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 June 30, 2000
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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 of incorporation (I.R.S. Employer Identification
or organization) Number)
121 West Lincoln Highway 60115-3609
DeKalb, Illinois (Zip Code)
(Address of principal executive offices)
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 4,392,498 shares of Common Stock outstanding as of July 31,
2000.
1
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
-----------------------------------------------------------------------------
(UNAUDITED)
==============================================================================================================
ASSETS June 30, December 31,
2000 1999
--------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 19,849 17,501
Investment securities available for sale (note 2) 122,489 126,159
Mortgage loans held for sale, lower of cost or market 222 14,892
Loans (note 3) 376,143 364,419
Less:
Allowance for loan losses (note 3) 4,757 4,636
Unearned income and deferred loan fees, net 359 332
--------------------------------------------------------------------------------------------------------------
Net loans 371,027 359,451
Premises and equipment 11,594 11,547
Goodwill, net of amortization 2,057 2,210
Assets of discontinued operations (note 7) 1,914 2,878
Other assets 6,005 6,212
--------------------------------------------------------------------------------------------------------------
$ 535,157 540,850
==============================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
--------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Non-interest-bearing $ 60,986 52,274
Interest-bearing 411,564 408,143
--------------------------------------------------------------------------------------------------------------
Total deposits 472,550 460,417
Other borrowings 22,097 39,486
Other liabilities 1,716 3,539
--------------------------------------------------------------------------------------------------------------
Total liabilities 496,363 503,442
Stockholders' equity:
Common stock, $.33 1/3 par value; 25,000,000 shares authorized, 4,390,810 and
4,369,663 shares issued and outstanding in 2000 and 1999, respectively 1,464 1,457
Additional paid-in capital 7,058 6,830
Accumulated other comprehensive loss, net of tax (3,105) (3,164)
Retained earnings 33,377 32,285
--------------------------------------------------------------------------------------------------------------
Total stockholders' equity 38,794 37,408
Commitments and contingent liabilities
--------------------------------------------------------------------------------------------------------------
$ 535,157 540,850
==============================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except share data)
(UNAUDITED)
==========================================================================================================
3 Months Ended
June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 7,936 6,885
Interest and dividends on investment securities available for sale:
Taxable 1,691 1,653
Nontaxable 222 277
Interest on excess funds sold 123 11
Interest on mortgage loans held for sale 21 440
----------------------------------------------------------------------------------------------------------
Total interest income 9,993 9,266
----------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,536 4,170
Interest on other borrowings 479 387
----------------------------------------------------------------------------------------------------------
Total interest expense 5,015 4,557
----------------------------------------------------------------------------------------------------------
Net interest income before provision
for loan losses 4,978 4,709
Provision for loan losses 105 337
----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,873 4,372
----------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 196 212
Deposit service charges 130 95
Other service charges 569 364
Investment securities gains, net - 4
Mortgage loan origination income, net 217 283
Other income 55 310
----------------------------------------------------------------------------------------------------------
Total other operating income 1,167 1,268
----------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 2,578 2,655
Net occupancy expense of premises 276 330
Furniture and fixtures 321 358
Office supplies 79 94
Outside services 211 186
Advertising expense 141 145
FDIC insurance assessment 24 13
Postage and courier 80 96
Telephone expense 88 113
Amortization expense - goodwill 77 77
Other expenses 477 517
----------------------------------------------------------------------------------------------------------
Total other operating expenses 4,352 4,584
----------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,688 1,056
Income tax expense 552 280
----------------------------------------------------------------------------------------------------------
Net earnings from continuing operations $ 1,136 776
----------------------------------------------------------------------------------------------------------
Discontinued operations (note 7) $ - (105)
----------------------------------------------------------------------------------------------------------
Net earnings $ 1,136 671
