[LOGO] NORTHEAST
INDIANA
Bancorp, Inc/
May 10, 2005
Dear Stockholder:
You are cordially invited to attend the annual meeting of stockholders of
Northeast Indiana Bancorp, Inc. to be held on June 15, 2005 at 1:00 p.m. local
time at First Federal Savings Bank's North Office located at 100 Frontage Road,
Huntington, Indiana.
At this important meeting, you will be asked to consider and vote on the
election of two directors. In addition, you will be asked to vote on proposed
amendments to our certificate of incorporation. These amendments will provide
for a reverse 1-for-125 stock split followed immediately by a forward 125-for-1
stock split of our common stock. The text of the proposed amendments is attached
as Appendix A to the accompanying proxy statement.
If approved at the annual meeting, the reverse/forward stock split
transaction will affect our stockholders as follows:
If you are a record stockholder with: Effect:
- ------------------------------------- -------
125 or more shares: Will continue to hold the same number of shares
Fewer than 125 shares: Will be entitled to $23.50 in cash, without interest, per share
The primary effect of this transaction will be to reduce our total number
of stockholders of record to below 300. As a result, we will terminate the
registration of our common stock under federal securities laws, our reporting
obligations with the Securities and Exchange Commission (the "SEC") will be
suspended, and we will no longer be eligible for trading on the Nasdaq market.
We are proposing this transaction because our Board has concluded, after
careful consideration, that the costs and other disadvantages associated with
being an SEC-reporting company outweigh any of the advantages. The reasons the
Board considered in reaching this conclusion include:
o we estimate that we will eliminate current costs of approximately
$177,750 on an annual basis by eliminating the requirement to make
periodic reports and reducing the expenses of stockholder
communications;
o operating as a non-SEC reporting company will reduce the burden on
our management that arises from increasingly stringent SEC reporting
requirements, including requirements of the Sarbanes-Oxley Act of
2002 ("SOX"), thus allowing management to focus more of its
attention on our customers and the communities in which we operate;
o if the company does not go private before the end of 2006, it will
need to comply with the requirements of Section 404 of SOX. Under
that Section, the company is required to include a report of
management on the company's internal control over financial
reporting and an attestation report of the company's independent
auditors on management's assessment of the company's internal
control over financial reporting. The one-time costs of such initial
compliance are estimated at $100,000 in 2006 (assuming the company
outsources the project). Each year after 2006, additional costs
associated with Section 404 compliance are also anticipated and
these could be as much as $50,000 per year. These costs will be
avoided if the stockholders approve the reverse/forward stock split
described in the accompanying proxy statement;
o at least 259 of our 433 record stockholders own under 125 shares and
the elimination of those small stockholders can be expected to
reduce significantly our costs of stockholder communications; and
o these costs of being a public company outweigh the benefits to a
well-capitalized company of our size, and going private will free up
management to focus on long-term business prospects beneficial to
stockholders and customers.
The enclosed proxy statement includes a discussion of the alternatives and
factors considered by the Board in connection with its approval of the
reverse/forward stock split, and we encourage you to read carefully the proxy
statement and its appendices. Your Board of Directors believes the terms of the
proposed transaction are fair and are in the best interest of our unaffiliated
stockholders, and unanimously recommends that you vote "FOR" the proposal to
amend our certificate of incorporation.
Your vote is very important. Whether or not you plan to attend the annual
meeting, please complete, date, sign and return your proxy promptly in the
enclosed envelope, which requires no postage if mailed in the United States. If
you attend the annual meeting, you may vote in person if you wish, even if you
have previously returned your proxy.
Sincerely,
/s/ Stephen E. Zahn
Stephen E. Zahn
Chairman of the Board and
Chief Executive Officer
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of this transaction, passed upon the
merits or fairness of this transaction or passed upon the adequacy or accuracy
of the disclosure in this document. Any representation to the contrary is a
criminal offense.
NORTHEAST INDIANA BANCORP, INC.
648 North Jefferson Street
Huntington, Indiana 46750
(260) 356-3311
www.firstfedhuntington.com
-----------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
TO BE HELD ON JUNE 15, 2005
An annual meeting of stockholders of Northeast Indiana Bancorp, Inc. (the
"Company") will be held on Wednesday, June 15, 2005, at 1:00 p.m., local time at
First Federal Savings Bank's North Office located at 100 Frontage Road,
Huntington, Indiana:
(1) Reverse/Forward Stock Split. To consider and vote upon a proposal to
adopt two amendments to the Company's certificate of incorporation. The
amendments will provide for (a) a reverse 1-for-125 stock split, followed
immediately by (b) a forward 125-for-1 stock split. Each record stockholder
owning fewer than 125 shares of common stock, $.01 par value per share,
immediately prior to the reverse split will, instead of participating in the
forward split, receive a cash payment equal to $23.50 per share on a pre-split
basis.
(2) Election of Directors. To elect two directors of the Company, each
with a term of three years.
(3) Adjournment. To approve a proposal to adjourn the annual meeting to
permit further solicitation of proxies in the event that an insufficient number
of shares is present in person or by proxy to approve the proposals presented at
the annual meeting.
(4) Other Matters. To consider and vote upon a proposal to transact any
other business that properly comes before the annual meeting or any adjournment
or postponement of the annual meeting.
The Board of Directors has fixed the close of business on April 26, 2005,
as the record date for determining those stockholders entitled to vote at the
annual meeting and any adjournment or postponement of the annual meeting. Only
stockholders at the close of business on the record date are entitled to notice
of, and to vote at, the annual meeting.
A copy of our Annual Report for the fiscal year ended December 31, 2004,
is enclosed. The Annual Report is not part of the proxy soliciting material
enclosed with this letter, except as otherwise provided herein.
By order of the Board of Directors
/s/ Stephen E. Zahn
Stephen E. Zahn
Chairman of the Board and
Chief Executive Officer
Huntington, Indiana
May 10, 2005
YOUR VOTE IS VERY IMPORTANT.
Whether or not you plan to attend the annual meeting in person, please take the
time to vote by completing and marking the enclosed proxy card in the enclosed
postage-paid envelope. If you attend the annual meeting, you may still vote in
person if you wish, even if you have previously returned your proxy card.
Your Board of Directors unanimously recommends that you vote "FOR"
approval of the amendments to our certificate of incorporation.
TABLE OF CONTENTS
SUMMARY TERM SHEET...................................................................... 1
QUESTIONS AND ANSWERS ABOUT THE SPLIT TRANSACTION AND
THE ANNUAL MEETING................................................................... 6
ABOUT THE ANNUAL MEETING................................................................ 9
Date, Time and Place of Annual Meeting............................................... 9
Matters to be Considered at the Annual Meeting....................................... 9
Record Date; Voting Power............................................................ 9
Quorum ............................................................................ 9
Vote Required for Approval........................................................... 9
Voting and Revocation of Proxies..................................................... 10
Solicitation of Proxies; Expenses of Solicitation.................................... 10
Other Matters to be Considered at Annual Meeting..................................... 11
PROPOSAL 1 -- THE SPLIT TRANSACTION -- SPECIAL FACTORS.................................. 12
Overview of the Split Transaction.................................................... 12
Background of the Split Transaction.................................................. 13
Reasons for the Split Transaction.................................................... 18
Fairness of the Split Transaction.................................................... 21
Effects of the Split Transaction on Affiliates....................................... 25
Determination of Fairness of Split Transaction by Affiliates......................... 25
Board Recommendation................................................................. 26
Fairness Opinion of Financial Advisor................................................ 26
Structure of the Split Transaction................................................... 30
Effects of the Split Transaction on NEIB............................................. 30
Interests of Certain Persons in the Split Transaction................................ 33
Financing of the Split Transaction................................................... 34
Federal Income Tax Consequences...................................................... 34
Appraisal Rights and Dissenters' Rights.............................................. 36
Regulatory Requirements.............................................................. 36
Accounting Treatment................................................................. 36
Fees and Expenses.................................................................... 36
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA........................................ 37
MARKET PRICE OF NORTHEAST INDIANA BANCORP, INC. COMMON STOCK AND
DIVIDEND INFORMATION................................................................. 39
COMMON STOCK PURCHASE INFORMATION....................................................... 39
PROPOSAL 2 -- ELECTION OF DIRECTORS OF NEIB
Voting Securities and Principal Holders Thereof...................................... 40
Section 16(a) Beneficial Ownership Reporting Compliance.............................. 41
Directors............................................................................ 42
Executive Officers................................................................... 43
Meetings and Committees of the Board of Directors.................................... 43
Nominating Committee Matters......................................................... 44
Audit Committee Matters.............................................................. 44
Director Compensation................................................................ 45
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Executive Compensation............................................................... 46
Employment Agreement................................................................. 47
Executive Supplemental Retirement Income Plan........................................ 47
Stockholder Benefit Plan............................................................. 48
Certain Transactions................................................................. 48
AUDITORS................................................................................ 48
PROPOSAL 3 -- ADJOURNMENT OF THE ANNUAL MEETING......................................... 49
STOCKHOLDER PROPOSALS................................................................... 50
STOCKHOLDER COMMUNICATIONS.............................................................. 50
OTHER MATTERS .......................................................................... 50
Forward-Looking Statements........................................................... 50
Where You Can Find More Information.................................................. 51
Information Incorporated by Reference................................................ 51
APPENDIX A-1 Proposed Form of Amendment to Certificate of Incorporation to Effect
Reverse Stock Split..................................................... A-1
APPENDIX A-2 Proposed Form of Amendment to Certificate of Incorporation to Effect
Forward Stock Split..................................................... A-2
APPENDIX B Opinion of Keefe, Bruyette & Woods, Inc................................... B-1
APPENDIX C Northeast Indiana Bancorp, Inc. Audit Committee Charter................... C-1
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SUMMARY TERM SHEET
This summary provides an overview of material information from this proxy
statement. However, it is a summary only. To better understand the reverse stock
split and forward stock split transaction and for a more complete description of
its terms, and for a description of other matters to be considered at the annual
meeting, we encourage you to read carefully this entire document and the
documents to which it refers before voting.
In this proxy statement, "NEIB" "we," "our," "ours," "us" and the
"company" refer to Northeast Indiana Bancorp, Inc., a Delaware corporation. The
term "Bank" refers to NEIB's wholly-owned subsidiary, First Federal Savings
Bank, which is a federal savings bank. The term "split transaction" refers to
the reverse and forward stock splits, together with the related cash payments to
registered stockholders holding fewer than 125 shares at the effective time of
the split transaction. The term "non-continuing stockholders" of NEIB means all
record holders of common stock of NEIB (i.e., registered owners of the shares
whose name appears on NEIB's records as stockholders) with fewer than 125 shares
at the effective time of the reverse stock split transaction. The term
"continuing stockholders" means all record holders of common stock of NEIB with
at least 125 shares at the effective time of the reverse stock split
transaction. References to "common stock" or "shares" refer to NEIB's common
stock, par value $0.01 per share.
Date, Time and Place of Annual Meeting; Proposals to be Considered at the Annual
Meeting
Our Board of Directors is asking for your proxy for use at an annual
meeting of stockholders to be held on Wednesday, June 15, 2005, at 1:00 p.m.,
local time, at the Bank's North Office at 100 Frontage Road, Huntington,
Indiana, and at any adjournments or postponements of that meeting. At the annual
meeting, stockholders will be asked:
o to consider and vote upon a proposal to adopt amendments to
our certificate of incorporation that will result in a
1-for-125 reverse stock split followed immediately by a
125-for-1 forward stock split;
o to elect two directors of NEIB, each with a term of three
years; and
o to adjourn the annual meeting if necessary to permit the
further solicitation of proxies in the event that an
insufficient number of shares is present in person or by proxy
to approve the proposals presented at the annual meeting.
Stockholders are also being asked to consider and vote upon any other matters
that may properly be submitted to a vote at the meeting or any adjournment or
postponement of the annual meeting. See "ABOUT THE ANNUAL MEETING."
Record Date
You may vote at the annual meeting if you owned NEIB common stock at the close
of business on April 26, 2005, which has been set as the record date. At the
close of business on the record date, there were 1,411,921 shares of our common
stock outstanding. You are entitled to one vote on each matter considered and
voted upon at the annual meeting for each share of common stock you held of
record at the close of business on the record date.
Vote Required for Approval
Proposal 1 -- The Reverse/Forward Stock Split. Approval of the split
transaction requires the affirmative vote of the holders of a majority of all
outstanding shares of our common stock entitled to vote at the annual meeting,
or 705,961 of the 1,411,921 outstanding shares. Because the executive officers
and directors of NEIB and the Bank have the power to vote a total of 230,660
shares and we believe that all of such executive officers and directors will
vote in favor of the transaction, this means a total of 475,301 shares held by
stockholders who are not executive officers or directors of the company or the
Bank will be required to vote in favor of the transaction for it to be approved.
Because the executive officers and directors of NEIB and the Bank own only
approximately 16.3% of the voting power of our outstanding common stock, there
is no assurance that the split transaction will be approved.
Proposal 2 -- Election of Directors. Directors will be elected by a
plurality of the votes cast at the annual meeting. Plurality means that the
individuals who receive the largest number of votes cast are elected up to the
maximum number of directors to be elected at the meeting.
Proposal 3 -- Adjournment of the Annual Meeting. Approval of the proposal
to adjourn or postpone the meeting to allow extra time to solicit proxies
requires the affirmative vote of a majority of the shares of common stock voting
on the matter. See "ABOUT THE ANNUAL MEETING--Vote Required for Approval."
NEIB and First Federal Savings Bank
Northeast Indiana Bancorp, Inc. is a unitary savings and loan holding
company, with a business address of 648 North Jefferson Street, Huntington,
Indiana, 46750 and a business telephone number of (260) 356-3311. We own 100% of
our subsidiary bank, First Federal Savings Bank, a federal savings. NEIB's
common stock is publicly traded on the Nasdaq National Market ("NMS") under the
symbol "NEIB". As of the close of business on May 4, 2005, the market price of
our common stock as reported on the NMS was $20.50 per share.
First Federal Savings Bank is a federal savings bank. The Bank operates
three free-standing branches in Huntington, Indiana. The Bank has one
wholly-owned subsidiary, Northeast Indiana Financial, Inc., which provides
brokerage services through an affiliation with OneAmerica Securities, Inc., a
registered broker-dealer. The Bank offers a wide range of services that include
consumer banking, business banking and related financial services. The Bank also
provides trust services through a third party marketing agreement with another
financial institution.
Introduction and Overview of the Split Transaction
We are proposing that our stockholders adopt amendments to our certificate
of incorporation that will result in a reverse 1-for-125 stock split followed
immediately by a forward 125-for-1 stock split. If the split transaction is
completed, our record stockholders who hold only fractional shares after giving
effect to the reverse 125-for-1 stock split will receive a payment of $23.50 per
share for each pre-split share. If the reverse stock split is completed, record
stockholders with fewer than 125 pre-split shares will have no interest in the
company and will become entitled only to a cash payment for their shares
following the reverse stock split. After we complete the reverse stock split and
identify those stockholders entitled to payment for their pre-split shares, we
will complete a forward stock split in which each share of common stock will be
converted into 125 shares of common stock post-split. As a result of this
subsequent forward stock split, record stockholders who hold 125 or more shares
prior to the reverse stock split will ultimately hold the same number of shares
following the forward stock split. The effect of the split transaction will be
to reduce the number of stockholders of record to less than 300, which will
allow us to suspend our reporting obligations under federal securities laws.
2
We expect to pay a total of approximately $445,000 to stockholders in the
reverse stock split and we anticipate that the number of outstanding shares of
our common stock will decrease approximately 1.3%, from 1,411,921 shares to
approximately 1,393,066 shares as a result of the split transaction. These
numbers and amounts may change as a result of trading activity in our shares
between the date hereof and the effective date of the split transaction. See
"PROPOSAL 1--THE SPLIT TRANSACTION--SPECIAL FACTORS--Overview of the Split
Transaction."
Background of the Split Transaction
For a description of the events leading to the approval of the split
transaction by our Board of Directors and the reasons for its approval, you
should refer to "PROPOSAL 1--THE SPLIT TRANSACTION--SPECIAL FACTORS--Background
of the Split Transaction," "--Reasons for the Split Transaction", "--Fairness of
the Split Transaction," and "--Board Recommendation" on pages 13 through 26. As
we explain more fully in these sections, our Board considered and rejected
various alternative methods of effecting a transaction that would enable us to
become a non-SEC reporting company, while remaining an independent,
community-owned company.
Reasons for the Split Transaction
The Board's reasons for the split transaction are set forth on pages 18 to
21. The Board has concluded that the costs of complying with the securities laws
outweigh the benefits the company receives for being an SEC reporting company.
See "PROPOSAL 1 -- THE SPLIT TRANSACTION--SPECIAL FACTORS -- Reasons for the
Split Transaction."
Fairness of the Split Transaction
Based on a careful review of the facts and circumstances relating to the
split transaction, our Board of Directors believes that the split transaction
and the terms and provisions of the split transaction, including the cash to be
paid to the non-continuing stockholders, are substantively and procedurally fair
to our unaffiliated stockholders, including unaffiliated stockholders that are
continuing stockholders and unaffiliated stockholders that are non-continuing
stockholders. Our directors unanimously approved the split transaction. See
"PROPOSAL 1--THE SPLIT TRANSACTION--SPECIAL FACTORS--Fairness of the Split
Transaction."
For a complete discussion of the positive and negative factors considered
by the Board, please see pages 21 through 25.
Fairness Opinion of Financial Advisor
In deciding to approve the split transaction and recommend it to our
stockholders, our Board of Directors considered the opinion of Keefe Bruyette &
Woods, Inc. ("KBW") that the $23.50 consideration proposed to be paid to the
non-continuing stockholders, whether affiliated or unaffiliated, is fair from a
financial point of view to those stockholders.
The full text of the fairness opinion is attached to this proxy statement
as Appendix B, and you are encouraged to read it carefully. See "PROPOSAL 1--THE
SPLIT TRANSACTION--SPECIAL FACTORS--Fairness Opinion of Financial Advisor."
Structure of the Split Transaction
The transaction has been structured as a two-step stock split transaction
because the reverse stock split will enable us to reduce the number of our
stockholders of record to fewer than 300, while the forward stock split will
avoid disruption to the record stockholders that own 125 or more shares of
common stock prior to the split transaction. Because stockholders owning 125 or
3
more shares of common stock are not affected by the two-step structure, this
structure minimizes the costs of our becoming a non-SEC reporting company while
achieving the goals outlined in this proxy statement. See "PROPOSAL 1--THE SPLIT
TRANSACTION--SPECIAL FACTORS--Background of the Split Transaction" beginning on
page 13.
The split transaction is being effected at the record stockholder level.
This means that we will look at the number of shares registered in the name of a
single holder to determine if that holder's shares will be cashed out. Because
we think it is likely that any nominee (including nominees in whose name brokers
or banks hold their customers' shares) will hold more than 125 shares in the
aggregate, we think it is likely that all "street name" holders will remain
continuing stockholders.
Effects of the Split Transaction
The split transaction is a going private transaction for NEIB, meaning it
will allow us to deregister with the SEC and our reporting obligations under
federal securities laws will be suspended.
For a further description of how the split transaction will affect our
stockholders, including the different effects on the affiliated and unaffiliated
continuing and non-continuing stockholders, please see "PROPOSAL 1--THE SPLIT
TRANSACTION--SPECIAL FACTORS--Fairness of the Split Transaction--Substantive
Fairness" on pages 21 through 23. For more information on the effects on NEIB of
the split transaction, see "PROPOSAL 1--THE SPLIT TRANSACTION--SPECIAL
FACTORS--Effects of the Split Transaction on NEIB."
Interests of Certain Persons in the Split Transaction
You should be aware that the directors and executive officers of NEIB have
interests in the split transaction that may present actual or potential, or the
appearance of actual or potential, conflicts of interest in connection with the
split transaction. See "PROPOSAL 1--THE SPLIT TRANSACTION--SPECIAL
FACTORS--Interests of Certain Persons in the Split Transaction."
Financing of the Split Transaction
We estimate that the total funds required to fund the payment of the split
transaction consideration to the non-continuing stockholders and to pay fees and
expenses relating to the split transaction will be approximately $545,000. This
amount may increase as a result of trading activity in our shares between the
date hereof and the effective date of the split transaction. The company has
sufficient working capital at the holding company level to pay this amount or
reasonably anticipated increases in this amount.
Material Federal Income Tax Consequences of the Split Transaction
We believe that the split transaction, if approved and completed, will
have the following federal income tax consequences:
o the split transaction should result in no material federal
income tax consequences to us;
o the continuing stockholders, whether affiliated or
unaffiliated, will not recognize any gain or loss or dividend
income in connection with the split transaction; and
o the receipt of cash in the split transaction by the
non-continuing stockholders, whether affiliated or
unaffiliated, will be taxable to those stockholders, who will
generally recognize gain or loss in the split transaction in
an amount determined by the difference between the cash they
receive and their adjusted tax basis in their
4
common stock surrendered. Any such recognized gain will be
treated as capital gain unless, in the case of the particular
stockholder, the receipt of the cash is deemed to have the
effect of a dividend.
Because determining the tax consequences of the split transaction can be
complicated, you should consult your own tax advisor to understand fully how the
split transaction will affect you. See "PROPOSAL 1--THE SPLIT
TRANSACTION--SPECIAL FACTORS--Federal Income Tax Consequences."
