<PAGE> 1
Registration No. [ ]
As filed with the Securities and Exchange Commission on July 30, 1999
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ST. JOSEPH CAPITAL CORPORATION
(Exact name of the registrant as specified in its charter)
DELAWARE 35-1977746 6022
(State or other (I.R.S. Employer (Primary Standard Industrial
jurisdiction of Identification No.) Classification Code Number)
incorporation or
organization)
3820 EDISON LAKES PARKWAY
MISHAWAKA, INDIANA 46545
(219) 273-9700
(Address, including zip code, and telephone number of registrant's
principal executive office)
JOHN W. ROSENTHAL
PRESIDENT
ST. JOSEPH CAPITAL CORPORATION
3820 EDISON LAKES PARKWAY
MISHAWAKA, INDIANA 46545
(219) 273-9700
(Name, address and telephone number of agent for service)
With copies to:
JOHN E. FREECHACK, ESQ.
DENNIS R. WENDTE, ESQ.
BARACK FERRAZZANO KIRSCHBAUM PERLMAN & NAGELBERG
333 W. WACKER DRIVE, SUITE 2700
CHICAGO, ILLINOIS 60606
(312) 984-3100
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: AS SOON AS PRACTICABLE
AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering.[ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule
462(d) under the Securities Act, check the following box and list the Securities
Act registration statement number of the earlier effective registration
statement for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================================
Title of Each Class of Securities to Dollar amount Proposed Maximum Proposed Maximum Amount of Registration
be Registered to be Registered Price per Unit Aggregate Offering Fee(1)
Price
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<S> <C> <C> <C> <C>
Common Stock, $0.01 par value $5,000,000(2) $________ $_____________ $1,390
====================================================================================================================================
</TABLE>
(1) The registration fee is calculated in accordance with Rule 457 (a).
(2) St. Joseph may sell an additional $3,000,000 of common shares.
THE REGISTRANT HEREBY AMENDS THE REGISTRATION STATEMENT ON SUCH DATE OR DATES AS
MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A
FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
<PAGE> 2
SUBJECT TO COMPLETION, DATED AUGUST __, 1999
$5,000,000
ST. JOSEPH CAPITAL CORPORATION
[LOGO]
COMMON STOCK
-------------------
St. Joseph Capital Corporation is offering $5 million of shares of its
common stock for sale to current stockholders. Only St. Joseph stockholders of
record as of [MAILING DATE OF PRELIMINARY PROSPECTUS], 1999 and who reside in
Indiana, Illinois, Ohio, Michigan, Wisconsin or Florida are eligible to purchase
shares of common stock through this offering.
St. Joseph's common stock is traded on the OTC Bulletin Board under the
trading symbol "SJOE". On August __, the last reported sale price for the common
stock was $___ per share.
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INVESTING IN COMMON STOCK INVOLVES RISKS. WE URGE YOU TO CAREFULLY READ
THE "RISK FACTORS" SECTION BEGINNING ON PAGE 6, WHERE WE DESCRIBE SPECIFIC RISKS
RELATED TO AN INVESTMENT IN THE COMMON STOCK AND RISKS RELATING TO ST. JOSEPH,
ALONG WITH THE REMAINDER OF THIS PROSPECTUS, BEFORE YOU MAKE YOUR INVESTMENT
DECISION.
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THESE SECURITIES ARE NOT SAVINGS ACCOUNTS, DEPOSITS OR OBLIGATIONS OF
ANY BANK AND ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION OR ANY
OTHER GOVERNMENTAL AGENCY. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR
ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES
OR PASSED UPON THE ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
PER COMMON SHARE TOTAL
-------------------------------------
<S> <C> <C>
Public offering price $[______] $5,000,000
Proceeds, before expenses, to St. Joseph Capital Corporation $[______] $5,000,000
</TABLE>
St. Joseph is offering the shares directly to its stockholders and has
not engaged any underwriter to underwrite the shares being offered. St. Joseph
will offer up to an additional $3 million of its common stock to cover
over-subscriptions, if any.
- --------------------------------------------------------------------------------
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES AND IT IS NOT SOLICITING AN OFFER TO BUY THESE
SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED.
- --------------------------------------------------------------------------------
The date of this prospectus is [_________________], 1999.
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page Page
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<S> <C>
Cautionary Statements...............................1 Management's Discussion and Analysis of
Summary.............................................2 Financial Condition and Results of
Selected Consolidated Financial Data................4 Operations......................................20
Risk Factors........................................6 Management.........................................39
Who May Invest......................................8 Certain Transactions...............................43
Use of Proceeds.....................................9 Principal Stockholders.............................43
Determination of the Offering Price Description of Capital Securities..................44
of the Stock.....................................9 Shares Eligible for Future Sale....................46
Prior Market Prices and Dividend Policy.............9 Legal Matters......................................46
Business...........................................10 Experts............................................47
Supervision and Regulation.........................13 Where You Can Find Information.....................47
Index to Financial Statements.....................F-1
</TABLE>
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS PROSPECTUS.
WE HAVE NOT AUTHORIZED ANY OTHER PERSON TO PROVIDE YOU WITH DIFFERENT
INFORMATION. THIS PROSPECTUS IS NOT AN OFFER TO SELL, NOR IS IT AN OFFER TO BUY,
THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT PERMITTED. THE
INFORMATION IN THIS PROSPECTUS IS COMPLETE AND ACCURATE AS OF THE DATE ON THE
FRONT COVER, BUT THE INFORMATION MAY HAVE CHANGED SINCE THAT DATE.
CAUTIONARY STATEMENTS
Statements which are not historical facts contained or incorporated by
reference in this prospectus are forward-looking statements that involve risks
and uncertainties that could cause actual results to differ from projected
results. Factors that could cause actual results to differ materially include
the factors discussed in "Risk Factors" as well as continued success of St.
Joseph's community banking strategy, general economic conditions, economic
conditions in the "Michiana" area of Michigan and Indiana, the monetary policy
of the Federal Reserve, changes in interest rates, changes in inflation and
changes in the state and federal regulatory regime applicable to St. Joseph's
operations.
Information included and incorporated by reference in this prospectus
includes forward-looking statements, which can be identified by the use of
forward-looking terminology such as may, will, expect, anticipate, believe,
estimate, continue or comparable terminology. The statements in "Risk Factors"
and other statements and disclaimers in this prospectus constitute cautionary
statements identifying important factors, including risks and uncertainties,
relating to the forward-looking statements that could cause actual results to
differ materially from those reflected in the forward-looking statements.
1
<PAGE> 4
SUMMARY
The items in the following summary are described in more detail later
in this prospectus. Therefore, you should also read the more detailed
information set forth in this prospectus, our financial statements and the other
information that is incorporated by reference in this prospectus. Unless the
context clearly suggests otherwise, references in this prospectus to "us," "we,"
"St. Joseph" or "the Company" include St. Joseph Capital Corporation and its
wholly owned subsidiary, St. Joseph Capital Bank.
ST. JOSEPH CAPITAL CORPORATION
We are a bank holding company that owns the St. Joseph Capital Bank, a
full-service commercial banking institution located in Mishawaka, Indiana. The
bank provides a broad range of banking products and services, including credit,
cash management and deposit services to its targeted client base of executives
and professionals and small to medium-sized businesses. Our market area
encompasses a substantial portion of the Indiana communities of Mishawaka, South
Bend, Notre Dame, Granger, Osceola and Elkhart, as well as certain Michigan
communities, including Niles, Edwardsburg and Cassopolis. Due to the overlap of
this metropolitan area over state lines, this region is often referred to as
"Michiana." At June 30, 1999, we had total assets of $108.0 million, loans of
$66.1 million and deposits of $82.8 million.
The individuals who organized the company continue to represent a
strategic advantage for us. Our directors are experienced business people who
have had significant experience as directors or executive officers of other
financial institutions prior to becoming involved with us.
Our company started its banking operations on February 13, 1997, with
the goal of building a locally owned and managed financial institution to meet
the banking needs of our clients. As part of our operating strategy, we strive
to offer clients a high level of service on a consistent basis. Total assets
have increased fivefold from $21.2 million at March 31, 1997, to $108.0 million
at June 30, 1999. Our rapid growth over the past two years has largely been a
product of our success in attracting targeted individuals and businesses to
become clients, coupled with our ability to recruit and retain a
community-oriented management team with significant commercial banking
experience in the Michiana area. We have also taken advantage of the customer
disruption caused by the acquisition of a number of the area's other locally
owned financial institutions by large regional and super-regional bank holding
companies.
Our rapid growth to date, coupled with our desire to take advantage of
additional opportunities to increase our market share, lead us to believe that
we should increase the capital in our banking subsidiary to support additional
growth. We believe that additional growth will eventually allow us to take
advantage of the operating leverage available to a larger financial institution.
We have been profitable in each of the previous three quarters and profitable on
a trailing twelve-month basis. However, our overall asset growth rate continues
to exceed the growth rate of our retained earnings. An increase of the bank's
capital will allow us to increase our lending limit which we believe will enable
us to compete more effectively in our marketplace.
A hallmark of our operation has been our commitment to operate out of a
single location as a way of keeping tight control on overhead expenses. The
delivery of our banking services is accomplished through our headquarters
facility, a courier service program, our ATM/debit card product, our postage
paid bank-by-mail program, telephone banking and computer banking. The diversity
of our delivery systems enables our clients to choose the method of banking
which is most convenient for them. While no such plans currently exist, we may
also expand our product offerings, expand into new markets or make strategic
acquisitions of other financial institutions in the future. We intend to
continue to pursue an aggressive growth strategy focused on the addition of
experienced banking personnel in the Michiana area, while also maintaining
strong asset quality and enhancing our profitability.
We currently maintain our office at 3820 Edison Lakes Parkway,
Mishawaka, Indiana, 46545. Our telephone number is (219) 273-9700.
2
<PAGE> 5
THE OFFERING
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<S> <C>
The issuer................................ St. Joseph Capital Corporation
Shares being offered...................... $5 million of common stock will be initially offered with an
over-subscription option of an additional $3 million of common stock.
Price per share........................... The price per share will be [ ].
Eligibility restrictions.................. Only St. Joseph stockholders of record as of [MAILING DATE OF THE
PRELIMINARY PROSPECTUS], 1999, who reside in Indiana, Illinois, Ohio,
Michigan, Wisconsin or Florida will be eligible to participate in this
offering.
Over the counter "Bulletin-Board"
Trading Symbol.......................... "SJOE"
Use of proceeds........................... We plan to invest a significant portion of the net proceeds of the
offering into the bank in order to fund investments in loans and
securities. The remaining proceeds will be used for general corporate
purposes or expansion into other lines of business closely related to
banking.
How to invest............................. If you are interested in participating in this offering, please complete the stock
order form that is being sent to stockholders with the final prospectus. Please
include your payment for the shares along with the order form. If you have questions
about this offering, you may also contact Mr. John W. Rosenthal or Mr. Edward R.
Pooley at St. Joseph Capital Corporation at 3820 Edison Lakes Parkway, Mishawaka,
Indiana 46545, (219) 273-9700 or (800) 890-2798.
</TABLE>
3
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SELECTED CONSOLIDATED FINANCIAL DATA
The summary consolidated financial data presented below is derived from
our consolidated financial statements as of and for the periods indicated,
annualized where applicable. From the date of our inception in February, 1996
through December 31, 1996, St. Joseph and the bank conducted no business other
than the matters incidental to their organization and opening for business. The
bank commenced business on February 13, 1997. In our opinion, all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of results as of or for the periods indicated have been included. This
information should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Consolidated
Financial Statements and the notes thereto included with this prospectus.
Results for past periods are not necessarily indicative of results to be
expected for any future period.
<TABLE>
<CAPTION>
AS OF OR FOR PERIOD AS OF OR FOR PERIOD
ENDED JUNE 30, ENDED DECEMBER 31,
------------------- --------------------------------
1999 1998 1998 1997 1996
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(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
SUMMARY OF FINANCIAL CONDITION
Total assets $107,967 $ 74,090 $ 96,604 $ 50,839 $ 11,841
Total cash and cash equivalents 12,473 10,059 15,719 4,535 1,410
Interest-bearing time deposits in
other financial institutions -- -- -- 500 --
Securities available for sale 27,548 31,154 31,066 22,351 10,128
Loans receivable, net of
allowance for loan losses 65,181 31,330 48,011 21,991 --
Total deposits 82,807 57,050 76,390 34,916 --
FHLB advances 3,500 -- 2,000 -- --
Total stockholders' equity 11,052 11,201 11,611 11,257 11,793
Average stockholders' equity 11,595 11,195 11,296 11,628 4,754
Average total assets 98,276 61,284 71,232 31,283 4,892
SUMMARY OF OPERATING RESULTS
Total interest and dividend
income $ 3,265 $ 2,094 $ 4,790 $ 2,022 $ 197
Total interest expense 1,689 1,178 2,699 942 8
-------- -------- -------- -------- --------
Net interest income 1,576 916 2,091 1,080 189
Provision for loan losses 206 200 392 360 --
Total noninterest income 43 20 158 4 --
Total noninterest expense 1,238 955 2,086 1,486 479
-------- -------- -------- -------- --------
Income (loss) before income taxes 175 (219) (229) (762) (29)
Income tax expense -- -- -- -- --
Net income (loss) 175 (219) (229) (762) (29)
</TABLE>
<PAGE> 7
<TABLE>
<CAPTION>
AS OF OR FOR PERIOD AS OF OR FOR PERIOD
ENDED JUNE 30, ENDED DECEMBER 31,
------------------- --------------------------------
1999 1998 1998 1997 1996
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<S> <C> <C> <C> <C> <C>
SUPPLEMENTAL DATA
Return on average total assets .36% (.71)% (.32)% (2.44) (5.93)%
Return on average stockholders' equity 3.02 (3.91) (2.03) (6.55) (6.10)
Net interest rate spread(1) 2.67 1.95 2.09 1.61 (1.25)
Net yield on average interest-earning assets(2) 3.42 3.18 3.15 3.72 4.58
Net interest income to operating expenses(3) 127.28 95.83 100.21 72.65 39.49
Average stockholders' equity to average total assets 11.80 18.27 15.86 37.17 97.18
Average interest-earning assets to average
interest-bearing liabilities 120.72 130.21 126.52 165.02 3,103.01
Nonperforming assets to total assets -- -- -- -- --
Nonperforming loans to total loans receivable -- -- -- -- --
Allowance for loan losses to total loans
receivable 1.45 1.76 1.54 1.61 --
Allowance for loan losses to nonperforming
loans receivable -- -- -- -- --
Basic income (loss) per common share $ .14 $ (.17) $ (.18) $ (.60) $ (.23)
Diluted income (loss) per common share $ .13 $ (.17) $ (.18) $ (.60) $ (.23)
Dividends declared per common share -- -- -- -- --
Book value per common share $ 8.62 $ 8.77 $ 9.08 $ 8.87 $ 9.32
</TABLE>
- ---------------
(1) Interest rate spread is calculated by subtracting average interest rate
cost from average interest rate earned.
(2) Net interest income divided by average interest-earning assets.
(3) Operating expenses consist of other expenses less taxes,
<PAGE> 8
RISK FACTORS
You should carefully read the following risk factors and other sections
of this prospectus before purchasing any shares of common stock.
WE HAVE A LIMITED OPERATING HISTORY
Because the bank opened for business in February, 1997, St. Joseph and
the bank have only a limited operating history. Although our board of directors
and our management are generally pleased with St. Joseph's and the bank's
progress through the date of this prospectus, St. Joseph and the bank remain
subject to the risks inherent in the establishment of a new business enterprise.
Although we have recorded a profit for each of the last three quarters, we still
have an accumulated deficit of approximately $1.1 million as of June 30, 1999.
WE FACE LENDING RISKS AND LIMITS ON OUR ABILITY TO LOAN MONEY
The risk of nonpayment of loans is inherent in commercial banking, and
such nonpayment, if it occurs, may have a material adverse effect on our
earnings, overall financial condition and ability to pay dividends in the
future. Moreover, we focus primarily on lending to small to medium sized
businesses. As a result, we may assume greater lending risks than financial
institutions that have a lesser concentration of such loans and tend to make
loans to larger companies. Additionally, we have made many of these loans
recently, so there is no significant repayment history against which we can
fully assess the adequacy of our allowance for loan losses. We could be
adversely affected by these and other risks related to our loans. Borrower
defaults resulting in losses in excess of our allowance for loan losses could
have a material adverse effect on our profitability and financial condition.
The legal lending limit for the bank is approximately $1.6 million,
although the board of directors has established an "in-house" limit of
$1,350,000. Accordingly, the size of the loans which we can offer to potential
clients is less than the size of loans which most of our competitors with larger
lending limits are able to offer. This limit affects our ability to seek
relationships with the area's larger businesses. Through previous experience and
relationships with a number of the region's other financial institutions, we are
generally able to accommodate loan volumes in excess of our lending limit
through the sale of participations in such loans to other banks. However, there
can be no assurance that we will be successful in attracting or maintaining
clients seeking larger loans or that we will be able to engage in participations
of such loans on terms favorable to us.
OUR BUSINESS IS CONCENTRATED IN THE MICHIANA AREA
Substantially all of our business is from the Michiana area.
Unfavorable or worsening economic conditions in the Michiana area could have a
material adverse effect on us in a number of ways. The number of borrowers
unable to timely repay their loans could significantly increase. There could be
a decline in the value of the properties securing our loans. Clients may also
reduce the amount of their deposits if the economic condition worsens.
WE DETERMINED THE OFFERING PRICE
The offering price for the common stock of $[ ] per share was
determined by our board of directors. The board did not solicit or obtain any
independent appraisals of the value of the common stock. The price does not
necessarily bear any relationship to the assets, earnings or other known
criteria of value of St. Joseph, and there can be no assurance that the market
price for the common stock will remain at or rise above its historical trading
prices. Over the last six months, the price of the common stock, as quoted on
the OTC Bulletin Board, ranged from $_____ to $_____ per share.
INTEREST RATES AND OTHER CONDITIONS IMPACT OUR RESULTS OF OPERATIONS
Our profitability is in part a function of the spread between the
interest rates earned on investments and loans and the interest rates paid on
deposits and other interest-bearing liabilities. In the early 1990s, many
6
<PAGE> 9
banking organizations experienced historically high interest rate spreads. More
recently, interest rate spreads have generally narrowed due to changing market
conditions and competitive pricing pressure, and these circumstances may
continue.
Like most banking institutions, our net interest spread and margin will
be affected by general economic conditions and other factors, including fiscal
and monetary policies of the federal government, that influence market interest
rates and our ability to respond to changes in such rates. At any given time,
our assets and liabilities will be such that they are affected differently by a
given change in interest rates. As a result, an increase or decrease in rates,
the length of loan terms or the mix of adjustable and fixed rate loans in our
portfolio could have a positive or negative effect on our net income, capital
and liquidity. There can be no assurance that the positive trends or
developments discussed in this prospectus will continue or that negative trends
or developments will not have a material adverse effect on us.
WE MAY NOT PAY ANY DIVIDENDS IN THE FUTURE
It is anticipated that we will not pay dividends on the common stock
for the immediately foreseeable future. It is likely that St. Joseph will be
largely dependent upon dividends paid by the bank for funds to pay dividends on
the common stock, if and when such dividends are declared. The bank does not
anticipate paying dividends during at least the next year of its operations. No
assurance can be given that future earnings of the bank, and any resulting
dividends to St. Joseph, will be sufficient to permit the legal payment of
dividends to our stockholders at any time in the future. Even if we may legally
declare dividends, the amount and timing of such dividends will be at the
discretion of St. Joseph's board of directors. The board may in its sole
discretion decide not to declare dividends.
WE RELY HEAVILY ON OUR MANAGEMENT
We are dependent upon the efforts and services of John W. Rosenthal and
our other senior officers. The loss of the services of Mr. Rosenthal could have
a material adverse effect on our operations. Although we currently have an
employment agreement with Mr. Rosenthal, there can be no assurance that he will
continue to be employed with us into the future. St. Joseph is the beneficiary
of a $1.5 million life insurance policy on Mr. Rosenthal.
WE HAVE A CONTINUING NEED FOR TECHNOLOGICAL CHANGE
The banking industry is undergoing rapid technological changes with
frequent introductions of new technology-driven products and services. In
addition to better serving customers, the effective use of technology increases
efficiency and enables financial institutions to reduce costs. Our future
success will depend in part upon our ability to address the needs of our clients
by using technology to provide products and services that will satisfy customer
demands for convenience as well as to create additional efficiencies in our
operations. Many of our competitors have substantially greater resources to
invest in technological improvements. There can be no assurance that we will be
able to effectively implement new technology-driven products and services or be
successful in marketing such products and services to our clients.
UNCERTAINTY EXISTS WITH RESPECT TO THE YEAR 2000
The year 2000 has posed a unique set of challenges to those industries
reliant on information technology. As a result of methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the year 2000 from the year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the industry's
dependence on electronic data processing systems. In addition, the bank's
clients may withdraw their deposits due to uncertainty of the impact of year
2000 issues, resulting in decreased liquidity of the bank. Due to the
uncertainty inherent in the year 2000 problem, resulting primarily from the
uncertainty of the year 2000 readiness of our clients and other third parties,
we are unable to determine at this time whether the consequences of year 2000
failures will have a material adverse impact on our financial condition and
profitability.
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<PAGE> 10
THERE IS STRONG COMPETITION IN THE FINANCIAL SERVICES INDUSTRY
We compete for loan and deposit clients with other banks and thrifts
located in the Michiana area, as well as other financial services organizations
such as brokerage firms, insurance companies and money market mutual funds, all
of whom aggressively solicit customers within our market area by advertising
through direct mail, the electronic media and other means. Many of these
competitors have been in business for many years, have established customer
bases and are substantially larger than us. Many of the financial institutions
have substantially higher lending limits than we do and are able to offer
services, including international banking services, that we can offer only
through correspondents, if at all. In addition, many of these entities have
greater capital resources than we do, and some of these are not subject to our
same degree of regulation.
OUR GROWTH STRATEGY INVOLVES RISKS THAT MAY NEGATIVELY IMPACT OUR NET INCOME
We have pursued and continue to pursue an internal growth strategy, the
success of which will depend primarily on generating an increasing level of
loans and deposits at acceptable risk levels without corresponding increases in
non-interest expenses. Our growth strategy has been to operate out of a single
location. While no plans currently exist, we may establish new branches and
product areas, expand into new markets or make strategic acquisitions of other
financial institutions, which may require significant upfront investments in
technology, personnel and site locations. There can be no assurance that we will
be successful in continuing our growth strategy and in continuing to improve or
maintain our net income by leveraging our non-interest expenses.
WE ARE SUBJECT TO SIGNIFICANT GOVERNMENT REGULATION
We are subject to extensive regulation by the Federal Reserve, Federal
Deposit Insurance Corporation and the Indiana Department of Financial
Institutions. Supervision, regulation and examination of banks and bank holding
companies by bank regulatory agencies are intended primarily for the protection
of depositors rather than stockholders of these entities. These governmental
agencies examine bank holding companies and commercial banks, establish capital
and other financial requirements and approve acquisitions or other changes of
control of these financial institutions. Our ability to establish new facilities
or make acquisitions is conditioned upon the receipt of required regulatory
approvals from the Federal Reserve and other applicable regulatory bodies.
Changes in legislation and regulations will continue to have a significant
impact on the banking industry. Although some of the legislative and regulatory
changes may benefit the bank, others will increase its costs of doing business
and assist competitors which are not subject to similar regulation.
WHO MAY INVEST
To provide the most economical means of raising capital for St. Joseph,
we are offering the common stock directly to our stockholders. We have not
engaged an underwriter to sell the common stock, and we have chosen to offer the
common stock only to existing stockholders who reside in certain states. This
strategy is intended to save us the cost of paying a third party to sell the
common stock as well as to save the cost of state securities filings in states
where few of our stockholders reside. Therefore, only St. Joseph stockholders of
record as of [MAILING DATE OF THE PRELIMINARY PROSPECTUS], 1999 who reside in
Indiana, Illinois, Ohio, Michigan, Wisconsin or Florida are eligible to purchase
shares of common stock through this offering. St. Joseph's executive officers
are able to offer and sell the common stock in all of the states where the stock
is being offered. We have complete discretion to reject subscriptions, in whole
or in part, or allot to a particular investor fewer than the number of shares of
common stock subscribed for by the investor.
In the distribution of the final prospectus, we have enclosed a stock
order form. If you are eligible, and interested in participating in this
offering, we encourage you to complete the order form and return it to the
address on the front of the enclosed envelope. Please include your payment for
the shares along with the order form. If you have any questions about this
offering, you may contact Mr. John W. Rosenthal or Mr. Edward R. Pooley at St.
Joseph at 3820 Edison Lakes Parkway, Mishawaka, Indiana 46545, (219) 273-9700 or
(800) 890-2798.
8
<PAGE> 11
USE OF PROCEEDS
No commissions have been or will be paid in connection with the sale of
the common stock. We intend to raise between $5 million and $8 million, net of
expenses, through this offering. A majority of the net proceeds will be invested
in the bank and will be used to fund investments in loans and securities. The
remaining proceeds will be used for general corporate purposes or expansion into
other lines of business closely related to banking.
The additional capital in the bank will allow us to increase our
lending limit which we believe will enable enhance our ability to compete for
and attract larger loans. This additional capital will also allow for
continuation of the bank's growth by providing a larger capital base and
providing the flexibility for possible expansion of the bank's product line or
the expansion into new markets.
DETERMINATION OF THE OFFERING PRICE OF THE STOCK
Our board of directors determined the offering price for the common
stock. The price does not necessarily bear any relationship to the assets,
earnings or other known criteria of value of St. Joseph, and there can be no
assurance that the market price for the common stock will remain at or rise
above its historical trading prices. The best indication of the true value of
shares of the common stock is the price agreed to between a willing buyer and a
willing seller, each being under no compulsion to buy or sell. While we have
recorded a profit for each of the last three quarters, we still retain an
accumulated deficit of approximately $1.1 million arising from a combination of
start-up costs and initial losses. Our book value per share, as of June 30,
1999, was approximately $8.62.
PRIOR MARKET PRICES AND DIVIDEND POLICY
As of June 30, 1999, we had approximately 70 holders of record of the
common stock and we estimate that we had 435 stockholders holding their shares
in street name. The following table shows, for the periods indicated, the high
and low closing prices of transactions in St. Joseph's common stock as quoted on
the OTC Bulletin Board. Other private transactions may have occurred during the
periods indicated of which St. Joseph has no knowledge. There has been no
regular and liquid trading market for the common stock, and there is not an
expectation that this will change after the offering. The following prices
represent inter-dealer prices without retail markups, markdowns or commissions.
No dividends have been paid on the common stock since St. Joseph's inception in
1996.
<TABLE>
<CAPTION>
PER SHARE
PRICES
1996 HIGH LOW
---- ---- ---
<S> <C> <C>
September 30, 1996 $ 10.625 $ 10.000 *
December 31, 1996 10.750 10.625
1997
----
March 31, 1997 $ 12.125 $ 10.750
June 30, 1997 13.375 12.125
September 30, 1997 16.000 13.000
December 31, 1997 17.250 16.000
1998
----
March 31, 1998 $ 22.000 $ 17.250
June 30, 1998 20.000 18.000
September 30, 1998 20.000 16.250
December 31, 1998 18.250 16.375
1999
----
March 31, 1999 $ 18.250 $ 16.50
June 30, 1999 16.375 15.00
</TABLE>
* Represents the initial public offering price of the common stock.
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<PAGE> 12
We expect that all of St. Joseph's and the bank's earnings, if any,
will continue to be retained to finance the growth of St. Joseph and the bank
and that no cash dividends will be paid for the foreseeable future. If and when
dividends are declared, St. Joseph will probably be largely dependent upon
dividends paid by the bank for funds to pay dividends on the common stock. It is
also possible, however, that St. Joseph will pay dividends in the future
generated from investment income and other activities of St. Joseph.
