[GRAPHIC OMITTED]
2002
annual NORTHEAST INDIANA Bancorp, Inc.
report
PRESIDENT'S MESSAGE TO OUR SHAREHOLDERS
- --------------------------------------------------------------------------------
[GRAPIC OMITTED]
Dear Shareholders,
2002 proved to be a very challenging year for our industry and for Northeast
Indiana Bancorp, Inc. and its wholly owned subsidiary First Federal Savings
Bank. The economic climate in our market area, northeastern Indiana, has
remained very weak and housing sales, our main source of loans have been modest.
These factors, along with an interest rate environment that did not favor the
current composition of our balance sheet, produced results that were average for
the industry but well below our expectations.
Despite these obstacles, we continued to be profitable. Net income for the year
ended December 31, 2002 was $1.6 million, or diluted earnings per common share
of $1.06, compared to $2.0 million, or diluted earnings per common share of
$1.25 for the year ended December 31, 2001. The reduction in net income was the
direct result of a decrease in net interest income, increased loan loss
provisions and increases in other noninterest expenses.
On a more positive note, Northeast Indiana Bancorp, Inc. returned more than $2.1
million to shareholders in 2002, including cash dividends of $752,000 and stock
repurchases of 87,676 shares at an average price of $15.06 per share. The
Company has increased cash dividends paid per share from $0.252 (adjusted for
10% stock dividends declared and paid in both November 1998 and November 1999)
during the first full year of operations for the year ended December 31, 1996 to
$0.490 for the current year ended December 31, 2002. This represents a 94.4%
compound growth rate for dividends paid across this six-year period. During the
past twelve months our stock price has increased from a closing price of $12.50
per share on December 31, 2001 to a closing price of $15.80 per share at
December 31, 2002, a 26.4% increase in value.
As we enter 2003 there are many uncertainties which face our nation and the
financial services industry. Our directors and officers remain excited and
optimistic about our future and the opportunities that lie ahead. A strong
capital base is in place, liquidity has been maintained and a concerted effort
is being made to adjust the asset/liability mix to enhance future earnings of
the Company. We are dedicated to doing the best possible job for our
shareholders, customers, and employees. As such, we will continue to position
ourselves to become more profitable in the future. I thank you for your
continued support and loyalty as we work to preserve and expand shareholder
value.
Sincerely,
/s/ Stephen E. Zahn
Stephen E. Zahn
Chairman of the Board,
President, Chief Executive Officer
1
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PRESIDENT'S MESSAGE TO OUR SHAREHOLDERS ...................................... 1
SELECTED CONSOLIDATED FINANCIAL INFORMATION................................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS ....................................................... 3
REPORT OF INDEPENDENT AUDITORS ...............................................17
CONSOLIDATED FINANCIAL STATEMENTS ............................................18
STOCKHOLDER INFORMATION ......................................................45
DIRECTORS AND EXECUTIVE OFFICERS ..............................Inside Back Cover
DESCRIPTION OF BUSINESS
- --------------------------------------------------------------------------------
Northeast Indiana Bancorp, Inc. ("Northeast Indiana Bancorp") was formed as a
Delaware corporation in March, 1995 for the purpose of issuing common stock and
owning all of the common stock of First Federal Savings Bank ("First Federal")
as a unitary thrift holding company. The Bank conducts business from its three
offices located in Huntington, Indiana. The principal business of First Federal
consists of attracting deposits from the general public and making loans secured
by residential real estate. Historically, First Federal has been among the top
real estate lenders and is the largest financial institution by asset size in
Huntington County. In order to serve additional financial needs of area
residents, First Federal established a Trust Department during 1998, and now
provides brokerage services via its wholly owned subsidiary, Northeast Indiana
Financial, Inc. First Federal has been serving the Huntington community since
1912.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31
-----------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
Selected Financial Condition Data: (dollars in thousands)
Total assets ...................................... $225,019 $238,395 $247,094 $254,747 $212,425
Securities ........................................ 43,063 39,671 31,609 33,649 14,187
Loans receivable, net ............................. 154,560 162,830 200,151 208,395 185,906
Deposits .......................................... 122,357 137,030 146,806 143,212 123,336
Total borrowings .................................. 74,894 73,966 72,539 84,754 63,080
Shareholders' equity .............................. 26,562 26,281 26,574 25,655 25,005
Selected Operations Data:
Total interest income ............................. $ 14,297 $ 17,436 $ 19,565 $ 17,722 $ 16,139
Total interest expense ............................ 7,997 10,765 12,485 9,846 9,061
-------- -------- -------- -------- --------
Net interest income ............................ 6,300 6,671 7,080 7,876 7,078
Provision for loan losses ......................... 732 575 1,591 449 360
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses .......................................... 5,568 6,096 5,489 7,427 6,718
Total noninterest income .......................... 1,464 1,348 1,010 832 731
Total noninterest expense ......................... 4,971 4,702 4,775 4,194 3,691
-------- -------- -------- -------- --------
Income before income taxes ........................ 2,061 2,742 1,724 4,065 3,758
Income tax expense ................................ 471 773 441 1,475 1,369
-------- -------- -------- -------- --------
Net income ........................................ $ 1,590 $ 1,969 $ 1,283 $ 2,590 $ 2,389
======== ======== ======== ======== ========
Basic earnings per common share (2) ............... $ 1.09 $ 1.28 $ 0.80 $ 1.59 $ 1.36
Diluted earnings per common share (2) ............. 1.06 1.25 0.79 1.54 1.28
Selected Financial Ratios and Other Data:
Performance Ratios:
Return on assets (ratio of net income to
average total assets) ........................ 0.69% 0.81% 0.50% 1.11% 1.17%
Return on equity (ratio of net income to
average total shareholders' equity) .......... 6.01 7.35 4.88 10.15 9.15
Interest rate spread information:
Average during period ....................... 2.44 2.39 2.39 3.03 2.95
End of period ............................... 2.57 2.53 2.34 3.02 3.11
Net interest margin (1) ........................ 2.87 2.88 2.90 3.50 3.57
Ratio of operating expense to average total
assets ....................................... 2.16 1.94 1.88 1.80 1.81
Ratio of average interest-earning assets to
average interest-bearing liabilities ......... 111.80 110.54 109.95 110.74 113.66
Quality Ratios:
Non-performing assets to total assets at end
of period .................................... 3.00 3.03 1.79 .70 .63
Allowance for loan losses to non-performing
loans ........................................ 34.35 28.26 53.99 103.33 120.36
Allowance for loan losses to total loans ....... 1.36 1.19 .99 .84 .78
Capital Ratios:
Total shareholders' equity to total assets at
end of period ................................ 11.80 11.02 10.75 10.07 11.77
Average total shareholders' equity to average
total assets ................................. 11.52 11.07 10.33 10.94 12.80
Other Data:
Dividends declared per share (2) ............... $ 0.490 $ 0.450 $ 0.410 $ 0.345 $ 0.293
Dividend payout ratio .......................... 44.95% 35.16% 51.25% 21.70% 21.54%
Number of full-service offices ................. 3 3 3 3 3
- ----------
(1) Net interest income divided by average interest-earning assets.
(2) All share and per share amounts have been restated to reflect the 10%
stock dividends paid on November 23, 1998 to shareholders of record
November 6, 1998 and again on November 22, 1999 to shareholders of record
November 6, 1999.
2
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Northeast Indiana Bancorp, Inc. ("Northeast Indiana Bancorp" or "the Company")
was formed as a Delaware corporation in March, 1995 for the purpose of issuing
common stock and owning all of the common stock of First Federal Savings Bank
("First Federal") as a unitary thrift holding company. First Federal conducts
business from its three offices located in Huntington, Indiana. Northeast
Indiana Bancorp's primary business activity is its investment in First Federal,
and therefore, the following discussion relates primarily to its operations.
During 1998, First Federal established a trust department which began operations
in the fourth quarter. At the end of 2002, $39.8 million was held under asset
management. In February 1999, Northeast Indiana Bancorp announced the
establishment of Northeast Indiana Financial, Inc., a wholly-owned subsidiary of
the Bank. Northeast Indiana Financial, Inc. provides brokerage services through
the purchase of mutual funds, annuities, stocks and bonds for its customers and
has $12.8 million of assets held for our customers. The trust department has
grown to a level where it provides a slight positive impact to the Company.
Northeast Indiana Financial, Inc. has not been able to produce positive results
thus far primarily due to the extremely challenging equity markets over the past
three years. Management continues to believe that the equity markets will
eventually stabilize and that the additional value of these types of services to
customers will be rewarded with future profitability.
The principal business of savings banks, including First Federal, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. First Federal's earnings are primarily
dependent on net interest income, the difference between interest income and
interest expense. Interest income is a function of the balances of loans and
investments outstanding during the period and the yield earned on such assets.
Interest expense is a function of the balances of deposits and borrowings
outstanding during the same period and the rates paid on such deposits and
borrowings. Provisions for loan losses, service charge and fee income, other
noninterest income, operating expenses and income taxes also affect First
Federal's earnings. Operating expenses consist primarily of employee
compensation and benefits, occupancy and equipment expenses, data processing,
federal deposit insurance premiums and other general and administrative
expenses.
Prevailing economic conditions as well as federal regulations concerning
monetary policies, fiscal policies, and financial institutions significantly
affect First Federal. During 2000 the Federal Reserve raised short-term rates
three times for a total of 100 basis points to help the United States economy
maintain low inflation. The increase in interest rates helped cause the economy
to slow as became evident by the fourth quarter of 2000. Due to the continued
economic downturn, the Federal Reserve lowered short-term rates eleven times
during 2001 for a total of 475 basis points in an attempt to stimulate the
economy. The low interest rate environment carried over into 2002 as the economy
continued to struggle. The Federal Reserve eventually lowered short-term rates
an additional 50 basis points in the fourth quarter of 2002, bringing the
benchmark federal funds target rate to the lowest levels of the past three
decades.
3
The low interest rate environment of the past two years has continued to
pressure the net interest margin of the Company as loan repayments and
amortizing security prepayment speeds have ran at very high levels. As a result,
the net interest margin for First Federal Savings Bank decreased slightly from
2.88% as of December 31, 2001 to 2.87% at the end of 2002.
After operating in this historically low interest rate environment now in excess
of twelve months, Management has tried to position the Company favorably for a
rising rate environment. However, there can be no assurance that First Federal
can continue to successfully market its lending products in a rising rate
environment or that such interest rate movements will not adversely affect net
income.
Subsequent to September 30, 2000, Northeast Indiana Bancorp became aware of
adverse circumstances that had occurred involving loans originated by First
Federal to a single commercial borrower. During the fourth quarter 2000 these
loans were written down to estimated fair value of the collateral. The
collateral included repossessed vehicles, consumer auto leases and contracts.
The estimated present value of leases and contracts was approximately $1.5
million and was included in consumer loans at December 31, 2000. These leases
and contracts were considered both non-performing and impaired at that time. As
of December 31, 2002 the remaining estimated present value of these leases and
contracts was approximately $235,000, a decline from the $685,000 reported at
December 31, 2001. These leases and contracts are included in consumer loans and
are still considered both non-performing and impaired.
Deposit balances are influenced by a number of factors including interest rates
paid on competing personal investments and the level of personal income and
savings within First Federal's market. Lending activities are influenced by the
demand for housing as well as competition from other lending institutions.
