SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED September 30, 1999
---------------------------------------------------
Commission File No. 0-25914
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CASTLE BANCGROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-3238190
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
121 West Lincoln Highway
DeKalb, Illinois 60115-3609
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (815) 758-7007
---------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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 [ ]
The registrant had 4,367,873 shares of Common Stock outstanding as of October
31, 1999.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
============================================================================================================
ASSETS September 30, December 31,
1999 1998
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 11,738 12,270
Investment securities (note 2) 129,203 132,060
Mortgage loans held for sale, lower of cost or market 17,951 67,354
Loans (note 3) 345,380 329,197
Less:
Allowance for possible loan losses (note 3) 4,560 4,775
Unearned income and deferred loan fees, net 419 2,388
- ------------------------------------------------------------------------------------------------------------
Net loans 340,401 322,034
Premises and equipment 12,434 11,554
Goodwill, net of amortization 3,640 3,967
Other assets 6,752 6,216
- ------------------------------------------------------------------------------------------------------------
$522,119 555,455
============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Non-interest-bearing $ 44,787 50,371
Interest-bearing 404,882 401,794
- ------------------------------------------------------------------------------------------------------------
Total deposits 449,669 452,165
Short-term borrowings 20,330 44,197
Long-term debt 9,050 10,300
Other liabilities 2,381 7,248
- ------------------------------------------------------------------------------------------------------------
Total liabilities 481,430 513,910
- ------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Common stock, $.33 1/3 par value; 25,000,000 shares authorized, 4,366,422 and
4,343,710 shares issued and outstanding in 1999 and 1998, respectively 1,455 1,448
Additional paid-in capital 6,794 6,439
Accumulated other comprehensive (loss) earnings (2,342) 935
Retained earnings 34,782 32,723
- ------------------------------------------------------------------------------------------------------------
Total stockholders' equity 40,689 41,545
Commitments and contingent liabilities
- ------------------------------------------------------------------------------------------------------------
$522,119 555,455
============================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
==============================================================================================
3 Months Ended
Sept. 30, 1999 Sept. 30, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 7,063 7,729
Interest and dividends on investment securities:
Taxable 1,721 1,989
Nontaxable 263 165
Interest on excess funds sold 3 55
Interest on mortgage loans held for sale 407 379
- ----------------------------------------------------------------------------------------------
Total interest income 9,457 10,317
- ----------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,144 4,465
Interest on short-term borrowings 399 207
Interest on long-term debt 78 164
- ----------------------------------------------------------------------------------------------
Total interest expense 4,621 4,836
- ----------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 4,836 5,481
Provision for possible loan losses 76 147
- ----------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,760 5,334
- ----------------------------------------------------------------------------------------------
Other operating income
Trust fees 205 208
Deposit service charges 100 85
Other service charges 483 304
Investment securities gains, net 1 (1)
Mortgage loan origination income, net 2,660 2,698
Other income 240 299
- ----------------------------------------------------------------------------------------------
Total other operating income 3,689 3,593
- ----------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 5,063 4,678
Net occupancy expense of premises 431 450
Furniture and fixtures 411 403
Office supplies 142 134
Outside services 356 358
Advertising expense 114 153
FDIC insurance assessment 13 12
Postage and courier 137 164
Telephone expense 146 105
Amortization expense - goodwill 109 172
Other expenses 504 393
- ----------------------------------------------------------------------------------------------
Total other operating expenses 7,426 7,022
- ----------------------------------------------------------------------------------------------
Earnings before income taxes 1,023 1,905
Income tax expense 243 645
- ----------------------------------------------------------------------------------------------
Net earnings $ 780 1,260
==============================================================================================
Net earnings applicable to common stock $ 780 1,254
==============================================================================================
Basic earnings per common share $ .18 .29
==============================================================================================
Diluted earnings per common share $ .18 .28
==============================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
==============================================================================================
9 Months Ended
Sept. 30, 1999 Sept. 30, 1998
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and dividends on investment securities:
Interest and fees on loans $ 21,099 22,010
Taxable 5,069 6,161
Nontaxable 781 470
Interest on excess funds sold 14 71
Interest on mortgage loans held for sale 1,567 1,453
- ----------------------------------------------------------------------------------------------
Total interest income 28,530 30,165
- ----------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 12,391 13,195
Interest on short-term borrowings 989 1,023
Interest on long-term debt 472 516
- ----------------------------------------------------------------------------------------------
Total interest expense 13,852 14,734
- ----------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 14,678 15,431
Provision for possible loan losses 594 421
- ----------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 14,084 15,010
- ----------------------------------------------------------------------------------------------
Other operating income
Trust fees 616 582
Deposit service charges 276 261
Other service charges 1,148 901
Investment securities gains, net (note 2) 250 71
Mortgage loan origination income, net 8,862 8,139
Other income 901 875
- ----------------------------------------------------------------------------------------------
Total other operating income 12,053 10,829
- ----------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 15,133 13,198
Net occupancy expense of premises 1,439 1,309
Furniture and fixtures 1,215 1,117
Office supplies 454 401
Outside services 944 832
Advertising expense 453 467
FDIC insurance assessment 39 41
Postage and courier 429 443
Telephone expense 427 316
Amortization expense - goodwill 327 390
Loss on sale of loans 513 0
Other expenses 1,640 1,437
- ----------------------------------------------------------------------------------------------
Total other operating expenses 23,013 19,951
- ----------------------------------------------------------------------------------------------
Earnings before income taxes 3,124 5,888
Income tax expense 760 2,013
- ----------------------------------------------------------------------------------------------
Net earnings $ 2,364 3,875
==============================================================================================
Net earnings applicable to common stock $ 2,364 3,857
==============================================================================================
Basic earnings per common share $ .54 .89
==============================================================================================
Diluted earnings per common share $ .54 .88
