Item 1. Business - -------------------
Castle BancGroup, Inc. (Company) is a registered bank holding company organized in 1984 under Delaware law. The operations of the Company and its subsidiaries consist primarily of those financial activities common to the commercial financial services industry, including trust and data processing. Unless the context otherwise requires, the term "Company" as used herein includes the Company and its subsidiaries on a consolidated basis. Substantially all of the operating income of the Company is attributable to its subsidiaries.
The primary function of the Company is to coordinate the policies and operations of its subsidiaries in order to improve and expand their products and services and to effect operating economies of scale. The Company provides auditing, marketing, accounting, human resources, and data processing services to the subsidiaries. It also provides management services, training, and business development assistance.
The Company is also responsible for the identification and evaluation of potential financial industry acquisition targets within the strategic market area, generally defined as the corridor bounded by Chicago's western suburbs on the east, Interstate 39 on the west, and southern Wisconsin on the north.
Castle Bank N.A., First National Bank in DeKalb, and Castle Bank Harvard, N.A. merged on June 26, 2000. The name of the merged bank is Castle Bank, N.A. (CB or Subsidiary Bank) and is a wholly owned bank subsidiary of the Company. The Subsidiary Bank provides banking services common to the industry, including but not limited to, demand, savings and time deposits, loans, cash management, electronic banking services, trust services, and credit and debit cards. The Subsidiary Bank serves a diverse customer base including individuals, businesses, governmental units, and institutional customers. The Subsidiary Bank has banking offices in DeKalb, Sycamore, Sandwich, Plano, Sugar Grove, Harvard, McHenry, and Yorkville, Illinois.
CasBanc Mortgage, Inc. (CMI) is an Illinois corporation and wholly owned subsidiary of the Company. CMI was closed in January 2000 and continues to wind down its remaining business. Before its closure, it was a residential mortgage originator and broker that engaged in the origination of residential mortgages, which were subsequently sold in the secondary market. CMI also provided processing services and delivery in the secondary market for residential mortgage loans originated by the Subsidiary Banks. The closure of CMI was accounted for as a discontinued operation.
Castle Finance Company (CFC) is an Illinois corporation and wholly owned subsidiary of the Company. CFC was closed in January 1999 and sold a substantial portion of its loan portfolio in March 1999. CFC continues to wind down its remaining business, which is primarily the collection of a small portfolio of loans that were not sold in March 1999. Before its closure, CFC was a consumer finance company that engaged in making small consumer loans, as well as acting as an agent to sell insurance relating to those loans.
Competition - -----------
Active competition exists in all principal areas where the Company and its subsidiaries operate, not only with other commercial banks, finance companies and mortgage bankers, but also with savings and loan associations, credit unions, and other financial service companies serving the Company's defined market area. The principal methods of competition between the Company and its competitors are price and service. Price competition, primarily in the form of interest rate competition, is a standard practice within the Company's market place as well as the financial services industry. Service and product quality are also significant factors in competing and allow for differentiation from competitors.
Deposits in the Subsidiary Bank are well balanced, with a large customer base and no dominant segment of accounts. The Subsidiary Bank's loan portfolio is also characterized by a large customer base, including loans to commercial, agricultural and consumer customers, with no dominant relationships. There is no readily available source of information that delineates the market for financial services offered by non-bank competitors in the Company's market.
Regulation and Supervision - ----------------------------
Bank holding companies and banks are extensively regulated under both federal and state law. To the extent that the following information describes statutory and regulatory provisions, it is qualified in its entirety by reference to the particular statutes and regulations. Any significant change in applicable law or regulation may have an effect on the business and prospects of the Company and its subsidiaries.
The Company is registered as a bank holding company under the Bank Holding Company Act of 1956, as amended, and is regulated by the Board of Governors of the Federal Reserve System (Federal Reserve Board). Under the Bank Holding Company Act, the Company is required to file annual reports and such additional information as the Federal Reserve Board may require and is subject to examination by the Federal Reserve Board. The Federal Reserve Board has jurisdiction to regulate virtually all aspects of the Company's business. See "The Company's Banking Subsidiary" below for discussion of regulators of the Subsidiary Bank.
The Bank Holding Company Act requires every bank holding company to obtain the prior approval of the Federal Reserve Board before merging with or consolidating into another bank holding company, acquiring substantially all the assets of any bank or acquiring directly or indirectly any ownership or control of more than 5% of the voting shares of any bank.
The Bank Holding Company Act also prohibits a bank holding company, with certain exceptions, from acquiring direct or indirect ownership or control of more than 5% of the voting shares of any company which is not a bank and from engaging in any business other than that of banking, managing and controlling banks, or furnishing services to banks and their subsidiaries. The Company, however, may engage in certain businesses determined by the Federal Reserve Board to be so closely related to banking or managing and controlling banks as to be a proper incident thereto. See "Financial Modernization Legislation" below for a discussion of expanded activities permissible to bank holding companies that become financial holding companies.
Deposits of the Subsidiary Bank are insured by the Federal Deposit Insurance Corporation (FDIC) and are subject to the provisions of the Federal Deposit Insurance Act. Under the FDIC's risk-based insurance assessment system, each insured bank is placed in one of nine risk categories based on its level of capital and other relevant information. Each insured bank's insurance assessment rate is then determined by the risk category in which it has been classified by the FDIC. There is currently a 27 basis point spread between the highest and lowest assessment rates, so that banks classified as strongest by the FDIC are subject in 2001 to no insurance assessment, and banks classified as weakest by the FDIC are subject to an insurance assessment rate of 0.27%. In addition to its insurance assessment, each insured bank is subject in 2000 to quarterly debt service assessments in connection with bonds issued by a government corporation that financed the federal savings and loan bailout. The first quarter 2001 debt service assessment was 0.0196%.
National banking regulations restrict the amount of dividends that a bank may pay to its stockholders. Generally, the regulations provide that dividends are limited to net earnings for the current and two preceding years, reduced by dividends paid and transfers to permanent capital. At December 31, 2000, subject to minimum regulatory capital guidelines, the Subsidiary Bank could, without prior approval of regulatory authorities, declare dividends of approximately $6,134,000.
The Company's Banking Subsidiary - -----------------------------------
The Subsidiary Bank is a nationally chartered bank and a Federal Reserve member, and is therefore subject to regulation and examination by the Office of the Comptroller of the Currency, as well as the Federal Reserve Board. The Subsidiary Bank is subject to the provisions of the Federal Deposit Insurance Act and examination by the FDIC. The examinations by the various regulatory authorities are designed for the protection of bank depositors.
The federal laws and regulations generally applicable to the Subsidiary Bank regulate among other things, the scope of its business, its investments, its reserve against deposits, the nature and amount of and collateral for loans, and the location of banking offices and types of activities which may be performed at such offices.
Subsidiary banks of a bank holding company are subject to certain restrictions under the Federal Reserve Act and the Federal Deposit Insurance Act on loans and extensions of credit to the bank holding company or to its other subsidiaries, investments in the stock or other securities of the bank holding company or its other subsidiaries, or advances to any borrower collateralized by such stock or other securities.
Capital Requirements - ---------------------
All federal bank regulatory agencies have adopted risk-based capital guidelines. These guidelines establish required levels of capital that are monitored by certain ratios. Capital is divided into two components; Tier 1 capital which includes common stock, additional paid-in capital, retained earnings and certain types of perpetual preferred stock less goodwill, and Tier 2 capital which includes, among other things, limited life preferred stock, subordinated debt, limited amounts of unrealized gains on equity securities, and the allowance for possible loan losses. These components of capital are compared to both total assets as reported on the balance sheet and assets that have been adjusted to compensate for associated risk to the organization. The guidelines require a tangible leverage capital ratio (defined as Tier 1 capital to average assets) of 3.00% for bank holding companies and banks that meet certain specified criteria, including having the highest regulatory rating. All other banking organizations are required to maintain a leverage ratio of at least 4.00%. The Company had a tangible leverage capital ratio of 7.73% as of December 31, 2000. The guidelines require a total capital ratio (defined as the total of both Tier 1 and Tier 2 capital to risk weighted assets) of 8.00%. The Company had a total capital to risk weighted assets ratio of 11.56% as of December 31, 2000. The guidelines also require a Tier 1 ratio (defined as Tier 1 capital to risk weighted assets) of 4.00%. The Company had a Tier 1 ratio of 10.44% as of December 31, 2000. The regulatory requirements are considered minimums and actual ratios should be commensurate with the level and nature of all risks of a company (as determined by the regulatory agencies). Regulators generally expect organizations that are experiencing internal growth or are making acquisitions to maintain capital levels substantially above the minimum supervisory levels and comparable to peer groups, without significant reliance on intangible assets. Management intends to continue its emphasis on a strong capital position.
