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, 2004
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.
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(Name of small business issuer in its charter)
Delaware 35-1948594
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
648 North Jefferson Street, Huntington, Indiana 46750
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (260) 356-3311
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Securities Registered Pursuant to Section 12(b) of the Act:
None
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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 |X|.
Our revenues for the most recent fiscal year: $12.8 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 1, 2005, was $23.7 million.
As of March 1, 2005, there were 1,429,279 shares outstanding of the
registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I and II of Form 10-KSB - Annual Report to Stockholders for the
fiscal year ended December 31, 2004.
Transitional Small Business Disclosure Format: YES |_|; NO |X|
INDEX
FORM 10-KSB
Page (s)
--------
Part I
Item 1. Description of Business ..................................................... 1
Item 2. Description of Property ..................................................... 31
Item 3. Legal Proceedings ........................................................... 31
Item 4. Submission of Matters to a Vote of Security Holders ......................... 31
Part II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
Issuer Purchases of Equity Securities ....................................... 32
Item 6. Management's Discussion and Analysis or Plan of Operation ................... 32
Item 7. Financial Statements ........................................................ 32
Item 8. Changes in and Disagreements with Accountants on Accounting and Financial
Disclosure .................................................................. 33
Item 8A. Controls and Procedures ..................................................... 33
Item 8B. Other Information ........................................................... 33
Part III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act ...................................... 34
Item 10. Executive Compensation ...................................................... 35
Item 11. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters ......................................................... 39
Item 12. Certain Relationships and Related Transactions .............................. 41
Item 13. Exhibits .................................................................... 42
Item 14. Principal Accountant Fees and Services ...................................... 43
Signatures
Exhibits
i
PART I
Item 1. Description of Business
-----------------------
Northeast Indiana Bancorp, Inc. ("Northeast Indiana" or the "Company"), a
Delaware corporation, is the holding company for First Federal Savings Bank
("First Federal" or the "Bank") 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, 2004, we had $228.7 million of assets and stockholders'
equity of $26.0 million (or 11.4% 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 Indiana Financial, Inc. ("Northeast Financial"), an Indiana
corporation, was established as a subsidiary of First Federal. In June 2004,
First Federal acquired the brokerage firm Innovative Financial Services
("Innovative") through Northeast Financial. The staff of Innovative, including
one broker and three support staff, became employees of First Federal through
Northeast Financial. Innovative offers non-FDIC insured products such as mutual
funds, stocks, bonds, life insurance, estate planning, retirement plans to small
businesses, and brokerage accounts to its customer base through an affiliation
with OneAmerica Securities (broker/dealer) and had roughly $60 million in assets
under management as of December 31, 2004.
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, 2004, 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.
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, 2004, we had $11.9 million in brokered deposits.
Our executive offices are located at 648 North Jefferson Street,
Huntington, Indiana 46750, and our telephone number at that address is (260)
356-3311.
FORWARD-LOOKING STATEMENTS
Northeast Indiana and its wholly-owned subsidiary, First Federal and its
wholly-owned subsidiary, 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
Risk Factors
Like all regulated financial institutions, we are exposed to numerous
risks that could adversely impact profits, financial condition and cash flows,
and, ultimately, franchise value. In order to mitigate these risks somewhat, we
have various policies, personnel and committees that establish limits for and
monitor various aspects of our risk profile. There can be no assurance that such
policies, personnel and committees will be effective in controlling these or
other risks.
Geographic Risks. A significant majority of our assets, deposits and fee
income are generated in our local lending area. As a result, deterioration of
local economic conditions in this area could expose us to losses associated with
higher loan default rates and lower asset collateral values, deposit withdrawals
and other factors that could adversely impact our financial condition and
results of operations.
Fluctuations in Interest Rates (Market Risk). Significant increases in
market interest rates, or the perception that an increase may occur, could
adversely impact our ability to generate new variable loans and cause the value
of our fixed-rate assets to decline. An increase in market interest rates may
also adversely impact the ability of adjustable rate borrowers to meet repayment
obligations, thereby causing nonperforming loans and loan charge-offs to
increase. Significant decreases in market interest rates could result in an
acceleration of loan repayments thereby mitigating the positive impact of
declining interest rates on fixed rate assets. Changes in market interest rates,
including changes in the relationship between short-term and long-term market
interest rates or between different rate indices, can impact interest rate
spread.
Competition Risk. We face significant competitive pressure from local and
regional banking institutions as well as thrifts, finance companies, credit
unions, brokerage and insurance companies and other financial intermediaries.
Many of our competitors are larger and have greater financial and other
resources. We compete on the basis of our reputation, localized decision-making,
interest rates, convenient locations and quality of customer service.
Credit Risk. We are exposed to credit risk on the loans and other credit
instruments we have in our portfolio. While the portfolio is closely monitored
and an on-going analysis and evaluation of this risk is performed, because of
the nature of our business, unexpected credit losses may subsequently be
identified as a result of additional analysis we perform or comments received
from regulatory examiners. In addition, collateral values may deteriorate
subsequent to the making of a loan so that a loss exposure develops.
Legislative and Regulatory Risk. Our operations are subject to extensive
regulation by federal banking authorities and are also subject to various laws
and judicial and administrative decisions imposing requirements and restrictions
on our operations. Policies adopted and positions taken by these regulatory and
administrative entities can impact our operations. In addition, these
authorities periodically examine us and may impose various requirements or
sanctions. The regulatory environment may periodically change significantly as
new laws and regulations are promulgated. As a result of new laws and
regulations, the competitive environment may also change significantly.
Dividend Limitation Risk. Northeast Indiana is a holding company and its
operations are conducted primarily through First Federal, its operating
subsidiary. Thus, Northeast Indiana's ability to pay dividends to its
shareholders and to service its debt is dependent primarily upon the ability of
First Federal to make dividend and other payments to Northeast Indiana. Certain
laws and regulatory requirements restrict the ability of First Federal to make
such payments to Northeast Indiana, and Northeast Indiana to make payments to
shareholders.
Liquidity Risk. We closely monitor our liquidity position including our
sources of funding and commitments to fund assets or deposit withdrawals. We
maintain adequate credit facilities. We believe that we have sufficient
liquidity to fund our commitments. However, changes in the stability of the
economic, social or political environments culminating in large withdrawals, or
a deterioration in the public's confidence in the banking system in general or
in us in particular, could have an adverse impact on our liquidity position.
3
Operational Risk. We rely on various information systems for operating
significant aspects of our business, including loan and deposit information, as
well as internal management systems. These systems and our operations could be
adversely affected by, among other things, damage or interruption from natural
disasters, power loss, network failure, improper operations, security breaches,
computer viruses or sabotage. Controls and procedures have been implemented to
minimize these risks, but any disruption in the operation of our various
information systems could adversely impact our operations which may affect our
results of operations and financial condition.
Reputation Risk. We strive to operate in a professional manner and have
implemented various personnel policies and procedures, including an employee
code of conduct applicable to all employees, to help ensure the maintenance of
integrity and professionalism. Nevertheless, Northeast Indiana or its employees
may fail to perform in accordance with these policies and procedures, or we may
find ourselves in a situation that is embarrassing from a public relations
perspective and, upon this information becoming public knowledge, may suffer
damage to our reputation. This damage could adversely impact customer confidence
and have an adverse impact on our financial condition and results of operations.
Disintermediation. In the banking and financial services businesses,
disintermediation is the process by which customers and potential customers
bypass banks and other traditional financial institutions thereby depleting
anticipated revenue streams. While we continue our efforts to make our products
and services an integral, valuable component of our customers' financial
transactions, the possibility of disintermediation is an inherent risk in the
banking and traditional financial services business as customers may migrate to
other financial intermediaries.
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, 2004, gross loans outstanding totaled $179.2 million, of which
$97.9 million or 54.66% were one- to four-family residential mortgage loans. Of
the one- to four-family mortgage loans outstanding at that date, 59.79% were
fixed-rate loans, and 40.21% were adjustable-rate loans. At that same date,
commercial real estate and multi-family loans totaled $26.3 million, of which
65.54% were fixed-rate loans and 34.46% were adjustable-rate loans. Also at that
date, construction or development loans totaled $5.9 million or 3.31% of the
total loan portfolio, 18.61% of which were adjustable-rate loans. At December
31, 2004, commercial business loans totaled $25.7 million or 14.35% of the total
loan portfolio, of which 36.79% were fixed-rate loans and 63.21% were
adjustable-rate loans.
At December 31, 2004, the balance of our consumer loans consisted of $23.3
million of loans, which represented 12.99% of the gross loan portfolio. Of the
consumer loans outstanding, 69.67% were fixed-rate loans and 30.33% 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, 2004, the maximum amount, which First
Federal could have lent to any one borrower and the borrower's related entities,
was approximately $3.8 million. See "Regulation - Federal Regulation of Savings
Associations." At December 31, 2004, we had no loans or groups of loans to
related borrowers with
4
outstanding balances in excess of this amount. Our largest lending relationship
at December 31, 2004 was $2.9 million in loans to one borrower secured by real
estate, inventory, accounts receivable and equipment.
5
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,
-----------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Real Estate Loans
-----------------
One- to four-family ............... $ 97,943 54.66% $ 91,637 54.10% $ 86,489 54.47%
Multi-family ...................... 4,328 2.42 4,709 2.78 3,709 2.34
Commercial ........................ 21,978 12.27 20,424 12.06 19,482 12.27
Construction or development ....... 5,931 3.31 9,469 5.59 6,074 3.82
-------- ------ -------- ------ -------- ------
Total real estate loans ........ 130,180 72.66 126,239 74.53 115,754 72.90
-------- ------ -------- ------ -------- ------
Other Loans:
------------
Consumer Loans:
Deposit account ................... 242 .14 153 .09 127 .08
Automobile ........................ 10,275 5.73 9,591 5.66 10,409 6.55
Home equity ....................... 6,520 3.64 6,148 3.63 6,140 3.87
Home improvement .................. 1,432 .80 628 .37 1,472 .93
Other ............................. 4,808 2.68 4,664 2.76 5,620 3.54
-------- ------ -------- ------ -------- ------
Total consumer loans ........... 23,277 12.99 21,184 12.51 23,768 14.97
-------- ------ -------- ------ -------- ------
Commercial business loans ......... 25,719 14.35 21,956 12.96 19,263 12.13
-------- ------ -------- ------ -------- ------
Total loans .................... 179,176 100.00% 169,379 100.00% 158,785 100.00%
====== ====== ======
Less:
-----
Undisbursed portion of
construction loans ................ 2,684 3,503 1,455
Loans in process .................. 83 134 318
Deferred fees and discounts ....... 252 293 316
Allowance for loan losses ......... 1,357 1,772 2,136
-------- -------- --------
Total loans receivable, net .... $174,800 $163,677 $154,560
======== ======== ========
December 31,
------------------------------------------
2001 2000
------------------------------------------
Amount Percent Amount Percent
-------- ------- -------- -------
(Dollars in Thousands)
Real Estate Loans
-----------------
One- to four-family ............... $ 95,777 57.03% $117,683 57.61%
Multi-family ...................... 3,625 2.16 4,377 2.14
Commercial ........................ 20,199 12.03 24,519 12.00
Construction or development ....... 6,363 3.79 7,188 3.52
-------- ------ -------- ------
Total real estate loans ........ 125,964 75.01 153,767 75.27
-------- ------ -------- ------
Other Loans:
------------
Consumer Loans:
Deposit account ................... 34 .02 53 0.03
Automobile ........................ 12,788 7.61 14,098 6.90
Home equity ....................... 5,821 3.47 6,961 3.41
Home improvement .................. 2,791 1.66 1,251 0.61
Other ............................. 6,277 3.74 7,422 3.63
-------- ------ -------- ------
Total consumer loans ........... 27,711 16.50 29,785 14.58
-------- ------ -------- ------
Commercial business loans ......... 14,259 8.49 20,730 10.15
-------- ------ -------- ------
Total loans .................... 167,934 100.00% 204,282 100.00%
====== ======
Less:
-----
Undisbursed portion of
construction loans ................ 2,217 1,745
Loans in process .................. 641 156
Deferred fees and discounts ....... 291 229
Allowance for loan losses ......... 1,955 2,001
-------- --------
Total loans receivable, net .... $162,830 $200,151
======== ========
6
The following table shows the composition of our loan portfolio by fixed-
and adjustable-rate at the dates indicated.
