<PAGE> 1
UNITES STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period ended June 30, 2000
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to __________
Commission File Number: 333-6581
ST. JOSEPH CAPITAL CORPORATION
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(Exact name of small business issuer as specified in its charter)
DELAWARE 35-1977746
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(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
3820 EDISON LAKES PARKWAY, MISHAWAKA, IN 46545
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(Address of principal executive offices)
(219) 273-9700
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(Issuer's telephone number)
N/A
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(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act, during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
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APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
1,675,112 shares of common stock, $0.01 par value per share, were
outstanding as of August 9, 2000.
Transitional Small Business Disclosure Format (check one): Yes No X
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
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<S> <C> <C>
PART I - FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets,
June 30, 2000 (Unaudited), December 31, 1999 (Audited)
And June 30, 1999 (Unaudited) 3
Condensed Consolidated Statements of Income,
Three Months Ended June 30, 2000 and 1999 (Unaudited) 4
Six Months Ended June 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Changes in Shareholders' Equity,
Three Months Ended June 30, 2000 and 1999 (Unaudited)
Six Months Ended June 30, 2000 and 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows,
Six Months Ended June 30, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 2. CHANGES IN SECURITIES 16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES 16
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16
ITEM 5. OTHER INFORMATION 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
SIGNATURES 17
</TABLE>
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31, JUNE 30,
ASSETS 2000 1999 1999
(UNAUDITED) (AUDITED) (UNAUDITED)
------------- ------------ ------------
<S> <C> <C> <C>
Cash and due from banks $ 10,678,443 $ 5,722,712 $ 5,217,832
Interest-bearing deposits in other financial institutions-
short-term 94,390 43,403 155,440
Federal funds sold - 7,500,000 7,100,000
------------- ------------ ------------
Total cash and cash equivalents 10,772,833 13,266,115 12,473,272
Securities available for sale 25,589,624 29,675,749 27,548,122
Federal Home Loan Bank (FHLB) stock 600,000 388,800 388,800
Loans receivable, net of allowance for loan losses of
$1,616,000 at June 30, 2000, $1,270,000 at
December 31, 1999 and $957,675 at June 30, 1999 111,409,336 85,053,558 65,180,510
Accrued interest receivable 1,084,195 998,569 838,143
Premises and equipment, net 1,474,909 1,464,368 1,467,058
Other assets 470,551 84,928 71,005
------------- ------------ ------------
Total Assets $151,401,448 $130,932,087 $107,966,910
============= ============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing demand $ 20,950,697 $ 10,217,950 $ 10,544,803
Savings, NOW and money market 52,849,476 51,422,001 44,770,691
Certificates of deposit 41,683,225 36,601,270 27,491,951
------------- ------------ ------------
Total deposits 115,483,398 98,241,221 82,807,445
Federal funds purchased 2,000,000 - -
Securities sold under agreements to repurchase 4,233,770 8,135,784 10,354,997
FHLB advances 12,000,000 7,500,000 3,500,000
Accrued interest payable 271,308 189,514 144,029
Other liabilities 115,662 66,558 108,668
------------- ------------ ------------
Total Liabilities 134,104,138 114,133,077 96,915,139
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 2,500,000 shares authorized;
1,675,112 shares issued and outstanding at June 30, 2000
and December 31, 1999, and 1,282,000 shares issued and
outstanding at June 30, 1999 16,751 16,751 12,820
Additional paid in capital 18,302,139 18,302,139 12,377,968
Accumulated deficit (302,814) (769,864) (1,106,065)
Accumulated other comprehensive loss, net
of tax of $-0- (718,766) (750,016) (232,952)
------------- ------------ ------------
Total shareholders' equity 17,297,310 16,799,010 11,051,771
------------- ------------ ------------
Total liabilities and shareholders' equity $ 151,401,448 $130,932,087 $107,966,910
============= ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial
statements (unaudited).
3
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $2,181,493 $ 1,215,966 $ 4,004,987 $ 2,271,597
Securities available for sale - taxable 382,041 432,460 833,005 875,625
Securities available for sale - tax exempt 8,494 -- 17,024 --
FHLB stock 10,125 7,776 18,552 14,515
Federal Funds sold 79,201 40,841 97,991 98,180
Other interest earning assets 1,477 1,474 2,314 5,328
---------- ----------- ----------- -----------
Total interest and
dividend income 2,662,831 1,698,517 4,973,873 3,265,245
Interest expense
Deposits 1,245,025 743,462 2,286,086 1,430,724
Federal funds purchased 1,872 2,671 13,409 3,520
Securities sold under agreements to
repurchase 62,129 90,201 135,367 181,096
FHLB advances 169,213 43,675 271,922 73,908
---------- ----------- ----------- -----------
Total interest expense 1,478,239 880,009 2,706,784 1,689,248
---------- ----------- ----------- -----------
NET INTEREST INCOME 1,184,592 818,508 2,267,089 1,575,997
Provision for loan losses 188,000 108,000 346,000 206,000
---------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 996,592 710,508 1,921,089 1,369,997
Noninterest income
Loss on sales and calls of securities
available for sale, net - -- (13,589) --
Other income 55,157 23,903 91,120 43,051
---------- ----------- ----------- -----------
Total noninterest income 55,157 23,903 77,531 43,051
Noninterest expense
Salaries and employee benefits 493,333 364,811 947,533 694,992
Occupancy and equipment 96,255 108,903 198,654 226,484
Other expense 203,642 154,657 385,571 316,779
---------- ----------- ----------- -----------
Total noninterest expense 793,230 628,371 1,531,758 1,238,255
---------- ----------- ----------- -----------
INCOME BEFORE INCOME TAXES 258,519 106,040 466,862 174,793
Income tax expense (benefit) (188) -- (188) --
---------- ----------- ----------- -----------
NET INCOME $ 258,707 $ 106,040 $ 467,050 $ 174,793
========== =========== =========== ===========
Basic income per common share $ .15 $ .08 $ .28 $ .14
========== =========== =========== ===========
Diluted income per common share $ .15 $ .08 $ .28 $ .13
========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial
statements (unaudited).
