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, 2004
|_| TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF THE EXCHANGE ACT
For the transition period from __________ to __________
Commission file number 0-26012.
NORTHEAST INDIANA BANCORP, INC.
(Exact Name of Small Business Issuer as Specified in its Charter)
Delaware 35-1948594
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
648 North Jefferson Street, Huntington, IN 46750
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (260) 356-3311
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Issuer was required to file such reports), and (2) has been
subject to such requirements for the past 90 days. YES |X| NO |_|
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date:
CLASS OUTSTANDING AT OCTOBER 15, 2004
--------------------------------------------------------------------------------
Common Stock, par value $.01 per share 1,433,909
Transitional Small Business Disclosure Format: YES |_| NO |X|
NORTHEAST INDIANA BANCORP, INC.
INDEX
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PART 1. FINANCIAL INFORMATION (UNAUDITED) PAGE NO.
Item 1. Financial Statements (Condensed)
Consolidated Balance Sheets
September 30, 2004 and December 31, 2003 1
Consolidated Statements of Income for the
three and nine months ended September 30, 2004 and 2003 2
Consolidated Statement of Changes in Shareholders' Equity
for the nine months ended September 30, 2004 3
Consolidated Statements of Cash Flows for the nine
months ended September 30, 2004 and 2003 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 9
Item 3. Controls and Procedures 17
PART II. OTHER INFORMATION 18
Item 1. Legal Proceedings 18
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports on Form 8-K 20
Signature page 21
Exhibit 31.1 and Exhibit 31.2 -Certifications Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002 22
Exhibit 32.1 and Exhibit 32.2 -Certifications Furnished Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002 23
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NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
September 30, 2004 and December 31, 2003
--------------------------------------------------------------------------------
September 30, December 31,
2004 2003
(Unaudited)
ASSETS
Interest earning cash and cash equivalents $ 2,401,752 $ 6,849,198
Noninterest earning cash and cash equivalents 2,771,941 2,483,881
------------- -------------
Total cash and cash equivalents 5,173,693 9,333,079
Securities available for sale 39,434,079 43,687,318
Securities held to maturity (fair value: September
30, 2004 - $60,000; December 31, 2003 - $150,000) 60,000 150,000
Loans held for sale 224,100 --
Loans receivable, net of allowance for loan losses: September 30,
2004 - $1,461,051 and December 31, 2003 - $1,772,109 172,319,234 163,676,825
Accrued interest receivable 838,473 798,722
Premises and equipment, net 2,158,128 2,061,781
Investments in limited liability partnerships 1,428,726 1,602,147
Cash surrender value of life insurance 5,108,374 4,352,129
Other assets 1,944,003 1,732,531
------------- -------------
Total assets $ 228,688,810 $ 227,394,532
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits-noninterest bearing $ 7,271,900 $ 5,945,039
Savings 12,235,463 10,916,937
NOW 12,234,192 13,005,299
MMDA 21,708,007 19,335,140
Time deposits 74,988,184 72,807,321
------------- -------------
Total deposits 128,437,746 122,009,736
Borrowed funds 72,494,686 76,545,485
Accrued expenses and other liabilities 1,782,318 1,644,751
------------- -------------
Total liabilities 202,714,750 200,199,972
Shareholders' equity
Preferred Stock, no par value: 500,000 shares authorized; 0 shares issued -- --
Common stock, $.01 par value: 4,000,000 shares authorized;
9/30/04: 2,640,672 shares issued, 1,425,357 shares outstanding
12/31/03: 2,640,672 shares issued, 1,487,514 shares outstanding 26,407 26,407
Additional paid in capital 29,398,118 29,143,357
Retained earnings, substantially restricted 15,066,121 14,428,855
Unearned employee stock ownership plan shares (258,067) (351,190)
Unearned recognition and retention plan shares (53,625) --
Accumulated other comprehensive loss, net of tax (701,781) (236,943)
Treasury stock, 1,215,315 and 1,153,518 common shares, at
cost, at September 30, 2004 and December 31, 2003 (17,503,113) (15,815,926)
------------- -------------
Total shareholders' equity 25,974,060 27,194,560
------------- -------------
Total liabilities and shareholders' equity $ 228,688,810 $ 227,394,532
============= =============
--------------------------------------------------------------------------------
See accompanying notes to financial statements
1.