December 31,
-----------------------------------------------------------------
2004 2003 2002
-----------------------------------------------------------------
Amount Percent Amount Percent Amount Percent
-----------------------------------------------------------------
(Dollars in Thousands)
Fixed-Rate Loans:
-----------------
Real estate:
One- to four-family ........................... $ 58,561 32.68% $ 58,254 34.39% $ 56,424 35.54%
Multi-family .................................. 2,552 1.43 2,926 1.73 3,594 2.26
Commercial .................................... 14,689 8.20 17,788 10.50 17,670 11.13
Construction or development ................... 4,827 2.69 5,878 3.47 4,163 2.62
-------- ------ -------- ------ -------- ------
Total real estate loans .................... 80,629 45.00 84,846 50.09 81,851 51.55
-------- ------ -------- ------ -------- ------
Consumer ........................................ 16,216 9.05 14,472 8.54 16,419 10.34
Commercial business ............................. 9,463 5.28 10,969 6.48 7,523 4.74
-------- ------ -------- ------ -------- ------
Total fixed-rate loans ..................... 106,308 59.33 110,287 65.11 105,793 66.63
Adjustable-Rate Loans:
----------------------
Real estate:
One- to four-family ........................... 39,382 21.98 33,383 19.71 30,065 18.94
Multi-family .................................. 1,776 .99 1,783 1.05 115 .07
Commercial .................................... 7,289 4.07 2,636 1.56 1,812 1.14
Construction or development ................... 1,104 .62 3,591 2.12 1,911 1.20
-------- ------ -------- ------ -------- ------
Total real estate loans .................... 49,551 27.66 41,393 24.44 33,903 21.35
-------- ------ -------- ------ -------- ------
Consumer ........................................ 7,061 3.94 6,712 3.96 7,349 4.63
Commercial business ............................. 16,256 9.07 10,987 6.49 11,740 7.39
-------- ------ -------- ------ -------- ------
Total adjustable-rate loans ................ 72,868 40.67 59,092 34.89 52,992 33.37
-------- ------ -------- ------ -------- ------
Total loans ................................ 179,176 100.00% 169,379 100.00% 158,785 100.00%
====== ====== ======
Less:
-----
Undisbursed portion of construction loans ..... 2,684 3,503 1,455
Loans in process .............................. 83 134 318
Deferred fees and discounts ................... 252 293 316
Allowance for loan losses ..................... 1,357 1,772 2,136
-------- -------- --------
Total loans receivable, net ................ $174,800 $163,677 $154,560
======== ======== ========
7
The following schedule illustrates the interest rate sensitivity of our
loan portfolio at December 31, 2004. 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
----------------------------------------------------------------------------
Multi-Family and Construction or
One- to Four-Family Commercial Development
----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------------
(Dollars in Thousands)
Due During the
Period Ending
December 31,
2005 .............. $ 10 7.57% $ 22 9.09% $ 3,157 6.27%
2006 and 2007 ..... 727 6.46 1,720 7.85 186 5.38
2008 and 2009 ..... 2,588 6.53 4,271 5.76 2,000 5.42
2010 to 2014 ...... 11,831 6.23 8,197 6.54 -- .00
2015 to 2034 ...... 82,787 5.76 12,096 6.90 588 5.56
-------- -------- --------
$ 97,943 5.84% $ 26,306 6.67% $ 5,931 5.89%
======== ======== ========
Consumer Commercial Business Total
----------------------------------------------------------------------------
----------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
----------------------------------------------------------------------------
(Dollars in Thousands)
Due During the
Period Ending
December 31,
2005 .............. $ 4,593 8.73% $ 9,202 6.18% $ 16,984 6.89%
2006 and 2007 ..... 3,176 7.62 5,575 5.43 11,384 6.48
2008 and 2009 ..... 7,345 6.09 4,255 6.09 20,459 6.01
2010 to 2014 ...... 7,604 6.23 4,126 6.40 31,758 6.33
2015 to 2034 ...... 559 7.69 2,561 6.68 98,591 5.93
-------- -------- --------
$ 23,277 6.90% $ 25,719 6.09% $179,176 6.14%
======== ======== ========
The total amount of loans due after December 31, 2005 which have
predetermined interest rates is $99.0 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is $63.2
million.
8
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 creditworthiness 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,
2004, one- to four-family residential mortgage loans totaled $97.9 million, or
54.66%, of the gross loan portfolio.
We currently offer fixed-rate and adjustable-rate mortgage loans. For the
year ended December 31, 2004, we originated $12.1 million of fixed-rate loans
and $11.4 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 5.0% 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, 2004, the total balance of one-
to four-family adjustable-rate loans was $39.4 million or 21.98% of our gross
loan portfolio.
We also offer fixed-rate mortgage loans with maturities of up to 30 years.
At December 31, 2004, the total balance of one- to four-family fixed-rate loans
was $58.6 million or 32.68% 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, 2004, we had $22.0 million and $4.3 million of commercial and multi-family
real estate loans, which represented 12.27% and 2.42%, of the gross loan
portfolio.
9
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, 2004, we had $5.9
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, 2004, we had $4.8 million and $1.1 million of fixed-rate and adjustable-rate
construction or development loans, respectively, which represented 2.69% and
.62%, 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 six 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, 2004, automobile loans totaled $10.3 million or
5.73% of the gross loan portfolio. Of this amount, approximately $3.7 million or
35.92% and $6.6 million or 64.08% 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, 2004, home equity and second mortgage loans,
most of which are secured by mortgages, amounted to $6.5 million and $1.4
million, which represented 3.64% and .80% of the gross loan portfolio.
10
At December 31, 2004, the consumer loan portfolio totaled $23.3 million,
or 12.99% of our gross loan portfolio. At December 31, 2004, approximately 9.05%
of consumer loans were short- and intermediate-term, fixed-rate consumer loans
and 3.94% 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, 2004, $111,000 of our consumer loans
were non-performing, representing .06% of the gross loan portfolio.
Commercial Business Lending. We also originate commercial business loans
and purchase commercial leases. At December 31, 2004 approximately $25.7
million, or 14.35% 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 $1.7 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, 2004, we
originated $12.1 million in fixed-rate loans and $11.4 million in
adjustable-rate loans.
One- to four-family loan originations decreased for the year to $23.5
million in 2004 from $57.7 million in 2003, reflecting the decline in
refinancing activity in 2004 compared to 2003.
We have purchased loans from time to time from other 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, 2004, First
Federal purchased $7.9 million in loans from other financial institutions.
11
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, 2004, First Federal originated $2.2 million in conforming
fixed-rate mortgages that were sold to Freddie Mac. There were two participation
loans sold during the same time frame for a total of $574,000.
Asset Quality
The following table sets forth our loan delinquencies by type, by amount
and by percentage of type at December 31, 2004. 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 ......... 15 $ 635 0.65% 2 $ 272 0.28% 17 $ 907 0.93%
Multi-family ................ 1 302 6.98 -- -- 0.00 1 302 6.98
Commercial .................. 1 38 0.17 64 1,321 6.01 65 1,359 6.18
Construction or development . -- -- 0.00 1 6 0.10 1 6 0.10
Consumer .................... 43 230 0.99 16 111 0.48 59 341 1.46
Commercial Business ......... 4 489 1.90 1 3 0.01 5 492 1.91
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total ....................... 64 $ 1,694 0.95% 84 $ 1,713 0.95% 148 $ 3,407 1.90%
======== ======== ======== ======== ======== ======== ======== ======== ========
Total Loans by Category:
One- to four-family ......... $ 97,943
Multi-family ................ 4,328
Commercial .................. 21,978
Construction or development . 5,931
Consumer .................... 23,277
Commercial Business ......... 25,719
--------
Total ....................... $179,176
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.
12
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,
--------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family .................. $ 272 $ 81 $ 495 $ 442 $ 608
Multi-family ......................... -- -- -- -- 29
Commercial real estate ............... 1,321 2,047 4,500 5,085 708
Construction or development ......... 6 -- 506 -- 472
Consumer ............................. 111 207 510 1,125 1,691
Commercial business .................. 3 78 207 267 198
------ ------ ------ ------ ------
Total ............................. 1,713 2,413 6,218 6,919 3,706
------ ------ ------ ------ ------
Foreclosed assets:
One- to four-family .................. 54 146 420 46 --
Commercial and land .................. 150 16 96 173 185
------ ------ ------ ------ ------
Total ............................. 204 162 516 219 185
------ ------ ------ ------ ------
Repossessed assets:
Consumer and commercial .............. 7 3 12 83 539
------ ------ ------ ------ ------
Total ............................. 7 3 12 83 539
------ ------ ------ ------ ------
Total non-performing assets ............. $1,924 $2,578 $6,746 $7,221 $4,430
====== ====== ====== ====== ======
Total as a percentage of total assets ... 0.84% 1.13% 3.00% 3.03% 1.79%
====== ====== ====== ====== ======
Total non-performing assets decreased from $2.6 million at December 31,
2003 to $1.9 million at December 31, 2004. At December 31, 2004, one borrower
comprised $678,000 or 35.2% of the $1.9 million in total non-performing assets.
Management has already established a specific reserve to cover potential losses
related to this borrower and does not anticipate any further loss at this time.
For the year ended December 31, 2004, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms was $183,000, of which $81,000 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
13
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, 2004,
we had classified $1.7 million of our assets, net of specific reserves, as
substandard, representing 6.5% of the stockholders' equity or 0.7% of total
assets. These figures represent significant improvements over December 31, 2003
substandard classified assets, net of specific reserves, of $2.2 million,
representing 8.1% of stockholders' equity or 1.0% 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 as discussed in Note 3 of the Notes to
Consolidated Financial Statements in the Annual Report to Stockholders, 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.
There was $37,500 in provision for loan losses in 2004 compared to zero in
2003. This continued low trend in provisions was possible due to the Company's
improvement in non-performing loans as evidenced in Note 3 to the Consolidated
Financial Statements in our Annual Report to Stockholders for the year ended
December 31, 2004, attached hereto as Exhibit 13 (Annual Report to
Stockholders). The increased provision for loan losses less net charge-offs for
the year resulted in a $415,000 decrease in the allowance for loan losses. The
allowance for loan losses of $1.4 million at December 31, 2004 compared to
allowance for loan losses of $1.8 million at December 31, 2003. Management will
continue to maintain the allowance for loan losses at a level deemed adequate by
management based on its quarterly analysis and will include additional
consideration of non-performing loans.