Monetary Policy and Economic Conditions - -------------------------------------------
The earnings of commercial banks and bank holding companies are affected not only by general economic conditions, but also by the policies of various governmental regulatory authorities. In particular, the Federal Reserve Board influences conditions in the money and capital markets, which affect interest rates and growth in bank credit and deposits. Federal Reserve Board monetary policies have had a significant effect on the operating results of commercial banks in the past and this is expected to continue in the future. The general effect, if any, of such policies on future business and earnings of the Company and its Subsidiary Bank cannot be predicted.
Financial Modernization Legislation - -------------------------------------
On November 12, 1999, the President signed into law the Gramm-Leach-Bliley Act (GLB Act). The GLB Act significantly changes financial services regulation by expanding permissible non-banking activities of bank holding companies and removing barriers to affiliations among banks, insurance companies, securities firms and other financial services entities. These activities and affiliations can be structured through a holding company structure or, subject to certain limitations, through a financial subsidiary of a bank. The GLB Act also establishes a system of federal and state regulation based on functional regulation, meaning that primary regulatory oversight for a particular activity will generally reside with the federal or state regulator having the greatest expertise in the area. Banking is to be supervised by banking regulators, insurance by state insurance regulators and securities activities by the SEC and state securities regulators. The GLB Act also establishes a minimum federal standard of financial privacy and adopts various other provisions designed to improve the delivery of financial services to consumers while maintaining an appropriate level of safety in the financial services industry.
The GLB Act repeals the anti-affiliation provisions of the Glass-Steagall Act and revises the Bank Holding Company Act to permit qualifying holding companies, called "financial holding companies," to engage in, or to affiliate with companies engaged in, a full range of financial activities including banking, insurance activities (including insurance portfolio investing), securities activities, merchant banking and additional activities that are "financial in nature," incidental to financial activities or, in certain circumstances, complementary to financial activities. A bank holding company's subsidiary banks must be "well-capitalized" and "well-managed" and have at least a "satisfactory" Community Reinvestment Act rating for the bank holding company to elect status as a financial holding company. The Company, at present, has not elected status as a "financial holding company."
A significant component of the GLB Act's focus on functional regulation relates to the application of federal securities laws and SEC oversight to bank securities activities previously subject to blanket exemptions. Among other things, the GLB Act amends the definitions of "broker" and "dealer" under the Securities Exchange Act of 1934 to remove the blanket exemption for banks. Following effectiveness of these amendments, in May, 2001, banks will no longer be able to rely solely on their status as banks to avoid registration as broker-dealers. Instead, banks will need to carefully consider their securities activities in light of a new set of limited exemptions designed to allow banks to continue, without broker-dealer registration, only those activities traditionally considered to be primarily banking or trust activities. The GLB Act also amends, effective May, 2001, the Investment Advisers Act of 1940 to require the registration of banks that act as investment advisers for mutual funds.
Employees - ---------
As of December 31, 2000, the Company and its subsidiaries had a total of 220 full-time equivalent employees. None of these employees are subject to a collective bargaining agreement.
Item 2.
Item 2. Properties - --------------------
The following table sets forth information related to the Subsidiary Bank's properties utilized in the Subsidiary Bank's business. These properties are suitable and adequate for the Subsidiary Bank's business needs.
Item 3.
Item 3. Legal Proceedings - ----------------------------
Neither the Company nor any subsidiary is a party to, and none of their property is subject to, any material legal proceedings at this time. However, the Company and its subsidiaries are from time to time parties to routine litigation incidental to their businesses.
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders - ---------------------------------------------------------------------
No matters, through the solicitation of proxies or otherwise, were submitted to a vote of security holders during the quarter ended December 31, 2000.
PART II
Item 5.
Item 5. Market for the Registrant's Common Equity and Related Stockholder - -------------------------------------------------------------------------------- Matters - -------
Since June 29, 1998 the Company's stock has been traded over-the-counter and has been quoted on the OTC Bulletin Board, under the symbol "CTBG." Before June 29, 1998, there was no established market for the Company's stock. The Company completed in May 1999 a 2-for-1 stock split in the form of a 100% stock dividend. All information presented herein reflects the stock split. The following table reflects the quarterly high and low bid quotations for the Company's stock since January 1, 1999:
2000 High Low - ---------------------------------------------------------------------- Fourth Quarter $12.75 11.00 Third Quarter 13.75 12.75 Second Quarter 13.25 10.50 First Quarter 14.00 10.25
1999 High Low - ---------------------------------------------------------------------- Fourth Quarter $16.25 12.25 Third Quarter 16.375 16.25 Second Quarter 16.125 15.00 First Quarter 15.00 14.50
These quotations are based on information provided by the company's principal market maker, and reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.
The approximate number of record holders of Common Stock of the Company as of March 12, 2001 was 1,039.
Cash dividends on the above referenced common stock are declared semi-annually. Dividends declared for the years ended December 31, 2000 and 1999 were as follows:
2000 1999 - ----------------------------------------------------------------- First semi-annual dividend $0.09 0.07 Second semi-annual dividend 0.12 0.09 ----- ---- Total $0.21 0.16 ===== ====
The amount of dividends payable by the Company on its common stock is limited by the provisions of its long-term debt agreement. Dividends are limited to 50% of the net earnings, less dividends paid, in the previous eight quarters. As of December 31, 2000, the Company could declare dividends of approximately $402,000 beyond dividends already paid in 1999 and 2000.
Item 6.
Item 6. Selected Financial Data - -----------------------------------
Five Year Summary of Selected Consolidated Financial Data
For years ended December 31 (Dollars in thousands, except per share data)
Item 7.
Item 7. Management's Discussion and Analysis of Financial Condition and Results - -------------------------------------------------------------------------------- of Operations - --------------
The following discussion is management's analysis of the consolidated financial condition and results of operations of the Company, which may not otherwise be apparent from the consolidated financial statements included in this report at Item 8. Reference should be made to those statements, the notes thereto and the selected financial data presented elsewhere in this report for an understanding of the following discussion and analysis.
Forward-Looking Statements - ---------------------------
Certain statements in this Annual Report on Form 10-K 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; - - 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 totaled $3,783,000 in 2000, an increase from $261,000 in 1999. This represents an increase of $3,522,000. Net earnings totaled $4,735,000 for 1998. The increase in net earnings in 2000 is attributable to the impact of discontinued operations in 1999, which produced a loss of $837,000 in 2000 as compared to a loss of $3,786,000 in 1999. The discontinued operations relate to the Company's mortgage banking segment. In addition, a loss of $514,000 was recorded on the sale of a substantial portion of the CFC loan portfolio in March, 1999. There was no loss recorded in 2000.
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. Through December 31, 2000, the Company repurchased and re-sold or indemnified investors for 34 loans.
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 in 2000 totaled $4,620,000, a 14.2% increase from 1999 net earnings from continuing operations of $4,047,000. Net earnings from continuing operations for 1998 was $4,159,000. The increase in net earnings from continuing operations was due primarily to the loss in 1999 on the sale of a substantial portion of the CFC loan portfolio as mentioned earlier.
Net earnings applicable to common stock was $3,783,000 for 2000, $261,000 for 1999, and $4,712,000 for 1998. Net earnings applicable to common stock differs from net earnings due to dividends paid on preferred stock. There were no dividends paid on preferred stock in 2000 and 1999 as compared to $23,000 in 1998. The Company redeemed $300,000 of its preferred stock in 1998.
Basic earnings per share from continuing operations increased to $1.05 for 2000 as compared to $0.93 for 1999 and $0.96 for 1998. Basic earnings per share increased to $0.86 for 2000 as compared to $0.06 for 1999 and $1.09 for 1998. Basic earnings (loss) per share from discontinued operations was ($0.19) in 2000, ($0.87) in 1999, and $0.13 in 1998. Per common share data reflects the May 1999 2-for-1 stock split in the form of a 100% stock dividend. The following table highlights significant factors that have contributed to the changes in basic net earnings per share:
The Company's banking segment posted net earnings of $6,569,000 for 2000, as compared to $6,752,000 for 1999 and $6,214,000 for 1998. Earnings for 2000 decreased 2.7% from 1999. The decrease is primarily attributable to a decrease in other operating income of $665,000, partially offset by a $454,000 increase in net interest income after provision for loan losses.