==============================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
- -----------------------------------------------------------------------------
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN
THOUSANDS, EXCEPT SHARE DATA)
(UNAUDITED)
================================================================================================
ACCUMULATED
OTHER
COMMON RETAINED COMPREHENSIVE
STOCK SURPLUS EARNINGS EARNINGS TOTAL
(LOSS)
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 1999 $ 1,448 6,439 32,723 935 41,545
Comprehensive Earnings
Net Earnings - - 2,364 - 2,364
Unrealized loss on investment
securities - - - (5,089) (5,089)
Reclassification adjustments for
gains included in net earnings - - - (250) (250)
Income tax effect - - - 2,062 2,062
-------
Total comprehensive earnings - - - - (913)
Issuance of 22,712 shares of common stock 7 355 - - 362
Cash dividends on common stock - - (305) - (305)
-----------------------------------------------------
Balance as of Sept. 30, 1999 $ 1,455 6,794 34,782 (2,342) 40,689
=====================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
(UNAUDITED)
9 Months Ended
Sept. 30, 1999 Sept. 30, 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 26,547 28,564
Fees received 12,527 11,337
Net decrease in mortgage loans held for sale 49,403 20,098
Interest paid (14,201) (14,709)
Cash paid to suppliers and employees (25,034) (18,874)
Income taxes paid (792) (1,871)
- -----------------------------------------------------------------------------------------
Net cash provided by operating activities 48,450 24,545
- -----------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investment securities 15,053 42,315
Sales of investment securities 26,828 22,050
Purchases of investment securities (44,294) (71,561)
Net (increase) / decrease in loans (17,040) (4,881)
Premises and equipment expenditures (1,972) (1,448)
Other real estate owned 0 0
- -----------------------------------------------------------------------------------------
Net cash used in investing activities (21,425) (13,525)
- -----------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts, and savings accounts 1,032 22,846
Net (decrease) in certificates of deposit (3,528) (6,448)
Dividends paid on preferred stock 0 (18)
Dividends paid on common stock (305) (510)
Net change in short-term debt (23,868) (27,773)
Proceeds from issuance of common stock 362 412
Issuance of long-term debt 0 1,000
Repayment of long-term debt (1,250) (475)
- -----------------------------------------------------------------------------------------
Net cash (used in) financing activities (27,557) (10,966)
- -----------------------------------------------------------------------------------------
Net change in cash and cash equivalents (532) 54
Cash and cash equivalents at beginning of year 12,270 11,377
- -----------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 11,738 11,431
=========================================================================================
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 2,364 3,875
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,505 1,239
Provision for possible loan losses 594 421
Gains on sale of investment securities (250) (71)
(Decrease) increase in:
Income taxes payable (32) 145
Interest payable (350) 25
Unearned income (1,969) 132
Other liabilities (2,219) (532)
Decrease (increase) in:
Interest receivable 10 (958)
Other assets (581) 367
Decrease in mortgage loans held for sale 49,403 20,098
Discount accretion recorded as income (274) (425)
Premium amortization charged against income 249 229
- -----------------------------------------------------------------------------------------
$ 48,450 24,545
=========================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
6
<PAGE>
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Castle BancGroup, Inc.
(Company) and subsidiaries are prepared in conformity with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These consolidated
financial statements should be read in conjunction with the Company's 1998
Annual Report on Form 10-K. In the opinion of management, all normal recurring
adjustments necessary for a fair presentation of the financial position and the
results of operations for the periods presented have been included. Results of
operations for interim periods are not necessarily indicative of the results
that may be expected for the year.
(2) INVESTMENT SECURITIES
Investments in debt and equity securities have been classified as available
for sale and reported at fair value. The amortized value is adjusted for
amortization of premiums and accretion of discounts using a method that
approximates level yield. Unrealized gains and losses, net of related deferred
income taxes, are reported as a component of accumulated other comprehensive
earnings (loss).
A comparison of amortized cost and fair value of investment securities
available-for-sale at September 30, 1999 and December 31, 1998 follows (dollars
in thousands):
<TABLE>
<CAPTION>
=================================================================================
September 30, 1999
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 66,553 35 (1,567) 65,021
Obligations of state and political
subdivisions 21,117 16 (737) 20,396
Mortgage-backed securities 42,762 23 (1,626) 41,159
- ---------------------------------------------------------------------------------
Total debt securities 130,432 74 (3,930) 126,576
- ---------------------------------------------------------------------------------
Federal Home Loan Bank stock 2,052 0 0 2,052
Other Equity securities 575 0 0 575
- ---------------------------------------------------------------------------------
Total securities $ 133,059 74 (3,930) 129,203
=================================================================================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
=================================================================================
December 31, 1998
-------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 66,082 1,008 (17) 67,073
Obligations of state and political
subdivisions 15,329 277 (36) 15,570
Mortgage-backed securities 47,050 381 (130) 47,301
- ---------------------------------------------------------------------------------
Total debt securities 128,461 1,666 (183) 129,944
- ---------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,673 0 0 1,673
Other Equity securities 443 0 0 443
- ---------------------------------------------------------------------------------
Total securities $ 130,577 1,666 (183) 132,060
=================================================================================
</TABLE>
The amortized cost and fair value of securities available for sale at
September 30, 1999 by contractual maturity, are shown below (dollars in
thousands). Actual maturities may differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
September 30, 1999
------------------------
Amortized Fair
cost value
- ------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 5,553 5,552
Due after one year through five years 36,699 36,053
Due after five years through ten years 32,020 31,203
Due after ten years 13,398 12,609
- ------------------------------------------------------------------
87,670 85,417
Mortgage-backed securities 42,762 41,159
- ------------------------------------------------------------------
Total debt securities 130,432 126,576
- ------------------------------------------------------------------
Federal Home Loan Bank stock 2,052 2,052
Other Equity securities 575 575
- ------------------------------------------------------------------
Total securities $ 133,059 129,203
==================================================================
</TABLE>
Gross losses of approximately $61,648 and $5,477 occurred from security
activity during the nine months ended September 30, 1999 and 1998, respectively.
Gross gains of $311,695 and $76,551 occurred from security activity during the
nine-month period ended September 30, 1999 and 1998, respectively. All security
gains and losses that occurred during 1999 and 1998 were as a result of
transactions involving available for sale securities.
Investment securities carried at approximately $78,232,000 and $83,062,000
at September 30, 1999 and December 31, 1998, respectively, were pledged to
secure deposits and for other purposes as permitted or required by law.
