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, 2004
|_| 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 20, 2004
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 1,463,917
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, 2004 and December 31, 2003 1
Consolidated Statements of Income for the
three and six months ended June 30, 2004 and 2003 2
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended June 30, 2004 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2004 and 2003 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 and Small Business Issuer Purchases
of Equity Securities 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 21
Signature page 22
Exhibit 31.1 and Exhibit 31.2 -Certifications Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 23
Exhibit 32.1 and Exhibit 32.2 -Certifications Furnished
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 24
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NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2004 and December 31, 2003
- --------------------------------------------------------------------------------
June 30, December 31,
2004 2003
(Unaudited)
ASSETS
Interest earning cash and cash equivalents $ 2,331,792 $ 6,849,198
Noninterest earning cash and cash equivalents 4,462,827 2,483,881
------------- -------------
Total cash and cash equivalents 6,794,619 9,333,079
Securities available for sale 41,174,716 43,687,318
Securities held to maturity (fair value:
June 30, 2004- $60,000; December 31, 2003 - $150,000) 60,000 150,000
Loans receivable, net of allowance for loan losses: June 30,
2004 - $1,483,672; and December 31, 2003 - $1,772,109 164,358,144 163,676,825
Accrued interest receivable 803,947 798,722
Premises and equipment, net 2,117,731 2,061,781
Investments in limited liability partnerships 1,486,533 1,602,147
Cash surrender value of life insurance 5,056,430 4,352,129
Other assets 3,247,321 1,732,531
------------- -------------
Total assets $ 225,099,441 $ 227,394,532
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits- noninterest bearing $ 6,116,711 $ 5,945,039
Savings 12,667,210 10,916,937
NOW 14,570,500 13,005,299
MMDA 23,717,858 19,335,140
Time deposits 72,998,341 72,807,321
------------- -------------
Total deposits 130,070,620 122,009,736
Borrowed funds 66,802,588 76,545,485
Accrued expenses and other liabilities 1,702,849 1,644,751
------------- -------------
Total liabilities 198,576,057 200,199,972
Shareholders' equity
Preferred stock, no par value: 500,000 shares authorized; 0 shares issued -- --
Common stock, $.01 par value: 4,000,000 shares authorized;
6/30/04: 2,640,672 shares issued, 1,467,917 shares outstanding
12/31/03: 2,640,672 shares issued, 1,487,514 shares outstanding 26,407 26,407
Additional paid in capital 29,324,329 29,143,357
Retained earnings, substantially restricted 14,845,810 14,428,855
Unearned employee stock ownership plan shares (289,108) (351,190)
Unearned recognition and retention plan shares (56,719) --
Accumulated other comprehensive loss, net of tax (774,544) (236,943)
Treasury stock, 1,172,755 and 1,153,158 common shares, at
cost, at June 30, 2004 and December 31, 2003 (16,552,791) (15,815,926)
------------- -------------
Total shareholder's equity 26,523,384 27,194,560
------------- -------------
Total liabilities and shareholders' equity $ 225,099,441 $ 227,394,532
============= =============
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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 six months ended June 30, 2004 and 2003
- --------------------------------------------------------------------------------
Three months ended Six months ended
June 30, June 30,
2004 2003 2004 2003
---- ---- ---- ----
(Unaudited)
Interest income
Loans, including fees $ 2,610,198 $ 2,692,068 $ 5,210,880 $ 5,480,715
Taxable securities 343,511 394,726 719,023 786,891
Non-taxable securities 26,809 17,374 50,242 34,569
Deposits with financial institutions 14,087 44,619 23,959 81,006
----------- ----------- ----------- -----------
Total interest income 2,994,605 3,148,787 6,004,104 6,383,181
Interest expense
Deposits 621,887 774,459 1,259,245 1,615,717
Borrowed funds 784,370 899,258 1,581,403 1,798,049
----------- ----------- ----------- -----------
Total interest expense 1,406,257 1,673,717 2,840,648 3,413,766
Net interest income 1,588,348 1,475,070 3,163,456 2,969,415
Provision for loan losses -- -- -- --