Appraisal Rights
Under Delaware law, you do not have appraisal rights in connection with
the split transaction. Although you will not have appraisal rights in connection
with the split transaction, you may pursue all available remedies under
applicable law.
Recommendation of Board of Directors
Our Board of Directors unanimously recommends that you vote "FOR" the
proposed amendments to our certificate of incorporation that will effect the
split transaction.
Our Board of Directors also recommends that you vote "FOR" the director
nominees, namely J. David Carnes and William A. Zimmer.
Our Board of Directors also recommends a vote "FOR" the proposal to
adjourn or postpone the meeting to allow extra time to solicit proxies, if
necessary.
5
QUESTIONS AND ANSWERS ABOUT THE
SPLIT TRANSACTION AND THE ANNUAL MEETING
Q What is the date, time and place of the annual meeting?
A: The annual meeting of our stockholders will be held on Wednesday, June 15,
2005, at 1:00 p.m. local time at the Bank's North Office at 100 Frontage
Road, Huntington, Indiana.
Q: What is the proposed split transaction?
A: We are proposing that our stockholders approve a reverse 1-for-125 stock
split followed immediately by a forward 125-for-1 stock split of our
outstanding common stock.
The purpose of the split transaction is to allow us to suspend our
SEC-reporting obligations (referred to as "going private") by reducing the
number of our stockholders of record to fewer than 300. This will allow us
to terminate our registration under the Securities Exchange Act of 1934,
and relieve us of the costs typically associated with the preparation and
filing of reports and other documents with the SEC.
Q: What will I receive in the split transaction?
A: If you are the registered owner of fewer than 125 shares of our common
stock on the date of the reverse stock split, you will receive $23.50 in
cash from us for each pre-split share you own. If you are the registered
owner of 125 or more shares of our common stock on the date of the reverse
stock split, you will not receive any cash payment for your shares in
connection with the split transaction and will continue to hold the same
number of shares of our common stock as you did before the split
transaction.
Q: Why is 125 shares the "cutoff' number for determining which stockholders
will be cashed out and which stockholders will remain as stockholders of
NEIB?
A: The purpose of the split transaction is to reduce the number of our
stockholders of record to fewer than 300, which will allow us to
de-register as an SEC-reporting company. Our Board selected 125 shares as
the "cutoff" number in order to enhance the probability that after the
split transaction, if approved, we will have fewer than 300 stockholders
of record.
Q: May I buy additional shares in order to remain a stockholder of NEIB?
A: Yes. The key date for acquiring additional shares is June 15, 2005. So
long as you are able to acquire a sufficient number of shares so that you
are the registered owner of 125 or more shares by June 15, 2005, your
shares of common stock will not be cashed out by the split transaction.
Q: What if I hold my shares in "street name"?
A: The split transaction will be effected at the registered stockholder
level. This means that we will look at the number of shares registered in
the name of a single holder as that name appears in the company's records
to determine if that holder's shares will be cashed out. So for shares
held in "street name," because it is likely that your brokerage firm holds
125 or more total shares registered in nominee name, you are not likely to
be cashed out, even if you beneficially own fewer than 125 shares. If you
hold shares in "street name," you should talk to your broker, nominee or
agent to determine how the split transaction will affect you.
6
Q: What is the recommendation of our Board of Directors regarding the
proposal?
A: Our Board of Directors has determined that the split transaction is
advisable and in the best interests of NEIB's stockholders, including
affiliated and unaffiliated stockholders. Our Board of Directors has
unanimously approved the split transaction and recommends that you vote
"FOR" approval of the split transaction at the annual meeting.
Q: When is the split transaction expected to be completed?
A: If the proposed amendments to our certificate of incorporation are
approved at the annual meeting, we expect the split transaction to be
completed as soon as practicable thereafter. We need to file the
amendments with the Delaware Secretary of State for the split transaction
to become effective.
Q: Who is entitled to vote at the annual meeting?
A: Holders of record of our common stock as of the close of business on April
26, 2005, are entitled to vote at the annual meeting. Each of our
stockholders is entitled to one vote for each share of our common stock
owned at the record date.
Q: What vote is required for our stockholders to approve the split
transaction?
A: For the amendments to our certificate of incorporation to be adopted and
the split transaction to be approved, holders of a majority of the
outstanding shares entitled to vote at the annual meeting must vote "FOR"
the split transaction.
Q: What if the proposed split transaction is not completed?
A: It is possible that the proposed split transaction will not be completed.
The proposed split transaction will not be completed if, for example, the
holders of a majority of our common stock do not vote to adopt the
proposed amendments to our certificate of incorporation and approve the
proposed split transaction. Alternatively, even if stockholder approval is
received, if the Board determines that it is not in the best interests of
the company's stockholders to complete the transaction, the Board may
decide to abandon it. If the split transaction is not completed, we will
continue our current operations, and we will continue to be subject to the
reporting requirements of the SEC.
Q: What happens if I do not return my proxy card?
A: Because the affirmative vote of the holders of a majority of the shares of
our common stock outstanding on the record date is required to approve the
split transaction, unless you vote in person, a failure to return your
proxy card will have the same effect as voting against the split
transaction proposal.
Q: What do I need to do now?
A: After carefully reading and considering the information contained in this
proxy statement, please vote your shares of common stock as soon as
possible. You may vote your shares by returning the enclosed proxy or by
voting in person at the annual meeting of stockholders. This proxy
statement includes detailed information on how to cast your vote.
Q: If my shares are held for me by my broker, will my broker vote those
shares for me?
A: Your broker will vote your shares only if you provide instructions to your
broker on how to vote. You should instruct your broker on how to vote your
shares using the voting instruction card provided by your broker.
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Q: Can I change my vote after I have mailed my proxy card?
A: Yes. You can change your vote at any time before your proxy is voted at
the annual meeting by following the procedures outlined in this proxy
statement.
Q: Do I need to attend the annual meeting in person?
A: No. You do not have to attend the annual meeting to vote your NEIB shares.
Q: Will I have appraisal or dissenters' rights in connection with the split
transaction?
A: No. Under Delaware law, which governs the split transaction, you do not
have the right to demand the appraised value of your shares or any other
dissenters' rights if you vote against the proposed split transaction.
Your rights are described in more detail under "PROPOSAL 1--THE SPLIT
TRANSACTION--SPECIAL FACTORS--Appraisal Rights and Dissenters' Rights" at
page 36.
Q: Should I send in my stock certificates now?
A: No. If you are the registered owner of fewer than 125 shares of common
stock on the date the split transaction is completed, our transfer agent
will send you written instructions for exchanging your stock certificates
for cash. If you are the registered owner of 125 or more shares of our
common stock, you will continue to hold the same shares after the split
transaction as you did before.
Q: If I own fewer than 125 shares and cannot locate my stock certificates,
what should I do?
A: If you are entitled to receive cash in the split transaction you will be
sent a Letter of Transmittal with instructions for tendering your stock
certificates. Those instructions will explain what to do if you cannot
find your stock certificates. Generally, you will need to submit a lost
share affidavit and a fee for a surety bond in lieu of submitting the
lost, misplaced or destroyed stock certificate.
Q: What are the tax consequences of the split transaction to me?
A. There will be no tax consequences to you if you are the registered owner
of more than 125 shares of NEIB common stock or if you hold shares with a
brokerage firm or bank that owns through a nominee in the aggregate more
than 125 shares of NEIB common stock. If you receive cash in the split
transaction because you are the registered owner of fewer than 125 shares
of NEIB common stock, you will generally recognize gain or loss in the
split transaction in an amount determined by the difference between the
cash you receive and your adjusted tax basis in your shares of common
stock surrendered. See "PROPOSAL 1--THE SPLIT TRANSACTION--SPECIAL
FACTORS--Federal Income Tax Consequences."
Q: Where can I find more information about NEIB?
A. We file periodic reports and other information with the SEC. You may read
and copy this information at the SEC's public reference facilities. Please
call the SEC at 1-800-SEC-0330 for information about these facilities.
This information is also available at the Internet site maintained by the
SEC at http://www.sec.gov. General information about us is available at
our Internet site at www.firstfedhuntington.com; the information on our
Internet site is not incorporated by reference into this proxy statement
and does not form a part of this proxy statement. For a more detailed
description of the information available, please see pages 50 through 51.
8
Q: Who can help answer my questions?
A. If you have questions about the split transaction after reading this proxy
statement or need assistance in voting your shares, you should contact
Michael S. Zahn, our President, or Randy J. Sizemore, our Senior Vice
President, Treasurer and Chief Financial Officer, at (260) 358-4680.
9
ABOUT THE ANNUAL MEETING
Date, Time and Place of Annual Meeting
Our Board of Directors is asking for your proxy for use at our annual
meeting of stockholders to be held on Wednesday, June 15, 2005, at 1:00 p.m.,
local time, at the Bank's North Office located at 100 Frontage Road, Huntington,
Indiana, and at any adjournments or postponements of that meeting.
Matters to be Considered at the Annual Meeting
The purpose of the annual meeting is for you to consider and vote upon:
Proposal 1: The adoption of amendments to our certificate of incorporation
that will result in a reverse, followed by a forward, stock split transaction.
This transaction is comprised of:
o a reverse stock split, in which each 125 shares of our common
stock held in the record name of a stockholder at the
effective time of the reverse stock split will be converted
into one share of common stock; followed immediately by
o a forward stock split, in which each share of common stock
outstanding after completion of the reverse stock split will
be converted into 125 shares of common stock.
Each record stockholder owning fewer than 125 shares of common stock immediately
prior to the reverse stock split will receive a cash payment of $23.50 per share
on a pre-split basis.
Proposal 2: The election of two directors to serve until 2008.
Proposal 3: Any necessary adjournment of the meeting to permit further
solicitation of proxies in the event that insufficient shares are represented at
the meeting.
Stockholders are also being asked to consider and vote upon any other
matters that may properly be submitted to a vote at the meeting or any
adjournment or postponement of the annual meeting. The Board is not aware of any
other business to be conducted at the annual meeting.
Record Date; Voting Power
You may vote at the annual meeting if you were the record owner of shares
of our common stock at the close of business on April 26, 2005, which has been
set as the record date. At the close of business on the record date, there were
1,411,921 shares of our common stock, $.01 par value per share, outstanding. You
are entitled to one vote on each matter considered and voted upon at the annual
meeting for each share of common stock you held of record at the close of
business on the record date.
Quorum
The presence, in person or by proxy, of one-third of our outstanding
shares is necessary to constitute a quorum at the annual meeting. Abstentions
and broker non-votes are counted for purposes of establishing a quorum at the
annual meeting.
Vote Required for Approval
Approval of the split transaction (Proposal 1) requires the affirmative
vote of the holders of a majority of all outstanding shares of our common stock
entitled to vote at the annual meeting, or 705,961 of the 1,411,921 outstanding
shares. Because the executive officers and directors of
10
NEIB and the Bank have the power to vote a total of 230,660 shares and because
we believe that all of the executive officers and directors will vote in favor
of the transaction, this means a total of 475,301 shares held by stockholders
who are not executive officers or directors of the company or the Bank will be
required to vote in favor of the transaction for it to be approved. Because the
executive officers and directors hold only approximately 16.3% of the voting
power of our outstanding common stock, there is no assurance that the split
transaction will be approved. Approval of the amendments and the split
transaction do not require the separate vote of a majority of our unaffiliated
stockholders, and no separate vote will be conducted. Because broker non-votes
and abstentions are not affirmative votes, they will have the effect of a vote
against the split transaction.
The election of directors (Proposal 2) will be determined by a plurality
of the votes cast at the annual meeting. Plurality means that the individuals
who receive the largest number of votes cast are elected up to the maximum
number of directors to be elected at the meeting. Broker non-votes, abstentions
and instructions to withhold votes for one or more directors will result in that
nominee receiving fewer votes but will not count as a vote against the nominee.
The proposal to adjourn or postpone the annual meeting (Proposal 3), if
necessary, must be approved by the holders of at least a majority of the shares
of our common stock voting in person or by proxy at the annual meeting.
Abstentions will be treated as "NO" votes and, therefore, will have an effect on
this proposal, while broker non-votes will have no impact on this proposal.
Voting and Revocation of Proxies
You may vote your shares in person by attending the annual meeting, or by
mailing us your completed proxy if you are unable or do not wish to attend. If a
proxy card is submitted without instructions, the proxies will be voted "FOR"
the proposal to approve the split transaction, the director nominees, and the
proposal to adjourn or postpone the meeting, if necessary.
You can revoke your proxy at any time before the vote is taken at the
meeting by:
o delivering to DeeAnn Hammel, our Secretary, at our corporate
offices at 648 North Jefferson Street, Huntington, Indiana
46750, on or before the date of the annual meeting, a
later-dated and signed proxy card or a written revocation of
the proxy;
o delivering to us at the annual meeting prior to the taking of
the vote a later-dated and signed proxy card or a written
revocation;
o attending the annual meeting and voting in person; or
o if you have instructed a broker to vote your shares, following
the directions received from your broker to change those
instructions.
Revoking a proxy will not affect a vote once it has been taken. Attendance
at the annual meeting will not, in itself, constitute a revocation of a proxy.
You must vote in person at the annual meeting if you wish to change a vote that
you have previously made by submitting a signed proxy.
Solicitation of Proxies; Expenses of Solicitation
We are mailing this proxy material to our stockholders on or about May 10,
2005.
The enclosed proxy is solicited on behalf of our Board of Directors. The
cost of soliciting proxies in the accompanying form will be borne by us. In
addition to the use of mail, our officers and directors may solicit proxies by
telephone or other electronic means. These individuals will receive no
additional compensation for these services, but will be reimbursed for any
transaction expenses incurred by them in connection with these services. Upon
request, we will reimburse
11
brokers, dealers, banks and trustees or their nominees for reasonable expenses
incurred by them in forwarding proxy material to beneficial owners of shares of
existing common stock. In addition, NEIB has retained Regan & Associates, Inc.
("Regan") to solicit proxies on NEIB's behalf. For acting as its proxy
solicitor, NEIB will pay Regan a fee of $8,000.
Other Matters to be Considered at Annual Meeting
As of the date of this proxy statement, the only business that our
management expects to be presented at the meeting is that set forth above. If
any other matters are properly brought before the meeting, or any adjournments
thereof, it is the intention of the persons named in the accompanying form of
proxy to vote the proxy on such matters in accordance with their best judgment.
12
PROPOSAL 1 -- THE SPLIT TRANSACTION -- SPECIAL FACTORS
Overview of the Split Transaction
This proxy statement is furnished in connection with the solicitation of
proxies by the Board of Directors of Northeast Indiana Bancorp, Inc., a Delaware
corporation, and is to be used at an annual meeting at which our stockholders,
among other things, will be asked to consider and vote upon a proposal to amend
our certificate of incorporation. If approved, the amendments will result in a
1-for-125 reverse split of our common stock, followed immediately by a 125-for-1
forward split of our common stock.
If the reverse and forward stock splits are approved as described below,
record holders of fewer than 125 shares of our common stock prior to the reverse
split will no longer be stockholders of the company. Instead, those stockholders
will be entitled only to receive payment of $23.50 per share of common stock
held prior to the reverse split. Record stockholders holding 125 or more
pre-split shares will remain stockholders. We intend, immediately following the
split transaction, to terminate the registration of our shares, and our
registration and further reporting under the Securities Exchange Act of 1934.
If approved by our stockholders at the annual meeting and implemented by
our Board of Directors, the split transaction will generally affect our
stockholders as follows:
STOCKHOLDER POSITION
PRIOR TO SPLIT TRANSACTION EFFECT OF SPLIT TRANSACTION
- -------------------------- ---------------------------
Stockholders holding in registered name 125 Stockholders will continue to hold the same
or more shares of common stock number of shares held pre-split transaction.
Stockholders holding in registered name Shares will be converted into $23.50 per share
fewer than 125 shares of common stock of common stock outstanding immediately prior
to the reverse stock split.
Stockholders holding common stock in "street The split transaction will be effected at
name" through a nominee (such as a bank or the record stockholder level. Therefore,
broker) regardless of the number of beneficial
holders or the number of shares held by
each beneficial holder, shares held in
"street name" by a bank or broker who holds
through a nominee in the aggregate more
than 125 shares for its customers will be
subject to the forward split, and the
beneficial holders who hold their shares in
"street name" will be continuing
stockholders with the same number of shares
as before the split transaction. If
stockholder owns fewer than 125 shares with
a bank or broker who does not own of record
in its own name or in a nominee name at
least 125 shares in the aggregate for its
customers, that stockholder will receive
$23.50 per share of common stock
outstanding immediately prior to the
reverse stock split.
13
Our Board of Directors will have the discretion to determine if and when
to effect the split transaction, and reserves the right to abandon the
transaction even if it is approved by the stockholders. Under applicable
Delaware law, the Board has a duty to act in the best interest of the company's
stockholders. Accordingly, the Board reserves the right to abandon the split
transaction after stockholder approval and before the effective time of the
split transaction, if for any reason the Board determines that, in the best
interest of the company's stockholders, it is not advisable to proceed with the
split transaction. The Board intends to complete the split transaction if
approved by the company's stockholders, and the Board is unaware of any
circumstance that would cause it to abandon the transaction, other than (i) a
significant increase in transaction costs resulting from purchases of shares
prior to the effective date of the split apparently made solely for the purpose
of receiving the premium to be paid to holders of fewer than 125 shares or (ii)
a determination that the approved split will not reduce the number of
stockholders of record to fewer than 300.
The split transaction will become effective upon the filing of the
necessary amendments to our certificate of incorporation with the Delaware
Secretary of State or a later date specified in that filing. The forms of the
amendments to our certificate of incorporation are attached to this proxy
statement as Appendix A. Under no circumstances would the Board consummate the
reverse stock split and not the forward stock split, for the reasons set forth
in "PROPOSAL 1--THE SPLIT TRANSACTION--SPECIAL FACTORS--Fairness of the Split
Transaction."
Although there is no date by which the split transaction must occur, we
expect that if the stockholders approve and the Board elects to effect the split
transaction, the split transaction will be completed as soon as practicable
after the annual meeting (generally expected to be no later than three business
days following the annual meeting).
Background of the Split Transaction
As an SEC reporting company, we are required to prepare and file with the
SEC, among other items, the following:
o Annual Reports on Form 10-KSB;
o Quarterly Reports on Form 10-QSB;
o Proxy Statements and related materials;
o Shareholder Annual Reports; and
o Current Reports on Form 8-K.
In addition to the burden on management, the costs associated with these
reports and other filing obligations comprise a significant corporate overhead
expense. These costs include securities counsel fees, auditor fees, special
Board and committee meeting fees, costs of printing and mailing stockholder
documents, and EDGAR filing costs. For 2004, the total costs, including costs of
management and staff time, of being a public company were $150,844. These costs
have been increasing over the years, and we believe they will continue as a
significant expense of the company, particularly as a result of the additional
reporting and disclosure obligations imposed on SEC-reporting companies by the
recently enacted the Sarbanes-Oxley Act of 2002 ("SOX"). We estimate that our
costs and expenses incurred in connection with being a public company
14
increased by approximately $6,250 in 2004. We are projecting additional
increases in such costs in 2005 of approximately $37,150.
In addition, if the company does not go private before the end of 2006, it
will need to comply with the requirements of Section 404 of SOX. Under that
Section, the company is required to include a report of management on the
company's internal control over financial reporting and an attestation report of
the company's independent auditors on management's assessment of the company's
internal control over financial reporting. The costs of such compliance are
estimated at $100,000 in 2006 (assuming the company outsources the project).
Each year after 2006, additional costs associated with Section 404 compliance
are also anticipated and these could be as much as $50,000 per year. These costs
will be avoided if the stockholders approve the reverse/forward stock split
described in the accompanying proxy statement. The deadline for compliance with
Section 404 was recently extended by the SEC for one year for public
corporations like the company. Prior to that extension, the company had
estimated total costs of being a public company in 2005 at $288,000, assuming
the need to comply with Section 404.
Our Board of Directors and management believe that the recurring expense
and burden of our SEC-reporting requirements described above are not cost
efficient for NEIB. Becoming a non-SEC reporting company will allow us to avoid
these costs and expenses. In addition, once our SEC reporting obligations are
suspended, we will not be subject to the provisions of SOX, and our officers
will not be required to certify the accuracy of our financial statements under
SEC rules. However, we will continue to be subject to the rules and regulations
imposed by the Office of Thrift Supervision and the Federal Deposit Insurance
Corporation, including those relating to financial reporting.
There can be many advantages to being a public company, including a more
active trading market and the enhanced ability to use company stock to raise
capital or make acquisitions. However, there is a limited market for our common
stock, and we have therefore not been able to effectively take advantage of
these benefits. This may be due, in part, to the relatively few number of
stockholders owning the company's common stock and the fact that our directors
and executive officers beneficially own approximately 19.7% of our outstanding
shares. In the past twelve months ending April 30, 2005, our common stock was
not traded at all on 105 of the trading days. On the days traded during such
period, our common stock had an average trading volume of 2,921 shares.
Moreover, our limited trading market makes it difficult for our stockholders to
liquidate a large number of shares of our stock without negatively affecting the
per share sale price. In contrast, the split transaction will allow our small
stockholders to sell their shares at a fixed price that will not decline based
upon the number of shares sold, and allow them to do so without incurring
typical transaction costs.