4
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
Three Months Three Months Six Months Six Months
Ended Ended Ended Ended
June 30, 2000 June 30, 1999 June 30, 2000 June 30, 1999
Total Total Total Total
Shareholders' Shareholders' Shareholders' Shareholders'
Equity Equity Equity Equity
------ ------ ------ ------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD: $ 16,985,877 $ 11,346,915 $ 16,799,010 $ 11,610,845
Comprehensive income (loss):
Net income 258,707 106,040 467,050 174,793
Net change in net unrealized
appreciation (depreciation) on
securities available for sale, net
of reclassification adjustments
and tax effects 52,726 (420,305) 31,250 (787,902)
------------- -------------- ------------- -------------
Total comprehensive income (loss) 311,433 (314,265) 498,300 (613,109)
Proceeds from issuance of common
stock by 401k plan -- 19,121 -- 54,035
------------- -------------- ------------- -------------
BALANCE AT END OF PERIOD: $ 17,297,310 $ 11,051,771 $ 17,297, 310 $ 11,051,771
============= ============== ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial
statements (unaudited).
5
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 467,050 $ 174,793
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 129,814 118,804
Provision for loan loss 346,000 206,000
Net amortization on securities
available for sale 42,436 45,184
Loss on sales and calls of securities
available for sale, net 13,589 --
Net change in
Accrued interest receivable (85,626) (99,119)
Other assets (385,623) 32,560
Accrued interest payable 81,794 43,322
Other liabilities 49,104 (4,384)
------------- ------------
Net cash from operating activities 658,538 517,160
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of securities available for sale (2,448,628) (1,514,862)
Proceeds from sales of securities available for sale 4,929,978 --
Proceeds from maturities and calls of securities
available for sale 1,580,000 4,200,000
Purchase of FHLB stock (211,200) (166,600)
Net change in loans receivable (26,701,778) (17,375,214)
Purchase of premises and equipment, net (140,355) (843,367)
------------- ------------
Net cash from investing activities (22,991,983) (15,700,043)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 17,242,177 6,416,980
Net change in federal funds purchased 2,000,000 --
Net change in securities sold under agreements
to repurchase (3,902,014) 3,966,026
Proceeds from FHLB advances 4,500,000 1,500,000
Proceeds from issuance of common stock, net -- 54,035
------------- ------------
Net cash from financing activities 19,840,163 11,937,041
------------- ------------
Net change in cash and cash equivalents (2,493,282) (3,245,842)
Cash and cash equivalents at beginning of period 13,266,115 15,719,114
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 10,772,833 $ 12,473,272
============= ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 2,624,990 $ 1,645,926
Income taxes 398,000 --
</TABLE>
See accompanying notes to condensed consolidated financial
statements (unaudited).
6
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
The accompanying condensed consolidated financial statements include the
accounts of St. Joseph Capital Corporation and our wholly owned subsidiary, St.
Joseph Capital Bank (the "Bank").
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions for Form 10-QSB.
Accordingly, they do not include all information and footnotes required by
generally accepted accounting principles for complete presentation of financial
statements. In the opinion of management, the condensed consolidated financial
statements contain all adjustments (consisting only of normal recurring
accruals) considered necessary for a fair presentation. All significant
inter-company accounts and transactions have been eliminated in consolidation.
The income reported for the periods presented is not necessarily indicative of
the results to be expected for the full year.
NOTE 2 - LOANS RECEIVABLE, NET
Loans receivable were as follows:
June 30, December 31,
2000 1999
---- ----
(In thousands)
One to four family residential mortgage loans $ 29,944 $ 25,176
Construction loans - residential 2,242 1,431
Construction loans - commercial 8,812 5,949
Commercial and multi-family real estate loans 34,349 27,801
Commercial business loans 33,287 22,841
Consumer loans 4,416 3,161
---------- ----------
113,050 86,359
Allowance for loan losses (1,616) (1,270)
Net deferred loan origination fees (25) (36)
---------- ----------
$ 111,409 $ 85,053
========== ==========
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Some financial instruments are used to meet client financing needs and to
reduce exposure to interest rate changes. These financial instruments include
commitments to extend credit, unused open end revolving lines of credit and
standby letters of credit. These involve, to varying degrees, credit and
interest-rate risk in excess of the amount reported in the balance sheet.
