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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 July 26, 2002
- --------------------------------------------------------------------------------
Common Stock, par value $.01 per share 1,547,243
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
Consolidated Balance Sheets
June 30, 2002 and December 31, 2001 1
Consolidated Statements of Income for the
three and six months ended June 30, 2002 and 2001 2
Consolidated Statement of Changes in Shareholders' Equity
for the six months ended June 30, 2002 3
Consolidated Statements of Cash Flows for the six
months ended June 30, 2002 and 2001 4
Notes to Consolidated Financial Statements 5
Item 2. Management's Discussion and Analysis or Plan of Operation 7
PART II. OTHER INFORMATION 15
Signature page 17
Exhibit 99.1 and Exhibit 99.2 -Certification Pursuant
to section 906 of the Sarbanes-Oxley Act of 2002 18
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, 2002 And December 31, 2001
June 30, December 31,
2002 2001
(Unaudited)
ASSETS
Interest earning cash and cash equivalents $ 10,571,630 $ 23,541,599
Noninterest earning cash and cash equivalents 2,147,248 2,750,133
------------- -------------
Total cash and cash equivalents 12,718,878 26,291,732
Securities available for sale 44,302,759 39,365,026
Securities held to maturity (fair value:
June 30, 2002- $266,000; December 31, 2001 - $306,000) 266,000 306,000
Loans held for sale, net of unrealized losses; June 30, 2002
$900 and December 31, 2001 $3,278 272,563 1,543,422
Loans receivable, net of allowance for loan losses: June 30,
2002 - $2,067,072; and December 31, 2001 - $1,954,900 159,856,733 162,830,186
Accrued interest receivable 711,379 753,000
Premises and equipment, net 2,246,774 2,298,102
Investments in limited liability partnerships 1,465,399 1,546,177
Other assets 3,453,415 3,460,884
------------- -------------
Total assets $ 225,293,900 $ 238,394,529
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Deposits
Demand deposits- noninterest bearing $ 5,579,607 $ 4,579,159
Savings 10,813,498 9,261,040
NOW and MMDA 32,109,819 31,350,364
Time deposits 78,409,112 91,839,448
------------- -------------
Total deposits 126,912,036 137,030,011
Borrowed funds 70,655,079 73,966,411
Accrued expenses and other liabilities 1,166,505 1,117,069
------------- -------------
Total liabilities 198,733,620 212,113,491
Shareholders' equity
Preferred stock, no par value: 500,000 shares authorized; 0 shares issued -- --
Common stock, $.01 par value: 4,000,000 shares authorized;
6/30/02: 2,640,672 shares issued, 1,549,743 shares outstanding
12/31/01: 2,640,672 shares issued, 1,550,656 shares outstanding 26,407 26,407
Additional paid in capital 28,895,654 28,874,771
Retained earnings, substantially restricted 12,752,936 12,447,813
Unearned employee stock ownership plan shares (551,421) (620,566)
Unearned recognition and retention plan shares (8,237) (12,555)
Accumulated other comprehensive income (loss), net of tax (4,110) 20,979
Treasury stock, 1,090,929 and 1,090,016 common shares, at
cost, at June 30, 2002 and December 31, 2001 (14,550,949) (14,455,811)
------------- -------------
Total shareholders' equity 26,560,280 26,281,038
------------- -------------
Total liabilities and shareholders' equity $ 225,293,900 $ 238,394,529
============= =============
See accompanying notes to financial statements
1.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Three and six months ended June 30, 2002 and 2001
Three months ended Six months ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited)
Interest income
Loans, including fees $ 3,065,836 $ 3,939,491 $ 6,245,235 $ 7,952,352
Taxable securities 464,543 463,995 932,046 931,356
Non-taxable securities 14,349 5,476 19,186 10,822
Deposits with financial institutions 84,046 130,818 186,609 180,910
----------- ----------- ----------- -----------
Total interest income 3,628,774 4,539,780 7,383,076 9,075,440
