Letter To Shareholders
To Our Shareholders:
Two significant developments highlighted the events in 1996. One, which
affected all savings institutions, was the recapitalization of the Savings
Association Insurance Fund (SAIF). The other was the decision by the Board of
Directors of Indiana Federal Corporation to undertake a "merger of equals" with
Pinnacle Financial Services, Inc. of St. Joseph, Michigan.
The one-time special assessment to recapitalize the SAIF reduced Indiana
Federal Corporation's 1996 after-tax earnings by $1.7 million or $0.36 per
share. The long-term effect of this one-time special assessment should create a
healthier, more competitive industry because it will result in much lower FDIC
insurance premiums beginning in 1997 thereby creating a more level playing field
with commercial banks. For Indiana Federal, pre-tax deposit insurance premiums
are expected to be reduced by $750,000 in 1997.
The decision to merge with Pinnacle Financial Services, Inc., when approved
by regulators and shareholders, will create the largest locally-managed
financial institution on the southern tip of Lake Michigan with approximately $2
billion in assets and a network of 47 full-service banking centers and 45 ATMs.
The "merger of equals" was a key point in the Board's decision to merge with
Pinnacle. Both companies will benefit from the synergies created by the
tremendous innovation and creativity inherent in the combination of two high
performance teams. In addition, the expected economies of scale, streamlined
operations and reduced costs that result will benefit our respective customers
and shareholders with more competitive products and increased shareholder value.
For 1996, IFC reported net income of $4.6 million or $0.96 per share
compared to $7.3 million or $1.51 per share in 1995. To get a clearer picture of
how the Corporation is currently performing, let us look at the specifics of the
last two reporting quarters ended September 30 and December 31. Third quarter
earnings per share increased 18 percent, before the $0.36 per share one-time
SAIF special assessment charge, compared to 1995's third quarter ended September
30. Fourth quarter earnings per share would have increased 3 percent over 1995's
strong fourth quarter, if 1996's fourth quarter earnings were not impacted by
the $500,000 additional provision for loan losses, and a $325,000 write-down of
a real estate owned property.
Statement of Condition Highlights
Assets increased 16.0 percent to $836.8 million at December 31, 1996, up
$115.5 million from $721.3 million the previous year. Total loans grew just
short of $100 million to $629.0 million, an increase of 18.8 percent for the
year. Loans originated and purchased totaled $292.7 million in 1996, a 47.0
percent increase over 1995's $199.2 million. Deposits also grew nicely to $569.1
million, up 6.8 percent from the previous year's ending balance of $532.9
million. The balance of 1996's asset growth was funded with Federal Home Loan
Bank advances and other borrowings, which were up 69.0 percent to $192.8
million. Most of the loan and asset growth came in the second half of the year.
Other Income
In addition to the expected improvement in net interest income in 1997,
other income, when excluding non-recurring gains and losses on the sale of
assets, was up 10.9 percent in 1996 and is expected to continue that growth in
1997. One reason for that optimism is the continued improvement in revenues
generated by the newly formed IFB Investment Services, Inc., a wholly-owned
subsidiary specializing in financial planning, portfolio management and
non-traditional bank investment products. Launched last April, this new
subsidiary, with its revenue momentum and with most of the start-up costs out of
the way, is expected to show much improved bottom-line results in 1997.
Another announcement made last year was the acquisition of a one-third
ownership interest in Forrest Holdings, Inc., of Oak Brook, Illinois, a leasing
company specializing in information systems. Although it has not added much to
Indiana Federal Corporation's bottom-line to date, the company is on target with
its business plan and is building shareholder value.
Operating Expense Management
We indicated in last year's report that we were committed to expense
management and cost containment as an ongoing process, and our goal was to
reduce operating expenses in 1996 from the record level in 1995. Operating
expenses increased $2.3 million because of the non-recurring pre-tax charge of
$2.8 million to recapitalize SAIF.
If the $2.8 million is excluded, operating expenses for 1996 would have
decreased $570,000 or 2.8 percent from 1995's level. We expect 1997's core
operating expense to decrease again due to our strong commitment to improve
productivity and cost containment. As a result, our efficiency ratio in 1997
should fall below 60 percent.
Asset Quality
One of our main objectives in 1996 was to improve asset quality by reducing
non-performing assets. Non-performing assets declined at December 31, 1996 to
$10.1 million or 1.21 percent of total assets from $11.0 million or 1.53 percent
at the beginning of the year. Moreover, two parcels of real estate owned
acquired through foreclosure totaling $3.3 million have been sold and were
closed in February of 1997.
In addition, two non-accruing multi-family apartment loans with a combined
book balance of $2.4 million were paid off in February of 1997 as a result of an
agreement with the borrower who refinanced both properties with another lender.
A discount given the borrower as an incentive to repay the loans was taken as a
charge to 1996 earnings.
The above transactions will reduce non-performing assets by approximately
57 percent from the December 31 level, and will reduce non-performing assets as
a percentage of total assets to the lowest level since the Corporation became a
public company in 1987.
As we approach 10 years as a public company, we should reflect on what we
have been able to accomplish during that period. We have added major new
products such as securities, tax-deferred annuities, commercial lending, demand
deposit accounts, trust services, and debit and credit cards. We have enhanced
customer service and convenience by providing extended hours and seven
days-a-week banking with our in-store banking centers. We have doubled our
retail franchise from 8 full-service banking centers to sixteen. Assets during
that time have grown 82 percent from $461 million to $837 million. Shareholders'
equity has grown 217 percent from $22.5 million to $71.4 million, and the price
of stock per share has increased five fold from $5 per share (adjusted for stock
splits) to approximately $25 per share. If dividends are included, which have
consistently increased every year since 1988 from 2-1/2 cents (adjusted for
stock splits) to the current quarterly dividend of 18 cents per share, the
average annual return to shareholders during this 10 year period would be 63.7
percent.
Our success, of course, could not have been achieved without the
dedication, experience and quality of our employees. To them, our deepest
gratitude cannot be adequately expressed. They have truly made us what we are
today. And finally to you, our shareholders, we thank you for having the
confidence in us, for staying with us, even when our industry was facing an
uncertain future.
We look to 1997 with great optimism; we embrace change. We are not looking
at next year as an end of an era, but a new beginning with new challenges and a
bright future.
Finally, enclosed with this annual report is Indiana Federal Corporation's
and Pinnacle's joint proxy statement-prospectus relating to the proposed merger.
It lays out the reasons for the merger and some background data. This is an
extremely important event, so please give it your careful attention.
/s/Donald A. Lesch
- ------------------
Donald A. Lesch
Chairman, C.E.O.
/s/Peter R. Candela
- -------------------
Peter R. Candela
President, C.O.O.
March 1997
Financial Highlights
December 31,
----------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994
---- ---- ----
Total assets ......................... $836,825 $721,333 $717,574
Net loans receivable ................. 621,584 522,693 512,171
Mortgage-backed securities ........... 43,281 26,737 29,241
Deposits ............................. 569,078 532,896 510,475
Shareholders' equity ................. 71,366 70,730 64,315
Equity to total assets ............... 8.5% 9.8% 9.0%
Net interest income .................. $ 25,000 $ 25,315 $ 21,208
Provision for loan losses ............ 1,115 177 179
Net income ........................... 4,623 7,304 7,262
Loans originated and purchased ....... 292,710 199,243 204,376
Interest spread during the year ...... 3.54% 3.69% 3.47%
Earnings per share ................... $ 0.96 $ 1.51 $ 1.50
Dividend per share ................... 0.82 0.86 0.72
Dividend yield ....................... 3.67% 4.05% 4.43%
Book value per share at end of year .. $ 14.97 $ 14.98 $ 13.81
Stock price per share at end of year . 22.375 21.25 16.25
Stock price/book value per share ..... 149% 142% 118%
Stock price/earnings per share ....... 23.3x 14.1x 10.8x
[GRAPHIC-GRAPHS OF FINANCIAL HIGHLIGHTS ABOVE]
Selected Financial Data
December 31,
-------------------------------------------------------------
(Dollars in thousands, except per share data) 1996 1995 1994 1993 1992
Selected Financial Condition Data:
Total assets .............................................. $ 836,825 $ 721,333 $ 717,574 $ 639,148 $ 602,377
Real estate loans (1-4 Family) ............................ 308,431 292,049 282,137 225,821 205,509
Agricultural loans ........................................ 11,511 12,940 10,323 -- --
Income-producing property loans ........................... 108,197 89,538 119,789 126,263 131,129
Consumer loans ............................................ 120,126 82,762 78,494 62,659 63,911
Commercial loans .......................................... 87,322 55,124 37,409 13,136 5,627
Mortgage-backed securities ................................ 43,281 26,737 29,241 40,956 93,252
Due from brokers for unsettled securities transactions .... -- -- -- 80,634 --
Investment & trading securities, interest-earning
deposits and federal funds .............................. 86,499 78,226 108,659 51,627 64,211
Deposits .................................................. 569,078 532,896 510,475 430,829 416,081
FHLB advances and other borrowings ........................ 192,800 114,105 138,243 140,159 121,299
Shareholders' equity ...................................... 71,366 70,730 64,315 63,090 59,816
Selected Operations Data:
Total interest income ..................................... $ 56,859 $ 55,170 $ 43,573 $ 46,744 $ 47,533
Total interest expense .................................... (31,859) (29,855) (22,365) (25,888) (27,588)
--------- --------- --------- --------- ---------
Net interest income ....................................... 25,000 25,315 21,208 20,856 19,945
Provision for loan losses ................................. (1,115) (177) (179) (1,097) (1,395)
Other income .............................................. 4,350 4,679 4,471 4,579 3,710
Other expense ............................................. (22,451) (20,195) (15,172) (13,678) (12,388)
Income tax expense ...................................... (1,161) (2,318) (3,066) (3,076) (3,891)
--------- --------- --------- --------- ---------
Net income before early extinguishment of debt and
the cumulative effect of a change in accounting principle 4,623 7,304 7,262 7,584 5,981
Early extinguishment of debt, net of income tax effect .... -- -- -- (429) --
Cumulative effect on prior years (to December 31, 1991)
of changing to a different method of accounting for
income taxes ............................................ -- -- -- -- 250
--------- --------- --------- --------- ---------
Net income ................................................ $ 4,623 $ 7,304 $ 7,262 $ 7,155 $ 6,231
========= ========= ========= ========= =========
Other Data:
Interest rate spread during period (1) 3.54% 3.69% 3.47% 3.25% 3.26%
Net interest margin (2) 3.61 3.78 3.70 3.48 3.65
Return on average assets (3) 0.84 1.00 1.19 1.13 1.08
Return on average equity (3) 8.91 10.74 11.28 11.57 10.78
Operating expenses to average assets (4) 2.59 2.77 2.49 2.15 2.16
Efficiency ratio (5) 65.88 67.31 60.26 55.19 53.50
Equity to assets 8.53 9.81 8.96 9.87 9.93
Non-performing assets to total assets 1.21 1.53 1.49 1.16 2.38
Reserve to non-performing loans 111.75 101.98 105.86 89.64 40.67
Net charge-off to loans receivable, net 0.05 0.06 0.02 0.03 0.05
Dividend payout ratio 85.42 56.95 48.00 36.55 31.50
Shares outstanding 4,768,531 4,720,946 4,656,935 4,658,832 4,727,600
Book value per share $ 14.97 $ 14.98 $ 13.81 $ 13.54 $ 12.65
Earnings per share $ 0.96 $ 1.51 $ 1.50 $ 1.45 $ 1.27
Dividends per share $ 0.82 $ 0.86 $ 0.72 $ 0.53 $ 0.40
Number of full-service offices 16 15 13 9 9
(1) The difference between the weighted-average yield earned on interest-earning
assets and the weighted-average rate paid on all interest-bearing liabilities.
(2) Net interest income divided by average interest-earning assets.
(3) Calculations for 1996 are before the one-time special SAIF assessment. After
the SAIF assessment of $1.7 million, net of tax, return on average assets was
0.61% and return on average equity was 6.51%.
(4) Calculation for 1996 excludes the one-time special SAIF assessment of $2.8
million.
(5) Other expenses divided by the sum of net interest income and other income,
net of non-recurring charges and securities gains and losses. Other expenses for
1996 excludes the one-time special SAIF assessment.
Management's Discussion and Analysis of
Financial Condition and Results of Operations
General
On November 30, 1988, Indiana Federal Corporation (the "Corporation") was
formed as the holding company for Indiana Federal Savings and Loan Association.
On September 28, 1992, Indiana Federal Savings and Loan Association changed its
name to Indiana Federal Bank for Savings ("Indiana Federal" or the "Bank"). On
December 12, 1994, the Corporation completed its acquisition of American Bancorp
Inc. ("ABI"), the parent company of American State Bank, with assets of
approximately $65.0 million and offices in North Judson, San Pierre and Knox,
Indiana. The Corporation completed its acquisition of NCB Corporation ("NCB") on
January 31, 1995. The acquisition of NCB added approximately $45.0 million in
assets and offices in Culver and Granger, Indiana. On November 14, 1996, Indiana
Federal Corporation announced a merger of equals with Pinnacle Financial
Services, Inc. ("PNFI") of St. Joseph, Michigan. The merger, which is subject to
regulatory and shareholder approval, is expected to be completed by mid-year
1997. This merger of equals will create a new bank franchise with 47 branch
locations in southwest Michigan and northwest Indiana with assets of
approximately $2.0 billion. The results of the Corporation are primarily those
of the Bank, IndFed Mortgage Company and IFB Investment Services, Inc., as its
principal wholly-owned subsidiaries.
Indiana Federal's net income is primarily dependent on its net interest
margin, which is the difference, or spread, between the average yield earned on
loans and investments, and the interest paid on deposits and other borrowed
money, and the relative amounts of such assets and liabilities. The provision
for loan losses, commissions and fee income, gains on sale of loans, operating
expenses and income taxes also have a significant impact on earnings.
Critical to the Bank's performance is the business of managing and
controlling the inherent credit, prepayment, interest rate, liquidity and
capital risks associated with its operations, through an effective asset and
liability management program in order to maximize both its net interest margin
and return to shareholders.