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, 2004, we had a total allowance for loan losses of $1.4 million
or 79.2% of non-performing loans. See Note 3 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders.
14
The distribution of the allowance for loan losses at the dates
indicated is summarized as follows:
December 31,
------------------------------------------------------------------------
2004 2003
------------------------------------------------------------------------
Percent Percent
of of
Loans in Loans in
Amount Loan Each Amount Loan Each
of Loan Amounts Category of Loan Amounts Category
Loss by to Total Loss by to Total
Allowance Category Loans Allowance Category Loans
------------------------------------------------------------------------
(Dollars in Thousands)
One- to four-family ...... $ 80 $ 97,943 54.66% $ 107 $ 91,637 54.10%
Multi-family ............. 6 4,328 2.42 7 4,709 2.78
Commercial real estate ... 483 21,978 12.27 578 20,424 12.06
Construction or
development .............. 5 5,931 3.31 15 9,469 5.59
Consumer ................. 374 23,277 12.99 499 21,184 12.51
Commercial business ...... 409 25,719 14.35 566 21,956 12.96
Unallocated .............. -- -- -- -- -- --
-------- -------- ------ -------- -------- ------
Total ................. $ 1,357 $179,176 100.00% $ 1,772 $169,379 100.00%
======== ======== ====== ======== ======== ======
December 31,
------------------------------------------------------------------------------------------------------
2002 2001 2000
------------------------------------------------------------------------------------------------------
Percent Percent Percent
of of of
Loans in Loans in Loans in
Amount Loan Each Amount Loan Each Amount Loan Each
of Loan Amounts Category of Loan Amounts Category of Loan Amounts Category
Loss by to Total Loss by to Total Loss 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 .............. -- -- -- -- -- -- -- -- --
-------- -------- ------ -------- -------- ------ -------- -------- ------
Total ................. $ 2,136 $158,785 100.00% $ 1,955 $167,934 100.00% $ 2,001 $204,282 100.00%
======== ======== ====== ======== ======== ====== ======== ======== ======
15
The following table sets forth an analysis of the allowance for loan
losses.
Year Ended December 31,
--------------------------------------------------
2004 2003 2002 2001 2000
------ ------ ------ ------ ------
(Dollars in Thousands)
Balance at beginning of period ........... $1,772 $2,136 $1,955 $2,001 $1,767
Charge-offs:
One- to four-family ................... 3 26 -- 58 1
Commercial real estate ................ 258 236 109 -- --
Commercial ............................ 73 160 -- 392 1,150
Consumer .............................. 274 226 727 385 259
------ ------ ------ ------ ------
608 648 836 835 1,410
------ ------ ------ ------ ------
Recoveries:
One- to four-family ................... -- -- -- 3 --
Commercial real estate ................ -- -- -- -- --
Commercial ............................ 10 96 82 153 4
Consumer .............................. 146 188 203 58 50
------ ------ ------ ------ ------
156 284 285 214 54
------ ------ ------ ------ ------
Net charge-offs .......................... 452 364 551 621 1,356
Additions charged to operations .......... 37 -- 732 575 1,590
------ ------ ------ ------ ------
Balance at end of period ................. $1,357 $1,772 $2,136 $1,955 $2,001
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average loans outstanding
during the period ........................ 0.26% 0.23% 0.34% 0.34% 0.65%
====== ====== ====== ====== ======
Ratio of net charge-offs during the
period to average non-performing loans ... 24.59% 10.31% 8.63% 8.81% 51.77%
====== ====== ====== ====== ======
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, 2004, our liquidity ratio (liquid
assets as a percentage of net withdrawable savings deposits and current
borrowings) was 9.6%.
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, obligations of states and
municipalities, 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.
16
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, 2004, our
interest-earning cash and cash equivalents totaled $1.1 million, or .50% of
total assets, and our securities, consisting of obligations of states and
political subdivisions, money market mutual funds, and other securities totaled
$39.0 million, or 17.0% of total assets. Included in other securities, as of
such date, we had a $5.5 million investment in Federal Home Loan Bank (FHLB)
stock, satisfying our requirement for membership in the FHLB of Indianapolis.
At December 31, 2004, we had $60,000 in securities held to maturity
consisting of obligations of other debt securities, and we had securities
available for sale with a fair value of $38.9 million. See Note 2 of the Notes
to Consolidated Financial Statements in the Annual Report to Stockholders.
The following table sets forth the composition of our securities portfolio
at the dates indicated.
2004 2003 2002
-------------------- -------------------- --------------------
Carrying % of Carrying % of Carrying % of
Value Total Value Total Value Total
-------- ------- -------- ------- -------- -------
(Dollars in Thousands)
Debt securities:
States and Political Subdivisions ..... $ 3,570 9.16% $ 3,167 7.22% $ 396 .92%
Mortgage-backed securities ............ 12,651 32.47 17,628 40.21 16,408 38.10
U.S. Government agencies .............. 9,677 24.84 9,767 22.28 6,137 14.25
Corporate bonds ....................... 60 .15 115 .26 115 .27
Mutual funds .......................... 4,250 10.91 4,180 9.54 11,106 25.79
------- ------- ------- ------- ------- -------
Total debt securities .............. 30,208 77.53 34,857 79.51 34,162 79.33
Equity securities:
Equity securities ..................... 8,756 22.47 8,980 20.49 8,901 20.67
------- ------- ------- ------- ------- -------
Total securities ................... $38,964 100.00% $43,837 100.00% $43,063 100.00%
======= ======= ======= ======= ======= =======
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,
2004.
Maturity
-------------------------------------------------------------------------------
(Dollars in Thousands)
Within One Year 1 to 5 years 5 to 10 years Over 10 years
---------------- ---------------- ---------------- ----------------
Amount Yield Amount Yield Amount Yield Amount Yield
------ ------ ------ ------ ------ ------ ------ ------
States and Political Subdivisions(1) ..... $ 20 4.35% $ 383 3.87% $3,042 3.49% $ 125 4.00%
Mortgage-backed securities ............... 0 -- 1,440 3.99 3,375 4.24 7,836 4.80
U.S. Government agencies(1) .............. 5,003 3.72 1,976 3.19 2,698 4.40 -- --
Corporate bonds .......................... 60 8.55 -- -- -- -- -- --
------ ------ ------ ------ ------ ------ ------ ------
Total ................................. $5,083 3.73% $3,799 3.56% $9,115 4.04% $7,961 4.79%
====== ====== ====== ====== ====== ====== ====== ======
----------
(1) Yields are not presented on a tax equivalent basis.
Northeast Indiana also has $4.3 million in mutual funds, backed by
short-term 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.
17
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, 2004, we had total FHLB advances of $68.8 million
with the capacity to borrow as of December 31, 2004 an additional $2.4 million,
based on collateral currently pledged to FHLB. See Note 8 of the Notes to
Consolidated Financial Statements in the Annual Report to Stockholders.
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. Total deposits increased $1.9 million or
1.6% to $123.9 million at December 31, 2004 compared to $122.0 million at
December 31, 2003. Noninterest bearing demand, savings, and NOW accounts
increased $2.8 million or 9.4% to $32.6 million at December 31, 2004 while time
deposits increased $2.9 million to $75.7 million at the same time frame. These
increases were partially offset by a decline in MMDA balances of $3.8 million
due primarily to one significant municipal deposit relationship that transferred
a large amount of funds to their sweep account towards the end of 2004. Those
funds continued to remain with First Federal and comprise a portion of borrowed
funds on the consolidated balance sheet. The flow of deposits is influenced
significantly by general economic conditions, changes in money market and
prevailing interest rates and competition.
We remain 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.
18
The following table sets forth our deposit flows during the periods
indicated.
Year Ended December 31,
-----------------------------------------
2004 2003 2002
--------- --------- ---------
(Dollars in Thousands)
Opening balance ................ $ 122,010 $ 122,357 $ 137,030
Deposits ....................... 748,075 609,904 659,547
Withdrawals .................... (748,651) (613,263) (678,535)
Interest credited .............. 2,517 3,012 4,315
--------- --------- ---------
Ending Balance ................. $ 123,951 $ 122,010 $ 122,357
========= ========= =========
Net change ..................... $ 1,941 $ (347) $ (14,673)
========= ========= =========
Percent change ................. 1.59% (.28%) (10.71%)
========= ========= =========
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,
---------------------------------------------------------------------------
2004 2003 2002
---------------------------------------------------------------------------
Percent of Percent of Percent of
Amount Total Amount Total Amount Total
---------------------------------------------------------------------------
(Dollars in Thousands)
Transactions and savings deposits:
----------------------------------
Passbook Accounts (.50%)(1) .......... $ 11,830 9.54% $ 10,917 8.95% $ 10,397 8.50%
Demand and NOW Accounts (.30%)(1) .... 20,813 16.79 18,951 15.53 17,871 14.60
Money Market Accounts (1.19%)(1) ..... 15,586 12.58 19,335 15.85 18,085 14.78
-------- -------- -------- -------- -------- --------
Total non-time deposits .............. 48,229 38.91 49,203 40.33 46,353 37.88
-------- -------- -------- -------- -------- --------
Time deposits:
--------------
Less than 1.0% ....................... -- 0.00 283 0.23 -- --
1.00 - 1.99% ......................... 9,630 7.77 11,851 9.71 2,815 2.30
2.00 - 3.99% ......................... 64,108 51.72 51,591 42.28 46,529 38.03
4.00 - 5.99% ......................... 666 .54 5,997 4.92 19,062 15.58
6.00 - 7.99% ......................... 1,318 1.06 3,085 2.53 7,598 6.21
-------- -------- -------- -------- -------- --------
Total time deposits .................. 75,722 61.09 72,807 59.67 76,004 62.12
-------- -------- -------- -------- -------- --------
Total deposits ....................... $123,951 100.00% $122,010 100.00% $122,357 100.00%
======== ======== ======== ======== ======== ========
----------
(1) End of year 2004 average interest rates.
19
The following table shows rate and maturity information for our time
deposit accounts as of December 31, 2004.
Less
than 1.00- 2.00- 4.00- 6.00- Percent
1.00% 1.99% 3.99% 5.99% 7.99% Total of Total
--------------------------------------------------------------------------------------
(Dollars in Thousands)
Time deposit accounts
maturing in quarter ending:
---------------------------
March 31, 2005 ................ $ -- $ 5,028 $11,985 $ 246 $ -- $17,259 22.79%
June 30, 2005 ................. 2,281 7,573 57 -- 9,911 13.09
September 30, 2005 ............ -- 1,113 9,602 48 543 11,306 14.93
December 31, 2005 ............. -- 317 6,106 109 775 7,307 9.65
March 31, 2006 ................ -- 260 5,657 30 -- 5,947 7.85
June 30, 2006 ................. -- 631 8,251 -- -- 8,882 11.73
September 30, 2006 ............ -- -- 4,608 -- -- 4,608 6.09
December 31, 2006 ............. -- -- 4,375 -- -- 4,375 5.78
March 31, 2007 ................ -- -- 2,724 66 -- 2,790 3.68
June 30, 2007 ................. -- -- 2,438 10 -- 2,448 3.23
September 30, 2007 ............ -- -- 313 100 -- 413 0.55
December 31, 2007 ............. -- -- 17 -- -- 17 0.02
Thereafter .................... -- 459 -- -- 459 .61
-------------------------------------------------------------------------------------
Total ................... $ -- $ 9,630 $64,108 $ 666 $ 1,318 $75,722 100.00%
=====================================================================================
Percent of total ........ 0.00% 12.72% 84.66% 0.88% 1.74% 100.00%
======= ======= ======= ======= ======= =======
The following table indicates the amount of our time deposit accounts by
time remaining until maturity as of December 31, 2004.
