<PAGE> 1
UNITED 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 September 30, 2000
O 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
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
DELAWARE 35-1977746
--------------------------------- ---------------------------------------
(State or other jurisdiction (I.R.S. Employer Identification Number)
of incorporation or organization)
3820 EDISON LAKES PARKWAY, MISHAWAKA, IN 46545
(Address of principal executive offices)
(219) 273-9700
---------------------------
(Issuer's telephone number)
N/A
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act, during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes X No
----- -----
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the Issuer's classes of
common equity, as of the latest practicable date:
1,675,112 shares of common stock, $0.01 par value per share, were
outstanding as of November 2, 2000.
Transitional Small Business Disclosure Format (check one): Yes X No
--- ---
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NUMBER
------
PART I - FINANCIAL INFORMATION
<S> <C> <C>
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets,
September 30, 2000 (Unaudited), December 31, 1999
And September 30, 1999 (Unaudited) 3
Condensed Consolidated Statements of Income,
Three Months Ended September 30, 2000 and 1999 (Unaudited) 4
Nine Months Ended September 30, 2000 and 1999 (Unaudited)
Condensed Consolidated Statements of Changes in Shareholders' Equity,
Three Months Ended September 30, 2000 and 1999 (Unaudited)
Nine Months Ended September 30, 2000 and 1999 (Unaudited) 5
Condensed Consolidated Statements of Cash Flows,
Nine Months Ended September 30, 2000 and 1999 (Unaudited) 6
Notes to Condensed Consolidated Financial Statements (Unaudited) 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION 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 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
SIGNATURES 17
</TABLE>
2
<PAGE> 3
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
PART I - FINANCIAL INFORMATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, SEPTEMBER 30,
ASSETS 2000 DECEMBER 31, 1999
(UNAUDITED) 1999 (UNAUDITED)
------------- ------------- -------------
<S> <C> <C> <C>
Cash and due from banks $ 8,536,263 $ 5,722,712 $ 7,720,718
Interest-bearing deposits in other financial institutions-
short-term 180,849 43,403 74,397
Federal funds sold 8,100,000 7,500,000 7,200,000
------------- ------------- -------------
Total cash and cash equivalents 16,817,112 13,266,115 14,995,115
Securities available for sale 22,672,852 29,675,749 27,334,155
Federal Home Loan Bank (FHLB) stock 878,500 388,800 388,800
Loans receivable, net of allowance for loan losses of
$1,756,000 at September 30, 2000, $1,270,000 at
December 31, 1999 and $1,100,000 at September 30, 1999 119,828,361 85,053,558 78,039,707
Accrued interest receivable 967,417 998,569 686,688
Premises and equipment, net 1,437,126 1,464,368 1,424,165
Deferred and accrued income taxes, net 820,374 -- --
Other assets 43,045 84,928 59,383
------------- ------------- -------------
Total Assets $ 163,464,787 $ 130,932,087 $ 122,928,013
============= ============= =============
LIABILITIES AND SHAREHOLDERS' EQUITY
LIABILITIES
Deposits
Noninterest-bearing demand $ 15,662,621 $ 10,217,950 $ 13,725,765
Savings, NOW and money market 60,252,385 51,422,001 48,292,047
Certificates of deposit 46,438,910 36,601,270 27,784,369
------------- ------------- -------------
Total deposits 122,353,916 98,241,221 89,802,181
Securities sold under agreements to repurchase 7,636,484 8,135,784 9,771,013
FHLB advances 15,070,000 7,500,000 6,000,000
Accrued interest payable 282,363 189,514 163,137
Other liabilities 153,920 66,558 316,218
------------- ------------- -------------
Total Liabilities 145,494,683 114,133,077 106,052,549
SHAREHOLDERS' EQUITY
Common stock, $.01 par value, 2,500,000 shares authorized;
1,675,112 shares issued and outstanding at September 30, 2000
and December 31, 1999, and 1,673,264 shares issued and
outstanding at September 30, 1999 16,751 16,751 16,733