Earnings Performance
Indiana Federal Corporation reported net income of $4.6 million or $0.96
per share for the year ended December 31, 1996, compared to $7.3 million or
$1.51 per share for the same period a year ago. Net income for the year ended
December 31, 1994 was $7.3 million or $1.50 per share. Net income for the year
ended December 31, 1996 was substantially impacted by a non-recurring pre-tax
charge of $2.8 million resulting from legislation signed into law on September
30, 1996 to recapitalize the Federal Deposit Insurance Corporation's ("FDIC")
Savings Association Insurance Fund ("SAIF"). This one-time special assessment
reduced 1996 after tax earnings by $1.7 million or $0.36 per share. Provision
for loan losses increased by $938,000 due to the significant loan growth of
$99.7 million during 1996. Also impacting 1996 earnings were write-downs on real
estate owned totaling $495,000 in order to facilitate the sale of the Bank's
only two real estate owned properties. Return on average assets was .84 percent
for 1996, compared to 1.00 percent for 1995 and 1.19 percent for 1994. Return on
average shareholders' equity was 8.91 percent for 1996 compared to 10.74 percent
for 1995 and 11.28 percent for 1994.
Return on average assets and return on average shareholders' equity for
1996 were calculated prior to the one-time SAIF assessment. After the one-time
special SAIF assessment for 1996, return on average assets and return on average
shareholders' equity were .61 percent and 6.51 percent, respectively. The
Corporation paid cash dividends in 1996 totaling $0.82 per share compared to
$0.86 per share in 1995 and $0.72 per share in 1994.
Net Interest Income
Net interest income is determined by the amounts of interest-earning assets
and interest-bearing liabilities, and by the spread between rates earned and
paid on those amounts. Net interest income for 1996 declined slightly to $25.0
million from $25.3 million for the same period last year. In 1994, net interest
income was $21.2 million. The $315,000 decrease in net interest income during
1996 resulted from a decline of 3 basis points in the yield on interest-earning
assets and an increase in the cost of average interest-bearing liabilities of 12
basis points. This 15 basis point decline in interest rate spread resulted in a
$1.1 million decrease in net interest income, which was partially offset by an
increase of $806,000 in net interest income, due to the $23.0 million increase
in average interest-earning assets and the $26.0 million increase in average
interest-bearing liabilities. The increase in net interest income in 1995 of
$4.1 million when compared to 1994, was primarily attributable to higher volumes
of interest-earning assets and interest-bearing liabilities that resulted from
the acquisition of ABI and NCB. The average balance of interest-earning assets
increased by $96.8 million during 1995 when compared to 1994, while the average
balance of interest-bearing liabilities increased by $114.9 million. In 1994,
management chose to purchase $50.0 million of two-year and $4.0 million of
ten-year U.S. Treasury Notes, which were funded with short-term reverse
repurchase agreements. During the first quarter of 1995, the $50.0 million of
two-year U.S. Treasury Notes were sold, which resulted in a loss on sale of
investment securities of $384,000.
The Bank's net interest margin (net interest income divided by average
interest-earning assets) decreased to 3.61 percent during 1996 as compared to
3.78 percent in 1995 and 3.70 percent in 1994. The decrease in the net interest
margin was primarily due to the 15 basis point decline in the interest rate
spread for 1996 as compared to 1995, which was partially offset by an increase
in interest-earning assets of $23 million. The increase in the Bank's interest
rate spread for 1995 was in part the result of the acquisition of ABI and NCB,
which added higher yielding commercial loans and lower costing checking
accounts.
During 1996, 1995 and 1994, interest-earning assets exceeded
interest-bearing liabilities by $10.7 million, $13.6 million and $31.6 million,
respectively. The decline in 1996 of the Bank's excess of net interest-earning
assets to interest-bearing liabilities was primarily the result of funding an
additional $1.8 million investment in single premium life insurance policies and
a $2.5 million investment in Forrest Holdings, Inc. The decline in 1995 was
primarily the result of funding the acquisitions of ABI and NCB.
The following table provides average balances, net interest income, the
yields on interest-earning assets and costs of interest-bearing liabilities,
interest rate spreads and net interest margin for the last three years. The
average balances are based on historic costs while the yield information does
not give effect to fair value changes.
Average Balances - Net Interest Income - Average Rates
1996 1995 1994
Interest Interest Interest
Average Income/ Average Average Income/ Average Average Income/ Average
(Dollars in thousands) Balance Expense Yield/Rate Balance Expense Yield/Rate Balance Expense Yield/Rate
- ---------------------- ------- ------------------ ------- ------------------ ------- ------------------
Interest-earning assets:
Loans receivable $ 573,795 $ 48,913 8.52% $549,033 $46,895 8.54% $435,281 $ 35,298 8.11%
Mortgage-backed securities 33,796 2,381 7.05% 27,314 1,918 7.02% 36,934 2,414 6.54%
Investment securities 85,351 5,565 6.52% 93,574 6,357 6.79% 100,883 5,861 5.81%
-------------------------------------------------------------------------------------------
Total earning assets 692,942 56,859 8.21% 669,921 55,170 8.24% 573,098 43,573 7.60%
Other assets 63,987 60,108 36,758
-------------------------------------------------------------------------------------------
Total assets $ 756,929 $730,029 $609,856
===========================================================================================
Interest-bearing liabilities:
Deposits $ 553,739 24,438 4.41% $532,884 22,423 4.21% $433,906 16,479 3.80%
FHLB advances and
other borrowings 128,551 7,421 5.77% 123,431 7,432 6.02% 107,552 5,886 5.47%
-------------------------------------------------------------------------------------------
Total interest-bearing
liabilities 682,290 31,859 4.67% 656,315 29,855 4.55% 541,458 22,365 4.13%
Other liabilities 3,591 5,696 4,041
-------------------------------------------------------------------------------------------
Total liabilities 685,881 662,011 545,499
Shareholders' equity 71,048 68,018 64,357
-------------------------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 756,929 $730,029 $609,856
===========================================================================================
Interest rate spread 3.54% 3.69% 3.47%
Excess interest-earning assets $ 10,652 $ 13,606 $ 31,640
Net interest income/margin $ 25,000 3.61% $25,315 3.78% $ 21,208 3.70%
===========================================================================================
Rate / Volume Analysis
The following table presents for the periods indicated, the changes in
interest income, and the changes in interest expense attributable to the changes
in interest rates and the changes in the volume of interest-earning assets and
interest-bearing liabilities. The change attributable to both volume and rate
has been allocated proportionately to the changes due to volume and rate.
Year ended December 31,
1996 vs. 1995 1995 vs. 1994
------------------------------------------------------------------------------------
Increase Increase Increase Increase
(Decrease) (Decrease) Total (Decrease) (Decrease) Total
Due To Due To Increase Due To Due To Increase
(Dollars in thousands) Volume Rate (Decrease) Volume Rate (Decrease)
--------- ---------- --------- --------- ---------- ----------
Interest Income
Attributable to:
Loans receivable ....................... $ 2,111 $ (93) $ 2,018 $ 9,636 $ 1,961 $ 11,597
Mortgage-backed securities ............. 455 8 463 (664) 168 (496)
Investment securities ............... (546) (246) (792) (16) 512 496
----------------------------------------------------------------------------------
Total interest-earning assets .......... $ 2,020 $ (331) $ 1,689 $ 8,956 $ 2,641 $ 11,597
==================================================================================
Interest Expense
Attributable to:
Deposits ............................... $ 911 $ 1,104 $ 2,015 $ 4,042 $ 1,902 $ 5,944
FHLB advances
and other borrowings ................. 303 (314) (11) 919 627 1,546
-----------------------------------------------------------------------------------
Total interest-bearing
liabilities ...................... $ 1,214 $ 790 $ 2,004 $ 4,961 $ 2,529 $ 7,490
==================================================================================
Increase (decrease) in net
interest income ........................ $ (315) $ 4,107
==================================================================================
Provision for Loan Losses
The provision for loan losses, which is charged to current earnings, is
based on management's ongoing review of the loan portfolio. Factors that are
considered in determining the provision for loan losses include: past loan loss
experience, the ability of the borrower to repay the loan, the estimated value
of the loan collateral, economic conditions, changes in the loan mix, growth in
the loan portfolio and other factors and estimates that are subject to changes
over time.
The provision for loan losses was $1.1 million in 1996 compared to $177,000
in 1995. In 1994, the provision for loan losses totaled $179,000. Provision for
loan losses increased in 1996 when compared to 1995 and 1994, primarily due to
the significant increase in loans receivable of $99.7 million during 1996.
Provision for loan losses in 1995 and 1994 were approximately the same due to
slower growth in net loans receivable and management's decision that reserve
levels were adequate. The allowance for loan losses was $7.5 million or 1.20
percent of net loans receivable at December 31, 1996 compared to $6.7 million or
1.27 percent at year end 1995. At December 31, 1994, allowance for loan losses
was $6.1 million or 1.19 percent of net loans receivable. The allowance for loan
losses increased $803,000 in 1996 due to the $99.7 million increase in net loans
receivable during the year. Included in allowance for loan losses at December
31, 1995 was $757,000 of reserves that the Bank assumed with the purchase of
NCB. Net loan charge-offs for 1996 decreased to $312,000 from $379,000 in 1995.
In 1994, net loan charge-offs were $89,000. The increase in net loan charge-offs
in 1995 was primarily in consumer loans, which had net charge-offs totaling
$405,000 in 1995 compared to $152,000 in 1994.
Based on available information, management believes that the allowance for
loan losses is adequate to absorb potential losses in the portfolio, however,
future additions to the allowance may be necessary based on changes in economic
conditions. In addition, various regulatory agencies periodically review the
allowance for loan losses. These agencies may require that additions be made to
the allowance for loan losses based upon their judgment of information available
to them at the time of their examinations.
Non-performing assets (which include non-accrual loans, accruing loans
delinquent 90 days or more, restructured loans and real estate owned) decreased
to $10.1 million or 1.21 percent of total assets at December 31, 1996 from $11.0
million or 1.53 percent of total assets at December 31, 1995. Non-performing
assets were $10.7 million or 1.49 percent of total assets at December 31, 1994.
Included in non-performing assets at December 31, 1996 was a student housing
complex in Gainesville, Florida with a book value of $2.3 million. The Bank
acquired the property in June of 1994. During 1996, an additional write-down of
$325,000 was necessary in order to facilitate the sale of the property. In
February 1997, the Bank sold the property for $2.3 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 percent. In addition, in February
1995, the Bank acquired a shopping center in Sturgis, Michigan with a book
balance of $1.0 million at December 31, 1996. During 1996, an additional
write-down of $173,000 was necessary in order to facilitate the sale of the
property. In February 1997, the Bank sold the property for $1.0 million and did
not provide the purchaser with the financing for the sale. Also included in the
non-performing asset portfolio at December 31, 1996 were two apartment
properties that were classified as non-accruing loans. These properties are both
located in Indianapolis, Indiana with a combined book balance of $2.4 million at
December 31, 1996. During 1996, the Bank increased the allowance for loan losses
on these two properties by $175,000. 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. Management continuously
reviews these properties to determine their appropriate carrying value.
Other Income
Other income consists primarily of commissions earned on the sale of
insurance and securities products to retail customers, trust and private banking
fees, loan servicing fees, deposit products service fees and gains and losses on
the sale of assets.
Other income decreased to $4.4 million for the year ended December 31, 1996
from $4.7 million in 1995 and $4.5 million in 1994. When excluding the
non-recurring gains and losses on the sale of assets, other income increased in
1996 to $5.3 million from $4.7 million for 1995 and $4.0 million for 1994.
Non-recurring items in 1996 included a net loss of $918,000, including a loss on
the sale of real estate owned of $495,000 and the loss on the sale of mortgage
loans of $478,000 compared to a net loss of $71,000 in 1995 which resulted from
a loss on the sale of real estate owned of $450,000, a loss on the sale of
mortgage loans of $61,000 offset by a gain on the sale of securities of
$440,000. Non-recurring items in 1994 totaled a net gain of $479,000 primarily
from a gain of $400,000 on the sale of mortgage servicing.
At December 31, 1996, the Bank had $2.0 million in conventional one- to
four-family fixed-rate mortgage loans held for sale, which were recorded at the
lower of cost or market. At December 31, 1996, the market value of the loans
held for sale exceeded the book value. In 1996, the Bank recorded net losses on
the sale of mortgage loans totaling $478,000 compared to a net loss of $61,000
recorded for 1995 and a net loss of $25,000 in 1994.
Other Expenses
Other expenses in 1996 increased to $22.5 million from $20.2 million in
1995. Included in the 1996 other expenses was the $2.8 million one-time special
SAIF assessment. When excluding this non-recurring item, other expenses in 1996
decreased to $19.6 million from $20.2 million in 1995. The decrease in other
expenses in 1996, after the non-recurring item, resulted primarily from a
$131,000 decrease in salaries and employee benefits and a $263,000 reduction in
FDIC expenses.
Other expenses in 1995 increased to $20.2 million from $15.2 million in
1994. This 33 percent increase in expenses was due primarily to the acquisition
of ABI and NCB which added four full-service banking centers and approximately
50 full-time employees. As a result of the added banking centers and employees,
salaries and employee benefits and other expenses related to banking operations
increased. In addition, amortization related to the acquisitions totaled
$608,000 for the year ended December 31, 1995.
Income Taxes
In 1996, the total provision for state and federal income taxes was $1.2
million, for an effective tax rate of 20.1 percent, compared to $2.3 million in
1995, for an effective tax rate of 24.1 percent. In 1994, the total provision
for state and federal income tax was $3.1 million, for an effective tax rate of
29.7 percent. The relatively low effective tax rate for the last three years was
the result of increasing tax credits received for investments in low and
moderate income housing by the Corporation's subsidiary, IndFed Mortgage
Company. These tax credits totaled $1.2 million in 1996 compared to $1.2 million
in 1995 and $829,000 in 1994. The effective tax rate in 1996 was impacted by the
effect of credits on pre-tax income that had been reduced due to the $2.8
million one-time special SAIF assessment. The equity investment in low and
moderate income housing totaled $6.5 million at December 31, 1996 compared to
$6.7 million at December 31, 1995 and $5.2 million at December 31, 1994.
