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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2002
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
----------------- -----------------
Commission File Number 0-26012
NORTHEAST INDIANA BANCORP, INC.
(Name of small business issuer in its charter)
Delaware 35-1948594
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
648 North Jefferson Street, Huntington, Indiana 46750
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (260) 356-3311
Securities Registered Pursuant to Section 12(b) of the Act:
None
Securities Registered Pursuant to Section 12(g) of the Act:
Common Stock, par value $0.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12
months (or for such shorter period that the registrant was required to file such
reports) and (2) has been subject to such filing requirements for the past 90
days. YES |X|. NO |_|.
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained herein, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
Our revenues for the most recent fiscal year: $15.8 million
The aggregate market value of the voting stock held by non-affiliates,
computed by reference to the average of the bid and asked price of such stock as
of March 10, 2003, was $18.0 million. (The exclusion from such amount of the
market value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate.)
As of March 10, 2003, there were 1,483,909 shares outstanding of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts II of Form 10-KSB - Annual Report to Stockholders for the fiscal year
ended December 31, 2002. Part III of Form 10-KSB - Proxy Statement for
Annual Meeting of Stockholders.
Transitional Small Business Disclosure Format: YES |_|; NO |X|
FORWARD-LOOKING STATEMENTS
Northeast Indiana Bancorp, Inc. (Northeast Indiana) and its wholly-owned
subsidiary, First Federal Savings Bank (First Federal) and its wholly-owned
subsidiary, Northeast Indiana Financial, Inc. (Northeast Financial), may from
time to time make written or oral "forward-looking statements," including
statements contained in its filings with the Securities and Exchange Commission
(the SEC). These forward-looking statements may be included in this Annual
Report on Form 10-KSB and the exhibits attached to it, in Northeast Indiana's
reports to stockholders and in other communications, which are made in good
faith by us pursuant to the "safe harbor" provisions of the Private Securities
Litigation Reform Act of 1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may," "could," "should," "would," "believe," "anticipate," "estimate,"
"expect," "intend," "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause our
financial performance to differ materially from the plans, objectives,
expectations, estimates and intentions expressed in the forward-looking
statements:
o the strength of the United States economy in general and the strength of
the local economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies and
laws, including interest rate policies of the Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and
services and the perceived overall value of these products and services
by users, including the features, pricing and quality compared to
competitors' products and services;
o the willingness of users to substitute our products and services for
products and services of our competitors;
o our success in gaining regulatory approval of our products and services,
when required;
o the impact of changes in financial services' laws and regulations
(including laws concerning taxes, banking, securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
The list of important factors stated above is not exclusive. We do not
undertake to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of Northeast Indiana, First
Federal or Northeast Financial.
2
PART I
Item 1. Description of Business
Northeast Indiana, a Delaware corporation, is the holding company for
First Federal and its subsidiary Northeast Financial. All references to
Northeast Indiana prior to June 27, 1995, the date of First Federal's conversion
from mutual to stock form, except where otherwise indicated, are to First
Federal. References in this Form 10-KSB to "we," "us" and "our" refer to
Northeast Indiana and/or First Federal and/or Northeast Financial as the context
requires.
At December 31, 2002, we had $225.0 million of assets and
stockholders' equity of $26.6 million (or 11.8% of total assets).
First Federal is a federally chartered stock savings association
headquartered in Huntington, Indiana. Our deposits are insured up to applicable
limits by the Federal Deposit Insurance Corporation (FDIC), which is backed by
the full faith and credit of the United States Government.
Northeast Financial, an Indiana corporation, was established as a
subsidiary of First Federal to provide brokerage services through an affiliation
with VESTAX Securities Corporation (broker/dealer).
Our principal business consists of attracting retail deposits from
the general public and investing those funds primarily in first mortgage loans
on owner-occupied, single-family residential real estate. We also originate
commercial real estate, construction, consumer and commercial business loans. We
have in the past purchased a limited number of loans and equipment leases. At
December 31, 2002, substantially all of the real estate mortgage loans,
including commercial and multi-family, were secured by properties located in our
market area. We also invest in obligations of states and political subdivisions,
mutual funds and other permissible investments.
We offer traditional trust services, including but not limited to,
revocable living trusts, testamentary trusts, investment agency relationships,
estate administration, guardianships, and custodial accounts. The professionals
in our trust department have collectively over 30 years of banking and
investments experience.
Our revenues are derived principally from interest on loans,
investment and other securities and service fee income. We do not originate
loans to fund leveraged buyouts, and have no loans to foreign corporations or
governments. While we generally solicit deposits only in our primary market
area, at December 31, 2002, we had $6.3 million in brokered deposits. This
represents a decline of $3.8 million or 37.6% from the $10.1 million in brokered
deposits reported at December 31, 2001.
Our executive offices are located at 648 North Jefferson Street,
Huntington, Indiana 46750, and our telephone number at that address is (260)
356-3311.
3
Market Area
Our office is located at 648 North Jefferson Street in Huntington,
Indiana. The City of Huntington is located in Huntington County, Indiana, and 25
miles southwest of Fort Wayne, Indiana. The City of Huntington is the County
Seat of Huntington County and has a population of approximately 17,500. Along
with an agricultural base, the major employers in Huntington County are engaged
in the light manufacturing, education and health care industries and include the
following: United Technologies, CFM Majestic, Wabash/Optek Sensor Group, Bendix
Commercial Vehicle System Co., Dana Corporation, Hayes Lemmerz, Square D, Good
Humor-Breyers Ice Cream, Our Sunday Visitor, Huntington County Community School
Corporation and Parkview-Huntington Hospital.
Lending Activities
Our loan portfolio consists primarily of conventional, first mortgage
loans secured by one-to four-family residences and, to a lesser extent, consumer
loans, commercial real estate loans, commercial business loans, construction or
development loans and loans secured by multi-family real estate. At December 31,
2002, gross loans outstanding totaled $158.8 million, of which $86.5 million or
54.47% were one-to four-family residential mortgage loans. Of the one-to
four-family mortgage loans outstanding at that date, 65.24% were fixed-rate
loans, and 34.76% were adjustable-rate loans. At that same date, commercial real
estate and multi-family loans totaled $23.2 million, of which 91.69% were
fixed-rate loans and 8.31% were adjustable-rate loans. Also at that date,
construction or development loans totaled $6.1 million or 3.82% of the total
loan portfolio, 31.46% of which were adjustable-rate loans. At December 31,
2002, commercial business loans totaled $19.3 million or 12.13% of the total
loan portfolio, of which 39.05% were fixed-rate loans and 60.95% were
adjustable-rate loans.
At December 31, 2002, the balance of our consumer loans consisted of
$23.8 million of loans, which represented 14.97% of the gross loan portfolio. Of
the consumer loans outstanding, 69.08% were fixed-rate loans and 30.92% were
adjustable-rate loans.
The aggregate amount of loans that First Federal is permitted to make
under applicable federal regulations to any one borrower, including related
entities, is generally equal to the greater of 15% of unimpaired capital and
surplus or $500,000. At December 31, 2002, the maximum amount, which First
Federal could have lent to any one borrower and the borrower's related entities,
was approximately $3.9 million. See "Regulation - Federal Regulation of Savings
Associations." At December 31, 2002, we had no loans or groups of loans to
related borrowers with outstanding balances in excess of this amount. Our
largest lending relationship at December 31, 2002 was $2.6 million in loans to
one borrower secured by real estate, inventory, accounts receivable and
equipment.
4
Loan Portfolio Composition. The following table sets forth
information concerning the composition of our loan portfolio in dollar amounts
and in percentages (before deductions for loans in process, deferred fees and
discounts and allowance for loan losses) as of the dates indicated.
December 31,
----------------------- -------------------------- -------------------------
2002 2001 2000
---------- ------------ ------------- ------------ ------------- -----------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans
One- to four-family......................... $86,489 54.47% $95,777 57.03% $117,683 57.61%
Multi-family................................ 3,709 2.34 3,625 2.16 4,377 2.14
Commercial.................................. 19,482 12.27 20,199 12.03 24,519 12.00
Construction or development................. 6,074 3.82 6,363 3.79 7,188 3.52
----- ---- ----- ----- ----- ----
Total real estate loans.................. 115,754 72.90 125,964 75.01 153,767 75.27
------- ------ ------- ----- ------- -----
Other Loans:
Consumer Loans:
Deposit account............................. 127 .08 34 .02 53 0.03
Automobile.................................. 10,409 6.55 12,788 7.61 14,098 6.90
Home equity................................. 6,140 3.87 5,821 3.47 6,961 3.41
Home improvement............................ 1,472 .93 2,791 1.66 1,251 0.61
Other....................................... 5,620 3.54 6,277 3.74 7,422 3.63
----- ---- ----- ---- ----- -----
Total consumer loans..................... 23,768 14.97 27,711 16.50 29,785 14.58
------ ----- ------ ----- ------ -----
Commercial business loans................... 19,263 12.13 14,259 8.49 20,730 10.15
------ ----- ------ ---- ------ -----
Total loans.............................. 158,785 100.00% 167,934 100.00% 204,282 100.00%
======= ======= =======
Less:
Undisbursed portion of construction loans 1,455 2,217 1,745
Loans in process............................ 318 641 156
Deferred fees and discounts................. 316 291 229
Allowance for loan losses................... 2,136 1,955 2,001
----- ----- -----
Total loans receivable, net................. $154,560 $162,830 $200,151
======== ======== ========
December 31,
----------------------------------------------------
1999 1998
------------- ---------- --------------- -----------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans
One- to four-family......................... $119,283 55.50% $113,919 59.66%
Multi-family................................ 3,779 1.76 2,908 1.52
Commercial.................................. 24,471 11.39 16,514 8.65
Construction or development................. 12,613 5.87 11,365 5.95
------ ---- ------ ----
Total real estate loans.................. 160,146 74.52 144,706 75.78
------- ----- ------- -----
Other Loans:
Consumer Loans:
Deposit account............................. 47 0.02 146 0.08
Automobile.................................. 15,442 7.18 12,248 6.41
Home equity................................. 6,366 2.96 5,206 2.73
Home improvement............................ 805 0.37 742 0.39
Other....................................... 7,935 3.70 6,521 3.41
----- ------ ----- ------
Total consumer loans..................... 30,595 14.23 24,863 13.02
------ ------ ------ ------
Commercial business loans................... 24,184 11.25 21,393 11.20
------ ----- ------ -----
Total loans.............................. 214,925 100.00% 190,962 100.00%
======= =======
Less:
Undisbursed portion of construction loans 4,088 2,800
Loans in process............................ 443 663
Deferred fees and discounts................. 233 139
Allowance for loan losses................... 1,766 1,454
----- -----
Total loans receivable, net................. $208,395 $185,906
======== ========
5
The following table shows the composition of our loan portfolio by
fixed-and adjustable-rate at the dates indicated.
