<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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For the Quarter Ended June 30, 1996 Commission File No. 2-84979
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CASTLE BANCGROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 36-3238190
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OF ORGANIZATION) NUMBER)
208 West Locust Street 60115
DeKalb, Illinois (ZIP CODE)
(ADDRESS OF PRINCIPAL
EXECUTIVE OFFICES)
Registrant's telephone number, including area code (815) 758-7007
---------------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes /x/ No / /
The registrant has 2,068,571 shares of Common Stock outstanding as of June 30,
1996.
<PAGE>
PART I
ITEM 1 -- FINANCIAL STATEMENTS
The following unaudited interim consolidated financial statements of Castle
BancGroup, Inc. (Company) are included herewith:
1. Interim Consolidated Balance Sheets as of June 30, 1996 and December
31, 1995.
2. Interim Consolidated Statements of Earnings for the three months ended
June 30, 1996 and 1995 and for the six months ended June 30, 1996
and 1995.
3. Interim Statement of Changes in Stockholders' Equity for the six
months ended June 30, 1996.
4. Interim Consolidated Statements of Cash Flows for the six months ended
June 30, 1996 and 1995.
ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
The Company posted year-to-date net earnings of $915,824 at June 30, 1996,
$284,659 or 23.7% less than year-to-date earnings of $1,200,483 at June 30,
1995. Second quarter net earnings were $583,984 for 1996 as compared to
$782,472 during the second quarter of 1995, a $198,488 or 25.4% decrease. This
decrease in earnings can be attributed to increased expenses related to the
expansion of the Company's mortgage origination line of business. New mortgage
origination facilities were opened in Chicago and Rockford, Illinois during the
first half of 1996. Additionally, increased expenses have been incurred for
staffing and technology needs relating to the start up of a secondary marketing
function at the Company's mortgage origination subsidiary, Castle Mortgage, Inc.
Fluctuating interest rates have also created secondary marketing losses on the
Company's mortgage loan warehouse, in addition to negatively impacting mortgage
demand in the market place. While current year-to-date profits have been
adversely affected, management expects that operating results will improve in
the future from these activities.
Year-to-date earnings per common share was $.40 at June 30, 1996, down $.08 per
share from June 30, 1995 earnings per common share of $.48. Second quarter
earnings per common share was $.26 for 1996 as compared to $.33 for the same
period in 1995. The decrease in earnings per share is due primarily to the
increased expenses incurred during the first half of 1996, as described above,
which are expected to enhance future returns to the Company. Net earnings
applicable to common stock of $815,074 year-to-date at June 30, 1996 compares to
$963,063 at June 30, 1995. This represents a $147,989 decrease. Year-to-date
preferred stock dividends were $100,750 at June 30, 1996 as compared to $237,420
at June 30, 1995 as a result of the redemption of $2,750,000 of preferred stock
on June 30, 1995.
To improve operating results, the Company continues its attempt to control
holding company expenses as well as improve Subsidiary earnings through
economies of scale and earnings enhancement
2
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opportunities. The Company's strategy for future growth is based on internal
growth of its Subsidiaries and selective acquisition of financial institutions
and financial services companies in markets west of the Chicago metropolitan
area.
The following discussion of performance for the six month period ending June 30,
1996 as compared to the corresponding period in 1995 highlights significant
points of interest, trends in operations, and management's operating
philosophies. (Unless otherwise stated, all averages are simple daily
averages.)
INTEREST INCOME
Net interest income for the first six months of 1996 increased approximately
$625,000 to $8,830,000 as compared to $7,484,054 at June 30, 1995. This
increase can be attributed to the interest earnings on the Company's portfolio
of mortgage loans held for sale, with a year-to-date average outstanding balance
of $39.3 million, net of increased interest expense on short-term borrowings and
deposits which are used to fund the mortgage loan portfolio. On a tax
equivalent basis, net interest income increased $537,000 for the first two
quarters of 1996 as compared to the same period in 1995.
The average net interest margin, on a tax equivalent basis (including
non-accruing loans), declined in the first half of 1996 to 4.25% as compared
to 4.55% in 1995. This decline can be traced to a 0.20% increase in the
Company's average cost of funds for the first two quarters of 1996 as
compared to the same period in 1995. Increases in short term interest rates
continue to put pressure on the Subsidiaries' net interest margins.
