NOTE 1 – BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements reflect all adjustments that are, in the opinion of the Company’s management, necessary to fairly present the financial position, results of operations and cash flows for the Company. These adjustments consist only of normal recurring adjustments. The condensed consolidated balance sheet of the Company, as of December 31, 2009, has been derived from the audited consolidated balance sheet of the Company as of that date. Certain information and footnote disclosures, normally included in financial statements prepared in accordance with generally accepted accounting principles, have been condensed or omitted. The Company’s Annual Report to shareholders for the year ended December 31, 2009, contains consolidated fin ancial statements and related footnote disclosures which should be read in conjunction with the accompanying consolidated financial statements. The results of operations for the period ended September 30, 2010 are not necessarily indicative of the operating results for the full year.
On July 9, 2008, Midwest Federal Savings and Loan Association (the Association) approved a plan (the Plan) to convert from a federally-chartered mutual savings association to a federally-chartered stock savings association, subject to approval by its members. The Plan, which included a formation of a holding company, St. Joseph Bancorp, Inc., (the Company) to own all of the outstanding stock of the Association, was approved by the Office of Thrift Supervision (OTS) and included the filing of a registration statement with the Securities and Exchange Commission, which was declared effective on November 12, 2008.
The Plan called for the common stock of the holding company to be offered to various parties in a subscription offering at a price based on an independent appraisal of the Association, which was determined to be $10 per share. Shares that were not purchased in the subscription offering were offered in a community offering. The Association may not declare or pay a cash dividend if the effect thereof would cause its net worth to be reduced below either the amount required for the regulatory capital requirements imposed by the OTS.
The conversion has been accounted for in accordance with generally accepted accounting principles. Accordingly, the condensed consolidated balance sheets as of September 30, 2010 and December 31, 2009, and the condensed consolidated statements of operations for the three months and nine months ended September 30, 2010 and 2009, and cash flows for the nine months ended September 30, 2010 and 2009, are presented as results of the Company and its subsidiaries.
The condensed consolidated financial statements include the accounts of St. Joseph Bancorp, as well as its wholly owned subsidiaries, Midwest Federal Savings and Loan Association, and MFS Financial Services, Inc., an insurance agency, which is currently inactive. All significant intercompany balances and transactions have been eliminated in consolidation. The condensed consolidated financial statements have been prepared without audit. In the opinion of management, all adjustments (including normal recurring adjustments) necessary to present fairly the Company’s consolidated financial position, results of operations and changes in cash flows have been made.
The Company operates in a highly regulated environment and is subject to extensive regulation, supervision and examination. Applicable laws and regulations may change, and there is no assurance that such changes will not adversely affect the Company’s business. Such regulation and supervision govern the activities in which an institution may engage and are intended primarily for the protection of the Association, its depositors and the FDIC. Regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including but not limited to the imposition of restrictions on the operation of an institution, the classification of assets by the institution and the adequacy of an institution’s allowance for loan losses. Any change in such regu lation and oversight, whether in the form of restrictions on activities, regulatory policy, regulations, or legislation, including but not limited to changes in the regulations governing banks, could have a material impact on the Company’s operations. In particular, the Dodd-Frank Wall Street Reform and Consumer Protection Act was recently signed into law by the President. The effect of this new law on the banking industry and on the Company is uncertain at the present time given that many of the changes will be implemented through regulatory rules that have yet to be proposed or adopted.
ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
NOTE 2 – FORMATION OF HOLDING COMPANY AND CONVERSION
On January 30, 2009, the Company became the holding company for the Association upon the Association’s conversion from a federally chartered mutual savings association to a federally chartered capital stock savings association. The conversion was accomplished through the sale and issuance by the Company of 376,918 shares of common stock at $10 a share. Proceeds from the sale of common stock, net of expenses incurred of $803,890, were $2,965,290. This does not include $301,530 related to shares held by the Association’s Employee Stock Ownership Plan (ESOP).
NOTE 3 – EMPLOYEE STOCK OWNERSHIP PLAN
In connection with the conversion to an entity owned by stockholders, the Association established an ESOP for the exclusive benefit of eligible employees (all salaried employees who have completed at least 1,000 hours of service in a twelve-month period and have attained the age of 21). The ESOP borrowed funds from the Company in an amount sufficient to purchase 30,153 shares (approximately 8% of the common stock issued in the stock offering). The loan is secured by the shares purchased and will be repaid by the ESOP with funds from contributions made by the Association and dividends received by the ESOP. Contributions will be applied to repay interest on the loan first, then the remainder will be applied to principal. The loan is expected to be repaid over a period of up to 30 years. &# 160;Shares purchased with the loan proceeds are held in a suspense account for allocation among participants as the loan is repaid. Contributions to the ESOP and shares released from the suspense account are allocated among participants in proportion to their compensation, relative to total compensation of all active participants. Participants will vest in their accrued benefits under the employee stock ownership plan at the rate of 20 percent per year. Vesting is accelerated upon retirement, death or disability of the participant, or a change in control of the Association. Forfeitures will be reallocated to remaining plan participants. Benefits may be payable upon retirement, death, disability, separation from service, or termination of the ESOP.