Liquidity levels and funds available to originate loans may also impact lending
activities. The primary sources of funds for lending activities include
deposits, borrowed funds, loan payments, loan sales and funds provided from
operations.
4
Forward-Looking Statements
When used in this document and in future filings by Northeast Indiana Bancorp
with the Securities and Exchange Commission, in our press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. Such statements are subject to
risks and uncertainties, including but not limited to, changes in economic
conditions in our market area, changes in policies by regulatory agencies,
fluctuations in interest rates, demand for loans in our market area and
competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected.
Northeast Indiana Bancorp wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and advises readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities and competitive and
regulatory factors, could affect our financial performance and could cause our
actual results for future periods to differ materially from those anticipated or
projected.
Northeast Indiana Bancorp does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements, or for
any other reason.
5
Financial Condition
Northeast Indiana Bancorp's total assets decreased from $238.4 million at
December 31, 2001 to $225.0 million at December 31, 2002, a decrease of $13.4
million, or 5.6%. The decrease was due primarily to a decrease in net loans
receivable of $8.3 million or 5.1% and a decrease in interest earning cash of
$8.3 million offset in part by an increase of $3.4 million in securities
available for sale. The overall reduction in liabilities was due mainly to a
$14.7 million decrease in total deposits, primarily in time deposits.
Most segments of the loan portfolio decreased during 2002. The decrease was
mostly attributable to mortgage loans, which decreased $10.2 million. Mortgage
loans secured by one-to-four family residences decreased $9.3 million to $86.5
million at December 31, 2002 and represent 56.0% of First Federal's net loan
portfolio. Due to the low interest rate environment, First Federal sold
approximately $18.9 million fixed rate one-to-four family mortgages during 2002
which contributed to the decrease in mortgage loans. Mortgage loans secured by
multi-family and commercial real estate decreased $633,000 to $23.2 million at
December 31, 2002 and construction loans secured by residential and
non-residential real estate decreased $289,000 to $6.1 million.
First Federal also offers a variety of consumer loans including automobile,
credit card, commercial, home equity and second mortgage loans. Total consumer
and commercial business loans increased $1.1 million to $43.0 million at
December 31, 2002. This increase was primarily due to increases in commercial
loans offset by declines in automobile, home equity and second mortgage loans ,
credit card, and other consumer loans. Automobile loans comprise $10.4 million
of total consumer loans while home equity and second mortgage loans represent
another $7.6 million at December 31, 2002. While typically producing higher
yields, non-mortgage lending exposes the Company to more collateral risk in
addition to credit risk.
Future loan growth and profitability related thereto, is dependent on the
economy. First Federal currently anticipates low growth in mortgages and will
continue to sell long term fixed rate mortgages to the secondary market while
planning to hold more of the 10 to 20 year term fixed rate mortgages in our
portfolio. First Federal will continue to provide commercial and consumer
lending and anticipates non-residential mortgage lending to increase as a
percentage of total loans.
Total deposits decreased $14.7 million to $122.4 million at December 31, 2002.
The 10.7% decrease in 2002 was primarily due to a decrease in time deposits of
$15.8 million, partially offset by an increase of $1.5 million in non-interest
bearing demand and savings deposits. A decrease in jumbo time deposits,
primarily from outside of our market area, of $19.4 million was offset by an
increase of $3.6 million of local non-jumbo time deposits. First Federal
remained competitive in the local market and was more aggressive with longer
term rates in an attempt to lengthen deposit maturities.
Total borrowed funds increased $928,000, from $74.0 million to $74.9 million at
December 31, 2002. Borrowed funds include advances from the Federal Home Loan
Bank of Indianapolis (FHLB) with variable interest rates and stated maturities
ranging through 2011. The balance of FHLB advances was $67.0 million an increase
from $65.0 million at December 31, 2001.
6
FHLB advances are subject to prepayment fees and include $16.0 million maturing
in 2003 and 2004. In addition, $51.0 million of the advances outstanding at
December 31, 2002 contained options with dates ranging from April 27, 2003
through December 21, 2005, whereby the interest rate may be adjusted by the
FHLB, at which time the advances may be repaid at the options of First Federal
without a prepayment fee. First Federal's borrowing limit at the FHLB as of
December 31, 2002, was $68.0 million based on the collateral pledged. Borrowings
at December 31, 2002 also include various securities sold under repurchase
agreements that were offered starting in 1999. The balance of securities sold
under repurchase agreements at December 31, 2002 was $7.8 million, a decline
from $9.0 million at December 31, 2001.
Results of Operations
Comparison of Years Ended December 31, 2002 and 2001
General. Net income for the year ended December 31, 2002 was $1.6 million
compared to net income of $2.0 million for 2001, a decrease of $379,000. The
decrease in net income was primarily the result of an increase in provision for
loan losses of $157,000, a decrease in net interest income of $371,000, and an
increase in non-interest expense of $269,000. These items were partially offset
by an increase in non-interest income of $116,000 and a reduction in income tax
expense of $302,000. Further details regarding the changes in the income and
expenses are discussed below.
Interest Income. Interest income decreased $3.1 million or 18.0% to $14.3
million for the year ended December 31, 2002. The decrease in interest income
was primarily the result of loan interest income decreasing $2.9 million to
$12.2 million along with a decrease of $228,000 to $2.1 million in securities
and other interest earning assets. The average yield for the year on the loan
portfolio decreased to 7.62% in 2002 compared to 8.19% in 2001. The decrease in
loan interest income occurred as a result of a reduction in average balances of
loans outstanding in 2002 compared to 2001, and lower average rates during 2002.
Interest Expense. Interest expense for 2002 decreased $2.8 million or 25.7% over
2001 interest expense. The majority of the decrease was due to less interest
expense on deposits, which decreased $2.7 million in 2002. The average rate for
time deposits decreased 153 basis points from 2001 to 2002. The average rate for
money market accounts decreased by 161 basis points to 2.02% for 2002 along with
a decrease of 61 basis points on the average rate for savings accounts, and a
decrease of 47 basis points on NOW accounts. Other borrowed funds declined 24
basis points to 5.08% in 2002.
Net interest income. Net interest income decreased $371,000 or 5.6% from $6.7
million to $6.3 million for the year ended December 31, 2002. The average spread
increased to 2.44% over the 2.39% reported in 2001. Average interest-earning
assets margin decreased to 2.87% in 2002 from 2.88% in 2001.
Provision for Loan Losses. The provision for loan losses for 2002 was $732,000
compared to $575,000 in 2001, an increase of $157,000. The provision for loan
losses less net charge-offs for the year resulted in a $181,000 increase in the
allowance for loan losses. The allowance for loan losses of $2.1 million at
December 31, 2002 was a 9.2% increase compared to December 31, 2001. Management
will continue to maintain the allowance for loan losses at a level deemed
adequate by management based on its quarterly analysis and will include
additional consideration of non-performing loans.
7
Comparison of Years Ended December 31, 2002 and 2001 (Continued)
Noninterest income. Noninterest income increased from $1.3 million in 2001 to
$1.5 million in 2002. The majority of this change occurred as a result of our
increases in net gain on sale of loans to $475,000 in 2002 compared to $234,000
for 2001, an increase of $241,000 or 103.0%. Trust and brokerage fees increased
$46,000 and $22,000 or 43.5% and 48.4% to $153,000 and $66,000 in 2002 primarily
from additional trust assets under management and fee changes in trust accounts
and increased volume of discount brokerage services. Other service charges and
fees of $425,000 in 2002 decreased by $163,000 compared to $588,000 for 2001.
This decrease included an additional $101,000 in net losses on the sale of
repossessed assets in 2002.
Noninterest expense. Total noninterest expense increased $269,000 from $4.7
million to $5.0 million. Salaries and employee benefits increased $135,000 in
2002 over 2001, primarily a result of increases in salaries of $116,000 and an
increase in benefits of $19,000. Other expense increased $140,000 to $793,000 in
2002. This was primarily due to an increase in impairment provisions on
low-income housing partnership investments of $55,000 from a new partnership
investment, increases in advertising of $14,000 and increases in other operating
expenses of $45,000 between periods.
Income tax expense. Income tax expense decreased from $773,000 to $471,000 in
the current year. This decrease was due to lower taxable income for 2002 coupled
with more federal tax credits from a new investment in a low-income housing
limited liability partnership. The Company now has four such investments
aggregating $1.8 million as of December 31, 2002. Management's intent of these
investments is not to be involved in the operational aspects of the
partnerships, but solely for tax planning. Northeast Indiana Bancorp, Inc.'s
effective tax rate was 22.8% in 2002 as compared to 28.2% in 2001.
Comparison of Years Ended December 31, 2001 and 2000
General. Net income for the year ended December 31, 2001 was $2.0 million as
compared to net income of $1.3 million for 2000, an increase of $686,000. The
increase in net income was primarily the result of a decrease in provision for
loan losses of $1.0 million that was offset by a $409,000 reduction in net
interest income along with a $338,000 improvement in non-interest income. The
increase in earnings was partially offset by an increase of $332,000 in income
tax expense. Further details regarding the changes in the income and expenses
are discussed below.
Interest Income. Interest income decreased $2.1 million or 10.9% to $17.4
million for the year ended December 31, 2001. The decrease in interest income
was primarily the result of mortgage loan interest income decreasing $1.0
million to $11.1 million along with a decrease of $880,000 to $4.0 million in
consumer and other loan interest income. The average yield for the year on the
loan portfolio decreased to 8.19% in 2001 compared to 8.24% in 2000. The
decrease in loan interest income occurred as a result of a reduction in average
balances of loans outstanding in 2001 compared to 2000, and lower average rates
during 2001.
Interest Expense. Interest expense for 2001 decreased $1.7 million or 13.8% over
2000 interest expense. The majority of the decrease was due to lower interest
costs for borrowings, which decreased 83 basis points in 2001, compared to 2000.
The average rate for time deposits decreased 11 basis points from 2000 to 2001.
The average rate for money market accounts decreased by 132 basis points to
3.63% for 2001 along with a decrease of 14 basis points in the average rate for
savings accounts.
8
Comparison of Years Ended December 31, 2001 and 2000 (Continued)
Net interest income. Net interest income decreased $409,000 or 5.8% from $7.1
million to $6.7 million for the year ended December 31, 2001. The average spread
held steady at 2.39%. Average interest-earning assets margin decreased to 2.88%
from 2.90% due to a decrease in income earnings products offered during 2001
that was offset by a similar decrease in interest-bearing liabilities offered in
2001.
Provision for Loan Losses. The provision for loan losses for 2001 was $575,000
compared to $1.6 million in 2000, a decrease of $1.0 million. The provision for
loan losses less net charge-offs for the year resulted in a $46,000 decrease in
the allowance for loan losses. The allowance for loan losses of $2.0 million at
December 31, 2001 was a 2.3% decrease compared to December 31, 2000.
Noninterest income. Noninterest income increased from $1.0 million in 2000 to
$1.3 in 2001. The majority of this change occurred as a result of our increases
in net gain on sale of loans to $234,000 in 2001 compared to $22,000 for 2000,
an increase of $212,000. Other service charges and fees of $588,000 in 2001
increased by $114,000 compared to $474,000 for 2000. This increase included
$79,000 in additional loan fees and an increase in ATM operating income of
$47,000.