Interest expense
Deposits 1,121,110 1,894,395 2,392,697 3,866,907
Borrowed funds 918,502 920,449 1,812,923 1,835,454
----------- ----------- ----------- -----------
Total interest expense 2,039,612 2,814,844 4,205,620 5,702,361
Net interest income 1,589,162 1,724,936 3,177,456 3,373,079
Provision for loan losses 175,000 100,000 392,300 250,000
----------- ----------- ----------- -----------
Net interest income after provision
for loan losses 1,414,162 1,624,936 2,785,156 3,123,079
Noninterest income
Service charges on deposit accounts 90,224 94,660 173,850 183,301
Loan servicing fees 50,618 75,076 114,134 126,471
Net gain (loss) on sale of securities
available for sale (10,535) -- (10,535) --
Net gain on sale of loans held for sale 41,782 57,162 72,207 88,422
Net gain (loss) on sale of foreclosed
real estate and repossessed assets (76,918) (39,606) (62,287) (39,606)
Trust and brokerage fees 70,422 36,468 116,266 75,991
Other service charges and fees 82,045 75,853 146,791 151,318
----------- ----------- ----------- -----------
Total noninterest income 247,638 299,613 550,426 585,897
Noninterest expense
Salaries and employee benefits 598,740 588,568 1,207,352 1,163,742
Occupancy 114,796 118,114 231,317 232,113
Data processing 157,473 154,499 309,533 315,203
Deposit insurance premium 5,986 6,949 12,471 13,446
Professional fees 88,895 60,535 138,389 143,731
Correspondent bank charges 54,073 59,679 107,502 112,655
Other expense 232,474 186,308 448,669 425,113
----------- ----------- ----------- -----------
Total noninterest expense 1,252,437 1,174,652 2,455,233 2,406,003
----------- ----------- ----------- -----------
Income before income taxes 409,363 749,897 880,349 1,302,973
Income tax expense 85,476 234,660 203,238 395,035
----------- ----------- ----------- -----------
Net income $ 323,887 $ 515,237 $ 677,111 $ 907,938
=========== =========== =========== ===========
Comprehensive income $ 405,616 $ 493,444 $ 652,022 $ 1,012,280
=========== =========== =========== ===========
Basic earnings per common share $ 0.22 $ 0.33 $ 0.46 $ 0.58
Diluted earnings per common share $ 0.22 $ 0.33 $ 0.45 $ 0.57
See accompanying notes to financial statements
2.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Six months ended June 30, 2002
- --------------------------------------------------------------------------------
(Unaudited)
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 six months ended June 30, 2002 677,111
Other comprehensive income (loss):
Net change in unrealized gains(losses)
On securities available for sale, net of tax
Total other comprehensive income (loss)
Comprehensive income
Cash dividends paid $.24 per share year to date (371,988)
Purchase of 26,676 shares of treasury stock
Issuance of 25,763 shares of treasury stock upon exercise of stock
options (31,956)
Tax effect of stock plans 2,644
8,366 shares committed to be released under ESOP 50,195 69,145
Amortization of RRP contributions
------ ---------- ---------- --------
Balance at June 30, 2002 26,407 28,895,654 12,752,936 (551,421)
====== ========== ========== ========
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 six months ended June 30, 2002 677,111
Other comprehensive income (loss):
Net change in unrealized gains(losses)
On securities available for sale, net of tax
(25,089)
Total other comprehensive income (loss) (25,089)
----------
Comprehensive income 652,022
Cash dividends paid $.24 per share year to date (371,988)
Purchase of 26,676 shares of treasury stock (377,253) (377,253)
Issuance of 25,763 shares of treasury stock upon exercise of stock
options 282,115 250,159
Tax effect of stock plans 2,644
8,366 shares committed to be released under ESOP 119,340
Amortization of RRP contributions 4,318 4,318
------ ------ ----------- ----------
Balance at June 30, 2002 (8,237) (4,110) (14,550,949) 26,560,280
====== ====== =========== ==========
See accompanying notes to financial statements
3.
