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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934 (Fee required) For the fiscal year ended December 31, 1999
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[ ] Transition report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 (No fee required) For the transition period from to
Commission file number 333-06581
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ST. JOSEPH CAPITAL CORPORATION
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(Name of Small Business Issuer in Its Charter)
Delaware 35-1977746
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
3820 Edison Lakes Parkway, Mishawaka, Indiana 46545
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(Address of Principal Executive Offices) (Zip Code)
(219) 273-9700
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(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Exchange Act:
None.
Securities registered under Section 12(g) of the Exchange Act:
None.
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter period that the Issuer was required to file such reports), and
(2) has been subject to such filing requirements for past 90 days.
Yes [ x ] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
regulation S-B contained in this form, and no disclosure will be contained, to
the best of Issuer's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [ x ]
The Issuer's revenues for its most recent fiscal year were $7,468,521.
The aggregate market value of the voting stock held by non-affiliates of the
Issuer as of March 13, 2000 was approximately $22,614,012. As of said date, the
Issuer had 1,675,112 shares of Common Stock issued and outstanding.
Documents incorporated by reference:
Part III of Form 10-KSB - Proxy statement for annual meeting of stockholders to
be held May 16, 2000. Transitional Small Business Disclosure Format (check one):
Yes [ ] No [ x ]
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ST. JOSEPH CAPITAL CORPORATION
1999 FORM 10-KSB ANNUAL REPORT
TABLE OF CONTENTS
PART I
Description of Business
Description of Property
Legal Proceedings
Submission of Matters to a Vote of Security Holders
PART II
Market for Common Equity and Related Stockholder Matters
Management's Discussion and Analysis or Plan of Operation
Financial Statements
Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
PART III
Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management
Certain Relationships and Related Transactions
Exhibits and Reports on Form 8-K
PART I
DESCRIPTION OF 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, deposit and asset management to its targeted client base of
executive 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 Edwardsburg and Cassopolis. Due to the overlap
of this metropolitan area over state lines, this region is often referred to as
"Michiana." At December 31, 1999, we had total assets of $130.9 million, loans
of $86.3 million and deposits of $98.2 million.
The individuals who organized the company continue to represent a
strategic
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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 from $21.2 million at March 31, 1997 to $130.9 at December 31,
1999. Our rapid growth since 1997 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 client disruption caused by the acquisition of a number
of the area's other locally owned financial institutions by large 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 increase the
capital in our banking subsidiary during 1999 to support additional growth. 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 five quarters and profitable for the
twelve months ended December 31, 1999. However, our overall asset growth rate
continues to exceed the growth rate of our retained earnings. An increase in the
bank's capital allowed us to increase our lending limit, which will enable us to
compete more effectively in our marketplace.
A hallmark of our operations 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
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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 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 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. 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, 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.
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 $2,400,000. The board
of directors has established an "in-house" limit of $ 2,100,000. 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 addition, the bank has taken personal guarantees to help assure
payment when appropriate.
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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. We anticipate the growth in the residential loan portfolio to
slow during 2000 due to the increasing interest rate environment.
CONSUMER LENDING. 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 community 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 rates.
There are approximately 11 other commercial banks, 6 savings and loans
13 credit unions, along with other financial institutions that 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
clients within these market areas. The bank also faces competition from finance
companies, insurance companies, mortgage companies, securities brokerage firms,
money market mutual funds, loan production offices and other providers of
financial services.
Under the Gramm-Leach-Bliley Act of 1999, effective March 11, 2000,
securities firms and insurance companies that elect to become financial holding
companies may acquire banks and other financial institutions. The
Gramm-Leach-Bliley Act may significantly change the competitive environment in
which St. Joseph Capital Corporation and the bank conduct business. The
financial services industry is also likely to become more competitive as further
technological advances enable more companies to provide financial services.
These technological advances may diminish the importance of depository
institutions and other financial intermediaries in the transfer of funds between
parties.
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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 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. 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 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 smaller manufacturing, retail and service businesses.
Many major manufacturing companies are also located in adjacent Elkhart County,
including 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 31 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.
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 the Company can be affected not only by management decisions and
general economic conditions, but also by the requirements of applicable state
and federal statutes and regulations and the policies of various governmental
regulatory authorities, including the Indiana Department of Financial
Institutions (the "DFI"), the Board of Governors of the Federal Reserve System
(the "Federal Reserve"), the Federal Deposit Insurance Corporation (the "FDIC"),
the Internal Revenue Service and state taxing authorities and the Securities and
Exchange Commission (the "SEC"). 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 the Company and its subsidiaries, regulate,
among other things, the scope of
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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 the Company and its subsidiaries establishes a
comprehensive framework for their respective operations and is intended
primarily for the protection of the FDIC's deposit insurance funds and the
depositors, rather than the shareholders, of financial institutions.
The following is a summary of the material elements of the regulatory
framework that applies to the Company and its subsidiaries. It does not describe
all of the statutes, regulations and regulatory policies that apply to the
Company and its subsidiaries, 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 the Company
and its subsidiaries.
RECENT REGULATORY DEVELOPMENTS
On November 12, 1999, President Clinton signed legislation that allows
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
Federal Reserve, in consultation with the Secretary of the Treasury, determines
by regulation or order is (i) financial in nature, (ii) incidental to any such
financial activity, or (iii) 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 a financial
holding company (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 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 bank investments in financial subsidiaries.
At this time, it is not possible to predict the impact the Act may have
on the Company. Various bank regulatory agencies have just begun issuing
regulations as mandated by the Act. The Federal Reserve has issued an interim
rule that sets forth procedures by which bank
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holding companies may become financial holding companies, the criteria necessary
for such a conversion, and the Federal Reserve's enforcement powers should a
holding company fail to maintain compliance with the criteria. The Office of the
Comptroller of the Currency has issued a final rule discussing the procedures by
which national banks may establish financial subsidiaries as well as the
qualifications and safeguards that will be required. In addition, in February,
2000, all federal bank regulatory agencies jointly issued a proposed rule that
would implement the financial privacy provisions of the Act.
THE COMPANY
GENERAL. The Company, as the sole shareholder of the Bank, is a bank
holding company. As a bank holding company, the Company is registered with, and
is subject to regulation by, the Federal Reserve under the Bank Holding Company
Act, as amended (the "BHCA"). In accordance with Federal Reserve policy, the
Company is expected to act as a source of financial strength to the Bank and to
commit resources to support the Bank in circumstances where the Company might
not otherwise do so. Under the BHCA, the Company is subject to periodic
examination by the Federal Reserve. The Company is also required to file with
the Federal Reserve periodic reports of the Company's operations and such
additional information regarding the Company and its subsidiaries as the Federal
Reserve may require. The Company is also subject to regulation by the DFI under
Indiana law.
INVESTMENTS AND ACTIVITIES. Under the BHCA, 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 (unless it already owns or
controls the majority of such shares); (ii) acquiring all or substantially all
of the assets of another bank; or (iii) merging or consolidating with another
bank holding company. Subject to certain conditions (including certain deposit
concentration limits established by the BHCA), 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 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 BHCA also generally prohibits the Company 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, the Company
and its non-bank subsidiaries are 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
(including software development), and mortgage banking and brokerage. The BHCA
generally
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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 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 (other than
certain 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 (i.e., Tier 1
capital less all intangible assets), 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 the Company, have less than
$150 million in total consolidated assets.
DIVIDENDS. The Delaware General Corporation Law (the "DGCL") allows the
Company to pay dividends only out of its surplus (as defined and computed in
accordance with the provisions of the DGCL) or if the Company 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 holding company
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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. The Company's common stock is not
registered with the SEC under the Securities Exchange Act of 1934, as amended
(the "Exchange Act"). Consequently, the Company is not subject to the
information, proxy solicitation, insider trading and other restrictions and
requirements of the SEC under the Exchange Act. As a result of the filing by the
Company of a registration statement with the SEC in 1996, the Company was
subject to the periodic reporting requirements of the Securities Act of 1933.
Although these reporting obligations were suspended at the end of 1996, the
Company has voluntarily continued filing periodic reports with the SEC.
THE BANK
GENERAL. The Bank is an Indiana-chartered bank, the deposit accounts of
which are insured by the FDIC's Bank Insurance Fund ("BIF"). As a BIF-insured,
Indiana-chartered bank, the Bank is subject to the examination, supervision,
reporting and enforcement requirements of the DFI, as the chartering authority
for Indiana banks, and the FDIC, as administrator of the BIF.
DEPOSIT INSURANCE. As an FDIC-insured institution, the Bank is required
to pay deposit insurance premium assessments to the FDIC. The FDIC 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 (as defined by the FDIC) and
considered healthy pay the lowest premium while institutions that are less than
adequately capitalized (as defined by the FDIC) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC for each semi-annual assessment period.
During the year ended December 31, 1999, BIF assessments ranged from 0%
of deposits to 0.27% of deposits. For the semi-annual assessment period
beginning January 1, 2000, BIF assessment rates will continue to range from 0%
of deposits to 0.27% of deposits.
The FDIC may terminate the deposit insurance of any insured depository
institution if the FDIC 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 FDIC. The FDIC 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 the Company 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 FDIC's Savings Association Insurance Fund
("SAIF") has been used to cover interest payments due on the outstanding
obligations of the Financing Corporation
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("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 BIF 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 FDIC for deposit
insurance. Between January 1, 2000 and the final maturity of the outstanding
FICO obligations in 2019, BIF members and SAIF members will share the cost of
the interest on the FICO bonds on a pro rata basis. During the year ended
December 31, 1999, the FICO assessment rate for SAIF members ranged between
approximately 0.058% of deposits and approximately 0.061% of deposits, while the
FICO assessment rate for BIF members ranged between approximately 0.0116% of
deposits and approximately 0.0122% of deposits. During the year ended December
31, 1999, the Bank paid FICO assessments totaling $12,411.35.
SUPERVISORY ASSESSMENTS. All Indiana banks are required to pay
supervisory assessments to the DFI to fund the operations of the DFI. During the
year ended December 31, 1999, the Bank paid supervisory assessments to the DFI
totaling $10,143.57.
CAPITAL REQUIREMENTS. The FDIC 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 (see "--The Company--Capital
Requirements").