Noninterest expense. Total noninterest expense decreased from $4.8 million to
$4.7 million or $73,000. Salaries and employee benefits decreased $155,000 in
2001 over 2000, the result of a reduction in the cost associated with employee
benefits, this was offset by higher insurance cost and higher personnel costs a
result of hiring additional staff and salary increases. During 2001, data
processing costs increased $60,000 primarily due to higher volume and additional
processing costs incurred as we expand our product lines.
Income tax expense. Income tax expense increased from $441,000 to $773,000. This
increase was due to higher taxable income for 2001 partially reduced by
increased tax benefits from the investment in low-income housing limited
liability partnerships.
Asset/Liability Management
First Federal, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities reprice on a different
basis than its interest-earning assets. Office of Thrift Supervision ("OTS")
regulations provide a Net Portfolio Value ("NPV") approach to the quantification
of interest rate risk. In essence, this approach calculates the difference
between the present value of liabilities, expected cash flows from assets and
cash flows from off balance sheet contracts.
Management has established maximum limits for changes in net portfolio value
resulting from changes in interest rates based on consideration of First
Federal's portfolio mix of interest-earning assets and interest-bearing
liabilities along with management's objectives for managing these portfolios in
varying interest rate environments. Management monitors various indicators of
interest rate risk, including NPV, and expectations regarding interest rate
movements along with consideration of First Federal's overall capital levels to
determine acceptable levels of interest rate risk. First Federal's
interest-earning assets are composed primarily of loans, especially mortgage
loans. Management has offered adjustable rate loan products to assist in the
management of interest rate risk. At December 31, 2002, adjustable rate loans
comprised 33.4% of the total loan portfolio. The interest rate exposure as
outlined in the NPV table reflects our exposure to a rising interest rate
environment due to the concentration of longer term mortgage loans funded by
relatively shorter-term deposits and FHLB advances. In
9
Asset/Liability Management (continued)
addition, the interest rate risk is also impacted by adjustable rate loans,
which are tied to indices, which lag behind market rates. Management is aware of
First Federal's interest rate risk exposure in a rising interest rate
environment. To address this interest rate risk, which we would categorize as
moderately high in comparison to our peers, management will continue to market
adjustable rate mortgage loans when possible and review longer term funding
sources. Management also considers the current capital position of First Federal
and the composition of the loan portfolio and monitors these factors in
conjunction with its strategic plan of offering various mortgage loan products
to customers in our market area. As stated earlier, First Federal is now using
the secondary market to assist in managing our interest rate risk exposure. We
are also making adjustable rate commercial loans when possible. Nonetheless, our
interest rate exposure, particularly in a rising interest rate environment, will
grow, especially to the extent that loan demand produces increases in balance
sheet growth. While management monitors and, from time to time, takes actions to
adjust our interest rate risk, we believe a rising interest rate environment
will have an adverse impact on our profitability.
Presented below, as of December 31, 2002 and December 31, 2001, is an analysis
of First Federal's estimated interest rate risk as measured by changes in NPV
for instantaneous and sustained parallel shifts in interest rates, up and down
300 basis points in 100 point increments. Due to current low interest rates the
change in rates does not include results for the minus 200 basis points or minus
300 basis points scenarios. Assumptions used in calculating the amounts in this
table are those assumptions utilized by the OTS in assessing the interest rate
risk of the thrifts it regulates. NPV is calculated by the OTS for the purposes
of interest rate risk assessment and should not be considered as an indicator of
value of First Federal.
During 2002, our rate sensitivity showed an increase over last year from (233)
bp at December 31, 2001 to (438) bp as of December 31, 2002 based on a 200 basis
point increase in rates. The rising rate scenarios reflect the decreasing Net
Portfolio Value (NPV) of equity.
At December 31, 2002
------------------------------------------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Present Value of Assets
------------------------------------- ----------------------------
Change In Rates $ Amount $ Change % Change NPV Ratio Change
--------------- ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
+300 bp $ 11,149 $ (13,434) (55)% 5.05% (545) bp
+200 13,810 (10,774) (44) 6.12 (438)
+100 15,919 (8,664) (35) 6.91 (359)
0 24,584 -- -- 10.51 --
-100 16,133 (8,451) (34) 6.80 (370)
-200 -- -- -- -- --
-300 -- -- -- -- --
10
Asset/Liability Management (continued)
At December 31, 2001
-----------------------------------------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Present Value of Assets
---------------------------------- ------------------------
Change In Rates $ Amount $ Change % Change NPV Ratio Change
--------------- ------------ ------------ ------------ ------------ ------------
(Dollars in Thousands)
+300 bp $ 18,853 $ (10,382) (36)% 8.14% (370) bp
+200 22,516 (6,719) (23) 9.51 (233)
+100 26,148 (3,087) (11) 10.80 (104)
0 29,235 -- -- 11.84 --
-100 30,892 1,657 6 12.34 50
-200 -- -- -- -- --
-300 -- -- -- -- --
Due to the current low interest rate environment, the OTS's NPV model is not
calculating results for the minus 200 bp or minus 300 bp scenario. Based on
these limitations, in the event of a 200 basis point increase in interest rates
compared to a 100 basis point decrease in interest rates using NPV estimates as
of December 31, 2002, First Federal would experience a 44% decrease in NPV in a
rising rate environment, while experiencing a 34% decrease in NPV in a declining
rate environment.
During periods of rising rates, the value of monetary assets and liabilities
decline. Conversely, during periods of falling rates, the value of monetary
assets and liabilities increase. However, the amount of change in value of
specific assets and liabilities due to changes in rates is not the same in a
rising rate environment as in a falling rate environment (i.e., the amount of
value increase under a specific rate decline may not equal the amount of value
decrease under an identical upward rate movement). Based upon the NPV
methodology, the increased level of interest rate risk experienced by First
Federal in 2002 was primarily due to the extreme increase in the fair market
value of First Federal's putable FHLB advances. The fair market price increases
were a direct result of the rates remaining constant on such advances while
interest rates, in general, declined further during the year 2002. The increases
in present values on the liability side, without similar asset present value
increases, show a sharp decline in the net present value of equity. Furthermore,
to the extent that we use liabilities with shorter terms to maturity than the
assets in which we invest, we will continue to experience increased levels of
interest rate risk in a rising interest rate environment.
In evaluating First Federal's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ from that presented in the
foregoing table.
11
Average Balances, Interest Rates and Yields
The following table presents for the periods indicated the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are daily average balances. Non-accruing loans have been
included in the table as loans carrying a zero yield.
Year Ended December 31,
--------------------------------------------------------------------------
2002 2001
----------------------------------- -----------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
----------- ---------- -------- ----------- ---------- --------
Interest-earning assets: (Dollars in Thousands)
Loans receivable(1) $ 160,486 $ 12,223 7.62% $ 184,684 $ 15,134 8.19%
Securities 38,278 1,510 3.94 27,070 1,469 5.43
FHLB stock 4,947 298 6.02 4,913 365 7.43
Other interest-earning assets 15,915 266 1.67 14,751 468 3.17
Total interest earning
assets(1) 219,626 14,297 6.51 231,418 17,436 7.53
----------- ---------- ----------- ----------
Non-interest earning assets 9,982 10,479
----------- -----------
Total assets $ 229,608 $ 241,897
=========== ===========
Interest-bearing liabilities:
Savings $ 10,491 132 1.26 $ 9,390 176 1.87
Money market 19,149 386 2.02 18,558 674 3.63
NOW 12,520 134 1.07 11,443 176 1.54
Time 81,804 3,663 4.48 100,257 6,027 6.01
Borrowed funds 72,488 3,682 5.08 69,709 3,712 5.32
----------- ---------- ----------- ----------
Total interest bearing
liabilities 196,452 7,997 4.07 209,357 10,765 5.14
----------- ---------- ----------- ----------
Non-interest bearing liabilities 6,715 5,766
----------- -----------
Total liabilities 203,167 215,123
Total shareholders'
equity 26,441 26,774
----------- -----------
Total liabilities and
shareholders' equity $ 229,608 $ 241,897
=========== ===========
Net interest income $ 6,300 $ 6,671
========== ==========
Net interest rate spread 2.44% 2.39%
==== ====
Net interest earning assets $ 23,174 $ 22,061
=========== ===========
Net yield on average interest-
earning assets 2.87% 2.88%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.12x 1.11x
==== ====
Year Ended December 31,
------------------------------------
2000
------------------------------------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
----------- ---------- --------
Interest-earning assets: (Dollars in Thousands)
Loans receivable(1) $ 207,119 $ 17,063 8.24%
Securities 28,376 1,844 6.50
FHLB stock 4,913 405 8.24
Other interest-earning assets 3,550 253 7.13
----------- ----------
Total interest earning
assets(1) 243,958 19,565 8.02
----------- ----------
Non-interest earning assets 10,549
-----------
Total assets $ 254,507
===========
Interest-bearing liabilities:
Savings $ 9,738 196 2.01
Money market 18,092 895 4.95
NOW 11,013 165 1.50
Time 90,979 5,564 6.12
Borrowed funds 92,065 5,665 6.15
----------- ----------
Total interest bearing
liabilities 221,887 12,485 5.63
----------- ----------
Non-interest bearing liabilities 6,339
-----------
Total liabilities 228,226
Total shareholders'
equity 26,281
-----------
Total liabilities and
shareholders' equity $ 254,507
===========
Net interest income $ 7,080
==========
Net interest rate spread 2.39%
====
Net interest earning assets $ 22,071
===========
Net yield on average interest-
earning assets 2.90%
====
Average interest-earning assets to
average interest-bearing liabilities 1.10x
====
- ---------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses. Also includes Loans Held for Sale net of lower
of cost or market.
12
Interest Rate Spread
The following table presents the weighted average yields on loans, investments
and other interest-earning assets, and the weighted average rate on deposits and
borrowings and the resulting interest rate spreads at the dates indicated.
At December 31,
---------------
2002 2001 2000
---- ---- ----
Weighted average yield on:
Loans receivable ....................... 7.40% 8.07% 8.41%
Securities ............................. 4.08 5.30 6.82
Other interest-earning assets .......... 1.28 1.71 6.12
Combined weighted average yield on
interest-earning assets ........ 6.30 6.93 8.16
Weighted average rate on:
Savings ................................ 0.97 1.49 2.00
Money market ........................... 1.63 2.18 5.27
NOW .................................... 0.77 1.24 1.55
Time ................................... 3.96 5.09 6.54
Borrowed funds ......................... 5.32 5.47 6.17
Repurchase agreements .................. 1.18 1.60 5.77
Combined weighted average rate on
interest-bearing liabilities ..... 3.73 4.40 5.82
Spread ...................................... 2.57 2.53 2.34
The loans receivable yield, which is the largest portion of interest income,
decreased 67 basis points to 7.40%, an 8.3% decrease at the end of period 2002
yield compared to 8.07% at the end of 2001. The overall weighted average yield
decreased 63 basis points to 6.30% at the end of 2002 down from 6.93% at the end
of 2001, a 9.1% decrease. Interest-bearing liabilities rate changes were also
lower on the major liability products. Time deposits decreased to 3.96% at the
end of 2002 compared to 5.09% at the end of 2001, a 113 basis point decrease.
Money market accounts decreased 55 basis points to 1.63% at the end of 2002
compared to 2.18% at the end of 2001, a 25.2% decrease. Borrowing rates
decreased 15 basis points in 2002 to 5.32% compared to 5.47% at the end of 2001.
