PRESIDENT'S MESSAGE TO OUR SHAREHOLDERS
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Dear Fellow Shareholders,
This past year has produced a number of changes for Northeast Indiana Bancorp,
Inc. and its wholly-owned subsidiary First Federal Savings Bank. Core earnings
for the Bank continued to increase as the year progressed but this was offset in
the fourth quarter by management's decision to recognize through the income
statement the non-cash impairment of $735,500 related to our holding of FHLMC
and FNMA preferred stock. This write-down resulted in 2004 earnings of $982,000.
Prior to this adjustment, 2004 earnings had been projected to be approximately
$1.7 million. Given the fact that mortgage originations were substantially below
2003 levels, along with the impairment charge, earning the income that we did
has to be considered a positive achievement.
A number of changes took place this past year at your company. First and
foremost, effective January 1, 2005, Michael Zahn was appointed President of the
Bank by its Board of Directors. This will allow for the smooth succession of
management as I begin to near my retirement age and solidifies the Board and
management's commitment to remain an independent community bank.
First Federal Savings Bank also acquired the assets of Innovative Financial
Services, a full service investment operation, and combined this company with
First Federal's existing financial service subsidiary. This addition solidifies
the Bank's position as the leading financial service provider in Huntington. To
date, account growth and income from the new operation has exceeded management's
expectation and continues to grow monthly. With the addition of Innovative
Financial and the successful implementation of the new retail overdraft program,
these areas helped offset the decrease in mortgage banking activity as it
relates to noninterest income. Also on a positive note, the Bank's
non-performing assets continue to decline and our net interest margin continued
to increase in 2004. This reflects the emphasis management has placed on
addressing credit quality, improved underwriting policies and pricing structure.
Our Directors and employees remain excited about what the future holds for your
company. We continue to increase each investor's percentage of ownership by our
stock repurchase program. In 2004 the Company repurchased 107,326 shares at an
aggregate cost of $2.3 million. With a strong capital position, we continue to
increase and pay an above market dividend. We are dedicated to a strategy of
building a company which will benefit our shareholders, customers, employees,
and our community. I thank you for your continued support.
Sincerely,
/s/ Stephen E. Zahn
Stephen E. Zahn
Chairman of the Board, President, Chief Executive Officer
/s/ Michael S. Zahn
Michael S. Zahn
Senior Vice President
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1.
NORTHEAST INDIANA BANCORP, INC.
TABLE OF CONTENTS
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PRESIDENT'S MESSAGE TO OUR SHAREHOLDERS ................................... 1
SELECTED CONSOLIDATED FINANCIAL INFORMATION ............................... 2
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ..................................... 3
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM ...................................................................... 19
CONSOLIDATED FINANCIAL STATEMENTS ......................................... 20
STOCKHOLDER INFORMATION ................................................... 54
DIRECTORS AND EXECUTIVE OFFICERS ........................... Inside Back Cover
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SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31
-----------
2004 2003 2002 2001 2000
-------- -------- -------- -------- --------
Selected Financial Condition Data: (dollars in thousands, excluding earnings per share data)
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Total assets ........................................ $228,672 $227,395 $225,019 $238,395 $247,094
Securities .......................................... 38,964 43,837 43,063 39,671 31,609
Loans receivable, net ............................... 174,800 163,677 154,560 162,830 200,151
Deposits ............................................ 123,951 122,010 122,357 137,030 146,806
Total borrowings .................................... 77,067 76,545 74,894 73,966 72,539
Shareholders' equity ................................ 26,047 27,195 26,562 26,281 26,574
Selected Operations Data:
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Total interest income ............................... $ 12,103 $ 12,368 $ 14,297 $ 17,436 $ 19,565
Total interest expense .............................. 5,715 6,519 7,997 10,765 12,485
-------- -------- -------- -------- --------
Net interest income .............................. 6,388 5,849 6,300 6,671 7,080
Provision for loan losses ........................... 38 -- 732 575 1,591
-------- -------- -------- -------- --------
Net interest income after provision for loan
losses ............................................ 6,350 5,849 5,568 6,096 5,489
Total noninterest income ............................ 720 1,739 1,464 1,348 1,010
Total noninterest expense ........................... 5,477 4,969 4,971 4,702 4,775
-------- -------- -------- -------- --------
Income before income taxes .......................... 1,593 2,619 2,061 2,742 1,724
Income tax expense .................................. 611 689 471 773 441
-------- -------- -------- -------- --------
Net income .......................................... $ 982 $ 1,930 $ 1,590 $ 1,969 $ 1,283
======== ======== ======== ======== ========
Basic earnings per common share ..................... $ 0.69 $ 1.36 $ 1.09 $ 1.28 $ 0.80
Diluted earnings per common share ................... 0.67 1.31 1.06 1.25 0.79
Selected Financial Ratios and Other Data:
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Performance Ratios:
Return on assets (ratio of net income to
average total assets) .......................... 0.43% 0.87% 0.69% 0.81% 0.50%
Return on equity (ratio of net income to
average total shareholders' equity) ............ 3.70 7.22 6.01 7.35 4.88
Interest rate spread information:
Average during period ......................... 2.67 2.41 2.44 2.39 2.39
End of period ................................. 2.82 2.75 2.57 2.53 2.34
Net interest margin (1) .......................... 2.97 2.78 2.87 2.88 2.90
Ratio of operating expense to average total
assets ......................................... 2.40 2.23 2.16 1.94 1.88
Ratio of average interest-earning assets to
average interest-bearing liabilities ........... 111.26 111.85 111.80 110.54 109.95
Quality Ratios:
Nonperforming assets to total assets at end
of period ...................................... 0.84 1.13 3.00 3.03 1.79
Allowance for loan losses to nonperforming
loans .......................................... 79.30 73.44 34.35 28.26 53.99
Allowance for loan losses to total loans ......... 0.77 1.07 1.36 1.19 .99
Capital Ratios:
Total shareholders' equity to total assets at
end of period .................................. 11.39 11.96 11.80 11.02 10.75
Average total shareholders' equity to average
total assets ................................... 11.62 12.01 11.52 11.07 10.33
Other Data:
Dividends declared per share ..................... $ 0.570 $ 0.530 $ 0.490 $ 0.450 $ 0.410
Dividend payout ratio ............................ 82.61% 38.97% 44.95% 35.16% 51.25%
Number of full-service offices ................... 3 3 3 3 3
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(1) Net interest income divided by average interest-earning assets.
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2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Northeast Indiana Bancorp, Inc. ("Northeast Indiana Bancorp" or "the Company")
was formed as a Delaware corporation in 1995 for the purpose of issuing common
stock and owning all of the common stock of First Federal Savings Bank ("First
Federal") as a unitary thrift holding company. First Federal conducts business
from its three offices located in Huntington, Indiana. Northeast Indiana
Bancorp's primary business activity is its investment in First Federal, and
therefore, the following discussion relates primarily to its operations.
During 1998, First Federal established a trust department which began operations
in the fourth quarter. By the end of 2002, trust assets under management had
grown to $39.8 million with no significant growth in the prior twelve months in
either number of accounts or assets under management. With the trust department
only providing slight positive impacts to the Company and with the resignation
of First Federal's senior trust officer in the first quarter 2003, management
and the board of directors elected to enter into a cooperative arrangement with
another financial institution for trust services. The final cooperative
agreement was signed during the third quarter 2003. At the same time, the trust
assets and fiduciary responsibilities were transferred to the other financial
institution. Under the agreement, First Federal will continue to offer trust
services to existing customers and solicit new business with technical support
from the other financial institution. Management expects minimal impact to
Northeast Indiana Bancorp's operating performance from this transaction.
During 1999, Northeast Indiana Bancorp announced the establishment of Northeast
Indiana Financial, Inc. ("Northeast Indiana"), a wholly-owned subsidiary of the
Bank. In June 2004, First Federal announced it had acquired the brokerage firm
Innovative Financial Services ("Innovative") through Northeast Indiana. The
staff of Innovative, including one broker and three support staff, became
employees of First Federal through Northeast Indiana. Innovative offers non-FDIC
insured products such as mutual funds, annuities, stocks, bonds, life insurance,
estate planning, retirement plans to small businesses, and brokerage accounts to
its customer base and had roughly $60 million in assets under management as of
December 31, 2004.
The principal business of savings banks, including First Federal, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. First Federal's earnings are primarily
dependent on net interest income, the difference between interest income and
interest expense.
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3.
Interest income is a function of the balances of loans and investments
outstanding during the period and the yield earned on such assets. Interest
expense is a function of the balances of deposits and borrowings outstanding
during the same period and the rates paid on such deposits and borrowings.
Provisions for loan losses, service charges and fee income, gains on sales of
loans, other noninterest income, operating expenses and income taxes also affect
First Federal's earnings. Operating expenses consist primarily of employee
compensation and benefits, occupancy and equipment expenses, data processing,
federal deposit insurance premiums and other general and administrative
expenses.
Prevailing economic conditions as well as federal regulations concerning
monetary policies, fiscal policies, and financial institutions significantly
affect First Federal. After operating under historically low interest rates for
the better part of the last thirty six months, the Federal Reserve changed its
fiscal policy in 2004 and began raising short-term rates at a moderate pace
which included five rate hikes over the last seven months of the year
aggregating a 125 basis point increase in short-term rates. The low interest
rate environment of the past three years had continued to pressure the net
interest margin of the Company as loan repayments and amortizing security
prepayment speeds have run at very high levels, but these trends also began to
improve during 2004 as rates began to increase. As a result, the net interest
margin for First Federal increased from 2.78% as of December 31, 2003 to 2.97%
at the end of 2004.
Over the course of the past thirty six months, management has tried to position
the Company favorably for a rising rate environment. There can be no assurance
that First Federal can continue to successfully market its lending products in a
rising rate environment or that such interest rate movements will not adversely
affect net income.
Deposit balances are influenced by a number of factors including interest rates
paid on competing personal investments and the level of personal income and
savings within First Federal's market. Lending activities are influenced by the
demand for housing as well as competition from other lending institutions.
Liquidity levels and funds available to originate loans may also impact lending
activities. The primary sources of funds for lending activities include
deposits, borrowed funds, loan payments, loan sales and funds provided from
operations.
Forward-Looking Statements
When used in this document and in future filings by Northeast Indiana Bancorp
with the Securities and Exchange Commission, in our press releases or other
public or shareholder communications, or in oral statements made with the
approval of an authorized executive officer, the words or phrases "would be,"
"will allow," "intends to," "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project" or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
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4.
Such statements are subject to risks and uncertainties, including but not
limited to, changes in economic conditions in our market area, changes in
policies by regulatory agencies, fluctuations in interest rates, demand for
loans in our market area and competition, all or some of which could cause
actual results to differ materially from historical earnings and those presently
anticipated or projected.
Northeast Indiana Bancorp wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and advises readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities and competitive and
regulatory factors, could affect our financial performance and could cause our
actual results for future periods to differ materially from those anticipated or
projected.
Northeast Indiana Bancorp does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements, or for
any other reason.
Executive Summary
While asset growth was minimal for the year ended December 31, 2004, management
was able to accomplish several core objectives including further reductions in
nonperforming assets, increased net interest margins, significant share
repurchases on the open market, modest loan growth, increased noninterest income
through both a retail overdraft program implemented and brokerage fees through a
brokerage acquisition. However, these positive items were overshadowed by a
non-cash impairment charge of $735,500 that was recorded on certain Federal
National Mortgage Association ("FNMA") and Federal Home Loan Mortgage
Corporation ("FHLMC") preferred stocks along with significant reductions in
mortgage origination volumes that sharply reduced net gains on sale of loans and
deferred loan fees. All of the above translated into net income of $982,000
($1.7 million without the non-cash impairment change) and diluted earnings per
common share of $0.67 ($1.17 without the non-cash impairment change) for the
year ended 2004 compared to net income of $1.9 million and diluted earnings per
common share of $1.31 for the year ended 2003. Detailed discussions of each of
these areas can be found under the Financial Condition and Results of Operations
pages that follow.
Financial Condition
Northeast Indiana Bancorp's total assets increased slightly from $227.4 million
at December 31, 2003 to $228.7 million at December 31, 2004, an increase of $1.3
million, or 0.6%. The increase was due primarily to an increase in net loans
receivable of $11.1 million, or 6.8%, and an increase in cash surrender value of
life insurance of $807,000 offset in part by a decrease of $5.9 million in cash
and cash equivalents, and a reduction of $4.8 million in securities available
for sale between periods. The overall increase in total liabilities of $2.4
million was due mainly to an increase of $1.9 million in total deposits and an
increase of $521,000 in borrowed funds.
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5.
Most segments of the loan portfolio increased during 2004. The increase was
mostly attributable to mortgage loans, which increased $4.0 million. Mortgage
loans secured by one-to-four family residences increased $6.3 million to $97.9
million at December 31, 2004 and represent 54.6% of First Federal's net loan
portfolio. Mortgage loans secured by multi-family and commercial real estate
increased $1.2 million to $26.3 million at December 31, 2004 and construction
loans secured by residential and nonresidential real estate decreased $3.5
million to $5.9 million.
First Federal also offers a variety of consumer loans including automobile,
credit card, home equity and second mortgage loans as well as commercial
business loans. Total consumer and commercial business loans increased $5.9 to
$49.0 million at December 31, 2004. This increase was primarily due to an
increase in commercial loans of $3.7 million to $25.7 million and small
increases in automobile, home equity and second mortgage, and other consumer
loans, offset by a slight decline in credit cards. Automobile loans comprise
$10.3 million of total consumer loans while home equity and second mortgage
loans represent another $8.0 million at December 31, 2004. While typically
producing higher yields, non-mortgage lending exposes the Company to more
collateral risk in addition to credit risk.