Maturity
--------------------------------------------------------
3 Months Over Over Over
or 3 to 6 6 to 12 12
Less Months Months Months Total
--------------------------------------------------------
(Dollars in Thousands)
BALANCES
Time deposits less than $100,000 ..... $ 9,747 $ 5,922 $11,385 $19,394 $46,448
Time deposits of $100,000 or more .... 5,274 3,717 7,127 10,545 26,663
Public funds (1) ..................... 2,238 272 101 -- 2,611
-------------------------------------------------------
Total time deposits .................. $17,259 $ 9,911 $18,613 $29,939 $75,722
=======================================================
Maturity
--------------------------------------------------------
3 Months Over Over Over
or 3 to 6 6 to 12 12
Less Months Months Months Total
--------------------------------------------------------
NUMBER OF ACCOUNTS
Time deposits less than $100,000 ..... 575 394 712 1,029 2,710
Time deposits of $100,000 or more .... 44 32 52 94 222
Public funds (1) ..................... 4 2 1 -- 7
-------------------------------------------------------
Total time deposits .................. 623 428 765 1,123 2,939
=======================================================
----------
(1) Deposits from governmental and other public entities, all over $100,000.
20
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 residential mortgage loans and multi-family
mortgage loans. 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, 2004, we had $68.8 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 Stockholders 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,
-----------------------------
2004 2003 2002
-----------------------------
(Dollars in Thousands)
Maximum Balance:
----------------
FHLB advances ..... $68,750 $67,000 $67,000
Average Balance:
----------------
FHLB advances ..... $63,719 $64,819 $65,926
Service Corporation Activities
At December 31, 2004, First Federal had one subsidiary, Northeast
Financial, which is now functioning as our brokerage subsidiary with one
registered representative. As was discussed previously in the description of
business under Item 1, First Federal acquired a local independent brokerage firm
during 2004 through Northeast Financial. The combined assets under management
were roughly $60 million at December 31, 2004. This acquisition strengthened
Northeast Financial's product offerings and reinforced management's commitment
to being a leader in the financial services industry within our market.
Regulation
General. 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
U.S. government up to applicable limits set by the FDIC. The Bank is subject to
broad federal regulation and oversight extending to all of its operations,
principally by its primary federal regulator, the OTS. 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 the Bank, the Company also is subject to
federal regulation and oversight, principally by the OTS. The purpose of the
regulation of the Company and other holding companies is to protect subsidiary
savings associations. The Bank is a member of the Savings Association Insurance
Fund ("SAIF"), which together with the Bank Insurance Fund (the "BIF") are the
two deposit insurance funds administered by the FDIC. As a result, the FDIC has
certain regulatory and examination authority over the Bank. Certain of these
regulatory requirements and restrictions are discussed below or elsewhere in
this document.
The Financial Services Modernization Act. On November 12, 1999, the
Gramm-Leach-Bliley Financial Services Modernization Act of 1999 ("GLBA") was
signed into law. The purpose of this legislation was to modernize the financial
services industry by establishing a comprehensive framework to permit
affiliations among commercial banks, insurance companies, securities firms and
other financial service providers. Generally, the Act:
(a) repealed the historical restrictions and eliminates many federal and state
law barriers to affiliations among banks, securities firms, insurance
companies and other financial service providers;
21
(b) provided a uniform framework for the functional regulation of the
activities of banks, savings institutions and their holding companies;
(c) broadened the activities that may be conducted by national banks, banking
subsidiaries of bank holding companies and their financial subsidiaries;
(d) provided an enhanced framework for protecting the privacy of consumer
information; and
(e) addressed a variety of other legal and regulatory issues affecting
day-to-day operations and long-term activities of financial institutions.
The GLBA also imposed certain obligations on financial institutions to
develop privacy policies, restrict the sharing of nonpublic customer data with
nonaffiliated parties at the customer's request, and establish procedures and
practices to protect and secure customer data. These privacy provisions were
implemented by regulations that were effective on November 12, 2000. Compliance
with the privacy provisions was required by July 1, 2001.
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 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.
Among other requirements, Title III of the USA Patriot Act imposes the
following requirements:
o All financial institutions must establish anti-money laundering programs
that include (i) internal policies, procedures and controls, (ii) specific
designation of an anti-money laundering compliance officer, (iii) ongoing
employee training programs and (iv) an independent audit function to test
the anti-money laundering program.
o Financial institutions that establish, maintain, administer, or manage
private banking accounts or correspondent accounts in the United States
for non-United States persons or their representatives must establish
appropriate, specific, and, where necessary, enhanced due diligence
policies, procedures, and controls designed to detect and report money
laundering.
o Financial institutions are prohibited from establishing, maintaining,
administering or managing correspondent accounts for foreign shell banks
that do not have a physical presence in any country, and will be subject
to certain record keeping obligations with respect to correspondent
accounts of foreign banks.
o Bank regulators are directed to consider a holding company's effectiveness
in combating money laundering when ruling on Federal Reserve Act and Bank
Merger Act applications.
The Company's policies and procedures have been updated to reflect the
requirements of the USA Patriot Act.
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 ("SEC") under the Securities Exchange Act of 1934 (the
"Exchange Act").
22
The SOA creates an independent auditing-oversight board under the SEC. It
also increases penalties for corporate wrongdoers, forces faster and more
extensive financial disclosure, and creates avenues of recourse for aggrieved
shareholders. The SOA also contains separate provisions that require signed
certifications to be made by the chief executive officer and the chief financial
officer of all public companies, and provides criminal penalties of up to $5.0
million and imprisonment of up to 20 years for an officer that willfully
provides a certification knowing it to be untrue.
The SOA also addresses functions and responsibilities of audit committees
of public companies. Each audit committee is directly responsible for the
appointment, compensation and oversight of the work of the Company's outside
auditors, and the auditors must report directly to the audit committee. Each
audit committee member must be independent, which under the Act means that he or
she cannot (other than in his or her capacity as a member of the audit
committee, the board or any other board committee) accept any consulting,
advisory or other compensatory fees from the Company or be affiliated with the
Company or any of its subsidiaries. Each audit committee must establish
procedures to receive and respond to any complaints and concerns regarding the
Company's accounting, accounting controls or auditing matters. These procedures
would include enabling the Company's employees to transmit concerns regarding
questionable accounting or auditing matters by confidential, anonymous
submission. In recognition of the audit committee's independent status, each
audit committee is authorized to engage independent counsel and other advisors.
The Company must also provide the appropriate funding, as determined by the
audit committee, for payment of compensation to the auditors and advisors of the
audit committee.
Northeast Indiana management and directors have been investigating the
possibility of de-listing its stock and de-registering with the SEC. The Company
is primarily concerned with the escalating costs and additional allocation of
management's time that is becoming necessary under the SOA. This concern is
further heightened under the pending implementation of Section 404 that will
impact the Company beginning with the fiscal year ended December 31, 2006. This
de-registering strategy would reduce future expenses associated with SEC
reporting requirements as well as NASDAQ filing fees, but would also result in
the Company's common stock no longer being quoted on the NASDAQ Stock Market. In
order to de-register, the Company must first have fewer than 300 shareholders of
record. The Company currently has 450 shareholders of record. The Company is
currently exploring possible methods of reducing shareholders below 300 and the
costs of any such possible transactions. The Company's shares trade infrequently
and residents of Indiana hold many shares. Therefore, it is management's belief
that any negative impact on the liquidity of the shares as a result of
de-registering and de-listing would be minimal.
Federal Regulation of Savings Associations. The OTS has extensive
authority over the operations of savings banks, such as First Federal. As part
of this authority, the Bank is required to file periodic reports with the OTS
and is subject to periodic examinations by the OTS and the FDIC. The last
regular OTS and FDIC examinations of the Bank were as of December 2003 and June
2004 respectively. Under agency scheduling guidelines, another review is
expected as of June 2005. When these examinations are conducted by the OTS and
the FDIC, the examiners may require the Bank to provide for higher general or
specific loan loss reserves and take other corrective actions. All savings
associations are subject to a semi-annual assessment, based upon the savings
association's total assets, to fund the operations of the OTS. The Bank's OTS
assessment for fiscal 2004 was $60,731.
The OTS also has extensive enforcement authority over all savings
institutions and their holding companies, including the Bank and the Company.
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. In general, these enforcement actions may be
initiated for violations of laws and regulations and unsafe or unsound
practices. Other actions or inactions may provide the basis for enforcement
action, including misleading or untimely reports filed with the OTS. Except
under certain circumstances, public disclosure of final enforcement actions by
the OTS is required.
In addition, the investment, lending and branching authority of the Bank
is prescribed by federal law, and it is prohibited from engaging in any
activities not permitted by such laws. For example, the permissible level of
investment by federal associations, subject to safety and soundness
restrictions, (1) in loans secured by non-residential real property may not
exceed 400% of total capital, (2) in commercial loans may not exceed 20% of
23
assets, provided that amounts in excess of 10% of assets may only be small
business loans, (3) in loans related to leasing of tangible personal property
may not exceed 10% of assets, and (4) in loans for personal, family and
household purposes, when combined with commercial paper and corporate debt
securities, may not exceed 35% of assets. The Bank is in compliance with the
noted restrictions. Federal savings associations are also generally authorized
to branch nationwide. Federal associations such as First Federal may designate
under which investment authority (or basket) it made a loan or investment if
that loan or investment is authorized under different sections of the law.
The Bank's 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, 2004, the Bank's lending limit under this restriction was
approximately $3.8 million. At December 31, 2004, we had no lending relationship
to a single borrower in excess of our loans-to-one borrower limit.
The OTS, as well as the other federal banking agencies, has adopted
guidelines establishing safety and soundness standards on such matters as loan
underwriting and documentation, asset quality, earnings standards, internal
controls and audit systems, interest rate risk exposure and compensation and
other employee benefits. Any institution which fails to comply with these
standards must submit a compliance plan. A failure to submit a plan or to comply
with an approved plan will subject the institution to further enforcement
action.
Insurance of Accounts and Regulation by the FDIC. First Federal is a
member of the SAIF, which is administered by the FDIC. Deposits are insured up
to applicable limits by the FDIC and such insurance is backed by the full faith
and credit of the U.S. government. 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 SAIF or the BIF. 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 the 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 Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") 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 or Tier 1 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 will be made by the FDIC for each semi-annual assessment period. As
of December 31, 2004, the Bank was classified as a well-capitalized institution.
The FDIC is authorized to increase assessment rates, on a semi-annual
basis, if it determines that the reserve ratio of the SAIF will be less than the
designated reserve ratio of 1.25% of SAIF insured deposits. In setting these
increased assessments, the FDIC must seek to restore the reserve ratio to that
designated reserve level, or such higher reserve ratio as established by the
FDIC. The FDIC may also impose special assessments on SAIF members to repay
amounts borrowed from the U.S. Treasury or for any other reason deemed necessary
by the FDIC.
