, the Committee approves all
opening and closing of trust accounts, as well as all purchases, sales and
changes of trust assets, taking into consideration federal and state laws, as
well as relevant economic considerations.
Subsidiary Activities
Indiana Federal is permitted by current OTS regulations to invest in
the capital stock, obligations, or other specified types of securities of
subsidiaries (referred to as "service corporations") and to make loans to such
subsidiaries and joint ventures in which such subsidiaries are participants in
an aggregate amount not exceeding 2% of an association's assets, plus an
additional 1% of assets if the amount above 2% is used for specified community
or inner-city development purposes. In addition, federal regulations permit
associations to make specified types of loans to such subsidiaries (other than
special-purpose finance subsidiaries), in which the association owns more than
10% of the stock, in an aggregate amount not exceeding 50% of the association's
loans-to-one-borrower limit if the association's regulatory capital is in
compliance with minimum regulatory capital requirements. When an association
fails to meet that standard, such loans must be included in amounts invested
under the general limit, unless a waiver is obtained from the OTS. At December
31, 1996, the Bank's total investment in its service corporation was $385,000 or
.05% of the Bank's assets.
Indiana Federal's service corporation, IndFed Financial Services, Inc.
operates under the name Indiana Financial Insurance Agency ("Indiana
Financial"). Indiana Financial is a full service insurance agency which provides
multiple lines of insurance coverage including, commercial, general liability,
workmans compensation, group health, payroll deduction and automobile insurance.
Indiana Financial also offers fixed annuity products. During 1996, Indiana
Financial recorded a net profit of $11,000.
In May 1996, IFB Investment Services Corp. was formed as a wholly owned
subsidiary of IFC. IFB is a registered broker/dealer and provides investment
services to its clients. Such services include personal investing and financial,
tax and business succession planning. Assets under management by IFB were
$529,000 as of December 31, 1996. During 1996, IFB recorded a net profit of
$124,000.
In December 1989, IndFed Mortgage Company ("IndFed Mortgage") was
formed as a wholly-owned subsidiary of IFC. IndFed Mortgage's activities consist
of participating as an equity partner in various joint venture projects, as
discussed below. During 1996, IndFed Mortgage recorded a net profit of $854,000.
During 1991, IndFed Mortgage entered into two joint venture low and
moderate income apartment housing projects to take advantage of certain tax
benefits under Section 42 of the Internal Revenue Code of 1986, as amended (the
"Code"). Since 1991, IndFed Mortgage has entered into five additional joint
ventures for low and moderate income apartment housing projects; two in 1992,
two in 1994 and one in 1995.
IndFed Mortgage's equity investment in the seven joint ventures totaled
$6.5 million at December 31, 1996, with the largest investment totaling $1.6
million and the smallest investment totaling $400,000. In addition to IndFed
Mortgage's equity investments, Indiana Federal has made loans to such joint
ventures. At December 31, 1996, Indiana Federal had outstanding loans to four of
these joint ventures totaling $6.6 million, all of which were performing in
accordance with their repayment terms. The Corporation received $1.2 million in
tax credits during 1996 as a result of IndFed Mortgage's activities.
Regulation
General. Indiana Federal is a federally chartered savings bank, the
deposits of which are federally insured and backed by the full faith and credit
of the United States Government. Accordingly, Indiana Federal 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 Indiana Federal, the
Corporation also is subject to federal regulation and oversight. The purpose of
the regulation of the Corporation and other holding companies is to protect
subsidiary savings associations. Indiana Federal is a member of the Savings
Association Insurance Fund (the "SAIF") which, together with the Bank Insurance
Fund (the "BIF"), are the two deposit insurance funds administered by the FDIC
and the deposits of Indiana Federal are insured by the FDIC. As a result, the
FDIC has certain regulatory and examination authority over Indiana Federal.
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, Indiana Federal 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 Indiana Federal were as of July 1996, and October
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
Indiana Federal to provide for higher general or specific loan loss reserves.
All savings associations are subject to a semi-annual assessment, based upon the
savings association's total assets, to fund the operations of the OTS. Indiana
Federal's OTS assessment for the fiscal year ended December 31, 1996, was
$152,000.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including Indiana Federal and the
Corporation. 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 Indiana
Federal 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. Indiana Federal is in compliance with the noted
restrictions.
Indiana Federal'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, 1996, Indiana Federal's lending
limit under this restriction was $7.5 million. Indiana Federal 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.
