SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
|X| QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2003
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
For the transition period from _________ to _________
Commission file number 0-26012.
NORTHEAST INDIANA BANCORP, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 35-1948594
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
648 North Jefferson Street, Huntington, IN 46750
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (260) 356-3311
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such requirements for the past 90 days. YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
CLASS OUTSTANDING AT July 24, 2003
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 1,464,944
Transitional Small Business Disclosure Format: YES |_| NO |X|
NORTHEAST INDIANA BANCORP, INC.
INDEX
PART 1. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2003 and December 31, 2002 1
Consolidated Statements of Income for the
three and six months ended June 30, 2003 and 2002 2
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended June 30, 2003 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial Condition 9
and Results of Operation
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Changes In Securities 18
Item 3. Defaults Upon Senior Securities 18
Item 4. Submission of Matters to a Vote of Security Holders 18
Item 5. Other Information 18
Item 6. Exhibits and Reports on Form 8-K 19
Signature page 20
Exhibit 31.1 and Exhibit 31.2 -Certifications Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 21
Exhibit 32.1 and Exhibit 32.2 -Certifications Furnished
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 22
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2003 And December 31, 2002
June 30, December 31,
2003 2002
(Unaudited)
ASSETS
Interest earning cash and cash equivalents $ 7,726,393 $ 15,195,326
Noninterest earning cash and cash equivalents 2,225,113 3,061,082
------------- -------------
Total cash and cash equivalents 9,951,506 18,256,408
Securities available for sale 48,628,785 42,838,211
Securities held to maturity (fair value:
June 30, 2003- $184,000; December 31, 2002 - $225,000) 184,000 225,000
Loans held for sale 542,390 409,375
Loans receivable, net of allowance for loan losses: June 30,
2003 - $1,857,963; and December 31, 2002 - $2,135,630 150,310,065 154,559,565
Accrued interest receivable 739,425 694,593
Premises and equipment, net 2,099,145 2,176,356
Investments in limited liability partnerships 1,717,761 1,833,375
Cash surrender value of life insurance 4,160,692 2,082,890
Other assets 1,719,837 1,943,142
------------- -------------
Total assets $ 220,053,606 $ 225,018,915
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits- noninterest bearing $ 5,970,098 $ 4,926,793
Savings 11,454,210 10,396,258
NOW and MMDA 32,336,009 31,029,233
Time deposits 72,880,838 76,004,368
------------- -------------
Total deposits 122,641,155 122,356,652
Borrowed funds 67,936,851 74,893,922
Accrued expenses and other liabilities 2,698,047 1,205,856
------------- -------------
Total liabilities 193,276,053 198,456,430
Shareholders' equity
Preferred stock, no par value: 500,000 shares authorized; 0 shares issued -- --
Common stock, $.01 par value: 4,000,000 shares authorized;
6/30/03: 2,640,672 shares issued, 1,464,944 shares outstanding
12/31/02: 2,640,672 shares issued, 1,497,058 shares outstanding 26,407 26,407
Additional paid in capital 29,081,047 29,000,459
Retained earnings, substantially restricted 14,012,145 13,285,229
Unearned employee stock ownership plan shares (416,771) (482,351)
Unearned recognition and retention plan shares -- (3,918)
Accumulated other comprehensive income, net of tax 74,292 139,555
Treasury stock, 1,175,728 and 1,143,614 common shares, at
cost, at June 30, 2003 and December 31, 2002 (15,999,567) (15,402,896)
------------- -------------
Total shareholders' equity 26,777,553 26,562,485
------------- -------------
Total liabilities and shareholders' equity $ 220,053,606 $ 225,018,915
============= =============
See accompanying notes to financial statements
1.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and six months ended June 30, 2003 and 2002
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
(Unaudited)
Interest income
Loans, including fees $ 2,692,068 $ 3,065,836 $ 5,480,715 $ 6,245,235
Taxable securities 394,726 464,543 786,891 932,046
Non-taxable securities 17,374 14,349 34,569 19,186
Deposits with financial institutions 44,619 84,046 81,006 186,609
----------- ----------- ----------- -----------
Total interest income 3,148,787 3,628,774 6,383,181 7,383,076
Interest expense
Deposits 774,459 1,121,110 1,615,717 2,392,697
Borrowed funds 899,258 918,502 1,798,049 1,812,923
----------- ----------- ----------- -----------