Since January 1, 1997, the premium schedule for BIF and SAIF insured
institutions has ranged from 0 to 27 basis points. However, SAIF- 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 equal to approximately 1.5 basis points for each $100 in domestic deposits
annually. These assessments, which may be revised based upon the level of BIF
and SAIF deposits, will continue until the bonds mature.
Under the Federal Deposit Insurance Act ("FDIA"), the FDIC may terminate
deposit insurance upon a finding that the institution has engaged in unsafe or
unsound practices, is in an unsafe or unsound condition to continue operations
or has violated any applicable law, regulation, rule, order or condition imposed
by the FDIC or the OTS. Management of the Bank does not know of any practice,
condition or violation that might lead to termination of deposit insurance.
24
Regulatory Capital Requirements. Federally insured savings associations,
such as the Bank, 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. These capital
requirements must be generally as stringent as the comparable capital
requirements for national banks. The OTS is also authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis.
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. In addition, all
intangible assets, other than a limited amount of purchased mortgage servicing
rights, must be deducted from tangible capital for calculating compliance with
the requirement. At December 31, 2004, the Bank had $595,000 of intangible
assets and no purchased mortgage servicing rights.
The OTS regulations establish special capitalization requirements for
savings associations that own subsidiaries. In determining compliance with the
capital requirements, all subsidiaries engaged solely in activities permissible
for national banks or engaged in certain other activities solely as agent for
its customers are "includable" subsidiaries that are consolidated for capital
purposes in proportion to the association's level of ownership. For excludable
subsidiaries the debt and equity investments in such subsidiaries are deducted
from assets and capital. All subsidiaries of the Bank are includable
subsidiaries.
At December 31, 2004, the Bank had tangible capital of $24.4 million, or
10.7% of adjusted total assets, which is approximately $21.0 million above the
minimum requirement of 1.5% of adjusted total assets in effect on that date.
The capital standards also effectively require core capital equal to at
least 3% to 4% of adjusted total assets. Core capital generally consists of
tangible capital plus certain intangible assets, including a limited amount of
purchased credit card receivables. At December 31, 2004, the Bank had no
intangible assets which were subject to these tests. At December 31, 2004, the
Bank had core capital equal to $24.4 million, or 10.7% of adjusted total assets,
which is $15.3 million above the minimum leverage ratio requirement of 4% as in
effect on that date.
The OTS risk-based 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 permanent and maturing 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. The
OTS is also authorized to require a savings association to maintain an
additional amount of total capital to account for concentration of credit risk
and the risk of non-traditional activities. At December 31, 2004, the Bank had
$1.1 million of capital instruments that qualify as supplementary capital, and
$1.1 million of general loss reserves, which was less than 1.25% of
risk-weighted assets. Certain exclusions from capital and assets are required to
be made for the purpose of calculating total capital. First Federal had no
exclusions from capital and assets at December 31, 2004. 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.
On December 31, 2004, the Bank had total capital of $25.5 million
(including $24.4 million in core capital and $1.1 million in qualifying
supplementary capital) and risk-weighted assets of $152.5 million (including
$4.2 million in converted off-balance sheet assets); or total capital of 16.7%
of risk-weighted assets. This amount was $13.3 million above the 8% requirement
in effect on that date.
Prompt Corrective Action. 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% Tier 1 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
25
may not make capital distributions. The OTS is authorized to impose the
additional restrictions that are applicable to significantly undercapitalized
associations. As a condition to the approval of the capital restoration plan,
any company controlling an undercapitalized association must agree that it will
enter into a limited capital maintenance guarantee with respect to the
institution's achievement of its capital requirements.
Any savings association that fails to comply with its capital plan or is
"significantly undercapitalized" (i.e., Tier 1 risk-based or core capital ratios
of less than 3% or a risk-based capital ratio of less than 6%) must be made
subject to one or more of additional specified actions and operating
restrictions, which may cover all aspects of its operations and include a forced
merger or acquisition of the association. An association that becomes
"critically undercapitalized" (i.e., a tangible capital ratio of 2% or less) is
subject to further mandatory restrictions on its activities in addition to those
applicable to significantly undercapitalized associations. In addition, the OTS
must appoint a receiver (or conservator with the concurrence of the FDIC) for a
savings association, with certain limited exceptions, within 90 days after it
becomes critically undercapitalized. Any undercapitalized association is also
subject to the general enforcement authority of the OTS and the FDIC, including
the appointment of a conservator or a receiver. The OTS is also generally
authorized to reclassify an association into a lower capital category and impose
the restrictions applicable to such category if the institution is engaged in
unsafe or unsound practices or is in an unsafe or unsound condition.
The imposition by the OTS or the FDIC of any of these measures on the
Company or the Bank may have a substantial adverse effect on the Company's
operations and profitability.
Limitations on Dividends and Other Capital Distributions. OTS regulations
impose 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. OTS regulations also prohibit a savings association from
declaring or paying any dividends or from repurchasing any of its stock if, as a
result, the regulatory capital of the association would be reduced below the
amount required to be maintained for the liquidation account established in
connection with its mutual to stock conversion.
Assuming the absence of supervisory problems, savings associations that
before and after the proposed distribution remain well-capitalized, may make
capital distributions during any calendar year equal to the greater of 100% of
net income for the year-to-date plus retained net income for the two preceding
years (less any dividends paid). However, an institution deemed to be in need of
more than normal supervision by the OTS may have its dividend authority
restricted by the OTS. The Bank may pay dividends in accordance with this
general authority.
Savings associations proposing to make any capital distribution need only
submit written notice to the OTS 30 days prior to such distribution. Savings
associations that do not, or would not meet their current minimum capital
requirements following a proposed capital distribution, however, must obtain OTS
approval prior to making such distribution. The OTS may object to the
distribution during that 30-day period based on safety and soundness concerns.
Qualified Thrift Lender Test. All savings associations, including the
Bank, are required to meet a qualified thrift lender ("QTL") test to avoid
certain restrictions on their operations. This test requires a savings
association 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 association
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 "Code"). Such assets
primarily consist of residential housing related loans and investments. At
December 31, 2004, the Bank met the test and has always met the test since its
effectiveness.
Any savings association that fails to meet the QTL test must convert to a
national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an association 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 such an association 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
association is immediately ineligible to receive any new FHLB borrowings and is
subject to national bank limits for payment of dividends. If such association
has not requalified or converted to a national bank within three years after the
failure, it must divest of all investments and cease all activities
impermissible for a
26
national bank. In addition, it must repay promptly any outstanding FHLB
borrowings, which may result in prepayment penalties. If any association that
fails the QTL 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."
If the Bank fails the QTL test, the Company must obtain the approval of
the OTS prior to continuing after such failure, directly or through its other
subsidiaries, any business activity other than those approved for multiple
savings and loan holding companies or their subsidiaries. In addition, within
one year of such failure, the Company must register as, and will become subject
to, the restrictions applicable to bank holding companies. The activities
authorized for a bank holding company are more limited than are the activities
authorized for a unitary or multiple savings and loan holding company.
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 does not establish specific lending requirements or programs for financial
institutions nor does it limit an institution's discretion to develop the types
of products and services that it believes are best suited to its particular
community, consistent with the CRA. The CRA requires the OTS, in connection with
the examination of the Bank, to assess the institution's record of meeting the
credit needs of its community and to take such record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by the Bank. An unsatisfactory rating may be used as the basis for the
denial of an application by the OTS.
The federal banking agencies, including the OTS, have recently revised the
CRA regulations and the methodology for determining an institution's compliance
with the CRA. Due to the heightened attention being given to the CRA in the past
few years, the Bank may be required to devote additional funds for investment
and lending in its local community. The Bank was examined for CRA compliance for
June 2003 and received a rating of "outstanding."
Activities of Associations and Their Subsidiaries. When a savings
institution establishes or acquires a subsidiary or elects to conduct any new
activity through a subsidiary that the association controls, the savings
institution must notify the FDIC and the OTS 30 days in advance and provide the
information each agency may, by regulation, require. Savings institutions also
must conduct the activities of subsidiaries in accordance with existing
regulations and orders.
The OTS may determine that the continuation by a savings institution of
its ownership, control of, or its relationship to, the subsidiary constitutes a
serious risk to the safety, soundness or stability of the savings institution or
is inconsistent with sound banking practices or with the purposes of the FDIC.
Based upon that determination, the FDIC or the OTS has the authority to order
the savings institution to divest itself of control of the subsidiary. The FDIC
also may determine by regulation or order that any specific activity poses a
serious threat to the SAIF. If so, it may require that no SAIF member engage in
that activity directly.
Transactions with Affiliates. Savings institutions must comply with
Sections 23A and 23B of the Federal Reserve Act relative to transactions with
affiliates in the same manner and to the same extent as if the savings
institution were a Federal Reserve member Savings Bank. Generally, transactions
between a savings institution or its subsidiaries and its affiliates are
required to be on terms as favorable to the association as transactions with
non-affiliates. In addition, certain of these transactions, such as loans to an
affiliate, are restricted to a percentage of the association's capital.
Affiliates of the Bank include the Company and any company that is under common
control with the Bank. In addition, a savings institution may not lend to any
affiliate engaged in activities not permissible for a savings and loan holding
company or acquire the securities of most affiliates. The OTS has the discretion
to treat subsidiaries of savings institutions as affiliates on a case-by-case
basis.
On April 1, 2003, the Federal Reserve's Regulation W, which
comprehensively amends sections 23A and 23B of the Federal Reserve Act, became
effective. The Federal Reserve Act and Regulation W are applicable to savings
institutions such as the Bank. The Regulation unifies and updates staff
interpretations issued over the years, incorporates several new interpretative
proposals (such as to clarify when transactions with an unrelated third party
will be attributed to an affiliate) and addresses new issues arising as a result
of the expanded scope of nonbanking
27
activities engaged in by banks and bank holding companies in recent years and
authorized for financial holding companies under the Financial Services
Modernization Act of 1999.
Certain transactions with directors, officers or controlling persons are
also subject to conflict of interest regulations enforced by the OTS. These
conflict of interest regulations and other statutes also impose restrictions on
loans to such persons and their related interests. Among other things, such
loans must be made on terms substantially the same as for loans to unaffiliated
individuals.
Regulatory and Criminal Enforcement Provisions. The OTS has primary
enforcement responsibility over savings institutions and has the authority to
bring action against all "institution-affiliated parties," including
stockholders, and any attorneys, appraisers and accountants who knowingly or
recklessly participate in wrongful action likely to have an adverse effect on an
insured institution. Formal enforcement action may range from the issuance of a
capital directive or cease and desist order to removal of officers or directors,
receivership, conservatorship or termination of deposit insurance. Civil
penalties cover a wide range of violations and can amount to $25,000 per day, or
$1.1 million per day in especially egregious cases. The FDIC has the authority
to recommend to the Director of the OTS that enforcement action be taken with
respect to a particular savings institution. If the Director does not take
action, the FDIC has authority to take such action under certain circumstances.
Federal law also establishes criminal penalties for certain violations.
Holding Company Regulation. The Company is a unitary savings and loan
holding company subject to regulatory oversight by the OTS. As such, the Company
is required to register and file reports with the OTS and is subject to
regulation and examination by the OTS. In addition, the OTS has enforcement
authority over the Company 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
prior to May 4, 1999, the Company generally is not subject to activity
restrictions. If the Company acquires control of another savings association as
a separate subsidiary, it would become a multiple savings and loan holding
company, and the activities of the Company and any of its subsidiaries (other
than the Bank or any other SAIF-insured savings association) would become
subject to such restrictions.
