<PAGE> 1
UNITES STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended March 31, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 333-6581
ST. JOSEPH CAPITAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
DELAWARE 35-1977746
- ------------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
3820 EDISON LAKES PARKWAY, MISHAWAKA, IN 46545
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(Address of principal executive offices)
(219) 273-9700
-------------------------
(Issuer's telephone number)
N/A
--------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act, during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
--- ---
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Issuer's classes
of common equity, as of the latest practicable date:
1,675,112 shares of common stock, $0.01 par value per share, were
outstanding as of April 24, 2000.
Transitional Small Business Disclosure Format (check one): Yes No X
--- ---
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets,
March 31, 2000 (Unaudited) and December 31, 1999 (Audited) 3
Condensed Consolidated Statements of Income and Comprehensive Income,
Three Months Ended March 31, 2000 and 1999. 4
Condensed Consolidated Statements of Cash Flow,
Three Months Ended March 31, 2000 and 1999. 5
Notes to Condensed Consolidated Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 14
ITEM 2. CHANGES IN SECURITIES 14
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 14
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 14
ITEM 5. OTHER INFORMATION 14
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 14
SIGNATURES 15
</TABLE>
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 2000 1999
(UNAUDITED) (AUDITED)
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<S> <C> <C>
Cash and due from banks $ 20,115,511 $ 5,722,712
Interest-bearing deposits in other financial institutions-
short-term 92,514 43,403
Federal funds sold 5,500,000 7,500,000
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Total cash and cash equivalents 25,708,025 13,266,115
Securities available for sale 25,546,814 29,675,749
Federal Home Loan Bank (FHLB) stock 550,000 388,800
Loans receivable, net of allowance for loan losses of
$1,428,000 in 2000 and $1,270,000 in 1999 93,000,647 85,053,558
Accrued interest receivable 777,804 998,569
Premises and equipment, net 1,489,619 1,464,368
Other assets 219,835 84,928
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Total Assets $ 147,292,744 $ 130,932,087
============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing demand $ 17,632,927 $ 10,217,950
Savings, NOW and money market 52,282,659 51,422,001
Certificates of deposit 42,208,647 36,601,270
------------- -------------
Total deposits 112,124,233 98,241,221
Securities sold under agreements to repurchase 6,920,852 8,135,784
FHLB advances 11,000,000 7,500,000
Accrued interest payable 165,344 189,514
Other liabilities 96,438 66,558
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Total Liabilities 130,306,867 114,133,077
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 2,500,000 shares authorized;
1,675,112 shares issued and outstanding 16,751 16,751
Additional paid in capital 18,302,139 18,302,139
Accumulated deficit (561,522) (769,864)
Accumulated other comprehensive loss, net
of tax of $-0- (771,491) (750,016)
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Total shareholders' equity 16,985,877 16,799,010
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Total liabilities and shareholders' equity $ 147,292,744 $ 130,932,087
============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
INTEREST AND DIVIDEND INCOME
Loans receivable, including fees $ 1,823,494 $ 1,055,630
Securities available for sale - taxable 450,964 443,161
Securities available for sale - tax exempt 8,530 --
FHLB stock 8,427 6,739
Federal funds sold 18,790 57,340
Other interest earning assets 837 3,856
----------- -----------
Total interest and dividend income 2,311,042 1,566,726
INTEREST EXPENSE
Deposits 1,041,061 687,262
Federal funds purchased 11,537 849
Securities sold under agreements to repurchase 73,238 90,895
FHLB advances 102,709 30,233
----------- -----------
Total interest expense 1,228,545 809,239
NET INTEREST INCOME 1,082,497 757,487
Provision for loan losses 158,000 98,000
----------- -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 924,497 659,487
Noninterest income
Gain (loss) on sales and calls of securities
available for sale, net (13,589) --
Other income 35,963 19,148
----------- -----------
Total noninterest income 22,374 19,148
Noninterest expense
Salaries and employee benefits 454,200 330,181
Occupancy and equipment 102,399 117,581
Other expense 181,930 162,121
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Total noninterest expense 738,529 609,883
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INCOME BEFORE INCOME TAX 208,342 68,752
Income tax expense -- --
----------- -----------
NET INCOME $ 208,342 $ 68,752