Asset/Liability Management
Financial institutions are subject to interest rate risks to the degree
that interest-bearing liabilities reprice or mature more frequently or on a
different basis than interest-earning assets. The Bank's main objective in asset
and liability management is to closely match the interest rate sensitivity of
its assets and liabilities in order to maintain stable interest income in an
environment of changing interest rates.
Management has established an interest rate risk management program to
increase its investment in loans and securities that tend to be more interest
rate sensitive and to lengthen the effective maturity of its liabilities. As
part of this program, the Bank seeks to: (i) consistently originate residential
adjustable-rate mortgage loans for portfolio; (ii) originate, for portfolio,
adjustable-rate income-producing property loans; (iii) sell a majority of its
current originations of fixed-rate long-term mortgage loans in the secondary
market while retaining the servicing on these loans; (iv) originate prime-based
floating-rate commercial loans; (v) originate higher yielding and shorter term
consumer loans; (vi) purchase shorter term mortgage-backed securities; (vii)
maintain significant early withdrawal penalties on deposits to protect the
deposit maturity and cost structure; and (viii) utilize Federal Home Loan Bank
advances to fund loans of equivalent terms and maturities and to lengthen the
maturities of the Bank's liabilities.
The Bank's interest rate risk decreased during 1996. Indiana Federal's
one-year gap (a measure of exposure to interest rate risk, defined as the ratio
of the difference between interest-sensitive assets and liabilities maturing or
repricing within the next year to total assets) was -8.0 percent at year end
1996. This one year gap compares with gaps of -12.4 percent and -21.3 percent
for the years ended 1995 and 1994, respectively. The decrease in interest rate
risk during 1996 resulted from an increase in short term and adjustable rate
commercial loans, and an increase in longer term certificates of deposit.
Management also reduced the percentage of non-maturity deposits assumed to
reprice within one year. Excluding this change in assumption, the gap at year
end 1996 would have been -11.0 percent. Other factors that affected the Bank's
gap in 1996 include the purchase of $30.0 million of fixed-rate, ten-year home
equity loans, and the purchase of $25.0 million in fixed-rate investment
securities. These assets were funded primarily with short-term borrowings.
Because of the Bank's negative interest rate gap position, an increasing
interest rate environment may have an adverse effect on the Bank's net interest
income. Conversely, a declining interest rate environment may have a positive
effect on the Bank's net interest income.
Maturity and Rate Sensitivity Analysis
The following table sets forth, at December 31, 1996, the Bank's interest
rate sensitive asset and liability position and associated weighted-average
yields and costs. Mortgage loans, mortgage-backed securities, commercial loans
and consumer loans are shown on the basis of contractual amortization and are
assumed to prepay based on forecasts made by major Wall Street mortgage security
dealer firms, and also based on the Bank's historical information. Loans and
investments are determined to reprice at the earlier of maturity, the first date
on which a security may be put at par or the next contractual repricing date.
The volumes of savings, NOW and MMDA accounts which management assumes will
reprice within the first year at 15 percent, 39 percent and 78 percent,
respectively. While the estimated prepayment rates utilized are based on the
best information available to the Bank, there can be no assurance that the
assets and liabilities will have the projected maturities used in developing
this table. The table does not include redeployment of funds from contractual
amortization.
One Year Three
Three Three Six Months To Years Greater
Months Months To To Three To Than
(Dollars in Thousands) or Less Six Months One Year Years Five Years Five Years Total
-------------------------------------------------------------------------------------------------------
Amount Amount Amount Amount Amount Amount Amount Rate
-------------------------------------------------------------------------------------------------------
Mortgage loans ............. 74,264 $ 58,371 $ 92,153 $ 99,158 $ 62,052 $ 42,140 $ 428,138 8.03%
Mortgage-backed
securities .............. 9,696 3,928 6,989 11,939 5,580 5,149 43,281 7.02%
Commercial loans ........... 39,907 11,838 11,725 15,070 4,179 4,603 87,322 9.22%
Consumer loans ............. 26,531 11,554 19,089 41,532 15,785 5,635 120,126 10.07%
Investments ................ 30,595 2,197 5,395 9,711 12,545 25,990 86,433 6.51%
Loans held for sale ........ 1,970 -- -- -- -- -- 1,970 7.97%
------- --------- --------- --------- --------- --------- --------- -----
Interest-sensitive assets .. 182,963 $ 87,888 $ 135,351 $ 177,410 $ 100,141 $ 83,517 $ 767,270 8.26%
======= ========= ========= ========= ========= ========= ========= ====
Deposits ................... 129,409 $ 72,233 $ 106,583 $ 135,954 $ 8,051 $ 116,848 $ 569,078 4.47%
Borrowings ................. 145,879 8,309 10,447 27,771 127 267 192,800 6.08%
------- --------- --------- --------- --------- --------- --------- -----
Interest-sensitive
liabilities ............. 275,288 $ 80,542 $ 117,030 $ 163,725 $ 8,178 $ 117,115 $ 761,878 4.88%
======= ========= ========= ========= ========= ========= ========= ====
Interest-sensitive
gap ..................... (92,325) $ 7,346 $ 18,321 $ 13,685 $ 91,963 $ (33,598) $ 5,392 3.38%
======= ========= ========= ========= ========= ========= ========= ====
Cumulative gap ............. (92,325) $ (84,979) $ (66,658) $ (52,973) $ 38,990 $ 5,392
======= ========= ========= ========= ========= ========= ========= ====
Assets/liabilities ......... 0.66 1.09 1.16 1.08 12.25 0.71 1.01
======= ========= ========= ========= ========= ========= ========= ====
% Cumulative gap to
total assets ............ (11.03)% (10.15)% (7.97)% (6.33)% 4.66% 0.64%
======= ========= ========= ========= ========= ========= ========= ====
Financial Condition
Capital Resources
At December 31, 1996, shareholders' equity was $71.4 million or 8.5 percent
of total assets. Shareholders' equity was $70.7 million or 9.8 percent of total
assets at year end 1995, and $64.3 million or 9.0 percent of total assets at
year end 1994. At December 31, 1996, the Corporation had acquired a total of
1,109,999 shares of its outstanding common shares from its previously announced
share repurchase plans. Of that total, 6,999 shares were repurchased during
1996. Indiana Federal's regulatory capital has significantly exceeded all three
of the regulatory capital requirements for each of the last five years. The
Bank's capital also exceeds the fully phased-in capital requirements of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989. See Note I
of Notes to Consolidated Financial Statements.
Liquidity
The standard measure of liquidity for the thrift industry is the ratio of
cash and eligible investments to the sum of net withdrawable savings and
borrowings due within one year. The liquidity requirement is currently 5
percent, but it may vary from time to time depending on economic conditions and
deposit flows. At December 31, 1996, the Bank's liquidity was 6.59 percent
compared to 6.88 percent at year end 1995 and 6.52 percent at year end 1994.
Changes in the liquidity position result from the Bank's operating, investing
and financing activities.
The Bank's primary investment activities include loan disbursements, loan
repayments and purchases and sales of loans and marketable securities. In 1996,
investing activities used $124.4 million of cash, compared to 1995 where $67.2
million was provided. In 1994, investing activities used $13.3 million of cash.
Loans originated and purchased totaled $292.7 million in 1996 compared to $199.2
million in 1995 and $204.4 million in 1994. Principal repayments totaled $155.2
million in 1996 compared to $185.9 million in 1995 and $126.2 million in 1994.
During 1996, the Bank sold $41.3 million of loans compared to $32.4 million in
1995 and $30.1 million in 1994. The loans sold, pursuant to management's
asset/liability strategy, were one- to four-family, fifteen and thirty year
fixed-rate mortgages.
The Bank's primary financing activity is the sale of certificates and
non-certificate of deposit products to consumers in its local market. In 1996,
deposit accounts experienced a net increase of $35.9 million compared to a net
decrease of $19.0 million in 1995 and a net increase of $16.0 million in 1994.
Deposit account sales in 1996 increased significantly due to the Bank's
aggressive pricing for one and two year certificate of deposits, in order to
lengthen the maturities of the Bank's liabilities. Deposit account sales in 1995
and 1994 were adversely affected by depositors seeking alternative investments
with higher yields. The Bank also utilized advances from the Federal Home Loan
Bank ("FHLB") to match fund income property loans, loan growth and investment
leveraging strategies. The Bank increased FHLB advances by $59.1 million in 1996
compared to $24.3 million in 1995 and a reduction of $55.8 million in 1994.
During 1996, the Bank used FHLB advances to purchase $30.0 million in fixed-rate
home equity loans and to fund a $25.0 million leveraging strategy in fixed-rate
investment securities. From time to time, the Bank also uses short-term reverse
repurchase agreements to fund growth in its loan and investment portfolios. At
December 31, 1996, the Bank had $9.1 million of short-term reverse repurchase
agreements compared to $9.4 million at year end 1995 and $51.8 million at year
end 1994. The Bank will also purchase federal funds from time to time in order
to meet short-term cash needs. At December 31, 1996, the Bank had $20.0 million
in federal funds purchased compared to no federal funds purchased at year end
1995.
At December 31, 1996, the Bank had normal recurring commitments to
originate and purchase loans of approximately $28.9 million, which are expected
to be funded during the first quarter of 1997. Loan repayments, deposits and
borrowings are considered to be sufficient to fund all outstanding commitments
and to provide desired levels of liquidity.
The Corporation conducts its business through its subsidiary, Indiana
Federal Bank for Savings. Dividends from this subsidiary are the Corporation's
main source of funds. The OTS capital distribution regulations enacted in August
1990 restrict the Bank's cash dividend payments or other capital distributions
of the Bank's shares. Indiana Federal is permitted by these regulations to make
capital distributions during the calendar year up to 100 percent of its net
income to date during the calendar year, plus the amount that would reduce by
one-half the Bank's surplus capital ratio at the beginning of the year. The term
"surplus capital ratio" means the percentage by which the Bank's
capital-to-assets ratio exceeds the ratio of its fully phased-in capital
requirements to assets.
Indiana Federal's current dividend policy is well below the limits
established by these regulations. The capital distribution limits could become
more restrictive if the Bank suffered substantial losses or failed to meet its
fully phased-in capital requirements. In 1996, the Corporation received $9.5
million in dividends from the Bank compared to $14.8 million in 1995, which
included $8.1 million related to the purchase of NCB.
Impact of Inflation and Changing Prices
The Consolidated Financial Statements of the Corporation, the Notes
thereto, and related data have been prepared in accordance with generally
accepted accounting principles, which require measurement of financial position
and operating results in terms of historical dollars without considering changes
in the relative purchasing power of money over time due to inflation. Unlike
most industrial companies, virtually all of the assets and liabilities of a
financial institution are monetary in nature. As a result, interest rates have a
more significant impact on the financial institution's performance than the
effects of general levels of inflation. Interest rates do not necessarily move
in the same direction or magnitude as the prices of goods and services.
Stock Data
The Corporation's common stock is traded on the over-the-counter ("OTC")
market and is listed on the Nasdaq National Market System under the symbol IFSL.
At December 31, 1996, the Corporation had approximately 1,600 shareholders of
record (not including the number of persons or entities holding stock in
nominees or street name through various brokerage firms) and 4,768,531
outstanding shares of common stock.
The following table sets forth the range of the high and low closing prices
per share of the common stock reported by Nasdaq System. Such information
reflects inter-dealer prices, without retail mark-up, mark-down or commission,
and may not represent actual transactions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Financial Condition
- -- Liquidity" and Note I of the Notes to Consolidated Financial Statements for
restrictions on dividend payments. See Note L of the Notes to Consolidated
Financial Statements for the Corporation's quarterly dividend payments to
shareholders.
1996 1995 1994
- ---------------------------------------------------------------
High Low High Low High Low
First Quarter $21.50 $18.50 $18.00 $15.50 $17.17 $14.17
Second Quarter 21.50 16.25 17.75 16.00 17.00 14.67
Third Quarter 21.00 18.25 18.75 16.50 17.50 15.00
Fourth Quarter 23.00 19.50 21.25 17.75 17.00 14.88
Forward-Looking Statements
Certain statements in this Annual Report to Stockholders that relate to
Indiana Federal Corporation's plans, objectives or future performance may be
deemed to be forward-looking statements within the meaning of the Private
Securities Litigation Reform Act of 1995. Such statements are based on
Management's current expectations. Actual strategies and results in future
periods may differ materially from those currently expected because of various
risks and uncertainties. Additional discussion of factors affecting Indiana
Federal's business and prospects is contained in the Corporation's periodic
filings with the Securities and Exchange Commission.
Report of Ernst & Young LLP, Independent Auditors
Shareholders and Board of Directors
Indiana Federal Corporation
We have audited the accompanying consolidated statements of condition of Indiana
Federal Corporation and subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the three years in the period ended December 31, 1996. These
financial statements are the responsibility of the Corporation's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Indiana Federal
Corporation and subsidiaries at December 31, 1996 and 1995, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1996, in conformity with generally accepted
accounting principles.
As discussed in Note A to the consolidated financial statements, in 1994, the
Corporation changed its method of accounting for investments and mortgage-backed
securities.