Additional paid in capital 18,302,139 18,302,139 18,237,786
Accumulated deficit (31,001) (769,864) (956,827)
Accumulated other comprehensive loss, net
of tax of ($213,190) at September 30, 2000 and
$ -0- at December 31, 1999 and September 30, 1999 (319,785) (750,016) (422,228)
------------- ------------- -------------
Total shareholders' equity 17,968,104 16,799,010 16,875,464
------------- ------------- -------------
Total liabilities and shareholders' equity $ 163,464,787 $ 130,932,087 $ 122,928,013
============= ============= =============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 4
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Interest and dividend income
Loans receivable, including fees $ 2,533,092 $ 1,436,875 $ 6,538,079 $ 3,708,471
Securities available for sale - taxable 340,632 413,095 1,173,637 1,288,717
Securities available for sale - tax exempt 8,493 -- 25,517 --
FHLB stock 18,490 1,516 37,042 16,031
Federal Funds sold 54,533 63,344 152,524 161,524
Other interest earning assets 1,585 1,676 3,899 7,007
----------- ----------- ----------- -----------
Total interest and
dividend income 2,956,825 1,916,506 7,930,698 5,181,750
Interest expense
Deposits 1,409,991 869,001 3,696,077 2,299,726
Federal funds purchased 16,263 -- 29,672 3,522
Securities sold under agreements to
repurchase 84,509 102,764 219,876 283,858
FHLB advances 238,510 43,675 510,432 117,582
----------- ----------- ----------- -----------
Total interest expense 1,749,273 1,015,440 4,456,057 2,704,688
----------- ----------- ----------- -----------
NET INTEREST INCOME 1,207,552 901,066 3,474,641 2,477,062
Provision for loan losses 140,000 142,325 486,000 348,325
----------- ----------- ----------- -----------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 1,067,552 758,741 2,988,641 2,128,737
Noninterest income
Loss on sales and calls of securities
available for sale, net (6,327) -- (19,916) --
Other income 54,540 28,988 145,660 72,039
----------- ----------- ----------- -----------
Total noninterest income 48,213 28,988 125,744 72,039
Noninterest expense
Salaries and employee benefits 504,042 380,940 1,451,575 1,075,932
Occupancy and equipment 99,057 97,870 297,711 324,354
Other expense 228,216 159,680 613,788 476,459
----------- ----------- ----------- -----------
Total noninterest expense 831,315 638,490 2,363,074 1,876,745
----------- ----------- ----------- -----------
INCOME BEFORE INCOME TAX EXPENSE 284,450 149,239 751,311 324,031
Income tax expense 12,636 -- 12,448 --
----------- ----------- ----------- -----------
NET INCOME $ 271,814 $ 149,239 $ 738,863 $ 324,031
=========== =========== =========== ===========
Basic income per common share $ .16 $ .12 $ .44 $ .25
=========== =========== =========== ===========
Diluted income per common share $ .16 $ .11 $ .44 $ .25
=========== =========== =========== ===========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 5
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
Three Months Three Months Nine Months Nine Months
Ended Ended Ended Ended
Sept 30, 2000 Sept 30, 1999 Sept 30, 2000 Sept 30, 1999
Total Total Total Total
Shareholders' Shareholders' Shareholders' Shareholders'
Equity Equity Equity Equity
------------ ------------- ------------- --------------
<S> <C> <C> <C> <C>
BALANCE AT BEGINNING OF PERIOD: $ 17,297,310 $ 11,051,771 $ 16,799,010 $ 11,610,845
Comprehensive income (loss):
Net income 271,814 149,239 738,863 324,031
Net change in net unrealized
appreciation (depreciation) on
securities available for sale, net
of reclassification adjustments
and tax effects 398,980 (189,277) 430,231 (977,178)
------------ ------------ ------------ ------------
Total comprehensive income (loss) 670,794 (40,038) 1,169,094 (653,147)
Proceeds from issuance of common
Stock, net -- 5,863,731 -- 5,917,766
------------ ------------ ------------ ------------
BALANCE AT END OF PERIOD: $ 17,968,104 $ 16,875,464 $ 17,968,104 $ 16,875,464
============ ============ ============ ============
</TABLE>
See accompanying notes to condensed consolidated financial statements.