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Other comprehensive income (loss), net of tax:
Change in unrealized gains (losses) on securities (35,064) (367,597)
Reclassification adjustment for losses included in net income 13,589 --
----------- -----------
Total other comprehensive income (loss) (21,475) (367,597)
----------- -----------
TOTAL COMPREHENSIVE INCOME (LOSS) $ 186,867 $ (298,845)
=========== ===========
BASIC AND DILUTED INCOME PER COMMON SHARE $ .12 $ .05
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 2000 MARCH 31, 1999
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 208,342 $ 68,752
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 66,385 57,737
Provision for loan loss 158,000 98,000
Net amortization (accretion) on securities
available for sale 22,520 19,369
Losses on sales and calls of securities
available for sale, net 13,589 --
Net change in
Accrued interest receivable 220,765 108,916
Other assets (134,907) (2,462)
Accrued interest payable (24,170) 6,667
Other liabilities 29,880 (26,666)
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Net cash from operating activities 560,404 330,313
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (2,438,629) (1,262,969)
Proceeds from sales of securities available for sale 4,929,980 --
Proceeds from maturities and calls of securities
available for sale 1,580,000 2,200,000
Purchase of FHLB stock (161,200) (166,600)
Net change in loans receivable (8,105,089) (10,371,724)
Purchase of premises and equipment, net (91,636) (25,855)
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Net cash from investing activities (4,286,574) (9,627,148)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 13,883,012 (1,393,967)
Net change in securities sold under agreements
to repurchase (1,214,932) 5,948,504
Proceeds from FHLB advances 3,500,000 1,500,000
Proceeds from issuance of common stock, net -- 34,915
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Net cash from financing activities 16,168,080 6,089,452
------------ ------------
Net change in cash and cash equivalents 12,441,910 (3,207,383)
Cash and cash equivalents at beginning of period 13,266,115 15,719,114
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 25,708,025 $ 12,511,731
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 1,252,715 $ 802,572
Income taxes 132,000 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary, St. Joseph Capital
Bank (the "Bank").
The accompanying unaudited condensed consolidated financial statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions for Form 10-QSB.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete presentation of financial
statements. In the opinion of management, the condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation have been included. All
significant inter-company accounts and transactions have been eliminated in
consolidation. The income reported for the periods presented is not necessarily
indicative of the results to be expected for the full year.
NOTE 2 - LOANS RECEIVABLE, NET
Loans receivable were as follows:
<TABLE>
<CAPTION>
March 31, December 31,
2000 1999
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<S> <C> <C>
One to four family residential mortgage loans $ 26,874,548 $ 25,176,345
Construction loans - residential 1,748,952 1,431,108
Construction loans - commercial 6,134,160 5,949,282
Commercial and multi-family real estate loans 29,475,005 27,800,413
Commercial business loans 26,612,410 22,841,332
Consumer loans 3,611,972 3,161,056
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94,457,047 86,359,536
Allowance for loan losses (1,428,000) (1,270,000)
Net deferred loan origination fees (28,400) (35,978)
------------- --------------
$ 93,000,647 $ 85,053,558
============= ==============
</TABLE>
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Some financial instruments are used to meet client 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>
March 31, December 31,
2000 1999
---- ----
<S> <C> <C>
Commitments to extend credit $ 8,961,000 $ 4,877,000
Unused open end revolving lines of credit 46,831,000 38,219,000
Standby letters of credit 2,134,000 2,736,000
</TABLE>
Commitments to extend credit are agreements to lend to a client 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 client'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.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion provides additional information regarding our
operations for the three month period ended March 31, 2000 and 1999 and
financial condition as of March 31, 2000 and December 31, 1999. This discussion
should be read in conjunction with our consolidated financial statements and the
accompanying notes thereto and other information in our 1999 10-KSB.
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 $147.3 million as of March 31, 2000. We expect continued
opportunities for growth, even though the rate of growth will probably be slower
than we have experienced to date.