The debt of the ESOP is eliminated in consolidation. Contributions to the ESOP shall be sufficient to pay principal and interest currently due under the loan agreement. As shares are committed to be released from collateral, the Company reports compensation expense equal to the average market price of the shares for the respective period, and the shares become outstanding for earnings per share computations. Dividends on unallocated ESOP shares are recorded as a reduction of debt and accrued interest. ESOP compensation expense was $7,907 and $5,030 for the nine months ended September 30, 2010 and 2009, respectively.
A summary of ESOP shares at September 30, 2010 is as follows:
| Released shares | | | 1,005 | |
| Shares committed for release | | | 753 | |
| Unreleased shares | | | 28,395 | |
| | | | | |
Total | | | 30,153 | |
| | | | | |
| Fair value of unreleased shares | | $ | 298,148 | |
The Company is obligated, at the option of each beneficiary, to repurchase shares of the ESOP at its current fair market value, upon the beneficiary’s termination or after retirement (“put right”). The put right feature makes the stock mandatorily redeemable. Since the redemption feature is not within the sole control of the Company, this obligation has been classified outside of permanent equity, and included within the caption temporary equity on the balance sheet. The Company accounts for this obligation based on the maximum cash obligation, which is based on the fair value of the underlying equity securities. At September 30, 2010, the fair value as estimated by an independent third party of the 1,758 shares released and committed for release, held by the ESOP, is $18,45 9.
ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
NOTE 4 – CURRENT ACCOUNTING DEVELOPMENTS
On December 23, 2009, the FASB issued guidance which modifies certain aspects contained in the Transfers and Servicing topic of FASB ASC 860. This standard enhances information reported to users of financial statements by providing greater transparency about transfers of financial assets, including securitization transactions, and where companies have continuing exposure to the risks related to transferred financial assets. This standard was effective for the Company as of January 1, 2010 with adoption applied prospectively for transfers that occur on or after that date. The adoption of this standard did not have a material impact on its financial position or results of operations.
In January 2010, the FASB issued guidance which modifies certain aspects contained in the Fair Value Measurements and Disclosure topic of FAS ASC 820. This standard enhances information reported to users of the financial statements by providing additional and enhanced disclosures about the fair value measurements. This standard was effective for the Company as of January 1, 2010, except for the disclosures about purchases, sales, issuances and settlements in the roll forward of activity in Level 3 fair value measurements, which will be effective on January 1, 2011. The adoption of this standard did not have a material impact on the Company’s financial position or results of operations.
In July 2010, the FASB issued Accounting Standards Update 2010-20, Disclosure about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This new guidance will increase disclosures made about the credit quality of loans and the allowance for credit losses. The disclosures will provide additional information about the nature of credit risk inherent in the Company’s loans, how credit risk is analyzed and assessed, and the reasons for the change in the allowance for loan losses. The requirements will be effective for the Company’s year ending December 31, 2010. Upon adoption, management does not anticipate that this standard will have a material impact on the Company’s condensed consolidated fi nancial statements.
NOTE 5 – EARNINGS (LOSS) PER SHARE
Earnings (loss) per share amount is based on the weighted average number of shares outstanding for the period and the net income (loss) applicable to common stockholders. There were no outstanding shares of common stock until the conversion on January 30, 2009. ESOP shares are excluded from shares outstanding until they have been committed to be released.
The following table presents a reconciliation of basic earnings per share to diluted earnings per share for the periods indicated.
