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 September 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 OCTOBER 22, 2003
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 1,472,944
Transitional Small Business Disclosure Format: YES |_| NO |X|
NORTHEAST INDIANA BANCORP, INC.
INDEX
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PART 1. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Condensed)
Consolidated Balance Sheets
September 30, 2003 and December 31, 2002 1
Consolidated Statements of Income for the
three and nine months ended September 30, 2003 and 2002 2
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 2003 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2003 and 2002 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Controls and procedures 18
PART II. OTHER INFORMATION 19
Item 1. Legal Proceedings 19
Item 2. Changes in Securities 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Submissions of Matters to a Vote of Security Holders 19
Item 5. Other Information 19
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
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NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2003 and December 31, 2002
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September 30, December 31,
2003 2002
(Unaudited)
ASSETS
Interest earning cash and cash equivalents $ 6,429,253 $ 15,195,326
Noninterest earning cash and cash equivalents 708,461 3,061,082
------------- -------------
Total cash and cash equivalents 7,137,714 18,256,408
Securities available for sale 49,127,744 42,838,211
Securities held to maturity (fair value: September
30, 2003- $150,000; December 31, 2002 - $225,000) 150,000 225,000
Loans held for sale 150,850 409,375
Loans receivable, net of allowance for loan losses: September 30,
2003 - $1,856,347 and December 31, 2002 - $2,135,630 154,510,694 154,559,565
Accrued interest receivable 819,936 694,593
Premises and equipment, net 2,091,562 2,176,356
Investments in limited liability partnerships 1,659,954 1,833,375
Cash surrender value of life insurance 4,208,969 2,082,890
Other assets 1,626,464 1,943,142
------------- -------------
Total assets $ 221,483,887 $ 225,018,915
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits-noninterest bearing $ 5,865,397 $ 4,926,793
Savings 11,146,900 10,396,258
NOW and MMDA 31,755,208 31,029,233
Time deposits 73,664,340 76,004,368
------------- -------------
Total deposits 122,431,845 122,356,652
Borrowed funds 70,220,256 74,893,922
Accrued expenses and other liabilities 1,709,923 1,205,856
------------- -------------
Total liabilities 194,362,024 198,456,430
Shareholders' equity
Preferred Stock, no par value: 500,000 shares authorized; 0 shares issued -- --
Common stock, $.01 par value: 4,000,000 shares authorized;
9/30/03: 2,640,672 shares issued, 1,472,944 shares outstanding
12/31/02: 2,640,672 shares issued, 1,497,058 shares outstanding 26,407 26,407
Additional paid in capital 29,116,386 29,000,459
Retained earnings, substantially restricted 14,215,859 13,285,229
Unearned employee stock ownership plan shares (383,981) (482,351)
Unearned recognition and retention plan shares -- (3,918)
Accumulated other comprehensive income, net of tax 59,156 139,555
Treasury stock, 1,167,728 and 1,143,614 common shares, at
cost, at September 30, 2003 and December 31, 2002 (15,911,964) (15,402,896)
------------- -------------
Total shareholders' equity 27,121,863 26,562,485
------------- -------------
Total liabilities and shareholders' equity $ 221,483,887 $ 225,018,915
============= =============
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See accompanying notes to financial statements
1.