The Company's mortgage banking segment posted a net loss of $837,000 and $3,786,000 for 2000 and 1999, respectively, as compared to earnings of $576,000 for 1998. Following the discovery of the irregularities and fraud at CMI 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 closure of CMI is accounted for as a discontinued operation, in accordance with APB 30, because, among other criteria, it represented both a separate major line of business and a class of customer. CMI represented a distinct segment and served a customer base from a market distinct from that of the Subsidiary Bank.
The mortgage lending activities of the Subsidiary Bank represents an integral, inseparable component of the banking segment. CMI provided mortgage brokerage services to the Subsidiary Bank that are now provided by independent third parties. The banking segment will continue to originate and sell mortgage loans into the secondary market and hold mortgage loans for sale on its balance sheet. The mortgage loan origination income presented on the Company's Consolidated Statements of Earnings represents the income derived from the mortgage lending activities of the banking segment. The mortgage loan
origination income produced by CMI is presented as a component of discontinued operations in the Consolidated Statements of Earnings. The mortgage loans held for sale presented on the Company's Consolidated Balance Sheets represent mortgages currently held for sale by the Subsidiary Bank. These balances relate to mortgages originated in the banking segment.
The loss from discontinued operations of $837,000 in 2000 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.
The loss from discontinued operations of $3,786,000 in 1999 represents a loss from operating activities, which includes a pre-tax charge of $2,300,000 to establish a reserve liability for possible losses on loans previously sold, and a pre-tax charge of $1,341,000 to write-off the remaining carrying value of intangible assets related to the mortgage banking segment. The remaining reserve liability was $1,880,000 at December 31, 2000, and is included in other liabilities in the Consolidated Balance Sheet as of December 31, 2000 and December 31, 1999 at Item 8. While the Company's management believes that the reserve should be adequate to cover such losses, the reserve is an estimate based on, among other things, information gathered during the Company's investigation of the fraud relating to amount of loans that may be affected by the fraud and assumptions relating to the likelihood that CMI would be required to repurchase loans from the investors and the diminution in the value of such loans if such loans are repurchased by CMI. Actual results could differ from the Company's estimates. The Company has notified its insurance carrier of the fraud discussed above, and has filed a claim for actual and anticipated losses. The outcome of the claim is pending and uncertain. In addition to the charges discussed above, the mortgage banking segment experienced an increase in other operating expenses of $3,975,000 in 1999 associated with the expansion of retail mortgage origination offices, higher commission structures and other costs.
Segment information presented under "Other" (see note 16 to the Financial Statements included in Item 8) includes the holding company and consumer finance business. This segment produced a net loss of $1,949,000 for 2000, compared to net losses of $2,705,000 and $2,055,000 in 1999 and 1998, respectively. The decrease in net losses for 2000 is primarily due to the losses taken in association with CFC regarding a sale of a substantial portion of its loan portfolio and other related charges involved in closing that business in 1999.
The Company's return on average equity for 2000 was 9.71%, as compared to 0.64% in 1999 and 11.95% in 1998. Return on average assets was 0.70% in 2000 versus 0.05% in 1999 and 0.92% in 1998. The change in these ratios for 2000 were primarily due to the loss on discontinued operations at CMI in 1999 and the losses at CFC regarding the sale of a substantial portion of its loan portfolio in 1999 as described above. Excluding the loss from discontinued operations, the return on average equity would have been 11.86%, and the return on average assets would have been 0.86% for 2000.
Net Interest Income - ---------------------
Net interest income before provision for loan losses, the Company's primary source of earnings, totaled $19,755,000 in 2000, a $314,000, or 1.6% increase over 1999. This increase can primarily be attributed to an increase in earning assets in 2000, offset by a decrease in net interest income no longer realized from funding mortgage loans held for sale from CMI and a decrease in net interest income from the CFC loan portfolio. Net interest income before provision for loan losses decreased $1,202,000 in 1999 as compared to 1998, which represented a 5.8% decrease.
Management believes that net interest margins may continue to narrow as competitive pressures in the market place expand. Competition from financial institutions and non-traditional competitors, as well as general economic trends, will 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.
On a tax equivalent basis, net interest income increased to $20,735,000 in 2000 from $20,486,000 in 1999 and decreased from $21,237,000 in 1998. The tax equivalent net interest margin decreased in 2000, to 4.11% as compared to 4.15% in 1999 and 4.40% in 1998.
Total average earning assets in 2000 were $504,399,000, an increase of $10,921,000 or 2.2% over 1999. Average earning assets as a percentage of total average assets increased slightly to 94.0% during 2000 as compared to 93.7% in 1999. It was also 94.0% in 1998. The net average loan portfolio represented 74.2% of total average earning assets in 2000, an increase from 68.9% in 1999 and an increase from 64.4% in 1998. Mortgage loans held for sale represented 0.5% of average earning assets in 2000, a decrease from 5.0% in 1999. Mortgage loans held for sale represented 7.2% of average earning assets in 1998. In 2000, average total interest-bearing liabilities were $438,664,000, a $6,926,000 or 1.6% increase over 1999. This increase can be attributed to a $14,875,000 increase in average interest-bearing deposits, offset by a decrease of $7,949,000 in average other borrowings. The proportion of average interest-bearing liabilities to average earning assets in 2000 decreased slightly to 87.0% as compared to 87.5% in 1999.
Provisions for Loan Losses - -----------------------------
The adequacy of the Subsidiary Bank's allowance for loan losses is determined by calculating the allocated and unallocated portions of the allowance using a combination of internal loan classifications, weighted historical charge-off experience, and an evaluation of probable losses on existing problem credits. The allowance is maintained to cover the allocated requirement plus an unallocated portion, which considers economic conditions, industry concentrations, peer-group comparisons, lending staff experience, and other risk factors.
The coverage of the allowance for loan losses to non-performing loans and loans past due 90 days or more and still accruing was 175.3% at the end of 2000 versus 137.2% and 168.6% at the end of 1999 and 1998, respectively. This increase in coverage was primarily due to a decrease in non-accrual loans from $2,685,000 at the end of 1999 to $2,374,000 at the end of 2000. The allowance for loan losses as a percentage of total outstanding loans decreased to 1.17% at December 31, 2000, as compared to 1.27% at December 31, 1999. The allowance level was at 1.45% of total loans at December 31, 1998. The decreased percentage is due to an increase in loans outstanding. The reserve liability for losses on loans previously sold by CMI, as discussed above, is included in other liabilities in the Consolidated Balance Sheet at Item 8.
Gross charge-offs increased $96,000 from 1999 to 2000, primarily due to commercial charge-offs, which increased $377,000 offset by a decrease in consumer and real estate mortgage charge-offs of $142,000 and $139,000 respectively. The ratio of net charge-offs to average total loans outstanding increased during 2000 to 0.15% as compared to 0.11% in 1999. The net charge-off ratio during 1998 was 0.19%. The increase in this ratio was primarily due to the increase in commercial charge-offs as described above, and a decrease in recoveries of $90,000 primarily due to commercial/agricultural loans.
The provision for loan losses is based on management's analysis of risk in the loan portfolio, which takes into account portfolio growth and historical charge-offs, among many other factors. The provision totaled $420,000 in 2000 as compared to $695,000 in 1999, a $285,000 decrease. This decrease was due to the closing of CFC in 1999 as described above. The provision for loan losses decreased $18,000 from 1998 to 1999. Management's analysis of the allowance for loan losses indicates that the level at December 31, 2000 of 1.17% of total outstanding loans is adequate to cover probable losses inherent in the loan portfolio.
Non-performing assets (defined as loans 90 days or more past due but still accruing interest, loans in non-accrual status, restructured loans and other real estate owned) totaled $2,563,000, or 0.46% of total assets, at December 31, 2000. This represents a decrease from $3,579,000 or 0.66% of total assets at December 31, 1999. Non-performing assets at December 31, 1998 were $2,817,000 or 0.50% of total assets.
Other Operating Income - ------------------------
Total other operating income is comprised of mortgage loan origination income on loans sold 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 totaled $4,854,000 for 2000, a decrease from $5,233,000 and $5,382,000 in 1999 and 1998, respectively. This change represents a 7.2% decrease from 1999 to 2000, which can be primarily attributed to decreases in mortgage loan origination income of $278,000 and other income of $778,000, partially offset by increases in trust fees and other service charges of $103,000 and $542,000, respectively. 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.