--------------------------------------------------------------------------------
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and nine months ended September 30, 2004 and 2003
--------------------------------------------------------------------------------
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
(Unaudited)
Interest income
Loans, including fees $ 2,616,209 $ 2,559,296 $ 7,827,088 $ 8,040,007
Taxable securities 358,838 390,735 1,077,861 1,177,626
Non-taxable securities 26,850 27,939 77,092 62,508
Deposits with financial institutions 25,581 19,758 49,540 100,764
----------- ----------- ----------- -----------
Total interest income 3,027,478 2,997,728 9,031,581 9,380,905
Interest expense
Deposits 614,650 708,946 1,873,895 2,324,663
Borrowed funds 828,558 891,032 2,409,962 2,689,081
----------- ----------- ----------- -----------
Total interest expense 1,443,208 1,599,978 4,283,857 5,013,744
Net interest income 1,584,270 1,397,750 4,747,724 4,367,161
Provision for loan losses -- -- -- --
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 1,584,270 1,397,750 4,747,724 4,367,161
Noninterest income
Service charges on deposit accounts 150,671 94,669 359,536 272,788
Loan servicing fees 71,406 61,393 194,152 174,850
Net gain on sale of securities
available for sale 165 12,397 19,136 12,397
Net gain on sale of loans held for sale 19,028 52,095 75,236 477,215
Net gain (loss) on sale of foreclosed
real estate and repossessed assets (14,924) (5,829) (10,702) 57,033
Trust and brokerage fees 28,657 31,989 54,493 134,202
Other income 101,333 106,348 307,408 306,113
----------- ----------- ----------- -----------
Total noninterest income 356,336 353,062 999,259 1,434,598
Noninterest expense
Salaries and employee benefits 771,904 653,916 2,274,258 1,931,281
Occupancy 110,913 111,459 333,578 358,642
Data processing 161,274 175,808 483,541 512,135
Deposit insurance premium 4,758 5,001 14,122 15,072
Professional fees 61,285 50,948 197,034 197,953
Correspondent bank charges 55,064 55,540 162,689 155,314
Other expense 194,152 172,216 582,222 570,279
----------- ----------- ----------- -----------
Total noninterest expense 1,359,350 1,224,888 4,047,444 3,740,676
----------- ----------- ----------- -----------
Income before income taxes 581,256 525,924 1,699,539 2,061,083
Income tax expense 158,796 130,728 442,069 552,628
----------- ----------- ----------- -----------
Net income $ 422,460 $ 395,196 $ 1,257,470 $ 1,508,455
=========== =========== =========== ===========
Comprehensive income $ 495,223 $ 380,060 $ 792,632 $ 1,428,056
=========== =========== =========== ===========
Basic earnings per common share $ 0.30 $ 0.28 $ 0.88 $ 1.06
Diluted earnings per common share $ 0.29 $ 0.28 $ 0.85 $ 1.02
--------------------------------------------------------------------------------
See accompanying notes to financial statements
2.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
Nine months ended September 30, 2004
--------------------------------------------------------------------------------
(Unaudited)
Unearned
Employee
Additional Stock
Common Paid-in Retained Ownership
Stock Capital Earnings Plan Shares
------- ------------ ------------ ------------
Balance at January 1, 2004 $26,407 $ 29,143,357 $ 14,428,855 $ (351,190)
Net Income for nine months ended
September 30, 2004 1,257,470
Other comprehensive income(loss):
Net change in unrealized gains(losses)
on securities available for sale, net of tax
Total other comprehensive income (loss)
Total comprehensive income (loss)
Cash dividends ($.42 per share year to date) (620,204)
Purchase of 91,196 shares of treasury stock
Issuance of 26,039 shares of treasury stock
upon exercise of options (4,597)
Tax effect on stock plans 81,025
11,274 shares committed to be released
under ESOP 147,965 93,123
Purchase of 3,000 treasury shares for RRP 30,368
Amortization of RRP contributions
--------------------------------------------------------------
Balance at September 30, 2004 $26,407 $ 29,398,118 $ 15,066,121 $ (258,067)
==============================================================
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 for nine months ended
September 30, 2004 1,257,470
Other comprehensive income(loss):
Net change in unrealized gains(losses)
on securities available for sale, net of tax (464,838)
---------
Total other comprehensive income (loss) (464,838)
------------
Total comprehensive income (loss) 792,632
Cash dividends ($.42 per share year to date) (620,204)
Purchase of 91,196 shares of treasury stock (1,984,379) (1,984,379)
Issuance of 26,039 shares of treasury stock
upon exercise of options 265,685 261,088
Tax effect on stock plans 81,025
11,274 shares committed to be released
under ESOP
241,088
Purchase of 3,000 treasury shares for RRP (61,875) 31,507 --
Amortization of RRP contributions 8,250 8,250
------------------------------------------------------------------
Balance at September 30, 2004 $ (53,625) $(701,781) $(17,503,113) $ 25,974,060
==================================================================
--------------------------------------------------------------------------------
See accompanying notes to financial statements
3.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine months ended September 30, 2004 and 2003
--------------------------------------------------------------------------------
Nine months ended
September 30,
2004 2003
------------ ------------
(Unaudited)
Cash flows from operating activities
Net income $ 1,257,470 $ 1,508,455