/s/Ernst & Young LLP
- --------------------
Ernst & Young LLP
Chicago, Illinois
February 28, 1997
Consolidated Statements of Condition
Indiana Federal Corporation and Subsidiaries
December 31,
------------------------------
Assets 1996 1995
------------- -------------
Cash and cash equivalents:
Cash ............................................... $ 25,820,066 $ 22,894,745
Interest-bearing deposits in other institutions .... 66,473 178,207
Federal funds loaned ............................... -- 5,375,000
------------- -------------
Total cash and cash equivalents .................. 25,886,539 28,447,952
Investment securities available-for-sale (Note C) .... 86,432,613 72,672,893
Mortgage-backed securities available-for-sale (Note C) 43,281,163 26,737,343
Loans receivable, net (Note D) ....................... 621,583,734 522,692,957
Loans held for sale ................................... 1,969,697 16,044,609
Real estate held for sale, acquired through foreclosure 3,308,412 4,413,617
Office properties and equipment (Note E) ............. 10,476,611 10,919,615
Federal Home Loan Bank stock (Note G) ................ 8,173,300 7,739,700
Accrued interest receivable ........................... 5,558,283 5,005,115
Other assets .......................................... 30,154,326 26,659,289
------------- -------------
Total assets ..................................... $ 836,824,678 $ 721,333,090
============= =============
Liabilities and Shareholders' Equity
Deposits (Note F) .................................... $ 569,077,995 $ 532,895,925
Federal Home Loan Bank advances and other
borrowings (Note G) ............................... 192,799,821 114,105,475
Advance payments by borrowers for taxes and
insurance .......................................... 1,175,407 1,409,051
Other liabilities ..................................... 2,405,175 2,192,463
------------- -------------
Total liabilities ................................ 765,458,398 650,602,914
Shareholders' equity: (Note I)
Serial Preferred Stock, par value $.01 per share;
authorized: 5,000,000 shares; issued: none ...... -- --
Common Stock, par value $.01 per share;
authorized: 10,000,000 shares; issued:
1996-- 5,878,530 shares; 1995-- 5,823,946 shares . 58,785 58,239
Additional paid-in capital ......................... 27,729,839 27,428,077
Retained earnings .................................. 52,174,772 51,443,400
Treasury Stock, at cost:
1996-- 1,109,999 shares; 1995-- 1,103,000 shares . (8,754,075) (8,628,949)
Unrealized gains on available-for-sale
securities, net of tax ........................... 360,055 779,343
Guaranteed ESOP obligation (Note K) ............... (203,096) (349,934)
------------- -------------
Total shareholders' equity ....................... 71,366,280 70,730,176
------------- -------------
Total liabilities and shareholders' equity ....... $ 836,824,678 $ 721,333,090
============= =============
See notes to consolidated financial statements.
Consolidated Statements of Income
Indiana Federal Corporation and Subsidiaries
Year Ended December 31,
------------------------------------------------
1996 1995 1994
------------------------------------------------
Interest Income
Interest on loans .............................. $ 48,912,728 $ 35,298,055 $ 46,895,003
Interest and dividends on investment securities 5,565,122 6,356,988 5,861,053
Interest on mortgage-backed securities ......... 2,381,331 1,918,224 2,414,080
------------ ------------ ------------
Total interest income ........................ 56,859,181 55,170,215 43,573,188
Interest Expense
Interest on deposits (Note F) ................. 24,438,454 22,423,077 16,479,561
Interest on FHLB advances and other borrowings . 7,421,227 7,432,380 5,885,818
------------ ------------ ------------
Total interest expense ....................... 31,859,681 29,855,457 22,365,379
------------ ------------ ------------
Net interest income .......................... 24,999,500 25,314,758 21,207,809
Provision for Loan Losses ......................... 1,115,000 176,967 178,822
------------ ------------ ------------
Net interest income after
provision for loan losses .................... 23,884,500 25,137,791 21,028,987
Other Income
Commissions on sales of insurance and securities 1,654,691 1,137,694 1,099,411
Net gains (losses) on real estate owned ........ (495,244) (449,920) 33,789
Loss on sale of mortgage loans ................. (477,510) (60,673) (25,012)
Net gain on sale of securities ................. 55,059 439,715 69,991
Gain on sale of mortgage loan servicing ........ -- -- 400,378
Customer service fees .......................... 1,690,532 1,612,093 1,073,594
Other .......................................... 1,922,560 2,000,253 1,819,131
------------ ------------ ------------
Total other income ........................... 4,350,088 4,679,162 4,471,282
Consolidated Statements of Income
Indiana Federal Corporation and Subsidiaries
(continued)
Year Ended December 31,
------------------------------------------------
1996 1995 1994
------------------------------------------------
Other Expenses
Salaries and employee benefits ................. 8,823,947 8,955,214 7,407,078
Net occupancy expense .......................... 1,798,254 1,790,539 1,414,343
Furniture and equipment expense ................ 1,637,560 1,659,723 1,090,438
Federal insurance premiums ..................... 886,931 1,149,561 995,013
SAIF special assessment ........................ 2,825,551 -- --
Marketing ...................................... 638,036 691,695 648,695
Other general and administrative expenses ...... 5,841,084 5,948,070 3,616,070
------------ ------------ ------------
Total other expenses ....................... 22,451,363 20,194,802 15,171,637
Income before income taxes ................... 5,783,225 9,622,151 10,328,632
------------ ------------ ------------
Income tax expense (Note H) ....................... 1,160,700 2,317,861 3,066,357
------------ ------------ ------------
Net income ................................. $ 4,622,525 $ 7,304,290 $ 7,262,275
============ ============ ============
Earnings per share ................................ $ 0.96 $ 1.51 $ 1.50
============ ============ ============
See notes to consolidated financial statements.
Consolidated Statements of Shareholders' Equity
Indiana Federal Corporation and Subsidiaries
Unrealized
Gains (Losses) on
Additional Guaranteed Available-
Common Paid-in Retained Treasury ESOP For-Sale
Stock Capital Earnings Stock Obligation Securities Total
----- ------- -------- ----- ---------- ---------- -----
Balance at December 31, 1993 $56,400 $25,956,460 $44,297,680 ($6,694,344) ($526,418) $ -- $63,089,778
------------------------------------------------------------------------------------
Adjustment at January 1, 1994 for unrealized
gains (losses) on available-for-sale
securities, net of taxes 363,216 363,216
Change in unrealized gains (losses) on
available-for-sale securities, net of taxes (2,434,855) (2,434,855)
Issuance of 95,456 shares of common
stock upon exercise of stock options 955 842,101 843,056
Cash paid in lieu of fractional shares (4) (5,876) (5,880)
Net income for 1994 7,262,275 7,262,275
Payments made on guaranteed ESOP
obligation 116,484 116,484
Purchase of 97,000 shares of outstanding
common stock (1,534,421) (1,534,421)
Common stock dividends-- $.72 per share (3,384,815) (3,384,815)
------------------------------------------------------------------------------------
Balance at December 31, 1994 $57,351 $26,792,685 $48,175,140 ($8,228,765) ($409,934) ($2,071,639) $64,314,838
------------------------------------------------------------------------------------
Change in unrealized gains (losses) on
available-for-sale securities, net of taxes 2,850,982 2,850,982
Issuance of 88,810 shares of common
stock upon exercise of stock options 888 635,392 636,280
Net income for 1995 7,304,290 7,304,290
Payments made on guaranteed ESOP
obligation 60,000 60,000
Purchase of 24,799 shares of outstanding
common stock (400,184) (400,184)
Common stock dividends-- $.86 per share (4,036,030) (4,036,030)
------------------------------------------------------------------------------------
Balance at December 31, 1995 $58,239 $27,428,077 $51,443,400 ($8,628,949) ($349,934) $779,343 $70,730,176
------------------------------------------------------------------------------------
Change in unrealized gains (losses) on
available-for-sale securities, net of taxes (419,288) (419,288)
Issuance of 54,584 shares of common
stock upon exercise of stock options 546 301,762 302,308
Net income for 1996 4,622,525 4,622,525
Payments made on guaranteed ESOP
obligation 146,838 146,838
Purchase of 6,999 shares of outstanding
common stock (125,126) (125,126)
Common stock dividends-- $.82 per share (3,891,153) (3,891,153)
------------------------------------------------------------------------------------
Balance at December 31, 1996 $58,785 $27,729,839 $52,174,772 ($8,754,075)($203,096) $360,055 $71,366,280
===================================================================================
See notes to consolidated financial statements.
Consolidated Statements of Cash Flows
Indiana Federal Corporation and Subsidiaries
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994
-------------------------------------------------------
Operating Activities
Net income ....................................................... $ 4,622,525 $ 7,304,290 $ 7,262,275
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses ...................................... 1,115,000 176,967 178,822
Originations of loans held for sale ............................ (37,525,140) (47,354,734) (24,227,376)
Proceeds from loans sold ....................................... 41,342,511 32,407,338 30,121,564
Provision for depreciation and amortization .................... 2,150,799 2,261,164 1,140,591
Amortization of premiums and discounts, net .................... 10,602 (181,030) 186,461
Proceeds from sales of trading securities ...................... 10,154,220 1,974,760 13,610,921
Purchases of trading securities ................................ (10,170,626) (1,975,624) (13,553,200)
Deferred federal income taxes .................................. (944,813) (66,155) 689,204
(Increase) decrease in interest receivable on loans ............ (553,168) 405,905 (211,451)
Increase (decrease) in interest payable ........................ 358,092 330,711 (154,410)
Net gain on sale of securities ................................. (55,059) (439,715) (69,991)
Net losses (gains) on real estate owned ........................ 495,244 449,920 (33,789)
Net losses on sale of mortgage loans ........................... 477,510 60,673 25,012
Net change in other assets and liabilities ..................... (413,276) (4,979,302) (2,386,942)
------------- ------------- -------------
Net cash provided (used) by operating activities ............. 11,064,421 (9,624,832) 12,577,691
------------- ------------- -------------
Investing Activities
Available-for-sale investment securities:
Purchases ...................................................... (42,858,328) (28,542,626) (140,912,453)
Proceeds from settlement of sales ................................... 6,571,875 71,283,634 6,825,156
Proceeds from maturities ............................................ 8,928,946 2,500,000 80,470,222
Proceeds from principal payments .................................... 12,929,767 2,323,710 --
Held-to-maturity investment securities:
Principal payments ............................................. -- 1,879,652 --
Proceeds from maturities ............................................ -- 4,435,000 3,668,076
Available-for-sale mortgage-backed securities:
Purchases ...................................................... (11,792,294) -- --
Proceeds from settlement of sales .............................. -- -- 2,040,223
Principal payments ............................................. 5,081,239 3,500,000 8,826,291
Held-to-maturity mortgage-backed securities:
Proceeds from settlement of sales .............................. -- -- 80,633,683
Principal payments ............................................. -- 1,095,517 1,923,432
Purchase of Forrest Holdings Inc. preferred stock ................ (2,500,000) -- --
Purchases of Federal Home Loan Bank stock ........................ (433,600) -- --
Loan originations and principal payments on loans ................ (58,692,430) 18,643,745 (56,005,487)
Purchases of loans ............................................... (41,331,499) (2,877,000) (4,525,810)
Purchases of office properties and equipment ..................... (857,483) (1,437,963) (1,588,332)
Proceeds from sales of real estate ............................... 513,361 1,271,401 160,364
Payment for purchase of American Bancorp Inc.,
net of cash acquired ........................................... -- -- 5,170,054
Payment for purchase of NCB Corp., net of cash acquired .......... -- (6,841,388) --
------------- ------------- -------------
Net cash (used) provided by investing activities ............... (124,440,446) 67,233,682 (13,314,581)
------------- ------------- -------------
Consolidated Statements of Cash Flows
Indiana Federal Corporation and Subsidiaries
(continued)
Year Ended December 31,
-------------------------------------------------------
1996 1995 1994
-------------------------------------------------------
Financing Activities
Net increase (decrease) in non-certificate accounts .............. 14,912,356 (33,488,989) (14,745,352)
Net increase (decrease) in certificates of deposit ............... 21,008,687 14,455,311 30,756,131
Proceeds from Federal Home Loan Bank advances .................... 279,100,000 359,000,000 61,000,000
Repayments on Federal Home Loan Bank advances .................... (219,982,566) (334,747,809) (116,780,479)
Net increase (decrease) in other borrowings ...................... 19,723,750 (48,730,000) 53,112,500
Net increase (decrease) in advance payments by borrowers
for taxes and insurance ........................................ (233,644) (317,747) 53,440
Cash dividends ................................................... (3,891,153) (4,036,030) (3,384,815)
Cash paid in lieu of fractional shares from stock dividend ....... -- -- (5,880)
Purchases of treasury stock ...................................... (125,126) (400,184) (1,534,421)
Exercise of stock options ........................................ 302,308 569,280 557,066
------------- ------------- -------------
Net cash provided (used) by financing activities ............... 110,814,612 (47,696,168) 9,028,190
------------- ------------- -------------
Increase (decrease) in cash and cash equivalents ................. (2,561,413) 9,912,682 8,291,300
------------- ------------- -------------
Cash and cash equivalents at beginning of year ................... 28,447,952 18,535,270 10,243,970
------------- ------------- -------------
Cash and cash equivalents at end of year ......................... $ 25,886,539 $ 28,447,952 $ 18,535,270
============= ============= =============
Consolidated Statements of Cash Flows, continued
Year Ended December 31,
-----------------------------------------
1996 1995 1994
-----------------------------------------
Supplemental Disclosures of Cash Flow
Information -- Cash paid during the year for:
Interest:
Deposits ............................................ $24,177,426 $22,144,979 $16,570,589
Federal Home Loan Bank advances and other borrowings 7,324,163 7,379,767 5,949,266
----------- ----------- -----------
$31,501,589 $29,524,746 $22,519,855
Income taxes .......................................... $ 1,270,536 $ 2,705,000 $ 2,809,158
Supplemental Disclosures of Non-Cash
Investing Activity:
Loans transferred to real estate owned .................. $ -- $ 1,500,922 $ 3,367,619
Loans transferred to held for sale category due to
borrower conversion of adjustable-rate mortgage loans
to fixed-rate mortgage loans .......................... $ 262,016 $ 251,505 $ 682,664
Loans transferred to mortgage-backed securities ......... $ 9,780,031 $ -- $ --
Loans originated to finance the sale of real estate owned $ -- $ 962,500 $ --
=========== =========== ===========
See notes to consolidated financial statements
Indiana Federal Corporation and Subsidiaries
Notes to Consolidated Financial Statements
Note A -- Summary of Significant Accounting Policies
Organization
Indiana Federal Corporation is a financial services holding company. The
Corporation's principal operating subsidiary is Indiana Federal Bank for
Savings. The Bank is principally engaged in the business of attracting savings
deposits from the general public and investing these funds, together with
borrowings and other funds, to originate one- to four-family residential real
estate loans, consumer loans, income-producing property real estate loans, and
commercial business loans. The Bank conducts its activities from a network of 16
full-service banking centers and 3 loan production offices located in Northwest
Indiana.
Principles of Consolidation
The consolidated financial statements are comprised of the accounts of
Indiana Federal Corporation (the "Corporation") and its principal and
wholly-owned subsidiaries, Indiana Federal Bank for Savings (the "Bank"), IndFed
Mortgage Company, and IFB Investment Services, Inc. All significant
inter-company balances and transactions have been eliminated in consolidation.