8
<PAGE>
(3) LOANS
The composition of the loan portfolio at the dates shown is as follows
(dollars in thousands):
<TABLE>
<CAPTION>
================================================================================
Sept. 30, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 100,131 85,790
Real estate mortgage 226,418 213,761
Consumer 18,549 29,168
Lease financing receivables 282 478
- --------------------------------------------------------------------------------
Total loans, gross $ 345,380 329,197
================================================================================
</TABLE>
At September 30, 1999 and December 31, 1998, the following items existed
(dollars in thousands):
<TABLE>
<CAPTION>
==================================================================================================
Sept. 30, 1999 Dec. 31, 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans and leases $ 2,939 2,262
Loans past due 90 days or more and still accruing 308 544
Restructured loans still accruing and less than 90 days past due 123 208
- --------------------------------------------------------------------------------------------------
Total non-performing loans and leases $ 3,370 3,014
==================================================================================================
</TABLE>
The following is a summary of activity in the allowance for possible loan
losses (dollars in thousands):
<TABLE>
<CAPTION>
================================================================================
9 months ended 9 months ended
Sept. 30, 1999 Sept. 30, 1998
- --------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of period $ 4,775 4,646
Provision charged to expense 594 421
Recoveries on loans previously charged off 162 356
- --------------------------------------------------------------------------------
5,531 5,423
Less loans charged off 526 758
Less allowance on loans sold 445 0
- --------------------------------------------------------------------------------
Balance, end of period $ 4,560 4,665
================================================================================
</TABLE>
9
<PAGE>
The following is a summary of loan loss experience for the nine months
ended September 30, 1999, including an allocation of the allowance, by loan
category, at period end: (dollars in thousands)
<TABLE>
<CAPTION>
====================================================================================================
Commercial Real
and Agricultural Estate Consumer Leases Unalloc. Total
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ 1,811 1,173 1,586 5 200 4,775
Provision charged to expense 0 187 407 0 0 594
Recoveries on loans previously
charged off 99 3 60 0 0 162
- ----------------------------------------------------------------------------------------------------
1,910 1,363 2,053 5 200 5,531
Less loans charged off 17 184 325 0 0 526
Less allowance on loans sold 0 0 445 0 0 445
- ----------------------------------------------------------------------------------------------------
Balance, September 30, 1999 $ 1,893 1,179 1,283 5 200 4,560
====================================================================================================
Ratios:
Loans in category to total loans 28.99% 65.56% 5.37% .08% N/A 100.00%
====================================================================================================
</TABLE>
The allocation of the allowance for loan losses is based on historical trends in
charge-offs, general economic conditions, peer comparisons and management
experience.
(4) OPERATING SEGMENTS
The Company's operations include two primary segments: banking and
mortgage banking. Through its banking subsidiaries' network of 10 retail
banking facilities in Northern Illinois, the Company provides traditional
community banking services such as accepting deposits and making loans. The
Mortgage Banking segment is entirely related to the activities conducted through
the Company's subsidiary, CasBanc Mortgage, Inc. (CMI), including the
origination and brokerage of primarily residential mortgage loans for sale to
various investors. The Company's two reportable segments are strategic business
units that are separately managed as they offer different products and services
and have different marketing strategies. Smaller operating segments are
combined and consist of consumer finance and holding company operations. The
Company's consumer finance subsidiary, Castle Finance Company (CFC), ceased all
new lending activities effective with the sale of a substantial portion of the
loan portfolio in the first quarter of 1999.
10
<PAGE>
<TABLE>
<CAPTION>
Operating segment information is as follows:
(Dollars in thousands)
==========================================================================================================
Mortgage Consolidated
Banking Banking Other Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Three months ended September 30, 1999
- -------------------------------------
Interest income $ 9,521 39 (103) 9,457
Interest expense 4,611 0 10 4,621
- ----------------------------------------------------------------------------------------------------------
Net interest income before provision for possible loan losses 4,910 39 (113) 4,836
Provision for possible loan losses 64 12 0 76
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,846 27 (113) 4,760
Other operating income 1,267 2,383 39 3,689
Other operating expenses 3,660 3,006 760 7,426
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 2,453 (596) (834) 1,023
Income tax expense (benefit) 813 (231) (339) 243
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,640 (365) (495) 780
- ----------------------------------------------------------------------------------------------------------
September 30, 1999
- ------------------
Assets $ 525,518 3,854 (7,253) 522,119
==========================================================================================================
Three months ended September 30, 1998
- -------------------------------------
Interest income $ 9,954 74 289 10,317
Interest expense 4,753 1 82 4,836
- ----------------------------------------------------------------------------------------------------------
Net interest income before provision for possible loan losses 5,201 73 207 5,481
Provision for possible loan losses 72 0 75 147
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 5,129 73 132 5,334
Other operating income 1,277 2,315 1 3,593
Other operating expenses 3,931 2,107 984 7,022
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 2,475 281 (851) 1,905
Income tax expense (benefit) 859 109 (323) 645
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,616 172 (528) 1,260
- ----------------------------------------------------------------------------------------------------------
September 30, 1998
- ------------------
Assets $ 510,070 4,589 (5,014) 509,645
==========================================================================================================
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
Operating segment information is as follows:
(Dollars in thousands)
Mortgage Consolidated
Banking Banking Other Total
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Nine months ended September 30,1999
- -----------------------------------
Interest income $ 28,424 166 (60) 28,530
Interest expense 13,889 46 (83) 13,852
- ----------------------------------------------------------------------------------------------------------
Net interest income before provision for possible loan losses 14,535 120 23 14,678
Provision for possible loan losses 248 34 312 594
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 14,287 86 (289) 14,084
Other operating income 4,250 7,784 19 12,053
Other operating expenses 11,030 8,823 3,160 23,013
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 7,507 (953) (3,430) 3,124
Income tax expense (benefit) 2,525 (370) (1,395) 760
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 4,982 (583) (2,035) 2,364
- ----------------------------------------------------------------------------------------------------------
September 30, 1999
- ------------------
Assets $ 525,518 3,854 (7,253) 522,119
==========================================================================================================
Nine months ended September 30, 1998
- ------------------------------------
Interest income $ 28,977 183 1,005 30,165
Interest expense 14,323 1 410 14,734
- ----------------------------------------------------------------------------------------------------------
Net interest income before provision for possible loan losses 14,654 182 595 15,431
Provision for possible loan losses 196 0 225 421
- ----------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 14,458 182 370 15,010
Other operating income 3,922 6,821 86 10,829
Other operating expenses 11,191 6,192 2,568 19,951
- ----------------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 7,189 811 (2,112) 5,888
Income tax expense (benefit) 2,497 314 (798) 2,013
- ----------------------------------------------------------------------------------------------------------
Net earnings (loss) $ 4,692 497 (1,314) 3,875
- ----------------------------------------------------------------------------------------------------------
September 30, 1998
- ------------------
Assets $ 510,070 4,589 (5,014) 509,645
==========================================================================================================
</TABLE>
12
<PAGE>
(5) COMPREHENSIVE INCOME
The FASB has issued SFAS No. 130, "Reporting Comprehensive Income," which
is effective for fiscal years beginning after December 15, 1997. This statement
establishes standards for reporting and display of comprehensive income and its
components (revenues, expenses, gains and losses) in a full set of general
purpose financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is displayed with
the same prominence as other financial statements. The Company adopted SFAS No.