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NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and nine months ended September 30, 2003 and 2002
- --------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
(Unaudited)
Interest income
Loans, including fees $ 2,559,296 $ 3,033,529 $ 8,040,007 $ 9,278,765
Taxable securities 390,735 482,153 1,177,626 1,414,198
Non-taxable securities 27,939 18,622 62,508 37,808
Deposits with financial institutions 19,758 28,296 100,764 214,905
------------- ------------- ------------- -------------
Total interest income 2,997,728 3,562,600 9,380,905 10,945,676
Interest expense
Deposits 708,946 1,010,280 2,324,663 3,402,977
Borrowed funds 891,032 924,211 2,689,081 2,737,133
------------- ------------- ------------- -------------
Total interest expense 1,599,978 1,934,491 5,013,744 6,140,110
Net interest income 1,397,750 1,628,109 4,367,161 4,805,566
Provision for loan losses -- 190,000 -- 582,300
------------- ------------- ------------- -------------
Net interest income after provision
for loan losses 1,397,750 1,438,109 4,367,161 4,223,266
Noninterest income
Service charges on deposit accounts 94,669 88,423 272,788 262,273
Loan servicing fees 61,393 39,296 174,850 153,431
Net gain(loss) on sale of securities
available for sale 12,397 -- 12,397 (10,535)
Net gain on sale of loans held for sale 52,095 106,887 477,215 179,094
Net gain (loss) on sale of foreclosed
real estate and repossessed assets (5,829) (37,782) 57,033 (100,070)
Trust and brokerage fees 31,989 56,149 134,202 172,415
Other service charges and fees 106,348 76,798 306,113 223,591
------------- ------------- ------------- -------------
Total noninterest income 353,062 329,771 1,434,598 880,199
Noninterest expense
Salaries and employee benefits 653,916 659,701 1,931,281 1,951,108
Occupancy 111,459 115,585 358,642 346,899
Data processing 175,808 148,330 512,135 457,864
Deposit insurance premium 5,001 5,738 15,072 18,209
Professional fees 50,948 57,500 197,953 195,889
Correspondent bank charges 55,540 59,398 155,314 166,899
Other expense 172,216 195,348 570,279 559,969
------------- ------------- ------------- -------------
Total noninterest expense 1,224,888 1,241,600 3,740,676 3,696,837
------------- ------------- ------------- -------------
Income before income taxes 525,924 526,280 2,061,083 1,406,628
Income tax expense 130,728 95,868 552,628 299,106
------------- ------------- ------------- -------------
Net income $ 395,196 $ 430,412 $ 1,508,455 $ 1,107,522
============= ============= ============= =============
Comprehensive income $ 380,060 $ 479,887 $ 1,428,056 $ 1,131,908
============= ============= ============= =============
Basic earnings per common share $ 0.28 $ 0.30 $ 1.06 $ 0.76
Diluted earnings per common share $ 0.28 $ 0.30 $ 1.02 $ 0.74
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See accompanying notes to financial statements
2.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
Nine months ended September 30, 2003
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(Unaudited)
Unearned Accumulated
Employee Unearned Other
Additional Stock Recognition Comprehensive Total
Common Paid-in Retained Ownership And Retention Income(Loss) Treasury Shareholders'
Stock Capital Earnings Plan Shares Plan Shares Net of Tax Stock Equity
----- ------- -------- ----------- ----------- ---------- ----- ------
Balance at January 1, 2003 $26,407 $29,000,459 $13,285,229 $(482,351) $(3,918) $139,555 $(15,402,896) $26,562,485
Net Income for nine months
ended September 30, 2003 1,508,455 1,508,455
Other comprehensive income
(loss):
Net change in unrealized
gains (losses)
on securities available
for sale, net of tax (80,399)
--------
Total other comprehensive
income (loss) (80,399)
-----------
Total comprehensive income
(loss) 1,428,056
Cash dividends ($.39 per
share year to date) (577,825) (577,825)
Purchase of 48,128 shares
of treasury Stock (772,031) (772,031)
Issuance of 24,014 shares of
treasury stock upon exercise
of options (26,584) 262,963 236,379
Tax effect on stock plans 33,999 33,999
11,909 shares committed to
be released under ESOP 108,512 98,370 206,882
Amortization of RRP
contributions 3,918 3,918
----------------------------------------------------------------------------------------------------
Balance at September 30,2003 $26,407 $29,116,386 $14,215,859 $(383,981) -- $ 59,156 $(15,911,964) $27,121,863
====================================================================================================
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See accompanying notes to financial statements
3.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30, 2003 and 2002
- --------------------------------------------------------------------------------