Future loan growth and profitability related thereto, is dependent on the
economy. First Federal currently anticipates low growth in mortgages and will
continue to sell long term fixed rate mortgages to the secondary market while
planning to hold more of the 10 to 15 year term fixed rate mortgages and
continue to hold all hybrid ARM mortgage products in our portfolio. First
Federal will continue to provide commercial and consumer lending and anticipates
non-residential mortgage lending to increase as a percentage of total loans.
Total deposits increased $1.9 million to $123.9 million at December 31, 2004.
The 1.6% increase in 2004 was due to increases in time deposits, noninterest
bearing demand, NOW, and savings offset by a decline in MMDA account balances.
Under a new strategic plan finalized during late 2004, management will continue
to seek ways to increase core deposit relationships in 2005.
Total borrowed funds increased $521,000, from $76.5 million at December 31, 2003
to $77.1 million at December 31, 2004. Borrowed funds include advances from the
Federal Home Loan Bank of Indianapolis (FHLB) with variable interest rates and
stated maturities ranging through 2012. The balance of FHLB advances was $68.8
million, an increase from $63.0 million at December 31, 2003.
FHLB advances are subject to prepayment fees and include $16.8 million maturing
in 2005 and 2006. In addition, $36.0 million of the advances outstanding at
December 31, 2004 contained options with dates ranging from March 1, 2005
through December 21, 2005, whereby the interest rate may be adjusted by the
FHLB, at which time the advances may be repaid at the option of First Federal
without a prepayment fee. First Federal's borrowing capacity at the FHLB as of
December 31, 2004, was $2.3 million based on the collateral pledged. Borrowings
at December 31, 2004 also include various securities sold under repurchase
agreements that were offered starting in 1999. The balance of securities sold
under repurchase agreements at December 31, 2004 was $8.3 million, a decrease
from $13.5 million at December 31, 2003.
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6.
Results of Operations
Comparison of Years Ended December 31, 2004 and 2003
General. Net income for the year ended December 31, 2004 was $982,000 compared
to net income of $1.9 million for 2003, a decrease of $948,000. The decline in
net income was primarily a result of a decline in noninterest income of $1.0
million and an increase in noninterest expense of $508,000, partially offset by
increased net interest income of $539,000 and decreased income tax expense of
$78,000. All of these items are discussed in more detail below.
Interest Income. Interest income decreased $265,000 or 2.1% to $12.1 million for
the year ended December 31, 2004. The decrease in interest income was the result
of loan interest income decreasing $103,000 to $10.5 million along with a
decrease of $162,000 to $1.6 million in interest income on securities and other
interest earning assets. The average yield for the year on the loan portfolio
decreased to 6.24% in 2004 compared to 6.91% in 2003. The decrease in loan
interest income occurred as a result of lower average rates during 2004,
partially offset by increased average balances of loans outstanding in 2004
compared to 2003.
Interest Expense. Interest expense for 2004 decreased $804,000 or 12.3% over
2003 interest expense. The majority of the decrease was due to less interest
expense on deposits, which decreased $495,000 in 2004. The average rate for time
deposits decreased 66 basis points from 2003 to 2004. The average rate for money
market accounts decreased by 17 basis points to 1.16% for 2004 along with a
decrease of 13 basis points on the average rate for savings accounts, and a
decrease of 9 basis points on NOW accounts. The average rate for other borrowed
funds declined 47 basis points to 4.57% in 2004.
Net interest income. Net interest income increased $539,000 or 9.2% from $5.9
million to $6.4 million for the year ended December 31, 2004. The average spread
increased to 2.67% from the 2.41% reported in 2003. Average interest-earning
assets margin increased to 2.97% in 2004 from 2.78% in 2003. The net decreases
in both interest income and interest expense attributable to both
interest-earning assets and interest-bearing liabilities were due primarily to
decreases in rates offset partially by increases in volume.
Provision for Loan Losses. Provision for loan losses in 2004 was $37,500
compared to no provision for loan loss in 2003. This modest increase in
provisions was possible due to the Company's continued improvement in
nonperforming loans as evidenced in Note 3 to the Consolidated Financial
Statements. The increased provision for loan losses less net charge-offs for the
year resulted in a $415,000 decrease in the allowance for loan losses. The net
decrease in allowance for loan losses during 2004 was further made possible as
the Company recognized lower charge-offs than had been allocated towards in
prior periods on several loans that were transferred to real estate owned and
subsequently sold during 2004. The allowance for loan losses of $1.4 million at
December 31, 2004 represents 0.77% of total loans outstanding at December 31,
2004 compared to 1.07% at December 31, 2003. Management will continue to
maintain the allowance for loan losses at a level deemed adequate by management
based on its quarterly analysis and will include additional consideration of
non-performing loans.
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7.
Comparison of Years Ended December 31, 2004 and 2003 (Continued)
Non-cash Impairment Charge. Management recorded a non-cash impairment charge on
certain FHLMC/FNMA preferred stocks during late 2004 in the amount of $735,500.
This decision was made after these security market values continued to decline
further in 2004 under the scrutiny of several public disclosures about these
companies and the uncertainty about the time frames in which recovery in market
values would take place. These preferred stocks are investment grade securities
that have never defaulted on payment to First Federal. No tax benefit was
recorded on the impairment charge as First Federal does not believe it is likely
to realize a tax benefit from this charge. The future value of these preferred
stocks will be impacted by their variable rate features in the face of rising
interest rates and other positive income characteristics.
Noninterest income. Noninterest income decreased from $1.7 million in 2003 to
$720,000 in 2004. The majority of this change occurred as a result of
management's decision to take a non-cash impairment charge of $735,500 discussed
above. This resulted in a net loss on securities of ($716,000) for the year
ended December 31, 2004 compared to a net gain on securities of $18,000 in the
year ended December 31, 2003. Service charges on deposits increased $169,000 or
47.0% to $530,000 for the year ended December 31, 2004 as management implemented
a new retail overdraft program during 2004. Net gain on sale of loans declined
$421,000 between 2003 to 2004 as refinancing volumes on residential mortgages
saw dramatic declines. Trust fees declined sharply to $29,000 for the twelve
month period ended 2004 from $114,000 for the twelve month period ended 2003 as
2004 was the first full year First Federal operated under a revenue sharing
agreement with another financial institution on trust assets formerly managed by
First Federal. Brokerage fees increased sharply by $65,000 or 174.8% following a
mid-year 2004 acquisition of an independent brokerage firm as previously
discussed.
Noninterest expense. Noninterest expense increased to $5.5 million for the year
ended December 31, 2004 compared to $5.0 million for the year ended December 31,
2003. This increase came primarily in salaries and employee benefits due to
increased funding on a defined benefit pension plan, increased ESOP expense due
to the Company's higher average share price in 2004 compared to 2003, less
deferred loan origination fees due to lower mortgage volumes and wage increases
related to more employees from a brokerage acquisition that was completed late
June 2004. All other noninterest expense areas either declined slightly or only
saw very minor increases year to year.
Income tax expense. Income tax expense decreased from $689,000 in 2003 to
$611,000 in the current year. This decrease was mainly due to lower taxable
income for 2004 but was also assisted by increases in non-taxable income items
such as non-taxable security interest income and increases in earnings on cash
surrender value of life insurance. Income taxes were not affected by the
$735,500 non-cash impairment charge discussed earlier as no deferred tax asset
was created in regard to this transaction. Due to this fact, Northeast Indiana
Bancorp's effective tax rate was 38.4% (26.3% without impairment charge) in 2004
as compared to 26.3% in 2003.
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8.
Comparison of Years Ended December 31, 2003 and 2002
General. Net income for the year ended December 31, 2003 was $1.9 million
compared to net income of $1.6 million for 2002, an increase of $340,000. The
increase in net income was primarily the result of a decrease in provision for
loan losses of $732,000 combined with an increase in noninterest income of
$276,000. These items were partially offset by a decrease in net interest income
of $450,000 and an increase in income tax expense of $219,000.
Noninterest expense was relatively unchanged between periods at $5.0 million.
Further details regarding the changes in the income and expenses are discussed
below.
Interest Income. Interest income decreased $1.9 million or 13.5% to $12.4
million for the year ended December 31, 2003. The decrease in interest income
was primarily the result of loan interest income decreasing $1.6 million to
$10.6 million along with a decrease of $300,000 to $1.8 million in securities
and other interest earning assets. The average yield for the year on the loan
portfolio decreased to 6.91% in 2003 compared to 7.62% in 2002. The decrease in
loan interest income occurred as a result of a reduction in average balances of
loans outstanding in 2003 compared to 2002, and lower average rates during 2003.
Interest Expense. Interest expense for 2003 decreased $1.5 million or 18.5% over
2002 interest expense. The majority of the decrease was due to less interest
expense on deposits, which decreased $1.3 million in 2003. The average rate for
time deposits decreased 96 basis points from 2002 to 2003. The average rate for
money market accounts decreased by 69 basis points to 1.33% for 2003 along with
a decrease of 62 basis points on the average rate for savings accounts, and a
decrease of 53 basis points on NOW accounts. The average rate for other borrowed
funds declined 4 basis points to 5.04% in 2003.
Net interest income. Net interest income decreased $450,000 or 7.1% from $6.3
million to $5.8 million for the year ended December 31, 2003. The average spread
decreased to 2.41% from the 2.44% reported in 2002. Average interest-earning
assets margin decreased to 2.78% in 2003 from 2.87% in 2002. The net decreases
in both interest income and interest expense attributable to both
interest-earning assets and interest-bearing liabilities were due primarily to
decreases in rates and secondarily to decreases in volume.
Provision for Loan Losses. There were no provisions for loan loss in 2003
compared to $732,000 in 2002. This sharp decrease in provisions was possible due
to the Company's dramatic improvement in nonperforming loans as evidenced in
Note 3 to the Consolidated Financial Statements. The decreased provision for
loan losses less net charge-offs for the year resulted in a $364,000 decrease in
the allowance for loan losses. The allowance for loan losses of $1.8 million at
December 31, 2003 was a 17.0% decrease compared to December 31, 2002. Management
will continue to maintain the allowance for loan losses at a level deemed
adequate by management based on its quarterly analysis and will include
additional consideration of nonperforming loans.
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9.
Comparison of Years Ended December 31, 2003 and 2002 (continued)
Noninterest income. Noninterest income increased from $1.5 million in 2002 to
$1.7 million in 2003. The majority of this change occurred as a result of our
increases in other income to $699,000 in 2003 compared to $425,000 for 2002, an
increase of $274,000 or 64.3%. The two largest component increases in this area
were due to net gains on the sale of repossessed assets in 2003 of $48,000
compared to net losses on the same in 2002 of $116,000 and an increase to
$169,000 on cash surrender value of life insurance in 2003 compared to $100,000
in 2002. The former was a result of better residual values on repossessed assets
year to year and the latter due to additional purchases of bank-owned life
insurance ("BOLI") in 2003 of $2.1 million.
Noninterest expense. Total noninterest expense was unchanged at $5.0 million for
both 2003 and 2002. Slight increases in data processing and professional fees
were more than offset by declines in correspondent bank charges and other
expense between periods. All other areas were relatively unchanged year to year.
Income tax expense. Income tax expense increased from $471,000 in 2002 to
$689,000 in the current year. This increase was mainly due to higher taxable
income for 2003 partially offset by increases in non-taxable income items such
as non-taxable security interest income and increases in earnings on cash
surrender value of life insurance. Northeast Indiana Bancorp's effective tax
rate was 26.3% in 2003 as compared to 22.8% in 2002.
Asset/Liability Management
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First Federal, like other financial institutions, is subject to interest rate
risk to the extent that its interest-bearing liabilities reprice on a different
basis than its interest-earning assets. Office of Thrift Supervision ("OTS")
regulations provide a Net Portfolio Value ("NPV") approach to the quantification
of interest rate risk. In essence, this approach calculates the difference
between the present value of liabilities, expected cash flows from assets and
cash flows from off balance sheet contracts.
Management has established maximum limits for changes in net portfolio value
resulting from changes in interest rates based on consideration of First
Federal's portfolio mix of interest-earning assets and interest-bearing
liabilities along with management's objectives for managing these portfolios in
varying interest rate environments. Management monitors various indicators of
interest rate risk, including NPV, and expectations regarding interest rate
movements along with consideration of First Federal's overall capital levels to
determine acceptable levels of interest rate risk.
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10.
First Federal's interest-earning assets are composed primarily of loans,
especially mortgage loans. Management has offered adjustable rate loan products
to assist in the management of interest rate risk. At December 31, 2004,
adjustable rate loans comprised 40.7% of the total loan portfolio. The interest
rate exposure as outlined in the NPV table reflects our exposure to a rising
interest rate environment due to the concentration of longer term mortgage loans
funded by relatively shorter-term deposits and FHLB advances. In addition, the
interest rate risk is also impacted by adjustable rate loans, which are tied to
indices, which lag behind market rates. Management is aware of First Federal's
interest rate risk exposure in a rising interest rate environment. To address
this interest rate risk, which we would categorize as moderately high in
comparison to our peers, management will continue to market adjustable rate
mortgage loans when possible and review longer term funding sources. Management
also considers the current capital position of First Federal and the composition
of the loan portfolio and monitors these factors in conjunction with its
strategic plan of offering various mortgage loan products to customers in our
market area. As stated earlier, First Federal is now using the secondary market
to assist in managing our interest rate risk exposure. We are also making
adjustable rate commercial loans when possible. Nonetheless, our interest rate
exposure, particularly in a rising interest rate environment, will grow,
especially to the extent that loan demand produces increases in balance sheet
growth. While management monitors and, from time to time, takes actions to
adjust our interest rate risk, we believe a rising interest rate environment
will have an adverse impact on our profitability.