Another potential advantage of being a public company is the ability to
access capital markets to meet additional capital needs. However, since becoming
a public company in 1995, we have had no additional capital needs. We have also
not made any additional public offerings of common stock or any other equity or
debt securities since our organization in 1995. In addition, we have not used
our common stock as consideration for any acquisition. Currently, we do not
anticipate issuing additional shares of common stock in either public or private
transactions.
For these and other reasons noted below, our Board of Directors and
management have concluded that the benefits of being an SEC-reporting company
are substantially outweighed by the burden on management and the expense related
to the SEC reporting obligations. As a result, during 2004 our management began
to explore the possibility of reducing our number of record stockholders to
below 300 in order to suspend our periodic reporting obligations to the SEC.
At a regular NEIB Board meeting held on October 26, 2004, the directors
invited representatives of Keefe, Bruyette & Woods, Inc. ("KBW") to discuss the
market for mergers and
15
acquisitions of financial institutions and the benefits and disadvantages of
going private. KBW also presented information on a possible merger of NEIB with
a bank in its market area of comparable asset size and income. KBW advised the
Board that such a merger would result in a significant dilution to the Bank's
book value, but would be one way to leverage the Bank's capital. The directors
decided not to pursue such a transaction. The burdens and costs and potential
liabilities associated with filing reports as a public company, including risks
associated with the officer certifications required by SOX, were discussed at
that meeting. Such potential liabilities make it more difficult to attract and
retain directors and executive officers and generally result in higher costs,
including increased compensation, director fees, and director and officer
liability insurance premiums. Steps that could be taken to become a private
company, including a reverse stock split, stock repurchases or a tender offer
were examined. The directors focused on the strategic direction of the Bank and
prospects for growth in our market area if the Bank remained an independent
community bank. They noted that the Bank's financial performance was in line
with its peers and the Bank had the highest deposit share in Huntington,
Indiana. The directors considered possibilities for growth as an independent
community bank, through branch acquisitions within and outside of the Bank's
current market area and through offering other products, including attractive
deposit products, to existing and potential customers. The directors agreed to
continue their discussion of these issues at the Audit Committee meeting on
November 8, 2004.
At that Audit Committee meeting, a representative of Crowe Chizek and
Company LLC discussed the anticipated costs of required procedures for complying
with Section 404 of SOX in 2005. An outline of the pros and cons of becoming a
private company was distributed and discussed at length by the Audit Committee
members.
At the next regular NEIB Board meeting held on November 30, 2004, the
Company's Chief Financial Officer, Randy J. Sizemore, presented a report showing
the costs of compliance with Section 404 of SOX. The report indicated that it
would cost the Bank approximately $35,000 to do the necessary work internally or
$100,000 to outsource the work to a third party. The Board concluded that the
time that would be required from at least three employees at the Bank, including
Mr. Sizemore, the Controller of the Bank and an accounting employee, to perform
the work in-house would be at an unacceptable level, as it would divert them
from other responsibilities they needed to perform for the Bank. Mr. Sizemore
estimated that his time devoted to matters for NEIB was projected to increase
from 25% to 40%, the Controller's time was projected to increase from 10% to
50%, and the accounting employee's time was projected to increase from 20% to
40%, as a result of the requirements of SOX.
The directors discussed the fact that from a management time, cost and
liability standpoint, it appeared that it would be in the best interests of NEIB
and its stockholders to become a private company. The directors resolved to
initiate the process of moving forward with a possible going private
transaction, including consulting with legal counsel on the specific methods
that could be taken to cause NEIB's stockholders to fall below 300.
On January 25, 2005, at a regular meeting of NEIB's Board, a
representative of Barnes & Thornburg, prospective legal counsel, made a
presentation of the advantages and disadvantages of going private and available
methods of reducing the number of our record stockholders to allow us to suspend
SEC reporting requirements, including open market stock repurchases, a tender
offer, a cash-out merger or reverse stock split, and a reverse/forward stock
split. For a more detailed discussion of the alternative methods of effecting a
going private transaction that were discussed by the Board see "--Reasons for
the Split Transaction." The representative of Barnes & Thornburg recommended
that, if the Board decided to proceed with a going private transaction, a
Special Committee of outside directors should be formed to consider the
structure and price to be paid in any such transaction and that such Committee
should have the power to
16
employ legal counsel and a financial advisor to represent it in such an
endeavor. The directors discussed the fact that the annual meeting of
stockholders, which is normally held in April of each year, would need to be
delayed if the split transaction were to be presented to a vote of stockholders
at that meeting.
On February 4, 2005, a meeting of three of the four outside directors was
held at which Barnes & Thornburg was hired as counsel to assist NEIB in its
consideration of a going private transaction. The outside directors also
discussed an approach that had been made by a bank outside of NEIB's market area
about a possible affiliation. Although no offer had been made, possible terms of
such an affiliation were discussed. Pros and cons of the potential merger were
discussed, including its potential impact on stockholders, employees and the
community. The merger partner was not in NEIB's market so no anti-competitive
problems would be created by the merger. However, cost savings also were not
likely to be as significant as those with an in-market merger party. The
problems with effecting a merger during a period that NEIB needs to focus on
compliance with Section 404 of SOX was also considered a negative aspect of the
potential transaction. It was discussed that the merger would not permit the
company to avoid Section 404 work as the company resulting from the merger would
need to comply with SOX. Strategic alternatives to such a combination were
discussed, including the going private transaction which was expected to have a
positive potential impact on earnings. Among other things, the Board considered
the possibility of going private in an effort to reduce expenses and improve
earnings, followed by consideration of a merger at a later date. The directors
agreed to reconsider the possible affiliation and a going private transaction at
the next regular Board meeting.
On February 10, 2005, at a special meeting of the Board of Directors at
which a representative of Barnes & Thornburg LLP was present, the directors
again discussed the contact that had been made by a bank outside of its market
area for a possible affiliation. Counsel described the responsibilities of the
directors in evaluating such a contact. Among other things, the directors
discussed their view that the timing of such transaction would not be in the
best interests of stockholders who would remain as continuing stockholders of
the company following the split transaction, since earnings were expected to
improve if the company achieved the cost savings anticipated from a going
private transaction. The fact that any stockholders cashed out in the split
transaction might not benefit from an improvement in earnings at the company was
offset by their ability to remain stockholders of the company by transferring
shares into nominee name or by purchasing shares on the market following the
split transaction. The directors also discussed the pricing information for
mergers of comparable financial institutions that had been presented by KBW at
the October 26, 2004 Board meeting and noted that the tentative pricing
discussions with the possible merger partner were on the low end of the pricing
ranges discussed at that meeting. The Board was not aware of any reason why the
prospective offer by the potential merger partner would be distinguished from
the pricing information for mergers of comparable financial institutions that
had been presented by KBW at the October 26, 2004 meeting. Michael S. Zahn, the
Senior Vice President of the company, and Stephen E. Zahn, President and Chief
Executive Officer of the company, who had been meeting with representatives of
the possible merger candidate believed that the price range discussed was not
likely to increase because of statements to that effect made by representatives
of the possible merger candidate. The Board also considered other strategic
business plans to enhance stockholder value. Opening of new branches and new
products, such as the Bank's recently offered premium checking account, were
discussed. After a lengthy discussion, it was concluded that NEIB would not
proceed with discussions with the prospective merger partner and instead should
implement its going private strategy. Among other things, each director
described his views on the strategic direction of NEIB and what course of action
would be in the best interests of its stockholders. Each director believed a
decision to keep NEIB independent at this time to
17
pursue expense reductions and business opportunities that would enhance
earnings, such as new branches and new products, was in the best interests of
its stockholders and customers. Because of the low interest rate environment,
the Bank's net interest margin was being squeezed and anticipated increases in
interest rates, coupled with expense reductions, would be expected to improve
Bank earnings in the future. While NEIB's directors as an ongoing matter
consider ways to enhance stockholder value, including through possible mergers
with other financial institutions, each of the directors expressed the opinion
that the timing was not right now for a merger.
Legal counsel then discussed the procedures for pursuing a going private
transaction. After a discussion of these matters, the Board appointed a Special
Committee of its four outside directors to represent the interests of the
company's stockholders who would be cashed out in a going private transaction.
Pursuant to a resolution adopted by the Board, the Committee was empowered to
hire a financial advisor to assist it with a determination of a fair price to be
paid to such cashed out stockholders, and to seek legal assistance on the legal
standards applicable to and steps required for the going private transaction.
The Committee discussed the fact that Barnes & Thornburg had recently been
engaged by NEIB primarily to assist it with consideration of a going private
transaction and therefore was a more independent legal representative than
previous counsel which had represented NEIB for years. As a result, the
Committee concluded that if it needed to seek advice on the legal standards and
steps involved in a going private transaction, it would consult Barnes &
Thornburg. If it concluded it needed independent counsel on other issues, it had
authority to employ counsel of its choosing at any time.
On February 11, 2005, a representative of the Special Committee contacted
KBW to discuss its possible engagement as financial advisor to the Special
Committee in the going private transaction. Although KBW had provided services
to NEIB in the past from time to time, including acting as a financial advisor
in the Bank's conversion from mutual to stock form, the Special Committee
believed that such prior service for the company would be helpful in assisting
the Special Committee in determining a fair value to be paid to stockholders
holding fewer than 125 shares of the company's common stock. KBW was engaged by
the Special Committee, and not the company, in connection with the
reverse/forward stock split.
On March 3, 2005, at a meeting of the Special Committee, KBW presented a
proposed engagement letter under which it would be engaged to represent the
Special Committee in considering the fairness of the split transaction to
affiliated and unaffiliated stockholders cashed out in the transaction, and was
hired. The Special Committee decided to retain KBW based on that firm's
extensive experience, knowledge and background in valuing financial institutions
and holding companies. At that meeting, KBW discussed the objectives of the
going private transaction and the split transaction structure and process. It
also described that information it had reviewed to assist the Special Committee
in determining a fair price to be paid to non-continuing stockholders in the
split transaction.
The Special Committee also discussed possible stock split ratios which
could be used to reduce the number of the company's record stockholders to less
than 300, concluding that a 1 for 125 share split made the most sense given the
company's objectives. Prices that could be paid to such stockholders were
discussed, including the basis for those possible prices. KBW presented three
different ways of determining the price to be paid to stockholders to be cashed
out in the transaction. One was market value based on a 30-day trading average,
peer group comparison (median price/LTM EPS and median price/tangible book
value), and discounted cash flow using 12.0x and 14.5x terminal multiples. This
approach resulted in a value of $20.43. The second approach was the premium
represented by other "going private" transactions. This price ranged between
$23.15 and $23.99. The third price was the average of prices paid in mergers and
acquisitions of comparable companies, which averaged $26.94. The Special
Committee
18
tentatively concluded, based on the information provided and subject to the
receipt of a fairness opinion from KBW, that $23.50 would be an appropriate
amount to pay non-continuing stockholders in the split transaction. In reaching
that conclusion, the Special Committee placed greater emphasis on the premiums
provided in other "going private" transactions than other methodologies for
arriving at such price. It also focused on the fact that the $23.50 per share
price exceeded recent market prices for NEIB common stock and all prices the
company had paid for such shares in its stock repurchase programs. This seemed
to be a fair price based on the information presented by KBW and yet was not so
high as to be unfair to stockholders not cashed out in the transaction.
At a meeting of the Special Committee held on March 16, 2005, a
representative of Barnes & Thornburg again reviewed with the Committee the
potential advantages of the use of a reverse/forward stock split transaction as
a preferred method to go private. For a discussion of the alternatives
considered, see "--Reasons for the Split Transaction." A draft proxy statement
for the annual meeting at which the reverse/forward stock split would be
presented to a vote of stockholders had been circulated prior to the meeting,
along with a draft Schedule 13E-3, and the directors provided comments on those
documents.
Also at the meeting of the Special Committee, the outside directors were
provided with a draft copy of the fairness opinion prepared by KBW. A
representative of KBW reviewed the draft fairness opinion with the outside
directors and described the methodologies used by KBW as a basis for the
fairness opinion. KBW indicated that it would be able to render such an opinion
based on a price of $23.50 per share to the stockholders cashed out in the
transaction. The Special Committee adopted resolutions recommending to the full
Board the proposed split transaction with a cash payment of $23.50 per share to
the stockholders who were to be cashed out in the transaction.
At a special meeting of the Board of Directors held on March 16, 2005,
following the Special Committee meeting, a representative of Barnes & Thornburg
reviewed with the full Board the draft proxy statement for the annual meeting,
the steps that would need to be taken to effect a reverse/forward stock split as
recommended by the Special Committee, and the Schedule 13E-3 that needed to be
filed with the SEC for the split transaction. Following the legal presentation,
KBW delivered to the Board of Directors a draft of its fairness opinion. The
fairness opinion also included a discussion of the assumptions made by KBW in
preparing the opinion. See "-- Fairness Opinion."
After reviewing the draft fairness opinion of KBW and considering the
review by Barnes & Thornburg and following lengthy discussion, the Board
unanimously approved the split transaction by means of a 1 for 125 reverse stock
split followed by a 125 for 1 forward stock split, pursuant to which
stockholders owning fewer than 125 shares would receive $23.50 in cash for their
pre-split shares of our common stock. Following the Board's determination of the
$23.50 per share price, KBW delivered its oral opinion that the $23.50 per share
cash consideration to be paid to stockholders holding fewer than 125 shares of
our common stock prior to the reverse stock split was fair from a financial
point of view to our non-continuing stockholders who will be cashed out in the
transaction.
The following week, KBW delivered to us its written fairness opinion,
dated March 16, 2005, a copy of which is attached as Appendix B.
Reasons for the Split Transaction
NEIB is undertaking the split transaction at this time to end our SEC
reporting obligations, which will enable us to save the company and our
stockholders the substantial costs associated
19
with being a reporting company. The specific factors considered in electing at
this time to undertake the split transaction and become a non-SEC reporting
company are as follows:
o We estimate that we will eliminate costs of approximately
$177,750 on an annual basis by eliminating the requirement to
make periodic reports and reducing the expenses of stockholder
communications. These expenses include legal expenses
($50,000), accounting expenses ($45,000), printing and EDGAR
costs ($10,500), Nasdaq listing fees ($24,500), newswire costs
($4,250), and costs of staff and management time spent on
reporting and securities law compliance matters ($43,500).
o If the company does not go private before the end of 2006, it
will need to comply with the requirements of Section 404 of
SOX. Under that Section, the company is required to include a
report of management on the company's internal control over
financial reporting and an attestation report of the company's
independent auditors on management's assessment of the
company's internal control over financial reporting. The costs
of such compliance are estimated at $100,000 in 2006 (assuming
the company outsources the project). Each year after 2006,
additional costs associated with Section 404 compliance are
also anticipated and these could be as much as $50,000 per
year. These costs will be avoided if the stockholders approve
the reverse/forward stock split described in the accompanying
proxy statement.
o We believe that, as a result of the recent disclosure and
procedural requirements resulting from SOX, the legal,
accounting and administrative expense, and diversion of our
Board of Directors, management and staff effort necessary to
continue as an SEC-reporting company will remain significant,
particularly in view of the requirements of Section 404,
without a commensurate benefit to our stockholders. We expect
to continue to provide our stockholders with company financial
information by disseminating our annual reports, but we
anticipate that the costs associated with these reports will
be substantially less than those we incur currently.
o In the Board of Directors' judgment, little justification
exists for the continuing direct and indirect costs of
registration with the SEC, which costs have recently increased
as a result of SOX, given the low trading volume in our common
stock and that our earnings are sufficient to support growth
and we therefore do not depend on raising capital in the
public market, and do not expect to do so in the near future.
If it becomes necessary to raise additional capital, we
believe that there are adequate sources of additional capital
available, whether through borrowing at the holding company
level or through private or institutional sales of equity or
debt securities, although we recognize that there can be no
assurance that we will be able to raise additional capital if
required, or that the cost of any required additional capital
will be attractive.
o The expense of administering accounts of small stockholders is
disproportionate to their ownership in the company. As of the
record date, approximately 259 of our 433 stockholders of
record beneficially own fewer than 125 shares of our common
stock. These stockholders owned less than 1% of our shares of
common stock on the record date. A disproportionate amount of
our administrative expenses relating to stockholder accounts
and reporting requirements is attributable to those
stockholders.
o The split transaction allows non-continuing stockholders to
receive fair value and cash for their shares, in a simple and
cost-effective manner, particularly given the possible
ineffectiveness and inefficiencies of a tender offer, an open
market share repurchase or a cash-out merger. Stockholders
owning under 125 shares may find it
20
uneconomical to dispose of those shares due to minimum
brokerage commissions which are often charged.
o The split transaction will allow the non-continuing
stockholders to realize what our Board has determined to be
fair value for their NEIB common stock, without incurring
brokerage commissions. In addition to the fairness opinion of
KBW, the Board considered the following specific factors in
reaching its conclusion that the price to be paid in the
reverse stock split to certain unaffiliated stockholders in
lieu of fractional shares is fair to such stockholders.
Individual directors may have given differing weights to
different factors. Due to the relative illiquidity of the
common stock, the Board as a whole generally placed more
emphasis on the fairness opinion than on the stock prices as
quoted on Nasdaq, and the Board ultimately relied on the
findings of KBW in determining that the $23.50 price per share
is fair to unaffiliated stockholders.
Current and Historical Market Prices of NEIB's Common Stock.
Although the common stock is quoted on Nasdaq, there is a
limited trading market for the common stock. The high and low
sale prices for the common stock from January 1, 2003 to
December 31, 2004, ranged from a high of $22.72 on November 1,
2004, to a low of $15.05 per share on March 19, 2003. The
closing sale price of the common stock on March 15, 2005,
which was the last trading day on which the common stock was
traded before announcement of the proposed reverse stock split
on March 16, 2005, was $20.00 per share.
Premium Over Market Price. In order to increase the value of
the transaction to those unaffiliated stockholders who hold
fewer than 125 shares pre-split and thus will be cashed out in
the reverse stock split, the Board decided to add a premium
over current market prices in determining the price to be paid
for fractional shares. The $23.50 price to be paid for
fractional shares includes a premium of $3.50 per share
(17.5%) over the last closing trading price of $20.00 prior to
the announcement of the split transaction on March 16, 2005,
and a premium of $2.49 per share (11.8%) over the average
closing trading price of $21.01 for the thirty calendar days
prior to March 16, 2005.
Net Book Value. As of December 31, 2004, the book value per
share of common stock was $18.33, and the $23.50 per share
price represents 128% of that book value.
Going Concern Value. Based on applicable Delaware law, the
Special Committee concluded that going concern value, in the
context of a reverse/forward stock split, should not be given
much weight, as stockholders cashed out in the transaction can
avoid its effects by purchasing a sufficient amount of stock
to survive the reverse stock split or by simply using the
payment received in the reverse stock split to purchase shares
of NEIB common stock after the transaction is effective. If
the cashed-out stockholders are awarded the value of NEIB as a
going concern, they, rather than NEIB and its continuing
stockholders, would receive a windfall. The cashed-out
stockholders could capture the full proportionate value of the
fractional interest, return to the market and buy new stock at
the market price, and realize the going concern value a second
time should NEIB ever merge or otherwise become subject to a
change of control transaction.
Liquidation Value. The Board did not consider the liquidation
value of the company when selecting the purchase price. A
liquidation analysis is not believed to be a relevant factor
because the liquidation of a bank or discontinuance of a
bank's operations is not considered to be a viable
alternative. Historically, banks have
21
generally only been liquidated in the event of insolvency or
receivership. Neither NEIB's management nor the Board has any
intention of liquidating the Bank.
Stock Repurchases. In reaching its determination as to
fairness of the $23.50 per share price, the directors
considered the purchase prices paid by the NEIB in previous
purchases pursuant to its stock repurchase programs. See
"Common Stock Purchase Information." In the past two years,
those prices ranged from $15.35 to $22.37 per share. The
directors did not consider these prices to be a material
factor in their consideration of the fairness of the split
transaction, because these purchase prices generally
approximated the then-market value of our common stock. As
discussed above, give the relatively low number of trades in
our common stock, we feel that market price is not necessarily
the most applicable measure of our common stock's fair value.
o Completing the split transaction at this time will allow us to
begin to realize cost savings, and will allow our management
to focus on long-term beneficial business prospects to our
stockholders, customers and communities.
We considered that some stockholders may prefer to continue as
stockholders of NEIB as an SEC-reporting company, which is a factor weighing
against the split transaction. However, we believe that the disadvantages of
remaining a public company subject to the registration and reporting
requirements of the SEC outweigh any advantages. We have no present intention to
raise capital through sales of securities in a public offering in the future or
to acquire other business entities using stock as the consideration for such
acquisition. Accordingly, we are not likely to make use of advantages that our
status as an SEC-reporting company may offer.
In view of the wide variety of factors considered in connection with its
evaluation of the split transaction, our Board of Directors did not find it
practicable to, and did not, quantify or otherwise attempt to assign relative
weights to the specific factors it considered in reaching its determinations.