Certain reclassifications have been made to the 1995 and 1994 financial
statements to conform to the 1996 presentation.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Cash Equivalents
Cash equivalents represent highly liquid investments with a maturity of
three months or less when purchased.
Trading Account Assets, Investment
Securities, and Mortgage-Backed Securities
On January 1, 1994, the Corporation adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." In accordance with the Statement, prior period
financial statements have not been restated to reflect the change in accounting
principle. Application of SFAS No. 115 resulted in the increase of $363,216 in
shareholders' equity as of January 1, 1994, representing the recognition in
shareholders' equity of unrealized appreciation, net of deferred income taxes of
$143,900, for the Corporation's investment in debt and equity securities
determined to be available-for-sale, previously carried at amortized cost or
lower of cost or market (LOCOM).
The carrying amount of securities is dependent upon their classification as
held-to-maturity, trading, or available-for-sale. Management determines the
appropriate classification of debt securities at the time of purchase. The
accounting for securities in each of the three categories is as follows:
Trading account assets: Trading account assets are held for resale in
anticipation of short-term market movements. Trading account assets are stated
at fair value with unrealized holding gain (loss) recognized in the income
statement as trading account income.
Securities held-to-maturity and available-for-sale: Debt securities are
classified as held-to-maturity when the Corporation has the positive intent and
ability to hold the securities to maturity. Held-to-maturity securities are
stated at amortized cost.
Debt securities not classified as held-to-maturity or trading are
classified as available-for-sale. Available-for-sale securities are stated at
fair value, with the unrealized gains and losses, net of tax, reported in a
separate component of shareholders' equity.
The amortized cost of debt securities classified as held-to-maturity or
available-for-sale is adjusted for amortization of premiums and accretion of
discounts to maturity, or in the case of mortgage-backed securities, over the
life of the security. Such amortization is included in interest income from
investments. Interest and dividends are included in interest income from
investments. Realized gains and losses, and declines in value judged to be
other-than-temporary are included in net securities gains (losses). Gains and
losses on sales of securities are determined by specifically identifying the
carrying amount of the securities sold.
On November 15, 1995, the FASB staff issued a Special Report, "A Guide to
Implementation of SFAS No. 115 on Accounting for Certain Investments in Debt and
Equity Securities." In accordance with provisions in that Special Report, the
Corporation chose to reclassify securities from held-to-maturity to
available-for-sale. At the date of transfer, the amortized cost of those
securities was $34,357,508 and the unrealized gain on those securities was
$696,873, which is included in shareholders' equity.
Non-Accrual Loans
A loan is classified as non-accrual and the accrual of interest on such
loan is discontinued when the contractual payment of principal or interest has
become 90 days past due or when management has serious doubts about further
collectibility of principal or interest, even though the loan currently is
performing. A loan may remain on accrual status if it is in the process of
collection and is either guaranteed or well secured. When a loan is placed on
non-accrual status, unpaid interest credited to income in the current year is
reversed and unpaid interest accrued in prior years is charged against the
allowance for interest on loans. Interest received on non-accrual loans
generally is either applied against principal or reported as interest income,
according to management's judgment as to the collectibility of principal.
Generally, loans are restored to accrual status when the obligation is brought
current, has performed in accordance with the contractual terms for a reasonable
period of time, and the ultimate collectibility of the total contractual
principal and interest is no longer in doubt.
Interest on Loans
Interest on loans is credited to income when earned. An allowance for
interest on loans is provided when management considers the collection of these
accounts doubtful.
Loan Fees
Loan origination and commitment fees and certain direct loan origination
costs related to loans or commitments originated are deferred and the net amount
amortized as an adjustment of the related loan's yield. The Corporation is
amortizing deferred amounts over the contractual life of the related loans.
Loans Held for Sale
Loans held for sale are carried at the lower of aggregate cost or market
value.
Real Estate Held for Sale Acquired Through
Foreclosure
Foreclosed assets are comprised of property acquired through a foreclosure
proceeding or acceptance of a deed-in-lieu of foreclosure. A loan is classified
as in-substance foreclosure when the Corporation has taken possession of the
collateral regardless of whether formal foreclosure proceedings take place.
Foreclosed assets initially are recorded at fair value at the date of
foreclosure establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the lower
of cost or fair value minus estimated costs to sell.
Depreciation and Amortization
Depreciation of office properties and equipment and amortization of
leasehold improvements are computed on a straight-line basis over the estimated
useful lives of the related assets.
Cost in Excess of the Fair Value of Net Assets
Acquired
Cost in excess of the fair value of net assets acquired less liabilities
assumed in connection with the purchase of a branch facility is being charged to
operations over its estimated useful life using the straight-line method. The
branch purchase premium included in other assets amounted to $485,000 and
$606,000 at December 31, 1996 and 1995, respectively.
In regard to the purchase of NCB Corporation, the Bank recorded goodwill
totaling $1,493,363 and a deposit base intangible totaling $1,089,771. At
December 31, 1996, the amount of goodwill and deposit base intangible included
in other assets is $1,308,785 and $791,389, respectively. In regard to the
purchase of American Bancorp, Inc., the Bank recorded goodwill totaling $906,588
and a deposit base intangible totaling $1,600,000. At December 31, 1996, the
amount of goodwill and deposit base intangible included in other assets was
$785,700 and $1,142,872, respectively. The goodwill is being amortized straight
line over 15 years, while the deposit base intangible is being amortized over 7
years.
Provision for Loan Losses
Provisions for loan losses are charged to income based on a periodic review
and evaluation of various factors affecting the value of loans receivable,
including the borrower's financial ability to pay, value of collateral, current
economic conditions, and the overall quality of the loan portfolio. In 1995, the
Corporation adopted SFAS No. 114, "Accounting by Creditors for Impairment of a
Loan." Under the new standard, the allowance for losses related to loans that
are identified for evaluation in accordance with SFAS No. 114 is based on
discounted cash flows using the loan's initial effective interest rate or the
fair value for certain collateral-dependent loans. Prior to 1995, the allowance
for loan losses related to these loans was based on undiscounted cash flows or
the fair value of the collateral for collateral-dependent loans. At December 31,
1996 and 1995, the recorded investment in loans that are considered impaired
under Statement 114 was $6.5 and $6.3 million, respectively, of which $4.2 and
$4.5 million were on a non-accrual basis. Loans are considered non-accrual if
the most likely corrective action taken by the Bank will either be the
repossession of the collateral or the charge-off of the loan. The impaired loan
balances at December 31, 1996 and 1995 are net of specific reserve for loan
losses totaling $845,000 and $530,000, respectively. Management has determined,
based on anticipated discounted cash flows, that impaired loans with balances of
$2.6 million and $2.1 million, respectively, at December 31, 1996 and 1995 will
be repaid in full with no loss incurred by the Bank. The average recorded
investment in impaired loans during the year ended December 31, 1996 and 1995,
was $6.3 and $5.9 million, respectively. The Bank recognized interest income on
those impaired loans of $298,000 in 1996 and $425,000 in 1995 which included
$197,000 and $322,000 of interest income recognized using the cash basis method
of income recognition. Management believes that the allowance for loan losses is
adequate to absorb potential losses in the portfolio, however, future additions
to the allowance may be necessary based on changes in economic conditions. In
addition, various regulatory agencies periodically review the provision for loan
losses. These agencies may require that additions be made to allowance for loan
losses based upon their judgment of information available to them at the time of
their examination. This evaluation is inherently subjective as it requires
material estimates including the amount and timing of future cash flows expected
to be received on impaired loans that may be susceptible to significant change.
Earnings Per Share
Earnings per share are determined by dividing net income for the year by
the weighted-average number of shares of common stock and common stock
equivalents outstanding. Common stock equivalents assume exercise of stock
options, and the calculation assumes purchase of treasury stock with the
proceeds at the average market price for the period (when dilutive). Fully
diluted earnings per share equals the primary amount.
Accounting for Mortgage Servicing Rights
In 1996, the Corporation adopted SFAS No. 122, "Accounting for Mortgage
Servicing Rights," which requires that a separate asset right to service
mortgage loans for others be recognized, regardless of how those servicing
rights are acquired. The effect of the adoption of this standard was not
material.
Accounting for Stock-Based Compensation
The Corporation accounts for its Stock Option Plan in accordance with APB
Opinion No. 25, "Accounting for Stock Issued to Employees." Under APB Opinion
No. 25, because the exercise price of the Corporation's employee stock options
equals the market price of the underlying stock on the date of grant, no
compensation expense is recognized.
SFAS No. 125
In June 1996, the Financial Accounting Standards Board (FASB) issued SFAS
No. 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," which addresses the accounting for transfers
and servicing of financial assets and extinguishments of liabilities. The
Corporation will apply SFAS No. 125 to transfers and servicing of financial
assets and extinguishments of liabilities occurring after December 31, 1996 and,
based on current circumstances, does not believe the effect of adoption will be
material.
Stock Split
On April 21, 1994, the Corporation's Board of Directors declared a stock
split in the form of a three-for-two stock dividend to shareholders of record as
of May 17, 1994. All references to number of shares, except shares authorized,
and to per share information in the consolidated financial statements, have been
adjusted to reflect the stock split on a retroactive basis.
Employee Stock Ownership Plan
The Corporation has established an Employee Stock Ownership Plan ("ESOP")
for its employees. Beginning January 1, 1994, the Corporation prospectively
adopted the American Institute of Certified Public Accountants ("AICPA")
Statement of Position 93-6, "Employers' Accounting for Employee Stock Ownership
Plans." SOP 93-6 requires the recognition of compensation expense for ESOP
shares acquired after 1992 and not committed to be released before the beginning
of 1994, be measured based on the fair value of those shares when committed to
be released to employees, rather than based on their original cost.
As of December 31, 1996, the ESOP had 29,706 shares acquired after January
1, 1993 that are committed to be released beginning in 1997. The adoption of SOP
93-6 had no impact on net income for the year ended December 31, 1995 and 1996.
The effect of SOP 93-6 on net income in 1997 and beyond is not determinable
because it is based on future prices of the Corporation's stock. Under SOP 93-6,
dividends on the unallocated ESOP shares were reported as a reduction of accrued
interest on the ESOP borrowings rather than as a reduction of retained earnings.
Loan Servicing Fees
The Corporation services mortgage loans for permanent investors under
servicing contracts. Fees earned for servicing loans owned by investors are
based on the outstanding principal balances of the loans being serviced, and are
recognized as income when the related mortgage payments are received. Loan
servicing costs are charged to expense as incurred.
Note B -- Mergers & Acquisitions
On November 14, 1996, the Corporation entered into an Agreement and Plan of
Merger ("Merger Agreement") with Pinnacle Financial Services, Inc. ("Pinnacle"),
a bank and savings and loan holding company located in St. Joseph, Michigan. The
Merger Agreement provides for a "merger of equals" with Pinnacle to be accounted
for as a pooling of interests. Upon completion of the Merger, (a) the
Corporation will be merged with and into Pinnacle, with Pinnacle being the
surviving corporation, and (b) each issued and outstanding share of common stock
of the Corporation will be converted into one share of common stock of Pinnacle.
Conditions to the consummation of the merger include, among other things,
requisite and satisfactory stockholder and regulatory approvals and the receipt
of certain opinion and certificates. It is anticipated the merger will occur in
the second quarter of 1997.
With the execution of the Merger Agreement, Pinnacle (as issuer) and the
Corporation (as grantee) entered into the Pinnacle Stock Option Agreement
pursuant to which Pinnacle granted to the Corporation the Pinnacle Option. At
the same time, the Corporation (as issuer) and Pinnacle (as grantee) entered
into the IFC Stock Option Agreement, pursuant to which the Corporation granted
to Pinnacle the IFC Option. The Pinnacle Stock Option Agreement provides for the
purchase by the Corporation of 591,678 shares of Pinnacle Common Stock at an
exercise price of $24.625 per share. The IFC Stock Option Agreement provides for
the purchase by Pinnacle of 470,361 shares of the Corporation Common Stock at an
exercise price of $19.875 per share. The Stock Option Agreements are intended to
increase the likelihood that the Merger will be consummated. The options would
be eligible for exercise only upon the occurrence of specific "Events" deemed
detrimental to the merger process.
On January 31, 1995, the Corporation acquired, for $8.2 million, NCB
Corporation ("NCB"), a bank holding company with total assets of approximately
$45.0 million with offices in Culver and Granger, Indiana. The operations of NCB
are included in the Corporation's Consolidated Statements of Income from the
acquisition date and reflect the application of the purchase method of
accounting. Under this method of accounting, the aggregate cost to the
Corporation of the acquisition was allocated to the assets acquired and
liabilities assumed, based on their estimated fair values as of January 31,
1995.
On December 12, 1994, the Corporation acquired, for $7.1 million, American
Bancorp, Inc. ("ABI"), a bank holding company with total assets of approximately
$65.0 million with offices in North Judson, Knox, and San Pierre, Indiana. The
operations of ABI are included in the Corporation's Consolidated Statements of
Income from the acquisition date and reflect the application of the purchase
method of accounting. Under this method of accounting, the aggregate cost to the
Corporation of the acquisition was allocated to the assets acquired and
liabilities assumed, based on their estimated fair values as of December 12,
1994.
Pro forma results of operations assuming the NCB acquisition had occurred
on January 1, 1995 would not differ materially from historical results.