5
<PAGE> 6
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine Months Nine Months
Ended Ended
Sept 30, 2000 Sept 30, 1999
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 738,863 $ 324,031
Adjustments to reconcile net income to net cash
from operating activities
Depreciation 196,236 182,438
Provision for loan loss 486,000 348,325
Net amortization on securities
available for sale 60,078 69,875
Loss on sales and calls of securities
available for sale, net 19,916 --
Net change in:
Accrued interest receivable 31,152 52,336
Other assets 41,883 44,182
Deferred and accrued income tax, net (607,184) --
Accrued interest payable 92,849 62,430
Other liabilities 87,362 203,166
------------ ------------
Net cash from operating activities 1,147,155 1,286,783
------------ ------------
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 7,928,572 --
Proceeds from maturities and calls of securities
available for sale 1,660,000 4,200,000
Purchase of FHLB stock (489,700) (166,600)
Net change in loans receivable (35,260,803) (30,376,736)
Purchase of premises and equipment, net (168,994) (864,108)
------------ ------------
Net cash from investing activities (28,779,553) (28,722,306)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in deposits 24,112,695 13,411,716
Net change in securities sold under agreements
to repurchase (499,300) 3,382,042
Proceeds from new FHLB advances 11,570,000 4,000,000
Repayment of FHLB advances (4,000,000) --
Proceeds from issuance of common stock, net -- 5,917,766
------------ ------------
Net cash from financing activities 31,183,395 26,711,524
------------ ------------
Net change in cash and cash equivalents 3,550,997 (723,999)
Cash and cash equivalents at beginning of period 13,266,115 15,719,114
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 16,817,112 $ 14,995,115
============ ============
Supplemental disclosures of cash flow information
Cash paid during the period for
Interest $ 4,363,208 $ 2,642,258
Income taxes $ 609,491 --
</TABLE>
See accompanying notes to condensed consolidated financial statements.
6
<PAGE> 7
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 unaudited 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:
<TABLE>
<CAPTION>
Sept 30, December 31, Sept 30,
2000 1999 1999
-------- ------------ --------
(In thousands)
<S> <C> <C> <C>
One to four family residential mortgage loans $ 32,707 $ 25,176 $ 22,273
Construction loans - residential 433 1,431 1,965
Construction loans - commercial 10,639 5,949 7,897
Commercial and multi-family real estate loans 38,865 27,801 26,704
Commercial business loans 34,664 22,841 17,590
Consumer loans 4,298 3,161 2,752
--------- --------- ---------
121,606 86,359 79,181
Allowance for loan losses (1,756) (1,270) (1,100)
Net deferred loan origination fees (22) (35) (41)
--------- --------- ---------
$ 119,828 $ 85,054 $ 78,040
========= ========= =========
</TABLE>
NOTE 3 - COMMITMENTS AND CONTINGENCIES
Some financial instruments are used to meet client financing needs and to
reduce exposure to interest rate changes. These financial instruments include
commitments to extend credit, unused open end revolving lines of credit and
standby letters of credit. These involve, to varying degrees, credit and
interest-rate risk in excess of the amount reported in the balance sheet.
<TABLE>
<CAPTION>
Commitments were as follows: Sept 30, December 31, Sept 30,
2000 1999 1999
----------- ----------- -----------
<S> <C> <C> <C>
Commitments to extend credit $ 7,510,000 $ 4,877,000 $ 9,237,000
Unused open end revolving lines of credit 45,563,000 38,219,000 27,868,000
Standby letters of credit 2,742,000 2,736,000 2,204,000
</TABLE>
Commitments to extend credit are agreements to lend to a client as long as
there is no violation of any condition established in the commitment, and
generally have fixed expiration dates. Standby letters of credit are conditional
commitments to guarantee a client's performance to a third party. Exposure to
credit loss if the other party does not perform is represented by the
contractual amount of these items. Collateral or other security is normally not
obtained for these financial instruments prior to their use, and many of the
commitments are expected to expire without being used.
7
<PAGE> 8
ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - ALLOWANCE FOR LOAN LOSSES
Activity in the allowance for loan losses at nine months ended
September 30, 2000 and 1999 was as follows:
<TABLE>
<CAPTION>
Sept 2000 Sept 1999
---------- ----------
<S> <C> <C>
Beginning balance $1,270,000 $ 751,675
Provision for loan losses 486,000 348,325
Recoveries -- --
Charge-offs -- --
---------- ----------
Ending balance $1,756,000 $1,100,000
========== ==========
</TABLE>
At September 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 OR PLAN OF OPERATION
The following discussion provides additional information regarding our
operations for the three and nine month periods ended September 30, 2000 and
1999 and financial condition as of September 30, 2000, September 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 Form 10-KSB.