==========================================================================================================
Basic earnings per common share from:
Continuing operations $ 0.26 0.17
Discontinued operations N/A (0.02)
Net earnings 0.26 0.15
Diluted earnings per common share from:
Continuing operations $ 0.26 0.17
Discontinued operations N/A (0.02)
Net earnings 0.26 0.15
==========================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except share data)
(UNAUDITED)
==========================================================================================================
6 Months Ended
June 30, 2000 June 30, 1999
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 15,613 14,032
Interest and dividends on investment securities available for sale:
Taxable 3,437 3,349
Nontaxable 450 518
Interest on excess funds sold 124 11
Interest on mortgage loans held for sale 147 1,159
----------------------------------------------------------------------------------------------------------
Total interest income 19,771 19,069
----------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 8,937 8,369
Interest on other borrowings 930 938
----------------------------------------------------------------------------------------------------------
Total interest expense 9,867 9,307
----------------------------------------------------------------------------------------------------------
Net interest income before provision
for loan losses 9,904 9,762
Provision for loan losses 210 496
----------------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,694 9,266
----------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 382 410
Deposit service charges 236 181
Other service charges 1,056 664
Investment securities gains, net - 249
Mortgage loan origination income, net 331 684
Other income 314 749
----------------------------------------------------------------------------------------------------------
Total other operating income 2,319 2,937
----------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 5,186 5,414
Net occupancy expense of premises 575 732
Furniture and fixtures 662 706
Office supplies 129 187
Outside services 331 440
Advertising expense 204 235
FDIC insurance assessment 47 26
Postage and courier 171 197
Telephone expense 163 171
Amortization expense - goodwill 153 153
Loss on sale of loans - 513
Other expenses 969 1,142
----------------------------------------------------------------------------------------------------------
Total other operating expenses 8,590 9,916
----------------------------------------------------------------------------------------------------------
Earnings before income taxes 3,423 2,287
Income tax expense 1,100 656
----------------------------------------------------------------------------------------------------------
Net earnings from continuing operations $ 2,323 1,631
----------------------------------------------------------------------------------------------------------
Discontinued operations $ (837) (47)
----------------------------------------------------------------------------------------------------------
Net earnings $ 1,486 1,584
==========================================================================================================
Basic earnings per common share from:
Continuing operations $ 0.53 0.37
Discontinued operations (0.19) (0.01)
Net earnings 0.34 0.36
Diluted earnings per common share from:
Continuing operations $ 0.53 0.37
Discontinued operations (0.19) (0.01)
Net earnings 0.34 0.36
==========================================================================================================
</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
ADDITIONAL OTHER
COMMON PAID-IN RETAINED COMPREHENSIVE
STOCK CAPITAL EARNINGS EARNINGS TOTAL
(LOSS)
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance as of January 1, 2000 $ 1,457 6,830 32,285 (3,164) 37,408
Comprehensive earnings
Net earnings - - 1,486 - 1,486
Unrealized gains on investment
securities available for sale - - - 96 96
Income tax effect - - - (37) (37)
-------
Total comprehensive earnings - - - - 1,545
Issuance of 21,147 shares of common stock 7 228 - - 235
Cash dividends on common stock (394) (394)
-------------------------------------------------------
Balance as of June 30, 2000 $ 1,464 7,058 33,377 (3,105) 38,794
==================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
(UNAUDITED)
===========================================================================================================
6 Months Ended
June 30, 2000 June 30,1999
-----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from continuing operating activities:
Interest received $ 19,981 17,678
Fees received 4,005 3,232
Net decrease in mortgage loans held for sale 14,670 38,986
Interest paid (9,810) (9,716)
Cash paid to suppliers and employees (11,075) (10,803)
Income taxes paid (350) (381)
-----------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 17,421 38,996
-----------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investment securities available for sale 5,694 13,209
Sales of investment securities available for sale 20 20,264
Purchases of investment securities available for sale (2,508) (33,701)
Net increase in loans (11,844) (10,400)
Premises and equipment expenditures (626) (1,400)