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 FDIC 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 FDIC
required the Bank to maintain a minimum leverage ratio of 8% during the first
three years of the Bank's operations. As of December 31, 1999, the Bank exceeded
applicable regulatory capital requirements with a leverage ratio of 12.7% and a
risk-based capital ratio of 18.7%.
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 (including
additional voting 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
<PAGE> 12
interest on subordinated debt; and ultimately, appointing a receiver for the
institution. As of December 31, 1999, the Bank was well capitalized, as defined
by FDIC 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 DFI for the payment of any dividend if the total of all
dividends declared by the Bank during the calendar year, including the proposed
dividend, would exceed the sum of the retained net income for the year to date
combined with its retained net income for the previous two years. Indiana law
defines "retained net income" to mean the net income of a specified period,
calculated under the consolidated report of income instructions, less the total
amount of all dividends declared for the specified period.
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 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 December 31, 1999. As of December 31, 1999, there were no funds available
to be paid as dividends to the Company by the Bank. Notwithstanding the
availability of funds for dividends, however, the FDIC may prohibit the payment
of any dividends by the Bank if the FDIC 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 the Company and its
subsidiaries, on investments in the stock or other securities of the Company and
its subsidiaries and the acceptance of the stock or other securities of the
Company or its subsidiaries 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 the Company and its
subsidiaries, to principal stockholders of the Company, 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 the Company or one of its subsidiaries or a principal
stockholder of the Company 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. Since the fourth quarter of 1998, and through the first quarter of
2000, the federal banking regulators have 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
<PAGE> 13
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 (the "Riegle-Neal Act"), 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 and
establish branches in such state.
STATE BANK ACTIVITIES. Under federal law and FDIC regulations, FDIC
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 FDIC regulations also prohibit
FDIC 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 FDIC 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
<PAGE> 14
aggregating $44.3 million or less, the reserve requirement is 3% of total
transaction accounts; and for transaction accounts aggregating in excess of
$44.3 million, the reserve requirement is $1.329 million plus 10% of the
aggregate amount of total transaction accounts in excess of $44.3 million. The
first $5.0 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.
DESCRIPTION OF PROPERTY
We leased the premises for the bank's main office until we purchased
the building and land 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 57 vehicles. The building is located on a major thoroughfare in
Mishawaka, approximately 2 miles south of Interstate 80 and near the city's
population center.
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.
LEGAL PROCEEDINGS
None
SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Our common stock was held by approximately 127 holders of record as of
March 24, 2000, and is quoted on the OTC Bulletin Board under the symbol "SJOE."
To date there has been no regular and liquid market for the common stock, and
there can be no assurance that a regular and liquid trading market will develop
in the foreseeable future.
The following table shows, for the periods indicated, the high and low
trades per share of transactions in our common stock as quoted on the OTC
Bulletin Board. Other private transactions may have occurred during the periods
indicated of which we have no knowledge. The following prices represent
inter-dealer prices without retail markups, markdowns or commissions.
<TABLE>
<CAPTION>
Per Share Per Share
Prices Dividends
1998 High Low Declared
---- ---- --- --------
<S> <C> <C> <C>
March 31, 1998 $ 22.00 $ 17.25 -
June 30, 1998 20.00 18.00 -
September 30, 1998 20.00 16.25 -
December 31, 1998 18.25 16.37 -
</TABLE>
<PAGE> 15
<TABLE>
<CAPTION>
1999
----
<S> <C> <C> <C>
March 31, 1999 $ 18.25 $ 16.50 -
June 30, 1999 16.50 15.00 -
September 30, 1999 17.75 15.50 -
December 31, 1999 16.25 15.25 -
</TABLE>
No cash or other dividends were declared or paid during the fiscal year
ended December 31, 1999 or 1998. We expect that all company and bank earnings,
if any, will be retained to finance our growth and that no cash dividends will
be paid for the foreseeable future. If and when dividends are declared, we will
probably be largely dependent upon dividends paid by the bank for funds to pay
dividends on our common stock. It is also possible however that we will pay
dividends in the future generated from investment income and other activities of
the company.
<PAGE> 16
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of St. Joseph Capital
Corporation and its subsidiary is qualified in its entirety by, and should be
read in conjunction with, the consolidated financial statements, including notes
thereto, included elsewhere in this report.
<TABLE>
<CAPTION>
At December 31
--------------
(In thousands)
SUMMARY OF FINANCIAL CONDITION: 1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total assets $ 130,932 $ 96,604 $ 50,839 $ 11,841
Total cash and cash equivalents 13,266 15,719 4,535 1,410
Interest-bearing time deposits in
other financial institutions - - 500 -
Securities available for sale 29,676 31,066 22,351 10,128
Loans receivable, net of allowance for loan losses 85,054 48,011 21,991 -
Total deposits 98,241 76,390 34,916 -
FHLB advances 7,500 2,000 - -
Total shareholders' equity 16,799 11,611 11,257 11,793
Average shareholders' equity 13,345 11,296 11,628 4,754
Average total assets 108,773 71,232 31,283 4,892
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1999, 1998 and 1997
and Period From February 29, 1996 to December 31, 1996
------------------------------------------------------
(In thousands)
SUMMARY OF OPERATING RESULTS:
1999 1998 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Total interest and dividend income $ 7,370 $ 4,790 $ 2,022 $ 197
Total interest expense 3,847 2,699 942 8
--------- --------- --------- ---------
Net interest income 3,523 2,091 1,080 189
Provision for loan losses 518 392 360 -
Total noninterest income 98 158 4 -
Total noninterest expense 2,592 2,086 1,486 479
--------- --------- --------- ---------
Income (loss) before income taxes 511 (229) (762) (290)
Income tax expense (benefit) - - - -
--------- --------- --------- ---------
Net income (loss) $ 511 $ (229) $ (762) $ (290)
========= ========= ========= =========
SUPPLEMENTAL DATA:
Return on average total assets .47% (.32)% (2.44)% (5.93)%
Return on average shareholders' equity 3.83 (2.03) (6.55) (6.10)
Net interest rate spread (1) 2.68 2.09 1.61 (1.25)
Net yield on average interest-earning assets (2) 3.46 3.15 3.72 4.58
Net interest income to operating expenses (3) 135.92 100.21 72.65 39.49
Average shareholders' equity to average total assets 12.27 15.86 37.17 97.18
Average interest-earning assets to average interest-
bearing liabilities 120.30 126.52 165.02 3,103.01
Nonperforming assets to total assets - - - -
Nonperforming loans to total loan receivable - - - -
Allowance for loan losses to total loans receivable 1.47 1.54 1.61 -
Allowance for loan losses to non-performing loans
receivable - - - -
Basic income (loss) per common share $ .37 $ (.18) $ (.60) $ (.23)
Diluted income (loss) per common share $ .36 $ (.18) $ (.60) $ (.23)
Dividends declared per common share $ - $ - $ - $ -
Book value per common share $ 10.03 $ 9.08 $ 8.87 $ 9.32
Number of offices 1 1 1 -
- -------------------------------------------------------------------------------------------------------------------
</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> 17
ST. JOSEPH CAPITAL CORPORATION
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 each of the years ended December 31,
1999, 1998 and 1997. The objective of this financial review is to enhance the
reader's understanding of the accompanying tables, consolidated financial
statements and the related notes thereto presented elsewhere in this report.
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 $130.9 million as of December 31, 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 $510,994 or $.37 basic and $.36 diluted income
per common share for the year ended December 31, 1999 as compared to a net loss
of $(228,519) or $(.18) basic and diluted loss per common share for the year
ended December 31, 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 $.8 million at December 31, 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
1999 COMPARED WITH 1998
<PAGE> 18
OVERVIEW. Consolidated net income for the year ended December 31, 1999
was $510,994 as compared to a net loss of $(228,519) in 1998 for an increase of
$739,513. Income per common share for 1999 increased to $.37 basic and $.36
diluted from a basic and diluted loss of $(.18) for the same period of 1998. The
increase in net income was primarily comprised of the increase in net interest
income after provision for loan losses of $1,306,266 reduced by an increase in
noninterest expense of $506,054.
NET INTEREST INCOME. Net interest income for 1999 and 1998 amounted to
$3.5 million and $2.1 million, respectively, and represented the difference
between interest income earned on earning assets and interest expense paid on
interest bearing liabilities.
Interest income increased by $2.6 million, from $4.8 million for the
year ended December 31, 1998 to $7.4 million for the year ended December 31,
1999. The 54.2% 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 $1.1 million, from $2.7 million for the
year ended December 31, 1998 to $3.8 million for the year ended December 31,
1999. The 40.7% 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 $518,325 for
the year ended December 31, 1999 compared to $391,675 in the same period in
1998. At December 31, 1999, the allowance for loan losses was $1,270,000 or
1.47% of total loans receivable compared to $751,675 or 1.54% at December 31,
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 December 31, 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 68.7% of the allowance for loan
losses to commercial loans, 11.0% to residential real estate mortgage loans and
5.6% to installment loans at December 31, 1999, leaving 14.7% unallocated. There
were no non-performing loans at December 31, 1999. Management believes the
allowance for loan losses at December 31,
<PAGE> 19
1999 was adequate to absorb existing losses in the loan portfolio.
NONINTEREST INCOME. Noninterest income decreased by $60,699, from
$158,872 for the year ended December 31, 1998 to $98,173 for the year ended
December 31, 1999. Noninterest income during 1998 consisted of income from gains
on sales and calls of securities available for sale of $116,644, depository
account service fees of $32,228 and other miscellaneous fees of $10,000.
Noninterest income during 1999 consisted of income from depository account
service fees of $87,733 and other miscellaneous fees of $10,440. The 38.2%
decrease was primarily a result of not receiving gains on sales and calls of
securities for sale during 1999.
NONINTEREST EXPENSE. The main components of noninterest expense were
primarily salaries and benefits, occupancy and equipment, data processing fees
and other for 1999 and salaries and benefits, occupancy and equipment,
professional fees and data processing fees for 1998. Noninterest expense for the
year ended December 31, 1999 was $2,592,414 as compared to $2,086,360 for the
same period in 1998, an increase of $506,054. 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 years ended December 31, 1999 and 1998.