Under Indiana law, the bank will be restricted as to the maximum amount
of dividends it may pay on its common stock. The Indiana Financial Institutions
Act provides that an Indiana bank may not pay dividends in an amount greater
than its undivided profits or if the payment of dividends would impair a bank's
capital. Moreover, the approval of Indiana's Department of Financial
Institutions is required for the payment of any dividend if the aggregate amount
of all dividends paid by the bank during such calendar year, including the
proposed dividend, would exceed the sum of: (i) the total net profits of the
bank for that year; and (ii) the retained net profits of the bank for the
previous two years. The Department of Financial Institutions and the Federal
Deposit Insurance Corporation are also authorized under certain circumstances to
prohibit the payment of dividends by the bank. In the case of St. Joseph, the
Delaware General Corporation Law would allow St. Joseph to pay dividends only
out of its surplus, or if none, out of the current and/or the past fiscal year's
net profits. Further restrictions on dividends may also be imposed by the
Federal Reserve.
BUSINESS
GENERAL
We are a bank holding company that owns the St. Joseph Capital Bank, a
full-service commercial banking institution located in Mishawaka, Indiana. The
bank provides a broad range of banking products and services, including credit,
cash management and deposit services to its targeted client base of executives
and professionals and small to medium-sized businesses. Our market area
encompasses a substantial portion of the Indiana communities of Mishawaka, South
Bend, Notre Dame, Granger, Osceola and Elkhart, as well as certain Michigan
communities, including Niles, Edwardsburg and Cassopolis. Due to the overlap of
this metropolitan area over state lines, this region is often referred to as
"Michiana." At June 30, 1999, we had total assets of $108.0 million, loans of
$66.1 million and deposits of $82.8 million.
The individuals who organized the company continue to represent a
strategic advantage for us. Our directors are experienced business people who
have had significant experience as directors or executive officers of other
financial institutions prior to becoming involved with us. Specifically, six of
our directors have been or currently serve as executive officers of financial
institutions.
Our company started its banking operations on February 13, 1997 with
the goal of building a locally owned and managed financial institution to meet
the banking needs of our clients. As part of our operating strategy, we strive
to offer clients a high level of service on a consistent basis. Total assets
have increased fivefold from $21.2 million at March 31, 1997 to $108.0 million
at June 30, 1999. Our rapid growth over the past two years has largely been a
product of our success in attracting targeted individuals and businesses to
become clients, coupled with our ability to recruit and retain a
community-oriented management team with significant commercial banking
experience in the Michiana area. We have also taken advantage of the customer
disruption caused by the acquisition of a number of the area's other locally
owned financial institutions by large regional and super-regional bank holding
companies.
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<PAGE> 13
Our rapid growth to date, coupled with our desire to take advantage of
additional opportunities to increase our market share, lead us to believe that
we should increase the capital in our banking subsidiary to support additional
growth. We believe that additional growth will eventually allow us to take
advantage of the operating leverage available to a larger financial institution.
Many of our expenses are fixed costs. Increasing our client base allows us to
spread those costs over a larger universe of clients thereby improving our
operating efficiency. We have been profitable in each of the previous three
quarters and profitable on a trailing twelve-month basis. However, our overall
asset growth rate continues to exceed the growth rate of our retained earnings.
An increase of the bank's capital will allow us to increase our lending limit
which we believe will enable us to compete more effectively in our marketplace.
A hallmark of our operation has been our commitment to operate out of a
single location as a way of keeping tight control on overhead expenses. The
delivery of our banking services is accomplished through our headquarters
facility, a courier service program, our ATM/debit card product, our postage
paid bank-by-mail program, telephone banking and computer banking. The diversity
of our delivery systems enables our clients to choose the method of banking
which is most convenient for them. While no plans currently exist, we may also
expand our product offerings, expand into new markets or make strategic
acquisitions of other financial institutions in the future. We intend to
continue to pursue an aggressive growth strategy focused on the addition of
experienced banking personnel in the Michiana area, while also maintaining
strong asset quality and enhancing our profitability.
We have and will continue to price our loan products and deposit
products competitively. The net interest income generated by the lending and
deposit gathering activities of the bank should continue to increase as the
overall size of the bank increases.
We currently maintain our office at 3820 Edison Lakes Parkway,
Mishawaka, Indiana, 46545. Our telephone number is (219) 273-9700.
BUSINESS STRATEGY
The bank expects to establish a high standard of quality in each
service it provides, and the employees of the bank are expected to emphasize
service in their dealings with clients. We believe that the use of
state-of-the-art technology will permit each employee to devote more time and
attention to personal service, respond more quickly to a client's requests and
deliver services in the most timely manner possible.
Our goal is to create a "client-driven" organization focused on
providing high value to clients by promptly delivering products and services
matched directly to their needs. Furthermore, we expect to gain market share by
developing strong ties to our community. In this regard, most of our directors
currently hold, and have held in the past, leadership positions in a number of
community organizations, and intend to continue this active involvement in
future years. Members of the senior management team are also involved in
leadership positions in a variety of community organizations, and intend to
continue this active involvement in future years. Additionally, all employees
are encouraged to be active in civic, charitable or social organizations located
in the Michiana area.
The bank offers a broad range of deposit services, including checking
accounts, money market accounts, savings accounts and time deposits of various
types, as well as a full range of short to intermediate term personal and
commercial loans. Commercial loans include lines of credit to finance accounts
receivable and inventory, term loans to finance machinery and equipment, as well
as commercial mortgages to finance land and buildings. The bank makes personal
loans directly to its clients for various purposes, including purchases of
automobiles, boats and other recreational vehicles, manufactured homes, home
improvements, education and personal investments. The bank also makes
residential mortgage loans and substantially all of them are retained by the
bank and consist of balloon payment, adjustable and fixed rate mortgages. The
bank also offers other services, including credit cards, cashiers checks,
traveler's checks and automated teller access.
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<PAGE> 14
LENDING ACTIVITIES
The bank provides a broad range of commercial and retail lending
services to corporations, partnerships and individuals. The bank actively
markets its services to qualified borrowers. Lending officers actively solicit
the business of new borrowers entering their market areas as well as
long-standing members of the local business community. The bank has established
lending policies which include a number of underwriting factors to be considered
in making a loan, including location, loan to value ratio, cash flow, interest
rate and the credit history of the borrower.
The bank's legal lending limit is approximately $1,620,000. The board
of directors has established an "in-house" limit of $ 1,350,000. The board may
from time to time raise or lower the "in-house" limit as it deems appropriate to
comply with safe and sound banking practices and respond to overall economic
conditions.
As part of the loan monitoring activity at the bank, the officers' loan
committee meets weekly to review loan portfolio dynamics. The bank's loan review
officers present detailed reports on the loan portfolio to the board during
monthly board meetings. Management has attempted to identify problem loans at an
early stage and to aggressively seek a resolution of these situations.
COMMERCIAL LOANS. The bank is an active commercial lender in the
Michiana area. The bank's areas of emphasis include, but are not limited to,
loans to manufacturers, building contractors, developers and business services
companies. The bank also provides a wide range of business loans, including
lines of credit for working capital and operational purposes, as well as term
loans for the acquisition of equipment and other purposes. Collateral for these
loans generally includes accounts receivables, inventory, equipment and real
estate. In additional, the bank has taken personal guarantees to help assure
payment when appropriate. Terms of commercial business loans generally range
from one to five years. A significant portion of the bank's commercial business
loans have floating interest rates or re-price within one year. The bank also
makes commercial real estate loans, which are generally secured by the
underlying real estate and improvements. However, the bank may also require
additional assets of the borrower as collateral.
RESIDENTIAL REAL ESTATE MORTGAGE LOANS. The main focus of the bank's
lending activity continues to be on the commercial side and residential
mortgages have been viewed by us primarily as a way for the bank to attract and
service targeted clients. The bank offers a variety of adjustable rate products
as well as traditional 15-year fixed rate loans. The growth in the residential
loan portfolio has in part been due to the fact that historically low interest
rates over the last few years have induced a large number of home owners to
refinance existing home mortgages and an equally large number to acquire or
construct homes. The bank has retained substantially all real estate loans in
its portfolio.
CONSUMER LOANS. The bank provides all types of consumer loans including
motor vehicles, home improvement, home equity, signature loans and small
personal credit lines. The bank has no indirect lending, and intends to actively
seek to increase its personal lines of credit and home equity loans.
COMPETITION
The bank's market area is competitive. St. Joseph competes for loans
principally through the range and quality of service it provides and interest
rates. St. Joseph believes that its reputation in the communities it serves and
personal service philosophy enhance its ability to compete favorably in
attracting and retaining individual and business clients. St. Joseph actively
solicits deposits by offering clients personal attention, professional service
and competitive interest rates.
There are approximately 11 other commercial banks, 6 savings and loans
13 credit unions, along with other financial institutions, that currently
operate in the primary market area of the bank. In addition, many other
financial institutions based in the communities surrounding these areas also
actively compete for customers within these market areas. The bank also faces
competition from finance companies, insurance companies, mortgage
12
<PAGE> 15
companies, securities brokerage firms, money market mutual funds, loan
production offices and other providers of financial services.
MARKET AREA
The bank offers a full range of commercial and consumer banking
services primarily within a fifteen mile radius of its main office located in
Mishawaka, Indiana. This area encompasses a substantial portion of the Indiana
communities of Mishawaka, South Bend, Notre Dame, Granger, Osceola and Elkhart,
and certain Michigan communities, including Niles, Cassopolis and Edwardsburg.
Due to the overlap of this metropolitan area over state lines, this region is
often referred to as "Michiana."
According to the St. Joseph County Chamber of Commerce, the cost of
living index in the South Bend - Mishawaka metropolitan statistical area was
92.6% or 7.4% less than the national average. Total employment in the county at
September 30, 1998 was 136,500 with unemployment at 2.4%. The local economy is
diversified among manufacturing, retail and wholesale trades, and service
industries. The area's retail, distribution, convention and tourism, health care
and services sectors have expanded to offset the decrease in manufacturing jobs
which has occurred in recent years. The University of Notre Dame, with over
10,000 students on the northeast side of the city of South Bend, is the area's
largest employer and contributes to the stability of the local economy. South
Bend is also home to eight other colleges and technical schools providing
additional stability and access to a skilled work force.
The Michiana area has also become a large provider of health care
services. Memorial Hospital and St. Joseph's Regional Medical Center together
employed approximately 6,000 residents at December 31, 1998. Allied Signal, Inc.
and A. M. General Corp. are two of the region's largest manufacturers, and the
area is also home to a number of small manufacturing, retail and service
businesses. Many major manufacturing companies are also located in adjacent
Elkhart County, including Bayer Corporation, Coachmen Industries, CTS
Corporation and Skyline Corporation. We believe this diverse commercial base
provides significant potential for business banking services, together with
personal banking services for owners and employees of these entities.
EMPLOYEES
We have 30 full-time equivalent employees. None of our employees are
covered by a collective bargaining agreement with St. Joseph or the bank. We
consider our employee relations to be excellent.
PROPERTIES
We leased the premises for the bank's main office until we purchased
the building for $800,000 in May, 1999. This facility serves as the main office
of the bank as well as our corporate headquarters and is located at 3820 Edison
Lakes Parkway, Mishawaka, Indiana. The premises consist of a 9,600 square foot,
two-story brick building constructed in 1988 with parking for approximately 60
vehicles. The building is located on a major thoroughfare in Mishawaka,
approximately 2 miles south of Interstate 80.
The bank has four interior teller stations and a night depository
facility. We believe the facility will be adequate to meet the needs of St.
Joseph and the bank for the foreseeable future. We believe that the building is
adequately covered by insurance.
SUPERVISION AND REGULATION
GENERAL
Financial institutions and their holding companies are extensively
regulated under federal and state law. As a result, the growth and earnings
performance of St. Joseph can be affected not only by management decisions and
general economic conditions, but also by the requirements of applicable state
and federal statutes and
13
<PAGE> 16
regulations and the policies of various governmental regulatory authorities,
including the Board of Governors of the Federal Reserve System, the Federal
Deposit Insurance Corporation, the Indiana Department of Financial Institutions,
the Internal Revenue Service and state taxing authorities and the Securities and
Exchange Commission. The effect of applicable statutes, regulations and
regulatory policies can be significant, and cannot be predicted with a high
degree of certainty.
Federal and state laws and regulations generally applicable to
financial institutions, such as St. Joseph and its subsidiary, regulate, among
other things, the scope of business, investments, reserves against deposits,
capital levels relative to operations, the nature and amount of collateral for
loans, the establishment of branches, mergers, consolidations and dividends. The
system of supervision and regulation applicable to St. Joseph and its subsidiary
establishes a comprehensive framework for their respective operations and is
intended primarily for the protection of the Federal Deposit Insurance
Corporation's deposit insurance funds and the depositors, rather than the
stockholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to St. Joseph and its subsidiary. It does not describe
all of the statutes, regulations and regulatory policies that apply to St.
Joseph and the bank, nor does it restate all of the requirements of the
statutes, regulations and regulatory policies that are described. As such, the
following is qualified in its entirety by reference to the applicable statutes,
regulations and regulatory policies. Any change in applicable law, regulations
or regulatory policies may have a material effect on the business of St. Joseph
and the bank.
RECENT REGULATORY DEVELOPMENTS
PENDING LEGISLATION. Legislation has been introduced in the Congress
that would allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. The expanded powers generally would be available to a bank holding
company only if the bank holding company and its bank subsidiary remain
well-capitalized and well-managed. At this time, St. Joseph is unable to predict
whether the proposed legislation will be enacted and, therefore, is unable to
predict the impact the legislation may have on St. Joseph and the bank.
THE COMPANY
GENERAL. St. Joseph, as the sole shareholder of the bank, is a bank
holding company. As a bank holding company, St. Joseph is registered with, and
is subject to regulation by, the Federal Reserve under the Bank Holding Company
Act. In accordance with Federal Reserve policy, St. Joseph is expected to act as
a source of financial strength to the bank and to commit resources to support
the bank in circumstances where St. Joseph might not otherwise do so. Under the
Bank Holding Company Act, St. Joseph is subject to periodic examination by the
Federal Reserve. St. Joseph is also required to file with the Federal Reserve
periodic reports of St. Joseph's operations and any additional information
regarding St. Joseph and its subsidiary as the Federal Reserve may require. St.
Joseph is also subject to regulation by the Department of Financial Institutions
under Indiana law.
INVESTMENTS AND ACTIVITIES. Under the Bank Holding Company Act, a bank
holding company must obtain Federal Reserve approval before: (i) acquiring,
directly or indirectly, ownership or control of any voting shares of another
bank or bank holding company if, after the acquisition, it would own or control
more than 5% of the shares of the other bank or bank holding company; (ii)
acquiring all or substantially all of the assets of another bank; or (iii)
merging or consolidating with another bank holding company. The Federal Reserve
may allow a bank holding company to acquire banks located in any state of the
United States without regard to whether the acquisition is prohibited by the law
of the state in which the target bank is located. In approving interstate
acquisitions, however, the Federal Reserve is required to give effect to
applicable state law limitations on the aggregate amount of deposits that may be
held by the acquiring bank holding company and its insured depository
institution affiliates in the state in which the target bank is located,
provided that those limits do not discriminate against out-of-state depository
institutions or their holding companies, and state laws which require that the
target
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<PAGE> 17
bank have been in existence for a minimum period of time, not to exceed five
years, before being acquired by an out-of-state bank holding company.
The Bank Holding Company Act also generally prohibits St. Joseph from
acquiring direct or indirect ownership or control of more than 5% of the voting
shares of any company which is not a bank and from engaging in any business
other than that of banking, managing and controlling banks or furnishing
services to banks and their subsidiaries. This general prohibition is subject to
a number of exceptions. The principal exception allows bank holding companies to
engage in, and to own shares of companies engaged in, certain businesses found
by the Federal Reserve to be "so closely related to banking ... as to be a
proper incident thereto." Under current regulations of the Federal Reserve, St.
Joseph is permitted to engage in a variety of banking-related businesses,
including the operation of a thrift, sales and consumer finance, equipment
leasing, the operation of a computer service bureau, and mortgage banking and
brokerage. The Bank Holding Company Act generally does not place territorial
restrictions on the domestic activities of non-bank subsidiaries of bank holding
companies.
Federal law also prohibits any person or company from acquiring
"control" of a bank or a bank holding company without prior notice to the
appropriate federal bank regulator. "Control" is defined in certain cases as the
acquisition of 10% of the outstanding shares of a bank or bank holding company.
CAPITAL REQUIREMENTS. Bank holding companies are required to maintain
minimum levels of capital in accordance with Federal Reserve capital adequacy
guidelines. If capital falls below minimum guideline levels, a bank holding
company, among other things, may be denied approval to acquire or establish
additional banks or non-bank businesses.
The Federal Reserve's capital guidelines establish the following
minimum regulatory capital requirements for bank holding companies: a risk-based
requirement expressed as a percentage of total risk-weighted assets, and a
leverage requirement expressed as a percentage of total assets. The risk-based
requirement consists of a minimum ratio of total capital to total risk-weighted
assets of 8%, at least one-half of which must be Tier 1 capital. The leverage
requirement consists of a minimum ratio of Tier 1 capital to total assets of 3%
for the most highly rated companies, with a minimum requirement of 4% for all
others. For purposes of these capital standards, Tier 1 capital consists
primarily of permanent stockholders' equity less intangible assets, not
including various mortgage servicing rights and purchased credit card
relationships. Total capital consists primarily of Tier 1 capital plus certain
other debt and equity instruments which do not qualify as Tier 1 capital and a
portion of the company's allowance for loan and lease losses.
The risk-based and leverage standards described above are minimum
requirements. Higher capital levels will be required if warranted by the
particular circumstances or risk profiles of individual banking organizations.
For example, the Federal Reserve's capital guidelines contemplate that
additional capital may be required to take adequate account of, among other
things, interest rate risk, or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities. Further, any banking
organization experiencing or anticipating significant growth would be expected
to maintain capital ratios, including tangible capital positions, well above the
minimum levels.
Under the Federal Reserve's guidelines, the capital standards described
above apply on a consolidated basis to bank holding companies that have more
than $150 million in total consolidated assets, but generally apply on a
bank-only basis to bank holding companies that, like St. Joseph, have less than
$150 million in total consolidated assets. Nevertheless, as of June 30, 1999,
St. Joseph had regulatory capital, calculated on a consolidated basis, in excess
of the Federal Reserve's minimum requirements, with a risk-based capital ratio
of 17.3% and a leverage ratio of 11.5%.
DIVIDENDS. The Delaware General Corporation Law allows St. Joseph to
pay dividends only out of its surplus or if St. Joseph has no such surplus, out
of its net profits for the fiscal year in which the dividend is declared and/or
the preceding fiscal year. Additionally, the Federal Reserve has issued a policy
statement with regard to the payment of cash dividends by bank holding
companies. The policy statement provides that a bank
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<PAGE> 18
holding company should not pay cash dividends which exceed its net income or
which can only be funded in ways that weaken the bank holding company's
financial health, such as by borrowing. The Federal Reserve also possesses
enforcement powers over bank holding companies and their non-bank subsidiaries
to prevent or remedy actions that represent unsafe or unsound practices or
violations of applicable statutes and regulations. Among these powers is the
ability to proscribe the payment of dividends by banks and bank holding
companies.
FEDERAL SECURITIES REGULATION. St. Joseph's common stock is registered
with the Securities and Exchange Commission under the Securities Act. St.
Joseph's common stock has not been registered under the Securities Exchange Act
of 1934. However, it voluntarily complies with the information, proxy
solicitation and certain other restrictions and requirements of the Exchange
Act.
THE BANK
GENERAL. The bank is an Indiana-chartered bank, the deposit accounts of
which are insured by the Federal Deposit Insurance Corporation's Bank Insurance
Fund. As a Bank Insurance Fund-insured, Indiana-chartered bank, the bank is
subject to the examination, supervision, reporting and enforcement requirements
of the Department of Financial Institutions, as the chartering authority for
Indiana banks, and the Federal Deposit Insurance Corporation, as administrator
of the Bank Insurance Fund.
DEPOSIT INSURANCE. As a Federal Deposit Insurance Corporation-insured
institution, the bank is required to pay deposit insurance premium assessments
to the Federal Deposit Insurance Corporation. The Federal Deposit Insurance
Corporation has adopted a risk-based assessment system under which all insured
depository institutions are placed into one of nine categories and assessed
insurance premiums based upon their respective levels of capital and results of
supervisory evaluations. Institutions classified as well-capitalized and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized and considered of substantial supervisory concern pay the
highest premium. Risk classification of all insured institutions is made by the
Federal Deposit Insurance Corporation for each semi-annual assessment period.
During the year ended December 31, 1998, Bank Insurance Fund
assessments ranged from 0% of deposits to 0.27% of deposits. For the semi-annual
assessment period beginning January 1, 1999, Bank Insurance Fund assessment
rates will continue to range from 0% of deposits to 0.27% of deposits.
The Federal Deposit Insurance Corporation may terminate the deposit
insurance of any insured depository institution if the Federal Deposit Insurance
Corporation determines, after a hearing, that the institution (i) has engaged or
is engaging in unsafe or unsound practices, (ii) is in an unsafe or unsound
condition to continue operations or (iii) has violated any applicable law,
regulation, order, or any condition imposed in writing by, or written agreement
with, the Federal Deposit Insurance Corporation. The Federal Deposit Insurance
Corporation may also suspend deposit insurance temporarily during the hearing
process for a permanent termination of insurance if the institution has no
tangible capital. Management of St. Joseph is not aware of any activity or
condition that could result in termination of the deposit insurance of the bank.
FICO ASSESSMENTS. Since 1987, a portion of the deposit insurance
assessments paid by members of the Federal Deposit Insurance Corporation's
Savings Association Insurance Fund ("SAIF") has been used to cover interest
payments due on the outstanding obligations of the Financing Corporation
("FICO"). FICO was created in 1987 to finance the recapitalization of the
Federal Savings and Loan Insurance Corporation, the SAIF's predecessor insurance
fund. As a result of federal legislation enacted in 1996, beginning as of
January 1, 1997, both SAIF members and Bank Insurance Fund members became
subject to assessments to cover the interest payments on outstanding FICO
obligations. These FICO assessments are in addition to amounts assessed by the
Federal Deposit Insurance Corporation for deposit insurance. Until January 1,
2000, the FICO assessments made against Bank Insurance Fund members may not
exceed 20% of the amount of the FICO assessments made against SAIF members.
Between January 1, 2000 and the final maturity of the outstanding FICO
obligations in 2019, Bank Insurance Fund members and SAIF members will share the
cost of the interest on the FICO bonds on a proportional basis. During the year
ended December 31, 1998, the FICO assessment rate for SAIF members ranged
between approximately 0.061% of deposits and approximately 0.063% of deposits,
while the
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<PAGE> 19
FICO assessment rate for Bank Insurance Fund members ranged between
approximately 0.012% of deposits and approximately 0.013% of deposits. During
the year ended December 31, 1998, the bank paid FICO assessments totaling
$5,034.
SUPERVISORY ASSESSMENTS. All Indiana banks are required to pay
supervisory assessments to the Department of Financial Institutions to fund the
operations of the Department of Financial Institutions. During the year ended
December 31, 1998, the bank paid supervisory assessments to the Department of
Financial Institutions totaling $6,754.
CAPITAL REQUIREMENTS. The Federal Deposit Insurance Corporation has
established the following minimum capital standards for state-chartered insured
non-member banks, such as the bank: a leverage requirement consisting of a
minimum ratio of Tier 1 capital to total assets of 3% for the most highly-rated
banks with a minimum requirement of at least 4% for all others, and a risk-based
capital requirement consisting of a minimum ratio of total capital to total
risk-weighted assets of 8%, at least one-half of which must be Tier 1 capital.
For purposes of these capital standards, Tier 1 capital and total capital
consist of substantially the same components as Tier 1 capital and total capital
under the Federal Reserve's capital guidelines for bank holding companies.
The capital requirements described above are minimum requirements.
Higher capital levels will be required if warranted by the particular
circumstances or risk profiles of individual institutions. For example, the
regulations of the Federal Deposit Insurance Corporation provide that additional
capital may be required to take adequate account of, among other things,
interest rate risk or the risks posed by concentrations of credit,
nontraditional activities or securities trading activities.
As a condition to being granted federal deposit insurance, the Federal
Deposit Insurance Corporation required the bank to maintain a minimum leverage
ratio of 8% during the first three years of the bank's operations. As of June
30, 1999, the bank exceeded its applicable regulatory capital requirements with
a leverage ratio of 9.9% and a risk-based capital ratio of 15.6%.
Federal law provides the federal banking regulators with broad power to
take prompt corrective action to resolve the problems of undercapitalized
institutions. The extent of the regulators' powers depends on whether the
institution in question is "well capitalized," "adequately capitalized,"
"undercapitalized," "significantly undercapitalized" or "critically
undercapitalized," in each case as defined by regulation. Depending upon the
capital category to which an institution is assigned, the regulators' corrective
powers include: requiring the institution to submit a capital restoration plan;
limiting the institution's asset growth and restricting its activities;
requiring the institution to issue additional capital stock or to be acquired;
restricting transactions between the institution and its affiliates; restricting
the interest rate the institution may pay on deposits; ordering a new election
of directors of the institution; requiring that senior executive officers or
directors be dismissed; prohibiting the institution from accepting deposits from
correspondent banks; requiring the institution to divest certain subsidiaries;
prohibiting the payment of principal or interest on subordinated debt; and
ultimately, appointing a receiver for the institution. As of June 30, 1999, the
bank was well capitalized, as defined by Federal Deposit Insurance Corporation
regulations.
DIVIDENDS. Indiana law prohibits the bank from paying dividends in an
amount greater than its undivided profits. The bank is required to obtain the
approval of the Department of Financial Institutions for the payment of any
dividend if the aggregate amount of all dividends paid by the bank during any
calendar year, including the proposed dividend, would exceed the sum of: (i) the
total net profits of the bank for that year; and (ii) the retained net profits
of the bank for the previous two years. Indiana law defines, "net profits" to
mean the sum of all earnings from current operations plus actual recoveries on
loans, investments and other assets, less the sum of all current operating
expenses, actual losses, accrued dividends on preferred stock, if any and all
federal, state and local taxes.
The payment of dividends by any financial institution or its holding
company is affected by the requirement to maintain adequate capital pursuant to
applicable capital adequacy guidelines and regulations, and a
17
<PAGE> 20
financial institution generally is prohibited from paying any dividends if,
following payment thereof, the institution would be undercapitalized. As
described above, the bank exceeded its minimum capital requirements under
applicable guidelines as of June 30, 1999. As of June 30, 1999, there were no
funds available to be paid as dividends to St. Joseph by the bank.
Notwithstanding the availability of funds for dividends, however, the Federal
Deposit Insurance Corporation may prohibit the payment of any dividends by the
bank if it determines such payment would constitute an unsafe or unsound
practice.
INSIDER TRANSACTIONS. The bank is subject to certain restrictions
imposed by federal law on extensions of credit to St. Joseph and its subsidiary,
on investments in the stock or other securities of St. Joseph and its subsidiary
and the acceptance of the stock or other securities of St. Joseph or its
subsidiary as collateral for loans. Certain limitations and reporting
requirements are also placed on extensions of credit by the bank to its
directors and officers, to directors and officers of St. Joseph and its
subsidiary, to principal stockholders of St. Joseph, and to "related interests"
of such directors, officers and principal stockholders. In addition, federal law
and regulations may affect the terms upon which any person becoming a director
or officer of St. Joseph or its subsidiary or a principal stockholder of St.
Joseph may obtain credit from banks with which the bank maintains a
correspondent relationship.
SAFETY AND SOUNDNESS STANDARDS. The federal banking agencies have
adopted guidelines which establish operational and managerial standards to
promote the safety and soundness of federally insured depository institutions.
The guidelines set forth standards for internal controls, information systems,
internal audit systems, loan documentation, credit underwriting, interest rate
exposure, asset growth, compensation, fees and benefits, asset quality and
earnings. In addition, in October 1998, the federal banking regulators issued
safety and soundness standards for achieving Year 2000 compliance, including
standards for developing and managing Year 2000 project plans, testing
remediation efforts and planning for contingencies.