OVERVIEW
St. Joseph Capital Corporation 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 the Company grew to approximately $163.5 million in assets
as of September 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 $271,814 or $.16 basic and diluted income per
common share for the three month period ended September 30, 2000 as compared to
a net income of $149,239 or $.12 basic and $.11 diluted income per common share
for the same period in 1999. For the nine month period ended September 30, 2000,
net income was $738,863 or $.44 basic and diluted income per common share
compared to $324,031 or $.25 basic and 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. During the three and nine month periods ending September 30, 2000, we
recorded our first tax expense of $12,636 for the three months ended September
30, 2000 and $12,448 for the nine months ended September 30, 2000. In future
quarters, we anticipate to continue to record income tax expense.
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 and other miscellaneous fees. Our operating
expenses include salaries and employee 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 employees and equipment 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.
8
<PAGE> 9
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.
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.
9
<PAGE> 10
RESULTS OF OPERATIONS
THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2000
COMPARED WITH THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
OVERVIEW. Consolidated net income for the nine-month period ended
September 30, 2000 was $738,863 as compared to a $324,031 for the same period in
1999 for an increase of $414,832 or 128.0%. Income per common share for the
first nine months of 2000 increased to $.44 basic and diluted from a basic and
diluted income per common share of $.25 for the nine months of 1999. Net income
for the three-month period ended September 30, 2000 was $271,814 as compared to
$149,239 for the same period in 1999 for an increase of $ 122,575 or 82.1%.
Income per common share for the three-month period ended September 30, 2000
increased to $ .16 basic and diluted from a basic of $.12 and diluted income per
common share of $.11 for the three months ended September 30, 1999. The increase
in net income for the nine-month period was comprised of increases in both net
interest income after provision for loan losses of $859,904 and noninterest
income of $53,705 reduced by an increase in noninterest expense of $486,329. 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
$308,811 and noninterest income of $19,225 reduced by an increase in noninterest
expense of $192,825.
NET INTEREST INCOME. Net interest income for the nine months ended
September 30, 2000 and 1999, amounted to $3.5 million and $2.5 million,
respectively, and for the three months ended September 30, 2000 and 1999, net
interest income amounted to $1.2 million and $0.9 million, respectively. Net
interest income represented the difference between interest income earned on
interest earning assets and interest expense on interest bearing liabilities.
The margin at September 30, 2000 was 3.42% compared to 3.57% at September 30,
1999.
Interest income increased by $2.7 million, from $5.2 million for the
nine-month period ended September 30, 1999 to $7.9 million for the nine-month
period ended September 30, 2000 and for the three months ended September 30,
2000 and 1999, interest income increased by $1.1 million, from $1.9 million to
$3.0 million, respectively. The 53.1% and 54.3% rise in interest income for the
nine months ended and the three months ended September 30, 2000 as compared to
the similar periods in 1999 was 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 $1.8 million, from $2.7 million for the
nine-month period ended September 30, 1999 to $4.5 million for the nine-month
period ended September 30, 2000 and for the three months ended September 30,
2000 and 1999, interest expense increased by $0.7 million, from $1.0 million to
$1.7 million, respectively. The 64.8% and 72.3% rise in interest expense for the
nine months ended and the three months ended September 30, 2000 as compared to
the similar periods in 1999 was primarily attributable to greater average
outstanding balances in interest bearing liabilities as well as the
competitiveness of the local market on deposit pricing. 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 $486,000 for
the nine-month period ended September 30, 2000 compared to $348,325 in the same
period in 1999. For the three months ended September 30, 2000, the provision for
loan losses was $140,000 compared to $142,325 in the same period of 1999. At
September 30, 2000, the allowance for loan losses was $1,756,000 or 1.44% of
total loans receivable compared to $1,100, 000 or 1.39% at September 30, 1999.
The increase in the allowance for loan losses is a result of the growth of the
loan portfolio. The increase in the percentage of allowance for loan losses to
total loans receivable between periods is a result of management's risk
assessment of the portfolio. The risk assessment is based on numerous
statistical factors including the specific asset class of each loan (i.e.
commercial, residential or consumer), the internal risk rating of each loan,
specific industry concentrations, an assessment for large dollar and unsecured
loans and specific reserves for watchlist credits.
We have not experienced any charge-offs of loans receivable since
inception. At September 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.