<TABLE>
<CAPTION>
Year Ended December 31,
1999 1998 % Change
---- ---- --------
<S> <C> <C> <C>
Salaries and employee benefits $ 1,495,407 $ 1,047,262 42.79%
Occupancy and equipment expense 432,573 449,496 (3.76)
Advertising and promotion 75,605 49,659 52.25
Client courier 24,850 92,297 (73.08)
Data processing 149,658 110,531 35.40
Incorporation expense 4,588 6,156 (25.47)
Liability insurance 27,123 26,461 2.50
Printing, postage, stationery and supplies 76,320 46,287 64.88
Professional dues and memberships 20,945 21,258 (1.47)
Professional fees 85,979 112,786 (23.77)
Telephone 36,731 31,884 15.20
Other 162,635 92,283 76.24
------------- -------------
$ 2,592,414 $ 2,086,360 24.26
============= =============
</TABLE>
Salaries and benefits experienced the most significant dollar increase
of any noninterest expense component. For the year ended December 31, 1999,
total salaries and benefits were $1,495,407 compared to $1,047,262 for the year
ended December 31, 1998. The change was primarily attributable to the increase
in the number of full time equivalent employees from 23 at December 31, 1998 to
31 at December 31, 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 year ended December 31, 1999 other
expense increased to $162,635 or $70,352 over the 1998 year end total of
$92,283. 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
<PAGE> 20
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
35.4% and printing, postage, stationary and supplies of 64.9% 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. As of December 31, 1999, a valuation allowance was
recorded for the portion of deferred tax assets considered more likely than not
to not be realized. As we continue to be profitable, the valuation allowance
will continue to be reduced and a tax benefit will be realized. Refer to
footnote 11 for detailed information on the valuation allowance.
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 $.9 million in
1997, an increase of $1.8 million, which primarily represents interest paid to
depositors. 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 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
<PAGE> 21
realized with future sales. Other noninterest income consisted of depository
account service fees and consulting 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. Included in other income in 1998 was $10,000 from
consulting services performed.
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 and 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.
<PAGE> 22
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. As of December 31, 1998 and
1997 a valuation allowance was 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.
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, net
interest income, net interest spread and net interest margin:
<PAGE> 23
The following are the average balance sheets for the years ending
December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999
----
Average
Average
Balance Interest
------- --------
Rate
---- (Dollars in thousands)
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Federal funds sold $ 4,449 $ 228 5.12%
Interest-bearing deposits in other
financial institutions 109 8 7.34
Securities available for sale-taxable (1) 28,959 1,726 5.94
FHLB stock 375 24 6.40
Loans receivable (2) 67,884 5,384 7.93
--------- --------
Total interest-earning assets (1) 101,776 7,370 7.23%
Noninterest-earning assets
Cash and due from banks 5,954
Allowance for loan losses (970)
Premises and equipment, net 1,214
Accrued interest receivable and
other assets 799
---------
$ 108,773
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Savings, NOW and money markets $ 44,707 $ 1,943 4.35%
Certificates of deposits 26,673 1,341 5.03
Federal funds purchased 74 4 5.41
Securities sold under agreements
to repurchase 8,980 366 4.07
FHLB advances 4,167 193 4.63
--------- --------
Total interest-bearing liabilities 84,601 3,847 4.55%
--------
Noninterest-bearing liabilities
Demand deposits 10,460
Accrued interest payable and
other liabilities 367
---------
95,428
Shareholders' equity 13,345
---------
$ 108,773
=========
Net interest income/spread $ 3,523 2.68%
======== =======
Net interest income as a percent
of average interest earning assets (1) 3.46%
=======
</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.
<PAGE> 24
<TABLE>
<CAPTION>
1998
----
Average
Average
Balance Interest
------- --------
(Dollars in thousands)
Rate
----
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Federal funds sold $ 6,114 $ 325 5.32%
Interest-bearing deposits in other
financial institutions 88 7 7.95
Securities available for sale-taxable (1) 27,459 1,652 6.08
FHLB stock 115 9 7.83
Loans receivable (2) 32,955 2,797 8.49
--------- --------
Total interest-earning assets (1) 66,731 4,790 7.21%
Noninterest-earning assets
Cash and due from banks 3,644
Allowance for loan losses (536)
Premises and equipment, net 820
Accrued interest receivable and
other assets 573
---------
$ 71,232
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Savings, NOW and money markets $ 25,785 $ 1,286 4.99%
Certificates of deposits 18,278 1,011 5.53
Federal funds purchased 56 3 5.36
Securities sold under agreements
to repurchase 8,601 399 4.64
FHLB advances 22 - -
--------- --------
Total interest-bearing liabilities 52,742 2,699 5.12%
Noninterest-bearing liabilities
Demand deposits 6,955
Accrued interest payable and
other liabilities 239
---------
59,936
Shareholders' equity 11,296
---------
$ 71,232
=========
Net interest income/spread $ 2,091 2.09%
======== =======
Net interest income as a percent
of average interest earning assets (1) 3.15%
=======
</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.
<PAGE> 25
<TABLE>
<CAPTION>
1997
----
Average
Average
Balance Interest
------- --------
Rate
---- (Dollars in thousands)
<S> <C> <C> <C>
ASSETS
Interest-earning assets
Federal funds sold $ 3,132 $ 177 5.65%
Interest-bearing deposits in other
financial institutions 617 41 6.65
Securities available for sale-taxable (1) 15,414 920 5.97
Loans receivable (2) 9,895 884 8.93
--------- --------
Total interest-earning assets (1) 29,058 2,022 6.96%
Noninterest-earning assets
Cash and due from banks 1,386
Allowance for loan losses (147)
Premises and equipment, net 681
Accrued interest receivable and
other assets 305
---------
$ 31,283
=========
LIABILITIES AND SHAREHOLDERS' EQUITY
Interest-bearing liabilities
Savings, NOW and money markets $ 7,873 $ 398 5.06%
Certificates of deposits 7,583 437 5.76
Securities sold under agreements
to repurchase 2,153 107 4.97
--------- --------
Total interest-bearing liabilities 17,609 942 5.35%
--------
Noninterest-bearing liabilities
Demand deposits 1,904
Accrued interest payable and
other liabilities 142
---------
19,655
Shareholders' equity 11,628
---------
$ 31,283
=========
Net interest income/spread $ 1,080 1.61%
======== =======
Net interest income as a percent
of average interest earning assets (1) 3.72%
=======
</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.
<PAGE> 26
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:
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>
<CAPTION>
Total Variance Attributable To Total Variance Attributable To
Variance ------------------------ Variance ------------------------
1999/1998 Volume Rate 1998/1997 Volume Rate
--------- ------ ---- --------- ------ ----
(In thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST INCOME
Federal funds sold $ (97) $ (86) $ (11) $ 148 $ 159 $ (11)
Interest-bearing deposits in other
financial institutions 1 2 (1) (34) (41) 7
Securities available for sale-taxable 74 113 (39) 732 714 18
FHLB stock 15 17 (2) 9 9 -
Loans receivable 2,587 2,782 (195) 1,913 1,959 (46)
------ ------- ------- ------ ------ -------
2,580 2,828 (248) 2,768 2,800 (32)
INTEREST EXPENSE
Savings, NOW and money markets 657 840 (183) 888 893 (5)
Certificates of deposits 330 429 (99) 574 592 (18)
Federal funds purchased 1 1 - 3 3 -
Securities sold under agreements
to repurchase (33) 17 (50) 292 300 (8)
FHLB advances 193 193 - - - -
--------- --------- --------- --------- -------- ----------
1,148 1,480 (332) 1,757 1,788 (31)
--------- --------- ---------- --------- -------- ----------
NET INTEREST INCOME $ 1,432 $ 1,348 $ 84 $ 1,011 $ 1,012 $ (1)
========= ========= ========= ========= ======== ==========
</TABLE>
FINANCIAL CONDITION
Our total assets increased by $34.3 million or 35.5% to $130.9 million
at December 31, 1999 from $96.6 million at December 31, 1998. The growth during
the period 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 December 31, 1999 was in the loan portfolio.
CASH AND CASH EQUIVALENTS. Cash and due from banks decreased by $0.4
million or 6.4% to $5.7 million at December 31, 1999 from $6.1 million at
December 31, 1998. 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
December 31, 1999, we had $7.5 million invested in federal funds compared to
$9.6 million at December 31, 1998. The decrease in federal funds sold was a
result of funding the loan growth for the period.
<PAGE> 27
INVESTMENT PORTFOLIO. Securities available for sale totaled $29.7
million at December 31, 1999, which represented a decrease of $1.4 million or
4.5% from $31.1 million at December 31, 1998. The decrease was a result of a
decline in market value of securities for sale.
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 $(750,016) at December 31, 1999
compared to an unrealized gain on the securities portfolio of $554,950 at
December 31, 1998. The increase in the unrealized loss of the securities
portfolio was due to an increase in market interest rates.
The carrying value of securities available for sale as of December 31
are summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(In thousands)
<S> <C> <C> <C>
U.S. Government and federal agencies $ 26,255 $ 27,276 $ 22,190
Obligations of states and
political subdivisions 3,345 2,574 161
Corporate bonds - 1,195 -
Marketable equity securities 76 21 -
------------ ------------ ------------
$ 29,676 $ 31,066 $ 22,351
============ ============ ============
</TABLE>
The maturity distribution and weighted average interest rates of debt
securities available for sale at December 31, 1999 are as follows:
<TABLE>
<CAPTION>
Maturing
(Dollars in thousands) --------
After One Year After Five Years
Within But Within But Within After
One Year Five Years Ten Years Ten Years
Amount Rate Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ---- ------ ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
U.S. Government and
federal agencies $ 4,498 6.18% $ 14,076 5.94% $ 7,681 6.14% $ - -%
Obligations of states
and political
subdivisions 160 6.37 2,029 5.06 446 5.28 710 5.31
-------- -------- -------- --------
$ 4,658 6.19% $ 16,105 5.83% $ 8,127 6.09% $ 710 5.31%
======== ======== ======== ========
</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 shareholders' equity of the Company
at December 31, 1999.
<PAGE> 28
LOAN PORTFOLIO. Loans receivable net of allowance increased by $37.0
million or 77.1% to $85.0 million at December 31, 1999 from $48.0 million at
December 31, 1998. The increases for both periods were attributable to our
officer calling program.