In general, the safety and soundness guidelines prescribe the goals to
be achieved in each area, and each institution is responsible for establishing
its own procedures to achieve those goals. If an institution fails to comply
with any of the standards set forth in the guidelines, the institution's primary
federal regulator may require the institution to submit a plan for achieving and
maintaining compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary federal regulator, the regulator is
required to issue an order directing the institution to cure the deficiency.
Until the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstances. Noncompliance with the standards established by the safety and
soundness guidelines may also constitute grounds for other enforcement action by
the federal banking regulators, including cease and desist orders and civil
money penalty assessments.
BRANCHING AUTHORITY. Indiana banks, such as the bank, have the
authority under Indiana law to establish branches anywhere in the State of
Indiana, subject to receipt of all required regulatory approvals.
Under the Riegle-Neal Interstate Banking and Branching Efficiency Act
of 1994, both state and national banks are allowed to establish interstate
branch networks through acquisitions of other banks, subject to certain
conditions, including certain limitations on the aggregate amount of deposits
that may be held by the surviving bank and all of its insured depository
institution affiliates. The establishment of new interstate branches or the
acquisition of individual branches of a bank in another state, rather than the
acquisition of an out-of-state bank in its entirety, is allowed by the
Riegle-Neal Act only if specifically authorized by state law. The legislation
allowed individual states to "opt-out" of certain provisions of the Riegle-Neal
Act by enacting appropriate legislation prior to June 1, 1997. Indiana has
enacted legislation permitting interstate mergers subject to certain conditions,
including a prohibition against interstate mergers involving Indiana banks that
have been in existence and continuous operation for fewer than five years.
Additionally, Indiana law allows out-of-state banks to acquire individual branch
offices in Indiana and to establish new branches in Indiana subject to certain
conditions, including a requirement that the laws of the state in which the
out-of-state bank is headquartered grant Indiana banks authority to acquire or
to establish branches in such state.
18
<PAGE> 21
STATE BANK ACTIVITIES. Under federal law and Federal Deposit Insurance
Corporation regulations, Federal Deposit Insurance Corporation insured state
banks are prohibited, subject to certain exceptions, from making or retaining
equity investments of a type, or in an amount, that are not permissible for a
national bank. Federal law and Federal Deposit Insurance Corporation regulations
also prohibit Federal Deposit Insurance Corporation insured state banks and
their subsidiaries, subject to certain exceptions, from engaging as principal in
any activity that is not permitted for a national bank or its subsidiary,
respectively, unless the bank meets, and continues to meet, its minimum
regulatory capital requirements and the Federal Deposit Insurance Corporation
determines the activity would not pose a significant risk to the deposit
insurance fund of which the bank is a member. These restrictions have not had,
and are not currently expected to have, a material impact on the operations of
the bank.
FEDERAL RESERVE SYSTEM. Federal Reserve regulations, as presently in
effect, require depository institutions to maintain non-interest earning
reserves against their transaction accounts, primarily NOW and regular checking
accounts, as follows: for transaction accounts aggregating $46.5 million or
less, the reserve requirement is 3% of total transaction accounts; and for
transaction accounts aggregating in excess of $46.5 million, the reserve
requirement is $1.395 million plus 10% of the aggregate amount of total
transaction accounts in excess of $46.5 million. The first $4.9 million of
otherwise reservable balances are exempted from the reserve requirements. These
reserve requirements are subject to annual adjustment by the Federal Reserve.
The bank is in compliance with the foregoing requirements.
19
<PAGE> 22
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion provides additional information regarding our
operations and financial condition for the six month periods ended June 30, 1999
and 1998, and each of the years ended December 31, 1998, 1997 and 1996. This
discussion should be read in conjunction with "Selected Consolidated Financial
Data" and our consolidated financial statements and the accompanying notes
thereto included or incorporated by reference elsewhere in this prospectus.
OVERVIEW
St. Joseph was formed in February, 1996 for the purpose of organizing
the bank. The bank opened in February 1997 with $10.0 million in assets and grew
to approximately $108.0 million as of June 30, 1999. We expect continued
opportunities for growth, even though the rate of growth will probably be slower
than we have experienced to date.
We reported earnings of $174,793 or $.14 basic and $.13 diluted income
per common share for the first six months of 1999 as compared to a net loss of
$(219,474) or $(.17) basic and diluted loss per common share for the same period
in 1998. This increase resulted primarily from increased interest income as a
result of the growth of the loan portfolio. The fourth quarter of 1998 was the
first quarterly period during which we posted a profit, after only approximately
a year and a half of operations. As anticipated, since our inception we have
incurred start-up costs resulting in an accumulated deficit of $1.1 million at
June 30, 1999.
Our results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on loans and
securities and the interest paid on deposits and borrowings. Our operating
results are also affected by sources of noninterest income, including deposit
account service charge fees, loan fees and other income. Our operating expenses
include employee compensation and benefits, occupancy, equipment expense and
other noninterest expenses. Our operating results are also affected by economic
and competitive conditions, particularly changes in interest rates, government
policies and actions of regulatory authorities. The majority of our loan
portfolio is invested in commercial loans. Deposits from commercial clients
represent a significant funding source as well.
We have added equipment and employees to accommodate historical growth
and anticipated growth. As such, overhead expenses have had a significant impact
on earnings. Our primary challenge currently, from a profitability standpoint,
is to increase our net interest income. Additional growth will enable us to
continue to increase net interest income.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1999 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1998
OVERVIEW. Consolidated net income for the six month period ended June
30, 1999 was $174,793 as compared to a net loss of $(219,474) for the same
period in 1998 for an increase of $394,267. Income per common share for the
first six months of 1999 increased to $.14 basic and $.13 diluted from a basic
and diluted loss of $(.17) for the first six months of 1998. The increase in net
income was comprised of increases in both net interest income after provision
for loan losses of $654,504 and noninterest income of $22,721 reduced by
increases in noninterest expense of $282,958.
NET INTEREST INCOME. Net interest income for the six months ended June
30, 1999 and 1998, amounted to $1.6 million and $0.9 million, respectively, and
represented the difference between interest income earned on earning assets and
interest expense paid on interest bearing liabilities.
Interest income increased by $1.2 million, from $2.1 million for the
six month period ended June 30, 1998 to $3.3 million for the six month period
ended June 30, 1999. The 57.1% rise in interest income was basically
attributable to greater average outstanding balances in interest earning assets,
principally loans receivable. Interest income should continue to grow as the
loan portfolio and other interest earning assets increase.
Interest expense increased by $0.5 million, from $1.2 million for the
six month period ended June 30,
20
<PAGE> 23
1998 to $1.7 million for the six month period ended June 30, 1999. The 41.7%
rise in interest expense was primarily attributable to greater average
outstanding balances in interest bearing liabilities. Interest expense should
also continue to increase as deposits and Federal Home Loan Bank advances and
other borrowings grow.
PROVISION FOR LOAN LOSSES. The provision for loan losses is established
based on factors such as the local and national economy and the risk associated
with the loans in the portfolio. The provision for loan losses was $206,000 for
the six month period ended June 30, 1999 compared to $200,005 in the same period
in 1998. At June 30, 1999, the allowance for loan losses was $957,675 or 1.45%
of total loans receivable compared to $560,005 or 1.76% at June 30, 1998. The
increase in the allowance for loan losses is a result of the growth of the loan
portfolio and management's risk assessment of the portfolio. The decrease in the
percentage of allowance for loan losses to total loans receivable between
periods is a result of management's risk assessment of the portfolio. The risk
assessment is based on numerous statistical factors including the specific asset
class of each loan (i.e. commercial, residential or consumer), the internal risk
rating of each loan, specific industry concentrations, an assessment for large
dollar and unsecured loans and specific reserves for watchlist credits.
We have not experienced any charge-offs from loans receivable since
inception. At June 30, 1999, no portion of the allowance for loan losses was
allocated to impaired loan balances, as there were no loans considered impaired.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of a
similar nature such as residential mortgage, consumer and credit card loans, and
on an individual loan basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loan's existing rate, or at the
fair value of collateral if repayment is expected solely from the collateral.
Loans receivable are evaluated for impairment when payments are delayed,
typically 90 days or more, or when it is probable that all principal and
interest amounts will not be collected according to the original terms of the
loan.
Management allocated approximately 65% of the allowance for loan losses
to commercial loans, 12% to residential real estate mortgage loans and 5% to
installment loans at June 30, 1999, leaving 18% unallocated. There were no
non-performing loans at June 30, 1999. Management believes the allowance for
loan losses at June 30, 1999 was adequate to absorb existing losses in the loan
portfolio.
NONINTEREST INCOME. Noninterest income increased by $22,721, from
$20,330 for the six month period ended June 30, 1998 to $43,051 for the six
month period ended June 30, 1999. Noninterest income during the first half of
1998 consisted of income from gains on sales and calls of securities available
for sale, depository account service fees and other miscellaneous fees.
Noninterest income during the first half of 1999 consisted of income from
depository account service fees and other miscellaneous fees. The 111.8%
increase was primarily due to depository account service fees of $40,288.
NONINTEREST EXPENSE. The main components of noninterest expense were
primarily salaries and benefits, occupancy and equipment, professional fees and
data processing fees for both periods. Noninterest expense for the six months
ended June 30, 1999 was $1,238,255 as compared to $955,297 for the same period
in 1998, an increase of $282,958. Management continues to attempt to control
overhead expenses without impairing the quality of service provided to clients.
The following table sets forth the various categories of noninterest
expense for the six month periods ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
Six Months Ended June 30,
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Salaries and employee benefits $ 694,992 $ 481,346 44.39%
Occupancy and equipment expense 226,484 219,962 2.97
Advertising and promotion 20,110 21,396 (6.01)
Client courier 9,979 37,817 (73.61)
Data processing 70,679 50,592 39.70
Incorporation expense 4,588 3,078 49.06
Liability insurance 11,878 14,204 (16.38)
Printing, postage, stationery and supplies 29,692 18,500 60.50
Professional dues and memberships 10,841 6,550 65.51
Professional fees 45,360 55,389 (18.11)
Telephone 20,755 14,334 44.80
Other 92,897 32,129 189.14
------------- -------------
$ 1,238,255 $ 955,297 29.62
============= ============= ========
</TABLE>
21
<PAGE> 24
Salaries and benefits experienced the most significant dollar increase of
any noninterest expense component. For the six months ended June 30, 1999, total
salaries and benefits were $694,992 compared to $481,346 for the six months
ended June 30, 1998. The change was primarily attributable to the increase in
the number of employees from 17 at June 30, 1998 to 27 at June 30, 1999, as well
as merit and cost of living raises.
Other expense experienced the largest single percentage increase within the
noninterest expense category. For the six months ended June 30, 1999 and June
30, 1998, other expense increased to $92,897 or $60,768 over the 1998 six month
total of $32,129. The change was primarily attributable to the increase in
business development expenses associated with attracting new and retaining
existing clients as well as other normal miscellaneous expenses associated with
our growth.
The reduction in the expense associated with our courier service was a
result of bringing the operations of the courier service in-house versus paying
a third party vendor for courier services. The percentage increase in data
processing of 39.70% and printing, postage, stationary and supplies of 60.50%
continued to be associated with the growth in the number of account holders. The
percentage increases in other categories were mainly attributable to the
increased volume of transactions handled due to the growing number of clients.
INCOME TAXES. The potential future income tax benefit from the financial
statement net operating losses in the years 1998, 1997 and 1996 has not been
reflected in the consolidated financial statements. A valuation allowance has
been recorded to offset the excess of deferred tax assets over deferred tax
liabilities. As we continue to be profitable, the valuation allowance will
continue to be reduced and the tax benefit from these losses will be realized.
The federal and state income tax benefit from tax return net operating losses
can be carried forward for twenty years and fifteen years, respectively, from
the time of the loss before they expire.
As of June 30, 1999, we would have approximately $285,000 and $101,000 of
tax return net operating loss carryforwards available for federal and state
income tax purposes expiring in 2016 and 2017 for federal purposes and 2011 and
2012 for state purposes, if tax returns were filed as of June 30, 1999.
1998 COMPARED WITH 1997
OVERVIEW. Net loss for the year ended December 31, 1998 was $(228,519)
compared to $(762,120) for the year ended December 31, 1997. Our results
improved primarily because of a $979,114 increase in net interest income after
provision for loan losses, and a $154,486 increase in noninterest income. These
increases were offset by a $599,999 increase in noninterest expense due
primarily to the increased number of employees and higher operating costs
related to the increased volume of business. The fourth quarter of 1998 was the
first quarterly period during which we posted a profit, after only approximately
a year and a half of operations. As anticipated, during that initial time period
we incurred start-up costs resulting in an accumulated deficit of $1.3 million
at December 31, 1998.
NET INTEREST INCOME. Net interest income for the years ended December
31, 1998 and December 31, 1997 amounted to $2.1 million and $1.1 million,
respectively, and represented the difference between interest income earned on
earning assets and interest expense paid on interest bearing liabilities.
Interest income increased to $4.8 million in 1998 from $2.0 million in
1997, an increase of $2.8 million. This was primarily due to greater average
outstanding balances in interest earning assets. Interest income is comprised
primarily of interest income on loans (including fees), securities and federal
funds sold.
Interest expense increased to $2.7 million in 1998 from $1.0 million in
1997, an increase of $1.7 million, which primarily represents interest paid to
depositors and to the Federal Home Loan Bank for advances and federal funds
purchased. The increase in interest expense was again primarily due to greater
average outstanding balances in interest bearing liabilities.
PROVISION FOR LOAN LOSS. The provision for loan losses charged to
operations was based partially on management's estimation of potential losses
from their evaluation of portfolio risk and economic factors. The provision for
loan losses was $391,675 for the year ended December 31, 1998, compared to
$360,000 for the year ended December 31, 1997. The provision for loan losses
during 1998 was primarily in response to the growth in the loan portfolio during
1998. At December 31, 1998, the allowance for loan losses was 1.54% of total
loans
22
<PAGE> 25
receivable compared to 1.61% at December 31, 1997. There were no nonperforming
loans at December 31, 1998 or December 31, 1997.
NONINTEREST INCOME. Noninterest income increased by $154,486 to
$158,872 in 1998 from $4,386 in 1997. The most significant component of
noninterest income was the net gains on sales and calls of securities available
for sale. Net gains on securities available for sale were $116,644 in 1998
compared to $2,139 in 1997. The gains received on the sale of securities were a
result of securities sales for liquidity needs and similar gains may not be
realized with future sales. Other noninterest income consisted of depository
account service fees. Depository account service fees were $32,228 and $2,247 in
1998 and 1997, respectively. The increase in depository account service fees
will continue to grow as the number of commercial depository accounts increases.
NONINTEREST EXPENSE. Noninterest expense consisted primarily of
salaries and benefits, occupancy and equipment, professional fees, data
processing fees and client courier charges. Noninterest expense increased to
$2.1 million in 1998 from $1.5 million in 1997. The $0.6 million, or 40.0%,
increase was primarily due to higher overhead expense on the increased volume of
business attained during 1998.
The following table sets forth the various categories of noninterest
expense for the years ended December 31, 1998 and 1997.
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 % Change
---- ---- --------
<S> <C> <C> <C>
Salaries and employee benefits $ 1,047,262 $ 756,388 38.46%
Occupancy and equipment expense 449,496 301,478 49.10
Advertising and promotion 49,659 48,403 2.59
Client courier 92,297 49,317 87.15
Data processing 110,531 64,107 72.42
Incorporation expense 6,156 6,156 0.00
Liability insurance 26,461 25,200 5.00
Printing, postage, stationery and supplies 46,287 44,221 4.67
Professional dues and memberships 21,258 16,082 32.19
Professional fees 112,786 84,921 32.81
Telephone 31,884 22,951 38.92
Other 92,283 67,137 37.45
------------- -------------
$ 2,086,360 $ 1,486,361 40.37
============= =============
</TABLE>
In 1998, salaries and benefits experienced the most significant dollar
increase of any noninterest expense component. For the year ended December 31,
1998, total salaries and benefits increased to $1.0 million or $0.3 million over
the 1997 total of $0.7 million. The change was primarily attributable to the
increase in the number of employees from 17 at December 31, 1997 to 23 at
December 31, 1998, as well as to merit and cost of living raises.
In 1998, client courier expense experienced the largest single
percentage increase within the noninterest expense category. For the year ended
December 31, 1998, client courier expense increased to $92,297 or $42,980 over
the 1997 total of $49,317. The change was primarily attributable to the need to
lease additional cars and hire additional drivers to service the growth in
commercial depository clients utilizing the courier service.
The percentage increase in occupancy and equipment expense of 49.1%
during 1998 was a result of additional equipment needed to operate the bank. The
increase in data processing expense of 72.4% was a result of increased fees
associated with a larger number of client accounts and a higher level of
transactions. Professional fees consist of legal and accounting fees. The 32.8%
increase was attributable to additional professional services for regulatory
reporting, SEC reporting as well as consulting services. The percentage
increases in the other categories were primarily attributable to the increased
volume of transactions we handled due to our growing number of clients.
INCOME TAXES. The potential future income tax benefit from the
financial statement net operating losses in 1998, 1997 and 1996 has not been
reflected in the consolidated financial statements. A valuation allowance has
been recorded to offset the excess of deferred tax assets over deferred tax
liabilities. As we become profitable, the valuation allowance will be reduced
and a tax benefit will be realized. The federal and state income tax benefit
from tax return net operating losses can be carried forward for twenty years and
fifteen years, respectively, from the time of the loss before they expire.
As of December 31, 1998, we had $687,245 and $522,703 of tax return net
operating loss carryforwards available for federal and state income tax purposes
expiring in 2016 and 2017 for federal purposes and 2011 and 2012 for state
purposes.
23
<PAGE> 26
1997 COMPARED WITH THE PERIOD FROM FEBRUARY 29, 1996 (DATE OF INCEPTION) TO
DECEMBER 31, 1996
OVERVIEW. Net loss for the year ended December 31, 1997 was $(762,120)
compared to $(290,219) for the year ended December 31, 1996. The increase in net
loss was expected due to the overhead expenses required to form, open and
operate the bank. Since the only activity performed during 1996 was related to
the organization and formation of the bank, a discussion concerning the
percentage increases between 1997 and 1996 would not be meaningful and has not
been included in the comparative analysis. The bank began operations in February
1997.
NET INTEREST INCOME. Net interest income for 1997 and 1996 amounted to
$1.1 million and $0.2 million, respectively, and represents the difference
between interest income earned on earning assets and interest expense paid on
interest bearing liabilities. Primarily all of the change from 1996 to 1997 was
a result of greater average outstanding balances in interest earning assets and
interest bearing liabilities as a result of the bank beginning operations in
February of 1997.
Interest income increased to $2.0 million in 1997 from $0.2 million in
1996, an increase of $1.8 million. The bank began operations in February of 1997
and primarily all of the change from 1996 to 1997 was a result of greater
average outstanding balances in interest earning assets.
Interest expense increased to $942,324 in 1997 from $7,656 in 1996, an
increase of $934,668, and represented interest paid primarily to depositors, as
well as interest paid on federal funds purchased. The increase in interest
expense was again primarily due to greater average outstanding balances in
interest bearing liabilities.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $360,000
for 1997. No provision for loan losses was recorded during 1996 due to the bank
not starting operations until February, 1997. The level of the provision for
loan losses during 1997 was primarily related to the growth in the loan
portfolio during 1997. At December 31, 1997, the allowance for loan losses was
1.61% of total loans receivable. There were no nonperforming loans at December
31, 1997.
NONINTEREST INCOME. Noninterest income was $4,386 in 1997 and none in
1996. Noninterest income resulted from net gains on sales of securities
available for sale and other income.
NONINTEREST EXPENSE. Noninterest expense consisted primarily of
salaries and benefits, occupancy and equipment, professional fees, data
processing fees, client courier service and advertising costs. Noninterest
expense increased to $1.5 million in 1997 from $0.5 million in 1996. The $1.0
million increase was primarily due to higher overhead expense involved in
opening and staffing the bank.
The following table sets forth the various categories of noninterest
expense for the years ended December 31, 1997 and 1996.
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996
---- ----
<S> <C> <C>
Salaries and employee benefits $ 756,388 $ 272,088
Occupancy and equipment expense 301,478 29,588
Advertising and promotion 48,403 23,487
Client courier 49,317 0
Data processing 64,107 2,650
Incorporation expense 6,156 30,819
Liability insurance 25,200 2,158
Printing, postage, stationery and supplies 44,221 31,639
Professional dues and memberships 16,082 8,238
Professional fees 84,921 55,805
Telephone 22,951 8,148
Other 67,137 15,000
------------- -------------
$ 1,486,361 $ 479,620
============= =============
</TABLE>
In 1997, salaries and benefits experienced the most significant dollar
increase of any noninterest expense component. Total salaries and benefits
increased to $756,388 or $484,300 over the 1996 total of $272,088. The change
was attributable to the increase in the number of employees needed to open and
operate the bank.
24
<PAGE> 27
INCOME TAX EXPENSE. The potential future income tax benefit from the
net operating losses in 1997 and 1996 has not been reflected in the consolidated
financial statements. A valuation allowance has been recorded to offset the
excess of deferred tax assets over deferred tax liabilities. As we become
profitable, the valuation allowance will be reduced and a tax benefit will be
realized. The federal and state income tax benefit from tax return net operating
losses can be carried forward for twenty years and fifteen years, respectively,
from the time of the loss before they expire.
RESULTS OF OPERATIONS - ADDITIONAL STATISTICAL INFORMATION
Our net income is derived primarily from net interest income. Net
interest income is the difference between interest income, principally from
loans and investment securities, and interest expense, principally on client
deposits and borrowings. Changes in net interest income result from changes in
volume, net interest spread and net interest margin. Volume refers to average
dollar levels of interest earning assets and interest bearing liabilities. Net
interest spread refers to the difference between the average yield on interest
earning assets and the average cost of interest bearing liabilities. Net
interest margin refers to the net interest income divided by average interest
earning assets and is influenced by the level and relative mix of interest
earning assets and interest bearing liabilities.
The following tables set forth information for the periods indicated
with regard to average balances of assets and liabilities, as well as the total
dollar amounts of interest income from interest earning assets and interest
expense on interest bearing liabilities and resultant yields or costs
(annualized where applicable), net interest income, net interest spread, net
interest margin, and the ratio of average interest earning assets to average
interest bearing liabilities:
25
<PAGE> 28
The following are the average balance sheets for the six month periods
ended June 30:
<TABLE>
<CAPTION>
---------------------------------------------------------------------
1999 1998
------------------------------------ --------------------------------
Interest Average Interest Average
Average Earned Yield Or Average Earned Yield Or
Balance Or Paid Cost Balance Or Paid Cost
----------- ---------- ------------ ----------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold $3,980 $ 98 4.92% $ 4,578 $ 125 5.46%
Interest-bearing deposits in
other financial institutions 128 5 7.81 205 7 6.83
Securities available for sale-
taxable (1) 29,687 875 5.90 24,748 760 6.16
FHLB stock 360 15 8.33 - - -
Loans receivable (2) 57,966 2,272 7.84 28,115 1,202 8.55
-------- -------- --------- ---------
Total interest earning assets (1) 92,121 3,265 7.09% 57,646 2,094 7.27%
Noninterest-earning assets:
Cash and due from banks $ 5,261 $ 2,672
Allowance for loan losses (841) (447)
Premises and equipment, net 962 858
Accrued interest receivable and
other assets 773 555
-------- ---------
Total assets $ 98,276 $ 61,284
======== ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings, NOW and money market $ 42,408 902 4.25% $ 19,747 505 5.11%
Certificates of deposit 21,729 529 4.87 19,335 546 5.65
Securities sold under agreements
to repurchase 8,801 181 4.11 5,077 124 4.88
Federal funds purchased 123 3 4.88 112 3 5.36
FHLB advances 3,250 74 4.55 - - -
-------- -------- --------- ---------
Total interest bearing
liabilities 76,311 1,689 4.43% 44,271 1,178 5.32%
-------- ---------
Noninterest-bearing liabilities
Noninterest-bearing demand 10,007 5,616
Accrued interest payable and
other liabilities 363 203
------ --------
Total liabilities 86,681 50,090
Stockholders' equity 11,595 11,194
-------- ---------
Total liabilities and
stockholders' equity $ 98,276 $ 61,284
======== =========
Net interest income/Spread $1,576 2.66% $ 916 1.95%
====== ==== ====== ====
Net interest income as a percent of
average interest earning assets 3.42% 3.18%
==== ====
</TABLE>
26
<PAGE> 29
The following are the average balance sheets for the years ended
December 31:
<TABLE>
<CAPTION>
1998
----
Interest Average
Average Earned Yield Or Average
Balance Or Paid Cost Balance
------- ------- ---- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold $ 6,114 $ 325 5.32% $ 3,132
Interest bearing deposits in other financial
institutions 88 7 7.95 617
Securities available for sale-taxable (1) 27,459 1,652 6.08 15,414
FHLB stock 115 9 7.83 -
Loans receivable (2) 32,955 2,797 8.49 9,895
--------- --------- ---------
Total interest earning assets (1) 66,731 4,790 7.21% 29,058
Noninterest-earning assets:
Cash and due from banks $ 3,644 $ 1,386
Allowance for loan losses (536) (147)
Premises and equipment, net 820 681
Accrued interest receivable and other assets 573 305
--------- ---------
Total assets $ 71,232 $ 31,283
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings, NOW and money market $ 25,785 1,286 4.99% $ 7,873
Certificates of deposit 18,278 1,011 5.53 7,583
Securities sold under agreements to repurchase 8,601 399 4.64 2,153
Federal funds purchased 56 3 5.36 -
FHLB advances / borrowings 22 - - -
--------- --------- ---------
Total interest bearing liabilities 52,742 2,699 5.12% 17,609
---------
Noninterest-bearing liabilities
Demand deposits 6,955 1,904
Accrued interest payable and other liabilities 239 142
--------- ---------
Total liabilities 59,936 19,655
Stockholders' equity 11,296 11,628
--------- ---------
Total liabilities and stockholders' equity $ 71,232 $ 31,283
========= =========
Net interest income/Spread $ 2,091 2.09%
========= ====
Net interest income as a percent of average interest
earning assets 3.15%
====
</TABLE>
<TABLE>
<CAPTION>
1997 1996
----- -----
Interest Average Interest Average
Earned Yield Average Earned Yield
Or Paid Or Cost Balance Or Paid Or Cost
------- ------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
ASSETS
Interest earning assets:
Federal funds sold $ 177 5.65% $ - $ - -%
Interest bearing deposits in other financial
institutions 41 6.65 - - -
Securities available for sale-taxable (1) 920 5.97 4,127 197 4.77
FHLB stock - - - - -
Loans receivable (2) 884 8.93 - - -
-------- --------- ---------
Total interest earning assets (1) 2,022 6.96% 4,127 197 4.77%
Noninterest-earning assets:
Cash and due from banks $ 658
Allowance for loan losses -
Premises and equipment, net -
Accrued interest receivable and other assets 107
---------
Total assets $ 4,892
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Savings, NOW and money market 398 5.06% $ - - -%
Certificates of deposit 437 5.76 - - -
Securities sold under agreements to repurchase 107 4.97 - - -
Federal funds purchased - - - - -
FHLB advances / borrowings - - 133 8 6.02
-------- --------- ---------
Total interest bearing liabilities 942 5.35% 133 8 6.02%
-------- ---------
Noninterest-bearing liabilities
Demand deposits -
Accrued interest payable and other liabilities 5
---------
Total liabilities 138
Stockholders' equity 4,754
---------
Total liabilities and stockholders' equity $ 4,892
=========
Net interest income/Spread $ 1,080 1.61% $ 189 (1.25)%
======== ==== ========= =====
Net interest income as a percent of average interest
earning assets 3.72% 4.58%
==== =====
</TABLE>
(1) Securities balances represent daily average balances for the fair value of
securities. The average rate is calculated based on the daily average
balance for the amortized cost of securities.