December 31,
------------------------------ ---------------------------- ---------------------------
2002 2001 2000
------------------------------ ---------------------------- ---------------------------
Amount Percent Amount Percent Amount Percent
------ ------- ------ ------- ------ -------
(Dollars in Thousands)
Fixed-Rate Loans:
Real estate:
One- to four-family.................. $ 56,424 35.54% $ 56,043 33.37% $ 58,485 28.63%
Multi-family......................... 3,594 2.26 2,732 1.63 2,514 1.23
Commercial........................... 17,670 11.13 18,097 10.78 19,835 9.71
Construction or development.......... 4,163 2.62 4,714 2.81 1,972 0.97
-------- ------ -------- ------ -------- ------
Total real estate loans........... 81,851 51.55 81,586 48.59 82,806 40.54
-------- ------ -------- ------ -------- ------
Consumer............................... 16,419 10.34 19,325 11.51 21,005 10.28
Commercial business.................... 7,523 4.74 6,999 4.17 9,408 4.61
-------- ------ -------- ------ -------- ------
Total fixed-rate loans............ 105,793 66.63 107,910 64.27 113,219 55.43
Adjustable-Rate Loans:
Real estate:
One- to four-family.................. 30,065 18.94 39,734 23.66 59,198 28.98
Multi-family......................... 115 .07 893 0.53 1,863 0.91
Commercial........................... 1,812 1.14 2,102 1.25 4,684 2.29
Construction or development.......... 1,911 1.20 1,649 0.98 5,216 2.55
-------- ------ -------- ------ -------- ------
Total real estate loans........... 33,903 21.35 44,378 26.42 70,961 34.74
-------- ------ -------- ------ -------- ------
Consumer............................... 7,349 4.63 8,386 4.99 8,780 4.30
Commercial business.................... 11,740 7.39 7,260 4.32 11,322 5.54
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans....... 52,992 33.37 60,024 35.73 91,063 44.58
-------- ------ -------- ------ -------- ------
Total loans....................... 158,785 100.00% 167,934 100.00% 204,282 100.00%
======= ======= =======
Less:
Undisbursed portion of construction
loans................................ 1,455 2,217 1,745
Loans in process....................... 318 641 156
Deferred fees and discounts............ 316 291 229
Allowance for loan losses.............. 2,136 1,955 2,001
-------- -------- --------
Total loans receivable, net........ $154,560 $162,830 $200,151
======== ======== ========
6
The following schedule illustrates the interest rate sensitivity of
our loan portfolio at December 31, 2002. Mortgages which have adjustable or
renegotiable interest rates are shown as maturing in the period during which the
contract is due. The schedule does not reflect the effects of possible
prepayments or enforcement of due-on-sale clauses.
Real Estate
-------------------------- ---------------------------- ----------------------------
One- to Four-Family Multi-family and Commercial Construction or Development Consumer
----------------------- --------------------------- ---------------------------- ---------------------------
Weighted Weighted Weighted Weighted
Amount Average Rate Amount Average Rate Amount Average Rate Amount Average Rate
-------- ------------- -------- -------------- ------------ ------------- --------- -------------
(Dollars in Thousands)
Due During the
Period Ending
December 31,
2003............. $ 3,126 7.13% $ 883 9.17% $ 4,954 7.35% $ 5,061 8.92%
2004 and 2005.... 431 8.35 69 8.70 -- -- 4,878 8.98
2006 and 2007.... 2,835 7.30 2,770 8.70 -- -- 6,688 8.10
2008 to 2012..... 14,139 7.66 8,691 7.69 -- -- 6,452 7.04
2013 to 2032..... 65,958 6.92 10,778 8.02 1,120 7.14 689 7.98
------- ------- ------- -------
$86,489 7.07% $ 23,191 8.02% $ 6,074 7.30% $23,768 8.16%
======= ======== ======= =======
Commercial Total
Business
---------------------------- ----------------------------
Weighted Weighted
Amount Average Rate Amount Average Rate
------------- -------------- ------------- --------------
(Dollars in Thousands)
Due During the
Period Ending
December 31,
2003............. $ 4,766 6.53% $ 18,790 7.10%
2004 and 2005.... 4,786 5.56 10,164 7.34
2006 and 2007.... 3,096 6.85 15,389 7.81
2008 to 2012..... 1,966 7.68 31,248 7.54
2013 to 2032..... 4,649 5.96 83,194 7.02
------- --------
$19,263 6.32% $158,785 7.23%
======= =======
The total amount of loans due after December 31, 2003 which have
predetermined interest rates is $95.9 million, while the total amount of loans
due after such dates which have floating or adjustable interest rates is $44.1
million.
7
All of our lending is subject to our written underwriting standards
and loan origination procedures. Decisions on loan applications are made on the
basis of detailed applications and property valuations. Properties securing real
estate loans made by us are generally appraised by Board-approved independent
appraisers. In the loan approval process, we assess the borrower's ability to
repay the loan, the adequacy of the proposed security, the employment stability
of the borrower and the credit-worthiness of the borrower.
We require evidence of marketable title and lien position or
appropriate title insurance on all loans secured by real property. We also
require fire and extended coverage casualty insurance in amounts at least equal
to the lesser of the principal amount of the loan or the value of improvements
on the property, depending on the type of loan. As required by federal
regulations, we also require flood insurance to protect the property securing
its interest if such property is located in a designated flood area.
ONE- TO FOUR-FAMILY RESIDENTIAL MORTGAGE LENDING. Residential loan
originations are generated by our marketing efforts, our present customers,
walk-in customers and referrals from real estate brokers. We have focused our
lending efforts primarily on the origination of loans secured by first mortgages
on owner-occupied, single-family residences in our market area. At December 31,
2002, one- to four-family residential mortgage loans totaled $86.5 million, or
54.47%, of the gross loan portfolio.
We currently offer fixed-rate and adjustable-rate mortgage loans. For
the year ended December 31, 2002, we originated $31.4 million of fixed-rate
loans and $5.7 million of adjustable-rate real estate loans, all of which were
secured by one- to four-family residential real estate. Substantially all of our
one- to four-family residential mortgage originations are secured by properties
located in our market area.
We offer adjustable-rate mortgage loans at rates and on terms
determined in accordance with market and competitive factors. We originate
adjustable-rate mortgage loans with terms of up to 30 years. We offer one-year,
three-year and five-year adjustable-rate mortgage loans (where the terms are
fixed for the first one-year, three-years and five-years, respectively, and
thereafter adjust annually) with a stated interest rate margin over the United
States Treasury. Increases or decreases in the interest rate of our
adjustable-rate loans are generally limited to 1.0% at any adjustment date and,
for example the one year adjustable rate mortgage product has limits of 4.0%
over the life of a loan. As a consequence of using caps, the interest rates on
these loans may not be as rate sensitive as is our cost of funds. Currently, all
adjustable-rate mortgage loans originated do provide for a minimum interest rate
based on margins and caps over the life of the loans. At December 31, 2002, the
total balance of one- to four-family adjustable-rate loans was $30.1 million or
18.94% of our gross loan portfolio.
We also offer fixed-rate mortgage loans with maturities of up to 30
years. At December 31, 2002, the total balance of one- to four-family fixed-rate
loans was $56.4 million or 35.54% of our gross loan portfolio.
Currently we will lend up to 97% of the lesser of the sales price or
appraised value of the security property on owner occupied single family
residence loans, provided that private mortgage insurance is obtained in an
amount sufficient to reduce our exposure to not more than 80% of the appraised
value or sales price, as applicable. Residential loans do not include prepayment
penalties, are non-assumable (other than government-insured or guaranteed
loans), and do not produce negative amortization. Real estate loans originated
by us contain a "due on sale" clause allowing us to declare the unpaid principal
balance due and payable upon the sale of the security property.
The loans currently originated by us are typically underwritten and
documented pursuant to the guidelines of Freddie Mac. Under our current policy,
we originate and hold all adjustable-rate mortgage loans and most 10 through 20
year fixed rate mortgages in the portfolio while selling conforming fixed rate
mortgages with terms in excess of 20 years.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. We have also engaged
in commercial and multi-family real estate lending in our market area. At
December 31, 2002, we had $19.5 million and $3.7 million of commercial and
multi-family real estate loans, which represented 12.27% and 2.34%, of the gross
loan portfolio.
8
The commercial and multi-family real estate loan portfolio is secured
primarily by retail properties, apartments, churches and real estate located in
Huntington and Allen Counties, Indiana. Commercial and multi-family real estate
loans generally have terms that do not exceed 15 years and a variety of rate
adjustment features and other terms. Generally, the loans are made in amounts up
to 75% of the lesser of the appraised value or sales price of the security
property. We currently offer one-year, three-year and five-year adjustable-rate
commercial and multi-family real estate loans (where the terms are fixed for the
first one-year, three-years and five-years, respectively, and thereafter adjust
annually) with a margin over a designated index. In underwriting these loans, we
analyze the financial condition of the borrower, the borrower's credit history,
and the reliability and predictability of the cash flow generated by the
property securing the loan. We generally require personal guaranties of the
borrowers. Appraisals on properties securing commercial real estate loans
originated by us are performed by independent appraisers, to the extent required
by federal regulations.
Multi-family and commercial real estate loans generally present a
higher level of risk than loans secured by one- to four-family residences. This
greater risk is due to several factors, including the concentration of principal
in a limited number of loans and borrowers, the effect of general economic
conditions on income producing properties and the increased difficulty of
evaluating and monitoring these types of loans. Furthermore, the repayment of
loans secured by multi-family and commercial real estate is typically dependent
upon the successful operation of the related real estate project. If the cash
flow from the project is reduced (for example, if leases are not obtained or
renewed, or a bankruptcy court modifies a lease term, or a major tenant is
unable to fulfill its lease obligations), the borrower's ability to repay the
loan may be impaired.
CONSTRUCTION OR DEVELOPMENT LENDING. At December 31, 2002, we had
$6.1 million of construction or development loans. We offer loans to both
builders and borrowers for the construction of one- to four-family residences,
and to a lesser extent, commercial real estate and multi-family properties.
