SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2002
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE
EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 0-26012.
NORTHEAST INDIANA BANCORP, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 35-1948594
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
648 North Jefferson Street, Huntington, IN 46750
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (260) 356-3311
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such requirements for the past 90 days. YES [X] NO [ ]
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
CLASS OUTSTANDING AT NOVEMBER 1, 2002
--------------------------------------------------------------------------------
Common Stock, par value $.01 per share 1,508,943
Transitional Small Business Disclosure Format: YES [ ] NO [X]
NORTHEAST INDIANA BANCORP, INC.
INDEX
-----
PART 1. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Condensed)
Consolidated Balance Sheets
September 30, 2002 and December 31, 2001 1
Consolidated Statements of Income for the
three and nine months ended September 30, 2002 and 2001 2
Consolidated Statement of Change in Shareholders' Equity
for the nine months ended September 30, 2002 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Controls and procedures 17
PART II. OTHER INFORMATION 18
Signature page 19
Certifications Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002 20
Exhibit 99.1 and Exhibit 99.2 -Certifications Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 21
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2002 and December 31, 2001
September 30, December 31,
2002 2001
(Unaudited)
ASSETS
Interest earning cash and cash equivalents $ 4,812,648 $ 23,541,599
Noninterest earning cash and cash equivalents 2,343,740 2,750,133
------------- -------------
Total cash and cash equivalents 7,156,388 26,291,732
Securities available for sale 47,545,885 39,365,026
Securities held to maturity (fair value: September
30, 2002- $225,000; December 31, 2001 - $306,000) 225,000 306,000
Loans held for sale, net of unrealized losses; September 30,
2002 $0 and December 31, 2001 $3,278 1,991,220 1,543,422
Loans receivable, net of allowance for loan losses: September 30,
2002 - $2,111,706 and December 31, 2001 - $ 1,954,900 157,814,287 162,830,186
Accrued interest receivable 711,530 753,000
Premises and equipment, net 2,207,692 2,298,102
Investments in limited liability partnerships 1,910,745 1,546,177
Other assets 3,420,421 3,460,884
------------- -------------
Total assets $ 222,983,168 $ 238,394,529
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits $ 5,028,757 $ 4,579,159
Savings 10,842,482 9,261,040
NOW and MMDA 30,392,546 31,350,364
Time deposits 77,118,545 91,839,448
------------- -------------
Total deposits 123,382,330 137,030,011
Borrowed funds 71,698,945 73,966,411
Accrued expenses and other liabilities 1,566,910 1,117,069
------------- -------------
Total liabilities 196,648,185 212,113,491
Shareholders' equity
Preferred Stock, no par value: 500,000 shares authorized;
0 shares issued -- --
Common stock, $.01 par value: 4,000,000 shares authorized;
9/30/02: 2,640,672 shares issued, 1,511,943 shares outstanding
12/31/01: 2,640,672 shares issued, 1,550,656 shares outstanding 26,407 26,407
Additional paid in capital 28,923,237 28,874,771
Retained earnings, substantially restricted 12,997,979 12,447,813
Unearned employee stock ownership plan shares (516,849) (620,566)
Unearned recognition and retention plan shares (6,077) (12,555)
Accumulated other comprehensive income, net of tax 45,365 20,979
Treasury stock, 1,128,729 and 1,090,016 common shares, at
cost, at September 30, 2002 and December 31, 2001 (15,135,079) (14,455,811)
------------- -------------
Total shareholders' equity 26,334,983 26,281,038
------------- -------------
Total liabilities and shareholders' equity $ 222,983,168 $ 238,394,529
============= =============
See accompanying notes to financial statements
1.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and nine months ended September 30, 2002 and 2001
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
Interest income
Loans, including fees $ 3,033,529 $3,697,561 $ 9,278,765 $11,649,908
Taxable securities 482,153 451,854 1,414,198 1,383,210
Non-taxable securities 18,622 5,319 37,808 16,141
Deposits with financial institutions 28,296 139,178 214,905 320,087
----------- ---------- ------------ -----------
Total interest income 3,562,600 4,293,912 10,945,676 13,369,346
Interest expense
Deposits 1,010,280 1,719,865 3,402,977 5,586,772
Borrowed funds 924,211 923,602 2,737,133 2,759,057
----------- ---------- ------------ -----------
Total interest expense 1,934,491 2,643,467 6,140,110 8,345,829
Net interest income 1,628,109 1,650,445 4,805,566 5,023,517
Provision for loan losses 190,000 135,000 582,300 385,000
----------- ---------- ------------ -----------
Net interest income after provision
for loan losses 1,438,109 1,515,445 4,223,266 4,638,517