On September 10, 1999, the Company completed a rights offering during
which 390,581 shares of the Company's common stock were sold at $15.50 per
share, resulting in gross proceeds of $6.1 million. The Company used
approximately $5.5 million of the proceeds from the rights offering to provide
additional capital to the Bank.
We reported earnings of $208,342 or $.12 basic and diluted income per
common share for the three month period ended March 31, 2000 as compared to a
net income of $68,752 or $.05 basic and diluted income per common share for the
same period in 1999. For all periods involved, the increase resulted primarily
from increased interest income as a result of the 9.4% growth in the loan
portfolio.
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 service
charge fees on deposit accounts, 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.
BUSINESS STRATEGY
The Company concentrates on the financial services needs of individuals
and local businesses. A cornerstone of its business strategy is to emphasize the
Bank's local management and its commitment to the Bank's market area. The
Company also expects to establish a high standard of quality in each service it
provides, and its employees are expected to emphasize service in their dealings
with clients. Management believes 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
timeliest manner possible.
The Company's 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. The Company expects to gain market share by
developing strong ties to its community. In this regard, most of the Company's
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. Other members of the management team will also be
encouraged to volunteer for such positions. Additionally, employees are expected
to be active in the civic, charitable and 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. The Bank makes personal loans directly to individuals for
various purposes, including purchases of automobiles, boats and other
recreational vehicles, home improvements, education and personal investments.
The Bank makes residential mortgage loans and substantially all of such loans
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.
The Company's market area is competitive and contains numerous
commercial banks, savings and loans and credit unions. It also faces competition
from finance companies, insurance companies, mortgage companies, securities
brokerage firms, money market funds, loan production offices and other providers
of financial services. Most competitors have been in business for many years,
have established client bases, are substantially larger, have substantially
larger lending limits than the Bank and can offer
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certain services, including multiple branches and international banking
services, that the Bank will be able to offer only through correspondent banks,
if at all. In addition, most of these entities have greater capital resources
than the Bank, which among other things may allow them to price their services
at levels more favorable to clients and to provide larger credit facilities than
could the Bank.
PLAN FOR OPERATION
The Company's plan of operation is centered on the growth of the Bank.
The primary operation of the Bank is to accept deposits and make loans. General
economic conditions, the monetary and fiscal policies of federal agencies and
the regulatory policies of agencies that regulate financial institutions affect
the operating results of the Company. Interest rates on competing investments
and general market rates of interest influence the Company's cost of funds.
Client and commercial demand influence lending activities, which in turn are
affected by the interest rates at which such loans are made general economic
conditions and the availability of funds for lending activities.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimated",
"project", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in the Company's market area, changes
in policies by regulatory agencies, fluctuations in interest rates, demand for
loans in the Company's market area and competition, that could cause actual
results to differ materially from historical earnings and those presently
anticipated or projected. The Company wishes to caution readers not to place
undue reliance on any such forward-looking statements, which speak only as to
the date made. The Company wishes to advise readers that the factors listed
above could affect the Company's financial performance and could cause the
Company's actual results for future periods to differ materially from any
opinions or statements expressed with respect to future periods in any current
statements.
The Company does not undertake, and specifically disclaims any
obligation to subsequently update or revise any forward-looking statements
contained in the report after the date of the report.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2000 COMPARED WITH THREE MONTHS ENDED MARCH 31,
1999
OVERVIEW. Consolidated net income for the three month period ended
March 31, 2000 was $208,342 as compared to a net income of $68,752 for the same
period in 1999 for an increase of $ 139,590 or 203.0%. Income per common share
for the three month period ended March 31, 2000 increased to $.12 basic and
diluted from a basic and diluted income per common share of $.05 for the three
months ended March 31, 1999. The increase in net income for the three month
period was comprised of increases in both net interest income after provision
for loan losses of $265,010 and noninterest income of $3,226 reduced by
increases in noninterest expense of $128,646.
NET INTEREST INCOME. Net interest income for the three months ended
March 31, 2000 and 1999 amounted to $1.1 million and $0.8 million, respectively.
Net interest income represented the difference between interest income earned on
earning assets and interest expense paid on interest bearing liabilities.