Nine months ended
September 30,
2003 2002
---- ----
(Unaudited)
Cash flows from operating activities
Net income $ 1,508,455 $ 1,107,522
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 322,130 338,725
Provision for loan losses -- 582,300
Net (gain) loss on sale of:
Foreclosed real estate and repossessed assets (54,767) 100,070
Loans held for sale (477,215) (179,094)
Securities available for sale (12,397) 10,535
Originations of loans held for sale (18,187,909) (7,417,747)
Proceeds from loans sold 18,923,649 7,149,043
Reduction of obligation under ESOP 206,882 181,495
Amortization of RRP 3,918 6,478
Net change in:
Other assets 55,947 (204,771)
Accrued interest receivable (125,343) 41,470
Accrued expenses and other liabilities 504,067 449,841
------------ ------------
Total adjustments 1,158,962 1,058,345
------------ ------------
Net cash from operating activities 2,667,417 2,165,867
Cash flows from investing activities
Purchases of securities available for sale (26,763,774) (21,105,114)
Proceeds from maturities and principal payments of:
Securities available for sale 17,735,632 11,651,656
Securities held to maturity 75,000 81,000
Proceeds from sale of securities available for sale 2,582,867 1,405,188
Purchase of life insurance (2,000,000) --
Purchase of loans (1,588,213) (2,005,427)
Net change in loans (159,085) 5,910,678
Proceeds from sale of foreclosed real estate and repossessed
vehicles 2,148,898 535,186
Expenditures on premises and equipment (105,486) (101,438)
Proceeds from sale of premises and equipment -- 8,143
------------ ------------
Net cash from investing activities (8,074,161) (3,620,128)
Cash flows from financing activities
Net change in deposits 75,193 (13,647,681)
Advances from FHLB 6,000,000 2,000,000
Repayment of FHLB advances (8,000,000) --
Payments of demand notes (100,000) --
Net change in other borrowed funds (2,573,666) (4,767,466)
Dividends paid (577,825) (557,356)
Purchase of treasury stock (772,031) (961,383)
Sale of treasury stock 236,379 252,803
------------ ------------
Net cash from financing activities (5,711,950) (17,681,083)
------------ ------------
Net change in cash and cash equivalents (11,118,694) (19,135,344)
Cash and cash equivalents at beginning of period 18,256,408 26,291,732
------------ ------------
Cash and cash equivalents at end of period $ 7,137,714 $ 7,156,388
============ ============
Cash paid for:
Interest $ 5,076,259 $ 6,126,122
Income taxes 381,650 408,800
Non-cash transactions:
Investment in obligation relative to limited partnership -- 500,000
Transfer from loans to other real estate and repossessed assets 1,796,169 528,348
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See accompanying notes to financial statements
4.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003
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NOTE 1 - BASIS OF PRESENTATION
The unaudited information for the three and nine months ended September 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 nine month periods reported but should not be
considered as indicative of the results to be expected for the full year.
NOTE 2 - EARNINGS PER COMMON SHARE
Basic earnings per common share is based on weighted-average common shares
outstanding. Diluted earnings per common share further assumes issuance of any
dilutive potential common shares.
Three months ended Nine months ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Earnings Per Common Share
Net income available to common shareholders $ 395,196 $ 430,412 $1,508,455 $1,107,522
Weighted average common shares outstanding,
(excluding unallocated ESOP and non-vested RRP shares) 1,410,934 1,438,787 1,419,016 1,452,981
========== ========== ========== ==========
Basic Earnings Per Common Share $ 0.28 $ 0.30 $ 1.06 $ 0.76
Earnings Per Common Share Assuming Dilution
Net income available to common shareholders $ 395,196 $ 430,412 $1,508,455 $1,107,522
Weighted average common shares outstanding for
basic earnings per common share 1,410,934 1,438,787 1,419,016 1,452,981
Add: dilutive effects of assumed exercises of
stock options 21,930 16,095 57,219 41,680
---------- ---------- ---------- ----------
Weighted average common and dilutive potential
common shares outstanding 1,432,864 1,454,882 1,476,235 1,494,661
========== ========== ========== ==========
Diluted Earnings Per Common Share $ 0.28 $ 0.30 $ 1.02 $ 0.74
NOTE 3 - SUBSEQUENT EVENT - CASH DIVIDENDS
On October 28, 2003 the Board of Directors of Northeast Indiana Bancorp, Inc.
declared a quarterly cash dividend of $.14 per common share. The dividend will
be paid on November 28, 2003 to common shareholders of record on November 17,
2003. The payment of the cash dividend will reduce shareholders' equity (fourth
quarter) by approximately $206,000.