The ratio of average earning assets to average total assets increased to 93.9%
for the first six months of 1996 as compared to 92.3% for the same period in
1995, due to efforts by the Company to obtain higher yielding assets. The
mortgage loan held for sale portfolio increased $39.2 million from $12.1 million
at June 30, 1995 to $51.3 million at June 30, 1996. The Subsidiaries originate
long-term fixed-rate mortgage loans which are sold in the secondary market,
servicing released and without recourse. This line of business not only
provides needed services for customers, but also generates substantial fee
income and reduces the Company's exposure to long-term interest rate risk. The
Subsidiaries also continue efforts to improve the net interest margin by
increasing the loan portfolio, traditionally higher yielding assets, with
quality credits. The gross loan portfolio has increased $29.0 million, or
11.9%, from June 30, 1995 to June 30, 1996. The ratio of average loans,
including mortgages held for sale, to total average assets, has increased
significantly to 66.5% at June 30, 1996 as compared to 56.9% at June 30, 1995.
Management believes that net interest margins will continue to experience the
downward pressure experienced by financial institutions in recent years, which
will continue to impact future earnings. This downward pressure is due to
competition from both financial institutions and competitors outside the
industry, as well as general trends in the economy.
PROVISION FOR POSSIBLE LOAN LOSSES
The Subsidiaries establish a provision for loan losses which management believes
is sufficient to maintain adequate reserve levels. The provision is a result of
credit analysis, historical trends in net charges to the allowance, loan
portfolio configuration and loan growth.
3
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Management follows conservative credit standards and closely monitors loan
quality to minimize loan losses. The Company's loan review program closely
monitors credit conditions of specific loans, historical trends in
charge-offs at the Subsidiaries as well as companies within their peer group,
experience and quality of lending staff, and general economic conditions in
the communities that the Subsidiaries serve. This system allows management
to assess the requirements of the allowance for loan losses. Due to these
efforts, management has permitted the allowance as a percentage of loans to
remain at 1.30% as of June 30, 1996 which remained stable as compared to
1.31% at December 31,1995. The provision for loan losses recorded during the
first six months of 1996 was $445,531 as compared to $163,750 during the same
period in 1995. This $282,000 increase can be attributed to maintaining the
1.30% reserved level on the loan portfolio, which increased $29 million
during this period. Management intends to continue its conservative loan
policies and to maintain the Company's allowance for loan losses at levels
deemed to be sufficient based on the evaluation of the above factors.
Management continues to monitor and control asset quality. Non-performing
assets, defined as loans 90 days or more past due and still accruing, loans in
non-accrual status, restructured loans and other real estate owned, represented
0.63% of total assets as of June 30, 1996 which has increased modestly from
0.53% as December 31, 1995.
Year-to-date net charge-offs at June 30, 1996 totaled $323,608 as compared to
$109,234 at June 30, 1995. As experienced through out the consumer finance
industry, Castle Finance has experienced higher delinquencies and charge-offs
during the first half of 1996, which accounts for $62,000 of this increase.
Additionally, a Subsidiary bank had one large comercial loan charge-off for
$73,000 and one residential real estate charge-off of $42,000 during the
first six months of 1996, as compared to net charge-offs of only $29,000 at
this Subsidiary during the same period in 1995.
OTHER OPERATING INCOME
Other income, excluding security gains and losses, totaled $5,154,000 for the
first six months of 1996 as compared to $2,609,000 for the same period in 1995.
Approximately $2,217,000 of the $2,545,000 increase over the prior year relates
to fee income earned by Castle Mortgage, Inc. on the origination of mortgages
sold into the secondary market. Castle Mortgage acquired the assets of Premier
on May 24, 1995. As a result, year-to-date earnings for the Company at June 30,
1995 include income earned by Castle Mortgage, Inc. from the date of acquisition
only.
Net securities gains of $28,846 were recognized during the first six months
of 1996 as compared to net losses of ($288,320) during the first six months
of 1995. For both periods, all recognized gains and losses related to the
sale or call of securities classified as available for sale. During the first
quarter of 1995, $232,500 of non-recurring security losses, net of applicable
income taxes, were recognized as the result of the sale of several securities
that were consummated to permit reinvestment in higher yielding investments.