Presented below, as of December 31, 2004 and December 31, 2003, is an analysis
of First Federal's estimated interest rate risk as measured by changes in NPV
for instantaneous and sustained parallel shifts in interest rates, up and down
300 basis points in 100 point increments. Due to current low interest rates the
change in rates does not include results for the minus 200 basis points or minus
300 basis points scenarios. Assumptions used in calculating the amounts in this
table are those assumptions utilized by the OTS in assessing the interest rate
risk of the thrifts it regulates. NPV is calculated by the OTS for the purposes
of interest rate risk assessment and should not be considered as an indicator of
value of First Federal.
During 2004, our rate sensitivity showed a slight decrease over last year from
(246) bp at December 31, 2003 to (242) bp as of December 31, 2004 based on a 200
basis point increase in rates. The rising rate scenarios reflect the decreasing
Net Portfolio Value (NPV) of equity.
At December 31, 2004
-------------------------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Present Value of Assets
---------------------------------- -----------------------
Change In Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
(Dollars in Thousands)
+300 bp $ 18,174 $(10,821) (37)% 8.26% (408) bp
+200 22,349 (6,646) (23) 9.92 (242)
+100 26,200 (2,795) (10) 11.36 (98)
0 28,995 -- -- 12.34 --
-100 30 296 1,301 4 12.71 37
-200 -- -- -- -- --
-300 -- -- -- -- --
- --------------------------------------------------------------------------------
11.
At December 31, 2003
-------------------------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Present Value of Assets
---------------------------------- -----------------------
Change In Rates $ Amount $ Change % Change NPV Ratio Change
--------------- -------- -------- -------- --------- ------
(Dollars in Thousands)
+300 bp $ 15,525 $(10,870) (41)% 7.11% (411) bp
+200 19,634 (6,761) (26) 8.76 (246)
+100 23,426 (2,969) (11) 10.19 (103)
0 26,395 -- -- 11.22 --
-100 27,471 1,076 4 11.49 27
-200 -- -- -- -- --
-300 -- -- -- -- --
Due to the current low interest rate environment, the OTS's NPV model is not
calculating results for the minus 200 bp or minus 300 bp scenario. Based on
these limitations, in the event of a 200 basis point increase in interest rates
compared to a 100 basis point decrease in interest rates using NPV estimates as
of December 31, 2004, First Federal would experience a 23% decrease in NPV in a
rising rate environment, while experiencing a 4% increase in NPV in a declining
rate environment.
During periods of rising rates, the value of monetary assets and liabilities
decline. Conversely, during periods of falling rates, the value of monetary
assets and liabilities increase. However, the amount of change in value of
specific assets and liabilities due to changes in rates is not the same in a
rising rate environment as in a falling rate environment (i.e., the amount of
value increase under a specific rate decline may not equal the amount of value
decrease under an identical upward rate movement). Based upon the NPV
methodology, the increased level of interest rate risk experienced by First
Federal in 2004 was primarily due to present value losses on assets in a 200
basis point increase environment.
Rates on average interest earning assets continued to decline in 2004. These
lower average rate assets will lose more value in a 200 basis point increase
environment than could be offset through decreases in liability values using the
model's assumptions. Furthermore, to the extent that we use liabilities with
shorter terms to maturity than the assets in which we invest, we will continue
to experience increased levels of interest rate risk in a rising interest rate
environment.
In evaluating First Federal's exposure to interest rate risk, certain
shortcomings inherent in the method of analysis presented in the foregoing table
must be considered. For example, although certain assets and liabilities may
have similar maturities or periods to repricing, they may react in different
degrees to changes in market interest rates. Also, the interest rates on certain
types of assets and liabilities may fluctuate in advance of changes in market
interest rates, while interest rates on other types may lag behind changes in
market rates. Further, in the event of a change in interest rates, prepayments
and early withdrawal levels could deviate significantly from those assumed in
calculating the table. Finally, the ability of many borrowers to service their
debt may decrease in the event of an interest rate increase. As a result, the
actual effect of changing interest rates may differ considerably from that
presented in the foregoing table.
- --------------------------------------------------------------------------------
12.
Average Balances, Interest Rates and Yields
- -------------------------------------------
The following table presents for the periods indicated the total dollar amount
of interest income from average interest earning assets and the resultant
yields, as well as the interest expense on average interest bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are daily average balances. Nonaccruing loans have been
included in the table as loans carrying a zero yield.
___________________________Year Ended December 31,______________________
--------------2 0 0 4-------------- --------------2 0 0 3--------------
------- -------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
------- ---- ---- ------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) $168,042 $ 10,492 6.24% $153,378 $ 10,595 6.91%
Securities 35,390 1,288 3.64 41,677 1,395 3.34
FHLB stock 5,391 232 4.30 5,148 259 5.02
Other interest-earning assets 6,301 91 1.44 10,301 119 1.16
-------- -------- -------- --------
Total interest-earning
assets(1) 215,124 12,103 5.63 210,504 12,368 5.87
-------- -------- -------- --------
Non-interest earning assets 13,284 11,972
-------- --------
Total assets $228,408 $222,476
======== ========
Interest-bearing liabilities:
Savings $ 12,259 62 0.51 $ 11,181 71 0.64
Money market 23,632 275 1.16 20,765 275 1.33
NOW 13,352 60 0.45 12,943 70 0.54
Time 74,120 2,120 2.86 73,685 2,595 3.52
Borrowed funds 69,993 3,198 4.57 69,630 3,508 5.04
-------- -------- -------- --------
Total interest-bearing
liabilities 193,356 5,715 2.96 188,204 6,519 3.46
-------- -------- -------- --------
Non-interest bearing liabilities 8,503 7,552
-------- --------
Total liabilities 201,859 195,756
Total shareholders'
equity 26,549 26,720
-------- --------
Total liabilities and
shareholders' equity $228,408 $222,476
======== ========
Net interest income $ 6,388 $ 5,849
======== ========
Net interest rate spread 2.67% 2.41%
==== ====
Net interest earning assets $ 21,768 $ 22,300
======== ========
Net yield on average interest-
earning assets 2.97% 2.78%
==== ====
Average interest-earning assets to
average interest-bearing liabilities 1.11x 1.12x
==== ====
______Year Ended December 31,______
--------------2 0 0 2--------------
-------
Average Interest
Outstanding Earned/ Yield/
Balance Paid Rate
------- ---- ----
(Dollars in Thousands)
Interest-earning assets:
Loans receivable(1) $160,486 $ 12,223 7.62%
Securities 38,278 1,510 3.94
FHLB stock 4,947 298 6.02
Other interest-earning assets 15,915 266 1.67
-------- --------
Total interest-earning
assets(1) 219,626 14,297 6.51
-------- --------
Non-interest earning assets 9,982
--------
Total assets $229,608
========
Interest-bearing liabilities:
Savings $ 10,491 132 1.26
Money market 19,149 386 2.02
NOW 12,520 134 1.07
Time 81,804 3,663 4.48
Borrowed funds 72,488 3,682 5.08
-------- --------
Total interest-bearing
liabilities 196,452 7,997 4.07
-------- --------
Non-interest bearing liabilities 6,715
--------
Total liabilities 203,167
Total shareholders'
equity 26,441
--------
Total liabilities and
shareholders' equity $229,608
========
Net interest income $ 6,300
========
Net interest rate spread 2.44%
====
Net interest earning assets $ 23,174
========
Net yield on average interest-
earning assets 2.87%
====
Average interest-earning assets to
average interest-bearing liabilities 1.12x
====
- ----------
- --------------------------------------------------------------------------------
(1) Calculated net of deferred loan fees, loan discounts, loans in process and
allowance for loan losses. Also includes Loans Held for Sale net of lower
of cost or market.
13.
The following table presents the weighted average yields on loans, investments
and other interest-earning assets, and the weighted average rate on deposits and
borrowings and the resulting interest rate spreads at the dates indicated.
At December 31,
-------------------------
2004 2003 2002
----- ----- -----
Weighted average yield on:
Loans receivable ............................. 6.20% 6.43% 7.40%
Securities ................................... 3.89 4.09 4.08
Other interest-earning assets ................ 1.76 0.90 1.28
Combined weighted average yield on
interest-earning assets ............... 5.76 5.78 6.30
Weighted average rate on:
Savings ...................................... 0.50 0.50 0.97
Money market ................................. 1.19 1.09 1.63
NOW .......................................... 0.46 0.46 0.77
Time ......................................... 2.93 3.12 3.96
Borrowed funds ............................... 4.34 4.96 5.32
Repurchase agreements ........................ 2.24 0.88 1.18
Combined weighted average rate on
interest-bearing liabilities ............ 2.94 3.03 3.73
Spread ............................................ 2.82 2.75 2.57
The loans receivable yield, which is the largest portion of interest income,
decreased 23 basis points to 6.20%, a 3.6% decrease at the end of period 2004
compared to 6.43% at the end of period 2003. The overall weighted average yield
on interest earning assets only decreased 2 basis points to 5.76% at the end of
2004 down from 5.78% at the end of 2003. Interest-bearing liability rate changes
were also lower on most products. Time deposits decreased to 2.93% at the end of
2004 compared to 3.12% at the end of 2003, a 19 basis point decrease. Money
market accounts increased 10 basis points to 1.19% at the end of 2004 compared
to 1.09% at the end of 2003, a 9.2% increase. Borrowing rates decreased 62 basis
points in 2004 to 4.34% compared to 4.96% at the end of 2003. The repurchase
agreements reflect the end of period rates paid on our repurchase accounts that
complement our accounts with a sweep feature. The combined interest-bearing
liabilities weighted average rates decreased to 2.94% at the end of 2004
compared to 3.03% at the end of 2003. This 9 basis point decrease in interest
costs compared to the earning assets yield's smaller decrease of 2 basis points
caused the spread to widen to 2.82% at the end of 2004 compared to 2.75% at the
end of 2003, a 7 basis point improvement over 2003.
- --------------------------------------------------------------------------------
14.
Rate/Volume Analysis
- --------------------
The following schedule presents the dollar amount of changes in interest income
and interest expense for major components of interest-earning assets and
interest-bearing liabilities. It distinguishes between the changes related to
outstanding balances and that due to the changes in interest rates. For each
category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to:
o Changes in volume (i.e., changes in volume multiplied by old rate)
o Changes in rate (i.e., changes in rate multiplied by old volume)
For purposes of this table, changes attributable to both rate and volume, which
cannot be segregated, have been allocated proportionately to the change due to
volume and the change due to rate.
________________________Year Ended December 31,___________________________
2004 vs. 2003 2003 vs. 2002
----------------------------------- -----------------------------------
Increase Increase
(Decrease) Total (Decrease) Total
Due to Increase Due to Increase
Volume Rate (Decrease) Volume Rate (Decrease)
------ ---- ---------- ------ ---- ----------
(Dollars in Thousands)
Interest-earning assets:
Loans receivable $ 964 $(1,067) $ (103) $ (525) $(1,104) $(1,629)
Securities (222) 115 (107) 127 (242) (115)
FHLB stock 12 (39) (27) 12 (51) (39)
Other interest-
earning assets (53) 25 (28) (78) (68) (146)
------- ------- ------- ------- ------- -------
Total interest-
earning assets $ 701 $ (966) $ (265) $ (464) $(1,465) $(1,929)
======= ======= ======= ======= ======= =======
Interest-bearing
liabilities:
Savings $ 6 $ (15) $ (9) $ 8 $ (69) $ (61)
Money market 36 (36) -- 30 (141) (111)
NOW 2 (12) (10) 4 (68) (64)
Time 15 (490) (475) (339) (729) (1,068)
Borrowed funds (41) (269) (310) (83) (91) (174)
------- ------- ------- ------- ------- -------
Total interest-
bearing
liabilities $ 18 $ (822) $ (804) $ (380) $(1,098) $(1,478)
======= ======= ======= ======= ======= =======
Net interest income $ 539 $ (451)
======= =======
- --------------------------------------------------------------------------------
15.
Liquidity and Capital Resources
- -------------------------------
First Federal's primary sources of funds are deposits, borrowings from the FHLB,
the sale of fixed rate mortgages to the secondary market and principal and
interest payments on loans. While scheduled repayments of loans are a
predictable source of funds, deposit flows and mortgage prepayments are greatly
influenced by general interest rates, economic conditions and competition. First
Federal has maintained its liquidity position by, among other things, monitoring
its cash and cash equivalents while reducing balances in rate sensitive jumbo
deposits.
OTS regulations require First Federal to maintain sufficient liquidity to assure
its safe and sound operation. A measure of liquidity for thrift institutions is
the ratio of cash and eligible investments to a certain percentage of net
withdrawable savings and borrowings due within one year. As of December 31,
2004, First Federal's average liquidity ratio was 9.6%, of which 75.5% was
comprised of short-term investments. Management believes First Federal has
maintained adequate liquidity.
During the year ended December 31, 2004, there was a net decrease in cash and
cash equivalents of $5.9 million. The major source of funds during the year
included proceeds from sale of long-term fixed rate mortgages to the secondary
market of $2.2 million, proceeds from called/sold investments and principal
payments of $10.9 million, new advances from FHLB of $33.0 million and a net
increase in deposits of $1.9 million. These proceeds were used to purchase $6.7
million in securities, fund new loans of $5.2 million, purchase $7.9 million in
loans from other institutions, purchase $600,000 in life insurance premiums, and
purchase $2.3 million of Northeast Indiana Bancorp stock, and fund a net
decrease in other borrowed funds of $5.2 million.