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(Continued)
5.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003
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NOTE 4 - STOCK REPURCHASE PROGRAM
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. There were no shares repurchased during the quarter ended
September 30, 2003, but 18,965 shares were repurchased during the quarter ended
June 30, 2003. This leaves approximately 55,000 shares still available to be
repurchased under the current program.
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 September 30, 2003, the capital requirements for First Federal under those
federal regulatory requirements and First Federal 's actual capital ratios. As
of September 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 Capitalized Under Prompt
Actual Capital Adequacy Purpose Corrective Action Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total Capital
(to risk weighted assets) $26,214 18.4% $11,417 8.0% $14,271 10.0%
Tier 1 (core) capital (to
risk weighted assets) 24,938 17.5% 5,708 4.0% 8,563 6.0%
Tier 1(core) capital (to
adjusted total assets) 24,938 11.3% 8,836 4.0% 11,046 5.0%
Tier 1 (core) capital (to
average assets) 24,938 11.2% 8,870 4.0% 11,088 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.
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6.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003
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NOTE 6 - INVESTMENTS IN LIMITED LIABILITY PARTNERSHIPS (Continued)
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. 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
discount 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 September 30, 2003, First
Federal had four such investments. The last investment, in the amount of
$500,000, was fully funded as of September 30, 2003. The obligation 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 Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---- ---- ---- ----
Net income as reported $ 395,196 $ 430,412 $ 1,508,455 $ 1,107,522
Proforma net income 389,391 426,515 1,491,041 1,095,831
Reported earnings per common share
Basic 0.28 0.30 1.06 0.76
Diluted 0.28 0.30 1.02 0.74
Proforma earnings per common share
Basic 0.28 0.30 1.05 0.75
Diluted 0.27 0.29 1.01 0.73
The weighted average fair value of stock options granted during the nine months
ended September 30, 2003 was $5.81 per option. The weighted average fair value
of stock options granted during the nine months ended September 30, 2002 was
$3.16 per option.
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7.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2003
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NOTE 7 - STOCK OPTIONS (Continued)
The fair value of options granted during the nine months ended September 30,
2003 and September 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 3.58% 4.68%
Expected option life 6 years 6 years
Expected dividend yield 3.09% 3.37%
Expected volatility 37.23% 24.64%
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
quarters ended March 31, 2003 and September 30, 2003. Information about options
available for grant and options granted are as follows:
Weighted-
Average
Available Options Exercise
For Grant Outstanding Price
--------- ----------- -----
Balance at January 1, 2003 155,024 169,429 $10.37
Options exercised -- (24,014) 9.84
Options granted (15,000) 15,000 18.85
Options forfeited 1,150 (1,150) 12.91
------- -------
Balance at September 30, 2003 141,174 159,265 11.23
======= =======
At September 30, 2003, options outstanding had a weighted average remaining life
of approximately 3.71 years. There were 129,565 options exercisable at September
30, 2003 with a weighted-average exercise price of $10.12.
NOTE 8 - RECLASSIFICATIONS
Certain amounts in the 2002 consolidated financial statements have been
reclassified to conform to the 2003 presentation.
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8.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
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GENERAL
Northeast Indiana Bancorp, Inc. (the "Company") 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 September 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. Provisions for loan losses, service charge and
fee income, and other non-interest 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 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.
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Continued
9.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
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TRUST AND FINANCIAL SERVICES (continued)
The final cooperative agreement was signed during the third quarter of 2003. The
trust assets and fiduciary responsibilities were also 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 $3.5 million or 1.6% from
$225.0 million at December 31, 2002 to $221.5 million at September 30, 2003.
Asset reduction at September 30, 2003 compared to December 31, 2002 was due to
an advance being repaid to the Federal Home Loan Bank and excess funds being
held in repurchase agreements at the prior year end flowing out. Cash and cash
equivalents were used to fund both outflows, and cash and cash equivalents
decreased by approximately $11.1 million to $7.1 million at September 30, 2003
from $18.3 million at December 31, 2002. Securities available for sale increased
$6.3 million from $42.9 million at December 31, 2002 to $49.1 million at
September 30, 2003.