The Subsidiaries continue to work on improving non-interest revenues by
collection of fee income and periodic reevaluation of fee schedules to ensure
that they are fair to the customer and adequately compensate the Company for
costs incurred and risk assumed.
OTHER OPERATING EXPENSES
Other operating expenses increased approximately $3,466,000 year to date at June
30, 1996 over the corresponding period in 1995. $3,288,000 of this increase
relates to operations of Castle Mortgage which, as noted above, was not actively
operating during the first four months of 1995. Increases in employee salaries
and benefit expenses accounted for another $755,000 of the increase. Increased
operating expenses relating to the start-up of two new mortgage origination
offices also contributed to the increase, as did increased professional fees
associated with management's continuing efforts to identify growth and revenue
enhancement opportunities.
Increases in operating expenses were partially off-set by a $398,000 decrease in
FDIC insurance expense during the first six months of 1996, as compared to the
same period in
4
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1995. This savings is a direct result of the reduction of FDIC premiums in late
1995 for well managed financial institutions.
Subsidiary 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. Several staff additions
were made at the Subsidiaries that will help facilitate future growth in key
operational areas.
Management anticipates that the current upward trend in other operating expenses
will slow somewhat as economies of scale are realized at the holding company
level through centralization of bank functions such as internal audit, human
resources, accounting, marketing, data processing, and purchasing. Management
also anticipates that inflation will be moderate over the next several years
which will further limit the growth of expenses.
In October of 1995, the Financial Accounting Standards Board (FASB) adopted
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation." This statement required implementation of either a change to a
fair value based method accounting or a proforma disclosure of the effects of
such a change for fiscal years beginning after December 15, 1995. The Company
has elected not to implement the new fair value based method in determining
compensation expense. Therefore, the implementation of this Statement had no
effect on the financial results of the Company. Based on current information, a
proforma disclosure of the effect of the change in accounting to a fair value
based method would require a proforma increase to compensation expense of
approximately $435,000.
The FASB also issued Statement No. 121, "Accounting for the Impairment of Long-
lived Assets and for Long-lived Assets to be Disposed Of." This statement
provides guidance for recognition and measurement of impairment of long-lived
assets, certain intangible assets and goodwill related both to assets to be held
and used, and assets of which are to be disposed. Statement No. 121 is
effective for fiscal years beginning after December 15, 1995. Implementation of
this statement had no impact on the financial results of the Company.
In 1995 the FASB also issued SFAS No. 122, "Accounting for Mortgage Servicing
Rights", which requires capitalization of servicing rights on mortgage plans
when the loans are to be sold and the servicing retained. Currently, the
Company primarily sells all mortgage loans with servicing released, thus
implementation of this accounting statement is not expected to be materials
to the Company's business practices or results of operations.
FINANCIAL CONDITION
The Company continues to face new and different challenges as the financial
services industry continues to evolve. As the economy continues on its course
to recovery, improvement in the marketplace will allow those organizations with
drive and vision to continue to succeed and grow. While competition from
financial and non-financial sources continues to increase, so do opportunities
from traditional and non-traditional markets. Historically, the Company has
responded well to both the challenges and opportunities with innovative products
and services, fair and appropriate pricing, risk management, cost containment,
and aggressive pursuit of market opportunities. The Company has responded to
these challenges with new approaches to
5
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providing customer satisfaction such as the acquisition of Premier, which
provides greater access to mortgage markets, and the creation of a full service
brokerage department for our banking subsidiaries. Management believes that the
Company's future success will continue to be from effective operation of the
Subsidiaries. The development of centralized functions at the holding company
was designed to provide essential services to the Subsidiaries to allow them to
continue as dominant competitors in the markets which they serve and to provide
a solid basis for future growth through acquisition of financial assets that fit
the Company's long term strategy.
BALANCE SHEET STRUCTURE
Average assets for the first six months of 1996 increased by $51,396,000 or
approximately 12.4% as compared to the corresponding period in 1995. Total
deposits increased $32,956,000 or 9.1% over the corresponding period. The
Subsidiary Banks are all experiencing significant competition for deposits which
has caused an increase in Company's cost of funds, as noted previously.
Management continues to view "core" deposits (individuals, partnerships and
corporate deposits) as the primary long term funding source for internal growth
of the Company. The Company does not have any brokered deposits as of June 30,
1996. Deposit growth requires the Subsidiary Banks to continue to develop and
offer high value deposit products that attract new customer relationships, as
well as maintaining existing relationships.