The repurchase agreements reflect the end of period rates paid on our repurchase
accounts that compliment our sweep accounts. The combined interest-bearing
liabilities weighted average rates decreased to 3.73% at the end of 2002
compared to 4.40% at the end of 2001. This 67 basis points decrease in interest
costs compared to the earning assets yields smaller decrease of 63 basis points
caused the spread to widen to 2.57% at the end of 2002 compared to 2.53% at the
end of 2001, a 4 basis point improvement over 2001.
13
Rate/Volume Analysis
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to:
o Changes in volume (i.e., changes in volume multiplied by old rate)
o Changes in rate (i.e., changes in rate multiplied by old volume)
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
Year Ended December 31,
------------------------------------------------------------------------------------------
2002 vs. 2001 2001 vs. 2000
------------------------------------------ ------------------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
Interest-earning assets: (Dollars in Thousands)
Loans receivable ...... $ (1,892) $ (1,019) $ (2,911) $ (1,839) $ (90) $ (1,929)
Securities ............ 508 (467) 41 (82) (293) (375)
FHLB stock ............ 2 (69) (67) -- (40) (40)
Other interest-
earning assets ...... 34 (236) (202) 422 (207) 215
--------- --------- --------- --------- --------- ---------
Total interest-
earning assets ...... $ (1,348) $ (1,791) $ (3,139) $ (1,499) $ (630) $ (2,129)
========= ========= ========= ========= ========= =========
Interest-bearing
liabilities:
Savings ............... $ 19 $ (63) $ (44) $ (7) $ (13) $ (20)
Money market .......... 21 (309) (288) 23 (244) (221)
NOW ................... 15 (57) (42) 7 4 11
Time .................. (991) (1,373) (2,364) 559 (96) 463
Borrowed funds ........ 145 (175) (30) (1,256) (697) (1,953)
--------- --------- --------- --------- --------- ---------
Total interest-
bearing
liabilities ... $ (791) $ (1,977) $ (2,768) $ (674) $ (1,046) $ (1,720)
========= ========= ========= ========= ========= =========
Net interest income ......... $ (371) $ (409)
========= =========
14
Liquidity and Capital Resources
First Federal's primary sources of funds are deposits, borrowings from the FHLB,
the sale of fixed rate mortgages to the secondary market and principal and
interest payments on loans. While scheduled repayments of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. First
Federal has maintained its liquidity position by, among other things, monitoring
its cash and cash equivalents while reducing balances in rate sensitive jumbo
deposits.
OTS regulations require First Federal to maintain sufficient liquidity to assure
its safe and sound operation. A measure of liquidity for thrift institutions is
the ratio of cash and eligible investments to a certain percentage of net
withdrawable savings and borrowings due within one year. As of December 31,
2002, First Federal's average liquidity ratio was 20.6%, of which 85.8% was
comprised of short-term investments. Management believes First Federal has
maintained adequate liquidity.
During the year ended December 31, 2002, there was a net decrease in cash and
cash equivalents of $8.0 million. The major source of funds during the year
included proceeds from sale of long-term fixed rate mortgages to the secondary
market of $20.5 million, proceeds from called/sold investments and principal
payments of $24.7 million, new advances from FHLB of $2.0 million along with a
net decrease in loans providing $9.8 million. These proceeds were used to
purchase $27.9 million in securities, allowed a decrease in deposits of $14.7
million including rate sensitive jumbo time deposits, purchased $3.5 million in
loans from other institutions and purchased $1.3 million of Northeast Indiana
Bancorp stock.
During the year ended December 31, 2001, there was a net increase in cash and
cash equivalents of $19.7 million. The major source of funds during the year
included proceeds from sale of long-term fixed rate mortgages to the secondary
market of $12.7 million, proceeds from called investments and principal payments
of $18.6 million along with a net decrease in loans providing $33.8 million.
These proceeds were used to purchase $26.6 million in securities, allowed a
decrease in deposits of $9.8 million including rate sensitive jumbo time
deposits, reduced FHLB advances by $2.4 million and purchased $2.1 million of
Northeast Indiana Bancorp stock.
Under currently effective capital regulations, savings associations must meet a
4.0% core capital requirement and a total capital to risk weighted assets ratio
of 8.0%. At December 31, 2002, First Federal's core capital ratio was 10.9% and
its total capital to risk weighted assets ratio was 18.3%. First Federal's
capital significantly exceeds all capital requirements currently in effect and
the institution is considered "well-capitalized" under federal regulations. See
Note 11 of the Notes to Consolidated Financial Statements.
During 2002, Northeast Indiana Bancorp completed its eighth stock repurchase
program which began in September 2001; 17,677 shares of stock were purchased in
2002 related to this program. Northeast Indiana Bancorp implemented its ninth
stock repurchase program in March 2002. Northeast Indiana Bancorp had
repurchased 63,500 of the shares authorized for repurchase as of December 31,
2002. 6,499 shares were also repurchased upon the exercise of stock options in
2002 in accordance with the stock option plan agreement. As stock is
repurchased, it becomes treasury stock and can be used for general corporate
purposes. At December 31, 2002 the Company had 1,143,614 shares of treasury
stock and 1,497,058 of common stock outstanding.
15
Impact of Inflation and Changing Prices
The Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation can be found in the
increased cost of Northeast Indiana Bancorp's operations. Nearly all of our
assets and liabilities are financial, unlike most industrial companies. As a
result, Northeast Indiana Bancorp's performance is directly impacted by changes
in interest rates, which are indirectly influenced by inflationary expectations.
Our ability to match the financial assets to the financial liabilities in its
asset/liability management will tend to minimize the change of interest rates on
our performance. Changes in investment rates do not necessarily move to the same
extent as changes in the price of goods and services.
Newly Issued But Not Yet Effective Accounting Standards
New accounting standards for asset retirement obligations, restructuring
activities and exit costs, operating leases, and early extinguishment of debt
were issued in 2002. Management has determined that when the new accounting
standards are adopted in 2003 they will not have a material impact on the
Company's consolidated financial condition or results of operations.
16
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Northeast Indiana Bancorp, Inc.
Huntington, Indiana
We have audited the accompanying consolidated balance sheets of Northeast
Indiana Bancorp, Inc. as of December 31, 2002 and 2001 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 2002, 2001 and 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northeast Indiana
Bancorp, Inc. as of December 31, 2002 and 2001 and the results of its operations
and its cash flows for the years ended December 31, 2002, 2001 and 2000 in
conformity with accounting principles generally accepted in the United States of
America.
Crowe, Chizek and Company LLP
South Bend, Indiana
February 13, 2003
17
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2002, and 2001
2002 2001
------------- -------------
ASSETS
Interest earning cash and cash equivalents $ 15,195,326 $ 23,541,599
Noninterest earning cash and cash equivalents 3,061,082 2,750,133
------------- -------------
Total cash and cash equivalents 18,256,408 26,291,732
Securities available for sale 42,838,211 39,365,026
Securities held to maturity (fair value: 2002 - $225,000;
2001 - $306,000) 225,000 306,000
Loans held for sale, net of unrealized losses of $0 in 2002
and $3,278 in 2001 409,375 1,543,422
Loans receivable, net of allowance for loan losses of
$2,135,630 in 2002 and $1,954,900 in 2001 154,559,565 162,830,186
Accrued interest receivable 694,593 753,000
Premises and equipment, net 2,176,356 2,298,102
Investments in limited liability partnerships 1,833,375 1,546,177
Other assets 4,026,032 3,460,884
------------- -------------
Total assets $ 225,018,915 $ 238,394,529
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand - noninterest bearing $ 4,926,793 $ 4,579,159
Savings 10,396,258 9,261,040
NOW and MMDA 31,029,233 31,350,364
Time 76,004,368 91,839,448
------------- -------------
Total deposits 122,356,652 137,030,011
Borrowed funds 74,893,922 73,966,411
Accrued expenses and other liabilities 1,205,856 1,117,069
------------- -------------
Total liabilities 198,456,430 212,113,491
Shareholders' equity
Preferred stock, no par value; 500,000 shares
authorized; 0 shares issued -- --
Common stock, $.01 par value; 4,000,000 shares
authorized; 2,640,672 shares issued;
2002 - 1,497,058 shares outstanding;
2001 - 1,550,656 shares outstanding 26,407 26,407
Additional paid in capital 29,000,459 28,874,771
Retained earnings, substantially restricted 13,285,229 12,447,813
Unearned employee stock ownership plan shares (482,351) (620,566)
Unearned recognition and retention plan shares (3,918) (12,555)
Accumulated other comprehensive income (loss), net of tax 139,555 20,979
Treasury stock, at cost; 2002 - 1,143,614 shares;
2001 - 1,090,016 shares (15,402,896) (14,455,811)
------------- -------------
Total shareholders' equity 26,562,485 26,281,038
------------- -------------
Total liabilities and shareholders' equity $ 225,018,915 $ 238,394,529
============= =============
The accompanying notes are an integral part of
these consolidated financial statements.
18
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
------------ ----------- ------------
Interest income
Loans, including fees $ 12,223,690 $15,133,873 $ 17,062,817
Taxable securities 1,751,720 1,814,294 2,227,100
Non-taxable securities 56,282 19,635 22,317
Deposits with financial institutions 265,581 468,105 253,305
------------ ----------- ------------
Total interest income 14,297,273 17,435,907 19,565,539
Interest expense
Deposits 4,315,055 7,052,334 6,820,286
Borrowed funds 3,682,428 3,712,402 5,665,012
------------ ----------- ------------
Total interest expense 7,997,483 10,764,736 12,485,298
------------ ----------- ------------
Net interest income 6,299,790 6,671,171 7,080,241
Provision for loan losses 732,300 575,212 1,590,546
------------ ----------- ------------
Net interest income after provision for loan
losses 5,567,490 6,095,959 5,489,695
Noninterest income
Service charges on deposit accounts 354,539 374,350 362,188
Net loss on sale of securities (10,535) -- (11,886)
Net gain on sale of loans 475,053 234,034 22,531
Trust fees 153,218 106,808 88,488
Brokerage fees 66,138 44,578 74,560
Other service charges and fees 425,378 588,134 473,712
------------ ----------- ------------
Total noninterest income 1,463,791 1,347,904 1,009,593
Noninterest expense
Salaries and employee benefits 2,600,923 2,465,599 2,620,818
Occupancy 466,357 462,486 440,456
Data processing 621,523 631,802 571,854
Deposit insurance premium 23,570 26,969 27,335
Professional fees 240,688 236,434 200,755
Correspondent bank charges 224,734 226,944 233,658
Other expense 792,869 651,675 680,082
------------ ----------- ------------
Total noninterest expense 4,970,664 4,701,909 4,774,958
------------ ----------- ------------
Income before income taxes 2,060,617 2,741,954 1,724,330
Income tax expense 470,721 772,577 440,887
------------ ----------- ------------
Net income $ 1,589,896 $ 1,969,377 $ 1,283,443
============ =========== ============
Basic earnings per common share $ 1.09 $ 1.28 $ 0.80
============ =========== ============
Diluted earnings per common share $ 1.06 $ 1.25 $ 0.79
============ =========== ============
The accompanying notes are an integral part of
these consolidated financial statements.