During the year ended December 31, 2003, there was a net decrease in cash and
cash equivalents of $8.9 million. The major source of funds during the year
included proceeds from sale of long-term fixed rate mortgages to the secondary
market of $20.1 million, proceeds from called/sold investments and principal
payments of $25.8 million, new advances from FHLB of $15.0 million along with a
net increase in other borrowed funds providing $5.8 million. These proceeds were
used to purchase $27.1 million in securities, fund new loans of $9.3 million,
purchase $1.7 million in loans from other institutions, purchase $2.1 million in
life insurance premiums, and purchase $903,000 of Northeast Indiana Bancorp
stock.
Under currently effective capital regulations, savings associations must meet a
4.0% core capital requirement and a total capital to risk weighted assets ratio
of 8.0%. At December 31, 2004, First Federal's core capital ratio was 10.7% and
its total capital to risk weighted assets ratio was 16.7%. First Federal's
capital significantly exceeds all capital requirements currently in effect and
the institution is considered "well-capitalized" under federal regulations. See
Note 11 of the Notes to Consolidated Financial Statements.
During 2004, Northeast Indiana Bancorp completed its eleventh stock repurchase
program which began in March 2004; 77,546 shares of stock were purchased in 2004
related to this program. Northeast Indiana Bancorp implemented its twelfth stock
repurchase program in September 2004. Northeast Indiana Bancorp had repurchased
16,130 of the shares authorized for repurchase as of December 31, 2004. 13,650
shares were also repurchased upon the exercise of stock options in 2004 in
accordance with the stock option plan agreement. As stock is repurchased, it
becomes treasury stock and can be used for general corporate purposes.
- --------------------------------------------------------------------------------
16.
At December 31, 2004 the Company had 1,219,893 shares of treasury stock and
1,420,779 of common stock outstanding.
Impact of Inflation and Changing Prices
- ---------------------------------------
The Financial Statements have been prepared in accordance with accounting
principles generally accepted in the United States of America, which require the
measurement of financial position and operating results in terms of historical
dollars without consideration for changes in the relative purchasing power of
money over time due to inflation. The impact of inflation can be found in the
increased cost of Northeast Indiana Bancorp's operations. Nearly all of our
assets and liabilities are financial, unlike most industrial companies. As a
result, Northeast Indiana Bancorp's performance is directly impacted by changes
in interest rates, which are indirectly influenced by inflationary expectations.
Our ability to match the financial assets to the financial liabilities in its
asset/liability management will tend to minimize the change of interest rates on
our performance. Changes in investment rates do not necessarily move to the same
extent as changes in the price of goods and services.
Newly Issued But Not Yet Effective Accounting Standards
- -------------------------------------------------------
Financial Accounting Standard 123R requires all public companies to record
compensation cost for stock options provided to employees in return for employee
service. The cost is measured at the fair value of the options when granted, and
this cost is expensed over the employee service period, which is normally the
vesting period of the options. This will apply to awards granted or modified
after the first quarter or year beginning after December 15, 2005. Compensation
cost will also be recorded for prior option grants that vest after the date of
adoption. The effect on results of operations will depend on the level of future
option grants and the calculation of the fair value of the options granted at
such future date, as well as the vesting periods provided, and so cannot
currently be predicted.
Statement of Position 03-3 requires that a valuation allowance for loans
acquired in a transfer, including in a business combination, reflect only losses
incurred after acquisition and should not be recorded at acquisition. It applies
to any loan acquired in a transfer that showed evidence of credit quality
deterioration since it was made. The effect of this new standard on the
Company's financial position and results of operations is not expected to be
material upon adoption.
Critical Accounting Policies
- ----------------------------
Management uses many assumptions in accounting for its financial instruments in
conformity with accounting principles generally accepted in the United States of
America. These assumptions impact the presentation of the Company's consolidated
financial statements. Included within the summary of significant accounting
policies disclosed in Note 1 of the Notes to Consolidated Financial Statements
are accounting policies that management feels are critical to the fair
presentation of the consolidated financial statements.
- --------------------------------------------------------------------------------
17.
Management feels the most critical accounting policies involve the accounting
for loans, securities, and the allowance for loan losses. The combination of
these three items represents a significant percentage of the Company's assets as
well as accounting for a high percentage of Northeast Indiana Bancorp's interest
income. Any significant deviation from the Company's existing accounting on any
or all of these areas could impact the future financial performance of Northeast
Indiana Bancorp. For more detail on these areas, see Note 1 of the Notes to
Consolidated Financial Statements.
- --------------------------------------------------------------------------------
18.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of Directors
Northeast Indiana Bancorp, Inc.
Huntington, Indiana
We have audited the accompanying consolidated balance sheets of Northeast
Indiana Bancorp, Inc. as of December 31, 2004 and 2003 and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for the years ended December 31, 2004, 2003 and 2002. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Northeast Indiana
Bancorp, Inc. as of December 31, 2004 and 2003 and the results of its operations
and its cash flows for the years ended December 31, 2004, 2003 and 2002 in
conformity with accounting principles generally accepted in the United States of
America.
/s/ Crowe Chizek and Company LLC
Crowe Chizek and Company LLC
South Bend, Indiana
February 3, 2005
- --------------------------------------------------------------------------------
19.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2003
- --------------------------------------------------------------------------------
2004 2003
------------- -------------
ASSETS
Interest earning cash and cash equivalents $ 1,142,340 $ 6,849,198
Noninterest earning cash and cash equivalents 2,242,859 2,483,881
------------- -------------
Total cash and cash equivalents 3,385,199 9,333,079
Securities available for sale 38,903,998 43,687,318
Securities held to maturity (fair value: 2004 - $60,000;
2003 - $150,000) 60,000 150,000
Loans receivable, net of allowance for loan losses of
$1,357,505 in 2004 and $1,772,109 in 2003 174,800,272 163,676,825
Accrued interest receivable 830,837 798,722
Premises and equipment, net 2,175,981 2,061,781
Investments in limited liability partnerships 1,370,919 1,602,147
Cash surrender value of life insurance 5,159,178 4,352,129
Goodwill 130,972 --
Other intangible assets 187,242 --
Other assets 1,667,625 1,732,531
------------- -------------
Total assets $ 228,672,223 $ 227,394,532
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Demand - noninterest bearing $ 7,123,510 $ 5,945,039
Savings 11,830,095 10,916,937
NOW 13,689,018 13,005,299
MMDA 15,585,845 19,335,140
Time 75,722,300 72,807,321
------------- -------------
Total deposits 123,950,768 122,009,736
Borrowed funds 77,066,576 76,545,485
Accrued expenses and other liabilities 1,608,346 1,644,751
------------- -------------
Total liabilities 202,625,690 200,199,972
Shareholders' equity
Preferred stock, no par value; 500,000 shares
authorized; 0 shares issued -- --
Common stock, $.01 par value; 4,000,000 shares
authorized; 2,640,672 shares issued;
2004 - 1,420,779 shares outstanding;
2003 - 1,487,514 shares outstanding 26,407 26,407
Additional paid in capital 29,502,677 29,143,357
Retained earnings, substantially restricted 14,576,087 14,428,855
Unearned employee stock ownership plan shares (227,026) (351,190)
Unearned recognition and retention plan shares (50,531) --
Accumulated other comprehensive loss, net of tax (36,810) (236,943)
Treasury stock, at cost; 2004 - 1,219,893 shares;
2003 - 1,153,158 shares (17,744,271) (15,815,926)
------------- -------------
Total shareholders' equity 26,046,533 27,194,560
------------- -------------
Total liabilities and shareholders' equity $ 228,672,223 $ 227,394,532
============= =============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
20.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Interest income
Loans, including fees $ 10,492,255 $ 10,595,572 $ 12,223,690
Taxable securities 1,414,523 1,564,920 1,751,720
Non-taxable securities 105,556 88,633 56,282
Deposits with financial institutions 90,892 119,590 265,581
------------ ------------ ------------
Total interest income 12,103,226 12,368,715 14,297,273
Interest expense
Deposits 2,516,768 3,011,536 4,315,055
Borrowed funds 3,198,473 3,507,760 3,682,428
------------ ------------ ------------
Total interest expense 5,715,241 6,519,296 7,997,483
------------ ------------ ------------
Net interest income 6,387,985 5,849,419 6,299,790
Provision for loan losses 37,500 -- 732,300
------------ ------------ ------------
Net interest income after provision for loan
losses 6,350,485 5,849,419 5,567,490
Noninterest income
Service charges on deposit accounts 529,665 360,389 354,539
Net gain (loss) on securities (716,364) 18,427 (10,535)
Net gain on sale of loans 89,164 510,369 475,053
Trust fees 29,049 113,901 153,218
Brokerage fees 102,226 37,206 66,138
Other income 686,630 699,085 425,378
------------ ------------ ------------
Total noninterest income 720,370 1,739,377 1,463,791
Noninterest expense
Salaries and employee benefits 3,106,407 2,607,819 2,600,923
Occupancy 456,225 463,926 466,357
Data processing 645,002 667,745 621,523
Deposit insurance premium 18,840 19,733 23,570
Professional fees 257,495 248,978 240,688
Correspondent bank charges 216,063 210,273 224,734
Other expense 777,122 750,880 792,869
------------ ------------ ------------
Total noninterest expense 5,477,154 4,969,354 4,970,664
------------ ------------ ------------
Income before income taxes 1,593,701 2,619,442 2,060,617
Income tax expense 611,479 689,468 470,721
------------ ------------ ------------
Net income $ 982,222 $ 1,929,974 $ 1,589,896
============ ============ ============
Basic earnings per common share $ 0.69 $ 1.36 $ 1.09
============ ============ ============
Diluted earnings per common share $ 0.67 $ 1.31 $ 1.06
============ ============ ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
21.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
Unearned
Employee
Additional Stock
Common Paid in Retained Ownership
Stock Capital Earnings Plan Shares
----- ------- -------- -----------
Balance, January 1, 2002 $ 26,407 $ 28,874,771 $ 12,447,813 $ (620,566)
Net income -- -- 1,589,896 --
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale -- -- -- --
Total tax effect -- -- -- --
Total other comprehensive income -- -- -- --
Total comprehensive income -- -- -- --
Cash dividends ($.49 per share) -- -- (752,480) --
Purchase of 87,676 shares of treasury stock -- -- -- --
Issuance of 34,078 shares of treasury stock upon
exercise of stock options -- (16,685) -- --
Tax effect of stock plans -- 37,080 -- --
16,733 shares committed to be released
under the ESOP -- 105,293 -- 138,215
Amortization of RRP contributions -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2002 26,407 29,000,459 13,285,229 (482,351)
Net income -- -- 1,929,974 --
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale -- -- -- --
Total tax effect -- -- -- --
Total other comprehensive income -- -- -- --
Total comprehensive income -- -- -- --
Cash dividends ($.53 per share) -- -- (786,348) --
Purchase of 54,328 shares of treasury stock -- -- -- --
Issuance of 44,784 shares of treasury stock upon
exercise of stock options -- (52,347) -- --
Tax effect of stock plans -- 38,257 -- --
15,879 shares committed to be released
under the ESOP -- 156,988 -- 131,161
Amortization of RRP contributions -- -- -- --
------------ ------------ ------------ ------------
Balance, December 31, 2003 26,407 29,143,357 14,428,855 (351,190)
Accumulated
Unearned Other
Recognition Comprehensive Total
and Retention Income (Loss), Treasury Shareholders'
Plan Shares Net of Tax Stock Equity
----------- ---------- ----- ------
Balance, January 1, 2002 $ (12,555) $ 20,979 $(14,455,811) $ 26,281,038
Net income -- -- -- 1,589,896
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale -- 302,776 --
Total tax effect -- (184,200) --
------------
Total other comprehensive income -- 118,576 -- 118,576
------------
Total comprehensive income -- -- -- 1,708,472
Cash dividends ($.49 per share) -- -- -- (752,480)
Purchase of 87,676 shares of treasury stock -- -- (1,320,253) (1,320,253)
Issuance of 34,078 shares of treasury stock upon
exercise of stock options -- -- 373,168 356,483
Tax effect of stock plans -- -- -- 37,080
16,733 shares committed to be released
under the ESOP -- -- -- 243,508
Amortization of RRP contributions 8,637 -- -- 8,637
------------ ------------ ------------ ------------
Balance, December 31, 2002 (3,918) 139,555 (15,402,896) 26,562,485
Net income -- -- -- 1,929,974
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale -- (550,803) --
Total tax effect -- 174,305 --
------------
Total other comprehensive income -- (376,498) -- (376,498)
------------
Total comprehensive income -- -- -- 1,553,476
Cash dividends ($.53 per share) -- -- -- (786,348)
Purchase of 54,328 shares of treasury stock -- -- (903,433) (903,433)
Issuance of 44,784 shares of treasury stock upon
exercise of stock options -- -- 490,403 438,056
Tax effect of stock plans -- -- -- 38,257
15,879 shares committed to be released
under the ESOP -- -- -- 288,149
Amortization of RRP contributions 3,918 -- -- 3,918
------------ ------------ ------------ ------------
Balance, December 31, 2003 -- (236,943) (15,815,926) 27,194,560
- --------------------------------------------------------------------------------
(Continued)
22.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
Unearned
Employee
Additional Stock
Common Paid in Retained Ownership
Stock Capital Earnings Plan Shares
----- ------- -------- -----------
Balance at January 1, 2004 $ 26,407 $ 29,143,357 $ 14,428,855 $ (351,190)
Net income 982,222
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale
Total tax effect
Total other comprehensive income
Total comprehensive income
Cash dividends ($.57 per share) (834,990)
Purchase of 107,326 shares of treasury stock
Issuance of 37,591 shares of treasury stock upon
exercise of stock options 877
Tax effect of stock plans 132,306
15,032 shares committed to be released
under the ESOP 195,769 124,164
Purchase of 3,000 treasury shares for RRP 30,368
Amortization of RRP contributions
------------ ------------ ------------ ------------
Balance, December 31, 2004 $ 26,407 $ 29,502,677 $ 14,576,087 $ (227,026)
============ ============ ============ ============
Accumulated
Unearned Other
Recognition Comprehensive Total
and Retention Income (Loss), Treasury Shareholders'
Plan Shares Net of Tax Stock Equity
----------- ---------- ----- ------
Balance at January 1, 2004 $ -- $ (236,943) $(15,815,926) $ 27,194,560