Currently, such loans are offered with fixed or adjustable rates of interest. At
December 31, 2002, we had $4.2 million and $1.9 million of fixed-rate and
adjustable-rate construction or development loans, respectively, which
represented 2.62% and 1.20%, respectively, of our gross loan portfolio.
Following the construction period, these loans may become permanent loans, with
terms for up to 25 years for adjustable-rate loans and 20 years for fixed-rate
loans.
Construction lending is generally considered to involve a higher
level of credit risk than one- to four-family residential lending since the risk
of loss on construction loans is dependent largely upon the accuracy of the
initial estimate of the individual property's value upon completion of the
project and the estimated cost (including interest) of the project. If the cost
estimate proves to be inaccurate, we may be required to advance funds beyond the
amount originally committed to permit completion of the project.
CONSUMER LENDING. We offer a variety of secured consumer loans,
including automobile, home equity lines of credit, second mortgage and loans
secured by savings deposits. We also offer unsecured consumer loans. We
currently originate substantially all of our consumer loans in our primary
market area. We originate consumer loans on a direct basis and on an indirect
basis through the acquisition of installment payment contracts from dealers who
extend credit to their customers for the purchase of an automobile, both new and
used.
A significant component of our consumer loan portfolio consists of
automobile loans. These loans generally have terms that do not exceed five and a
half years and carry a variety of rate adjustment features and other terms.
Generally, loans on new vehicles are made in amounts up to 100% of dealer cost
and loans on used vehicles are made in amounts up to its published value, less
certain adjustments. At December 31, 2002, automobile loans totaled $10.4
million or 6.55% of the gross loan portfolio. Of this amount, approximately $3.9
million or 37.50% and $6.5 million or 62.50% were originated on a direct and
indirect basis, respectively.
We also originate fixed rate second mortgages and adjustable rate
home equity line of credit loans. Home equity and second mortgage loans secured
by mortgages, together with loans secured by all prior liens, are generally
limited to 90% or less of the appraised value (where we have the first mortgage)
of the property securing the loan or 80% or less of appraised value (where we do
not have the first mortgage) or 75% or less of appraised value (where the
collateral property is non-owner occupied). Generally, such loans have a maximum
term of up to 10 years. As of December 31, 2002, home equity and second mortgage
loans, most of which are secured by mortgages, amounted to $6.1 million and $1.5
million, which represented 3.87% and .93% of the gross loan portfolio.
9
At December 31, 2002, the consumer loan portfolio totaled $23.8
million, or 14.97% of our gross loan portfolio. At December 31, 2002,
approximately 69.08% of consumer loans were short- and intermediate-term,
fixed-rate consumer loans and 30.92% were adjustable rate consumer loans.
Our underwriting standards for consumer loans include an application,
a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing obligations and payments on the proposed
loan. Although creditworthiness of the applicant is a primary consideration, the
underwriting process also includes a comparison of the value of the security, if
any, in relation to the proposed loan amount.
Consumer loans may entail greater credit risk than do residential
mortgage loans, particularly in the case of consumer loans which are unsecured
or are secured by rapidly depreciable assets, such as automobiles. In addition,
consumer loan collections are dependent on the borrower's continuing financial
stability, and thus are more likely to be affected by adverse personal
circumstances. Furthermore, the application of various federal and state laws,
including bankruptcy and insolvency laws, may limit the amount which can be
recovered on such loans. At December 31, 2002, $510,000 of our consumer loans
were non-performing, representing .32% of the gross loan portfolio.
The $510,000 of non-performing consumer loans includes $235,000 that
represented the present value of individual lease contracts and their residual
value that were received from the foreclosure of a commercial borrower in the
fourth quarter of 2000. The present value of $235,000 at December 31, 2002 has
been reduced from $685,000 of present value of the collateral at December 31,
2001. The present value of the leases and contracts was $1.5 million at December
31, 2000.
COMMERCIAL BUSINESS LENDING. We also originate commercial business
loans and purchase commercial leases. At December 31, 2002 approximately $19.3
million, or 12.13% of our gross loan portfolio was commercial business lending.
The largest commercial business loan at this date was a combination real estate
and equipment loan of $2.6 million to a foundry operation.
Commercial business loans typically are made on the basis of the
borrower's ability to make repayment from the cash flow of the borrower's
business. As a result, the availability of funds for the repayment of commercial
business loans may be substantially dependent on the success of the business
itself (which, in turn, is likely to be dependent upon the general economic
environment). Our commercial business loans are usually, but not always, secured
by business assets. However, the collateral securing the loans may depreciate
over time, may be difficult to appraise and may fluctuate in value based on the
success of the business.
Our commercial business lending policy includes credit file
documentation and analysis of the borrower's character, capacity to repay the
loan, the adequacy of the borrower's capital and collateral as well as an
evaluation of conditions affecting the borrower. Analysis of the borrower's
past, present and future cash flows is also an important aspect of our credit
analysis. Nonetheless, such loans carry a higher credit risk than more
traditional thrift lending.
ORIGINATIONS, PURCHASES AND SALES OF LOANS
Loan originations are developed from continuing business with
depositors and borrowers, soliciting realtors, builders, walk-in customers and
other third-party sources.
While we originate both adjustable-rate and fixed-rate loans, our
ability to originate loans to a certain extent is dependent upon the relative
customer demand for loans in its market, which is affected by the interest rate
environment, among other factors. For the year ended December 31, 2002, we
originated $57.2 million in fixed-rate loans and $29.0 million in adjustable
rate loans.
One- to four-family loan originations increased for the year to $37.1
million in 2002 from $27.0 million in 2001, reflecting the drop in mortgage
rates resulting in an increase in refinancing during 2002.
10
We have purchased loans from time to time from other Indiana
Financial Institutions with whom we have developed a comfort level. These
purchases are typically secured by commercial real estate or leased equipment
and help in managing First Federal's loan diversity and overall asset liability
management. Management imposes similar underwriting standards to these purchases
that would apply to its own originations. During the year ended December 31,
2002, First Federal purchased $3.5 million in loans from other financial
institutions.
First Federal began selling conforming long term fixed rate mortgages
to Freddie Mac during 2000. The intent was to both improve First Federal's
sensitivity to interest rate risk and to provide another source of liquidity. We
additionally have sold participations in our own loan originations on occasion
to other financial institutions. The purpose of such sales would be to decrease
First Federal's concentration risk with any single borrower. During the year
ended December 31, 2002, First Federal originated $18.9 million in conforming
fixed rate mortgages that were sold to Freddie Mac. There were no participation
loans sold during the same time frame.
ASSET QUALITY
The following table sets forth our loan delinquencies by type, by
amount and by percentage of type at December 31, 2002. The amounts presented in
the table below represent the total remaining principal balances of the loans,
rather than the actual payment amounts which are overdue.
Loans Delinquent For:
------------------------------------------------------------
30 to 89 Days 90 Days and Over Total Delinquent Loans
----------------------------- ----------------------------- -------------------------------
Percent of Percent of Percent of
Loan Loan Loan
Number Amount Category Number Amount Category Number Amount Category
------ -------- ---------- ------ -------- ---------- ------ -------- -----------
(Dollars in Thousands)
Real Estate:
One- to four-family............... 16 $ 708 0.82% 8 $ 495 0.57% 24 $1,203 1.39%
Multi-family...................... -- --- 0.00 --- --- 0.00 --- --- 0.00
Commercial........................ 3 135 0.69 165 4,500 23.10 168 4,635 23.79
Construction or development....... 1 64 1.05 1 506 8.33 2 570 9.38
Consumer.......................... 68 428 1.80 72 510 2.15 140 938 3.95
Commercial Business............... 1 3 0.02 2 207 1.07 3 210 1.09
-- ------ ---- --- ------ ----- --- ------ -----
Total............................. 89 $1,338 0.84% 248 $6,218 3.92% 337 $7,556 4.76%
== ====== ==== === ====== ===== === ====== =====
When a borrower fails to make a required payment on a loan, we
contact the borrower in an attempt to cure the delinquency. In the case of loans
secured by real estate, reminder notices are sent to borrowers. If payment is
late, appropriate late charges are assessed, and a notice of late charges is
sent to the borrower. If the loan is in excess of 90 days delinquent, the loan
will be referred to our legal counsel for collection. In all cases, if we
believe that collateral is at risk and added delay would place the
collectibility of the balance of the loan in further question, we may refer
loans for collection even sooner than the 90 days described above.
When a loan becomes delinquent 90 days or more, we place the loan on
non-accrual status and previously accrued interest income on the loan is charged
against current income. The loan will remain on a non-accrual status as long as
the loan is 90 days delinquent.
Delinquent consumer loans are handled in a similar manner as those
described above; however, shorter time frames for each step apply due to the
type of collateral generally associated with such types of loans. Our procedures
for repossession and sale of consumer collateral are subject to various
requirements under Indiana consumer protection laws.
11
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of non-performing assets in our loan portfolio. Loans are placed on
non-accrual status when the collection of principal and/or interest becomes
doubtful. For all years presented, we had no troubled debt restructurings (which
involve forgiving a portion of interest or principal on any loans or making
loans at a rate materially less than that of market rates). Foreclosed assets
include assets acquired in settlement of loans.
December 31,
---------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------------------------------------------------------------------------------------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family.................. $ 495 $ 442 $ 608 $ 339 $ 149
Multi-family......................... -- -- 29 22 --
Commercial real estate............... 4,500 5,085 708 247 614
Construction or development......... 506 -- 472 683 --
Consumer............................. 510 1,125 1,691 186 107
Commercial business.................. 207 267 198 233 338
------- ------- ------ ------- -------
Total............................. 6,218 6,919 3,706 1,710 1,208
======= ------- ------ ------- -------
Foreclosed assets:
One- to four-family.................. 420 46 --- 49 58
Commercial and land.................. 96 173 185 -- 52
------- ------- ------ ------- -------
Total............................. 516 219 185 49 110
------- ------- ------ ------- -------
Repossessed assets:
Consumer and commercial.............. 12 83 539 14 10
------- ------- ------ ------- -------
Total............................. 12 83 539 14 10
------- ------- ------ ------- -------
Total non-performing assets............. $ 6,746 $ 7,221 $ 4,430 $ 1,773 $ 1,328
======= ======= ======= ======= ======
Total as a percentage of total assets 3.00% 3.03% 1.79% 0.70% 0.63%
==== ==== ==== ==== ====
Total non-performing assets decreased from $7.2 million at December
31, 2001 to $6.7 million at December 31, 2002. At December 31, 2002, one
borrower comprised $1.4 million or 20.8% of the $6.7 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, there is a related group of borrowers
whose loans in the aggregate total $2.6 million or 38.5% of the $6.7 million in
total non-performing assets. The primary collateral on this group is 1-4 family
residential rental properties. Management has already established specific
reserves to cover potential losses related to this group of borrowers and does
not anticipate any further losses at this time.