| | | Three Months Ended | | | Three Months Ended | | | Nine Months Ended | | | Nine Months Ended | |
| | | 9/30/10 | | | 9/30/09 | | | 9/30/10 | | | 9/30/09 | |
| | | | | | | | | | | | | |
| Net loss | | $ | (108,839 | ) | | $ | (73,518 | ) | | $ | (316,084 | ) | | $ | (239,673 | ) |
| Change in redemption value of ESOP | | | | | | | | | | | | | | | | |
| shares subject to mandatory redemption | | | (125 | ) | | | - | | | | (879 | ) | | | - | |
| Net loss | | $ | (108,964 | ) | | $ | (73,518 | ) | | $ | (316,963 | ) | | $ | (239,673 | ) |
| | | | | | | | | | | | | | | | | |
| Average common shares outstanding | | | 348,398 | | | | 347,016 | | | | 348,147 | | | | 346,089 | |
| Average common share stock options | | | | | | | | | | | | | | | | |
outstanding | | | - | | | | - | | | | - | | | | - | |
| Average diluted common shares | | | 348,398 | | | | 347,016 | | | | 348,147 | | | | 346,089 | |
| | | | | | | | | | | | | | | | | |
| Loss per share: | | | | | | | | | | | | | | | | |
Basic | | $ | (0.31 | ) | | $ | (0.21 | ) | | $ | (0.91 | ) | | $ | (0.69 | ) |
Diluted | | | (0.31 | ) | | | (0.21 | ) | | | (0.91 | ) | | | (0.69 | ) |
ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
NOTE 6 – AVAILABLE-FOR-SALE SECURITIES
The amortized cost of available-for-sale securities and their estimated fair values are summarized below:
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
| September 30, 2010: | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| U.S. Government agencies | | $ | 2,225,596 | | | $ | 51,879 | | | $ | - | | | $ | 2,277,475 | |
| Mortgage-backed securities | | | 1,352,105 | | | | 65,730 | | | | - | | | | 1,417,835 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 3,577,701 | | | $ | 117,609 | | | $ | - | | | $ | 3,695,310 | |
| | | | | | | | | | | | | | | | | |
| | | Amortized Cost | | | Gross Unrealized Gains | | | Gross Unrealized Losses | | | Estimated Fair Value | |
| December 31, 2009: | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| U.S. Government agencies | | $ | 2,014,241 | | | $ | 21,482 | | | $ | - | | | $ | 2,035,723 | |
| Municipal securities | | | 95,000 | | | | 1,850 | | | | - | | | | 96,850 | |
| Mortgage-backed securities | | | 2,059,037 | | | | 68,679 | | | | - | | | | 2,127,716 | |
| | | | | | | | | | | | | | | | | |
| | | $ | 4,168,278 | | | $ | 92,011 | | | $ | - | | | $ | 4,260,289 | |
All mortgage-backed securities at September 30, 2010 and December 31, 2009 relate to residential mortgages, and were issued by government-sponsored enterprises.
Interest receivable for investments totaled $30,850 and $24,194 at September 30, 2010 and December 31, 2009, respectively.
The amortized cost and fair value of available-for-sale securities at September 30, 2010, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.
| | | | Amortized Cost | | | Fair Value | |
| | | | | | | | |
| | Within one year | | $ | - | | | $ | - | |
| | One to five years | | | 2,225,596 | | | | 2,277,475 | |
| | Mortgage-backed securities | | | 1,352,105 | | | | 1,417,835 | |
| | | | | | | | | | |
| | Totals | | $ | 3,577,701 | | | $ | 3,695,310 | |
Certain investments in debt securities may be reported in the condensed consolidated financial statements at an amount less than their historical cost. There were no unrealized losses at September 30, 2010 or December 31, 2009.
ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. It also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
| | Level 1: | Inputs to the valuation methodology are quoted prices, unadjusted, for identical assets or liabilities in active markets. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. |
| | Level 2: | Inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets; inputs to the valuation methodology include quoted prices for identical or similar assets or liabilities in markets that are not active; or inputs to the valuation methodology that are derived principally from or can be corroborated by observable market data by correlation or other means. |
| | Level 3 | Inputs to the valuation methodology are unobservable and significant to the fair value measurements. Level 3 assets and liabilities include financial instruments whose value is determined using discounted cash flow methodologies, as well as instruments for which the determination of fair value requires significant management judgment or estimation. |
The following tables present the balances of assets measured at fair value on a recurring basis by level at September 30, 2010 and December 31, 2009:
| | | | | | Quoted Prices in | | | Significant | | | | |
| | | | | | Active Markets | | | Other | | | Significant | |
| | | | | | For Identical | | | Observable | | | Unobservable | |
| Description | | Total | | | Assets (Level 1) | | | Inputs (Level 2) | | | Inputs (Level 3) | |
| | | | | | | | | | | | | |
| September 30, 2010 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 2,277,475 | | | $ | - | | | $ | 2,277,475 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | | 1,417,835 | | | | - | | | | 1,417,835 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 3,695,310 | | | $ | - | | | $ | 3,695,310 | | | $ | - | |
| December 31, 2009 | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
U.S. Government agencies | | $ | 2,035,723 | | | $ | - | | | $ | 2,035,723 | | | $ | - | |
| | | | | | | | | | | | | | | | | |
| Municipal securities | | | 96,850 | | | | - | | | | 96,850 | | | | - | |
| | | | | | | | | | | | | | | | | |
Mortgage-backed securities | | | 2,127,716 | | | | - | | | | 2,127,716 | | | | - | |
| | | | | | | | | | | | | | | | | |
| Total | | $ | 4,260,289 | | | $ | - | | | $ | 4,260,289 | | | $ | - | |
ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
Securities available-for-sale are recorded at fair value on a recurring basis. Fair value measurement is based upon quoted prices, if available. If quoted prices are not available, fair values are measured using independent pricing models or other model-based valuation techniques such as the present value of future cash flows, adjusted for the securities credit rating, prepaying assumptions and other factors such as credit loss assumptions. Level 2 securities include U.S. government agency securities, mortgage-backed securities (including pools and collateralized mortgage obligations), municipal bonds, and corporate-debt securities. There were no transfers between level one and two classifications. The Company’s policy is to recognize transfers in and transfers out as of the actual date of the event or change in circumstances that caused the transfer.