10
<PAGE> 11
Management allocated approximately 68% of the allowance for loan losses
to commercial loans, 10% to residential real estate mortgage loans and 8% to
installment loans at September 30, 2000, leaving 14% unallocated. There were no
non-performing loans at September 30, 2000. Management believes the allowance
for loan losses at September 30, 2000 was adequate to absorb existing losses in
the loan portfolio.
NONINTEREST INCOME. Noninterest income increased by $53,705, from
$72,039 for the nine-month period ended September 30, 1999 to $125,744 for the
nine-month period ended September 30, 2000. For the three-month period ended
September 30, 2000, noninterest income increased by $19,225, from $28,988 for
1999 to $48,213 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 nine-month period ended September 30, 2000, noninterest income was
reduced by the loss from the sale of securities available for sale of $(19,916).
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 employee benefits, occupancy and equipment, professional
fees and data processing fees for both nine-month periods. Noninterest expense
for the nine months ended September 30, 2000 was $2,363,074 as compared to
$1,876,745 for the same period in 1999, an increase of $486,329. Management
continues to control overhead expenses without impairing the quality of service
provided to clients.
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999 $ Change % Change
---- ---- -------- --------
<S> <C> <C> <C> <C>
Salaries and employee benefits $ 1,451,575 $ 1,075,932 $ 375,643 34.91%
Occupancy and equipment expense 297,711 324,354 (26,643) (8.21)
Advertising and promotion 69,526 34,550 34,976 101.23
Data processing 139,189 104,048 35,141 33.77
Printing, postage, stationery and supplies 47,916 46,404 1,512 3.26
Professional fees 92,145 69,959 22,186 31.71
Other 265,012 221,498 43,514 19.65
----------- ---------- -----------
$2,363,074 $ 1,876,745 $ 486,329 25.91
========== ============= ===========
</TABLE>
Salaries and employee benefits experienced the most significant dollar
increase of any noninterest expense component. For the nine months ended
September 30, 2000, total salaries and employee benefits were $1,451,575
compared to $1,075,932 for the nine months ended September 30, 1999. For the
three months ended September 30, 2000, salaries and employee benefits was
$504,042 compared to $380,940 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 September 30, 1999 to 33 at September 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 nine months ended
September 30, 2000 and September 30, 1999, advertising and promotion expense
increased to $69,526 or $34,976 over the nine-month period in 1999 of $34,550.
The change was primarily attributable to the increase in advertising and
promotional expenses associated with attracting new clients as well as retaining
existing clients.
The reduction in our occupancy and equipment expense was a result of
purchasing our headquarters building in May, 1999, eliminating the bank building
lease expense. The increase in data processing continues to be associated with
the growth in the number of account holders as well as the development of new
products such as Premierecom, our secure internet banking application. The
increase in professional fees and other noninterest expenses 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
assets. Consequently, we reversed all of the remaining $261,000 valuation
allowance for deferred tax assets during the nine months ending September 30,
2000. As we continue to be profitable, we will continue to report net tax
expense.
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<PAGE> 12
FINANCIAL CONDITION
SEPTEMBER 30, 2000 COMPARED WITH THE DECEMBER 31, 1999 AND SEPTEMBER 30, 1999
Our total assets increased by $32.6 million or 24.8% and $40.6 million
or 33.0% to $163.5 million at September 30, 2000 from $130.9 million at December
31, 1999 and $122.9 million at September 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 September 30, 2000 as compared to December 31, 1999 and
September 30, 1999 was in the loan portfolio.
CASH AND CASH EQUIVALENTS. Cash and cash equivalents increased by $3.5
million or 26.8% and $1.8 million or 12.2% to $16.8 million at September 30,
2000 from $13.3 and $15.0 million at December 31, 1999 and September 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 September 30, 2000, we had $8,100,000 invested into federal funds. This
amount increased by $.6 million and $.9 million from $7.5 million and $7.2
million at December 31, 1999 and September 30, 1999. The increase in federal
funds sold was a result of increased deposit growth, Federal Home Loan Bank
advances as well as maturities and sales of securities available for sale all of
which was to fund the growth in the loan portfolio.
INVESTMENT PORTFOLIO. Securities available for sale and FHLB stock
totaled $23.6 million at September 30, 2000, which represented a decrease of
$6.5 million or 21.7% and $4.1 million or 15.0% from $30.1 million at December
31, 1999 and $27.7 at September 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 shareholders' equity, net of tax. The unrealized loss
on the securities portfolio, net of taxes was $(319,785), ($750,016) and
($422,228) at September 30, 2000, December 31, 1999 and September 30, 1999.