We considered various alternative transactions to accomplish the proposed
transaction, but ultimately elected to proceed with the split transaction. The
following were the alternative transactions considered, but rejected:
o Tender Offer to Stockholders. Our Board of Directors
determined that it would require more funds to effect a tender
offer. In addition, there might not be a sufficient number of
record stockholders tendering their shares to reduce the
number of stockholders of record below 300, resulting in the
requirement of a second-step merger.
o Open Market Stock Repurchase. The Board considered announcing
a stock buy-back plan and purchasing shares on the open
market. Although the expenses associated with such a
transaction would be low, it might not result in the desired
reduction of stockholders of record. The Board determined that
an open market stock repurchase might not achieve the record
stockholder reduction objective.
o Cash-Out Merger. The Board considered a cash-out merger of the
company into a newly-formed corporation, with the conversion
of the outstanding shares occurring in the same general manner
and ratios as in the split transaction. This type of merger
would have the same net effect on our stockholders as the
split transaction. However, the Board determined that a
cash-out merger was not a preferable option because it did not
offer any advantages over the split transaction, but would
have required the formation of a new corporation, more
documentation than the split transaction, including a plan of
the merger, and likely increased costs.
22
o Business Combination. Although during the last 12 months, the
Board considered possible affiliations with other financial
institutions, it concluded that NEIB's stockholders would be
better served if NEIB achieved the cost savings attributable
to going private and focused on business strategies to enhance
stockholder value as an independent customer-oriented and
community-based financial institution.
o Maintaining the Status Quo. The Board considered maintaining
the status quo. In that case, we would continue to incur the
significant expenses, as outlined above, of being an
SEC-reporting company without the expected commensurate
benefits. Thus, the Board considered maintaining the status
quo not to be in our best interests or the best interests of
our stockholders and rejected this alternative.
Fairness of the Split Transaction
Based on a careful review of the facts and circumstances relating to the
split transaction, our Board of Directors believes that the split transaction
and the terms and provisions of the split transaction, including the cash to be
paid to non-continuing stockholders, are substantively and procedurally fair to
our affiliated and unaffiliated stockholders. Our Board of Directors unanimously
approved the split transaction.
Substantive Fairness
In concluding that the terms and conditions of the split transaction,
including the cash to be paid to the non-continuing stockholders, are
substantively fair to our unaffiliated stockholders, our Board of Directors
considered a number of factors.
The factors that our Board of Directors considered positive for all
unaffiliated stockholders, including both those that are continuing and
non-continuing stockholders, included the following:
o our smaller stockholders who prefer to remain as stockholders
of NEIB, despite the Board's recommendation, may elect to do
so by acquiring sufficient shares so that they hold at least
125 shares of common stock in their own names immediately
prior to the split transaction;
o beneficial owners who hold their shares in "street name," who
would be cashed out if they were record owners instead of
beneficial owners, and who wish to be cashed out as if they
were record owners instead of beneficial owners, can work with
their broker or nominee to transfer their shares into a record
account in their own name so that they will be cashed out; and
o stockholders receive limited benefit from our being an
SEC-reporting company because of our size and the limited
trading of our common stock.
In addition to the positive factors applicable to all of our stockholders
set forth above, the factors that the Board of Directors considered beneficial
for the unaffiliated stockholders that are non-continuing stockholders included:
o the cash price of $23.50 represents a 28.2% premium over the
book value of our common stock as of December 31, 2004, and a
14.3% premium over the ten-day average of the market prices of
our common stock on March 15, 2005, the day before the split
transaction was announced, and represents 19.4 times earnings
for 2004 (excluding the one-time $735,500 impairment charge
for agency preferred stock);
o the factors relating to the fairness of the $23.50 per share
price set forth on pages 19 and 20 hereof;
23
o our common stock trades infrequently, not trading at all on
105 of the 251 trading days during the twelve months ended
April 30, 2005, and with an average trading volume on the
trading days during that period of only 2,921 shares, a volume
that the Board felt did not provide our stockholders with
sufficient opportunity to readily obtain cash for a
significant number of shares;
o the cash to be paid to non-continuing in the split transaction
will provide certainty of value to those stockholders and
immediate liquidity for them; and
o no brokerage or other transaction costs are to be incurred by
them in connection with the transfer of their shares to the
company.
The factors that the Board of Directors considered positive for the
affiliated and unaffiliated stockholders that are continuing stockholders
included:
o they will continue to have the opportunity to participate in
our future growth and earnings;
o they will realize the potential benefits of termination of
registration of our common stock, including reduced expenses
as a result of no longer needing to comply with SEC reporting
requirements;
o the fact that we anticipate that our shares will continue to
be traded on the OTC Bulletin Board ("OTCBB") or in the pink
sheets electronic quotation system after the split
transaction, which will provide opportunities for continuing
stockholders to trade their shares in the future; and
o the two step structure of the split transaction will avoid
disruption to holders of 125 or more shares of our common
stock, who are not being cashed out in the transaction, by
avoiding the requirement that these stockholders forward their
stock certificates to the company for cash for fractional
shares of common stock and replacement stock certificates for
whole shares of common stock.
The Board also considered the per-share purchase price to be fair from the
perspective of continuing stockholders, as it was based on a price that willing
buyers and sellers pay for the shares on the market, and that the purchase of
shares in the split transaction at this price to be a good use of the company's
excess capital at this time.
The Board is aware of, and has considered, the impact of certain
potentially countervailing factors on the substantive fairness of the split
transaction to the unaffiliated non-continuing stockholders, including that:
o they will be required to surrender their shares involuntarily
in exchange for the cash-out price determined by the Board
without the opportunity to liquidate their shares at a time
and for a price of their choosing;
o they will not have the opportunity to participate in any of
our future growth, earnings and dividends; and
o they will be required to pay income tax on the receipt of cash
in the split transaction.
The factors that our Board of Directors considered as potentially negative
for the affiliated and unaffiliated stockholders that are continuing
stockholders included:
o they will have reduced access to our financial information
once we are no longer an SEC-reporting company, including
forms filed by our directors and executive officers reporting
changes in their beneficial ownership, although we do intend
to continue to provide the continuing stockholders with our
annual reports and NEIB and the Bank
24
will continue to be subject to the filing requirements of the
Office of Thrift Supervision and the Federal Deposit Insurance
Corporation;
o the continuing stockholders will lose certain anti-takeover
protections provided to public companies under Delaware law,
see "Effects of the Split Transaction on NEIB--Effect on
Statutory Anti-Takeover Protections;"
o the fact that future business partners might require more
information from us before entering into a business
relationship due to the lack of publicly available information
about us;
o the fact that we may have a lower public profile in our
community, which may be a negative factor with some of our
customers;
o the fact that continuing stockholders will lose certain
protections currently provided under the Securities Exchange
Act of 1934, such as limitations on short-swing transactions
by executive officers and directors under Section 16 of that
Act;
o the liquidity of our shares of common stock held by continuing
stockholders may be further reduced by the termination of the
registration of the common stock under the Securities Exchange
Act of 1934 and the delisting of the common stock from the
Nasdaq market. Future trading in our shares after we go
private if it occurs will only occur in the OTCBB, the pink
sheets electronic quotation system or in privately negotiated
sales;
o the company expects to pay approximately $545,000 (including
expenses) to effect the split transaction. This amount may
change as a result of trading activity in our shares between
the date hereof and the effective date of the split
transaction. The company anticipates that the book value per
share of common stock as of December 31, 2004, will be reduced
from $18.33 per share on a historical basis to $18.20 per
share on a pro forma basis, which represents a 0.7% change in
the book value per share of our common stock as a result of
the split transaction; and
o net income for the year ended December 31, 2004 would decrease
from $1,718 ($1.21 per share) on a historical basis to
approximately $1,652 (or $1.18 per share) on a pro forma basis
as a result of the split transaction.
Our Board of Directors believes that these potentially countervailing
factors did not, individually or in the aggregate, outweigh the overall
substantive fairness of the split transaction to our affiliated and unaffiliated
stockholders, whether they be continuing or non-continuing stockholders and that
the foregoing factors are outweighed by the positive factors previously
described.
Procedural Fairness
We believe that the split transaction is procedurally fair to our
unaffiliated stockholders, including those that are continuing stockholders and
those that are non-continuing stockholders. The factors that our Board of
Directors considered positive for all stockholders, including both continuing
and non-continuing stockholders, included the following:
o the split transaction is being effected in accordance with all
applicable requirements of Delaware law;
o our Board of Directors formed a Special Committee of
independent directors to represent stockholders who will be
cashed out in the split transaction;
25
o the Board obtained a fairness opinion from an independent
third party concerning the price to be paid to cash out
stockholders, and the Special Committee imposed no limitations
upon KBW with respect to the investigation made or procedures
followed in rendering its fairness opinion;
o the Special Committee retained and received advice from legal
counsel in evaluating the terms of the split transaction;
o management and the Board considered alternative methods of
effecting a transaction that would result in our becoming a
non-SEC reporting company, each of which was determined to be
impractical, more expensive than the split transaction, or
potentially ineffective in achieving the goals of providing
cash and value to the non-continuing stockholders as soon as
possible and eliminating the costs and burdens of public
company status;
o stockholders will have the opportunity to determine whether or
not they will remain stockholders after the split transaction
by acquiring sufficient shares so that they hold at least 125
shares immediately prior to the split transaction or selling
sufficient shares so that they hold fewer than 125 shares
immediately prior to the split transaction, so long as they
act sufficiently in advance of the split transaction so that
the sale or purchase is reflected in our stockholder records
by the close of business (local time) on the effective date of
the split transaction; and
o NEIB has sufficient cash resources to undertake the necessary
actions to finance the split transaction, with total
expenditures estimated at $545,000, and therefore the split
transaction should not materially affect our financial
condition and results of operations.
The Board is aware of, and has considered, the impact of the following
potentially countervailing factors, which affect both continuing and
non-continuing stockholders to the same degree, on the procedural fairness of
the split transaction:
o the transaction is not structured to require approval of at
least a majority of stockholders being cashed out in the split
transaction; however, we determined that any such voting
requirement would improperly usurp the power of the holders of
a majority of our outstanding shares to consider and approve
the proposed amendments as provided in our certificate of
incorporation and under Delaware law;
o no appraisal or dissenters' rights are available under
Delaware law to stockholders who dissent from the split
transaction; and
o we did not receive a valuation of our common stock by an
independent appraiser.
The Board of Directors believes that the foregoing potentially
countervailing factors did not, individually or in the aggregate, outweigh the
overall procedural fairness of the split transaction to our unaffiliated
stockholders, whether they are continuing or non-continuing stockholders, and
the foregoing factors are outweighed by the procedural safeguards previously
described.
In addition, with respect to the determination not to seek a valuation,
our Board felt that the fairness opinion to be given by KBW provided sufficient
procedural safeguards with respect to the cash to be paid to the non-continuing
stockholders, and determined that it would be unnecessary to incur the
additional cost associated with obtaining a valuation.
Because stockholders will have the opportunity to adjust their share
ownership levels and thereby elect whether or not to remain a stockholder, the
Board did not consider the absence of appraisal rights to be a significant
factor with respect to the split transaction.
26
We therefore believe that the split transaction is substantively and
procedurally fair to our affiliated and unaffiliated stockholders, including
those that are continuing stockholders and those that are non-continuing
stockholders, for the reasons and factors described above. In reaching this
determination, we have not assigned specific weights to particular factors, and
we considered all factors as a whole.
We have not made any provision in connection with the split transaction to
grant unaffiliated stockholders access to our corporate files or to obtain
counsel or appraisal services at our expense. With respect to unaffiliated
stockholders' access to our corporate files, our Board determined that this
proxy statement, together with our other filings with the SEC, provide adequate
information for unaffiliated stockholders. With respect to obtaining counsel or
appraisal services solely for unaffiliated stockholders at our expense, the
Board did not consider these actions necessary or customary. Our Board also
considered the fact that under Delaware corporate law, and subject to certain
conditions set forth under Delaware law, stockholders have the right to review
our relevant books and records of account.
Effects of the Split Transaction on Affiliates
The split transaction will impact both affiliated and non-affiliated
stockholders of the company. As used in this proxy statement, the term
"affiliated stockholder" means any stockholder who is a director or executive
officer of the company, and the term "unaffiliated stockholder" means any
stockholder other than an affiliated stockholder. As the affiliates of the
company are all believed to own over 125 shares of company common stock, the
effects of the split transaction on each of the affiliated stockholders will be
the same. We expect that our executive officers and directors will continue to
beneficially own approximately 290,609 shares as a group immediately after the
split transaction. For more information regarding the beneficial ownership of
directors and executive officers of the company, see "PROPOSAL 2--ELECTION OF
DIRECTORS OF NEIB--Voting Securities and Principal Holders Thereof."
Other potential effects of the split transaction which are unique to the
affiliated stockholders include the following:
o Reduced reporting requirements for officers and directors. The
directors and executive officers will no longer be subject to
the reporting and short-swing profit provisions under the
Securities Exchange Act of 1934 with respect to changes in
their beneficial ownership of our common stock.
o Share Ownership. If the split transaction occurs, we expect
that the percentage of beneficial ownership of common stock of
the company held by executive officers and directors of the
company as a group will increase from 19.7% to 20.0%,
resulting in greater voting power for affiliated stockholders
and less for non-affiliated stockholders.
o Net Book Value. The aggregate net book value of NEIB, as of
December 31, 2004, with respect to the directors' and
executive officers' relative ownership is expected to decrease
$27,022 from $4,255,031 to $4,228,008, or a decrease of
approximately .6%.
o Net Income. The directors' and executive officers' interest in
the net income of NEIB for 2004 would decrease from $280,663
on a historical basis to approximately $273,533 on a pro forma
basis as a result of the split transaction, a decrease of
approximately 2.5%.
27
Determination of Fairness of Split Transaction By Affiliates
J. David Carnes, M.D., Stephen E. Zahn, William A. Zimmer, Dan L. Stephan,
Michael S. Zahn, Randall C. Rider, Randy J. Sizemore, DeeAnn Hammel and Thomas
P. Frantz are considered "affiliates" of the company due to their positions in
senior management and/or on the Board of Directors of the company. The
affiliates who are not Board members reviewed the same information regarding the
split transaction that the Board reviewed and considered the same factors as the
Board of Directors. Each of these affiliates adopts the analysis of the Board of
Directors which is discussed in this proxy statement and has separately
determined that the split transaction is fair to affiliated and unaffiliated
stockholders.
Board Recommendation
Our Board of Directors believes the terms of the split transaction are
fair and in the best interests of our unaffiliated and affiliated stockholders
and unanimously recommends that you vote "FOR" the adoption of the amendments to
our certificate of incorporation that will allow us to effect the split
transaction.
Fairness Opinion of Financial Advisor
At a meeting of the Special Committee of our Board of Directors (the
"Committee") on March 16, 2005, Keefe, Bruyette, and Woods, Inc. ("KBW")
rendered an opinion as investment bankers as to the fairness, from a financial
point of view, to the stockholders of NEIB of the consideration received as a
result of cashing out their shares in conjunction with the proposed reverse
stock split. KBW's fairness opinion was addressed to the Board of Directors as
to the fairness of the offer price, from a financial point of view, to the
stockholders of NEIB who will be cashed out, of the consideration received as a
result reverse stock split. The Committee and the Board of Directors, based upon
the recommendation of the Committee, each unanimously approved the offer. KBW `s
opinion does not consider the merits of the Company's decision to privatize, but
addresses only the fairness of the consideration received for those stockholders
being cashed out.
The full text of the opinion of KBW, which is attached as Appendix B to
this document, sets forth certain assumptions made, matters considered and
limitations on the review undertaken by KBW, and should be read in its entirety.
The summary of the KBW opinion set forth in this document and is qualified in
its entirety by reference to the full text of the KBW's opinion. The opinion of
KBW is directed to the Board of Directors and does not constitute a
recommendation to any stockholder as to any action that such stockholder should
take in the offer, or otherwise.
In rendering its opinion, KBW reviewed the following materials relating to
the financial and operating condition:
o Annual reports to stockholders;
o Quarterly reports on Form 10-QSB;
o Certain internal financial analysis and forecasts of NEIB
prepared by management;
o Certain publicly available information concerning the trading
of NEIB common stock; and
o Certain publicly available information with respect to banking
companies and the terms of certain similar type transactions.
NEIB's internal forecasts projected growth in basic earnings per share
from $1.21 per share in 2004 (excluding the $735,000 non-cash impairment charge
with respect to agency securities) to $1.97 per share in 2008. These projections
were based on the assumptions that (1) NEIB would
28
not be a public company in 2006, (2) the company's employee stock ownership plan
would be terminated by 2007, (3) and the Chairman of the Board of the company
would retire by 2008. Other assumptions included loan growth of 6% per year,
deposit growth of 9% each year, and repurchases of 4-5% of the company's
outstanding shares each year. Numerous risks and uncertainties could cause the
company's actual results to be materially different from those projected,
including changes in general economic conditions, market interest rates,
monetary and fiscal policies of the federal government, legislative and
regulatory changes, and other factors disclosed periodically in the company's
securities filings.
KBW discussed with senior management and the Committee the current
position and prospective outlook, including the local economy and growth
prospects. KBW considered historical quotations, levels of activity and prices
of recorded transactions in the common stock and reviewed financial and stock
market data of other thrifts in a comparable asset range and with similar
operating characteristics to NEIB.
In rendering its opinion, KBW assumed and relied upon the accuracy and
completeness of the financial information that was provided. In its review, with
our consent, KBW did not undertake any independent verification of the
information provided by NEIB, nor did it make any independent appraisal or
evaluation of our assets or liabilities.
The following is a summary of the material financial analyses performed by
KBW in connection with providing its opinion of March 16, 2005:
Analysis of Recent Trading Activity of Comparable Thrift Institutions
KBW analyzed certain companies of comparable asset size and capital to
asset ratio performance. There were twenty-six companies in the comparable group
with the following characteristics: thrifts located in the Midwest region,
assets between $125 million and $600 million and tangible equity to assets
greater than 9%. The analysis summarizes the average and median trading
multiples of the comparable companies compared to NEIB's implied prices based
off of December 31, 2004 unaudited numbers.
Price to
- --------------------------------------------------------------------------------
Earnings Per Share
-----------------------
Last Twelve
Book Tangible Book Months Quarter
---- ------------- ------ -------
Average 119.8% 126.9% 20.0x 18.0x
Median 116.0% 117.6% 17.1x 17.0x
NEIB Implied:
Average Pricing $21.97 $23.27 $24.22 $21.72
Median Pricing $21.27 $21.55 $20.65 $20.56
Discounted Cash Flow Analysis
KBW used a discounted cash flow analysis that analyzed a stream of
dividends and a terminal multiple which incorporated a projection of our
financial operations and cash flow analysis over the next five years to
determine a theoretical valuation range assuming that we operate without
executing the reverse stock split. Key assumptions included:
o Estimated earnings per share for the five years as provided by
management
29
o Terminal multiple of 12.0x, which is the median price to
earnings per share for all thrifts from 2000 - 2004 and 14.5x,
which is the median price to earnings per share for NEIB from
2000 - 2004
o Discount rate range of 10.0% to 13.0%, based on the estimated
cost of equity capital for small capitalization financial
institutions of 11.7% published by Ibbotson Associates, a
recognized statistical source. The resulting discount rate was
widened to a range of 10.0% to 13.0% to provide flexibility in
assessing the potential changes in the risk profile of equity
markets in general and small capitalization financial
institutions in particular.
Sensitivity Analysis
Terminal Multiple
Discount Rate 10.0x 11.0x 12.0x 13.0x 14.0x
----------------------------------------------------------------------
13.0% $13.62 $14.74 $15.87 $16.99 $18.11
12.0% $14.19 $15.37 $16.54 $17.71 $18.89
11.7% $14.37 $15.56 $16.75 $17.94 $19.13
11.0% $14.79 $16.02 $17.25 $18.48 $19.71
10.0% $15.43 $16.71 $18.00 $19.28 $20.57
Terminal Multiple
Discount Rate 12.5x 13.5x 14.5x 15.5x 16.5x
----------------------------------------------------------------------
13.0% $16.43 $17.55 $18.67 $19.79 $20.92
12.0% $17.13 $18.30 $19.47 $20.65 $21.82
11.7% $17.34 $18.53 $19.72 $20.91 $22.10
11.0% $17.86 $19.09 $20.32 $21.55 $22.77
10.0% $18.64 $19.93 $21.21 $22.49 $23.78
Based on the assumptions, KBW's analysis implied that the theoretical
range of values was $13.62 to $20.57 at a terminal multiple of 12.0x and $16.43
to $23.78 at a terminal multiple of 14.5x. Discounted cash flow is a widely used
valuation methodology, but it relies on numerous assumptions, including
projected earnings, terminal values, and discount rates. This analysis does not
purport to be indicative of the actual values or expected values of our common
stock.
Other "Going Private" Transactions
KBW reviewed 13 financial institution reverse stock splits, reverse
mergers or tender offers completed since 2001 to determine the premium of the
reverse stock split price compared to the median trading price of the stock for
the thirty days prior to the announcement. The results were as follows:
Price Range - Premium to 30-day average stock price
---------------------------------------------------
Maximum 40.9%
Minimum (5.9)%
Median 15.9%
NEIB 10.4%
In determining fairness of the price to be paid to the certain
stockholders, this premium was applied to the various calculated market prices
obtained above. Given that the $23.50 per share consideration offered to
stockholders in the reverse stock split is greater than or within the
theoretical valuation ranges, KBW believes that this analysis supports the
fairness, from a
30
financial point of view, to the stockholders of NEIB of the consideration
received as a result of cashing out their shares in conjunction with the
proposed reverse stock split.
Analysis of Recent Comparable Acquisition Transactions
In order to determine the current market of recent merger transactions to
assist KBW in rendering its opinion, KBW analyzed certain comparable merger and
acquisition transactions of thrift deals, comparing the acquisition price
relative to tangible book value, latest twelve months earnings, and premium to
core deposits. This analysis was completed to determine the amount of
consideration that might be received based on a sale of the entire Company.