(2) Includes fees on loans. The inclusion of loan fees does not have a material
effect on the average interest rate.
27
<PAGE> 30
The following tables set forth the effect of volume and rate changes on interest
income and expense for the periods indicated. For purposes of these tables,
changes in interest due to volume and rate were determined as follows:
<TABLE>
<S> <C> <C>
Volume Variance = change in volume multiplied by the previous year's rate.
Rate Variance = change in rate multiplied by the previous year's volume.
Rate/Volume Variance = change in volume multiplied by the change in rate. This
variance was allocated to volume
variance and rate variance in proportion
to the relationship of the absolute
dollar amount of the change in each.
</TABLE>
<TABLE>
<CAPTION>
Total Variance
Six Month Period Variance Attributable To
June 30, ------------------------
1999/1998 Volume Rate
--------- ------ ----
(In thousands)
<S> <C> <C> <C>
Interest income
Federal funds sold $ (27) $ (15) $ (12)
Interest bearing deposits in other financial
institutions (2) (3) 1
Securities available for sale-taxable 115 148 (33)
FHLB stock 15 15 -
Loans receivable 1,070 1,178 (108)
----------- ----------- -----------
1,171 1,323 (152)
Interest expense
Savings, NOW and money market 397 494 (97)
Certificates of deposit (17) 63 (80)
Securities sold under agreements to repurchase 57 79 (22)
Federal funds purchased - - -
FHLB advances 74 74 -
----------- ----------- -----------
511 710 (199)
----------- ----------- -----------
Net interest income $ 660 $ 613 $ 47
=========== =========== ===========
</TABLE>
28
<PAGE> 31
The following table illustrates, for the periods indicated, the changes in our
net interest income due to changes in volume and changes in interest rates. For
purposes of these tables, changes in interest due to volume and rate were
determined as follows:
<TABLE>
<S> <C> <C>
Volume Variance = change in volume multiplied by the previous year's rate.
Rate Variance = change in rate multiplied by the previous year's volume.
Rate/Volume Variance = change in volume multiplied by the change in rate. This variance
was allocated to volume variance and rate
variance in proportion to the
relationship of the absolute dollar
amount of the change in each.
</TABLE>
<TABLE>
<CAPTION>
Total Variance
Total Variance Year ended
Year Ended Variance Attributable To December 31, Variance Attributable To
December 31, ------------------------ ------------------------
1998/1997 Volume Rate 1997/1996 Volume Rate
--------- ------ ---- --------- ------ ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
Interest income
Federal Funds sold $ 148 $ 159 $ (11) $ 177 $ 177 $ -
Interest bearing deposits in (34) (41) 7 41 41 -
other financial institutions
Securities available for
sale-taxable 732 714 18 723 662 61
FHLB stock 9 9 - - - -
Loans receivable 1,913 1,959 (46) 884 884 -
------------ ------------ ------------ ------------ ---------- ---------
2,768 2,800 (32) 1,825 1,764 61
Interest expense
Savings, NOW and money market 888 893 (5) 398 398 -
Certificates of deposit 574 592 (18) 437 437 -
Securities sold under agreements
to repurchase 292 300 (8) 107 107 -
Federal funds purchased 3 3 - - - -
FHLB advances - - - - - -
Borrowings - - - (8) (8) -
------------ ------------ ------------ ------------ ---------- ---------
1,757 1,788 (31) 934 934 -
------------ ------------ ------------ ------------ ---------- ---------
Net interest income $ 1,011 $ 1,012 $ (1) $ 891 $ 830 $ 61
============ ============ ============ ============ ========== =========
</TABLE>
FINANCIAL CONDITION
Our total assets increased by $11.4 million or 11.8% to $108.0 million
at June 30, 1999 from $96.6 million at December 31, 1998. Our total assets grew
by $45.8 million, or 90.2%, to $96.6 million at December 31, 1998 from $50.8
million at December 31, 1997. The growth during both periods primarily resulted
from an increase in the loan portfolio funded by deposits received from clients
and by FHLB advances. The largest increase in our balance sheet as of June 30,
1999 was in the loan portfolio.
CASH AND CASH EQUIVALENTS. Cash and due from banks decreased by $0.9
million or 14.6% to $5.2 million at June 30, 1999 from $6.1 million at December
31, 1998. Cash and due from banks increased by $5.1 million or 520.4%, to $6.1
million at December 31, 1998 from $1.0 million at December 31, 1997. Cash and
due from banks represented cash maintained at correspondent banks in the form of
demand deposits as well as cash maintained at the Federal Reserve Bank of
Chicago.
Federal funds sold are inter-bank funds with daily liquidity. At June
30, 1999, we had $7.1 million invested in federal funds. This amount decreased
by $2.5 million or 26.0% from $9.6 million at December 31, 1998. The decrease in
federal funds sold was a result of funding the loan growth for the period. The
$9.6 million which we had invested in such funds at December 31, 1998 was an
increase of $6.0 million, or 166.7%, from $3.6 million at December 31, 1997. The
increase at December 31, 1998 was primarily attributable to increased deposits
during the fourth quarter of 1998.
INVESTMENT PORTFOLIO. Securities available for sale totaled $27.5
million at June 30, 1999, which represented a decrease of $3.6 million or 11.6%
from $31.1 million at December 31, 1998. The decrease was a result of funding
increased loan demand as well as normal maturities. For the year ended December
31, 1998, securities available for sale increased $8.7 million to $31.1
million from $22.4 million as of December 31, 1997. The increase was
attributable to the growth in deposits over and above those deposits which were
not used to fund additional loans.
29
<PAGE> 32
All securities have been classified as available for sale. Available
for sale securities represent those securities which we may decide to sell if
needed for liquidity, asset/liability management or other reasons. Such
securities are reported at fair value with unrealized gains and losses included
as a separate component of stockholders' equity, net of tax. The unrealized loss
on the securities portfolio, net of taxes was $(232,952) at June 30, 1999
compared to an unrealized gain on the securities portfolio of $554,950 at
December 31, 1998. The unrealized gain at December 31, 1998 was $554,950
compared to $132,368 at December 31, 1997.
The carrying value of securities available for sale are summarized as
follows:
<TABLE>
<CAPTION>
December 31,
June 30, ------------------- ------------------- ------------------
1999 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
U.S. Government and federal agencies $ 24,770 $ 27,276 $ 22,190 $ 10,128
Obligations of states and political subdivisions 2,757 2,574 161 -
Corporate bonds - 1,195 - -
Marketable equity securities 21 21 - -
----------- ----------- ----------- -----------
$ 27,548 $ 31,066 $ 22,351 $ 10,128
=========== =========== =========== ===========
</TABLE>
The maturity distribution and weighted average interest rates of debt
securities available for sale at June 30, 1999 were as follows:
<TABLE>
<CAPTION>
After One Year After Five Years
Through Through
Within One Year Five Years Ten Years After Ten Years
--------------------------------------------------------------------------------------
Amount Rate Amount Rate Amount Rate Amount Rate
---------- ---------- ---------- ---------- ---------- --------- ----------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 1,511 6.56% $ 15,307 5.91% $ 7,952 6.14% $ - -%
Obligations of states and
political subdivisions 80 6.34 2,155 5.11 - - 522 5.40
--------- --------- -------- ---------
$ 1,591 6.55% $ 17,462 5.81% $ 7,952 6.14% $ 522 5.40%
========= ========= ======== =========
</TABLE>
The weighted average interest rates are based on coupon rates for
securities purchased at par value and on effective interest rates considering
amortization or accretion if the securities were purchased at a premium or
discount.
Excluding those holdings of the investment portfolio in U.S. Treasury
securities and other agencies of the U.S. Government, there were no securities
of any one issuer which exceeded 10% of the stockholders' equity at June 30,
1999.
LOAN PORTFOLIO. Loans receivable net of allowance increased by $17.1
million or 35.6% to $65.1 million at June 30, 1999 from $48.0 million at
December 31, 1998. For the year ended December 31, 1998, loans receivable net of
allowance were $48.0 million for an increase of $26.0 million from $22.0 million
as of December 31, 1997. The increases for both periods were attributable to our
officer calling program.
Total loans on the balance sheet were comprised of the following
classifications:
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Commercial $ 43,282 $ 33,202 $ 14,733 $ -
Residential real estate mortgage 21,332 13,925 6,376 -
Consumer 1,524 1,636 1,242 -
---------- ---------- ----------- -----------
$ 66,138 $ 48,763 $ 22,351 $ -
========== ========== =========== ===========
</TABLE>
Concentrations of Credit Risk: We make commercial, residential real
estate mortgage and installment loans to individuals and businesses mainly in
the Michiana area. Commercial loans include loans collateralized by business
assets. Commercial loans make up approximately 65.4% of the loan portfolio and
the loans are expected to be repaid from cash flow from operations of
businesses. Residential real estate mortgage loans make up approximately 32.3%
of the loan portfolio and are collateralized by residential real estate.
Consumer loans make up approximately 2.3% of the loan portfolio and are
primarily collateralized by consumer assets.
30
<PAGE> 33
Maturities and Sensitivities of Loans to Changes in Interest Rates: The
following table shows the amounts of commercial loans outstanding based on
remaining scheduled repayments of principal which are due in the periods
indicated. Also, the amounts have been classified according to sensitivity to
changes in interest rates for commercial loans due after one year. Variable-rate
loans are those loans with floating or adjustable interest rates.
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Maturing
Within one year $ 18,590 $ 17,391 $ 5,785 $ -
After one year but within five years 21,479 13,215 7,991 -
After five years 3,213 2,596 957 -
---------- ---------- ----------- -----------
$ 43,282 $ 33,202 $ 14,733 $ -
========== ========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
Commercial Loan Interest Sensitivity
------------------------------------
June 30, December 31, December 31,
1999 1998 1997
---- ---- ----
(In thousands)
Fixed Variable Fixed Variable Fixed Variable
Rate Rate Total Rate Rate Total Rate Rate Total
---- ---- ----- ---- ---- ----- ---- ---- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Due after one year
but within five
years $ 20,687 $ 792 $ 21,479 $ 12,895 $ 320 $ 13,215 $ 5,339 $ 2,652 $ 7,991
Due after five
years 3,213 - 3,213 2,596 - 2,596 553 404 957
--------- --------- --------- -------- --------- --------- --------- --------- ---------
$ 23,900 $ 792 $ 24,692 $ 15,491 $ 320 $ 15,811 $ 5,892 $ 3,056 $ 8,948
========= ========= ========= ======== ========= ========= ========= ========= =========
</TABLE>
There were no commercial loans as of December 31, 1996.
Risk Elements - Nonaccrual, Past Due, Restructured and Impaired Loans:
The following schedule summarizes nonaccrual, past due, restructured and
impaired loans for the periods indicated:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Loans accounted for on a nonaccrual basis $ - $ - $ - $ -
Accruing loans which are contractually past
due 90 days or more as to interest or principal
payments $ - $ - $ - $ -
Loans not included above which are "Troubled
Debt Restructurings" as defined by Statement
of Financial Accounting Standards No. 15 $ - $ - $ - $ -
Other loans defined as "impaired" $ - $ - $ - $ -
=============== =========== =========== ===========
$ - $ - $ - $ -
=============== =========== =========== ===========
</TABLE>
31
<PAGE> 34
Management believes the allowance for loan losses at June 30, 1999 was
adequate to absorb any losses on nonperforming loans, as the allowance balance
is maintained by management at a level considered adequate to cover losses that
are currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time.
<TABLE>
<CAPTION>
December 31,
June 30, ------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Gross income that would have been recorded if the loans had
been current, in accordance with their original terms and
had been outstanding throughout the period
or since origination if held for part of the period $ - $ - $ - $ -
Interest income actually recorded on nonaccrual loans
and included in net income for the period $ - $ - $ - $ -
Interest income not recognized during the period $ - $ - $ - $ -
</TABLE>
Discussion of the Nonaccrual Policy: The accrual of interest income is
discontinued when the collection of a loan or interest, in whole or in part, is
doubtful. When interest accruals are discontinued, interest income accrued in
the current period is reversed. While loans which are past due 90 days or more
as to interest or principal payments are considered for nonaccrual status,
management may elect to continue the accrual of interest when the estimated net
realizable value of collateral, in management's judgment, is sufficient to cover
the principal balance and accrued interest.
Potential Problem Loans: As of June 30, 1999, there were no other
outstanding loans where known information about possible credit problems of the
borrowers caused management to have serious doubts as to the ability of such
borrowers to comply with the present loan repayment terms and which may result
in disclosure of such loans at some future date. Consideration was given to
loans classified for regulatory purposes as loss, doubtful, substandard or
special mention. To the extent that such loans are not disclosed as potential
problem loans, management believes that such loans will not materially impact
future operating results, liquidity, or capital resources.
Other Interest Earning Assets: There were no other interest earning
assets as of June 30, 1999 which would be required to be disclosed if such
assets were loans.
Summary of Loan Loss Experience: The following schedule presents an
analysis of the allowance for loan losses, average loan data and related ratios
for the periods indicated:
<TABLE>
<CAPTION>
June 30, December 31,
-------------------------------------------
1999 1998 1997 1996
--------------------------------------------------------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Loans
Loans outstanding at end of period $ 66,138 $ 48,763 $ 22,351 $ -
Average loans outstanding at
end of period 57,966 32,955 9,895 -
Allowance for loan losses
Balance at beginning of period $ 752 $ 360 $ - $ -
Loans charged-off
Commercial - - - -
Residential real estate mortgage - - - -
Consumer - - - -
--------- --------- --------- ---------
Subtotal charge-offs - - - -
--------- --------- --------- ---------
Recoveries of loans previously
charged-off
Commercial $ - $ - $ - $ -
Residential real estate mortgage - - - -
</TABLE>
32
<PAGE> 35
<TABLE>
<S> <C> <C> <C> <C>
Consumer - - - -
--------- --------- --------- ---------
Subtotal recoveries - - - -
--------- --------- --------- ---------
Net loans charged-offs - - - -
Provision for loan losses 206 392 360 -
--------- --------- --------- ---------
Balance, end of year $ 958 $ 752 $ 360 $ -
========= ========= ========= =========
Ratio of net charge-offs during the period
to average loans outstanding during the
period -% -% -% -%
</TABLE>
The allowance for loan losses balance and the provision for loan losses
are determined by management based upon periodic reviews of the loan portfolio.
In addition, management considers the level of charge-offs on loans as well as
the fluctuations of charge-offs and recoveries on loans, including the factors
which caused these changes. Estimating the risk of loss and the amount of loss
is necessarily subjective. Accordingly, the allowance is maintained by
management at a level considered adequate to cover losses that are currently
anticipated based on past loss experience, general economic conditions,
information about specific borrower situations including their financial
position and collateral values and other factors and estimates which are subject
to change over time.
The following schedule is a breakdown of the allowance for loan losses
allocated by type of loan and related ratios for the periods indicated:
<TABLE>
<CAPTION>
December 31,
June 30, ------------
1999 1998 1997 1996
---- ---- ---- ----
Percentage of Percentage of Percentage of Percentage of
Loans In Loans In Loans In Loans In
Each Each Each Each
Category Category Category Category
Allowance to Total Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial $ 620 65.4% $ 471 68.1% $ 151 65.9% $ - -%
Residential real estate
mortgage 113 32.3 75 28.5 49 28.5 - -
Consumer 55 2.3 31 3.4 14 5.6 - -
Unallocated 170 - 175 - 146 - - -
-------- ------- --------- -------- -------- ------- --------- ------
$ 958 100.0% $ 752 100.0% $ 360 100.0% $ - -%
======== ======= ========= ======== ======== ======= ========= ======
</TABLE>
While management's periodic analysis of the adequacy of the allowance
for loan losses may allocate portions of the allowance for specific problem loan
situations, the entire allowance is available for any loan charge-offs that
occur.
OTHER ASSETS. Premises and equipment increased by $724,563 or 97.6% to
$1,467,058 at June 30, 1999 from $742,495 at December 31, 1998. The increase was
primarily the result of purchasing our headquarters building in May, 1999 for
$800,000. Premises and equipment decreased by $139,345, or 15.8%, to $742,495 as
of December 31, 1998 from $881,840 as of December 31, 1997. The decrease
resulted from depreciation expense offset by the purchase of additional
furniture, fixtures and equipment.
Accrued interest receivable on loans, securities and interest bearing
cash accounts increased by $99,119 or 13.4% to $838,143 at June 30, 1999 from
$739,024 at December 31, 1998. Accrued interest receivable on loans, securities
and interest bearing cash accounts increased by $212,685, or 40.4% to $739,024,
as of December 31, 1998 from $526,339 as of December 31, 1997. The increases
were primarily due to greater average outstanding balances in interest earning
assets.
33
<PAGE> 36
Other assets as of June 30, 1999 and December 31, 1998 totaled $71,005
and $103,565, respectively. The $32,560, or 31.4%, decrease was attributable to
the reduction of related prepaid expenses.
DEPOSITS. Deposits increased by $6.4 million or 8.4% to $82.8 million
at June 30, 1999 from $76.4 million at December 31, 1998. The increase resulted
from an $8.9 million net increase in certificates of deposit which were offset
by a $2.5 million net decrease in noninterest-bearing, NOW, money market and
other savings accounts. We do not accept brokered certificates of deposit. The
increase in certificates of deposit during the first half of 1999 was primarily
a result of expanding relationships with existing clients and obtaining business
from other local relationship based clients.
Transaction accounts, which include noninterest-bearing, NOW, money
market, other savings and our client-based repurchase agreement relationships,
increased by $1.4 million during the first six months of 1999. Our average cost
of interest bearing liabilities decreased from 5.12% during the year 1998 to
4.43% during the first six months of 1999.
The increase in deposits for these periods were a result of periodic
aggressive pricing programs for deposits, ongoing marketing efforts and the
hiring of new personnel. Management also believes the increase was a reaction by
clients to the acquisitions and mergers of local banks by transferring their
financial business to community banks that have the ability to offer more
personalized service.
The average amount of deposits and average rates paid are summarized as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
------------
1999 1998 1997 1996
------------------------- ------------------------- ------------------------- ------------------------
Average Average Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Savings, NOW and
money market $ 42,408 4.25% $ 25,785 4.99% $ 7,873 5.06% $ - -
Certificates of deposit 21,729 4.87 18,278 5.53 7,583 5.76 - -
Demand deposits
(noninterest-bearing) 10,007 - 6,955 - 1,904 - - -
-------- --------- -------- ---------
$ 74,144 $ 51,018 $ 17,360 $ -
======== ========= ======== =========
</TABLE>
Included in interest bearing deposits as of June 30, 1999 were
certificates of deposit totaling $22.8 million, that were $100,000 or greater.
Maturities of time certificates of deposit and other time deposits of $100,000
or more are summarized as follows:
<TABLE>
<CAPTION>
December 31,
June 30, ----------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Three months or less $ 16,664 $ 9,979 $ 6,607 $ -
Over three months and through six months 2,714 1,555 6,316 -
Over six months and through twelve months 552 2,007 1,722 -
Over twelve months 2,884 1,525 605 -
-------- -------- -------- -------
$ 22,814 $ 15,066 $ 15,250 $ -
======== ======== ======== =======
</TABLE>
SHORT-TERM BORROWINGS. Short-term borrowings increased $4.0 million
from $6.4 million as of December 31, 1998 to $10.4 million as of June 30, 1999.
As of December 31, 1998, short-term borrowings increased to $6.4 from $4.5
million as of December 31, 1997, for an increase of $1.9 million. Short-term
borrowings represented repurchase agreements offered to commercial clients.
Though short-term in nature, repurchase agreements have been and continue to be
a stable source of funds.
We had securities sold under agreements to repurchase for which the
average balance outstanding during the reported period was 30 percent or more of
stockholders' equity at the end of the reported period. The required disclosure
is incorporated by reference and can be located in the Notes to the Consolidated
Financial Statements, found at the end of this prospectus.
FHLB ADVANCES AND OTHER BORROWINGS. As a result of our membership in
the Federal Home Loan Bank of Indianapolis,
34
<PAGE> 37
we have the ability to borrow for short or long-term purposes under a variety of
programs. FHLB advances increased by $1.5 million to $3.5 million as of June 30,
1999 from $2.0 million at December 31, 1998. As of December 31, 1998, FHLB
advances had increased to $2.0 million from none as of December 31, 1997, for an
increase of $2.0 million. As of June 30, 1999, the bank held $388,800 of FHLB
stock. The increases primarily resulted as we used FHLB advances for loan
matching and for hedging against the possibility of rising interest rates.
Other liabilities decreased by $4,384 or 3.9% to $108,668 as of June
30, 1999 from $113,052 as of December 31, 1998. Other liabilities were $41,431
at December 31, 1997. Other liabilities were comprised of unpaid amounts for
various products and services and accrued but unpaid interest on deposits.
CAPITAL RESOURCES
Additional paid-in capital increased by $0.1 million from $12.3 million
at December 31, 1998 to $12.4 million at June 30, 1999. The increase in
additional paid-in capital was a result of employees' stock purchases through
our 401(k) plan.
The retained deficit decreased by $0.2 million or 13.6% to $(1.1)
million as of June 30, 1999 from $(1.3) million as of December 31, 1998. The
decrease reflected net income for the six month period ended June 30, 1999.
Unrealized gains (losses) on securities available for sale, were
$(232,952) as of June 30, 1999 as compared to $554,950 as of December 31, 1998.
The decrease was attributable to the decrease during the period in fair value of
the securities available for sale due to rising interest rates.
Total stockholders' equity was $11.1 million as of June 30, 1999, a
decrease of $0.5 million from $11.6 million as of December 31, 1998. The net
decrease resulted from the combination of the increase in the net income for the
period, a decrease in the net unrealized gains/losses on securities available
for sale as well as an increase in the investment in our stock by our employees
through our 401(k) plan.
The components of total risk-based capital are Tier 1 capital and Tier
2 capital. Tier 1 capital is total stockholders' equity less intangible assets.
Tier 2 capital is Tier 1 capital plus a portion of the allowance for loan
losses. The allowance for loan losses is includable in Tier 2 capital up to a
maximum of 1.25% of risk weighted assets. The net unrealized appreciation
(depreciation) on securities available for sale, net of tax, is not considered
in meeting regulatory capital requirements. The following table provides the
bank's minimum regulatory capital requirements and the bank's actual capital
ratios at June 30, 1999:
<TABLE>
<CAPTION>
Minimum Required For Minimum Required To Be Well
Capital Adequacy Capitalized Under Prompt Bank's Capital
June 30, 1999 Purposes Corrective Action Regulations Ratio
<S> <C> <C> <C>
Ratio of Total Capital to Risk
Weighted Assets 8.0% 10.0% 15.6%
Ratio of Tier 1 Capital to Risk
Weighted Assets 4.0% 6.0% 14.4%
Ratio of Tier 1 Capital to Average
Assets 4.0% 5.0% 10.3%
</TABLE>
The bank exceeded the applicable minimum regulatory capital
requirements at June 30, 1999 and was considered to be well capitalized.
Restrictions exist regarding the ability of the bank to transfer funds
to St. Joseph in the form of cash dividends, loans or advances. No cash or other
dividends were declared or paid during the six month period ended June 30, 1999
or the years ended December 31, 1998, 1997 or 1996.
As of June 30, 1999, management was not aware of any current
recommendations by the banking regulatory authorities which, if they were to be
implemented, would have, or are reasonably likely to have, a material adverse
effect on our liquidity, capital resources or operations.
35
<PAGE> 38
RETURN ON EQUITY AND ASSETS
The ratio of net income (loss) to average stockholders' equity and
average total assets and certain other ratios, annualized where applicable, are
as follows:
<TABLE>
<CAPTION>
December 31,
June 30, --------------------------------------------------
1999 1998 1997 1996
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
Average total assets $ 98,276 $ 71,232 $ 31,283 $ 4,892
========= ========= =========== ========
Average stockholders' equity (1) $ 11,595 $ 11,296 $ 11,628 $ 4,754
========= ========= =========== ========
Net income/loss $ 175 $ (229) $ (762) $ (290)
========= ========= ========== ========
Cash dividends declared $ - $ - $ - $ -
========= ========= ========== ========
Return on average total assets .36% (.32)% (2.44)% (5.93)%
Return on average stockholders' equity 3.02% (2.03)% (6.55)% (6.10)%
Dividend payout percentage -% -% -% -%
Average stockholders' equity to average total assets 11.80% 15.86% 37.17% 97.18%
</TABLE>
(1) Net of average unrealized appreciation or depreciation on securities
available for sale
ASSET/LIABILITY MANAGEMENT
LIQUIDITY
Liquidity relates primarily to our ability to fund loan demand, meet
deposit customers' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash and due from banks, federal
funds sold, interest bearing deposits in other financial institutions and
securities available for sale. These assets are commonly referred to as liquid
assets. Liquid assets were $40.0 million at June 30, 1999 compared to $46.8
million at December 31, 1998, respectively. Liquidity levels declined $6.8
million from December 31, 1998 due to the need to fund our loan growth with
liquid assets. Management recognizes that securities may need to be sold in the
future to help fund loan demand and accordingly, as of June 30, 1999, the entire
securities portfolio of $27.5 million was classified as available for sale.
Management believes its current liquidity level is sufficient to meet
anticipated future growth.
The statements of cash flows for the periods presented provide an
indication of our sources and uses of cash as well as an indication of our
ability to maintain an adequate level of liquidity. A discussion of the
statements of cash flows for the six month period ended June 30, 1999 and 1998
follows.
During the 1998 period presented, we experienced a net increase in cash
from operating activities. Net cash from operating activities was $517,160
during the six months ended June 30, 1999 compared to a net decrease in cash
from operating activity of $(66,627) for the same period in 1998. The increase
in cash from operating activities of $583,634 during 1999 as compared to 1998
was primarily a result of our ability to generate an operating profit of
$174,793 for the six months ended June 30, 1999 compared to a net operating loss
of $(219,474) for the same period in 1998.
For all periods presented, we experienced a net decrease in net cash
from investing activities. Net cash from investing activities was $(15.7)
million and $(17.9) million for the six months ended June 30, 1999 and 1998,
respectively. The changes in net cash from investing activities include
reinvestments of interest bearing deposits in other financial institutions,
purchases, maturities and calls of securities available for sale, growth in
loans receivable and purchases of premises and equipment.
Net cash flow from financing activities was $11.9 million and $23.4
million for the periods ended June 30, 1999 and 1998, respectively. In 1999 and
1998, the increase was primarily attributable to growth in total deposits,
securities sold under agreements to repurchase and Federal Home Loan Bank
advances of $6.4 million, $4.0 million and $1.5 million compared to $22.1
million, $1.2 million and $0.
36
<PAGE> 39
MANAGEMENT OF INTEREST SENSITIVITY
A number of measures are used to monitor and manage interest rate risk,
including income simulation and interest sensitivity (GAP) analysis. An income
simulation model is management's primary tool used to assess the direction and
magnitude of variations in net interest income resulting from changes in
interest rates. Key assumptions in the model include repayment speeds on various
loan and investment assets; cash flow and maturities of financial instruments
held for purposes other than trading; changes in market conditions, loan
volumes, and pricing; deposit sensitivity; client preferences; and management's
capital plans. These assumptions are inherently uncertain, subject to
fluctuations and revision in a dynamic environment and as a result, the model
cannot precisely estimate net interest income or exactly predict the impact of
higher or lower interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude, and frequency of
interest rate changes and changes in market conditions and management
strategies, among other factors.
Results of the simulation done as of May 28, 1999, suggest that we
could expect net interest income to increase by approximately $205,000, if
interest rates gradually decline by 100 basis points over the next twelve
months, and to decrease approximately $120,000, if interest rates gradually
increased 100 basis points over the next twelve months, from forecast levels of
net interest income absent any changes in rates. These variances in net interest
income were within our policy parameters established to manage interest rate
risk. In addition to changes in interest rate, the level of future net interest
income is also dependent on a number of other variables, including growth,
composition and absolute levels of deposits, loans, and other earning assets and
interest bearing liabilities, economic and competitive conditions, client
preference and other factors.