Insurance of Accounts and Regulation by the FDIC. Indiana Federal is a
member of the SAIF, which is administered by the Federal Deposit Insurance
Corporation (the "FDIC"). Deposits are insured up to applicable limits by the
FDIC and such insurance is backed by the full faith and credit of the United
States Government. As insurer, the FDIC imposes deposit insurance premiums and
is authorized to conduct examinations of and to require reporting by
FDIC-insured institutions. It also may prohibit any FDIC-insured institution
from engaging in any activity the FDIC determines by regulation or order to pose
a serious risk to the SAIF or BIF. The FDIC also has the authority to initiate
enforcement actions against savings associations, after giving the OTS an
opportunity to take such action, and may terminate the deposit insurance if it
determines that the institution has engaged in unsafe or unsound practices or is
in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions will be made by the FDIC for each semi-annual assessment period.
The FDIC is authorized to increase assessment rates, on a semiannual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the United States Treasury or for any other reason deemed
necessary by the FDIC.
As is the case with the SAIF, the FDIC is authorized to adjust the
insurance premium rates for banks that are insured by the BIF of the FDIC in
order to maintain the reserve ratio of the BIF at 1.25% of BIF insured deposits.
As a result of the BIF reaching its statutory reserve ratio the FDIC revised the
premium schedule for BIF insured institutions to provide a range of .04% to .31%
of deposits. The revisions became effective in the third quarter of 1995. In
addition, the BIF rates were further revised, effective January 1996, to provide
a range of 0% to .27%. The SAIF rates, however, were not adjusted. At the time
the FDIC revised the BIF premium schedule, it noted that, absent legislative
action (as discussed below), the SAIF would not attain its designated reserve
ratio until the year 2002. As a result, SAIF insured members would continue to
be generally subject to higher deposit insurance premiums than BIF insured
institutions until, all things being equal, the SAIF attained its required
reserve ratio.
In order to eliminate this disparity and any competitive disadvantage
between BIF and SAIF member institutions with respect to deposit insurance
premiums, legislation to recapitalize the SAIF was enacted in September 1996.
The legislation provides for a one-time assessment to be imposed on all deposits
assessed at the SAIF rates, as of March 31, 1995, in order to recapitalize the
SAIF. It also provides for the merger of the BIF and the SAIF on January 1, 1999
if no savings associations then exist. The special assessment rate has been
established at .657% of deposits by the FDIC and the resulting assessment of
$2.8 million was paid in November 1996. This special assessment significantly
increased noninterest expense and adversely affected the Corporation's results
of operations for the year ended December 31, 1996. As a result of the special
assessment, the Bank's annual deposit insurance premiums were reduced to
$306,000 based upon its current risk classification and the new assessment
schedule for SAIF insured institutions. These premiums are subject to change in
future periods.
Prior to the enactment of the legislation, a portion of the SAIF
assessment imposed on savings associations was used to repay obligations issued
by a federally chartered corporation to provide financing ("FICO") for resolving
the thrift crisis in the 1980s. Although the FDIC has proposed that the SAIF
assessment be equalized with the BIF assessment schedule, effective October 1,
1996, SAIF-insured institutions will continue to be subject to a FICO assessment
as a result of this continuing obligation. Although the legislation also now
requires assessments to be made on BIF-assessable deposits for this purpose,
effective January 1, 1997, that assessment will be limited to 20% of the rate
imposed on SAIF assessable deposits until the earlier of December 31, 1999 or
when no savings association continues to exist, thereby imposing a greater
burden on SAIF member institutions such as Indiana Federal. Thereafter, however,
assessments on BIF-member institutions will be made on the same basis as
SAIF-member institutions. The rates to be established by the FDIC to implement
this requirement for all FDIC-insured institutions is uncertain at this time,
but are anticipated to be about a 6.5 basis points assessment on SAIF deposits
and 1.5 basis points on BIF deposits until BIF insured institutions participate
fully in the assessment.
Regulatory Capital Requirements. Federally insured savings
associations, such as Indiana Federal, are required to maintain a minimum level
of regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations. These
capital requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 1996, the Bank had $4.5 million of intangible
assets, all of which was required to be deducted from tangible capital.
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. As of December 31, 1996, the Bank had $245,000 in
investments in and advances to its subsidiaries that were excluded from
regulatory capital.