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 1,588,348 1,475,070 3,163,456 2,969,415
Noninterest income
Service charges on deposit accounts 124,493 93,585 208,865 178,121
Loan servicing fees 62,900 63,247 122,744 113,456
Net gain on sale of securities
available for sale -- -- 18,970 --
Net gain on sale of loans held for sale 27,659 259,546 56,208 425,120
Net gain (loss) on sale of foreclosed
real estate and repossessed assets (1,450) 48,508 4,221 62,862
Trust and brokerage fees 10,913 50,517 25,837 102,212
Other income 106,926 122,459 206,077 199,764
----------- ----------- ----------- -----------
Total noninterest income 331,441 637,862 642,922 1,081,535
Noninterest expense
Salaries and employee benefits 756,050 617,615 1,502,354 1,277,364
Occupancy 110,409 123,454 222,663 247,182
Data processing 158,181 167,243 322,266 336,324
Deposit insurance premium 4,680 4,918 9,364 10,071
Professional fees 65,103 69,288 135,751 147,005
Correspondent bank charges 54,251 53,836 107,626 99,773
Other expense 183,481 186,981 388,071 398,072
----------- ----------- ----------- -----------
Total noninterest expense 1,332,155 1,223,335 2,688,095 2,515,791
----------- ----------- ----------- -----------
Income before income taxes 587,634 889,597 1,118,283 1,535,159
Income tax expense 155,214 257,550 283,273 421,900
----------- ----------- ----------- -----------
Net income $ 432,420 $ 632,047 $ 835,010 $ 1,113,259
=========== =========== =========== ===========
Comprehensive income (loss) $ (104,697) $ 617,008 $ 297,409 $ 1,047,996
=========== =========== =========== ===========
Basic earnings per common share $ 0.30 $ 0.45 $ 0.58 $ 0.78
Diluted earnings per common share $ 0.29 $ 0.43 $ 0.56 $ 0.75
- --------------------------------------------------------------------------------
See accompanying notes to financial statements
2.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 30, 2004
- --------------------------------------------------------------------------------
(Unaudited)
Unearned
Employee
Additional Stock
Common Paid-in Retained Ownership
Stock Capital Earnings Plan Shares
------- ---------- -------- -----------
Balance at January 1, 2004 $26,407 $29,143,357 $14,428,855 $(351,190)
Net income for six months
ended June 30, 2004 835,010
Other comprehensive loss:
Net change in unrealized losses
on securities available for sale,
net of tax
Total other comprehensive loss
Total comprehensive income
Cash dividends ($.28 per share year to date) (418,055)
Purchase of 46,936 shares of treasury stock
Issuance of 24,339 shares of treasury
stock upon exercise of stock options (10,300)
Tax effect of stock plans 61,726
7,516 shares committed to be released
under ESOP 99,178 62,082
Purchase of 3,000 treasury shares for RRP
Amortization of RRP contributions 30,368
------- ----------- ----------- ---------
Balance at June 30, 2004 $26,407 $29,324,329 $14,845,810 $(289,108)
======= =========== =========== =========
Accumulated
Unearned Other
Recognition Comprehensive Total
And Retention Loss, Treasury Shareholders'
Plan Shares Net of Tax Stock Equity
------------- ------------- --------- -------------
Balance at January 1, 2004 -- $(236,943) $(15,815,926) $ 27,194,560
Net income for six months
ended June 30, 2004 835,010
Other comprehensive loss:
Net change in unrealized losses
on securities available for sale,
net of tax (537,601)
---------
Total other comprehensive loss (537,601)
------------
Total comprehensive income 297,409
Cash dividends ($.28 per share year to date) (418,055)
Purchase of 46,936 shares of treasury stock (1,016,846) (1,016,846)
Issuance of 24,339 shares of treasury
stock upon exercise of stock options 248,474 238,174
Tax effect of stock plans 61,726
7,516 shares committed to be released
under ESOP 161,260
Purchase of 3,000 treasury shares for RRP (61,875) --
Amortization of RRP contributions 5,156 31,507 5,156
-------- --------- ------------ ------------
Balance at June 30, 2004 $(56,719) $(774,544) $(16,552,791) $ 26,523,384
======== ========= ============ ============
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See accompanying notes to financial statements
3.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2004 and 2003
- --------------------------------------------------------------------------------
Six months ended
June 30,
2004 2003
---- ----
(Unaudited)
Cash flows from operating activities
Net income $ 835,010 $ 1,113,259