NORTHEAST INDIANA BANCORP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2001
- --------------------------------------------------------------------------------
Six months ended
June 30,
2002 2001
---- ----
(Unaudited)
Cash flows from operating activities
Net income $ 677,111 $ 907,938
Adjustments to reconcile net income
to net cash from operating activities
Depreciation and amortization 217,464 211,668
Provision for loan losses 392,300 250,000
Net (gain) loss on sale of:
Foreclosed real estate and repossessed assets 62,287 39,606
Loans held for sale (72,207) (88,421)
Securities available for sale 10,535 --
Originations of loans held for sale (2,978,590) (5,223,451)
Proceeds from loans sold 4,321,656 5,311,872
Reduction of obligation under ESOP 119,340 107,844
Amortization of RRP 4,318 4,318
Net change in:
Other assets (197,358) (10,023)
Accrued interest receivable 41,621 158,236
Accrued expenses and other liabilities 49,436 (124,069)
------------ ------------
Total adjustments 1,970,802 637,580
------------ ------------
Net cash from operating activities 2,647,913 1,545,518
Cash flows from investing activities
Purchases of securities available for sale (15,043,523) (14,568,458)
Proceeds from maturities and principal payments of:
Securities available for sale 8,741,709 13,052,419
Securities held to maturity 40,000 38,000
Proceeds from sale of securities available for sale 1,405,188 --
Purchases of loans -- (79,997)
Net change in loans 2,165,348 13,462,670
Proceeds from sale of participation loans -- 650,000
Proceeds from sale of foreclosed real estate and repossessed vehicles 470,395 793,430
Expenditures on premises and equipment (79,638) (178,053)
Proceeds from sale of premises and equipment 8,143 --
------------ ------------
Net cash from investing activities (2,292,378) 13,170,011
Cash flows from financing activities
Net change in deposits (10,117,975) (3,129,976)
Advances from FHLB -- 29,000,000
Repayment of FHLB advances -- (31,399,663)
Payments of demand notes -- (125,000)
Net change in other borrowed funds (3,311,332) (599,260)
Dividends paid (371,988) (367,627)
Purchase of treasury stock (377,253) (1,024,065)
Sale of treasury stock 250,159 178,830
------------ ------------
Net cash from financing activities (13,928,389) (7,466,761)
------------ ------------
Net change in cash and cash equivalents (13,572,854) 7,248,768
Cash and cash equivalents at beginning of period 26,291,732 6,576,266
------------ ------------
Cash and cash equivalents at end of period $ 12,718,878 $ 13,825,034
============ ============
Cash paid for:
Interest $ 4,151,365 $ 5,755,485
Income taxes 286,300 401,700
Non-cash transactions:
Transfer from loans to other real estate and repossessed assets 415,805 416,777
See accompanying notes to financial statements
4.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(UNAUDITED)
June 30, 2002
- --------------------------------------------------------------------------------
NOTE 1 - BASIS OF PRESENTATION
The unaudited information for the three and six months ended June 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 six month periods reported but should not be
considered as indicative of the results to be expected for the full year.
Certain reclassifications were made to the prior period financial statements to
conform to the current period presentation.
NOTE 2 - EARNINGS PER SHARE
Basic earnings per common share is based on weighted-average common shares
outstanding less unallocated and nonvested RRP shares. Diluted earnings per
common share further assumes issue of any dilutive potential common shares.
Three months ended Six months ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Earnings Per Common Share
Net income available to common shareholders $ 323,887 $ 515,237 $ 677,111 $ 907,938
Weighted average common shares outstanding
(excluding unallocated ESOP shares and
nonvested RRP shares) 1,454,996 1,556,315 1,460,195 1,574,536
Basic Earnings Per Common Share $ 0.22 $ 0.33 $ 0.46 $ 0.58
Earnings Per Common Share Assuming Dilution
Net income available to common shareholders $ 323,887 $ 515,237 $ 677,111 $ 907,938
Weighted average common shares outstanding
for basic earnings per common share 1,454,996 1,556,315 1,460,195 1,574,536
Add: dilutive effects of assumed exercises of
stock options 28,314 18,216 44,171 26,830
---------- ---------- ---------- ----------
Weighted average common and dilutive
potential common shares
outstanding 1,483,310 1,574,531 1,504,366 1,601,366
Diluted Earnings Per Common Share $ 0.22 $ 0.33 $ 0.45 $ 0.57
NOTE 3 - SUBSEQUENT EVENT-CASH DIVIDENDS
On July 29, 2002, the Board of Directors of Northeast Indiana Bancorp, Inc.
announced a quarterly cash dividend of $.12 per common share. The dividend will
be paid on August 27, 2002 to common shareholders of record on August 13, 2002.