The Company had no significant assets measured at fair value on a non-recurring basis at September 30, 2010 or December 31, 2009.
The following methods were used to estimate the fair value of all other financial instruments recognized in the accompanying condensed consolidated balance sheets at amounts other than fair value:
Cash and Due From Banks, Interest-earning Deposits and Federal Home Loan Bank Stock
The carrying amount approximates fair value.
Loans and Interest Receivable
The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Loans with similar characteristics were aggregated for purposes of the calculations. The carrying amount of accrued interest approximates its fair value.
Deposits and Interest Payable
Deposits include savings accounts, NOW accounts and certain money market deposits. The carrying amount approximates fair value. The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities. The carrying amount of interest payable approximates its fair value.
Advances From Borrowers for Taxes and Insurance
The carrying amount approximates fair value.
ST. JOSEPH BANCORP, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2010
(Unaudited)
NOTE 7 – FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The following table presents estimated fair values of the Company’s financial instruments at September 30, 2010 and December 31, 2009 and includes financial instruments that are not accounted for at fair value:
| | | September 30, 2010 | | | December 31, 2009 | |
| | | Carrying Amount | | | Fair Value | | | Carrying Amount | | | Fair Value | |
| Financial assets | | | | | | | | | | | | |
| Cash and due from banks | | $ | 1,787,405 | | | $ | 1,787,405 | | | $ | 1,311,198 | | | $ | 1,311,198 | |
Interest-earning deposits | | | 8,044,471 | | | | 8,044,471 | | | | 4,196,227 | | | | 4,196,227 | |
Loans, net of allowance for loan losses | | | 14,583,624 | | | | 14,864,195 | | | | 12,827,709 | | | | 12,952,930 | |
Federal Home Loan Bank Stock | | | 26,700 | | | | 26,700 | | | | 26,200 | | | | 26,200 | |
Interest receivable | | | 105,901 | | | | 105,901 | | | | 82,325 | | | | 82,325 | |
| Financial liabilities | | | | | | | | | | | | |
Deposits | | | 21,607,543 | | | | 22,078,318 | | | | 15,278,628 | | | | 15,482,658 | |
Advances from borrowers for taxes and insurance | | | 101,562 | | | | 101,562 | | | | 23,799 | | | | 23,799 | |
Interest payable | | | 926 | | | | 926 | | | | 1,274 | | | | 1,274 | |
NOTE 8 – RECLASSIFICATIONS
Certain reclassifications have been made to the December 31, 2009 condensed consolidated financial statements to conform to the September 30, 2010 condensed consolidated financial statement presentation. These reclassifications had no effect on net income.
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including statements about anticipated operating and financial performance, such as loan originations, operating efficiencies, loan sales, charge-offs and loan loss provision, growth opportunities, interest rates and deposit growth. Words such as “may,” “could,” “should,” “would,” “will,” ”will likely result,” ”believe,” ”expect,” ”plan,” ”will continue,” ”is anticipated,” ”estimate,” ”intend,” ”project,” and similar expressions are intended to identify these forward-looking statements. We wish to caution readers not to place undue reliance on any such forward-looking statements, each of which speaks only as of the date made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical earnings than those presently anticipated or projected.
Critical Accounting Policies
In reviewing and understanding financial information for the Company, you are encouraged to read and understand the significant accounting policies used in preparing our consolidated financial statements. The accounting and financial reporting policies of the Company conform to accounting principles generally accepted in the United States of America and to general practices within the banking industry. Accordingly, the financial statements require certain estimates, judgments, and assumptions, which are believed to be reasonable, based upon the information available. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of income and expenses during the period s presented. The following accounting policy comprises those that management believes are the most critical to aid in fully understanding and evaluating our reported financial results. This policy requires numerous estimates or economic assumptions that may prove inaccurate or may be subject to variations, which may significantly affect our reported results and financial condition for the period or in future periods.
The Company’s critical accounting policy involving the more significant judgments and assumptions used in the preparation of the condensed consolidated financial statements as of September 30, 2010 has remained unchanged from December 31, 2009. This policy relates to the allowance for loan losses. This critical accounting policy is incorporated by reference under Item 8 “Financial Statements and Supplementary Data” in the Annual Report on Form 10-K for the year ended December 31, 2009.
Comparison of Financial Condition at September 30, 2010 and December 31, 2009
Total assets increased $6.1 million, or 26.5%, to $29.4 million at September 30, 2010 from $23.2 million at December 31, 2009. The increase was primarily the result of an increase in interest-earning deposits due to our deposit growth along with an increase in loans.