At December 31, 1996, the Bank had tangible capital of $49.4 million,
or 6.0% of adjusted total assets, which is approximately $37.2 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also require core capital equal to at least 3% of
adjusted total assets. Core capital generally consists of tangible capital plus
certain intangible assets, including a limited amount of purchased credit card
relationships. As a result of the prompt corrective action provisions discussed
below, however, a savings association must maintain a core capital ratio of at
least 4% to be considered adequately capitalized unless its supervisory
condition is such to allow it to maintain a 3% ratio. At December 31, 1996, the
Bank had $4.5 million of intangibles which were subject to these tests.
At December 31, 1996, the Bank had core capital equal to $49.4 million,
or 6.0% of adjusted total assets, which is $24.8 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, 1996, Indiana
Federal had $6.4 million of general loss reserves, which was less than 1.25% of
risk- weighted assets.
Certain exclusions from capital and assets are required to be made for
the purpose of calculating total capital. Such exclusions consist of equity
investments (as defined by regulation) and that portion of land loans and
nonresidential construction loans in excess of an 80% loan-to-value ratio and
reciprocal holdings of qualifying capital instruments. Indiana Federal had no
such exclusions from capital and assets at December 31, 1996.
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 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, 1996, the Bank had total capital of $55.6 million
(including $49.4 million in core capital and $6.2 million in qualifying
supplementary capital) and risk-weighted assets of $568.2 million; or total
capital of 9.8% of risk-weighted assets. This amount was $10.1 million above the
8% requirement in effect on that date.
The OTS and the FDIC are authorized and, under certain circumstances
required, to take certain actions against savings associations that fail to meet
their capital requirements. The OTS is generally required to take action to
restrict the activities of an "undercapitalized association" (generally defined
to be one with less than either a 4% core capital ratio, a 4% Tier 1
risked-based capital ratio or an 8% risk-based capital ratio). Any such
association must submit a capital restoration plan and until such plan is
approved by the OTS may not increase its assets, acquire another institution,
establish a branch or engage in any new activities, and generally may not make
capital distributions. The OTS is authorized to impose the additional
restrictions that are applicable to significantly undercapitalized associations.
As a condition to the approval of the capital restoration plan, any
company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or
is "significantly undercapitalized" (i.e., Tier 1 risk-based or core capital
ratios of less than 3% or a risk-based capital ratio of less than 6%) must be
made subject to one or more of additional specified actions and operating
restrictions which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver.
The OTS is also generally authorized to reclassify an association into
a lower capital category and impose the restrictions applicable to such category
if the institution is engaged in unsafe or unsound practices or is in an unsafe
or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on
Indiana Federal may have a substantial adverse effect on Indiana Federal's
operations and profitability. IFC shareholders do not have preemptive rights,
and therefore, if IFC 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 Corporation.
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 period notice based on safety and soundness
concerns. See "- Regulatory Capital Requirements."
The OTS has proposed regulations that would revise the current capital
distribution restrictions. Under the proposal a savings association may make a
capital distribution without notice to the OTS (unless it is a subsidiary of a
holding company) provided that it has a CAMEL 1 or 2 rating, is not of
supervisory concern, and would remain adequately capitalized (as defined in the
OTS prompt corrective action regulations) following the proposed distribution.
Savings associations that would remain adequately capitalized following the
proposed distribution but do not meet the other noted requirements must notify
the OTS 30 days prior to declaring a capital distribution. The OTS stated it
will generally regard as permissible that amount of capital distributions that
do not exceed 50% of the institution's excess regulatory capital plus net income
to date during the calendar year. A savings association may not make a capital
distribution without prior approval of the OTS and the FDIC if it is
undercapitalized before, or as a result of, such a distribution. As under the
current rule, the OTS may object to a capital distribution if it would
constitute an unsafe or unsound practice. No assurance may be given as to
whether or in what form the regulations may be adopted.
Liquidity. All savings associations, including Indiana Federal, are
required to maintain an average daily balance of liquid assets equal to a
certain percentage of the sum of its average daily balance of net withdrawable
deposit accounts and borrowings payable in one year or less. For a discussion of
what Indiana Federal includes in liquid assets, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations-Liquidity and Capital
Resources." This liquid asset ratio requirement may vary from time to time
(between 4% and 10%) depending upon economic conditions and savings flows of all
savings associations. At the present time, the minimum liquid asset ratio is 5%.