Austin Advisors, Inc., a firm specializing in consulting and providing
assistance to banks, performs a formal asset/liability management analysis on a
monthly basis. This information is presented and reviewed by the "ALCO"
Committee.
IMPACT OF INFLATION AND CHANGING PRICES
The majority of our assets and liabilities are monetary in nature and
therefore we differ greatly from most commercial and industrial companies that
have significant investments in fixed assets or inventories. However, inflation
does have an important impact on the growth of total assets in the banking
industry and the resulting need to increase equity capital at higher than normal
rates in order to maintain an appropriate equity to assets ratio. Inflation
significantly affects noninterest expense, which tends to rise during periods of
general inflation.
IMPACT OF YEAR 2000 COMPLIANCE
The Year 2000 has posed a unique set of challenges to those industries
reliant on information technology. As a result of methods employed by early
programmers, many software applications and operational programs may be unable
to distinguish the Year 2000 from the Year 1900. If not effectively addressed,
this problem could result in the production of inaccurate data, or, in the worst
cases, the inability of the systems to continue to function altogether.
Financial institutions are particularly vulnerable due to the industry's
dependency on electronic data processing systems. In 1997, we started the
process of identifying the hardware and software issues required to be addressed
to assure Year 2000 compliance. We began by assessing the issues related to the
Year 2000 and the potential for those to adversely affect our operations.
Since that time, we have established a Year 2000 committee to deal with
this issue. The committee meets with and utilizes various representatives from
key units throughout the Company to aid in analysis and testing. It is the
mission of this committee to identify areas subject to complications related to
the Year 2000 and to initiate remedial measures designed to eliminate any
adverse effects on our operations. The committee has identified all
mission-critical software and hardware that may be adversely affected by the
Year 2000 and has requested vendors to represent that the systems and products
provided are or will be Year 2000 compliant.
We license all software used in conducting our business from third
party vendors. None of our software has been internally developed. We have
developed a comprehensive list of all software, all hardware and all service
providers used. Every vendor has been contacted regarding the Year 2000 issues,
and we continue to closely track the progress each vendor is making in resolving
the problems associated with this issue. The vendor of the primary software we
use was compliant with the Year 2000 with no remediation needed. Testing
standards were formulated and comprehensive testing was completed in September
1998. We continue to monitor all other
37
<PAGE> 40
major vendors of services for Year 2000 issues in order to avoid shortages of
supplies and services in the coming months. We have not had any material delays
regarding our information systems projects as a result of the Year 2000 project.
There are third party utilities with which we have an important
relationship, i.e. Ameritech (phone service), Mishawaka Power (electricity) and
NIPSCO (natural gas). We have not identified any practical, long-term
alternatives to relying on these companies for basic utility services, however,
we have installed a generator that will supply power to our building as a backup
for any disruption in electrical service. In the event that the utilities
significantly curtail or interrupt their services to us, there would be a
significant adverse effect on our ability to conduct business. Information
received from these utilities indicates that they have significantly completed
remediation and validation of their mission critical applications.
We have also tested such things as alarm systems and networks for Year
2000 functionality and are not aware of any significant problems with such
systems.
Our cumulative costs of the Year 2000 project through the second
quarter of 1999 were approximately $48,000. The estimated total cost of the Year
2000 project is $72,000. This includes costs to upgrade equipment specifically
for the purpose of Year 2000 compliance and certain administrative expenditures.
At the present time, no situation that will require material cost expenditures
to become fully compliant have been identified. However, the Year 2000 problem
is pervasive and complex and can potentially affect any computer process.
Accordingly, no assurance can be given that Year 2000 compliance can be achieved
without additional unanticipated expenditures and uncertainties that might
affect future financial results.
We are committed to a plan for achieving compliance, focusing not only
on our own data processing systems, but also on our loan and depository clients.
The Year 2000 committee has taken steps to educate and assist our clients with
identifying their Year 2000 compliance problems, if any. In addition, the
management committee has proposed policies and procedures to help identify
potential risks and to gain an understanding of how clients are managing the
risks associated with the Year 2000. We are assessing the impact, if any, of the
Year 2000 risk in our credit analysis. In connection with potential credit risk
related to the Year 2000 issue, we have contacted our large commercial loan and
depository clients regarding their level of preparedness for the Year 2000.
Through these questionnaires and resulting assessments, we believe that overall
credit and liquidity risk to our large corporate borrowers and depositors is not
excessive.
We have developed contingency plans for various Year 2000 problems and
continue to revise those plans based on testing and vendor notifications.
The federal banking regulators issued guidelines establishing minimum
safety and soundness standards for achieving Year 2000 compliance. The
guidelines, which took effect October 15, 1998 and apply to all FDIC- insured
depository institutions, established standards for developing and managing Year
2000 project plans, testing remediation efforts and planning for contingencies.
The guidelines are based upon guidance previously issued by the agencies under
the auspices of the Federal Financial Institutions Examination Council but are
not intended to replace or supplant the Federal Financial Institutions
Examination Council guidance which will continue to apply to all federally
insured depository institutions.
The guidelines were issued under section 39 of the Federal Deposit
Insurance Act, which requires the federal banking regulators to establish
standards for the safe and sound operation of federally insured depository
institutions. Under section 39 of the Federal Deposit Insurance Act, if an
institution fails to meet any of the standards established in the guidelines,
the institution's primary regulators may require the institution to submit a
plan for achieving compliance. If an institution fails to submit an acceptable
compliance plan, or fails in any material respect to implement a compliance plan
that has been accepted by its primary regulator, the regulator is required to
issue an order directing the institution to cure the deficiency. Such an order
is enforceable in court in the same manner as a cease and desist order. Until
the deficiency cited in the regulator's order is cured, the regulator may
restrict the institution's rate of growth, require the institution to increase
its capital, restrict the rates the institution pays on deposits or require the
institution to take any action the regulator deems appropriate under the
circumstance. In addition to the enforcement procedures established in section
39 of the Federal Deposit Insurance Act, noncompliance with the standards
established by the guidelines may also be grounds for other enforcement action
by federal banking regulators, including cease and desist orders and civil money
penalty assessments. Our management believes Year 2000 planning has been
consistent with regulatory guidelines.
38
<PAGE> 41
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS
The executive officers and directors of St. Joseph, and their
occupational history for the past five years, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION AND WORK EXPERIENCE
- ---- --- ----------------------------
<S> <C> <C>
John W. Rosenthal (2, 3, 4)......... 40 Chairman, President and Chief Executive Officer (1996-present); Vice
President and Senior Corporate Banker, The First National Bank of
Chicago (1988-1996)
Brian R. Brady (2, 3, 4)............ 47 Director; President and Chief Executive Officer, Damon Corporation
(1988-1998)
David A. Eckrich (1, 2, 4).......... 58 Director; President, Adams Road Development, Inc. (1978-present)
Jerry Hammes (1, 2)................. 67 Director; Chairman, Romy Hammes Bancorp, Peoples Bank of Kankakee
County and Romy Hammes, Inc. (1970-present)
V. Robert Hepler.................... 70 Director; President and Chief Executive Officer, VRH Rentals
(1994-present)
Scott C. Malpass (2, 4)............. 37 Director; Vice President for Finance and Chief Investment Officer,
University of Notre Dame (1988-present)
Jack Matthys (2, 3)................. 52 Vice Chairman, Chief Lending Officer and Director (1996-present);
President, Krizman, Inc. (1990-1992)
Arthur H. McElwee, Jr. (2, 3)....... 56 Director; President, Toefco Engineered Coating Systems, Inc.
(1994-present); President, Goshen Rubber, Inc. (1992-1994)
Myron C. Noble (1, 2)............... 61 Director; Chairman, Pi-Rod, Inc. (1996-present); President, Pi-Rod,
Inc. (1974-1996)
Richard A. Rosenthal (2, 4)......... 66 Director; Athletic Director Emeritus (1995-present), Director of
Athletics (1987-1995), University of Notre Dame
Robert A. Sullivan (2, 3)........... 45 Director; President, Capital Bank, N.A. (1989-present)
Edward R. Pooley.................... 34 Senior Vice President, Chief Financial Officer and Secretary
(1996-present); Cashier and Chief Operations Officer, Metamora State
Bank (1991-1996)
</TABLE>
- -----------------
(1) Member of the Audit Committee.*
(2) Member of the Directors Loan Policy Committee.
(3) Member of the Human Resources Committee.
(4) Member of the Investment Committee.
*All committees are bank level committees except the Audit Committee which
is holding company committee.
No directors or officers are related by blood or marriage, except that
Richard A. Rosenthal is the father of John W. Rosenthal. Mr. Arthur J. Decio
serves as Director Emeritus. Except for V. Robert Helper, all of the directors
of St. Joseph are also directors of the bank.
39
<PAGE> 42
REMUNERATION OF EXECUTIVE OFFICERS
The following table shows the compensation for the last three fiscal
years paid by St. Joseph to its Chief Executive Officer, Mr. Rosenthal. No other
executive officer of St. Joseph or the bank had 1998 salary and bonus which
exceeded $100,000.
<TABLE>
<CAPTION>
====================================================================================================================
SUMMARY COMPENSATION TABLE
- --------------------------------------------------------------------------------------------------------------------
ANNUAL COMPENSATION
- --------------------------------------------------------------------------------------------------------------------
(a) (b) (c) (d) (g) (h)
FISCAL SECURITIES
YEAR UNDERLYING
NAME AND ENDED OPTIONS ALL OTHER
PRINCIPAL POSITION DECEMBER 31st SALARY($)(1) BONUS ($) GRANTED (#) COMPENSATION($)(2)
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
John W. Rosenthal 1998 $107,000 --- 15,000 $12,343
President & Chief Executive 1997 $101,015 $10,000 3,000 $13,186
Officer 1996 75,384 --- 27,000 6,038
====================================================================================================================
</TABLE>
(1) Includes compensation deferred at the election of Mr. Rosenthal.
(2) Represents amounts paid by St. Joseph for contributions to St. Joseph's
401(k) Plan, an automobile allowance and for life insurance.
STOCK OPTION INFORMATION
The following table sets forth certain information concerning the
number and value of stock options granted in the last fiscal year to the
individuals named in the Summary Compensation Table:
<TABLE>
<CAPTION>
====================================================================================================================
OPTION GRANTS IN LAST FISCAL YEAR
- --------------------------------------------------------------------------------------------------------------------
INDIVIDUAL GRANTS
- --------------------------------------------------------------------------------------------------------------------
====================================================================================================================
(a) (b) (c) (d) (e)
OPTIONS % OF TOTAL OPTIONS
NAME GRANTED GRANTED TO EMPLOYEES EXERCISE OR BASE EXPIRATION
(#)(1) IN FISCAL YEAR PRICE ($/SH) DATE
====================================================================================================================
<S> <C> <C> <C> <C>
John W. Rosenthal 15,000 52.6% $18.25 09/10/08
====================================================================================================================
</TABLE>
(1) Options vest as follows: 2,500 on 01/01/1999; 3,000 on 01/01/2000; 3,000 on
01/01/2001; 3,000 on 01/01/2002; and 3,500 on 01/01/2003
40
<PAGE> 43
The following table sets forth certain information concerning the
exercisable and nonexercisable stock options at December 31, 1998, held by the
individuals named in the above Summary Compensation Table:
<TABLE>
<CAPTION>
===================================================================================================================
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END
OPTION VALUES
- -------------------------------------------------------------------------------------------------------------------
SHARES NUMBER OF SECURITIES
ACQUIRED UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-
ON VALUE OPTIONS AT FY-END THE-MONEY OPTIONS
NAME EXERCISE REALIZED (#)(d) AT FY-END ($)(e)
(#)(a) (#)(b) ($)(c) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
John W. Rosenthal --- $--- 27,000 18,000 $209,250 $3,750
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
EMPLOYMENT AGREEMENTS
St. Joseph has entered into an employment agreement with John W.
Rosenthal which provides for an initial three-year term beginning on March 18,
1996. In the absence of notice from either party to the contrary, the employment
term under the agreement extends for an additional one year at the end of each
year of the agreement. Under the agreement, Mr. Rosenthal received an initial
annual salary of $98,000. The agreement also includes a provision for the
review, and possible increase, but not a decrease, of his salary in subsequent
years, as well as performance bonuses, membership in a local country club, life
insurance in the amount of $300,000, an automobile allowance and participation
in St. Joseph's benefit plans and disability benefits. The agreement also
provides for the grant of options to purchase 27,000 shares of common stock
under St. Joseph's stock option plan.
The employment agreement is terminable at any time by either St.
Joseph's board of directors or by Mr. Rosenthal. The agreement provides
severance benefits in the event he is terminated without cause, including
severance compensation equal to his then current salary and benefits for the
remainder of the then current term of the employment agreement. St. Joseph also
must pay all accrued salary, vested deferred compensation and other benefits
then due to him. St. Joseph may terminate the agreement at any time for cause
without incurring any post-termination obligation to Mr. Rosenthal. If Mr.
Rosenthal is terminated upon a change in control, he is to be paid severance
compensation equal to three times: (i) his salary at the rate then in effect at
the time of termination; (ii) the amount of any bonus he would have received;
and (iii) the value of the other benefits which would have accrued to him if he
had remained employed for the full term of his agreement. Moreover, he will
continue to receive health, life and disability insurance coverage for three
years following such termination. Pursuant to a non-competition covenant of the
agreement, Mr. Rosenthal is prohibited from competing with St. Joseph or its
subsidiaries within a 50-mile radius of St. Joseph's main office for a period of
one year following the termination of his employment agreement.
STOCK INCENTIVE PLAN
St. Joseph's board of directors and its initial sole stockholder
created a Stock Incentive Plan to promote equity ownership of St. Joseph by
directors and selected officers and employees of St. Joseph and the bank, to
increase their proprietary interest in the success of St. Joseph and to
encourage them to remain in the employ of St. Joseph.
ADMINISTRATION. The Stock Incentive Plan is administered by St.
Joseph's human resources committee, which is comprised of at least two
non-employee directors appointed by St. Joseph's board of directors. The
committee will have the authority, subject to approval by the board, to select
the directors and employees to whom awards may be granted, to determine the
terms of each award, to interpret the provisions of the Stock Incentive Plan and
to make all other determinations that it may deem necessary or advisable for the
administration of the plan.
41
<PAGE> 44
The Stock Incentive Plan provides for the grant of "incentive stock
options," as defined under Section 422(b) of the Internal Revenue Code of 1986,
options that do not so qualify (referred to herein as "nonstatutory options"),
restricted stock and stock appreciation rights, as determined in each individual
case by the committee. The board of directors has reserved 200,000 shares of
common stock for issuance under the plan. In general, if any award (including an
award granted to a non-employee director) granted under the plan expires,
terminates, is forfeited or is canceled for any reason, the shares of common
stock allocable to such award may again be made subject to an award granted
under the plan.
AWARDS. Directors and key policy-making employees of St. Joseph and the
bank are eligible to receive grants under the Stock Incentive Plan. Only
employees may be granted incentive stock options. Awards may be granted subject
to a vesting requirement and in any event will become fully vested upon a merger
or change of control of St. Joseph. The exercise price of incentive stock
options granted under the Stock Incentive Plan must at least equal the fair
market value of the common stock subject to the option (determined as provided
in the plan) on the date the option is granted. The exercise price of
nonstatutory options and stock appreciation rights will be determined by the
committee.
An incentive stock option granted under the plan to an employee owning
more than 10% of the total combined voting power of all classes of capital stock
of St. Joseph is subject to the further restriction that the option must have an
exercise price of at least 110% of the fair market value of the shares of common
stock issuable upon exercise of the option, determined as of the date the option
is granted, and may not have an exercise term of more than five years. Incentive
stock options are also subject to the further restriction that the aggregate
fair market value, determined as of the date of grant, of common stock as to
which any such incentive stock option first becomes exercisable in any calendar
year, is limited to $100,000. If options covering more than $100,000 worth of
common stock first become exercisable in any one calendar year, the excess will
be nonstatutory options. For purposes of determining which, if any, options have
been granted in excess of the $100,000 limit, options will be considered to
become exercisable in the order granted.
Each director and key employee eligible to participate in the Stock
Incentive Plan will be notified by the committee. To receive an award under the
plan, an award agreement must be executed which specifies the type of award to
be granted, the number of shares of common stock, if any, to which the award
relates, the terms and conditions of the award and the date granted. In the case
of an award of options, the award agreement will also specify the price at which
the shares of common stock subject to the option may be purchased, the date(s)
on which the option becomes exercisable and whether the option is an incentive
stock option or a nonstatutory option.
The full exercise price for all shares of common stock purchased upon
the exercise of options granted under the plan must be paid by cash, personal
check, personal note, award surrender or common stock owned at the time of
exercise. Incentive stock options granted to employees under the plan may remain
outstanding and exercisable for ten years from the date of grant or until the
expiration of ninety days, or such lesser period as the committee may determine,
from the date on which the person to whom they were granted ceases to be
employed by St. Joseph. Nonstatutory options and stock appreciation rights
granted under the Plan remain outstanding and exercisable for such period as the
committee may determine.
INCOME TAX. Incentive stock options granted under the plan have certain
advantageous tax attributes to the recipient under the income tax laws. No
taxable income is recognized by the option holder for income tax purposes at the
time of the grant or exercise of an incentive stock option, although neither is
there any income tax deduction available to St. Joseph as a result of such a
grant or exercise. Any gain or loss recognized by an option holder on the later
disposition of shares of common stock acquired pursuant to the exercise of an
incentive stock option generally will be treated as capital gain or loss if such
disposition does not occur prior to one year after the date of exercise of the
option, or two years after the date the option was granted.
As in the case of incentive stock options, the grant of nonstatutory
stock options, restricted stock or stock appreciation rights will not result in
taxable income for income tax purposes to the recipient of the awards, nor will
St. Joseph be entitled to an income tax deduction. Upon the exercise of
nonstatutory stock options or stock appreciation rights, or the lapse of
restrictions on restricted stock, the award holder will generally recognize
42
<PAGE> 45
ordinary income for income tax purposes equal to the difference between the
exercise price and the fair market value of the shares of common stock acquired
or deemed acquired on the date of exercise, and St. Joseph will be entitled to
an income tax deduction in the amount of the ordinary income recognized by the
option holder. In general, any gain or loss realized by the option holder on the
subsequent disposition of such shares will be a capital gain or loss.
AMENDMENT AND TERMINATION. The Stock Incentive Plan expires ten years
after its adoption, unless sooner terminated by the board. The board has
authority to amend the plan in such manner as it deems advisable. Also, the plan
provides for appropriate adjustment, as determined by the committee, in the
number and kind of shares subject to unexercised options, in the event of any
change in the outstanding shares of common stock by reason of a stock split,
stock dividend, combination or reclassification of shares, recapitalization,
merger or similar event.
CERTAIN TRANSACTIONS
During the year ended December 31, 1998, some of our directors and
executive officers, including their affiliates, families and companies in which
they are principal owners, officers or directors, became loan customers of, and
have had other transactions with, St. Joseph or the bank in the ordinary course
of business. The loans and lines of credit have been made in the ordinary course
of business on substantially the same terms, including interest rates and
collateral, as those prevailing at the time for transactions with other persons
and are not believed to involve more than the normal risk of collectibility or
present other unfavorable features.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information regarding our common
stock beneficially owned on June 30, 1999 with respect to all persons known to
us to be the beneficial owner of more than five percent of our common stock,
each director, each executive officer named in the Summary Compensation Table
and all directors and executive officers of St. Joseph and the bank as a group.
NAME OF INDIVIDUAL AND AMOUNT AND NATURE OF PERCENT
NUMBER OF PERSONS IN GROUP BENEFICIAL OWNERSHIP(1)(2) OF CLASS
- -------------------------- -------------------------- --------
DIRECTORS
John W. Rosenthal(3) 48,273 3.7%
Brian R. Brady 6,399 .5%
David A. Eckrich 28,493 2.2%
Jerry Hammes(4) 49,318 3.8%
V. Robert Hepler 27,598 2.1%
Scott C. Malpass 5,963 .5%
Jack Matthys 35,000 2.7%
Arthur H. McElwee 13,463 1.0%
Myron C. Noble 27,773 2.2%
Richard A. Rosenthal(5) 23,478 1.8%
43
<PAGE> 46
Robert A. Sullivan 13,508 1.1%
All directors and executive
officers as a group
(12 persons) 282,253 20.7%
- -------------------------
(1) The information contained in this column is based upon information furnished
to St. Joseph by the persons named above and the members of the designated
group. The nature of beneficial ownership for shares shown in this column is
sole voting and investment power, except as set forth in the footnotes below.
Inclusion of shares shall not constitute an admission of beneficial ownership or
voting or investment power over included shares.
(2) Includes shares obtainable under options granted to directors and officers
of St. Joseph and the bank under St. Joseph's Stock Incentive Plan which are
presently exercisable or which become exercisable within 60 days of the date of
this table, as follows: Mr. John Rosenthal - 32,500 shares; Mr. Brady - 2,299;
Mr. Eckrich-3,493; Mr. Hammes - 3,518; Mr. Hepler - 2,598; Messrs. Malpass and
McElwee - 3,463; Mr. Matthys - 15,000; Mr. Noble - 2,773; Mr. Richard Rosenthal
- -3,478; Mr. Sullivan - 3,508; and all directors and executive officers as a
group - 69,631.
(3) Includes 6,400 shares held in a trust for the benefit of Mr. Richard
Rosenthal's family and over which Mr. John Rosenthal has shared voting and
investment power.
(4) Includes 600 shares for which Mr. Hammes disclaims beneficial ownership.
(5) Includes 6,400 shares gifted to a trust for the benefit of Mr. Richard
Rosenthal's family by Mr. Richard Rosenthal and for which he disclaims
beneficial ownership.
DESCRIPTION OF CAPITAL SECURITIES
The authorized capital stock of St. Joseph presently consists of
2,500,000 shares of common stock, par value $.01 per share, and 100,000 shares
of preferred stock, par value $.01 per share, issuable in series.
COMMON STOCK
As of June 30, 1999, there were 1,281,953 shares of common stock issued
and outstanding held by approximately 70 holders of record of the common stock,
and we estimate that we had 435 stockholders of our common stock holding their
shares in street name. The common shares are listed for trading on the OTC
Bulletin Board under the symbol "SJOE". The holders of common stock are entitled
to one vote for each share held of record on all matters voted upon by
stockholders. Subject to preferences that may be applicable to any outstanding
shares of preferred stock, each share of outstanding common stock is entitled to
participate equally in any distribution of net assets made to the stockholders
in liquidation, dissolution or winding up St. Joseph and is entitled to
participate equally in dividends as and when declared by St. Joseph's board.
There are no redemption, sinking fund, conversion or preemptive rights with
respect to the shares of common stock. All shares of common stock have equal
rights and preferences. The transfer agent and registrar for the common stock is
First Union National Bank of North Carolina.
PREFERRED STOCK
As of the date of this prospectus, no shares of preferred stock were
issued or outstanding. The board is authorized to fix or alter the rights,
preferences, privileges and restrictions of any wholly unissued series of
preferred stock, including the dividend rights, original issue price, conversion
rights, voting rights, terms of redemption, liquidation preferences and sinking
fund terms thereof, and the number of shares constituting any such series and
the designation thereof and to increase or decrease the number of shares of such
series subsequent to the issuance of shares of such series, but not below the
number of shares then outstanding. Because the terms of the preferred stock can
be fixed by the board without stockholder action, the preferred stock could be
issued
44
<PAGE> 47
with terms calculated to defeat a proposed takeover of St. Joseph or to make the
removal of management more difficult. The board, without stockholder approval,
could issue preferred stock with dividend, voting and conversion rights which
could adversely affect the rights of the holders of common stock. At present,
St. Joseph has no plans to issue any shares of preferred stock.
CERTAIN ANTI-TAKEOVER, INDEMNIFICATION AND LIMITED LIABILITY PROVISIONS
St. Joseph's certificate of incorporation contains certain provisions
which may have the effect of delaying, deferring or preventing a change in
control of St. Joseph. Such provisions could also result in St. Joseph being
less attractive to a potential acquiror. The certificate provides that the board
shall consist of three classes of directors, each serving for a three-year term
ending in a successive year. This provision may make it more difficult to effect
a takeover of St. Joseph because it would generally take two annual meetings of
stockholders for an acquiring party to elect a majority of the board. As a
result, a classified board may discourage proxy contests for the election of
directors or purchasers of a substantial block of stock because it could operate
to prevent obtaining control of the board in a relatively short period of time.
The certificate also requires the affirmative vote of 66-2/3% of the
outstanding shares of voting stock, or of shares held by disinterested
stockholders if the transaction involves an interested stockholder, to approve
certain fundamental changes such as mergers, consolidations or dissolutions of
St. Joseph or the sale or lease of all or substantially all of St. Joseph's
assets. A majority vote is required if these changes have received advance
approval of 66-2/3% of St. Joseph's directors, or of directors not affiliated
with an interested stockholder if the transaction involves an interested
stockholder.
In addition, the certificate of incorporation provides that the
stockholders may only take action at a duly called and held meeting and may not
take action by written consent. This provision may make it more difficult to
effect a takeover of St. Joseph by means of certain transactions, such as a
merger or sale of assets, by requiring a potential acquiror to hold a
stockholders' meeting before such a transaction could be consummated.
The certificate also provides that the provisions of the certificate
governing the amendment of the certificate and the bylaws, establishing St.
Joseph's classified board of directors, restricting certain business
combinations with interested stockholders, requiring stockholder actions to be
taken only at meetings, providing that special meetings of stockholders may only
be called by the board and permitting the board to consider certain
non-stockholder interests when evaluating a proposed tender or exchange offer,
may be amended only by the affirmative vote of not less than 66-2/3% of the
outstanding shares of voting stock of St. Joseph, unless such changes have
received advance approval of at least 66-2/3% of St. Joseph's directors, in
which case the required vote is a majority.
St. Joseph is subject to the provisions of Section 203 of the Delaware
General Corporation Law. In general, this statute prohibits a publicly held
Delaware corporation from engaging in a "business combination" with an
"interested stockholder" for a period of three years after the date the person
or entity becomes an interested stockholder, unless the business combination or
the transaction in which the person becomes an interested stockholder is
approved in a prescribed manner. Generally, a "business combination" includes a
merger, asset or stock sale or other transaction resulting in a financial
benefit to the stockholder. An "interested stockholder" is generally defined as
a person who, together with affiliates and associates, owns 15% or more of the
corporation's voting stock, or did own within the three prior years. This
provision may have the effect of delaying, deferring or preventing a change in
control of St. Joseph without further action by the stockholders.
As permitted by the provisions of the Delaware General Corporation Law,
the certificate eliminates in certain circumstances the monetary liability of
directors of St. Joseph for a breach of their fiduciary duty as directors. These
provisions do not eliminate the liability of a director for:
45
<PAGE> 48
- a breach of the director's duty of loyalty to St. Joseph or its
stockholders;
- acts or omissions by a director not in good faith or which
involve intentional misconduct or a knowing violation of law;
- liability arising under Section 174 of the Delaware General
Corporation Law which relates to the declaration of dividends and
purchase or redemption of shares in violation of the Delaware
General Corporation Law; or
- any transaction from which the director derived an improper
personal benefit.
In addition, these provisions do not limit the rights of St. Joseph or its
stockholders, in appropriate circumstances, to seek equitable remedies such as
injunctive or other forms of non-monetary relief. Such remedies may not be
effective in all cases.
St. Joseph's certificate of incorporation and bylaws provide that it
shall indemnify all directors and officers of St. Joseph to the full extent
permitted by the Delaware General Corporation Law. Under such provisions, any
director or officer, who in his or her capacity as such, is made or threatened
to be made, a party to any suit or proceeding, shall be indemnified if such
director or officer acted in good faith and in a manner he or she reasonably
believed to be in or not opposed to the best interests to St. Joseph. The
certificate, bylaws and the Delaware General Corporation Law further provide
that such indemnification is not exclusive of any other rights to which such
individuals may be entitled under the certificate, the bylaws, any agreement,
insurance policies, vote of stockholders or disinterested directors or
otherwise.