Note C -- Securities
The amortized cost and fair values of investments in debt securities are as
follows:
Available-For-Sale Securities
December 31, 1996
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ----------- ----------- ------------
U.S. Government and agency securities $ 35,128,056 $ 410,074 ($ 190,859) $ 35,347,271
Collateralized mortgage obligations 23,974,110 6,090 (146,119) 23,834,081
Corporate debt securities 12,000,000 -- (33,390) 11,966,610
Asset-backed securities 14,472,949 64,347 (227,644) 14,309,652
Municipal securities 937,061 43,238 (5,300) 974,999
------------ ---------- ---------- ------------
Total investment securities 86,512,176 523,749 (603,312) 86,432,613
Mortgage-backed securities 42,605,384 803,360 (127,581) 43,281,163
------------ ---------- ---------- ------------
Total available-for-sale securities $129,117,560 $1,327,109 ($ 730,893) $129,713,776
============ ========== ========== ============
Available-For-Sale Securities
December 31, 1995
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
------------ ------------ ----------- -----------
U.S. Government and agency securities $23,041,022 $ 747,625 $ -- $23,788,647
Collateralized mortgage obligations 33,039,197 118,469 (215,244) 32,942,422
Corporate debt securities 12,458,758 4,806 (103,691) 12,359,873
Asset-backed securities 1,998,129 81,871 -- 2,080,000
Municipal securities 1,444,488 58,725 (1,262) 1,501,951
Total investment securities 71,981,594 1,011,496 ( 320,197) 72,672,893
------------ ---------- ---------- ------------
Mortgage-backed securities 26,138,126 600,797 (1,580) 26,737,343
------------ ---------- ---------- ------------
Total available-for-sale securities $98,119,720 $1,612,293 ($321,777) $99,410,236
=========== ========== ========= ===========
The amortized cost and estimated market value of debt securities at December 31,
1996, by contractual maturity, are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Securities
available-for-sale
Estimated
Amortized Market
Cost Value
---- -----
Due in one year or less $ 8,740,858 $ 8,778,472
Due after one year through five years 15,589,959 15,565,808
Due after five years through ten years 26,816,621 26,969,418
Due after ten years 35,364,738 35,118,915
------------ ------------
Total investment securities 86,512,176 86,432,613
Mortgage-backed securities 42,605,384 43,281,163
------------ ------------
Total securities $129,117,560 $129,713,776
============ ============
Proceeds from the sale of investments in debt securities (excluding trading
securities) for the years ended December 31, 1996, 1995, and 1994 were
$6,571,875, $71,283,634, and $8,865,379, respectively. Gross gains realized on
these sales were $82,908, $1,024,109 and $12,270 for 1996, 1995, and 1994,
respectively, and gross losses realized on these sales were $11,442, $583,530,
and $0 for 1996, 1995, and 1994, respectively, resulting in a tax liability of
$28,000, $175,000, and $5,000, respectively.
Note D -- Loans Receivable
Loans receivable at December 31, 1996
and 1995 consist of the following:
December 31,
--------------------------------------------------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
1996 1996 1995 1995
------------- ------------- ------------- -------------
Real estate loans:
One- to four-family residential ............. $ 287,655,315 $ 288,006,203 $ 278,679,552 $ 283,482,597
Agricultural ................................ 11,510,639 11,364,076 12,939,809 12,939,809
Income-producing property ................... 99,444,077 99,061,503 83,452,762 80,230,440
Construction, one- to four-family residential 20,775,389 20,779,754 13,369,811 13,386,421
Construction, income-producing property ..... 8,752,580 8,725,587 6,085,230 6,085,240
--------------------------------------------------------------------
Total real estate loans ................... 428,138,000 427,937,123 394,527,164 396,124,507
Consumer loans ................................. 120,125,790 120,641,042 82,762,062 82,893,129
Commercial loans ............................... 87,322,444 87,232,056 55,124,442 54,701,144
--------------------------------------------------------------------
635,586,234 635,810,221 532,413,668 533,718,780
Less:
Unearned discounts .......................... 59,339 -- 197,669 --
Undisbursed portion of loan proceeds ........ 7,829,987 7,829,987 3,932,784 3,932,784
Net deferred loan fees and costs ............ (1,344,617) -- (1,064,813) --
--------------------------------------------------------------------
Loans receivable .......................... 629,041,525 627,980,234 529,348,028 529,785,996
Allowance for loan losses ................... 7,457,791 -- 6,655,071 --
--------------------------------------------------------------------
Loans receivable, net ..................... $ 621,583,734 $ 627,980,234 $ 522,692,957 $ 529,785,996
====================================================================
Weighted-average interest rate ................. 8.45% 8.56%
====================================================================
Credit is extended based on an evaluation of the borrower's financial condition,
the value of the collateral, and in the case of income-producing property, the
sufficiency of net cash flows from the property's operation to service debt.
When loans are made to businesses, personal guarantees may also be required of
major shareholders or partners.
Loans collateralized by income-producing
property are used in the following industries:
December 31,
-----------------------------------------------------------------------------
1996 1995
-----------------------------------------------------------------------------
Dollars in thousands (000s) Recourse Non-recourse Total Recourse Non-recourse Total
-------- ------------ -------- -------- ------------ -----
Land development $ 5,139 -- $ 5,139 $ 3,662 $ -- $ 3,662
Hotels/motels 16,906 3,117 20,023 11,750 4,130 15,880
Multi-family apartments 23,858 10,606 34,464 13,264 9,617 22,881
Shopping centers 2,920 6,644 9,564 2,090 7,952 10,042
Nursing homes 7,902 -- 7,902 6,237 -- 6,237
Office/warehouse 17,260 236 17,496 9,246 2,138 11,384
Mobile home parks 9,666 -- 9,666 15,180 -- 15,180
Medical/professional 3,922 21 3,943 4,189 83 4,272
------- -------- -------- ------- ------- -------
$87,573 $ 20,624 $108,197 $65,618 $23,920 $89,538
======= ======== ======== ======= ======= =======
Loans collateralized by income-producing property
categorized by state consist of the following:
December 31,
-----------------------------------------------------------------------------
1996 1995
Dollars in thousands (000s) Recourse Non-recourse Total Recourse Non-recourse Total
-------- ------------ -------- -------- ------------ -----
Indiana $65,357 $ 11,651 $ 77,008 $47,570 $12,954 $60,524
Illinois 6,782 682 7,464 4,525 692 5,217
Michigan 9,325 3,434 12,759 7,865 3,464 11,329
Kentucky 860 -- 860 887 -- 887
Georgia 952 2,769 3,721 2,300 2,749 5,049
Florida 1,339 1,630 2,969 143 2,896 3,039
Ohio 970 458 1,428 301 1,165 1,466
Others 1,988 -- 1,988 2,027 -- 2,027
------- -------- -------- ------- ------- -------
$87,573 $ 20,624 $108,197 $65,618 $23,920 $89,538
======= ======== ======== ======= ======= =======
Note D -- Loans Receivable, continued
Changes in the allowance for loan losses
are as follows:
Year Ended December 31,
-------------------------------------------
1996 1995 1994
----------- ----------- -----------
Balance at beginning of year ....... $ 6,655,071 $ 6,100,951 $ 5,355,599
Acquired from NCB Corporation ...... -- 756,611 --
Acquired from American Bancorp, Inc. -- -- 655,159
Provision for losses ............... 1,115,000 176,967 178,822
Charge-offs ........................ (443,822) (455,499) (180,386)
Recoveries ......................... 131,542 76,041 91,757
----------- ----------- -----------
Balance at end of year .......... $ 7,457,791 $ 6,655,071 $ 6,100,951
=========== =========== ===========
Charge-offs include allowances for losses at the time loans are foreclosed and
transferred to real estate owned. At December 31, 1996, 1995, and 1994, loans
serviced for others were $146.0 million, $125.0 million, and $144.2 million,
respectively. At December 31, 1996, the Bank had commitments to originate and
purchase loans of approximately $28.9 million, of which $4.7 million had fixed
interest rates and available, but unfunded lines of credit totaled $19.9
million. At December 31, 1995, commitments to originate and purchase loans
approximated $27.1 million of which $3.9 million had fixed interest rates and
available, but unfunded lines of credit totaled $27.6 million. The Bank uses the
same credit policies in making commitments as it does for on-balance sheet
instruments. The Corporation had loans outstanding of $6.6 million and $4.8
million at December 31, 1996 and 1995, respectively, to developments in which a
subsidiary of the Corporation is a limited partner. These loans are secured by
multi-family housing projects.
Note E -- Office Properties and Equipment
The following is a summary of office
properties and equipment accounts:
Estimated Useful December 31,
(in years) 1996 1995
---------- ---- ----
Cost:
Land -- $ 2,253,318 $ 2,223,864
Building 29.0 10,559,205 10,103,183
Parking lot improvements 10.0 194,172 194,172
Furniture and fixtures 6.4 9,462,394 10,691,293
---- ----------- -----------
22,469,089 23,212,512
Less allowances for depreciation 11,992,478 12,292,897
----------- -----------
$10,476,611 $10,919,615
=========== ===========
Depreciation expense was $1,300,487, $1,268,510, and $867,168 for 1996, 1995 and
1994, respectively.
Note F -- Deposits
December 31,
-------------------------------------------------------------------------------
Weighted-Average Carrying Fair Carrying Fair
Deposits at December 31, 1996 Interest Rate Amount Value Amount Value
and 1995 consist of the following: 1996 1995 1996 1996 1995 1995
-------------------------------------------------------------------------------
Negotiable order of withdrawal (NOW accounts) 2.13% 2.11% $ 53,459,320 $ 53,459,320 $ 55,148,995 $ 55,148,995
Non-interest bearing ........................ -- -- 31,685,860 31,685,860 28,260,577 28,260,577
Passbook savings ............................ 3.13 2.93 55,966,713 55,966,713 43,914,645 43,914,645
Money market accounts
Demand ................................... 4.96 2.86 24,011,992 24,011,992 3,658,104 3,658,104
Prestige/Savers Edge statement accounts .. 2.86 2.87 58,798,241 58,798,241 78,027,449 78,027,449
---- ---- ------------ ------------ ------------ ------------
Total non-certificate accounts ......... 223,922,126 223,922,126 209,009,770 209,009,770
Certificates ................................ 5.71 5.69 251,703,615 251,805,927 237,425,096 238,809,995
Individual retirement accounts .............. 5.87 5.89 52,192,693 52,225,283 53,299,470 53,649,676
Negotiated interest rate certificates ....... 5.42 5.48 38,639,494 38,656,921 30,802,550 30,824,850
---- ---- ------------ ------------ ------------ ------------
Total certificate accounts ............. 342,535,802 342,688,131 321,527,116 323,284,521
Accrued interest payable .................... 2,620,067 2,620,067 2,359,039 2,359,039
---- ---- ------------ ------------ ------------ ------------
4.47% 4.36% $569,077,995 $569,077,995 $532,895,925 $534,653,330
==== ==== ============ ============ ============ ============
The scheduled maturities of
certificate accounts are as follows:
December 31,
------------
1996
------------
Within one year $268,291,963
From one to two years 51,656,917
From two to three years 9,825,020
From three to four years 4,774,069
From four to five years 3,497,894
After five years 4,489,939
------------
$342,535,802
============
Note F -- Deposits, continued
Interest expense on deposits
consists of the following:
Year Ended December 31,
-----------------------------------------------
1996 1995 1994
----------- ----------- -----------
NOW accounts ............. $ 1,086,625 $ 1,079,320 $ 765,244
Passbooks ................ 1,620,929 1,331,900 736,295
Money market accounts .... 2,396,920 2,618,860 3,486,369
Certificate accounts ..... 19,333,980 17,392,997 11,491,653
----------- ----------- -----------
$24,438,454 $22,423,077 $16,479,561
=========== =========== ===========
At December 31, 1996, the Bank had 512 deposit accounts, or approximately $115.9
million, with balances greater than $100,000. At December 31, 1995, the Bank had
440 deposit accounts, or approximately $94.4 million, with balances greater than
$100,000.
Note G -- Federal Home Loan Bank Advances and Other Borrowings
Borrowings at December 31, 1996
and 1995, consist of the following:
Weighted-
Average
Year of Interest Carrying Fair Carrying Fair
Maturity Rate Amount Value Amount Value
---------------------------------------------------------------------------------------
1996 1995 1996 1996 1995 1995
---------- ---- ---- ------------ ------------ ------------ ------------
Federal Home Loan Bank
of Indianapolis:
1996 -- 5.88% $ -- $ -- $ 75,182,530 $ 75,242,460
1997 5.92% 5.96% 135,246,158 135,259,683 14,246,158 14,292,069
1998 5.92% 5.71% 22,750,963 22,684,985 14,450,999 14,450,049
1999 6.74% 6.73% 5,074,913 5,129,722 74,913 78,254
2000/2003 6.73% 6.73% 393,441 395,448 393,441 410,988
--------------------------------------------------------------------------------------
163,465,475 163,469,838 104,348,041 104,473,820
Reverse repurchase agreements 1996 -- 5.39% -- -- 9,407,500 9,407,500
1997 5.60% -- 9,131,250 9,131,250 -- --
Guaranteed ESOP obligation-- Note J 203,096 203,096 349,934 349,934
Federal funds purchased 1997 7.31% -- 20,000,000 20,000,000 -- --
--------------------------------------------------------------------------------------
Total Advances and Other Borrowings 6.08% 5.83% $192,799,821 $192,804,184 $114,105,475 $114,231,254
=======================================================================================
The Bank is required to maintain qualifying loans in its portfolio of at least
170% of outstanding advances as collateral for advances from the Federal Home
Loan Bank of Indianapolis. The required amount at December 31, 1996, is
approximately $278,000,000. In addition, Federal Home Loan Bank stock is
assigned as collateral on such advances. The Bank enters into sales of
securities with agreements to repurchase (reverse repurchase agreements) that
are treated as financings. Outstanding reverse repurchase agreements at December
31, 1996, totaled $9.1 million. The collateral for these borrowings at December
31, 1996, was U.S. Government securities with an aggregate amortized cost of
$9.2 million and market value of $9.1 million. The securities underlying the
agreements are delivered to the dealers that arrange the transactions. The
dealers agree to resell to the Bank the same securities at the maturity of the
agreements. All agreements are transacted with dealers considered to be "primary
dealers." The highest month-end balances of reverse repurchase agreements were
$27.8 million, $53.0 million and $52.3 million for 1996, 1995 and 1994,
respectively. The average outstanding balances of reverse repurchase agreements
were $11.4 million, $18.0 million and $25.6 million for 1996, 1995 and 1994,
respectively.
Note H -- Income Taxes
The Bank has qualified under provisions of the Internal Revenue Code that permit
it to deduct from taxable income an allowance for bad debts that differs from
the provision for such losses charged to income. Accordingly, the Bank has base
year tax reserves of approximately $9,210,000 for which no provision for federal
income taxes has been made. If, in the future, this portion of retained earnings
is used for any purpose other than to absorb bad debt losses, or if the Bank
fails to meet the tax requirements to qualify as a savings and loan institution,
federal income taxes may be imposed at the then applicable rates. If federal
income taxes had been provided, the deferred tax liability would have been
approximately $3,223,500.