Trust fees increased 12.5% to $929,000 in 2000 as compared to $826,000 in 1999 and $769,000 in 1998. The Company continues to focus on growth of trust services in light of corporate goals to diversify revenue sources. The market value of assets managed by the Subsidiary Bank's trust department was $180.8 million at December 31, 2000 as compared to $154.5 million and $163.9 million at year-end 1999 and 1998, respectively.
There were no net security gains in 2000 as compared to net gains, on a pre-tax basis, of $250,000 and $154,000 in 1999 and 1998, respectively. The entire investment portfolio is classified as available for sale and all sales during the last three years 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 fair market value in the accompanying consolidated financial statements at Item 8. It is management's expectation to classify all investment securities purchased as available for sale for the foreseeable future. Changes in the fair 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 $17,497,000 in 2000 as compared to $18,373,000 and $19,165,000 in 1999 and 1998, respectively. As a percentage of average assets, total operating expenses decreased to 3.2% in 2000 versus 3.5% in 1999 and 3.2% for 1998. The efficiency ratio, which measures the ratio of non-interest expense to total net revenues, was 71.1% in 2000 as compared to 74.5% and 73.6% in 1999 and 1998, respectively.
Salaries and employee benefits expense represents the largest component of other operating expenses. This category increased $184,000, or 1.8% from 1999 to 2000. During 1999, this expense decreased $1,118,000, or 10.0%, when compared to 1998. The Company has been able to reduce salary and benefits expense as it has consolidated certain "back office" functions and closed CFC. The Company employed 220 full-time equivalent (FTE) employees at December 31, 2000 as compared to 361 and 364 at December 31, 1999 and 1998, respectively. Of the 361 FTE's at December 31, 1999, approximately 123 were employed at CMI, which was closed in January 2000. The salaries and employee benefits expense for the CMI employees is reported as a component of discontinued operations.
Occupancy and furniture and fixtures expenses totaled $2,628,000 in 2000, a decrease of $106,000, or 3.9%, from 1999. During 1999, occupancy and furniture and fixture expenses decreased $70,000 as compared to 1998. Outside services and other expense decreased 29.2% to $671,000 during 2000 as compared to $948,000 in the prior year, partially due to reduced legal fees. Advertising expense increased 1.8% in 2000 to $407,000 compared to $400,000 in 1999. 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 December 31, 2000 were $552,260,000, an $11,410,000 or 2.1% increase over December 31, 1999 total assets of $540,850,000. This increase can primarily be attributed to an increase in net loans outstanding of $20,635,000 and an increase in federal funds sold of $8,250,000 offset by a decrease in mortgage loans held for sale at the Subsidiary Bank of $11,872,000 and a decrease in investment securities available for sale of $4,411,000. Cash and cash equivalents are continually monitored and maintained at operational minimums to minimize the Company's reliance on other borrowings. Average assets for 2000 grew by $10,098,000 or 1.9% to $536,702,000 as compared to $526,604,000 for 1999.
The Company's increase in year-end assets is also represented by an increase in total deposits of $27,356,000. Management continues to view "core" deposits (individual, partnership and corporate deposits) as the primary long term funding source for internal growth of the Company, but also recognizes the growing need for alternative sources of funding. Alternative sources of funding will be necessary if loans grow faster than deposits in the future. Average deposits increased $20,392,000, or 4.5%, during 2000, while average other borrowings decreased $7,949,000, or 24.0%. There were no brokered deposits at December 31, 2000. Brokered deposits totaled $297,000 at December 31, 1999, with an interest rate of 6.75% and matured in August, 2000.
Capital - -------
The Company is committed to maintaining strong capital positions in the Subsidiary Bank 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. During 2000, stockholders' equity increased $5,961,000 over December 31, 1999, primarily due to an increase in retained earnings of $2,861,000 and an increase of $2,800,000 in accumulated other comprehensive earnings, which represents the change in unrealized gains/losses on investment securities available for sale, which decreased from a loss of $3,164,000 at December 31, 1999 to a loss of $364,000 at December 31, 2000. The change of $2,800,000 in accumulated other comprehensive earnings represents a $4,572,000 gross unrealized gain less the applicable tax effect of $1,772,000. The increase was primarily caused by a decrease in interest rates at the end of the year resulting in a corresponding increase in the value of debt securities.
The Company issued 27,005 shares of stock through its Dividend Reinvestment and Stock Purchase Plan and its Stock Benefit Plan during 2000, which generated $300,000 of new shareholders' equity. The Company's Tier 1 Leverage ratio at December 31, 2000 was 7.73%, which increased from 7.26% as of December 31, 1999. This ratio exceeds the minimum regulatory capital requirement. The Company's Total Risk Weighted Capital ratio increased to 11.56% as of December 31, 2000 from 11.11% as of December 31, 1999. The Tier 1 Capital ratio increased to 10.44% at December 31, 2000 from 9.91% at December 31, 1999. For further discussion of the regulatory capital requirements, see note 12 to the Consolidated Financial Statements included in Item 8.
Liquidity - ---------
The Company ensures that 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 repayment of loans, high-quality marketable investment securities available for sale, and the Subsidiary Bank's federal funds position. These sources of liquidity should be 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 sources in case of unanticipated demand for funds.
As presented in the Consolidated Statements of Cash Flows included in Item 8, the Company has experienced significant changes in its cash flows from operating, investing, and financing activities during 2000 and 1999 as compared to prior years. These fluctuations primarily relate to increases in the loan portfolio and decreases in mortgage loans held-for-sale at the Subsidiary Bank at year-end, which have allowed for decreases in other borrowings.
Interest Rate Sensitivity - ---------------------------
The Company's overall success is largely 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 (see note 13 included in Item 8). 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 agreements 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 Funds Management Committee reviews the Subsidiary Bank's 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.
Interest rate exposure is reviewed and managed, to the extent possible, by matching maturities of interest bearing assets and interest bearing liabilities. The difference between the amount of interest earning assets that are scheduled to mature or reprice during a period and the amount of interest bearing liabilities maturing or repricing in the same period significantly affects the Company's interest rate risk. This difference is generally referred to as the interest sensitivity gap. A positive gap, or asset sensitive position, indicates there are more rate-sensitive assets than rate-sensitive liabilities repricing or maturing within specified time frames, which generally has a favorable impact on net interest income in periods of rising interest rates. Conversely, a negative gap, or liability sensitive position, would generally imply a favorable impact on net interest income in periods of declining interest rates. In periods of changing interest rates, net interest margin is not only impacted by the amounts of repricing assets and liabilities, but also by the rate at which repricings occur. Earnings may also be impacted by variances in repayment of loans and securities.
The following table indicates the Company's interest sensitive assets and liabilities over specific time horizons as well as its interest sensitivity gap at December 31, 2000:
The entire mortgage held for sale portfolio is included in the 90-day category, as the vast majority of these loans will be sold to investors within 90 days. The interest rates on lines-of-credit included in other borrowings, reprice every 90 days or are priced at LIBOR. As a result, these liabilities are also included in the 90-day category in the above table. Non-maturing interest bearing NOW and savings accounts and certain other interest-bearing deposit accounts are contractually subject to repricing within 90 days and therefore are included in the 90-day category in the above table. Using historical analysis, management believes that these deposits are less interest rate sensitive and are less likely to reprice, regardless of the contractual ability to do so. As a result, management believes that the interest rate gap is overstated in the short-term as it relates to these deposits.
The table below presents in tabular form contractual balances of the Company's on balance sheet financial instruments in U.S. dollars at the expected maturity dates as well as the fair value of those on balance sheet financial instruments for the period ended December 31, 2000. The expected maturity categories take into consideration the repricing ability of loans, and the callable feature of certain investments. The Company's liabilities that do not have a stated maturity date are considered to be long term in nature by the Company and are reported in the thereafter column. The Company does not consider these financial instruments materially sensitive to interest rate fluctuations and historically the balances have remained fairly constant over various economic conditions. The weighted average interest rates for the various assets and liabilities presented are actual as of December 31, 2000. The fair value of loans takes into consideration discounted cash flows through the estimated maturity or repricing dates using estimated market discount rates that reflect credit risk. The fair value of checking, savings and interest-bearing checking accounts is the amount payable upon demand. The fair value of time deposits is based upon the discounted value of contractual cash flows, which is estimated using current rates offered for deposits of similar remaining terms. The fair value of other borrowings approximates the carrying value due to the borrowings interest rate approximating market rates.
The computations in the above table are based on numerous assumptions, including relative levels of market interest rates, discount rates, loan prepayments, investment call options, and deposit decay, and should not be relied upon as indicative of actual results. Further, the computations do not contemplate any actions the Funds Management Committee could undertake in response to changes in interest rates. Certain shortcomings are inherent in the method of analysis presented in the computation of the change in the market value of equity. Actual values may differ from those projections presented, should market conditions vary from assumption used.