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 498,693 322,130
Provision for loan losses -- --
Net (gain) loss on sale of:
Foreclosed real estate and repossessed assets 17,501 (54,767)
Loans held for sale (75,236) (477,215)
Securities available for sale (19,136) (12,397)
Originations of loans held for sale (1,770,949) (18,187,909)
Proceeds from loans sold 1,622,085 18,923,649
Reduction of obligation under ESOP 241,088 206,882
Amortization of RRP 8,250 3,918
Net change in:
Other assets (244,254) 55,947
Accrued interest receivable (39,751) (125,343)
Accrued expenses and other liabilities 137,567 504,067
------------ ------------
Total adjustments 375,858 1,158,962
------------ ------------
Net cash from operating activities 1,633,328 2,667,417
Cash flows from investing activities
Purchases of securities available for sale (5,116,724) (26,763,774)
Proceeds from maturities and principal payments of:
Securities available for sale 6,006,041 17,735,632
Securities held to maturity 90,000 75,000
Proceeds from sale of securities available for sale 2,726,160 2,582,867
Purchase of life insurance (600,000) (2,000,000)
Purchase of loans (5,766,225) (1,588,213)
Proceeds from sale of participation loans 264,829 --
Net change in loans (4,265,538) (159,085)
Proceeds from sale of foreclosed real estate and repossessed
vehicles 1,110,392 2,148,898
Expenditures on premises and equipment (275,366) (105,486)
------------ ------------
Net cash from investing activities (5,826,431) (8,074,161)
Cash flows from financing activities
Net change in deposits 6,428,010 75,193
Advances from FHLB 13,000,000 6,000,000
Repayment of FHLB advances (8,250,000) (8,000,000)
Payments of demand notes -- (100,000)
Net change in other borrowed funds (8,800,799) (2,573,666)
Dividends paid (620,204) (577,825)
Purchase of treasury stock (1,984,379) (772,031)
Sale of treasury stock 261,088 236,379
------------ ------------
Net cash from financing activities 33,716 (5,711,950)
------------ ------------
Net change in cash and cash equivalents (4,159,386) (11,118,694)
Cash and cash equivalents at beginning of period 9,333,079 18,256,408
------------ ------------
Cash and cash equivalents at end of period $ 5,173,693 $ 7,137,714
============ ============
Cash paid for:
Interest $ 4,275,501 $ 5,076,259
Income taxes 247,250 381,650
Non-cash transactions:
Transfer from loans to other real estate and repossessed assets 1,124,525 1,796,169
--------------------------------------------------------------------------------
See accompanying notes to financial statements
4.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2003
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NOTE 1 - BASIS OF PRESENTATION
The unaudited information for the three and nine months ended September 30, 2004
and 2003 includes the results of operations of Northeast Indiana Bancorp, Inc.
("Northeast Indiana Bancorp"or "the Company") and its wholly-owned subsidiary,
First Federal Savings Bank ("First Federal") and its wholly-owned subsidiary,
Northeast Indiana Financial, Inc. ("Northeast Indiana Financial"). The
consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America for
interim financial information and with the instructions to Form 10-QSB.
Accordingly, they do not include all of the information and footnotes required
by accounting principles generally accepted in the United States of America for
complete financial statements. 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. Certain reclassifications were made to
the prior period financial statements to conform to current period
presentations.
NOTE 2 - EARNINGS PER COMMON SHARE
Basic earnings per common share is based on weighted-average common shares
outstanding less unallocated ESOP shares and nonvested RRP shares. Diluted
earnings per common share further assumes issuance of any dilutive potential
common shares.
Three months ended Nine months ended
September 30, September 30,
2004 2003 2004 2003
---------- ---------- ---------- ----------
Earnings Per Common Share
Net income available to common shareholders $ 422,460 $ 395,196 $1,257,470 $1,508,455
Weighted average common shares outstanding,
(excluding unallocated ESOP and non-vested RRP shares) 1,400,399 1,410,934 1,427,182 1,419,016
========== ========== ========== ==========
Basic Earnings Per Common Share $ 0.30 $ 0.28 $ 0.88 $ 1.06
Earnings Per Common Share Assuming Dilution
Net income available to common shareholders $ 422,460 $ 395,196 $1,257,470 $1,508,455
Weighted average common shares outstanding for
basic earnings per common share 1,400,399 1,410,934 1,427,182 1,419,016
Add: dilutive effects of assumed exercises of
stock options 44,458 44,503 49,292 57,219
---------- ---------- ---------- ----------
Weighted average common and dilutive potential
common shares outstanding 1,444,857 1,455,437 1,476,474 1,476,235
========== ========== ========== ==========
Diluted Earnings Per Common Share $ 0.29 $ 0.27 $ 0.85 $ 1.02
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5.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2003
--------------------------------------------------------------------------------
NOTE 3 - SUBSEQUENT EVENT - CASH DIVIDENDS
On October 26, 2004 the Board of Directors of Northeast Indiana Bancorp, Inc.
declared a quarterly cash dividend of $.15 per common share. The dividend will
be paid on November 23, 2004 to common shareholders of record on November 9,
2004. The payment of the cash dividend will reduce shareholders' equity (fourth
quarter) by approximately $215,000.