Total interest expense 1,673,717 2,039,612 3,413,766 4,205,620
Net interest income 1,475,070 1,589,162 2,969,415 3,177,456
Provision for loan losses -- 175,000 -- 392,300
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 1,475,070 1,414,162 2,969,415 2,785,156
Noninterest income
Service charges on deposit accounts 93,585 90,224 178,121 173,850
Loan servicing fees 63,247 50,618 113,456 114,134
Net loss on sale of securities
available for sale -- (10,535) -- (10,535)
Net gain on sale of loans held for sale 259,546 41,782 425,120 72,207
Net gain (loss) on sale of foreclosed
real estate and repossessed assets 48,508 (76,918) 62,862 (62,287)
Trust and brokerage fees 50,517 70,422 102,212 116,266
Other service charges and fees 122,459 82,045 199,764 146,791
----------- ----------- ----------- -----------
Total noninterest income 637,862 247,638 1,081,535 550,426
Noninterest expense
Salaries and employee benefits 617,615 647,256 1,277,364 1,291,411
Occupancy 123,454 114,796 247,182 231,317
Data processing 167,243 157,473 336,324 309,533
Deposit insurance premium 4,918 5,986 10,071 12,471
Professional fees 69,288 88,895 147,005 138,389
Correspondent bank charges 53,836 54,073 99,773 107,502
Other expense 186,981 183,958 398,072 364,610
----------- ----------- ----------- -----------
Total noninterest expense 1,223,335 1,252,437 2,515,791 2,455,233
----------- ----------- ----------- -----------
Income before income taxes 889,597 409,363 1,535,159 880,349
Income tax expense 257,550 85,476 421,900 203,238
----------- ----------- ----------- -----------
Net income $ 632,047 $ 323,887 $ 1,113,259 $ 677,111
=========== =========== =========== ===========
Comprehensive income $ 617,008 $ 405,616 $ 1,047,996 $ 652,022
=========== =========== =========== ===========
Basic earnings per common share $ 0.45 $ 0.22 $ 0.78 $ 0.46
Diluted earnings per common share $ 0.44 $ 0.22 $ 0.75 $ 0.45
See accompanying notes to financial statements
2.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 30, 2003
(Unaudited)
Unearned
Employee
Additional Stock
Common Paid-in Retained Ownership
Stock Capital Earnings Plan Shares
------------- ------------- ------------- -------------
Balance at January 1, 2003 $ 26,407 $ 29,000,459 $ 13,285,229 $ (482,351)
Net income for six months ended June 30, 2003 1,113,259
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net of tax
Total other comprehensive (loss)
Total comprehensive income
Cash dividends ($.26 per share year to date) (386,343)
Purchase of 48,128 shares of treasury stock
Issuance of 16,014 shares of treasury stock upon exercise
of stock options (16,661)
Tax effect of stock plans 33,999
7,940 shares committed to be released under ESOP 63,250 65,580
Amortization of RRP contributions
------------- ------------- ------------- -------------
Balance at June 30, 2003 $ 26,407 $ 29,081,047 $ 14,012,145 $ (416,771)
============= ============= ============= =============
Accumulated
Unearned Other
Recognition Comprehensive Total
And Retention Income (Loss), Treasury Shareholders'
Plan Shares Net of Tax Stock Equity
------------- ------------- ------------- -------------
Balance at January 1, 2003 $ (3,918) $ 139,555 $ (15,402,896) $ 26,562,485
Net income for six months ended June 30, 2003 1,113,259
Other comprehensive income (loss):
Net change in unrealized gains (losses)
on securities available for sale, net of tax
(65,263)
Total other comprehensive (loss) (65,263)
-------------
Total comprehensive income 1,047,996
Cash dividends ($.26 per share year to date) (386,343)
Purchase of 48,128 shares of treasury stock (772,031) (772,031)
Issuance of 16,014 shares of treasury stock upon exercise
of stock options 175,360 158,699
Tax effect of stock plans 33,999
7,940 shares committed to be released under ESOP 128,830
Amortization of RRP contributions 3,918 3,918
------------- ------------- ------------- -------------
Balance at June 30, 2003 -- $ 74,292 $ (15,999,567) $ 26,777,553
============= ============= ============= =============
See accompanying notes to financial statements
3.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2002
Six months ended
June 30,
2003 2002
------------ ------------
(Unaudited)
Cash flows from operating activities
Net income $ 1,113,259 $ 677,111
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 22,823 217,464
Provision for loan losses -- 392,300
Net (gain) loss on sale of:
Foreclosed real estate and repossessed assets (62,862) 62,287
Loans held for sale (425,120) (72,207)
Securities available for sale -- 10,535
Originations of loans held for sale (16,192,611) (2,978,590)
Proceeds from loans sold 16,484,716 4,321,656
Reduction of obligation under ESOP 128,830 119,340
Amortization of RRP 3,918 4,318
Net change in:
Other assets 57,902 (197,358)
Accrued interest receivable (44,832) 41,621