Commitments were as follows:
June 30, December 31,
2000 1999
---- ----
Commitments to extend credit $ 2,988,000 $ 4,877,000
Unused open end revolving lines of credit 58,296,000 38,219,000
Standby letters of credit 2,570,000 2,736,000
Commitments to extend credit are agreements to lend to a client as long as
there is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are conditional
commitments to guarantee a client's performance to a third party. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount of these items. Collateral or other security is normally not
obtained for these financial instruments prior to their use, and many of the
commitments are expected to expire without being used.
7
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ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - LOANS RECEIVABLE, NET
Activity in the allowance for loan losses at six months ended June 30, 2000 and
1999 was as follows:
2000 1999
---- ----
Beginning balance $ 1,270,000 $ 751,675
Provision for loan losses 346,000 206,000
Recoveries - -
Charge-offs - -
----------- ----------
Ending balance $ 1,616,000 $ 957,675
=========== ==========
At June 30, 2000 and 1999 and December 31, 1999 no portion of the allowance for
loan losses was allocated to impaired loan balances as there were no loans
considered impaired.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion provides additional information regarding our
operations for the three and six month periods ended June 30, 2000 and 1999 and
financial condition as of June 30, 2000, June 30, 1999 and December 31, 1999.
This discussion should be read in conjunction with our consolidated financial
statements and the accompanying notes thereto and other information in our 1999
10-KSB.
OVERVIEW
St. Joseph was formed in February 1996 for the purpose of organizing
the bank. The bank opened in February 1997 with $10.0 million in assets and grew
to approximately $151.4 million as of June 30, 2000. We expect continued
opportunities for growth, even though the rate of growth will probably be slower
than we have experienced to date.
On September 10, 1999, we completed a rights offering during which
390,581 shares of our common stock were sold at $15.50 per share, resulting in
gross proceeds of $6.1 million. We used approximately $5.5 million of the
proceeds from the rights offering to provide additional capital to the Bank.
We reported earnings of $258,707 or $.15 basic and diluted income per
common share for the three month period ended June 30, 2000 as compared to a net
income of $106,040 or $.08 basic and diluted income per common share for the
same period in 1999. For the six month period ended June 30, 2000, net income
was $467,050 or $.28 basic and diluted income per common share compared to
$174,793 or $.14 basic and $.13 diluted income per common share for the same
period in 1999. For all periods involved, the increase resulted primarily from
increased net interest income as a result of the growth in the loan portfolio.
Our results of operations are dependent primarily on net interest
income, which is the difference between the interest earned on loans and
securities and the interest paid on deposits and borrowings. Our operating
results are also affected by sources of noninterest income, including service
charge fees on deposit accounts, loan fees and other income. Our operating
expenses include employee compensation and benefits, occupancy and 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.
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BUSINESS STRATEGY
We concentrate on the financial services needs of individuals and
local businesses. A cornerstone of our business strategy is to emphasize our
local management and our commitment to the market area. We also expect to
establish a high standard of quality in each service we provide, and our
employees are expected to emphasize service in their dealings with clients. We
believe that the use of state-of-the-art technology will permit each employee to
devote more time and attention to personal service, respond more quickly to a
client's requests and deliver services in the timeliest 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. 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.
Other members of the management team will also be encouraged to volunteer for
such positions. Additionally, employees are expected to be active in the civic,
charitable and social organizations located in the Michiana area.
The Bank offers a broad range of deposit services, including checking
accounts, money market accounts, savings accounts and time deposits of various
types, as well as a full range of short to intermediate term personal and
commercial loans. The Bank makes personal loans directly to individuals for
various purposes, including purchases of automobiles, boats and other
recreational vehicles, home improvements, education and personal investments.
The Bank makes residential mortgage loans and substantially all of such loans
are retained by the Bank and consist of balloon payment, adjustable and fixed
rate mortgages. The Bank also offers other services, including credit cards,
cashiers checks, traveler's checks and automated teller access.
Our market area is competitive and contains numerous commercial banks,
savings and loans and credit unions. We also face competition from finance
companies, insurance companies, mortgage companies, securities brokerage firms,
money market funds, loan production offices and other providers of financial
services. Most competitors have been in business for many years, have
established client bases, are substantially larger, have substantially larger
lending limits than ours and can offer certain services, including multiple
branches and international banking services, that we will be able to offer only
through correspondent banks, if at all. In addition, most of these entities have
greater capital resources than ours, which among other things may allow them to
price their services at levels more favorable to clients and to provide larger
credit facilities than we could.
PLAN FOR OPERATION
Our plan of operation is centered on the growth of the Bank. The
primary operation of the Bank is to accept deposits and make loans. General
economic conditions, the monetary and fiscal policies of federal agencies and
the regulatory policies of agencies that regulate financial institutions affect
our operating results. Interest rates on competing investments and general
market rates of interest influence our cost of funds. Client and commercial
demand influence lending activities, which in turn are affected by the interest
rates at which such loans are made, general economic conditions and the
availability of funds for lending activities.