For the year ended December 31, 2002, gross interest income which
would have been recorded had the non-accruing loans been current in accordance
with their original terms was $489,000, of which $365,000 was included in
interest income.
CLASSIFIED ASSETS. Federal regulations classify loans and other
assets, such as debt and equity securities considered by the Office of Thrift
Supervision ("OTS") to be of lesser quality, as "substandard," "doubtful" or
"loss." An asset is considered "substandard" if it is inadequately protected by
the current net worth and paying capacity of the obligor or of the collateral
pledged, if any. "Substandard" assets include those characterized by the
"distinct possibility" that the insured institution will sustain "some loss" if
the deficiencies are not corrected. Assets classified as "doubtful" have all of
the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is not warranted.
12
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but which, unlike specific allowances, have not been
allocated to particular problem assets. When an insured institution classifies
problem assets as "loss," it is required either to establish a specific
allowance for losses equal to 100% of that portion of the asset so classified or
to charge off such amount. An institution's determination as to the
classification of its assets and the amount of its valuation allowances is
subject to review by the regulatory authorities, who may order the establishment
of additional general or specific loss allowances.
In connection with the filing of our periodic reports with the OTS
and in accordance with our classification of assets policy, we regularly review
the problem assets in our portfolio to determine whether any assets require
classification in accordance with applicable regulations. At December 31, 2002,
we had classified $5.4 million of our assets, net of specific reserves, as
substandard, representing 20.3% of the stockholders' equity or 2.4% of total
assets. These figures represent improvements over December 31, 2001 substandard
classified assets, net of specific reserves, of $6.7 million, representing 25.5%
of stockholders' equity or 2.8% of total assets.
OTHER LOANS OF CONCERN. Other than the (i) non-performing loans,
repossessed assets and foreclosed real estate held for sale set forth in the
tables above, (ii) impaired loans incorporated by reference from the Annual
Report to Shareholders, and (iii) the classified assets, there were no
classified loans with respect to which known information about the possible
credit problems of the borrowers or the cash flows of the security properties,
have caused management to have doubts as to the ability of the borrowers to
comply with present loan repayment terms and which may result in the future
inclusion of such items in the non-performing asset categories.
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is
established based on our evaluation of the risk inherent in our loan portfolio
and changes in the nature and volume of our loan activity, including those loans
which are being specifically monitored. Such evaluation, which includes a review
of loans for which full collectibility may not be reasonably assured, considers
among other matters, the loan classifications discussed above, the estimated
fair value of the underlying collateral, economic conditions, historical loan
loss experience, the amount of loans outstanding and other factors that warrant
recognition in providing for an adequate loan loss allowance.
Although we believe that we use the best information available to
determine the allowance, unforeseen market conditions could result in
adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to the allowance will be the result of periodic
loan, property and collateral reviews and thus cannot be predicted in advance.
At December 31, 2002, we had a total allowance for loan losses of $2.1 million
or 34.4% of non-performing loans. See Note 3 of the Notes to Consolidated
Financial Statements in our Annual Report to Shareholders for the year ended
December 31, 2002, attached hereto as Exhibit 13 (Annual Report to
Shareholders).
13
The distribution of the allowance for loan losses at the dates
indicated is summarized as follows:
December 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000
-------------------------------- ---------------------------------- --------------------------------
Percent Percent of Percent
of Loans Loans in of Loans
Amount Loan in Each Amount Each in Each
of Loan Amounts Category of Loan Loan Category Amount of Loan Category
Loss by to Total Loss Amounts by to Total Loan Loss Amounts by to Total
Allowance Category Loans Allowance Category Loans Allowance Category Loans
--------- ---------- --------- --------- ---------- ---------- --------- ---------- ----------
(Dollars in Thousands)
One- to four-family........ $ 112 $ 86,489 54.47% $ 108 $ 95,777 57.03% $ 172 $ 117,683 57.61%
Multi-family............... 7 3,709 2.34 6 3,625 2.16 9 4,377 2.14
Commercial real estate..... 986 19,482 12.27 825 20,199 12.03 595 24,519 12.00
Construction or
development.............. 8 6,074 3.82 8 6,363 3.79 182 7,188 3.52
Consumer................... 380 23,768 14.97 535 27,711 16.50 608 29,785 14.58
Commercial business........ 643 19,263 12.13 473 14,259 8.49 435 20,730 10.15
Unallocated................ -- -- -- -- -- -- 212 -- --
------- -------- ------ ------ ------- ------ ------ -------- ------
Total................... $ 2,136 $158,785 100.00% $ 1,955 $167,934 100.00% $ 2,001 $204,282 100.00%
======= ======== ======= ======= ======== ======= ======= ======== =======
December 31,
----------------------------------------------------------------------
1999 1998
---------------------------------- ----------------------------------
Percent of Percent
Loans in of Loans
Amount Each in Each
of Loan Loan Category Amount of Loan Category
Loss Amounts by to Total Loan Loss Amounts by to Total
Allowance Category Loans Allowance Category Loans
--------- ---------- ---------- --------- ---------- ----------
(Dollars in Thousands)
One- to four-family........ $ 278 $119,283 55.50% $ 266 $ 113,919 59.66%
Multi-family............... 35 3,779 1.76 27 2,908 1.52
Commercial real estate..... 272 24,471 11.39 204 16,514 8.65
Construction or
development.............. 284 12,613 5.87 278 11,365 5.95
Consumer................... 273 30,595 14.23 183 24,863 13.02
Commercial business........ 413 24,184 11.25 305 21,393 11.20
Unallocated................ 191 -- -- -- -- --
------- -------- ------ ------ --------- ------
Total................... $ 1,767 $214,925 100.00% $ 1,454 $ 190,962 100.00%
======= ======== ====== ======= ========= =======
14
The following table sets forth an analysis of the allowance for loan
losses.
Year Ended December 31,
------------------------------------------------------------------------
2002 2001 2000 1999 1998
------------ ------------ ------------ ----------- ------------
(Dollars in Thousands)
Balance at beginning of period $ 1,955 $ 2,001 $ 1,767 $ 1,454 $ 1,194
Charge-offs:
One- to four-family............................. -- 58 1 1 47
Commercial real estate.......................... 109 -- -- -- --
Commercial...................................... -- 392 1,150 26 --
Consumer........................................ 727 385 259 159 99
------- ------- ------- ------- -------
836 835 1,410 186 146
------- ------- ------- ------- -------
Recoveries:
One- to four-family............................. -- 3 -- -- 3
Commercial real estate.......................... -- -- -- -- --
Commercial...................................... 82 153 4 -- 1
Consumer........................................ 203 58 50 50 42
------- ------- ------- ------- -------
285 214 54 50 46
------- ------- ------- ------- -------
Net charge-offs.................................... 551 621 1,356 136 100
Additions charged to operations.................... 732 575 1,590 449 360
------- ------- ------- ------- -------
Balance at end of period........................... $2,136 $1,955 $2,001 $1,767 $1,454
====== ====== ====== ====== ======
Ratio of net charge offs during the period to
average loans outstanding during the period........ 0.34% 0.34% 0.65% 0.07% 0.06%
===== ===== ===== ===== =====
Ratio of net charge-offs during the period to
average non-performing loans....................... 8.63% 8.81% 51.77% 9.80% 12.99%
===== ===== ====== ===== ======
INVESTMENT ACTIVITIES
Liquidity may increase or decrease depending upon the availability of
funds and comparative yields on investments in relation to the return on loans.
Our liquidity level is now higher than our peers, historically we have generally
maintained liquid assets at levels above the minimum requirements that had been
imposed by OTS regulations and at levels believed adequate to meet the
requirements of normal operations, including repayments of maturing debt and
potential deposit outflows. At December 31, 2002, our liquidity ratio (liquid
assets as a percentage of net withdrawable savings deposits and current
borrowings) was 20.6%.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including United States Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in commercial paper,
investment grade corporate debt securities and mutual funds whose assets conform
to the investments that a federally chartered savings institution is otherwise
authorized to make directly.
15
Generally, our investment policy is to invest funds among various
categories of investments and maturities based upon our liquidity needs,
asset/liability management policies, investment quality, marketability and
performance objectives.
SECURITIES AND OTHER INTEREST-EARNING ASSETS. At December 31, 2002,
our interest-earning cash and cash equivalents totaled $15.2 million, or 6.8% of
total assets, and our securities, consisting of obligations of states and
political subdivisions, money market mutual funds, and other securities totaled
$43.1 million, or 19.1% of total assets. Included in other securities, as of
such date, we had a $4.9 million investment in Federal Home Loan Bank (FHLB)
stock, satisfying our requirement for membership in the FHLB of Indianapolis.
At December 31, 2002, we had $225,000 in securities held to maturity
consisting of obligations of states and political subdivisions and other debt
securities, and we had securities available for sale with a fair value of $42.8
million. See Note 2 of the Notes to the Consolidated Financial Statements in the
Annual Report to Shareholders.
The following table sets forth the composition of our securities
portfolio at the dates indicated.
2002 2001 2000
----------------------------------------------------------------------------------------
Carrying % of Carrying % of Carrying % of
------------- -------------- -------------- --------------- ------------- --------------
(Dollars in Thousands)
Debt securities:
Obligations of states and political $ 396 .92% $ 462 1.16% $ 493 1.56%
Mortgage-backed securities.......... 16,408 38.10 25,301 63.78 6,863 21.71
U.S. Government agencies............ 6,137 14.25 4,045 10.20 18,359 58.08
Corporate bonds..................... 115 .27 115 0.29 115 0.37
Mutual funds........................ 11,106 25.79 899 2.27 866 2.74
------ ----- -------- ------ -------- ------
Total debt securities............ 34,162 79.33 30,822 77.70 26,696 84.46
Equity securities:
Equity securities................... 8,901 20.67 8,849 22.30 4,913 15.54
-------- ------ -------- ------ -------- ------
Total securities................. $43,063 100.00% $ 39,671 100.00% $ 31,609 100.00%
======= ====== ======== ====== ======== ======
The following table sets forth the carrying value of debt securities
by maturity and weighted average yield for each range of maturities at December
31, 2002.