Accrued expenses and other liabilities 1,492,191 49,436
------------ ------------
Total adjustments 1,464,955 1,970,802
------------ ------------
Net cash from operating activities 2,578,214 2,647,913
Cash flows from investing activities
Purchases of securities available for sale (18,888,396) (15,043,523)
Proceeds from maturities and principal payments of:
Securities available for sale 13,235,698 8,741,709
Securities held to maturity 41,000 40,000
Proceeds from sale of securities available for sale -- 1,405,188
Purchase of life insurance (2,000,000) --
Net change in loans 2,787,830 2,165,348
Proceeds from sale of foreclosed real estate and repossessed assets 1,668,277 470,395
Expenditures on premises and equipment (55,282) (79,638)
Proceeds from sale of premises and equipment -- 8,143
------------ ------------
Net cash from investing activities (3,210,873) (2,292,378)
Cash flows from financing activities
Net change in deposits 284,503 (10,117,975)
Repayment of FHLB advances (2,000,000) --
Payments of demand notes (100,000) --
Net change in other borrowed funds (4,857,071) (3,311,332)
Dividends paid (386,343) (371,988)
Purchase of treasury stock (772,031) (377,253)
Sale of treasury stock 158,699 250,159
------------ ------------
Net cash from financing activities (7,672,243) (13,928,389)
------------ ------------
Net change in cash and cash equivalents (8,304,902) (13,572,854)
Cash and cash equivalents at beginning of period 18,256,408 26,291,732
------------ ------------
Cash and cash equivalents at end of period $ 9,951,506 $ 12,718,878
============ ============
Cash paid for:
Interest $ 3,473,353 $ 4,151,365
Income taxes 225,850 286,300
Non-cash transactions:
Transfer from loans to other real estate and repossessed assets 1,461,670 415,805
See accompanying notes to financial statements
4.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2003
NOTE 1 - BASIS OF PRESENTATION
The unaudited information for the three and six months ended June 30, 2003 and
2002 includes the results of operations 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, Inc. ("Northeast Indiana Financial"). In the opinion of
management, the information reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results of
operations for the three and six month periods reported but should not be
considered as indicative of the results to be expected for the full year.
Certain reclassifications were made to the prior period financial statements to
conform to the current period presentation.
NOTE 2 - EARNINGS PER COMMON SHARE
Basic earnings per common share is based on weighted-average common shares
outstanding less unallocated ESOP shares and nonvested RRP shares. Diluted
earnings per common share further assumes issue of any dilutive potential common
shares.
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Earnings Per Common Share
Net income available to common shareholders $ 632,047 $ 323,887 $1,113,259 $ 677,111
Weighted average common shares outstanding
(excluding unallocated ESOP shares and
nonvested RRP shares) 1,414,449 1,454,996 1,423,186 1,460,195
-------------------------------------------------
Basic Earnings Per Common Share $ 0.45 $ 0.22 $ 0.78 $ 0.46
=================================================
Earnings Per Common Share Assuming Dilution
Net income available to common shareholders $ 632,047 $ 323,887 $1,113,259 $ 677,111
Weighted average common shares outstanding
for basic earnings per common share 1,414,449 1,454,996 1,423,186 1,460,195
Add: dilutive effects of assumed exercises of
stock options 28,157 28,314 51,850 44,171
-------------------------------------------------
Weighted average common and dilutive
potential common shares
outstanding 1,442,606 1,483,310 1,475,036 1,504,366
-------------------------------------------------
Diluted Earnings Per Common Share $ 0.44 $ 0.22 $ 0.75 $ 0.45
=================================================
NOTE 3 - SUBSEQUENT EVENT-CASH DIVIDENDS
On July 30, 2003, the Board of Directors of Northeast Indiana Bancorp announced
a cash dividend of $0.13 per common share. The dividend will be paid on August
27, 2003 to common shareholders of record on August 13, 2003. The payment of the
cash dividend will reduce shareholders' equity in the third quarter by
approximately $190,000.
Continued
5.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2003
NOTE 4 - STOCK REPURCHASE PLAN
On March 26, 2003, Northeast Indiana Bancorp announced a stock repurchase
program to repurchase up to 5.00% of the outstanding shares in the open market
as Treasury shares over the next twelve months. This program will include up to
74,195 shares. During the quarter ended June 30, 2003 there were 18,965 shares
repurchased at an average price of $16.86. This leaves 55,230 shares still
available to be repurchased under the current plan.