-----------------------------------------------------------------------------------------------------------
Net cash used in investing activities (9,264) (12,028)
-----------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase in demand deposits,
NOW accounts, and savings accounts 14,061 2,996
Net decrease in certificates of deposit (1,929) (11,160)
Dividends paid on common stock (787) (609)
Net change in other borrowings (17,389) (16,823)
Proceeds from issuance of common stock 235 292
Repayment of long-term debt - (1,250)
-----------------------------------------------------------------------------------------------------------
Net cash used in financing activities (5,809) (26,554)
-----------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 2,348 414
Cash and cash equivalents at beginning of year 17,501 12,269
-----------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 19,849 12,683
===========================================================================================================
Reconciliation of net earnings to net cash provided by
continuing operating activities:
Net earnings $ 2,323 1,631
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Discontinued operations (837) (47)
Depreciation and amortization 764 846
Provision for loan losses 210 496
Gains on sale of investment securities - (249)
Discount accretion (199) (180)
Premium amortization 117 178
(Decrease) increase in:
Income taxes payable 168 274
Interest payable 118 (409)
Unearned income 27 (1,934)
Other liabilities (1,110) (1,514)
Decrease (increase) in:
Interest receivable 205 545
Other assets 965 544
Decrease in mortgage loans held for sale 14,670 38,815
-----------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities $ 17,421 38,996
===========================================================================================================
Net change in cash and cash equivalents from discontinued operations $ 914 (1,775)
===========================================================================================================
</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 1999 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 June 30, 2000 and December 31, 1999 follows (dollars
in thousands):
<TABLE>
<CAPTION>
=====================================================================================
June 30, 2000
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 65,954 - (2,446) 63,508
Obligations of state and political
subdivisions 19,196 5 (791) 18,410
Mortgage-backed securities 39,112 3 (1,873) 37,242
-------------------------------------------------------------------------------------
Total debt securities 124,262 8 (5,110) 119,160
-------------------------------------------------------------------------------------
Federal Home Loan Bank stock 2,052 - - 2,052
Other Equity securities 1,277 - - 1,277
-------------------------------------------------------------------------------------
Total securities $ 127,591 8 (5,110) 122,489
=====================================================================================
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
=====================================================================================
December 31, 1999
--------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 66,617 3 (2,352) 64,268
Obligations of state and political
subdivisions 20,350 14 (930) 19,434
Mortgage-backed securities 41,569 6 (1,939) 39,636
-------------------------------------------------------------------------------------
Total debt securities 128,536 23 (5,221) 123,338
-------------------------------------------------------------------------------------
Federal Home Loan Bank stock 2,052 - - 2,052
Other equity securities 769 - - 769
-------------------------------------------------------------------------------------
Total securities $ 131,357 23 (5,221) 126,159
=====================================================================================
</TABLE>
The amortized cost and fair value of securities available for sale at June
30, 2000 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>
June 30, 2000
-------------------
Amortized Fair
cost value
-------------------------------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 6,265 6,235
Due after one year through five years 46,709 45,230
Due after five years through ten years 19,763 18,910
Due after ten years 12,413 11,543
-------------------------------------------------------------------------------------
85,150 81,918
Mortgage-backed securities 39,112 37,242
-------------------------------------------------------------------------------------
Total debt securities 124,262 119,160
-------------------------------------------------------------------------------------
Federal Home Loan Bank stock 2,052 2,052
Other equity securities 1,277 1,277
-------------------------------------------------------------------------------------
Total securities $ 127,591 122,489
=====================================================================================
</TABLE>
There were no gross realized losses or gains from security activity during
the six months ended June 30, 2000. There was $5,000 in gross realized
losses and $254,000 in gross realized gains during the six months ended
June 30, 1999. All security gains and losses were as a result of
transactions involving available for sale securities.