Noninterest income
Service charges on deposit accounts 88,423 92,778 262,273 276,080
Loan servicing fees 39,296 58,557 153,431 185,029
Net loss on sale of securities
available for sale -- -- (10,535) --
Net gain on sale of loans held for sale 106,887 50,626 179,094 139,048
Net gain (loss) on sale of foreclosed
real estate and repossessed assets (37,782) 40,743 (100,070)
1,137
Trust and brokerage fees 56,149 35,659 172,415 111,650
Other service charges and fees 76,798 76,082 223,591 227,398
----------- ---------- ------------ -----------
Total noninterest income 329,771 354,445 880,199 940,342
Noninterest expense
Salaries and employee benefits 619,222 569,130 1,826,573 1,732,875
Occupancy 115,585 114,118 346,899 346,232
Data processing 148,330 151,806 457,864 467,006
Deposit insurance premium 5,738 6,970 18,209 20,416
Professional fees 57,500 42,526 195,889 186,256
Correspondent bank charges 59,398 56,764 166,899 169,420
Other expense 235,827 170,749 684,504 595,854
----------- ---------- ------------ -----------
Total noninterest expense 1,241,600 1,112,063 3,696,837 3,518,059
----------- ---------- ------------ -----------
Income before income taxes 526,280 757,827 1,406,628 2,060,800
Income tax expense 95,868 226,673 299,106 621,708
----------- ---------- ------------ -----------
Net income $ 430,412 $ 531,154 $ 1,107,522 $ 1,439,092
=========== ========== ============ ===========
Comprehensive Income $ 479,887 $ 713,337 $ 1,131,908 $ 1,725,617
=========== ========== ============ ===========
Basic earnings per share $ 0.30 $ 0.35 $ 0.76 $ 0.92
Diluted earnings per share $ 0.30 $ 0.35 $ 0.74 $ 0.91
See accompanying notes to financial statements
2.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
Nine months ended September 30, 2002
(Unaudited)
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 for nine months ended
September 30, 2002 1,107,522
Other comprehensive income:
Net change in unrealized gains on
securities available for sale, net of tax
Total other comprehensive income
Comprehensive income
Cash dividends declared $.36 per share
year to date (557,356)
Purchase of 64,476 shares of treasury stock
Issuance of 25,763 shares of treasury stock upon
exercise of options (31,956)
Tax effect on stock plans 2,644
12,549 shares committed to be released under ESOP
77,778 103,717
Amortization of RRP contributions
------------- ----------------- ----------------- --------------
Balance at September 30, 2002 $26,407 $28,923,237 $12,997,979 $(516,849)
============= ================= ================= ==============
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 for nine months ended
September 30, 2002 1,107,522
Other comprehensive income:
Net change in unrealized gains on
securities available for sale, net of tax
24,386
-------
Total other comprehensive income
24,386
----------
Comprehensive income
1,131,908
Cash dividends declared $.36 per share
year to date (557,356)
Purchase of 64,476 shares of treasury stock
(961,383) (961,383)
Issuance of 25,763 shares of treasury stock upon
exercise of options 282,115 250,159
Tax effect on stock plans 2,644
12,549 shares committed to be released under ESOP 181,495
Amortization of RRP contributions 6,478 6,478
------------- --------- ------------- ------------
Balance at September 30, 2002 $(6,077) $45,365 $(15,135,079) $26,334,983
============= ========= ============= ============
See accompanying notes to financial statements
3
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 and 2001
Nine months ended
September 30,
2002 2001
(Unaudited)
Cash flows from operating activities
Net income $ 1,107,522 $ 1,439,092
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 338,725 302,911
Provision for loan losses 582,300 385,000
Net (gain) loss on sale of:
Foreclosed real estate and repossessed assets 100,070 (1,137)
Loans held for sale (179,094) (139,048)
Securities available for sale 10,535 --
Originations of loans held for sale (7,417,747) (8,308,965)
Proceeds from loans sold 7,149,043 7,933,213
Reduction of obligation under ESOP 181,495 161,266
Amortization of RRP 6,478 6,478
Net change in:
Other assets (204,771) (92,023)
Accrued interest receivable 41,470 182,763
Accrued expenses and other liabilities 449,841 268,156
------------ ------------
Total adjustments 1,058,345 698,614
------------ ------------
Net cash from operating activities 2,165,867 2,137,706
ash flows from investing activities
Purchases of securities available for sale (21,105,114) (18,492,982)
Proceeds from maturities and principal payments of:
securities available for sale 11,651,656 16,963,405
securities held to maturity 81,000 77,000
Proceeds from sale of securities available for sale 1,405,188 --
Purchases of loans (2,005,427) (79,997)
Net change in loans 5,910,678 22,508,139
Proceeds from sale of participation loans -- 1,150,000
Proceeds from sale of foreclosed real estate and repossessed vehicles 535,186 957,209
Expenditures on premises and equipment (101,438) (218,730)