NOTE 5 - REGULATORY CAPITAL REQUIREMENTS
Pursuant to federal regulatory agencies, savings institutions must meet three
separate minimum capital-to-asset requirements. The following table summarizes,
as of June 30, 2003, the capital requirements for First Federal under those
federal regulatory requirements and First Federal's actual capital ratios. As of
June 30, 2003, First Federal substantially exceeded all regulatory minimum
capital requirements and is considered to be "well capitalized" as defined by
federal regulatory capital requirements.
Minimum Required To Be Well
Minimum Required For Capital Capitalized Under Prompt
Actual Adequacy Purposes Corrective Action Regulations
------ ----------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total Capital
(to risk weighted assets) $26,321 18.7% $11,289 8.0% $14,111 10.0%
Tier 1 (core) capital (to
risk weighted assets) 25,056 17.8 5,645 4.0 8,467 6.0
Tier 1(core) capital (to
adjusted total assets) 25,056 11.4 8,786 4.0 10,983 5.0
Tier 1 (core) capital (to
average assets) 25,056 11.3 8,904 4.0 11,129 5.0
NOTE 6 - INVESTMENTS IN LIMITED LIABILITY PARTNERSHIPS
These represent First Federal'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 First Federal.
Continued
6.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2003
NOTE 6 - INVESTMENTS IN LIMITED LIABILITY PARTNERSHIPS (Continued)
These investments are reviewed for impairment when events indicate their
carrying amounts may not be recoverable from future discounted cash flows. If
impaired, the investments are reported at discounted amounts. First Federal's
involvement in these types of investments is for tax planning purposes only and
as such, First Federal is not involved in the management or operation of such
investments. At June 30, 2003, First Federal had four such investments with a
carrying value of $1.7 million. The most recent investment, in the amount of
$500,000, became fully funded during the second quarter ended June 30, 2003. The
final draw of $50,000 was remitted during the current quarter. This amount was
previously included in borrowed funds in the consolidated balance sheet as of
December 31, 2002.
NOTE 7 - STOCK OPTIONS
The following proforma information presents net income and basic and diluted
earning per common share had the fair value method been used to measure
compensation for stock options granted. The exercise price of options granted is
equivalent to the market price of the underlying stock at the grant date;
therefore, no compensation expense has been recorded for stock options granted.
Three months ended Six months ended
June 30, June 30,
2003 2002 2003 2002
----------- ----------- ----------- -----------
Net income as reported $ 632,047 $ 323,887 $ 1,113,259 $ 677,111
Proforma net income 627,448 319,990 1,104,061 669,317
Reported earnings per common share
Basic 0.45 0.22 0.78 0.46
Diluted 0.44 0.22 0.75 0.45
Proforma earnings per common share
Basic 0.44 0.22 0.78 0.46
Diluted 0.43 0.22 0.75 0.44
The weighted average fair value of stock options granted during the six months
ended June 30, 2003 was $2.96 per option. The weighted average fair value of
stock options granted during the six months ended June 30, 2002 was $3.16 per
option. The fair value of options granted during the six months ended June 30,
2003 and June 30, 2002 were estimated using an option pricing model with the
following weighted average information as of the grant date:
2003 2002
------- -------
Risk free rate of interest 3.27% 4.68%
Expected option life 6 years 6 years
Expected dividend yield 3.37% 3.37%
Expected volatility 24.84% 24.64%
Continued
7.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2003
NOTE 7 - STOCK OPTIONS (Continued)
In future years, as additional options are granted, the proforma effect on net
income and earnings per common share may increase. Stock options are used to
reward directors and certain executive officers and provide them with an
additional equity interest. Options are issued for 10 year periods and have five
year vesting schedules. The options granted during 2003 occurred during the
quarter ended March 31, 2003. Information about options available for grant and
options granted are as follows:
Weighted-
Average
Available Options Exercise
For Grant Outstanding Price
--------- ------------ ----------
Balance at December 31, 2002 155,024 169,429 $ 10.37
Options exercised -- (16,014) 9.91
Options granted (5,000) 5,000 15.27
Options forfeited 1,150 (1,150) 12.91
------- ------- ---------
Balance at June 30, 2003 151,174 157,265 10.56
======= ======= =========
At June 30, 2003, options outstanding had a weighted average remaining life of
approximately 3.49 years. There were 137,565 options exercisable June 30, 2003
with a weighted-average exercise price of $10.10.
8.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
GENERAL
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 the common stock of First Federal Savings Bank ("First Federal") as a
unitary thrift holding company. As of June 30, 2003, Northeast Indiana Bancorp
had no significant assets other than the investment in the capital stock of
First Federal and cash and cash equivalents.