Interest income increased by $.7 million to $2.3 million for the three
months ended March 31, 2000 from $1.6 million for the three months ended March
31, 1999. The 43.8% rise in interest income for the three months ended March 31,
2000 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 $0.4 million to $1.2 million for the
three months ended March 31, 2000 from $.8 million for the three months ended
March 31, 1999. The 50.0% rise in interest expense for the three months ended
March 31, 2000 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 $158,000 for
the three month period ended March 31, 2000 compared to $98,000 in the same
period of 1999. At March 31, 2000, the allowance for loan losses
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was $1,428,000 or 1.51% of total loans receivable compared to $849,675 or 1.44%
at March 31, 1999. 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 increase 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 March 31, 2000 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 63.7% of the allowance for loan
losses to commercial loans, 10.0% to residential real estate mortgage loans and
6.4% to installment loans at March 31, 2000, leaving 19.9% unallocated. There
were no non-performing loans at March 31, 2000. Management believes the
allowance for loan losses at March 31, 2000 was adequate to absorb existing
losses in the loan portfolio.
NONINTEREST INCOME. Noninterest income increased by $3,226, from
$19,148 for the three month period ended March 31, 1999 to $22,374 for the three
month period ended March 31, 2000. Noninterest income during the period of 1999
consisted of income from depository account service fees and other miscellaneous
fees. Noninterest income during the period in 2000 consisted of income from
depository account service fees and other miscellaneous fees offset by $13,589
in losses on the sale of securities to fund the loan growth.
NONINTEREST EXPENSE. The main components of noninterest expense were
primarily salaries and benefits, occupancy and equipment, professional fees and
data processing fees for both three month periods. Noninterest expense for the
three months ended March 31, 2000 was $738,529 as compared to $609,883 for the
same period in 1999, an increase of $128,646 or 21.09%. Management continues to
attempt to control overhead expenses without impairing the quality of service
provided to clients.
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999 $ Change % Change
--------- --------- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 454,200 $ 330,181 $ 124,019 37.56%
Occupancy and equipment expense 102,399 117,581 (15,182) (12.91)
Advertising and promotion 20,188 10,324 9,864 95.54
Data processing 42,330 35,280 7,050 19.98
Printing, postage, stationery and supplies 14,161 14,758 (597) (4.05)
Professional fees 30,345 22,680 7,665 33.80
Other 74,906 79,079 (4,173) (5.28)
--------- --------- --------
$ 738,529 $ 609,883 $ 128,646 21.09
========= ========= =========
</TABLE>
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Salaries and benefits experienced the most significant dollar increase of
any noninterest expense component. For the three months ended March 31, 2000
total salaries and benefits were $454,200 compared to $330,181 for the three
months ended March 31, 1999. The change was primarily attributable to the
increase in the number of employees from 25 at March 31, 1999 to 33 at March 31,
2000, as well as merit and cost of living raises.
Advertising and promotion expense experienced the largest single percentage
increase within the noninterest expense category. For the three months ended
March 31, 2000, advertising and promotion expense increased to $20,188 over the
1999 three month total of $10,324. The change was primarily attributable to the
increase in business development expenses associated with attracting new and
retaining existing clients.
Data processing expense was $42,330 for the three months ended March 31,
2000 compared to $35,280 for the same period in 1999. The 19.98% increase was a
result of the cost associated with servicing the growth in deposit
relationships.
Occupancy and equipment expense experienced the largest decrease of
noninterest expense. Occupancy and equipment expense decreased 12.91% to
$102,399 for the three months ended March 31, 2000 from $117,581 for the same
period in 1999. The decrease in occupancy expense was a result of the bank
exercising its option to purchase the building in May 1999.
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.
It is anticipated that the tax return net operating loss carryforwards
available for federal and state income tax purposes will be completely used in
2000.
FINANCIAL CONDITION
MARCH 31, 2000 COMPARED WITH DECEMBER 31, 1999
Our total assets increased by $16.4 million or 12.5% to $147.3 million
at March 31, 2000 from $130.9 million at December 31, 1999. The growth during
the period was primarily resulting from an increase in the loan portfolio funded
by deposits received from clients and FHLB advances.
