<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant To Section 13 or 15 (d)
of the Securities Exchange Act of 1934
For the Quarterly Period Ended Commission File Number
September 30, 1996 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 November 7, 1996, there were 4,751,131 outstanding shares of the
registrant's Common Stock.
<PAGE>
INDIANA FEDERAL CORPORATION
INDEX
Page
Number
PART I. FINANCIAL INFORMATION
Item 1. Condensed Consolidated Financial
Statements (unaudited)
Condensed Consolidated Statements of Financial Condition
September 30, 1996 and December 31, 1995 2 - 3
Condensed Consolidated Statements of Income, Three and
Nine Months Ended September 30, 1996 and 1995 4
Consolidated Statements of Cash Flow, Nine Months
Ended September 30, 1996 and 1995 5 - 6
Notes to Condensed Consolidated Financial Statements 7 - 9
Item 2. Management's Discussion and Analysis
of Financial Condition and Results
of Operations 10 - 15
PART II. OTHER INFORMATION 16
SIGNATURES 17
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
ASSETS
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------------- --------------
<S> <C> <C>
Cash $ 23,568,907 $ 22,894,745
Interest-earning deposits in other institutions 66,311 178,207
Federal funds loaned -- 5,375,000
Total Cash and Cash Equivalents 23,635,218 28,447,952
Investment securities:
Available-for-sale 79,695,476 72,672,893
Mortgage-backed securities:
Available-for-sale 42,086,981 26,737,343
Loans receivable 609,718,379 529,348,028
Allowance for loan losses (6,856,399) (6,655,071)
---------------- --------------
Loans Receivable, Net 602,861,980 522,692,957
Loans held for sale 883,069 16,044,609
Real estate held for sale, acquired through foreclosure 3,902,111 4,413,617
Office properties and equipment 10,758,320 10,919,615
Federal Home Loan Bank stock 7,739,700 7,739,700
Accrued interest receivable 5,983,857 5,005,115
Goodwill and deposit base intangible 4,679,997 5,160,639
Investment in Section 42 properties 6,989,922 6,679,081
Investment in single premium life insurance policies 12,477,024 10,793,759
Other assets 7,429,145 4,025,810
---------------- --------------
TOTAL ASSETS $ 809,122,800 $ 721,333,090
================ ==============
</TABLE>
2
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
1996 1995
---------------- --------------
<S> <C> <C>
Deposits $ 559,187,254 $ 532,895,925
Federal Home Loan Bank advances
and other borrowings 173,244,070 114,105,475
Advance payments by borrowers for
taxes and insurance 2,390,568 1,409,051
Other liabilities 4,343,527 2,192,463
---------------- --------------
TOTAL LIABILITIES 739,165,419 650,602,914
---------------- --------------
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
1996--5,847,130 shares, 1995--5,823,946 shares 58,471 58,239
Additional paid-in capital 27,568,227 27,428,077
Unrealized gain (loss) on available-for-sale securities,
net of deferred income taxes (289,653) 779,343
Retained earnings 51,611,376 51,443,400
Treasury Stock, at cost - September 1996--1,110,000
shares; December 1995--1,103,000 shares (8,754,075) (8,628,949)
Guaranteed ESOP obligation (236,965) (349,934)
---------------- --------------
TOTAL SHAREHOLDERS' EQUITY 69,957,381 70,730,176
---------------- --------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 809,122,800 $ 721,333,090
================ ==============
</TABLE>
3
<PAGE>
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Interest income:
Interest on loans $12,301,833 $11,780,354 $35,823,045 $35,019,383