However, for purposes of this fairness opinion and for the reasons set forth in
the section on page 20 hereof dealing with "going concern value," KBW believes
that the consideration received by the stockholders does not have to represent a
change of control premium. The analysis included a comparison of the average and
median of the above ratios for representative acquisitions pending or completed
as of June 30, 2004, where the selling institution was a thrift located in the
Midwest and Southeast regions, had assets less than $550 million and tangible
capital ratio greater than 9%. As a result of these transaction criteria, the
following selling thrifts were used in analyzing comparable transactions:
Selling Institution
Citizens First Financial Corp. Generations Bank First Clermont Bank
Lawrence Financial Holdings Frankfort First Bancorp, Inc. HCB Bancshares, Inc.
Mississippi View Holding Co. Western Ohio Financial Corp. North Bancshares, Inc.
Chesterfield Financial Corp. DutchFork Bancshares, Inc. FSF Financial Corp.
NEIB is a thrift in the midwest region with an average tangible capital
ratio of 11.4% over the past five years, assets of $228 million, and a year to
date (YTD) return on average equity of 5.46%. The comparable group included 12
companies with assets ranging between $75 million to $51 million with an average
asset size of $233 million and a median asset size of $207 million. These
comparable companies had a YTD return on average equity ranging from 1.76% to
21.58%, with an average YTD return on average equity of 5.52% and a median YTD
return on average equity of 7.0%. For these reasons, KBW concluded that this was
an appropriate comparable group.
The transaction analysis resulted in a range of values for NEIB based upon
comparable thrift merger and acquisition transactions. KBW derived the median
pricing metrics of the aforementioned comparable group and summarized the
results of comparative thrift merger and acquisition transactions and compared
the range of values to the consideration being offered in the reverse stock
split. The comparable thrift merger and acquisition statistics are as follows:
Price to Price to Last 12 Core Deposit
Tangible Book Ratio Months Earnings Premium
- ------------------------------------------------------------------------------------------
Average 150.0% 31.4x 13.5%
Median 145.8% 30.5x 12.9%
NEIB Implied Pricing:
Average $26.38 $30.65 $25.72
Median $25.65 $29.82 $25.36
KBW viewed the aforementioned comparable group as the most appropriate in
deriving a comparable transaction value based on NEIB's size and earnings. KBW
viewed the fact that with the query based on the above criteria producing twelve
transactions with reported pricing metrics in the comparable group as being
statistically significant for the purposes of comparison. KBW
31
viewed the three resulting metrics (price to tangible book value, price to last
twelve months earnings and core deposit premium) from the comparable
transactions on a median basis, as the key metrics used in this phase of the
evaluation.
In preparing its analysis, KBW made numerous assumptions with respect to
industry performance, business and economic conditions and other matters, many
of such assumptions are beyond our control. The analyses performed by KBW is not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses and do not
purport to be appraisals or reflect the prices at which a companies securities
will trade.
KBW, as part of its investment banking business, is regularly engaged in
the evaluation of business and securities in connection with securities
transactions, mergers and acquisitions, negotiated transactions, and
distributions of listed and unlisted securities. KBW is familiar with the market
for common stocks of publicly traded banks, thrifts and bank and thrift holding
companies. The Committee selected KBW on the basis of the firm's reputation and
its experience and expertise in transactions similar to the offer.
KBW received a fee of $25,000 for issuing a fairness opinion regarding the
reverse stock split. NEIB has also agreed to reimburse KBW for all reasonable
out-of-pocket expenses and disbursements, which will not exceed $3,000, incurred
in connection with its engagement and to indemnify KBW and its affiliates and
their respective directors, officers, employees, agents, and controlling persons
against certain expenses and liabilities, including liabilities under securities
laws.
Availability of Documents
KBW's fairness opinion is attached as Appendix B to this proxy statement.
In addition, the fairness opinion will be made available for inspection and
copying at our principal executive offices, located at 648 North Jefferson
Street, Huntington, Indiana 46750, during our regular business hours by any
interested stockholder or representative who has been designated in writing. A
copy of these materials will also be sent to any interested stockholder or
representative who has been designated in writing, upon written request and at
the expense of the requesting stockholder.
Structure of the Split Transaction
The proposed transaction has been structured as a two-step stock split
transaction to allow small stockholders easily to obtain the fair value in cash
for their shares, to avoid disruption to stockholders of 125 or more shares who
would not be cashed out in the transaction, and to limit the costs of the split
transaction by avoiding costs associated with cashing out the fractional shares
of the holders of 125 or more shares of common stock and reissuing stock
certificates to those stockholders.
The Board elected to structure the transaction to take effect at the
record stockholder level, meaning that NEIB will look at the number of shares
registered in the name of a single holder on the company's records to determine
if that holder's shares will be cashed out. The Board chose to structure the
transaction this way in part because it determined that this method would
provide NEIB with the best understanding at the effective time of how many
stockholders would be cashed out and what the exact cost to the company would
be, because the company's transfer agent will be able to provide it with a
complete and final list of all record stockholders at the effective time. In
addition, the Board considered that effecting the transaction at the record
stockholder level would allow stockholders some flexibility with respect to
whether they will be treated as continuing or non-continuing stockholders. The
Board felt that this flexibility would
32
help to enhance the substantive fairness of the transaction to both continuing
and non-continuing stockholders.
If you hold your shares in "street name," you should talk to your broker,
nominee or agent to determine how they expect the split transaction to affect
you. Because other "street name" holders who hold shares in nominee name through
your broker, agent or nominee may adjust their holdings prior to the split
transaction, you may have no way of knowing whether you will be cashed out in
the transaction until it is consummated. However, because we think it is
unlikely that any brokerage firm or other nominee will hold in a single nominee
name fewer than 125 shares in the aggregate, we think it is likely that all
"street name" holders will remain continuing stockholders.
Effects of the Split Transaction on NEIB
The split transaction will have various effects on us, which are described
below.
Effect of the Proposed Transaction on Common Stock and Trading of Common
Stock
Our certificate of incorporation currently authorizes the issuance of
4,000,000 shares of common stock. The number of authorized shares of common
stock will remain unchanged after completion of the split transaction. As of the
record date, the number of outstanding shares of common stock was 1,411,921.
Based upon our best estimates, if the split transaction had been consummated as
of the record date, the number of outstanding shares of common stock would have
been reduced approximately 1.3% from 1,411,921 to approximately 1,393,066, cash
would have been paid for approximately 18,855 shares, and the number of record
stockholders would have been reduced from approximately 433 to approximately
174.
Our common stock is publicly traded on the Nasdaq National Market System
under the symbol NEIB, and we will not be able to trade our common stock on
NASDAQ after we become a private company. We anticipate that our common stock
will be traded on the OTCBB or in the pink sheets electronic quotation system
following the completion of the split transaction.
Termination of Securities Exchange Act Registration and Reporting
Requirements
Upon the completion of the split transaction, we expect that our common
stock will be held by fewer than 300 record stockholders. Accordingly, our
obligation to continue to file periodic reports with the SEC will be suspended
pursuant to Rule 12h-3 of the Securities Exchange Act of 1934.
The suspension of the filing requirement will substantially reduce the
information required to be furnished by us to our stockholders and to the SEC.
Therefore, we estimate that we will eliminate annual costs associated with these
filing requirements, which we estimate to be approximately $177,750 on an annual
basis. These annual costs are broken down as follows:
Description Amount
----------------------------------------- --------
Independent Auditors (SEC review work) $ 45,000
SEC Counsel $ 50,000
Staff and Executive Time $ 43,500
Printing and EDGAR Costs $ 10,500
Newswire Costs $ 4,250
Nasdaq Listing Fees $ 24,500
--------
Total $177,750
========
In addition, the company anticipates saving a one-time cost of
approximately $100,000 which
33
we estimate would be required to comply with Section 404 of SOX in 2006 if NEIB
does not go private and outsources the Section 404 compliance. Each year after
2006, additional costs associated with Section 404 compliance are also
anticipated and these could be as much as $50,000 per year.
We will apply for termination of the registration of our common stock and
suspension of our SEC reporting obligations as soon as practicable following
completion of the split transaction. Following completion of the split
transaction, we intend to continue to provide our stockholders with financial
information by continuing to disseminate annual reports.
Elimination of Non-Continuing Stockholders
As a result of the split transaction, all shares held by non-continuing
stockholders will be converted into the right to receive $23.50 in cash. As a
result, the non-continuing stockholders will not have the opportunity to
participate in our earnings and growth after the split transaction. Similarly,
the non-continuing stockholders will not face the risk of losses generated by
our operations or any decline in our value after the split transaction. For more
effects of the split transaction on our stockholders, see "--Fairness of the
Split Transaction."
Effect on Statutory Anti-Takeover Protections
As a result of the split transaction, NEIB will no longer be covered by
Section 203 of the Delaware General Corporation Law which is intended to
discourage certain takeover practices by impeding the ability of an acquiror to
engage in certain transactions with the target company.
In general, the statute provides that a "person" who owns 15% or more of
the outstanding voting stock of a Delaware corporation (an "interested
stockholder") may not consummate a merger or other business combination
transaction with such corporation at any time during the three-year period
following the date such person became an interested stockholder. The term
"business combination" is defined broadly to cover a wide range of corporate
transactions including mergers, sales of assets, issuances of stock,
transactions with subsidiaries and the receipt of disproportionate financial
benefits.
The statute exempts the following transactions from the requirements of
the statute:
o any business combination if, before the date a person became
an interested stockholder, the Board of Directors approved
either the business combination or the transaction which
resulted in the stockholder becoming an interested
stockholder;
o any business combination involving a person who acquired at
least 85% of the outstanding voting stock in the transaction
in which he became an interested stockholder, excluding, for
purposes of determining the number of shares outstanding,
shares owned by the corporation's directors who are also
officers and specific employee stock plans;
o any business combination with an interested stockholder that
is approved by the Board of Directors and by a two-thirds vote
of the outstanding voting stock not owned by the interested
stockholder; and
o certain business combinations that are proposed after the
corporation had received other acquisition proposals and which
are approved or not opposed by a majority of certain
continuing members of the Board of Directors.
Because by statute these provisions apply only to Delaware corporations
that have shares listed on a stock exchange or NASDAQ or with more than 2,000
stockholders, they will not apply to NEIB after we terminate our registration.
34
However, our Certificate of Incorporation provides that at least 80% of
the outstanding shares of voting stock must approve certain business
combinations involving an "interested stockholder" or any affiliate of an
"interested stockholder." An "interested stockholder" is generally a 10% or
greater stockholder. However, if a majority of directors not affiliated with the
interested stockholder approves the business combination or certain pricing and
disclosure criteria are satisfied, a majority vote of the outstanding shares is
sufficient to approve such a business combination. Moreover, in our certificate
of incorporation approval of holders of at least 80% of voting shares is
required subject to certain exceptions for any direct or indirect purchase or
other acquisition of equity securities from any interested person other than
certain acquisitions made on the same terms to all holders of such securities.
These provisions will remain applicable to NEIB following the split transaction.
Financial Effects of the Split Transaction
We expect that the split transaction and the use of approximately $545,000
in cash to complete the split transaction, which includes approximately $445,000
to be paid to non-continuing stockholders in exchange for their shares, and
approximately $100,000 in professional fees, printing and mailing costs, filing
fees and EDGAR costs, and other expenses related to the split transaction, will
not have any material adverse effect on our capital adequacy, liquidity, results
of operations or cash flow. The amount to be paid to non-continuing stockholders
may change as a result of trading activity in our shares between the date hereof
and the effective date of the split transaction. See "--Fees and Expenses" for a
description of the fees and expenses we expect to incur in connection with the
split transaction. See "--Financing of the Split Transaction" below for a
description of how the split transaction will be financed.
Effect on Options
Upon effectiveness of the split transaction, the number of shares of
common stock subject to outstanding options under NEIB's stock option plans and
the exercise prices of the options will remain the same.
Effect on Conduct of Business after the Transaction
We expect our business and operations to continue as they are currently
being conducted and the transaction is not anticipated to have any effect upon
the conduct of our business. Although we cannot guarantee the continued payment
of a dividend, we do not intend to change our current dividend policy or
practice at this time. No changes in our directors or executive officers are
anticipated to result from the split transaction.
Dividend Payments
The company has declared a dividend of $.15 per share payable to
stockholders of record on May 10, 2005. This dividend payment will be paid on
May 24, 2005. Stockholders who are cashed out in the split transaction will
receive that dividend if they were stockholders of record on May 10 2005. They
are not expected to receive any additional dividend payments on any dividend for
the June 30, 2005 quarter which will not be declared until July, 2005.
Plans or Proposals
As described above, NEIB during the last 12 months considered possible
affiliations with other financial institutions within and outside of its market
area although it never engaged in serious negotiations with any such potential
merger parties and is not engaged in any discussions with such parties at this
time. The company has no present plans to engage in a merger with or acquisition
of any financial institutions. Other than as described in this proxy statement,
neither
35
we nor our management has any current plans or proposals to effect any
extraordinary corporate transaction, either with respect to NEIB or the Bank,
such as a merger, reorganization or liquidation, to sell or transfer any
material amount of our or the Bank's assets, to change either our Board of
Directors or management, to change materially our indebtedness or
capitalization, or otherwise to effect any material change in our corporate
structure or business or that of the Bank. Although our management does not
presently have any intent to enter into any transaction described above, either
at the holding company or Bank level, nor is our management in negotiations with
respect to any such transaction, there is always a possibility that we may enter
into such an arrangement or transaction in the future, including, but not
limited to, entering into a merger or acquisition transaction, making a public
or private offering of our shares or entering into any other arrangement or
transaction we may deem appropriate. In such event, our continuing stockholders
may receive payment for their shares in any such transaction lower than, equal
to or in excess of the amount paid to the non-continuing stockholders in the
split transaction. Any acquisition strategy is dependent upon the opportunities
that might arise, and there can be no certainty that any such transactions will
occur.
Interests of Certain Persons in the Split Transaction
It is not anticipated that the split transaction will have any effect on
the directors and executive officers of NEIB and the Bank, other than with
respect to their relative share ownership. We expect that all of our directors
and executive officers will hold more than 125 shares at the effective time of
the split transaction, and therefore all of those directors and executive
officers will continue to own shares after the split transaction.
Because total outstanding shares will be reduced, the executive officers
and directors as a group will hold a larger relative percentage of the company.
As of the record date, these directors and executive officers collectively
beneficially held 209,609 shares, or 19.8% of our common stock. Based upon our
estimates, taking into account the effect of the split transaction on our
outstanding shares as described above, the directors and executive officers will
beneficially hold 20.9% of our common stock following the split transaction.
This represents a potential conflict of interest because the directors of
NEIB approved the split transaction and are recommending that you approve it.
Despite this potential conflict of interest, the Board believes the proposed
split transaction is fair to our unaffiliated stockholders for the reasons
discussed in this proxy statement
Financing of the Split Transaction
NEIB expects that the split transaction will require approximately
$545,000 in cash, which includes approximately $445,000 to be paid to
non-continuing stockholders in exchange for their shares and approximately
$100,000 in professional fees, printing and mailing costs, filing fees and EDGAR
costs, and other expenses payable by us related to the split transaction. See
"--Fees and Expenses" for a breakdown of the expenses associated with the split
transaction. The amount payable to non-continuing stockholders may change as a
result of trading activity in our shares between the date hereof and the
effective date of the split transaction. NEIB has sufficient working capital at
the holding company level to pay these amounts or projected increases in these
amounts.
Federal Income Tax Consequences
The following discusses the material federal income tax consequences to us
and our stockholders that would result from the split transaction. No opinion of
counsel or ruling from the Internal Revenue Service has been sought or obtained
with respect to the tax consequences of the split transaction, and the
conclusions contained in this summary are not binding on the
36
Internal Revenue Service. This discussion is based on existing U.S. federal
income tax law, which may change, even retroactively. This discussion does not
discuss all aspects of federal income taxation that may be important to you in
light of your individual circumstances. In particular, it does not address the
federal income tax considerations applicable to certain types of stockholders,
such as: financial institutions; insurance companies; tax-exempt organizations;
dealers in securities or currency; traders in securities that elect
mark-to-market; persons who hold our common stock as part of a straddle, hedge,
risk reduction, constructive sale, or conversion transaction; persons who are
considered foreign persons for U.S. federal income tax purposes, or who acquired
their shares of NEIB common stock through the exercise of an employee stock
option or otherwise as compensation. In addition, this discussion does not
address any state, local, foreign or other tax considerations. This discussion
also assumes that you have held and, in the case of continuing stockholders will
continue to hold, your shares as capital assets within the meaning of the
Internal Revenue Code of 1986, as amended, which we refer to as the Code.
Stockholders are encouraged to consult their own tax advisor as to the
particular federal, state, local, foreign and other tax consequences of the
split transaction, in light of their individual circumstances.
NEIB and the Bank. The split transaction will constitute a tax-free
"recapitalization" for federal income tax purposes, within the meaning of
Section 368(a)(1)(E) of the Code, meaning that neither NEIB nor the Bank will
recognize any gain or loss with respect to the transaction.
Affiliated and Unaffiliated Stockholders Who Receive No Cash. If you
continue to hold NEIB common stock immediately after the split transaction, and
you receive no cash as a result of the split transaction, then you will not
recognize any gain or loss or dividend income in connection with the transaction
and you will have the same adjusted tax basis and holding period in your NEIB
common stock as you had in such stock immediately prior to the split
transaction.
Affiliated and Unaffiliated Stockholders Who Receive Cash. If you receive
cash as a result of the split transaction and do not continue to hold shares of
NEIB common stock immediately after the split transaction, you will be treated
as having had your shares redeemed by NEIB and you will recognize gain or loss
on the redeemed shares equal to the difference between the cash and your
adjusted tax basis in the redeemed shares. Any recognized gain will be treated
as capital gain unless the receipt of cash is deemed to have the effect of a
dividend under Section 302 of the Code, in which case the gain will be treated:
(a) first, as a taxable dividend to the extent of your allocable share of NEIB's
accumulated earnings and profits, if any; (b) second, as a tax-free return of
capital to the extent of your adjusted tax basis in the redeemed shares; and (c)
finally, any remaining amount as capital gain. Under the principles of Section
302, you will recognize capital gain rather than dividend income with respect to
the cash received if the redemption is (1) "not essentially equivalent to a
dividend," (2) is "substantially disproportionate," or (3) is a "complete
termination" of the your interest in NEIB. In applying the principles of Section
302, the constructive ownership rules of Section 318 of the Code will apply in
determining your ownership interest in NEIB. Whether a redemption by NEIB is
"not essentially equivalent to a dividend" with respect to you will depend on
whether the redemption was a "meaningful reduction" of your interest in NEIB
based on the facts and circumstances. For example, if (1) you exercise no
control over the affairs of NEIB (e.g., you are not an officer, director, or
high ranking employee), (2) your relative stock interest in NEIB is minimal, and
(3) your post-split transaction ownership percentage is less than your pre-split
transaction ownership percentage, then your receipt of cash would be generally
regarded as "not essentially equivalent to a dividend." A redemption would be
"substantially disproportionate" and, therefore, would not have the effect of a
distribution of a dividend with respect to you if the percentage of NEIB shares
of common stock actually and constructively owned by you immediately after the
redemption is less than 80% of the percentage of all shares of NEIB common stock
actually and constructively owned by you
37
immediately before the redemption. Your interest in NEIB is "completely
terminated" if all of the NEIB shares common stock actually and constructively
owned by you are redeemed, unless you make a waiver of family attribution
election and file it with the Internal Revenue Service pursuant to Section
302(c) of the Code in which case the NEIB common stock constructively owned by
you does not have to be redeemed.
Any capital gain will be long-term capital gain subject to a rate not to
exceed 15% if, as of the date of the exchange, the holding period for your NEIB
shares is greater than one year. Any gain recognized by you and classified as a
dividend under Section 302 of the Code will be treated as either ordinary income
or qualified dividend income. Any gain treated as qualified dividend income will
be taxable to you, if you are an individual stockholder, at the long-term
capital gains rate, provided that you held the shares giving rise to such income
for more than 61 days during the 121 day period beginning 60 days before the
closing date. Gain treated as ordinary income will be taxed at ordinary income
rates.
In all other cases, if you receive cash in lieu of a fractional share of
NEIB common stock, and immediately after the split transaction you
constructively own shares of NEIB common stock, the cash you receive will be
treated: (1) first, as a taxable dividend to the extent of your ratable share of
NEIB's accumulated earnings and profits; (2) then, if the total amount of cash
paid in the split transaction exceeds NEIB's accumulated earnings and profits,
as a tax-free return of capital to the extent of your adjusted tax basis in the
redeemed shares; and (3) finally, to the extent of the cash in excess of your
adjusted tax basis in the redeemed shares, as capital gain from the sale or
exchange of the redeemed shares.
Payments of cash to you for the surrender of your redeemed shares of NEIB
common stock will be subject to information reporting and "backup" withholding
at a rate of 28% of the cash payment, unless you furnish NEIB with your taxpayer
identification number in the manner prescribed in applicable Treasury
Regulations, certify that such number is correct, certify as to no loss of
exemption from backup withholding, and satisfy certain other conditions. Backup
withholding is not an additional tax. Any amounts withheld from payments to you
under the backup withholding rules will be allowed as a refund or credit against
your United States federal income tax liability, provided the required
information is furnished to the Internal Revenue Service.
