SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Under Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For Quarterly Period Ended Commission File Number
March 31, 1997 0-17379
INDIANA FEDERAL CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 35-1735820
(State or other jurisdiction (I.R.S. Employer Identification
of incorporation or Number)
organization)
56 Washington Street
Valparaiso, Indiana 46383
(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (219) 462-4131
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes (X) No ( )
As of May 9, 1997, there were 4,787,585 outstanding shares of the registrant's
Common Stock.
INDIANA FEDERAL CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial
Statements (unaudited)
Condensed Consolidated Statements of Financial Condition
March 31, 1997 and December 31, 1996 2 - 3
Condensed Consolidated Statements of Income, Three Months
Ended March 31, 1997 and 1996 4
Consolidated Statements of Cash Flow, Three Months
Ended March 31, 1997 and 1996 5 - 6
Notes to Condensed Consolidated Financial Statements 7 - 8
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 9 - 12
PART II. OTHER INFORMATION 13
SIGNATURES 14
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
ASSETS
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Cash $ 21,673,373 $ 25,820,066
Interest-earning deposits in other institutions 85,160 66,473
------------ ------------
Total Cash and Cash Equivalents 21,758,533 25,886,539
Investment securities:
Available-for-sale 84,534,351 86,432,613
Mortgage-backed securities:
Available-for-sale 41,637,500 43,281,163
Loans receivable 620,965,609 629,041,525
Allowance for loan losses (6,907,913) (7,457,791)
------------ ------------
Loans Receivable, Net 614,057,696 621,583,734
Loans held for sale 754,248 1,969,697
Real estate held for sale, acquired through foreclosure 1,013,828 3,308,412
Office properties and equipment 10,150,227 10,476,611
Federal Home Loan Bank stock 9,043,600 8,173,300
Accrued interest receivable 5,639,870 5,558,283
Goodwill and deposit base intangible 4,347,319 4,513,658
Investment in Section 42 properties 6,336,882 6,486,882
Investment in single premium life insurance policies 12,620,469 12,569,683
Other assets 7,029,870 6,584,103
------------ ------------
TOTAL ASSETS $818,924,393 $836,824,678
============ ============
2
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
LIABILITIES AND SHAREHOLDERS' EQUITY
MARCH 31, DECEMBER 31,
1997 1996
------------ ------------
Deposits $550,388,778 $569,077,995
Federal Home Loan Bank advances
and other borrowings 191,298,392 192,799,821
Advance payments by borrowers for
taxes and insurance 2,486,697 1,175,407
Other liabilities 2,830,168 2,405,175
------------ ------------
TOTAL LIABILITIES 747,004,035 765,458,398
Shareholders' Equity
Serial Preferred Stock, par value $.01
per share; authorized: 5,000,000 shares;
none issued -- --
Common Stock, par value $.01 per share;
authorized: 10,000,000 shares; issued
1997--5,895,236 shares, 1996--5,878,530 shares 58,952 58,785
Additional paid-in capital 27,932,024 27,729,839
Unrealized gain (loss) on available-for-sale
securities, net of deferred income taxes (708,789) 360,055
Retained earnings 53,595,342 52,174,772
Treasury Stock, at cost - 1,109,000 shares (8,754,075) (8,754,075)
Guaranteed ESOP obligation (203,096) (203,096)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 71,920,358 71,366,280
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $818,924,393 $836,824,678
============ ============
3
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- -----------
Interest income:
Interest on loans $13,049,111 $11,691,030
Interest on mortgage-backed securities 748,933 460,958
Interest and dividends on investment securities 1,689,142 1,205,028
----------- -----------
Total Interest Income 15,487,186 13,357,016
Interest expense:
Interest on deposits 6,110,321 5,850,772
Interest on FHLB advances and other borrowings 2,635,670 1,460,139
----------- -----------
Total Interest Expense 8,745,991 7,310,911
----------- -----------
Net Interest Income 6,741,195 6,046,105
Provision for loan losses 240,000 50,000
----------- -----------
Net Interest Income After Provision for Loan Losses 6,501,195 5,996,105
Other income:
Commissions on sales of insurance and securities 452,149 363,450
Gain (loss) on sale of real estate owned (21,811) (2,046)
Gain (loss) on sale of mortgage loans 26,186 (17,670)
Gain (loss) on valuation of mortgage loans -- (195,071)
Gain (loss) on sale of securities -- (20,313)
Customer service fees 468,386 376,533