19
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2002, 2001 and 2000
Unearned
Employee Unearned
Additional Stock Recognition
Common Paid in Retained Ownership and Retention
Stock Capital Earnings Plan Shares Plan Shares
----- ------- -------- ----------- -----------
Balance, January 1, 2000 $ 26,407 $ 28,733,423 $ 10,641,144 $ (1,018,325) $ (229,851)
Net income -- -- 1,283,443 -- --
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale, net of
reclassification adjustments -- -- -- -- --
Total tax effect -- -- -- -- --
Total other comprehensive income -- -- -- -- --
Total comprehensive income -- -- -- -- --
Cash dividends ($.41 per share) -- -- (710,816) -- --
Purchase of 64,922 shares of treasury stock -- -- -- -- --
Issuance of 4,422 shares of treasury stock upon
exercise of stock options -- (5,942) -- -- --
30,500 shares committed to be released
under the ESOP -- 90,233 -- 251,930 --
Purchase of 500 treasury stock shares for RRP -- 129 -- -- (5,656)
Amortization of RRP contributions, net of
984 RRP shares forfeited -- -- -- -- 214,311
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2000 26,407 28,817,843 11,213,771 (766,395) (21,196)
Net income -- -- 1,969,377 -- --
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale -- -- -- -- --
Total tax effect -- -- -- -- --
Total other comprehensive income -- -- -- -- --
Total comprehensive income -- -- -- -- --
Cash dividends ($.45 per share) -- -- (735,335) -- --
Purchase of 169,492 shares of treasury stock -- -- -- -- --
Issuance of 27,612 shares of treasury stock upon
exercise of stock options -- (35,474) -- -- --
Tax effect of stock plans -- 24,064 -- -- --
17,588 shares committed to be released
under the ESOP -- 68,338 -- 145,829 --
Amortization of RRP contributions -- -- -- -- 8,641
------------ ------------ ------------ ------------ ------------
Balance at December 31, 2001 26,407 28,874,771 12,447,813 (620,566) (12,555)
Net income -- -- 1,589,896 -- --
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale -- -- -- -- --
Total tax effect -- -- -- -- --
Total other comprehensive income -- -- -- -- --
Total comprehensive income -- -- -- -- --
Cash dividends ($.49 per share) -- -- (752,480) -- --
Purchase of 87,676 shares of treasury stock -- -- -- -- --
Issuance of 34,078 shares of treasury stock upon
exercise of stock options -- (16,685) -- -- --
Tax effect of stock plans -- 37,080 -- -- --
16,733 shares committed to be released
under the ESOP -- 105,293 -- 138,215 --
Amortization of RRP contributions -- -- -- -- 8,637
------------ ------------ ------------ ------------ ------------
Balance, December 31, 2002 $ 26,407 $ 29,000,459 $ 13,285,229 $ (482,351) $ (3,918)
============ ============ ============ ============ ============
Accumulated
Other
Comprehensive Total
Income (Loss), Treasury Shareholders'
Net of Tax Stock Equity
---------- ----- ------
Balance, January 1, 2000 $ (543,742) $ (11,953,757) $ 25,655,299
Net income -- -- 1,283,443
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale, net of
reclassification adjustments 806,828 -- --
Total tax effect (318,504) -- --
------------
Total other comprehensive income 488,324 -- 488,324
------------
Total comprehensive income -- -- 1,771,767
Cash dividends ($.41 per share) -- -- (710,816)
Purchase of 64,922 shares of treasury stock -- (730,927) (730,927)
Issuance of 4,422 shares of treasury stock upon
exercise of stock options -- 48,879 42,937
30,500 shares committed to be released
under the ESOP -- -- 342,163
Purchase of 500 treasury stock shares for RRP -- 5,527 --
Amortization of RRP contributions, net of
984 RRP shares forfeited -- (10,977) 203,334
------------ ------------ ------------
Balance, December 31, 2000 (55,418) (12,641,255) 26,573,757
Net income -- -- 1,969,377
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale 128,141 -- --
Total tax effect (51,744) -- --
------------
Total other comprehensive income 76,397 -- 76,397
------------
Total comprehensive income -- -- 2,045,774
Cash dividends ($.45 per share) -- -- (735,335)
Purchase of 169,492 shares of treasury stock -- (2,118,144) (2,118,144)
Issuance of 27,612 shares of treasury stock upon
exercise of stock options -- 303,588 268,114
Tax effect of stock plans -- -- 24,064
17,588 shares committed to be released
under the ESOP -- -- 214,167
Amortization of RRP contributions -- -- 8,641
------------ ------------ ------------
Balance at December 31, 2001 20,979 $(14,455,811) $ 26,281,038
Net income -- -- 1,589,896
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale 302,776 -- --
Total tax effect (184,200) -- --
------------
Total other comprehensive income 118,576 -- 118,576
------------
Total comprehensive income -- -- 1,708,472
Cash dividends ($.49 per share) -- -- (752,480)
Purchase of 87,676 shares of treasury stock -- (1,320,253) (1,320,253)
Issuance of 34,078 shares of treasury stock upon
exercise of stock options -- 373,168 356,483
Tax effect of stock plans -- -- 37,080
16,733 shares committed to be released
under the ESOP -- -- 243,508
Amortization of RRP contributions -- -- 8,637
------------ ------------ ------------
Balance, December 31, 2002 $ 139,555 $(15,402,896) $ 26,562,485
============ ============ ============
The accompanying notes are an integral part
of these consolidated financial statements.
20
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income $ 1,589,896 $ 1,969,377 $ 1,283,443
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 555,379 409,445 392,626
Provision for loan losses 732,300 575,212 1,590,546
Net (gain) loss on sale of:
Foreclosed real estate and repossessed assets 115,931 (26,760) 68,474
Premises and equipment -- 4,429 14,251
Securities available for sale 10,535 -- 11,886
Loans held for sale (475,053) (234,034) (22,531)
Originations of loans held for sale (18,855,817) (13,962,342) (1,158,650)
Proceeds from loans sold 20,464,917 12,652,954 1,181,181
Reduction of obligation under ESOP 243,508 214,167 342,163
Amortization of RRP 8,637 8,641 203,334
Net change in:
Other assets (487,036) 4,128 (1,331,881)
Accrued interest receivable 58,407 142,612 (55,645)
Accrued expenses and other liabilities 88,787 (58,688) 49,750
------------- ------------- -------------
Total adjustments 2,460,495 (270,236) 1,285,504
------------- ------------- -------------
Net cash from operating activities 4,050,391 1,699,141 2,568,947
Cash flows from investing activities
Investment in limited liability partnership (500,000) -- --
Net decrease in interest-bearing deposits in financial institutions -- -- 100,000
Purchases of securities available for sale (27,870,418) (26,559,506) (5,129,734)
Proceeds from maturities and principal payments of:
Securities available for sale 23,191,989 18,549,112 393,361
Securities held to maturity 81,000 77,000 73,463
Proceeds from sale of securities available for sale 1,405,188 -- 7,479,825
Purchases of loans (3,464,773) (79,997) (1,006,837)
Proceeds from sale of participation loans -- 2,300,000 --
Net change in loans 9,824,524 33,773,116 6,396,582
Proceeds from sale of foreclosed real estate and
repossessed assets 837,407 1,200,931 533,682
Expenditures on premises and equipment (136,677) (310,600) (213,296)
Proceeds from sale of premises and equipment 8,143 -- 600
------------- ------------- -------------
Net cash from investing activities 3,376,383 28,950,056 8,627,646
Cash flows from financing activities
Net change in deposits (14,673,359) (9,776,107) 3,594,525
Advances from FHLB 2,000,000 29,000,000 149,000,000
Repayment of FHLB advances -- (31,399,663) (162,099,085)
Additional borrowings and payments of demand notes 100,000 (175,000) (465,000)
Net change in other borrowed funds (1,172,489) 4,002,404 848,836
Dividends paid (752,480) (735,335) (710,816)
Purchase of treasury stock (1,320,253) (2,118,144) (730,927)
Sale of treasury stock 356,483 268,114 42,937
------------- ------------- -------------
Net cash from financing activities (15,462,098) (10,933,731) (10,519,530)
------------- ------------- -------------
Net change in cash and cash equivalents (8,035,324) 19,715,466 677,063
Cash and cash equivalents at beginning of year 26,291,732 6,576,266 5,899,203
------------- ------------- -------------
Cash and cash equivalents at end of year $ 18,256,408 $ 26,291,732 $ 6,576,266
============= ============= =============
Cash paid for:
Interest $ 7,991,828 $ 10,815,628 $ 12,540,501
Income taxes 628,300 727,300 851,975
Non-cash transactions:
Investment in obligation relative to limited liability partnership $ -- $ -- $ 500,000
Transfer from loans to other real estate and repossessed assets 1,178,570 752,616 1,263,152
The accompanying notes are an integral part
of these consolidated financial statements.
21
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include the accounts of Northeast Indiana Bancorp, Inc. ("Northeast
Indiana Bancorp") and its wholly-owned subsidiary, First Federal Savings Bank
("First Federal") and its wholly owned subsidiary Northeast Indiana Financial
("Northeast Indiana Financial"), together referred to as "the Company".
Northeast Indiana Bancorp, Inc. was organized for the purpose of owning all of
the outstanding stock of First Federal Savings Bank. Intercompany transactions
and balances have been eliminated in consolidation.
The primary source of income for Northeast Indiana Bancorp is the origination of
commercial and residential real estate loans in northeastern Indiana. Loans
secured by real estate mortgages comprise approximately 82% and 80% of the loan
portfolio at December 31, 2002 and 2001, and are primarily secured by
residential mortgages.
Use of Estimates: To prepare the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
management makes estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The
allowance for loan losses and fair values of financial instruments are
particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due from
banks and short-term interest earning deposits in financial institutions with
original maturities under 90 days. Net cash flows are reported for customer loan
and deposit transactions as well as securities sold under agreements to
repurchase with original maturities of 90 days or less.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income
or loss and shareholders' equity, net of tax. Other securities such as Federal
Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is not temporary.
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Loans held for sale are reported at the lower of
cost or market, on an aggregate basis.
(Continued)
22
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days. Payments received on such loans
are reported as principal reductions. In all cases, loans are placed on
nonaccrual or charged-off at an earlier date if collection of principal or
interest is considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at the lower of the loan balance or fair value when acquired,
establishing a new cost basis. If the value subsequently declines, a valuation
allowance is recorded through expense. Costs after acquisition are expensed.
Foreclosed assets totaled $527,861 and $302,629 at December 31, 2002 and 2001.
(Continued)
23
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Investments in Limited Liability Partnerships: These represent the Company's
investments in affordable housing projects for the primary purpose of available
tax benefits. They are accounted for using the cost method of accounting. The
excess of the carrying amount of the investment over its estimated residual
value is amortized during the periods in which associated tax credits are
allocated to the investor. The annual amortization of the investment is based on
the proportion of tax credits received in the current year to total estimated
tax credits to be allocated to the Company. These investments are reviewed for
impairment when events indicate their carrying amounts may not be recoverable
from future undiscounted cash flows. If impaired, the investments are reported
at discount amounts.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed over
asset useful lives on the straight line basis. The useful lives for buildings
and leasehold improvements range from 10 to 40 years. The useful lives for
furniture, fixtures and equipment range from 3 to 10 years.
Company (or Bank) Owned Life Insurance: The Company has purchased life insurance
policies on certain key executives. Company owned life insurance is recorded at
its cash surrender value, or the amount that can be realized.
Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
Securities Sold Under Repurchase Agreements: Substantially all securities sold
under repurchase agreements represent amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not covered by
federal deposit insurance.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise plan equal to or
greater than the market price of the underlying common stock at date of grant.
The following table illustrates the effect on net income and earnings per common
share if expense was measured using the fair value recognition provisions of
FASB Statement No. 123, Accounting for Stock-Based Compensation.
(Continued)
24
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
2002 2001 2000
---- ---- ----
Net income as reported $ 1,589,896 $ 1,969,377 $ 1,283,443
Deduct: Stock-based compensation expense
determined under fair value based method (15,588) (12,685) (180,461)
------------ ------------ ------------
Pro forma net income $ 1,574,308 $ 1,956,692 $ 1,102,982
============ ============ ============
Basic earnings per common share as reported $ 1.09 $ 1.28 $ .80
Pro forma basic earnings per common share 1.08 1.27 .69
Diluted earnings per common share as reported 1.06 1.25 .79
Pro forma diluted earnings per common share 1.05 1.25 .68
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date.
2002 2001 2000
---- ---- ----
Risk-free interest rate 4.28% 4.32% 6.32%
Expected option life in years 6 7 6
Expected stock price volatility 24.7% 22.9% 23.5%
Dividend yield 3.37% 3.95% 3.76%
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
yet allocated to participants, is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participant accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest.
Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
(Continued)
25
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP and RRP shares are considered outstanding for this calculation unless
unearned. Diluted earnings per common share includes the dilutive effect of
additional potential common shares issuable under stock options.
Stock Dividends: Common share amounts related to the ESOP plan, stock
compensation plans and earnings and dividends per share are restated for stock
dividends.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income or loss. Other comprehensive income or loss includes
unrealized gains and losses on securities available for sale, net of tax, which
are also recognized as separate components of shareholders' equity.
Industry Segment: Northeast Indiana Bancorp and its subsidiary are primarily
organized to operate in the banking industry. Substantially all revenues and
services are derived from banking products and services in northeastern Indiana.
While Northeast Indiana Bancorp's chief decision makers monitor various products
and services, operations are managed and financial performance is evaluated on a
company-wide basis. Accordingly, all of Northeast Indiana Bancorp's banking
operations are considered by management to be aggregated in one business
segment.
Newly Issued But Not Yet Effective Accounting Standards: New accounting
standards for asset retirement obligations, restructuring activities and exit
costs, operating leases, and early extinguishment of debt were issued in 2002.
Management has determined that when the new accounting standards are adopted in
2003 they will not have a material impact on the Company's consolidated
financial condition or results of operations.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the Company's consolidated financial statements.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by First Federal to Northeast Indiana
Bancorp or by Northeast Indiana Bancorp to shareholders.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Reclassifications: Some items in the prior year's financial statements were
reclassified to conform to the current presentation.
(Continued)
26
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
------------ ------------ ------------
Available for sale - 2002
U.S. Government agencies $ 6,137,150 $ 132,078 $ --
Mutual funds 11,106,395 22,581 --
Mortgage-backed 16,407,960 333,213 (4,925)
States and political
subdivisions 285,856 16,813 --
FHLB Stock 4,913,000 -- --
Equity 3,987,850 24,000 (186,250)
------------ ------------ ------------
$ 42,838,211 $ 528,685 $ (191,175)
============ ============ ============
Available for sale - 2001
U.S. Government agencies $ 4,045,050 $ 49,295 $ --
Mutual funds 898,857 -- --
Mortgage-backed 25,301,456 100,758 (48,546)
States and political
subdivisions 271,163 2,257 --
FHLB Stock 4,913,000 -- --
Equity 3,935,500 10,000 (79,030)
------------ ------------ ------------
$ 39,365,026 $ 162,310 $ (127,576)
============ ============ ============
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
Held to maturity - 2002
States and political
subdivisions $ 110,000 $ -- $ -- $ 110,000
Other debt securities 115,000 -- -- 115,000
------------ ------------ ------------ ------------
$ 225,000 $ -- $ -- $ 225,000
============ ============ ============ ============
(Continued)
27
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 2 - SECURITIES (Continued)
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
------ ----- ------ -----
Held to maturity - 2001
States and political
subdivisions $ 191,000 $ -- $ -- $ 191,000
Other debt securities 115,000 -- -- 115,000
------------ ------------ ------------ ------------
$ 306,000 $ -- $ -- $ 306,000
============ ============ ============ ============
Contractual maturities of debt securities at year end 2002 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities and mutual funds backed by debt securities, are shown separately.
Available for Sale Held to Maturity
------------------ ----------------
Fair Carrying Fair
Value Amount Value
Due in one year or less $ 4,062,775 $ -- $ --
Due from one to five years 2,201,091 225,000 225,000
Due from five to ten years 159,140 -- --
Mutual funds 11,106,395 -- --
Mortgage backed securities 16,407,960 -- --
----------- ----------- -----------
$33,937,361 $ 225,000 $ 225,000
=========== =========== ===========
Sales of securities available for sale were as follows:
2002 2001 2000
---- ---- ----
Proceeds $1,405,188 $ -- $7,479,825
Gross gains 3,663 -- --
Gross losses (14,198) -- (11,886)
Securities pledged at year end 2002 and 2001 had a carrying value of $12,514,000
and $10,588,000, and were pledged to secure securities sold under repurchase
agreements and Federal Home Loan Bank advances.
(Continued)
28
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 3 - LOANS RECEIVABLE, NET
Year end loans were as follows:
2002 2001
---- ----
Mortgage
Secured by one-to-four family residences $ 86,489,210 $ 95,777,368
Secured by other properties 23,190,685 23,823,754
Construction - residential 4,298,246 4,561,695
Construction - nonresidential 1,776,018 1,801,401
Automobile 10,408,734 12,787,567
Credit card 2,148,585 2,431,911
Commercial 19,262,622 14,258,860
Home equity and second mortgage 7,611.782 8,611,814
Other consumer 3,599,110 3,879,546
------------- -------------
158,784,992 167,933,916
Net of:
Loans in process (318,474) (641,058)
Undisbursed portion of construction loans (1,454,895) (2,216,913)
Net deferred loan origination fees (316,428) (290,859)
Allowance for loan losses (2,135,630) (1,954,900)
------------- -------------
Loans receivable, net $ 154,559,565 $ 162,830,186
============= =============
Activity in the allowance for loan losses was as follows:
2002 2001 2000
---- ---- ----
Balance at beginning of year $ 1,954,900 $ 2,001,172 $ 1,766,700
Provision charged to income 732,300 575,212 1,590,546
Charge-offs (836,914) (835,462) (1,410,039)
Recoveries 285,344 213,978 53,965
----------- ----------- -----------
Balance at end of year $ 2,135,630 $ 1,954,900 $ 2,001,172
=========== =========== ===========
Impaired loans were as follows:
2002 2001
---- ----
Year-end loans with no allocated allowance
for loan losses $ 1,395,630 $ 623,820
Year-end loans with allocated allowance
for loan losses 4,105,996 5,318,029
----------- -----------
Total $ 5,501,626 $ 5,941,849
=========== ===========
(Continued)
29
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
2002 2001 2000
---- ---- ----
Amount of the allowance for loan
losses allocated $ 959,108 $1,049,596 $ 912,313
Average of impaired loans during the year 5,564,385 5,493,961 3,514,345
Interest income recognized during impairment 366,874 392,943 18,748
Cash-basis interest income recognized 365,208 373,510 18,748
Nonperforming loans were as follows:
2002 2001
---- ----
Loans past due over 90 days still on accrual $ -- $ --
Nonaccrual loans 6,218,000 6,919,000
Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category.
NOTE 4 - SECONDARY MORTGAGE MARKETING ACTIVITIES
Activity for capitalized mortgage servicing rights and the related valuation
allowance was as follows:
2002 2001
---- ----
Servicing rights:
Beginning of year $ 119,825 $ 11,498
Additions 188,558 124,156
Amortized to expense (59,702) (15,829)
--------- ---------
End of year $ 248,681 $ 119,825
========= =========
(Continued)
30
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 5 - PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
2002 2001
---- ----
Land $ 458,331 $ 458,331
Buildings and leasehold improvements 2,022,705 2,009,348
Furniture, fixtures and equipment 1,437,119 1,333,555
----------- -----------
Total cost 3,918,155 3,801,234
Accumulated depreciation and amortization (1,741,799) (1,503,132)
----------- -----------
$ 2,176,356 $ 2,298,102
=========== ===========
Depreciation expense was $250,000, $252,000 and $247,000 for 2002, 2001 and
2000.
NOTE 6 - DEPOSITS
Time deposits of $100,000 or more were $28,336,000 and $47,207,000 at year end
2002 and 2001.
Scheduled maturities of time deposits for the next five years were as follows:
2003 $44,867,792
2004 18,901,059
2005 11,564,946
2006 304,826
2007 235,858
Thereafter 129,887
-----------
$76,004,368
===========
NOTE 7 - SECURITIIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase are secured by mortgage-backed
securities with a carrying amount of $8,015,000 and $9,122,000 at year-end 2002
and 2001.
Securities sold under agreements to repurchase are financing arrangements that
mature within one day. At maturity, the securities underlying the agreements are
returned to the Company. Information concerning securities sold under agreements
to repurchase is summarized as follows:
2002 2001
---- ----
Average daily balance during the year $ 6,562,312 $ 7,170,023
Average interest rate during the year 1.52% 2.99%
Maximum month-end balance during the year $14,991,867 $16,250,277
Weighted average interest rate at year-end 1.18% 1.60%
(Continued)
31
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 8 - BORROWED FUNDS
Year end borrowed funds were as follows:
2002 2001
---- ----
Federal Home Loan Bank (FHLB) advances $67,000,000 $65,000,000
Securities sold under repurchase agreements 7,793,922 8,966,411
Demand notes 100,000 --
----------- -----------
$74,893,922 $73,966,411
=========== ===========
FHLB advances have fixed and variable interest rates ranging from 2.37% to
6.88%. Scheduled maturities and the weighted average interest rates by maturity
at year end 2002 were as follows:
Weighted
Average
Interest
Rate
----
2003 $13,000,000 4.88%
2004 3,000,000 4.46
2005 -- --
2006 -- --
2007 10,000,000 6.65
Thereafter 41,000,000 5.19
-----------
$67,000,000 5.32%
===========
FHLB advances are secured by FHLB stock, eligible mortgage loans and
specifically pledged securities. At December 31, 2002 and 2001, in addition to
FHLB stock, collateral of approximately $85.0 million and $97.9 million was
pledged to the FHLB to secure advances outstanding.
In addition, $51,000,000 of the advances outstanding at December 31, 2002
contained options with dates ranging from March 19, 2003 to December 21, 2005,
whereby the interest rate may be adjusted by the FHLB, at which time the
advances may be repaid at the option of First Federal without penalty.
The demand notes relate to investments in limited partner interests in
partnerships formed for the construction, ownership and management of affordable
housing projects. The total original amount of the notes was $2,400,000 for 2002
and $1,900,000 for 2001, with $2,300,000 and $1,900,000 funded at year end 2002
and 2001. Payments were required within five days of written demand; however,
the note could be prepaid in full or in part at the option of the maker at any
time without penalty. The obligation to make payment was absolute and
unconditional.