As explained above, the amounts paid to you as a result of the split
transaction may result in dividend income, capital gain income, or some
combination of dividend and capital gain income to you depending on your
individual circumstances. The foregoing discussion of material United States
federal income tax consequences of the split transaction set forth above
represents general information only and is based upon the Code, its legislative
history, existing and proposed regulations thereunder, published rulings and
decisions, all as currently in effect as of the date hereof, and all of which
are subject to change, possibly with retroactive effect. You should consult your
tax advisor as to the particular federal, state, local, foreign and other tax
consequences of the split transaction, as well as the applicability of the
alternative minimum tax to you, in light of your specific circumstances.
Appraisal Rights and Dissenters' Rights
No appraisal or dissenters' rights are available under Delaware law to
stockholders who dissent from the split transaction. There may exist other
rights or actions under Delaware law or federal or state securities laws for
stockholders who can demonstrate that they have been damaged by the split
transaction. Although the nature and extent of these rights or actions are
uncertain and may vary depending upon facts or circumstances, stockholder
challenges to
38
corporate actions in general are related to the fiduciary responsibilities of
corporate officers and directors and to the fairness of corporate transactions.
Regulatory Requirements
In connection with the split transaction, we will be required to make a
number of filings with, and obtain a number of approvals from, various federal
and state governmental agencies, including:
o filing of amendments to NEIB's certificate of incorporation
with the Delaware Secretary of State, in accordance with
Delaware law; and
o complying with federal and state securities laws, including
filing of this proxy statement on Schedule 14A and a
transaction statement on Schedule 13E-3 with the SEC.
Accounting Treatment
We anticipate that we will account for the split transaction by treating
the shares repurchased in the split transaction as treasury shares.
Fees and Expenses
We will be responsible for paying the split transaction related fees and
expenses, consisting primarily of fees and expenses of our financial advisor,
attorneys, printing and mailing costs, filing fees and EDGAR costs, and other
related charges. We estimate that our expenses will total approximately
$100,000, assuming the split transaction is completed. This amount consists of
the following estimated fees:
Description Amount
------------------------------------- --------
KBW fees and expenses $ 28,000
Legal fees and expenses $ 32,000
Paying agent fees and expenses $ 5,000
Printing and mailing costs $ 20,000
Filing Fees and EDGAR charges $ 2,000
Miscellaneous expenses $ 5,000
Proxy Solicitor Fees $ 8,000
--------
Total $100,000
========
SELECTED HISTORICAL AND PRO FORMA FINANCIAL DATA
Set forth below is our selected historical and pro forma consolidated
financial information. The historical financial information was derived from the
audited consolidated financial statements (including the balance sheets,
statements of income, changes in stockholders' equity and statements of cash
flows as of December 1, 2004 and 2003 and for the three years ending December
31, 2004) included in our Annual Report on Form 10-KSB for the fiscal year ended
December 31, 2004, and from other information and data contained in the Annual
Report. The Annual Report is incorporated herein by reference in its entirety.
More comprehensive financial information is included in the Annual Report. The
financial information that follows is qualified in its entirety by reference to,
and should be read in conjunction with, the Annual Report, and all of the
financial statements and related notes contained in the Annual Report, copies of
which may
39
be obtained as set forth below under the caption "Other Matters--Where You Can
Find More Information."
The following summary pro forma balance sheet data is based on historical
data, adjusted to give effect to the cash payment for fractional shares
resulting from the transaction and expenses related to the transaction. The pro
forma balance sheet data is based on the assumption that an aggregate of 18,855
shares will result in fractional shares and will be purchased for approximately
$445,000, with $100,000 in costs incurred.
The following summary unaudited income statement data gives effect to the
transaction as if it had occurred on January 1, 2004. The pro forma information
set forth below is not necessarily indicative of what our actual financial
position would have been had the transaction been consummated as of the above
referenced dates or of the financial position that may be reported by us in the
future.
40
NORTHEAST INDIANA BANCORP, INC.
SELECTED CONSOLIDATED FINANCIAL INFORMATION
(Dollars in thousands, except share data)
December 31, 2004 Change Pro Forma
- -------------------------------------------------------------------------------------------
Cash, investments and cash equivalents $ 42,349 (545) $ 41,804
Loans 174,800 -- 174,800
Other assets 11,523 34 11,557
Total assets $228,672 $228,161
======== ========
Deposits $123,951 -- $123,951
Other borrowings 77,067 -- 77,067
Other liabilities 1,608 -- 1,608
-------- --------
Total liabilities $202,626 $202,626
======== ========
Common Stock $ 26 -- $ 26
Surplus 11,758 (445) 11,313
Retained earnings 14,299 (66) 14,233
Accumulated other comprehensive income (loss) (37) -- (37)
-------- --------
Total Stockholders Equity $ 26,046 $ 25,535
======== ========
Interest Income $ 12,103 (10) $ 12,093
Interest Expense 5,715 -- 5,715
Provision for loan losses 38 -- 38
-------- --------
Net interest income $ 6,350 $ 6,340
Noninterest Income $ 1,456 -- $ 1,456
Noninterest Expense $ 5,477 (100) $ 5,577
-------- --------
Income before income taxes $ 2,329 (110) $ 2,219
Income tax expense 611 (44) 567
-------- --------
Net income from continuing operations* $ 1,718 (66) $ 1,652
======== ========
Basic earnings per share $ 1.21 (.03) $ 1.18
Diluted earnings per share $ 1.17 (.03) $ 1.14
Book value per share $ 18.33 (.13) $ 18.20
*Without non-cash impairment charge of $735,500
41
MARKET PRICE OF NORTHEAST INDIANA BANCORP, INC.
COMMON STOCK AND DIVIDEND INFORMATION
The Company's shares are traded on the Nasdaq National Market System under
the trading symbol "NEIB."
Sales Prices Per Share
----------------------
Quarter ending High Low Dividends Paid Per Share
- --------------------- ---------- ---------- ------------------------
Through May 4, 2005 $21.50 $19.80 --
March 31, 2005 $21.85 $20.00 $0.15
December 31, 2004 $22.72 $20.10 $0.15
September 30, 2004 $22.00 $20.07 $0.14
June 30, 2004 $22.35 $21.00 $0.14
March 31, 2004 $21.49 $19.95 $0.14
December 31, 2003 $22.00 $18.15 $0.14
September 30, 2003 $21.25 $18.18 $0.13
June 30, 2003 $20.02 $15.50 $0.13
March 31, 2003 $16.20 $15.05 $0.13
There were 433 record holders of our common stock on April 26, 2005.
We do not have a formal dividend policy. Regulations issued by the Office
of Thrift Supervision govern the Bank's capital requirements and may affect the
amount of dividends we can pay. Generally, the timing and amount of future
dividends on our shares will depend on earnings, cash requirements, our and the
Bank's financial condition, applicable government regulations and other factors
that our Board deems relevant.
Under the Delaware Business Corporation Law we may pay dividends from our
surplus or net profits for the fiscal year in which the dividend is paid and/or
the preceding fiscal year.
COMMON STOCK PURCHASE INFORMATION
NEIB has effected the following repurchases of its shares during the last
two fiscal years:
Total Number of Average Price
Quarter Ended Shares Purchased Range of Prices Paid Paid Per Share
- ------------- ---------------- -------------------- --------------
12/31/04 16,130 $22.11 - $22.37 $22.24
9/30/04 44,260 $21.46 - $22.23 $21.86
6/30/04 30,186 $21.66 - $22.35 $21.95
3/31/04 16,750 $20.91 - $21.50 $21.15
12/31/03 6,200 $20.95 - $21.37 $21.19
9/30/03 -- -- --
6/30/03 18,965 $16.35 - $17.90 $16.86
3/31/03 29,163 $15.35 - $16.12 $15.51
Under a previously announced repurchase program, there are 31,280 shares
remaining available for repurchase by NEIB at this time. NEIB has suspended its
repurchase program during the period that proxies are being solicited for the
annual meeting of stockholders.
Within the past 60 days, none of NEIB, the Bank, the Bank's ESOP, the
Bank's 401(k) plan, or their affiliates, directors, executive officers or
subsidiaries have made any purchases of NEIB common stock, provided that since
March 1, 2005, the Bank's 401(k) plan has purchased 244
42
shares of company common stock for an average price of $20.79 per share and NEIB
repurchased 20,358 shares at an average price of $21.35 per share.
PROPOSAL 2 -- ELECTION OF DIRECTORS OF NEIB
In addition to the consideration of the split transaction, the
stockholders of NEIB are also being asked to vote on the election of two
directors to serve until 2008. The directors nominees are J. David Carnes, M.D.,
and William A. Zimmer, each of whom currently serves on the Board of Directors
of NEIB and the Bank. This section of this proxy statement contains certain
information about NEIB relating to the directors and director nominees of NEIB.
THE NEIB BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR" THE
DIRECTOR NOMINEES, NAMELY, J. DAVID CARNES, M.D., AND WILLIAM A. ZIMMER.
Voting Securities and Principal Holders Thereof
The following table sets forth as of April 26, 2005, information regarding
beneficial share ownership of: (i) those persons or entities known by us to
beneficially own more than five percent of NEIB common stock; (ii) each member
of the NEIB Board of Directors; (iii) each executive officer of NEIB named in
the Summary Compensation table appearing under "Executive Compensation" below;
and (iv) all current directors and executive officers of NEIB as a group. The
address of each of the beneficial owners, except where otherwise indicated, is
the same address as NEIB. NEIB only has one class of voting security, NEIB
common stock. Information in the table below is being provided with respect to
beneficial ownership of NEIB common stock.
Shares
Beneficially Percent
Beneficial Owner Owned of Class
- ----------------------------------------------------- ------------ --------
Northeast Indiana Bancorp, Inc. Employee Stock
Ownership Plan ("ESOP") 147,890(1) 10.5%
First Manhattan Co.
437 Madison Avenue
New York, New York 10022 111,290(2) 7.9%
Stephen E. Zahn, Chairman of the Board, President
and Chief Executive Officer 175,672(3) 12.1%
Dan L. Stephan, Director 10,000(4) .7%
J. David Carnes, Director 24,840(5) 1.8%
Randall C. Rider, Director 8,998(6) .6%
William A. Zimmer, Director 3,350(7) .2%
Michael S. Zahn, Director and Senior Vice President 27,296(8) 1.9%
Directors and executive officers as a group (9 persons) 290,609(9) 19.7%
43
(1) Pursuant to a filing on Schedule 13G filed on February 7, 2005, the amount
reported represents 147,890 shares of common stock held by the ESOP,
120,405 of which have been allocated to accounts of participants as of the
record date. Peoples Federal Savings Bank is the trustee of the ESOP and
may be deemed to beneficially own the shares held by the ESOP which have
not been allocated to accounts of participants. Participants in the ESOP
are entitled to instruct the ESOP trustee as to the voting of the shares
allocated to their ESOP accounts. For each issue voted upon by the
stockholders of NEIB, the unallocated shares held by the ESOP are voted by
the ESOP trustee in the same proportion as the participants who directed
the trustee as to the voting of the shares allocated to their plan
accounts. Allocated shares as to which the ESOP trustee receives no voting
instructions are voted by the trustee in its discretion.
(2) As reported on Schedule 13G/A filed on February 8, 2005. First Manhattan
Co. reports that it has sole voting and dispositive power over 108,290 of
the shares listed above, and shared voting and dispositive power over
3,000 shares.
(3) The amount of shares beneficially owned by Mr. S. Zahn includes: (i)
27,667 shares owned directly; (ii) 39,009 shares held jointly by Mr. S.
Zahn and his wife; (iii) 4,673 shares held by Mr. S. Zahn's wife; (iv)
26,908 shares allocated to Mr. S. Zahn's ESOP account as of December 31,
2004; (v) 37,565 shares which Mr. S. Zahn has the right to acquire
pursuant to stock options that are exercisable at or within 60 days of the
record date; (vi) 2,668 shares held in Mr. S. Zahn's 401(k) account as of
the record date; and (vii) 37,182 shares held in a revocable trust as to
which Mr. S. Zahn is a trustee. On November 17, 2003, Mr. S. Zahn and
certain associated family members including Alyce M. Zahn, Michael S. and
Susan E. Zahn, Jamie M. and Jodie Z. Groves, Michael C. and Julie A.
Jennings, and Scott and Cherie Z. Axelrod, received permission from the
Office of Thrift Supervision ("OTS") to acquire up to nineteen percent
(19%) of the issued and outstanding shares of NEIB common stock.
(4) The amount of shares beneficially owned by Mr. Stephan includes: (i) 8,198
shares owned directly and (ii) 1,802 shares which Mr. Stephan has the
right to acquire pursuant to stock options that are exercisable at or
within 60 days of the record date.
(5) The amount of shares beneficially owned by Dr. Carnes includes: (i) 8,563
shares owned directly; (ii) 9,075 shares held jointly by Dr. Carnes and
his wife; and (iii) 7,202 shares which Dr. Carnes has the right to acquire
pursuant to stock options that are exercisable at or within 60 days of the
record date.
(6) These shares are beneficially owned directly by Mr. Rider.
(7) The amount of shares beneficially owned by Mr. Zimmer includes 1,000
shares of restricted stock, 1,350 shares held jointly by Mr. Zimmer and
his spouse, and 1,000 shares subject to options exercisable within 60 days
of the record date. This amount does not include 8,000 shares subject to
options that are not exercisable within 60 days of the record date.
(8) The amount of shares beneficially owned by Mr. M. Zahn includes: (i)
13,220 shares owned directly; (ii) 5,896 shares allocated to Mr. M. Zahn's
ESOP account as of December 31, 2004; (iii) 7,380 shares which Mr. M. Zahn
has the right to acquire pursuant to stock options that are exercisable at
or within 60 days of the record date, and (iv) 800 shares of restricted
stock. The amount does not include 500 shares subject to stock options
which are not exercisable within 60 days of the record date.
(9) The amount includes shares held directly, as well as jointly with family
members, shares held in retirement accounts, in a fiduciary capacity, by
certain family members or by trusts of which the director or executive
officer is a trustee or substantial beneficiary, with respect to which the
individual may be deemed to have sole or shared voting and/or dispositive
power. The amount also includes an aggregate of 59,949 shares which
directors and executive officers as a group have the right to acquire
pursuant to stock options that are exercisable at or within 60 days of the
record date and an aggregate of 48,321 shares allocated to the ESOP
accounts of the executive officers as of December 31, 2004, and an
aggregate of 4,894 shares allocated to the 401(k) plan accounts of
executive officers as of the
44
record date. The amount does not include 15,000 shares subject to options
not exercisable within 60 days of the record date.
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of NEIB's outstanding shares of
common stock, to file with the SEC initial reports of ownership and reports of
changes in ownership of common stock of NEIB. Officers, directors and greater
than 10% stockholders are required by SEC regulation to furnish us with copies
of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and the written representations that no other reports were
required, all Section 16(a) filing requirements applicable to our officers,
directors and greater than 10% beneficial owners were complied with during the
fiscal year ended December 31, 2004.
Directors
Our Board of Directors currently consists of six members, each of whom is
also a director of First Federal Savings Bank. Directors are generally elected
to serve for three-year staggered terms or until their respective successors
have been elected and qualified. Approximately one-third of the directors are
elected annually.
The following table sets forth certain information regarding the Board of
Directors, including each director's term of office and the Board nominees for
election. The nominees have consented to being named in this proxy statement and
have agreed to serve if elected. If a nominee is unable to stand for election,
the Board of Directors may either reduce the number of directors to be elected
or select a substitute nominee. If a substitute nominee is selected, the proxy
holders will vote your shares for the substitute nominee, unless you have
withheld authority. Except as described herein, there are no arrangements or
understandings between any director or nominee and any other person pursuant to
which such director or nominee was selected.
Position(s) Held with Director Term
Name Northeast Indiana Bancorp Age (1) Since (2) Expires
- -------------------- ----------------------------- ------- --------- -------
Nominees
J. David Carnes Director 53 1991 2008
William A. Zimmer Director 52 2003 2008
Directors Continuing in Office
Randall C. Rider Director 54 1989 2006
Dan L. Stephan Director 57 1987 2007
Michael S. Zahn Director and Senior Vice President 35 2000 2006
Stephen E. Zahn Chairman of the Board, President
and Chief Executive Officer 62 1965 2007
- ----------
(1) At December 31, 2004.
(2) Includes service as a director of First Federal Savings Bank.
The business experience of each director is set forth below. All directors
have held their present positions for at least the past five years, except as
otherwise indicated.
J. David Carnes, MD. Dr. Carnes has, since 1981, practiced medicine in
Huntington, Indiana.
Stephen E. Zahn. Mr. S. Zahn is the Chairman of the Board, President and
Chief Executive Officer of NEIB and Chairman of the Board and Chief Executive
Officer of the Bank.
45
Mr. S. Zahn has served in such capacities for over ten years and also served as
President of the Bank since 1980, until Michael S. Zahn assumed that position in
2005. Mr. S. Zahn is the father of Michael S. Zahn, Director of NEIB and
Director and President of the Bank.
Michael S. Zahn. Mr. M. Zahn became President of the Bank on January 1,
2005. Mr. M. Zahn joined the Bank in 1996 as a loan officer. Prior to his
employment with the Bank, Mr. Zahn worked as a Senior Underwriter for a regional
insurance carrier. Mr. M. Zahn is the son of Stephen E. Zahn, Chairman of the
Board, President and Chief Executive Officer of NEIB and the Bank.
Randall C. Rider. Mr. Rider is President of Lime City Manufacturing Co.,
Inc., a position he has held since 1983.
Dan L. Stephan. Mr. Stephan is a retired State Representative to the
Indiana Legislature, a position he was first elected to in 1980 and retired at
end of 1998. Mr. Stephan is also employed as a sales representative for the
Variable Annuity Life Insurance Company.
William A. Zimmer. Mr. Zimmer founded the W.A. Zimmer Co., a home
improvement company based in Huntington, Indiana, in 1976 and currently serves
as President.
The Board of Directors has affirmatively determined that Directors Carnes,
Rider, Stephan, and Zimmer are "independent" under the definition of
independence contained in the National Association of Securities Dealers'
listing standards for the Nasdaq Stock Market.
Executive Officers
The business experience of the executive officers who are not also
directors is set forth below.
Randy J. Sizemore is Senior Vice President, Treasurer and Chief Financial
Officer, positions he has held since April 2002. Prior to joining First Federal,
Mr. Sizemore held positions in a similar capacity with another bank holding
company and its subsidiary since 1999, and prior to that he performed similar
job functions for another bank holding company. Mr. Sizemore has a total of 11
years experience working with financial institutions.
DeeAnn Hammel is Senior Vice President, Secretary and Chief Operations
Officer, positions she has held since March 1995. Ms. Hammel first joined First
Federal in 1975 as a teller. Ms. Hammel is responsible for directing and
controlling First Federal's daily activities.
Thomas P. Frantz is Senior Vice President and Chief Lending Officer,
positions he has held since October 2001. Prior to joining First Federal, Mr.
Frantz held positions in a lending capacity for another bank since 1995. Mr.
Frantz has a total of 29 years experience working with financial institutions.
Meetings and Committees of the Board of Directors
Board and Committee Meetings of Northeast Indiana Bancorp. Meetings of
NEIB's Board of Directors are generally held on a monthly basis. The Board of
Directors met twelve times during fiscal 2004. During fiscal 2004, no incumbent
director attended fewer than 75% of the total number of Board meetings and the
total number of meetings held by the Board committees on which he served.
The Board of Directors has standing Audit, Nominating, Proxy and
Compensation Committees. We do not have a standing executive committee.
The Audit Committee reviews audit reports and related matters with respect
to compliance with regulations and internal policies and procedures. This
committee also engages and sets
46
compensation for an accounting firm to perform the annual audit and acts as a
liaison between the auditors and the Board. The current members of this
committee are Directors Rider (Chairman), Stephan, Carnes and Zimmer. This
Committee met four times during fiscal 2004. For additional information
regarding the Audit Committee, see "Audit Committee Matters" below.
The Proxy Committee meets annually to review proxies for the current year
prior to the annual meeting. Members of the committee are Directors Stephen Zahn
and Michael Zahn. This Committee met one time during fiscal 2004.
The Compensation Committee establishes our compensation policies and
reviews compensation matters. The current members of this committee are
Directors Stephan, Rider, Carnes and Zimmer. These members meet the standards
for independence for compensation committee members prescribed by the National
Association of Securities Dealers, Inc. This committee met two times during
fiscal 2004.
Audit Compensation Nominating Proxy
Director Committee Committee Committee Committee
- ------------------- ----------- -------------- ------------ -----------
Stephen E. Zahn Chairman
J. David Carnes Member Member
Michael S. Zahn Member
Randall C. Rider Chairman Member Member
Dan L. Stephan Member Chairman Member
William A. Zimmer Member Member
Nominating Committee Matters
The Nominating Committee meets annually in order to nominate candidates
for membership on the Board of Directors. The Nominating Committee met one time
during fiscal 2004. This committee is comprised of Board members who are not up
for election, and are "independent" under the definition of independence
contained in the National Association of Securities Dealers' listing standards
for the nominating committee members. Current members of this Committee are
Directors Carnes and Stephan. The Nominating Committee does not have a written
charter.