FORWARD-LOOKING STATEMENTS
When used in this Form 10-QSB, the words or phrases "will likely
result", "are expected to", "will continue", "is anticipated", "estimated",
"project", or similar expressions are intended to identify "forward-looking
statements" within the meaning of the Private Securities Litigation Reform Act
of 1995. Such statements are subject to certain risks and uncertainties
including changes in economic conditions in our market area, changes in policies
by regulatory agencies, fluctuations in interest rates, demand for loans in our
market area and competition, that could cause actual results to differ
materially from historical earnings and those presently anticipated or
projected. We wish to caution readers not to place undue reliance on any such
forward-looking statements, which speak only as to the date made. We wish to
advise readers that the factors listed above could affect our financial
performance and could cause our actual results for future periods to differ
materially from any opinions or statements expressed with respect to future
periods in any current statements.
9
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We do not undertake, and specifically disclaim any obligation to
subsequently update or revise any forward-looking statements contained in this
report after the date of the report.
RESULTS OF OPERATIONS
THREE AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH THREE AND
SIX MONTHS ENDED JUNE 30, 1999
OVERVIEW. Consolidated net income for the six month period ended June
30, 2000 was $467,050 as compared to a $174,793 for the same period in 1999 for
an increase of $292,257 or 167.2%. Income per common share for the first six
months of 2000 increased to $.28 basic and diluted from a basic and diluted
income per common share of $.14 and $.13, respectively for the first six months
of 1999. Net income for the three month period ended June 30, 2000 was $258,707
as compared to $106,040 for the same period in 1999 for an increase of $ 152,667
or 144.0%. Income per common share for the three month period ended June 30,
2000 increased to $ .15 basic and diluted from a basic and diluted income per
common share of $.08 for the three months ended June 30, 1999. The increase in
net income for the six month period was comprised of increases in both net
interest income after provision for loan losses of $551,092 and noninterest
income of $34,480 reduced by increases in noninterest expense of $293,503. The
increase in net income for the three month period was also comprised of
increases in both net interest income after provision for loan losses of
$286,084 and noninterest income of $31,254 reduced by increase in noninterest
expense of $164,859.
NET INTEREST INCOME. Net interest income for the six months ended June
30, 2000 and 1999, amounted to $2.3 million and $1.6 million, respectively, and
for the three months ended June 30, 2000 and 1999, net interest income amounted
to $1.2 million and $0.8 million, respectively. Net interest income represented
the difference between interest income earned on interest earning assets and
interest expense on interest bearing liabilities.
Interest income increased by $1.7 million, from $3.3 million for the
six month period ended June 30, 1999 to $5.0 million for the six month period
ended June 30, 2000 and for the three months ended June 30, 2000 and 1999,
interest income increased by $1.0 million, from $1.7 million to $2.7 million,
respectively. The 52.3% and 56.8% rise in interest income for the six months
ended and the three months ended June 30, 2000 and 1999 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 $1.0 million, from $1.7 million for the
six month period ended June 30, 1999 to $2.7 million for the six month period
ended June 30, 2000 and for the three months ended June 30, 2000 and 1999,
interest expense increased by $0.6 million, from $0.9 million to $1.5 million,
respectively. The 60.2% and 68.0% rise in interest expense for the six months
ended and the three months ended June 30, 2000 and 1999 was primarily
attributable to the increases in interest rates by the Federal Reserve Bank as
well as 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 in addition to potential future
increases in interest rates by the Federal Reserve Bank.
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
$346,000 for the six month period ended June 30, 2000 compared to $206,000 in
the same period in 1999. For the three months ended June 30, 2000, the provision
for loan losses was $188,000 compared to $108,000 in the same period of 1999. At
June 30, 2000, the allowance for loan losses was $1,616,000 or 1.43% of total
loans receivable compared to $957,675 or 1.45% at June 30, 1999. The increase in
the allowance for loan losses is a result of the growth of the loan 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.
10
<PAGE> 11
We have not experienced any charge-offs of loans receivable since
inception. At June 30, 2000, no portion of the allowance for loan losses was
allocated to impaired loan balances, as there were no loans considered impaired.
Loan impairment is reported when full payment under the loan terms is not
expected. Impairment is evaluated in total for smaller-balance loans of a
similar nature such as residential mortgage, consumer and credit card loans, and
on an individual loan basis for other loans. If a loan is impaired, a portion of
the allowance is allocated so that the loan is reported, net, at the present
value of estimated future cash flows using the loan's existing rate, or at the
fair value of collateral if repayment is expected solely from the collateral.
Loans receivable are evaluated for impairment when payments are delayed,
typically 90 days or more, or when it is probable that all principal and
interest amounts will not be collected according to the original terms of the
loan.
Management allocated approximately 63% of the allowance for loan
losses to commercial loans, 10% to residential real estate mortgage loans and 8%
to installment loans at June 30, 2000, leaving 19% unallocated. There were no
non-performing loans at June 30, 2000. Management believes the allowance for
loan losses at June 30, 2000 was adequate to absorb existing losses in the loan
portfolio.