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 347,464 22,823
Net (gain) loss on sale of:
Foreclosed real estate and repossessed assets 313 (62,862)
Loans held for sale (56,208) (425,120)
Securities available for sale (18,970) --
Originations of loans held for sale (1,438,049) (16,192,611)
Proceeds from loans sold 1,494,257 16,484,716
Reduction of obligation under ESOP 161,260 128,830
Amortization of RRP 5,156 3,918
Net change in:
Other assets (430,395) 57,902
Accrued interest receivable (5,225) (44,832)
Accrued expenses and other liabilities 58,098 1,492,191
------------ ------------
Total adjustments 117,701 1,464,955
------------ ------------
Net cash from operating activities 952,711 2,578,214
Cash flows from investing activities
Purchases of securities available for sale (5,033,030) (18,888,396)
Proceeds from maturities and principal payments of:
Securities available for sale 4,938,720 13,235,698
Securities held to maturity 90,000 41,000
Proceeds from sale of securities available for sale 1,786,137 --
Purchase of life insurance (600,000) (2,000,000)
Purchase of loans (2,061,029) --
Proceeds from sale of participation loans 875,000 --
Net change in loans (592,165) 2,787,830
Proceeds from sale of foreclosed real estate and repossessed assets 163,807 1,668,277
Expenditures on premises and equipment (179,870) (55,282)
------------ ------------
Net cash from investing activities (612,430) (3,210,873)
Cash flows from financing activities
Net change in deposits 8,060,884 284,503
FHLB advances 3,000,000 --
Repayment of FHLB advances (4,000,000) (2,000,000)
Payments of demand notes -- (100,000)
Net change in other borrowed funds (8,742,897) (4,857,071)
Dividends paid (418,056) (386,343)
Purchase of treasury stock (1,016,846) (772,031)
Sale of treasury stock 238,174 158,699
------------ ------------
Net cash from financing activities (2,878,741) (7,672,243)
------------ ------------
Net change in cash and cash equivalents (2,538,460) (8,304,902)
Cash and cash equivalents at beginning of period 9,333,079 18,256,408
------------ ------------
Cash and cash equivalents at end of period $ 6,794,619 $ 9,951,506
============ ============
Cash paid for:
Interest $ 2,849,791 $ 3,473,353
Income taxes 245,250 225,850
Non-cash transactions:
Transfer from loans to other real estate and repossessed assets 1,096,875 1,461,670
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See accompanying notes to financial statements
4.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2004
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NOTE 1 - BASIS OF PRESENTATION
The unaudited information for the three and six months ended June 30, 2004 and
2003 includes the results of operations of Northeast Indiana Bancorp, Inc.
("Northeast Indiana Bancorp"or "the Company") 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,
------------------ ----------------
2004 2003 2004 2003
---- ---- ---- ----
Earnings Per Common Share
Net income available to common shareholders $ 432,420 $ 632,047 $ 835,010 $1,113,259
Weighted average common shares outstanding
(net of unallocated ESOP shares and
nonvested RRP shares) 1,436,264 1,414,449 1,440,721 1,423,186
----------------------------------------------------------
Basic Earnings Per Common Share $ 0.30 $ 0.45 $ 0.58 $ 0.78
----------------------------------------------------------
Earnings Per Common Share Assuming Dilution
Net income available to common shareholders $ 432,420 $ 632,047 $ 835,010 $1,113,259
Weighted average common shares outstanding
for basic earnings per common share 1,436,264 1,414,449 1,440,721 1,423,186
Add: dilutive effects of assumed exercises of
stock options and non qualified stock options
incentive 47,303 46,093 51,216 51,850
----------------------------------------------------------
Weighted average common and dilutive
potential common shares outstanding 1,483,568 1,460,542 1,491,937 1,475,036
----------------------------------------------------------
Diluted Earnings Per Common Share $ 0.29 $ 0.43 $ 0.56 $ 0.75
==========================================================
NOTE 3 - SUBSEQUENT EVENT-CASH DIVIDENDS
On July 27, 2004, the Board of Directors of Northeast Indiana Bancorp announced
a cash dividend of $0.14 per common share. The dividend will be paid on August
24, 2004 to common shareholders of record on August 10, 2004. The payment of the
cash dividend will reduce shareholders' equity in the third quarter by
approximately $205,000.