Other 900,637 544,651
----------- -----------
Total Other Income 1,825,547 1,049,534
Other expenses:
Salaries and employee benefits 2,532,669 2,208,142
Net occupancy expense 456,955 381,703
Furniture and equipment expense 353,166 424,974
Federal insurance premiums 76,560 262,500
Marketing 134,211 118,510
Other general and administrative expenses 1,469,121 1,467,073
----------- -----------
Total Other Expenses 5,022,682 4,862,902
----------- -----------
Income Before Income Taxes 3,304,060 2,182,737
Income Tax Expense 1,024,380 546,100
----------- -----------
Net Income $ 2,279,680 $ 1,636,637
=========== ===========
Amounts per common share:
Net Income $0.47 $0.34
===== =====
Cash Dividend Paid $0.18 $0.28
===== =====
4
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- -----------
OPERATING ACTIVITIES
Net income $ 2,279,680 $ 1,636,637
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 240,000 50,000
Originations of loans held for sale (5,572,412) (9,673,832)
Cost of loans sold 6,787,861 4,034,355
Provision for depreciation and amortization 522,664 561,741
Amortization (accretion) of premiums and discounts, net (60,204) (160,995)
Proceeds from sales of trading securities -- 4,076,563
Purchases of trading securities -- (4,096,875)
Deferred federal income taxes (118,572) (167,819)
Increase (decrease) in interest receivable (81,587) 953,897
Decrease in interest payable 214,485 33,245
Net losses on sale of securities -- 20,313
Net losses on sale of real estate owned 21,811 2,046
Net (gains) losses on sale and valuation of mortgage loans (26,186) 212,741
Net change in other assets and liabilities 1,020,694 (2,593,738)
----------- -----------
Net Cash Provided (Used) by Operating Activities 5,228,234 (5,111,721)
----------- -----------
INVESTING ACTIVITIES
Purchase of Forrest Holdings, Inc. stock -- (2,500,000)
Purchase of FHLB stock (870,300) --
Principal payments on securities available-for-sale 2,483,214 4,635,000
Proceeds from maturities of securities available-for-sale 6,500,000 1,950,000
Purchase of securities available-for-sale (8,365,389) (3,475,768)
Principal payments on mortgage-backed securities
available-for-sale 1,153,684 1,025,225
Loan originations and principal payments on loans 8,075,916 (3,591,250)
Purchases of office properties and equipment (35,748) (486,067)
Proceeds from sale of real estate 456,184 146,695
----------- -----------
Net Cash Provided (Used) by Investing Activities 9,397,561 (2,296,165)
----------- -----------
FINANCING ACTIVITIES
Net decrease in non-certificate accounts (5,290,482) (1,923,053)
Net increase (decrease) in certificates of deposit (12,616,418) 15,906,943
Proceeds from Federal Home Loan Bank advances 60,000,000 10,000,000
Repayments on Federal Home Loan Bank advances (50,093,929) (32,626,213)
Net increase (decrease) in other borrowings (11,407,500) 3,591,250
Net increase in advance payments by borrowers
for taxes and insurance 1,311,290 1,405,611
5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
THREE MONTHS ENDED
MARCH 31,
1997 1996
----------- -----------
FINANCING ACTIVITIES (Continued)
Cash dividends $ (859,114) $(1,327,550)
Exercise of stock options 202,352 96,678
----------- -----------
Net Cash Used by Financing Activities (18,753,801) (4,876,334)
----------- -----------
Decrease in Cash and Cash Equivalents (4,128,006) (12,284,220)
Cash and Cash Equivalents at Beginning of Year 25,886,539 28,447,952
----------- -----------
Cash and Cash Equivalents at End of Quarter $21,758,533 $16,163,732
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - CASH PAID DURING THE PERIOD:
Interest:
Deposits $ 6,339,451 $ 5,777,123
Federal Home Loan Bank advances and other borrowings 2,621,025 1,493,384
----------- -----------
$ 8,960,476 $ 7,270,507
=========== ===========
Income Taxes $ 345,000 $ 500,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITY:
Loans transferred to held-for-sale category due to
borrower conversion of adjustable-rate mortgage
loans to fixed-rate mortgage loans $ 405,416 $ --
Loans originated to finance the sale of
real estate owned $ 1,838,400 $ --
6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
March 31, 1997
NOTE 1 - Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with instructions to Form 10-Q and Article 10 of
regulation S-X. Accordingly, such statements do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for a
fair presentation have been included. Operating results for the three month
period ended March 31, 1997 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1997.
