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 March 31, 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 (I.R.S. Employer
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 4,376,893 shares of Common Stock outstanding as of April 30,
2000.
<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (dollars in thousands, except share data)
(UNAUDITED)
- ---------------------------------------------------------------------------------------------------------
ASSETS March 31, December 31,
2000 1999
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 13,202 17,501
Investment securities available for sale (note 2) 123,800 126,159
Mortgage loans held for sale, lower of cost or market 5,443 14,892
Loans (note 3) 368,110 364,419
Less:
Allowance for loan losses (note 3) 4,679 4,636
Unearned income and deferred loan fees, net 337 332
- ---------------------------------------------------------------------------------------------------------
Net loans 363,094 359,451
Premises and equipment 11,588 11,547
Goodwill, net of amortization 2,133 2,210
Assets of discontinued operations 1,339 2,878
Other assets 5,831 6,212
- ---------------------------------------------------------------------------------------------------------
$526,430 540,850
=========================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest-bearing $ 51,539 52,274
Interest-bearing 412,610 408,143
- ---------------------------------------------------------------------------------------------------------
Total deposits 464,149 460,417
Other borrowings 22,192 39,486
Other liabilities 2,594 3,539
- ---------------------------------------------------------------------------------------------------------
Total liabilities 488,935 503,442
Stockholders' equity:
Common stock, $.33 1/3 par value; 25,000,000 shares authorized, 4,375,008 and
4,369,663 shares issued and outstanding in 2000 and 1999, respectively 1,458 1,457
Additional paid-in capital 6,899 6,830
Accumulated other comprehensive loss (3,497) (3,164)
Retained earnings 32,635 32,285
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 37,495 37,408
Commitments and contingent liabilities
- ---------------------------------------------------------------------------------------------------------
$526,430 540,850
=========================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF EARNINGS (dollars in thousands, except share data)
(UNAUDITED)
=====================================================================================
3 Months Ended
March 31, 2000 March 31, 1999
- -------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 7,677 7,147
Interest and dividends on investment securities
available for sale:
Taxable 1,746 1,696
Nontaxable 228 241
Interest on excess funds sold 1 0
Interest on mortgage loans held for sale 126 719
- -------------------------------------------------------------------------------------
Total interest income 9,778 9,803
- -------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,401 4,199
Interest on other borrowings 451 551
- -------------------------------------------------------------------------------------
Total interest expense 4,852 4,750
- -------------------------------------------------------------------------------------
Net interest income before provision
for loan losses 4,926 5,053
Provision for loan losses 105 159
- -------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,821 4,894
- -------------------------------------------------------------------------------------
Other operating income
Trust fees 186 198
Deposit service charges 106 86
Other service charges 487 300
Investment securities gains, net 0 245
Mortgage loan origination income, net 115 401
Other income 259 439
- -------------------------------------------------------------------------------------
Total other operating income 1,153 1,669
- -------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 2,608 2,759
Net occupancy expense of premises 298 402
Furniture and fixtures 341 348
Office supplies 50 93
Outside services 119 254
Advertising expense 63 90
FDIC insurance assessment 24 13
Postage and courier 91 101
Telephone expense 75 58
Amortization expense - goodwill 76 76
Loss on sale of loans 0 513
Other expenses 494 625
- -------------------------------------------------------------------------------------
Total other operating expenses 4,239 5,332
- -------------------------------------------------------------------------------------
Earnings before income taxes 1,735 1,231
Income tax expense 548 376
- -------------------------------------------------------------------------------------
Net earnings from continuing operations $ 1,187 855
- -------------------------------------------------------------------------------------
Discontinued operations $ (837) 58
- -------------------------------------------------------------------------------------
Net earnings $ 350 913
=====================================================================================
Basic earnings per common share from:
Continuing operations $ 0.27 0.20
Discontinued operations (0.19) 0.01
Net earnings 0.08 0.21
Diluted earnings per common share from:
Continuing operations $ 0.27 0.20
Discontinued operations (0.19) 0.01
Net earnings 0.08 0.21
=====================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<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
(LOSS) TOTAL
- ---------------------------------------------------------------------------------------------
<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 - - 350 - 350
Unrealized loss on investment
securities - - - (545) (545)
Income tax effect - - - 212 212
-------
Total comprehensive earnings - - - - 17
Issuance of 5,345 shares of common stock 1 69 - - 70
- ---------------------------------------------------------------------------------------------
Balance as of March 31, 2000 $ 1,458 6,899 32,635 (3,497) 37,495