Note H -- Income Taxes, continued
The components of the provision for income taxes are as follows:
1996 1995 1994
----------- ----------- -----------
Current:
Federal ............. $ 1,465,572 $ 1,601,897 $ 1,595,725
State ............... 639,941 782,119 781,428
Deferred ............ (944,813) (66,155) 689,204
----------- ----------- -----------
$ 1,160,700 $ 2,317,861 $ 3,066,357
=========== =========== ===========
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
1996 1995 1994
----- ------ -----
Statutory rate ..................... 35.0% 35.0% 35.0%
Increase (decrease) in income
tax resulting from:
Low income housing credit .......... (19.7) (8.0)
Tax exempt interest on
earning assets .................. (1.5) (1.0) (1.0)
State taxes ........................ 6.2 5.4 5.8
Other .............................. 0.1 (3.3) (2.1)
------ ----- ----
Effective rate ..................... 20.1% 24.1% 29.7%
====== ===== =====
Significant components of the deferred tax liabilities and assets at December
31, 1996 and 1995, are as follows:
1996 1995
----------- -----------
Deferred tax liabilities:
Loan fees deferred for income tax
purposes ..................................... $ 1,104,268 $ 1,161,191
Depreciation ................................... 600,077 563,568
Stock dividends on FHLB stock .................. 255,850 238,452
Available-for-sale securities adjustment ....... 236,161 511,173
Accrued interest on mortgage loans ............. 93,849 106,930
Excess of tax accumulated provision
for losses over base year .................... 131,015 41,762
Deposit base intangible ........................ 822,061 918,355
Other .......................................... 580,938 492,432
----------- -----------
$ 3,824,219 $ 4,033,863
Deferred tax assets:
General valuation reserves ..................... 2,769,478 2,275,529
Net operating loss carry forward and tax credits 825,795 440,316
Other, net ..................................... 1,398,989 1,268,236
----------- -----------
4,994,262 3,984,081
----------- -----------
Net deferred (asset) liability .................... ($1,170,043) $ 49,782
=========== ===========
Current and deferred income taxes consists of the following:
1996 1995
----------- -----------
Income taxes currently
(receivable) payable .................... $ 57,981 ($ 521,712)
Deferred income tax (asset) liability ...... (1,170,043) 49,782
========== ======
Deferred income taxes result from temporary differences in the basis of assets
and liabilities for financial reporting and income taxes.
The source of these temporary differences and their resulting effect on income
tax expense are as follows:
1996 1995 1994
--------- --------- ---------
General valuation allowance .......... ($493,949) ($433,119 $ 3,456
Excess of tax accumulated
provision for losses
over base year .................... 89,253 (394,863) 123,864
Purchase accounting adjustments ...... -- 585,953 --
Loan fees deferred for income
tax purposes ...................... (56,923) (158,448) 331,377
Depreciation ......................... 36,509 87,081 281,306
Other, net ........................... (519,703) 247,241 (50,799)
--------- --------- ---------
($944,813) ($ 66,155) $ 689,204
========= ========= =========
Note I -- Shareholders' Equity and Regulatory Capital
The Bank is subject to various regulatory capital requirements administered
by the federal regulatory agencies. Failure to meet minimum capital requirements
can initiate certain mandatory--and possibly additional--discretionary actions
by regulators that, if undertaken, could have a direct material effect on the
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of assets, liabilities,
and certain off-balance sheet items as calculated under regulatory accounting
practices. The Bank's capital amounts and classification are also subject to
qualitative judgments by the regulators about components, risk weightings, and
other factors.
Note I -- Shareholders' Equity, continued
Quantitative measures established by regulation to ensure capital adequacy
require the Bank to maintain minimum amounts and ratios (set forth in the table
below) of core, tangible, and risk-based capital. Management believes that, as
of December 31, 1996, the Bank meets all capital adequacy requirements to which
it is subject.
As of December 31, 1996, the most recent notification from the Office of
Thrift Supervision categorized the Bank as adequately capitalized under the
regulatory framework for prompt corrective action. To be categorized as
adequately capitalized, the Bank must maintain minimum core, tangible and
risk-based capital ratios as set forth in the table. No conditions or events
have occured since that notification that management believes have changed the
institution's category.
The Bank's actual capital amounts and ratios are also presented in the
table. No amount was required to be deducted from capital for interest-rate
risk.
Shareholders' Rights Plan
On February 26, 1992, the Corporation declared a distribution of one common
stock purchase right for each share of the Corporation's common stock
outstanding on March 6, 1992. Each right would initially entitle the shareholder
to purchase one share of the Corporation's common stock at an exercise price of
$30.00 per share, subject to adjustment. The rights are not currently
exercisable, but would become exercisable if certain events occurred related to
a person or group ("Acquiring Person") acquiring or attempting to acquire 10% or
more of the outstanding shares of common stock. In the event that the rights
become exercisable, each right (except for rights beneficially owned by the
Acquiring Person, which become null and void) would entitle the holder to
purchase, for the exercise price then in effect, shares of the Corporation's
common stock having a value of twice the exercise price. The rights may be
redeemed by the Board of Directors in whole, but not in part, at a price of $.01
per right. The rights have no voting or dividend privileges and are attached to,
and do not trade separately from, the common stock. In connection with the
proposed merger with Pinnacle, the Corporation intends to redeem the rights at a
price of $.01 per right or approximately $50,000.
To Be Well-Capitalized
Under Prompt
For Capital Adequacy Corrective Action
Actual Purposes Provisions
---------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
----------- ------- ----------- ------- ----------- -------
At Dec. 31, 1996:
Risk-based $55,594,427 9.78% $45,464,897 8.00% $56,816,121 10.00%
Core $49,443,445 6.01% $24,665,142 3.00% $41,108,570 5.00%
Tangible $49,443,445 6.01% $12,232,571 1.50% $20,554,285 2.50%
At. Dec. 31, 1995
Risk-based $58,849,581 12.97% $36,322,960 8.00% $45,403,700 10.00%
Core $53,416,120 7.48% $21,414,630 3.00% $35,691,050 5.00%
Tangible $48,255,481 6.81% $10,617,705 1.50% $17,696,175 2.50%
Note J -- Stock Option Plan
The Corporation has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees," (APB 25) and related
interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
No. 123, "Accounting for Stock-Based Compensation," requires use of option
valuation models that were not developed for use in valuing employee stock
options. Under APB 25, because the exercise price of the Corporation's employee
stock options equals the market price of the underlying stock on the date of
grant, no compensation expense is recognized.
The Corporation's stock option plan has authorized the grant of incentive
and non-qualified stock options to certain directors, officers, and key
employees. At December 31, 1996, there were 275,946 shares of common stock
available for future grant or award. All options granted have 10 year terms and
vest and become fully exercisable over a 5 year period from the grant date.
Pro forma information regarding net income and earnings per share is
required by SFAS 123, which also requires that the information be determined as
if the Corporation has accounted for its employee stock options granted
subsequent to December 31, 1994 under the fair value method of that Statement.
The fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model with the following weighted-average
assumptions for 1995 and 1996, respectively: risk-free interest rate of 6.5%; a
dividend yield of 3.75%; volatility factors of the expected market price of the
Corporation's common stock of .216%; and a weighted-average expected life of the
option of 7 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options that have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Corporation's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
Corporation's pro forma information follows (in thousands except for earnings
per share information):
1996 1995
---------- ----------
Pro forma net income $4,573,879 $7,303,890
Pro forma earnings
per share $ 0.95 $ 1.51
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 2000.
A summary of the Corporation's stock options activity, and related information
for the years ended December 31, follows:
1996 1995 1994
------------------------------------------------------------------------------------
Weighted-Average Weighted-Average Weighted-Average
Options Exercise Price Options Exercise Price Options Exercise Price
------- ---------------- ------- --------------- -------- ----------------
Outstanding--beginning of
year 257,014 $12.20 303,316 $15.35 332,463 $ 6.80
Granted 50,500 20.54 82,025 16.66 76,248 16.49
Exercised 54,584 5.52 88,810 6.41 95,456 5.84
Forfeited 11,441 14.33 39,517 12.43 9,939 13.20
------------------------------------------------------------------------------------
Outstanding--end of year 241,489 $15.35 257,014 $12.20 303,316 $ 9.33
------------------------------------------------------------------------------------
Exercisable at end of year 147,740 $13.62 160,661 $10.52 147,740 $13.62
Weighted-average fair value
of options granted during
the year $ 4.83 $ 3.92
====================================================================================
Exercise prices for options outstanding as of December 31, 1996, ranged from
$4.625 to $21.00. The weighted-average remaining contractual life of those
options is 7.1 years.
Note K -- Retirement Plans
The Corporation has established a leveraged Employee Stock Ownership Plan
("ESOP") in which all employees who attain minimum age and service requirements
are eligible to participate. The Corporation is to make contributions on behalf
of each participant at the rate of 1 percent of such participant's total
compensation. The Board of Directors may authorize additional contributions at
its discretion. The Corporation recorded expenses related to these plans of
$278,000, $407,000, and $402,000 for the years ended December 31, 1996, 1995,
1994, respectively. The Corporation's 1996 contribution to the ESOP was $350,350
compared to $382,628 in 1995 and $362,093 in 1994. The ESOP entered into a loan
agreement to borrow up to $1,200,000 from an unrelated financial institution to
purchase shares of common stock in the open market. The loan is unconditionally
guaranteed by the Corporation and an equivalent amount, which is comparable to
unearned compensation, is shown as a deduction of shareholders' equity. Both the
liability and the amount of shareholders' equity will be reduced in equal
amounts as the ESOP repays the borrowing. The ESOP will repay the loan, plus
interest, over a ten-year period using Corporation contributions.
At December 31, 1996 and 1995, the outstanding ESOP loan balance was
$203,096 and $349,934, respectively. The interest incurred on the ESOP loan
amounted to $18,950 in 1996, $31,250 in 1995, and $29,848 in 1994. Dividends
earned on unallocated shares are used to purchase additional shares of stock for
the ESOP. Dividends paid on the unallocated ESOP shares totaled $45,519 in 1996,
$50,023 in 1995, and $53,780 in 1994. The table below summarizes shares of
Corporation Stock held by the ESOP.
December 31,
------------------------
1996 1995
------- ---------
Shares allocated to participants ............... 185,171 168,396
Unallocated shares:
Grandfathered under SOP 93-6 ................ 10,672 31,507
Unearned ESOP shares ........................ 29,706 24,004
-------- --------
Total ..................................... 225,549 223,907
======== ========
Fair value of unearned ESOP shares .......... $664,671 $510,085
======== ========
The Corporation sponsors a stock-based deferred compensation plan for
directors, in which directors can defer fees and purchase phantom units on the
Corporation's common stock at $11.63. The amount charged to expense related to
this plan was $156,839, $162,199, and $54,198 in 1996, 1995, and 1994,
respectively. At December 31, 1996, the directors had purchased 31,894 phantom
units of which 8,903 were purchased in 1996. The Corporation has purchased
corporate-owned life insurance to partially fund its obligation under this plan.
The Corporation has a supplemental executive retirement plan for certain senior
executives. The plan provides for a retirement benefit based on years of service
and compensation levels. The Corporation has purchased corporate-owned life
insurance to partially fund its obligation under this plan. The expense
recognized in 1996 totaled $230,000 compared to $25,000 in 1995 and $105,000 in
1994.
Note L -- Quarterly Results of Operations
1996 1995
-------------------------------------------------------------------------------------------------------------
Three Months Ended Three Months Ended
(unaudited) Dec. 31 Sept. 30 June 30 March 31 Dec. 31 Sept. 30 June 30 March 31
------------------------------------------------------ ----------------------------------------------------
Interest income .......$15,458,198 $14,545,647 $13,498,320 $13,357,016 $13,961,413 $13,649,808 $13,840,792 $13,718,202
Interest expense ...... 8,919,750 8,134,904 7,494,116 7,310,911 7,590,639 7,445,388 7,518,574 7,385,932
-------------------------------------------------------------------------------------------------------------
Net interest income ... 6,538,448 6,410,743 6,004,204 6,046,105 6,370,774 6,204,420 6,322,218 6,332,270
Provision for
loan losses........... 650,000 265,000 150,000 50,000 -- 2,357 30,459 144,151
Other income .......... 1,404,681 1,069,504 826,369 1,049,534 1,365,746 942,407 1,716,444 654,565
Other expense ......... 5,298,292 7,405,268 4,884,901 4,862,902 5,697,768 4,895,189 4,767,007 4,749,762
-------------------------------------------------------------------------------------------------------------
Income (loss) before
income taxes.......... 1,994,837 (190,021) 1,795,672 2,182,737 2,038,752 2,249,281 3,241,196 2,092,922
Income taxes .......... 573,700 (384,700) 425,600 546,100 182,216 571,260 1,012,315 552,070
-------------------------------------------------------------------------------------------------------------
Net income ............$ 1,421,137 $ 194,679 $ 1,370,072 $ 1,636,637 $ 1,856,536 $ 1,678,021 $2,228,881 $ 1,540,852
=============================================================================================================
Net earnings per share $ 0.29 $ 0.04 $ 0.29 $ 0.34 $ 0.39 $ 0.34 $ 0.46 $ 0.32
Dividends per share ...$ 0.18 $ 0.18 $ 0.18 $ 0.28 $ 0.165 $ 0.165 $ 0.165 $ 0.365
=============================================================================================================
During the third quarter of 1996, the Corporation recognized $2.8 million of
other expense (.36 per share after tax effect) due to the recapitalization of
the SAIF. During the fourth quarter of 1995, the provision for income taxes was
reduced by $309,000 ($.07 per share) due to additional low-to-moderate income
housing credits.