130 in the first quarter of 1998.
The Company's comprehensive income for the nine month periods ended
September 30, 1999 and 1998, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------
1999 1998
-------- -------
<S> <C> <C>
Net earnings $ 2,364 $3,875
Other comprehensive earnings
Unrealized (loss)/gain on investment securities (5,089) 1,628
Reclass adjustment for net gains included in net earnings (250) (71)
Income tax effect 2,062 (593)
-------- -------
Total comprehensive (loss)/earnings $ (913) $4,839
-------- -------
</TABLE>
(6) COMMITMENTS AND CONTINGENT LIABILITIES
The Company has originated for sale to the secondary mortgage market,
through CMI, a substantial amount of one- to four-family mortgage loans. These
mortgage loans are sold to investors in the secondary mortgage market with
recourse back to CMI, meaning that CMI may be obligated to repurchase these
loans from investors under certain circumstances. A number of circumstances may
give rise to this repurchase obligation, such as deficiency in the documentation
of a loan or early default by a borrower. The company has recently uncovered
irregularities in CMI's underwriting and documentation of certain mortgage loans
originated for sale by CMI, which may ultimately result in the inability to sell
loans currently held for sale, or the purchasers of sold loans putting them back
to CMI under the recourse provisions of the loan sale agreements. The Company's
investigation into these irregularities is in its initial phase, and it is not
possible at this time to determine the extent of the irregularities (including
the total amount of loans that may be affected by such irregularities), the
likelihood that CMI would be required to purchase the loans from the investors
or the diminution in the value of such loans after such loans are repurchased by
CMI. Accordingly, it is not possible at this time to determine the amount of
any additional provision to the Company's allowance for loan loss or other
write-offs that may be required in future periods as a result of these
irregularities or the extent of any charge-offs that may be incurred.
13
<PAGE>
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
--------------------------
Certain statements in this Quarterly Report on Form 10-Q constitute
"forward-looking statements" within the meaning of Section 21E under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). For example,
forward-looking statements may be made with respect to the Company's pricing and
fee trends, credit quality and outlook, new business results, expansion plans,
anticipated expenses and planned schedules and projected costs for Year 2000
work. The Company intends these forward-looking statements to be subject to the
safe harbor created by the Exchange Act and is including this statement to avail
itself of these safe harbor provisions. Forward-looking statements, which are
based on certain assumptions and describe future plans, strategies and
expectations of the Company, are identified by statements containing words and
phrases such as "may," "project," "are confident," "should be," "will be,"
"predict," "believe," "plan," "expect," "estimate," "anticipate" and similar
expressions. These forward-looking statements reflect the Company's current
views with respect to future events and financial performance, but are subject
to many uncertainties and factors relating to the Company's operations and
business environment, which could change at any time and which could cause
actual results to differ materially from those expressed or implied by the
forward-looking statements.
There are inherent difficulties in predicting factors that may affect the
accuracy of forward-looking statements. Potential risks and uncertainties that
may affect the Company's operations, performance, development and business
results include the following:
- - the risk of adverse changes in business conditions in the banking industry
generally and in the specific Midwestern markets in which the Company's
subsidiary banks operate;
- - changes in the legislative and regulatory environment that result in
increased competition or operating expenses;
- - changes in the interest rates and changes in monetary and fiscal policies;
- - increased competition from other financial and non-financial institutions;
- - factors that may affect the Company's ability, or the ability of its
customer or suppliers, to achieve Year 2000 readiness in a timely manner,
including the ability of its vendors, clients, counter-parties and customers to
complete their Year 2000 renovation efforts on a timely basis and in manner that
allows them to continue normal business operations or furnish products, services
or data to the Company without disruption, and the Company's ability to
accurately evaluate the Year 2000 readiness of its vendors, clients,
counter-parties and customers in this regard and, where necessary develop and
implement effective contingency plans;
- - the competitive impact of technological advances in the conduct of the
banking business; and
- - other risks set forth from time to time in the Company's filings with the
Securities and Exchange Commission.
These risks and uncertainties should be considered in evaluating forward-looking
statements, and undue reliance should not be placed on such statements. The
Company does not assume any obligation to update or revise any forward-looking
statements subsequent to the date on which they are made.
14
<PAGE>
RESULTS OF OPERATIONS
---------------------
The Company posted year-to-date net earnings of $2,364,000 at September 30,
1999, a decrease of $1,511,000, or 39% from year-to-date earnings of $3,875,000
at September 30, 1998. This decrease in earnings is primarily due to losses
recognized at CasBanc Mortgage, Inc. (CMI) due to expenses associated with the
expansion of retail mortgage origination and lower than expected origination
volume due to higher interest rates. In addition, the company experienced
losses related to the sale of a substantial portion of the Castle Finance
Company (CFC) loan portfolio and related charges. CFC is a wholly-owned
subsidiary of the Company. The Company posted quarter-to-date net earnings of
$780,000 at September 30, 1999, a decrease of $480,000, or 38% from
quarter-to-date earnings of $1,260,000 at September 30, 1998.
Year-to-date basic earnings per common share was $.54 at September 30, 1999,
down $.35 per share from September 30, 1998 basic earnings per common share of
$.89. The decrease in basic earnings per share is due primarily to the losses
at CFC and CMI as described above. Diluted earnings per share was also $.54.