The Nominating Committee considers candidates for membership on the Board
of Directors from any reasonable source, including stockholder recommendations,
provided such nominees are recommended in accordance with the nominating
procedures set forth in NEIB's By-Laws. The Nominating Committee does not
evaluate candidates differently based on who has made the proposal.
The Nominating Committee believes that candidates for membership on the
Board of Directors must exhibit certain minimum characteristics: namely, good
business judgment and an even temperament, high ethical standards, leadership
skills, financial stability, a healthy view of the relative responsibilities of
a Board member and management, intelligence and the ability to articulate and to
think independently. In selecting candidates and approving nominees for open
Board positions, the Nominating Committee will make every effort to ensure that
the Board of Directors and its committees include at least the number of
independent directors, as that term is defined and as may be required by SOX and
applicable standards promulgated by NASDAQ and the SEC, and any other applicable
requirements.
Audit Committee Matters
Audit Committee Report. The Audit Committee of the Board of Directors of
NEIB has issued the following report with respect to the audited consolidated
financial statements of NEIB as of and for the fiscal year ended December 31,
2004:
47
o The Audit Committee has reviewed and discussed with NEIB's
management NEIB's fiscal 2004 audited consolidated financial
statements;
o The Audit Committee has discussed with NEIB's independent
auditors (Crowe Chizek and Company LLC) the matters required
to be discussed by Statement on Auditing Standards No. 61;
o The Audit Committee has received the written disclosures and
letter from the independent auditors required by Independence
Standards Board No. 1 (which relates to the auditors'
independence from NEIB and its related entities) and has
discussed with the auditors their independence from NEIB; and
o Based on the review and discussions referred to in the three
items above, the Audit Committee recommended to the Board of
Directors that the audited consolidated financial statements
be included in NEIB's Annual Report on Form 10-KSB for the
fiscal year ended December 31, 2004.
Submitted by the Audit Committee of the Board of Directors of NEIB:
Randall C. Rider, Chairman
Dan L. Stephan
J. David Carnes
Independence. All of the members of the Audit Committee are "independent"
under the definition of independence in the National Association of Securities
Dealers' listing standards for the Nasdaq Stock Market applicable to such
members.
Audit Committee Charter. Northeast Indiana Bancorp has adopted a written
audit committee charter. A copy of the charter is attached to this proxy
statement as Appendix C.
Audit Committee Financial Expert. NEIB does not have an audit committee
financial expert serving on the Audit Committee. It is difficult for NEIB, as a
small public company, to identify, recruit and add an audit committee financial
expert to the Audit Committee.
Director Compensation
Directors of NEIB are paid $200 per regular meeting for their service in
such capacity. Directors of the Bank receive a retainer fee of $2,250 per
quarter and $400 per regular monthly meeting. Directors do not receive any
compensation for participation on the committees of the Boards of Directors of
NEIB and the Bank.
Deferred Compensation Program. The Bank has a deferred compensation
program for the benefit of its directors. This program permits participating
directors to defer up to a maximum of $400 of Board fees per month or $4,800 per
year, over a five year period which ended December 31, 1996, except for
Directors Michael Zahn and William Zimmer. Director Michael Zahn may defer up to
a maximum of $500 of Board fees per month or $6,000 per year, over a five year
period which will end July 31, 2005, and Director William Zimmer may defer up to
$500 of Board fees per month or $6,000 per year, over a five year period which
will end October 31, 2008. Generally upon attaining age 65, the director (or in
the event of death, his designated beneficiary) receives a monthly cash payment
based upon the amount of fees deferred for a period of up to 120 months. In
addition, the designated beneficiary of each participating director will receive
a $10,000 burial fee. In order to balance the expected payments under the
deferred compensation plan, the Bank has purchased life insurance policies on
the lives of the participating
48
directors. Although the insurance policies do not generate periodic payments to
cover the monthly payments owed to retiring directors, the death benefits
payable on the insurance policies have been selected to actuarially approximate
the future monthly payment obligation. During fiscal 2004, Director Michael Zahn
deferred a total of $6,000 in Board fees and Director Zimmer deferred a total of
$6,000 in Board fees pursuant to this program. No other director deferred his
Bank Board fees in fiscal 2004.
The following table provides information relating to option exercises by
directors of NEIB during the last fiscal year. Value realized upon exercise is
the difference between the closing price on the Nasdaq Stock Market of the
underlying stock on the exercise date and the exercise or base price of the
option.
Name Shares Acquired on Exercise (#) Value Realized ($)
- ------------------- --------------------------------- --------------------
J. David Carnes 2,000 $ 22,330
Randall C. Rider 13,202 $ 157,203
Dan L. Stephan 7,000 $ 83,320
Michael S. Zahn 1,500 $ 14,193
William A. Zimmer 1,000 $ 1,490
Executive Compensation
Our executive officers do not receive any compensation for services
performed in their capacity as such. The following table sets forth the
compensation paid by the Bank during fiscal 2004 to the Chairman and Chief
Executive Officer of NEIB and the Bank. No other executive officer earned salary
and bonus exceeding $100,000 in fiscal 2004.
Summary Compensation Table
Annual Compensation Long Term Compensation Awards
------------------- -----------------------------
Other
Annual Restricted All Other
Name and Fiscal Compen- Stock Options/ LTIP Compen-
Principal Position Year Salary ($)(1) Bonus ($) sation ($) Award(s) ($) SARs (#) Payouts ($) sation ($)
- ------------------ ---- ------------- --------- ---------- ------------ -------- ----------- ----------
Stephen E. Zahn, 2004 $179,600 $17,500 -- -- -- -- $171,285(2)
Chairman of the 2003 172,100 17,500 -- -- -- -- 148,486(3)
Board and Chief 2002 167,500 12,500 -- -- -- -- 128,850(4)
Executive Officer
(1) Includes directors' fees of $14,600 for 2003 and $13,100 for 2002.
(2) Includes: (i) $10,469 of life, health and disability insurance premiums
paid by the Bank; (ii) $5,084 of contributions by the Bank to Mr. S.
Zahn's 401(k) plan account; (iii) $83,263 accrued by the Bank under the
Executive Supplemental Retirement Income Plan on behalf of Mr. S. Zahn;
(iv) $29,809 accrued by the Bank under the Stockholder Benefit Plan on
behalf of Mr. S. Zahn; (v) $38,993 of contributions to Mr. S. Zahn's ESOP
account; and (vi) $3,667 allocated based on the personal use of an
automobile by Mr. S. Zahn.
(3) Includes: (i) $11,796 of life, health and disability insurance premiums
paid by the Bank; (ii) $4,206 of contributions by the Bank to Mr. S.
Zahn's 401(k) plan account; (iii) $55,416 accrued by the Bank under the
Executive Supplemental Retirement Income Plan on behalf of Mr. S. Zahn;
(iv) $31,573 accrued by the Bank under the Stockholder Benefit Plan on
behalf of Mr. S. Zahn; (v) $41,660 of contributions to Mr. S. Zahn's ESOP
account; and (vi) $3,835 allocated based on the personal use of an
automobile by Mr. S. Zahn.
(4) Includes: (i) $11,725 of life, health and disability insurance premiums
paid by the Bank; (ii) $4,431 of contributions by the Bank to Mr. S.
Zahn's 401(k) plan account; (iii) $49,041 accrued by the Bank under the
Executive Supplemental Retirement Income Plan on behalf of Mr. S. Zahn;
(iv) $32,409
49
accrued by the Bank under the Stockholder Benefit Plan on behalf of Mr. S.
Zahn; (v) $26,988 of contributions to Mr. S. Zahn's ESOP account; and (vi)
$4,256 allocated based on the personal use of an automobile by Mr. S.
Zahn.
The following table provides information as to the value of the options
held by our President and Chief Executive Officer on December 31, 2004. No stock
appreciation rights were granted during fiscal 2004.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year End
Option Values
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End ($) Fiscal Year End ($)(1)
------------------- ----------------------
Shares Acquired on Value Exercisable Unexercisable Exercisable Unexercisable
Name Exercise (#) Realized (#) (#) ($) ($)
- ---- ------------ -------- --- --- --- ---
Stephen E. Zahn ___ ___ 37,565 ___ $423,733 ___
- ----------
(1) Represents the aggregate market value (market price of the common stock
less the exercise price) of the options granted based upon the closing
price of $20.99 per share of the common stock as reported on the NASDAQ
National Market on January 3, 2005.
Employment Agreement
In December 1995, First Federal Savings Bank entered into an employment
contract with Mr. S. Zahn. The employment contract provides for an annual base
salary in an amount established by the Board of Directors. The initial term of
the employment contract was for three years. The contract provides for
extensions of one year, in addition to the then-remaining term under the
agreement, on each anniversary of the effective date of the contract, subject to
a formal performance evaluation performed by disinterested members of the Board
of Directors of the Bank, and the contract has been renewed each year since the
expiration of the initial term. The contract provides for termination upon Mr.
S. Zahn's death, for cause, or in certain events specified by Office of Thrift
Supervision regulations. The employment contract is also terminable by Mr. S.
Zahn upon 90 days notice to the Bank.
The employment contract provides for payment to Mr. S. Zahn of the greater
of his salary for the remainder of the term of the agreement, or 299% of his
base compensation, in the event there is a "change in control" of the Bank where
employment terminates involuntarily in connection with such change in control or
within twelve months thereafter. For the purposes of the employment contract, a
"change in control" is defined as any event which would require the filing of an
application for acquisition of control or notice of change in control pursuant
to Office of Thrift Supervision regulations. Such events are generally triggered
by the acquisition of control of more than 10% of NEIB's common stock. Based on
his current salary, if Mr. S. Zahn was terminated in December, 2004 under
circumstances entitling him to severance pay as described above, he would have
been entitled to receive a lump sum cash payment of approximately 794,000.
50
Executive Supplemental Retirement Income Plan
First Federal Savings Bank maintains a supplemental retirement income plan
established in 1992 for the benefit of Mr. S. Zahn. This plan was subsequently
amended in 1996, 2002, and 2004 pursuant to an agreement entered into with Mr.
S. Zahn. Payments made by the Bank are placed into a secular trust account with
an independent administrator through another financial institution. Upon
continuous service to the Bank through age 65, Mr. S. Zahn (or in the event of
Mr. S. Zahn's death, his beneficiary) will become entitled to monthly cash
payments for a period of 180 months of up to 60% of Mr. S. Zahn's final base
compensation paid by the Bank annually of approximately $43,500 after tax. This
amount will become payable at the time Mr. S. Zahn reaches age 67. In the event
that Mr. S. Zahn voluntarily leaves employment with the Bank before attaining
the age of 65, he would be eligible to receive commencing at age 67 the
after-tax contributions made by the Bank into the secular trust account up to
the point of termination of service. The Bank has purchased a life insurance
policy with respect to this program which is comparable to the policies
described herein for the Bank directors' deferred compensation program. In
addition, to the extent that the proceeds realized by the Bank on said life
insurance policies owned by the Bank exceed the cash surrender values of the
same policies, Mr. S. Zahn's designated beneficiary will receive a $30,000
burial fee from this plan. All expenses related to this program are paid by the
Bank.
Stockholder Benefit Plan
In January of 2000, the Bank set up a deferred compensation plan for Mr.
S. Zahn based on the savings to the institution. In connection with the
establishment of this plan, Mr. S. Zahn relinquished shares of stock granted to
him pursuant to the NEIB Recognition and Retention Plan. The Bank agreed to
accrue a benefit for Mr. S. Zahn based on the difference between the income
derived from the Bank's investment in a no-load, no-surrender charge life
insurance policy and the Bank's after-tax cost of funds as determined by the
last available quarterly rate of the 6th District Cost of Funds from the Federal
Home Loan Bank in Indianapolis plus fifty basis points.
This benefit accrues over the working life of Mr. S. Zahn such that, upon
reaching the age of 65, he shall be entitled to the annuitized value of the
accrued benefit payable over a fifteen year period. Should Mr. S. Zahn die prior
to reaching age 65, his beneficiary is entitled to a Survivor's Benefit payable
over a fifteen year period. In the event that Mr. S. Zahn is involuntarily
terminated, including termination coincident with or within three years of a
change in control of the Bank (as defined), Mr. S. Zahn is entitled to receive a
benefit as if he had continued to be employed with the Bank until his retirement
age of 65. If Mr. S. Zahn voluntarily terminates his employment with the Bank,
he is entitled to the accrued benefit determined as of the date of termination.
Certain Transactions
First Federal Savings Bank has followed a policy of granting loans to
eligible directors, officers, employees and members of their immediate families
for the financing of their personal residences, for consumer purposes and
general business loans. All loans to senior officers and directors are subject
to Office of Thrift Supervision regulations restricting loans and other
transactions with affiliated persons of the Bank. Under applicable law, all
loans or extensions of credit to executive officers and directors must be made
on substantially the same terms and conditions, including interest rates and
collateral, as those prevailing at the time for comparable transactions with the
general public and must not involve more than the normal risk of repayment or
present other unfavorable features.
51
In this regard, all outstanding loans to directors have been made in the
ordinary course of business and on the same terms and conditions, including
interest rates and collateral, as those prevailing at the time for comparable
transactions and do not involve more than the normal risk of collectibility or
present other unfavorable features. Although, all outstanding loans to executive
officers have been made in the ordinary course of business and do not involve
more than the normal risk of collectibility, as employees, the executive
officers are eligible for a 1/2% discount from the current rate offered after
one year of service and a 1% discount from the current rate offered after 5
years of service on one consumer loan. They also receive a waiver of 50% ($250)
of the origination fee on one residential loan.
AUDITORS
A representative of Crowe Chizek and Company LLC is expected to attend the
annual meeting to respond to appropriate questions. The representative of Crowe
Chizek and Company LLC will also have an opportunity to make a statement if he
or she desires to do so.
Audit Fees. The aggregate fees billed to NEIB by Crowe Chizek and Company
LLC for professional services rendered for the audit of NEIB's consolidated
financial statements for fiscal 2003 and 2004 and the reviews of the
consolidated financial statements included in NEIB's Forms 10-QSB for those
years were $53,550 and $59,300 respectively.
Audit-Related Fees. The aggregate fees billed to NEIB by Crowe Chizek and
Company LLC for assurance and related services that were reasonably related to
the performance of the audit of NEIB's consolidated financial statements and the
reviews of the consolidated financial statements included in NEIB's Forms 10-QSB
for fiscal 2003 and 2004 were $1,550 and $2,458, respectively.
Tax Fees. The aggregate fees billed to NEIB by Crowe Chizek and Company
LLC for professional services rendered by Crowe Chizek and Company LLC for tax
compliance, tax advice, and tax planning for fiscal 2003 and 2004 were $0 and
$2,625, respectively.
All Other Fees. The aggregate fees for all other services billed to NEIB
by Crowe Chizek and Company LLC for fiscal 2003 and 2004 were $0 and $875,
respectively.
Financial Information Systems Design and Implementation Fees. There were
no fees for financial information systems design and implementation billed to
NEIB by Crowe Chizek and Company LLC for fiscal 2003 or 2004.
The Audit Committee's policy is to approve or pre-approve all audit,
audit-related, tax and permitted non-audit services performed for NEIB by our
independent auditors in accordance with Section 10A(i) of the Securities
Exchange Act of 1934, as amended, and the Securities and Exchange Commission's
rules adopted thereunder. In 2003, the Audit Committee pre-approved the audit
services provided by Crowe Chizek and Company LLC, which approximated 97.2% of
the total fees paid. In 2003, the de minimus exception was used for
audit-related services that were not approved in advance by the Audit Committee.
These services approximated 2.8% of the total fees paid. In 2004, the Audit
Committee pre-approved all services provided by Crowe Chizek and Company LLC.
THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS HAS CONSIDERED WHETHER
PROVIDING ALL NON-AUDITING SERVICES (AND THE AGGREGATE FEES BILLED FOR SUCH
SERVICES) IN FISCAL 2004 BY CROWE CHIZEK AND COMPANY LLC, THE PRINCIPAL
INDEPENDENT AUDITORS, IS COMPATIBLE WITH MAINTAINING THE PRINCIPAL AUDITORS'
INDEPENDENCE.
52
PROPOSAL 3 -- ADJOURNMENT OF THE ANNUAL MEETING
In addition to the proposals to approve the split transaction and to elect
directors, the stockholders of NEIB are also being asked to approve a proposal
to adjourn or postpone the Annual Meeting to permit further solicitation of
proxies in the event that an insufficient number of shares is present in person
or by proxy to approve the split transaction.
Pursuant to Delaware law, the holders of a majority of the outstanding
shares of common stock of NEIB are required to approve the split transaction. It
is rare for a company to achieve 100% (or even 90%) stockholder participation at
an annual or annual meeting of stockholders, and only one-third of the holders
of the outstanding shares of common stock of NEIB are required to be represented
at the meeting, in person or by proxy, for a quorum to be present. In the event
that stockholder participation at the annual meeting is lower than expected,
NEIB would like the flexibility to postpone or adjourn the meeting in order to
attempt to secure broader stockholder participation in the decision to approve
the split transaction.
Approval of the proposal to adjourn or postpone the annual meeting to
allow extra time to solicit proxies (Proposal 3 on your proxy card) requires a
vote of a majority of the shares voting on the proposal. Abstentions will be
treated as "NO" votes and, therefore, will have an effect on this proposal, and
broker non-votes will have no impact on this proposal.
THE BOARD OF DIRECTORS OF NEIB UNANIMOUSLY RECOMMENDS THAT YOU VOTE "FOR"
THIS PROPOSAL (WHICH IS PROPOSAL 3 ON YOUR PROXY CARD).
STOCKHOLDER PROPOSALS
Any proposal which a stockholder wishes to have presented at the next
annual meeting of the company and included in the proxy statement and form of
proxy relating to that meeting must be received at the main office of the
company for inclusion in the proxy statement a reasonable time before the
company begins to print the proxy materials for the 2006 annual meeting. Any
such proposal should be sent to the attention of the Secretary of the company at
648 North Jefferson Street, Huntington, Indiana 46750, and will be subject to
the requirements of the proxy rules under the Securities Exchange Act of 1934
and, as with any stockholder proposal (regardless of whether included in the
company's proxy materials), the company's certificate of incorporation, by-laws
and Delaware law.
A stockholder proposal being submitted for presentation at the annual
meeting but not for inclusion in the company's proxy statement and form of
proxy, will be considered untimely if it is received by the company later than a
reasonable time before the company begins to print the proxy materials for the
2006 annual meeting. If, however, less than 40 days' notice of the date of the
next annual meeting is given or made to stockholders, such proposal shall be
considered untimely it if is received by the company later than the close of
business on the 10th day following the day on which such notice of the date of
the meeting was mailed. If the company received notice of such proposal after
such time, each proxy that the company receives will confer upon it the
discretionary authority to vote on the proposal in the manner the proxies deem
appropriate, even though there is no discussion of the proposal in the company's
proxy statement for the next annual meeting.
53
STOCKHOLDER COMMUNICATIONS
NEIB has a process for communications by stockholders to directors.
Stockholders are encouraged to send meaningful correspondence to DeeAnn Hammel,
Secretary of Northeast Indiana Bancorp at 648 Jefferson Street, Huntington,
Indiana 46750, who will then distribute such correspondence to the appropriate
director(s).
It is the policy of NEIB that all members of the Board of Directors attend
NEIB's annual meetings of stockholders, unless such attendance would result in
undue hardship to such member(s). All six members of the Board of Directors
attended the annual meeting of stockholders held on April 1, 2004.
OTHER MATTERS
Forward-Looking Statements
Statements contained herein that are not purely historical are
forward-looking statements, including, but not limited to, statements regarding
our expectations, hopes, beliefs, intentions or strategies regarding the future.
Actual results could differ materially from those projected in any
forward-looking statements as a result of a number of factors, including those
detailed in this proxy statement. The forward-looking statements are made as of
the date of this proxy statement and we undertake no obligation to update or
revise the forward-looking statements, or to update the reasons why actual
results could differ materially from those projected in the forward-looking
statements.
We caution you not to place undo reliance on any forward-looking
statements made by, or on behalf us in this proxy statement or in any of our
filings with the SEC or otherwise. Additional information with respect to
factors that may cause the results to differ materially from those contemplated
by forward-looking statements is included in our current and subsequent filings
with the SEC. See "--Where You Can Find More Information."
Where You Can Find More Information
We are subject to the information requirements of the Securities Exchange
Act, as amended, and in accordance therewith we file reports, proxy statements
and other information with the SEC. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities of
the SEC at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza, Washington, DC
20549. Copies of such materials can also be obtained at prescribed rates by
writing to the Public Reference Section of the SEC at 450 Fifth Street, N.W.,
Judiciary Plaza, Washington, DC 20549. In addition, such reports, proxy
statements and other information are available from the EDGAR filings obtained
through the SEC's Internet Website (http://www.sec.gov).
Information Incorporated by Reference
In our filings with the SEC, information is sometimes incorporated by
reference. This means that we are referring you to information that we have
filed separately with the SEC. The information incorporated by reference should
be considered part of this proxy statement, except for any information
superceded by information contained directly in this proxy statement. The
following documents are incorporated by reference herein:
o our Annual Report on Form 10-KSB for fiscal year ended
December 31, 2004, including audited financial information;
and
54
o our Form 8-K reporting the financial results for the fiscal
quarter ended March 31, 2005 filed on April 18, 2005; and
o our Form 8-K announcing the date of the annual meeting of
stockholders and the quarterly dividend payable for the first
fiscal quarter of 2005 filed on April 28, 2005.