Total loans on the balance sheet are comprised of the following
classifications at December 31 for the years indicated:
<TABLE>
<CAPTION>
1999 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Commercial $ 56,591 $ 33,202 $ 14,733 $ -
Residential real estate mortgage 26,571 13,925 6,376 -
Installment loans to individuals 3,161 1,636 1,242 -
------------ ------------- ------------ ------------
$ 86,323 $ 48,763 $ 22,351 $ -
============ ============= ============ ============
</TABLE>
CONCENTRATIONS OF CREDIT RISK: The Company grants commercial,
residential real estate mortgage and installment loans to individuals mainly in
northern Indiana. Commercial loans include loans collateralized by business
assets. Commercial loans make up approximately 65% 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 31% of the loan
portfolio and are collateralized by residential real estate. Installment loans
to individuals make up approximately 4% of the loan portfolio and are primarily
collateralized by consumer assets.
MATURITIES AND SENSITIVITIES OF LOANS TO CHANGES IN INTEREST RATES: The
following table shows the amounts of commercial loans outstanding as of December
31, 1999, based on remaining scheduled repayments of principal, 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>
1999
----
(In thousands)
<S> <C>
Maturing
Within one year $ 29,253
After one year but within five years 24,059
After five years 3,279
------------
$ 56,591
============
Commercial Loan Interest Sensitivity
---------------------------------------------
1999
----
(In thousands)
Fixed Variable
Rate Rate Total
---- ---- -----
<S> <C> <C> <C>
Due after one year but within five years $ 23,287 $ 772 $ 24,059
Due after five years 3,279 - 3,279
------------- ------------ ------------
$ 26,566 $ 772 $ 27,338
============= ============ ============
</TABLE>
<PAGE> 29
RISK ELEMENTS - NONACCRUAL, PAST DUE, RESTRUCTURED AND IMPAIRED LOANS:
The following schedule summarizes nonaccrual, past due, restructured and
impaired loans at December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
(a) Loans accounted for on a nonaccrual basis
$ - $ - $ - $ -
(b) Accruing loans which are contractually past due 90
days or more as to interest or principal payments - - - -
(c) Loans not included in (a) or (b) which are "Troubled
Debt Restructurings" as defined by
Statement of Financial Accounting Standards No. 15 - - - -
(d) Other loans defined as "impaired" - - - -
----- ---- ---- ----
$ - $ - $ - $ -
===== ==== ==== ====
</TABLE>
Management believes the allowance for loan losses at December 31, 1999
is 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>
1999
(In thousands)
<S> <C>
Gross interest income that would have been recorded in 1999 on
nonaccrual loans outstanding at December 31, 1999 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>
<PAGE> 30
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 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 December 31, 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.
FOREIGN OUTSTANDINGS: None
LOAN CONCENTRATIONS: None
OTHER INTEREST-BEARING ASSETS: There are no other interest-bearing
assets as of December 31, 1999 which would be required to be disclosed under
"Risk Elements" or "Potential Problem Loans" if such assets were loans.
<PAGE> 31
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 years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997 1996
---- ---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C> <C>
LOANS
Loans outstanding at end of period $ 86,323 $ 48,763 $ 22,351 $ -
========= ========= ========== ==========
Average loans outstanding during period $ 67,884 $ 32,955 $ 9,895 $ -
========= ========= ========== ==========
ALLOWANCE FOR LOAN LOSSES
Balance at beginning of period $ 752 $ 360 $ - $ -
Loans charged-off
Commercial - - - -
Residential real estate mortgage - - - -
Installment loans to individuals - - - -
--------- --------- ---------- ----------
- - - -
Recoveries of loans previously charged-off
Commercial - - - -
Residential real estate mortgage - - - -
Installment loans to individuals - - - -
--------- --------- ---------- ----------
- - - -
--------- --------- ---------- ----------
Net loans charged-off - - - -
Provision for loan losses 518 392 360 -
--------- --------- ---------- ----------
Balance at end of period $ 1,270 $ 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 judgmentally determined by management based upon periodic reviews of the
loan portfolio. In addition, management considered 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.
<PAGE> 32
The following schedule is a breakdown of the allowance for loan losses
allocated by type of loan and related ratios at December 31:
<TABLE>
<CAPTION>
Allocation of the Allowance for Loan Losses
-------------------------------------------
1999 1998 1997
---- ---- ----
Percentage of Percentage of Percentage of
Loans In Loans In Loans In
Each Each Each
Category Category Category
Allowance to Total Allowance to Total Allowance to Total
Amount Loans Amount Loans Amount Loans
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Commercial $ 873 65.5% $ 471 68.1% $ 151 65.9%
Residential real estate
mortgage 140 30.8 75 28.5 49 28.5
Installment loans to
individuals 70 3.7 31 3.4 14 5.6
Unallocated 187 - 175 - 146 -
-------- -------- --------- -------- -------- -------
$ 1,270 100.0% $ 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 $721,873 or 97.2% to
$1,464,368 at December 31, 1999 from $742,495 at December 31, 1998. The increase
was primarily the result of purchasing our headquarters building and land in
May, 1999 for $800,000.
Accrued interest receivable on loans, securities and interest bearing
cash accounts increased by $259,545 or 35.1% to $998,569 at December 31, 1999
from $739,024 at December 31, 1998. The increases were primarily due to greater
average outstanding balances in interest earning assets.
Other assets as of December 31, 1999 and December 31, 1998 totaled
$84,928 and $103,565, respectively. The $18,637, or 18.0%, decrease was
attributable to the reduction of prepaid expenses.
DEPOSITS. Deposits increased by $21.8 million or 28.6% to $98.2 million
at December 31, 1999 from $76.4 million at December 31, 1998. The increase in
certificates of deposit during 1999 was primarily a result of expanding
relationships with existing clients and obtaining business from other local
relationship based clients and were not brokered deposits.
Transaction accounts, which include noninterest-bearing demand,
savings, NOW and money market accounts, increased by $3.8 million during 1999.
Our average cost of interest bearing liabilities decreased from 5.12% during the
year 1998 to 4.55% during 1999.
<PAGE> 33
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 for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
Average Average Average Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Savings, NOW and money
markets $ 44,707 4.35% $ 25,785 4.99% $ 7,873 5.06%
Certificates of deposits 26,673 5.03 18,278 5.53 7,583 5.76
Demand deposits (noninterest-
bearing) 10,460 - 6,955 - 1,904 -
--------- -------- --------
$ 81,840 $ 51,018 $ 17,360
========= ======== ========
</TABLE>
Included in interest bearing deposits as of December 31, 1999 were
certificates of deposit totaling $29.6 million, that were $100,000 or greater.
Maturities of time certificates of deposit and other time deposits of $100,000
or more outstanding at December 31, 1999 are summarized as follows:
<TABLE>
<CAPTION>
1999
Amount
(In thousands)
<S> <C>
Three months or less $ 20,877
Over three months and through six months 954
Over six months and through twelve months 5,642
Over twelve months 2,164
------------
$ 29,637
</TABLE>
SHORT-TERM BORROWINGS. Short-term borrowings increased $1.7 million
from $6.4 million as of December 31, 1998 to $8.1 million as of December 31,
1999. 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 periods was 30 percent or more
of shareholders' equity at the end of the reported periods. The required
disclosures are incorporated by reference and can be located in Footnote 7 to
the consolidated financial statements.
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 $5.5 million to $7.5
<PAGE> 34
million as of December 31, 1999 from $2.0 million at December 31, 1998. As of
December 31, 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 $46,494 or 41.1% to $66,558 as of
December 31, 1999 from $113,052 as of December 31, 1998. Other liabilities were
comprised of unpaid amounts for various products and services.
Accrued interest payable on interest bearing liabilities increased by
$88,807 or 88.2% to $189,514 at December 31, 1999 from $100,707 at December 31,
1998. The increases were primarily due to greater average outstanding balances
in interest bearing liabilities.
CAPITAL RESOURCES
Additional paid-in capital increased by $6.0 million from $12.3 million
at December 31, 1998 to $18.3 million at December 31, 1999. The increase in
additional paid-in capital was a result of the successful secondary offering as
well as employee stock purchases through our 401(k) plan.
The retained deficit decreased by $510,994 or 39.9% to $(0.8) million
as of December 31, 1999 from $(1.3) million as of December 31, 1998. The
decrease reflected net income for the year ended December 31, 1999.
Unrealized gains (losses) on securities available for sale, were
$(750,016) as of December 31, 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 $16.8 million as of December 31, 1999,
an increase of $5.2 million from $11.6 million as of December 31, 1998. The net
increase 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 existing
shareholders in the secondary offering and 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 December 31, 1999:
Minimum Minimum Required
Required For To Be Well
Capital Capitalized Under Bank's
Adequacy Prompt Corrective Capital
December 31, 1999 Purposes Action Regulations Ratio
- ----------------- -------- ------------------ -----
Ratio of Total Capital
to Risk Weighted Assets 8.0% 10.00% 18.7%
Ratio of Tier 1 Capital
to Risk Weighted Assets 4.0% 6.0% 17.4%
Ratio of Tier 1 Capital
to Average Assets 4.0% 5.0% 12.7%
<PAGE> 35
The Bank exceeded the applicable minimum regulatory capital
requirements at December 31, 1999 and was considered to be well capitalized.
Restrictions exist regarding the ability of the Bank to transfer funds
to the Company in the form of cash dividends, loans or advances. (See Note 1 to
consolidated financial statements). No cash or other dividends were declared or
paid during the years ended December 31, 1999, 1998 or 1997.
As of December 31, 1999, management was not aware of any current
recommendations by the banking regulatory authorities which, it they were to be
implemented, would have, or are reasonably likely to have, a material adverse
effect on the Company's liquidity, capital resources or operations.
RETURN ON EQUITY AND ASSETS
The ratio of net income (loss) to average shareholders' equity and
average total assets and certain other ratios are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
(Dollars in thousands)
<S> <C> <C> <C>
Average total assets $ 108,773 $ 71,232 $ 31,283
============ ============ ============
Average shareholders'
equity (1) $ 13,345 $ 11,296 $ 11,628
============ ============ ============
Net income (loss) $ 511 $ (229) $ (762)
============ ============ ============
Cash dividends declared $ - $ - $ -
============ ============ ============
Return on average total assets .47% (.32)% (2.44)%
Return on average shareholders' equity 3.83% (2.03)% (6.55)%
Dividend payout percentage -% -% -%
Average shareholders'
equity to average total assets 12.27% 15.86% 37.17%
</TABLE>
(1) Net of average unrealized appreciation (depreciation) on securities
available for sale.