Investment securities carried at approximately $78,530,000 and $77,732,000
at June 30, 2000 and December 31, 1999, 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):
===========================================================================
June 30, 2000 Dec. 31, 1999
---------------------------------------------------------------------------
Commercial, financial, and agricultural $ 104,003 105,163
Real estate mortgage 252,626 240,743
Consumer 19,163 18,144
Lease financing receivables 351 369
---------------------------------------------------------------------------
Total loans, gross $ 376,143 364,419
===========================================================================
The following is a summary of activity in the allowance for loan losses
(dollars in thousands):
6 months ended 6 months ended
June 30, 2000 June 30, 1999
--------------------------------------------------------------------------------
Balance, beginning of period $ 4,636 4,750
Provision charged to expense 210 496
Recoveries on loans previously charged off 48 143
--------------------------------------------------------------------------------
4,894 5,389
Less loans charged off 137 277
Less allowance on loans sold - 471
--------------------------------------------------------------------------------
Balance, end of period $ 4,757 4,641
================================================================================
(4) OPERATING SEGMENTS
The Company's operations include two primary segments: banking and mortgage
banking. Through its banking subsidiary's network of 10 retail banking
facilities in Northern Illinois, the Company provides traditional community
banking services such as accepting deposits and making loans. The Company's
three subsidiary banks were consolidated into one charter, Castle Bank
N.A., as of June 24, 2000. The Mortgage Banking segment is entirely related
to the Company's subsidiary, CasBanc Mortgage, Inc. (CMI), which was
discontinued in January 2000 and included 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
consisted 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.
9
<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 June 30, 2000
--------------------------------
Interest income $ 9,911 82 9,993
Interest expense 4,853 162 5,015
---------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 5,058 (80) 4,978
Provision for loan losses 105 - 105
---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,953 (80) 4,873
Other operating income 1,132 35 1,167
Other operating expenses 3,538 814 4,352
---------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 2,547 (859) 1,688
Income tax expense (benefit) 883 (331) 552
---------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations $ 1,664 (528) 1,136
---------------------------------------------------------------------------------------------------
Discontinued operations $ - - - -
---------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,664 - (528) 1,136
---------------------------------------------------------------------------------------------------
June 30, 2000
-------------
Assets $ 531,695 1,914 1,548 535,157
===================================================================================================
Three months ended June 30, 1999
--------------------------------
Interest income $ 9,040 226 9,266
Interest expense 4,225 332 4,557
---------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 4,815 (106) 4,709
Provision for loan losses 112 225 337
---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,703 (331) 4,372
Other operating income 1,226 42 1,268
Other operating expenses 3,630 954 4,584
---------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 2,299 (1,243) 1,056
Income tax expense (benefit) 755 (475) 280
---------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations $ 1,544 (768) 776
---------------------------------------------------------------------------------------------------
Discontinued operations $ - (105) - (105)
---------------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,544 (105) (768) 671
---------------------------------------------------------------------------------------------------
June 30, 1999
-------------
Assets $ 519,381 4,794 1,068 525,243
===================================================================================================
</TABLE>
10
<PAGE>
<TABLE>
<CAPTION>
Operating segment information is as follows:
(Dollars in thousands)
Mortgage Consolidated
Banking Banking Other Total
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Six months ended June 30, 2000
------------------------------
Interest income $ 19,729 42 19,771
Interest expense 9,652 215 9,867
---------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 10,077 (173) 9,904
Provision for loan losses 210 - 210
---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,867 (173) 9,694
Other operating income 2,248 71 2,319
Other operating expenses 7,115 1,475 8,590
---------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 5,000 (1,577) 3,423
Income tax expense (benefit) 1,709 (609) 1,100
---------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations $ 3,291 (968) 2,323
---------------------------------------------------------------------------------------------------
Discontinued operations $ - (837) - (837)
---------------------------------------------------------------------------------------------------
Net earnings (loss) $ 3,291 (837) (968) 1,486
---------------------------------------------------------------------------------------------------
June 30, 2000
-------------
Assets $ 531,695 1,914 1,548 535,157
===================================================================================================