The payment of the cash dividend will reduce shareholders' equity (third
quarter) by approximately $186,000.
- --------------------------------------------------------------------------------
Continued
5.
NORTHEAST INDIANA BANCORP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
June 30, 2002
- --------------------------------------------------------------------------------
NOTE 4 - STOCK REPURCHASE PLAN
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 will include up to
76,649 shares. During the quarter ended June 30, 2002 there were 7,000 shares
repurchased at an average price of $15.69. This leaves approximately 70,000
shares still available to be repurchased under the current plan.
NOTE 5 - REGULATORY CAPITAL REQUIREMENTS
Pursuant to federal regulatory agencies, savings institutions must meet three
separate minimum capital-to-asset requirements. The following table summarizes,
as of June 30, 2002, the capital requirements for First Federal under those
federal regulatory requirements and First Federal's actual capital ratios. As of
June 30, 2002, First Federal substantially exceeded all regulatory minimum
capital requirements and is considered to be "well capitalized" as defined by
federal regulatory capital requirements.
Minimum Required To Be Well
Minimum Required For Capitalized Under Prompt
Actual Capital Adequacy Purposes Corrective Action Regulations
------ ------------------------- -----------------------------
Amount Ratio Amount Ratio Amount Ratio
(Dollars in thousands)
Total Capital
(to risk weighted assets) $25,799 18.2% $11,313 8.0% $14,141 10.0%
Tier 1 (core) capital (to risk weighted
assets) 24,463 17.3 5,656 4.0 8,485 6.0
Tier 1(core) capital (to adjusted total
assets) 24,463 10.9 9,000 4.0 11,250 5.0
Tier 1 (core) capital (to average assets)
24,463 10.5 9,301 4.0 11,626 5.0
- --------------------------------------------------------------------------------
Continued
6.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2002
- --------------------------------------------------------------------------------
GENERAL
Northeast Indiana Bancorp, Inc. ("Northeast Indiana Bancorp") was formed as a
Delaware corporation in March, 1995, for the purpose of issuing common stock and
owning all the common stock of First Federal Savings Bank ("First Federal") as a
unitary thrift holding company. As of June 30, 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. First Federal's earnings are also affected by
provisions for loan losses, service charge and fee income, and other
non-interest income, operating expenses and income taxes. Operating expenses
consist primarily of employee compensation and benefits, occupancy and equipment
expenses, data processing, federal deposit insurance premiums and other general
administrative expenses.
The most significant outside factors influencing the operations of First Federal
and other savings institutions include general economic conditions, competition
in the local market place and related monetary and fiscal policies of agencies
that regulate financial institutions. More specifically, the cost of funds is
influenced by interest rates on competing investments and general market rates
of interest. Lending activities are influenced by the demand for real estate
financing and other types of loans, which in turn is affected by the interest
rates at which such loans may be offered and other factors affecting loan demand
and funds availability.
TRUST AND FINANCIAL SERVICES
During the year of 1998, First Federal established a trust department, which
began operations in the fourth quarter. At the end of June 30, 2002,
approximately $41.2 million in trust assets were held under management. 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
7.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2002
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
Northeast Indiana Bancorp's total assets decreased $13.1 million or 5.5% from
$238.4 million at December 31, 2001 to $225.3 million at June 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 mainly used to allow wholesale time deposits to leave at their
maturity dates in an effort to reposition the Company's liabilities.
Net loans receivable decreased $3.0 million or 1.8% from $162.8 million at
December 31, 2001 to $159.9 million at June 30, 2002. The decrease in loans
during the first six months of 2002 was evenly spread between the mortgage,
commercial, and consumer portfolio's. In light of general weaknesses detected in
the local economy, management has remained cautious in its approach to local
loan underwriting. In addition, First Federal has continued to sell long term
fixed rate mortgages into the secondary market, with servicing retained, in an
effort to minimize the future interest rate risk associated with this product.