Net loans receivable were relatively unchanged from $154.6 million at December
31, 2002 to $154.5 million at September 30, 2003. Even though net loan
receivable growth was relatively flat, First Federal actually increased its
lending relationships due to $18.9 million of residential mortgages sold into
the secondary market with servicing retained during the nine months ended
September 30, 2003. These sales slowed down in the third quarter 2003 as
interest rates began to increase and management began holding 10 and 15 year
residential mortgages in the loan portfolio again. Allowance for loan losses
decreased approximately $279,000 through the nine months ended September 30,
2003, which is discussed in more detail under the non-performing assets and
allowance for loan losses section.
Cash surrender value of life insurance increased $2.1 million to $4.2 million at
September 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 were unchanged at $122.4 million at both September 30, 2003 and
December 31, 2002. Declines in time deposits of $2.3 million were more than
offset by aggregate increases in noninterest bearing demand deposits, savings,
NOW and MMDA balances of $2.3 million.
- --------------------------------------------------------------------------------
Continued
10.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
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FINANCIAL CONDITION(Continued)
Management continues to focus on replacing maturing out of market jumbo time
deposits with lower cost transaction-based accounts.
Other liabilities increased $504,000 primarily due to a deferred gain on the
sale of foreclosed real estate. The deferred gain 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 part of non-performing loan balances
at December 31, 2002.
RESULTS OF OPERATIONS
Northeast Indiana Bancorp had net income of $395,000 or $0.28 per diluted common
share and $1.5 million or $1.02 per diluted common share for the three and nine
months ended September 30, 2003 compared to $430,000 or $0.30 per diluted common
share and $1.1 million or $0.74 per diluted common share for the three and nine
months ended September 30, 2002.
The $35,000 decrease quarter to quarter represents an 8.2% decrease expressed as
a percentage. The $401,000 increase to $1.5 million for the nine months ended
September 30, 2003 compared to $1.1 million for the nine months ended September
30, 2002 represents a 36.2% increase.
Net interest income decreased to $1.4 million for the three months ended
September 30, 2003 compared to $1.6 million for the three months ended September
30, 2002. Net interest income decreased to $4.4 million from $4.8 million for
the nine months ended September 30, 2003 and September 30, 2002. Interest income
for the current quarter decreased $565,000 to $3.0 million for September 30,
2003 compared to $3.6 million for September 30, 2002. Interest income for the
nine months ended September 30, 2003 was $9.4 million compared to $10.9 million
for the nine months ended September 30, 2002, a decrease of $1.6 million or
14.3%. Of the $1.6 million decline, 31.3% is attributed to volume while 68.7% is
related to lower rates. The high volume refinancing trends of 2003 have made it
very difficult for Northeast Indiana Bancorp to maintain average
interest-earning asset balances and to hold the loss of interest-earning asset
yields at levels exceeding declines in interest-bearing liability costs. For the
third quarter, interest expense decreased $335,000 to $1.6 million for the
quarter ended September 30, 2003 compared to $1.9 million for the quarter ended
September 30, 2002. Interest expense for the nine months ended September 30,
2003 was approximately $5.0 million, a decrease of $1.1 million compared to $6.1
million expensed for the same period ended September 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 nine months
ended September 30, 2003, Northeast Indiana Bancorp has reduced both its funding
reliance on wholesale time deposits and borrowed funds.
- --------------------------------------------------------------------------------
Continued
11.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
Due to improving non-performing asset trends during the three and nine months
ended September 30, 2003 and flat overall growth in net loans receivable, there
were no provisions for loan losses recorded. This compares to provision for loan
losses recorded in the amount of $190,000 and $582,000 during the three and nine
months ended September 30, 2002. The improving trends are discussed in more
detail under the non-performing assets and allowance for loan losses section of
this discussion.
Noninterest income increased to $353,000 for the three months ended September
30, 2003 compared to $330,000 for the comparable period in 2002. This increase
was due to increases in service charges on deposit accounts, loan servicing
fees, decreases in net losses on the sale of foreclosed real estate and
repossessed assets and increases in other service charges and fees, partially
offset by decreases in net gains on the sale of loans held for sale and trust
and brokerage fees. Loan servicing fees were impacted by lesser amortization of
mortgage servicing rights due to fewer payoffs on serviced mortgage loans. The
decline in selling of fixed rate residential mortgages also led to the decrease
on net gains on loans held for sale . The decrease in net losses on sale of
foreclosed real estate and repossessed assets was due to fewer repossessions
during the current quarter due to improving non-performing loan trends. Trust
and brokerage fees declined due to fewer broker fees and lesser trust fees as
First Federal transitioned its trust department into a cooperative arrangement
with another financial institution discussed previously under Trust and
Financial Services. Other service charges and fees increased mainly due to
increases in cash surrender values on BOLI contracts executed in March 2003.