NOTE 4 - STOCK REPURCHASE PROGRAM
The Company closed out a stock repurchase program during the current quarter
that had been announced March 2004. There were 74,446 common shares repurchased
on the open market at an average cost of $21.90 per common share. Subsequent to
the announcement of the program being closed, the board of directors approved a
new repurchase program authorizing the repurchase of 5% or approximately 71,000
shares over the next twelve months. No shares were repurchased under this new
program prior to the current quarter end.
NOTE 5 - REGULATORY CAPITAL REQUIREMENTS
Pursuant to federal regulations, savings institutions must meet three separate
minimum capital-to-asset requirements. The following table summarizes, as of
September 30, 2004, the capital requirements for First Federal under those
federal regulatory requirements and First Federal's actual capital ratios. As of
September 30, 2004, First Federal substantially exceeded all regulatory minimum
capital requirements, and is considered to be "well capitalized" as defined by
federal regulatory capital requirements.
Minimum Required To Be
Well Capitalized Under
Minimum Required For Prompt Corrective Action
Actual Capital Adequacy Purpose Regulations
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total Capital
(to risk weighted assets) $26,206 17.4% $12,074 8.0% $15,092 10.0%
Tier 1 (core) capital (to
risk weighted assets) 25,058 16.6% 6,037 4.0% 9,055 6.0%
Tier 1(core) capital (to
adjusted total assets) 25,058 10.9% 9,164 4.0% 11,455 5.0%
Tier 1 (core) capital (to
average assets) 25,058 11.1% 9,034 4.0% 11,292 5.0%
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6.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2003
--------------------------------------------------------------------------------
NOTE 6 - INVESTMENTS IN LIMITED LIABILITY PARTNERSHIPS
These represent First Federal's investments in affordable housing projects for
the primary purpose of available tax benefits. Three of these investments are
accounted for under the cost method of accounting, based on ownership
percentages, and the fourth investment is accounted for under the equity method
of accounting as interpreted by the Emerging Issues Task Force ("EITF")
statement 03-16.
The excess of the carrying amount of the investment over its estimated residual
value is amortized during the periods in which associated tax credits are
allocated to the investor. The annual amortization of the investment is based on
the proportion of tax credits received in the current year to total estimated
tax credits to be allocated to First Federal. These investments are reviewed for
impairment when events indicate their carrying amounts may not be recoverable
from future discounted cash flows. If impaired, the investments are reported at
discounted amounts. First Federal's involvement in these types of investments is
for tax planning purposes only and as such, First Federal is not involved in the
management or operation of such investments. At September 30, 2004, First
Federal had four such investments with a carrying value of $1.4 million.
NOTE 7 - STOCK OPTIONS
The following proforma information presents net income and basic and diluted
earning per common share had the fair value method been used to measure
compensation for stock options granted. The exercise price of options granted is
equivalent to the market price of the underlying stock at the grant date;
therefore, no compensation expense has been recorded for stock options granted.
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
------------- ------------- ------------- -------------
Net income as reported $ 422,460 $ 395,196 $ 1,257,470 $ 1,508,455
Proforma net income 415,372 389,391 1,236,205 1,491,041
Reported earnings per common share
Basic 0.30 0.28 0.88 1.06
Diluted 0.29 0.28 0.85 1.02
Proforma earnings per common share
Basic 0.30 0.28 0.87 1.05
Diluted 0.29 0.27 0.84 1.01
The weighted average fair value of stock options granted during the nine months
ended September 30, 2003 was $5.81 per option. No options were granted in the
same period 2004.
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7.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2003
--------------------------------------------------------------------------------
NOTE 7 - STOCK OPTIONS (Continued)
The fair value of options granted during the nine months ended September 30,
2003 were estimated using an option pricing model with the following weighted
average information as of the grant date:
2003
----
Risk free rate of interest 3.58%
Expected option life 6 years
Expected dividend yield 3.09%
Expected volatility 37.23%
In future years, as additional options are granted, the proforma effect on net
income and earnings per common share may increase. Stock options are used to
reward directors and certain executive officers and provide them with an
additional equity interest. Options are issued for 10 year periods and have five
year vesting schedules. Information about options available for grant and
options granted are as follows:
Weighted-
Average
Available Options Exercise
For Grant Outstanding Price
--------- ----------- -----
Balance at January 1, 2004 141,174 138,495 $11.46
Options exercised -- (26,039) 10.03
Options forfeited 300 (300) 11.31
------- -------
Balance at September 30, 2004 141,474 112,156 $11.79
======= =======
At September 30, 2004, options outstanding had a weighted average remaining life
of approximately 3.18 years. There were 90,656 options exercisable at September
30, 2004 with a weighted-average exercise price of $10.24.