Net income 982,222
Other comprehensive income:
Net change in unrealized gains (losses)
on securities available for sale 151,027
Total tax effect 49,106
------------
Total other comprehensive income 200,133 200,133
------------
Total comprehensive income 1,182,355
Cash dividends ($.57 per share) (834,990)
Purchase of 107,326 shares of treasury stock (2,343,157) (2,343,157)
Issuance of 37,591 shares of treasury stock upon
exercise of stock options 383,305 384,182
Tax effect of stock plans 132,306
15,032 shares committed to be released
under the ESOP 319,933
Purchase of 3,000 treasury shares for RRP (61,875) 31,507 --
Amortization of RRP contributions 11,344 11,344
------------ ------------ ------------ ------------
Balance, December 31, 2004 $ (50,531) $ (36,810) $(17,744,271) $ 26,046,533
============ ============ ============ ============
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
23.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
2004 2003 2002
------------ ------------ ------------
Cash flows from operating activities
Net income $ 982,222 $ 1,929,974 $ 1,589,896
Adjustments to reconcile net income
to net cash from operating activities:
Depreciation and amortization 615,393 500,310 555,379
Provision for loan losses 37,500 -- 732,300
Net (gain) loss on sale of:
Foreclosed real estate and repossessed assets 8,180 (43,577) 115,931
Premises and equipment 1,604 -- --
Loans held for sale (89,164) (510,369) (475,053)
Net (gain) loss on securities available for sale 716,364 (18,427) 10,535
Originations of loans held for sale (2,158,520) (19,145,087) (18,855,817)
Proceeds from loans sold 2,247,684 20,064,831 20,464,917
Reduction of obligation under ESOP 319,933 288,149 243,508
Amortization of RRP 11,344 3,918 8,637
Amortization of intangible assets 12,486 -- --
Net change in:
Other assets 84,301 (108,333) (487,036)
Accrued interest receivable (32,115) (104,129) 58,407
Accrued expenses and other liabilities (36,405) 438,895 88,787
------------ ------------ ------------
Total adjustments 1,738,585 1,366,181 2,460,495
------------ ------------ ------------
Net cash from operating activities 2,720,807 3,296,155 4,050,391
Cash flows from investing activities
Investment in limited liability partnership -- -- (500,000)
Purchases of securities available for sale (6,701,182) (27,121,059) (27,870,418)
Cash paid for acquisitions (437,500) -- --
Proceeds from maturities and principal payments of:
Securities available for sale 8,050,700 21,128,468 23,191,989
Securities held to maturity 90,000 75,000 81,000
Proceeds from sale of securities available for sale 2,721,405 4,595,171 1,405,188
Purchase of life insurance (600,000) (2,100,000) --
Purchases of loans (7,929,680) (1,735,793) (3,464,773)
Proceeds from sale of participation loans 573,551 -- --
Net change in loans (5,215,690) (9,261,881) 9,824,524
Proceeds from sale of foreclosed real estate and
repossessed assets 1,357,660 2,286,258 837,407
Expenditures on premises and equipment (333,609) (138,570) (136,677)
Proceeds from sale of premises and equipment -- -- 8,143
------------ ------------ ------------
Net cash from investing activities (8,424,345) (12,272,406) 3,376,383
Cash flows from financing activities
Net change in deposits 2,028,532 (346,916) (14,673,359)
Advances from FHLB 33,000,000 15,000,000 2,000,000
Repayment of FHLB advances (27,250,000) (19,000,000) --
Additional borrowings and payments of demand notes -- (100,000) 100,000
Net change in other borrowed funds (5,228,909) 5,751,563 (1,172,489)
Dividends paid (834,990) (786,348) (752,480)
Purchase of treasury stock (2,343,157) (903,433) (1,320,253)
Sale of treasury stock 384,182 438,056 356,483
------------ ------------ ------------
Net cash from financing activities (244,342) 52,922 (15,462,098)
------------ ------------ ------------
Net change in cash and cash equivalents (5,947,880) (8,923,329) (8,035,324)
Cash and cash equivalents at beginning of year 9,333,079 18,256,408 26,291,732
------------ ------------ ------------
Cash and cash equivalents at end of year $ 3,385,199 $ 9,333,079 $ 18,256,408
============ ============ ============
Cash paid for:
Interest $ 5,710,711 $ 6,589,699 $ 7,991,828
Income taxes 327,250 510,525 628,300
Non-cash transactions:
Transfer from loans to other real estate and repossessed assets 1,410,872 1,880,414 1,178,570
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of these consolidated financial statements.
24.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations and Principles of Consolidation: The consolidated financial
statements include the accounts of Northeast Indiana Bancorp, Inc. ("Northeast
Indiana Bancorp") and its wholly-owned subsidiary, First Federal Savings Bank
("First Federal") and its wholly-owned subsidiary Northeast Indiana Financial
("Northeast Indiana Financial"), together referred to as "the Company".
Northeast Indiana Bancorp was organized for the purpose of owning all of the
outstanding stock of First Federal. Intercompany transactions and balances have
been eliminated in consolidation.
The primary source of income for the Company is the origination of commercial
and residential real estate loans in northeastern Indiana. Loans secured by real
estate mortgages comprise approximately 77% and 79% of the loan portfolio at
December 31, 2004 and 2003, and are primarily secured by residential mortgages.
Use of Estimates: To prepare the consolidated financial statements in conformity
with accounting principles generally accepted in the United States of America,
management makes estimates and assumptions based on available information. These
estimates and assumptions affect the amounts reported in the financial
statements and the disclosures provided, and future results could differ. The
allowance for loan losses and fair values of financial instruments are
particularly subject to change.
Cash Flow Reporting: Cash and cash equivalents are defined as cash and due from
banks and short-term interest earning deposits in financial institutions with
original maturities under 90 days. Net cash flows are reported for customer loan
and deposit transactions as well as securities sold under agreements to
repurchase with original maturities of 90 days or less.
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported in other comprehensive income
or loss and shareholders' equity, net of tax. Other securities such as Federal
Home Loan Bank stock are carried at cost.
Interest income includes amortization of purchase premium or discount. Gains and
losses on sales are based on the amortized cost of the security sold. Securities
are written down to fair value when a decline in fair value is determined by
management to be "other than temporary" as defined by FASB 115. In estimating
other-than-temporary losses, management considers: (1) the length of time and
extent that fair value has been less than cost, (2) the financial condition and
near term prospects of the issuer, and (3) the Company's ability and intent to
hold the security for a period sufficient to allow for any anticipated recovery
in fair value.
- --------------------------------------------------------------------------------
(Continued)
25.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Loans: Loans that management has the intent and ability to hold for the
foreseeable future or until maturity or payoff are reported at the principal
balance outstanding, net of unearned interest, deferred loan fees and costs, and
an allowance for loan losses. Loans held for sale are reported at the lower of
cost or market, on an aggregate basis.
Interest income is reported on the interest method and includes amortization of
net deferred loan fees and costs over the loan term. Interest income is not
reported when full loan repayment is in doubt, typically when the loan is
impaired or payments are past due over 90 days. Past due status is based on the
contractual terms of the loan. Payments received on such loans are reported as
principal reductions. In all cases, loans are placed on nonaccrual or
charged-off at an earlier date if collection of principal or interest is
considered doubtful.
All interest accrued but not received for loans placed on nonaccrual is reversed
against interest income. Interest received on such loans is accounted for on the
cash-basis or cost-recovery method, until qualifying for return to accrual.
Loans are returned to accrual status when all the principal and interest amounts
contractually due are brought current and future payments are reasonably
assured.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance for probable credit losses, increased by the provision for loan losses
and decreased by charge-offs less recoveries. Management estimates the allowance
balance required using past loan loss experience, the nature and volume of the
portfolio, information about specific borrower situations and estimated
collateral values, economic conditions, and other factors. Allocations of the
allowance may be made for specific loans, but the entire allowance is available
for any loan that, in management's judgment, should be charged-off. Loan losses
are charged against the allowance when management believes the uncollectibility
of a loan balance is confirmed.
A loan is impaired when full payment under the loan terms is not expected.
Impairment is evaluated in total for smaller-balance loans of similar nature
such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
- --------------------------------------------------------------------------------
(Continued)
26.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Assets: Assets acquired through or instead of loan foreclosure are
initially recorded at the lower of the loan balance or fair value when acquired,
establishing a new cost basis. If the value subsequently declines, a valuation
allowance is recorded through expense. Costs after acquisition are expensed.
Foreclosed assets totaled $211,000 and $165,594 at December 31, 2004 and 2003.
Investments in Limited Liability Partnerships: These represent the Company's
investments in affordable housing projects for the primary purpose of available
tax benefits. They are accounted for using the cost or equity methods of
accounting depending on ownership. The excess of the carrying amount of the
investment over its estimated residual value is amortized during the periods in
which associated tax credits are allocated to the investor. The annual
amortization of the investment is based on the proportion of tax credits
received in the current year to total estimated tax credits to be allocated to
the Company. These investments are reviewed for impairment when events indicate
their carrying amounts may not be recoverable from future undiscounted cash
flows. If impaired, the investments are reported at discounted amounts.
Premises and Equipment: Land is carried at cost. Premises and equipment are
stated at cost less accumulated depreciation. Depreciation is computed over
asset useful lives on the straight line basis. The useful lives for buildings
and leasehold improvements range from 10 to 40 years. The useful lives for
furniture, fixtures and equipment range from 3 to 10 years.
Company (or Bank) Owned Life Insurance: The Company has purchased life insurance
policies on certain key executives. Company owned life insurance is recorded at
its cash surrender value, or the amount that can be realized.
Goodwill and Other Tangible Assets: Goodwill results from business acquisitions
and represents the excess of the purchase price over the fair value of acquired
tangible assets and liabilities and identifiable intangible assets. Goodwill is
assessed at least annually for impairment and any such impairment will be
recognized in the period identified.
Other tangible assets consist of acquired customer relationship intangible
assets arising from business acquisitions. They are initially measured at fair
value and then are amortized on an accelerated method over the estimated useful
lives.
Long-term Assets: These assets are reviewed for impairment when events indicate
their carrying amount may not be recoverable from future undiscounted cash
flows. If impaired, the assets are recorded at discounted amounts.
- --------------------------------------------------------------------------------
(Continued)
27.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities Sold Under Repurchase Agreements: Substantially all securities sold
under repurchase agreements represent amounts advanced by various customers.
Securities are pledged to cover these liabilities, which are not covered by
federal deposit insurance.
Stock Compensation: Employee compensation expense under stock options is
reported using the intrinsic value method. No stock-based compensation cost is
reflected in net income, as all options granted had an exercise price equal to
or greater than the market price of the underlying common stock at date of
grant. The following table illustrates the effect on net income and earnings per
common share if expense was measured using the fair value recognition provisions
of FASB Statement No. 123, Accounting for Stock-Based Compensation.
2004 2003 2002
---------- ---------- ----------
Net income as reported $ 982,222 $1,929,974 $1,589,896
Deduct: Stock-based compensation expense
determined under fair value based method (28,353) (23,219) (15,588)
---------- ---------- ----------
Pro forma net income $ 953,869 $1,906,755 $1,574,308
========== ========== ==========
Basic earnings per common share as reported $ 0.69 $ 1.36 $ 1.09
Pro forma basic earnings per common share 0.67 1.34 1.08
Diluted earnings per common share as reported 0.67 1.31 1.06
Pro forma diluted earnings per common share 0.65 1.29 1.05
The pro forma effects are computed using option pricing models, using the
following weighted-average assumptions as of grant date. No stock options were
granted in 2004.
2003 2002
----- -----
Risk-free interest rate 3.58% 4.28%
Expected option life in years 6 6
Expected stock price volatility 37.23% 24.7%
Dividend yield 3.09% 3.37%
Income Taxes: Income tax expense is the total of the current year income tax due
or refundable and the change in deferred tax assets and liabilities. Deferred
tax assets and liabilities are the expected future tax amounts for the temporary
differences between carrying amounts and tax bases of assets and liabilities,
computed using enacted tax rates. A valuation allowance, if needed, reduces
deferred tax assets to the amount expected to be realized.
- --------------------------------------------------------------------------------
(Continued)
28.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Employee Stock Ownership Plan: The cost of shares issued to the ESOP, but not
yet allocated to participants, is shown as a reduction of shareholders' equity.
Compensation expense is based on the market price of shares as they are
committed to be released to participants' accounts. Dividends on allocated ESOP
shares reduce retained earnings; dividends on unearned ESOP shares reduce debt
and accrued interest.
Financial Instruments: Financial instruments include credit instruments, such as
commitments to make loans and standby letters of credit, issued to meet customer
financing needs. The face amount for these items represents the exposure to
loss, before considering customer collateral or ability to repay. Such financial
instruments are recorded when they are funded.
Earnings Per Common Share: Basic earnings per common share is net income divided
by the weighted average number of common shares outstanding during the period.
ESOP and RRP shares are considered outstanding for this calculation unless
unearned. Diluted earnings per common share includes the dilutive effect of
additional potential common shares issuable under stock options and RRP plans.
Stock Dividends: Common share amounts related to the ESOP plan, stock
compensation plans and earnings and dividends per share are restated for stock
dividends.