Interest on mortgage-backed securities 732,903 484,499 1,626,590 1,458,231
Interest and dividends on investment 1,510,911 1,384,955 3,951,348 4,974,750
----------- ----------- ----------- -----------
Total Interest Income 14,545,647 13,649,808 41,400,983 41,452,364
Interest expense:
Interest on deposits 6,234,133 5,750,998 18,149,378 16,658,452
Interest on FHLB advances & other borrowings 1,900,771 1,694,390 4,790,553 5,691,442
----------- ----------- ----------- -----------
Total Interest Expense 8,134,904 7,445,388 22,939,931 22,349,894
----------- ----------- ----------- -----------
Net Interest Income 6,410,743 6,204,420 18,461,052 19,102,470
Provision for loan losses 265,000 2,357 465,000 176,967
----------- ----------- ----------- -----------
Net Interest Income After Provision for Loan Losses 6,145,743 6,202,063 17,996,052 18,925,503
Other income:
Commissions on sales of insurance and securities 312,581 247,802 942,994 882,298
Gain (loss) on sale of real estate owned (174,383) 1,059 (175,370) (354,420)
Gain (loss) on sale and valuation of mortgage loans 14,228 (96,991) (489,901) (32,713)
Gain (loss) on sale of securities 69,979 -- 52,479 439,715
Customer service fees 443,758 383,213 1,287,568 1,093,736
Other 403,341 407,324 1,327,637 1,135,393
----------- ----------- ----------- -----------
Total Other Income 1,069,504 942,407 2,945,407 3,164,009
Other expenses:
Salaries and employee benefits 2,150,204 2,142,831 6,473,617 6,657,753
Net occupancy expense 384,877 430,132 1,143,613 1,109,835
Furniture and equipment expense 373,981 386,577 1,209,481 1,191,531
Federal insurance premiums 162,536 250,750 680,036 839,677
SAIF Assessment 2,825,000 -- 2,825,000 --
Marketing 103,191 197,706 465,363 534,484
Other general and administrative 1,405,479 1,487,193 4,355,961 4,172,832
----------- ----------- ----------- -----------
Total Other Expenses 7,405,268 4,895,189 17,153,071 14,506,112
----------- ----------- ----------- -----------
Income (Loss) Before Income Taxes (190,021) 2,249,281 3,788,388 7,583,400
Income Tax Expense (Benefit) (384,700) 571,260 587,000 2,135,645
----------- ----------- ----------- -----------
Net Income $ 194,679 $ 1,678,021 $ 3,201,388 $ 5,447,755
=========== =========== =========== ===========
Amounts per common share:
Net Income $0.04 $0.34 $0.67 $1.12
===== ===== ===== =====
Cash Dividend Paid $0.18 $0.165 $0.64 $0.695
===== ====== ===== ======
</TABLE>
4
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------------- --------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 3,201,388 $ 5,447,755
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 465,000 176,967
Originations of loans held for sale (29,431,570) (36,078,595)
Cost of loans sold 34,509,962 27,099,856
Provision for depreciation and amortization 1,638,273 1,331,790
Amortization of premiums and discounts, net 111,581 146,838
Proceeds from sales of trading securities 8,135,782 1,974,760
Purchases of trading securities (8,153,438) (1,975,625)
Deferred federal income taxes (971,805) (1,882,479)
Increase (decrease) in interest receivable 978,742 (1,452,482)
Decrease in interest payable (4,329) (621,339)
Net (gains) on sale of securities (52,479) (439,715)
Net losses on real estate owned 175,370 354,420
Net losses on sale and valuation of mortgage loans 489,901 32,713
Net change in other assets and liabilities 836,111 (250,905)
--------------- --------------
Net Cash Provided (Used) by Operating Activities 11,928,489 (6,136,041)