NOTE 2 - Earnings Per Share
Earnings per share of common stock have been determined by dividing net income
for the period by the weighted average number of shares of common stock
equivalents outstanding. Common stock options in the calculation assumes
purchase of treasury stock with the option proceeds at the average market price
for the period (when dilutive).
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Statement 128 is effective for both interim and annual financial statements for
periods ending after December 15, 1997. Earlier application is not permitted.
As a result, calendar year end companies will first report on the new EPS basis
in the fourth quarter ended December 1997. Subsequent to the effective date,
all prior-period EPS amounts (including EPS information in interim financial
statements, earnings summaries and selected financial data) are required to be
restated to conform to the provisions of Statement 128.
NOTE 3 - Reclassification
Certain amounts in the 1996 condensed consolidated financial statements have
been reclassified to conform with the 1997 presentation.
NOTE 4 - Mergers and Acquisitions
On November 14, 1996, the Corporation announced a merger of equals with Pinnacle
Financial Services, Inc. ("Pinnacle") of St. Joseph, Michigan. In addition, on
March 3, 1997, Pinnacle announced the acquisition of CB Bancorp, Inc. of
Michigan City, Indiana.
7
The mergers, which are subject to regulatory and shareholder approval, are
expected to be completed by mid-year 1997. The merger will create a new bank
franchise with 50 branch locations in southwest Michigan and northwest Indiana
with assets of approximately $2.2 billion.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INDIANA FEDERAL CORPORATION
FINANCIAL CONDITION
Indiana Federal Corporation (the "Corporation") the parent company of Indiana
Federal Bank for Savings (the "Bank"), had total assets of $818.9 million at
March 31, 1997, compared to total assets of $836.8 million at December 31, 1996.
Declines of $7.5 million in the loan portfolio, $4.1 million in cash and cash
equivalents, $2.3 million in real estate owned, $1.9 million in investment
securities and $1.6 million in mortgage backed securities were primarily
responsible for the decline in assets. The proceeds from the decline in assets
were used to replace a decrease of $18.7 million in deposits.
Total investment securities declined to $84.5 million at March 31, 1997 from
$86.4 million at December 31, 1996. Mortgage-backed securities declined to
$41.6 million at March 31, 1997, from $43.3 million at December 31, 1996. The
decline in mortgage-backed securities was the result of principal repayments.
The net loan portfolio balance at March 31, 1997 decreased to $614.1 million
from $621.6 million at December 31, 1996 primarily as a result of the decline in
the income producing property portfolio to $97.7 million at March 31, 1997 from
$108.2 million at December 31, 1996. The decline in the income producing
product portfolio came as a result of prepayments totaling $10.7 million
including the payoff of $2.4 million in non-accruing loans. One- to four-family
mortgage, income producing property, consumer and commercial loans originated
and purchased during the three months ended March 31, 1997 were $22.7 million,
$2.3 million, $8.0 million and $7.2 million, respectively, totaling $40.2
million or $12.6 million more than the $27.6 million originated and purchased
during the same period a year ago. Loan repayments totaled $35.8 million for
the three months ended March 31, 1997 compared to $16.1 million for the same
period last year. Sales of one- to four-family fixed-rate mortgage loans
increased to $6.8 million for the three months ended March 31, 1997 from $4.0
million for the same period a year ago.