Maturity
-------------------------------------------------------------------------------------------
Within One Year 1 to 5 years 5 to 10 years Over 10 years
--------------- ------------ ------------- -------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ----- ------ ----- ------ ----- ------ -----
U.S. Government agencies.............. $ 4,063 3.93% $2,074 3.84% -- -- -- --
Mortgage-backed securities............ -- -- -- -- $3,783 4.66% $12,625 5.13%
Obligations of states and
political(1)........................ -- -- 237 4.31 159 4.38 -- --
Corporate bonds....................... -- -- 115 8.55 -- -- -- --
------- ---- ------ ---- ------ ---- ------- ----
Total $ 4,063 3.93% $2,426 4.11% $3,942 4.65% $12,625 5.13%
======= ===== ====== ==== ====== ==== ======= ====
(1) Yields are not presented on a tax equivalent basis.
Northeast Indiana also has $11.1 million in mutual funds, backed by
debt securities that contain no contractual maturity date.
The weighted average rates are based on coupon rates for securities
purchased at par value and on effective rates considering amortization or
accretion if the securities were purchased at a premium or discount.
16
SOURCES OF FUNDS
Our primary sources of funds are deposits, payment of principal and
interest on loans, interest earned on securities, interest earned on
interest-earning deposits with other banks, FHLB advances, the sale of fixed
rate mortgages to the secondary market and other funds provided from operations.
FHLB advances are used to support lending activities and to assist in
our asset/liability management strategy. Typically, we do not use other forms of
borrowings. At December 31, 2002, we had total FHLB advances of $67.0 million
with the capacity to borrow as of December 31, 2002 an additional $212,000,
based on collateral currently pledged to FHLB. See Note 8 of the Notes to
Consolidated Financial Statements in the Annual Report to Shareholders.
Deposits. We offer a variety of deposit accounts having a wide range
of interest rates and terms. Deposits consist of passbook savings, NOW,
checking, money market deposit and time deposit accounts. The time deposit
accounts currently range in terms from 182 days to five years.
We rely primarily on advertising, competitive pricing policies and
customer service to attract and retain these deposits. We generally solicit
deposits from our market area and occasionally accept brokered funds and out of
area jumbos as a source of deposits. During 2002, there was a concerted effort
made to reduce First Federal's reliance on both brokered and out of area jumbo
time deposits. To that end, total time deposits decreased $15.8 million during
2002. This decline was primarily due to a decline in jumbo time deposits of
$19.4 million offset by an increase of $3.6 million of local non-jumbo time
deposits. The flow of deposits is influenced significantly by general economic
conditions, changes in money market and prevailing interest rates and
competition.
We have become more susceptible to short-term fluctuations in deposit
flows as customers have become more interest rate conscious. We endeavor to
manage the pricing of our deposits in keeping with our profitability objectives
giving consideration to our asset/liability management. Our ability to attract
and maintain savings accounts and time deposit accounts and the rates paid on
these deposits, has been and will continue to be significantly affected by
market conditions.
17
The following table sets forth our deposit flows during the periods
indicated.
Year Ended December 31,
--------------------------------------------------
2002 2001 2000
--------------------------------------------------
(Dollars in Thousands)
Opening balance......................................... $ 137,030 $ 146,806 $143,212
Deposits................................................ 659,547 649,701 641,902
Withdrawals............................................. 678,535 666,529 645,128
Interest credited....................................... 4,315 7,052 6,820
--------- --------- --------
Ending Balance.......................................... $ 122,357 $ 137,030 $146,806
========= ========= ========
Net change.............................................. $ (14,673) $ (9,776) $3,594
========= ========= =========
Percent change.......................................... (10.71%) (6.66%) 2.51%
====== ===== ====
The following table sets forth the dollar amount of deposits in the
various types of deposit programs we offered for the periods indicated.
December 31,
------------------------------------------------------------------------------------
2002 2001 2000
------------- ------------- -------------- ------------- ------------- -------------
Amount Percent of Amount Percent of Amount Percent of
Total Total Total
------------- ------------- -------------- ------------- ------------- -------------
(Dollars in Thousands)
Transactions and savings deposits:
Passbook Accounts (.97%)(1) ............... $10,397 8.50% $9,261 6.76% $9,266 6.31%
Demand and NOW Accounts (.56%)(1) .......... 17,871 14.60 16,962 12.38 16,447 11.20
Money Market Accounts (1.63%)(1) ........... 18,085 14.78 18,968 13.84 19,021 12.96
------ -------- ------ ------- -------- ------
Total non-time deposits..................... 46,353 37.88 45,191 32.98 44,734 30.47
------ --------- ------ ------- -------- ------
Time deposits:
1.00 - 1.99%................................ 2,815 2.30 -- -- -- --
2.00 - 3.99%................................ 46,529 38.03 22,424 16.36 271 0.18
4.00 - 5.99%................................ 19,062 15.58 41,233 30.09 10,996 7.49
6.00 - 7.99%................................ 7,598 6.21 28,182 20.57 90,805 61.86
----- -------- ------ ------- -------- ------
Total time deposits......................... 76,004 62.12 91,839 67.02 102,072 69.53
------ -------- ------ ------- -------- ------
Total deposits.............................. $122,357 100.00% $137,030 100.00% $146,806 100.00%
======== ======= ======== ======= ======== ======
(1) End of year 2002 average interest rates.
18
The following table shows rate and maturity information for our time
deposit accounts as of December 31, 2002.
1.00- 2.00-3.99% 4.00- 6.00- Percent of
1.99% 5.99% 7.99% Total Total
------------- --------------- -------------- -------------- -------------- -------------
(Dollars in Thousands)
Time deposit accounts maturing in
quarter ending:
March 31, 2003........................ $ 1,499 $ 8,469 $ 3,600 $ 996 $ 14,564 19.16%
June 30, 2003......................... 542 8,903 5,054 912 15,411 20.27
September 30, 2003.................... 98 2,554 2,867 605 6,124 8.06
December 31, 2003..................... 676 4,414 1,684 1,995 8,769 11.54
March 31, 2004........................ -- 4,894 3,580 686 9,160 12.05
June 30, 2004......................... -- 6,128 415 457 7,000 9.21
September 30, 2004.................... -- 736 1,191 -- 1,927 2.54
December 31, 2004..................... -- 291 24 499 814 1.07
March 31, 2005........................ -- 5,697 246 100 6,043 7.95
June 30, 2005......................... -- 1,439 57 -- 1,496 1.97
September 30, 2005.................... -- 23 45 602 670 0.88
December 31, 2005..................... -- 2,508 101 746 3,355 4.41
Thereafter............................ -- 473 198 -- 671 0.89
------- ------- ------- ------- ------- ------
Total........................... $ 2,815 $46,529 $19,062 $ 7,598 $76,004 100.00%
======= ======= ======= ======= ======= ======
Percent of total................ 3.70% 61.22% 25.08% 10.00% 100.00%
===== ====== ====== ====== ======
The following table indicates the amount of our time deposit accounts
by time remaining until maturity as of December 31, 2002.
Maturity
---------------------------------------------------------------
Over Over
3 Months or 3 to 6 6 to 12 Over 12
Less Months Months Months Total
------------- -------- ---------- -------------- -------------
(Dollars in Thousands)
BALANCES
Time deposits less than $100,000................ $8,714 $10,148 $8,972 $19,834 $47,668
Time deposits of $100,000 or more............... 3,232 4,697 5,921 11,151 25,001
Public funds (1)................................ 2,618 566 -- 151 3,335
------------ ------- ------- ------- -------
Total time deposits ............................ $14,564 $15,411 $14,893 $31,136 $76,004
============ ======= ======= ======= =======
Maturity
---------------------------------------------------------------
Over Over
3 Months or 3 to 6 6 to 12 Over 12
Less Months Months Months Total
------------- -------- ---------- -------------- -------------
NUMBER OF ACCOUNTS
Time deposits less than $100,000................ 511 624 606 1,120 2,861
Time deposits of $100,000 or more............... 30 36 56 99 221
Public funds (1)................................ 5 2 -- 1 8
------------ ------- ------- ------- -------
Total time deposits ............................ 546 662 662 1,220 3,090
============ ======= ======= ======= =======
(1) Deposits from governmental and other public entities, all over $100,000.
19
BORROWINGS. Although deposits are our primary source of funds, our
policy has been to utilize borrowings when they are a less costly source of
funds or can be invested at a positive rate of return. We may obtain advances
from the FHLB of Indianapolis upon the security of our capital stock in the FHLB
of Indianapolis and certain of our mortgage loans and mortgage-backed
securities. Such advances may be made pursuant to several different credit
programs, each of which has its own interest rate and range of maturities. At
December 31, 2002, we had $67.0 million in FHLB advances outstanding. For
additional information regarding the term to maturity and the interest rates on
FHLB advances, see Note 8 of the Notes to Consolidated Financial Statements in
the Annual Report to Shareholders and "- Borrowed Funds."
The following table sets forth the maximum month-end balance and
average balance of FHLB advances for the periods indicated.
December 31,
------------------------------------------------
2002 2001 2000
---------------- ---------------- --------------
(Dollars in Thousands)
Maximum Balance:
FHLB advances......... $67,000 $67,400 $96,400
Average Balance:
FHLB advances......... $65,926 $62,539 $84,761
SERVICE CORPORATION ACTIVITIES
At December 31, 2002, First Federal had one subsidiary, Northeast
Financial, which is now functioning as our brokerage subsidiary and we have
three registered representatives to provide this service to the customers. The
description of the provision that follows is a summary of the complex statutory
and regulatory framework that governs Northeast Indiana and its subsidiaries; it
does not purport to be, and is not a complete description.
REGULATION
First Federal is a federally chartered savings bank, the deposits of
which are federally insured and backed by the full faith and credit of the
United States Government. Accordingly, we are subject to broad federal
regulation and oversight extending to all of our operations. First Federal is a
member of the FHLB of Indianapolis and is subject to certain limited regulation
by the Board of Governors of the Federal Reserve System ("Federal Reserve
Board"). As the savings and loan holding company of First Federal, Northeast
Indiana also is subject to federal regulation and oversight. However, since
Northeast Indiana existed as a unitary savings and loan holding company prior to
May 4, 1999, there is virtually no restriction on its activities.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings associations. As part of this
authority, we are required to file periodic reports with, and pay assessments
to, the OTS and are subject to periodic examinations by the OTS and the FDIC.