There have been no material changes in the market risks faced by the Company since December 31, 1999.
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. The adoption of SFAS No. 133 on January 1, 2001, did not have a material impact on the Company's financial position, results of operations or liquidity.
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." This statement replaces FASB Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". It revises the standards for accounting for securitizations and other transfers of financial assets and collateral and requires certain disclosures, but it carries over most of Statement 125's provisions without reconsideration. This statement provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The majority of the provisions of SFAS No. 140 will become effective for transactions entered into after March 31, 2001; however, certain disclosure requirements are effective for financial statements for fiscal years ending after December 15, 2000. SFAS No. 140 is not expected to have a material impact on the Company's financial position, results of operations or liquidity.
The following supplementary financial information of the registrant for each of the last three years (unless otherwise stated) is included on pages 22 through 28 of this Report:
Table 1 Comparison of Average Balance Sheets Table 2 Analysis of Net Interest Income - Tax Equivalent Basis Table 3 Maturity Of Investment Securities Table 4 Analysis of Loan Portfolio and Loss Experience (for last five years) Table 5 Allocation of Allowance for Loan Losses (for last five years) Table 6 Maturity and Interest Sensitivity of Loans Table 7 Average Deposits (for last five years) Table 8 Other Borrowings Table 9 Return on Equity and Assets (for last five years)
The following table sets forth the registrant's maturity distribution for all time deposits of $100,000 or more as of December 31, 2000.
TABLE 8 OTHER BORROWINGS
The following table sets forth a summary of the registrant's other borrowings for each of the last three years.
TABLE 9 RETURN ON EQUITY AND ASSETS
The following table sets forth the registrant's return on average assets, return on average equity, dividend payout ratio, and average equity to average asset ratio for the last five years:
Item 7A.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk - ---------------------------------------------------------------------------
See Item 7 above.
Item 8.
Item 8. Financial Statements and Supplementary Data - ---------------------------------------------------------
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
See accompanying notes to consolidated financial statements.
Years Ended December 31, 2000, 1999, and 1998 ================================================================================ (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - The consolidated financial statements of Castle BancGroup, Inc. and subsidiaries (Company) are prepared in conformity with accounting principles generally accepted in the United States of America and prevailing practices of the financial services industry which require management to make estimates that affect the reported financial position and results of operations. Actual results could differ from those estimates. The following is a summary of the significant accounting and reporting policies used in preparing the consolidated financial statements.
(a) BASIS OF CONSOLIDATION. The accompanying consolidated financial statements include the accounts of the Company and the Company's wholly owned subsidiaries, Castle Bank N.A.(CB), Castle Finance Company (CFC), CasBanc Mortgage, Inc. (CMI), and SBI Illinois, Inc. Significant inter-company transactions and accounts have been eliminated in consolidation. CMI is reported as a discontinued operation (see note 18).
(b) INVESTMENT SECURITIES AVAILABLE FOR SALE. Investments in debt and equity securities have been classified as available for sale and reported at fair value. The amortized valued 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 in stockholders' equity.
Gains and losses from the sale of investment securities prior to maturity are computed under the specific identification method and are included in investment securities gains, net, in the consolidated statement of earnings.
(c) MORTGAGE LOANS HELD FOR SALE. Mortgage loans held for sale are valued at the lower of cost or market value as determined by outstanding commitments from investors or current investor yield requirements on an aggregate basis. Holding costs are treated as period costs. The mortgage loans held for sale presented on the Company's Consolidated Balance Sheets represent mortgages currently held for sale by the Subsidiary Bank. Mortgage loans held for sale by CMI (i.e., those not sold to the Subsidiary Bank) are presented in assets of discontinued operations on the Consolidated Balance Sheets.
(d) MORTGAGE LOAN ORIGINATION INCOME. Gains or losses on sales and service release premiums of mortgage loans held for sale are recognized at the time the loans are purchased by the permanent investor and are based upon the difference between the selling price and the carrying value of the related mortgage loan sold. All mortgage loans are sold servicing released, and the related premiums are recognized at the time loans are sold. Points, application and other origination fees, net of appraisal, credit report and inspection costs, are recognized at closing on mortgage loans held for sale. The mortgage loan origination income presented on the Company's Consolidated Statements of Earnings represents the income derived from the mortgage lending activities of the banking segment. The mortgage loan origination income produced by CMI is presented as a component of discontinued operations in the Consolidated Statements of Earnings.
(e) LOANS. Loans are carried at the principal balance outstanding. Interest on loans is computed on the principal balance outstanding, except that interest on certain consumer loans is recognized using the sum-of-the-months-digit method. No interest income on non-accrual and impaired loans is recognized until the principal is collected. Loans are generally placed on non-accrual status when they are past due 90 days as to either interest or principal. However, loans well secured and in the process of collection may remain on accrual status, at the judgment of senior credit management. A non-accrual loan may be restored to accrual basis when interest and principal payments are current and prospects for future payments are no longer in doubt.
Loans are considered impaired when, based on current information and events, it is probable that the Company will not be able to collect all amounts due according to the contractual terms of the loan agreement. Impairment is measured based on the present value of expected future cash flows, or alternatively, the observable market price of the loans or the fair value of the collateral. However, for those loans that are collateral dependent, and for which management has determined foreclosure is probable, the measure of impairment is based on the fair value of the collateral less estimated disposal costs.
(f) LOAN FEES. The Subsidiaries defer all certain fees and costs associated with the origination of loans and leases. Such fees and costs are amortized, using a level yield method, over the period to maturity or sale date of the loans and leases.
(g) ALLOWANCE FOR LOAN LOSSES. An allowance for loan losses is maintained at a level deemed adequate by management to provide for probable losses in the loan portfolio. The allowance is based upon a continuing review of specific loans, past loan loss experience, current economic conditions that may affect the borrowers' ability to pay, and the underlying collateral value of the loans. Loans deemed to be uncollectible are charged off and deducted from the allowance. The provision for loan losses and recoveries on loans previously charged off are added to the allowance.
(h) PREMISES AND EQUIPMENT. Premises and equipment are stated at cost less accumulated depreciation. Depreciation is charged to expense on a straight-line or accelerated basis over the estimated useful lives of the respective assets, as follows: building and improvements, 15 to 40 years; and furniture, fixtures, and equipment, 3 to 10 years.
(i) GOODWILL. The total cost of the Company's acquisitions of various subsidiaries relating to continuing operations exceeded their fair value of net assets acquired by approximately $5,892,000 at the date of acquisition. This amount, net of accumulated amortization of $3,988,000 and $3,682,000 at December 31, 2000 and 1999, respectively, is shown as goodwill in the Consolidated Balance Sheets.
The cost of the Company's acquisition of CMI (i.e. discontinued operations) exceeded the fair value of the net assets acquired by approximately $1,922,000. The remaining carrying value of CMI's goodwill was written-off at December 31, 1999, such that the accumulated amortization was $1,922,000 at December 31, 1999.
The goodwill for continuing operations is being amortized on a straight line basis over 15 years. Goodwill and other valuation intangibles are reviewed for impairment when events or future assessments of profitability indicate that the carrying value may not be recoverable.
(j) OTHER REAL ESTATE OWNED. Other real estate owned includes foreclosures and property acquired in forgiveness of debt, and is included in other assets in the accompanying Consolidated Balance Sheets. These properties are carried at the lower of cost or fair market value, less the estimated costs of disposal. Losses arising from the acquisition of property in full or partial satisfaction of loans are treated as loan losses. Any subsequent losses are charged to other expenses.
(k) INCOME TAXES. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and net operating loss (NOL) and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The Company and Subsidiaries file consolidated Federal and State income tax returns.
(l) EARNINGS PER SHARE. Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding. Diluted EPS is based on the weighted average number common shares outstanding, increased by the assumed conversion of the convertible preferred stock and exercise of the Company's stock options.
All information relating to per common share data reflects the May 1999 2-for-1 stock split in the form of a 100% stock dividend.
The components of basic and diluted EPS for the years ended December 31, 2000, 1999, and 1998 were as follows:
(2) CASH AND DUE FROM BANKS - The Company's Subsidiary Bank, which is a member of the Federal Reserve System, is required to maintain certain daily reserve balances in accordance with Federal Reserve Board requirements. The reserves required to be maintained at the Federal Reserve Bank averaged $10,466,000 and $3,275,000 in 2000 and 1999, respectively. Cash and due from banks include cash on hand and in banks with original maturities of three months or less.