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Continued
5.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2004
- --------------------------------------------------------------------------------
NOTE 4 - STOCK REPURCHASE PLAN
On March 31, 2004, Northeast Indiana Bancorp announced a stock repurchase
program to repurchase up to 5.0% of the outstanding shares in the open market as
Treasury shares over the next twelve months. This program will include up to
74,446 shares. During the quarter ended June 30, 2004 there were 30,186 shares
repurchased at an average price of $21.95. This leaves 44,260 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, 2004, the capital requirements for First Federal under those
federal regulatory requirements and First Federal's actual capital ratios. As of
June 30, 2004, 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 Purposes Corrective Action Regulations
------ ------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total Capital
(to risk weighted assets) $26,719 18.4% $11,587 8.0% $14,481 10.0%
Tier 1 (core) capital (to
risk weighted assets) 25,387 17.5 5,794 4.0 8,691 6.0
Tier 1(core) capital (to
adjusted total assets) 25,387 11.2 9,029 4.0 11,286 5.0
Tier 1 (core) capital (to
average assets) 25,387 11.2 9,058 4.0 11,323 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.
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Continued
6.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2004
- --------------------------------------------------------------------------------
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, 2004, First Federal had four such investments with a
carrying value of $1.5 million.
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,
2004 2003 2004 2003
---- ---- ---- ----
Net income as reported $ 432,420 $ 632,047 $ 835,010 $ 1,113,259
Proforma net income 425,332 627,448 820,834 1,104,061
Reported earnings per common share
Basic 0.30 0.45 0.58 0.78
Diluted 0.29 0.43 0.56 0.75
Proforma earnings per common share
Basic 0.30 0.44 0.57 0.78
Diluted 0.29 0.43 0.55 0.75
The weighted average fair value of stock options granted during the six months
ended June 30, 2003 was $2.96 per option. No options were granted in the same
period of 2004. The fair value of options granted during the six months ended
June 30, 2003 were estimated using an option pricing model with the following
weighted average information as of the grant date:
2003
----
Risk free rate of interest 3.27%
Expected option life 6 years
Expected dividend yield 3.37%
Expected volatility 24.84%
- --------------------------------------------------------------------------------
Continued
7.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2004
- --------------------------------------------------------------------------------
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. 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, 2003 141,174 138,495 $11.46
Options exercised -- (24,339) 9.79
------- -------
Balance at June 30, 2004 141,174 114,156 11.82
======= =======
At June 30, 2004, options outstanding had a weighted average remaining life of
approximately 3.46 years. There were 90,356 options exercisable at June 30, 2004
with a weighted-average exercise price of $10.53.
- --------------------------------------------------------------------------------
8.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
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, 2004, 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 salaries and employee benefits, occupancy 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.
FINANCIAL SERVICES
Northeast Indiana Bancorp announced during the quarter ended June 30, 2004 the
acquisition of Innovative Financial Services ("Innovative") through First
Federal's subsidiary, Northeast Indiana Financial. The staff of Innovative,
including one broker and three support staff, will become employees of First
Federal through Northeast Indiana Financial. The acquisition will enable
Northeast Indiana Financial to offer non-FDIC insured products such as life
insurance, estate planning, financial planning, and retirement plans to small
businesses in addition to its existing product offerings of mutual funds,
annuities, stocks, bonds, and brokerage accounts. Management feels the addition
of Innovative, one of the largest independent brokerage firms in our primary
market based on assets under management, should produce a positive cash flow to
First Federal and provide existing and potential customers with quality service
and a broad product mix.
- --------------------------------------------------------------------------------
Continued
9.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
Northeast Indiana Bancorp's total assets decreased $2.3 million or 1.0% from
$227.4 million at December 31, 2003 to $225.1 million at June 30, 2004.
Securities available for sale decreased $2.5 million to $41.2 million as
management utilized proceeds from called, matured and sold securities to fund
new loans and to purchase new Bank-Owned Life Insurance ("BOLI"). Cash and cash
equivalents decreased by $2.5 million, from $9.3 million to $6.8 million.