Quarter-to-date basic earnings per common share was $.18 at September 30, 1999,
down $.11 per share from September 30, 1998 basic earnings per common share of
$.29. Diluted earnings per share was $.18.
Year-to-date net earnings in the Banking segment of $4,982,000 for the nine
months ending September 30, 1999, compare favorably to $4,692,000 for the same
period in 1998. Net earnings for the third quarter in this segment was
$1,640,000 versus $1,616,000 for the third quarter of 1998.
The Mortgage Banking segment experienced a net loss of $583,000 for the nine
months ending September 30, 1999, compared to net earnings of $497,000 for the
same period in 1998. While other operating income increased $963,000 due to
increased income earned on the origination of mortgages sold in the secondary
market, other operating expenses increased $2,631,000 primarily related to
increased commissions paid to mortgage loan originators and increased salaries
and benefits, all associated with the expansion of this segment. The overall
change from $497,000 of net earnings to $583,000 of net loss created a total
decrease of $1,080,000 which represents a substantial portion of the $1,511,000
decrease in the total consolidated net earnings described above. The net loss
for the third quarter of 1999 for the Mortgage Banking segment was $365,000
versus earnings of $172,000 for the third quarter of 1998, creating a total
decrease of $537,000 which explains the $480,000 decrease in total consolidated
net earnings described above. The slowdown in real estate financing will likely
continue to hinder this segment.
Segment information presented under "Other" includes primarily the holding
company and consumer finance business. A net loss of $2,035,000 for the nine
months ending September 30, 1999, compares unfavorably to a net loss of
$1,314,000 for the same period in 1998, primarily due to net losses associated
with CFC. The third quarter 1999 net loss of $495,000 compares to $528,000 for
the third quarter 1998.
The following discussion of performance for the three and nine month periods
ending September 30, 1999 as compared to the corresponding periods in 1998
highlights significant points of interest, trends in operations, and
management's operating philosophies. (Unless otherwise stated, all averages are
simple daily averages.)
15
<PAGE>
INTEREST INCOME
---------------
Net interest income before provision for possible loan losses for the third
quarter of 1999 was $4,836,000 versus $5,481,000 for the third quarter of 1998
for a decrease of 12% or $645,000. Net interest income before provision for
possible loan losses for the first nine months of 1999 decreased 4.9% to
$14,678,000 as compared to $15,431,000 for the first nine months of 1998. This
decrease can be attributed to a $781,000 decrease in interest on investment
securities, a decrease of $911,000 in interest and fees on loans, offset by a
decrease of $804,000 in interest on deposits. The decrease in interest on
investments is partially due to lower volume and portfolio management strategies
to maximize long-term total return that resulted in first quarter security gains
offset by reduced interest income. The decrease in interest and fees on loans
is due to the sale of higher yielding loans associated with the CFC portfolio
that was sold in the first quarter.
The average net interest margin, on a tax equivalent basis (including
non-accruing loans), decreased for the first nine months of 1999 to 4.12% as
compared to 4.51% in 1998. This decrease can primarily be attributed to the
decrease in net interest income as note above. The ratio of average earning
assets to average total assets was 94.3% for the first nine months of 1999 as
compared to 93.5% for the first nine months of 1998.
Competition both from financial institutions and non-traditional competitors, as
well as general economic trends, will continue to impact future earnings. The
earning asset mix, as well as the net interest margin, are monitored and
evaluated by management to develop strategies to help maintain and improve
earnings.
PROVISION FOR POSSIBLE LOAN LOSSES
--------------------------------------
The subsidiaries establish a provision for loan losses which management believes
is sufficient to maintain adequate reserve levels. The provision is a result of
credit analysis, historical trends in net charges to the allowance, loan
portfolio configuration, and loan growth. Management closely monitors loan
quality to minimize loan losses. The Company's loan review program closely
monitors credit conditions of specific loans, historical trends in charge-offs
at the subsidiaries as well as companies within their peer group, experience and
quality of lending staff, and general economic conditions in the communities
that the subsidiaries serve. This system allows management to assess the
adequacy of the allowance for loan losses. The allowance for loan losses as a
percentage of total outstanding loans decreased to 1.32% at September 30, 1999
as compared to 1.46% at December 31, 1998. This decrease is primarily
attributed to the sale of a substantial portion of the CFC loan portfolio, as
well as, an increase in loans outstanding. The allowance level was at 1.48% of
net loans at December 31, 1997.
The provision for loan losses recorded during the first nine months of 1999 was
$594,000 as compared to $421,000 during the same period in 1998. The provision
for loan losses recorded during the three months ended September 30, 1999 was
$76,000 as compared to $147,000 at September 30, 1998. The increase for the
nine month period ending September 30, 1999, is due to an increased provision
for the remaining CFC loans not sold, overall growth in the banks' loan
portfolio, and to provide for possible losses for certain loans at CMI. The
balance in the allowance for loan loss account is derived from the quarterly
assessment of adequacy performed in the ordinary course of business by
management. The allowance for loan loss balance reflects the underlying credit
risk in the loan and lease portfolio. As such, fluctuations are expected in the
allowance balance, however, as noted, the fluctuations have not been material.
Management continues to closely monitor and control asset quality.
Non-performing assets, defined as loans 90 days or more past due and still
accruing interest, loans in non-accrual status, restructured loans, and other
real estate owned, represented .65% of total assets as of September 30, 1999,
which has increased from .54% at December 31, 1998. The following table
summarizes the components of non-performing assets at September 30, 1999 and at
December 31, 1998.
16
<PAGE>
<TABLE>
<CAPTION>
SEPTEMBER 30,1999 DECEMBER 31, 1998
----------------------- ------------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans $ 2,939 $ 2,262
Loans past due 90+ days & still accruing 308 544
Restructured loans, performing in accordance
with terms of a restructure agreement 123 208
Other real estate owned 0 0
----------------------- ------------------
Total non-performing assets $ 3,370 $ 3,014
======================= ==================
</TABLE>
The increase in non-accrual loans is due to one commercial loan for $700,000,
offset by payoffs of other loans previously in non-accrual. In addition, three
CMI loans previously included in loans 90+ days past due and still accruing have
been transferred to non-accrual.