In addition, short-term liquid assets (e.g., cash, certain time
deposits, certain bankers acceptances and short-term United States Treasury
obligations) currently must constitute at least 1% of the association's average
daily balance of net withdrawable deposit accounts and current borrowings.
Penalties may be imposed upon associations for violations of either liquid asset
ratio requirement. At December 31, 1996, Indiana Federal was in compliance with
both requirements, with an overall liquid asset ratio of 6.6% and a short-term
liquid assets ratio of 3.3%.
Accounting. An OTS policy statement applicable to all savings
associations clarifies and re-emphasizes that the investment activities of a
savings association must be in compliance with approved and documented
investment policies and strategies, and must be accounted for in accordance with
GAAP. Under the policy statement, management must support its classification of
and accounting for loans and securities (i.e., whether held for investment, sale
or trading) with appropriate documentation. The Bank is in compliance with these
amended rules.
OTS accounting regulations, which may be made more stringent than GAAP
by the OTS, 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
Indiana Federal, 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, 1996, the
Bank met the test and has always met the test since it became effective.
Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association does not requalify and converts to a national bank
charter, it must remain SAIF-insured until the FDIC permits it to transfer to
the BIF. If such an association has not yet requalified or converted to a
national bank, its new investments and activities are limited to those
permissible for both a savings association and a national bank, and it is
limited to national bank branching rights in its home state. In addition, the
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities not
permissible for a national bank. In addition, it must repay promptly any
outstanding FHLB borrowings, which may result in prepayment penalties. If any
association that fails the QTL test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
("CRA"), every FDIC insured institution has a continuing and affirmative
obligation consistent with safe and sound banking practices to help meet the
credit needs of its entire community, including low and moderate income
neighborhoods. The CRA does not establish specific lending requirements or
programs for financial institutions nor does it limit an institution's
discretion to develop the types of products and services that it believes are
best suited to its particular community, consistent with the CRA. The CRA
requires the OTS, in connection with the examination of Indiana Federal, 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, Indiana Federal may be required to devote additional
funds for investment and lending in its local community. Indiana Federal was
examined for CRA compliance in April 1995 and received a rating of
"outstanding."
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 Indiana
Federal include the Corporation and any company which is under common control
with Indiana Federal.
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. Indiana Federal's subsidiaries are not deemed
affiliates, however; the OTS has the discretion to treat subsidiaries of savings
associations as affiliates on a case by case basis.
Certain transactions with directors, officers or controlling persons
are also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Holding Company Regulation. The Corporation is a unitary savings and
loan holding company subject to regulatory oversight by the OTS. As such, the
Corporation 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 Corporation 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 Corporation
generally is not subject to activity restrictions. If the Corporation 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
Corporation 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 Corporation 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 Corporation 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 Corporation 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 Corporation is registered with
the SEC under the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). The Corporation is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the SEC under the
Exchange Act.
IFC stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Corporation may not be resold
without registration or unless sold in accordance with certain resale
restrictions. If the Corporation meets specified current public information
requirements, each affiliate of the Corporation is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 1996, 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. Indiana Federal 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, Indiana Federal is required to purchase and maintain stock
in the FHLB of Indianapolis. At December 31, 1996, Indiana Federal had $8.2
million in FHLB stock, which was in compliance with this requirement. In past
years, the Bank has received substantial dividends on its FHLB stock. For the
year ended December 31, 1996, dividends paid by the FHLB of Indianapolis to
Indiana Federal totaled $606,000, which constituted a $4,000 decrease from the
amount of dividends received in calendar year 1995. The dividends received in
1996 reflect an annualized rate of 7.8%, or 0.1% below the rate for calendar
1995.
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 Indiana Federal's FHLB stock may result in a corresponding
reduction in Indiana Federal's capital.
Federal Taxation. Prior to 1996, savings associations such as the Bank
met certain definitional tests relating to the composition of assets and other
conditions prescribed by the Internal Revenue Code of 1986, as amended (the
"Code"), had been permitted to establish reserves for bad debts and to make
annual additions thereto which may, within specified formula limits, were
allowed to be taken as a deduction in computing taxable income for federal
income tax purposes. The amount of the bad debt reserve deduction for
"non-qualifying loans" was computed under the experience method. The amount of
the bad debt reserve deduction for "qualifying real property loans" (generally
loans secured by improved real estate) was computed under either the experience
method or the percentage of taxable income method (based on an annual election).