We are also incorporating by reference all additional reports and other
information filed by us with the SEC under Sections 13(a), 13(c), 14 or 15(d) of
the Securities Exchange Act between the date of this document and the date of
consummation of the split transaction.
We have supplied all information contained in or incorporated by reference
in this document relating to us, provided that any reference to any claim of
reliance on the Private Securities Litigation Reform Act's forward-looking
statement safe harbor contained in any such document is excluded, and is not
incorporated herein by reference. You may have been sent some of the reports and
other information incorporated by reference in this document by us, but you can
also obtain any of them through the SEC at the locations described above, or
through us at the address below. We will provide to you, without charge, by
first class mail or other equally prompt means within one business day of any
written or oral request by you, a copy of any report or other information
incorporated by reference in this document by us. You should direct your request
to the following address: Northeast Indiana Bancorp, Inc., 648 North Jefferson
Street, Huntington, Indiana 46750, Attention: Randy J. Sizemore.
55
APPENDIX A-1
------------
PROPOSED FORM OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
TO EFFECT REVERSE STOCK SPLIT
Paragraph A of the Fourth Article of the Certificate of Incorporation is
hereby amended by deleting Paragraph A in its entirety and replacing it with the
following Paragraph A:
"A. The total number of shares of all classes of stock which the Corporation
shall have the authority to issue is four million five hundred thousand
(4,500,000) consisting of:
1. Five hundred thousand (500,000) shares of preferred stock, par value one cent
($.01) per share (the "Preferred Stock"); and
2. Four million (4,000,000) shares of common stock, par value one cent ($.01)
per share (the "Common Stock").
Without regard to any other provision of this Certificate of Incorporation, each
one (1) share of Common Stock, either issued and outstanding or held by the
Corporation as treasury stock, immediately prior to the time this amendment
becomes effective shall be and is hereby automatically reclassified and changed
(without any further act) into one-one hundred twenty-fifth (1/125th) of a
fully-paid and nonassessable share of Common Stock, provided that no fractional
shares shall be issued to any registered holder of fewer than 125 shares of
Common Stock immediately prior to the time this amendment becomes effective, and
that instead of issuing such fractional shares, the Corporation shall pay in
cash $23.50 for each share of Common Stock held by any registered holder of
fewer than 125 shares of Common Stock immediately before the time this amendment
becomes effective."
APPENDIX A-2
------------
PROPOSED FORM OF AMENDMENT TO
CERTIFICATE OF INCORPORATION
TO EFFECT FORWARD STOCK SPLIT
Paragraph A of the Fourth Article of the Certificate of Incorporation is
hereby amended by deleting Paragraph A in its entirety and replacing it with the
following Paragraph A:
"A. The total number of shares of all classes of stock which the Corporation
shall have the authority to issue is four million five hundred thousand
(4,500,000) consisting of:
1. Five hundred thousand (500,000) shares of preferred stock, par value one cent
($.01) per share (the "Preferred Stock"); and
2. Four million (4,000,000) shares of common stock, par value one cent ($.01)
per share (the "Common Stock").
Without regard to any other provision of this Certificate of Incorporation, each
one (1) share of Common Stock, either issued and outstanding and any fractional
share held by any stockholder who holds in excess of one (1) share immediately
prior to the time this amendment becomes effective shall be and is hereby
automatically reclassified and changed (without any further act) into one
hundred twenty-five (125) fully-paid and nonassessable shares of Common Stock
(or, with respect to fractional shares, such lesser number of shares and
fractional shares as may be applicable upon such 125 for one ratio), provided
that no fractional shares of Common Stock shall be issued."
APPENDIX B
----------
OPINION OF KEEFE, BRUYETTE & WOODS, INC.
March 16, 2005
Special Committee of the Board of Directors
Northeast Indiana Bancorp, Inc.
648 North Jefferson Street
Huntington, Indiana 46750
Members of the Special Committee of the Board:
You have requested our opinion as investment bankers as to the fairness,
from a financial point of view, of the per share consideration paid in the
Company's proposed Reverse/Forward Stock Split (the "Split") to certain
shareholders of Northeast Indiana Bancorp, Inc. (the "Company"). In the split
each shareholder of record with fewer than 125 shares will be cashed out at
$23.50 per share. KBW does not opine as to the merits of the going private
transaction for either the Company or the remaining shareholders.
Keefe, Bruyette & Woods, Inc., as part of its investment banking business,
is continually engaged in the valuation of bank and bank holding company
securities in connection with acquisitions, negotiated underwritings, secondary
distributions of listed and unlisted securities, private placements and
valuations for various other purposes. As specialists in the securities of
banking companies, we have experience in, and knowledge of, the valuation of
banking enterprises. In the ordinary course of our business as a broker-dealer,
we may, from time to time purchase securities from, and sell securities to, the
Company, and as a market maker in securities, we may from time to time have a
long or short position in, and buy or sell, debt or equity securities of the
Company for our own account and for the accounts of our customers. To the extent
we are aware of any such position as of the date of this opinion it has been
disclosed to the Company. We have acted exclusively for the Special Committee of
the Board of Directors of the Company (the "Special Committee") in rendering
this fairness opinion and will receive a fee from the Company for our services.
In connection with this opinion, we have reviewed, analyzed and relied
upon material relative to the financial and operating condition of the Company,
including among other things, the following: (i) a draft of the Proxy Statement
describing the Split, which we assume will correspond in all material respects
to the final documents to be mailed to all shareholders; (ii) the Annual Reports
to Stockholders and Annual Reports on Form 10-KSB for the three years ended
December 31, 2003 of the Company; (iii) Quarterly Reports on Form 10-QSB of the
Company for quarters ended September 30, 2004 and June 30, 2004; (iv) recent
trading activity of NEIB stock; and (v) other financial information concerning
the businesses and operations of the Company furnished to us by the Company for
purposes of our analysis. We have also held discussions with senior management
of the Company regarding the past and current business operations, regulatory
relations, financial condition and future prospects of the Company and such
other matters as we have deemed relevant to our inquiry. In addition, we have
compared certain financial and stock market information for the Company with
similar information for
certain other companies the securities of which are publicly traded, reviewed
the financial terms of recent splits or other going private transactions in the
banking industry and performed such other studies and analyses as we considered
appropriate.
In conducting our review and arriving at our opinion, we have relied upon
the accuracy and completeness of all of the financial and other information
provided to us or publicly available and we have not assumed any responsibility
for independently verifying the accuracy or completeness of any such
information. We have relied upon the management of the Company as to the
reasonableness and achievability of the financial and operating forecasts and
projections provided to us, and we have assumed that such forecasts and
projections reflect the best currently available estimates and judgments of
management and that such forecasts and projections will be substantially
realized in the amounts and in the time periods currently estimated by
management. With your consent, we relied on advice of counsel and independent
accountants to the Company as to legal and financial matters, respectively,
concerning the Company and the Split, and have assumed that the Split will be
conducted in a manner that complies in all respects with applicable statutes,
law, rules and regulations. In rendering our opinion, we have not made or
obtained any evaluations or appraisals of the property of the Company, nor have
we examined any individual credit files.
We have considered such financial and other factors as we have deemed
appropriate under the circumstances, including, among others, the following: (i)
the historical and current financial position and results of operations of the
Company; (ii) future prospects of the Company; (iii) the nature and terms of
certain other similar transactions involving banks and bank holding companies;
(iv) trading activity in the Company's stock, and; (v) premiums paid on other
"going private" transactions. We have also taken into account our assessment of
general economic, market and financial conditions and our experience in other
similar transactions, as well as our experience in securities valuation and
knowledge of the banking industry generally. Our opinion is necessarily based
upon conditions as they exist and can be evaluated on the date hereof and the
information made available to us through the date hereof.
It is understood that this letter is for the information of the Special
Committee and may not be used for any other purpose without our prior written
consent; provided however, that the Company may include the opinion in its
entirety as an exhibit or appendix to any report, statement, or schedule filed
by the Company with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 in connection with the Split.
This opinion does not address the relative merits of the Split and the
privatization impact for either the Company or the remaining shareholders.
Based upon and subject to the foregoing, it is our opinion that, as of the
date hereof, the $23.50 per share consideration to be paid in the
Reverse/Forward Stock Split to record holders of fewer than 125 shares is fair,
from a financial point of view, to those shareholders of the Company.
Sincerely,
/s/ Keefe, Bruyette & Woods, Inc.
Keefe, Bruyette & Woods, Inc.
2
APPENDIX C
----------
NORTHEAST INDIANA BANCORP, INC.
AUDIT COMMITTEE CHARTER
The Audit Committee (the "Committee") of the Northeast Indiana Bancorp,
Inc. (the "Company") Board of Directors (the "Board") shall oversee the
Company's accounting and final reporting processes and the audits of the
Company's financial statements, and shall otherwise exercise oversight
responsibility, and assist the Board in fulfilling its oversight functions, with
respect to matters involving the accounting, auditing, financial reporting and
internal control functions of the Company. In so doing, it shall be the goal of
the Committee to maintain free and open means of communication between the
members of the Board, the Company's independent public accountants who audit the
Company's financial statements (the "Public Accountants") and the Company's
financial management. While it is not the Committee's responsibility to certify
the Company's financial statements or to guarantee the auditor's report, the
Committee will facilitate discussions among the Board, the Public Accountants
and the Company's management.
Composition
The Committee shall be comprised of three or more directors, as determined
by the Board, each of whom shall be "independent," as required by applicable
securities laws, rules and regulations, the rules of the NASDAQ Stock Market or
of any securities exchange or market on which securities of the Company are
listed, and any other applicable requirements. Each committee member shall also
be free from any relationship that, in the opinion of the Board, would interfere
with the exercise of his or her independent judgment as a member of the
Committee.
All members of the Committee shall have a basic understanding of finance
and accounting and be able to read and understand fundamental financial
statements, including the Company's balance sheet, income statement, and cash
flow statement. Though not necessarily an "audit committee financial expert"
within the meaning of 17 C.F.R. ss. 228.401, at least one member of the
Committee shall have accounting or related financial management expertise
consisting of employment experience in finance or accounting, requisite
professional certification in accounting, or other comparable experience or
background which results in the individual's financial sophistication, including
being or having been a chief executive officer, chief financial officer or other
senior officer with financial oversight responsibilities.
Responsibilities
The Committee will meet four times per year, or more frequently as
circumstances require at the discretion of the Committee. The Chairman of the
Committee will approve the agenda for each meeting. Minutes of each meeting
shall be recorded. In certain circumstances, the Chairman of the Committee may
represent or act on behalf of the entire Committee. The Committee shall, after
each Meeting, report its activities, findings and conclusions to the full Board
of Directors and shall ensure that the full Board of Directors is fully informed
of the Company's accounting policies and related issues. Attendees at Committee
meetings will generally include the Public Accountants, the Chief Financial
Officer and the Treasurer, and any other member(s) of management or others who
may provide pertinent information. The Committee will:
1
Financial Information and Reports
1. Review the significant accounting principles, policies and
practices followed by the Company in accounting for and reporting its
financial results of operations in accordance with generally accepted
accounting principles ("GAAP").
2. Review and discuss with management the Company's year-end audited
financial statements and related footnotes, and the opinion rendered by
the Public Accountants prior to filing or distribution.
3. Discuss the results of the year-end audit separately with the
Public Accountants and management prior to releasing year-end earnings in
accordance with the quality of accounting policies and disclosures set
forth in Statement on Auditing Standards No. 61.
4. Prepare any audit committee reports or other audit committee
related disclosure, in filings with the Securities and Exchange Commission
(the "SEC") or otherwise, required by applicable securities laws, rules
and regulations or by the rules of any securities exchange or market on
which securities of the Company are listed, including a report to be
included in the Company's Annual Stockholders Meeting Proxy Statement
stating whether the Committee has (i) reviewed and discussed the audited
financial statement with management, (ii) discussed with the Public
Accountants the matters required to be discussed by Statement on Auditing
Standards No. 61, (iii) received from the Public Accountants disclosures
regarding their independence required by Independence Standards Board
Standard No. 1 and (iv) discussed with the Public Accountants their
independence. The Proxy Statement shall also contain a statement as to
whether the Committee members are independent and that the Committee has
adopted a charter.
5. Review significant financial reports to be released to the
public, or filed with the SEC or other regulatory authority, prior to such
distribution or filing.
6. Review with financial management and the Public Accountants the
Company's earnings releases prior to their dissemination and to the extent
there are significant accounting matters in a quarter, discuss such
matters with the Public Accountants.
7. Review with the Public Accountants and Management the extent to
which changes or improvements in financial or accounting practices, as
approved by the Committee, have been implemented.
Public Accountants
1. Be directly responsible for the appointment, compensation,
retention and oversight of the work of the Public Accountants, including
resolution of disagreements between management and the Public Accountants
regarding financial reporting, for the purpose of preparing or issuing an
audit report or performing other audit, review or attest services for the
Company. The Public Accountants shall report directly to the Audit
Committee.
2. Pre-approve, and adopt such procedures for the pre-approval of,
all audit services and permitted non-audit services to be provided to the
Company by the Public Accountants, as required by Section l0A(i) of the
Exchange Act and the SEC rules adopted thereunder. The Committee may
delegate, subject to any rules or limitations it deems appropriate, to one
or more designated members of the Committee the authority to grant such
pre-approvals; provided, however, that the decisions of any member to whom
2
authority is so delegated to pre-approve an activity shall be presented to
the full Committee for ratification at its next meeting.
3. Review the Public Accountant's independence and objectivity at
least once annually by (i) inquiring into matters such as all
relationships between the Public Accountant and the Company and (ii)
reviewing disclosures from the Public Accountant regarding their
independence as required by Independence Standards Board Standard No. 1.
4. Review the effectiveness of the independent audit effort,
including approval of the scope of, and fees charged in connection with,
the annual audit, quarterly reviews and any non-audit services being
provided. The Committee may discharge the Public Accountants when
circumstances warrant.
5. On an annual basis, obtain and review a report from the Public
Accountants concerning their internal quality control review of the firm,
any inquiry or investigation by governmental or professional authorities
within the preceding five (5) years respecting one or more independent
audits carried out by the firm and any steps taken to address such issues.
6. Review the experience and qualifications of the senior members of
the Public Accountants' team.
7. Require the rotation of the lead audit partner on a regular basis
in accordance with the requirements of the Securities Exchange Act of
1934.
8. Review and approve or veto the Company's hiring of employees or
former employees of the Public Accountants who participated in any
capacity in the audits of the Company.
9. Following completion of the annual audit, review separately with
the Company's management and the Public Accountants any significant
difficulties encountered during the course of the audit, including any
restrictions on the scope of work or access to required information.
Risk Management and Controls
1. Inquire of management and the Public Accountant about significant
risks or exposures and assess the steps which management has taken to
minimize such risks and monitor control of these areas.
2. Review with the Public Accountant and the Chief Financial Officer
and Treasurer their findings on the adequacy and effectiveness of internal
controls and financial control policies and procedures, including
management's controls and security procedures with respect to the
Company's information systems, and their recommendations for improving the
internal control environment. Particular emphasis shall be given to the
adequacy of such internal controls to expose any payments, transactions or
procedures that might be deemed illegal or otherwise improper.
3. Conduct private sessions with the Public Accountant, the Chief
Financial Officer and Treasurer, financial management, and any other party
or person so as to ensure that information is adequately flowing to the
Committee.
4. Review with the Chief Financial Officer and Treasurer the annual
audit plan, significant findings from specific audits and the coordination
of audit coverages with the Public Accountant.
3
5. Periodically review with the Company's legal counsel any matters
that could have a significant impact on the Company's financial
statements, such as compliance with laws and regulation, litigation, and
inquiries received from governmental agencies and regulators.
6. Review and approve the appointment, replacement, reassignment, or
dismissal of the Chief Financial Officer.
7. Review and monitor compliance with the Company's Code of Ethics
for Financial Professionals.
Complaints
1. Establish procedures for the receipt, retention, and treatment of
complaints received by the Company regarding accounting, internal
accounting controls, or auditing matters.
2. Establish procedures for the confidential, anonymous submission
by Company employees of concerns regarding questionable accounting or
auditing matters.
General
1. Conduct or authorize investigations into any matters within the
Committee's scope of responsibilities.
2. Retain independent counsel, accountants, or others, as it
determines necessary to carry out its duties and approve fees of such
advisors.
3. Determine appropriate funding, which the Company shall provide,
for payment of: (i) compensation to the Public Accountant engaged for the
purpose of preparing or issuing an audit report or performing other audit,
review or attest services for the Company, (ii) compensation to any
advisers employed by the Committee, and (iii) ordinary administrative
expenses of the Committee that are necessary or appropriate in carrying
out its duties.
4. Discuss the Company's policies with respect to risk assessment
and risk management.
5. Investigate any other matter brought to its attention within the
scope of its duties that it deems appropriate for investigation.
6. Perform an annual evaluation of the Committee.
7. Perform such other functions assigned by law, the Company's
charter or bylaws, and the Board of Directors, and as are provided by the
SEC and the NASDAQ Stock Market, or of any securities exchange or market
on which securities of the Company are listed.
8. The Committee will review and reassess the adequacy of the
Committee Charter annually and recommend changes, if any, to the Board.
Limitations
While the Committee has the functions set forth in this Charter, it is not
the duty of the Committee to plan or conduct audits or to determine that the
Company's financial statements are complete and accurate or are in accordance
with generally accepted accounting principles. The Company's management is
principally responsible for Company accounting policies, the
4
preparation of the financial statements and insuring that the financial
statements are prepared in accordance with generally accepted accounting
principles. The Company's independent accountants are responsible for auditing
and attesting to the Company's financial statements and understanding the
Company's system of internal control sufficient to plan and to determine the
nature, timing and extent of audit procedures to be performed. The
responsibility to plan and conduct audits is that of the Company's independent
accountants.
In its oversight capacity, the Committee is neither intended nor equipped
to guarantee with certainty to the full Board and stockholders the accuracy and
quality of the Company's financial statements and accounting practices. Nor is
it the duty of the Committee to assure the Company's compliance with laws and
regulations. The primary responsibility for these matters also rests with the
Company's management. The Committee can do no more than rely upon information it
receives, questions and assesses in fulfilling its functions.
5
REVOCABLE PROXY
NORTHEAST INDIANA BANCORP, INC.
|X| PLEASE MARK VOTES AS IN THIS EXAMPLE
June 15, 2005
The undersigned hereby appoints DeeAnn Hammel or Thomas P. Frantz, or each
of them, each with power to appoint his substitute, to act as attorneys and
proxies for the undersigned to vote all shares of common stock of Northeast
Indiana Bancorp, Inc. which the undersigned is entitled to vote at the annual
meeting of stockholders, to be held on June 15, 2005 at First Federal Savings
Bank's North Office, located at 100 Frontage Road, Huntington, Indiana at 1:00
p.m., Eastern Standard Time, and at any and all adjournments or postponements
thereof, as follows:
FOR AGAINST ABSTAIN
I. The approval of two amendments to the Company's |_| |_| |_|
certificate of incorporation to effect a reverse
1-for-125 stock split followed immediately by a
forward 125-for-1 stock split of common shares.
Each registered stockholder owing fewer than 125
shares of common stock immediately prior to the
reverse stock split will, instead of participating
in the forward stock split, receive a cash payment
equal to $23.50 per share on a pre-split basis.
FOR ALL
FOR WITHHOLD EXCEPT
II. The election of the following directors for a |_| |_| |_|
three-year term to expire in the year 2008:
J. David Carnes, MD William A. Zimmer
INSTRUCTION: To withhold authority to vote for any individual nominee, mark "For
All Except" and write that nominee's name in the space provided below.
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FOR AGAINST ABSTAIN
III. The approval of an adjournment of the meeting, if |_| |_| |_|
necessary, to solicit additional proxies.
In their discretion, the proxies are authorized to vote on any other
business that may properly come before the annual meeting, or any adjournments
or postponements thereof.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR"
EACH OF THE LISTED PROPOSALS.
This proxy will be voted as directed, but if no instructions are
specified, this proxy will be voted for the proposals stated. If any other
business is presented at such annual meeting, this proxy will be voted by those
named in this proxy in their best judgment. At the present time, the board of
directors knows of no other business to be presented at the annual meeting.
Please be sure to sign and date this Proxy in the box below.
Date:
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Stockholder sign above
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Co-holder (if any) sign above
Detach above card, sign, date and mail in postage-paid envelope provided.
NORTHEAST INDIANA BANCORP, INC.
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
Should the above signatory be present and elect to vote at the annual
meeting, or at any adjournments or postponements thereof, and after notification
to the Secretary of Northeast Indiana Bancorp, Inc. at the annual meeting of the
stockholder's decision to terminate this proxy, then the power of such attorneys
and proxies will be deemed terminated and of no further force and effect.
The above signatory acknowledges receipt, prior to the execution of this proxy,
of Notice of the Annual Meeting, a Proxy Statement, and the Annual Report to
Stockholders for the fiscal year ended December 31, 2004.
Please sign exactly as your name appears above on this card. When signing as
attorney, executor, administrator, trustee or guardian, please give your full
title. If shares are held jointly, each holder should sign.
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PLEASE PROMPTLY COMPLETE, DATE, SIGN AND MAIL THIS PROXY IN
THE ENCLOSED POSTAGE-PAID ENVELOPE
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If your address has changed, please correct the address in the space provided
below and return this portion with the proxy in the envelope provided.
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