Year-to-date net charge-offs at September 30, 1999 totaled $364,000 as compared
to $402,000 at September 30, 1998. The allowance for loan losses was reduced
$445,000 as a result of the sale of a portion of the CFC loan portfolio. The
$445,000 represented the allocation of the allowance that was attributable to
the loans sold. Management continues to closely monitor all past dues and to
improve collection efforts.
The Company has originated for sale to the secondary mortgage market,
through CMI, a substantial amount of one- to four-family mortgage loans. These
mortgage loans are sold to investors in the secondary mortgage market with
recourse back to CMI, meaning that CMI may be obligated to repurchase these
loans from investors under certain circumstances. A number of circumstances may
give rise to this repurchase obligation, such as deficiency in the documentation
of a loan or early default by a borrower. The company has recently uncovered
irregularities in CMI's underwriting and documentation of certain mortgage loans
originated for sale by CMI, which may ultimately result in the inability to sell
loans currently held for sale, or the purchasers of sold loans putting them back
to CMI under the recourse provisions of the loan sale agreements. The Company's
investigation into these irregularities is in its initial phase, and it is not
possible at this time to determine the extent of the irregularities (including
the total amount of loans that may be affected by such irregularities), the
likelihood that CMI would be required to purchase the loans from the investors
or the diminution in the value of such loans after such loans are repurchased by
CMI. Accordingly, it is not possible at this time to determine the amount of
any additional provision to the Company's allowance for loan loss or other
write-offs that may be required in future periods as a result of these
irregularities or the extent of any charge-offs that may be incurred.
OTHER OPERATING INCOME
----------------------
Other operating income, excluding security gains and losses, totaled $11,803,000
for the first nine months of 1999 as compared to $10,758,000 for the same period
in 1998. The $1,045,000 increase over the prior year period primarily relates to
increased fee income earned on the origination of mortgages sold in the
secondary market as noted above in the discussion of the mortgage banking
segment. The increased income resulted from an increase in the number of both
retail offices and loan originators at CMI. Despite the increase, higher
interest rates for fifteen and thirty-year mortgages have caused lower than
expected mortgage origination volume. If interest rates for fifteen and
thirty-year mortgages remain relatively high or increase further, mortgage
origination activities and earnings may continue to be adversely impacted.
Other service charges increased $247,000 as a result of better pricing
strategies. For the three months ended September 30, 1999, other operating
income, excluding security gains and losses, totaled $3,688,000 as compared to
$3,594,000 for the same period in 1998.
Securities gains of $250,000 were recognized during the first nine months of
1999 as compared to $71,000 during the first nine months of 1998. For the three
months ended September 30, 1999 security gains of $1,000 was recognized as
compared to a loss of $1,000 during the same time period in 1998. All
recognized gains and losses were related to the sale or call of securities
classified as available for sale.
OTHER OPERATING EXPENSES
------------------------
Other operating expenses increased approximately $3,062,000 year to date at
September 30, 1999 over the same period in 1998. Increases in employee salaries
and benefits expense accounted for $1,935,000 of the increase. The majority of
the salary increase was due to additional staff and mortgage originators added
to CMI as a result of opening new offices and expanding current business, as
noted above. Increased expenses at CMI are both fixed and variable in nature.
Efforts are being made to improve efficiency at CMI to reduce the costs
associated with the origination and sale of mortgage loans. Salary and employee
benefits expense also increased due to normal merit increases granted during the
year. Also, a $513,000 loss was recognized due to the sale of a substantial
portion of the CFC loan portfolio. For the quarter ended September 30, 1999,
other operating expenses increased $404,000 over the corresponding three-month
period in 1998. Increases in employee salaries and benefits accounted for
$385,000 of the increase.
17
<PAGE>
FINANCIAL CONDITION
--------------------
Total assets at September 30,1999, decreased $33,336,000 as compared to December
31, 1998. This decrease is primarily due to a decrease in mortgage loans held
for sale of $49,403,000. This decrease is offset by an increase in net loans of
$18,367,000 and a decrease in short-term borrowings of $23,867,000. Average
assets for the first nine months of 1999 increased by $26,588,000 or
approximately 5.35% as compared to the corresponding period in 1998. This
increase was primarily attributed to a $32,137,000 increase in the average net
loan portfolio. This increase was funded primarily with an increase in average
total deposits of $18,564,000 or approximately 4.36% over the corresponding
period in 1998. Despite this growth in average deposits, the subsidiary banks
continue to experience competition for deposits that continue to put pressure on
the overall cost of funds. Management continues to view "core" deposits
(individuals, partnerships and corporate deposits) as the primary long term
funding source for internal growth of the Company. The Company had $693,000 of
brokered deposits at September 30, 1999, with interest rates ranging from 6.20%
to 6.75% and maturities ranging from August 2000 through October 2002. Brokered
deposits at December 31, 1998, were also $693,000.
Accumulated other comprehensive earnings decreased $3,277,000 from $935,000 at
December 31, 1998 to a loss of $2,342,000 at September 30, 1999. This decrease
is primarily due to the change in the fair value of the investment portfolio
caused by an increase in interest rates. Total stockholder' equity decreased
$856,000 from December 31, 1998 to September 30, 1999 due to this decrease in
accumulated other comprehensive earnings and cash dividends on common stock,
offset by net earnings and issuance of shares of common stock.
CAPITAL
-------
The Company is committed to maintaining strong capital positions in each of its
subsidiaries and on a consolidated basis. Management monitors, analyzes and
forecasts capital positions for each entity to ensure that adequate capital is
available to support growth and maintain financial soundness. The Company's
Tier 1 leverage ratio as of September 30, 1999 was 7.62%, an increase from 6.31%
at December 31, 1998. The ratio exceeds the regulatory well-capitalized levels,
and management believes the Company is maintaining a strong capital position.
The Company's September 30, 1999 total risk weighted capital ratio also
increased to 11.93% from 11.08% at December 31, 1998. The Tier 1 capital ratio
at September 30, 1999 increased to 10.69% from 9.83% at December 31, 1998. Both
the total risk weighted and Tier 1 Capital ratios also continue to exceed
regulatory well-capitalized levels.