Management is continuing its attempts to maximize returns on assets through
shifts in asset mix when it is deemed prudent to do so. As a result, the
investment portfolio has decreased and the loan portfolio, including mortgage
loans held for sale, has increased, in an effort to invest in higher yielding
assets.
CAPITAL
The Company is committed to maintaining strong capital positions in each of its
Subsidiaries and on a consolidated basis. Management monitors, analyzes and
forecasts capital positions for each entity to ensure that adequate capital is
available to support growth and maintain financial soundness. The Company's
tangible leverage ratio as of June 30, 1996 was 6.19%, down from 6.27% at
December 31, 1995. The ratio exceeds the regulatory minimum, and management
believes the Company is maintaining a strong capital position. The Company's
June 30, 1996 total risk weighted capital ratio also decreased to 10.23% from
10.95% at December 31, 1995. The Tier 1 Capital ratio decreased from 9.33% at
December 31, 1995 to 9.11% at June 30, 1996. Both the total risk weighted and
Tier 1 Capital ratios also continue to exceed regulatory minimums.
6
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LIQUIDITY
The Company ensures that the Subsidiaries maintain adequate 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 investments, and the bank's federal funds
position which, together, are more than sufficient to satisfy liquidity need
arising in the normal course of business. The Company is a secondary source of
liquidity for its Subsidiaries through discretionary access to short-term
funding sources in the event of unanticipated demand for funds.
As presented in the Consolidated Statement of Cash Flows, the Company has
experienced significant changes in the cash flows from operating, investing
and financing activities during the first six months of 1996 as compared to
the same period in 1995. These fluctuations primarily related to the $38
million increase in the portfolio of mortgage loans held for sale, which has
been funded by maturities and calls of investment securities, as well as the
addition of short-term debt, including an additional $5 million operating
line of credit for the Company, as well as increased federal funds purchased
at the Subsidiary Banks.
INTEREST RATE RISK
Senior management monitors and manages interest rate exposure to minimize the
impact of interest rate fluctuations. Interest rate exposure is reviewed and
managed, to the extent possible and prudent to do so, by matching interest
bearing assets and interest bearing liabilities. Maximization of net interest
income consistent with acceptable risk and liquidity needs are underlying
objectives of asset/liability management.
OVERVIEW
The regulatory environment continues to challenge Company management to satisfy
regulatory requirements while still providing financial services to the
communities we serve and adequate return and continuing confidence to our
shareholders. Recent banking acts including the Riegle Community Development
and Regulatory Improvement Act of 1994 and the Riegle-Neal Interstate Banking
and Branching Efficiency Act of 1994 (the Acts) will have significant impact on
the financial institution industry. Numerous regulatory relief provisions are
included in these Acts intended to streamline the regulatory process for banks
and thrifts. Additional, new provisions are included to allow for interstate
branching beginning in late 1995 and interstate merging beginning in June of
1997.
The Company has taken several significant steps toward its primary goal of
adding shareholder value through internal growth and earnings, as well as
increased franchise value from the strategic acquisition of financial
institutions in the path of westward growth of the Chicago market. The
acquisition of Premier in the southern and western portion of the Chicago
Suburban market, as well as expansion of the Castle Finance Company, represents
expansion into nontraditional banking markets and provides another strategic
market for Company expansion. The strategies to obtain our primary goal will
always include sound banking fundamentals, prudent lending and investment
policies, cost containment, outstanding customer service through competitively
priced products and services, local community involvement, and research and
entry into non-traditional markets. Management believes this strategy will
provide the earnings to build a solid capital position for both continued
financial soundness, as well as corporate growth through selected acquisitions
of financial assets in markets with potential for future growth and
profitability.
7
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PART II
ITEM 1 -- LEGAL PROCEEDINGS
Neither the Company nor any subsidiary is a party to any material legal
proceedings, other than routine litigation incidental to the financial services
industry.
ITEM 2 -- CHANGES IN SECURITIES
Not applicable.
ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 -- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
The Annual meeting of the registrant was held April 24, 1996 at which time two
matters were submitted to a vote of security holders:
MATTER 1: The Board of Directors was elected. There was no solicitation in
opposition of management's nominees, which included Larry D. Beaty, Robert T.