When these examinations are conducted by the OTS and the FDIC, the examiners may
require First Federal to provide for higher general or specific loan loss
reserves.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, such as First Federal and Northeast
Indiana. This enforcement authority includes, among other things, the ability to
assess civil money penalties, to issue cease-and-desist or removal orders, and
to initiate injunctive actions.
Our general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus
(except for loans fully secured by certain readily marketable collateral, in
which case this limit is increased to 25% of unimpaired capital and surplus). At
December 31, 2002, our lending limit under this restriction was approximately
$3.9 million. At December 31, 2002, we had no loans in excess of our
loans-to-one-borrower limit.
20
Insurance of Accounts and Regulation by the FDIC. As insurer, the
FDIC imposes deposit insurance premiums and is authorized to conduct
examinations of, and to require reporting by, FDIC-insured institutions. It also
may prohibit any FDIC-insured institution from engaging in any activity the FDIC
determines by regulation or order to pose a serious risk to the FHLB System or
the Savings Association Insurance Fund (SAIF). The FDIC also has the authority
to initiate enforcement actions against savings associations, after giving the
OTS an opportunity to take such action, and may terminate deposit insurance if
it determines that the institution has engaged in unsafe or unsound practices,
or is in an unsafe or unsound condition.
The FDIC's deposit insurance premiums are assessed through a
risk-based system under which all insured depository institutions are placed
into one of nine categories and assessed insurance premiums based upon their
level of capital and supervisory evaluation. Under the system, institutions
classified as well-capitalized (i.e., a core capital ratio of at least 5%, a
ratio of core capital to risk-weighted assets of at least 6% and a risk-based
capital ratio of at least 10%) and considered healthy, pay the lowest premium,
while institutions that are less than adequately capitalized (i.e., core
risk-based capital ratios of less than 4% or a risk-based capital ratio of less
than 8%) and considered of substantial supervisory concern pay the highest
premium. Risk classification of all insured institutions is made by the FDIC
semi-annually. At December 31, 2002, First Federal was classified as a
well-capitalized institution.
The current premium schedule for Bank Insurance Fund (BIF) and SAIF
insured institutions ranged from 0 to 27 basis points. However, SAIF insured
institutions and BIF insured institutions are required to pay a Financing
Corporation Assessment in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. For the quarter ended December 31, 2002, this
amount was equal to an annualized rate of 1.7 basis points for each $100 in
domestic deposits for SAIF members and BIF insured institutions. These
assessments, which may be revised based upon the level of BIF and SAIF deposits,
will continue until the bonds mature in 2017 through 2019.
Regulatory Capital Requirements. Federally insured savings
associations, such as First Federal, are required to maintain a minimum level of
regulatory capital. The OTS has established capital standards, including a
tangible capital requirement, a leverage ratio (or core capital) requirement and
a risk-based capital requirement applicable to such savings associations.
The capital regulations require tangible capital of at least 1.5% of
adjusted total assets (as defined by regulation). Tangible capital generally
includes common stockholders' equity and retained income, and certain
noncumulative perpetual preferred stock and related income and excluding certain
intangible assets. At December 31, 2002, First Federal had tangible capital of
$24.7 million, or 10.9% of adjusted total assets, which is approximately $21.3
million above the minimum requirement of 1.5% of adjusted total assets in effect
on that date. At December 31, 2002, First Federal had intangible assets
consisting of loan servicing rights of $249,000.
The capital standards also require core capital equal to 4% of
adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital plus certain intangible assets,
including a limited amount of purchased credit card relationships. At December
31, 2002, First Federal had core capital equal to $24.7 million, or 10.9% of
adjusted total assets, which is $15.7 million above the minimum leverage ratio
requirement of 4% in effect on that date.
The OTS risk-based capital requirement requires savings associations
to have total capital of at least 8% of risk-weighted assets. Total capital
consists of core capital, as defined above, and supplementary capital.
Supplementary capital consists of certain capital instruments that do not
qualify as core capital and general valuation loan and lease loss allowances up
to a maximum of 1.25% of risk-weighted assets. Supplementary capital may be used
to satisfy the risk-based requirement only to the extent of core capital. At
December 31, 2002, First Federal had $1.3 million of general loan loss reserves,
which was less than 1.25% of risk-weighted assets.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the OTS has assigned a risk weight of 50% for prudently underwritten
permanent one- to four-family first lien mortgage loans not more than 90 days
delinquent and having a loan to value ratio of not more than 80% at origination,
unless insured to such ratio by an insurer approved by Fannie Mae or Freddie
Mac.
21
On December 31, 2002, First Federal had total risk-based capital of
$25.9 million, including approximately $24.7 million in core capital and $1.2
million in qualifying supplementary capital and risk-weighted assets of $141.5
million, or total capital of 18.3% of risk-weighted assets. This amount was
$14.6 million above the 8% requirement in effect on that date.
The OTS is authorized to impose capital requirements in excess of
these standards on individual associations on a case-by-case basis. The OTS and
the FDIC are authorized and, under certain circumstances required, to take
certain actions against savings associations that fail to meet their capital
requirements. The OTS is generally required to take action to restrict the
activities of an "undercapitalized association" (generally defined to be one
with less than either a 4% core capital ratio, a 4% core risked-based capital
ratio or an 8% risk-based capital ratio). Any such association must submit a
capital restoration plan and until such plan is approved by the OTS may not
increase its assets, acquire another institution, establish a branch or engage
in any new activities, and generally may not make capital distributions. The OTS
is authorized to impose the additional restrictions that are applicable to
significantly undercapitalized associations.
The imposition by the OTS or the FDIC of any of these measures on
Northeast Indiana or First Federal may have a substantial adverse effect on our
operations and profitability and the value of Northeast Indiana's common stock.
Northeast Indiana shareholders do not have preemptive rights and, therefore, if
Northeast Indiana is directed by the OTS or the FDIC to issue additional shares
of common stock, such issuance may result in the dilution of the percentage of
ownership of Northeast Indiana.
Limitations on Dividends and Other Capital Distributions. The OTS
imposes various restrictions on savings associations with respect to their
ability to make distributions of capital, which include dividends, stock
redemptions or repurchases, cash-out mergers and other transactions charged to
the capital account. The OTS also prohibits a savings association from declaring
or paying any dividends or from repurchasing any of its stock if, as a result of
such action, the regulatory capital of the association would be reduced below
the amount required to be maintained for the liquidation account established in
connection with the association's mutual to stock conversion.
First Federal may make a capital distribution without the approval of
the OTS provided we notify the OTS 30 days before we declare the capital
distribution and we meet the following requirements: (i) we have a regulatory
rating in one of the two top examination categories, (ii) we are not of
supervisory concern, and will remain adequately- or well-capitalized, as defined
in the OTS prompt corrective action regulations, following the proposed
distribution, and (iii) the distribution does not exceed our net income for the
calendar year-to-date plus retained net income for the previous two calendar
years (less any dividends previously paid). If we do not meet the above stated
requirements, we must obtain the prior approval of the OTS before declaring any
proposed distributions.
Qualified Thrift Lender Test. All savings institutions are required
to meet a qualified thrift lender test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets (as defined by regulation) in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings institutions may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code of 1986, as
amended (the "Internal Revenue Code"). Under either test, these assets primarily
consist of residential housing related loans and investments. At December 31,
2002, First Federal met the test and has always met the test since its
effectiveness. First Federal's qualified thrift lender percentage was 84.8% at
December 31, 2002.
Any savings institution that fails to meet the qualified thrift
lender test must convert to a national bank charter, unless it requalifies as a
qualified thrift lender and remains a qualified thrift lender. If an institution
does not requalify and converts to a national bank charter, it must remain
SAIF-insured until the FDIC permits it to transfer to the BIF. If an institution
has not yet requalified or converted to a national bank, its new investments and
activities are limited to those permissible for both a savings association and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the institution is immediately ineligible to receive any new
FHLB borrowings and is subject to national bank limits for payment of dividends.
If the institution has not requalified or converted to a national bank within
three years after the failure, it must sell all investments and stop all
activities not permissible for a national bank. In addition, it must repay
promptly any outstanding FHLB borrowings, which may result in prepayment
penalties. If any institution that fails the qualified thrift lender test is
controlled by a holding
22
company, then within one year after the failure, the holding company must
register as a bank holding company and become subject to all restrictions on
bank holding companies. See "- Holding Company Regulation."
Community Reinvestment Act. Under the Community Reinvestment Act
(CRA), every FDIC insured institution has a continuing and affirmative
obligation, consistent with safe and sound banking practices, to help meet the
credit needs of its entire community, including low- and moderate-income
neighborhoods. The CRA requires the OTS, in connection with its examination of
First Federal, to assess the institution's record of meeting the credit needs of
our community and to take this record into account in our evaluation of certain
applications, such as a merger or the establishment of a branch, by First
Federal. An unsatisfactory rating may be used as the basis for the denial of an
application by the OTS. First Federal was examined for CRA compliance in March
1997 and received a rating of "satisfactory."
USA Patriot Act of 2001. In October 2001, the USA Patriot Act of 2001
was enacted in response to the terrorist attacks in New York, Pennsylvania and
Washington, D.C. which occurred on September 11, 2001. The Patriot Act is
intended is to strengthen U.S. law enforcement's and the intelligence
communities' abilities to work cohesively to combat terrorism on a variety of
fronts. The potential impact of the Patriot Act on financial institutions of all
kinds is significant and wide ranging. The Patriot Act contains sweeping
anti-money laundering and financial transparency laws and imposes various
regulations, including standards for verifying client identification at account
opening, and rules to promote cooperation among financial institutions,
regulators and law enforcement entities in identifying parties that may be
involved in terrorism or money laundering.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed
into law the Sarbanes-Oxley Act of 2002, or the SOA. The SOA is the most
far-reaching U.S. securities legislation enacted in many years, and includes
many substantive and disclosure-based requirements. The stated goals of the SOA
are to increase corporate responsibility, to provide for enhanced penalties for
accounting and auditing improprieties at publicly traded companies and to
protect investors by improving the accuracy and reliability of corporate
disclosures pursuant to the securities laws. The SOA generally applies to all
companies, both U.S. and non-U.S., that file or are required to file periodic
reports with the Securities and Exchange Commission under the Securities
Exchange Act of 1934 (the "Exchange Act"). Given the extensive and continuing
SEC role in implementing rules relating to many of the SOA's new requirements,
the effects of these requirements remain to be determined, although it is likely
that the Company's costs will increase somewhat, at least in the short term, as
a result of SOA implementation.