Net loans receivable increased by $1.8 million, or 13.7%, to $14.6 million at September 30, 2010 from $12.8 million at December 31, 2009. One- to four-family residential real estate loans increased $1.3 million, or 11.6%, to $12.9 million at September 30, 2010 from $11.6 million at December 31, 2009. Real estate construction loans decreased $123,000, or 61.5%, to $77,000 at September 30, 2010 from $200,000 at December 31, 2009. Home equity lines of credit increased $103,000, or 226.4% to $149,000 at September 30, 2010 from $46,000 at December 31, 2009. Commercial loans increased to $580,000 at September 30, 2010 from $-0- at December 31, 2009. Other types of loans decreased a net amount of $114,000, or 10.8%, to $939,000 at September 30, 2010 from $1.1 mi llion at December 31, 2009. The net increase during this period reflected a continued emphasis in growing our loan portfolio in our market area.
Our allowance for loan losses totaled $99,000 at September 30, 2010 and $63,500 at December 31, 2009. At September 30, 2010, our allowance for loan losses totaled 0.67% of total loans. Management will continue to monitor the allowance for loan losses as economic conditions and our performance dictate. Although we maintain our allowance for loan losses at a level which we consider to be adequate to provide for potential losses, there can be no assurance that future losses will not exceed estimated amounts or that additional provisions for loan losses will not be required in future periods.
Available-for-sale securities decreased $565,000, or 13.3%, to $3.7 million at September 30, 2010 from $4.3 million at December 31, 2009. The decrease was the result of purchases in the amount of $1.2 million and an increase of $26,000 in fair value offset by $8,000 in amortization, $765,000 in called securities, $330,000 in maturities and $705,000 in principal reductions on mortgage back securities.
Premises and equipment increased $643,000, or 152.7%, to $1.1 million at September 30, 2010 from $421,000 at December 31, 2009. This increase was a result of the purchase of an additional branch office at 2211 North Belt Highway in St. Joseph, Missouri. There were no deposits or loans acquired as part of this transaction.
Deposits increased $6.3 million, or 41.4%, to $21.6 million at September 30, 2010 from $15.3 million at December 31, 2009. This increase was due to savings deposits increasing $5.1 million, or 128.1%, to $9.2 million at September 30, 2010 from $4.1 million at December 31, 2009. Time deposits increased $1.2 million, or 10.1%, to $12.4 million at September 30, 2010 from $11.2 million at December 31, 2009. The increase in deposits resulted primarily from a more aggressive marketing campaign, competitive short-term savings rates offered during the period, and from calls to existing and potential clients requesting their business.
Total stockholders’ equity decreased $296,000 to $7.6 million at September 30, 2010 from $7.9 million at December 31, 2009. This decrease was primarily due to a net loss in the amount of $316,000 for the nine months ended September 30, 2010 offset by a net change in unrealized appreciation of available-for-sale securities of $20,000.
Comparison of Operating Results for the Nine Months Ended September 30, 2010 and September 30, 2009
General. Net loss increased $76,000 to $(316,000) for the nine months ended September 30, 2010 from $(240,000) for the nine months ended September 30, 2009. The primary reasons for the increase were a $111,000 increase in non-interest expense, a $14,000 increase in provision for loan losses offset by interest income increasing $9,000, interest expense decreasing $34,000, the credit for income taxes increasing $5,000, and non-interest income increasing $1,000.
Interest Income. Interest income increased $9,000, or 1.1%, to $782,000 for the nine months ended September 30, 2010 from $773,000 for the nine months ended September 30, 2009. The increase in interest income resulted from a $96,000 increase in interest income and fees on loans, a $33,000 increase in interest income on interest-earning deposits offset by a $120,000 decrease in interest income on available-for-sale securities.
Interest income and fees on loans increased $96,000, or 18.9%, to $604,000 for the nine months ended September 30, 2010 from $508,000 for the nine months ended September 30, 2009. The average balance of loans increased $2.6 million, or 24.0%, to $13.7 million for the nine months ended September 30, 2010 from $11.1 million for the nine months ended September 30, 2009. In addition, the average yield decreased to 5.74% for the nine months ended September 30, 2010 from 6.12% for the nine months ended September 30, 2009. The increase in the average balance of loans resulted primarily from increases in one- to four-family residential loans and increases in commercial loans.
Interest income on available-for-sale securities decreased $120,000, or 50.7% to $117,000 for the nine months ended September 30, 2010 from $237,000 for the nine months ended September 30, 2009. The average balance of investment securities decreased $2.0 million, or 33.5%, to $3.8 million for the nine months ended September 30, 2010 from $5.8 million for the nine months ended September 30, 2009. In addition, the average yield on the available-for-sale securities portfolio decreased to 3.86% for the nine months ended September 30, 2010 from 4.23% for the nine months ended September 30, 2009.