IMPACT OF YEAR 2000
The year 2000 issue that confronted us and our vendors and clients
centered on the
<PAGE> 36
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.
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 $42.9 million at December 31, 1999 compared to $46.8
million at December 31, 1998, respectively. Liquidity levels declined $3.9
million from December 31, 1998 due to the need to fund the 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 December 31, 1999, the
entire securities portfolio of $29.7 million was classified as available for
sale. Management believes its current liquidity level and funding sources are
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 years ended December 31, 1999, 1998 and 1997
follows.
During the 1999 and 1998 periods presented, we experienced a net
increase in cash from operating activities. Net cash from operating activities
was $1,173,708 and $115,518 during the years ended December 31, 1999 and 1998,
respectively compared to a net decrease in cash from operating activity of
$(764,627) for the year ended December 31, 1997. The increase in cash from
operating activities during 1999 was primarily a result of our ability to
generate an operating profit of $510,994. In 1998, the increase in cash from
operating activities was due to our ability to reduce the level of net loss by
$(533,601) compared to
<PAGE> 37
1997's net loss of $(762,120).
For all periods presented, we experienced a net decrease in net cash
from investing activities. Net cash from investing activities was $(38.7)
million, $(34.5) million and $(35.6) million for the years ended December 31,
1999, 1998 and 1997, respectively. The changes in net cash from investing
activities include purchases, maturities, calls and sales of securities
available for sale, growth in loans receivable and purchases of premises and
equipment.
Net cash flow from financing activities was $35.1 million, $45.5
million and $39.5 million for the periods ended December 31, 1999, 1998 and
1997, respectively. In 1999 the increase was primarily due to growth in total
deposits, the proceeds received from the secondary offering as well as
additional advances taken from the Federal Home Loan Bank. In 1998 and 1997, the
increase was primarily attributable to growth in total deposits, securities sold
under agreements to repurchase and Federal Home Loan Bank advances.
MANAGEMENT OF INTEREST SENSITIVITY
A number of measures are used to monitor and manage interest rate risk,
including income simulation, economic value of equity analysis 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 December 31, 1999, suggest that we
could expect net interest income to increase by approximately $183,000, if
interest rates gradually decline by 100 basis points over the next twelve
months, and to decrease approximately $78,000, 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.
Results of the economic value of equity analysis done as of December
31, 1999, suggest that we could expect the value of our equity to be reduce by
(4.20)%, if there was an immediate interest rates shift upward of 100 basis
points and to increase 4.54%, if there was an immediate interest rate shift
downward of 100 basis points.
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.
<PAGE> 38
.
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.
FORWARD-LOOKING STATEMENTS
This report contains certain forward-looking statements within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. The Company intends such
forward-looking statements to be covered by the safe harbor provisions for
forward-looking statements contained in the Private Securities Reform Act of
1995, and is including this statement for purposes of indicating such intent.
Forward-looking statements which are based on certain assumptions and describe
future plans, strategies and expectations of the Company, are generally
indentifiable by use of the words "believe", "expected", "intended",
"anticipated", "estimated", "project" or similar expressions. The Company's
ability to predict results or the actual effect of future plans or strategies is
inherently uncertain. Factors which could have a material adverse affect on the
operations and future prospects of the parent and the subsidiaries include, but
are not limited to, changes in interest rates, general economic conditions,
legislative/regulatory changes, monetary and fiscal policies of the U.S.
government, including policies of the U.S. Treasury and the Federal Reserve
Board, the quality or composition of the loan or investment portfolios, demand
for loan products, deposit flows, competition, demand for financial services in
the Company's market area and accounting principles, policies and guidelines.
These risks and uncertainties should be considered in evaluating forward-looking
statements and undue reliance should not be placed on such statements. Further
information concerning the Company and its business, including additional
factors that could materially affect the Company's financial results, is
included in the Company's filing with the Securities and Exchange Commission.
INDEX TO FINANCIAL STATEMENTS
The following financial statements and related notes are contained herein.
Report of Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Income
Consolidated Statements of Changes in Shareholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE> 39
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders
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, 1999 and 1998 and the
related consolidated statements of income, changes in shareholders' equity and
cash flows for the years ended December 31, 1999, 1998 and 1997. 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, 1999 and 1998, and the results of its operations and its cash flows
for the years ended December 31, 1999, 1998 and 1997 in conformity with
generally accepted accounting principles.
/s/ CROWE, CHIZEK AND COMPANY LLP
--------------------------------------
Crowe, Chizek and Company LLP
South Bend, Indiana
March 2, 2000
<PAGE> 40
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and due from banks $ 5,722,712 $ 6,113,583
Interest-bearing deposits in other financial institutions -
short-term 43,403 5,531
Federal funds sold 7,500,000 9,600,000
------------ -------------
Total cash and cash equivalents 13,266,115 15,719,114
Securities available for sale 29,675,749 31,066,346
Federal Home Loan Bank (FHLB) stock 388,800 222,200
Loans receivable, net of allowance for loan losses
of $1,270,000 in 1999 and $751,675 in 1998 85,053,558 48,011,296
Accrued interest receivable 998,569 739,024
Premises and equipment, net 1,464,368 742,495
Other assets 84,928 103,565
------------ -------------
Total assets $130,932,087 $ 96,604,040
============ =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities
Deposits
Noninterest-bearing demand $ 10,217,950 $ 11,442,145
Savings, NOW and money market 51,422,001 46,414,185
Certificates of deposit 36,601,270 18,534,135
------------ ------------
Total deposits 98,241,221 76,390,465
Securities sold under agreements to repurchase 8,135,784 6,388,971
FHLB advances 7,500,000 2,000,000
Accrued interest payable 189,514 100,707
Other liabilities 66,558 113,052
------------ ------------
Total liabilities 114,133,077 84,993,195
Shareholders' 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; 1,675,112 and 1,278,625 shares issued
and outstanding in 1999 and 1998 16,751 12,786
Additional paid-in capital 18,302,139 12,323,967
Accumulated deficit (769,864) (1,280,858)
Accumulated other comprehensive income (loss),
net of tax of $0 in 1999 and 1998 (750,016) 554,950
------------ ------------
Total shareholders' equity 16,799,010 11,610,845
------------ ------------
Total liabilities and shareholders' equity $130,932,087 $ 96,604,040
============ ============
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 41
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 5,384,235 $ 2,796,772 $ 883,629
Securities available for sale - taxable 1,725,177 1,652,227 920,425
Securities available for sale - tax exempt 803 - -
FHLB stock 23,871 8,703 -
Federal funds sold 228,533 325,139 176,944
Other interest earning assets 7,729 6,882 41,181
-------------- ------------ -----------
Total interest and dividend income 7,370,348 4,789,723 2,022,179
Interest expense
Deposits 3,284,113 2,297,456 834,759
Federal funds purchased 3,522 2,922 172
Securities sold under agreements to repurchase 365,811 398,701 107,393
FHLB advances 193,342 - -
-------------- ------------ -----------
Total interest expense 3,846,788 2,699,079 942,324
-------------- ------------ -----------
NET INTEREST INCOME 3,523,560 2,090,644 1,079,855
Provision for loan losses 518,325 391,675 360,000
-------------- ------------ -----------
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES 3,005,235 1,698,969 719,855
Noninterest income
Gain on sales and calls of securities
available for sale, net - 116,644 2,139
Other income 98,173 42,228 2,247
-------------- ------------ -----------
Total noninterest income 98,173 158,872 4,386
Noninterest expense
Salaries and employee benefits 1,495,407 1,047,262 756,388
Occupancy and equipment 432,573 449,496 301,478
Other expense 664,434 589,602 428,495
-------------- ------------ -----------
Total noninterest expense 2,592,414 2,086,360 1,486,361
-------------- ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES 510,994 (228,519) (762,120)
Income tax expense - - -
-------------- ------------ -----------
NET INCOME (LOSS) $ 510,994 $ (228,519) (762,120)
============== ============ ===========
Basic income (loss) per common share $ .37 $ (.18) (.60)
============== ============ ===========
Diluted income (loss) per common share $ .36 $ (.18) (.60)
============== ============ ===========
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 42
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
Accumulated
Other
Additional Comprehensive Total
Common Paid-In Accumulated Income (Loss), Shareholders'
Stock Capital Deficit Net of Tax Equity
----- ------- ------- ---------- ------
<S> <C> <C> <C> <C> <C>
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 for 401(k) plan 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 for 401(k) plan 91 159,319 - - 159,410
----------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1998 12,786 12,323,967 (1,280,858) 554,950 11,610,845
Comprehensive loss:
Net income - - 510,994 - 510,994
Net change in net unrealized
appreciation (depreciation) on
securities available for sale, net
of reclassification adjustments
and tax effects - - - (1,304,966) (1,304,966)
------------
Total comprehensive loss - - - - (793,972)
Proceeds from issuance of 390,581 shares
of common stock, net of stock offering costs 3,906 5,887,491 - - 5,891,397
Proceeds from issuance of 5,906 shares of
common stock for 401(k) plan 59 94,579 - - 94,638
Proceeds from issuance of 645 shares of
common stock upon exercise of stock options 6 6,658 - - 6,664
Repurchase and retirement of
645 shares of common stock (6) (10,556) - - (10,562)
----------- ------------ ----------- ----------- ------------
BALANCE AT DECEMBER 31, 1999 $ 16,751 $ 18,302,139 $ (769,864) $ (750,016) $ 16,799,010
=========== ============ =========== =========== ============
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 43
ST. JOSEPH CAPITAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 510,994 $ (228,519) $ (762,120)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Depreciation 248,572 219,273 138,215
Provision for loan losses 518,325 391,675 360,000
Net amortization (accretion) on securities
available for sale 94,412 61,223 (61,395)
Gain on sales and calls of securities
available for sale, net - (116,644) (2,139)
Net change in
Accrued interest receivable (259,545) (212,685) (526,339)
Other assets 18,637 (50,243) (24,651)
Accrued interest payable 88,807 (20,183) 120,890
Other liabilities (46,494) 71,621 (7,088)
------------ ------------ -------------
Net cash from operating activities 1,173,708 115,518 (764,627)
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 (4,208,781) (28,031,891) (32,281,778)
Proceeds from sales of securities available for sale - 11,269,802 4,001,875
Proceeds from maturities and calls of securities
available for sale 4,200,000 8,525,000 16,285,000
Purchase of FHLB stock (166,600) (222,200) -
Net change in loans receivable (37,560,587) (26,411,856) (22,351,115)
Purchase of premises and equipment, net (970,445) (79,928) (745,335)
------------ ------------ -------------
Net cash from investing activities (38,706,413) (34,451,073) (35,591,353)
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 21,850,756 41,474,584 34,915,881
Net change in securities sold under agreements
to repurchase 1,746,813 1,885,211 4,503,760
Proceeds from FHLB advances 5,500,000 2,000,000 -
Proceeds from issuance of common stock, net 5,982,137 159,410 61,691
------------ ------------ -------------
Net cash from financing activities 35,079,706 45,519,205 39,481,332
------------ ------------ -------------
Net change in cash and cash equivalents (2,452,999) 11,183,650 3,125,352
Cash and cash equivalents at beginning of year 15,719,114 4,535,464 1,410,112
------------ ------------ -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 13,266,115 $ 15,719,114 $ 4,535,464
============ ============ =============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 3,757,981 $ 2,719,262 $ 821,434
Income taxes 11,000 - -
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 44
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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. At December 31, 1999, commercial loans totaled approximately 65%,
residential real estate loans totaled approximately 31% and consumer loans
totaled approximately 4% of total loans outstanding. Categories of commercial
loans at December 31, 1999 exceeding 30% of year end shareholders equity are as
follows: Commercial loans concentrated in real estate development and investment
totaled $16 million and 19% of total loans; commercial loans concentrated in
medical and health services totaled $7 million and 9% of total loans.