Comprehensive Income: Comprehensive income consists of net income and other
comprehensive income or loss. Other comprehensive income or loss includes
unrealized gains and losses on securities available for sale, net of tax, which
are also recognized as separate components of shareholders' equity.
Industry Segment: Northeast Indiana Bancorp and its subsidiary are primarily
organized to operate in the banking industry. Substantially all revenues and
services are derived from banking products and services in northeastern Indiana.
While Northeast Indiana Bancorp's chief decision makers monitor various products
and services, operations are managed and financial performance is evaluated on a
company-wide basis. Accordingly, all of Northeast Indiana Bancorp's banking
operations are considered by management to be aggregated in one business
segment.
- --------------------------------------------------------------------------------
(Continued)
29.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Newly Issued But Not Yet Effective Accounting Standards: Financial Accounting
Standard 123R requires all public companies to record compensation cost for
stock options provided to employees in return for employee service. The cost is
measured at the fair value of the options when granted, and this cost is
expensed over the employee service period, which is normally the vesting period
of the options. This will apply to awards granted or modified after the first
quarter or year beginning after December 15, 2005. Compensation cost will also
be recorded for prior option grants that vest after the date of adoption. The
effect on results of operations will depend on the level of future option grants
and the calculation of the fair value of the options granted at such future
date, as well as the vesting periods provided, and so cannot currently be
predicted.
Statement of Position 03-3 requires that a valuation allowance for loans
acquired in a transfer, including in a business combination, reflect only losses
incurred after acquisition and should not be recorded at acquisition. It applies
to any loan acquired in a transfer that showed evidence of credit quality
deterioration since it was made. The effect of this new standard on the
Company's financial position and results of operations is not expected to be
material upon adoption.
Loss Contingencies: Loss contingencies, including claims and legal actions
arising in the ordinary course of business, are recorded as liabilities when the
likelihood of loss is probable and an amount or range of loss can be reasonably
estimated. Management does not believe there now are such matters that will have
a material effect on the Company's consolidated financial statements.
Dividend Restriction: Banking regulations require maintaining certain capital
levels and may limit the dividends paid by First Federal to Northeast Indiana
Bancorp or by Northeast Indiana Bancorp to shareholders.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in a separate note. Fair value estimates involve uncertainties and
matters of significant judgment regarding interest rates, credit risk,
prepayments, and other factors, especially in the absence of broad markets for
particular items. Changes in assumptions or in market conditions could
significantly affect the estimates.
Reclassifications: Some items in the prior year's financial statements were
reclassified to conform to the current presentation.
- --------------------------------------------------------------------------------
(Continued)
30.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES
The fair value of available for sale securities and the related gross unrealized
gains and losses recognized in accumulated other comprehensive income (loss)
were as follows:
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----------- ----------- -----------
Available for sale - 2004
U.S. Government agencies $ 9,677,252 $ 6,781 $ (44,527)
Mutual funds 4,250,538 -- (52,419)
Mortgage-backed 12,650,575 135,066 (103,505)
States and political
subdivisions 3,569,633 25,143 (30,805)
FHLB Stock 5,489,500 -- --
Equity 3,266,500 2,000 --
----------- ----------- -----------
$38,903,998 $ 168,990 $ (231,256)
=========== =========== ===========
Gross Gross
Fair Unrealized Unrealized
Value Gains Losses
----------- ----------- -----------
Available for sale - 2003
U.S. Government agencies $ 9,767,207 $ 59,152 $ (26,793)
Mutual funds 4,180,511 -- (22,557)
Mortgage-backed 17,627,711 161,488 (129,674)
States and political
subdivisions 3,131,589 43,087 (24,996)
FHLB Stock 5,253,300 -- --
Equity 3,727,000 65,000 (338,000)
----------- ----------- -----------
$43,687,318 $ 328,727 $ (542,020)
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
31.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
The carrying amount, unrecognized gains and losses, and fair value of securities
held to maturity were as follows:
Gross Gross
Carrying Unrecognized Unrecognized Fair
Amount Gains Losses Value
-------- ------------ ------------ --------
Held to maturity - 2004
Other debt securities $ 60,000 $ -- $ -- $ 60,000
-------- -------- -------- --------
$ 60,000 $ -- $ -- $ 60,000
======== ======== ======== ========
Held to maturity - 2003
States and political
subdivisions $ 35,000 $ -- $ -- $ 35,000
Other debt securities 115,000 -- -- 115,000
-------- -------- -------- --------
$150,000 $ -- $ -- $150,000
======== ======== ======== ========
Contractual maturities of debt securities at year end 2004 were as follows.
Securities not due at a single maturity date, primarily mortgage-backed
securities and mutual funds backed by debt securities, are shown separately.
--Available for Sale-- ------Held to Maturity------
------------------ ----------------
Fair Carrying Fair
Value Amount Value
----------- ----------- -----------
Due in one year or less $ 5,022,700 $ 60,000 $ 60,000
Due from one to five years 2,359,271 -- --
Due from five to ten years 5,739,661 -- --
Due in over ten years 125,253 -- --
Mutual funds 4,250,538 -- --
Mortgage backed securities 12,650,575 -- --
----------- ----------- -----------
$30,147,998 $ 60,000 $ 60,000
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
32.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
Sales of securities available for sale were as follows:
2004 2003 2002
----------- ----------- -----------
Proceeds $ 2,721,405 $ 4,595,171 $ 1,405,188
Gross gains 31,824 24,701 3,663
Gross losses (12,688) (6,274) (14,198)
Securities pledged at year end 2004 and 2003 had a carrying value of $17,013,000
and $25,431,000, and were pledged to secure securities sold under repurchase
agreements and Federal Home Loan Bank advances.
Securities with unrealized losses at year end 2004 not recognized in income are
as follows:
Continued Unrealized Continued Unrealized
Loss For Less than Loss For 12 Months
----------12 Months--------- -----------or More---------- -----------Total------------
--------- ------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
------------------------- ----------- ----------- ----------- ----------- ----------- -----------
U.S. Government agencies $ 6,670,312 $ (44,527) $ -- $ -- $ 6,670,312 $ (44,527)
Mutual funds -- -- 4,250,538 (52,419) 4,250,538 (52,419)
Mortgage-backed 2,262,862 (14,528) 3,830,404 (88,977) 6,093,266 (103,505)
State and political
subdivisions 1,890,505 (25,021) 245,683 (5,784) 2,136,188 (30,805)
--------------------------------------------------------------------------------------------------
Total temporarily impaired $10,823,679 $ (84,076) $ 8,326,625 $ (147,180) $19,150,304 $ (231,256)
==================================================================================================
Securities with unrealized losses at year end 2003 not recognized in income are
as follows:
Continued Unrealized Continued Unrealized
Loss For Loss For
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Description of Securities Value Loss Value Loss Value Loss
- ------------------------- ----------- ----------- ----------- ----------- ----------- -----------
U.S. Government agencies $ 3,495,756 $ (26,793) $ -- $ -- $ 3,495,756 $ (26,793)
Mutual funds 4,180,511 (22,557) -- -- 4,180,511 (22,557)
Mortgage-backed 8,245,451 (129,674) -- -- 8,245,451 (129,674)
State and Political
subdivisions 1,519,820 (24,996) -- -- 1,519,820 (24,996)
Equity -- -- 2,662,000 (338,000) 2,662,000 (338,000)
--------------------------------------------------------------------------------------------------
Total temporarily impaired $17,441,538 $ (204,020) $ 2,662,000 $ (338,000) $20,103,538 $ (542,020)
==================================================================================================
- --------------------------------------------------------------------------------
(Continued)
33.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 2 - SECURITIES (Continued)
At December 31, 2004, management recorded a non-cash impairment charge through
earnings of $735,500 for the decline in the value of $1.25 million of Fannie Mae
("FNMA") and $1.75 million of Freddie Mac ("FHLMC") floating rate preferred
stock securities it holds. The recent downgrade in rating on the FNMA security
due to recently disclosed accounting issues, the duration of the suppressed
market value on both the FNMA and FHLMC securities and inability to project when
market value recovery would occur led management to record the write-down. The
unrealized losses on marketable equity securities decreased from $748,000 at
September 30, 2004 to $ -0- at December 31, 2004 as a result of the non-cash
impairment charge. The fair value of the FNMA and FHLMC securities was $2.26
million at December 31, 2004.
Some of the Company's debt securities had unrealized losses as well at year end
2004. With the shorter average lives on these instruments compared to equity
securities, management believes its underlying investment will be recovered at
par by existing maturity dates.
NOTE 3 - LOANS RECEIVABLE, NET
Year end loans were as follows:
2004 2003
------------- -------------
Mortgage
Secured by one-to-four family residences $ 97,942,499 $ 91,636,930
Secured by other properties 26,306,421 25,133,492
Construction - residential 2,613,400 6,795,706
Construction - nonresidential 3,317,912 2,673,112
Automobile 10,274,648 9,591,277
Credit card 1,798,417 1,985,439
Commercial 25,718,871 21,955,578
Home equity and second mortgage 7,952,063 6,775,864
Other consumer 3,252,282 2,831,756
------------- -------------
179,176,513 169,379,154
Net of:
Loans in process (82,821) (134,411)
Undisbursed portion of construction loans (2,684,115) (3,503,029)
Net deferred loan origination fees (251,800) (292,780)
Allowance for loan losses (1,357,505) (1,772,109)
------------- -------------
Loans receivable, net $ 174,800,272 $ 163,676,825
============= =============
- --------------------------------------------------------------------------------
(Continued)
34.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 3 - LOANS RECEIVABLE, NET (Continued)
Activity in the allowance for loan losses was as follows:
2004 2003 2002
----------- ----------- -----------
Balance at beginning of year $ 1,772,109 $ 2,135,630 $ 1,954,900
Provision charged to income 37,500 -- 732,300
Charge-offs (608,515) (647,909) (836,914)
Recoveries 156,411 284,388 285,344
----------- ----------- -----------
Balance at end of year $ 1,357,505 $ 1,772,109 $ 2,135,630
=========== =========== ===========
Impaired loans were as follows:
2004 2003
---------- ----------
Year-end loans with no allocated allowance
for loan losses $ -- $ --
Year-end loans with allocated allowance
for loan losses 2,224,606 2,495,469
---------- ----------
Total $2,224,606 $2,495,469
========== ==========
2004 2003 2002
---------- ---------- ----------
Amount of the allowance for loan
losses allocated $ 311,778 $ 592,517 $ 959,108
Average of impaired loans during the year 2,257,324 3,756,415 5,564,385
Interest income recognized during impairment 82,759 156,114 366,874
Cash-basis interest income recognized 80,968 155,781 365,208
Nonperforming loans were as follows:
2004 2003
---------- ----------
Loans past due over 90 days still on accrual $ -- $ --
Nonaccrual loans 1,713,000 2,413,000
Nonperforming loans and impaired loans are defined differently. Some loans may
be included in both categories, whereas other loans may only be included in one
category.
- --------------------------------------------------------------------------------
(Continued)
35.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 4 - SECONDARY MORTGAGE MARKETING ACTIVITIES
Activity for capitalized mortgage servicing rights was as follows:
2004 2003
--------- ---------
Servicing rights:
Beginning of year $ 307,007 $ 248,681
Additions 21,583 195,605
Amortized to expense (51,984) (137,279)
--------- ---------
End of year $ 276,606 $ 307,007
========= =========
NOTE 5 - PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
2004 2003
----------- -----------
Land $ 458,331 $ 458,331
Automobiles 40,392 40,392
Buildings and leasehold improvements 2,046,946 2,038,953
Furniture, fixtures and equipment 1,807,596 1,519,049
----------- -----------
Total cost 4,353,265 4,056,725
Accumulated depreciation and amortization (2,177,284) (1,994,944)
----------- -----------
$ 2,175,981 $ 2,061,781
=========== ===========
Depreciation expense was $237,000, $253,000 and $250,000 for 2004, 2003 and
2002.
- --------------------------------------------------------------------------------
(Continued)
36.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 6 - GOODWILL AND INTANGIBLE ASSETS
Goodwill
The change in balance for goodwill during the year is as follows:
2004
--------
Beginning of year $ --
Acquired goodwill 130,972
--------
End of year $130,972
========
Acquired Intangible Assets
Acquired intangible assets were as follows as of year end:
2004
-------------------------
Gross
Carrying Accumulated
Amount Amortization
-------- ------------
Amortized intangible assets:
Customer relationship intangibles $199,728 $ 12,486
-------- --------
Total $199,728 $ 12,486
======== ========
Aggregate amortization expense was $12,486 for 2004.
NOTE 7 - DEPOSITS
Time deposits of $100,000 or more were $29,274,000 and $26,418,000 at year end
2004 and 2003.
Scheduled maturities of time deposits for the next five years were as follows:
2005 $45,783,645
2006 23,811,337
2007 5,668,441
2008 344,125
2009 14,752
Thereafter 100,000
-----------
$75,722,300
===========
- --------------------------------------------------------------------------------
(Continued)
37.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 8 - BORROWED FUNDS
Year end borrowed funds were as follows:
2004 2003
----------- -----------
Federal Home Loan Bank (FHLB) advances $68,750,000 $63,000,000
Securities sold under repurchase agreements 8,316,576 13,545,485
----------- -----------
$77,066,576 $76,545,485
=========== ===========
Securities Sold Under Agreements To Repurchase
Securities sold under agreements to repurchase are secured by mortgage-backed
securities with a carrying amount of $9,423,000 and $13,562,000 at year-end 2004
and 2003.