Interest income on interest-earning deposits increased $33,000, or 120.1%, to $61,000 for the nine months ended September 30, 2010 from $28,000 for the nine months ended September 30, 2009. The average balance of interest-earning deposits increased $1.6 million, or 36.0%, to $6.3 million for the nine months ended September 30, 2010 from $4.7 million for the nine months ended September 30, 2009. In addition, the average yield on interest-earning deposits decreased to 1.56% for the nine months ended September 30, 2010 from 2.12% for the nine months ended September 30, 2009.
Interest Expense. Interest expense decreased $34,000, or 10.5%, to $288,000 for the nine months ended September 30, 2010 from $322,000 for the nine months ended September 30, 2009. The decrease in interest expense on interest-bearing deposits was due to a decrease in rates. The average rate paid on interest-bearing deposits decreased 69 basis points to 2.22% for the nine months ended September 30, 2010 from 2.91% for the nine months ended September 30, 2009. We experienced increases in the average balances of savings accounts, NOW accounts, and a small increase in certificates of deposit. There was a $2.4 million, or 16.2%, increase in the av erage balance of interest-bearing deposits to $17.3 million for the nine months ended September 30, 2010 from $14.9 million for the nine months ended September 30, 2009. The increase in deposits resulted primarily from a more aggressive marketing campaign, competitive short-term savings rates offered during the period, and from calls to existing and potential clients requesting their business.
Provision for Loan Losses. The provision for loan losses is evaluated on a regular basis by our management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. The provision for loan losses was $35,000 for the nine months ended September 30, 2010 and $21,000 for the nine months ended September 30, 2009. There were no non-performing loans, loans delinquent 60 days or more, charge-offs or recoveries during the nine mo nths ended September 30, 2010 or 2009.
Recent weakness in economic conditions have had a severe impact on nationwide housing and financial markets, and the financial services industry in general. Continuation of these trends could adversely affect the local housing, construction and banking industries, and weaken the local economy. If borrowers are negatively affected by future adverse economic conditions, our non-performing assets may increase. The allowance for loan losses as a percentage of total loans was 0.67% and 0.49% at September 30, 2010 and December 31, 2009, respectively. We used the same methodology in calculating the provision for loan losses during each of the nine months ended September 30, 2010 and September 30, 2009. The provision for loan losses increase d primarily due to the Association engaging in a new line of commercial lending including one unsecured commercial loan of $500,000.
Non-interest Income. Non-interest income was $6,000 for the nine months ended September 30, 2010 as compared to $5,000 for the nine months ended September 30, 2009.
Non-interest Expense. Non-interest expense increased $111,000 or 16.14% to $798,000 for the nine months ended September 30, 2010 from $687,000 for the nine months ended September 30, 2009. Salaries and employee benefits expense increased $85,000 to $401,000 for the nine months ended September 30, 2010 from $316,000 for the nine months ended September 30, 2009 due to increased staffing and ESOP expense. Net occupancy expense increased $10,000 to $72,000 for the nine months ended September 30, 2010 from $62,000 for the nine months ended September 30, 2009 due to increased expenses resulting from the purchase of an additional branch office. Depreciation expense increased $18, 000 to $25,000 for the nine months ended September 30, 2010 from $7,000 for the nine months ended September 30, 2009 due to the purchase of an additional branch office. Legal expense decreased $22,000 to $29,000 for the nine months ended September 30, 2010 from $51,000 for the nine months ended September 30, 2009 primarily due to a reduction in fees related to our public filings. Audit fees and exams expense decreased $26,000 to $115,000 for the nine months ended September 30, 2010 from $141,000 for the nine months ended September 30, 2009. Franchise and special taxes increased $5,000 to $21,000 for the nine months ended September 30, 2010 from $16,000 for the nine months ended September 30, 2009 due to increased staffing. Marketing expense increased $12,000 to $41,000 for the nine months ended September 30, 2010 from $29,000 for the nine months ended September 30, 2009 due to a more aggressive marketing campaign.
Other expense increased $29,000 to $94,000 for the nine months ended September 30, 2010 from $65,000 for the nine months ended September 30, 2009 primarily due to increased FDIC assessments and increased miscellaneous operating expenses.
Income Tax Expense (Benefit). The credit for income taxes increased by $5,000 to $(18,000) for the nine months ended September 30, 2010 from $(13,000) for the nine months ended September 30, 2009.
Comparison of Operating Results for the Three Months Ended September 30, 2010 and September 30, 2009
General. Net loss increased $35,000 to $(109,000) for the three months ended September 30, 2010 from $(74,000) for the three months ended September 30, 2009. The primary reasons for the increase were a $56,000 increase in non-interest expense and interest income decreasing $8,000 offset by a $4,000 decrease in provision for loan losses, and a decrease in interest expense by $5,000 and the provision (credit) for income taxes increasing $19,000.
Interest Income. Interest income decreased $8,000, or 2.96%, to $260,000 for the three months ended September 30, 2010 from $268,000 for the three months ended September 30, 2009. The decrease in interest income resulted from a $30,000 increase in interest income and fees on loans and a $5,000 increase in interest income on interest-earning deposits offset by a $43,000 decrease in interest income on available-for-sale securities.