CASH AND CASH EQUIVALENTS. Cash and due from banks increased by $12.4
million or 93.2% to $25.7 million at March 31, 2000 from $13.3 million at
December 31, 1999. 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 March
31, 2000, we had $5.5 million invested in federal funds. This amount decreased
by $2.0 million or 26.7% from $7.5 million at December 31, 1999. The decrease in
federal funds sold was a result of funding the loan growth for the period.
INVESTMENT PORTFOLIO. Securities available for sale totaled $25.5
million at March 31, 2000, which represented a decrease of $4.2 million or 14.1%
from $29.7 million at December 31, 1999. The decrease was a result of funding
increased loan demand as well as normal maturities.
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 $(771,491) at March 31, 2000
compared to an unrealized loss on the securities portfolio of $(750,016) at
December 31, 1999.
LOAN PORTFOLIO. Loans receivable net of allowance increased by $7.9
million or 9.3% to $93.0 million at March 31, 2000 from $85.1 million at
December 31, 1999. The increase was attributable to our officer calling program.
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Management believes the allowance for loan losses at March 31, 2000 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.
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.
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. Other assets increased by $134,907 or 158.8% to $219,835
at March 31, 2000 from $84,928 at December 31, 1998. The increase was primarily
the result of activity in the deferred and payable income tax accounts.
DEPOSITS. Deposits increased by $13.9 million or 14.2% to $112.1
million at March 31, 2000 from $98.2 million at December 31, 1999. The increase
resulted from a $5.6 million increase in certificates of deposit and a $8.3
million increase in noninterest-bearing, NOW, money market and other savings
accounts. We do not accept brokered certificates of deposit. The increase in
deposits for the period was 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.
SHORT-TERM BORROWINGS. Short-term borrowings decreased $1.2 million
from $8.1 million as of December 31, 1999 to $6.9 million as of March 31, 2000.
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.
FHLB ADVANCES AND OTHER BORROWINGS. As a result of our membership in
the Federal Home Loan Bank of Indianapolis, we have the ability to borrow for
short or long-term purposes under a variety of programs. FHLB advances increased
by $3.5 million to $11.0 million as of March 31, 2000 from $7.5 million at
December 31, 1999. As of March 31, 2000, the bank held $550,000 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 increased by $29,880 or 44.9% to $96,438 as of March
31, 2000 from $66,558 as of December 31, 1999. Other liabilities were comprised
of unpaid amounts for various products and services and accrued but unpaid
interest on deposits.
CAPITAL RESOURCES
The retained deficit decreased by $208,342 or 27.1% to $(.6) million as
of March 31, 2000 from $(.8) million as of December 31, 1999. The decrease
reflected net income for the three month period ended March 31, 2000.
Unrealized gains (losses) on securities available for sale, were
$(771,491) as of March 31, 2000 as compared to $(750,016) as of December 31,
1999. 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 $17.0 million as of March 31, 2000, an
increase of $.2 million from $16.8 million as of December 31, 1999. The increase
resulted from the combination of the increase in the net income for the period
offset by the increase in the net unrealized loss on securities available for
sale.
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
11
<PAGE> 12
the bank's minimum regulatory capital requirements and the bank's actual capital
ratios at March 31, 2000:
<TABLE>
<CAPTION>
Minimum Required Minimum Required To Be Well
For Capital Adequacy Capitalized Under Prompt Bank's Capital
March 31, 2000 Purposes Corrective Action Regulations Ratio
-------------- -------------------- ----------------------------- --------------
<S> <C> <C> <C>
Ratio of Total Capital to Risk
Weighted Assets 8.0% 10.0% 17.1%
Ratio of Tier 1 Capital to Risk
Weighted Assets 4.0% 6.0% 15.8%
Ratio of Tier 1 Capital to Average
Assets 4.0% 5.0% 12.5%
</TABLE>
The bank exceeded the applicable minimum regulatory capital
requirements at March 31, 2000 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 three month period ended March 31,
2000 or the year ended December 31, 1999.
As of March 31, 2000, 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.