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, 1999 may change in the near-term future and that the
effect could be material to the financial statements.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 45
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 $721,000 and
$477,000 at year-end 1999 and 1998.
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 shareholders' 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)
<PAGE> 46
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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, 1999 or
1998.
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 has been recorded for the portion of
deferred tax assets considered more likely than not to not be realized.
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 and positive retained earnings which will prevent payment of
dividends until positive retained earnings are achieved and may limit the amount
of dividends thereafter. 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 shareholders' equity.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 47
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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 1998 and 1997 consolidated financial
statements were reclassified to conform with the 1999 presentation.
New Accounting Pronouncement: By January 1, 2001, the Company will be required
to adopt Statement of Financial Accounting Standards (SFAS) No. 133, Accounting
for Derivative Investments and Hedging Activities. Under SFAS No. 133, all
derivative instruments are recorded at their fair values. If derivative
instruments are designated as hedges of fair values, both the change in the fair
value of the hedge and the hedged item are included in current earnings. Fair
value adjustments related to cash flow hedges are recorded in other
comprehensive income (loss) and are reclassified to earnings when the hedged
transactions are reflected in earnings. Ineffective portions of hedges are
reflected in income currently. The Company does not currently have derivative
instruments in its portfolio to account for under provisions of this statement.
Accordingly, adoption of this statement is not expected to have a material
effect on the consolidated financial statements but the effect will depend on
derivative instruments held when this statement is adopted.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 48
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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. During 1999, the Company sold 390,581 shares of additional common
stock at a price of $15.50 per share in a secondary offering, resulting in net
proceeds of $5,891,000.
NOTE 3 - SECURITIES AVAILABLE FOR SALE
Year end securities available for sale were as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
1999 Cost Gains Losses Value
- ---- ---- ----- ------ -----
<S> <C> <C> <C> <C>
Debt securities
U.S. Government and
federal agencies $ 26,882,182 $ 3,220 $ (630,272) $ 26,255,130
Obligations of states and
political subdivisions 3,465,460 2,181 (122,482) 3,345,159
Marketable equity securities 78,123 - (2,663) 75,460
-------------- --------- ----------- -------------
$ 30,425,765 $ 5,401 $ (755,417) $ 29,675,749
============== ========= =========== =============
1998
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
============== ========= =========== =============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
<PAGE> 49
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- -------------------------------------------------------------------------------
NOTE 3 - SECURITIES AVAILABLE FOR SALE (Continued)
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, 1999
------------------------------
Amortized Fair
Cost Value
---------- --------
<S> <C> <C>
Due in one year or less $ 4,658,268 $ 4,658,149
Due after one year through five years 16,427,922 16,105,337
Due after five years through ten years 8,542,255 8,127,312
Due after ten years 719,197 709,491
Marketable equity securities 78,123 75,460
--------------- --------------
$ 30,425,765 $ 29,675,749
=============== ==============
</TABLE>
Activities related to sales and calls of securities available for sale are
summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<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 net gains on sales and calls - - -
</TABLE>
At December 31, 1999 and 1998, securities with a carrying value of approximately
$26,255,000 and $14,442,000, 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>
1999 1998
---- ----
<S> <C> <C>
One to four family residential mortgage loans $ 25,176,345 $ 13,311,145
Construction loans - residential 1,431,108 629,168
Construction loans - commercial 5,949,282 4,966,020
Commercial and multi-family real estate loans 27,800,413 14,988,484
Commercial business loans 22,841,332 13,247,735
Consumer loans 3,161,056 1,636,286
--------------- ---------------
86,359,536 48,778,838
Allowance for loan losses (1,270,000) (751,675)
Net deferred loan origination fees (35,978) (15,867)
--------------- ---------------
$ 85,053,558 $ 48,011,296
=============== ===============
</TABLE>
- -------------------------------------------------------------------------------
(Continued)
<PAGE> 50
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 4 - LOANS RECEIVABLE, NET (Continued)
Activity in the allowance for loan losses at year end was as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Beginning balance $ 751,675 $ 360,000 $ -
Provision for loan losses 518,325 391,675 360,000
Recoveries - - -
Charge-offs - - -
--------------- --------------- ---------------
Ending balance $ 1,270,000 $ 751,675 $ 360,000
=============== =============== ===============
</TABLE>
At December 31, 1999 and 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 years ended December 31, 1999, 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>
1999 1998
---- ----
<S> <C> <C>
Balance - beginning of year $ 2,839,000 $ 1,272,000
New loans 791,000 1,723,000
Repayments (1,157,000) (756,000)
Other changes 103,000 600,000
--------------- ---------------
Balance - end of year $ 2,576,000 $ 2,839,000
=============== ===============
</TABLE>
Other changes include adjustments for loans applicable to one reporting period
that are excludable from the other reporting period.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 51
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 5 - PREMISES AND EQUIPMENT, NET
Year end premises and equipment were as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Land and improvements $ 220,131 $ -
Building and improvements 826,922 -
Leasehold improvements, furniture, fixtures
and equipment 1,027,551 1,104,159
--------------- ---------------
Total cost 2,074,604 1,104,159
Accumulated depreciation (610,236) (361,664)
--------------- ---------------
$ 1,464,368 $ 742,495
=============== ===============
</TABLE>
During 1999, the Company purchased the building and land that had previously
been leased by the Company for a total of $800,000. The remaining unamortized
leasehold improvements were re-categorized to the building during 1999.
NOTE 6 - DEPOSITS
Certificates of deposit in denominations of $100,000 or more was approximately
$29,637,000 and $15,066,000 at year end 1999 and 1998.
At December 31, 1999, the scheduled maturities of certificates of deposit were
as follows for the years ended December 31:
<TABLE>
<S> <C>
2000 $ 33,662,597
2001 2,889,754
2002 48,919
---------------
$ 36,601,270
===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 52
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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, and the Company
maintains control over such securities. Information concerning securities sold
under agreements to repurchase for 1999, 1998 and 1997, is summarized as
follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Amount outstanding at year end $ 8,135,784 $ 6,388,971 $ 4,503,760
Weighted average interest rate at year end 4.10% 4.08% 4.97%
Maximum month end balance during
the year $ 11,201,198 $ 14,183,976 $ 4,588,163
Average daily balance during the year $ 8,980,174 $ 8,600,634 $ 2,152,651
Weighted average interest rate during
the year 4.07% 4.64% 4.99%
</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, 1999 and
1998.
<TABLE>
<CAPTION>
Repurchase
Liability
Weighted
U.S. Agencies U.S. Treasuries Total 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 - 1999 $ 8,799 $ 8,799 $ 5,004 $ 5,004 $ 13,803 $ 13,803 $ 8,136 4.10%
========== ========== ========== ========= ========== ========== ========== ========
Overnight - 1998 $ 9,322 $ 9,322 $ 2,045 $ 2,045 $ 11,367 $ 11,367 $ 6,389 4.08%
========== ========== ========== ========= ========== ========== ========== ========
</TABLE>
NOTE 8 - FHLB ADVANCES
At December 31, 1999 and 1998, advances from the FHLB of Indianapolis totaled
$7,500,000 and $2,000,000. The advances had fixed interest rates ranging from
4.74% to 5.99% at December 31, 1999. December 31, 1998 advances consisted of one
advance with a fixed interest rate of 4.99%.
A majority of the advances outstanding at December 31, 1999 contain an option
that would allow the FHLB, at their discretion or upon the occurrence of certain
events related to the LIBOR interest rate, to convert the current fixed rate
advances to adjustable rate advances at certain conversion dates beginning
January 31, 2000 and ending June 29, 2009. The converted adjustable rate
advances would bear an interest rate equal to the three month LIBOR flat rate.