LIQUIDITY
---------
The Company ensures the subsidiary banks maintain appropriate liquidity and
provides access to secondary sources of liquidity in case of unusual or
unanticipated demand for funds. Primary bank sources of liquidity are
repayments of loans, high-quality marketable investment securities available for
sale, and the bank's federal funds position which, together, are more than
sufficient to satisfy liquidity needs arising in the normal course of business.
The Company is a secondary source of liquidity for its subsidiary banks through
its discretionary access to short-term funding in case of unanticipated demand
for funds.
As presented in the Consolidated Statement of Cash Flows, the Company has
experienced significant changes in the cash flows from operating, investing and
financing activities during the first nine months of 1999 as compared to the
same period in 1998. These fluctuations primarily relate to the changes in the
loan, investment, and mortgage loans held for sale portfolios, as explained
above.
18
<PAGE>
INTEREST RATE SENSITIVITY
---------------------------
The Company's overall success is dependent upon its ability to manage interest
rate risk. Interest rate risk can be defined as the exposure of the Company's
net interest income to adverse movements in interest rates. Because the Company
has no trading portfolio, the Company is not exposed to significant market risk
from trading activities. Other types of market risk, such as foreign currency
exchange and commodity price risk, do not arise in the normal course of the
Company's business activities. The Company does not currently use derivatives
to manage market and interest rate risks. A derivative financial instrument
includes futures, forwards, interest rate swaps, option contracts, and other
financial instruments with similar characteristics.
The Company is party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and standby letters
of credit. These instruments involve to varying degrees, elements of credit and
interest rate risk in excess of the amount recognized in the consolidated
balance sheets. Commitments to extend credit are arrangements to lend to a
customer as long as there is no violation of any condition in the contract.
Commitments generally have fixed expiration dates and may require collateral
from the borrower if deemed necessary by the Company. Standby letters of credit
are conditional commitments issued by the Company to guarantee the performance
of a customer to a third party up to a stipulated amount and with specified
terms and conditions. Commitments to extend credit and standby letters of
credit are not recorded as an asset or liability by the Company until the
instrument is exercised.
Interest rate exposure is reviewed on a regular basis by the Asset/Liability
Committee (ALCO) for each bank. The principal objective of the Company's
interest rate risk management function is to evaluate the interest rate risk
included in certain balance sheet accounts, determine the level of risk
appropriate given the Company's business strategy, operating environment,
capital and liquidity requirements and performance objectives, and manage the
risk consistent with the funds management policy of the Company. Through such
management, the Company seeks to monitor the vulnerability of its operations to
changes in interest rates. The extent of the movement of interest rates is an
uncertainty that could have a negative effect on the earnings of the Company.
YEAR 2000
---------
Like other businesses dependent upon computerized information processing, the
Company must deal with "Year 2000" issues, which stem from using two digits to
reflect the year in many computer programs and data. Computer programmers and
other designers of equipment that use microprocessors have long abbreviated
dates by eliminating the first two digits of the year. As the year 2000
approaches, many systems may be unable to distinguish years beginning with 20
from years beginning 19, and so may not accurately process certain date-based
information, which could cause a variety of operational problems for businesses.
The Year 2000 project has been a top priority for the Company. Failure of
a mission critical system used by the Company could have a materially adverse
effect on the Company's operations and financial performance, as could Year 2000
problems experienced by others with whom the Company does business. Because of
the range of possible issues and the large number of variables involved, it is
impossible to quantify the potential cost of problems should the Company's Year
2000 efforts or the efforts of those with whom it does business not be
successful.
The Company began its Year 2000 efforts in May 1997. A dedicated Year 2000
Project Team was formed and the team meets on a monthly basis. Each major
operational area of the Company is represented on the team, including internal
audit. The status of the project is reported to the Board of Directors at each
meeting. Results of all exams performed by all external agencies are reported
to the Board at the next available meeting. Status reports are also presented
to the Internal Audit Committee by the Internal Auditor. The Company partnered
with a major consulting firm beginning in February 1998 to assist the Company in
testing core mission critical systems (e.g., the loan and deposit systems). The
Company performs no programming in house and controls no source codes. All
software used by the Company is purchased from third parties including core
applications. The core application software is provided by a highly recognized
bank software provider with well over 1,000 banks using their software
countrywide.
19
<PAGE>
The Company completed the assessment phase of the project by June 1997.
The Company completed the inventory phases of the project by September 1997.
Testing and remediation efforts have been completed for all mission critical
applications. Some mission critical applications were discovered to be
non-compliant. These systems were replaced with new compliant systems by
December 31, 1998. The Company performed extensive core application testing in
July 1998 that was overseen by a major consulting firm. The project team has
had extensive contact with all mission critical vendors and continues to monitor
their progress as diligently as possible. Although the Company is attempting to
monitor and validate the efforts of other parties, it cannot control the success
of these efforts. Contingency plans have been developed where practical to
provide the Company with alternatives in situations where an entity furnishing a
critical product or service experiences significant Year 2000 difficulties that
will affect the Company. With respect to non-mission critical applications, the
Company's target for completion of Year 2000 work is November 1999.
The Year 2000 project team has also been working on issues that are not
directly related to data processing systems. The team is reviewing various
infrastructure issues, such as checking elevators and heating, ventilation and
air-conditioning equipment, some of which include embedded systems, to verify
that they will function in the Year 2000. The team is also reviewing the status
of power and telecommunications providers. Possible problems in these areas are
continuing to be addressed by the Company.
As part of the Company's credit analysis process, it has developed a plan
for assessing the Year 2000 readiness of its major credit customers. Year 2000
issues have also been included in the loan review process and in the adequacy of
the reserve analysis. In addition, as part of the Company's fiduciary
responsibilities in the asset and trust management area, the Company has been
working very closely with the Company's third-party servicer to verify that
their product is Year 2000 compliant. The Company participated in proxy
testing of this servicer in the first quarter of 1999. The proxy testing was
coordinated by a major public accounting firm. The Company has also sent FDIC
prepared statement stuffers to all checking and savings account customers which
describes the Year 2000 problem in detail and provides guidance regarding FDIC
insurance.