Boey, John W. Castle, Peter H. Henning, Donald E. Kieso, James N. McInnes, Louis
P. Brady, Nancy D. Castle, and John B. Hiatt, all of whom received 1,637,522.68
votes; and, Bruce P. Bickner, who received 1,635,372.19 votes, and William R.
Monat, who received 1,632,756.09 votes out of a possible 2,060,538 shares
outstanding on the record date.
MATTER 2: The Castle BancGroup, Inc. Employee Stock Purchase Plan was approved
as presented with 1,611,510.19 votes for, 10,200 votes against, and 15,211
abstaining votes out of a possible 2,060,538 shares outstanding on the record
date.
ITEM 5 -- OTHER INFORMATION
Not applicable.
ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
1. The following documents are filed as part of this report:
Exhibits as follows -- not applicable.
2. Reports on Form 8-K
The registrant has not filed any reports on Form 8-K, nor has it been
required to file such reports, for the quarter ended June 30, 1996.
8
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CASTLE BANCGROUP, INC.
AND SUBSIDIAIRES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
ASSETS June 30, 1996 Dec. 31, 1995
Unaudited
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 10,941,752 15,499,903
Excess funds sold 11,000 5,550,000
- ---------------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 10,952,752 21,049,903
- ---------------------------------------------------------------------------------------------------------------------
Investment securities (note 2) 109,935,879 135,565,802
Mortgage loans held for sale, lower of cost or market 51,279,641 13,483,973
Loans (note 3) 273,341,431 257,673,647
Less:
Allowance for possible loan losses (note 3) 3,502,546 3,308,721
Unearned income and deferred loan fees 3,392,675 3,074,425
- ---------------------------------------------------------------------------------------------------------------------
Net loans 266,446,210 251,290,501
Other Real Estate Owned 74,996 0
Premises and equipment 10,250,567 9,983,628
Goodwill, net of amortization 5,322,820 5,583,290
Other assets 6,823,445 6,680,028
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$ 461,086,310 443,637,125
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LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 36,978,284 40,523,691
Interest-bearing 356,790,341 345,646,046
- ---------------------------------------------------------------------------------------------------------------------
Total deposits 393,768,625 386,169,737
Short-term borrowings 17,774,343 6,590,912
Long-term debt 10,575,000 11,000,000
Other liabilities 5,147,638 5,530,036
- ---------------------------------------------------------------------------------------------------------------------
Total liabilities 427,265,606 409,290,685
- ---------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value; authorized 100,000 shares :
7.75% cumulative preferred stock, no par
value, 2,600 shares issued and outstanding 2,600,000 2,600,000
Common stock, $.33 par value; 5,000,000 shares authorized, 2,068,571 and
2,057,131 shares issued and outstanding in 1996 and 1995, respectively 689,524 685,710
Additional paid-in capital 4,905,437 4,695,404
Net unrealized gain on investment securities (note 2) 23,960 1,371,900
Retained earnings 25,601,783 24,993,426
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Total stockholders' equity 33,820,704 34,346,440
Commitments and contingent liabilities
- ---------------------------------------------------------------------------------------------------------------------
$ 461,086,310 443,637,125
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</TABLE>
See accompanying notes to consolidated financial statements.