Upon notification by the FHLB to the Company that an option will be exercised to
convert an advance, the Company has the election to prepay, on the conversion
date or any subsequent quarterly reset date, the advance at par without a fee
being assessed. The remaining advances are fixed rate, fixed term, single
maturity advances.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 53
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 8 - FHLB ADVANCES (Continued)
At December 31, 1999, required annual principal payments on FHLB advances were
as follows:
<TABLE>
<CAPTION>
<S> <C>
2000 $ 1,500,000
2001 -
2002 -
2003 -
2004 -
Thereafter 6,000,000
--------------
$ 7,500,000
--------------
</TABLE>
At December 31, 1999, in addition to FHLB stock, the Company pledged qualifying
loans of approximately $25,979,000 and securities available for sale with a
carrying value of approximately $12,452,000 to the FHLB to secure advances
outstanding. At December 31, 1998, in addition to FHLB stock, the Company
pledged securities available for sale with carrying value of approximately
$3,075,000 to secure advances outstanding. The minimum required pledged
collateral was $12,000,000 and $3,200,00 at December 31, 1999 and 1998.
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.
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 1999, 1998 and 1997.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 54
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS (Continued)
The fair value of options granted during 1999, 1998 and 1997 is estimated using
the following weighted average information: risk-free interest rate of 5.0%,
4.8% and 6.5%, expected life of 10 years, expected volatility of stock price of
.12, .18 and .13, and expected dividends of 0% per year.
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) as reported $ 510,994 $ (228,519) $ (762,120)
Proforma net income (loss) $ 272,597 $ (382,553) $ (1,181,415)
Reported income (loss) per common share
Basic $ .37 $ (.18) $ (.60)
Diluted $ .36 $ (.18) $ (.60)
Proforma income (loss) per common share
Basic $ .20 $ (.30) $ (.93)
Diluted $ .19 $ (.30) $ (.93)
</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> <C>
Outstanding, beginning of 1997 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
Granted 47,668 15.75 - 17.75 16.81 $ 6.48
Exercised (645) 10.00 - 10.62 10.33
-----------
Outstanding, end of 1999 173,185 10.00 - 18.25 14.38
===========
</TABLE>
The weighted average remaining contractual life of options outstanding at
December 31, 1999 was approximately eight years. Stock options exercisable at
December 31, 1999, 1998 and 1997 totaled 124,585, 99,362 and 77,795 at a
weighted average exercise price of $13.24, $12.22 and $12.06. As of December 31,
1999, 26,170 options remain available for future grants.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 55
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 9 - BENEFIT PLANS (Continued)
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 approximately $29,000 for 1999,
$24,000 for 1998 and $14,000 for 1997.
NOTE 10 - OTHER EXPENSE
Other expense amounts were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Advertising and promotion $ 75,605 $ 49,659 $ 48,403
Client courier 24,850 92,297 49,317
Data processing 149,658 110,531 64,107
Incorporation expense 4,588 6,156 6,156
Liability insurance 27,123 26,461 25,200
Printing, postage, stationery and supplies 76,320 46,287 44,221
Professional dues and memberships 20,945 21,258 16,082
Professional fees 85,979 112,786 84,921
Telephone 36,731 31,884 22,951
Other 162,635 92,283 67,137
------------- ------------- --------------
$ 664,434 $ 589,602 $ 428,495
============= ============= ==============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 56
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES
The provision for income taxes consist of:
<TABLE>
<S> <C> <C> <C>
Federal
Current $ 153,359 $ - $ -
Deferred 39,140 (57,986) (229,914)
------------- ------------- --------------
192,499 (57,986) (229,914)
State
Current 17,127 - -
Deferred 12,082 (19,805) (63,180)
------------- ------------- --------------
29,209 (19,805) (63,180)
Change in deferred tax valuation allowance (221,708) 77,791 293,094
------------- ------------- --------------
Total income tax expense $ - $ - $ -
============= ============= ==============
</TABLE>
There was no income tax expense (benefit) for 1999, 1998 or 1997 as the result
of recording a deferred tax valuation allowance.
Total income tax expense differed from the amounts computed by applying the
federal income tax rate of 34% in all periods presented to income (loss) before
income taxes as a result of the following for the years ended December 31:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Income tax expense (benefit) at statutory rate $ 173,738 $ (77,696) $ (259,121)
Tax effect of:
State tax, net of federal income
tax effect 19,278 (13,071) (41,699)
Change in deferred tax valuation allowance (221,708) 77,791 293,094
Other, net 28,692 12,976 7,726
------------- ------------ ---------------
Total income tax expense $ - $ - $ -
============= ============ ===============
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 57
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 11 - INCOME TAXES (Continued)
The components of the net deferred tax asset recorded in the consolidated
balance sheets as of December 31 are as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Deferred tax assets
Net operating loss carryforward $ - $ 262,987 $ 286,625
Allowance for bad debts 470,076 264,767 142,596
Donation carryforward - - 4,315
Other 15,954 7,633 1,007
------------- ------------ ---------------
486,030 535,387 434,543
Deferred tax liabilities
Accretion (25,806) (15,841) (13,379)
Depreciation (28,903) (37,003) (16,412)
Other - - -
------------- ------------ ---------------
(54,709) (52,844) (29,791)
Valuation allowance (260,835) (482,543) (404,752)
------------- ------------ ---------------
Net deferred tax asset $ 170,486 $ - $ -
============= ============ ===============
</TABLE>
A valuation allowance has been recorded for the portion of deferred tax assets
considered more likely than not to not be realized.
- -------------------------------------------------------------------------------
(Continued)
<PAGE> 58
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 12 - 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:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
BASIC INCOME (LOSS) PER COMMON SHARE
Net income (loss) $ 510,994 $ (228,519) $ (762,120)
============ ============== ==============
Weighted average common shares
outstanding 1,381,400 1,276,596 1,266,830
============ ============== ==============
BASIC INCOME (LOSS) PER COMMON SHARE $ .37 $ (.18) $ (.60)
============ ============= ==============
DILUTED INCOME (LOSS) PER COMMON SHARE
Net income (loss) $ 510,994 $ (228,519) $ (762,120)
============ ============== ==============
Weighted average common shares
outstanding 1,381,400 1,276,596 1,266,830
Add: dilutive effects of assumed stock
option exercises 35,628 - -
------------ -------------- --------------
Weighted average common and dilutive
additional potential common shares
outstanding 1,417,028 1,276,596 1,266,830
============ ============== ==============
DILUTED INCOME (LOSS) PER COMMON
SHARE $ .36 $ (.18) $ (.60)
============ ============= ==============
</TABLE>
Outstanding stock options for 86,135, 126,162 and 91,795 shares of common stock
at December 31, 1999, 1998 and 1997, were not considered in computing diluted
income (loss) per common share for 1999, 1998 and 1997 because they were
antidilutive.
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.
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 59
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 13- COMMITMENTS AND CONTINGENCIES (Continued)
<TABLE>
<CAPTION>
Commitments at year end were as follows:
1999 1998
---- ----
<S> <C> <C>
Commitments to extend credit $ 4,877,000 $ 4,040,000
Unused open end revolving lines of credit 38,219,000 21,821,000
Standby letters of credit 2,736,000 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 $414,000 at December 31, 1999.
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
------ ----------------- ------------------
1999 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
<S> <C> <C> <C> <C> <C> <C>
Total capital (to risk weighted assets) $ 17.1 18.7% $ 7.3 8.0% $ 9.2 10.0%
Tier 1 capital (to risk weighted assets) 16.0 17.4 3.7 4.0 5.5 6.0
Tier 1 capital (to average assets) 16.0 12.7 5.0 4.0 6.3 5.0
1998 Amount Ratio Amount Ratio Amount Ratio
- ---- ------ ----- ------ ----- ------ -----
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
</TABLE>
- --------------------------------------------------------------------------------
(Continued)
<PAGE> 60
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
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, 1999 and 1998
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
ASSETS
Cash and cash equivalents $ 1,608,064 $ 1,870,197
Securities available for sale 75,460 21,125
Investment in Bank subsidiary 15,227,378 9,717,009
Other assets - 4,588
--------------- ----------------
Total assets $ 16,910,902 $ 11,612,919
=============== ================
LIABILITIES
Other liabilities $ 111,892 $ 2,074
SHAREHOLDERS' EQUITY 16,799,010 11,610,845
--------------- ----------------
Total liabilities and shareholders' equity $ 16,910,902 $ 11,612,919
=============== ================
</TABLE>
CONDENSED STATEMENTS OF INCOME
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Interest income $ 471 $ 119 $ 66,545
Other expenses (6,011) (42,273) (172,327)
--------------- --------------- ----------------
LOSS BEFORE INCOME TAXES AND EQUITY
IN UNDISTRIBUTED NET INCOME (LOSS) OF
BANK SUBSIDIARY (5,540) (42,154) (105,782)
Income tax benefit - - -
--------------- --------------- ----------------
LOSS BEFORE EQUITY IN UNDISTRIBUTED
NET INCOME (LOSS) OF BANK SUBSIDIARY (5,540) (42,154) (105,782)
Equity in undistributed net income (loss)
of Bank subsidiary 516,534 (186,365) (656,338)
--------------- --------------- ----------------
NET INCOME (LOSS) $ 510,994 $ (228,519) $ (762,120)
=============== =============== ================
</TABLE>
<PAGE> 61
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 15 - PARENT COMPANY FINANCIAL STATEMENTS (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
Years ended December 31, 1999, 1998 and 1997
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 510,994 $ (228,519) $ (762,120)
Adjustments to reconcile net income (loss)
to net cash from operating activities
Equity in undistributed net (income) loss
of Bank subsidiary (516,534) 186,365 656,338
Depreciation - - 1,528
Discount accretion - - (45,542)
Net change in other assets 4,588 7,504 6,224
Net change in other liabilities 109,818 (3,368) (43,077)
-------------- -------------- -------------
Net cash from operating activities 108,866 (38,018) (186,649)
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in Bank subsidiary (6,300,000) - (346,382)
Purchase of securities available for sale (53,136) (24,987) (3,056,000)
Proceeds from maturities and calls of securities
available for sale - - 3,930,061
Purchase of premises and equipment, net - - (39,041))
-------------- -------------- -------------
Net cash from investing activities (6,353,136) (24,987) 488,638
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock, net 5,982,137 159,410 61,691
-------------- -------------- -------------
Net cash from financing activities 5,982,137 159,410 61,691
-------------- -------------- -------------
Net change in cash and cash equivalents (262,133) 96,405 363,680
Cash and cash equivalents at beginning of year 1,870,197 1,773,792 1,410,112
-------------- -------------- -------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 1,608,064 $ 1,870,197 $ 1,773,792
============== ============== =============
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>
<PAGE> 62
NOTE 16 - FAIR VALUES OF FINANCIAL INSTRUMENTS
Financial instruments at year end are as follows, in thousands:
<TABLE>
<CAPTION>
1999 1998
---- ----
Carrying Estimated Carrying Estimated
Amount Fair Value Amount Fair Value
------ ---------- ------ ----------
<S> <C> <C> <C> <C>
Financial assets
Cash and cash equivalents $ 13,266 $ 13,266 $ 15,719 $ 15,719
Securities available for sale 29,676 29,676 31,066 31,066
FHLB stock 389 389 222 222
Loans receivable, net of allowance
for loan losses 85,054 84,892 48,011 48,370
Accrued interest receivable 999 999 739 739
Financial liabilities
Noninterest-bearing demand,
savings, NOW and money
market (61,640) (61,640) (57,856) (57,856)
Certificates of deposit (36,601) (36,601) (18,534) (18,534)
Securities sold under agreements to
repurchase (8,136) (8,136) (6,389) (6,389)
FHLB advances (7,500) (6,722) (2,000) (2,000)
Accrued interest payable (190) (190) (101) (101)
</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 and the allowance for loan losses is considered to be a
reasonable estimate of discount for credit quality concerns. The estimated fair
value for FHLB advances is based on estimates of the rate the Corporation would
pay on such borrowings at year end, applied for the time period until maturity.