SHARES ELIGIBLE FOR FUTURE SALE
If $5 million of common stock is sold through this offering, then we
expect to have [_____] shares of our common stock outstanding afterward. If $8
million of common stock is sold through this offering, then we expect to have
[_____] shares of our common stock outstanding afterward. Shares of St. Joseph's
common stock purchased in this offering have been registered with the Securities
and Exchange Commission under the Securities Act, and may generally be resold
without registration under the Securities Act unless they were acquired by
directors, executive officers, or other affiliates of St. Joseph or the bank.
These affiliates of St. Joseph may generally only sell shares of the common
stock pursuant to the Securities and Exchange Commission's Rule 144.
In general, under Rule 144 as currently in effect, an affiliate of St.
Joseph may sell shares of common stock within any three-month period in an
amount limited to the greater of the following:
- 1% of the outstanding shares of St. Joseph's common stock; or
- the average weekly trading volume in St. Joseph's common stock
during the four calendar weeks preceding such sale.
Sales under Rule 144 are also subject to certain manner-of-sale provisions,
notice requirements and the availability of current public information about St.
Joseph.
LEGAL MATTERS
The validity of the shares of common stock offered will be passed upon
for St. Joseph by Barack Ferrazzano Kirschbaum Perlman & Nagelberg, Chicago,
Illinois.
46
<PAGE> 49
EXPERTS
The consolidated financial statements as of December 31, 1998 and 1997
and for the years ended December 31, 1998, 1997 and for the period from February
29, 1996 (date of inception) to December 31, 1996, of St. Joseph and the bank
included in this prospectus have been audited by Crowe, Chizek and Company LLP,
independent certified public accountants. These statements are included in
reliance upon the authority of Crowe, Chizek and Company LLP as experts in
accounting and auditing.
WHERE YOU CAN FIND INFORMATION
This prospectus is a part of a Registration Statement on Form SB-2
filed by St. Joseph with the Securities and Exchange Commission under the
Securities Act, with respect to its common stock. This prospectus does not
contain all the information set forth in the registration statement, certain
parts of which are omitted in accordance with the rules and regulations of the
Securities and Exchange Commission. For further information with respect to St.
Joseph and the common stock offered by this prospectus, reference is made to the
registration statement, including the exhibits to the registration statement.
Statements contained in this prospectus concerning the provisions of such
documents are necessarily summaries of such documents and each such statement is
qualified in its entirety by reference to the copy of the applicable document
filed with the Securities and Exchange Commission.
St. Joseph is not currently subject to the information reporting
requirements of the Securities Exchange Act of 1934. However, we voluntarily
file periodic reports, proxy statements and other information with the
Securities and Exchange Commission. Our filings are available to the public over
the Internet at the Securities and Exchange Commission's web site. The address
of that site is http://www.sec.gov. You may also inspect and copy these
materials at the public reference facilities of the Securities and Exchange
Commission at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549, as well
as at 500 West Madison Street, Suite 1400, Chicago, Illinois 60661 and 75 Park
Place, Room 1400, New York, New York 10007. Copies of such material can be
obtained at prescribed rates from the Public Reference Section of the Securities
and Exchange Commission at 450 Fifth Street, N.W., Washington, D.C. 20549.
Please call the Securities and Exchange Commission at 1-800-SEC-0330 for further
information.
47
<PAGE> 50
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
AUDITED CONSOLIDATED FINANCIAL STATEMENTS
<S> <C>
Report of Independent Auditors..............................................................................F-2
Consolidated Balance Sheets at December 31, 1998 and 1997...................................................F-3
Consolidated Statements of Income for the
Years Ended December 31, 1998, 1997 and period from February 29,
1996 to December 31, 1996................................................................................F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1998, 1997 and period from February 29,
1996 to December 31, 1996................................................................................F-5
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and period from February 29,
1996 to December 31, 1996................................................................................F-6
Notes to Consolidated Financial Statements..................................................................F-7
INTERIM UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheets at June 30, 1999 (unaudited) and December 31, 1998..............................F-26
Consolidated Statements of Income for the Six Months
Ended June 30, 1999 and 1998 (unaudited).................................................................F-27
Consolidated Statements of Changes in Stockholders' Equity for the
Six Months Ended June 30, 1999 and 1998 (unaudited)......................................................F-28
Consolidated Statements of Cash Flows for the Six Months
Ended June 30, 1999 and 1998 (unaudited).................................................................F-29
Notes to Consolidated Financial Statements..................................................................F-30
</TABLE>
F-1
<PAGE> 51
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Stockholders
St. Joseph Capital Corporation
Mishawaka, Indiana
We have audited the accompanying consolidated balance sheets of St. Joseph
Capital Corporation (the Company) as of December 31, 1998 and 1997 and the
related consolidated statements of income, changes in stockholders' equity and
cash flows for the years ended December 31, 1998, and 1997 and for the period
from February 29, 1996 (date of inception) to December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1998 and 1997, and the results of its operations and its cash flows
for the years ended December 31, 1998, 1997 and for the period from February 29,
1996 (date of inception) to December 31, 1996 in conformity with generally
accepted accounting principles.
Crowe, Chizek and Company LLP
South Bend, Indiana
February 19, 1999
F-2
<PAGE> 52
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1998 and 1997
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 6,113,583 $ 985,464
Interest-bearing deposits in other financial institutions -
short-term 5,531 -
Federal funds sold 9,600,000 3,550,000
--------------- ----------------
Total cash and cash equivalents 15,719,114 4,535,464
Interest-bearing deposits in other financial institutions
(cost approximates fair value) - 500,000
Securities available for sale 31,066,346 22,351,254
Federal Home Loan Bank (FHLB) stock 222,200 -
Loans receivable, net of allowance for loan losses
of $751,675 in 1998 and $360,000 in 1997 48,011,296 21,991,115
Accrued interest receivable 739,024 526,339
Premises and equipment, net 742,495 881,840
Other assets 103,565 53,322
--------------- ----------------
Total assets $ 96,604,040 $ 50,839,334
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 11,442,145 $ 3,951,366
Savings, NOW and money market 46,414,185 13,612,678
Certificates of deposit 18,534,135 17,351,837
--------------- ----------------
Total deposits 76,390,465 34,915,881
Securities sold under agreements to repurchase 6,388,971 4,503,760
FHLB advances 2,000,000 -
Accrued interest payable 100,707 120,890
Other liabilities 113,052 41,431
--------------- ----------------
Total liabilities 84,993,195 39,581,962
Stockholders' equity
Preferred stock, $.01 par value, 100,000 shares
authorized; -0- shares issued and outstanding - -
Common stock, $.01 par value, 2,500,000 shares
authorized; 1,278,625 and 1,269,486 shares issued
and outstanding in 1998 and 1997 12,786 12,695
Additional paid-in capital 12,323,967 12,164,648
Accumulated deficit (1,280,858) (1,052,339)
Accumulated other comprehensive income 554,950 132,368
--------------- ----------------
Total stockholders' equity 11,610,845 11,257,372
--------------- ----------------
Total liabilities and stockholders' equity $ 96,604,040 $ 50,839,334
=============== ================
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE> 53
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and
period from February 29, 1996 to December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 2,796,772 $ 883,629 $ -
Securities available for sale - taxable 1,652,227 920,425 197,057
FHLB stock 8,703 - -
Federal funds sold 325,139 176,944 -
Other interest earning assets 6,882 41,181 -
-------------- -------------- ---------------
Total interest and dividend income 4,789,723 2,022,179 197,057
Interest expense
Deposits 2,297,456 834,759 -
Securities sold under agreements to repurchase 398,701 107,393 -
Other borrowings 2,922 172 7,656
-------------- -------------- ---------------
Total interest expense 2,699,079 942,324 7,656
-------------- -------------- ---------------
NET INTEREST INCOME 2,090,644 1,079,855 189,401
Provision for loan losses 391,675 360,000 -
-------------- -------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,698,969 719,855 189,401
Noninterest income
Gain on sales and calls of securities
available for sale, net 116,644 2,139 -
Other income 42,228 2,247 -
-------------- -------------- ---------------
Total noninterest income 158,872 4,386 -
Noninterest expense
Salaries and employee benefits 1,047,262 756,388 272,088
Occupancy and equipment 449,496 301,478 29,588
Other expense 589,602 428,495 177,944
-------------- -------------- ---------------
Total noninterest expense 2,086,360 1,486,361 479,620
-------------- -------------- ---------------
LOSS BEFORE INCOME TAXES (228,519) (762,120) (290,219)
Income tax expense - - -
-------------- -------------- ---------------
NET LOSS $ $ (228,519) $ (762,120) $ (290,219)
============== ============== ===============
Basic and diluted loss per common share $ (.18) $ (.60) $ (.23)
============== ============== ===============
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE> 54
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Years ended December 31, 1998, 1997 and
period from February 29, 1996 to December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Additional Other Total
Common Paid-In Accumulated Comprehensive Stockholders'
Stock Capital Deficit Income Equity
----- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
BALANCE AT FEBRUARY 29, 1996 $ - $ - $ - $ - $ -
Comprehensive loss:
Net loss - - (290,219) - (290,219)
Net change in net unrealized
appreciation (depreciation) on
securities available for sale, net
of reclassification adjustments
and tax effects - - - (32,547) (32,547)
--------------
Total comprehensive loss - - - - (322,766)
Proceeds from issuance of common
stock for initial capitalization 1,000 - - - 1,000
Proceeds from issuance of
1,265,160 shares of common stock,
net of stock offering costs 12,652 12,103,000 - - 12,115,652
Redemption of common stock
from initial capitalization (1,000) - - - (1,000)
------------- -------------- ------------- ------------- --------------
BALANCE AT DECEMBER 31, 1996 12,652 12,103,000 (290,219) (32,547) 11,792,886
Comprehensive loss:
Net loss - - (762,120) - (762,120)
Net change in net unrealized
appreciation (depreciation) on
securities available for sale, net
of reclassification adjustments
and tax effects - - - 164,915 164,915
--------------
Total comprehensive loss - - - - (597,205)
Proceeds from issuance of
4,326 shares of common stock 43 61,648 - - 61,691
------------- -------------- ------------- ------------- --------------
BALANCE AT DECEMBER 31, 1997 12,695 12,164,648 (1,052,339) 132,368 11,257,372
Comprehensive income:
Net loss - - (228,519) - (228,519)
Net change in net unrealized
appreciation (depreciation) on
securities available for sale, net
of reclassification adjustments
and tax effects - - - 422,582 422,582
--------------
Total comprehensive income - - - - 194,063
Proceeds from issuance of
9,139 shares of common stock 91 159,319 - - 159,410
------------- -------------- ------------- ------------- --------------
BALANCE AT DECEMBER 31, 1998 $ 12,786 $ 12,323,967 $ (1,280,858) $ 554,950 $ 11,610,845
============= ============== ============= ============= ==============
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE> 55
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and
period from February 29, 1996 to December 31, 1996
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (228,519) $ (762,120) $ (290,219)
Adjustments to reconcile net loss
to net cash from operating activities
Depreciation 219,273 138,215 4,176
Provision for loan losses 391,675 360,000 -
Net amortization (accretion) on securities
available for sale 61,223 (61,395) (167,621)
Gain on sales and calls of securities
available for sale, net (116,644) (2,139) -
Net change in
Accrued interest receivable (212,685) (526,339) -
Other assets (50,243) (24,651) (28,671)
Accrued interest payable (20,183) 120,890 -
Other liabilities 71,621 (7,088) 48,519
-------------- -------------- ---------------
Net cash from operating activities 115,518 (764,627) (433,816)
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest-bearing deposits in
other financial institutions 500,000 (500,000) -
Purchase of securities available for sale (28,031,891) (32,281,778) (17,054,828)
Proceeds from sales of securities available for sale 11,269,802 4,001,875 -
Proceeds from maturities and calls of securities
available for sale 8,525,000 16,285,000 7,062,000
Purchase of FHLB stock (222,200) - -
Net change in loans receivable (26,411,856) (22,351,115) -
Purchase of premises and equipment, net (79,928) (745,335) (278,896)
-------------- -------------- ---------------
Net cash from investing activities (34,451,073) (35,591,353) (10,271,724)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 41,474,584 34,915,881 -
Net change in securities sold under agreements
to repurchase 1,885,211 4,503,760 -
Proceeds from FHLB advances 2,000,000 - -
Proceeds from other borrowings - - 275,000
Repayment of other borrowings - - (275,000)
Proceeds from issuance of common stock, net 159,410 61,691 12,115,652
-------------- -------------- ---------------
Net cash from financing activities 45,519,205 39,481,332 12,115,652
-------------- -------------- ---------------
Net change in cash and cash equivalents 11,183,650 3,125,352 1,410,112
Cash and cash equivalents at beginning of period 4,535,464 1,410,112 -
-------------- -------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15,719,114 $ 4,535,464 $ 1,410,112
============== ============== ===============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 2,719,262 $ 821,434 $ 7,656
Income taxes - - -
</TABLE>
See accompanying notes to consolidated financial statements.
F-6
<PAGE> 56
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies of St. Joseph Capital Corporation conform
to generally accepted accounting principles and to general practices within the
banking industry. The following describes the significant accounting and
reporting policies, which are employed in the preparation of the financial
statements.
Principles of Consolidation: The consolidated financial statements include the
accounts of St. Joseph Capital Corporation, a bank holding company located in
Mishawaka, Indiana, (the Company) and its wholly-owned subsidiary St. Joseph
Capital Bank. All significant intercompany balances and transactions have been
eliminated.
Nature of Business and Concentration of Credit Risk: The Company accepts
deposits and grants commercial, real estate, and installment loans to customers
primarily in northern Indiana. Substantially all loans are secured by specific
items of collateral including business assets, consumer assets and real estate.
Commercial loans are expected to be repaid from cash flow from operations of
businesses. Real estate loans are secured by both residential and commercial
real estate.
Segments: The Company, through its subsidiary, St. Joseph Capital Bank (the
Bank), provides a broad range of financial services to individuals and companies
in northern Indiana. These services include demand, time and savings deposits;
lending; credit card servicing; ATM processing and cash management. While the
Company's chief decision makers monitor the revenue streams of the various
Company products and services, operations are managed and financial performance
is evaluated on a company-wide basis. Accordingly, all of the Company's banking
operations are considered by management to be aggregated in one reportable
operating segment.
Use of Estimates in Preparing Financial Statements: The preparation of financial
statements in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts of
assets, liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates. The allowance for loan losses, fair values of financial instruments,
the realization of deferred tax assets and fair value of stock options involve
certain significant estimates made by management. These estimates are reviewed
by management routinely and it is reasonably possible that circumstances that
exist at December 31, 1998 may change in the near-term future and that the
effect could be material to the financial statements.
Restrictions on Cash and Due From Banks: To satisfy legal cash reserve and
clearing balance requirements, noninterest-bearing balances are required to be
maintained as deposits with the Federal Reserve or as cash on hand. The total
required cash reserve and clearing balance requirements was $477,000 and
$107,000 at year end 1998 and 1997.
(Continued)
F-7
<PAGE> 57
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Securities: Securities are classified as held to maturity and carried at
amortized cost when management has the positive intent and ability to hold them
to maturity. Securities are classified as available for sale when they might be
sold before maturity. Securities available for sale are carried at fair value,
with unrealized holding gains and losses reported separately in other
comprehensive income (loss) and stockholders' equity, net of tax. Securities are
classified as trading when held for short-term periods in anticipation of market
gains, and are carried at fair value. Securities are written down to fair value
when a decline in fair value is not temporary.
The estimated fair value of securities is based on quoted market values for the
individual securities or for equivalent securities. Gains and losses on the sale
of securities are determined using the specific identification method based on
amortized cost and are reflected in results of operations at the time of sale.
Interest income includes amortization of purchase premiums and discounts over
the estimated life of the security using the level yield method.
Loans Receivable: Loans are reported at the principal balance outstanding, net
of unearned interest, deferred loan fees and costs, and an allowance for loan
losses. Interest income is reported on the interest method and includes
amortization of net deferred loan fees and costs over the loan term.
Interest income is not reported when full loan repayment is in doubt, typically
when payments are past due over 90 days. Payments received on such loans are
reported as principal reductions.
Allowance for Loan Losses: The allowance for loan losses is a valuation
allowance, increased by the provision for loan losses and decreased by
charge-offs less recoveries. Management estimates the allowance balance required
based on past loan loss experience, known and inherent risks in the portfolio,
information about specific borrower situations and estimated collateral values,
economic conditions and other factors. Allocations of the allowance may be made
for specific loans, but the entire allowance is available for any loan that, in
management's judgment, should be charged-off.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of similar
nature such as residential mortgage, consumer, and credit card loans, and on an
individual loan basis for other loans. If a loan is impaired, a portion of the
allowance is allocated so that the loan is reported, net, at the present value
of estimated future cash flows using the loan's existing rate or at the fair
value of collateral if repayment is expected solely from the collateral. Loans
are evaluated for impairment when payments are delayed, typically 90 days or
more, or when it is probable that all principal and interest amounts will not be
collected according to the original terms of the loan.
(Continued)
F-8
<PAGE> 58
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Foreclosed Real Estate: Real estate properties acquired through, or in lieu of,
loan foreclosure are initially recorded at fair value at the date of
acquisition, establishing a new cost basis. Any reduction to fair value from the
carrying value of the related loan at the time of acquisition is accounted for
as a loan loss and charged against the allowance for loan losses. Valuations are
periodically performed by management and valuation allowances are adjusted
through a charge to income for changes in fair value or estimated selling costs.
There were no foreclosed real estate properties held at December 31, 1998 or
1997.
Premises and Equipment: Premises and equipment are stated at cost less
accumulated depreciation. Leasehold improvements are depreciated using the
straight-line method over the lease term. Furniture, fixtures and equipment are
depreciated using the straight-line method over the estimated useful life of the
assets. Maintenance and repairs are expensed, and major improvements are
capitalized. Assets are reviewed for impairment under Statement of Financial
Accounting Standards (SFAS) No. 121 when events indicate that the reported
carrying amount may not be fully recoverable.
Profit Sharing Plan: The Company maintains a 401(k) profit sharing plan covering
substantially all employees. For details concerning the plan, see Note 9.
Income Taxes: Income tax expense (benefit) is the sum of the current year income
tax due or refundable and the change in deferred tax assets and liabilities.
Deferred tax assets and liabilities are the expected future tax consequences of
temporary differences between the carrying amounts and tax bases of assets and
liabilities computed using enacted tax rates. As the Company has only recently
begun operations, a valuation allowance reduces deferred tax assets to zero.
Financial Instruments With Off-Balance-Sheet Risk: The Company, in the normal
course of business, makes commitments to make loans which are not reflected in
the consolidated financial statements. A summary of these commitments is
disclosed in Note 13.
Dividend Restriction: Banking regulations require the maintenance of certain
capital levels which limit the amount of dividends which may be paid. For
regulatory capital requirements, see Note 14.
Comprehensive Income (Loss): Comprehensive income (loss) consists of net income
(loss) and other comprehensive income (loss). Other comprehensive income (loss)
includes the net change in net unrealized appreciation (depreciation) on
securities available for sale, net of tax which is also recognized as a separate
component of stockholders' equity. The accounting standard that requires
reporting comprehensive income (loss) first applies for 1998, with prior
information restated to be comparable.
(Continued)
F-9
<PAGE> 59
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Income (Loss) Per Common Share: Basic income (loss) per common share is based on
the net income (loss) divided by the weighted average number of common shares
outstanding during the period. Diluted income (loss) per common share shows the
dilutive effect of additional potential common shares issuable under stock
options.
Stock Option Plan: Expense for employee compensation under stock option plans is
based on Accounting Principles Board (APB) Opinion 25, with expense reported
only if options are granted below market price at grant date. If applicable,
disclosures of net income and income or loss per common share are provided as if
the fair value method of SFAS No. 123 were used for stock-based compensation.
Statement of Cash Flows: For purposes of the statement of cash flows, cash and
cash equivalents are defined to include the Company's cash on hand and due from
other banks, its short-term interest-bearing deposits in other financial
institutions and federal funds sold with a maturity of 90 days or less. The
Company reports net cash flows for customer loan and deposit transactions,
interest-bearing deposits in other financial institutions and short-term
borrowings with original maturities of 90 days or less.
Fair Values of Financial Instruments: Fair values of financial instruments are
estimated using relevant market information and other assumptions, as more fully
disclosed in Note 16. Fair value estimates involve uncertainties and matters of
significant judgment regarding interest rates, credit risk, prepayments and
other factors, especially in the absence of broad markets for particular items.
Changes in assumptions or in market conditions could significantly affect the
estimates.
Reclassifications: Certain amounts in the 1997 and 1996 consolidated financial
statements were reclassified to conform with the 1998 presentation.
NOTE 2 - ORGANIZATION
St. Joseph Capital Corporation was incorporated under the laws of the state of
Delaware on February 29, 1996, with an initial capitalization of $1,000. During
1996 and the first part of 1997, the Company's activities were limited to the
organization of the Bank, as well as preparation for and completion of a
$12,650,000 common stock offering (the Offering). The Company sold 1,265,000
shares of common stock at a price of $10 per share in the Offering resulting in
net proceeds of $12,115,000. A substantial portion of the proceeds of the
Offering were used by the Company to provide the initial capitalization of the
Bank which occurred on February 13, 1997, at which time the Bank began
operations.
(Continued)
F-10
<PAGE> 60
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE FOR SALE
Year end securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1998 Cost Gains Losses Value
- ---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
Debt securities
U.S. Government and
federal agencies $ 26,706,094 $ 575,570 $ (5,660) $ 27,276,004
Obligations of states and
political subdivisions 2,586,869 4,538 (17,039) 2,574,368
Corporate bonds 1,193,446 1,403 - 1,194,849
Marketable equity securities 24,987 - (3,862) 21,125
-------------- --------------- ------------- ---------------
$ 30,511,396 $ 581,511 $ (26,561) $ 31,066,346
============== =============== ============= ===============
1997
- ----
Debt securities
U.S. Government and
federal agencies $ 22,059,046 $ 136,756 $ (5,507) $ 22,190,295
Obligations of states and
political subdivisions 159,840 1,119 - 160,959
-------------- --------------- ------------- ---------------
$ 22,218,886 $ 137,875 $ (5,507) $ 22,351,254
============== =============== ============= ===============
</TABLE>
The amortized cost and fair value of securities available for sale by
contractual maturity are shown below. Expected maturities may differ from
contractual maturities because borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
-----------December 31, 1998----------
-----------------
Amortized Fair
Cost Value
---- -----
<S> <C> <C>
Due in one year or less $ 4,197,141 $ 4,214,699
Due after one year through five years 17,618,128 18,005,072
Due after five years through ten years 8,138,426 8,290,770
Due after ten years 532,714 534,680
Marketable equity securities 24,987 21,125
--------------- ----------------
$ 30,511,396 $ 31,066,346
=============== ================
</TABLE>
(Continued)
F-11
<PAGE> 61
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)
Activities related to sales and calls of securities available for sale are
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Proceeds from sales $ 11,269,802 $ 4,001,875 $ -
Gross gains on sales 117,139 2,802 -
Gross gains on calls 522 - -
Gross losses on sales 1,017 663 -
Tax effects of gain on sales and calls, net - - -
</TABLE>
At December 31, 1998 and 1997, securities and FHLB stock, with an amortized cost
of approximately $14,364,000 and $7,119,000, respectively, were pledged to
secure certain deposits, securities sold under agreements to repurchase and FHLB
advances.
NOTE 4 - LOANS RECEIVABLE, NET
Year end loans receivable were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
One to four family residential mortgage loans $ 13,311,145 $ 5,909,708
Construction loans - residential 629,168 468,094
Construction loans - commercial 4,966,020 3,400,709
Commercial and multi-family real estate loans 14,988,484 6,251,140
Commercial business loans 13,247,735 5,081,563
Consumer loans 1,636,286 1,241,508
--------------- ---------------
48,778,838 22,352,722
Allowance for loan losses (751,675) (360,000)
Net deferred loan origination fees (15,867) (1,607)
--------------- ---------------
$ 48,011,296 $ 21,991,115
=============== ===============
</TABLE>
Activity in the allowance for loan losses at year end was as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 360,000 $ - $ -
Provision for loan losses 391,675 360,000 -
Recoveries - - -
Charge-offs - - -
--------------- --------------- ---------------
Ending balance $ 751,675 $ 360,000 $ -
=============== =============== ===============
</TABLE>
(Continued)
F-12
<PAGE> 62
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
At December 31, 1998 and 1997 no portion of the allowance for loan losses was
allocated to impaired loan balances as there were no loans considered impaired
as of or for the years ended December 31, 1998 and 1997.
Certain directors and executive officers of the Company and its subsidiary,
including associates of such persons, are loan customers. A summary of the
related party loan activity, for loans aggregating $60,000 or more to any one
related party, is as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Balance - beginning of year $ 1,272,000 $ -
New loans 1,723,000 1,330,000
Repayments (756,000) (58,000)
Other changes 600,000 -
--------------- ---------------
Balance - end of year $ 2,839,000 $ 1,272,000
=============== ===============
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
NOTE 5 - PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Leasehold improvements, furniture, fixtures
and equipment $ 1,104,159 $ 1,024,231
Accumulated depreciation (361,664) (142,391)
---------------- ----------------
$ 742,495 $ 881,840
================ ================
</TABLE>
(Continued)
F-13
<PAGE> 63
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 6 - DEPOSITS
Certificates of deposit in denominations of $100,000 or more was approximately
$15,066,000 and $15,250,000 at year end 1998 and 1997.
At December 31, 1998, the scheduled maturities of certificates of deposit were
as follows for the years ended December 31:
<TABLE>
<S> <C>
1999 $ 16,926,888
2000 604,470
2001 1,002,777
-----------------
$ 18,534,135
=================
</TABLE>
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
Securities sold under agreements to repurchase consist of obligations of the
Company to other parties. These arrangements are all short-term retail
repurchase agreements and are secured by securities available for sale. Such
collateral is held by safekeeping agents of the Company. Information concerning
securities sold under agreements to repurchase for 1998 and 1997, is summarized
as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Amount outstanding at year end $ 6,388,971 $ 4,503,760
Weighted average interest rate at year end 4.08% 4.97%
Maximum month end balance during the year $ 14,183,976 $ 4,588,163
Average daily balance during the year $ 8,600,634 $ 2,152,651
Weighted average interest rate during the year 4.64% 4.99%
</TABLE>
Securities, including accrued interest, underlying these agreements at year end
were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Carrying value $ 11,367,000 $ 6,042,000
Fair value $ 11,367,000 $ 6,042,000
</TABLE>
The following presents the carrying value and market value, including accrued
interest, of securities pledged for securities sold under agreements to
repurchase according to the maturity of such agreements at December 31, 1998.
<TABLE>
<CAPTION>
Repurchase
Liability
U.S. Agencies U.S. Treasuries Total Weighted
------------------- ------------------- ------------------- Average
Carrying Market Carrying Market Carrying Market Repurchase Interest
Value Value Value Value Value Value Liability Rate
----- ----- ----- ----- ----- ----- --------- ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Overnight $ 9,322 $ 9,322 $ 2,045 $ 2,045 $ 11,367 $ 11,367 $ 6,389 4.08%
========== ========== ========== ========= ========== ========== ========== ========
</TABLE>
(Continued)
F-14
<PAGE> 64
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 7 - SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE (Continued)
At December 31, 1998, information regarding repurchase agreements with an
underlying at risk amount which exceeds 10% of total stockholders' equity is as
follows:
Weighted
Average Maturity
Amount Of Repurchase
At Risk Liability
------- ---------
Counterparty No. 1 $ 1,392,000 Overnight
Counterparty No. 2 1,833,000 Overnight
Counterparty No. 3 1,463,000 Overnight
Counterparty No. 4 1,962,000 Overnight
Counterparty No. 5 1,659,000 Overnight
Counterparty No. 6 1,827,000 Overnight
The amount at risk under a repurchase agreement is defined as the excess of the
carrying amount, or market value, if higher, of the sold securities, including
accrued interest, over the amount of the repurchase liability, evaluated on an
individual counterparty basis regardless of whether this amount is used for
other repurchase agreements. The Company is at risk for this amount if the
counterparty fails to perform under the terms of the repurchase agreement.