Other Laws and Regulations. The lending and deposit-taking activities
of First Federal are subject to a variety of federal and state consumer
protection laws, including the Equal Credit Opportunity Act (which prohibits
discrimination in all aspects of credit-granting), the Truth-in-Lending Act
(which principally mandates certain disclosures in connection with loans made
for personal, family or household purposes and imposes substantive restrictions
with respect to home equity lines of credit), the Truth-in-Savings Act (which
principally mandates certain disclosures in connection with deposit-taking
activities), the Fair Credit Reporting Act (which, among other things, requires
a lender to disclose the name and address of the credit bureau from whom a
lender obtains a report that resulted in a denial of credit), the Real Estate
Settlement Procedures Act (which, among other things, requires residential
mortgage lenders to provide loan applicants with closing cost information
shortly after the time of application and prohibits referral fees in connection
with loan originations and other real estate settlement services), the
Electronic Funds Transfer Act (which, among other things, requires certain
disclosures in connection with electronic funds transactions) and the Expedited
Funds Availability Act (which, among other things, requires that deposited funds
be made available for withdrawal in accordance with a prescribed schedule and
that the schedule be disclosed to customers). As a federal savings bank, First
Federal is exempt from most state laws, other than contract and commercial law;
real property law; tort law and criminal law.
Transactions with Affiliates. Under federal law, all transactions
between and among First Federal and its affiliates, which include its holding
company, are subject to Sections 23A and 23B of the Federal Reserve Act and
Regulation W promulgated thereunder as interpreted by the OTS. Generally, these
requirements limit these transactions to a percentage of the bank's capital and
require all of them to be on terms at least as favorable to the bank as
transactions with non-affiliates. In addition, a bank may not lend to any
affiliate engaged in non-banking activities not permissible for a bank holding
company or acquire shares of any affiliate that is not a subsidiary. The OTS is
authorized to impose additional restrictions on transactions with affiliates if
necessary to ensure safety and
23
soundness standards. The OTS regulations also set forth various reporting
requirements relating to transactions with affiliates.
Extensions of credit by First Federal to its executive officers,
directors and principal shareholders are subject to Section 22(h) of the Federal
Reserve Act, which among other things, generally prohibits loans to any such
individual where the aggregate amount exceeds an amount equal to 15% of an
institution's unimpaired capital and surplus plus an additional 10% of
unimpaired capital and surplus in the case of loans that are fully secured by
readily marketable collateral.
Section 22(h) permits loans to directors, executive officers and
principal stockholders made pursuant to a benefit or compensation program that
is widely available to employees of First Federal provided that no preference is
given to any officer, director or principal stockholder, or related interest
thereto, over any other employee. In addition, the aggregate amount of
extensions of credit by a savings institution to all insiders cannot exceed the
institution's unimpaired capital and surplus. Furthermore, Section 22(g) places
additional restrictions on loans to executive officers. Holding Company
Regulation. Northeast Indiana is a unitary savings and loan holding company
subject to regulatory oversight by the OTS. As such, we are required to register
and file reports with the OTS and are subject to regulation and examination by
the OTS. In addition, the OTS has enforcement authority over Northeast Indiana
and its non-savings association subsidiaries which also permits the OTS to
restrict or prohibit activities that are determined to be a serious risk to the
subsidiary savings association.
As a unitary savings and loan holding company, that has been in
existence since before May 4, 1999, Northeast Indiana generally is not subject
to activity restrictions. If Northeast Indiana acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of Northeast Indiana and any of its
subsidiaries (other than First Federal or any other SAIF-insured savings
association) would become subject to certain restrictions. Additionally, if we
fail the qualified thrift lender test, within one year Northeast Indiana must
register as and will become subject to, the restrictions applicable to bank
holding companies.
Federal Securities Law. The stock of Northeast Indiana is registered
with the SEC under the Securities Exchange Act of 1934, as amended (the Exchange
Act). Northeast Indiana is subject to the information, proxy solicitation,
insider trading restrictions and other requirements of the Exchange Act.
Northeast Indiana stock held by persons who are affiliates,
(generally officers, directors and 10% stockholders) of Northeast Indiana may
not be resold without registration unless sold in accordance with certain resale
restrictions. If Northeast Indiana satisfies the requirements of such resale
restrictions and meets specified current public information requirements, each
affiliate of Northeast Indiana is able to sell in the public market, without
registration, a limited number of shares in any three-month period.
Federal Reserve System. The Federal Reserve Board requires all
depository institutions to maintain non-interest bearing reserves at specified
levels against their transaction accounts (primarily checking, NOW and Super NOW
checking accounts). At December 31, 2002, First Federal was in compliance with
these reserve requirements.
Savings associations are authorized to borrow from the Federal
Reserve Bank "discount window," but Federal Reserve Board regulations require
associations to exhaust other reasonable alternative sources of funds, including
FHLB borrowings, before borrowing from the Federal Reserve Bank.
Federal Home Loan Bank System. First Federal is a member of the FHLB
of Indianapolis, which is one of 12 regional FHLBs that administer the home
financing credit function of savings associations. Each FHLB serves as a reserve
or central bank for its members within its assigned region. It makes loans to
members (i.e., advances) in accordance with policies and procedures, established
by the board of directors of the FHLB, which are subject to the oversight of the
Federal Housing Finance Board. All advances from the FHLB are required to be
fully secured by sufficient collateral as determined by the FHLB. In addition,
all long-term advances must be used for residential home financing.
24
As a member, First Federal is required to purchase and maintain a
minimum amount of stock in the FHLB of Indianapolis. At December 31, 2002, First
Federal had $4.9 million in FHLB stock, which was in compliance with this
requirement. For the fiscal year ended December 31, 2002, dividends paid by the
FHLB of Indianapolis to First Federal totaled $298,000, which constitutes a
$67,000 decrease compared to the amount of dividends received in fiscal 2001.
Over the past five fiscal years these dividends have averaged 7.55% and were
6.02% for fiscal 2002.
TAXATION
Federal Taxation. We file consolidated federal income tax returns on
a fiscal year basis using the accrual method of accounting. Savings institutions
that met certain definitional tests relating to the composition of assets and
other conditions prescribed by the Internal Revenue Code, had been permitted to
establish reserves for bad debts and to make annual additions which could,
within specified formula limits, be taken as a deduction in computing taxable
income for federal income tax purposes. The amount of the bad debt reserve
deduction is now computed under the experience method.
In addition to the regular income tax, corporations, including
savings institutions, generally are subject to a minimum tax. An alternative
minimum tax is imposed at a minimum tax rate of 20% on alternative minimum
taxable income, which is the sum of a corporation's regular taxable income (with
certain adjustments) and tax preference items, less any available exemption. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax and net operating losses can offset no more than 90% of
alternative minimum taxable income.
To the extent earnings appropriated to a savings institution's bad
debt reserves for "qualifying real property loans" and deducted for federal
income tax purposes exceed the allowable amount of such reserves computed under
the experience method and to the extent of the institution's supplemental
reserves for losses on loans, such excess may not, without adverse tax
consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder (including distributions on redemption,
dissolution or liquidation) or for any other purpose (except to absorb bad debt
losses). As of December 31, 2002, First Federal's excess for tax purposes
totaled approximately $1.3 million.
We have not been audited by the IRS recently with respect to federal
income tax returns. In our opinion, any examination of still open returns would
not result in a deficiency which could have a material adverse effect on our
financial condition.
Indiana Taxation. The State of Indiana imposes an 8.5% franchise tax
on the net income of financial (including thrift) institutions, exempting them
from the current gross income, supplemental net income and intangible taxes. Net
income for franchise tax purposes will constitute federal taxable income before
net operating loss deductions and special deductions, adjusted for certain
items, including Indiana income taxes, tax exempt interest and bad debts. Other
applicable Indiana taxes include sales, use and property taxes.
Delaware Taxation. As a company incorporated under Delaware state
law, Northeast Indiana is exempted from Delaware corporate income tax but is
required to file an annual report with, and pay an annual fee to, the State of
Delaware. We are also subject to an annual franchise tax imposed by the State of
Delaware.
COMPETITION
We face strong competition, both in originating real estate loans and
in attracting deposits. Competition in originating real estate loans comes
primarily from commercial banks, mortgage companies, credit unions and savings
institutions located in our market area. Commercial banks, savings institutions
and credit unions provide vigorous competition in consumer lending. We compete
for real estate and other loans principally on the basis of the quality of
services we provide to borrowers, the interest rates and loan fees we charge,
and the types of loans we originate. See "- Lending Activities."
We attract most of our deposits through our retail banking offices,
primarily from the communities in which those retail banking offices are
located. Therefore, competition for those deposits is principally from retail
25
brokerage offices, commercial banks, savings institutions and credit unions
located in these communities. We compete for these deposits by offering a
variety of account alternatives at competitive rates and by providing convenient
business hours, branch locations and interbranch deposit and withdrawal
privileges.
We primarily serve Huntington County, Indiana. There are six
commercial banks, no savings institutions other than First Federal, and six
credit unions which compete for deposits and loans in Huntington County. We
estimate that our share of the savings market in Huntington County based on FDIC
insured institutions is approximately 29% and our share of the residential
mortgage market is approximately 20%.
EMPLOYEES
At December 31, 2002, we had a total of 46 full-time, 8 part-time and
no seasonal employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
26
ITEM 2. DESCRIPTION OF PROPERTIES
We conduct our business through three offices, all of which are
located in Huntington, Indiana and are owned by First Federal. The following
table sets forth information relating to each of our offices as of December 31,
2002. The total net book value of our premises and equipment (including land,
buildings and leasehold improvements and furniture, fixtures and equipment) at
December 31, 2002 was approximately $2.2 million. See Note 5 of the Notes to the
Consolidated Financial Statements in the Annual Report to Shareholders.
Total
Owned Approximate
Year or Square Net Book Value at December
Location Acquired Leased Footage 31, 2002
- --------------------------------- -------- ---------- ----------- --------------------------
Main Office:
648 North Jefferson Street
Huntington, Indiana 46750 1974 Owned 1,700 $ 741,800
Branch Offices:
1240 South Jefferson Street
Huntington, Indiana 46750 1981 Owned 1,700 $ 237,080
100 Frontage Road
Huntington, Indiana 46750 1995 Owned 5,000 $ 1,197,476
We believe that our current and planned facilities are adequate to
meet our present and foreseeable needs. We also maintain an on-line database
with an independent service bureau servicing financial institutions.