Securities sold under agreements to repurchase are financing arrangements that
mature within one day. At maturity, the securities underlying the agreements are
returned to the Company. Information concerning securities sold under agreements
to repurchase is summarized as follows:
2004 2003
----------- -----------
Average daily balance during the year $ 6,273,679 $ 4,810,814
Average interest rate during the year 1.48% 0.99%
Maximum month-end balance during the year $15,715,902 $13,545,485
Weighted average interest rate at year-end 2.24% 0.88%
- --------------------------------------------------------------------------------
(Continued)
38.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 8 - BORROWED FUNDS (continued)
FHLB Advances
FHLB advances have fixed and variable interest rates ranging from 1.55% to
6.88%. Scheduled maturities and the weighted average interest rates by maturity
at year end 2004 were as follows:
Weighted
Average
Interest
Rate
----
2005 $11,750,000 1.97%
2006 5,000,000 2.99
2007 10,000,000 6.65
2008 6,000,000 4.74
2009 -- --
Thereafter 36,000,000 4.59
-----------
$68,750,000 4.34
===========
FHLB advances are secured by FHLB stock, eligible mortgage loans and
specifically pledged securities. At December 31, 2004 and 2003, in addition to
FHLB stock, collateral of approximately $94.9 million and $90.0 million was
pledged to the FHLB to secure advances outstanding.
In addition, $36,000,000 of the advances outstanding at December 31, 2004
contained options with dates ranging from March 1, 2005 to December 21, 2005,
whereby the interest rate may be adjusted by the FHLB, at which time the
advances may be repaid at the option of First Federal without penalty.
- --------------------------------------------------------------------------------
(Continued)
39.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS
Employee Pension Plan: First Federal is part of a noncontributory multi-employer
defined benefit pension plan covering substantially all employees. The trustees
of the Financial Institutions Retirement Fund administer the plan. There is no
separate actuarial valuation of plan benefits nor segregation of plan assets
specifically for First Federal because the plan is a multi-employer plan and
separate actuarial valuations are not made with respect to each employer nor are
the plan assets so segregated. Expense for 2004, 2003 and 2002 was approximately
$149,000, $95,000 and $50,000.
401(k) Plan: Northeast Indiana Bancorp has a 401(k) plan for all employees who
have completed one year of service (1,000 hours) and attained a minimum age of
21 years. Participants may make deferrals up to 75% of compensation. Northeast
Indiana Bancorp matches 50% of elective deferrals on the first 6% of the
participant's compensation. Expense for 2004, 2003 and 2002 was approximately
$46,000, $45,000 and $40,000.
Supplemental Retirement Plans: First Federal has a supplemental retirement plan
for the CEO and a deferred compensation plan for certain directors of First
Federal. First Federal is recording an expense equal to the change in the
present value of the payment due at retirement based on the projected remaining
years of service using the projected unit credit method. The balance of the
plans was approximately $652,000 and $549,000 at year-end 2004 and 2003. Expense
related to the plans was approximately $186,000, $154,000 and $130,000 for 2004,
2003 and 2002.
First Federal has purchased insurance on the lives of the participants in the
supplemental retirement plan and the deferred compensation plan with First
Federal as beneficiary. In addition, life insurance was purchased on a pool of
officers both during 2003 and 2004 with First Federal as beneficiary. The cash
surrender value of the life insurance was approximately $5,159,000 and
$4,352,000 at year-end 2004 and 2003. The income derived from the investment in
life insurance included in other income was approximately $207,000, $169,000 and
$100,000 for 2004, 2003 and 2002.
Employee Stock Ownership Plan (ESOP): An ESOP exists for the benefit of
substantially all employees. Contributions to the ESOP are made by Northeast
Indiana Bancorp and are determined by the Board of Directors at their
discretion. The contributions may be made in the form of cash or common stock.
The annual contributions may not be greater than the amount deductible for
federal income tax purposes and cannot cause Northeast Indiana Bancorp to
violate regulatory capital requirements.
- --------------------------------------------------------------------------------
(Continued)
40.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 9 - EMPLOYEE BENEFITS (Continued)
To fund the plan, the ESOP borrowed $1,745,700 from Northeast Indiana Bancorp
for the purpose of purchasing 211,261 shares of stock at $8.26 per share.
Principal payments on the loan are due in equal semi-annual installments over a
twelve-year period beginning June 30, 1995. Interest is payable semi-annually
during the term of the loan at 6.65%. The loan is collateralized by the shares
of Northeast Indiana Bancorp's common stock purchased with the proceeds and will
be repaid by the ESOP with funds from First Federal's contributions to the ESOP
and earnings on ESOP assets.
Shares are allocated among participants each December 31 on the basis of debt
service paid during the year by the ESOP on the loan from Northeast Indiana
Bancorp to total debt service, according to each participant's relative
compensation.
Cash contributions, including dividends on unearned ESOP shares, were
approximately $173,000 during 2004, $182,000 during 2003 and $192,000 during
2002. ESOP compensation expense was approximately $320,000, $288,000 and
$244,000 for 2004, 2003 and 2002.
ESOP shares at year end are as follows:
2004 2003
-------- --------
Allocated shares 105,373 108,551
Shares released for allocation 15,032 15,879
Unreleased shares 27,485 42,517
Shares vested and withdrawn 63,371 44,314
-------- --------
Total shares 211,261 211,261
======== ========
Fair value of unreleased shares $552,449 $894,558
======== ========
Recognition and Retention Plan (RRP): The RRP provides for issue of shares to
directors, officers and employees. The maximum total shares available under the
RRP was 105,620, and 14,126 shares are available for future grants. There were
3,000 new RRP grants awarded in 2004, after no new RRP grants in 2003 or 2002.
The expense associated with the RRP was approximately $11,000, $4,000 and $9,000
in 2004, 2003 and 2002.
- --------------------------------------------------------------------------------
(Continued)
41.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES
Income tax expense is summarized as follows:
2004 2003 2002
--------- --------- ---------
Current federal $ 360,135 $ 389,621 $ 491,123
Deferred federal 74,200 105,001 (159,336)
Current state 131,656 153,631 171,982
Deferred state 45,488 41,215 (33,048)
--------- --------- ---------
Income tax expense $ 611,479 $ 689,468 $ 470,721
========= ========= =========
Effective tax rates differ from federal statutory rates applied to financial
statement income due to the following:
2004 2003 2002
--------- --------- ---------
Federal statutory rate of 34% times financial
statement income before income taxes $ 541,858 $ 890,611 $ 700,610
Tax effect of:
State tax, net of federal income tax effect 60,229 128,598 91,696
Low income housing credit (237,200) (259,700) (250,000)
Tax exempt income (127,440) (121,172) (95,349)
Impairment on available for sale securities 250,070 -- --
ESOP market value adjustment 66,562 53,376 35,800
Other, net 57,400 (2,245) (12,036)
--------- --------- ---------
Income tax expense $ 611,479 $ 689,468 $ 470,721
========= ========= =========
The effective tax rate is 38.4%, 26.3% and 22.8% for 2004, 2003, and 2002.
The components of the net deferred tax asset recorded in the balance sheet at
year end are as follows:
2004 2003
---------- ----------
Deferred tax assets
Deferred compensation $ 258,639 $ 217,482
Bad debts 538,859 701,933
Deferred loan fees 99,738 115,970
Unearned compensation 89,391 84,898
Interest on non-accrual loans 35,079 79,929
Low income housing credit carryforwards 116,422 24,767
Other 32,596 4,891
---------- ----------
Total 1,170,724 1,229,870
---------- ----------
- --------------------------------------------------------------------------------
(Continued)
42.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 10 - INCOME TAXES (Continued)
2004 2003
--------- ---------
Deferred tax liabilities
Depreciation $(145,012) $(132,880)
Unrealized gain on securities available for sale -- (23,650)
FHLB stock dividends (168,897) (75,338)
Low income housing partnership (11,942) (58,897)
--------- ---------
Total (325,851) (290,765)
--------- ---------
Net deferred tax asset $ 844,873 $ 915,455
========= =========
Retained earnings at December 31, 2004 and 2003 include approximately $1.3
million for which no deferred federal income tax liability has been recognized.
This amount represents an allocation of income to bad debt deductions for tax
purposes only. Reduction of amounts so allocated for purposes other than tax bad
debt losses or adjustments arising from carryback of net operating losses would
create income for tax purposes only, which would be subject to the then-current
corporate income tax rate. The unrecorded deferred income tax liability on the
above amount was approximately $442,000 at December 31, 2004 and 2003.
NOTE 11 - REGULATORY MATTERS
First Federal is subject to regulatory capital requirements administered by
federal regulatory agencies. Capital adequacy guidelines and prompt corrective
action regulations involve quantitative measures of assets, liabilities, and
certain off-balance-sheet items calculated under regulatory accounting
practices.
Capital amounts and classifications are also subject to qualitative judgments by
regulators about components, risk weightings, and other factors, and the
regulators can lower classifications in certain cases. Failure to meet various
capital requirements can initiate regulatory action that could have a direct
material effect on the financial statements.
Prompt corrective action regulations provide five classifications: well
capitalized, adequately capitalized, undercapitalized, significantly
undercapitalized, and critically undercapitalized, although these terms are not
used to represent overall financial condition. If only adequately capitalized,
regulatory approval is required to accept brokered deposits. If
under-capitalized, capital distributions are limited, as is asset growth and
expansion, and capital restoration plans are required.
- --------------------------------------------------------------------------------
(Continued)
43.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 11 - REGULATORY MATTERS (Continued)
At year end, actual First Federal capital levels (in millions) and minimum
required levels were:
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2004
- ----
Total capital
(to risk weighted assets) $25.5 16.7% $12.2 8.0% $15.3 10.0%
Tier 1 (core) capital
(to risk weighted assets) 24.4 16.0 6.1 4.0 9.2 6.0
Tier 1 (core) capital
(to adjusted total assets) 24.4 10.7 9.1 4.0 11.4 5.0
Tier 1 (core) capital
(to average assets) 24.4 10.7 9.1 4.0 11.4 5.0
Minimum Required
To Be Well
Minimum Required Capitalized
For Capital Under Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
2003
- ----
Total capital
(to risk weighted assets) $26.4 17.8% $11.9 8.0% $14.8 10.0%
Tier 1 (core) capital
(to risk weighted assets) 25.2 17.0 5.9 4.0 8.9 6.0
Tier 1 (core) capital
(to adjusted total assets) 25.2 11.1 9.1 4.0 11.4 5.0
Tier 1 (core) capital
(to average assets) 25.2 11.3 8.9 4.0 11.1 5.0
First Federal was categorized as well capitalized at year end 2004 and 2003.
Regulations of the Office of Thrift Supervision limit the amount of dividends
and other capital distributions that may be paid by savings institutions without
prior approval of the Office of Thrift Supervision. The regulatory restriction
is based on a three-tiered system with the greatest flexibility being afforded
to well-capitalized (Tier 1) institutions. First Federal is currently a Tier 1
institution. Accordingly, First Federal can make, without prior regulatory
approval, distributions during a calendar year up to 100% of its retained net
income for the calendar year-to-date plus retained net income for the previous
two calendar years as long as First Federal would remain well-capitalized, as
defined by the Office of Thrift Supervision prompt corrective action
regulations, following the proposed distribution. At year end 2004, the Bank had
no retained earnings available for distribution without regulatory approval.
- --------------------------------------------------------------------------------
(Continued)
44.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 12 - COMMITMENTS AND CONTINGENCIES AND FINANCIAL INSTRUMENTS WITH
OFF-BALANCE-SHEET RISK
Some financial instruments, such as loan commitments, credit lines, letters of
credit, and overdraft protection, are issued to meet customer financing needs.
These agreements to provide credit or to support the credit of others, as long
as conditions established in the contract are met, usually have expiration
dates. Commitments may expire without being used. Off-balance-sheet risk to
credit loss exists up to the face amount of these instruments, although material
losses are not anticipated. The same credit policies are used to make such
commitments as are used for loans, including obtaining collateral at exercise of
the commitment.
Financial instruments with off-balance-sheet risk were as follows at year end.
2004 2003
----------- -----------
Fixed rate commitments $ 6,218,431 $ 6,956,076
Variable rate commitments 10,358,931 12,438,597
Credit card arrangements 4,051,233 3,841,561
Letters of credit 2,117,497 1,949,647
Most loan commitments have terms up to 60 days. At year end 2004, fixed
commitments have contractual interest rates ranging from 4.75% to 7.75%. Credit
card interest rates are fixed at 14.9% or 9.8%. Most variable rate arrangements
are tied either to the national monthly median cost of funds, prime rate or the
U.S. Treasury bill rate and have spreads between 0% and 5%.
Certain executives of the Bank have employment contracts, which are based upon
changes of control. The employment contracts provide for the payment of one to
three years worth of the officers' salaries upon a change of control.
NOTE 13 - STOCK OPTIONS
Options to buy stock have been granted to directors, officers and employees
under two different stock option and incentive plans. Exercise price is the
market price at date of grant. The maximum option term is ten years and options
vest over five years under both plans. The Company had almost awarded all stock
options under the original stock option plan by the year ended 2001. As such,
the 2002 Omnibus Incentive Plan was added to the Company's proxy statement and
approved by the shareholders at the May 1, 2002 Northeast Indiana Bancorp, Inc.
Annual Meeting. There were 158,753 new stock options approved under the new
plan. At year end 2004, 141,474 shares were authorized for future grants.