=============================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS (dollars in thousands)
(UNAUDITED)
=======================================================================================================
3 Months Ended
March 31, 2000 March 31,1999
- -------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from continuing operating activities:
Interest received $ 10,044 8,470
Fees received 2,762 2,130
Net decrease in mortgage loans held for sale 9,530 40,281
Interest paid (4,704) (4,843)
Cash paid to suppliers and employees (5,778) (7,271)
Income taxes paid (234) (191)
- -------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities 11,620 38,576
- -------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investment securities available for sale 3,068 10,036
Sales of investment securities available for sale 20 19,764
Purchases of investment securities available for sale (1,013) (27,962)
Net (increase) / decrease in loans (3,767) (107)
Premises and equipment expenditures (343) (864)
- -------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by investing activities (2,035) 867
- -------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase / (decrease) in demand deposits,
NOW accounts, and savings accounts 3,060 (11,873)
Net increase / (decrease) in certificates of deposit 673 (5,889)
Dividends paid on common stock (393) (304)
Net change in other borrowings (17,294) (23,749)
Proceeds from issuance of common stock 70 186
- -------------------------------------------------------------------------------------------------------
Net cash used in financing activities (13,884) (41,629)
- -------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (4,299) (2,186)
Cash and cash equivalents at beginning of year 17,501 12,270
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 13,202 10,084
=======================================================================================================
Reconciliation of net earnings to net cash provided by
continuing operating activities:
Net earnings $ 350 913
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Discontinued operations 837 (58)
Depreciation and amortization 393 420
Provision for loan losses 105 159
Gains on sale of investment securities 0 (245)
(Decrease) increase in:
Income taxes payable 314 184
Interest payable 147 (93)
Unearned income 5 (1,899)
Other liabilities (394) (1,282)
Decrease (increase) in:
Interest receivable 312 559
Other assets 69 (370)
Decrease in mortgage loans held for sale 9,530 40,281
Discount accretion recorded as income (97) (92)
Premium amortization charged against income 49 99
- -------------------------------------------------------------------------------------------------------
Net cash provided by continuing operating activities $ 11,620 38,576
=======================================================================================================
Net change in cash and cash equivalents from discontinued operations $ (628) (1,590)
=======================================================================================================
</TABLE>
See accompanying notes to unaudited consolidated financial statements.
<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 March 31, 2000 and December 31, 1999 follows (dollars
in thousands):
<TABLE>
<CAPTION>
================================================================================
March 31, 2000
- --------------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 66,673 0 (2,658) 64,015
Obligations of state and political
subdivisions 19,620 7 (934) 18,693
Mortgage-backed securities 40,417 3 (2,161) 38,259
- --------------------------------------------------------------------------------
Total debt securities 126,710 10 (5,753) 120,967
- --------------------------------------------------------------------------------
Federal Home Loan Bank stock 2,052 0 0 2,052
Other Equity securities 781 0 0 781
- --------------------------------------------------------------------------------
Total securities $ 129,543 10 (5,753) 123,800
================================================================================
</TABLE>
<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 0 0 2,052
Other equity securities 769 0 0 769
- --------------------------------------------------------------------------------
Total securities $ 131,357 23 (5,221) 126,159
================================================================================
</TABLE>
The amortized cost and fair value of securities available for sale at March
31, 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>
=============================================================
March 31, 2000
- -------------------------------------------------------------
Amortized Fair
cost value
- -------------------------------------------------------------
<S> <C> <C>
Due in one year or less $ 6,480 6,394
Due after one year through five years 35,351 34,152
Due after five years through ten years 32,127 30,707
Due after ten years 12,335 11,455
- -------------------------------------------------------------
86,293 82,708
Mortgage-backed securities 40,417 38,259
- -------------------------------------------------------------
Total debt securities 126,710 120,967
- -------------------------------------------------------------
Federal Home Loan Bank stock 2,052 2,052
Other equity securities 781 781
- -------------------------------------------------------------
Total securities $ 129,543 123,800
=============================================================
</TABLE>
Gross realized losses of approximately $0 and $3,748 occurred from security
activity during the three months ended March 31, 2000 and 1999,
respectively. Gross realized gains of $0 and $249,209 occurred from
security activity during the three months ended March 31, 2000 and 1999,
respectively. All security gains and losses were as a result of
transactions involving available for sale securities.