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 the function of the balances of deposits and borrowings and
the interest rates paid there on. First Federal's earnings are also affected by
provisions for loan losses, service charge and fee income, other noninterest
income, operating expenses and income taxes. Operating expenses consist
primarily of employee compensation and benefits, occupancy and equipment
expenses, data processing, federal deposit insurance premiums and other general
administrative expenses.
The most significant outside factors influencing the operations of First Federal
and other savings institutions include general economic conditions, competition
in the local market place and related monetary and fiscal policies of agencies
that regulate financial institutions. More specifically, the cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by the demand for real estate
financing and other types of loans, which in turn is affected by the interest
rates at which such loans may be offered and other factors affecting loan demand
and funds availability.
TRUST AND FINANCIAL SERVICES
First Federal established a trust department and began offering trust services
during 1998. Trust assets under management had grown to nearly $40 million when
First Federal's senior trust officer resigned in the quarter ended March 31,
2003 to pursue other interests. Management conducted an executive search and
also gave consideration to entering into a cooperative relationship with another
financial institution that offered trust services. After the executive search
was unsuccessful in producing a viable candidate and based on market
constraints, management intensified its pursuit of a cooperative arrangement for
trust services. After discussions with three other interested financial
institutions, the search was narrowed and an institution was selected. It is
anticipated that First Federal will continue to offer trust services to its
existing customers and solicit new business with technical support from the
other financial institution.
Continued
9.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
TRUST AND FINANCIAL SERVICES (continued)
The final cooperative agreement is expected to be signed during the third
quarter of 2003. The trust assets and fiduciary responsibilities are also
expected to be transferred during the third quarter of 2003. Management expects
minimal impact to Northeast Indiana Bancorp's operating performance from this
transaction.
In February 1999, Northeast Indiana Bancorp announced the establishment of
Northeast Indiana Financial, Inc., a wholly-owned subsidiary of First Federal.
Northeast Indiana Financial, Inc. provides brokerage services through the
purchase of mutual funds, annuities, stocks and bonds for its customers.
FINANCIAL CONDITION
Northeast Indiana Bancorp's total assets decreased $4.9 million or 2.2% from
$225.0 million at December 31, 2002 to $220.1 million at June 30, 2003. Asset
reduction was primarily related to cash and cash equivalents being used to fund
an advance that was repaid to the Federal Home Loan Bank and the outflows of
excess funds being held in repurchase agreements at the prior year end. Both of
these items are components of borrowed funds on the consolidated balance sheets.
Net loans receivable decreased $4.3 million or 2.8% from $154.6 million at
December 31, 2002 to $150.3 million at June 30, 2003. Most of the decline was
due to both residential loans being sold into the secondary market and loan
balances transferred to foreclosed real estate and repossessed assets of $1.5
million. Allowance for loan losses decreased approximately $278,000 through the
six months ended June 30, 2003, which is discussed in more detail under the
non-performing assets and allowance for loans losses section.
Cash surrender value of life insurance increased $2.1 million to $4.2 million at
June 30, 2003 as First Federal purchased new Bank-Owned Life Insurance ("BOLI")
policies on a pool of officers during the quarter ended March 31, 2003.
Management believes the earnings credit rate and the tax-advantaged status of
the new BOLI will help offset existing expenses related to benefit plans that
are currently in place for employees.
Total deposits are relatively unchanged at $122.6 million at June 30, 2003
compared to $122.4 million at December 31, 2002. Declines in time deposits of
$3.1 million are more than offset by aggregate increases in noninterest bearing
demand deposits, savings, NOW, and MMDA balances of $3.3 million. Management
continues to focus on replacing maturing out of market jumbo time deposits with
lower cost transaction-based accounts.
Other liabilities increased by $1.5 million due to both increased activity in
secondary market custodial account balances and a deferred gain on the sale of
foreclosed real estate. Balances
Continued
10.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
FINANCIAL CONDITION (continued)
had accumulated in custodial accounts at the end of the period due to increased
payoff activity on loans being serviced which were subsequently remitted to the
investor during the first few days of the third quarter. Management also
deferred a gain on the sale of foreclosed real estate, which was created through
a bulk sale of single family rental properties to a single investor during the
quarter ended June 30, 2003. These properties were being carried in other assets
at March 31, 2003 as real estate owned.
RESULTS OF OPERATIONS
Northeast Indiana Bancorp had net income of $632,000 or $0.44 per diluted common
share and $1.1 million or $0.75 per diluted common share for the three and six
months ended June 30, 2003 compared to net income of $324,000 or $0.22 per
diluted common share and $677,000 or $0.45 per common diluted share for the
three and six months ended June 30, 2002. The $308,000 and $436,000 dollar
increases quarter to quarter and six months to six months represents a 95.1% and
62.5% increase expressed as a percentage.