NOTE 8 - ADVANCES FROM FHLB
At December 31, 1998, the Bank had an advance from the FHLB of Indianapolis in
the amount of $2,000,000 with a fixed interest rate of 4.99% which matures in
2008. The advance contains an option for the FHLB to convert the entire advance
to a periodic adjustable rate advance at December 30, 2003 with an interest rate
equal to the three month LIBOR flat rate. At December 31, 1998, in addition to
FHLB stock of $222,200, the Company pledged securities with a minimum carrying
value of approximately $3,075,000 to the FHLB to secure advances outstanding.
NOTE 9 - BENEFIT PLANS
The Company's Board of Directors has adopted stock option plans. Under the terms
of these plans, options for up to 200,000 shares of the Company's common stock
may be granted to key management, employees and directors of the Company and its
subsidiaries. The exercise price of the options is determined at the time of
grant by an administrative committee appointed by the Board of Directors.
(Continued)
F-15
<PAGE> 65
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS (Continued)
SFAS No. 123 requires proforma disclosures for companies that do not adopt its
fair value accounting method for stock-based employee compensation. Accordingly,
the following proforma information presents net loss per common share had the
fair value method been used to measure compensation cost for stock option plans.
Compensation cost actually recognized for stock options was $-0- for 1998, 1997
and 1996.
The fair value of options granted during 1998, 1997 and 1996 is estimated using
the following weighted average information: risk-free interest rate of 4.8%,
6.5% and 6.5%, expected life of 10 years, expected volatility of stock price of
.18, .13 and .15, and expected dividends of 0% per year.
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss as reported $ (228,519) $ (762,120) $ (290,219)
Proforma net loss $ (382,553) $ (1,181,415) $ (476,453)
Basic and diluted loss per common
share as reported $ (.18) $ (.60) $ (.23)
Proforma basic and diluted loss
per common share $ (.30) $ (.93) $ (.38)
</TABLE>
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for 10-year periods with varying
vesting periods. Information about option grants follows:
<TABLE>
<CAPTION>
Weighted
Number of Weighted Average
Outstanding Exercise Average Fair Value
Options Price Exercise Price of Grants
------- ----- -------------- ---------
<S> <C> <C> <C> <C>
Outstanding, beginning of 1996 -
Granted 56,030 $ 10.00 - $ 10.62 $ 10.03 $ 4.92
-----------
Outstanding, end of 1996 56,030 10.00 - 10.62 10.03
Granted 35,765 10.62 - 17.25 14.45 $ 9.71
-----------
Outstanding, end of 1997 91,795 10.00 - 17.25 11.75
Granted 34,367 17.25 - 18.25 17.98 $ 6.92
-----------
Outstanding, end of 1998 126,162 10.00 - 18.25 13.45
===========
</TABLE>
(Continued)
F-16
<PAGE> 66
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS (Continued)
The weighted average remaining contractual life of options outstanding at
December 31, 1998 was approximately eight years. Stock options exercisable at
December 31, 1998, 1997 and 1996 totaled 99,362, 77,795 and 28,030 at a weighted
average exercise price of $12.22, $12.06 and $10.05. As of December 31, 1998,
73,838 options remain available for future grants.
The Company maintains a 401(k) plan covering substantially all employees. The
plan provides for voluntary employee contributions and discretionary employer
contributions. Employee voluntary contributions are vested at all times and the
Company's discretionary contributions are fully vested after three years. Annual
expense related to the plan is based on a discretionary matching of 50% of
voluntary employee contributions on the first 6% of the participants'
compensation. The plan also allows for an additional discretionary contribution
on the employee's behalf for any eligible employee irrespective of the
employee's voluntary participation in the plan during the year. The
discretionary matching percentage and the additional discretionary contribution
are to be determined by the Board of Directors at the end of each year. The
expense recorded related to this plan was $24,000 for 1998, $14,000 for 1997 and
$-0- for 1996.
NOTE 10 - OTHER EXPENSE
Other expense amounts were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Advertising and promotion $ 49,659 $ 48,403 $ 23,487
Client courier 92,297 49,317 -
Data processing 110,531 64,107 2,650
Incorporation expense 6,156 6,156 30,819
Liability insurance 26,461 25,200 2,158
Printing, postage, stationery and supplies 46,287 44,221 31,639
Professional dues and memberships 21,258 16,082 8,238
Professional fees 112,786 84,921 55,805
Telephone 31,884 22,951 8,148
Other 92,283 67,137 15,000
------------- ------------- --------------
$ 589,602 $ 428,495 $ 177,944
============= ============= ==============
</TABLE>
(Continued)
F-17
<PAGE> 67
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
There was no income tax expense (benefit) for 1998, 1997 or 1996 as the result
of recording a valuation allowance in the amount of net deferred tax assets.
Total income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in all periods presented to loss before income
taxes as a result of the following for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ (77,696) $ (259,121) $ (98,674)
Tax effect of:
State tax, net of federal income
tax effect (13,071) (41,699) (15,814)
Effect of deferred tax valuation allowance 77,791 293,094 111,658
Other, net 12,976 7,726 2,830
------------- ------------ ---------------
Total income tax expense $ - $ - $ -
============= ============ ===============
</TABLE>
The components of the net deferred tax asset recorded in the consolidated
balance sheets as of December 31 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforward $ 262,987 $ 286,625 $ 173,625
Allowance for bad debts 264,767 142,596 -
Donation carryforward - 4,315 -
Net unrealized depreciation
on securities available for sale - - 13,019
Other 7,633 1,007 -
------------- ------------ ---------------
535,387 434,543 186,644
</TABLE>
(Continued)
F-18
<PAGE> 68
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Deferred tax liabilities
Accretion $ (15,841) $ (13,379) $ (61,359)
Depreciation (37,003) (16,412) -
Other - - (608)
------------- ------------ ---------------
(52,844) (29,791) (61,967)
Valuation allowance (482,543) (404,752) (124,677)
------------- ------------ ---------------
Net deferred tax asset $ - $ - $ -
============= ============ ===============
</TABLE>
A valuation allowance had been recorded to offset the excess of all deferred tax
assets over deferred tax liabilities.
As of December 31, 1998, the Company has $687,245 and $522,703 of net operating
loss carryforwards available for federal and state income tax purposes expiring
in 2016 - 2017 for federal purposes and 2011 - 2012 for state purposes.
NOTE 12 - BASIC AND DILUTED LOSS PER COMMON SHARE
Loss per common and potential common share are based on the combined weighted
average number of common shares and potential common shares outstanding which
include, where appropriate, the assumed exercise or conversion of outstanding
stock options. In computing loss per common and potential common share, the
Company has utilized the treasury stock method.
The computation of loss per common share, weighted average common and potential
common shares used in the calculation of basic and diluted loss per common share
is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
BASIC LOSS PER COMMON SHARE
Net loss $ (228,519) $ (762,120) $ (290,219)
Weighted average common shares
outstanding 1,276,596 1,266,830 1,265,024
============== ============== ==============
BASIC LOSS PER COMMON SHARE $ (.18) $ (.60) $ (.23)
============== ============== ==============
</TABLE>
(Continued)
F-19
<PAGE> 69
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 12 - BASIC AND DILUTED LOSS PER COMMON SHARE (Continued)
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
DILUTED LOSS PER COMMON SHARE
Net loss $ (228,519) $ (762,120) $ (290,219)
Weighted average common shares
outstanding 1,276,596 1,266,830 1,265,024
Add: dilutive effects of assumed stock
option exercises - - -
-------------- -------------- --------------
Weighted average common and dilutive
additional potential common shares
outstanding 1,276,596 1,266,830 1,265,024
============== ============== ==============
DILUTED LOSS PER COMMON SHARE $ (.18) $ (.60) $ (.23)
============== ============= ==============
</TABLE>
Outstanding stock options for 126,162, 91,795 and 56,030 shares of common stock
at December 31, 1998, 1997 and 1996, were not considered in computing diluted
loss per common share for 1998, 1997 and 1996 because they were antidilutive.
Additionally, in January 1999 the Company granted stock options for 3,266 shares
of common stock which may affect the computation of diluted earnings per common
share in future periods.
NOTE 13- COMMITMENTS AND CONTINGENCIES
Some financial instruments are used to meet customer financing needs and to
reduce exposure to interest rate changes. These financial instruments include
commitments to extend credit, unused open end revolving lines of credit and
standby letters of credit. These involve, to varying degrees, credit and
interest-rate risk in excess of the amount reported in the balance sheet.
Commitments at year end were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Commitments to extend credit $ 4,040,000 $ 5,105,000
Unused open end revolving lines of credit 21,821,000 11,924,000
Standby letters of credit 3,147,000 1,043,000
</TABLE>
(Continued)
F-20
<PAGE> 70
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 13- COMMITMENTS AND CONTINGENCIES (Continued)
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are conditional
commitments to guarantee a customer's performance to a third party. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount of these items. Collateral or other security is normally not
obtained for these financial instruments prior to their use, and many of the
commitments are expected to expire without being used.
Under an employment agreement with an executive officer, certain events leading
to separation from the Company could result in cash payments totaling
approximately $346,000 at December 31, 1998.
The Company has leased a building for its main office location. The lease has a
term of five years with the option for one five-year extension. In addition, the
lease agreement allows the Company to purchase the building for $800,000 at any
time during the term of the lease. The aggregate annual lease payments were
$77,000 for 1998 and $67,500 for 1997, the first year of the lease. The lease
payments increase by $9,500 in 1999 and in each succeeding year for the two
remaining years of the lease.
<TABLE>
<S> <C>
1999 $ 86,500
2000 96,000
2001 105,500
-------------
Total $ 288,000
=============
</TABLE>
NOTE 14 - REGULATORY MATTERS
At year end, the Bank was considered well capitalized and all regulatory capital
requirements were met. The Bank's actual capital levels (in millions) and
minimum required levels were:
<TABLE>
<CAPTION>
Minimum Required
To Be Well
Minimum Required Capitalized Under
For Capital Prompt Corrective
Actual Adequacy Purposes Action Regulations
------ ----------------- ------------------
1998 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $ 9.9 17.1% $ 4.7 8.0% $ 5.8 10.0%
Tier 1 capital (to risk weighted assets) 9.2 15.8 2.3 4.0 3.5 6.0
Tier 1 capital (to average assets) 9.2 11.0 3.4 4.0 4.2 5.0
1997
Total capital (to risk weighted assets) $ 9.6 40.2% $ 1.9 8.0% $ 2.4 10.0%
Tier 1 capital (to risk weighted assets) 9.3 38.9 1.0 4.0 1.4 6.0
Tier 1 capital (to average assets) 9.3 20.0 1.9 4.0 2.3 5.0
</TABLE>
(Continued)
F-21
<PAGE> 71
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS
Presented below are the condensed financial statements for the parent company,
St. Joseph Capital Corporation.
CONDENSED BALANCE SHEETS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,870,197 $ 1,773,792
Securities available for sale 21,125 -
Investment in Bank subsidiary 9,717,009 9,476,930
Other assets 4,588 12,092
--------------- ----------------
Total assets $ 11,612,919 $ 11,262,814
=============== ================
LIABILITIES
Other liabilities $ 2,074 $ 5,442
STOCKHOLDERS' EQUITY 11,610,845 11,257,372
--------------- ----------------
Total liabilities and stockholders' equity $ 11,612,919 $ 11,262,814
=============== ================
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1998, 1997 and period from February 29, 1996 to
December 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Interest income $ 119 $ 66,545 $ 197,057
Interest expense - - (7,656)
Other expenses (42,273) (172,327) (479,620)
--------------- --------------- ----------------
LOSS BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET LOSS OF BANK
SUBSIDIARY (42,154) (105,782) (290,219)
Income tax benefit - - -
--------------- --------------- ----------------
LOSS BEFORE EQUITY IN UNDISTRIBUTED
NET LOSS OF BANK SUBSIDIARY (42,154) (105,782) (290,219)
Equity in undistributed net loss of Bank
subsidiary (186,365) (656,338) -
--------------- --------------- ----------------
NET LOSS $ (228,519) $ (762,120) $ (290,219)
=============== =============== ================
</TABLE>
(Continued)
F-22
<PAGE> 72
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1998, 1997 and period from February 29, 1996 to
December 31, 1996
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (228,519) $ (762,120) $ (290,219)
Adjustments to reconcile net loss
to net cash from operating activities
Equity in undistributed net loss
of Bank subsidiary 186,365 656,338 -
Depreciation - 1,528 4,176
Discount accretion - (45,542) (167,621)
Net change in other assets 7,504 6,224 (28,671)
Net change in other liabilities (3,368) (43,077) 48,519
-------------- -------------- -------------
Net cash from operating activities (38,018) (186,649) (433,816)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Bank subsidiary - (346,382) -
Purchase of securities available for sale (24,987) (3,056,000) (17,054,828)
Proceeds from maturities and calls of securities
available for sale - 3,930,061 7,062,000
Purchase of premises and equipment, net - (39,041) (278,896)
-------------- -------------- -------------
Net cash from investing activities (24,987) 488,638 (10,271,724)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from other borrowings - - 275,000
Repayment of other borrowings - - (275,000)
Proceeds from issuance of common stock, net 159,410 61,691 12,115,652
-------------- -------------- -------------
Net cash from financing activities 159,410 61,691 12,115,652
-------------- -------------- -------------
Net change in cash and cash equivalents 96,405 363,680 1,410,112
Cash and cash equivalents at beginning of period 1,773,792 1,410,112 -
-------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,870,197 $ 1,773,792 $ 1,410,112
============== ============== =============
Non-cash transfers to investment in Bank subsidiary
Securities available for sale $ - $ 9,331,930 $ -
Premise and equipment, net - 312,233 -
Other assets - 10,355 -
</TABLE>
(Continued)
F-23
<PAGE> 73
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year end are as follows, in thousands:
<TABLE>
<CAPTION>
---------------1998----------- --------------1997------------
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 15,719 $ 15,719 $ 4,535 $ 4,535
Interest-bearing deposits in other
financial institutions - - 500 500
Securities available for sale 31,066 31,066 22,351 22,351
FHLB stock 222 222 - -
Loans receivable, net of allowance
for loan losses 48,011 48,370 21,991 22,039
Accrued interest receivable 739 739 526 526
Financial liabilities
Noninterest-bearing demand,
savings, NOW and money
market (57,856) (57,856) (17,564) (17,564)
Certificates of deposit (18,534) (18,534) (17,352) (17,352)
Securities sold under agreements to
repurchase (6,389) (6,389) (4,504) (4,504)
FHLB advances (2,000) (2,000) - -
Accrued interest payable (101) (101) (121) (121)
</TABLE>
The estimated fair value approximates carrying amount for all items except those
described below. Estimated fair value for securities available for sale is based
on quoted market values for the individual securities or for equivalent
securities. Estimated fair value for loans is based on the rates charged at year
end for new loans with similar maturities, applied until the loans are assumed
to reprice or be paid. Estimated fair value for other financial instruments and
off-balance-sheet loan commitments is considered nominal.
While these estimates of fair value are based on management's judgment of the
most appropriate factors, there is no assurance that were the Company to have
disposed of such items at year end 1998 or 1997, the estimated fair values would
necessarily have been achieved at that date, since the market values may differ
depending on various circumstances. Also, the use of different market
assumptions and/or estimation methodologies may have a material effect on the
estimated fair value amounts. The estimated fair values at year end 1998 and
1997 should not necessarily be considered to apply at subsequent dates.
(Continued)
F-24
<PAGE> 74
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
- --------------------------------------------------------------------------------
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net change in net unrealized appreciation
(depreciation) on securities available
for sale
Net unrealized appreciation (depreciation)
arising during the year $ 539,226 $ 167,054 $ (32,547)
Reclassification adjustments for gains
included in net loss (116,644) (2,139) -
------------ ------------ ------------
Net change in net unrealized appreciation
(depreciation) on securities available
for sale 422,582 164,915 (32,547)
Tax effects - - -
------------ ------------ ------------
Total other comprehensive income (loss) $ 422,582 $ 164,915 $ (32,547)
============ ============ ============
</TABLE>
F-25
<PAGE> 75
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1999 (Unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,217,832 $ 6,113,583
Interest-bearing deposits in other financial institutions -
short-term 155,440 5,531
Federal funds sold 7,100,000 9,600,000
--------------- ----------------
Total cash and cash equivalents 12,473,272 15,719,114
Securities available for sale 27,548,122 31,066,346
Federal Home Loan Bank (FHLB) stock 388,800 222,200
Loans receivable, net of allowance for loan losses
of $957,675 in 1999 and $751,675 in 1998 65,180,510 48,011,296
Accrued interest receivable 838,143 739,024
Premises and equipment, net 1,467,058 742,495
Other assets 71,005 103,565
--------------- ----------------
Total assets $ 107,966,910 $ 96,604,040
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 10,544,803 $ 11,442,145
Savings, NOW and money market 44,770,691 46,414,185
Certificates of deposit 27,491,951 18,534,135
--------------- ----------------
Total deposits 82,807,445 76,390,465
Securities sold under agreements to repurchase 10,354,997 6,388,971
FHLB advances 3,500,000 2,000,000
Accrued interest payable 144,029 100,707
Other liabilities 108,668 113,052
--------------- ----------------
Total liabilities 96,915,139 84,993,195
Stockholders' equity
Preferred stock, $.01 par value, 100,000 shares
authorized; -0- shares issued and outstanding - -
Common stock, $.01 par value, 2,500,000 shares
authorized; 1,281,953 and 1,278,625 shares issued
and outstanding in 1999 and 1998 12,820 12,786
Additional paid-in capital 12,377,968 12,323,967
Accumulated deficit (1,106,065) (1,280,858)
Accumulated Other Comprehensive Income (232,952) 554,950
--------------- ----------------
Total stockholders' equity 11,051,771 11,610,845
--------------- ----------------
Total liabilities and stockholders' equity $ 107,966,910 $ 96,604,040
=============== ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-26
<PAGE> 76
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Six months ended June 30, 1999 and 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 2,271,597 $ 1,202,320
Securities available for sale - taxable 875,625 759,958
FHLB stock 14,515 -
Federal funds sold 98,180 124,795
Other interest earning assets 5,328 6,865
-------------- ---------------
Total interest and dividend income 3,265,245 2,093,938
Interest expense
Deposits 1,430,724 1,051,041
Securities sold under agreements to repurchase 181,096 124,478
FHLB advances 73,908 -
Other borrowings 3,520 2,921
-------------- ---------------
Total interest expense 1,689,248 1,178,440
-------------- ---------------
NET INTEREST INCOME 1,575,997 915,498
Provision for loan losses 206,000 200,005
-------------- ---------------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 1,369,997 715,493
Noninterest income
Gain on sales and calls of securities
available for sale, net - 11,334
Other income 43,051 8,996
-------------- ---------------
Total noninterest income 43,051 20,330
Noninterest expense
Salaries and employee benefits 694,992 481,346
Occupancy and equipment 226,484 219,962
Other expense 316,779 253,989
-------------- ---------------
Total noninterest expense 1,238,255 955,297
-------------- ---------------
INCOME (LOSS) BEFORE INCOME TAXES 174,793 (219,474)
Income tax expense - -
-------------- ---------------
NET INCOME (LOSS) $ 174,793 $ (219,474)
============== ===============
Basic income (loss) per common share $ .14 $ (.17)
============== ===============
Diluted income (loss) per common share $ .13 $ (.17)
============== ================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-27
<PAGE> 77
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
Six months ended June 30, 1999 and 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
Total Total
Stockholders' Stockholders'
Equity Equity
------ ------
<S> <C> <C>
BALANCE AT JANUARY 1: $ 11,610,845 $ 11,257,372
Comprehensive income (loss):
Net income (loss) 174,793 (219,474)
Net change in net unrealized
appreciation (depreciation) on
securities available for sale, net
of reclassification adjustments
and tax effects (787,902) 35,107
-------------- --------------
Total comprehensive income (loss) (613,109) (184,367)
Proceeds from issuance of 3,328 shares
in 1999 and 7,636 shares of common stock in 1998 54,035 128,401
-------------- --------------
BALANCE AT JUNE 30: $ 11,051,771 $ 11,201,406
============== ==============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-28
<PAGE> 78
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 1999 and 1998 (Unaudited)
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 174,793 $ (219,474)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation 118,804 107,556
Provision for loan losses 206,000 200,005
Net amortization on securities available for sale 45,184 25,549
Net change in
Accrued interest receivable (99,119) (159,216)
Other assets 32,560 (719)
Accrued interest payable 43,322 (3,483)
Other liabilities (4,384) (16,692)
-------------- ---------------
Net cash from operating activities 517,160 (66,474)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (1,514,862) (20,290,766)
Proceeds from maturities and calls of securities
available for sale 4,200,000 11,497,831
Purchase of FHLB stock (166,600) -
Net change in loans receivable (17,375,214) (9,538,555)
Purchase of premises and equipment, net (843,367) (33,709)
Net change in interest bearing deposits - 500,000
-------------- ---------------
Net cash from investing activities (15,700,043) (17,865,199)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 6,416,980 22,134,115
Net change in securities sold under agreements
to repurchase and other borrowings 3,966,026 1,192,335
Proceeds from FHLB advances 1,500,000 -
Proceeds from issuance of common stock, net 54,035 128,401
-------------- ---------------
Net cash from financing activities 11,937,041 23,454,851
-------------- ---------------
Net change in cash and cash equivalents (3,245,842) 5,523,178
Cash and cash equivalents at beginning of period 15,719,114 4,535,464
-------------- ---------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 12,473,272 $ 10,058,642
============== ===============
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
F-29
<PAGE> 79
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998 (Unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles for interim
financial information and Article 10-01 of Regulation S-X. Accordingly, footnote
disclosures, which would substantially duplicate the disclosures contained in
the most recent audited financial statements, have been omitted. In the opinion
of management of the Company, all adjustments necessary for a fair presentation
of such financial information have been included. All such adjustments are of a
normal recurring nature. The results of operations and cash flows for the six
months ended June 30, 1999 may not be indicative of the results for the entire
year. The accompanying unaudited consolidated financial statements should be
read in conjunction with the notes to consolidated financial statements
contained in the December 31, 1998 consolidated financial statements.
NOTE 1 - LOANS RECEIVABLE, NET
Loans receivable were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
One to four family residential mortgage loans $ 20,364,067 $ 13,311,145
Construction loans - residential 1,007,233 629,168
Construction loans - commercial 5,503,658 4,966,020
Commercial and multi-family real estate loans 22,572,677 14,988,484
Commercial business loans 15,205,464 13,247,735
Consumer loans 1,523,837 1,636,286
---------------- ----------------
66,176,936 48,778,838
Allowance for loan losses (957,675) (751,675)
Net deferred loan origination fees (38,751) (15,867)
---------------- ----------------
$ 65,180,510 $ 48,011,296
================ ================
</TABLE>
Activity in the allowance for loan losses was as follows:
<TABLE>
<CAPTION>
Six Months Ended Year Ended
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Beginning balance $ 751,675 $ 360,000
Provision for loan losses 206,000 391,675
Recoveries - -
Charge-offs - -
---------------- ----------------
Ending balance $ 957,675 $ 751,675
================ ================
</TABLE>
(Continued)
F-30
<PAGE> 80
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998 (Unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
NOTE 1 - LOANS RECEIVABLE, NET (Continued)
At June 30, 1999 and December 31, 1998 no portion of the allowance for loan
losses was allocated to impaired loan balances as there were no loans considered
impaired as of or for the period ending June 30, 1999 and for the year ending
December 31, 1998.
NOTE 2 - PREMISES AND EQUIPMENT, NET
Premises and equipment were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Land $ 200,000 $ -
Building and improvements 782,311 -
Leasehold improvements, furniture, fixtures
and equipment 965,215 1,104,159
Accumulated depreciation (480,468) (361,664)
---------------- ----------------
$ 1,467,058 $ 742,495
================ ================
</TABLE>
NOTE 3 - STOCK OPTION PLAN
The Company's Board of Directors has adopted stock option plans. Under the terms
of these plans, options for up to 200,000 shares of the Company's common stock
may be granted to key management, employees and directors of the Company and its
subsidiaries. The exercise price of the options is determined at the time of
grant by an administrative committee appointed by the Board of Directors.
SFAS No. 123 requires proforma disclosures for companies that do not adopt its
fair value accounting method for stock-based employee compensation. Accordingly,
the following proforma information presents net income (loss) per common share
had the fair value method been used to measure compensation cost for stock
option plans. Compensation cost actually recognized for stock options was $-0-
for June 30, 1999 and 1998.
(Continued)
F-31
<PAGE> 81
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998 (Unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
NOTE 3 - STOCK OPTION PLAN (Continued)
The fair value of options granted during the periods ending June 30, 1999 and
1998 is estimated using the following weighted average information: risk-free
interest rate of 5.01% and 4.8%, expected life of 10 years, expected volatility
of stock price of .12 and .18, and expected dividends of 0% per year.
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Net income (loss) as reported $ 174,793 $ (219,474)
Proforma net income (loss) $ 4,034 $ (250,118)
Basic income (loss) per common share as reported $ .14 $ (.17)
Diluted income (loss) per common share as reported $ .13 $ (.17)
Proforma basic income (loss) per common share $ .00 $ (.20)
Proforma diluted income (loss) per common share $ .00 $ (.20)
</TABLE>
In future years, the proforma effect of not applying this standard is expected
to increase as additional options are granted.
Stock option plans are used to reward employees and provide them with an
additional equity interest. Options are issued for 10-year periods with varying
vesting periods. Information about option grants follows:
<TABLE>
<CAPTION>
Weighted
Number of Weighted Average
Outstanding Exercise Average Fair Value
Options Price Exercise Price of Grants
------- ----- -------------- ---------
<S> <C> <C> <C> <C>
Outstanding, December 31,
1997 91,795 $ 10.00 - $ 17.25 $ 11.75
Granted 34,367 17.25 - 18.25 17.98 $ 6.92
-----------
Outstanding, December 31,
1998 126,162 10.00 - 18.25 13.45
Granted 47,328 16.75 - 17.75 16.82 $ 6.48
-----------
Outstanding, June 30, 1999 173,490 10.00 - 18.25 14.37
===========
</TABLE>
The weighted average remaining contractual life of options outstanding at June
30, 1999 was approximately eight years. Stock options exercisable at June 30,
1999 and December 31, 1998 totaled 102,628 and 99,362 at a weighted average
exercise price of $12.65 and $12.22. As of June 30, 1999, 26,510 options were
available for future grants.
(Continued)
F-32
<PAGE> 82
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999 and 1998 (Unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES
There was no income tax expense (benefit) for the six months ended June 30, 1999
and 1998 as the result of recording a valuation allowance in the amount of net
deferred tax assets.
Total income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in all periods presented to loss before income
taxes as a result of the following for the six months ended June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Income tax expense (benefit) at statutory rate $ 59,430 $ (74,621)
Tax effect of:
State tax, net of federal income
tax effect 11,586 (11,583)
Effect of deferred tax valuation allowance (75,278) 81,785
Other, net 4,262 4,419
------------ ---------------
Total income tax expense $ - $ -
============ ===============
</TABLE>
The components of the net deferred tax asset recorded in the consolidated
balance sheets as of June 30, 1999 and December 31, 1998 are as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carryforward $ 102,447 $ 262,987
Allowance for bad debts 346,364 264,767
Other 17,054 7,633
------------ ---------------
$ 465,865 $ 535,387
============ ===============
Deferred tax liabilities
Accretion $ (21,597) $ (15,841)
Depreciation (37,003) (37,003)
------------- ---------------
(58,600) (52,844)
Valuation allowance (407,265) (482,543)
------------ ---------------
Net deferred tax asset $ - $ -
============ ===============
</TABLE>
(Continued)
F-33
<PAGE> 83
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30 and 1999 and 1998 (Unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
NOTE 4 - INCOME TAXES (Continued)
A valuation allowance has been recorded to offset the excess of all deferred tax
assets over deferred tax liabilities.