Federal Securities Law. The stock of the Company is registered with the
SEC under the Exchange Act. The Company is subject to the information, proxy
solicitation, insider trading restrictions and other requirements of the SEC
under the Exchange Act.
Company stock held by persons who are affiliates (generally officers,
directors and principal stockholders) of the Company may not be resold without
registration or unless sold in accordance with certain resale restrictions. For
example, if the Company meets specified current public information requirements,
each affiliate of the Company 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, 2004, the Bank was in compliance with these
reserve requirements. The balances maintained to meet the reserve requirements
imposed by the Federal Reserve Board may be used to satisfy liquidity
requirements that may be imposed by the OTS.
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. The Bank 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. Each is funded
primarily from proceeds derived from the sale of consolidated obligations of the
FHLB System. 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
28
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.
As a member, the Bank is required to purchase and maintain stock in the
FHLB of Indianapolis. At December 31, 2004, the Bank had $5.3 million in FHLB
stock, which was in compliance with this requirement. For fiscal 2004 and 2003,
dividends paid by the FHLB of Indianapolis to First Federal totaled $236,000 and
$256,000 respectively. In addition, each of the four quarterly dividends from
the FHLB in 2004 were paid in the form of additional FHLB stock.
Under federal law, the FHLB is required to provide funds for the
resolution of troubled savings institutions and to contribute to low and
moderately priced housing programs through direct loans or interest subsidies on
advances targeted for community investment and low- and moderate-income housing
projects. These contributions have affected adversely the level of FHLB
dividends paid and could continue to do so in the future. These contributions
also could have an adverse effect on the value of FHLB stock in the future. In
addition, the federal agency that regulates the FHLBs has required each bank to
register its stock with the SEC, which will increase the costs of each bank and
may have other effects that are not possible to predict at this time.
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,
2004, 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.
29
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 30%.
Employees
At December 31, 2004, we had a total of 51 full-time, 7 part-time and no
seasonal employees. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
The following information as to the business experience during the past
five years is supplied with respect to executive officers of the Company and the
Bank who do not serve on the Company's Board of Directors. There are no
arrangements or understandings between the persons named and any other person
pursuant to which such officers were selected.
Position held with
Name Age(1) First Federal and Northeast Indiana
-----------------------------------------------------------------------------------------------
Randy J. Sizemore 34 Senior Vice President, Treasurer and Chief Financial Officer
DeeAnn Hammel 52 Senior Vice President, Secretary and Chief Operating Officer
Thomas P. Frantz 50 Senior Vice President and Chief Lending Officer
----------
(1) At December 31, 2004.
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 11
years experience working with financial institutions.
DeeAnn 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.
Thomas P. Frantz is Senior Vice President and Chief Lending Officer,
positions he has held since October 2001. Prior to joining First Federal, Mr.
Frantz held positions in a lending capacity for another bank since 1995. Mr.
Frantz has a total of 29 years experience working with financial institutions.
30
Item 2. Description of Property
-----------------------
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, 2004. The
total net book value of our premises and equipment (including land, buildings
and leasehold improvements and furniture, fixtures and equipment) at December
31, 2004 was approximately $2.2 million. See Note 5 of the Notes to Consolidated
Financial Statements in the Annual Report to Stockholders.
Total
Owned Approximate
Year or Square Net Book Value at
Location Acquired Leased Footage December 31, 2004
----------------------------------------------------------------------------------------------
Main Office:
648 North Jefferson Street
Huntington, Indiana 46750 1974 Owned 1,700 $ 891,479
Branch Offices:
1240 South Jefferson Street
Huntington, Indiana 46750 1981 Owned 1,700 $ 215,411
100 Frontage Road
Huntington, Indiana 46750 1995 Owned 5,000 $1,069,091
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,
2004.
31
PART II
Item 5. Market for Common Equity, Related Stockholder Matters and Small Business
------------------------------------------------------------------------
Issuer Purchases of Equity Securities
-------------------------------------
Page 54 of the attached 2004 Annual Report to Stockholders is incorporated
herein by reference.
The following table provides information about purchases by the Company
during the quarter ended Decmeber 31, 2004, of its common shares:
Issuer Purchases of Equity Securities
(a) (b) (c) (d)
------------ ---------- ------------ ---------------
Total Number Maximum
of Shares Number of
Purchased as Shares That
Part of May Yet Be
Publicly Purchased
Total Number Average Announced Under the Plans
of Shares Price Paid Plans or or Programs
Period Purchased Per Share Programs (1) (1)
------------------- ------------ ---------- ------------ ---------------
10/01/04 - 10/31/04 -- -- -- 71,268
11/01/04 - 11/31/04 12,630 $22.28 12,630 58,638
12/01/04 - 12/31/04 3,500 $22.11 3,500 55,138
Total 16,130 $22.24 16,130 55,138
On September 29, 2004 our board of directors announced a new common stock
repurchase program allowing for the repurchase of 71,268 shares prior to
expiration on September 29, 2005. There are 51,638 shares remaining to be
purchased under that previously announced program.
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
Pages 3 through 18 of the Annual Report to Stockholders are herein
incorporated by reference.
Item 7. Financial Statements
--------------------
The following information appearing in the Annual Report to Stockholders
is incorporated herein by reference.
Pages in
Annual
Annual Report Section Report
--------------------- ------
Report of Independent Registered Public Accounting Firm 19
Consolidated Balance Sheets as of December 31, 2004 and 2003 20
Consolidated Statements of Income for the Years Ended December 31, 2004, 2003 and 2002 21
Consolidated Statements of Changes in Shareholders' Equity for the Years Ended December 31, 22-23
2004, 2003 and 2002
Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 24
Notes to Consolidated Financial Statements 25-52
32
With the exception of the aforementioned information in Part II of the
Form 10-KSB, the Annual Report to Stockholders 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.
Item 8A. Controls and Procedures
-----------------------
Any control system, no matter how well designed and operated, can provide
only reasonable (not absolute) assurance that its objectives will be met.
Furthermore, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, have been detected.
Disclosure Controls and Procedures
The Company's management, with the participation of the Company's Chief
Executive Officer and Chief Financial Officer, has evaluated the effectiveness
of the Company's disclosure controls and procedures (as such term is defined in
Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the
period covered by this report. Based on such evaluation, the Company's Chief
Executive Officer and Chief Financial Officer have concluded that, as of the end
of such period, the Company's disclosure controls and procedures are effective
in recording, processing, summarizing and reporting, on a timely basis,
information required to be disclosed by the Company in the reports that it files
or submits under the Exchange Act.
Internal Control Over Financial Reporting
There have not been any changes in the Company's internal control over
financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f)
under the Exchange Act) during the fiscal year to which this report relates that
have materially affected, or are reasonably likely to materially affect, the
Company's internal control over financial reporting.
Item 8B. Other Information
-----------------
Not applicable.
33
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
------------------------------------------------------------------------
with Section 16(a) of the Exchange Act
--------------------------------------
Directors
---------
Our Board of Directors currently consists of six members, each of whom is
also a director of the Bank. Directors are generally elected to serve for
three-year staggered terms or until their respective successors have been
elected and qualified. Approximately one-third of the directors are elected
annually.
The following table sets forth certain information regarding the Board of
Directors, including each director's age and term of office.
Director Term
Name Position(s) Held with Northeast Indiana Bancorp Age(1) Since(2) Expires
---- ----------------------------------------------- ------ -------- -------
J. David Carnes Director 53 1991 2005
William A. Zimmer Director 52 2003 2005
Randall C. Rider Director 54 1989 2006
Dan L. Stephan Director 57 1987 2007
Michael S. Zahn Director and Senior Vice President 35 2000 2006
Stephen E. Zahn Chairman of the Board, President and Chief Executive Officer 62 1965 2007
----------
(1) At December 31, 2004.
(2) Includes service as a director of First Federal.
The business experience of each director is set forth below. All directors
have held their present positions for at least the past five years, except as
otherwise indicated.
J. David Carnes, MD. Dr. Carnes has, since 1981, practiced medicine in
Huntington, Indiana.
Stephen E. Zahn. Mr. S. Zahn is the Chairman of the Board, President and
Chief Executive Officer of NEIB and Chairman of the Board and Chief Executive
Officer of the Bank. Mr. S. Zahn has served in such capacities for over ten
years and also served as President of the Bank since 1980, until Michael S. Zahn
assumed that position in 2005. Mr. S. Zahn is the father of Michael S. Zahn,
Director of NEIB and Director and President of the Bank.
Michael S. Zahn. Mr. M. Zahn became President of the Bank on January 1,
2005. Mr. M. Zahn joined the Bank in 1996 as a loan officer. Prior to his
employment with the Bank, Mr. Zahn worked as a Senior Underwriter for a regional
insurance carrier. Mr. M. Zahn is the son of Stephen E. Zahn, Chairman of the
Board, President and Chief Executive Officer of NEIB and the Bank.
34
Randall C. Rider. Mr. Rider is President of Lime City Manufacturing Co.,
Inc., a position he has held since 1983.
Dan L. Stephan. Mr. Stephan is a retired State Representative to the
Indiana Legislature, a position he was first elected to in 1980 and retired at
end of 1998. Mr. Stephan is also employed as a sales representative for the
Variable Annuity Life Insurance Company.
William A. Zimmer. Mr. Zimmer founded the W.A. Zimmer Co., a home
improvement company based in Huntington, Indiana, in 1976 and currently serves
as President.
Executive Officers
------------------
Information regarding the business experience of the executive officers of
the Company and the Bank contained in Part I under the caption "Employees" of
this Form 10-KSB is incorporated herein by reference.
Compliance with Section 16(a)
-----------------------------
Section 16(a) of the Exchange Act requires our directors and executive
officers, and persons who own more than 10% of Northeast Indiana's outstanding
shares of common stock, to file with the SEC initial reports of ownership and
reports of changes in ownership of common stock of Northeast Indiana. Officers,
directors and greater than 10% stockholders are required by SEC regulation to
furnish us with copies of all Section 16(a) forms they file.
To our knowledge, based solely on a review of the copies of such reports
furnished to us and the written representations that no other reports were
required, all Section 16(a) filing requirements applicable to our officers,
directors and greater than 10% beneficial owners were complied with during the
fiscal year ended December 31, 2004.
Audit Committee Financial Expert
--------------------------------
The Audit Committee of Northeast Indiana's Board of Directors reviews
audit reports and related matters with respect to compliance with regulations
and internal policies and procedures. This committee also engages and sets
compensation for an accounting firm to perform the annual audit and acts as a
liaison between the auditors and the Board. The current members of this
committee are Directors Rider (Chairman), Stephan, Carnes, and Zimmer. This
Committee met four times during fiscal 2004.
Northeast Indiana does not have an audit committee financial expert
serving on the Audit Committee. It is difficult for Northeast Indiana, as a
small public company, to identify, recruit and add an audit committee financial
expert to the Audit Committee.
There have been no changes in the procedures by which stockholders may
recommend director nominees since the time the Company provided disclosure of
such procedures in its last definitive proxy statement mailed to stockholders.
Code of Ethics
--------------
We have adopted a code of ethics that applies to the principal executive
officer and all professionals serving in a finance, accounting, treasury or tax
role at Northeast Indiana and its subsidiaries. We have previously filed a copy
of this Code of Ethics as Exhibit 14 to the Form 10-KSB filed with the SEC on
March 26, 2004.