Proceeds from sale of premises and equipment 8,143 --
------------ ------------
Net cash from investing activities (3,620,128) 22,864,044
Cash flows from financing activities
Net change in deposits (13,647,681) (3,984,449)
Advances from FHLB 2,000,000 29,000,000
Repayment of FHLB advances -- (31,399,663)
Payments of demand notes -- (125,000)
Net change in other borrowed funds (4,767,466) 744,145
Dividends paid (557,356) (545,115)
Purchase of treasury stock (961,383) (1,520,494)
Sale of treasury stock 252,803 266,948
------------ ------------
Net cash from financing activities (17,681,083) (7,563,628)
------------ ------------
Net change in cash and cash equivalents (19,135,344) 17,438,122
Cash and cash equivalents at beginning of period 26,291,732 6,576,266
------------ ------------
Cash and cash equivalents at end of period $ 7,156,388 $ 24,014,388
============ ============
(Continued)
4.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 and 2001
Nine months ended
September 30,
2002 2001
---- ----
(Unaudited)
Cash paid for:
Interest $6,126,122 $8,394,665
Income taxes 408,800 756,000
Non-cash transactions:
Obligation relative to investment in limited partnership 500,000 --
Transfer from loans to other real estate and repossessed assets 528,348 502,446
See accompanying notes to financial statements
5
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2002
--------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The unaudited information for the three and nine months ended September 30, 2002
and 2001 includes the results of operations of Northeast Indiana Bancorp, Inc.
("Northeast Indiana Bancorp") and its wholly-owned subsidiary, First Federal
Savings Bank ("First Federal") and its wholly owned subsidiary, Northeast
Indiana Financial, Inc. ("Northeast Indiana Financial"). In the opinion of
management, the information reflects all adjustments (consisting only of normal
recurring adjustments) necessary for a fair presentation of the results of
operations for the three and nine month periods reported but should not be
considered as indicative of the results to be expected for the full year.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per share is based on weighted-average common shares outstanding.
Diluted earnings per share further assumes issuance of any dilutive potential
common shares.
Three months ended Nine months ended
September 30, September 30,
2002 2001 2002 2001
---- ---- ---- ----
Earnings Per Share
Net income available to common shareholders $ 430,412 $ 531,154 $1,107,522 $1,439,092
Weighted average common shares outstanding, net
of unallocated ESOP and non-vested RRP shares 1,438,787 1,521,506 1,452,981 1,556,299
========== ========== ========== ==========
Basic earnings per Share $ 0.30 $ 0.35 $ 0.76 $ 0.92
Earnings Per Share Assuming Dilution
Net income available to common shareholders $ 430,412 $ 531,154 $1,107,522 $1,439,092
Weighted average common shares outstanding for
basic earnings per share 1,438,787 1,521,506 1,452,981 1,556,299
Add: dilutive effects of assumed exercises of
incentive stock options and non qualified
stock options 16,095 15,553 41,680 33,641
---------- ---------- ---------- ----------
Weighted average and dilutive common shares
outstanding 1,454,882 1,537,059 1,494,661 1,589,940
========== ========== ========== ==========
Diluted earnings per share $ 0.30 $ 0.35 $ 0.74 $ 0.91
NOTE 3 - SUBSEQUENT EVENT - CASH DIVIDENDS
On October 31, 2002 the Board of Directors of Northeast Indiana Bancorp, Inc.
declared a quarterly cash dividend of $.13 per share. The dividend will be paid
on November 27, 2002 to shareholders of record on November 14, 2002. The payment
of the cash dividend will reduce shareholders' equity (fourth quarter) by
approximately $196,000.
(Continued)
6
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2002
--------------------------------------------------------------------------------
NOTE 4 - STOCK REPURCHASE PROGRAM
On March 28, 2002, Northeast Indiana Bancorp announced a stock repurchase
program to repurchase up to 5.00% of the outstanding shares in the open market
as Treasury shares over the next twelve months. This program was to include up
to 76,649 shares. During the quarter ended September 30, 2002 there were 37,800
shares repurchased at an average price of $15.45. This leaves approximately
32,000 shares still available to be repurchased under the current program.
NOTE 5 - REGULATORY CAPITAL REQUIREMENTS
Pursuant to federal regulatory agencies, savings institutions must meet certain
minimum capital-to-asset requirements. The following table summarizes, as of
September 30, 2002, the capital requirements for First Federal under federal
regulatory agencies and First Federal's actual capital ratios. As of September
30, 2002, First Federal substantially exceeded all current regulatory capital
standards, and is considered to be "well capitalized" under current regulatory
guidelines.