Net interest income decreased to $1.5 million for the three months ended June
30, 2003 compared to $1.6 million for the three months ended June 30, 2002. Net
interest income decreased to $3.0 million from $3.2 million for the six months
ended June 30, 2003 and June 30, 2002. Interest income for the quarter decreased
$480,000 to $3.1 million for June 30, 2003 compared to $3.6 million for June 30,
2002. Interest income for the six months ended June 30, 2003 was $6.4 million
compared to $7.4 million for the six months ended June 30, 2002, a decrease of
$1.0 million or 13.5%. Of the $1.0 million decrease, 36.1% is attributed to
volume while 63.9% is related to lower interest rates. For the second quarter,
interest expense decreased $365,000 to $1.7 million for the quarter ended June
30, 2003 compared to $2.0 million for the quarter ended June 30, 2002. Interest
expense for the six months ended June 30, 2003 was approximately $3.4 million, a
decrease of $792,000 when compared to the $4.2 million expensed for the same
period ended June 30, 2002. This decrease is primarily due to borrowed funds and
time deposits repricing at lower rates as they mature and lower average balances
between periods. During the first half of 2003, Northeast Indiana Bancorp has
reduced both its funding reliance on wholesale time deposits and borrowed funds.
Due to improving non-performing assets trends during the three and six months
ended June 30, 2003 and a slight reduction in loans balances outstanding during
the same period, there were no provisions for loan losses recorded. This
compares to provision for loan losses recorded in the amount of $175,000 and
$392,000 during the three and six months ended June 30, 2002. The improving
trends are discussed in more detail under the non-performing assets and
allowance for loan losses section of this discussion.
Continued
11.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
RESULTS OF OPERATIONS (continued)
Noninterest income increased to $638,000 for the three months ended June 30,
2003. This represents a $390,000 or 157.6% increase over the $248,000 recorded
for the comparable period in 2002. This significant increase was primarily due
to an increase of $218,000 in net gains on the sale of loans between periods due
to the ultra-low interest rate environment and the residential mortgage
refinancing that has occurred. Due to a recent decision to portfolio most 10
through 15 year one-to-four family mortgages and the very recent rise in
interest rates, management expects this area to return to more normal levels
going forward. Other increases between quarters came from net gains on the sale
of foreclosed real estate and repossessed assets during the current quarter
compared to net losses on the sale of these assets during the year earlier
quarter and increases in cash surrender value of life insurance between periods.
Noninterest income increased to $1.1 million for the six months ended June 30,
2003 compared to the $550,000 recorded for the six months ended June 30, 2002.
This significant increase is due to the same factors described for the three
month comparison of noninterest income.
Noninterest expenses were relatively unchanged for both the three and six month
periods ended June 30, 2003 compared to the prior year periods. For the
quarterly comparison, minimal increases in occupancy and data processing were
more than offset by decreases to salaries and employee benefits, deposit
insurance premiums, and professional fees as management continued to focus on
containing costs where possible. For the six month comparison, a modest increase
of $61,000 in noninterest expenses between periods or 2.5% was due to increases
in occupancy, data processing, professional fees and other expenses, partially
offset by reductions to salaries and employee benefits, deposit insurance
premiums and correspondent bank charges.
Income tax expense increased for the quarter ended June 30, 2003 to $258,000
compared to $85,000 for the quarter ended June 30, 2002 due primarily to higher
taxable income in the current period. Northeast Indiana Bancorp's effective tax
rate was 29.0% in the current quarter compared to 20.1% in the year earlier
quarter. Income tax expense was $422,000 for the six months ended June 30, 2003
compared to $203,000 for the six months ended June 30, 2002. This was again due
to higher taxable income between periods. The effective tax rate was 27.5% for
the current period compared to 23.1% in the prior year period.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan loss
calculation based on management's quarterly asset classification review and
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation considers, among other matters,
the estimated value of the underlying collateral, economic conditions, cash flow
analysis, historical loan loss experience, discussions held with delinquent
borrowers and other factors that warrant recognition in providing for an
adequate allowance for loan losses.
Continued
12.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
As a result of this review process and due to improving trends in non-performing
assets, Northeast Indiana Bancorp recorded no provision for loan losses for the
three and six months ended June 30, 2003 compared to $175,000 and $392,000 for
the same periods ended June 30, 2002.