(3) INVESTMENT SECURITIES - A comparison of amortized cost and fair value of investment securities available for sale at December 31, 2000 and 1999 follows:
The amortized cost and fair value of securities available for sale at December 31, 2000 by contractual maturity, are shown below. 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.
(Dollars in thousands)
December 31, 2000 --------------------------- Amortized Cost Fair Value - -------------------------------------------------------------------------------- Due in one year or less $ 6,962 6,961 Due after one year through five years 44,745 44,650 Due after five years through ten years 17,404 17,334 Due after ten years 12,575 12,367 - -------------------------------------------------------------------------------- $ 81,686 81,312 Mortgage-backed securities 36,520 36,173 - -------------------------------------------------------------------------------- Total debt securities $ 118,206 117,485 Federal Home Loan Bank stock 2,052 2,052 Other equity securities 2,316 2,411 - -------------------------------------------------------------------------------- Total securities $ 122,574 121,948 ================================================================================
There were no investment gains in 2000 but there were approximately $312,000, and $167,000 in gross gains and approximately $62,000, and $13,000 of gross losses that occurred from security activity during 1999 and 1998, respectively. All security gains and losses were as a result of transactions involving available for sale securities.
Investment securities carried at approximately $86,912,000 and $82,802,000 at December 31, 2000 and 1999, respectively, were pledged to secure deposits and for other purposes permitted or required by law.
(4) LOANS - The composition of the loan portfolio at December 31 is as follows:
(Dollars in thousands) - ----------------------------------------------------------------------------- 2000 1999 - ----------------------------------------------------------------------------- Commercial, financial, and agricultural $107,928 105,163 Real estate mortgage 257,111 240,743 Consumer 19,468 18,144 Lease financing receivables 355 369 - ----------------------------------------------------------------------------- Total $384,862 364,419 =============================================================================
The Company provides several types of loans to customers, including residential, construction, commercial, and consumer loans. The largest component of the loan portfolio is secured by residential and commercial real estate, or other interests in real property. Lending activities are conducted with customers in a wide variety of industries as well as with individuals with varying credit requirements. The Company does not have a concentration of loans in any specific industry. Credit risk, as it relates to the Company's business activities, tends to be geographically concentrated in that the majority of the customer base lies within the cities and surrounding communities served by the Company's Subsidiaries.
The components of non-performing loans and leases are as follows at December 31:
(Dollars in thousands) 2000 1999 - -------------------------------------------------------------------------------- Non-accrual loans and leases $2,374 2,685 Restructured loans 99 120 - -------------------------------------------------------------------------------- Total non-performing loans and leases $2,473 2,805 ================================================================================
Loans past due 90 days or more and still accruing interest are not included above and totaled $90,000 and $573,000 at December 31, 2000 and 1999, respectively.
Non-accrual and restructured loans and leases had the following effect on interest income for the years ended December 31:
(Dollars in thousands)
2000 1999 1998 - ------------------------------------------------------------------------------- Income recognized $ 198 101 65 Income which would have been recognized under original terms 339 168 175 ===============================================================================
Impaired loans averaged $1,642,000, $1,354,000, and $1,790,000 for the years ended December 31, 2000, 1999, and 1998, respectively. All $1,495,000 of impaired loans at December 31, 2000, represented non-accrual loans. Of the $1,790,000 of impaired loans at December 31, 1999, $473,000 represented loans still accruing interest and $1,317,000 represented non-accrual loans.
At various times throughout the year, certain officers and directors of the Company and its affiliates have borrowed money from the Subsidiary Bank. These loans were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with other bank customers.
The following summarizes activity on loans, including renewals, made to related parties during 2000 and 1999:
(Dollars in thousands)
2000 1999 - ----------------------------------------------------------------------------- Loans outstanding, beginning of year $2,090 5,666 New loans, renewals, and advances 232 295 Loan payments (543) (3,871) - ----------------------------------------------------------------------------- Loans outstanding, end of year $1,779 2,090 =============================================================================
The following is a summary of activity in the allowance for loan losses:
(Dollars in thousands)
2000 1999 1998 - ------------------------------------------------------------------------------ Balance, beginning of year $4,636 4,750 4,646 Provision charged to expense 420 695 713 Recoveries on loans previously charged off 102 198 425 - ------------------------------------------------------------------------------ 5,158 5,643 5,784 Less loans charged off 663 567 1,034 Less allowance for loans sold - 440 - - ------------------------------------------------------------------------------ Balance, end of year $4,495 4,636 4,750 ==============================================================================
(5) PREMISES AND EQUIPMENT - The components of premises and equipment at December 31 were as follows:
(Dollars in thousands)
2000 1999 - ------------------------------------------------------------------------ Land and land improvements $ 2,046 2,057 Building and improvements 12,452 11,659 Furniture, fixtures, and equipment 7,438 7,380 - ------------------------------------------------------------------------ 21,936 21,096 Less accumulated depreciation 10,619 9,549 - ------------------------------------------------------------------------ Total $11,317 11,547
(6) DEPOSITS - The aggregate amount of large time deposits, each with a minimum denomination of $100,000, was $68,566,000 and $58,693,000 at December 31, 2000 and 1999, respectively. In these totals there were no broker deposits at December 31, 2000 but there were $297,000 of brokered deposits at December 31, 1999, with an interest rate of 6.75%.
(7) OTHER BORROWINGS - The components of other borrowings at December 31 are as follows:
The secured revolving loan with a balance of $5,525,000 at December 31, 2000, and the secured term loan with a balance outstanding of $6,050,000 at December 31, 1999, (repaid in 2000) is secured by the stock of the subsidiaries and contains certain restrictive covenants, including restrictions on dividends to stockholders, maintenance of various capital adequacy levels, maintenance of allowance for loan losses, restrictions on non-performing assets, attainment of a minimum return on average assets, and certain restrictions with regard to other indebtedness. The Company is in compliance with all restrictive covenants as of December 31, 2000. The restriction on dividends to stockholders is described further in note 11. The secured revolving loan dated December 31, 2000, has a total commitment of $7,500,000.
Federal Home Loan Bank borrowings are collateralized by Federal Home Loan Bank stock and first mortgage real estate loans. As of December 31, 2000, the notes mature from 2001 through 2008 and have fixed interest rates with an average of 6.19%. CB has collateral pledge agreements whereby they have agreed to keep on hand at all times, free of all other pledges, loans, and encumbrances, whole first mortgages on improved residential property with unpaid principal balances aggregating no less than 167% of the outstanding advances from the Federal Home Loan Bank.
(8) INCOME TAXES - The components of Federal income tax expense (benefit) for 2000, 1999, and 1998 were as follows:
The reasons for the difference between income taxes in the statements of earnings and the amount computed by applying the statutory Federal income tax rate of 34% in 2000, 1999 and 1998 are as follows:
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2000 and 1999 are as follows:
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the capacity to carry back net operating losses, scheduled reversal of deferred tax liabilities, projected future taxable income, and tax planning strategies in making this assessment. Based on the level of historical taxable income and projections for future taxable income over the periods, which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deductible differences.
(9) EMPLOYEE BENEFIT PLANS - The Company maintains a profit-sharing plan, which was amended and restated as of January 1, 1999. The amended plan covers substantially all officers and employees of the Company. Under provisions of the plan, the Company may elect to provide discretionary contributions. Prior to the amendment as of January 1, 1999, the Company was required to make minimum annual contributions of 7.5% of net operating profits, as defined in the previous plan. Contributions by the Company to the plan totaled $522,000, $449,000, and $908,000 in 2000, 1999, and 1998, respectively.
In 1995, the Company instituted a non-qualified supplemental employee profit sharing plan. The supplemental plan covers certain officers and employees of the Company whose contributions under the qualified profit sharing plan were limited by the Internal Revenue Code of 1986, as amended (the Code). Under the non-qualified plan, the Company is required to accrue a liability for the contribution that was limited by the Code. Contributions paid by the Company to the plan totaled approximately $5,000, $18,000, and $14,000 in 2000, 1999, and 1998, respectively.
In 1992, the Company instituted an Employee Stock Purchase Plan covering substantially all officers and employees of the Company. In 1999, that plan was replaced by a newly instituted Dividend Reinvestment and Stock Purchase Plan (Plan). The Company incurs no costs associated with the Plan except for nominal administration expenses. Under the stock purchase portion of the Plan, employees may purchase original issue Company stock at market prices up to a maximum limit established within the Plan. Under the dividend reinvestment portion of the Plan, shareholders of the Company may elect to purchase original issue Company stock at market prices in lieu of receiving the cash dividend.