As of June 30, 1999, the Company would have approximately $285,000 and $101,000
of net operating loss carryforwards available for federal and state income tax
purposes expiring in 2016-2017 for federal purposes and 2011-2012 for state
purposes, if tax returns were filed as of June 30, 1999.
NOTE 5 - BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE
Income (loss) per common and potential common share are based on the combined
weighted average number of common shares and potential common shares outstanding
which include, where appropriate, the assumed exercise or conversion of
outstanding stock options. In computing income (loss) per common and potential
common share, the Company has utilized the treasury stock method.
The computation of income (loss) per common share, weighted average common and
potential common shares used in the calculation of basic and diluted income
(loss) per common share is as follows as of June 30:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
BASIC INCOME (LOSS) PER COMMON SHARE
Net income (loss) $ 174,793 $ (219,474)
Weighted average common shares outstanding 1,280,351 1,275,324
================ ================
BASIC INCOME (LOSS) PER COMMON SHARE $ .14 $ (.17)
================ ================
DILUTED INCOME (LOSS) PER COMMON SHARE
Net income (loss) $ 174,793 $ (219,474)
Weighted average common shares
outstanding 1,280,351 1,275,324
Add: dilutive effects of assumed stock
option exercises 26,175 -
---------------- ----------------
Weighted average common and dilutive
additional potential common shares
outstanding 1,306,526 1,275,324
================ ================
DILUTED INCOME (LOSS) PER COMMON SHARE $ .13 $ (.17)
================ ================
</TABLE>
(Continued)
F-34
<PAGE> 84
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30 and 1999 and 1998 (Unaudited) and December 31, 1998
- --------------------------------------------------------------------------------
NOTE 5 - BASIC AND DILUTED INCOME (LOSS) PER COMMON SHARE (Continued)
Outstanding stock options for 83,135 and 97,091 shares of common stock at June
30, 1999 and 1998, were not considered in computing diluted income (loss) per
common share for 1999 and 1998 because they were antidilutive.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Some financial instruments are used to meet customer financing needs and to
reduce exposure to interest rate changes. These financial instruments include
commitments to extend credit, unused open end revolving lines of credit and
standby letters of credit. These involve, to varying degrees, credit and
interest-rate risk in excess of the amount reported in the balance sheet.
Commitments were as follows:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
---- ----
<S> <C> <C>
Commitments to extend credit $ 3,183,000 $ 4,040,000
Unused open end revolving lines of credit 24,027,000 21,821,000
Standby letters of credit 3,344,000 3,147,000
</TABLE>
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are conditional
commitments to guarantee a customer's performance to a third party. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount of these items. Collateral or other security is normally not
obtained for these financial instruments prior to their use, and many of the
commitments are expected to expire without being used.
Under an employment agreement with an executive officer, certain events leading
to separation from the Company could result in cash payments totaling
approximately $375,000 at June 30, 1999.
During 1998, the Company had leased a building for its main office location.
During 1999, the Company exercised an option in the building lease agreement to
purchase the building for $800,000.
F-35
<PAGE> 85
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses in connection with
the sale and distribution of the securities being registered, other than
underwriting discounts and commissions. All amounts shown are estimates, except
the SEC's registration fee:
SEC's registration fee............................................$ 1,390
Printing and mailing expenses.......................................18,000
Fees and expenses of counsel.......................................100,000
Accounting and related expenses.....................................50,000
Blue Sky fees and expenses...........................................1,000
Miscellaneous........................................................4,610
Total..............................................................175,000
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
In accordance with the Delaware General Corporation Law, Articles Ninth
and Tenth of St. Joseph Capital Corporation's certificate of incorporation
provide as follows:
NINTH: Each person who is or was a director or officer
of the corporation and each person who serves or served at
the request of the corporation as a director, officer or
partner of another enterprise, shall be indemnified by the
corporation in accordance with, and to the fullest extent
authorized by, the General Corporation Law of the State of
Delaware, as the same now exists or may be hereafter amended.
No amendment to or repeal of this Article IX shall apply to
or have any effect on the rights of any individual referred
to in this Article IX for or with respect to acts or
omissions of such individual occurring prior to such
amendment or repeal.
TENTH: To the fullest extent permitted by the General
Corporation Law of Delaware, as the same now exists or may be
hereafter amended, a director of the corporation shall not be
liable to the corporation or its stockholders for monetary
damages for breach of fiduciary duty as a director. No
amendment to or repeal of this Article X shall apply to or
have any effect on the liability or alleged liability of any
director of the corporation for or with respect to any acts
or omissions of such director occurring prior to the
effective date of such amendment or repeal.
Article VII of St. Joseph Capital Corporation's Bylaws further provides
as follows:
SECTION 7.1 INDEMNIFICATION
7.1.1 ACTIONS, SUITS OR PROCEEDINGS OTHER THAN BY OR IN THE RIGHT
OF THE CORPORATION. The corporation shall indemnify any person who was
or is a party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding, whether civil,
criminal, administrative or investigative (other than an action by or
in the right of the corporation) by reason of the fact that he or she
is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director,
officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, or by reason of any action alleged
to have been taken or omitted in such capacity, against expenses
(including attorneys' fees), judgments, fines and amounts paid in
settlement actually and reasonably incurred by him or her or on his or
her behalf in connection with such action, suit or proceeding and any
appeal therefrom, if he or she acted in good faith and in a manner he
or she reasonably believed to be in, or not opposed to, the best
interests of the corporation, and, with
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<PAGE> 86
respect to any criminal action or proceeding, had no reasonable cause
to believe his or her conduct was unlawful. The termination of any
action, suit or proceeding by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent, shall not, of
itself, create a presumption that the person did not act in good faith
and in a manner which he or she reasonably believed to be in, or not
opposed to, the best interests of the corporation and, with respect to
any criminal action or proceeding, had reasonable cause to believe that
his or her conduct was unlawful.
7.1.2 ACTIONS OR SUITS BY OR IN THE RIGHT OF THE CORPORATION. The
corporation shall indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a
judgment in its favor by reason of the fact that he or she is or was a
director, officer, employee or agent of the corporation or is or was
serving or has agreed to serve at the request of the corporation as a
director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, or by reason of
any action alleged to have been taken or omitted in such capacity,
against expenses (including attorneys' fees) actually and reasonably
incurred by him or her or on his or her behalf in connection with the
defense or settlement of such action or suit and any appeal therefrom,
if he or she acted in good faith and in a manner he or she reasonably
believed to be in, or not opposed to, the best interests of the
corporation, except that no indemnification shall be made in respect of
any claim, issue or matter as to which such person shall have been
adjudged to be liable to the corporation unless and only to the extent
that the Court of Chancery of Delaware or the court in which such
action or suit was brought shall determine upon application that,
despite the adjudication of such liability but in view of all the
circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such costs, charges and expenses which the
Court of Chancery or such other court shall deem proper.
7.1.3 INDEMNIFICATION FOR COSTS, CHARGES AND EXPENSES OF
SUCCESSFUL PARTY. Notwithstanding the other provisions of this Section
7.1, to the extent that a director, officer, employee or agent has been
successful, on the merits or otherwise, including, without limitation,
to the extent permitted by applicable law, the dismissal of an action
without prejudice, in defense of any action, suit or proceeding
referred to in Sections 7.1.1 and 7.1.2, or in defense of any claim,
issue or matter therein, he or she shall be indemnified against all
costs, charges and expenses (including attorneys' fees) actually and
reasonably incurred by him or her or on his or her behalf in connection
therewith.
7.1.4 DETERMINATION OF RIGHT TO INDEMNIFICATION. Any
indemnification under Sections 7.1.1 and 7.1.2, (unless ordered by a
court) shall be paid by the corporation, if a determination is made (a)
by the board of directors by a majority vote of the directors who were
not parties to such action, suit or proceeding, or (b) if such majority
of disinterested directors so directs, by independent legal counsel in
a written opinion, or (c) by the stockholders, that indemnification of
the director or officer is proper in the circumstances because he or
she has met the applicable standard of conduct set forth in Sections
7.1.1 and 7.1.2.
7.1.5 ADVANCE OF COSTS, CHARGES AND EXPENSES. Expenses (including
attorneys' fees) incurred by a person referred to in Sections 7.1.1 and
7.1.2 in defending a civil, criminal, administrative or investigative
action, suit or proceeding shall be paid by the corporation in advance
of the final disposition of such action, suit or proceeding; provided,
however, that the payment of such costs, charges and expenses incurred
by a director or officer in his or her capacity as a director or
officer (and not in any other capacity in which service was or is
rendered by such person while a director or officer) in advance of the
final disposition of such action, suit or proceeding shall be made only
upon receipt of an undertaking by or on behalf of the director or
officer to repay all amounts so advanced in the event that it shall
ultimately be determined that such director or officer is not entitled
to be indemnified by the corporation as authorized in this Article VII.
Such costs, charges and expenses incurred by other employees and agents
may be so paid upon such terms and conditions, if any, as the majority
of the directors deems appropriate. The majority of the directors may,
in the manner set forth above, and upon approval of such director or
officer of the corporation, authorize the corporation's counsel to
represent
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<PAGE> 87
such person, in any action, suit or proceeding, whether or not the
corporation is a party to such action, suit or proceeding.
7.1.6 PROCEDURE FOR INDEMNIFICATION. Any indemnification under
Sections 7.1.1, 7.1.2 and 7.1.3, or advance of costs, charges and
expenses under Section 7.1.5, shall be made promptly, and in any event
within 60 days, upon the written request of the director, officer,
employee or agent. The right to indemnification or advances as granted
by this Article VII shall be enforceable by the director, officer,
employee or agent in any court of competent jurisdiction, if the
corporation denies such request, in whole or in part, or if no
disposition thereof is made within 60 days. Such person's costs and
expenses incurred in connection with successfully establishing his or
her right to indemnification, in whole or in part, in any such action
shall also be indemnified by the corporation. It shall be a defense to
any such action (other than an action brought to enforce a claim for
the advance of costs, charges and expenses under Section 7.1.5, where
the required undertaking, if any, has been received by the corporation)
that the claimant has not met the standard of conduct set forth in
Sections 7.1.1 and 7.1.2, but the burden of proving such defense shall
be on the corporation. Neither the failure of the corporation
(including its board of directors, its independent legal counsel and
its stockholders) to have made a determination prior to the
commencement of such action that indemnification of the claimant is
proper in the circumstances because he or she has met the applicable
standard of conduct set forth in Sections 7.1.1 and 7.1.2, nor the fact
that there has been an actual determination by the corporation
(including its board of directors, its independent legal counsel and
its stockholders) that the claimant has not met such applicable
standard of conduct, shall be a defense to the action or create a
presumption that the claimant has not met the applicable standard of
conduct.
7.1.7 SETTLEMENT. The corporation shall not be obligated to
reimburse the costs of any settlement to which it has not agreed. If in
any action, suit or proceeding, including any appeal, within the scope
of Sections 7.1.1 and 7.1.2, the person to be indemnified shall have
unreasonably failed to enter into a settlement thereof offered or
assented to by the opposing party or parties in such action, suit or
proceeding, then, notwithstanding any other provision hereof, the
indemnification obligation of the corporation to such person in
connection with such action, suit or proceeding shall not exceed the
total of the amount at which settlement could have been made and the
expenses incurred by such person prior to the time such settlement
could reasonably have been effected.
SECTION 7.2 SUBSEQUENT AMENDMENT. No amendment, termination or
repeal of this Article VII or of relevant provisions of the Delaware
General Corporation Law or any other applicable law shall affect or
diminish in any way the rights of any director or officer of the
corporation to indemnification under the provisions hereof with respect
to any action, suit or proceeding arising out of, or relating to, any
actions, transactions or facts occurring prior to the final adoption of
such amendment, termination or repeal.
SECTION 7.3 OTHER RIGHTS; CONTINUATION OF RIGHT TO
INDEMNIFICATION. The indemnification provided by this Article VII shall
not be deemed exclusive of any other rights to which a director,
officer, employee or agent seeking indemnification may be entitled
under any law (common or statutory), agreement, vote of stockholders or
disinterested directors or otherwise, both as to action in his or her
official capacity and as to action in any other capacity while holding
office or while employed by or acting as agent for the corporation, and
shall continue as to a person who has ceased to be a director, officer,
employee or agent, and shall inure to the benefit of the estate, heirs,
executors and administrators of such person. Nothing contained in this
Article VII shall be deemed to prohibit, and the corporation is
specifically authorized to enter into, agreements with officers and
directors providing indemnification rights and procedures different
from those set forth herein. All rights to indemnification under this
Article VII shall be deemed to be a contract between the corporation
and each director or officer of the corporation who serves or served in
such capacity at any time while this Article VII is in effect. The
corporation shall not consent to any acquisition, merger, consolidation
or other similar transaction unless the successor corporation assumes
by operation of law or by agreement the obligations set forth in this
Article VII.
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<PAGE> 88
SECTION 7.4 INSURANCE. The corporation shall have the power to
purchase and maintain insurance on behalf of any person who is or was a
director, officer, employee or agent of the corporation, or is or was
serving at the request of the corporation as director, officer,
employee or agent of another corporation, partnership, joint venture,
trust or other enterprise against any liability asserted against him or
her and incurred by him or her in any such capacity, or arising out of
his or her status as such, whether or not the corporation would have
the power to indemnify him or her against such liability under this
Article VII.
SECTION 7.5 CERTAIN DEFINITIONS. For purposes of this Article
VII:
(i) references to "the corporation" shall include, in
addition to the resulting corporation, any constituent corporation
(including any constituent of a constituent) absorbed in a
consolidation or merger which, if its separate existence had continued,
would have had the power and authority to indemnify its directors,
officers, employees or agents, so that any person who is or was a
director, officer, employee or agent of such constituent corporation,
or is or was serving at the request of such constituent corporation as
a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprises, shall stand in
the same position under this Article VII with respect to the resulting
or surviving corporation as he or she would have with respect to such
constituent corporation if its separate existence had continued;
(ii) references to "other enterprises" shall include
employee benefit plans;
(iii) references to "fines" shall include any excise taxes
assessed on a person with respect to an employee benefit plan;
(iv) references to "serving at the request of the
corporation" shall include any service as a director, officer, employee
or agent of the corporation which imposes duties on, or involves
services by, such director, officer, employee or agent with respect to
an employee benefit plan, its participants or beneficiaries; and
(v) a person who acted in good faith and in a manner he
or she reasonably believed to be in the interest of the participants
and beneficiaries of an employee benefit plan shall be deemed to have
acted in a manner "not opposed to the best interests of the
corporation," as referred to in this Article VII.
SECTION 7.6 SAVINGS CLAUSE. If this Article VII or any portion
hereof shall be invalidated on any ground by any court of competent
jurisdiction, then the corporation shall nevertheless indemnify each
director or officer of the corporation as to any costs, charges,
expenses (including attorney's fees), judgments, fines and amounts paid
in settlement with respect to any action, suit or proceeding, whether
civil, criminal, administrative or investigative, including an action
by or in the right of the corporation, to the full extent permitted by
any applicable portion of this Article VII that shall not have been
invalidated and to the full extant permitted by applicable law.
SECTION 7.7 SUBSEQUENT LEGISLATION. If the Delaware General
Corporation Law is amended after the date hereof to further expand the
indemnification permitted to directors and officers of the corporation,
then the corporation shall indemnify such person to the fullest extent
permitted by the Delaware General Corporation Law, as so amended.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling St. Joseph
pursuant to the foregoing provisions, St. Joseph has been informed that in the
opinion of the Commission such indemnification is against public policy, as
expressed in the Securities Act, and is therefore unenforceable.
St. Joseph also carries Directors' and Officers' liability insurance in
the amount of $2.0 million.
II-4
<PAGE> 89
ITEM 16. EXHIBITS.
Exhibit
Number
------
3.1 Certificate of Incorporation, as amended, of St. Joseph Capital
Corporation
3.2 Bylaws of St. Joseph Capital Corporation
5.1 Opinion of Barack Ferrazzano Kirschbaum Perlman & Nagelberg
(previously filed)
10.1 St. Joseph Capital Corporation 1996 Stock Incentive Plan
10.2 Stock Option Agreement between St. Joseph Capital Corporation and
John W. Rosenthal, dated June 11, 1996
10.3 Employment Agreement between St. Joseph Capital Corporation and
John W. Rosenthal, dated March 18, 1996
10.4 Amendment, dated January 8, 1998, to Employment Agreement between
St. Joseph Capital Corporation and John W. Rosenthal
10.5 St. Joseph Capital Bank 401(k) Plan
21.1 Subsidiaries of the Registrant (previously filed)
23.1 Consent of Crowe, Chizek and Company LLP (previously filed)
23.2 Consent of Barack Ferrazzano Kirschbaum Perlman & Nagelberg
(included in opinion filed as Exhibit 5.1)
24.1 Powers of Attorney (included as part of Signature Pages)
27.1 Financial Data Schedule (previously filed)
99.1 Form of Stock Order Form
ITEM 17. UNDERTAKINGS.
(e) Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions,
or otherwise, the small business issuer has been advised that in the opinion
of the Securities and Exchange Commission such indemnification is against
public policy as expressed in the Act and is, therefore, unenforceable.
(f) The Registrant hereby undertakes that:
(1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of
this registration statement in reliance upon Rule 430A and contained
in a form of prospectus filed by the small business issuer under
Rule 242(b)(1), or (4) or 497(h) under the Securities Act as part of
this registration statement as of the time the Commission declared
it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the
registration statement, and that offering of the securities at that
time as the initial bona fide offering of those securities.
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<PAGE> 90
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Mishawaka, State of Indiana, on July 16, 1999.
ST. JOSEPH CAPITAL CORPORATION
By: /s/ John W. Rosenthal
----------------------------------------------
John W. Rosenthal, Chairman, President and
Chief Executive Officer
By: /s/ Edward R. Pooley
----------------------------------------------
Edward R. Pooley, Senior Vice President and
Chief Financial and Accounting Officer
S-1
<PAGE> 91
Know all men by these presents, that each person whose signature
appears below constitutes and appoints John W. Rosenthal and Edward R. Pooley,
and each of them, his true and lawful attorney-in-fact and agent, each with full
power of substitution and re-substitution, for him and in his name, place and
stead, in any and all capacities (including in his capacity as a director or
officer of St. Joseph Capital Corporation) to sign any or all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or any of them, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities indicated on July 16, 1999.
Signature Title
--------- -----
/s/ John W. Rosenthal Chairman, President and Chief
----------------------------- Executive Officer
John W. Rosenthal
/s/ Brian R. Brady Director
-----------------------------
Brian R. Brady
/s/ David A. Eckrich Director
-----------------------------
David A. Eckrich
/s/ Jerry Hammes Director
-----------------------------
Jerry Hammes
/s/ V. Robert Hepler Director
-----------------------------
V. Robert Hepler
/s/ Scott C. Malpass Director
-----------------------------
Scott C. Malpass
/s/ Jack Matthys Vice Chairman and Director
-----------------------------
Jack Matthys
/s/ Arthur H. McElwee, Jr. Director
-----------------------------
Arthur H. McElwee, Jr.
/s/ Myron C. Noble Director
-----------------------------
Myron C. Noble
/s/ Richard A. Rosenthal Director
-----------------------------
Richard A. Rosenthal
/s/ Robert A. Sullivan Director
-----------------------------
Robert A. Sullivan
S-2
<PAGE> 92
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Filed Sequential
Number Description of Exhibit Incorporated Herein by Reference to Herewith Page No.
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
3.1 Certificate of Incorporation, as the Registration Statement on Form
amended, of St. Joseph Capital SB-2 filed by the Company on June 21,
Corporation 1996 (SEC file No. 333-06581), as
amended.
3.2 Bylaws of St. Joseph Capital the Registration Statement on Form
Corporation SB-2 filed by the Company on June 21,
1996 (SEC file No. 333-06581), as
amended.
5.1 Opinion of Barack Ferrazzano previously filed
Kirschbaum Perlman & Nagelberg
10.1 St. Joseph Capital Corporation 1996 the Registration Statement on Form
Stock Incentive Plan SB-2 filed by the Company on June 21,
1996 (SEC file No. 333-06581), as
amended.
10.2 Stock Option Agreement between St. the Registration Statement on Form
Joseph Capital Corporation and John W. SB-2 filed by the Company on June 21,
Rosenthal, dated June 11, 1996 1996 (SEC file No. 333-06581), as
amended.
10.3 Employment Agreement between St. the Registration Statement on Form
Joseph Capital Corporation and John W. SB-2 filed by the Company on June 21,
Rosenthal, dated March 18, 1996 1996 (SEC file No. 333-06581), as
amended.
10.4 Amendment, dated January 8, 1998, to the 1997 Form 10-KSB filed by the
Employment Agreement between St. Company on March 31, 1998.
Joseph Capital Corporation and John W.
Rosenthal
10.5 St. Joseph Capital Bank 401(k) Plan the Registration Statement on Form S-8
filed by the Company on October 29,
1996 (SEC file No. 333-14999).
21.1 Subsidiaries of St. Joseph Capital previously filed
Corporation
23.1 Consent of Crowe, Chizek and Company previously filed
LLP
</TABLE>
<PAGE> 93
<TABLE>
<S> <C> <C>
23.2 Consent of Barack Ferrazzano previously filed
Kirschbaum Perlman & Nagelberg
(included in opinion filed as
Exhibit 5.1)
24.1 Powers of Attorney
(included as part of Signature Pages)
27.1 Financial Data Schedule previously filed
99.1 Form of Stock Order Form
</TABLE>
<PAGE> 1
EXHIBIT 99.1
ST. JOSEPH CAPITAL CORPORATION
STOCK ORDER FORM
If you wish to purchase shares of the common stock of St. Joseph
Capital Corporation as described in the accompanying Prospectus dated
[__________], 1999, please complete this form and send it with your payment for
your shares to John W. Rosenthal, Chairman of the Board and Chief Executive
Officer, St. Joseph Capital Corporation, 3820 Edison Lakes Parkway, Mishawaka,
Indiana, 46545.
If you need help completing this form, please contact Edward R. Pooley
at (219) 273-9700. He may also be contacted at 3820 Edison Lakes Parkway,
Mishawaka, Indiana, 46545.
NUMBER OF SHARES AND PAYMENT
Please enter the number of shares you wish to purchase. Multiply this
number by the offering price of $[_____] per share and enter the Total Amount
Due. Payment by check, bank draft or money order should be made payable to "St.
Joseph Capital Corporation."
- --------------------------------------------------------------------------------
Total Number of Shares Subscription Price Total Amount Due
_____________________________ X $[_____] = $___________________________
Enclosed is a check, bank draft or money order made payable to
"St. Joseph Capital Corporation" for : $___________________________.
- --------------------------------------------------------------------------------
STOCK REGISTRATION
Please print the name(s) in which you want the stock recorded and
mailing address of the recorded holder. Enter the social security or taxpayer
identification number of one recorded owner. Only one number is required. Check
only the box that shows how you want the legal ownership of the stock to appear.
If necessary, mark "Other" and enter the correct ownership, such as corporation,
trust or estate. To purchase stock for a trust, include the date of the trust
agreement and trust title. PLEASE READ THE ATTACHED "GUIDELINES FOR RECORDING
STOCK" BEFORE COMPLETING THIS SECTION.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Name(s) in which your stock is to be recorded
- --------------------------------------------------------------------------------
Street Address City County
- --------------------------------------------------------------------------------
State Zip Code
- --------------------------------------------------------------------------------
Social Security Number or Taxpayer Identification Number
[ ] Individual [ ] Joint Tenants
[ ] Tenants in Common [ ] Uniform Gift to Minors
[ ] Other __________________________
- --------------------------------------------------------------------------------
<PAGE> 2
TELEPHONE NUMBERS
Please give us your daytime and evening telephone numbers, including
area codes, if we will need to call you.
- --------------------------------------------------------------------------------
Daytime Telephone (_____) _____________ Evening Telephone (_____) ____________
- --------------------------------------------------------------------------------
ACKNOWLEDGMENT
Please read the Acknowledgment statement carefully. Sign and date the
form where indicated by the "X." When purchasing as a custodian, corporate
officer or etc., include your full title.
- --------------------------------------------------------------------------------
THIS SECURITY IS NOT A DEPOSIT OR ACCOUNT
AND IS NOT FEDERALLY INSURED OR GUARANTEED.
I (we) have received the Prospectus and I (we) understand that this order may
not be modified, revoked or withdrawn without the consent of St. Joseph Capital
Corporation.
X
- --------------------------------------------------------------------------------
Signature Date
THIS ORDER IS NOT VALID UNLESS SIGNED
- --------------------------------------------------------------------------------
<PAGE> 3
GUIDELINES FOR RECORDING STOCK
For reasons of clarity and standardization, the stock transfer
industry has developed uniform stockholder registrations which we will utilize
in the issuance of your St. Joseph Capital Corporation stock certificate(s). If
you have any questions, please consult your legal advisor. Stock ownership must
be recorded in one of the following manners:
- --------------------------------------------------------------------------------
INDIVIDUAL: Avoid the use of two initials. Include the first given
name, middle initial and last name of the stockholder. Omit
words of limitation that do not affect ownership rights
such as "special account," "single man," "personal
property," etc. If the stock is held individually upon the
individual's death, the stock will be owned by the
individual's estate and distributed as indicated by the
individual's will or otherwise in accordance with law.
- --------------------------------------------------------------------------------
JOINT: Joint ownership of stock by two or more persons shall be
inscribed on the certificate with one of the following
types of joint ownership. Names should be joined by "and";
do not connect with "or." Omit titles such as "Mrs.,"
"Dr.," etc.
JOINT TENANTS -- Joint Tenancy with Right of Survivorship
and not as Tenants in Common may be specified to identify
two or more owners where ownership is intended to pass
automatically to the surviving tenant(s).
TENANTS IN COMMON -- Tenants in Common may be specified to
identify two or more owners. When stock is held as tenants
in common, upon the death of one co-tenant, ownership of
the stock will be held by the surviving co-tenant(s) and by
the heirs of the deceased co-tenant. All parties must agree
to the transfer or sale of shares held in this form of
ownership.
- --------------------------------------------------------------------------------
UNIFORM Stock may be held in the name of a custodian for a minor
TRANSFER TO under the Uniform Transfers to Minors laws of the
MINORS: individual states. There may be only one custodian and one
minor designated on a stock certificate. The standard
abbreviation of custodian is "CUST," while the description
"Uniform Transfers to Minors Act" is abbreviated "UNIF TRAN
MIN ACT." Standard U.S. Postal Service state abbreviations
should be used to describe the appropriate state. For
example, stock held by John P. Jones under the Indiana
Uniform Transfers to Minors Act will be abbreviated:
JOHN P. JONES CUST SUSAN A. JONES
UNIF TRAN MIN ACT IN
- --------------------------------------------------------------------------------
FIDUCIARIES: Stock held in a fiduciary capacity must contain the
following:
1. The name(s) of the fiduciary:
o If an individual, list the first given name,
middle initial and last name.
o If a corporation, list the corporate title.
o If an individual and a corporation, list the
corporation's title before the individual.
2. The fiduciary capacity:
o Administrator
o Conservator
o Executor
o Trustee
o Personal Representative
o Custodian
3. The type of document governing the fiduciary
relationship. Generally, such relationships are
either under a form of living trust agreement or
pursuant to a court order. Without a document
establishing the fiduciary relationship, your
stock may not be recorded in a fiduciary capacity.
4. The date of the document governing the
relationship. The date of the document need not
be used in the description of a trust created by
a will.
5. Either of the following:
The name of the maker, donor or testator
or
The name of the beneficiary
Example of Fiduciary Ownership:
JOHN D. SMITH, TRUSTEE FOR TOM A. SMITH
UNDER AGREEMENT DATED 6/9/74