--------------- --------------
INVESTING ACTIVITIES
Purchase of Forrest Holdings, Inc. preferred stock (2,500,000) --
Proceeds from maturities of securities
held-to-maturity -- 3,265,000
Proceeds from maturities and principal on
securities available-for-sale 16,260,108 --
Proceeds from sales of securities
available-for-sale 2,493,125 77,374,156
Purchases of securities available-for-sale (29,789,459) (31,634,419)
Purchases of mortgage-backed securities
available-for-sale (9,818,677) --
Principal payments on mortgage-backed securities
held-to-maturity -- 866,866
Principal payments on mortgage-backed securities
available-for-sale 3,792,060 1,229,251
Purchases of loans (24,705,828) (260,000)
Loan originations and principal payments on loans (55,463,195) 7,974,378
Purchases of office properties and equipment (815,094) (1,262,767)
Proceeds from sale of real estate 414,906 --
Payment for purchase of NCB Corp., net -- (6,467,096)
--------------- ---------------
Net Cash Provided (Used) by Investing Activities (100,132,054) 51,085,369
--------------- ---------------
</TABLE>
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (Continued)
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
1996 1995
--------------- --------------
<S> <C> <C>
FINANCING ACTIVITIES
Net increase (decrease) in non-certificate accounts $ 10,459,756 $ (37,702,785)
Net increase in certificates of deposit 15,831,573 6,955,935
Proceeds from Federal Home Loan Bank advances 167,900,000 30,000,000
Repayments on Federal Home Loan Bank advances (123,465,155) (4,157,167)
Net increase (decrease) in other borrowings 14,703,750 (42,975,000)
Net increase in advance payment by borrowers
for taxes and insurance 981,517 1,005,030
Cash dividends (3,035,869) (3,269,334)
Purchase of treasury stock (125,125) (400,185)
Exercise of stock options 140,384 461,707
--------------- --------------
Net Cash Provided (Used) by Financing Activities 83,390,831 (50,081,799)
--------------- --------------
Decrease in Cash and Cash Equivalents (4,812,734) (5,132,471)
Cash and Cash Equivalents at Beginning of Year 28,447,952 18,535,270
--------------- --------------
Cash and Cash Equivalents at End of Quarter $ 23,635,218 $ 13,402,799
=============== ==============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION - CASH PAID DURING THE PERIOD:
Interest:
Deposits $ 17,958,244 $ 16,257,166
Federal Home Loan Bank advances and other borrowings 4,794,882 5,686,644
--------------- --------------
$ 22,753,126 $ 21,943,810
=============== ==============
Income Taxes $ 878,000 $ 2,020,000
SUPPLEMENTAL DISCLOSURE OF NON-CASH
INVESTING ACTIVITY:
Loans transferred to real estate owned -- $ 1,000,310
Loans transferred to mortgage-backed securities $ 10,083,148 --
Loans transferred to held-for-sale category
due to borrower conversion of adjustable rate
mortgage loans to fixed rate mortgage loans -- $ 251,505
</TABLE>
6
<PAGE>
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) <PAGE>
INDIANA FEDERAL CORPORATION AND SUBSIDIARIES
September 30, 1996
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 nine month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
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
assume purchase of treasury stock with the option proceeds at the average
market price for the period (when dilutive).
NOTE 3 - Reclassification
Certain amounts in the 1995 condensed consolidated financial statements have
been reclassified to conform with the 1996 presentation.