--------------------------------------------------------------------------------
8.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
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GENERAL
Northeast Indiana Bancorp, Inc. ("Northeast Indiana Bancorp" or 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, 2004,
Northeast Indiana Bancorp had no significant assets other than the investment in
the capital stock of First Federal and cash and cash equivalents.
The principal business of savings banks, including First Federal, has
historically consisted of attracting deposits from the general public and making
loans secured by residential real estate. First Federal's earnings are primarily
dependent on net interest income, the difference between interest income and
interest expense. Interest income is a function of the balances of loans and
investments outstanding during the period and the yield earned on such assets.
Interest expense is the function of the balances of deposits and borrowings and
the interest rates paid there on. Provisions for loan losses, service charge and
fee income, and other non-interest income, operating expenses and income taxes
also affect First Federal's earnings. Operating expenses consist primarily of
employee compensation and benefits, occupancy and equipment expenses, data
processing, federal deposit insurance and other general administrative expenses.
The most significant outside factors influencing the operations of First Federal
and other savings institutions include general economic conditions, competition
in the local market place and related monetary and fiscal policies of agencies
that regulate financial institutions. More specifically, the cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by the demand for real estate
financing and other types of loans, which in turn is affected by the interest
rates at which such loans may be offered and other factors affecting loan demand
and funds availability.
FINANCIAL SERVICES
Northeast Indiana Bancorp announced during the quarter ended June 30, 2004 the
acquisition of Innovative Financial Services ("Innovative") through First
Federal's subsidiary, Northeast Indiana Financial. The staff of Innovative ,
including one broker and three support staff, became employees of First Federal
through Northeast Indiana Financial as of the same date. The acquisition has
enabled Northeast Indiana Financial to offer non-FDIC insured products such as
life insurance, estate planning, financial planning, and retirement plans to
small businesses in addition to its existing product offerings of mutual funds,
annuities, stocks, bonds, and brokerage accounts. While management feels the
addition of Innovative should produce a positive cash flow to First Federal in
time, it has not had a material impact to the financials to this point.
--------------------------------------------------------------------------------
Continued
9.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
--------------------------------------------------------------------------------
FINANCIAL CONDITION
Northeast Indiana Bancorp's total assets increased $1.3 million from $227.4
million at December 31, 2003 to $228.7 million at September 30, 2004. Cash and
cash equivalents and proceeds from maturing and sold securities were used to
fund net increases in loans receivable.
Net loans receivable increased $8.6 million or 5.3% from $163.7 million at
December 31, 2003 to $172.3 million at September 30, 2004. Most lending areas
have experienced growth in 2004 including residential mortgage, commercial real
estate, commercial, and consumer lending while construction and credit card
balances have seen declines. Allowance for loan losses decreased approximately
$311,000 through the nine months ended September 30, 2004, which is discussed in
more detail under the non-performing assets and allowance for loan losses
section.
Cash surrender value of life insurance increased $756,000 to $5.1 million at
September 30, 2004 as First Federal purchased new Bank-Owned Life Insurance
("BOLI") policies on a pool of officers. Management believes the earnings credit
rate and the tax-advantaged status of the new BOLI will help offset existing
expenses related to benefit plans that are currently in place for employees.
Total deposits increased $6.4 million or 5.2% from $122.0 million at December
31, 2003 to $128.4 million at September 30, 2004. Aggregate increases of $7.2
million in noninterest bearing demand, savings, MMDA, and time deposits offset a
slight decline of $771,000 in NOW accounts. Management continues to focus on
funding cost efficiencies by attracting lower cost funds when possible. Deposit
proceeds were primarily used to offset a decline in borrowed funds, primarily
short term borrowings under repurchase agreements.
RESULTS OF OPERATIONS
Northeast Indiana Bancorp had net income of $422,000 or $0.29 per diluted common
share and $1.3 million or $0.85 per diluted common share for the three and nine
months ended September 30, 2004 compared to $395,000 or $0.28 per diluted common
share and $1.5 million or $1.02 per diluted common share for the three and nine
months ended September 30, 2003. The differences between the three and nine
month periods are primarily related to significant increases in net interest
income offset by significant declines in net gains on the sale of loans and
increases in salaries and employee benefits as discussed in more detail below.