(Continued)
32
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 9 - EMPLOYEE BENEFITS
Employee Pension Plan: First Federal is part of a noncontributory multi-employer
defined benefit pension plan covering substantially all employees. The trustees
of the Financial Institutions Retirement Fund administer the plan. There is no
separate actuarial valuation of plan benefits nor segregation of plan assets
specifically for First Federal because the plan is a multi-employer plan and
separate actuarial valuations are not made with respect to each employer nor are
the plan assets so segregated. Expense for 2002, 2001 and 2000 was approximately
$50,000, $109,000 and $137,000.
401(k) Plan: Northeast Indiana Bancorp has a 401(k) plan for all employees who
have completed one year of service (1,000 hours). Participants may make
deferrals up to 15% of compensation. Northeast Indiana Bancorp matches 50% of
elective deferrals on the first 6% of the participant's compensation. Expense
for 2002, 2001 and 2000 was approximately $40,000, $42,000 and $41,000.
Supplemental Retirement Plans: First Federal has a supplemental retirement plan
for the President and a deferred compensation plan for certain directors of
First Federal. First Federal is recording an expense equal to the change in the
present value of the payment due at retirement based on the projected remaining
years of service using the projected unit credit method. The balance of the
plans was approximately $455,000 and $380,000 at year-end 2002 and 2001. The
cost of the plans was approximately $130,000, $114,000 and $162,000 for 2002,
2001 and 2000.
First Federal has purchased insurance on the lives of the participants in the
supplemental retirement plan and the deferred compensation plan with First
Federal as beneficiary. The cash surrender value of the life insurance was
approximately $2,083,000 and $1,983,000 at year-end 2002 and 2001. The income
derived from the investment in life insurance included in other income was
approximately $100,000, $94,000 and $86,000 for 2002, 2001 and 2000.
Employee Stock Ownership Plan (ESOP): An ESOP exists for the benefit of
substantially all employees. Contributions to the ESOP are made by Northeast
Indiana Bancorp and are determined by the Board of Directors at their
discretion. The contributions may be made in the form of cash or common stock.
The annual contributions may not be greater than the amount deductible for
federal income tax purposes and cannot cause Northeast Indiana Bancorp to
violate regulatory capital requirements.
To fund the plan, the ESOP borrowed $1,745,700 from Northeast Indiana Bancorp
for the purpose of purchasing 211,261 shares of stock at $8.26 per share.
Principal payments on the loan are due in equal semi-annual installments over a
twelve-year period beginning June 30, 1995. Interest is payable semi-annually
during the term of the loan at 6.65%. The loan is collateralized by the shares
of Northeast Indiana Bancorp's common stock purchased with the proceeds and will
be repaid by the ESOP with funds from First Federal's contributions to the ESOP
and earnings on ESOP assets.
(Continued)
33
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 9 - EMPLOYEE BENEFITS (Continued)
Shares are allocated among participants each December 31 on the basis of
principal repayments made by the ESOP on the loan from Northeast Indiana
Bancorp, according to each participant's relative compensation.
Contributions, including dividends on unearned ESOP shares, were approximately
$138,000 during 2002, $146,000 during 2001 and $252,000 for 2000. ESOP
compensation expense was approximately $244,000, $214,000 and $342,000 for 2002,
2001 and 2000.
ESOP shares at year end are as follows:
2002 2001
---- ----
Allocated shares 110,235 110,860
Shares released for allocation 16,733 17,588
Unreleased shares 58,396 75,129
Shares vested and withdrawn 25,897 7,684
-------- --------
Total shares 211,261 211,261
======== ========
Fair value of unreleased shares $922,567 $939,113
======== ========
Recognition and Retention Plan (RRP): The RRP provides for issue of shares to
directors, officers and employees. The maximum total shares available under the
RRP was 105,620, and 17,126 shares are available for future grants. There were
no new RRP grants awarded in either 2002 or 2001. During 2000, 500 shares were
awarded at $11.31. Also in 2000, 984 shares were forfeited and added to treasury
stock. The expense associated with the RRP was approximately $9,000, $9,000 and
$203,000 in 2002, 2001 and 2000.
NOTE 10 - INCOME TAXES
Income tax expense is summarized as follows:
2002 2001 2000
---- ---- ----
Current federal $ 491,123 $ 703,715 $ 527,427
Deferred federal (159,336) (130,649) (163,189)
Current state 171,982 203,734 108,667
Deferred state (33,048) (4,223) (32,018)
--------- --------- ---------
Income tax expense $ 470,721 $ 772,577 $ 440,887
========= ========= =========
(Continued)
34
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 10 - INCOME TAXES (Continued)
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2002 2001 2000
---- ---- ----
Federal statutory rate of 34%times financial
statement income before income taxes $ 700,610 $ 932,264 $ 586,272
Tax effect of:
State tax, net of federal income tax effect 91,696 131,677 50,588
Low income housing credit (250,000) (204,100) (173,465)
Tax exempt income (95,349) (73,637) (36,828)
Other, net 23,764 (13,627) 14,320
--------- --------- ---------
Income tax expense $ 470,721 $ 772,577 $ 440,887
========= ========= =========
Effective tax rate is 22.8%, 28.2%, and 25.6% for 2002, 2001, and 2000.
The components of the net deferred tax asset recorded in the balance sheet at
year end are as follows:
2002 2001
---- ----
Deferred tax assets
Deferred compensation $ 180,352 $ 150,713
Bad debts 799,907 682,302
Deferred loan fees 125,338 115,209
Unearned compensation 86,022 85,278
Interest on non-accrual loans 112,067 65,061
Other 6,008 6,010
----------- -----------
Total 1,309,694 1,104,573
Deferred tax liabilities
Depreciation (122,640) (109,467)
Unrealized gain on securities available for sale (197,955) (13,755)
Low income housing partnership (101,733) (102,169)
----------- -----------
Total (422,328) (225,391)
----------- -----------
Net deferred tax asset $ 887,366 $ 879,182
=========== ===========
(Continued)
35
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 10 - INCOME TAXES (Continued)
Retained earnings at December 31, 2002 and 2001 include approximately $1.3
million for which no deferred federal income tax liability has been recognized.
This amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $442,000 at December 31, 2002 and 2001.
Legislation passed in August 1997 now requires the Company to deduct a provision
for bad debts for tax purposes based on actual loss experience and to recapture
the excess bad debt reserve accumulated in tax years after 1986. The related
amount of deferred tax liability, which must be recaptured, was $276,000
originally and is payable over a six-year period that began in 1998.
NOTE 11 - REGULATORY MATTERS
First Federal is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices. Capital amounts and classifications are also subject to qualitative
judgments by regulators about components, risk weightings, and other factors,
and the regulators can lower classifications in certain cases. Failure to meet
various capital requirements can initiate regulatory action that could have a
direct material effect on the financial statements.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
under-capitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
(Continued)
36
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 11 - REGULATORY MATTERS (Continued)
At year end, actual First Federal capital levels (in millions) and minimum
required levels were:
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2002
Total capital
(to risk weighted assets) $ 25.9 18.3% $ 11.3 8.0% $ 14.2 10.0%
Tier 1 (core) capital
(to risk weighted assets) 24.7 17.4 5.7 4.0 8.5 6.0
Tier 1 (core) capital
(to adjusted total assets) 24.7 10.9 9.0 4.0 11.3 5.0
Tier 1 (core) capital
(to average assets) 24.7 10.7 9.2 4.0 11.5 5.0
2001
Total capital $ 25.6 17.9% $ 11.4 8.0% $ 14.3 10.0%
(to risk weighted assets)
Tier 1 (core) capital 24.3 17.0 5.7 4.0 8.6 6.0
(to risk weighted assets)
Tier 1 (core) capital 24.3 10.2 9.5 4.0 11.9 5.0
(to adjusted total assets)
Tier 1 (core) capital 24.3 10.0 9.7 4.0 12.1 5.0
(to average assets)
First Federal was categorized as well capitalized at year end 2002 and 2001.
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by savings institutions without
prior approval of the Office of Thrift Supervision. The regulatory restriction
is based on a three-tiered system with the greatest flexibility being afforded
to well-capitalized (Tier 1) institutions. First Federal is currently a Tier 1
institution. Accordingly, First Federal can make, without prior regulatory
approval, distributions during a calendar year up to 100% of its retained net
income for the calendar year-to-date plus retained net income for the previous
two calendar years as long as First Federal would remain well-capitalized, as
defined by the Office of Thrift Supervision prompt corrective action
regulations, following the proposed distribution. At year end 2002,
approximately $178,000 of the Bank's retained earnings are potentially available
for distribution without regulatory approval.
(Continued)
37
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 12 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS
WITH OFF-BALANCE-SHEET RISK
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These agreements to provide credit or to support the credit of others, as long
as conditions established in the contract are met, usually have expiration
dates. Commitments may expire without being used. Off-balance-sheet risk to
credit loss exists up to the face amount of these instruments, although material
losses are not anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of
the commitment.
Financial instruments with off-balance-sheet risk were as follows at year end.
2002 2001
---- ----
Fixed rate commitments $ 3,616,696 $4,968,005
Variable rate commitments 10,586,696 8,028,718
Credit card arrangements 3,926,015 3,881,939
Letters of credit 842,678 804,101
Most loan commitments have terms up to 60 days. At year end 2002, fixed
commitments have contractual interest rates ranging from 5.38% to 7.75%. Credit
card interest rates are fixed at 14.9% or 9.8%. Most variable rate arrangements
are tied either to the national monthly median cost of funds, prime rate or the
U.S. Treasury bill rate and have spreads between 0% and 5%.
Certain executives of the Bank have employment contracts, which are based upon
changes of control. The employment contracts provide for the payment of one to
three years worth of the officers' salaries upon a change of control.
NOTE 13 - STOCK OPTIONS
Options to buy stock have been granted to directors, officers and employees
under two different stock option and incentive plans. Exercise price is the
market price at date of grant. The maximum option term is ten years and options
vest over five years under both plans. The Company had almost awarded all stock
options under the original stock option plan by the year ended 2001. As such,
the 2002 Omnibus Incentive Plan was added to the Company's proxy statement and
approved by the shareholders at the May 1, 2002 Northeast Indiana Bancorp, Inc.
Annual Meeting. There were 158,753 new stock options approved under the new
plan. At year end 2002, 155,024 shares were authorized for future grants.
(Continued)
38
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 13 - STOCK OPTIONS (Continued)
Information about option grants follows:
Number Exercise Fair Value
of Options Price of Grants
---------- ----- ---------
Outstanding, beginning of 2000 216,614
Granted 5,500 $ 11.31 $ 2.63
Granted 2,500 10.19 2.06
Exercised (4,422) 9.71
Forfeited (1,573) 9.71
----------
Outstanding, end of 2000 218,619
Granted 5,000 12.75 2.40
Exercised (27,612) 9.71
----------
Outstanding, end of 2001 196,007
Granted 5,000 14.45 3.16
Granted 2,500 14.63 2.89
Exercised (25,763) 9.71
Exercised (3,300) 14.66
Exercised (2,200) 11.31
Exercised (1,815) 12.60
Exercised (1,000) 10.19
----------
Outstanding, end of 2002 169,429
==========
Options outstanding at year end were as follows:
2002 2001 2000
---- ---- ----
Number of options 169,429 196,007 218,619
Minimum exercise price $ 9.71 $ 9.71 $ 9.71
Maximum exercise price 18.49 18.49 18.49
Weighted-average exercise price 10.37 10.23 9.99
Weighted-average remaining option life 3.76 years 4.5 years 5.0 years
There were 149,103, 177,842 and 159,113 options exercisable at year end 2002,
2001 and 2000. The weighted-average exercise price of options exercisable at
year end 2002, 2001 and 2000 was $9.95, $9.94 and $9.86.