NOTE 4 - Marketable Debt and Mortgage-Backed Securities
The following is a summary of available-for-sale securities at September 30,
1996:
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
-------------- ------------- ------------ --------------
<S> <C> <C> <C> <C>
Securities available-for-sale:
U.S. Government and agency securities $ 31,143,677 $ 241,032 $ (442,479) $ 30,942,230
Collateralized mortgage obligations 36,145,174 24,885 (359,111) 35,810,948
Municipal securities 946,935 41,867 (4,544) 984,258
Corporate debt securities 11,999,631 3,489 (45,080) 11,958,040
-------------- ------------- ------------ --------------
Total investment securities 80,235,417 311,273 (851,214) 79,695,476
Mortgage-backed securities 42,026,677 408,417 (348,113) 42,086,981
-------------- ------------- ------------ --------------
Total securities available-for-sale $ 122,262,094 $ 719,690 $ (1,199,327) $ 121,782,457
============== ============= ============ ==============
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
Securities
available-for-sale
---------------------------------
Estimated
Amortized Market
Cost Value
-------------- ---------------
<S> <C> <C>
Due in one year or less $ 7,980,141 $ 7,999,365
Due after one year through five years 13,069,625 13,044,304
Due after five years through ten years 26,828,162 26,548,624
Due after ten years 32,357,489 32,103,183
-------------- ---------------
Total investment securities 80,235,417 79,695,476
Mortgage-backed securities 42,026,677 42,086,981
-------------- ---------------
Total securities $ 122,262,094 $ 121,782,457
============== ===============
</TABLE>
NOTE 5 - Accounting by Creditors for Impaired Loans
On January 1, 1995, Indiana Federal Corporation ("the Corporation") adopted
Statement of Financial Accounting Standards ("SFAS") No. 114, "Accounting by
Creditors for Impairment of a Loan." Under the new standard, the allowance
for credit 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 of the collateral
for certain collateral dependent loans. Prior to 1995, the allowance for
credit losses related to these loans was based on undiscounted cash flows or
the fair value of the collateral for collateral dependent loans. A loan is
considered impaired when a creditor will be unable to collect all amounts
due according to the contractual terms of the loan agreement.
In accordance with SFAS No. 114, a loan is classified as in-substance
foreclosure when the Bank has taken possession of the collateral regardless
of whether formal foreclosure proceedings take place. Loans previously
classified as in-substance foreclosure but where the Company has not taken
possession of the collateral continue to be classified as impaired loans.
At September 30, 1996, the recorded investment in loans that are considered
to be impaired under SFAS No. 114 was $6.6 million of which $4.4 million
were on a non-accrual basis. The average recorded investment in impaired
loans during the nine months ended September 30, 1996 was $6.2 million. For
the three and nine months ended September 30, 1996, the Bank recognized
interest income on those impaired loans of $20,000 and $75,000,
respectively.
NOTE 6 - Accounting for Mortgage Servicing Rights
The Corporation originates and purchases mortgage loans for sale in the
secondary market, and sells the loans with servicing either retained or
released. Effective January 1, 1996, the Corporation adopted SFAS No. 122,
"Accounting for Mortgage Servicing Rights". For
8
<PAGE>
servicing retained, SFAS No. 122 requires capitalizing the cost of mortgage
servicing rights, regardless of whether those rights were acquired through
origination or purchase activities.
Beginning in 1996, the total cost of mortgage loans purchased or originated
with the intent to sell is allocated between the loan servicing right and
the mortgage loan without servicing, based on their relative fair values at
the date of origination or purchase. The capitalized cost of loan servicing
rights is amortized in proportion to, and over the period of, estimated net
future servicing revenue. Estimated servicing costs include direct costs
associated with performing the servicing function and appropriate
allocations of other costs.
Mortgage servicing rights are periodically evaluated for impairment.
Impairment represents the excess of cost of an individual mortgage servicing
rights stratum over its fair value, and is recognized through a valuation
allowance. The amount capitalized approximated the market value of
servicing rights at September 30, 1996 and, accordingly, no valuation
allowance for servicing rights was established. Quoted market prices were
used to estimate the fair value of servicing rights at September 30, 1996.
The amounts capitalized during the three and nine month periods ended
September 30, 1996 were $38,379 and $305,768, respectively. The capitalized
amounts are being amortized over the estimated lives of the loans. The
amortization in the three and nine month periods ended September 30, 1996
was $14,273 and $28,331, respectively. At September 30, 1996, the fair
value of capitalized mortgage servicing rights totaled $277,437.
NOTE 7 - Investment in Forrest Holdings, Inc.
On February 2, 1996, the Corporation purchased for $2.5 million a one-third
interest in Forrest Holdings, Inc. of Oak Brook, Illinois. Forrest
Holdings, Inc. owns and operates Forrest Financial Corporation, a leasing
company which provides financing for the acquisition of information systems,
including equipment, software, training and maintenance.