NONINTEREST INCOME. Noninterest income increased by $34,480, from
$43,051 for the six month period ended June 30, 1999 to $77,531 for the six
month period ended June 30, 2000. For the three month period ended June 30,
2000, noninterest income increased by $31,254, from $23,903 for 1999 to $55,157
in 2000. Other income during all periods of 2000 and 1999 consisted of income
from depository account service fees and other miscellaneous fees. For the six
month period ended June 30, 2000, noninterest income was reduced by the loss
from the sale of securities available for sale of $(13,589). Thus, the increases
in total noninterest income in both periods was primarily due to increases in
depository account service fees and other miscellaneous fees.
NONINTEREST EXPENSE. The main components of noninterest expense were
primarily salaries and benefits, occupancy and equipment, professional fees and
data processing fees for both six month periods. Noninterest expense for the six
months ended June 30, 2000 was $1,531,758 as compared to $1,238,255 for the same
period in 1999, an increase of $293,503. Management continues to attempt to
control overhead expenses without impairing the quality of service provided to
clients.
<TABLE>
<CAPTION>
Six Months Ended June 30,
2000 1999 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 947,533 $ 694,992 $ 252,541 36.34%
Occupancy and equipment expense 198,654 226,484 (27,830) (12.29)
Advertising and promotion 42,892 20,110 22,782 113.29
Data processing 85,689 70,679 15,010 21.24
Printing, postage, stationery and supplies 30,389 29,692 697 2.35
Professional fees 60,495 45,360 15,135 33.37
Other 166,106 150,938 15,168 10.05
---------- ----------- ---------
$1,531,758 $ 1,238,255 $ 293,503 23.70
========== =========== =========
</TABLE>
Salaries and benefits experienced the most significant dollar increase of
any noninterest expense component. For the six months ended June 30, 2000, total
salaries and benefits were $947,533 compared to $694,992 for the six months
ended June 30, 1999. For the three months ended June 30, 2000, salaries and
benefits was $493,333 compared to $364,811 for the same period in 1999. The
change in both periods was primarily attributable to the increase in the number
of employees from 27 at June 30, 1999 to 33 at June 30, 2000, as well as merit
and cost of living raises.
Advertising and promotion expense experienced the largest single percentage
increase within the noninterest expense category. For the six months ended June
30, 2000 and June 30, 1999, advertising and promotion expense increased to
$42,892 or $22,782 over the six month period in 1999 of $20,110. The change was
primarily attributable to the increase in advertising and promotional expenses
associated with attracting new clients as well as retaining existing clients.
11
<PAGE> 12
The reduction in our occupancy expense continues to be the result of
bringing the operations of the courier service in-house versus paying a third
party vendor for courier services. The increase in data processing continues to
be associated with the growth in the number of account holders. The increase in
professional fees is a result of the growth in the size of the bank.
INCOME TAXES. We have utilized our entire net operating loss carry forward
and have shown adequate profitability to warrant recording our net deferred tax
asset to the extent of taxes paid. Consequently, we reversed approximately
$190,000 of the $260,000 valuation allowance for deferred tax assets during the
six months ending June 30, 2000. As we continue to be profitable, the remaining
$70,000 valuation allowance will continue to be reduced, and when it is
eliminated, we will begin to report net tax expense.
FINANCIAL CONDITION
JUNE 30, 2000 COMPARED WITH THE DECEMBER 31, 1999 AND JUNE 30, 1999
Our total assets increased by $20.5 million or 15.6% and $43.4 million
or 40.2% to $151.4 million at June 30, 2000 from $130.9 million at December 31,
1999 and $108.0 million at June 30, 1999. The growth during all periods
primarily resulted from an increase in the loan portfolio funded primarily by
deposits received from clients and by FHLB advances. The largest increase in our
balance sheet as of June 30, 2000 was in the loan portfolio.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents decreased by $2.5
million or 18.8% and $1.7 million or 13.6% to $10.8 million at June 30, 2000
from $13.3 and $12.5 million at December 31, 1999 and June 30, 1999. Cash and
due from banks represented cash maintained at correspondent banks in the form of
demand deposits as well as cash maintained at the Federal Reserve Bank of
Chicago. Federal funds sold are inter-bank funds with daily liquidity. At June
30, 2000, we did not have excess funds for investing into federal funds. This
amount decreased by $7.5 million and $7.1 million from $7.5 million and $7.1
million at December 31, 1999 and June 30, 1999. The decrease in federal funds
sold was a result of funding the loan growth for the period.
INVESTMENT PORTFOLIO. Securities available for sale and FHLB stock
totaled $26.2 million at June 30, 2000, which represented a decrease of $3.9
million or 12.9% and $1.7 million or 6.2% from $30.1 million at December 31,
1999 and $27.9 at June 30, 1999. The decrease was a result of sales of
securities available for sale to fund increased loan demand as well as normal
maturities.
All securities have been classified as available for sale. Available
for sale securities represent those securities which we may decide to sell if
needed for liquidity, asset/liability management or other reasons. Such
securities are reported at fair value with unrealized gains and losses included
as a separate component of stockholders' equity, net of tax. The unrealized loss
on the securities portfolio, net of taxes was $(718,766), ($750,016) and
($232,952) at June 30, 2000, December 31, 1999 and June 30, 1999.