Allowances for loan losses has increased approximately $112,000 through the six
months ended June 30, 2002 and is discussed in more detail in the following
pages under non-performing assets and allowance for loan losses. Securities
available-for-sale increased $4.9 million or 12.5% from $39.4 million to $44.3
million for the period December 31, 2001 to June 30, 2002. Management has
continued to look at alternative uses of borrowed funds to increase investment
yields over the current fed funds target rate. Borrowed funds have been reduced
by $3.3 million predominately by a reduction in securities sold under repurchase
agreements to local municipalities. Total deposits decreased by $11.1 million
from $137.0 million at December 31, 2001 to $126.9 million at June 30, 2002.
RESULTS OF OPERATIONS
Northeast Indiana Bancorp had net income of $324,000 or $0.22 per diluted share
and $677,000 or $0.45 per diluted share for the three and six months ended June
30, 2002 compared to $515,000 or $0.33 per diluted share and $908,000 or $0.57
per diluted share for the three and six months ended June 30, 2001.
Net interest income decreased to $1.6 million for the three months ended June
30, 2002 compared to $1.7 million for the three months ended June 30, 2001. Net
interest income decreased to $3.2 million from $3.4 million for the six months
ended June 30, 2002 and June 30, 2001 respectively. Interest income for the
quarter decreased $911,000 to $3.6 million for June 30, 2002 compared to $4.5
million for June 30,2001. Interest income for the six months ended June 30, 2002
was $7.4 million compared to $9.1 million for the six months ended June 30, 2001
a decrease of $1.7 million or 18.7%. Of the $1.7 million decrease, 47% is
attributed to volume while 53% is related to lower interest rates. For the
second quarter, interest expense decreased $775,000 to $2.0 million for the
quarter ended June 30, 2002 compared to $2.8 million for the quarter ended June
30, 2001.
- --------------------------------------------------------------------------------
Continued
8.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2002
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
Interest expense for the six months ended June 30, 2002 was approximately $4.2
million, a decrease of $1.5 million when compared to the $5.7 million expensed
for the same period ended June 30, 2001. This decrease is due to borrowed funds
and time deposits repricing at lower rates as they mature and lower average
balances between periods. During the first half of 2002, Northeast Indiana
Bancorp has reduced both its funding reliance on wholesale time deposits and
borrowed funds in an effort to reposition its liabilities.
The provision for loan losses increased by $75,000 to $175,000 for the three
months ended June 30, 2002 compared to $100,000 for the quarter ended June 30,
2001. In addition, the provision for loan losses was $392,000 for the six months
ended June 30, 2002, an increase of 56.8% or $142,000 compared to the $250,000
provision for loan losses in the year earlier period. The increases to
provisions are discussed in more detail under the non-performing assets and
allowances for loan losses section of this discussion.
Non-interest income decreased to $248,000 for the three months ended June 30,
2002 compared to $300,000 for the comparable period in 2001. This decrease was
primarily due to increases in net losses on sale of foreclosed and repossessed
assets, increases in net losses on the sale of securities, decreases in loan
servicing fees and decreases in net gains on the sale of loans. Management
continued to take an aggressive position with delinquent borrowers during the
second quarter, which led to the increases in net losses on the sale of
foreclosed and repossessed assets. In addition, management reviewed the
investment portfolio for systemic risks and sold two CMO's at a net loss that
were classified as available for sale. These CMO's exhibited a tendency to
become volatile from both an extension and price risk perspective in a rising
rate environment. These declines in non-interest income were partially offset by
a sharp increase of $34,000 in trust and brokerage fees. Non-interest income
decreased to $550,000 for the six months ended June 30, 2002 when compared to
the $586,000 recorded for the six months ended June 30, 2001. This decline is
due to the same factors described for the three month comparison of non-interest
income.