LOAN PORTFOLIO. Loans receivable net of allowance for loan losses
increased by $34.7 million or 40.9% and $41.8 million or 53.6% to $119.8 million
at September 30, 2000 from $85.1 million and $78.0 million at December 31, 1999
and September 30, 1999. The increase was largely attributable to our officer
calling program.
Management believes the allowance for loan losses at September 30, 2000
is 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.
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 decreased by (1.9)% and increased
by .9% to $1,437,126 at September 30, 2000 from $1,464,368 and $1,424,165 at
December 31, 1999 and September 30, 1999. The decrease from December 31, 2000,
was due to a reduction in the amount of new technology needed to operate the
Bank. The increase from September 30, 1999 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 decreased by (3.1)% and
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<PAGE> 13
increased by 40.9% to $967,417 at September 30, 2000 from $998,569 and $686,688
at December 31, 1999 and September 30, 1999. The increase from September 30,
1999 was primarily due to greater average outstanding balances in interest
earning assets, mainly loans. The decrease from December 31, 1999 was
attributable to the reduction in accrued interest receivables in the investment
portfolio due to maturities and sales of securities available for sale and
normal semi-annual coupon payments.
Other assets as of September 30, 2000, December 31, 1999 and September
30, 1999 totaled $43,045, $84,928 and $59,383, respectively. Other assets
consist primarily of prepaid equipment maintenance contracts.
DEPOSITS. Deposits increased by $24.2 million or 24.5% and $32.6
million or 36.2% to $122.4 million at September 30, 2000 from $98.2 million and
$89.8 million at December 31, 1999 and September 30, 1999. We do not accept
brokered certificates of deposit. The increase in deposits for these periods was
a result of periodic aggressive pricing programs for deposits, ongoing marketing
efforts and the hiring of new personnel. Management also believes the increase
was a reaction by clients to the acquisitions and mergers of local banks by
transferring their financial business to community banks that have the ability
to offer more personalized service.
SECURITIES SOLD UNDER AGREEMENT TO REPURCHASE. Securities sold under
agreements to repurchase decreased $.5 million and $2.2 million from $8.1
million and $9.8 million as of December 31, 1999 and September 30, 1999 to $7.6
million as of September 30, 2000. Though short-term in nature, securities sold
under agreements to repurchase 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 $7.6 million
and $9.1 million to $15.1 million as of September 30, 2000 from $7.5 million and
$6.0 million at December 31, 1999 and September 30, 1999. As of September 30,
2000, the Bank held $878,500 of FHLB stock. The increases primarily resulted as
we used FHLB advances for loan funding and general liquidity purposes.
OTHER LIABILITIES. Accrued interest payable increased by $92,849 or
49.0% and $119,226 or 73.1% to $282,363 at September 30, 2000 from $189,514 and
$163,137 at December 31, 1999 and September 30, 1999. The increases were
primarily due to greater average outstanding balances in interest bearing
liabilities.
Other liabilities increased by $87,362 or 131.3% and decreased by
$(162,298) or (51.3)% to $153,920 as of September 30, 2000 from $66,558 and
$316,218 as of December 31, 1999 and September 30, 1999. Other liabilities were
comprised of unpaid amounts for various products and services used in operating
the Bank and meeting the needs of our clients.
CAPITAL RESOURCES
The accumulated deficit decreased by $738,863 or 96.0% to $ (31,001) as
of September 30, 2000 from $(769,864) as of December 31, 1999 and $925,826 or
96.8% from $(956,827) as of September 30, 1999. The decreases reflect net income
for the nine and the twelve-month periods ended September 30, 2000.
Accumulated other comprehensive loss, net of tax from net unrealized
losses on securities available for sale, was $(319,785) as of September 30, 2000
as compared to $(750,016) and $(422,228) as of December 31, 1999 and September
30, 1999. The improvement since September 30, 1999 was attributable to a
decrease in fair value of the securities available for sale due to rising
interest rates offset by recognizing the tax benefit for the net unrealized
losses during the three months ended September 30, 2000 due to the reversal of
the deferred tax asset valuation allowance. The improvement since December 1999
was attributable to the increase in fair value of the securities available for
sale due to declining interest rates.