Net loans receivable increased $681,000 from $163.7 million at December 31, 2003
to $164.4 million at June 30, 2004. The increase in net loans receivable was
impacted by $1.1 million in loan balances transferred to real estate owned.
Allowance for loan losses decreased approximately $288,000 through the six
months ended June 30, 2004, which is discussed in more detail under the
non-performing assets and allowance for loans losses section.
Cash surrender value of life insurance increased $704,000 to $5.1 million at
June 30, 2004 as First Federal purchased new Bank-Owned Life Insurance ("BOLI")
policies on a pool of officers. 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 increased $8.1 million or 6.6% from $122.0 million at December
31, 2003 to $130.1 million at June 30, 2004. All deposit areas experienced
growth during the quarter, but most of the growth came in savings, NOW, MMDA,
and noninterest bearing demand deposits as management continues to focus on
enhancing funding cost efficiencies by attracting lower cost funds. Borrowed
funds have been reduced by $9.7 million predominantly through a reduction in
short term borrowings under repurchase agreements.
RESULTS OF OPERATIONS
Northeast Indiana Bancorp had net income of $432,000 or $0.29 per diluted common
share and $835,000 or $0.56 per diluted common share for the three and six
months ended June 30, 2004 compared to net income of $632,000 or $0.43 per
diluted common share and $1.1 million or $0.75 per common diluted share for the
three and six months ended June 30, 2003. The decreases between the three and
six month periods are primarily related to a decline in mortgage volumes between
periods due to significantly less refinancing activity during fiscal 2004
compared to the levels associated with the fiscal 2003, and are discussed in
more detail below.
Net interest income increased to $1.6 million for the three months ended June
30, 2004 compared to $1.5 million for the three months ended June 30, 2003. Net
interest income increased to $3.2 million from $3.0 million for the six months
ended June 30, 2004 and June 30, 2003.
- --------------------------------------------------------------------------------
Continued
10.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
The Company's net interest margin also improved 21 and 19 basis points to 2.99%
and 3.00% for the three and six months ended June 30, 2004 compared to 2.78% and
2.81% for the three and six months ended June 30, 2003. In both cases this was
primarily due to a decline in the cost of interest-bearing liabilities that was
greater than the decline in interest-earning asset yields and to a lesser
extent, higher average loan balances between the three and six month periods.
Due to improving non-performing asset trends during the three and six months
ended June 30, 2004 and minimal loan growth during the same period, there were
no provisions for loan losses recorded. This compares to no provision for loan
losses recorded during the three and six months ended June 30, 2003. The
improving trends are discussed in more detail under the non-performing assets
and allowance for loan losses section of this discussion.
Noninterest income decreased to $331,000 for the three months ended June 30,
2004 compared to $638,000 for the three months ended June 30, 2003. This was
primarily due to a $232,000 decrease in net gains on the sale of loans from
quarter to quarter. The Company also recorded a net loss on the sale of
repossessed assets for the quarter ended June 30, 2004 of $1,000 compared to a
net gain on the sale of repossessed assets for the quarter ended June 30, 2003
of $49,000. Trust and brokerage fees declined $40,000 between quarters due to
the conversion of trust assets to another financial institution during the third
quarter of 2003 under a revenue sharing agreement. Service charges on deposit
accounts increased $31,000 for the current quarter as a new retail overdraft
program was implemented by management during the quarter ended June 30, 2004.
Noninterest income decreased to $643,000 for the six months ended June 30, 2004
compared to the $1.1 million recorded for the six months ended June 30, 200.
This significant decrease is due to the same factors described for the three
month comparison of noninterest income.
Noninterest expenses increased $109,000 and $172,000 for the three and six month
periods ended June 30, 2004 compared to the prior year periods. For both the
quarterly and six month comparisons, the increases came primarily in salaries
and employee benefits due to increased funding on a defined benefit pension
plan, increased ESOP expense due to the Company's current share price, and less
deferred loan origination fees due to significantly lower mortgage volumes.
Occupancy, data processing, professional fees and other expenses saw decreases
between both the three months and six months ended June 30, 2004 compared to the
same periods in 2003 as management continues to contain costs where possible.