ASSET/LIABILITY MANAGEMENT
LIQUIDITY
Liquidity relates primarily to our ability to fund loan demand, meet
deposit clients' 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 $51.2 million at March 31, 2000 compared to $42.9
million at December 31, 1999. Liquidity levels increased $8.3 million from
December 31, 1999 due large deposit growth at quarter end.
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 three month period ended March 31, 2000 and
1999 follows.
During both periods presented, we experienced a net increase in cash
from operating activities. Net cash from operating activities was $560,404
during the three months ended March 31, 2000 compared to $330,313 for the same
period in 1999. The increase in cash from operating activities was primarily a
result of our ability to generate an operating profit of $208,342 for the three
months ended March 31, 2000 compared to a net operating income of $68,752 for
the same period in 1999.
For all periods presented, we experienced a net decrease in net cash
from investing activities. Net cash from investing activities was $(4.3) million
and $(9.6) million for the three months ended March 31, 2000 and 1999,
respectively. The changes in net cash from investing activities include
purchases, sales, 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 $16.2 million and $6.1
million for the periods ended March 31, 2000 and 1999, respectively. In 2000 the
increase was primarily attributable to the growth in total deposits and Federal
Home Loan Bank advances of $13.9 million and $3.5 million, respectively. In 1999
the increase was primarily attributable to the growth in securities sold under
agreements to repurchase and Federal Home Loan Bank advances of $5.9 million and
$1.5 million, respectively.
12
<PAGE> 13
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 March 31, 2000, suggest that we
could expect net interest income to increase by approximately $282,000, if
interest rates gradually decline by 100 basis points over the next twelve
months, and to decrease approximately $176,000, 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 issue that confronted us and our vendors and clients
centered on the potential inability of computer systems and embedded technology
to properly recognize dates at the end of and beyond the year 1999. In early
1998 we established a year 2000 working group consisting of senior officers and
other key employees. In accordance with bank regulatory guidelines, throughout
1998 and 1999 this group developed and implemented a comprehensive plan to
address the potential impact of the year 2000 problem on our information
technology and non-information technology systems. We completed inventory,
assessment and planning phases for our mission-critical information technology
and non-information technology systems, which posed risks to our ability to
process data for our loans, deposits and general ledger, thereby impacting
revenues and operating results. Recognizing that our ability to be year 2000
ready was also dependent upon the year 2000 efforts of our vendors, we requested
and received year 2000 readiness information from all significant vendors. In
addition, we utilized letters and questionnaires to assess material loan
clients' readiness, and followed-up with phone calls or additional letters when
deemed necessary. Finally, the year 2000 working group developed and tested
contingency plans to address alternative courses of action in the event that
mission-critical systems did not function properly. The total costs associated
with our year 2000 planning, primarily personnel expenses, were estimated to
aggregate less than $75,000 for 1998 and 1999. The arrival of year 2000 appears
to have caused no major computer-related problems for us or any of our vendors
or clients. All of our information technology and non-information technology
systems are working properly. Management is not aware of any vendors or
customers that have experienced computer-related problems or concerns as the
result of the year 2000 problem that have materially and adversely affected us.
RECENT REGULATORY DEVELOPMENTS
On November 12, 1999, President Clinton signed legislation that will
allow bank holding companies to engage in a wider range of nonbanking
activities, including greater authority to engage in securities and insurance
activities. Under the Gramm-Leach-Bliley Act (the "Act"), a bank holding company
that elects to become a financial holding company may engage in any activity
that the Board of Governors of the Federal Reserve System (the "Federal
Reserve"), in consultation with the Secretary of the Treasury,
13
<PAGE> 14
determines by regulation or order is financial in nature, incidental to any such
financial activity, or complementary to any such financial activity and does not
pose a substantial risk to the safety or soundness of depository institutions or
the financial system generally. The Act specifies certain activities that are
deemed to be financial in nature, including lending, exchanging, transferring,
investing for others, or safeguarding money or securities; underwriting and
selling insurance; providing financial, investment, or economic advisory
services; underwriting, dealing in or making a market in, securities; and any
activity currently permitted for bank holding companies by the Federal Reserve
under section 4(c)(8) of the Bank Holding Company Act. A bank holding company
may elect to be treated as a financial holding company only if all depository
institution subsidiaries of the holding company are well-capitalized,
well-managed and have at least a satisfactory rating under the Community
Reinvestment Act.