Six months ended June 30, 1999
------------------------------
Interest income $ 18,594 475 19,069
Interest expense 8,968 339 9,307
---------------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 9,626 136 9,762
Provision for loan losses 184 312 496
---------------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 9,442 (176) 9,266
Other operating income 2,948 (11) 2,937
Other operating expenses 7,335 2,581 9,916
---------------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 5,055 (2,768) 2,287
Income tax expense (benefit) 1,713 (1,057) 656
---------------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations $ 3,342 (1,711) 1,631
---------------------------------------------------------------------------------------------------
Discontinued operations $ - (47) - (47)
---------------------------------------------------------------------------------------------------
Net earnings (loss) $ 3,342 (47) (1,711) 1,584
---------------------------------------------------------------------------------------------------
June 30, 1999
-------------
Assets $ 519,381 4,794 1,068 525,243
===================================================================================================
</TABLE>
11
<PAGE>
(5) COMPREHENSIVE INCOME
The Company's comprehensive income for the six month periods ended June 30,
2000 and 1999, is as follows (dollars in thousands):
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------
2000 1999
------- --------
<S> <C> <C>
Net earnings $1,486 $ 1,584
Other comprehensive earnings
Unrealized gain (loss) on investment securities 96 (4,632)
Reclass adjustment for net gains included in net earnings - (249)
Income tax effect (37) 1,885
------- --------
Total comprehensive earnings (loss) $1,545 $(1,412)
------- --------
</TABLE>
(6) COMMITMENTS AND CONTINGENT LIABILITIES
Because of the nature of their activities, the Company and Subsidiaries are
subject to pending and threatened legal actions, which arise in the normal
course of business. In the opinion of management, based on the advice of
legal counsel, the disposition of any known pending legal actions will not
have a material adverse effect on the financial position or its liquidity
and results of operations of the Company.
(7) DISCONTINUED OPERATIONS
In January 2000, the Company formally adopted a plan to liquidate the
mortgage-banking segment, which is comprised entirely of the operations of
CMI. The mortgage-banking segment does not include the subsidiary bank's
mortgage lending activities, which are a component of continuing
operations. As a result of the decision to discontinue the mortgage-banking
segment, all related operating activity was reclassified and reported as
discontinued operations for financial reporting purposes at December 31,
1999.
The financial statements for the six months ended June 30, 2000, reflect a
loss from discontinued operations of $837,000, as follows:
Loss from operations of CMI (net of income tax
effect of $75,000) $116,000
Loss on disposal of CMI, including provision for
estimated operating losses during phase-out
period (net of income tax effect of $507,000) 721,000
--------
$837,000
12
<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 earnings
prospects, pricing and fee trends, credit quality and outlook, new business
results, expansion plans, and anticipated expenses. 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 bank operates;
- 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
and the corresponding effect on the Company's interest rate spread and net
interest margin;
- effects on the Company's liquidity if CMI is required to repurchase a
significant amount of the fraudulent loans originated and sold by CMI as
described below;
- increased competition from other financial and non-financial institutions;
- 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.
RESULTS OF OPERATIONS
---------------------
The Company's net earnings were $1,486,000 for the six months ended June 30,
2000, down from $1,584,000 for the six months ended June 30, 1999. This
represents a decrease of 98,000, or 6.2%. The decrease in net earnings is
primarily attributable to discontinued operations, which produced a loss of
$837,000 for the six months ended June 30, 2000, as compared to a loss of
$47,000 for June 30, 1999. The discontinued operations relate to the Company's
mortgage banking segment. Net earnings for the six months ended June 30, 1999
included a $513,000 loss on the sale of a substantial portion of the CFC
portfolio, as well as other charges to close that business. Net earnings of
$1,136,000 for the three months ended June 30, 2000 compared to net earnings of
$671,000 for the three months ended June 30, 1999, for an increase of $465,000,
or 69%.
13
<PAGE>
The Company's Annual Report on Form 10-K for the year ended December 31, 1999
reported that the Company uncovered fraud and other irregularities in CMI's
underwriting and documentation of certain mortgage loans originated and sold by
CMI. A more detailed description of the fraud and other irregularities is
included in that Form 10-K. These mortgage loans were 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,
which could include the fraud and other irregularities uncovered by the Company.
During its ongoing investigation into the fraud and other irregularities at CMI,
the Company decided to discontinue the mortgage-banking segment. All offices of
CMI, which had not been previously closed, were closed in January 2000. A
discussion of the discontinuance and the creation of a reserve liability for
possible losses on the loans affected by the fraud and the irregularities are
included in the Form 10-K for the year ended December 31, 1999.