The Company is also assessing liquidity risk in connection with the Year
2000 readiness of its major loan and deposit customers. Year 2000 problems of
the Company's major loan customers could affect their ability to make loan
payments when due to the Company and therefore negatively impact the Company's
short-term liquidity. Similarly, Year 2000 problems could affect the cash flows
of some of the Company's major business depositors resulting in their inability
to maintain historical deposit balance levels in their accounts, also creating a
negative impact on short term liquidity. In addition, the Company may
experience other unusual deposit outflow before December 31, 1999 as a result of
increased currency demands of its customers. These potential negative effects
on short-term liquidity have been considered by the Company in analyzing and
planning for its future liquidity needs.
The Company estimates the cost of the Year 2000 project to be $411,000
which does not include the cost of internal staff time. Costs incurred to date
total $333,000 of which $248,000 will be capitalized as a few new systems were
purchased to replace non-compliant mission critical systems. It is not
expected that the entire part will be incurred by December 31, 1999. It is
anticipated that there may be various miscellaneous expenditures made in the
first quarter of 2000 that cannot be estimated at this time.
The discussion above incorporates the Company's best estimates of the costs
and completion date of the Year 2000 project. The Company derived these
estimates using numerous assumptions of future events, including the continued
availability of certain resources and other factors. There can be no guarantee
that the Company will achieve these estimates. Therefore, actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability and cost
of personnel trained in this area, the ability to locate and correct all
relevant computer codes, and similar uncertainties.
20
<PAGE>
ACCOUNTING STANDARDS
--------------------
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This statement established accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. It requires
that any entity recognize all derivatives as either assets or liabilities in the
statement of financial position and measure those instruments at fair value.
The accounting for changes in the fair value of a derivative depends on the
intended use of the derivative and the resulting designation. In June 1999, the
FASB issued SFAS No. 137, "Accounting for Derivative Instruments and Hedging
Activities - Deferral of the effective date of Statement No. 133." This
statement defers the adoption of SFAS 133 to fiscal quarters of fiscal years
beginning after June 15, 2000. SFAS No. 133 is not expected to have a material
impact on the Company's financial position, results of operations or liquidity.
In October 1998, the FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise." This statement amends SFAS No.
65, "Accounting for Certain Mortgage Banking Activities" to conform the
subsequent accounting for securities retained after the securitization of
mortgage loans by a mortgage banking enterprise with the subsequent accounting
for securities retained after the securitization of other types of assets by a
non-mortgage banking enterprise. The statement is effective for the first
quarter beginning after December 15, 1998 and enterprises may reclassify
mortgage-backed securities and other beneficial interests retained after the
securitization of mortgage loans held for sale from the trading category, except
for those with sales commitments in place. The reclassification is to be done
when the statement is initially applied. The adoption of this statement is not
expected to have a material impact on the Company's financial position, results
of operations or liquidity.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the market risks faced by the Company
since December 31, 1998. For information regarding the Company's market risk,
refer to its Annual Report on Form 10-K for the year ended December 31, 1998.
21
<PAGE>
PART II
ITEM 1--LEGAL PROCEEDINGS
Neither the Company nor any subsidiary is a party to, and none of their property
is subject to, any material legal proceeding at this time. However, the Company
and its subsidiaries are from time to time parties to routine litigation
incidental to their businesses.
ITEM 2--CHANGES IN SECURITIES
Not applicable.
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4-- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5-- OTHER INFORMATION
Not applicable.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
--------
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) Reports on Form 8-K
----------------------
None
22
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ John W. Castle
- ------------------------
By: John W. Castle, Chairman of the Board
Chief Executive Officer and Director
Castle BancGroup, Inc.
Date: November 12, 1999
/s/ Micah R. Bartlett
- --------------------------
By: Micah R. Bartlett, Chief Accounting Officer
and Controller
Castle BancGroup, Inc.
Date: November 12, 1999
23
<PAGE>
EXHIBIT INDEX
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
24
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT 11
CASTLE BANCGROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
The components of basic and diluted EPS for the nine month periods ended September 30,
1999 and 1998 were as follows: (Dollars in thousands, except share data)
1999 1998
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS:
Net Income 2,364 3,875
Less: preferred stock dividends: 0 (18)
--------- ----------
Income available to common stockholders 2,364 3,857
========= ==========
Average common shares 4,355,935 4,322,628
========= ==========
Basic EPS .54 .89
========= ==========
Diluted EPS:
Income available to common stockholders 2,364 3,857
Assumed conversion of preferred stock 0 18
--------- ----------
Income available to common stockholders after assumed conversion 2,364 3,875
========= ==========
Average common shares 4,355,935 4,322,628
Assumed conversion of preferred stock N/A 22,784
Assumed exercise of stock options 59,070 34,984
--------- ----------
Average common shares after assumed conversions 4,415,005 4,380,396
========= ==========
Diluted EPS .54 .88
========= ==========
===========================================================================================
</TABLE>
25
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 11738
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 129203
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 362912
<ALLOWANCE> 4560
<TOTAL-ASSETS> 522119
<DEPOSITS> 449669
<SHORT-TERM> 20330
<LIABILITIES-OTHER> 2381
<LONG-TERM> 9050
0
0
<COMMON> 1455
<OTHER-SE> 39234
<TOTAL-LIABILITIES-AND-EQUITY> 522119
<INTEREST-LOAN> 21099
<INTEREST-INVEST> 5850
<INTEREST-OTHER> 1581
<INTEREST-TOTAL> 28530
<INTEREST-DEPOSIT> 12391
<INTEREST-EXPENSE> 13852
<INTEREST-INCOME-NET> 14678
<LOAN-LOSSES> 594
<SECURITIES-GAINS> 250
<EXPENSE-OTHER> 23013
<INCOME-PRETAX> 3124
<INCOME-PRE-EXTRAORDINARY> 3124
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2364
<EPS-BASIC> .54
<EPS-DILUTED> .54
<YIELD-ACTUAL> 4.12
<LOANS-NON> 2939
<LOANS-PAST> 308
<LOANS-TROUBLED> 123
<LOANS-PROBLEM> 3370
<ALLOWANCE-OPEN> 4775
<CHARGE-OFFS> 526
<RECOVERIES> 162
<ALLOWANCE-CLOSE> 4560
<ALLOWANCE-DOMESTIC> 4560
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200
</TABLE>