Investment securities carried at approximately $75,230,000 and $82,802,000
at March 31, 2000 and December 31, 1999, respectively, were pledged to
secure deposits and for other purposes as permitted or required by law.
<PAGE>
<TABLE>
<CAPTION>
(3) LOANS
The composition of the loan portfolio at the dates shown is as follows (dollars in thousands):
=====================================================================================================
Mar. 31, 2000 Dec. 31, 1999
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 101,908 105,163
Real estate mortgage 247,613 240,743
Consumer 18,269 18,144
Lease financing receivables 320 369
- -----------------------------------------------------------------------------------------------------
Total loans, gross $ 368,110 364,419
=====================================================================================================
At March 31, 2000 and December 31, 1999, the following items existed (dollars in thousands):
=====================================================================================================
Mar. 31, 2000 Dec. 31, 1999
- -----------------------------------------------------------------------------------------------------
Non-accrual loans and leases $ 2,032 2,685
Loans past due 90 days or more and still accruing 260 573
Restructured loans still accruing and less than 90 days past due 113 120
Other real estate owned 61 201
- -----------------------------------------------------------------------------------------------------
Total non-performing assets $ 2,466 3,579
=====================================================================================================
The following is a summary of activity in the allowance for loan losses (dollars in thousands):
=====================================================================================================
3 months ended 3 months ended
Mar. 31, 2000 Mar. 31, 1999
- -----------------------------------------------------------------------------------------------------
Balance, beginning of period $ 4,636 4,750
Provision charged to expense 105 159
Recoveries on loans previously charged off 22 126
- -----------------------------------------------------------------------------------------------------
4,763 5,035
Less loans charged off 84 224
Less allowance on loans sold 0 500
- -----------------------------------------------------------------------------------------------------
Balance, end of period $ 4,679 4,311
=====================================================================================================
</TABLE>
<PAGE>
The following is a summary of loan loss experience for the three months ended
March 31, 2000, 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, 1999 $ 1,889 1,185 1,357 5 200 4,636
Provision charged to expense 0 40 65 0 0 105
Recoveries on loans previously
charged off 1 10 11 0 0 22
- ----------------------------------------------------------------------------------------------------
1,890 1,235 1,433 5 200 4,763
Less loans charged off 27 0 57 0 0 84
- ----------------------------------------------------------------------------------------------------
Balance, March 31, 2000 $ 1,863 1,235 1,376 5 200 4,679
====================================================================================================
Ratios:
Loans in category to total loans 27.71% 67.25% 4.96% .08% N/A 100.00%
====================================================================================================
</TABLE>
(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 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 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.