Minimum Required To Be
Minimum Required For Well Capitalized Under
Actual Capital Adequacy Purpose Prompt Corrective Action
Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total Capital
(to risk weighted assets) $25,829 18.3% $11,324 8.0% $14,156 10.0%
Tier 1 (core) capital (to risk
weighted assets) 24,610 17.4% 5,662 4.0% 8,493 6.0%
Tier 1(core) capital (to adjusted
total assets) 24,610 11.1% 8,905 4.0% 11,132 5.0%
Tier 1 (core) capital (to average
assets)
24,610 10.6% 9,301 4.0% 11,626 5.0%
NOTE 6 - INVESTMENTS IN LIMITED LIABILITY PARTHERSHIPS
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
method of accounting. The excess of the carrying amount of the investment over
its estimated residual value is amortized during the periods in which associated
tax credits are allocated to the investor. The annual amortization of the
investment is based on the proportion of tax credits received in the current
year to total estimated tax credits to be allocated to the Company. These
investments are reviewed for impairment when events indicate their carrying
amounts may not be recoverable from future discounted cash flows. If impaired,
the investments are reported at discount amounts. The Company's involvement in
these types of investments is for tax planning purposes only and as such, the
Company is not involved in the management or operation of such investments. At
September 30, 2002, the Company had four such investments. The last investment,
in the amount of $500,000, was committed but not funded as of the end of the
period. The obligation is included in borrowed funds in the consolidated balance
sheet as of September 30, 2002.
NOTE 7 - RECLASSIFICATIONS
Certain amounts in the 2001 consolidated financial statements have been
reclassified to conform to the 2002 presentation.
7
8
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
GENERAL
Northeast Indiana Bancorp, Inc. (the "Company") was formed as a Delaware
corporation in March, 1995, for the purpose of issuing common stock and owning
all the common stock of First Federal Savings Bank ("First Federal") as a
unitary thrift holding company. As of September 30, 2002, Northeast Indiana
Bancorp had no significant assets other than the investment in the capital stock
of First Federal and cash and cash equivalents.
The principal business of savings banks, including First Federal, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. First Federal's earnings are primarily
dependent on net interest income, the difference between interest income and
interest expense. Interest income is a function of the balances of loans and
investments outstanding during the period and the yield earned on such assets.
Interest expense is the function of the balances of deposits and borrowings and
the interest rates paid there on. Provisions for loan losses, service charge and
fee income, and other non-interest income, operating expenses and income taxes
also affect First Federal's earnings. Operating expenses consist primarily of
employee compensation and benefits, occupancy and equipment expenses, data
processing, federal deposit insurance and other general administrative expenses.
The most significant outside factors influencing the operations of First Federal
Savings Bank and other savings institutions include general economic conditions,
competition in the local market place and related monetary and fiscal policies
of agencies that regulate financial institutions. More specifically, the cost of
funds is influenced by interest rates on competing investments and general
market rates of interest. Lending activities are influenced by the demand for
real estate financing and other types of loans, which in turn is affected by the
interest rates at which such loans may be offered and other factors affecting
loan demand and funds availability.
TRUST AND FINANCIAL SERVICES
During calendar 1998, First Federal established a trust department that began
operations in the fourth quarter. At the end of September 30, 2002,
approximately $41.4 million in Trust Assets were held under management compared
to $30.4 million as of September 30, 2001. This represents a 36.0% increase
between periods. In February 1999, Northeast Indiana Bancorp announced the
establishment of Northeast Indiana Financial, Inc., a wholly-owned subsidiary of
First Federal. Northeast Indiana Financial, Inc. provides brokerage services
through the purchase of mutual funds, annuities, stocks and bonds for its
customers. Although the trust and brokerage service operations have had a slight
negative impact to net income thus far, management continues to believe the
additional value of these types of services to customers will be rewarded with
future profitability.
Continued
9
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
FINANCIAL CONDITION
Northeast Indiana Bancorp's total assets decreased $15.4 million or 6.5% from
$238.4 million at December 31, 2001 to $223.0 million at September 30, 2002.
This decrease was due primarily to a decrease in cash and cash equivalents and
net loans receivable offset in part by an increase in securities available for
sale. The funds were utilized to pay off wholesale time deposits at maturity in
an effort to reposition the Company's liabilities, and to invest in securities
available-for-sale to increase interest-earning yields in exess of overnight
fund yields.
Net loans receivable decreased $5.0 million or 3.1% from $162.8 million at
December 31, 2001 to $157.8 million at September 30, 2002. The decrease in loans
during the first nine months of 2002 was primarily in the mortgage portfolio as
the low interest rate environment has continued to drive a refinance mentality.