9
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Unaudited
3 Months Ended
June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 6,430,435 5,750,678
Interest and dividends on investment securities:
Taxable 1,640,102 2,013,127
Nontaxable 193,975 132,473
Interest on time deposits 0 187
Interest on excess funds sold 9,915 90,073
Interest on mortgage loans held for sale 920,968 45,469
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 9,195,395 8,032,007
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 3,916,787 3,515,318
Interest on short-term borrowings 385,973 107,426
Interest on long-term debt 207,204 324,763
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 4,509,964 3,947,507
- ---------------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 4,685,431 4,084,500
Provision for possible loan losses 289,500 77,425
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,395,931 4,007,075
- ---------------------------------------------------------------------------------------------------------------------
Other operating income:
Trust fees 155,493 138,027
Deposit service charges 102,978 121,753
Other service charges 302,774 274,476
Data processing fees 72,081 50,888
Investment securities gains (losses), net (note 2) (9,089) 18,127
Mortgage loan origination income 1,406,496 787,769
Other income 579,555 389,997
- ---------------------------------------------------------------------------------------------------------------------
Total other operating income 2,610,288 1,781,037
- ---------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 3,754,597 2,679,966
Net occupancy expense of premises 388,904 269,035
Furniture and fixtures 467,544 280,971
Office supplies 108,631 93,895
Outside services 235,060 202,129
FDIC insurance assessment 2,000 200,671
Amortization expense - goodwill 101,567 97,968
Loan and collection expense 278,279 259,518
Other expenses 768,187 584,987
- ---------------------------------------------------------------------------------------------------------------------
Total other operating expenses 6,104,769 4,669,140
- ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 901,450 1,118,972
Income tax expense 317,466 336,500
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 583,984 782,472
- ---------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 533,609 663,762
- ---------------------------------------------------------------------------------------------------------------------
Per common share data based on weighted average common
shares outstanding of 2,066,407 shares in 1996, 2,016,417 shares in 1995 $ .26 .33
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
10
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
Unaudited
6 Months Ended
June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 12,518,025 11,170,033
Interest and dividends on investment securities:
Taxable 3,390,669 3,744,692
Nontaxable 392,745 561,962
Interest on time deposits 9,359 3,855
Interest on excess funds sold 91,241 163,515
Interest on mortgage loans held for sale 1,269,705 45,469
- ---------------------------------------------------------------------------------------------------------------------
Total interest income 17,671,744 15,689,526
- ---------------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 7,809,128 6,713,421
Interest on short-term borrowings 627,344 188,641
Interest on long-term debt 405,295 581,992
- ---------------------------------------------------------------------------------------------------------------------
Total interest expense 8,841,767 7,484,054
- ---------------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 8,829,977 8,205,472
Provision for possible loan losses 445,531 163,750
- ---------------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 8,384,446 8,041,722
- ---------------------------------------------------------------------------------------------------------------------
Other operating income:
Trust fees 291,332 254,437
Deposit service charges 210,175 242,527
Other service charges 567,150 525,868
Data processing fees 150,309 124,396
Investment securities gains (losses), net (note 2) 28,846 (288,320)
Mortgage loan origination income 3,042,450 825,167
Other income 892,326 636,718
- ---------------------------------------------------------------------------------------------------------------------
Total other operating income 5,182,588 2,320,793
- ---------------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 7,633,863 5,015,078
Net occupancy expense of premises 750,012 549,827
Furniture and fixtures 759,889 554,994
Office supplies 224,803 177,535
Outside services 489,557 342,565
FDIC insurance assessment 5,000 402,726
Amortization expense - goodwill 231,802 196,169
Loan and collection expense 543,180 315,279
Other expenses 1,452,604 1,070,859
- ---------------------------------------------------------------------------------------------------------------------
Total other operating expenses 12,090,710 8,625,032
- ---------------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,476,324 1,737,483
Income tax expense 560,500 537,000
- ---------------------------------------------------------------------------------------------------------------------
Net earnings $ 915,824 1,200,483
- ---------------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 815,074 963,063
- ---------------------------------------------------------------------------------------------------------------------
Per common share data based on weighted average common
shares outstanding of 2,062,905 shares in 1996, 2,004,151 shares in 1995 $ .40 .48
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
11
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Statement of Changes in Stockholder's Equity
Six months ended June 30, 1996
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized
gain (loss)
on
Preferred Common investment Retained
stock stock Surplus securities earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1996 $ 2,600,000 685,710 4,695,404 1,371,900 24,993,426 34,346,440
Issuance of 11,440 shares of common
stock - 3,814 210,033 - - 213,847
Change in unrealized gain/(loss) on investment