Item 10. Executive Compensation
----------------------
Director Compensation
Directors of Northeast Indiana are paid $200 per regular meeting for their
service in such capacity.
35
Directors of the Bank receive a retainer fee of $2,250 per quarter and $400 per
regular monthly meeting. Directors do not receive any compensation for
participation on the committees of the Boards of Directors of Northeast Indiana
and the Bank.
Deferred Compensation Program. The Bank has a deferred compensation
program for the benefit of its directors. This program permits participating
directors to defer up to a maximum of $400 of Board fees per month or $4,800 per
year, over a five year period which ended December 31, 1996, except for
Directors Michael Zahn and William Zimmer. Director Michael Zahn may defer up to
a maximum of $500 of Board fees per month or $6,000 per year, over a five year
period which will end July 31, 2005, and Director William Zimmer may defer up to
$500 of Board fees per month or $6,000 per year, over a five year period which
will end October 31, 2008. Generally upon attaining age 65, the director (or in
the event of death, his designated beneficiary) receives a monthly cash payment
based upon the amount of fees deferred for a period of up to 120 months. In
addition, the designated beneficiary of each participating director will receive
a $10,000 burial fee. In order to balance the expected payments under the
deferred compensation plan, the Bank has purchased life insurance policies on
the lives of the participating directors. Although the insurance policies do not
generate periodic payments to cover the monthly payments owed to retiring
directors, the death benefits payable on the insurance policies have been
selected to actuarially approximate the future monthly payment obligation.
During fiscal 2004, Director Michael Zahn deferred a total of $6,000 in Board
fees and Director Zimmer deferred a total of $6,000 in Board fees pursuant to
this program. No other director deferred his Bank Board fees in fiscal 2004.
The following table provides information relating to option exercises by
directors of Northeast Indiana during the last fiscal year. Value realized upon
exercise is the difference between the closing price on the Nasdaq Stock Market
of the underlying stock on the exercise date and the exercise or base price of
the option.
Name Shares Acquired on Exercise (#) Value Realized ($)
---- ------------------------------- ------------------
J. David Carnes 2,000 $ 22,330
Randall C. Rider 13,202 $157,203
Dan L. Stephan 7,000 $ 83,320
Michael S. Zahn 1,500 $ 14,193
William A. Zimmer 1,000 $ 1,490
Executive Compensation
Our executive officers do not receive any compensation for services
performed in their capacity as such. The following table sets forth the
compensation paid by the Bank during fiscal 2004 to the Chairman and Chief
Executive Officer of Northeast Indiana and the Bank. No other executive officer
earned salary and bonus exceeding $100,000 in fiscal 2004.
36
SUMMARY COMPENSATION TABLE
Long Term Compensation
Annual Compensation Awards
Other
Annual Restricted
Fiscal Compen Stock Options/ LTIP All Other
Name and Principal Position Year Salary($)(1) Bonus($) sation($) Award(s)($) SARs(#) Payouts($) Compensation($)
--------------------------- ---- ------------ -------- --------- ----------- ------- ---------- ---------------
Stephen E. Zahn, Chairman of 2004 $179,600 $ 17,500 -- -- -- -- $171,285(2)
the Board and Chief Executive
Officer 2003 172,100 17,500 -- -- -- -- 148,486(3)
2002 167,500 12,500 -- -- -- -- 128,850(4)
----------
(1) Includes directors' fees of $14,600 for 2003 and $13,100 for 2002.
(2) Includes: (i) $10,469 of life, health and disability insurance premiums
paid by the Bank; (ii) $5,084 of contributions by the Bank to Mr. S.
Zahn's 401(k) plan account; (iii) $83,263 accrued by the Bank under the
Executive Supplemental Retirement Income Plan on behalf of Mr. S. Zahn;
(iv) $29,809 accrued by the Bank under the Stockholder Benefit Plan on
behalf of Mr. S. Zahn; (v) $38,993 of contributions to Mr. S. Zahn's ESOP
account; and (vi) $3,667 allocated based on the personal use of an
automobile by Mr. S. Zahn.
(3) Includes: (i) $11,796 of life, health and disability insurance premiums
paid by the Bank; (ii) $4,206 of contributions by the Bank to Mr. S.
Zahn's 401(k) plan account; (iii) $55,416 accrued by the Bank under the
Executive Supplemental Retirement Income Plan on behalf of Mr. S. Zahn;
(iv) $31,573 accrued by the Bank under the Stockholder Benefit Plan on
behalf of Mr. S. Zahn; (v) $41,660 of contributions to Mr. S. Zahn's ESOP
account; and (vi) $3,835 allocated based on the personal use of an
automobile by Mr. S. Zahn.
(4) Includes: (i) $11,725 of life, health and disability insurance premiums
paid by the Bank; (ii) $4,431 of contributions by the Bank to Mr. S.
Zahn's 401(k) plan account; (iii) $49,041 accrued by the Bank under the
Executive Supplemental Retirement Income Plan on behalf of Mr. S. Zahn;
(iv) $32,409 accrued by the Bank under the Stockholder Benefit Plan on
behalf of Mr. S. Zahn; (v) $26,988 of contributions to Mr. S. Zahn's ESOP
account; and (vi) $4,256 allocated based on the personal use of an
automobile by Mr. S. Zahn.
The following table provides information as to the value of the options
held by our President and Chief Executive Officer on December 31, 2004. No stock
appreciation rights were granted during fiscal 2004.
37
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR END
OPTION VALUES
Value of
Number of Unexercised
Unexercised In-the-Money
Options at Options at
Fiscal Year End ($) Fiscal Year End ($)(1)
------------------------------------- -----------------------------------
Shares
Acquired on Value
Name Exercise (#) Realized ($) Exercisable (#) Unexercisable (#) Exercisable ($) Unexercisable ($)
---- ------------ ------------ --------------- ----------------- --------------- -----------------
Stephen E. Zahn -- -- 37,565 -- $423,733 --
----------
(1) Represents the aggregate market value (market price of the common stock
less the exercise price) of the options granted based upon the closing
price of $20.99 per share of the common stock as reported on the NASDAQ
National Market on January 3, 2005.
Employment Agreement
In December 1995, the Bank entered into an employment contract with Mr. S.
Zahn. The employment contract provides for an annual base salary in an amount
established by the Board of Directors. The initial term of the employment
contract was for three years. The contract provides for extensions of one year,
in addition to the then-remaining term under the agreement, on each anniversary
of the effective date of the contract, subject to a formal performance
evaluation performed by disinterested members of the Board of Directors of the
Bank, and the contract has been renewed each year since the expiration of the
initial term. The contract provides for termination upon Mr. S. Zahn's death,
for cause, or in certain events specified by Office of Thrift Supervision
regulations. The employment contract is also terminable by Mr. S. Zahn upon 90
days notice to the Bank.
The employment contract provides for payment to Mr. S. Zahn of the greater
of his salary for the remainder of the term of the agreement, or 299% of his
base compensation, in the event there is a "change in control" of the Bank where
employment terminates involuntarily in connection with such change in control or
within twelve months thereafter. For the purposes of the employment contract, a
"change in control" is defined as any event which would require the filing of an
application for acquisition of control or notice of change in control pursuant
to Office of Thrift Supervision regulations. Such events are generally triggered
by the acquisition of control of more than 10% of Northeast Indiana's common
stock. Based on his current salary, if Mr. S. Zahn was terminated in December,
2004 under circumstances entitling him to severance pay as described above, he
would have been entitled to receive a lump sum cash payment of approximately
794,000.
Executive Supplemental Retirement Income Plan.
The Bank maintains a supplemental retirement income plan established in
1992 for the benefit of Mr. S. Zahn. This plan was subsequently amended in 1996,
2002, and 2004 pursuant to an agreement entered into with Mr. S. Zahn. Payments
made by the Bank are placed into a secular trust account with an independent
administrator through another financial institution. Upon continuous service to
the Bank through age 65, Mr. S. Zahn (or in the event of Mr. S. Zahn's death,
his beneficiary) will become entitled to monthly cash payments for a period of
180 months of up to 60% of Mr. S. Zahn's final base compensation paid by the
Bank annually of approximately $43,500 after tax. This amount will become
payable at the time Mr. S. Zahn reaches age 67. In the event that Mr. S. Zahn
voluntarily leaves employment with the Bank before attaining the age of 65, he
would be eligible to receive commencing at age 67 the after-tax contributions
made by the Bank into the secular trust account up to the point of termination
of service. The Bank has purchased a life insurance policy with respect to this
program which is comparable to the policies described herein for the Bank
directors' deferred compensation program. In addition, to
38
the extent that the proceeds realized by the Bank on said life insurance
policies owned by the Bank exceed the cash surrender values of the same
policies, Mr. S. Zahn's designated beneficiary will receive a $30,000 burial fee
from this plan. All expenses related to this program are paid by the Bank.
Stockholder Benefit Plan.
In January of 2000, the Bank set up a deferred compensation plan for Mr.
S. Zahn based on the savings to the institution. In connection with the
establishment of this plan, Mr. S. Zahn relinquished shares of stock granted to
him pursuant to the Northeast Indiana Recognition and Retention Plan. The Bank
agreed to accrue a benefit for Mr. S. Zahn based on the difference between the
income derived from the Bank's investment in a no-load, no-surrender charge life
insurance policy and the Bank's after-tax cost of funds as determined by the
last available quarterly rate of the 6th District Cost of Funds from the Federal
Home Loan Bank in Indianapolis plus fifty basis points.
This benefit accrues over the working life of Mr. S. Zahn such that, upon
reaching the age of 65, he shall be entitled to the annuitized value of the
accrued benefit payable over a fifteen year period. Should Mr. S. Zahn die prior
to reaching age 65, his beneficiary is entitled to a Survivor's Benefit payable
over a fifteen year period. In the event that Mr. S. Zahn is involuntarily
terminated, including termination coincident with or within three years of a
change in control of the Bank (as defined), Mr. S. Zahn is entitled to receive a
benefit as if he had continued to be employed with the Bank until his retirement
age of 65. If Mr. S. Zahn voluntarily terminates his employment with the Bank,
he is entitled to the accrued benefit determined as of the date of termination.
Item 11. Security Ownership of Certain Beneficial Owners and Management and
----------------------------------------------------------------------
Related Stockholder Matters
---------------------------
Voting Securities and Principal Holders Thereof
The following table sets forth as of March 21, 2005, information regarding
beneficial share ownership of: (i) those persons or entities known by us to
beneficially own more than five percent of Northeast Indiana common stock; (ii)
each member of the Northeast Indiana Board of Directors; (iii) certain executive
officers of Northeast Indiana; and (iv) all current directors and executive
officers of Northeast Indiana as a group. The address of each of the beneficial
owners, except where otherwise indicated, is the same address as Northeast
Indiana. Northeast Indiana only has one class of voting security, Northeast
Indiana common stock. Information in the table below is being provided with
respect to beneficial ownership of Northeast Indiana common stock.