First Federal originated and sold $7.4 million in residential mortgages into the
secondary market with servicing retained during the first nine months of the
current year. Management continues to feel that these sales are prudent in the
current interest rate environment and should minimize future interest rate risk
when compared to originating and holding fixed rate mortgages. Allowance for
loan losses has increased approximately $157,000 through the nine months ended
September 30, 2002 and is discussed in more detail under Non-performing Assets
and Allowance for Loan Losses. Securities available-for-sale increased
approximately $8.1 million or 20.6% from $39.4 million to $47.5 million for the
nine month period ended September 30, 2002. Management has continued to examine
alternative uses of funds to increase investment yields over the current fed
funds target rate. Investments in limited liability partnerships increased
$365,000 during the current nine month period as the company became involved in
a new low income housing project. The new investment of $500,000 was partially
offset by amortization recognized on the three existing similar investments.
Management believes the tax benefit associated with the amortization combined
with tax credits available on these investments continue to be beneficial to the
Company.
Borrowed funds have been reduced by $2.3 million primarily by a reduction of
$4.8 million in securities sold under repurchase agreements to local
municipalities offset in part by an increase of $2.5 million in FHLB advances
and other borrowings. Total deposits decreased by $13.6 million from $137.0
million at December 31, 2001 to $123.4 million at September 30, 2002. This
decrease is primarily in the jumbo time deposit area as the Company has
continued in efforts to reposition its liabilities.
RESULTS OF OPERATIONS
Northeast Indiana Bancorp had net income of $430,000 or $0.30 per diluted share
and $1.1 million or $0.74 per diluted share for the three and nine months ended
September 30, 2002 compared to $531,000 or $0.35 per diluted share and $1.4
million or $0.91 per diluted share for the three and nine months ended September
30, 2001.
Continued
10
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
Net interest income was relatively unchanged at $1.6 million for both three
months ended September 30, 2002 and 2001. Net interest income decreased $218,000
to $4.8 million or 4.4% for the nine months ended September 30, 2002 compared to
$5.0 million for the same period in 2001. Interest income for the quarter
decreased $731,000 to $3.6 million for September 30, 2002 compared to $4.3
million for September 30, 2001. Interest income for the nine months ended
September 30, 2002 was $10.9 million compared to $13.4 million for the nine
months ended September 30, 2001 a decrease of $2.5 million or 18.7%. Of the $2.5
million decrease, 45.2% of the variance is attributed to decreases in volume
while 54.8% of the variance is related to lower rates. For the third quarter,
interest expense decreased $709,000 to $1.9 million for the quarter ended
September 30, 2002 compared to $2.6 million for the quarter ended September 30,
2001. Interest expense for the nine months ended September 30, 2002 was $6.1
million, a decrease of $2.2 million when compared to $8.3 million expensed for
the same period ended September 30, 2001. This substantial decrease is primarily
due to deposits repricing at lower rates, but also related to lower average
balances between periods. During the nine months ended September 30, 2002, First
Federal has reduced its funding reliance on wholesale jumbo time deposits in an
effort to reposition its liabilities.
Provisions for loan losses increased by $65,000 to $190,000 for the three months
ended September 30, 2002 compared to $135,000 for the quarter ended September
30, 2001. In addition, the provision for loan losses was $582,000 for the nine
months ended September 30, 2002, an increase of 51.2% or $197,000 compared to
the $385,000 provision for loan losses in the year earlier period. The increases
to provisions are discussed in more detail under the Non-performing Assets and
Allowance for Loan Losses section of this filing.
Non-interest income decreased to $330,000 for the three months ended September
30, 2002 compared to $354,000 for the comparable period in 2001. This decrease
was due to decreases in loan servicing fees and increases in net losses on the
sale of repossessed assets, partially offset by strong increases in net gains on
the sale of loans held for sale and trust/brokerage fees. Loan servicing fees
were impacted by increased mortgage servicing right write-downs due to heavy
refinancing volume. The Company experienced net losses on the sale of foreclosed
real estate and repossessed assets of $38,000 compared to net gains in the prior
year period of $41,000 as management continued to take an aggressive position
with delinquent borrowers coupled with declining used car market values. Net
gains on the sale of loans held for sale saw an increase of $56,000 or 110.6%
between three-month periods as fixed-rate refinancing reached high levels. Trust
and brokerage fees increased primarily due to increased assets under management
in the trust department of First Federal. Non-interest income decreased to
$880,000 for the nine months ended September 30, 2002 compared to $940,000 for
the nine months ended September 30, 2001. The decrease was related to the same
events discussed above on the three-month comparison with the exception of a
$11,000 net loss on the sale of two securities available-for-sale during the
current nine-month period. Management reviewed the investment portfolio for
systemic risks and identified these two securities as having extreme extension
risk and price volatility in a rising rate environment.