Under the experience method, the bad debt reserve deduction was an amount
determined under a formula based generally upon the bad debts actually sustained
by the savings association over a period of years.
The percentage of specially computed taxable income that was used to
compute a savings association's bad debt reserve deduction under the percentage
of taxable income method (the "percentage bad debt deduction") is 8%. The
percentage bad debt deduction thus computed is reduced by the amount permitted
as a deduction for non-qualifying loans under the experience method. Prior to
1988, the availability of the percentage of taxable income method permitted
qualifying savings associations to be taxed at a lower effective federal income
tax rate than that applicable to corporations generally (approximately 31.3%
assuming the maximum percentage bad debt deduction).
If an association's specified assets (generally, loans secured by
residential real estate or deposits, educational loans, cash and certain
government obligations) constituted less than 60% of its total assets, the
association was not allowed to deduct any addition to a bad debt reserve and
generally had to include existing reserves in income over a four year period.
In August 1996, legislation was enacted that eliminates the
percentage-of-taxable income method for computing additions to a savings
association's tax bad debt reserves since January 1, 1996 and requires all
savings associations to recapture, over a six year period, all or a portion of
their tax bad debt reserves added since January 1, 1988. A savings association
is allowed to postpone the recapture of bad debt reserves for up to two years if
the institution meets a minimum level of mortgage lending activity during those
years. The Bank believes that it will engage in sufficient mortgage lending
during 1996 and 1997 to be able to postpone any recapture of its bad debt
reserves until 1998. As a result of this legislation, the Bank will determine
additions to its tax bad debt reserves using the same method as a commercial
bank of comparable size. The management of the Company does not believe that the
legislation will have a material impact on the Company or Bank. See Note H to
the Note to Consolidated Financial Statements in the Annual Report.
In addition to the regular income tax, corporations, including savings
associations such as the Bank, generally are subject to a minimum tax. An
alternative minimum tax is imposed at a minimum tax rate of 20% on alternative
minimum taxable income, which is the sum of a corporation's regular taxable
income (with certain adjustments) and tax preference items, less any available
exemption. The alternative minimum tax is imposed to the extent it exceeds the
corporation's regular income tax and net operating losses can offset no more
than 90% of alternative minimum taxable income. For taxable years beginning
after 1986 and before 1996, corporations, including savings associations such as
the Bank, are also subject to an environmental tax equal to 0.12% of the excess
of alternative minimum taxable income for the taxable year (determined without
regard to net operating losses and the deduction for the environmental tax) over
$2.0 million.
Indiana Federal, the Bank and their subsidiaries file consolidated
federal income tax returns on a calendar year basis using the accrual method of
accounting. The income tax returns of the Corporation, the Bank and its
consolidated subsidiaries for the last three years are open to audit by the
Internal Revenue Service (the "IRS"). With respect to years examined by the IRS,
either all deficiencies have been satisfied or sufficient reserves have been
established to satisfy asserted deficiencies. In the opinion of management, any
examination of still open returns (including returns of subsidiaries and
predecessors of, or entities merged into, the Bank) would not result in a
deficiency which could have a material adverse effect on the financial condition
of the Corporation and its consolidated subsidiaries.
Indiana Taxation. Indiana Federal and the Bank are subject to the
Indiana Financial Institution's franchise tax. The franchise tax is imposed at a
rate of 8.5% of federal taxable income adjusted for Indiana tax purposes.
Delaware Taxation. As a Delaware holding company, the Corporation is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. The Corporation is
also subject to an annual franchise tax imposed by the State of Delaware based
on the number of shares of Corporation capital stock.
For additional information regarding taxation see Note H of Notes to
Consolidated Financial Statements in the Annual Report.
Competition
Indiana Federal faces strong competition both in originating real
estate loans and in attracting deposits. The Bank believes that its current
share of the savings and lending activity in its primary market area is
approximately 15%. The Bank defines its primary market area as Porter, Lake,
Jasper, Starke, Marshall, St. Joseph and LaPorte Counties in Indiana for
deposits, and as Indiana and contiguous states for its lending activities.