The non-performing assets to total assets ratio is one indicator of the exposure
to credit risk. Non-performing assets of First Federal consist of the
non-accruing loans, troubled debt restructuring and real estate owned and
repossessed assets which have been acquired as a result of foreclosures.
The following table summarizes in thousands the various categories of
non-performing assets:
June 30, March 31, December 31,
2003 2003 2002
Non-accruing loans
One-to-four family $ 104 $ 155 $ 495
Commercial real estate 3,328 4,005 5,006
Consumer 311 344 510
Commercial 102 107 207
------ ------ ------
Total 3,845 4,611 6,218
------ ------ ------
Foreclosed real estate
One-to-four family 278 1,034 420
Commercial real estate 92 92 96
------ ------ ------
Total 370 1,126 516
------ ------ ------
Repossessed assets
Consumer 14 7 11
Commercial -- -- 1
------ ------ ------
Total 14 7 12
------ ------ ------
Total non-performing assets $4,229 $5,744 $6,746
====== ====== ======
Total non-performing assets
as a percentage of total assets 1.92% 2.56% 3.00%
====== ====== ======
Total non-performing assets decreased from $6.7 million to $4.2 million or 1.9%
of total assets at June 30, 2003 from 3.0% of total assets at December 31, 2002
and $5.7 million or 2.6% of total assets at March 31, 2003. At June 30, 2003,
one borrower comprised $1.4 million or 33.3% of the $4.2 million in total
non-performing assets. Management was notified of this borrower's intent to file
bankruptcy during the quarter ended March 31, 2003 and is waiting to see if the
borrower's financial plan will be accepted by the bankruptcy courts. Management
has already
Continued
13.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
established a specific reserve to cover potential losses related to this
borrower in prior periods and does not anticipate any further loss at this time.
The following table represents an analysis of the Company's allowance for loan
losses for both the three and six months ended June 30, 2003 and June 30, 2002:
Three Months Ended Six Months Ended
June 30, June 30,
2003 2002 2003 2002
------------- ------------ ------------ ------------
Balance at beginning of period $ 1,796,511 $ 2,071,139 $ 2,135,630 $ 1,954,900
Charge-offs:
One-to-four family -- -- 25,954 --
Commercial real estate -- 61,400 201,379 61,400
Commercial -- -- 100,488 --
Consumer 48,717 188,341 140,865 350,554
------------- ------------ ------------ ------------
48,717 249,741 468,686 411,954
------------- ------------ ------------ ------------
Recoveries:
One-to-four family -- -- -- --
Commercial real estate -- -- -- --
Commercial 83,000 1,030 96,000 10,493
Consumer 27,169 69,644 95,019 121,333
------------- ------------ ------------ ------------
110,169 70,674 191,019 131,826
------------- ------------ ------------ ------------
Net charge-offs (recoveries) (61,452) 179,067 277,667 280,128
Additions charged to operations -- 175,000 -- 392,300
------------- ------------ ------------ ------------
Balance at end of period $ 1,857,963 $ 2,067,072 $ 1,857,963 $ 2,067,072
============= ============ ============ ============
Ave. gross loans and loans HFS $ 154,851,640 $165,337,330 $156,833,897 $166,253,753
------------- ------------ ------------ ------------
Ratio of net charge-offs (recoveries) to
average loans outstanding during the period
(annualized) (0.16)% 0.43% 0.35% 0.34%
------------- ------------ ------------ ------------
Average non-performing loans $ 3,844,645 $ 6,076,791 $ 4,891,447 $ 6,376,239
------------- ------------ ------------ ------------
Ratio of net charge-offs (recoveries) to
average non-performing loans (annualized) (6.39)% 11.79% 11.35% 8.79%
------------- ------------ ------------ ------------
Continued
14.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
Impaired loans at June 30, 2003 were $3.9 million compared to $5.5 million at
December 31, 2002 and $4.0 million at March 31, 2003. The net change in impaired
loans of $1.6 million between December 31, 2002 and June 30, 2003 was primarily
due to a large group of one-to-four family properties being transferred to
foreclosed real estate and subsequently sold. These properties were sold in a
bulk package at a net gain, which was deferred due to the terms of the sale,
during the quarter ended June 30, 2003. Two new impaired loans have been added
during the six months ended June 30, 2003 totaling approximately $207,000.
Management established specific reserves during the quarter ended June 30, 2003
towards these loans and expects no further loss at this time. As of June 30,
2003, management has set aside a total of $599,000 in specific reserves towards
these impaired loans.