<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 March 31, 2000
- -----------------------------------------------------
Interest income $ 9,818 0 (40) 9,778
Interest expense 4,799 0 53 4,852
- ----------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 5,019 0 (93) 4,926
Provision for loan losses 105 0 0 105
- ----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,914 0 (93) 4,821
Other operating income 1,116 0 37 1,153
Other operating expenses 3,577 0 662 4,239
- ----------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 2,453 0 (718) 1,735
Income tax expense (benefit) 826 0 (278) 548
- ----------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations $ 1,627 0 (440) 1,187
- ----------------------------------------------------------------------------------------------
Discontinued operations $ 0 (837) 0 (837)
- ----------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,627 (837) (440) 350
- ----------------------------------------------------------------------------------------------
March 31, 2000
- --------------
Assets $ 532,392 1,339 (7,301) 526,430
==============================================================================================
Three months ended March 31, 1999
- -----------------------------------------------------
Interest income $ 9,554 0 249 9,803
Interest expense 4,743 0 7 4,750
- ----------------------------------------------------------------------------------------------
Net interest income before provision for loan losses 4,811 0 242 5,053
Provision for loan losses 72 0 87 159
- ----------------------------------------------------------------------------------------------
Net interest income after provision for loan losses 4,739 0 155 4,894
Other operating income 1,722 0 (53) 1,669
Other operating expenses 3,705 0 1,627 5,332
- ----------------------------------------------------------------------------------------------
Earnings (loss) before income taxes 2,756 0 (1,525) 1,231
Income tax expense (benefit) 958 0 (582) 376
- ----------------------------------------------------------------------------------------------
Net earnings (loss) from continuing operations $ 1,798 0 (943) 855
- ----------------------------------------------------------------------------------------------
Discontinued operations $ 0 58 0 58
- ----------------------------------------------------------------------------------------------
Net earnings (loss) $ 1,798 58 (943) 913
- ----------------------------------------------------------------------------------------------
March 31, 1999
- --------------
Assets $ 516,229 4,609 (6,956) 513,882
==============================================================================================
</TABLE>
<PAGE>
(5) COMPREHENSIVE INCOME
The Company's comprehensive income for the three month periods ended March
31, 2000 and 1999, is as follows (dollars in thousands):
THREE MONTHS ENDED
MARCH 31,
----------------
2000 1999
------ --------
Net earnings $ 350 $ 913
Other comprehensive earnings
Unrealized (loss)/gain on investment securities (545) (1,323)
Reclass adjustment for net gains included in net earnings (0) (245)
Income tax effect 212 600
------ --------
Total comprehensive earnings/(loss) $ 17 $ (55)
------ --------
(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 banks'
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 financial statements for the three months ended March 31, 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
<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 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
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 $350,000 for the three months ended March 31,
2000, down from $913,000 for March 31, 1999. This represents a decrease of
$563,000, or 61.7%. The decrease in net earnings is primarily attributable to
discontinued operations, which produced a loss of $837,000 for March 31, 2000,
as compared to earnings of $58,000 for March 31, 1999. The discontinued
operations relate to the Company's mortgage banking segment.
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.
<PAGE>
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 is
included in the Form 10-K for the year ended December 31, 1999.
The Company's net earnings from continuing operations for the three months ended
March 31, 2000 totaled $1,187,000, a 38.8% increase from March 31, 1999 net
earnings from continuing operations of $855,000. This increase was primarily
due to the charges in the first quarter of 1999 to close Castle Finance Company,
which included a $513,000 loss on the sale of a substantial portion of the loan
portfolio and other related expenses. In addition, an increase in interest
rates through 1999 and 2000 reduced the Company's mortgage loan origination
income from the Subsidiary Banks. Those decreases were offset by decreases in
other operating expenses.
Basic earnings per share from continuing operations increased to $0.27 for March
31, 2000 as compared to $0.20 for March 31, 1999. When including discontinued
operations, basic earnings per share decreased to $0.08 for March 31, 2000 as
compared to $0.21 for March 31, 1999. Basic earnings (loss) per share from
discontinued operations was ($.19) for March 31, 2000 and $0.01 for March 31,
1999. Per common share data reflects the May 1999 2-for-1 stock split in the
form of a 100% stock dividend.
The Company's banking segment posted net earnings of $1,627,000 for the three
months ended March 31, 2000, as compared to $1,798,000 for March 31, 1999.