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 1999 or 1998, 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 1999 and
1998 should not necessarily be considered to apply at subsequent dates.
(Continued)
- --------------------------------------------------------------------------------
<PAGE> 63
ST. JOSEPH CAPITAL CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
- --------------------------------------------------------------------------------
NOTE 17 - OTHER COMPREHENSIVE INCOME (LOSS)
Other comprehensive income (loss) components and related taxes were as follows:
<TABLE>
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net change in net unrealized appreciation
(depreciation) on securities available
for sale
Net unrealized appreciation (depreciation)
arising during the year $ (1,304,966) $ 539,226 $ 167,054
Reclassification adjustments for gains
included in net income (loss) (116,644) (2,139)
--------------- ------------ ------------
Net change in net unrealized appreciation
(depreciation) on securities available
for sale (1,304,966) 422,582 164,915
Tax expense (benefit) - - -
--------------- ------------ ------------
Total other comprehensive income (loss) $ (1,304,966) $ 422,582 $ 164,915
=============== ============ ============
</TABLE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
<PAGE> 64
PART III
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
A. Directors. The information on pages 1 - 3 of the 2000
Proxy Statement under the caption "Election of Directors" is incorporated by
reference.
B. Executive Officers. The St. Joseph Capital
Corporation's executive officer who is not also a director is as follows:
EDWARD R. POOLEY, Senior Vice President and Chief Financial
Officer of St. Joseph Capital Corporation since 1996 and Senior Vice President,
Chief Financial Officer and Cashier of the bank since 1997; served since 1991 as
Cashier and Chief Operations Officer of Metamora State Bank and Treasurer of
Metamora Bancorp, Inc., located in Metamora, Ohio, until joining the St. Joseph
Capital Corporation.
The Employment Agreement between St. Joseph Capital and John
W. Rosenthal, dated March 18, 1996, is incorporated by reference from the
Registration Statement on Form SB-2 filed by St. Joseph Capital on June 21, 1996
(SEC File No. 333-06581), as amended.
The amendment to the Employment Agreement between St. Joseph
Capital Corporation and John W. Rosenthal, dated March 18, 1996 is incorporated
by reference from the 1997 Form 10-KSB filed by St. Joseph Capital Corporation
on March 31, 1998.
EXECUTIVE COMPENSATION
The information on pages 3 - 4 of the 2000 Proxy Statement
under the caption "Executive Compensation" is incorporated by reference.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information on page 5 of the 2000 Proxy Statement, under
the caption "Security Ownership of Certain Beneficial Owners" in incorporated by
reference.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information on page 3 of the 2000 Proxy Statement under
the caption "Transactions with Management" is incorporated by reference.
<PAGE> 65
EXHIBITS AND REPORTS ON FORM 8-K
(a)(1) Index to Financial Statements
See Part II, Financial Statements herewith in,
(a)(2) Schedule of Exhibits
The Exhibit Index which immediately follows the signature
pages to this Form 10-KSB is incorporated by reference. The exhibits required to
be filed with this Form 10-KSB are included with this Form 10-KSB and are
located immediately following the Exhibit Index to this Form 10-KSB.
(b) Reports on Form 8-K
None
- -------------------------------------------------------------------------------
<PAGE> 66
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, as amended, the
Issuer caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized, on March 25, 2000.
ST. JOSEPH CAPITAL CORPORATION
By: /s/ John W. Rosenthal
John W. Rosenthal, Chief Executive
Officer and Chairman of the Board
By: /s/ Edward R. Pooley
Edward R. Pooley, Principal Financial
Officer and Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the Issuer and in the capacities noted below and
on March 25, 2000.
Signature Title
--------- -----
/s/ John W. Rosenthal President, Principal Executive Officer
John W. Rosenthal and Chairman of the Board
/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
Director
/s/ Jack Matthys
Jack Matthys
/s/ Arthur H. McElwee Director
Arthur H. McElwee
/s/ Myron Noble Director
Myron Noble
/s/ Richard A. Rosenthal Director
Richard A. Rosenthal
/s/ Robert A. Sullivan Director
Robert A. Sullivan
- -------------------------------------------------------------------------------
<PAGE> 67
ST. JOSEPH CAPITAL CORPORATION
EXHIBIT INDEX
<TABLE>
<CAPTION>
- ------------------ ------------------------------------------------------------------------------------- -------------------
SEQUENTIAL
EXHIBIT NO. DESCRIPTION OF EXHIBITS PAGE
NO. NUMBER
- ------------------ ------------------------------------------------------------------------------------- -------------------
<S> <C> <C>
3.1 Certificate of Incorporation, as amended, of St. Joseph Capital Corporation *
- ------------------ ------------------------------------------------------------------------------------- -------------------
3.2 Bylaws of St. Joseph Capital Corporation *
- ------------------ ------------------------------------------------------------------------------------- -------------------
4.1 Specimen Common Stock Certificate of St. Joseph Capital Corporation (See also *
Articles IV, VI, VII, VIII, XI and XII of Exhibit 3.1 and Articles III, IX, X, XI
and XII of Exhibit 3.2)
- ------------------ ------------------------------------------------------------------------------------- -------------------
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 and John W. Rosenthal, dated *
March 18, 1996
- ------------------ ------------------------------------------------------------------------------------- -------------------
10.4 Amendment to the Employment Agreement between St. Joseph Capital Corporation and ***
John W. Rosenthal, dated March 18, 1996
- ------------------ ------------------------------------------------------------------------------------- -------------------
10.5 St. Joseph Capital Bank 401(k) Plan **
- ------------------ ------------------------------------------------------------------------------------- -------------------
21.1 Subsidiary of St. Joseph Capital Corporation *
- ------------------ ------------------------------------------------------------------------------------- -------------------
23.1 Consent of Crowe, Chizek & Company LLP 70
- ------------------ ------------------------------------------------------------------------------------- -------------------
27.1 Financial Data Schedule 71
- ------------------ ------------------------------------------------------------------------------------- -------------------
99.1 Proxy Statement and form of proxy for the Annual Meeting of Stockholders to be ****
held May 16, 2000, (except for sections incorporated by reference into this Form
10-KSB, the proxy materials shall not be deemed to be "filed" with the Commission)
- ------------------ ------------------------------------------------------------------------------------- -------------------
</TABLE>
* Incorporated by reference from the Registration Statement on Form SB-2
filed by the Company on June 21, 1996 (SEC File No. 333-06581), as
amended.
** Incorporated by reference from the Registration Statement on Form S-8
filed by the Company on October 29, 1996 (SEC File No. 333-14999).
*** Incorporated by reference from the 1997 Form 10-KSB filed by the
Company on March 31, 1998.
**** Portions incorporated by reference from the Form 14A (Definitive Proxy
Statement) filed by the Company on March 22, 2000.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement of
St. Joseph Capital Corporation on Form S-8 (Registration No. 333-14999) dated
October 29, 1996, relative to the St. Joseph Capital Bank 401(k) Plan, of our
report, dated March 2, 2000 on the consolidated financial statements of St.
Joseph Capital Corporation as of December 31, 1999 and 1998 and for the years
ended December 31, 1999, 1998 and 1997, included in St. Joseph Capital
Corporation's Annual Report on Form 10-KSB for 1999.
/s/ Crowe, Chizek and Company LLP
Crowe, Chizek and Company LLP
South Bend, Indiana
March 27, 2000
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> DEC-31-1999
<CASH> 5,722,712
<INT-BEARING-DEPOSITS> 43,403
<FED-FUNDS-SOLD> 7,500,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 29,675,749
<INVESTMENTS-CARRYING> 388,800
<INVESTMENTS-MARKET> 388,800
<LOANS> 86,323,558
<ALLOWANCE> 1,270,000
<TOTAL-ASSETS> 130,932,087
<DEPOSITS> 98,241,221
<SHORT-TERM> 9,635,784
<LIABILITIES-OTHER> 256,072
<LONG-TERM> 6,000,000
0
0
<COMMON> 16,751
<OTHER-SE> 16,782,259
<TOTAL-LIABILITIES-AND-EQUITY> 130,932,087
<INTEREST-LOAN> 5,384,235
<INTEREST-INVEST> 1,749,851
<INTEREST-OTHER> 236,262
<INTEREST-TOTAL> 7,370,348
<INTEREST-DEPOSIT> 3,284,113
<INTEREST-EXPENSE> 3,846,788
<INTEREST-INCOME-NET> 3,523,560
<LOAN-LOSSES> 518,325
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 2,592,414
<INCOME-PRETAX> 519,994
<INCOME-PRE-EXTRAORDINARY> 519,994
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 519,994
<EPS-BASIC> .37
<EPS-DILUTED> .36
<YIELD-ACTUAL> 3.46
<LOANS-NON> 0
<LOANS-PAST> 0
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 751,675
<CHARGE-OFFS> 0
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 1,270,000
<ALLOWANCE-DOMESTIC> 1,083,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 187,000
</TABLE>