LIQUIDITY AND CAPITAL RESOURCES
First Federal is required to maintain specific amounts of regulatory capital
pursuant to regulations of the Office of Thrift Supervision (OTS). Those capital
requirements follow: a risk-based capital standard expressed as a percent of
risk weighted assets, a leverage ratio of core capital to total assets, and a
core capital ratio expressed as a percent of total adjusted assets. At June 30,
2003, First Federal exceeded all regulatory capital standards.
At June 30, 2003, First Federal's risk based capital was $26.3 million or 18.7%
of risk weighted assets, which exceeds the OTS requirement of $11.3 million and
8.0% by $15.0 million and 10.7%. First Federal's core capital at June 30, 2003
was $25.1 million or 11.3% of average assets, which exceeds the OTS requirement
of $8.9 million, and 4.0% by $16.2 million and 7.3%. See Note 5 of Notes to
Consolidated Financial Statements (Unaudited).
First Federal's primary sources of funds are deposits, borrowings from the FHLB,
the sale of fixed rate mortgages to the secondary market, principal and interest
payments of loans, operations income and short-term investments. 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.
During the quarter ended June 30, 2003, Northeast Indiana Bancorp repurchased
18,965 shares of treasury stock at an average cost of $16.86 under a previously
announced stock repurchase program. In the opinion of management, these
repurchases help leverage Northeast Indiana Bancorp's remaining equity and tend
to improve return on shareholder's equity. Approximately 55,000 shares are still
available to be repurchased under the existing program.
Continued
15.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
LIQUIDITY AND CAPITAL RESOURCES (continued)
First Federal considers its liquidity and capital resources to be adequate to
meet its foreseeable short and long-term needs. First Federal expects to be able
to fund or refinance, on a timely basis, its material commitments and long-term
liabilities.
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings by Northeast Indiana Bancorp with
the Securities and Exchange Commission, in Northeast Indiana Bancorp's 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 Northeast Indiana Bancorp's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in Northeast Indiana Bancorp's 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 Northeast Indiana Bancorp's financial
performance and could cause Northeast Indiana Bancorp's 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.
Item 3. Controls and Procedures
With the participation and under the supervision of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, and
as of the end of the period covered by this quarterly report, the Company's
Chief Executive Officer and Chief Financial Officer have evaluated the
effectiveness of the design and operation of the Company's disclosure controls
and procedures (as defined in Exchange Act Rules 13a-15(e) and 15(d)-15(e)) and,
based on their evaluation, have concluded that the disclosure controls
16.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2003
Item 3. Controls and Procedures (continued)
and procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation, including any corrective
action with regard to significant deficiencies and material weaknesses.
17.
NORTHEAST INDIANA BANCORP, INC.
PART II
Other Information
ITEM 1 - LEGAL PROCEEDINGS
Northeast Indiana Bancorp and First Federal are involved from time to
time, as plaintiff or defendant in various legal actions arising from the
normal course of their businesses. While the ultimate outcome of these
proceedings cannot be predicted with certainty, it is the opinion of
management that the resolution of these proceedings should not have a
material effect on Northeast Indiana Bancorp's results of operations on a
consolidated basis.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) The Annual Meeting of Shareholders ("the meeting") of Northeast
Indiana Bancorp, Inc. was held on April 23, 2003. The matters
approved by shareholders at the meeting and the number of votes cast
for, against or withheld (as well as the number of abstentions) as
to each matter are set forth below:
(1) The election of the following directors for a three year term:
Votes
-----
For Withheld
--- --------
Michael S. Zahn 946,850 227,127
Randall C. Rider 949,289 224,688
(2) Ratification of Crowe Chizek and Company LLC as auditors:
Votes
-----
For Against Abstain
--- ------- -------
1,155,451 16,437 2,089
ITEM 5 - OTHER INFORMATION
None
Continued
18.
NORTHEAST INDIANA BANCORP, INC.
PART II (Continued)
Other Information
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 and Exhibit 31.2 - Certifications Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 and Exhibit 32.2 - Certifications Pursuant to Section
906 of the Sarbanes- Oxley Act of 2002
(b) Reports on Form 8-K
(1) April 14, 2003 Announcing First Quarter 2003 Earnings
(2) April 24, 2003 Announcing Cash Dividend and Results of Annual
Meeting
19.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHEAST INDIANA BANCORP, INC.
Date: August 14, 2003 By:
-----------------------------------------
Stephen E. Zahn
President and Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 2003 By:
-----------------------------------------
Randy J. Sizemore
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
20.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHEAST INDIANA BANCORP, INC.
Date: August 14, 2003 By: /S/ STEPHEN E. ZAHN
-----------------------------------------
Stephen E. Zahn
President and Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 2003 By: /S/ RANDY J. SIZEMORE
-----------------------------------------
Randy J. Sizemore
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
21.