The Company's net earnings from continuing operations for the six months ended
June 30, 2000 were $2,323,000, a 42.4% increase from net earnings from
continuing operations of $1,631,000 for the six months ended June 30, 1999. Net
earnings from continuing operations for the three months ended June 30, 2000
were $1,136,000 compared to $776,000 for the three months ended June 30, 1999, a
46% increase. These increases were primarily due to the charges in 1999 to close
CFC, as discussed above.
Basic earnings per share from continuing operations increased to $0.53 for the
six months ended June 30, 2000 as compared to $0.37 for the six months ended
June 30, 1999. When including discontinued operations, basic earnings per share
decreased to $0.34 for the six months ended June 30, 2000 as compared to $0.36
for the six months ended June 30, 1999. Basic earnings (loss) per share from
discontinued operations was ($.19) for the six months ended June 30, 2000 and
($0.01) for the six months ended June 30, 1999. Per common share data reflects
the May 1999 2-for-1 stock split in the form of a 100% stock dividend. Basic
earnings per share from continuing operations increased to $0.26 for the three
months ended June 30, 2000 as compared to $0.17 for the three months ended June
30, 1999. When including discontinued operations, basic earnings per share was
still the same for the three months ended June 30, 2000 and $0.15 for the three
months ended June 30, 1999.
The Company's banking segment posted net earnings of $3,291,000 for the six
months ended June 30, 2000, as compared to $3,342,000 for the six months ended
June 30, 1999, for a decrease of 1.5%. The decrease is primarily attributable
to the gain on sale of investment securities of $249,000 for the six months
ended June 30, 1999. There were no gains/losses during the same period in 2000.
The Company's mortgage banking segment, posted a net loss of $837,000 for the
six months ended June 30, 2000, as compared to a net loss of $47,000 for the
same time period in 1999. As discussed above, in January 2000, the Company
formally adopted a plan to liquidate the mortgage-banking segment, which is
comprised entirely of the operations of CMI. The mortgage-banking segment does
not include the subsidiary bank's mortgage lending activities, which are a
component of continuing operations. As a result of the decision to discontinue
the mortgage-banking segment, all related operating activity was reclassified
and reported as discontinued operations for financial reporting purposes.
The loss from discontinued operations included losses from operating activities
of CMI and the loss on disposal of the mortgage-banking segment. Included in
this charge are accruals for operating losses during the phase-out period,
accruals for salary and severance payments, write-downs of the value of fixed
assets, accruals for lease liabilities, and other items.
14
<PAGE>
Segment information presented under "Other" includes the holding company and
consumer finance business. This segment produced a net loss of $968,000 for the
six months ended June 30, 2000, compared to a net loss of $1,711,000 for the six
months ended June 30, 1999. The decrease in net losses for June 30, 2000 is
primarily due to net losses associated with the sale of a substantial portion of
its loan portfolio and other related charges involved in closing that business
taken in the first six months of 1999.
INTEREST INCOME
---------------
Net interest income before provision for loan losses, the Company's primary
source of earnings, was $9,904,000 for the six months ended June 30, 2000, a
$142,000, or 1.5% increase over the same period in 1999.
Management believes that net interest margins may narrow as competitive
pressures in the market place expand. Competition from financial institutions
and non-traditional competitors, as well as general economic trends, may
continue to impact future earnings. 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.
The average net interest margin, on a tax equivalent basis (including
non-accruing loans), decreased for the first six months of 2000 to 4.12% as
compared to 4.14% for the same period in 1999. The decrease can primarily be
attributed to a decrease in the average yield on earning assets due to
repricing.
The ratio of average earning assets to average total assets was 93.1% for the
first six months of 2000 as compared to 94.2% for the same time period in 1999.
PROVISION FOR 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 remained unchanged at 1.27% at June 30,
2000 as compared to December 31, 1999.
The provision for loan losses recorded during the first six months of 2000 was
$210,000 as compared to $496,000 during the same period in 1999. The decrease
is due to provisions recorded in 1999 related to CFC. 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. The Company continues to experience strong loan demand.