National banks are also authorized by the Act to engage, through
"financial subsidiaries," in any activity that is permissible for financial
holding companies (as described above) and any activity that the Secretary of
the Treasury, in consultation with the Federal Reserve, determines is financial
in nature or incidental to any such financial activity, except (i) insurance
underwriting, (ii) real estate development or real estate investment activities
(unless otherwise expressly permitted by law), (iii) insurance company portfolio
investments and (iv) merchant banking. The authority of a national bank to
invest in a financial subsidiary is subject to a number of conditions,
including, among other things, requirements that the bank must be well-managed
and well-capitalized (after deducting from capital the bank's outstanding
investments in financial subsidiaries). The Act provides that state banks may
invest in financial subsidiaries (assuming they have the requisite investment
authority under applicable state law) subject to the same conditions that apply
to national banks.
Various bank regulatory agencies have begun issuing regulations as
mandated by the Act. The Federal Reserve has issued an interim regulation
establishing procedures for bank holding companies to elect to become financial
holding companies. In addition, the Federal Reserve has issued interim
regulations listing the financial activities permissible for financial holding
companies and describing the parameters under which financial holding companies
may engage in securities and merchant banking activities. The Federal Deposit
Insurance Corporation has issued an interim regulation regarding the parameters
under which state nonmember banks may conduct activities through subsidiaries
that national banks may conduct only in financial subsidiaries. In addition, all
federal bank regulatory agencies have jointly issued a proposed regulation that
would implement the privacy provisions of the Act. At this time, it is not
possible to predict the impact the Act and its implementing regulations may have
on the Company. As of the date of this filing, the Company has not applied for
or received approval to operate as a financial holding company. In addition, the
Bank has not applied for or received approval to establish financial
subsidiaries.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a depository of funds, the Bank may occasionally be named as a defendant in
lawsuits (such as garnishment proceedings) involving claims to the ownership of
funds in particular accounts. Such litigation is incidental to the Bank's
business.
The Company's management is not aware of any pending litigation.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
14
<PAGE> 15
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
ST. JOSEPH CAPITAL CORPORATION
(Registrant)
Date: May 12, 2000 /s/ John W. Rosenthal
----------------------------------------
John W. Rosenthal
President
Date: May 12, 2000 /s/ Edward R. Pooley
----------------------------------------
Edward R. Pooley
Principal Financial Officer
15
<PAGE> 16
Exhibit Index
Ex 27 Financial Data Schedule
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 20,115,511
<INT-BEARING-DEPOSITS> 92,514
<FED-FUNDS-SOLD> 5,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 25,546,814
<INVESTMENTS-CARRYING> 550,000
<INVESTMENTS-MARKET> 550,000
<LOANS> 94,428,647
<ALLOWANCE> 1,428,000
<TOTAL-ASSETS> 147,292,744
<DEPOSITS> 112,124,233
<SHORT-TERM> 6,920,852
<LIABILITIES-OTHER> 261,782
<LONG-TERM> 11,000,000
16,751
0
<COMMON> 0
<OTHER-SE> 16,969,126
<TOTAL-LIABILITIES-AND-EQUITY> 147,292,744
<INTEREST-LOAN> 1,823,494
<INTEREST-INVEST> 467,921
<INTEREST-OTHER> 19,627
<INTEREST-TOTAL> 2,311,042
<INTEREST-DEPOSIT> 1,041,061
<INTEREST-EXPENSE> 1,228,545
<INTEREST-INCOME-NET> 1,082,497
<LOAN-LOSSES> 158,000
<SECURITIES-GAINS> (13,589)
<EXPENSE-OTHER> 738,529
<INCOME-PRETAX> 208,342
<INCOME-PRE-EXTRAORDINARY> 208,342
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 208,342
<EPS-BASIC> .12
<EPS-DILUTED> .12
<YIELD-ACTUAL> 3.54
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 1,270,000
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,428,000
<ALLOWANCE-DOMESTIC> 1,144,462
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 283,538
</TABLE>