9
<PAGE>
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 $809.1
million at September 30, 1996, compared to total assets of $721.3 million at
December 31, 1995. The growth in total assets primarily resulted from the
increase of $80.2 million and $15.3 million in net loans receivable and
mortgage-backed securities, respectively, offset by a $15.2 decline in loans
held for sale. The growth in assets was funded with increases of $26.3
million in deposits and $59.1 million in Federal Home Loan Bank ("FHLB")
advances and other borrowings.
Investment securities increased to $79.7 million at September 30, 1996 from
$72.7 million at December 31, 1995. The increase primarily resulted from
the $15.0 million purchase of Federal National Mortgage Association ("FNMA")
medium term notes, and a $5.3 million purchase of Federal Home Loan Mortgage
Corporation ("FHLMC") REMICs. These purchases more than offset normal
maturities and principal repayments from the investment portfolio.
Mortgage-backed securities increased to $42.1 million at September 30, 1996
from $26.7 million at December 31, 1995. The increase was the result of
management's decision to securitize $10.0 million of fixed-rate, one- to
four-family mortgage loans with FHLMC and a separate $10.0 million purchase
of 15 year fixed-rate FHLMC and FNMA mortgage-backed securities.
The net loan portfolio balance at September 30, 1996 increased $80.2 million
to $602.9 million from $522.7 million at December 31, 1995. One- to four-
family mortgage, income producing property, consumer and commercial loans
originated and purchased during the nine months ended September 30, 1996
were $91.4 million, $16.8 million, $57.6 million and $51.4 million,
respectively, totaling $217.2 million or $82.6 million more than the $134.6
million originated and purchased during the same period a year ago. The
consumer loan volume includes $24.7 million of home equity loans purchased
from Amerus Bank. Loan repayments totaled $98.6 million for the nine months
ended September 30, 1996 compared to $101.4 million for the same period last
year. Sales of one- to four-family fixed-rate mortgage loans increased to
$44.6 million for the nine months ended September 30, 1996 from $27.9
million for the same period a year ago.
Of the $91.4 million in one- to four-family mortgage loans originated and
purchased, $41.8 million or 45.7 percent consisted of adjustable-rate
mortgage loans, including $23.4 million in short-term construction loans.
The remaining $49.6 million of one- to four-family mortgage loans
represented long-term, fixed-rate loan originations. Included in
10
<PAGE>
fixed-rate loan originations were $11.0 million of 15 year loans which were
retained in the loan portfolio, $9.2 million of 30 year FHA and VA loans
which were purchased from correspondents and $29.4 million of 30 year fixed-
rate loans which were originated for sale. Fixed-rate loans held for sale
at September 30, 1996 decreased to $883,000 from $16.0 million at December
31, 1995. The loans held for sale at September 30, 1996 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 September 30, 1996,
the Corporation had recorded a net adjustment of $5,072 to reduce the book
value of these loans to their fair market value.
Deposits increased to $559.2 million at September 30, 1996 from $532.9
million at December 31, 1995. The increase in deposits occurred primarily
as a result of an increase of $10.5 million in passbook, money market and
other transaction accounts and an increase of $15.8 million in certificate
of deposit balances.
Shareholders' equity decreased to $70.0 million or $14.77 per share at
September 30, 1996 from $70.7 million or $14.98 per share at December 31,
1995. The decrease in shareholders' equity was primarily the result of a
$1.1 million decrease in unrealized gains on the available-for-sale
securities portfolio and the payment of $3.0 million in cash dividends.
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 Corporation attempts to mitigate its interest
rate risk exposure by managing the maturity, prepayment and repricing
characteristics of assets and liabilities. The Corporation retains certain
fixed-rate and adjustable-rate loans and sells in the secondary market
conforming thirty-year fixed-rate mortgage loans. At September 30, 1996,
the volume of liabilities repricing in one year or less exceeded the volume
of assets repricing in one year or less ("one year gap") by $96.3 million or
a negative 12.11 percent of the Corporation's total assets. This figure
compares to a negative 12.38 percent one year gap at December 31, 1995.
