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.
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.
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.
The following table shows the composition of our loan portfolio by fixed-and adjustable-rate at the dates indicated.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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).
The distribution of the allowance for loan losses at the dates indicated is summarized as follows:
The following table sets forth an analysis of the allowance for loan losses.
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.
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.
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.
(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.
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.
The following table sets forth our deposit flows during the periods indicated.
The following table sets forth the dollar amount of deposits in the various types of deposit programs we offered for the periods indicated.
(1) End of year 2002 average interest rates.
The following table shows rate and maturity information for our time deposit accounts as of December 31, 2002.
The following table indicates the amount of our time deposit accounts by time remaining until maturity as of December 31, 2002.
(1) Deposits from governmental and other public entities, all over $100,000.
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.
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.
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.
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
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
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.
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
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.
ITEM 2.
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.
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.
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.
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.
PART II
ITEM 5.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 45 of the Annual Report is herein incorporated by reference.
ITEM 6.
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.
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in the Annual Report is incorporated herein by reference.
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.
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.
PART III
ITEM 9.
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.
(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.
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.
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.
The following table provides information as of December 31, 2002 related to our equity compensation plans in effect at that time.
(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.
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.
ITEM 13.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
* 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.
ITEM 14.
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.
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.
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.
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
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
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