Item 3. Legal Proceedings
We are involved, from time to time, as plaintiff or defendant in
various legal actions arising in the normal course of their businesses. While
the ultimate outcome of these proceedings cannot be predicted with certainty, it
is the opinion of management, after consultation with counsel representing us in
the proceedings, that the resolution of these proceedings should not have a
material effect on our results of operations on a consolidated basis.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
2002.
27
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 45 of the Annual Report is herein incorporated by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATION
Pages 3 through 16 of the Annual Report are herein incorporated by
reference.
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in the Annual Report is
incorporated herein by reference.
Pages in
Annual
Annual Report Section Report
- --------------------- --------
Report of Independent Auditors 17
Consolidated Balance Sheets as of December 31, 2002 and 2001 18
Consolidated Statements of Income for the Years Ended December 31, 2002, 2001 and 2000 19
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 2002, 2001 and 2000 20
Consolidated Statements of Cash Flows for the Years Ended December 31, 2002, 2001 and 2000 21
Notes to Consolidated Financial Statements 22-44
With the exception of the aforementioned information in Part II of
the Form 10-KSB, the Annual Report is not deemed filed as part of this annual
report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
28
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
Information concerning our Directors and Compliance with Section 16(a) of the
Exchange Act is incorporated herein by reference from the definitive proxy
statement for the annual meeting of stockholders to be held in 2003, a copy of
which will be filed not later than 120 days after the close of the fiscal year.
EXECUTIVE OFFICERS OF NORTHEAST INDIANA AND FIRST FEDERAL
The following table sets forth certain information regarding our
executive officers who are not also directors.
Position held with
Name Age(1) First Federal and Northeast Indiana
- --------------------------------------------------------------------------------
Randy J. Sizemore 32 Senior Vice President, Treasurer and
Chief Financial Officer
Dee Ann Hammel 50 Senior Vice President, Secretary and
Chief Operating Officer
(1) At December 31, 2002.
The business experience of the executive officers who are not also
directors is set forth below.
RANDY J. SIZEMORE is Senior Vice President, Treasurer and Chief
Financial Officer, positions he has held since April 2002. Prior to joining
First Federal, Mr. Sizemore held positions in a similar capacity with another
bank holding company and its subsidiary since 1999, and prior to that he
performed similar job functions for another bank holding company. Mr. Sizemore
has a total of 10 years experience working with financial institutions.
DEE ANN HAMMEL is Senior Vice President, Secretary and Chief
Operations Officer, positions she has held since March 1995. Ms. Hammel first
joined First Federal in 1975 as a teller. Ms. Hammel is responsible for
directing and controlling First Federal's daily activities.
ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein
by reference from the definitive proxy statement for the annual meeting of
stockholders to be held in 2003, a copy of which will be filed not later than
120 days after the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information concerning security ownership of certain beneficial
owners and management is incorporated herein by reference from the definitive
proxy statement for the annual meeting of stockholders to be held in 2003, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
29
The following table provides information as of December 31, 2002
related to our equity compensation plans in effect at that time.
EQUITY COMPENSATION PLAN INFORMATION
- ------------------------------------------------------------------------------------------------------------------------------------
PLAN CATEGORY NUMBER OF SECURITIES TO BE
ISSUED UPON EXERCISE OF WEIGHTED-AVERAGE EXERCISE PRICE AVAILABLE FOR FUTURE ISSUANCE
OUTSTANDING OPTIONS, WARRANTS OF OUTSTANDING OPTIONS, AVAILABLE FOR FUTURE ISSUANCE
AND RIGHTS WARRANTS AND RIGHTS UNDER EQUITY COMPENSATION PLANS
- ----------------------------------- ----------------------------- ------------------------------- -------------------------------
(a) (b) (c)
Equity Compensation Plans
Approved by Security Holders 169,429(1) $10.37 172,150(2)
Equity Compensation Plans Not
Approved by Security Holders -- -- --
Total 169,429(1) $10.37 172,150(2)
(1) Restated to reflect the 10% stock dividends paid in both November
1998 and November 1999. Includes outstanding options to purchase shares of the
Company's Common Stock under our 1995 Stock Option and Incentive Plan and our
2002 Omnibus Incentive Plan.
(2) Includes shares available for future issuance under our 2002
Omnibus Incentive Plan and our Recognition and Retention Plan; excludes
securities reflected in column (a). In addition to stock options, the 2002
Omnibus Incentive Plan and the Recognition and Retention Plan provide for the
issuance of stock appreciation rights, restricted stock, or performance awards.
155,024 shares remain available under our 2002 Omnibus Incentive Plan and 17,126
remain available under our Recognition and Retention Plan for the issuance of
stock options, stock appreciation rights, restricted stock or performance
awards.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive proxy statement for the
annual meeting of stockholders to be held in 2003 a copy of which will be filed
not later than 120 days after the close of the fiscal year.
31
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
REFERENCE TO
REGULATION PRIOR FILING OR
S-B EXHIBIT EXHIBIT NUMBER
NUMBER DOCUMENT ATTACHED HERETO
- ------------------- --------------------------------------------------------------------------------- ---------------
2 Plan of acquisition, reorganization, arrangement, liquidation or succession None
3(i) Certificate of Incorporation, including amendments thereto *
3(ii) By-Laws *
4 Instruments defining the rights of security holders, including debentures *
9 Voting trust agreement None
10 Executive Compensation Plans and Arrangements
(a) Employment Contract between Stephen E. Zahn and First Federal *
(b) Employment Contract between Randy J. Sizemore and First Federal 10(b)
(c) Employment Contract between Dee Ann Hammel and First Federal *
(d) 1995 Stock Option and Incentive Plan *
(e) Recognition and Retention Plan *
(f) Shareholder Benefit Plan **
(g) 2002 Omnibus Incentive Plan 10(g)
11 Statement re: computation of per share earnings ***
13 Annual report to shareholders 13
16 Letter on change in certifying accountants None
18 Letter on change in accounting principles None
20 Other documents or statements to security holders None
21 Subsidiaries of registrant 21
22 Published report regarding matters submitted to vote None
23 Consents of experts 23
24 Power of attorney Not required
99 Additional exhibits
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.1
Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 99.2
* Filed as an exhibit to our Form S-1 Registration Statement (File No.
33-90558). All of such previously filed documents are hereby
incorporated herein by reference in accordance with Item 601 of
Regulation S-B.
** Filed as an exhibit to our Form 10-KSB filed on April 2, 2001. Such
previously filed document is hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-B.
*** See Notes 1 and 17 of the Notes to Consolidated Financial Statements
in the Annual Report to shareholders attached hereto as Exhibit 13.
(b) Reports on Form 8-K
During the quarter ended December 31, 2002, we filed the
following Current Reports on Form 8-K:
(i) Form 8-K filed on October 17, 2002, announcing third quarter
earnings;
(ii) Form 8-K filed on November 1, 2002, announcing increased
quarterly cash dividend.
31
ITEM 14. CONTROLS AND PROCEDURES
With the participation and under the supervision of
Northeast Indiana's management, including Northeast Indiana's
Chief Executive Officer and Chief Financial Officer, and within
90 days of the filing date of this annual report, Northeast
Indiana's Chief Executive Officer and Chief Financial Officer
have evaluated the effectiveness of the design and operation of
Northeast Indiana's disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14(c) and 15(d)-14(c)) and,
based on their evaluation, have concluded that the disclosure
controls and procedures are effective. There were no significant
changes in Northeast Indiana's internal controls or in other
factors that could significantly affect these controls subsequent
to the date of their evaluation, including any corrective action
with regard to significant deficiencies and material weaknesses.
32
SIGNATURES
In accordance with Section 13 of 15(d) of the Exchange Act, the
Issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
NORTHEAST INDIANA BANCORP, INC.
Date: March 26, 2003 By: /s/ Stephen E. Zahn
-------------------------------
Stephen E. Zahn
(Duly Authorized Representative)
In accordance with the Exchange Act, this report has been signed
below by the following persons on behalf of the Issuer and in the capacities and
on the dates indicated.
By: /s/ Stephen E. Zahn By: /s/ Randy J. Sizemore
---------------------------------------------------- -------------------------
Stephen E. Zahn, Chairman of the Board, President and Chief Randy J. Sizemore, Senior Vice President, Treasurer
Executive Officer and Chief Financial Officer
(Principal Executive and Operating Officer) (Principal Financial and Accounting Officer)
Date: March 26, 2003 Date: March 26, 2003
By: /s/ Michael S. Zahn By: /s/ Randall C. Rider
---------------------------------------------------- ------------------------
Michael S. Zahn, Director and Vice President Randall C. Rider, Director
Date: March 26,2003 Date: March 26, 2003
By: /s/ Dan L. Stephan By: /s/ J. David Carnes
---------------------------------------------------- ----------------------
Dan L. Stephan, Director J. David Carnes, MD, Director
Date: March 26, 2003 Date: March 26, 2003
33
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Stephen E. Zahn, certify that:
1. I have reviewed this annual report on Form 10-KSB of Northeast Indiana
Bancorp, Inc. (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c)) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Stephen E. Zahn
-------------------------------------
Stephen E. Zahn
President and Chief Executive Officer
34
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Randy J. Sizemore, certify that:
1. I have reviewed this annual report on Form 10-KSB of Northeast Indiana
Bancorp, Inc. (the "registrant");
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14(c) and 15d-14(c)) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this annual
report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officer and I have indicated in this annual
report whether or not there were significant changes in internal controls or in
other factors that could significantly affect internal controls subsequent to
the date of our most recent evaluation, including any corrective actions with
regard to significant deficiencies and material weaknesses.
Date: March 26, 2003 /s/ Randy J. Sizemore
-------------------------------------
Randy J. Sizemore
Chief Financial Officer
35
INDEX TO EXHIBITS
Exhibit No. Document
- -------------- ---------------------------------------------------------------
10(b) Employment Contract between Randy J. Sizemore and First Federal
10(g) 2002 Omnibus Incentive Plan
13 Annual Report to Shareholders
21 Subsidiaries of the Registrant
23 Consent of Crowe, Chizek and Company LLP
99.1 Certification of the CEO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
99.2 Certification of the CFO pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002