Continued
11
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OPERATIONS
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
Non-interest expense increased to $1.2 million for the three months ended
September 30, 2002 compared to $1.1 million for the quarter ended September 30,
2001. There was a one-time adjustment to employee benefits during the third
quarter of the prior year, which reduced non-interest expense in that quarter.
The remainder of the increase was primarily due to an increase of $15,000 in
professional fees and an increase in other expenses of $65,000 between
three-month periods. The increase in professional fees was related to increases
in First Federal's collection activity and the legal fees associated with the
same and the implementation of an outsourced internal audit function. The
increase in other expenses was due to increased amortization on the new limited
liability low income tax investment and other administrative expenses.
Non-interest expense increased to $3.7 million for the nine months ended
September 30, 2002 compared to $3.5 million for the corresponding period in
2001. This increase is primarily related to increases in salaries and employee
benefits, professional fees, and other expense between the two nine-month
periods.
Income tax expense decreased for the three and nine months ended September 30,
2002 by $131,000 and 323,000, respectively, when compared to the three and nine
months ended September 30, 2001. These decreases were due to both lower taxable
income compared to prior year periods and an increase in the available tax
credits from First Federal's investment in low income housing projects. The
Company's effective tax rate was 18.2% and 21.3% for the three and nine months
ended September 30, 2002 compared to 29.9% and 30.2% for the three and nine
months ended September 30, 2001.
NEW ACCOUNTING PRONOUNCEMENTS
On October 1, 2002, the Financial Accounting Standards Board ("FASB") Statement
of Financial Accounting Standards ("SFAS") No. 147, "Acquisitions of Certain
Financial Institutions became effective." SFAS No. 147 may be early applied and
supersedes SFAS No. 72, "Accounting for Certain Acquisitions of Banking or
Thrift Institutions." SFAS No. 147 provides guidance on the accounting for the
acquisition of a financial institution, and applies to all such acquisitions
except those between two or more mutual enterprises. Under SFAS No. 147, the
excess of the fair value of liabilities assumed over the fair value of tangible
and identifiable intangible assets acquired in a financial institution business
combination represents goodwill that should be accounted for under SFAS No. 142,
"Goodwill and Other Intangible Assets." If certain criteria are met, the amount
of the unidentifiable intangible asset resulting from prior financial
institutions acquisitions is to be reclassified to goodwill upon adoption of
this Statement. Financial institutions meeting conditions outlined in SFAS No.
147 are required to restate previously issued financial statements. The
objective of the restatement is to present the balance sheet and income
statement as if the amount accounted for under SFAS No. 72 as an unidentifiable
intangible asset had been reclassified to goodwill as of the date the Company
adopted SFAS No. 142. Adoption of SFAS No. 147 on October 1, 2002 did not have a
material effect on the Company's consolidated financial position or results of
operations.
Continued
12
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation considers among other matters, the estimated
value of the underlying collateral, economic conditions, cash flow analysis,
historical loan loss experience, discussions held with delinquent borrowers and
other factors that warrant recognition in providing for an adequate allowance
for loan losses. As a result of this review process, Northeast Indiana Bancorp
recorded provisions for loan losses in the amount of $190,000 and $582,000 for
the three and nine months ended September 30, 2002 compared to $135,000 and
$385,000 for the same periods ended September 30, 2001.
Even though non-performing loans have decreased to $6.7 million at September 30,
2002 from $6.9 million at December 31, 2001, First Federal experienced net loan
charge-offs totaling $145,000 and $425,000 during the current quarter and nine
month periods ended September 30, 2002 compared to $493,000 and $514,000 in the
same periods ended September 30, 2001. These steady net charge-off levels
combined with management's assessment of the adequacy of the allowance for
losses were the primary reason for the increase in the loan loss provisions for
both the three and nine months ended September 30, 2002 as compared to the year
earlier periods. Management has also continued to become more strict with
commercial loan grading and tracking to monitor the impact of the continued
economic slowdown and conditions within the local economy.
Impaired loans at September 30, 2002 were $5.4 million compared to $5.9 million
at December 31, 2001. Sequentially, impaired loans were $5.3 million at June 30,
2002 and $5.6 million at March 31, 2002. The net change in impaired loans of
$100,000 between June 30, 2002 and September 30, 2002 was primarily due to more
properties being added as impaired to a group of rental properties that were
previously classified out of the commercial real estate portfolio. As of
September 30, 2002, management has set aside approximately $892,000 in specific
reserves against the balances of these impaired loans.