NON-PERFORMING ASSETS AND LOAN LOSS RESERVES
The Corporation's non-performing assets decreased to $10.7 million or 1.32
percent of total assets at September 30, 1996 from $11.0 million or 1.53
percent of total assets at December 31, 1995.
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
11
<PAGE>
review process, recorded provision for loan losses of $265,000 and $465,000,
respectively, for the three and nine month periods ended September 30, 1996
compared to $2,000 and $177,000, for the three and nine months ended
September 30, 1995. The growth in the loan portfolio primarily was in
commercial, construction and home equity loans, which typically have higher
risks. In response to this loan growth and higher risk associated with the
loan mix, the Corporation increased its provision for loan losses.
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 September 30, 1996, the
Corporation's allowance for loan losses totaled $6.9 million or 1.13 percent
of net loans receivable compared to $6.7 million or 1.27 percent of net
loans receivable at December 31, 1995.
RESULTS OF OPERATIONS
The Corporation's third quarter 1996 earnings were 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 third quarter and year-
to-date earnings by $1.7 million or $0.36 per share. Net income for the
third quarter of 1996 was $195,000 or $0.04 per share, compared to net
income of $1.7 million or $0.34 per share for the same period in 1995. For
the nine months ended September 30, 1996, net income was $3.2 million or
$0.67 per share compared to $5.4 million or $1.12 per share for the same
period in 1995. Earnings per share for the third quarter of 1996, excluding
the one-time special deposit premium assessment, would have increased by 18
percent to $0.40 per share compared to $0.34 per share for the similar 1995
quarter. The return on average shareholders' equity, excluding the one-time
SAIF assessment, was 9.30 percent for the nine months ended September 30,
1996 compared to 10.93 percent for the same period in 1995. The return on
average assets, excluding the one-time special SAIF assessment, was .86
percent for the nine months ended September 30, 1996 compared to 1.01
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. The Corporation's net interest income after
provision for loan losses for the three months ended September 30, 1996
decreased to $6.1 million compared to $6.2 million for the same period in
1995. Net interest income after provision for loan losses for the nine
months ended September 30, 1996 decreased to $18.0 million from $18.9
million for the same period last year. The decline in net interest income
after provision for loan losses was a result of higher interest rates on
liability products and lower yields on interest-earning assets and higher
provision for loan losses. The net interest margin decreased to 3.69
percent for the
12
<PAGE>
three months ended September 30, 1996 compared to 3.81 percent for the same
period last year. For the nine months ended September 30, 1996, the net
interest margin declined to 3.65 percent compared to 3.79 percent for the
same period last year.
Other income when excluding gains and losses on the sale of assets increased
to $1.2 million for the three months ended September 30, 1996, compared to
$1.0 million for the same period last year. The increase was primarily due
to higher commissions on the sale of insurance and securities and customer
services fees. For the nine months ended September 30, 1996, other income
when excluding gains and losses on the sale of assets increased to $3.6
million from $3.1 million for the same period last year. The increase was
due to higher commissions on the sale of insurance and securities and
customer services fees and a prepayment penalty of $200,000 on the payoff of
an income producing property loan.
Excluding the one-time SAIF assessment of $2.8 million, other expenses
declined to $4.6 million for the three months ended September 30, 1996
compared to $4.9 million for the same period last year. For the nine months
ended September 30, 1996, other expenses declined to $14.3 million,
excluding the one-time SAIF assessment, compared to $14.5 million for the
same period last year. The decline in other expenses was primarily due to
efficiencies realized in 1996 from the acquisition of American State Bank
and the NCB Corporation.