Should strong loan growth continue in the future, the quarterly assessment of
adequacy of the allowance may indicate the need for an increase in the provision
for loan losses.
15
<PAGE>
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 0.56% of total assets as of June 30, 2000, which
has decreased from 0.66% at December 31, 1999. The following table summarizes
the components of non-performing assets at June 30, 2000 and at December 31,
1999:
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
(dollars in thousands)
Non-accrual loans $2,236 $2,685
Loans past due 90+ days & still accruing 313 573
Restructured loans 109 120
Other real estate owned 345 201
------ ------
TOTAL NON-PERFORMING ASSETS $3,003 $3,579
====== ======
Year-to-date net charge-offs at June 30, 2000 were $89,000 as compared to
$134,000 at June 30, 1999. Management continues to closely monitor all past
dues and to improve collection efforts.
OTHER OPERATING INCOME
----------------------
Total other operating income is comprised of mortgage loan origination income
from the subsidiary bank, trust services, deposit service charges, other
customer service charges, and other miscellaneous income. Excluding security
gains and losses, other operating income was $2,319,000 for the six months ended
June 30, 2000, a decrease from $2,688,000 or 13.7% for the six months ended June
30, 1999. This change can be primarily attributed to a decrease in mortgage
loan origination income from the subsidiary bank of $353,000. The decreased
mortgage loan activity at the subsidiary bank was a result of the unfavorably
high interest rate environment in effect for fifteen and thirty year mortgages
on one-to-four-family residential properties. For the three months ended June
30, 2000, other operating income, excluding security gains and losses, was
$1,167,000 as compared to $1,264,000 for the same period in 1999.
There was no security sale activity for the six months ended June 30, 2000 as
compared to net gains of $249,000 for the same time period in 1999. The entire
investment portfolio is classified as available-for-sale and the 1999 sales were
made from the available-for-sale classification. During 1999 several securities
were sold at a gain to take advantage of market conditions at the time of the
sale. The portfolio is recorded at current market value in the accompanying
financial statements. It is management's expectation to classify all investment
securities purchased as available-for-sale for the foreseeable future. Changes
in the market value of these securities are reflected in equity, net of
applicable income taxes. The decision to purchase or sell a security is based
on a number of factors including, but not limited to, the potential for
increased yield, improved liquidity, asset mix adjustment, improvement in the
interest rate gap, and collateral (pledging) requirements of local
municipalities. For the three months ended June 30, 2000, no security gains and
losses were recognized as compared to $4,000 during the same period in 1999.
OTHER OPERATING EXPENSES
------------------------
Other operating expenses were $8,590,000 for the six months ended June 30, 2000
as compared to $9,916,000 for the six months ended June 30, 1999. Salaries and
employee benefits expense represents the largest component of other operating
expenses. This category decreased $228,000, or 4.2% from the six month period
ended June 30, 1999 to June 30, 2000. The decrease is primarily attributable to
the closure of CFC and also reduced staff levels at the subsidiary bank and the
holding company, as the Company has consolidated certain "back office"
functions.
16
<PAGE>
Occupancy and furniture and fixtures expenses were $1,237,000 for the six months
ended June 30, 2000, a decrease of $201,000, or 14.0%, from the same period in
1999. Outside services and other expenses decreased 17.8% to $1,300,000 during
the six months ended June 30, 2000 as compared to $1,582,000 for the same period
in 1999. Advertising expense decreased 13.1% in the first six months of 2000 to
$204,000 versus $235,000 for the first six months of 1999. In addition other
operating expenses included a $513,000 loss on the sale of loans discussed
above, as well as other expenses associated with the closure of CFC. Management
continues to control overhead expenses by emphasizing cost containment and by
taking advantage of available economies of scale at the holding company level.
However, management's cost containment measures are tempered by the need to
maintain consistently high levels of customer service and the need to attract
and retain qualified staff. For the quarter ended June 30, 2000, total other
operating expenses decreased $232,000 over the corresponding three-month period
in 1999.