Competition in originating real estate loans comes primarily from other savings
institutions, commercial banks and mortgage bankers which also make loans
secured by real estate located primarily in the northwest Indiana area. The Bank
competes for real estate 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 faces substantial competition in attracting deposits from
other thrift institutions, commercial banks, money market and mutual funds,
credit unions and other financial institutions, both within and outside the
northwest Indiana area. 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 and other
factors. The Bank attracts a significant amount of deposits through its branch
offices primarily from the communities in which those branch offices are
located; therefore, competition for these deposits is principally from other
thrift institutions and commercial banks located in the same communities. The
Bank competes for these deposits by offering a variety of savings accounts at
competitive rates, convenient business hours, and convenient branch and
automated teller machine locations with interbranch deposit and withdrawal
privileges at each.
Pursuant to provisions of an Indiana Law adopted in 1985, large bank
holding companies have acquired local commercial banking companies in all of the
communities in which Indiana Federal has branch locations.
Executive Officers of the Registrant
The following table sets forth certain information with respect to each
of the executive officers of the Corporation.
Name Age Position(s) Held
---- --- ----------------
Donald A. Lesch 46 Chairman of the Board and Chief Executive Officer
Peter R. Candela 58 President, Chief Operating Officer and Director
George J. Eberhardt 47 Executive Vice President/Chief Financial Officer
Michael J. Griffin 49 Senior Vice President/Chief Marketing Officer
Terry D. Kimmel 52 Senior Vice President/Community & Human
Relations
Timothy M. Scannell 34 Senior Vice President/Trust and Private Banking
Richard C. Simaga 48 Senior Vice President/Commercial Banking
Gary T. Brownlee 44 Senior Vice President/Consumer and
Residential Lending
Donald A. Lesch. Since June 1, 1993, Mr. Lesch has been a full-time,
salaried Chairman of the Board of the Corporation and the Bank. He became the
Chief Executive Officer in 1996. Prior thereto, Mr. Lesch was an investor and
consultant to Gough and Lesch Development Corporation, a real estate development
company located in Merrillville, Indiana.
Peter R. Candela. Mr. Candela had been President, Chief Executive
Officer and a Director of the Bank since 1985. In 1996, Mr. Lesch became Chief
Executive Office and Mr. Candela became Chief Operating Officer. Previously, Mr.
Candela held a variety of positions with the Bank including Senior Vice
President and Chief Financial Officer. Mr. Candela has been with the Bank since
1973.
George J. Eberhardt. Mr. Eberhardt has been Executive Vice President
and Chief Financial Officer since 1995 and has been with the Bank since 1985.
From 1984 to 1985, Mr. Eberhardt was Vice President and Chief Financial Officer
of First Savings of Orland Park, Illinois. From 1983 to 1984, Mr. Eberhardt was
Controller of Financial Federal Savings Bank, Olympia Fields, Illinois.
Previously, Mr. Eberhardt held a variety of positions at First Federal Savings
of East Chicago (now Citizens Federal Savings).
Michael J. Griffin. Mr. Griffin has served as Senior Vice
President/Chief Marketing Officer of the Bank since May 1995. From 1974 to 1994
he owned and operated Griffin & Boyle, Inc., a full-service marketing and
communications company with offices in Chicago, Illinois and Chesterton,
Indiana. He sold his interest in the company in 1994 and performed consulting
services prior to being hired by Indiana Federal Bank.
Terry D. Kimmel. Mr. Kimmel has been Senior Vice President/Community &
Human Relations since June 1993. From 1984 to 1993, Mr. Kimmel was Senior Vice
President/Chief Lending Officer. Mr. Kimmel was Vice President and Chief Lending
Officer from 1981 to 1984. From 1972 until 1981, Mr. Kimmel held a variety of
other positions with the Bank.
Timothy M. Scannell. Mr. Scannell has been Senior Vice President and
managing director of the Trust and Private Banking Division since November 1994.
Prior to joining the Bank in 1994, Mr. Scannell worked as a certified public
accountant and certified financial planner in his own firm since 1986, which
provided estate and financial planning services.
Richard C. Simaga. Mr. Simaga has served as Senior Vice
President/Commercial Banking of the Bank since May, 1995. From 1993 to 1995, he
served as Vice President of Commercial Loans at Indiana Federal Bank. From 1987
to 1995, he was Senior Vice President/Commercial Banking at Bank One,
Merrillville, Indiana. Mr. Simaga has been in the banking industry since 1968.
Gary T. Brownlee. Mr. Brownlee has served as Senior Vice
President/Consumer and Residential Lending of the Bank since April 1995. From
1990 to 1995, he was a vice president of GE Capital Mortgage Corporation in
Raleigh, North Carolina. Mr. Brownlee was employed by Mellon Bank Corporation,
Pittsburgh, Pennsylvania from September 1978 to 1990, where he last served as
President of Data-Link Systems, Inc., a wholly-owned subsidiary.