On December 23, 1994, the Company adopted a Stock Benefit Plan covering key managerial employees and non-employee directors of the Company and its Subsidiaries. The Stock Benefit Plan provides for the grant of incentive stock options, non-qualified stock options, limited rights, stock appreciation rights, and restricted stock. The Company may award options to acquire up to 10.0% of its issued and outstanding common stock, with no options being granted after October 31, 2004. The exercise price on outstanding non-qualified stock options ranges from $7.00 to $16.00 per share at December 31, 2000. Non-qualified stock options issued are exercisable at not less than the current common stock market value at the date of grant. The outstanding options vest ratably over a four-year term. The following table presents certain information pursuant to the Stock Benefit Plan, at December 31:
The Company applies APB opinion No. 25 and related interpretations in accounting for the Stock Benefit Plan. Had compensation cost for the plan been determined consistent with FASB Statement No. 123, the Company's net earnings and earnings per share would have been reduced to the pro forma amounts indicated below:
The fair value of each option grant is estimated on the date of the grant using the Black-Scholes option-pricing model.
(10) PREFERRED STOCK - In 1993, the Company issued 2,600 shares of Perpetual Preferred Stock. On December 31, 1997, the Company redeemed 2,300 shares of its outstanding Perpetual Preferred Stock. Of the 2,300 shares, 841 shares were redeemed for cash, and 1,459 shares were exchanged into 132,622 shares of the Company's common stock. On December 31, 1998, the remaining 300 shares were redeemed for cash.
(11) DIVIDEND LIMITATIONS - The amendment to the secured term loan agreement contains several restrictive covenants, including restrictions on dividends to stockholders, and other restrictions as described in note 7. Future cash dividends, in addition to dividends on preferred stock are limited to 50% of the Company's net after-tax earnings for the immediately preceding eight fiscal quarters of the Company. As of December 31, 2000, the Company had $402,000 of unrestricted earnings available for additional cash dividends.
National banking regulations restrict the amount of dividends that a bank may pay to its stockholders. Generally, the regulations provide that dividends are limited to net earnings for the current and two preceding years, reduced by dividends paid and transfers to permanent capital. At December 31, 2000, subject to minimum regulatory capital guidelines, CB could, without prior approval of regulatory authorities, declare dividends of approximately $6,134,000.
(12) REGULATORY CAPITAL REQUIREMENTS - The Company and the Subsidiary Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Company's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Subsidiary Bank must meet specific capital guidelines that involve quantitative measures of the Company's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.
Quantitative measures established by regulations to ensure capital adequacy require the Company and subsidiaries to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets, and of Tier I capital to average assets, as defined in the regulations. Management believes, as of December 31, 2000 and 1999, that the Company and subsidiaries meet all capital adequacy requirements to which they are subject.
As of December 31, 2000, the most recent notification from the federal banking agencies categorized the Company and the Subsidiary Bank as well capitalized at December 31, 2000 and 1999 under the regulatory capital framework for prompt corrective action. There are no conditions or events since notification that management believes have changed the Company and subsidiaries' status. Minimum capital requirements and actual capital amounts and ratios as of December 31, 2000 and 1999 are as follows:
(13) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK - The Company is party to financial instruments with off-balance sheet risk in the normal course of business to meeting the financing needs of its customers and to effectively manage its exposure to interest rate risk.
Credit risk is the possibility that the Company will incur a loss due to the other party's failure to perform under its contractual obligations. The Company's exposure to credit loss in the event of non-performance by the other party with regard to commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Company uses the same credit policies in making commitments and conditional obligations as it does for actual extensions of credit.
Financial instruments representing potential credit risk at December 31, 2000 and 1999 are as follows:
Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established by the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The credit risk involved for commitments to extend credit and in issuing standby letters of credit is essentially the same as that involved in extending loans to customers.
(14) COMMITMENTS AND CONTINGENT LIABILITIES - Because of the nature of their activities, the Company and its 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.
(15) FAIR MARKET VALUE OF FINANCIAL INSTRUMENTS - Statement of Accounting Standards No 107, "Disclosures about Fair Value of Financial Instruments" (Statement 107), requires that the Company disclose estimated fair value for its financial instruments. Fair value estimates, methods, and assumptions are set forth below for the Company's financial instruments.
(a) CASH AND DUE FROM BANKS. The carrying amount of cash and due from banks approximate fair value because they mature daily and do not represent unanticipated credit risks.
(b) INVESTMENT SECURITIES AVAILABLE FOR SALE. The fair value of investment securities available for sale, with the exception of certain state and municipal securities, is estimated based on bid prices published in financial newspapers or bid quotations received from securities dealers. The fair value of certain state and municipal securities is not readily available through market sources other than dealer quotations, so fair value estimates are based on quoted market values of similar instruments, adjusted for differences between the quoted instruments, and the instruments being valued.
(c) MORTGAGE LOANS HELD FOR SALE. As of December 31, 2000 and 1999, the carrying value of the Company's mortgage loans held for sale was $3,020,000 and $14,892,000, respectively. The estimated fair value of these loans was $3,021,000 and $14,973,000 at December 31, 2000 and 1999, based on commitments to purchase from the end investors. The mortgage loans held for sale presented on the Company's Consolidated Balance Sheets represent mortgages currently held for sale by the Subsidiary Bank. These balances relate to mortgages originated in the banking segment.
(d) LOANS. Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential real estate, and consumer. Each loan category is further segmented into fixed and variable rate interest terms.
The fair value of loans is calculated by discounting scheduled cash flows through the estimated maturity using estimated market discount rates that reflect the credit and interest rate risk inherent in the loan.
(e) DEPOSIT LIABILITIES. Under Statement 107, the fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings and NOW accounts, and money market and checking accounts, is equal to the amounts payable on demand as of December 31, 2000 and 1999. The fair value of certificates of deposit is based on the discounted value of contractual cash flows. The discounted rate is estimated using the rates currently offered for deposits of similar maturities.
(f) OTHER BORROWINGS. For the short-term instruments, the carrying amount is a reasonable estimate of fair value. For long-term instrument, rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate fair value of existing borrowings.
(g) LOAN COMMITMENTS AND LETTERS OF CREDIT. The subsidiary bank's letters of credit, lines of credit, and loan commitments are financial instruments as defined by Statement 107. The fair value of these financial instruments is based on the present value of the fees received for these services, which are not significant at December 31, 2000 and 1999.
LIMITATIONS. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates do not reflect any premium or discount that could result from offering for sale at one time the Company's entire holdings of a particular financial instrument. Because no market exists for a significant portion of the Company's financial instruments, fair value estimates are based on judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Fair value estimates are based on existing on- and off-balance sheet financial instruments without attempting to estimate the value of anticipated future business and the value of assets and liabilities that are not considered financial instruments. For example, the Company has a substantial trust department that annually contributes net fee income. The trust department is not considered a financial instrument, and its value has not been incorporated into the fair value estimates. Other significant assets and liabilities that are not considered financial assets or liabilities include deferred tax liabilities, property, plant, equipment, and goodwill. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on fair value estimates and have not been considered in many of the estimates.
(16) OPERATING SEGMENTS - The Company's operations include two primary segments: banking and mortgage banking. Through its banking subsidiary network of 11 retail banking facilities in Northern Illinois, the Company provides traditional community banking services such as accepting deposits and making loans. Mortgage banking activities conducted through the Company's subsidiary, CMI (which has been discontinued as discussed in note 18), 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. CMI was legally, financially, operationally, and physically separate from the Subsidiary Bank, and had a separate Board of Directors, management team, compensation structure, etc. Smaller operating segments are combined and consist of consumer finance and holding company operations. Assets and results of operations are based on generally accepted accounting principles, with profit and losses of equity method investees excluded. Inter-segment revenues and expenses are eliminated in reporting consolidated results of operations. Operating segment information is on the following two pages:
(17) CONDENSED FINANCIAL INFORMATION (PARENT COMPANY ONLY) - The following is a summary of condensed financial information for the Parent Company only:
(18) 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.
The closure of CMI is accounted for as a discontinued operation, in accordance with APB 30, because, among other criteria, it represented both a separate major line of business and a class of customer. CMI represented a distinct segment and served a customer base from a market distinct from that of the Subsidiary Bank. CMI was legally, financially, operationally, and physically separate from the Subsidiary Bank, and had a separate Board of Directors, management team, and compensation structure.