Interest income and fees on loans increased $30,000, or 16.4%, to $209,000 for the three months ended September 30, 2010 from $179,000 for the three months ended September 30, 2009. The average balance of loans increased $2.5 million, or 21.0%, to $14.3 million for the three months ended September 30, 2010 from $11.8 million for the three months ended September 30, 2009. The average yield was 5.64% for the three months ended September 30, 2010 and 6.05% at September 30, 2009. The increase in the average balance of loans resulted primarily from increases in one- to four-family residential loans and increases in commercial loans.
Interest income on available-for-sale securities decreased $43,000, or 51.2%, to $41,000 for the three months ended September 30, 2010 from $84,000 for the three months ended September 30, 2009. The average balance of investment securities decreased $2.6 million, or 43.0%, to $3.4 million for the three months ended September 30, 2010 from $6.0 million for the three months ended September 30, 2009. In addition, the average yield on the available-for-sale securities portfolio decreased to 3.49% for the three months ended September 30, 2010 from 4.24% for the three months ended September 30, 2009.
Interest income on interest-earning deposits increased $5,000, or 119.6%, to $10,000 for the three months ended September 30, 2010 from $5,000 for the three months ended September 30, 2009. The average balance of interest-earning deposits increased $3.7 million, or 97.7%, to $7.6 million for the three months ended September 30, 2010 from $3.9 million for the three months ended September 30, 2009. In addition, the average yield on interest-earning deposits decreased to 1.26% for the three months ended September 30, 2010 from 2.08% for the three months ended September 30, 2009.
Interest Expense. Interest expense decreased $5,000, or 5.3%, to $102,000 for the three months ended September 30, 2010 from $107,000 for the three months ended September 30, 2009. The average rate paid on interest-bearing deposits decreased 69 basis points to 2.12% for the three months ended September 30, 2010 from 2.81% for the three months ended September 30, 2009. We experienced increases in the average balances of savings accounts, NOW accounts and certificates of deposit. There was a $3.8 million, or 25.0%, increase in the average balance of interest-bearing deposits to $19.2 million for the three months ended September 30, 2010 from $15.4 million for the three mo nths ended September 30, 2009. The increase in deposits resulted primarily from a more aggressive marketing campaign, competitive short-term savings rates offered during the period, and from calls to existing and potential clients requesting their business.
Provision for Loan Losses. The provision for loan losses was $-0- for the three months ended September 30, 2010 and $4,000 for the three months ended September 30, 2009. The provision for loan losses decreased as the Association did not require an adjustment to the allowance for loan losses for the three months ended September 30, 2010. There were no non-performing loans, loans delinquent 60 days or more, charge-offs or recoveries during the three months ended September 30, 2010 or 2009.
The allowance for loan losses as a percentage of total loans was 0.67% and 0.35% at September 30, 2010 and September 30, 2009, respectively. We used the same methodology in calculating the provision for loan losses during each of the three months ended September 30, 2010 and September 30, 2009. There was no change in the provision for loan losses during the three months ended September 30, 2010 as the industry rates used in calculating the provision for loan losses for most loan categories decreased and real estate construction loans decreased $123,000, or 61.5%, to $77,000 at September 30, 2010 from $200,000 at December 31, 2009.
Non-interest Expense. Non-interest expense increased $56,000, or 25.0%, to $279,000 for the three months ended September 30, 2010 from $223,000 for the three months ended September 30, 2009. Salaries and employee benefits expense increased $39,000 to $148,000 for the three months ended September 30, 2010 from $109,000 for the three months ended September 30, 2009 due to increased staffing and ESOP expense. Net occupancy expense increased $6,000 to $25,000 for the three months ended September 30, 2010 from $19,000 for the three months ended September 30, 2009 due to increased expenses resulting from the purchase of an additional branch office. Depreciation expense increased $18,000 to $20,000 for the three months ended September 30, 2010 from $2,000 for the three months ended September 30, 2009 due to the purchase of an additional branch office.
Legal expense decreased $31,000 to $1,000 for the three months ended September 30, 2010 from $32,000 for the three months ended September 30, 2009 primarily due to a reduction in fees related to our public filings. Audit fees and expenses decreased $10,000 to $21,000 for the three months ended September 30, 2010 from $31,000 for the three months ended September 30, 2009. Marketing expense increased $12,000 to $21,000 for the three months ended September 30, 2010 from $9,000 for the three months ended September 30, 2009 due to a more aggressive marketing campaign.
Income Tax Expense (Benefit). The provision (credit) for income taxes increased by $19,000 to $(11,000) for the three months ended September 30, 2010 from $8,000 for the three months ended September 30, 2009.
Liquidity and Capital Resources
Liquidity is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, loan repayments and maturities of securities. In addition, we have the ability to borrow funds from the Federal Home Loan Bank of Des Moines. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows and mortgage prepayments are greatly influenced by general interest rates, economic conditions and competition.