Note M -- Condensed Financial Information
(Parent company only):
December 31,
----------------------------
1996 1995
------------ ------------
Statements of Condition
Assets:
Cash and cash equivalents ........................... $ 4,489,118 $ 1,911,553
Dividend receivable from Indiana Federal Bank ....... -- 3,727,205
Note receivable from IndFed Mortgage Company ........ 950,000 950,000
Investment in Forrest Holdings, Inc. ................ 2,500,000 --
Equity in net assets of Indiana Federal Bank ........ 54,375,624 54,195,463
Equity in net assets of IndFed Mortgage Company ..... 8,091,757 9,738,074
Equity in net assets of IFB Investment Services, Inc. 323,999 100,000
Other assets ........................................ 1,280,783 548,418
------------ ------------
$ 72,011,281 $ 71,170,713
============ ============
Liabilities and Shareholders' Equity:
Other liabilities ................................... $ 645,001 $ 440,537
Common stock ........................................ 58,785 58,239
Additional paid-in capital .......................... 27,729,839 27,428,077
Unrealized gains on available-for-sale securities ... 360,055 779,343
Retained earnings ................................... 52,174,772 51,443,400
Treasury stock at cost .............................. (8,754,075) (8,628,949)
Guaranteed ESOP obligation .......................... (203,096) (349,934)
------------ ------------
$ 72,011,281 $ 71,170,713
============ ============
Years ended December 31,
--------------------------------------------
1996 1995 1994
--------------------------------------------
Statements of Income
Equity in earnings of subsidiaries ................................ $ 4,819,850 $ 7,638,468 $ 7,646,392
Other income ...................................................... 300,843 134,510 55,451
------------ ------------ ------------
Total income ...................................................... 5,120,693 7,772,978 7,701,843
Miscellaneous operating expenses .................................. 611,368 684,938 634,226
Federal income tax benefit ........................................ (113,200) (216,250) (194,658)
------------ ------------ ------------
Total expense ..................................................... 498,168 468,688 439,568
------------ ------------ ------------
Net income ........................................................ $ 4,622,525 $ 7,304,290 $ 7,262,275
============ ============ ============
Earnings per share ................................................ $ 0.96 $ 1.51 $ 1.50
============ ============ ============
Statements of Cash Flow
Operating activities:
Net income ........................................................ $ 4,622,525 $ 7,304,290 $ 7,262,275
Adjustments to reconcile net income to net cash used
by operating activities:
Equity in earnings of subsidiaries ............................. (4,819,850) (7,638,468) (7,646,392)
Net change in other assets and liabilities ..................... (381,063) (230,616) (65,169)
------------ ------------ ------------
Net cash used by operating activities ............................. (578,388) (564,794) (449,286)
Investing activities:
Contribution of cash of Norcen Bank to Indiana Federal Bank ....... -- (1,312,904) --
Payment for purchase of Norcen Bank, net of cash acquired ......... -- (6,440,229) --
Payment for purchase of American Bancorp, Inc., net
of cash acquired ............................................... -- -- 5,170,054
Contribution of cash of American State Bank to Indiana Federal Bank -- --
(11,905,055)
Purchases of treasury shares at cost .............................. (125,126) (400,184) (1,534,421)
Dividends received ................................................ 9,469,924 14,839,785 11,927,699
------------ ------------ ------------
Net cash provided by investing activities ......................... 9,344,798 6,686,468 3,658,277
Financing activities:
Borrow funds to IndFed Mortgage Company ........................... -- (950,000) --
Purchase preferred stock of Forrest Holdings, Inc. ................ (2,500,000) -- --
Purchase common stock of IFB Investment Services, Inc. ............ -- (100,000) --
Capital contribution to IFB Investment Services, Inc. ............. (100,000) -- --
Purchase common stock of IndFed Mortgage Company .................. -- (1,000,000) --
Net proceeds from sale of stock ................................... 302,308 569,280 551,186
Cash dividends and other financing activities ..................... (3,891,153) (4,036,030) (3,384,815)
------------ ------------ ------------
Net cash used by financing activities ............................. (6,188,845) (5,516,750) (2,833,629)
------------ ------------ ------------
Increase in cash and cash equivalents ............................. 2,577,565 604,924 375,362
Cash and cash equivalents at beginning of year .................... 1,911,553 1,306,629 931,267
------------ ------------ ------------
Cash and cash equivalents at end of year .......................... $ 4,489,118 $ 1,911,553 $ 1,306,629
============ ============ ============
Note N -- Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Values of Financial Instruments,"
requires disclosure of information about the fair value of financial instruments
for which it is practicable to estimate a value, whether or not recognized in
the Statement of Condition. Whenever possible, quoted market prices were used to
develop fair values. In cases where quoted market prices are not available, fair
values are based on estimates using present value or other valuation techniques.
Those techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Therefore, in many cases
the estimated fair values may not be realized in an immediate sale of the
instruments.
SFAS No. 107 excludes certain financial instruments and all nonfinancial
instruments from its disclosure requirements. Accordingly, the aggregate of the
estimated fair value amounts is not intended to represent the underlying value
of the Corporation.
The carrying amounts and the estimated fair values are as follows:
December 31, 1996 December 31, 1995
------------------------------- -------------------------------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------------ ------------ ------------ ------------
Assets:
Cash and cash equivalents $ 25,886,539 $ 25,886,539 $ 28,447,952 $ 28,447,952
Investment and mortgage-
backed securities (Note C) 129,713,776 129,713,776 99,410,236 99,410,236
Loans held for sale 1,969,697 1,976,175 16,044,609 16,319,939
Accrued interest receivable 5,558,283 5,558,283 5,005,115 5,005,115
FHLB Stock 8,173,300 8,173,300 7,739,700 7,739,700
Loans receivable 621,583,734 627,980,234 522,692,957 529,785,995
------------ ------------ ------------ ------------
Total asset financial instruments $792,885,329 $799,288,307 $679,340,569 $686,708,937
============ ============ ============ ============
Liabilities:
Deposits (Note F) $569,077,995 $569,230,324 $532,895,925 $534,653,329
Federal Home Loan Bank advances
and other borrowings (Note G) 192,799,821 192,804,184 114,105,475 114,231,254
Advanced payments (escrows) 1,175,407 1,175,407 1,409,051 1,409,051
Interest Payable 412,983 412,983 315,918 315,918
------------ ------------ ------------ ------------
Total liability financial instruments $763,466,206 $763,622,898 $648,726,369 $650,609,552
============ ============ ============ ============
The following methods and assumptions were used by the Bank in estimating its
fair value disclosures for financial instruments:
Cash and Cash Equivalents
The carrying amounts reported in the statement of condition for cash and
short-term instruments approximate those assets' fair values.
Note N -- Fair Value of Financial Instruments, CONTINUED
Investment and Mortgage-Backed Securities
Fair values for investment securities and mortgage-backed securities are
based on quoted market prices, where available. If quoted market prices are not
available, fair values are based on quoted market prices of comparable
instruments.
Loans Receivable
For variable-rate loans that reprice frequently and with no significant
change in credit risk, fair values are based on carrying amounts. The fair
values of conventional one- to four-family fixed-rate mortgage loans are based
on quoted market prices of similar loans sold in conjunction with securitization
transactions, adjusted for differences in loan characteristics. The fair values
for consumer loans, income-producing property loans, and commercial loans are
estimated using discounted cash flow analyses, using interest rates currently
being offered for loans with similar terms to borrowers of similar credit
quality. The carrying amount of accrued interest approximates its fair value.
Off-Balance-Sheet Instruments
The Bank's off-balance-sheet instruments consist primarily of loan
commitments. The fair value for such commitments is nominal.
Deposits
The fair value disclosed for interest-bearing and non-interest-bearing
checking accounts are, by definition, equal to the carrying amount. Fair values
for fixed-rate certificates of deposit are estimated using a discounted cash
flow calculation that applies interest rates currently being offered on
certificates to a schedule of aggregated expected monthly maturities on time
deposits.
Short-Term Borrowings
The carrying amounts of federal funds purchased, borrowings under
repurchase agreements, and other short-term borrowings approximate their fair
values.
Long-Term Borrowings
The fair values of the Bank's advances from the FHLB are estimated using
discounted cash flow analyses, based on the Bank's current incremental borrowing
rates for similar types of borrowing arrangements.
Community Involvement
Indiana Federal officers, directors, and employees are active at
many levels of community service and charity. They are presently
serving as directors, officers, or members of the following:
American Cancer Society
Boy Scouts of America
Boys & Girls Clubs
Building Industries Association of NW Indiana
Catholic Family Services
Chesterton Adult Learning Center
Chesterton High School Business Council Advisory Board
Christmas In April
Commitment to Career Success Champions
Community Homebuyers Corporation Board
Consumer Credit Counseling Service of NW Indiana
CROPWALK -- Porter County
Crown Point Chamber of Commerce
Culver Chamber of Commerce
Culver City Club
Culver Community High School Board
Culver Community Schools Building Trades Program
Culver Union Township Volunteer Fire Department
DECA
Dollars for Scholars
Downtown Valparaiso Business Association
Ducks Unlimited
Duneland Area Chamber of Commerce
Duneland School Corporation Board President
Duneland School Foundation Executive Board
Duneland YMCA Board
Entrepreneur Academy Board
Episcopal Community Services of Gary Board
Greater Highland Chamber of Commerce
Greater Knox Area Chamber of Commerce
Greater Merrillville Chamber of Commerce
Greater Munster Chamber of Commerce
Greater Portage Chamber of Commerce
Greater Valparaiso Chamber of Commerce
Greater Valparaiso Economic Development Commission
Habitat for Humanity
Indiana Builders Association
Indiana School Board Association
Indiana State Veterans Home
Indiana University National Public Affairs Council
Indiana University NW School of Business Advisory Board
Jay Mints 4-H Club
Junior Achievement
Kiwanis Club of Chesterton
Kiwanis Club of Culver
Kiwanis Club of Knox
Kiwanis Club of Merrillville
Kiwanis Club of Portage
Kiwanis Club of Valparaiso
Komen Breast Cancer Foundation
Lake Central High School Band Boosters
Lake County Agricultural Advisory Committee
Lake County Community Development Committee
March of Dimes
Meals On Wheels of Northwest Indiana, Inc., Board of Directors
Merrillville Exchange Club
Midwest Bankers Association
Mortgage Bankers Association
Muscular Dystrophy Association
National Association of Home Builders
National School Boards Association
North Judson Chamber of Commerce
Northern Indiana Board of Realtors
Northwest Indiana Easter Seals
Northwest Indiana Forum
Northwest Indiana Symphony
Opportunity Enterprises, Inc.
Pines Village Retirement Community Board
Plymouth Board of Public Works and Safety
Plymouth Building Trades Corporation
Plymouth City Council President
Plymouth Optimist Club
Portage Exchange Club
Portage High School Band Boosters
Portage Township Building Trades
Porter County Builders Association
Porter County Community Foundation, Inc., Board
Porter County Special Education Cooperative Board
Pulaski County Farm Bureau Board
Pulaski County Jail Building Corporation Board
Pulaski Memorial Hospital Board of Trustees
Purdue University North Central Advisory Board
SACQ, Liberty Middle School Advisory Council
Rotary International
Salvation Army
South Bend Home Improvement Program
South Lake Optimist Club
Starke County Development Foundation
Starke County 4-H
Starke United, Inc.
The Gary Accord Tradewinds Rehabilitation Center, Inc.
Tri Kappa Associates
United Way of Lake County
United Way of Porter County
Valparaiso Community Development Corporation
Valparaiso Park Foundation
Valparaiso Community University Campaign
Valparaiso YMCA Board
V.F.W. Post 988
Visiting Nurse Association
Wanatah Conservation Club
West Central High School Athletics
WYIN Channel 56
Indiana Federal Corporation
Board Of Directors
Donald A. Lesch
Chairman of the Board / CEO
Indiana Federal Corporation
Peter R. Candela
President/Chief Operating Officer
Indiana Federal Corporation
James E. Hutton
Vice President -- Operations
Burrell Professional Labs, Inc.
Philip A. Maxwell
Self-Employed Farmer
John R. Poncher, M.D.
Pediatrician
Byron Smith III
President
Smith Ready Mix, Inc.
Fred A. Wittlinger
President/Chief Executive Officer
United Consumers Club, Inc.
Barbara A. Young
President
Benchmark Ltd.
Joseph C. Durand
Chairman Emeritus
Officers
Donald A. Lesch
Chairman of the Board / CEO
Peter R. Candela
President/Chief Operating Officer
George J. Eberhardt
Executive Vice President
Gary T. Brownlee
Senior Vice President
Michael J. Griffin
Senior Vice President
Terry D. Kimmel
Senior Vice President
Timothy M. Scannell
Senior Vice President
Richard C. Simaga
Senior Vice President
Steven T. Casterline
Vice President/Treasurer
Dominic M. Fejer
Vice President/Controller
Brenda A. Sheetz
Corporate Secretary
IndFed Mortgage Company -- Directors and Officers
Donald A. Lesch
Chairman of the Board
Richard C. Simaga
President
Patrick M. Riley
Vice President
Terry D. Kimmel
Secretary
George J. Eberhardt
Treasurer
Peter R. Candela
Director
Byron Smith III
Director
Indiana Federal Bank for Savings -- Officers
Donald A. Lesch
Chairman of the Board / CEO
Peter R. Candela
President/Chief Operating Officer
Senior Vice Presidents
Gary T. Brownlee
Mortgage Banking
George J. Eberhardt
Chief Financial Officer
Michael J. Griffin
Chief Marketing Officer
Terry D. Kimmel
Community Relations / CRA Officer
Timothy M. Scannell
Trust & Private Banking
Richard C. Simaga
Commercial Banking
Vice Presidents
Steven T. Casterline
David A. Dodge
Dominic M. Fejer
Thomas P. Kabrich
Kenneth J. Krapf
Christian H. Madsen
Kent J. Mishler
Eugene R. Novello
Terry L. Richardson
Patrick M. Riley
Donna E. Scott
Jeffrey K. Spencer
Peggy L. Voigt
Janet E. Wilde
Kenneth Zagrocki
Mark R. Zimmerman
Brenda A. Sheetz
Secretary
IFB Investment
Services, Inc.
Directors and Officers
Donald A. Lesch
Chairman of the Board
Timothy M. Scannell
President / CEO
David M. Kover
Vice President
M. Thaddeus Murphy
Secretary
James E. Hutton
Director
Fred A. Wittlinger
Director
Steven T. Casterline
Director
Gary T. Brownlee
Director
Michael J. Griffin
Director