- --------------------------------------------------------------------------------
(Continued)
45.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS (Continued)
Information about option grants follows:
Number Exercise Fair Value
of Options Price of Grants
---------- ----- ---------
Outstanding, end of 2001 196,007
Granted 5,000 $ 14.45 $ 3.16
Granted 2,500 14.63 2.89
Exercised (25,763) 9.71
Exercised (3,300) 14.66
Exercised (2,200) 11.31
Exercised (1,815) 12.60
Exercised (1,000) 10.19
-------
Outstanding, end of 2002 169,429
-------
Granted 5,000 15.27 2.96
Granted 10,000 20.64 7.24
Exercised (43,934) 9.71
Exercised (550) 14.66
Exercised (300) 11.31
Forfeited (1,150) 12.91
-------
Outstanding, end of 2003 138,495
-------
Exercised 33,391 9.71
Exercised 500 10.19
Exercised 1,600 11.31
Exercised 1,100 14.66
Exercised 1,000 20.64
Forfeited (300) 11.31
-------
Outstanding, end of 2004 100,604
=======
Options outstanding at year end were as follows:
2004 2003 2002
----------- ----------- -----------
Number of options 100,604 138,495 169,429
Minimum exercise price $ 9.71 $ 9.71 $ 9.71
Maximum exercise price 20.64 20.64 18.49
Weighted-average exercise price 11.92 11.46 10.37
Weighted-average remaining option life 3.07 years 3.67 years 3.76 years
- --------------------------------------------------------------------------------
(Continued)
46.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 13 - STOCK OPTIONS (Continued)
Exercisable options outstanding at year-end 2004 were as follows:
Range of Number of Weighted Average
Exercise Prices Options Exercisable Exercise Price
--------------- ------------------- --------------
$9.00-$11.99 66,724 $ 9.71
$12.00-$14.99 8,750 13.95
$15.00-$17.99 2,815 16.79
$18.00-$20.99 2,815 19.25
------ ------
81,104 $10.75
====== ======
There were 81,104, 110,795 and 149,103 options exercisable at year end 2004,
2003 and 2002. The weighted-average exercise price of options exercisable at
year end 2004, 2003 and 2002 was $10.75, $10.24 and $9.95.
NOTE 14 - RELATED PARTY TRANSACTIONS
Certain directors and officers of First Federal are loan customers. A summary of
related party loan activity for loans aggregating $60,000 or more to any one
related party is as follows:
Balance - January 1, 2004 $ 3,402,556
New loans 923,193
Repayments (1,011,199)
Changes in related parties during the year --
-----------
Balance - December 31, 2004 $ 3,314,550
===========
Related party deposits were approximately $619,000 and $621,000 at year end 2004
and 2003.
- --------------------------------------------------------------------------------
(Continued)
47.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 15 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Following are carrying amounts and estimated fair values at year end (in
thousands):
2 0 0 4 2 0 0 3
------- -------
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
--------- ---------- --------- ----------
Financial assets:
- -----------------
Cash and cash equivalents $ 3,385 $ 3,385 $ 9,333 $ 9,333
Securities available for sale 38,904 38,904 43,687 43,687
Securities held to maturity 60 60 150 150
Loans receivable, net 174,800 177,687 163,677 167,023
Accrued interest receivable 831 831 799 799
Investments in limited
liability partnerships 1,371 1,371 1,602 1,602
Cash surrender value of life
insurance 5,159 5,159 4,352 4,352
Financial liabilities:
- ----------------------
Deposits (123,951) (123,944) (122,010) (123,491)
Borrowed funds (77,067) (79,416) (76,545) (82,133)
Accrued interest payable (175) (175) (170) (170)
For purposes of the above disclosures of estimated fair value, the following
assumptions were used. The estimated fair value for cash and cash equivalents,
accrued interest, investments in limited liability partnerships and cash
surrender value of life insurance is considered to approximate cost. The
estimated fair value for securities is based on quoted market values for the
individual securities or equivalent securities.
The estimated fair value for loans held for sale is based on market quotes. The
estimated fair value for loans is based on estimates of the rate that would be
charged for similar such loans at December 31, 2004 and 2003, applied for the
time period until estimated repayment and the allowance for loan losses is
considered to be a reasonable estimate of discount for credit quality concerns.
The estimated fair value for demand and savings deposits is based on their
carrying value. The estimated fair value for time deposits and borrowed funds is
based on estimates of the rate that would be paid on such deposits or for such
borrowings at December 31, 2004 and 2003, applied for the time period until
maturity. The estimated fair value of other financial instruments and
off-balance-sheet loan commitments approximates cost and is not considered
significant for this presentation.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were Northeast Indiana
Bancorp to have disposed of such items at December 31, 2004 or 2003, the
estimated fair values would necessarily have been achieved at that date, since
market values may differ depending on various circumstances. The estimated fair
values at December 31, 2004 and 2003 should not necessarily be considered to
apply at subsequent dates.
- --------------------------------------------------------------------------------
(Continued)
48.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 16 - BUSINESS COMBINATION
On June 30, 2004, First Federal acquired 100% of the personal property and
customer list of Innovative Financial Services, a locally-owned brokerage firm,
through First Federal's brokerage subsidiary Northeast Indiana Financial, Inc.
Operating results of Innovative Financial Services are included in the
consolidated financial statements since the date of acquisition. As a result of
this acquisition, the Company expects to further solidify its market share in
the financial services market, expand its customer base to enhance fee income
and provide an opportunity to market additional products and services to new
customers.
The aggregate purchase price was $350,000. The purchase price resulted in
approximately $131,000 in goodwill and $200,000 in customer relationship
intangible. The customer relationship intangible will be amortized over 8 years,
using an accelerated method. Goodwill will not be amortized but instead
evaluated periodically for impairment.
The following table summarizes the estimated fair value of assets acquired and
liabilities assumed at the date of acquisition.
Premises and equipment $ 19,300
Goodwill 130,972
Customer list intangible 199,728
--------
Total assets acquired 350,000
Total liabilites assumed --
Net assets acquired $350,000
========
Information relating to proforma income and expense had the acquisition occurred
at January 1, 2004 and 2003 is not considered material to this presentation.
- --------------------------------------------------------------------------------
(Continued)
49.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION
Condensed financial information of Northeast Indiana Bancorp, Inc. is as
follows:
CONDENSED BALANCE SHEETS
December 31, 2004 and 2003
2004 2003
----------- -----------
ASSETS
Cash and cash equivalents $ 582,710 $ 1,487,833
Securities available for sale 281,116 287,677
Loan receivable from Employee Stock Ownership Plan 290,950 436,425
Investment in subsidiary bank 24,905,980 24,993,175
Other assets 7,998 4,307
----------- -----------
Total assets $26,068,754 $27,209,417
=========== ===========
LIABILITIES
Accrued expenses $ 22,221 $ 14,857
SHAREHOLDERS' EQUITY 26,046,533 27,194,560
----------- -----------
Total liabilities and shareholders' equity $26,068,754 $27,209,417
=========== ===========
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
----------- ----------- -----------
Interest income $ 38,497 $ 48,458 $ 58,017
Dividends from subsidiary bank 1,725,000 1,775,000 1,600,000
----------- ----------- -----------
Total income 1,763,497 1,823,458 1,658,017
Operating expenses 241,793 229,497 233,454
----------- ----------- -----------
Income before income taxes and equity in
undistributed earnings of subsidiary bank 1,521,704 1,593,961 1,424,563
Income tax benefit (83,179) (70,808) (92,073)
----------- ----------- -----------
Income before equity in undistributed
earnings of subsidiary bank 1,604,883 1,664,769 1,516,636
Equity in undistributed
earnings of subsidiary bank (622,661) 265,205 73,260
----------- ----------- -----------
Net income $ 982,222 $ 1,929,974 $ 1,589,896
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
50.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 17 - PARENT COMPANY ONLY CONDENSED FINANCIAL INFORMATION (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 2004, 2003 and 2002
2004 2003 2002
----------- ----------- -----------
Cash flows from operating activities
Net income $ 982,222 $ 1,929,974 $ 1,589,896
Adjustments to reconcile net income to cash
from operating activities:
Amortization (154) (145) (137)
Equity in undistributed
earnings of subsidiary bank 622,661 (265,205) (73,260)
Change in:
Other assets 131,274 71,441 15,210
Accrued expenses 7,364 4,803 1,143
----------- ----------- -----------
Net cash from operating activities 1,743,367 1,740,868 1,532,852
Cash flows from investing activities
Repayments on loan receivable from ESOP 145,475 145,475 145,475
----------- ----------- -----------
Net cash from investing activities 145,475 145,475 145,475
Cash flows from financing activities
Dividends paid (834,990) (786,348) (752,480)
Purchase of treasury stock (2,343,157) (903,433) (1,320,253)
Sale of treasury stock 384,182 438,056 356,483
----------- ----------- -----------
Net cash from financing activities (2,793,965) (1,251,725) (1,716,250)
----------- ----------- -----------
Net change in cash and cash equivalents (905,123) 634,618 (37,923)
Cash and cash equivalents at beginning of year 1,487,833 853,215 891,138
----------- ----------- -----------
Cash and cash equivalents at end of year $ 582,710 $ 1,487,833 $ 853,215
=========== =========== ===========
- --------------------------------------------------------------------------------
(Continued)
51.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2004, 2003 and 2002
- --------------------------------------------------------------------------------
NOTE 18 - EARNINGS PER COMMON SHARE
A reconciliation of the numerators and denominators of the basic earnings per
common share and diluted earnings per common share computations for the years
ended December 31, is presented below.
2004 2003 2002
----------- ----------- -----------
Basic Earnings Per Common Share
Net income available to common shareholders $ 982,222 $ 1,929,974 $ 1,589,896
=========== =========== ===========
Weighted average common shares
outstanding before adjustment 1,461,346 1,478,123 1,531,361
Less: unallocated ESOP shares (42,517) (58,396) (75,129)
Less: non-vested RRP shares (3,100) (310) (762)
----------- ----------- -----------
Weighted average common shares outstanding
for basic earnings per common share 1,415,729 1,419,417 1,455,470
=========== =========== ===========
Basic Earnings Per Common Share $ 0.69 $ 1.36 $ 1.09
=========== =========== ===========
Diluted Earnings Per Common Share
Net income available to common
shareholders, per above $ 982,222 $ 1,929,974 $ 1,589,896
=========== =========== ===========
Weighted average common shares outstanding 1,415,729 1,419,417 1,455,470
Add: dilutive effects of assumed conversions
and exercises of stock options 48,179 58,038 49,532
----------- ----------- -----------
Weighted average common and dilutive
shares outstanding for dilutive earnings per
common share 1,463,908 1,477,455 1,505,002
=========== =========== ===========
Diluted Earnings Per Common Share $ 0.67 $ 1.31 $ 1.06
=========== =========== ===========
Stock options for 0, 10,000 and 14,380 shares of common stock were not
considered in computing diluted earnings per common shares for the years ended
December 31, 2004, 2003 and 2002 because they were not dilutive.
- --------------------------------------------------------------------------------
52.
STOCKHOLDER INFORMATION
Stock Listing Information
The Company's common stock is traded on The NASDAQ National Market under the
symbol "NEIB".
Stock Price Information
The following table sets forth the high and low bid prices and dividends
declared per share of common stock for the periods indicated. The source of such
price information was NASDAQ's monthly trade history report. The prices do not
represent actual transactions and do not include retail markups, markdowns or
commissions.
Dividends
Quarter Ended High Low Declared
------------- ---- --- --------
March 31, 2003 $16.20 $15.05 $ .13
June 30, 2003 20.02 15.50 .13
September 30, 2003 21.25 18.18 .13
December 31, 2003 22.00 18.15 .14
March 31, 2004 $21.49 $19.95 $ .14
June 30, 2004 22.35 21.00 .14
September 30, 2004 22.00 20.07 .14
December 31, 2004 22.72 20.10 .15
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note 1 and Note
11 of Notes to Consolidated Financial Statements included in this Annual Report.
As of February 08, 2005, there were approximately 403 shareholders of record,
not including those shares held in nominee or street name through various
brokerage firms or banks.
Annual Report on Form 10-KSB
A copy of the Company's annual report on Form 10-KSB, filed with the Securities
and Exchange Commission, is available without charge in PDF format at
www.firstfedhuntington.com or by writing:
Randy J. Sizemore
Senior Vice President/Chief Financial Officer
Northeast Indiana Bancorp, Inc.
100 Frontage Road
Huntington, Indiana 46750
Stock Transfer Agent
Inquiries regarding stock transfer, registration, lost certificates or changes
in name and address should be directed to the stock transfer agent and registrar
by writing:
Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016
Investor Information
Stockholders, investors, and analysts interested in additional information may
contact Stephen E. Zahn, Chairman, President and CEO, Northeast Indiana Bancorp,
Inc.
Corporate Office Special Counsel Independent Auditor
Northeast Indiana Bancorp, Inc. Barnes & Thornburg LLP Crowe Chizek and Company LLC
648 North Jefferson Street 11 South Meridian Street 330 E. Jefferson Blvd.
Huntington, Indiana 46750 Indianapolis, IN 46204 South Bend, Indiana 46624
(260) 356-3311
54.
NORTHEAST INDIANA BANCORP, INC.
DIRECTORS AND EXECUTIVE OFFICERS
- --------------------------------------------------------------------------------
BOARD OF DIRECTORS EXECUTIVE OFFICERS
Stephen E. Zahn Stephen E. Zahn
Chairman of the Board President and Chief Executive Officer
President and Chief Executive Officer
Dee Ann Hammel
Dan L. Stephan Senior Vice President, Secretary
Past State Representative and Chief Operations Officer
Indiana Legislature
Agent Randy J. Sizemore
Variable Annuity Life Insurance Company Senior Vice President, Treasurer
and Chief Financial Officer
J. David Carnes
Medical Doctor and Associate Michael S. Zahn
Family Practice Associates Senior Vice President
Michael S. Zahn
Senior Vice President
Randall C. Rider
President
Lime City Manufacturing Company, Inc.
William A Zimmer
President
W.A. Zimmer Company
55.