Noninterest income increased to $1.4 million for the nine months ended September
30, 2003 compared to $880,000 recorded for the nine months ended September 30,
2002. This significant increase is related to higher residential mortgage sale
volumes as evidenced in a $298,000 or 166.5% increase in net gains on the sale
of loans held for sale between periods. Based on interest rate trends and the
recent decision to portfolio most ten through fifteen year 1-4 family mortgages,
management expects the net gains on the sale of loans held for sale to return to
more normal levels going forward. There were also net gains on the sale of
foreclosed real estate and repossessed assets in the current period versus net
losses in the prior period and increases in other service charges and fees from
the new BOLI contracts. All of these items were partially offset by declines in
trust and brokerage fees.
Noninterest expenses were relatively unchanged for both the three and nine month
periods ended September 30, 2003, compared to the prior year periods. For the
quarterly comparison, an increase in data processing was offset by decreases in
all other areas. For the nine month comparison, increases in data processing,
professional fees, occupancy and other expenses were offset by declines in
salaries and employee benefits, deposit insurance premiums, and correspondent
bank charges.
- --------------------------------------------------------------------------------
Continued
12.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
Income tax expense increased to $131,000 for the quarter ended September 30,
2003 compared to $96,000 for the quarter ended September 20, 2002 even though
income before taxes was relatively unchanged. This is due to a tax adjustment
made in the prior year's comparable quarter to reflect tax credits that became
available during that period on a new limited liability partnership investment.
Northeast Indiana Bancorp's effective tax rate was 24.9% in the current quarter
compared to 18.2% in the year earlier quarter. Income tax expense was $553,000
for the nine months ended September 30, 2003 compared to $299,000 for the nine
months ended September 30, 2002. This was due to higher taxable income between
periods. The effective tax rate was 26.8% for the current nine month period
compared to 21.3% in the prior nine month period.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
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. As a result of this review process and due to improving trends
in non-performing assets, Northeast Indiana Bancorp recorded no provisions for
loan losses for the three and nine months ended September 30, 2003 compared to
$190,000 and $582,000 for the same periods ended September 30, 2002.
- --------------------------------------------------------------------------------
Continued
13.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
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 restructurings, other repossessed assets and
real estate owned which has been acquired as a result of foreclosure. The
following table summarizes in thousands the various categories of non-performing
assets:
September 30, June 30, March 31, December 31,
2003 2003 2003 2002
Non-accruing loans
One-to-four family $ 137 $ 104 $ 155 $ 495
Commercial real estate 2,747 3,328 4,005 5,006
Consumer 213 311 344 510
Commercial 134 102 107 207
---------------------------------------------------------
Total 3,231 3,845 4,611 6,218
---------------------------------------------------------
Foreclosed real estate
One-to-four family 202 278 1,034 420
Commercial real estate 16 92 92 96
---------------------------------------------------------
Total 218 370 1,126 516
---------------------------------------------------------
Repossessed assets
Consumer 9 14 7 11
Commercial 2 -- -- 1
---------------------------------------------------------
Total 11 14 7 12
---------------------------------------------------------
Total non-performing assets $ 3,460 $ 4,229 $ 5,744 $ 6,746
=========================================================
Total non-performing assets
as a percentage of total assets 1.56% 1.92% 2.56% 3.00%
=========================================================
Total non-performing assets decreased from $6.7 million to $3.5 million or 1.6%
of total assets at September 30, 2003 from 3.0% of total assets at December 31,
2002. At September 30, 2003, one borrower comprised $1.4 million or 40.0% of the
$3.5 million in total non-performing assets. Management had previously been
notified of this borrower's intent to file bankruptcy. During the quarter ended
September 30, 2003, the bankruptcy court rejected the borrower's financial plan
and dismissed the bankruptcy filing. Management has since initiated foreclosure
proceedings against this borrower. Due to the nature of this property, it could
still take several months to bring this property into foreclosed real estate.