--------------------------------------------------------------------------------
Continued
10.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
Net interest income increased to $1.6 million for the three months ended
September 30, 2004 compared to $1.4 million for the three months ended September
30, 2003. Net interest income increased to $4.7 million from $4.4 million for
the nine months ended September 30, 2004 and September 30, 2003. The Company's
net interest margin also improved 24 and 20 basis points to 2.93% and 2.97% for
the three and nine months ended September 30, 2004 compared to 2.69% and 2.77%
for the three and nine months ended September 30, 2003. In both cases this was
primarily due to a decline in the cost of interest-bearing liabilities that was
greater than the decline in interest-earning asset yields and due to higher
interest-earning assets between the three and nine month periods.
Due to significant improvements in non-performing asset trends during the three
and nine months ended September 30, 2004, there were no provisions for loan
losses recorded during either period. The improving trends are discussed in more
detail under the non-performing assets and allowance for loan losses section of
this discussion.
Noninterest income was relatively unchanged at $356,000 for the quarter ended
September 30, 2004 compared to $353,000 during the quarter ended September 30,
2003. Declines in net gain on the sale of loans and net gain on the sale of
securities were more than offset by a significant increase in service charges on
deposit accounts. The increased service charges on deposit accounts is due to a
new retail overdraft program that First Federal implemented during the quarter
ended June 30, 2004.
Noninterest income decreased $435,000 to $999,000 for the nine months ended
September 30, 2004 compared to $1.4 million in the prior year period. The main
reason is a decline of $402,000 between periods on net gain on the sale of loans
due to significantly fewer refinances of residential mortgages during the
current year. First Federal has also shown net losses on the sale of foreclosed
real estate and repossessed assets of $11,000 for the nine months ended
September 30, 2004 compared to net gains on the same of $57,000 for the nine
months ended September 30, 2003. Trust and brokerage fees declined $80,000
between nine month periods due to the conversion of trust assets to another
financial institution during the third quarter of 2003 under a revenue sharing
agreement. All of these declines were partially offset by a significant increase
of $87,000 between nine month periods in service charges on deposit accounts and
an increase in loan servicing fees between the same periods.
--------------------------------------------------------------------------------
Continued
11.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
--------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
Noninterest expense increased $134,000 and $307,000 respectively for the three
and nine month periods ended September 30, 2004 compared to the same periods in
2003. Both are primarily related to increases in salaries and employee benefits
due to increased funding on a defined benefit pension plan, increased ESOP
expense due to the Company's current higher share price, less deferred loan
origination fees due to lower residential mortgage volumes and wage increases
related to more employees from a brokerage acquisition that was completed late
June 2004.
Income tax expense increased to $159,000 for the quarter ended September 30,
2004 compared to $131,000 for the quarter ended September 20, 2003 due primarily
to higher taxable income in the current period. Northeast Indiana Bancorp's
effective tax rate was 27.3% in the current quarter compared to 24.9% in the
year earlier quarter. Income tax expense was $442,000 for the nine months ended
September 30, 2004 compared to $553,000 for the nine months ended September 30,
2003. This was due to lower taxable income between periods. The effective tax
rate was 26.0% for the current nine month period compared to 26.8% in the prior
nine month period.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan losses
based on management's quarterly asset classification review and evaluation of
the risk inherent in its loan portfolio and changes in the nature and volume of
its loan activity. Such evaluation considers among other matters, the estimated
value of the underlying collateral, economic conditions, cash flow analysis,
historical loan loss experience, discussions held with delinquent borrowers and
other factors that warrant recognition in providing for an adequate allowance
for loan losses. As a result of this review process and due to improving trends
in non-performing assets, Northeast Indiana Bancorp recorded no provisions for
loan losses for the three and nine months ended September 30, 2004, which was
unchanged from the same periods ended September 30, 2003. If recent increasing
loan balance trends and net charge-off trends continue, management will have to
recommend to the board of directors the commencement of provisions for loan
losses possibly as early as the quarter ended December 31, 2004.
--------------------------------------------------------------------------------
Continued
12.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
--------------------------------------------------------------------------------
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 have been acquired as a result of foreclosure. The
following table summarizes in thousands the various categories of non-performing
assets:
September 30, June 30, March 31, December 31,
2004 2004 2004 2003
Non-accruing loans
One-to-four family $ 310 $ 81 $ 165 $ 81
Commercial real estate 969 1,041 2,408 2,047
Construction or development 5 -- -- --
Consumer 135 91 154 207
Commercial 74 129 78 78
---------------------------------------------------------
Total 1,493 1,342 2,805 2,413
---------------------------------------------------------
Foreclosed real estate
One-to-four family -- 74 74 146
Commercial real estate -- 1,025 15 16
Land 150 -- -- --
---------------------------------------------------------
Total 150 1,099 89 162
---------------------------------------------------------
Repossessed assets
Consumer 12 -- 17 3
Commercial -- -- -- --
---------------------------------------------------------
Total 12 -- 17 3
---------------------------------------------------------
Total non-performing assets $1,655 $2,441 $2,911 $2,578
=========================================================
Total non-performing assets
as a percentage of total assets 0.72% 1.08% 1.31% 1.13%
=========================================================
Total non-performing assets decreased from $2.6 million to $1.7 million or 0.7%
of total assets at September 30, 2004 from 1.1% of total assets at December 31,
2003. The decline in non-performing assets is primarily due to the sale of a
significant commercial real estate property during the quarter ended September
30, 2004 that was included in foreclosed real estate at June 30, 2004 and was
included in non-accruing loans in several quarters prior to that. This property
was disposed at a minimal loss compared to the carrying value but was
responsible for a significant portion of loan balances charged off during 2004.