Of the $22.7 million in one- to four-family mortgage loans originated and
purchased, $15.4 million or 67.8 percent consisted of adjustable-rate mortgage
loans including $8.9 million in short-term construction loans. The remaining
$7.3 million of one- to four-family mortgage loan volume represented long-term,
fixed-rate loan originations. Included in fixed-rate loan originations were
$1.7 million of 30 year FHA and VA loans which were purchased from
correspondents and $5.6 million in fixed-rate loans which were originated for
sale. Fixed-rate loans held for sale at March 31, 1997 decreased to $800,000
from $2.0 million at December 31, 1996. The loans held for sale at March 31,
1997 are all held to be delivered pursuant to forward sales commitments. Loans
held for sale are accounted for on a lower of cost or market basis. As of
March 31, 1997, the market value exceeded the book value on these loans.
9
Deposits declined to $550.4 million at March 31, 1997 from $569.1 million at
December 31, 1996. The Bank had a net decrease of $12.6 million in certificate
of deposit balances and $6.1 million in passbook, money market and other
transaction account balances for the three months ended March 31, 1997. The
decrease in certificate of deposit balances came as a result of a $12.2 million
decline in negotiated certificates with minimum balances of $100,000. The
outstanding balance of negotiated certificates at March 31, 1997 totaled $14.1
million. The remaining decline in deposits was in business and public fund
demand accounts which decreased to a combined $34.8 million at March 31, 1997
from $41.2 million at December 31, 1996.
Shareholders' equity increased to $71.9 million or $15.03 per share at March 31,
1997 from $71.4 million or $14.97 per share at December 31, 1996. The increase
in shareholders' equity was the result of net income of $2.3 million, additional
paid-in capital through the exercise of stock options of $202,400 less cash
dividends of $859,100 and a decrease of $1.1 million in unrealized gains on
available-for-sale securities.
ASSET/LIABILITY MANAGEMENT
Management attempts to control fluctuations in net interest income which result
from an imbalance in the volume of assets and liabilities repricing during a
period of time. The Bank attempts to mitigate its interest rate risk exposure
by managing the maturity, prepayment and repricing characteristics of assets and
liabilities. The Bank retains certain fixed-rate and adjustable-rate loans and
sells in the secondary market conforming thirty-year fixed-rate mortgage loans.
At March 31, 1997, the volume of liabilities repricing in one year or less
exceeded the volume of assets repricing in one year or less by $71.6 million or
a negative 8.7 percent of the Bank's total assets. This figure compares to a
negative 7.97 percent one year gap at December 31, 1996.
NON-PERFORMING ASSETS AND LOAN LOSS RESERVES
Indiana Federal's non-performing assets decreased to $6.7 million or .82 percent
of total assets at March 31, 1997 from $10.2 million or 1.21 percent of total
assets at December 31, 1996. The improvement in non-performing assets was due
to the sale of a student housing complex with a book value of $2.3 million and
the payoff of two non-accruing apartment loans with a combined book value $2.4
million.
Management continuously reviews the various loan portfolios to determine
appropriate loan loss reserve levels. Factors considered in these reviews
include, but are not limited to, general economic conditions, loan mix,
historical charge-offs, condition of the underlying collateral and the ability
of the borrower to repay the loan. Management, as a result of this review
process, recorded provision for loan losses of $240,000 for the three months
ended March 31, 1997 compared to $50,000 for the same period last year.
10
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, and may require that additions be made based upon
their judgement of information available to them at the time of their
examination. At March 31, 1997, the Bank's allowance for loan losses totaled
$6.9 million or 1.12 percent of net loans receivable compared to $7.5 million or
1.20 percent of net loans receivable at December 31, 1996.
RESULTS OF OPERATIONS
The Corporation recorded net income of $2.3 million or $.47 per share for the
three months ended March 31, 1997 compared to $1.6 million or $.34 per share for
the same period last year. The return on average shareholders' equity increased
to 12.73 percent for the three months ended March 31, 1997 compared to 9.27
percent for the same period in 1996. The return of average assets was 1.10
percent for the three months ended March 31, 1997 compared to .91 percent for
the same period last year.