(Continued)
39
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors and officers of First Federal are loan customers. A summary of
related party loan activity for loans aggregating $60,000 or more to any one
related party is as follows:
Balance - January 1, 2002 $ 2,799,219
New loans 732,360
Repayments (248,169)
Changes in related parties during the year (453,983)
-----------
Balance - December 31, 2002 $ 2,829,427
===========
Related party deposits were approximately $391,000 and $540,000 at year end 2002
and 2001.
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Following are carrying amounts and estimated fair values at year end (in
thousands):
2002 2001
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
Financial assets:
Cash and cash equivalents $ 18,256 $ 18,256 $ 26,292 $ 26,292
Securities available for sale 42,838 42,838 39,365 39,365
Securities held to maturity 225 225 306 306
Loans held for sale 409 409 1,543 1,543
Loans receivable, net 154,560 160,564 162,830 170,585
Accrued interest receivable 695 695 753 753
Investments in limited
liability partnerships 1,833 1,833 1,546 1,546
Cash surrender value of life
insurance 2,083 2,083 1,983 1,983
Financial liabilities:
Deposits (122,357) (124,022) (137,030) (138,668)
Borrowed funds (74,894) (82,548) (73,966) (73,016)
Accrued interest payable (241) (241) (235) (235)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash equivalents,
accrued interest, investments in limited liability partnerships and cash
surrender value of life insurance is considered to approximate cost. The
estimated fair value for securities is based on quoted market values for the
individual securities or equivalent securities. The estimated fair value for
loans held for sale is based on market quotes. The estimated fair value for
loans is based on estimates of the rate that would be charged for similar such
loans at December 31, 2002 and 2001, applied for
(Continued)
40
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS (Continued)
the time period until estimated repayment and the allowance for loan losses is
considered to be a reasonable estimate of discount for credit quality concerns.
The estimated fair value for demand and savings deposits is based on their
carrying value. The estimated fair value for time deposits and borrowed funds is
based on estimates of the rate that would be paid on such deposits or for such
borrowings at December 31, 2002 and 2001, applied for the time period until
maturity. The estimated fair value of other financial instruments and
off-balance-sheet loan commitments approximates cost and is not considered
significant for this presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were Northeast Indiana
Bancorp to have disposed of such items at December 31, 2002 or 2001, the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. The estimated fair
values at December 31, 2002 and 2001 should not necessarily be considered to
apply at subsequent dates.
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Northeast Indiana Bancorp, Inc. is as
follows:
CONDENSED BALANCE SHEETS
December 31, 2002 and 2001
2002 2001
---- ----
ASSETS
Cash and cash equivalents $ 853,215 $ 891,138
Securities available for sale 285,856 271,163
Loan receivable from Employee Stock Ownership Plan 581,900 727,375
Investment in subsidiary bank 24,813,414 24,378,224
Other assets 38,154 22,049
----------- -----------
Total assets $26,572,539 $26,289,949
=========== ===========
LIABILITIES
Accrued expenses $ 10,054 $ 8,911
SHAREHOLDERS' EQUITY 26,562,485 26,281,038
----------- -----------
Total liabilities and shareholders' equity $26,572,539 $26,289,949
=========== ===========
(Continued)
41
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Interest income $ 58,017 $ 67,400 $ 75,103
Dividends from subsidiary bank 1,600,000 1,900,000 1,950,000
----------- ----------- -----------
Total income 1,658,017 1,967,400 2,025,103
Operating expenses 233,454 187,331 197,972
----------- ----------- -----------
Income before income taxes and equity in
undistributed earnings of subsidiary bank 1,424,563 1,780,069 1,827,131
Income tax benefit (92,073) (84,279) (72,240)
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiary bank 1,516,636 1,864,348 1,899,371
Equity in undistributed (excess distributed)
earnings of subsidiary bank 73,260 105,029 (615,928)
----------- ----------- -----------
Net income $ 1,589,896 $ 1,969,377 $ 1,283,443
=========== =========== ===========
(Continued)
42
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 16 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
(Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2001 and 2000
2002 2001 2000
---- ---- ----
Cash flows from operating activities
Net income $ 1,589,896 $ 1,969,377 $ 1,283,443
Adjustments to reconcile net income to cash
from operating activities
Equity in (undistributed) excess
distributed earnings of subsidiary bank (73,260) (105,029) 615,928
Change in
Other assets 15,210 (15,426) (1,899)
Accrued expenses 1,143 64 3,448
----------- ----------- -----------
Net cash from operating activities 1,532,989 1,848,986 1,900,920
Cash flows from investing activities
Repayments on loan receivable from ESOP 145,475 145,475 145,475
Purchase of securities available for sale (137) (40,311) (28,595)
----------- ----------- -----------
Net cash from investing activities 145,338 105,164 116,880
Cash flows from financing activities
Dividends paid (752,480) (735,335) (710,816)
Purchase of treasury stock (1,320,253) (2,118,144) (741,904)
Sale of treasury stock 356,483 268,114 48,593
----------- ----------- -----------
Net cash from financing activities (1,716,250) (2,585,365) (1,404,127)
----------- ----------- -----------
Net change in cash and cash equivalents (37,923) (631,215) 613,673
Cash and cash equivalents at beginning of year 891,138 1,522,353 908,680
----------- ----------- -----------
Cash and cash equivalents at end of year $ 853,215 $ 891,138 $ 1,522,353
=========== =========== ===========
(Continued)
43
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
NOTE 17 - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic earnings per
common share and diluted earnings per common share computations for the years
ended December 31, is presented below.
2002 2001 2000
---- ---- ----
Basic Earnings Per Common Share
Net income available to common shareholders $ 1,589,896 $ 1,969,377 $1,283,443,
=========== =========== ===========
Weighted average common shares
outstanding before adjustment 1,531,361 1,630,709 1,731,741
Less: unallocated ESOP shares (75,129) (92,717) (117,197)
Less: non-vested RRP shares (762) (1,335) (18,258)
----------- ----------- -----------
Weighted average common shares outstanding
for basic earnings per common share 1,455,470 1,536,657 1,596,286
=========== =========== ===========
Basic Earnings Per Common Share $ 1.09 $ 1.28 $ .80
=========== =========== ===========
Diluted Earnings Per Common Share
Net income available to common
shareholders, per above $ 1,589,896 $ 1,969,377 $ 1,283,443
=========== =========== ===========
Weighted average common shares outstanding 1,455,470 1,536,657 1,596,286
Add: dilutive effects of assumed conversions
and exercises of stock options 49,532 34,287 29,611
----------- ----------- -----------
Weighted average common and dilutive
shares outstanding for dilutive earnings per
common share 1,505,002 1,570,944 1,625,897
=========== =========== ===========
Diluted Earnings Per Common Share $ 1.06 $ 1.25 $ .79
=========== =========== ===========
Stock options for 14,380, 18,695 and 19,195 shares of common stock were not
considered in computing diluted earnings per common shares for the years ended
December 31, 2002, 2001 and 2000 because they were not dilutive.
(Continued)
44
STOCKHOLDER INFORMATION
Stock Listing Information
The Company's common stock is traded on The NASDAQ Stock Market under the symbol
"NEIB".
Stock Price Information
The following table sets forth the high and low bid prices and dividends
declared per share of common stock for the periods indicated. The source of such
price information was NASDAQ's monthly trade history report. The prices do not
represent actual transactions and do not include retail markups, markdowns or
commissions.
Dividends
Quarter Ended High Low Declared
------------- ------ ------ ---------
March 31, 2001 $11.50 $ 9.44 $ .11
June 30, 2001 13.20 10.43 .11
September 30, 2001 13.95 12.30 .11
December 31, 2001 13.90 12.50 .12
March 31, 2002 $13.93 $12.61 $ .12
June 30, 2002 16.25 13.40 .12
September 30, 2002 15.90 14.15 .12
December 31, 2002 16.10 13.10 .13
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions.
As of February 11, 2003, there were approximately 437 shareholders of record,
not including those shares held in nominee or street name through various
brokerage firms or banks.
Annual Report on Form 10-KSB
A copy of the Company's annual report on Form 10-KSB, filed with the Securities
and Exchange Commission, is available without charge by writing:
Randy J. Sizemore
Senior Vice President/Chief Financial Officer
Northeast Indiana Bancorp, Inc.
100 Frontage Road
Huntington, Indiana 46750
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Investor Information
Stockholders, investors, and analysts interested in additional information may
contact Stephen E. Zahn, Chairman, President and CEO, Northeast Indiana Bancorp,
Inc.
Corporate Office Special Counsel Independent Auditor
Northeast Indiana Bancorp, Inc. Katten Muchin Zavis Rosenman Crowe, Chizek and Company LLP
648 North Jefferson Street 1025 Thomas Jefferson Street, NW 330 E. Jefferson Blvd.
Huntington, Indiana 46750 East Lobby: Suite 700 South Bend, Indiana 46624
(260) 356-3311 Washington, DC 20007-5201
45
NOTES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
46
NOTES
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
47
DIRECTORS AND EXECUTIVE OFFICERS
NORTHEAST INDIANA BANCORP, INC.
[IMAGE OMITTED] [IMAGE OMITTED]
BOARD OF DIRECTORS EXECUTIVE OFFICERS
Stephen E. Zahn Stephen E. Zahn
Chairman of the Board President and Chief Executive
President and Chief Executive Officer Officer
Dee Ann Hammel
Dan L. Stephan Senior Vice President, Secretary
Past State Representative and Chief Operations Officer
Indiana Legislature
Agent Randy J. Sizemore
Variable Annuity Life Insurance Company Senior Vice President, Treasurer
and Chief Financial Officer
J. David Carnes
Medical Doctor and Associate Michael S. Zahn
Family Practice Associates Senior Vice President
Michael S. Zahn Thomas P. Frantz
Senior Vice President Senior Vice President
and Chief Lending Officer
Randall C. Rider
President
Lime City Manufacturing Company, Inc.
ANNUAL MEETING
- --------------------------------------------------------------------------------
The Annual Meeting of Stockholders of Northeast Indiana Bancorp, Inc., will be
held on April 23, 2003 at 1:00 P.M. the North location of First Federal Savings
Bank, 100 Frontage Road, Huntington, Indiana.
48
FIRST FEDERAL SAVINGS BANK
OFFICE LOCATIONS
North Office
100 Frontage Rd.
Huntington, IN 46750
260-358-4680
Downtown Office
648 N. Jefferson St.
Huntington, IN 46750
260-356-3311
South Office
1240 S. Jefferson St.
Huntington, IN 46750
260-356-5633
Northeast Indiana
Financial, Inc.
260-358-2622
www.firstfed-neib.com
[FDIC INSURED LOGO] [EQUAL HOUSING LENDER LOGO]
[IMAGE OMITTED]
[LOGO] NORTHEAST
INDIANA
Bancorp, Inc.
(C) 2003 Northeast Indiana Bancorp Inc.