Non-interest expense increased to $1.3 million for the three months ended June
30, 2002 as compared to $1.2 million for the quarter ended June 30, 2001. This
increase was primarily due to an increase in professional fees and other expense
between 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. Non-interest
expense increased to $2.5 million for the three months ended June 30, 2002
compared to $2.4 million for the corresponding period in 2001. This represents
an increase of $49,000 for the six months ended June 30, 2002 as compared to the
year earlier period. This increase is due primarily to increases in salaries and
employee benefits and other expense, which were partially offset by slight
decreases in data processing, professional fees, and correspondent bank charges.
- --------------------------------------------------------------------------------
Continued
9.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2002
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
Income tax expense decreased for the six months ended June 30, 2002 due to lower
taxable income compared to the same period in 2001 and an increase in the
available tax credits from First Federal's investment in low income housing
projects. This decrease was reflected in an effective tax rate of 23.1% for the
six months ended June 30, 2002 compared to an effective tax rate of 30.3% for
the six months ended June 30, 2001.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board (FASB) recently issued Statement of
Financial Standards (SFAS) No. 145 and No. 146. SFAS No. 145 applies for years
beginning after May 14, 2002 and may be adopted sooner. SFAS No. 145 covers
extinguishments of and leases, and includes some minor technical corrections.
Under previous accounting guidance, gains or losses from extinguishments of debt
were always treated as extraordinary items. Under SFAS No. 145 they will no
longer be considered extraordinary, except under very limited conditions. Upon
adoption of SFAS No. 145, any prior gains and losses from extinguishments of
debt must be reclassified as ordinary gains and losses. Under SFAS No. 145, if a
capital lease is modified to become an operating lease, it will be accounted for
as a sale-leaseback, by following the accounting guidance of SFAS No. 98,
instead of being accounted for as a new lease. SFAS No. 146 covers accounting
for costs associated with exit or long-lived asset disposal activities, such as
restructurings, consolidation or closing of facilities, lease termination costs
or employee relocation or severance costs. SFAS No. 146 replaces Emerging Issues
Task Force (EITF) 94-3, and is to be applied prospectively to exit or disposal
activities initiated after December 31, 2002, and may be adopted sooner. A
company may not restate its previously issued financial statements. SFAS No. 146
requires exit or long-lived asset disposal costs to be recognized as an expense
when the liability is incurred and can be measured at fair value, rather than at
the date of making a commitment to an exit or disposal plan. Management does not
expect the effects of the future adoptions of SFAS No. 145 and SFAS No. 146 to
be material to Northeast Indiana Bancorp's consolidated financial position or
results of operations.
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES
The allowance for loan losses is established through a provision for loan loss
calculation based on management's quarterly asset classification review and
evaluation of the risk inherent in its loan portfolio and changes in the nature
and volume of its loan activity. Such evaluation considers, among other matters,
the estimated value of the underlying collateral, economic conditions, cash flow
analysis, historical loan loss experience, discussions held with delinquent
borrowers and other factors that warrant recognition in providing for an
adequate allowance for loan losses.
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Continued
10.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2002
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NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES(CONTINUED)
As a result of this review process, Northeast Indiana Bancorp recorded
provisions for loan losses in the amount of $175,000 and $392,000 for the three
and six months ended June 30, 2002 compared to $100,000 and $250,000 for the
same periods ended June 30, 2001.
Even though non-performing loans have decreased to $6.1 million at June 30, 2002
from $6.9 million at December 31, 2001, First Federal experienced increased net
loan charge-offs totaling $179,000 and $280,000 during the current quarter and
six month periods compared to $50,000 and $21,000 in the year earlier periods.
These increased net charge offs were the primary reason for the increase in the
loan loss provisions for the both the three and six months ended June 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.
The non-performing assets to total assets ratio is one indicator of the exposure
to credit risk. Non-performing assets of First Federal consist of the
non-accruing loans, troubled debt restructuring and real estate owned and
repossessed assets which have been acquired as a result of foreclosures.