Employees
At December 31, 1996, the Corporation had a total of 317 employees
including 59 part-time employees. None of the Corporation's employees are
represented by any collective bargaining group. Management considers its
employee relations to be good.
Item 2. Properties
The Bank and the Corporation own the office building in which their
home and executive offices are located. At December 31, 1996, the Corporation
also owned 11 of its branch offices. The remaining offices or locations,
consisting of five branch offices, one loan production office and an annex
building where the operations center is located were leased. As of December 31,
1996, the net book value of the Corporation's investment in premises, equipment
and leaseholds, excluding computer equipment, was approximately $8.8 million.
Management believes that its current facilities are adequate to meet the present
and immediately foreseeable needs of the Bank and the Corporation.
The Bank maintains an on-line data base of depositor and borrower
customer information. The net book value of the data processing and computer
equipment utilized by the Bank at December 31, 1996 was $1.7 million.
Item 3. Legal Proceedings
The Corporation is a party to certain other lawsuits arising in the
ordinary course of its business. The Corporation believes that none of these
other current lawsuits would, if adversely determined, have a material adverse
effect on the Corporation.
Item 4. Submission of Matters to a Vote of Security Holders
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1996.
PART II
Item 5. Market for the Registrant's Common Stock and
Related Security Holder Matters
Page 14 of the attached Annual Report to Shareholders for the year
ended December 31, 1996 is herein incorporated by reference.
Item 6. Selected Financial Data
Page 6 of the attached Annual Report to Shareholders for the year ended
December 31, 1996 is herein incorporated by reference.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Pages 7 through 14 of the attached Annual Report to Shareholders for
the year ended December 31, 1996 are herein incorporated by reference.
Item 8. Financial Statements and Supplementary Data
Pages 15 through 35 of the attached Annual Report to Shareholders for
the year ended December 31, 1996 are herein incorporated by reference.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
Item 10. Directors and Executive Officers of the Registrant
Information concerning Directors of the Registrant is incorporated
herein by reference from the Corporation's definitive Proxy Statement for the
Annual Meeting of Shareholders scheduled to be held in May 1997, except for
information contained under the heading "Compensation Committee Report on
Executive Compensation" and "Shareholder Return Performance Presentation", a
copy of which will be filed not later than 120 days after the close of the
fiscal
year.
Item 11. Executive Compensation
Information concerning executive compensation is incorporated herein by
reference from the Corporation's definitive Proxy Statement for the Annual
Meeting of Shareholders scheduled to be held in May 1997, except for information
contained under the heading "Compensation Committee Report on Executive
Compensation" and "Shareholder Return Performance Presentation", a copy of which
will be filed not later than 120 days after the close of the fiscal
year.
Item 12. 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 Corporation's
definitive Proxy Statement for the Annual Meeting of Shareholders scheduled to
be held in May 1997, except for information contained under the heading
"Compensation Committee Report on Executive Compensation" and "Shareholder
Return Performance Presentation", a copy of which will be filed not later than
120 days after the close of the fiscal year.
Item 13. Certain Relationships and Related Transactions
Information concerning certain relationships and transactions is
incorporated herein by reference from the Corporation's definitive Proxy
Statement for the Annual Meeting of Shareholders scheduled to be held in May
1997, except for information contained under the heading "Compensation Committee
Report on Executive Compensation" and "Shareholder Return Performance
Presentation", a copy of which will be filed not later than 120 days after the
close of the fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) (1) Financial Statements:
The financial statements and report of independent auditors appearing
on pages 15 - 35 in the Registrant's Annual Report to Shareholders for the year
ended December 31, 1996, are incorporated by reference in this Form 10-K Annual
Report as Exhibit 13.
(a) (2) Financial Statement Schedules:
All financial statement schedules have been omitted as the information
is not required under the related instructions or is inapplicable.