LOAN PORTFOLIO. Loans receivable net of allowance increased by $26.3
million or 31.0% and $46.2 million or 70.9% to $111.4 million at June 30, 2000
from $85.1 million and $65.2 million at December 31, 1999 and June 30, 1999. The
increase was largely attributable to our officer calling program.
Management believes the allowance for loan losses at June 30, 2000 was
adequate to absorb losses on outstanding loans, as the allowance balance is
maintained by management at a level considered adequate to cover losses that are
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values, and other factors and estimates which
are subject to change over time.
The allowance for loan losses balance and the provision for loan
losses are determined by management based upon periodic reviews of the loan
portfolio. In addition, management considers the level of charge-offs on loans
as well as the fluctuations of charge-offs and recoveries on loans, including
the factors which caused these changes. Estimating the risk of loss and the
amount of loss is necessarily subjective. Accordingly, the allowance is
maintained by management at a level considered adequate to cover losses that are
currently anticipated based on past loss experience, general economic
conditions, information about specific borrower situations including their
financial position and collateral values and other factors and estimates which
are subject to change over time.
12
<PAGE> 13
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 .7% and .5% to
$1,474,909 at June 30, 2000 from $1,464,368 and $1,467,058 at December 31, 1999
and June 30, 1999. The increase was primarily the result of purchasing
additional technology to further enhance our ability to meet the needs of our
clients.
Accrued interest receivable on loans, securities and interest bearing
cash accounts increased by 8.6% and 29.4% to $1,084,195 at June 30, 2000 from
$998,569 and $838,143 at December 31, 1999 and June 30, 1999. The increase was
primarily due to greater average outstanding balances in interest earning
assets.
Other assets as of June 30, 2000, December 31, 1999 and June 30, 1999
totaled $470,551, $84,928 and $71,005, respectively. The increase is primarily a
result of recognizing a portion of our net deferred tax assets.
DEPOSITS. Deposits increased by $17.2 million or 17.5% and $32.7
million or 39.5% to $115.5 million at June 30, 2000 from $98.2 million and $82.8
million at December 31, 1999 and June 30, 1999. We do not accept brokered
certificates of deposit. 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.
SHORT-TERM BORROWINGS. Short-term borrowings decreased $1.9 million
and $4.1 million from $8.1 million and $10.4 million as of December 31, 1999 and
June 30, 1999 to $6.2 million as of June 30, 2000. Short-term borrowings
represented repurchase agreements offered to commercial clients and federal
funds purchased. Though short-term in nature, repurchase agreements have been
and continue to be a stable source of funds.
FHLB ADVANCES. 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 $4.5 million
and $8.5 million to $12.0 million as of June 30, 2000 from $7.5 million and $3.5
million at December 31, 1999 and June 30, 1999. As of June 30, 2000, the bank
held $600,000 of FHLB stock. The increases primarily resulted as we used FHLB
advances for loan matching, for hedging against the possibility of rising
interest rates and general liquidity purposes.
Other Liabilities. Accrued interest payable increased by $81,794 or
43.2% and $ 127,279 or 88.4% to $271,308 at June 30, 2000 from $189,514 and
$144,029 at December 31, 1999 and June 30, 1999. The increase was primarily due
to greater average outstanding balances in interest bearing liabilities.
Other liabilities increased by $49,104 or 73.8% and $6,994 or 6.4% to
$115,662 as of June 30, 2000 from $66,558 and $108,668 as of December 31, 1999
and June 30, 1999. Other liabilities were comprised of unpaid amounts for
various products and services.
CAPITAL RESOURCES
The accumulated deficit decreased by $467,050 or 60.7% to $(.3)
million as of June 30, 2000 from $(.8) million as of December 31, 1999 and
$803,251 or 72.6% from $(1.1) as of June 30, 1999. The decrease reflected net
income for the six and the twelve month periods ended June 30, 2000.
Accumulated other comprehensive loss, net of tax from unrealized
losses on securities available for sale, were $(718,766) as of June 30, 2000 as
compared to $(750,016) and $(232,952) as of December 31, 1999 and June 30, 1999.
The decrease was attributable to the decrease during the period in fair value of
the securities available for sale due to rising interest rates.
Total shareholders' equity was $17.3 million as of June 30, 2000, an
increase of $.5 million from $16.8 million as of December 31, 1999 and $6.2 from
$11.1 million as of June 30, 1999. The increase resulted from the combination of
the increase in the net income for the period as well as the completion of a
secondary stock offering in September 1999 offset by the changes in the net
unrealized loss on securities available for sale.
13
<PAGE> 14
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
minimum regulatory capital requirements and the actual capital ratios at June
30, 2000:
<TABLE>
<CAPTION>
Minimum Required To Be
Minimum Required Well Capitalized Under Corporation's
For Capital Prompt Corrective Action Capital Bank's Capital
June 30, 2000 Adequacy Purposes Regulations Ratio Ratio
------------------------------------ ------------------ ------------------------ ------------- --------------
<S> <C> <C> <C> <C>
Ratio of Total Capital to Risk
Weighted Assets 8.0% 10.0% 16.8% 15.4%
Ratio of Tier 1 Capital to Risk
Weighted Assets 4.0% 6.0% 15.5% 14.1%
Ratio of Tier 1 Capital to Average
Assets 4.0% 5.0% 11.1% 11.3%
</TABLE>
The bank and the Corporation exceeded the applicable minimum
regulatory capital requirements at June 30, 2000 and was considered to be well
capitalized.