Shares Percent
Beneficial Owner Beneficially Owned of Class
-------------------------------------------------------------------------------------------
Northeast Indiana Bancorp, Inc. Employee Stock 147,890(1) 10.3%
Ownership Plan ("ESOP")
First Manhattan Co. 111,290(2) 7.8%
437 Madison Avenue
New York, New York 10022
Stephen E. Zahn, Chairman of the Board, President and 175,894(3) 12.0%
Chief Executive Officer
Dan L. Stephan, Director 11,802(4) .8%
J. David Carnes, Director 27,584(5) 1.9%
Randall C. Rider, Director 8,998(6) .6%
William A. Zimmer, Director 3,350(7) .2%
Michael S. Zahn, Director and Senior Vice President 27,296(8) 1.9%
Directors and executive officers as a group (9 persons) 295,265(9) 19.8%
39
----------
(1) Pursuant to a filing on Schedule 13G filed on February 7, 2005, the amount
reported represents 147,890 shares of common stock held by the ESOP,
120,405 of which have been allocated to accounts of participants as of the
record date. Peoples Federal Savings Bank is the trustee of the ESOP and
may be deemed to beneficially own the shares held by the ESOP which have
not been allocated to accounts of participants. Participants in the ESOP
are entitled to instruct the ESOP trustee as to the voting of the shares
allocated to their ESOP accounts. For each issue voted upon by the
stockholders of Northeast Indiana, the unallocated shares held by the ESOP
are voted by the ESOP trustee in the same proportion as the participants
who directed the trustee as to the voting of the shares allocated to their
plan accounts. Allocated shares as to which the ESOP trustee receives no
voting instructions are voted by the trustee in its discretion.
(2) As reported on Schedule 13G/A filed on February 8, 2005. First Manhattan
Co. reports that it has sole voting and dispositive power over 108,290 of
the shares listed above, and shared voting and dispositive power over
3,000 shares.
(3) The amount of shares beneficially owned by Mr. S. Zahn includes: (i)
27,667 shares owned directly; (ii) 39,009 shares held jointly by Mr. S.
Zahn and his wife; (iii) 4,673 shares held by Mr. S. Zahn's wife; (iv)
26,908 shares allocated to Mr. S. Zahn's ESOP account as of December 31,
2004; (v) 37,565 shares which Mr. S. Zahn has the right to acquire
pursuant to stock options that are exercisable at or within 60 days of the
record date; (vi) 2,890 shares held in Mr. S. Zahn's 401(k) account as of
December 31, 2004; and (vii) 37,182 shares held in a revocable trust as to
which Mr. S. Zahn is a trustee. On November 17, 2003, Mr. S. Zahn and
certain associated family members including Alyce M. Zahn, Michael S. and
Susan E. Zahn, Jamie M. and Jodie Z. Groves, Michael C. and Julie A.
Jennings, and Scott and Cherie Z. Axelrod, received permission from the
Office of Thrift Supervision ("OTS") to acquire up to nineteen percent
(19%) of the issued and outstanding shares of Northeast Indiana common
stock.
(4) The amount of shares beneficially owned by Mr. Stephan includes: (i)
10,000 shares owned directly and (ii) 1,802 shares which Mr. Stephan has
the right to acquire pursuant to stock options that are exercisable at or
within 60 days of the record date.
(5) The amount of shares beneficially owned by Dr. Carnes includes: (i) 11,307
shares owned directly; (ii) 9,075 shares held jointly by Dr. Carnes and
his wife; and (iii) 7,202 shares which Dr. Carnes has the right to acquire
pursuant to stock options that are exercisable at or within 60 days of the
record date.
(6) These shares are beneficially owned directly by Mr. Rider.
(7) The amount of shares beneficially owned by Mr. Zimmer includes 1,000
shares of restricted stock, 1,350 shares held jointly by Mr. Zimmer and
his spouse, and 1,000 shares subject to options exercisable within 60 days
of the record date. This amount does not include 8,000 shares subject to
options that are not exercisable within 60 days of the record date.
(8) The amount of shares beneficially owned by Mr. M. Zahn includes: (i)
13,220 shares owned directly; (ii) 5,896 shares allocated to Mr. M. Zahn's
ESOP account as of December 31, 2004; (iii) 7,380 shares which Mr. M. Zahn
has the right to acquire pursuant to stock options that are exercisable at
or within 60 days of the record date, and (iv) 800 shares of restricted
stock. The amount does not include 500 shares subject to stock options
which are not exercisable within 60 days of the record date.
(9) The amount includes shares held directly, as well as jointly with family
members, shares held in retirement accounts, in a fiduciary capacity, by
certain family members or by trusts of which the director or executive
officer is a trustee or substantial beneficiary, with respect to which the
individual may be deemed to have sole or shared voting and/or dispositive
power. The amount also includes an aggregate of 59,949 shares which
directors and executive officers as a group have the right to acquire
pursuant to stock options that are exercisable at or within 60 days of the
record date and an aggregate of 48,321 shares allocated to the ESOP
accounts of the executive officers as of December 31, 2004, and an
aggregate of 5,004 shares allocated to the 401(k) plan accounts of
executive officers as of December 31, 2004. The amount does not include
15,000 shares subject to options not exercisable within 60 days of the
record date.
40
The following table provides information as of December 31, 2004 related
to our equity compensation plans in effect at that time.
======================================================================================================
Equity Compensation Plan Information
------------------------------------------------------------------------------------------------------
Plan Category Number of Securities to Weighted-average Number of securities
be Issued Upon Exercise Exercise Price of Remaining Available for
of Outstanding Options, Outstanding Options, Future Issuance Under
Warrants and Rights Warrants and Rights Equity Compensation
Plans
------------------------------------------------------------------------------------------------------
(a) (b) (c)
------------------------------------------------------------------------------------------------------
Equity Compensation
Plans Approved by
Security Holders 100,604(1) $11.92 155,600(2)
------------------------------------------------------------------------------------------------------
Equity Compensation -- -- --
Plans Not Approved by
Security Holders
------------------------------------------------------------------------------------------------------
Total 100,604(1) $11.92 155,600(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. 1,450
shares remain available under our 1995 Stock Option and Incentive Plan, 140,024
shares remain available under our 2002 Omnibus Incentive Plan, and 14,126 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
----------------------------------------------
Certain Transactions
The Bank has followed a policy of granting loans to eligible directors,
officers, employees and members of their immediate families for the financing of
their personal residences, for consumer purposes and general business loans. All
loans to senior officers and directors are subject to Office of Thrift
Supervision regulations restricting loans and other transactions with affiliated
persons of the Bank. Under applicable law, all loans or extensions of credit to
executive officers and directors must be made on substantially the same terms
and conditions, including interest rates and collateral, as those prevailing at
the time for comparable transactions with the general public and must not
involve more than the normal risk of repayment or present other unfavorable
features.
In this regard, all outstanding loans to directors have been made in the
ordinary course of business and on the same terms and conditions, including
interest rates and collateral, as those prevailing at the time for comparable
transactions and do not involve more than the normal risk of collectibility or
present other unfavorable features. Although, all outstanding loans to executive
officers have been made in the ordinary course of business and do not involve
more than the normal risk of collectibility, as employees, the executive
officers are eligible for a 1/2% discount from the current rate offered after
one year of service and a 1% discount from the current rate offered after 5
years of service on one consumer loan. They also receive a waiver of 50% ($250)
of the origination fee on one residential loan.
41
Item 13. 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 ***
(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 ***
(h) Amended Change of Control Agreement with Michael Zahn 10(h)
(i) Amended Change of Control Agreement with Randy J.
Sizemore 10(i)
11 Statement re: computation of per share earnings ****
13 Annual Report to Stockholders 13
14 Code of Ethics *****
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
31.1 Certification of Principal Executive Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 31.1
31.2 Certification of Principal Financial Officer Pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002 31.2
32 Certification Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 32
----------
* 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.
*** Filed as an exhibit to our Form 10-KSB filed on March 27, 2003. Such
previously filed document is hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-B.
**** See Note 1 of the Notes to Consolidated Financial Statements in the
Annual Report to Stockholders attached hereto as Exhibit 13.
***** Filed as an exhibit to our Form 10-KSB filed on March 26, 2004. Such
previously filed document is hereby incorporated herein by reference
in accordance with Item 601 of Regulation S-B.
42
Item 14. Principal Accountant Fees and Services
--------------------------------------
Crowe Chizek and Company LLC were our independent auditors for the fiscal
year ending December 31, 2004.
Audit Fees. The aggregate fees billed to Northeast Indiana by Crowe Chizek
and Company LLC for professional services rendered for the audit of Northeast
Indiana's consolidated financial statements for fiscal 2003 and 2004 and the
reviews of the consolidated financial statements included in Northeast Indiana's
Forms 10-QSB for those years were $53,550 and $59,300 respectively.
Audit-Related Fees. The aggregate fees billed to Northeast Indiana by
Crowe Chizek and Company LLC for assurance and related services that were
reasonably related to the performance of the audit of Northeast Indiana's
consolidated financial statements and the reviews of the consolidated financial
statements included in Northeast Indiana's Forms 10-QSB for fiscal 2003 and 2004
were $1,550 and $2,458, respectively.
Tax Fees. The aggregate fees billed to Northeast Indiana by Crowe Chizek
and Company LLC for professional services rendered by Crowe Chizek and Company
LLC for tax compliance, tax advice, and tax planning for fiscal 2003 and 2004
were $0 and $2,625, respectively.
All Other Fees. The aggregate fees for all other services billed to
Northeast Indiana by Crowe Chizek and Company LLC for fiscal 2003 and 2004 were
$0 and $875, respectively.
Financial Information Systems Design and Implementation Fees. There were
no fees for financial information systems design and implementation billed to
Northeast Indiana by Crowe Chizek and Company LLC for fiscal 2003 or 2004.
The Audit Committee's policy is to approve or pre-approve all audit,
audit-related, tax and permitted non-audit services performed for Northeast
Indiana by our independent auditors in accordance with Section 10A(i) of the
Securities Exchange Act of 1934, as amended, and the Securities and Exchange
Commission's rules adopted thereunder. In 2003, the Audit Committee pre-approved
the audit services provided by Crowe Chizek and Company LLC, which approximated
97.2% of the total fees paid. In 2003, the de minimus exception was used for
audit-related services that were not approved in advance by the Audit Committee.
These services approximated 2.8% of the total fees paid. In 2004, the Audit
Committee pre-approved all services provided by Crowe Chizek and Company LLC.
43
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 23, 2005 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 Randy J. Sizemore, Senior Vice
the Board, President and Chief President, Treasurer and Chief
Executive Officer Financial Officer
(Principal Executive and (Principal Financial and
Operating Officer) Accounting Officer)
Date: March 23, 2005 Date: March 23, 2005
By: /s/ Michael S. Zahn By:
-------------------------------- ----------------------------------
Michael S. Zahn, Randall C. Rider, Director
Director and Vice President
Date: March 23, 2005 Date: March 23, 2005
By: /s/ Dan L. Stephan By: /s/ J. David Carnes
-------------------------------- ----------------------------------
Dan L. Stephan, Director J. David Carnes, MD, Director
Date: March 23, 2005 Date: March 23, 2005
By: /s/ William A. Zimmer
--------------------------------
William A. Zimmer, Director
Date: March 23, 2005
44
INDEX TO EXHIBITS
Exhibit No. Document
----------- --------
--------------------------------------------------------------------------------
10(h) Amended Change of Control Agreement with Michael Zahn
10(i) Amended Change of Control Agreement with Randy J. Sizemore
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
23 Consent of Crowe Chizek and Company LLC
31.1 Certification of the Principal Executive Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the Principal Financial Officer Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
32 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002