FINANCIAL CONDITION
-------------------
Total assets at June 30, 2000, decreased $5,693,000 as compared to December 31,
1999. This decrease is primarily due to a decrease in mortgage loans held for
sale of $14,670,000 offset by an increase in net loans of $11,576,000. The
decrease in assets along with a $12,133,000 increase in deposits allowed for a
decrease in other borrowings of $17,389,000. Average assets for the first six
months of 2000 increased by $12,619,000 or approximately 2.4% as compared to the
corresponding period in 1999. This increase was primarily attributed to a
$24,363,000 increase in the average net loan portfolio offset by a decrease in
average mortgage loans held for sale of $14,434,000. Average total deposits
grew 2.9% over the corresponding period in 1999 to $462,525,000. Despite this
growth in average deposits, the subsidiary bank continues 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 $297,000 of brokered deposits at June
30, 2000, with interest rates of 6.75% maturing in August 2000. Brokered
deposits were unchanged from December 31, 1999.
CAPITAL
-------
The Company is committed to maintaining strong capital position at the
subsidiary bank and on a consolidated basis. Management monitors, analyzes and
forecasts capital positions to ensure that adequate capital is available to
support growth and maintain financial soundness. The Company's Tier 1 leverage
ratio as of June 30, 2000 was 7.58%, an increase from 7.26% at December 31,
1999. The ratio exceeds the regulatory well-capitalized levels, and management
believes the Company is maintaining a strong capital position. The Company's
June 30, 2000 total risk weighted capital ratio also increased to 11.26% from
11.11% at December 31, 1999. The Tier 1 capital ratio at June 30, 2000
increased to 10.06% from 9.91% at December 31, 1999. Both the total risk
weighted and Tier 1 Capital ratios also continue to exceed regulatory
well-capitalized levels.
Total stockholder' equity increased $1,386,000 from December 31, 1999 to June
30, 2000. This resulted from net earnings for the six months ended June 30,
2000 of $1,486,000, the issuance of common stock totaling $235,000, offset in
part by cash dividends on common stock of $394,000. In addition, accumulated
other comprehensive loss decreased by $59,000 due to the change in fair value of
investment securities.
17
<PAGE>
LIQUIDITY
---------
The Company ensures the subsidiary bank maintains 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, Federal Home Loan Bank advances, and the bank's federal funds position
that, 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 bank through its discretionary access to short-term funding
provided by its line of credit, in case of unanticipated demand for funds.
Should the subsidiary bank's loan portfolio continue to grow faster than
customer deposits, the Company may need to increase its use of alternative
funding sources.
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 six months of 2000 as compared to the same
period in 1999. These fluctuations primarily relate to the changes in the loan,
investment, and mortgage loans held for sale portfolios, as explained above.
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.
The Asset/Liability Committee (ALCO) reviews interest rate exposure on a regular
basis. 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.
18
<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. In June 2000, the FASB issued SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities--an Amendment of Statement No. 133," which statement addresses
various implementation issues relative to SFAS No. 133. SFAS No. 133 is not
expected to have a material impact on the Company's financial position, results
of operations or liquidity.
19
<PAGE>
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, 1999. For information regarding the Company's market risk,
refer to its Annual Report on Form 10-K for the year ended December 31, 1999.
20
<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
The annual meeting of the Company was held on May 25, 2000 at which one proposal
was submitted to a vote of security holders:
Proposal 1: Election of three members to the board of directors of the Company.
Vote For Votes Withheld
-------- --------------
Bruce P. Bickner 3,745,226 12,776
John W. Castle 3,654,590 12,176
Peter H. Henning 3,745,826 12,176
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
21
<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.
Castle BancGroup, Inc.
/s/ John W. Castle
-----------------------
By: John W. Castle, Chairman of the Board
Chief Executive Officer and Director
Castle BancGroup, Inc.
Date: August 11, 2000
/s/ Micah R. Bartlett
--------------------------
By: Micah R. Bartlett, Chief Accounting Officer
and Controller
Castle BancGroup, Inc.
Date: August 11, 2000
22
<PAGE>
EXHIBIT INDEX
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
23
<PAGE>