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Continued
11.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2002
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NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES(CONTINUED)
The following table summarizes in thousands the various categories of
non-performing assets:
June 30 December 31
2002 2001
---- ----
Non-accruing loans
One-to-four family $ 654 $ 442
Multi- family -- --
Commercial real estate 4,137 5,085
Construction or development -- --
Consumer 728 1,125
Commercial business 558 267
------ ------
Total 6,077 6,919
------ ------
Foreclosed assets
One -to-four -family -- 46
Commercial and Land 96 173
------ ------
Total 96 219
------ ------
Repossessed assets
66 38
Consumer 24 45
------ ------
Commercial
Total 90 83
------ ------
Total non-performing assets $6,263 $7,221
====== ======
Total non-performing assets as a percentage
of total assets 2.78% 3.03%
====== ======
Total non-performing assets decreased from $7.2 million to $6.3 million or 2.78%
of total assets at June 30, 2002 from 3.03% of total assets at December 31, 2001
and $6.4 million or 2.77% of total assets at March 31, 2002. At June 30, 2002,
one borrower comprised $1.4 million or 22.4% of the $6.3 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, the $4.1 million in commercial real
estate non-performing loans also includes $800,000 in loans secured by
one-to-four family residential rental properties that were placed on non-accrual
status at March 31, 2001 due to weaknesses in cash flows. Although the loans are
on non-accrual, First Federal now is receiving a majority of interest only
payments on a cash basis.
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Continued
12.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2002
- --------------------------------------------------------------------------------
NON-PERFORMING ASSETS AND ALLOWANCE FOR LOAN LOSSES(CONTINUED)
Impaired loans at June 30, 2002 were $5.3 million compared to $5.9 million at
December 31, 2001 and $5.6 million at March 31, 2002. One new impaired loan was
added during the second quarter of 2002 totaling approximately $100,000.
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 are as follows: a risk-based capital standard expressed as a
percent of risk weighted assets, a leverage ratio of core capital to total
assets, and a core capital ratio expressed as a percent of total adjusted
assets. At June 30, 2002, First Federal exceeded all regulatory minimum capital
requirements.
At June 30, 2002, First Federal's risk based capital was $25.8 million or 18.2%
of risk weighted assets, which exceeds the $11.3 million or 8.0% OTS minimum
requirement by $14.5 million and 10.2%. First Federal's core capital at June 30,
2002 was $24.5 million or 10.5% of average assets, which exceeds the OTS
requirement of $9.3 million or 4.0% by $15.2 million and 6.5%.
First Federal's primary sources of funds are deposits, FHLB advances, principal
and interest payments of loans, income from operations, 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 June 30, 2002, First
Federal had commitments to originate loans and to fund open lines of credit
totaling $16.5 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 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 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.
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Continued
13.
NORTHEAST INDIANA BANCORP, INC.
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
June 30, 2002
- --------------------------------------------------------------------------------
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.
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Continued
14.
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 HOLDERS
(a) The Annual Meeting of Shareholders ("the meeting") of Northeast
Indiana Bancorp, Inc. was held on May 1, 2002. The matters
approved by shareholders at the meeting and the number of votes
cast for, against or withheld (as well as the number of
abstentions) as to each matter are set forth below:
(1) The election of the following directors for a three year term:
Votes
-----
For Withheld
--- --------
J. David Carnes 989,433 180,583
(2) Ratification of the 2002 Omnibus Incentive Plan
Votes
-----
Broker
For Against Abstain Non-Vote
--- ------- ------- --------
496,579 298,445 21,745 353,247
ITEM 5 - OTHER INFORMATION
None
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Continued 16.
15.
NORTHEAST INDIANA BANCORP, INC.
PART II (Continued)
Other Information
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) April 25, 2002 Announcing First Quarter Earnings for 2002
(2) May 3, 2002 Announcing Cash Dividend and Annual
Shareholders' Meeting Results
- --------------------------------------------------------------------------------
16.
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.
Date: August 14, 2002 By: /S/ STEPHEN E. ZAHN
--------------------------------------
Stephen E. Zahn
President and Chief Executive Officer
(Duly Authorized Officer)
Date: August 14, 2002 By: /S/ RANDY J. SIZEMORE
--------------------------------------
Randy J. Sizemore
Senior Vice President and
Chief Financial Officer
(Principal Financial Officer)
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17.