- --------------------------------------------------------------------------------
Continued
11.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
Income tax expense decreased for the quarter ended June 30, 2004 to $155,000
compared to $258,000 for the quarter ended June 30, 2003 due primarily to lower
taxable income in the current period. Northeast Indiana Bancorp's effective tax
rate was 26.4% in the current quarter compared to 29.0% in the year earlier
quarter. Income tax expense was $283,000 for the six months ended June 30, 2004
compared to $422,000 for the six months ended June 30, 2003. This was again due
to lower taxable income between periods. The effective tax rate was 25.3% for
the current period compared to 27.5% 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.
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
either the three and six months ended June 30, 2004 or the three and six months
ended June 30, 2003.
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.
- --------------------------------------------------------------------------------
Continued
12.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table summarizes in thousands the various categories of
non-performing assets:
June 30, March 31, December 31,
2004 2004 2003
Non-accruing loans
One-to-four family $ 81 $ 165 $ 81
Commercial real estate 1,041 2,408 2,047
Consumer 91 154 207
Commercial 129 78 78
--------------------------------
Total 1,342 2,805 2,413
--------------------------------
Foreclosed real estate
One-to-four family 74 74 146
Commercial real estate 1,025 15 16
--------------------------------
Total 1,099 89 162
--------------------------------
Repossessed assets
Consumer -- 17 3
Commercial -- -- --
--------------------------------
Total -- 17 3
--------------------------------
Total non-performing assets $2,441 $2,911 $2,578
================================
Total non-performing assets
As a percentage of total assets 1.08% 1.31% 1.13%
================================
Total non-performing assets decreased from $2.9 million to $2.4 million or 1.1%
of total assets at June 30, 2004 from 1.3% of total assets at March 31, 2004.
Non-accruing loans declined $1.5 million to $1.3 million at June 30, 2004 from
$2.8 million at March 31, 2004. This was primarily due to a significant
commercial real estate loan being transferred to real estate owned during the
quarter ended June 30, 2004. Subsequent to the property being transferred to
real estate owned, the Bank accepted a purchase agreement and earnest money from
a qualified buyer. The property was sold during July 2004 and removed from real
estate owned as of the closing date.
- --------------------------------------------------------------------------------
Continued
13.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
The following table represents an analysis of the Company's allowance for loan
losses for both the three and six months ended June 30, 2004 and June 30, 2003:
Three Months Ended Six Months Ended
June 30, June 30,
2004 2003 2004 2003
--------------------------------------------------------------------------
Balance at beginning of period $ 1,694,249 $ 1,796,511 $ 1,772,109 $ 2,135,630
Charge-offs:
One-to-four family 2,907 -- 2,907 25,954
Commercial real estate 208,218 -- 208,218 201,379
Commercial -- -- -- 100,488
Consumer 55,291 48,717 167,482 140,865
--------------------------------------------------------------------------
266,416 48,717 378,607 468,686
--------------------------------------------------------------------------
Recoveries:
One-to-four family -- -- -- --
Commercial real estate -- -- -- --
Commercial 10,000 83,000 10,000 96,000
Consumer 45,839 27,169 80,170 95,019
--------------------------------------------------------------------------
55,839 110,169 90,170 191,019
--------------------------------------------------------------------------
Net charge-offs (recoveries) 210,577 (61,452) 288,437 277,667
Additions charged to operations -- -- -- --
--------------------------------------------------------------------------
Balance at end of period $ 1,483,672 $ 1,857,963 $ 1,483,672 $ 1,857,963
==========================================================================
Ave. gross loans and loans HFS $ 170,898,873 $ 154,851,640 $ 170,034,857 $ 156,833,897
--------------------------------------------------------------------------
Ratio of net charge-offs
(recoveries) to average loans
outstanding during the period
(annualized) 0.49% (0.16)% 0.34% 0.35%
--------------------------------------------------------------------------
Average non-performing loans $ 1,342,489 $ 3,844,645 $ 2,186,945 $ 4,891,447
--------------------------------------------------------------------------
Ratio of net charge-offs
(recoveries) to average non-
performing loans (annualized) 62.74% (6.39)% 26.38% 11.35%
--------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Continued
14.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (CONTINUED)
Impaired loans at June 30, 2004 were $1.4 million compared to $2.5 million at
December 31, 2003 and $2.8 million at March 31, 2004. The net change in impaired
loans of $1.1 million between December 31, 2003 and June 30, 2004 was primarily
due to a significant commercial real estate loan that was transferred to real
estate owned during the quarter ended June 30, 2004. As mentioned earlier, this
property was sold subsequent to June 30, 2004 and the closing took place during
July 2004. As of June 30, 2004, management has set aside a total of $152,000 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,
2004, First Federal exceeded all regulatory capital standards.