(a) (3) Exhibits:
Regulation Reference of
S-K Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
-------- ---------- ----------------
2 Plan of acquisition, reorganization, arrangement, liquidation or success:
(i) Merger Agreement by and between American and IFC (a)
(ii) Merger Agreement by and between NCB and IFC (b)
(iii) Merger Agreement by and between Pinnacle and IFC (c)
3 Articles of Incorporation and Bylaws (d)
4 Instrument defining the rights of security holders including indentures (d)
9 Voting trust agreement None
10.1 Employment Agreement of Peter R. Candela (e)
10.2 Employment Agreement of Donald A. Lesch (b)
10.3 Form of First Amendment to Employment Agreements (f)
10.4 Form of Severance Agreement (e)
10.5 Form of First Amendment to the Severance Agreement (f)
10.6 Incentive Compensation Plan (e)
10.7 Employee Stock Ownership Plan (d)
10.8 Stock Option and Incentive Plan, as amended (f)
10.9 Director Deferred Compensation Agreements (g)
10.10 Restated Executive Deferred Compensation Agreements (g)
10.11 Executive Death Benefit Agreements (g)
10.12 Executive Supplemental Income Agreements (g)
11 Statement re: computation of per share earnings None
Regulation Reference of
S-K Prior Filing or
Exhibit Exhibit Number
Number Document Attached Hereto
-------- ---------- ----------------
12 Statement re: computation of ratios Not required
13 Annual Report to Security Holders 13
16 Letter re: change in certifying accountant Not required
18 Letter re: change in accounting principles None
21 Subsidiaries of Registrant 21
22 Published report regarding matters submitted to vote of security holders None
23 Consent of Ernst & Young LLP 23
24 Power of Attorney Not required
27 Financial Data Schedule 27
99 Additional exhibits None
(a) Filed pursuant to a Current Report on Form 8-K dated December 12, 1994
(File No. 0-17379) pursuant to the Securities Exchange Act of 1934. All
such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) Filed on March 31, 1995 as an exhibit to the Registrant's Form 10-K
(File No. 0-17379) pursuant to the Securities Exchange Act of 1934. All
of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(c) Filed pursuant to a Current Report on Form 8-K dated November 25, 1996
(File No. 0-17379) pursuant to the Securities Exchange Act of 1934. All
such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(d) Filed on March 2, 1988, as exhibits to the Registrant's Form S-4
registration statement (Registration No. 33-20412) pursuant to the
Securities Act of 1933 or as a part of reports filed thereafter
pursuant to Section 13 the Securities Exchange Act of 1934. All of such
previously filed documents are hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-K.
(e) Filed on March 30, 1993 as exhibits to the Registrant's Form 10-K (File
No. 0-17379) pursuant to the Securities Exchange Act of 1934. All of
such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(f) Filed on March 28, 1996 as Exhibits to the Registrant's Form 10-K (File
No. 0-17379) pursuant to the Securities Exchange Act of 1934. All of
such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(g) Filed on March 30, 1994 as an exhibit to the Registrant's Form 10-K
(File No. 0-17379) pursuant to the Securities Exchange Act of 1934. All
of such previously filed documents are hereby incorporated herein by
reference in accordance with Item 601 of Regulation S-K.
(b) Reports on Form 8-K:
One Current Report on Form 8-K was filed with the Commission on
November 25, 1996 relating to the Merger between Pinnacle and IFC.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
INDIANA FEDERAL CORPORATION
Date: March 31, 1997 By: /s/Donald A. Lesch
---------------------------------
Donald A. Lesch
(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.
By: /s/Donald A. Lesch By: /s/Peter R. Candela
------------------------- ----------------------------
Donald A. Lesch, Chairman Peter R. Candela, President
of the Board and Chief and Director
Executive Officer
Date: March 31, 1997 Date: March 31, 1997
By: /s/James E. Hutton By: /s/Barbara A. Young
------------------------- ----------------------------
James E. Hutton, Director Barbara A. Young, Director
Date: March 31, 1997 Date: March 31, 1997
By: /s/Byron Smith By: /s/Philip A. Maxwell
------------------------- ----------------------------
Byron Smith, III, Director Philip A. Maxwell, Director
Date: March 31, 1997 Date: March 31, 1997
By: /s/John R. Poncher By: /s/Fred A. Wittlinger
--------------------------- -----------------------------
John R. Poncher, M.D., Fred A. Wittlinger, Director
Director
Date: March 31, 1997 Date: March 31, 1997
By: /s/George J. Eberhardt
-----------------------------
George J. Eberhardt, Senior
Vice President and Chief
Financial Officer
Date: March 31, 1997
INDEX TO EXHIBITS
Exhibit
- -------
13 Annual Report to security holders
21 Subsidiaries of the registrant
23 Consent of Independent Auditors
27 Financial Data Schedule