Earnings for the first quarter ending March 31, 2000 decreased 9.5% from the
same period in 1999. The decrease is primarily attributable to the gain on sale
of investment securities of $245,000 in the first quarter 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
three months ended March 31, 2000, as compared to earnings of $58,000 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 banks' 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 first quarter 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.
Segment information presented under "Other" includes the holding company and
consumer finance business. This segment produced a net loss of $440,000 for the
three months ended March 31, 2000, compared to net losses of $943,000 for March
31, 1999. The decrease in net losses for March 31, 2000 is primarily due to net
losses associated with CFC regarding a sale of a substantial portion of its loan
portfolio and other related charges involved in closing that business taken in
the first quarter of 1999.
<PAGE>
INTEREST INCOME
---------------
Net interest income before provision for loan losses, the Company's primary
source of earnings, totaled $4,926,000 for the three months ended March 31,
2000, a $127,000, or 2.5% decrease over the same period in 1999. This decrease
can primarily be attributed to a $346,000 decrease in net interest income before
provision for loan losses at CFC associated with the sale of a substantial
portion of its portfolio in March of 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), remained unchanged at 4.15% for the first three months of
2000 as compared to 1999.
The ratio of average earning assets to average total assets was unchanged at
94.4% for the first three months of 2000 as compared to 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 March 31,
2000 as compared to December 31, 1999. The allowance level was at 1.46% of
net loans at December 31, 1998.
The provision for loan losses recorded during the first three months of 2000 was
$105,000 as compared to $159,000 during the same period in 1999. 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 0.47% of total assets as of March 31, 2000, which
has decreased from 0.66% at December 31, 1999. The following table summarizes
the components of non-performing assets at March 31, 2000 and at December 31,
1999:
<PAGE>
<TABLE>
<CAPTION>
MARCH 31,2000 DECEMBER 31, 1999
----------------------- ------------------
(dollars in thousands)
<S> <C> <C>
Non-accrual loans $ 2,032 $ 2,685
Loans past due 90+ days & still accruing 260 573
Restructured loans, performing in accordance
with terms of a restructure agreement 113 120
Other real estate owned 61 201
----------------------- ------------------
TOTAL NON-PERFORMING ASSETS $ 2,466 $ 3,579
======================= ==================
</TABLE>
Year-to-date net charge-offs at March 31, 2000 totaled $62,000 as compared to
$98,000 at March 31, 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 subsidiary banks, trust services, deposit service charges, other customer
service charges, and other miscellaneous income. Excluding security gains and
losses, other operating income totaled $1,153,000 at March 31, 2000, a decrease
from $1,424,000 at March 31, 1999. This change represents a 19.0% decrease from
March 31, 1999 to March 31, 2000, which can be primarily attributed to a
decrease in mortgage loan origination income from subsidiary banks of $286,000.
The decreased mortgage loan activity at the subsidiary banks 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.
There were no net security gains for the first quarter as compared to net gains
of $245,000 for the same time period in 1999. The entire investment portfolio
is classified as available-for-sale and all 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.
OTHER OPERATING EXPENSES
------------------------
Other operating expenses totaled $4,239,000 at March 31, 2000 as compared to
$5,332,000 at March 31, 1999. Salaries and employee benefits expense represents
the largest component of other operating expenses. This category decreased
$151,000, or 5.4% from March 31, 1999 to March 31, 2000. The decrease for the
quarter ending March 31, 2000 is primarily attributable to the closure of CFC.
In addition, the Company has been able to reduce salary and benefits expense as
it has consolidated certain "back office" functions.
Occupancy and furniture and fixtures expenses totaled $639,000 at March 31,
2000, a decrease of $111,000, or 14.8%, from the same period in 1999. Outside
services and other expense decreased 30.3% to $613,000 during the first quarter
of 2000 as compared to $879,000 in the first quarter of 1999. Advertising
expense decreased 30.0% in the first quarter of 2000 to $63,000 versus $90,000
in the first quarter of 1999. In addition, the first quarter of 1999 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.