Continued
13
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
The non-performing assets to total assets ratio is one indicator of the exposure
to credit risk. Non-performing assets of First Federal consist of the
non-accruing loans, troubled debt restructurings, other repossessed assets and
real estate owned which has been acquired as a result of foreclosure or
insubstance foreclosure. The following table summarizes in thousands the various
categories of non-performing assets:
September 30 December 31
2002 2001
Non-accruing loans
One-to-four family $ 788 $ 442
Commercial real estate 4,771 5,085
Consumer 652 440
Commercial 444 267
------ ------
Total 6,655 6,919
------ ------
Foreclosed assets
One-to-four family 64 46
Commercial real estate 96 173
Commercial -- --
------ ------
Total 160 219
------ ------
Repossessed assets
48 38
Consumer 2 45
Commercial
------ ------
Total 50 83
------ ------
Total non-performing assets $6,865 $7,221
====== ======
Total non-performing assets as a percentage
of total assets 3.08% 3.03%
====== ======
Total non-performing assets decreased from $7.2 million to $6.9 million or 3.1%
of total assets at September 30, 2002 from 3.0% of total assets at December 31,
2001. At September 30, 2002, one borrower comprised $1.4 million or 20.3% of the
$6.9 million in total non-performing assets. Management has already established
a specific reserve to cover potential losses related to this borrower and does
not anticipate any further loss at this time. In addition, $4.3 million in
commercial real estate non-performing loans also includes $780,000 in loans
secured by one-to-four family residential rental properties that were placed on
non-accrual status at March 31, 2001 due to weakness in cash flows. Although the
loans remain on non-accrual, First Federal now is receiving a majority of
interest only payments on a cash basis.
Continued
14
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
The following table represents an analysis of the Company's allowance for loan
losses for both the three and nine months ended September 30, 2002 and September
30, 2001:
Three Months Ended Nine Months Ended
September 30, September 30,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Balance at beginning of period $ 2,067,072 $ 2,230,506 $ 1,954,900 $ 2,001,172
Charge-offs:
One-to-four family -- 10,862 61,400 58,456
Commercial -- 348,830 -- 367,192
Consumer 193,333 146,822 543,887 255,604
------------ ------------ ------------ ------------
193,333 506,514 605,287 681,252
------------ ------------ ------------ ------------
Recoveries:
One-to-four family -- -- -- 2,500
Commercial -- 1,787 10,493 134,853
Consumer 47,968 11,267 169,301 29,773
------------ ------------ ------------ ------------
47,968 13,054 179,794 167,126
------------ ------------ ------------ ------------
Net Charge-offs 145,365 493,460 425,493 514,126
Additions charged to operations 190,000 135,000 582,300 385,000
------------ ------------ ------------ ------------
Balance at end of period $ 2,111,707 $ 1,872,046 $ 2,111,707 $ 1,872,046
============ ============ ============ ============
Ave. gross loans and loans HFS $166,132,353 $185,979,373 $166,212,841 $193,970,645
------------ ------------ ------------ ------------
Ratio of net charge-offs during the period to
average loans outstanding during the period
(annualized)
0.35% 1.06% 0.34% 0.35%
------------------------------------------------ ------------ ------------ ------------ ------------
Average non-performing loans $ 6,654,677 $ 6,650,891 $ 6,288,097 $ 7,088,340
------------------------------------------------ ------------ ------------ ------------ ------------
Ratio of net charge-offs during the period to
average non-performing loans (annualized)
8.74% 29.68% 9.02% 9.67%
------------------------------------------------ ------------ ------------ ------------ ------------
LIQUIDITY AND CAPITAL RESOURCES
First Federal is required to maintain specific amounts of regulatory capital
pursuant to regulations of the Office of Thrift Supervision (OTS). Those capital
requirements follow: a risk-based capital standard expressed as a percent of
risk adjusted assets, and a leverage ratio of core capital to total assets. At
September 30, 2002, First Federal exceeded all regulatory capital standards.
(See Note 5).
Continued
15
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
At September 30, 2002, First Federal's risk based capital was $25.8 million or
18.3% of risk adjusted assets, which exceeds the $11.3 million and the 8.0% OTS
requirement by $14.5 million and 10.3%. First Federal's core capital at
September 30, 2002 is $24.6 million or 10.6% of average assets, which exceeds
the OTS requirement of $9.3 million, and 4.0% by $15.3 million and 6.6%.
First Federal's primary sources of funds are deposits, FHLB advances, principal
and interest payments of loans, income from operations, and sales and maturities
of short-term investments. Deposit flows and mortgage payments are greatly
influenced by general interest rates, economic conditions and competition.
First Federal uses its capital resources principally to meet its ongoing
commitments to fund maturing certificates of deposit and loan commitments,
maintain its liquidity, and meet operating expenses. As of September 30, 2002,
First Federal had commitments to originate loans and to fund open lines of
credit totaling $14.2 million. First Federal considers its liquidity and capital
resources to be adequate to meet its foreseeable short and long term needs.