Restrictions exist regarding the ability of the bank to transfer funds
to the Corporation in the form of cash dividends, loans or advances. No cash or
other dividends were declared or paid during the three month period or the six
month periods ended June 30, 2000 and 1999.
As of June 30, 2000, management was not aware of any current
recommendations by the banking regulatory authorities which, if they were to be
implemented, would have, or are reasonably likely to have, a material adverse
effect on our liquidity, capital resources or operations.
ASSET/LIABILITY MANAGEMENT
LIQUIDITY
Liquidity relates primarily to our ability to fund loan demand, meet
deposit clients' withdrawal requirements and provide for operating expenses.
Assets used to satisfy these needs consist of cash and due from banks, federal
funds sold, interest bearing deposits in other financial institutions and
securities available for sale. These assets are commonly referred to as liquid
assets. Liquid assets were $36.4 million at June 30, 2000 compared to $42.9
million at December 31, 1999 and $40.0 million at June 30, 1999. Liquidity
levels decreased due to the loan portfolio growing at a faster pace than the
deposit portfolio.
The statements of cash flows for the periods presented provide an
indication of our sources and uses of cash as well as an indication of our
ability to maintain an adequate level of liquidity. A discussion of the
statements of cash flows for the six month period ended June 30, 2000 and 1999
follows.
During both periods presented, we experienced a net increase in cash
from operating activities. Net cash from operating activities was $658,538
during the six months ended June 30, 2000 compared to $517,160 for the same
period in 1999. The increase in cash from operating activities was primarily a
result of our ability to generate an operating profit of $467,050 for the six
months ended June 30, 2000 compared to a net operating profit of $174,793 for
the same period in 1999.
For all periods presented, we experienced a net decrease in net cash
from investing activities. Net cash from investing activities was $(23.0)
million and $(15.7) million for the six months ended June 30, 2000 and 1999,
respectively. The changes in net cash from investing activities include
purchases, sales, maturities and calls of securities available for sale, growth
in loans receivable and purchases of premises and equipment.
14
<PAGE> 15
Net cash flow from financing activities was $19.8 million and $11.9
million for the periods ended June 30, 2000 and 1999, respectively. In 2000 the
increase was primarily attributable to the growth in total deposits and Federal
Home Loan Bank advances of $17.2 million and $4.5 million, respectively. In 1999
the increase was primarily attributable to the growth in deposits, securities
sold under agreements to repurchase and Federal Home Loan Bank advances of $6.4
million, $4.0 million and $1.5 million, respectively.
MANAGEMENT OF INTEREST SENSITIVITY
A number of measures are used to monitor and manage interest rate
risk, including income simulation and interest sensitivity (GAP) analysis. An
income simulation model is management's primary tool used to assess the
direction and magnitude of variations in net interest income resulting from
changes in interest rates. Key assumptions in the model include repayment speeds
on various loan and investment assets; cash flow and maturities of financial
instruments held for purposes other than trading; changes in market conditions,
loan volumes, and pricing; deposit sensitivity; client preferences; and
management's capital plans. These assumptions are inherently uncertain, subject
to fluctuations and revision in a dynamic environment and as a result, the model
cannot precisely estimate net interest income or exactly predict the impact of
higher or lower interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude, and frequency of
interest rate changes and changes in market conditions and management
strategies, among other factors.
Results of the simulation done as of June 30, 2000, suggest that we
could expect net interest income to increase by approximately $34,000, if
interest rates gradually decline by 100 basis points over the next twelve
months, and to decrease approximately $175,000, if interest rates gradually
increase 100 basis points over the next twelve months, from forecast levels of
net interest income absent any changes in rates. These variances in net interest
income were within our policy parameters established to manage interest rate
risk. In addition to changes in interest rate, the level of future net interest
income is also dependent on a number of other variables, including growth,
composition and absolute levels of deposits, loans, and other earning assets and
interest bearing liabilities, economic and competitive conditions, client
preference and other factors.
Austin Advisors, Inc., a firm specializing in consulting and providing
assistance to banks, performs a formal asset/liability management analysis on a
monthly basis. This information is presented and reviewed by the "ALCO"
Committee.
IMPACT OF INFLATION AND CHANGING PRICES
The majority of our assets and liabilities are monetary in nature and
therefore we differ greatly from most commercial and industrial companies that
have significant investments in fixed assets or inventories. However, inflation
does have an important impact on the growth of total assets in the banking
industry and the resulting need to increase equity capital at higher than normal
rates in order to maintain an appropriate equity to assets ratio. Inflation
significantly affects noninterest expense, which tends to rise during periods of
general inflation.