At June 30, 2004, First Federal's risk based capital was $26.7 million or 18.4%
of risk weighted assets, which exceeds the OTS requirement of $11.6 million and
8.0% by $15.1 million and 10.4%. First Federal's core capital at June 30, 2004
was $25.4 million or 11.4% of average assets, which exceeds the OTS requirement
of $9.1 million, and 4.0% by $16.2 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 June 30, 2004, Northeast Indiana Bancorp repurchased
30,186 shares of treasury stock at an average cost of $21.95 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 44,000 shares are still
available to be repurchased under the existing program.
- --------------------------------------------------------------------------------
15.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
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 its loans and other products 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
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.
- --------------------------------------------------------------------------------
16.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
June 30, 2004
- --------------------------------------------------------------------------------
Item 3. Controls and Procedures (Continued)
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.
There have not been any changes in the Company's internal control over financial
reporting (as such term is 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.
- --------------------------------------------------------------------------------
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.
- --------------------------------------------------------------------------------
18.
NORTHEAST INDIANA BANCORP, INC.
PART II
Other Information
(Continued)
ITEM 2 - CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OF EQUITY
SECURITIES
(e) The following table provides information about purchases by the Company
(and its affiliated purchasers) during the quarter ended June 30, 2004 of
equity securities that are registered by the Company pursuant to Section
12 of the Exchange Act.
ISSUER PURCHASES OF EQUITY SECURITIES
- -----------------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Total Number of
Shares Purchased as Maximum Number of
Part of Publicly Shares That May Yet Be
Total Number of Average Price Announced Plans or Purchased Under the
Period Shares Purchased Paid per Share Programs (1) Plans or Programs (1)
- -----------------------------------------------------------------------------------------------------------------------------
4/1/04 - 4/30/04 -- $ -- -- 74,446
- -----------------------------------------------------------------------------------------------------------------------------
5/1/04 - 5/31/04 18,400 $ 21.80 18,400 56,046
- -----------------------------------------------------------------------------------------------------------------------------
6/1/04 - 6/30/04 11,786 $ 22.19 11,786 44,260
- -----------------------------------------------------------------------------------------------------------------------------
Total: 30,186 $ 21.95 30,186 44,260
---------- ------
- -----------------------------------------------------------------------------------------------------------------------------
(1) On March 31, 2004 our board of directors announced a new common stock
repurchase program allowing for the repurchase of 74,446 shares prior to
expiration on March 31, 2005.
- --------------------------------------------------------------------------------
19.
NORTHEAST INDIANA BANCORP, INC.
PART II
Other Information
(Continued)
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 21, 2004. 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
--- --------
Stephen E. Zahn 1,151,805 12,826
Daniel L. Stephan 1,137,163 27,468
(2) Ratification of Crowe Chizek and Company LLC as auditors:
Votes
-----
For Against Abstain
--- ------- -------
1,162,512 850 1,269
ITEM 5 - OTHER INFORMATION
None
- --------------------------------------------------------------------------------
20.
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 19, 2004 Announcing First Quarter 2004 Earnings
(2) April 22, 2004 Announcing Cash Dividend and Results of Annual
Meeting
(3) June 30, 2004 Announcing Acquisition of Innovative Financial
Services
- --------------------------------------------------------------------------------
21.
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 12, 2004 By: /S/ STEPHEN E. ZAHN
Stephen E. Zahn
President and Chief Executive Officer
(Duly Authorized Officer)
Date: August 12, 2004 By: /S/ RANDY J. SIZEMORE
Randy J. Sizemore
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
- --------------------------------------------------------------------------------
22.