Management has already established a specific reserve to cover estimated losses
related to this borrower in prior periods and does not anticipate any further
loss at this time.
- --------------------------------------------------------------------------------
14.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
The following table represents an analysis of First Federal's allowance for loan
losses for both the three and nine months ended September 30, 2003 and September
30, 2002:
Three Months Ended Nine Months Ended
September 30, September 30,
2003 2002 2003 2002
---------------------------------------------------------------------
Balance at beginning of period $ 1,857,963 $ 2,067,072 $ 2,135,630 $ 1,954,900
Charge-offs:
One-to-four family -- -- 25,954 --
Commercial real estate 34,343 -- 235,722 61,400
Commercial -- -- 100,488 --
Consumer 30,323 193,333 171,188 543,887
---------------------------------------------------------------------
64,666 193,333 533,352 605,287
Recoveries:
One-to-four family -- -- -- --
Commercial real estate -- -- -- --
Commercial -- -- 96,000 10,493
Consumer 63,050 47,968 158,069 169,301
---------------------------------------------------------------------
63,050 47,968 254,069 179,794
---------------------------------------------------------------------
Net Charge-offs 1,616 145,365 279,283 425,493
Additions charged to operations -- 190,000 -- 582,300
---------------------------------------------------------------------
Balance at end of period $ 1,856,347 $ 2,111,707 $ 1,856,347 $ 2,111,707
=====================================================================
Ave. gross loans and loans HFS $156,429,415 $166,132,353 $156,697,589 $166,212,841
- --------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during the
period to average loans
outstanding during the period
(annualized) 0.00% 0.35% 0.24% 0.34%
- --------------------------------------------------------------------------------------------------------------
Average non-performing loans $ 3,232,106 $ 6,654,677 $ 3,896,046 $ 6,288,097
- --------------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during
the period to average non-
performing loans (annualized) 0.20% 8.74% 9.56% 9.02%
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
15.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
Impaired loans at September 30, 2003 were $3.1 million compared to $5.5 million
at December 31, 2002. The net change in impaired loans of $2.4 million between
December 31, 2002 and September 30, 2003 was primarily due to a large group of
one-to-four family properties being transferred to foreclosed real estate and
subsequently sold. Most of 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. An additional smaller group was transferred to foreclosed real
estate and sold at a slight loss during the quarter ended September 30, 2003.
Two new impaired loans have been added during the nine months ended September
30, 2003 totaling approximately $229,000. Management established specific
reserves during the quarters ended September 30, 2003 and June 30, 2003 towards
these loans and expects no further loss at this time. As of September 30, 2003,
management has set aside a total of $647,000 in specific reserves towards
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 September
30, 2003, First Federal exceeded all regulatory capital standards.
At September 30, 2003, First Federal's risk based capital was $26.2 million or
18.4% of risk weighted assets, which exceeds the OTS requirement of $11.4
million and 8.0% by $14.8 million and 10.4%. First Federal's core capital at
September 30, 2003 was $24.9 million or 11.2% of average assets, which exceeds
the OTS requirement of $8.9 million, and 4.0% by $16.0 million and 7.2%. 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 September 30, 2003, no shares were repurchased by
Northeast Indiana Bancorp under a previously announced stock repurchase program.
In the opinion of management, 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.
- --------------------------------------------------------------------------------
16.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 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.
- --------------------------------------------------------------------------------
17.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2003
- --------------------------------------------------------------------------------
ITEM 3. CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act)) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Officer have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial
reporting (as such term defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
- --------------------------------------------------------------------------------
18.
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
None
ITEM 5 - OTHER INFORMATION
None
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) July 14, 2003 Announcing Second Quarter Earnings for 2003
(2) July 30, 2003 Announcing Cash Dividend
- --------------------------------------------------------------------------------
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: November 14, 2003 By: /S/ STEPHEN E. ZAHN
Stephen E. Zahn
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 14, 2003 By: /S/ RANDY J. SIZEMORE
Randy J. Sizemore
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
20.