The mortgage lending activities of the Subsidiary Bank represent an integral, inseparable component of the banking segment. CMI provided mortgage brokerage services to the Subsidiary Bank that are now provided by independent third parties. The banking segment will continue to originate and sell mortgage loans into the secondary market and hold mortgage loans for sale on its balance sheet. The mortgage loan origination income presented on the Company's
Consolidated Statements of Earnings represents the income derived from the mortgage lending activities of the banking segment. The mortgage loan origination income produced by CMI is presented as a component of discontinued operations in the Consolidated Statements of Earnings. The mortgage loans held for sale presented on the Company's Consolidated Balance Sheets represent mortgages currently held for sale by the Subsidiary Bank. These balances relate to both mortgages originated in the 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. Through December 31, 2000, the Company repurchased and re-sold or indemnified investors for 34 loans.
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 loss from discontinued operations of $837,000 in 2000 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.
The loss from discontinued operations of $3,786,000 in 1999 represents a loss from operating activities, which includes a pre-tax charge of $2,300,000 to establish a reserve liability for possible losses on loans previously sold, and a pre-tax charge of $1,341,000 to write-off the remaining carrying value of intangible assets related to the mortgage banking segment. The remaining reserve liability was $1,880,000 at December 31, 2000, and is included in other liabilities in the Consolidated Balance Sheet as of December 31, 2000.
The consolidated financial statements of the Company have been presented to reflect the closing of CMI as a discontinued operation. Accordingly, the revenues and expenses, assets and liabilities, and cash flows of the mortgage banking segment have been excluded from the respective captions in the Consolidated Balance Sheets, Consolidated Statements of Earnings, and Consolidated Statements of Cash Flows, and have been reported as "Discontinued Operations," and "Assets of discontinued operations." The assets include cash and other assets. The liabilities generated by the discontinued operation are reflected in other liabilities in the Consolidated Balance Sheets.
(19) SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) - A summary of consolidated operating results on a quarterly basis is as follows:
INDEPENDENT AUDITORS' REPORT
Board of Directors Castle BancGroup, Inc.:
We have audited the accompanying consolidated balance sheets of Castle BancGroup, Inc. and subsidiaries (Company) as of December 31, 2000 and 1999, and the related consolidated statements of earnings, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended December 31, 2000. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States.
/s/ KPMG LLP
January 25, 2001 Chicago, Illinois
Item 9.
Item 9. Changes in and Disagreements With Accountants on Accounting and - -------------------------------------------------------------------------------- Financial Disclosure - ---------------------
The Board of Directors has selected Crowe, Chizek & Company LLP, independent certified public accountants, to serve as the independent auditors of the Corporation and its subsidiaries for the fiscal year ending December 31, 2001. The Corporation engaged Crowe, Chizek and Company LLP as its independent auditors on February 1, 2001. During the two years ended December 31, 2000, and the subsequent interim period from January 1, 2001 through engagement of Crowe, Chizek and Company LLP as the Corporation's independent auditors, neither the Corporation nor anyone on its behalf had consulted Crowe, Chizek and Company LLP with respect to any accounting or auditing issue involving the Corporation.
On February 1, 2001, the Corporation gave notification of dismissal of the firm of KPMG LLP as independent auditors of the Corporation, effective with completion of the audit of the Corporation's financial statements for the fiscal year ended December 31, 2000, and the issuance of their report thereon. The change in independent certified accountants was approved by the Audit Committee and by the Board of Directors. KPMG LLP served as the Corporation's independent auditor since its inception in 1984.
KPMG LLP performed audits of the financial statements of the Corporation for the two years ended December 31, 2000. Their reports did not contain an adverse opinion or a disclaimer of opinion and were not qualified or modified as to uncertainty, audit scope, or accounting principles. With respect to the foregoing, (1) there have been no disagreements between the Corporation and KPMG LLP on any matter of accounting principles or practice, financial statement disclosure, or auditing scope of procedure, which disagreements, if not resolved to the satisfaction of KPMG LLP, would have caused KPMG LLP to make reference to the subject matter of such disagreements in connection with its reports; and (2) KPMG LLP did not advise the Corporation of any of the other matters described in Item 304(a) of Regulation S-K under the Securities Act of 1933 and the Securities Exchange Act of 1934.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant - -------------------------------------------------------------------
Information regarding directors and executive officers of the Company is included in the Company's Definitive Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 2001 (Proxy Statement) under the caption "Proposal No. 1 - Election of Directors" which information is incorporated herein by reference.
Item 11.
Item 11. Executive Compensation - ----------------------------------
The information contained under the captions "Directors' Compensation" and "Executive Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management - --------------------------------------------------------------------------------
The information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement is incorporated herein by reference.
Item 13.
Item 13. Certain Relationships and Related Transactions - -------------------------------------------------------------
The information contained under the caption "Transactions with Management" in the Proxy Statement is incorporated herein by reference.
PART IV
Item 14.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K - --------------------------------------------------------------------------------
(a) Financial Statements: ----------------------
The following financial statements are submitted herewith in response to Part II Item 8:
Consolidated Balance Sheets as of December 31, 2000 and 1999.
Consolidated Statements of Earnings for the years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Changes in Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999, and 1998.
(b) Reports on Form 8-K ----------------------
The registrant has not filed any reports on Form 8-K for the quarter ended December 31, 2000.
(c) Exhibits: --------
3.1 Certificate of Incorporation of registrant as amended is incorporated herein by reference to Exhibit 3.1 of the registrant's Form 10-K for the fiscal year ended December 31, 1999.
3.2 By-laws of the registrant as amended are incorporated herein by reference to Exhibit 3.2 of the registrant's Form 10-K for the fiscal year ended December 31, 1997.
10.1 Castle BancGroup, Inc. Stock Benefit Plan is incorporated herein by reference to Exhibit 4.1 of the registrant's Form S-8, Registration Statement, filed on December 22, 1994, Registration No. 33-87658.
10.3 Employment agreement by and between Dewey R. Yaeger and Castle BancGroup, Inc., dated as of January 1, 1999 is incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-K for the fiscal year ended December 31, 1999.
21.1 Subsidiaries of Registrant.
23.1 Consent of KPMG LLP.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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. (registrant)
/s/ John W. Castle - ----------------------------------- BY: John W. Castle Chairman of the Board and Director
Date: March 12, 2001
Pursuant to the requirements of the Securities and Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
/s/ John W. Castle /s/ Dewey R. Yaeger - ------------------------------------------- ---------------------------------- By: John W. Castle By: Dewey R. Yaeger Chairman of the Board, and Director President, Chief Executive Officer, and Director Date: March 12, 2001 Date: March 12, 2001
/s/ Micah R. Bartlett /s/ Bruce P. Bickner - ------------------------------------------- ---------------------------------- By: Micah R. Bartlett By: Bruce P. Bickner Senior Vice President and Controller Director (Principal Financial Officer and Date: March 12, 2001 Principal Accounting Officer) Date: March 12, 2001
/s/ Peter H. Henning /s/ Robert T. Boey - ------------------------------------------- ---------------------------------- By: Peter H. Henning By: Robert T. Boey Director Director Date: March 12, 2001 Date: March 12, 2001
/s/ Kathleen L. Halloran /s/ Donald E. Kieso - ------------------------------------------- ---------------------------------- By: Kathleen L. Halloran By: Donald E. Kieso Director Director Date: March 12, 2001 Date: March 12, 2001
/s/ Richard C. McGinity - ------------------------------------------- By: Richard C. McGinity Director Date: March 12, 2001
EXHIBIT INDEX
Exhibit No. Description - ---------- -----------
3.1 Certificate of Incorporation of registrant as amended is incorporated herein by reference to Exhibit 3.1 of the registrant's Form 10-K for the fiscal year ended December 31, 1999.
3.2 By-laws of the registrant as amended are incorporated herein by reference to Exhibit 3.2 of the registrant's Form 10-K for the fiscal year ended December 31, 1997.
10.1 Castle BancGroup, Inc. Stock Benefit Plan is incorporated here by reference to Exhibit 4.1 of the registrant's Form S-8, Registration Statement, filed on December 22, 1994, Registration No. 33-87658.
10.3 Employment agreement by and between Dewey R. Yaeger and Castle BancGroup, Inc., dated as of January 1, 1999 is incorporated herein by reference to Exhibit 10.3 of the registrant's Form 10-K for the fiscal year ended December 31, 1999.
21.1 Subsidiaries of Registrant.
23.1 Consent of KPMG LLP.