IMPACT OF YEAR 2000 COMPLIANCE
The year 2000 issue that confronted us and our vendors and clients
centered on the potential inability of computer systems and embedded technology
to properly recognize dates at the end of and beyond the year 1999. In early
1998 we established a year 2000 working group consisting of senior officers and
other key employees. In accordance with bank regulatory guidelines, throughout
1998 and 1999 this group developed and implemented a comprehensive plan to
address the potential impact of the year 2000 problem on our information
technology and non-information technology systems. We completed inventory,
assessment and planning phases for our mission-critical information technology
and non-information technology systems, which posed risks to our ability to
process data for our loans, deposits and general ledger, thereby impacting
revenues and operating results. Recognizing that our ability to be year 2000
ready was also dependent upon the year 2000 efforts of our vendors, we requested
and received year 2000 readiness information from all significant vendors. In
addition, we utilized letters and questionnaires to assess material loan
clients' readiness, and followed-up with phone calls or additional letters when
deemed necessary. Finally, the year 2000 working group developed and tested
contingency plans to address alternative courses of action in the event that
mission-critical systems did not function properly. The total costs associated
with our year 2000 planning, primarily
15
<PAGE> 16
personnel expenses, were estimated to aggregate less than $75,000 for 1998 and
1999. The arrival of year 2000 appears to have caused no major computer-related
problems for us or any of our vendors or clients. All of our information
technology and non-information technology systems are working properly.
Management is not aware of any vendors or customers that have experienced
computer-related problems or concerns as the result of the year 2000 problem
that have materially and adversely affected us.
RECENT REGULATORY DEVELOPMENTS
The Gramm-Leach-Bliley Act (the "Act"), which was enacted in November,
1999, allows eligible bank holding companies to engage in a wider range of
nonbanking activities, including greater authority to engage in securities and
insurance activities. Under the Act, an eligible bank holding company that
elects to become a financial holding company may engage in any activity that the
Board of Governors of the Federal Reserve System (the "Federal Reserve"), in
consultation with the Secretary of the Treasury, determines by regulation or
order is financial in nature, incidental to any such financial activity, or
complementary to any such financial activity and does not pose a substantial
risk to the safety or soundness of depository institutions or the financial
system generally. National banks are also authorized by the Act to engage,
through "financial subsidiaries," in certain activity that is permissible for
financial holding companies (as described above) and certain 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.
Various bank regulatory agencies have begun issuing regulations as
mandated by the Act. During June, 2000, all of the federal bank regulatory
agencies jointly issued regulations implementing the privacy provisions of the
Act. In addition, the Federal Reserve issued interim regulations establishing
procedures for bank holding companies to elect to become financial holding
companies and issued a listing of the financial activities permissible for
financial holding companies, as well as describing the extent to which financial
holding companies may engage in securities and merchant banking activities. The
Federal Deposit Insurance Corporation issued an interim regulation regarding the
parameters under which state nonmember banks may conduct activities through
subsidiaries that national banks may conduct only in financial subsidiaries. At
this time, it is not possible to predict the impact the Act and its implementing
regulations may have on the Company or the Bank. As of the date of this filing,
the Company has not applied for or received approval to operate as a financial
holding company. In addition, the Bank has not applied for or received approval
to establish any financial subsidiaries.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
As a depository of funds, the Bank may occasionally be named as a
defendant in lawsuits (such as garnishment proceedings) involving claims to the
ownership of funds in particular accounts. Such litigation is incidental to the
Bank's business.
We are not aware of any pending litigation.
ITEM 2. CHANGES IN SECURITIES
Not applicable.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 16, 2000, we held our annual meeting of stockholders. At the
meeting, David A. Eckrich, Jerry Hammes, Arthur H. McElwee Jr. and John W.
Rosenthal were elected to serve as Class I directors with terms expiring in
2003. Continuing as Class II directors until 2001 are Brian R. Brady, V. Robert
Hepler, Jack Matthys and Richard A. Rosenthal. Continuing as Class III directors
until 2002 are Scott C. Malpass, Myron C. Noble and Robert A. Sullivan.
Stockholders also ratified the appointment of Crowe, Chizek and Company LLP as
our independent accountants for the 2000 fiscal year.
16
<PAGE> 17
There were 1,675,112 issued and outstanding shares of Common Stock and
there were 1,393,996 shares of Common Stock represented at the annual meeting.
The voting on each item presented at the annual meeting was as follows:
<TABLE>
<CAPTION>
Election of Directors Votes For Votes Withheld Votes Against Broker Non-Votes
--------------------- --------- -------------- ------------- ----------------
<S> <C> <C> <C> <C>
David A. Eckrich 1,391,496 0 0 0
Jerry Hammes 1,391,496 0 0 0
Arthur H. McElwee Jr. 1,391,496 0 0 0
John W. Rosenthal 1,374,347 0 0 0
Ratification of the appointment
of Crowe, Chizek and Company LLP
as independent public
accountants for us 1,384,246 4,750 5,000 0
</TABLE>
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ST. JOSEPH CAPITAL CORPORATION
(Registrant)
Date: August 14, 2000 /s/ John W. Rosenthal
------------------------------------------
John W. Rosenthal
President
Date: August 14, 2000 /s/ Edward R. Pooley
------------------------------------------
Edward R. Pooley
Principal Financial Officer
17