Income tax expenses, excluding the $1.1 million tax benefit on the $2.8
million SAIF assessment, totaled $734,000, an effective tax rate of 27.8
percent for the three months ended September 30, 1996 compared to $571,000,
an effective tax rate of 25.4 percent for the same period last year. For
the nine months ended September 30, 1996, income tax expenses, excluding the
one-time SAIF assessment, totaled $1,706,000 or an effective tax rate of
25.8 percent compared to $2,136,000 or an effective tax rate of 28.2 percent
for the same period last year. Provision for income tax expense for the
three and nine months ended September 30, 1996 included low to moderate
income housing tax credits of $315,000 and $942,000, respectively, compared
to $237,000 and $811,000, respectively for the same period last year.
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 September 30, 1996 and 1995, the Bank's liquidity ratio was
5.84 percent and 7.63 percent, respectively, which were both in excess of
the minimum regulatory requirement.
The Corporation's primary sources of funds include loan repayments, advances
from the FHLB of Indianapolis, reverse repurchase agreements, deposits and
loan sales. At September 30, 1996, the Corporation had commitments to
originate $34.1 million of loans
13
<PAGE>
(including $14.2 million in unused lines of credit). At the same date,
scheduled maturities of certificates of deposit during the succeeding 12
months amounted to $132.3 million (including $100.1 million within three
months or less) and scheduled maturities of FHLB advances during such 12-
month period amounted to $121.4 million. 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
September 30, 1996, the Bank substantially exceeded all regulatory capital
requirements.
At September 30, 1996, the Bank's tangible capital was $48.1 million or 6.09
percent of adjusted total assets, which was in excess of the 1.5 percent
requirement by $36.3 million. In addition, at September 30, 1996, the Bank
had core capital of $48.1 million or 6.09 percent of adjusted total assets,
which exceeded the 3.0 percent requirement by $24.4 million. The Bank also
had risk-based capital of $53.6 million at September 30, 1996 or 9.93
percent, which exceeded the 8.0 percent risk based capital requirement by
$10.4 million.
At September 30, 1996, the Corporation had acquired a total of 1,110,000
shares of its outstanding common shares through its previously announced
share repurchase programs. The Corporation acquired 7,000 shares in the
nine months ended September 30, 1996.
The Board of Directors approved a $.18 per share, or $854,700 cash dividend
for the third quarter of 1996.
IMPACT OF NEW ACCOUNTING STANDARD
In June 1996, the FASB issued Statement of Financial Accounting Standards
No. 125 ("SFAS No. 125"), "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities." This statement
applies a "financial-components approach" in recognizing assets and
liabilities, focusing on control of such financial assets and liabilities.
Under SFAS No. 125, an entity recognizes the financial and servicing assets
it controls and the liabilities it has incurred. An entity ceases to
recognize assets when control has been surrendered, and it ceases to
recognize liabilities when they are extinguished. SFAS No. 125 establishes
standards to distinguish between transfers of financial assets that are
sales and transfers of financial assets that are secured borrowings. SFAS
No. 125 is effective for transfers and servicing of financial assets that
are secured borrowings. SFAS No. 125 is effective for transfers and
servicing of financial assets and extinguishments of liabilities occurring
after December 31, 1996. The Corporation does not expect this pronouncement
to have a significant impact on its consolidated financial condition or
results of operations.
14
<PAGE>
RECENT DEVELOPMENTS
Legislation regarding bad debt recapture has been enacted. The legislation
requires recapture of reserves accumulated after 1987. The recapture tax on
post-1987 reserves must be paid over a six year period starting in 1996.
The payment of the tax can be deferred in each of 1996 and 1997 if an
institution originates at least the same average annual principal amount of
mortgage loans that it originated in the six years prior to 1996.
Management does not believe that this legislation will have a material
impact on the operations of the Corporation.
15
<PAGE>
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
B. None
16
<PAGE>
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: November 13, 1996 /s/ Peter R. Candela
------------------------- ----------------------------
Peter R. Candela
President/Chief Operating Officer
Date: November 13, 1996 /s/ George J. Eberhardt
-------------------------- ----------------------------
George J. Eberhardt
Executive Vice President/
Chief Financial Officer
17
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