The Corporation's net income is primarily dependent upon the difference between
interest earned on its loans and investments and interest paid on deposits and
borrowings. Indiana Federal's net interest income after provision for loan
losses for the three months ended March 31, 1997 increased to $6.5 million
compared to $6.0 million for the same period in 1996. The Corporation's average
interest-earning assets and interest bearing liabilities increased by $108.6
million in the three months ended March 31, 1997 compared to the same period
last year. The net interest margin, however, declined to 3.48 percent for the
three months ended March 31, 1997 compared to 3.68 percent for the same period
last year.
Other income increased to $1.8 million for the three months ended March 31, 1997
from $1.0 million for the same period a year ago. When excluding gains and
losses on the sale of assets and the 1996 valuation allowance of $195,000 on
loans held for sale, other income increased by $537,000. This increase was
primarily the result of loan broker fees totaling $450,000 from a newly formed
division of the Corporation, increased customer service fees on deposit accounts
and higher commissions on securities and insurance sales. Other income for the
three months ended March 31, 1996 included a pre-payment penalty of $200,000 on
the payoff of an income producing property loan.
Other expenses increased by 3.3 percent to $5.0 million for the three months
ended March 31, 1997 compared to $4.9 million for the same period a year ago.
The modest increase in expenses included a $186,000 reduction in deposit
insurance expense as a result of lower premium rates charged by the Federal
Deposit Insurance Corporation. The increase in expenses included commission
expense totaling $304,000 in connection with the above mentioned broker fee
income.
11
Income tax expenses totaled $1,024,000, an effective tax rate of 31.0 percent
for the three month period ended March 31, 1997 compared to $546,100, an
effective tax rate of 25.0 percent for the same period last year. Provision for
income tax expense for the three month periods ended March 31, 1997 and 1996
include tax credits of $285,000 and $321,000 respectively, which are
attributable to the equity investment in low and moderate income housing
projects by the Corporation's subsidiary IndFed Mortgage Company.
LIQUIDITY AND CAPITAL RESOURCES
Indiana Federal maintains certain levels of cash and other liquid assets to fund
normal volumes of loan commitments, savings deposit activity and other
obligations. The Office of Thrift Supervision requires thrifts to maintain
their liquidity ratio (cash and cash equivalent investments to net withdrawable
deposits and borrowing due within one year) in excess of five percent. As of
March 31, 1997 and 1996, the Bank's liquidity ratio was 6.28 percent and 7.45
percent, respectively, which were both in excess of the minimum regulatory
requirement.
Indiana Federal's primary sources of funds include loan repayments/advances from
the FHLB of Indianapolis, reverse repurchase agreements, deposits and loan
sales. Management considers its current liquidity and additional sources of
funds adequate to meet outstanding loan commitments.
Current regulatory standards impose the following capital requirements: risk-
based capital standard expressed as a percent of risk-adjusted assets, a
leverage ratio of core capital to total adjusted assets and a tangible capital
ratio expressed as a percent of total adjusted assets. As of March 31, 1997,
the Bank substantially exceeded all regulatory capital requirements.
At March 31, 1997, the Bank's tangible and core capital was $51.6 million or
6.50 percent of adjusted total assets, which was in excess of the 1.5 percent
requirement by $39.5 million and in excess of the 3.00 percent core capital
requirement by $27.4 million. The Bank also had risk-based capital of $57.7
million at March 31, 1997 or 10.43 percent, which exceeded the 8.0 percent risk
based capital requirement by $13.5 million.
At March 31, 1997, the Corporation had acquired a total of 1,109,999 shares of
its outstanding common shares through its previously announced share repurchase
programs. The Corporation did not acquire any shares in the first quarter of
1997.
The Board of Directors approved an $.18 per share, or $859,114 cash dividend for
the first quarter of 1997.
12
INDIANA FEDERAL CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
A. Exhibit 27 - Financial Data Schedule
13
INDIANA FEDERAL CORPORATION
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Indiana Federal Corporation
Registrant
Date: May 15, 1997 /s/ Peter R. Candela
Peter R. Candela
President/Chief Operations Officer
Date: May 15, 1997 /s/ George J. Eberhardt
George J. Eberhardt
Executive Vice President/
Chief Financial Officer
14