FINANCIAL CONDITION
--------------------
Total assets at March 31, 2000, decreased $14,420,000 as compared to December
31, 1999. This decrease is primarily due to a decrease in mortgage loans held
for sale of $9,449,000 and cash and due from banks of $4,299,000. The decrease
in assets allowed for a decrease in other borrowings of $17,294,000. Average
assets for the first three months of 2000 decreased by $1,561,000 or
approximately 0.3% as compared to the corresponding period in 1999. This
decrease was primarily attributed to a $26,367,000 increase in the average net
loan portfolio offset by a decrease in average mortgage loans held for sale of
$18,867,000 and a decrease in average securities available for sale of
$6,600,000. Average total deposits grew 1.9% over the corresponding period in
1999 to $456,879,000. 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
$297,000 of brokered deposits at March 31, 2000, with interest rates of 6.75%
and maturating in August 2000. Brokered deposits were unchanged from December
31, 1999.
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 March 31, 2000 was 7.41%, 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 March 31, 2000 total risk weighted capital ratio also increased to
11.14% from 11.11% at December 31, 1999. The Tier 1 capital ratio at March 31,
2000 increased to 9.94% 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.
Accumulated other comprehensive losses increased $333,000 from $3,164,000 at
December 31, 1999 to $3,497,000 at March 31, 2000. This increase is primarily
due to the change in the fair value of the investment portfolio caused by an
increase in interest rates. Total stockholder' equity increased $87,000 from
December 31, 1999 to March 31, 2000.
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 three 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) for each bank 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.
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.
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.
<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
<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: May 12, 2000
/s/ Micah R. Bartlett
- --------------------------
By: Micah R. Bartlett, Chief Accounting Officer
and Controller
Castle BancGroup, Inc.
Date: May 12, 2000
<PAGE>
EXHIBIT INDEX
Exhibit 11 Computation of Per Share Earnings
Exhibit 27 Financial Data Schedule
22
<PAGE>
EXHIBIT 11
CASTLE BANCGROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
The components of basic and diluted EPS for the three month periods ended
March 31, 2000 and 1999 were as follows: (dollars in thousands, except share
data)
2000 1999
--------- ---------
Basic EPS:
Net earnings 350 913
Average common shares 4,372,675 4,347,702
========= =========
Basic EPS .08 .21
========= =========
Diluted EPS:
Net earnings 350 913
Average common shares 4,372,675 4,347,702
Assumed exercise of stock optionsLKPLaura K. Potts 50,897 54,370
--------- ---------
Average common shares after assumed conversions 4,423,572 4,402,072
========= =========
Diluted EPS .08 .21
========= =========
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 9
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 13202
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 123800
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 373216
<ALLOWANCE> 4679
<TOTAL-ASSETS> 526430
<DEPOSITS> 464149
<SHORT-TERM> 22192
<LIABILITIES-OTHER> 2594
<LONG-TERM> 0
0
0
<COMMON> 1458
<OTHER-SE> 36037
<TOTAL-LIABILITIES-AND-EQUITY> 526430
<INTEREST-LOAN> 7677
<INTEREST-INVEST> 1974
<INTEREST-OTHER> 127
<INTEREST-TOTAL> 9778
<INTEREST-DEPOSIT> 4401
<INTEREST-EXPENSE> 4852
<INTEREST-INCOME-NET> 4926
<LOAN-LOSSES> 105
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 4239
<INCOME-PRETAX> 1735
<INCOME-PRE-EXTRAORDINARY> 1735
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 350
<EPS-BASIC> .08
<EPS-DILUTED> .08
<YIELD-ACTUAL> 4.15
<LOANS-NON> 2032
<LOANS-PAST> 260
<LOANS-TROUBLED> 113
<LOANS-PROBLEM> 2466
<ALLOWANCE-OPEN> 4636
<CHARGE-OFFS> 84
<RECOVERIES> 22
<ALLOWANCE-CLOSE> 4679
<ALLOWANCE-DOMESTIC> 4679
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200
</TABLE>