Total shareholders' equity was $18.0 million as of September 30, 2000,
an increase of $1.2 million from $16.8 million as of December 31, 1999 and $1.1
million from $16.9 million as of September 30, 1999. The increase resulted from
the increase in the net income for the periods, offset by the net changes in the
net unrealized loss on securities available for sale, net of tax.
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<PAGE> 14
The components of total risk-based capital are Tier 1 capital and Tier
2 capital. Tier 1 capital is total shareholders' 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
September 30, 2000:
<TABLE>
<CAPTION>
Minimum Required To Be
Minimum Required For Well Capitalized Under Corporation's
For Purposes Prompt Corrective Action Capital Bank's Capital
September 30, 2000 Capital Adequacy Regulations Ratio Ratio
---------------------------------- ---------------------- ------------------------- ------------- --------------
<S> <C> <C> <C> <C>
Ratio of Total Capital to Risk
Weighted Assets 8.0% 10.0% 15.9% 14.1%
Ratio of Tier 1 Capital to Risk
Weighted Assets 4.0% 6.0% 14.7% 12.9%
Ratio of Tier 1 Capital to Average
Assets 4.0% 5.0% 11.6% 10.8%
</TABLE>
The Bank and the Corporation exceeded the applicable minimum regulatory
capital requirements at September 30, 2000 and were 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 periods or the nine
month periods ended September 30, 2000 and 1999.
As of September 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 $39.5 million at September 30, 2000 compared to $42.9
million at December 31, 1999 and $42.3 million at September 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 nine-month periods ended September 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 $1.1 million
during the nine months ended September 30, 2000 compared to $1.3 million 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 $.7 million
for the nine months ended September 30, 2000 compared to a net operating profit
of $.3 million for the same period in 1999.
For both periods presented, we experienced a net decrease in net cash
from investing activities. Net cash from investing activities was $(28.8)
million and $(28.7) million for the nine months ended September 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.
Net cash flow from financing activities was $31.2 million and $26.7
million for the periods ended September 30,
14
<PAGE> 15
2000 and 1999, respectively. In 2000, the increase was primarily attributable to
the growth in total deposits and Federal Home Loan Bank advances of $24.1
million and $7.6 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 and proceeds from the issuance of
common stock of $13.4 million, $3.4 million, $4.0 million and $5.9 million,
respectively.
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 September 30, 2000, suggest that
we could expect net interest income to increase by approximately $316,000, if
interest rates gradually decline by 100 basis points over the next twelve
months, and to decrease approximately $192,000, 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 rates, 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 September
30, 2000, suggest that we could expect the value of our equity to be increased
by .40% and .92%, if there was an immediate interest rate shift upward of 100
and 200 basis points and to decrease (1.50)% and (5.43)%, if there was an
immediate interest rate shift downward of 100 and 200 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
Asset/Liability 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.
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.
15
<PAGE> 16
Although various bank regulatory agencies have issued regulations as
mandated by the Act, except for the jointly issued privacy regulations, the Act
and its implementing regulations have had little impact on the daily operations
of the Company and the Bank and, 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.
Less than 10% of all bank holding companies have elected to become financial
holding companies.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS No. 133 Accounting for Derivative Instruments and Hedging
Activities, as amended by SFAS No. 137 and 138, requires derivative instruments
be carried at fair value on the balance sheet. The statement continues to allow
derivative instruments to be used to hedge various risks and sets forth specific
criteria to be used to determine when hedge accounting can be used. The
statement also provides for offsetting changes in fair value or cash flows of
both the derivative and the hedged asset or liability to be recognized in
earnings in the same period; however, any changes in fair value or cash flow
that represent the ineffective portion of a hedge are required to be recognized
in earnings and cannot be deferred. For derivative instruments not accounted for
as hedges, changes in fair value are required to be recognized in earnings. The
adoption of this statement on January 1, 2000 is not expected to have a material
effect on the consolidated financial statements.
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
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(27) Financial Data Schedule
(b) Reports on Form 8-K
None.
16
<PAGE> 17
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: November 14, 2000 /s/ John W. Rosenthal
---------------------------
John W. Rosenthal
President
Date: November 14, 2000 /s/ Edward R. Pooley
---------------------------
Edward R. Pooley
Principal Financial Officer
17