First Federal expects to be able to fund or refinance, on a timely basis, its
material commitments and long-term liabilities.
First Federal, however, has grown substantially over the previous years and
therefore its liquidity position has tightened as management has leveraged its
capital. First Federal's liquidity position began to improve in 2001 and has
continued the same trend in the current year due to the following: a decline in
overall loan demand, the selling of new long-term fixed rate residential
mortgage loans and the substantial reduction of wholesale jumbo time deposits.
Management is satisfied with First Federal's current liquidity position and will
continue to utilize measurement tools necessary to validate the adequacy of its
liquidity position.
Northeast Indiana Bancorp's primary source of funds is from dividends paid from
its wholly-owned subsidiary, First Federal. These dividends from First Federal
require regulatory approval and are dependent on both First Federal's
profitability and its ability to remain within regulatory capital guidelines, as
discussed in more detail above. The Company has primarily used its capital
resources to fund repurchases of its own stock, which is traded on the NASDAQ
National Market under the ticker symbol of "NEIB". Management periodically
reviews where NEIB shares are trading relative to the book value. When Northeast
Indiana has satisfactory cash on hand, the stock is trading below book value,
and to the extent that capital ratio's are not hindered, the Company has
historically announced its intent to repurchase NEIB shares through open market
purchases. In management's opinion, these repurchases help leverage Northeast
Indiana Bancorp's remaining equity and tend to improve return on shareholder's
equity. Such a repurchase program currently exists.
16
NORTHEAST INDIANA BANCORP, INC.
ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
--------------------------------------------------------------------------------
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings by Northeast Indiana Bancorp with
the Securities and Exchange Commission, in Northeast Indiana Bancorp's press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
Such statements are subject to risks and uncertainties, including but not
limited to changes in economic conditions in Northeast Indiana Bancorp's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for loans in Northeast Indiana Bancorp's market area and
competition, all or some of which could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected.
Northeast Indiana Bancorp wishes to caution readers not to place undue reliance
on any such forward-looking statements, which speak only as of the date made,
and advises readers that various factors, including regional and national
economic conditions, substantial changes in levels of market interest rates,
credit and other risks of lending and investment activities and competitive and
regulatory factors, could affect Northeast Indiana Bancorp's financial
performance and could cause Northeast Indiana Bancorp's actual results for
future periods to differ materially from those anticipated or projected.
Northeast Indiana Bancorp does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences or
unanticipated events or circumstances after the date of such statements.
ITEM 3 CONTROLS AND PROCEDURES
With the participation and under the supervision of the Company's management,
including the Company's Chief Executive Officer and Chief Financial Officer, and
within 90 days of the filing date of this quarterly report, the Company's Chief
Executive Officer and Chief Financial Officer have evaluated the effectiveness
of the design and operation of the Company's disclosure controls and procedures
(as defined in the Exchange Act Rules 13a-14(C) and 15(D)-14(C)) and, based on
their evaluation, have concluded that the disclosure controls and procedures are
effective. There were no significant changes in the Company's internal controls
or in the other factors that could significantly affect these controls
subsequent to the date of their evaluation, including any corrective action with
regard to significant deficiencies and material weaknesses.
17
NORTHEAST INDIANA BANCORP, INC.
PART II
Other Information
ITEM 1 - LEGAL PROCEEDINGS
Northeast Indiana Bancorp and First Federal are involved from time to
time, as plaintiff or defendant in various legal actions arising from
the normal course of their businesses. While the ultimate outcome of
these proceedings cannot be predicted with certainty, it is the
opinion of management that the resolution of these proceedings should
not have a material effect on Northeast Indiana Bancorp's results of
operations on a consolidated basis.
ITEM 2 - CHANGES IN SECURITIES
None
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDER
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 99.1 and Exhibit 99.2 - Certification Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
(1) July 16, 2002 Announcing Second Quarter Earnings for 2002
(2) July 31, 2002 Announcing Cash Dividend
18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
NORTHEAST INDIANA BANCORP, INC.
Date: November 14, 2002 By: /s/ Stephen E. Zahn
-------------------------------------
Stephen E. Zahn
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 14, 2002 By: /s/ Randy J. Sizemore
-------------------------------------
Randy J. Sizemore
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
19
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Stephen E. Zahn, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Northeast Indiana
Bancorp, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Stephen E. Zahn
-------------------------------------
Stephen E. Zahn
President and Chief Executive Officer
20
Certification Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002
I, Randy J. Sizemore, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Northeast Indiana
Bancorp, Inc. (the "registrant");
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14(c) and 15d-14(c)) for the registrant and we
have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 14, 2002 /s/ Randy J. Sizemore
------------------------------
Randy J. Sizemore
Chief Financial Officer
21