--------------------------------------------------------------------------------
13.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
--------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
The following table represents an analysis of First Federal's allowance for loan
losses for both the three and nine months ended September 30, 2004 and September
30, 2003:
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
---------------------------------------------------------------------
Balance at beginning of period $ 1,483,672 $ 1,857,963 $ 1,772,109 $ 2,135,630
Charge-offs:
One-to-four family -- -- 2,907 25,954
Commercial real estate -- 34,343 208,218 235,722
Commercial -- -- -- 100,488
Consumer 68,324 30,323 235,806 171,188
---------------------------------------------------------------------
68,324 64,666 446,931 533,352
Recoveries:
One-to-four family -- -- -- --
Commercial real estate -- -- -- --
Commercial -- -- 10,000 96,000
Consumer 45,703 63,050 125,873 158,069
---------------------------------------------------------------------
45,703 63,050 135,873 254,069
---------------------------------------------------------------------
Net Charge-offs 22,621 1,616 311,058 279,283
Additions charged to operations -- -- -- --
---------------------------------------------------------------------
Balance at end of period $ 1,461,051 $ 1,856,347 $ 1,461,051 $ 1,856,347
=====================================================================
Ave. gross loans and loans HFS $174,374,798 $156,429,415 $171,509,542 $156,697,589
----------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during
the period to average loans
outstanding during the period
(annualized) 0.05% 0.00% 0.24% 0.24%
----------------------------------------------------------------------------------------------------------
Average non-performing loans $ 1,493,058 $ 3,232,106 $ 1,880,147 $ 3,896,046
----------------------------------------------------------------------------------------------------------
Ratio of net charge-offs during
the period to average non-
performing loans (annualized) 6.06% 0.20% 22.06% 9.56%
----------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------
14.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
--------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES (continued)
Impaired loans at September 30, 2004 were $1.6 million compared to $2.5 million
at December 31, 2003. The net decline in impaired loans of $900,000 between
December 31, 2003 and September 30, 2004 was primarily due to a significant
commercial real estate loan being foreclosed during the quarter ended June 30,
2004 and subsequently sold during the quarter ended September 30, 2004. Two new
impaired loans have been added during the nine months ended September 30, 2004
totaling approximately $521,000. One of these loans is a residential mortgage
and the other is a commercial real estate loan that was cross-collateralized at
inception. Based on the strong collateral position of both, management
anticipates no losses associated with these two loans at this time. As of
September 30, 2004, management has set aside a total of $313,000 in specific
reserves towards impaired loans.
LIQUIDITY AND CAPITAL RESOURCES
First Federal is required to maintain specific amounts of regulatory capital
pursuant to regulations of the Office of Thrift Supervision (OTS). Those capital
requirements follow: a risk-based capital standard expressed as a percent of
risk weighted assets, a leverage ratio of core capital to total assets, and a
core capital ratio expressed as a percent of total adjusted assets. At September
30, 2004, First Federal exceeded all regulatory capital standards.
At September 30, 2004, First Federal's risk based capital was $26.2 million or
17.4% of risk weighted assets, which exceeds the OTS requirement of $12.1
million and 8.0% by $14.1 million and 9.4%. First Federal's core capital at
September 30, 2004 was $25.1 million or 11.1% of average assets, which exceeds
the OTS requirement of $9.0 million, and 4.0% by $16.1 million and 7.1%. See
Note 5 of Notes to Consolidated Financial Statements (Unaudited).
First Federal's primary sources of funds are deposits, borrowings from the FHLB,
the sale of fixed rate mortgages to the secondary market, principal and interest
payments of loans, operations income and short-term investments. While scheduled
repayments of loans are a predictable source of funds, deposit flows and
mortgage prepayments are greatly influenced by general interest rates, economic
conditions and competition. First Federal has maintained its liquidity position
by, among other things, monitoring its cash and cash equivalents while growing
core deposit areas when possible.
During the quarter ended September 30, 2004, Northeast Indiana Bancorp closed
out a previously announced stock repurchase program after repurchasing 44,260
shares at an average cost of $21.86 during the current quarter. The Company
subsequently announced a new repurchase program to repurchase up to 5% or
approximately 71,000 shares over the next twelve months. In the opinion of
management, repurchases help leverage Northeast Indiana Bancorp's remaining
equity and tend to improve return on shareholder's equity.