Our Board of Directors is responsible for establishing and monitoring our liquidity targets and strategies in order to ensure that sufficient liquidity exists for meeting the borrowing needs and deposit withdrawals of our customers, as well as unanticipated contingencies. We believe that we have enough sources of liquidity to satisfy our short- and long-term liquidity needs as of September 30, 2010.
We regularly monitor and adjust our investments in liquid assets based upon our assessment of: (1) expected loan demand; (2) expected deposit flows; (3) yields available on interest-earning deposits and securities; and (4) the objectives of our asset/liability management program. Excess liquid assets are invested generally in interest-earning deposits and short- and intermediate-term securities.
Our most liquid assets are cash and cash equivalents and interest-earning deposits in other institutions. The levels of these assets are dependent on our operating, financing, lending and investing activities during any given period. At September 30, 2010, cash and cash equivalents totaled $1.8 million and interest-earning deposits in other institutions totaled $8.0 million. Securities classified as available-for-sale, which provide additional sources of liquidity, totaled $3.7 million at September 30, 2010. On September 30, 2010, we had no outstanding borrowings from the Federal Home Loan Bank of Des Moines. We have the ability to borrow from the Federal Home Loan Bank of Des Moines, although we have not currently established any cr edit lines.
At September 30, 2010 and December 31, 2009, we had no loan commitments outstanding. In addition, at September 30, 2010 we had unused lines-of-credit to borrowers totaling $390,000. At December 31, 2009, we had unused lines-of-credit to borrowers totaling $153,000. Certificates of deposit due within one year of September 30, 2010 totaled $3.1 million, or 14.3% of total deposits. If these deposits do not remain with us, we will be required to seek other sources of funds, including other deposits and Federal Home Loan Bank advances. Depending on market conditions, we may be required to pay higher rates on such deposits or borrowings than we currently pay on the certificates of deposit due on or before September 30, 2011. We believe, however, based on past experience that a significant portion of such deposits will remain with us. We have the ability to attract and retain deposits by adjusting the interest rates offered.
Our primary investing activities are originating loans, and purchasing interest-earning deposits and securities. During the nine months ended September 30, 2010 and 2009, we originated $4.0 million and $3.6 million, respectively, of loans. During the nine months ended September 30, 2010 and 2009, we had net purchases of interest-earning deposits totaling $3.8 million and $288,000, respectively. During those periods, we had net decreases in securities of $565,000 and net increases in securities of $176,000, respectively.
Financing activities consist primarily of activity in deposit accounts. We experienced a net increase in total deposits of $6.3 million for the nine months ended September 30, 2010, and a net decrease in total deposits of $1.0 million for the nine months ended September 30, 2009. The 2010 increase in deposits resulted primarily from a more aggressive marketing campaign, competitive short-term savings rates offered during the period, and from calls to existing and potential clients requesting their business. The 2009 decrease was due to subscription proceeds held by the Association at December 31, 2008, that were applied to proceeds from common stock issued on January 30, 2009.
The Company is subject to various regulatory capital requirements, including a risk-based capital measure. The risk-based capital guidelines include both a definition of capital and a framework for calculating risk-weighted assets by assigning balance sheet assets and off-balance sheet items to broad risk categories. At September 30, 2010 and December 31, 2009, the Company and the Association exceeded all regulatory capital requirements. The Company and the Association are considered “well capitalized” under regulatory guidelines.
The net proceeds from the stock offering significantly increased our liquidity and capital resources. Over time, the initial level of liquidity will likely be reduced as net proceeds from the stock offering are used for general corporate purposes, including the funding of loans.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
There have been no material changes in the quantitative and qualitative information about market risk from the information provided in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.
| Item 4T. | Controls and Procedures |
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(a) | Evaluation of disclosure controls and procedures. |
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| | Under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this quarterly report. Based upon that evaluation, the Principal Executive Officer and Principal Financial Officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission&# 8217;s rules and forms. |
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(b) | Changes in internal control over financial reporting. |
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| | There were no changes made in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. |
| PART II – OTHER INFORMATION |
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| Item 1. | Legal Proceedings |
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| | St. Joseph Bancorp, Inc. and Midwest Federal Savings and Loan Association are subject to various legal actions arising in the normal course of business. At September 30, 2010, we were not involved in any legal proceedings, the outcome of which we believe to be material to our financial condition or results of operations. |
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| Item 1A. | Risk Factors |
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| | Not applicable to a smaller reporting company. |
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| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
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| | None |
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| Item 3. | Defaults Upon Senior Securities |
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| | None |
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| Item 4. | [Reserved] |
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| Item 5. | Other Information |
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| | None |
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| Item 6. | Exhibits |
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| Exhibit 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
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| Exhibit 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of Sarbanes-Oxley Act of 2002 |
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| Exhibit 32 | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of Sarbanes-Oxley Act of 2002 |