--------------------------------------------------------------------------------
15.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
--------------------------------------------------------------------------------
LIQUIDITY AND CAPITAL RESOURCES (continued)
First Federal considers its liquidity and capital resources to be adequate to
meet its foreseeable short and long-term needs. First Federal expects to be able
to fund or refinance, on a timely basis, its material commitments and long-term
liabilities.
FORWARD-LOOKING STATEMENTS
When used in this filing and in future filings by Northeast Indiana Bancorp with
the Securities and Exchange Commission, in Northeast Indiana Bancorp's press
releases or other public or shareholder communications, or in oral statements
made with the approval of an authorized executive officer, the words or phrases
"would be," "will allow," "intends to," "will likely result," "are expected to,"
"will continue," "is anticipated," "estimate," "project" or similar expressions
are intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995.
Such statements are subject to risks and uncertainties, including but not
limited to changes in economic conditions in Northeast Indiana Bancorp's market
area, changes in policies by regulatory agencies, fluctuations in interest
rates, demand for 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.
--------------------------------------------------------------------------------
16.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
September 30, 2004
--------------------------------------------------------------------------------
ITEM 3. CONTROLS AND PROCEDURES
Any control system, no matter how well designed and operated, can provide only
reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934
(Exchange Act)) as of the end of the period covered by this report. Based on
such evaluation, the Company's Chief Executive Officer and Chief Financial
Office have concluded that, as of the end of such period, the Company's
disclosure controls and procedures are effective in recording, processing,
summarizing and reporting, on a timely basis, information required to be
disclosed by the Company in the reports that it files or submits under the
Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over financial
reporting (as such term defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the fiscal quarter to which this report relates that have
materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
--------------------------------------------------------------------------------
17.
NORTHEAST INDIANA BANCORP, INC.
PART II
Other Information
ITEM 1 - LEGAL PROCEEDINGS
Northeast Indiana Bancorp and First Federal are involved from time to
time, as plaintiff or defendant in various legal actions arising from the
normal course of their businesses. While the ultimate outcome of these
proceedings cannot be predicted with certainty, it is the opinion of
management that the resolution of these proceedings should not have a
material effect on Northeast Indiana Bancorp's results of operations on a
consolidated basis.
--------------------------------------------------------------------------------
18.
NORTHEAST INDIANA BANCORP, INC.
PART II
Other Information
(Continued)
ITEM 2 - UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
(e) The following table provides information about purchases by the Company
(and its affiliated purchasers) during the quarter ended September 30,
2004 of equity securities that are registered by the Company pursuant to
Section 12 of the Exchange Act.
ISSUER PURCHASES OF EQUITY SECURITIES
--------------------------------------------------------------------------------------------
(a) (b) (c) (d)
Total Number of Maximum
Shares Number of
Purchased as Shares That
Part of Publicly May Yet Be
Total Number of Announced Purchased
Shares Average Price Plans or Under the Plans
Period Purchased Paid per Share Programs (1) or Programs (1)
--------------------------------------------------------------------------------------------
7/1/04 - 7/31/04 19,400 $21.85 19,400 24,860
--------------------------------------------------------------------------------------------
8/1/04 - 8/31/04 11,528 $22.04 11,528 13,332
--------------------------------------------------------------------------------------------
9/1/04 - 9/30/04 13,332 $21.72 13,332 71,268
--------------------------------------------------------------------------------------------
Total: 44,260 $21.86 44,260 71,268
------ ------
--------------------------------------------------------------------------------------------
On September 29, 2004 our board of directors announced a new common stock
repurchase program allowing for the repurchase of 71,268 shares prior to
expiration on September 29, 2005.
--------------------------------------------------------------------------------
19.
NORTHEAST INDIANA BANCORP, INC.
PART II
Other Information
(Continued)
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5 - OTHER INFORMATION
None
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 31.1 and Exhibit 31.2 - Certifications Pursuant to Section
302 of the Sarbanes-Oxley Act of 2002
Exhibit 32.1 and Exhibit 32.2 - Certifications Pursuant to Section
906 of the Sarbanes- Oxley Act of 2002
(b) Reports on Form 8-K
(1) July 16, 2004 Announcing Second Quarter Earnings for 2004
(2) July 28, 2004 Announcing Cash Dividend
(3) September 21, 2004 Announcing Completion of Stock Repurchase Program
(4) September 29, 2004 Announcing New Stock Repurchase Program
--------------------------------------------------------------------------------
20.
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 10, 2004 By: /S/ STEPHEN E. ZAHN
Stephen E. Zahn
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 10, 2004 By: /S/ RANDY J. SIZEMORE
Randy J. Sizemore
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
--------------------------------------------------------------------------------
21.