securities - - - (1,347,940) - (1,347,940)
Net earnings - - - - 915,824 915,824
Cash dividends on preferred stock - - - - (100,750) (100,750)
Cash dividends on common stock ($.10 per share) - - - - (206,717) (206,717)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1996 $ 2,600,000 689,524 4,905,437 23,960 25,601,783 33,820,704
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Unaudited
6 Months Ended
June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 17,702,150 15,046,807
Fees received 4,926,820 2,351,379
Net (increase)decrease in mortgage loans held for sale (37,795,668) (12,122,146)
Interest paid (8,882,739) (7,484,053)
Cash paid to suppliers and employees (10,628,274) (6,779,526)
Income taxes paid (710,000) (537,000)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (35,387,711) (9,524,539)
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investments available-for-sale 23,765,729 12,910,297
Sales of investments available-for-sale 17,667,863 17,258,658
Purchases of investments available-for-sale (17,536,973) (20,147,488)
Net (increase)decrease in loans (15,951,632) (5,479,799)
Premises and equipment expenditures (843,130) (747,688)
Net cash used for acquisition of subsidiary 0 (2,027,884)
Other Real Estate Owned (74,996) 0
- ---------------------------------------------------------------------------------------------------------------------
Net cash used by investing activities 7,026,861 1,766,096
- ---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits,
NOW accounts, and savings accounts (212,942) (11,298,028)
Net change in certificates of deposit 7,811,830 17,156,753
Dividends paid on preferred stock (100,750) (237,424)
Dividends paid on common stock (206,717) (183,984)
Net proceeds from short-term debt 11,183,431 856,261
Proceeds from issuance of common stock 213,847 819,813
Repayment of long-term debt (425,000) (400,000)
Redemption of preferred stock 0 (2,750,000)
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,263,699 3,963,391
- ---------------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (10,097,151) (3,795,052)
Cash and cash equivalents at beginning of year 21,049,903 17,011,312
- ---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 10,952,752 13,216,260
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on next page)
13
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
Unaudited
6 Months Ended
June 30, 1996 June 30, 1995
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 915,824 1,200,484
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 967,301 839,005
Provision for possible loan losses 445,531 163,750
Losses (gains) on sale of investment securities (28,846) 288,320
Increase (decrease) in:
Income taxes payable (149,500) 0
Interest payable (40,972) 0
Unearned income 318,250 (423,056)
Other liabilities 495,136 945,617
Decrease (increase) in:
Interest receivable 22,970 0
Other assets (226,922) (257,734)
Increase in mortgage loans held for sale (37,795,668) (12,122,146)
Discount accretion recorded as income (483,754) (442,901)
Premium amortization charged against income 172,939 223,238
- ---------------------------------------------------------------------------------------------------------------------
$ (35,387,711) (9,585,423)
- ---------------------------------------------------------------------------------------------------------------------
Schedule of Non-Cash Financing and Investing Activities:
- ---------------------------------------------------------------------------------------------------------------------
Issuance of common stock for the acquisition of Premier
Home Financing $ 0 $ 637,000
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
A summary of the transaction completed in connection with the acquisition
of substantially all the assets and an assumption of substantially all the
liabilities of Premier Home Financing, Inc. is as follows:
Fair value of assets acquired $ 0 9,722,863
Excess of acquisition cost over fair value of assets acquired 0 1,922,000
Acquisition costs 0 (2,968,000)
- ---------------------------------------------------------------------------------------------------------------------
Liabilities assumed 0 8,676,863
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Statements
Six months ended June 30, 1996
- -------------------------------------------------------------------------------
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The unaudited consolidated financial statements of Castle BancGroup, Inc.
(Company) and subsidiaries are prepared in conformity with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. These financial
statements should be read in conjunction with the Company's 1995 Annual Report
on Form 10-K. In the opinion of management, all normal recurring adjustments
necessary for a fair presentation of the financial position and the results of
operations for the periods presented, have been included. Results of operations
for interim periods are not necessarily indicative of the results that may be
expected for the year.
(2) INVESTMENT SECURITIES
- --------------------------------------------------------------------------------
Unaudited
June 30, 1996 Dec. 31,1995
- --------------------------------------------------------------------------------
Available-for-sale, at fair value $ 109,935,879 135,565,802
- --------------------------------------------------------------------------------
A comparison of amortized cost and fair value of investment securities
available-for-sale at June 30, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
Unaudited
June 30, 1996
--------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 77,225,027 628,448 (983,163) 76,870,312
Obligations of state and political
subdivisions 11,336,256 392,548 (2,766) 11,726,038
Mortgage-backed securities 20,647,812 267,049 (273,957) 20,640,904
- ---------------------------------------------------------------------------------------------------------------
Total debt securities 109,209,095 1,288,045 (1,259,886) 109,237,254
Equity securities 698,625 0 0 698,625
- ---------------------------------------------------------------------------------------------------------------
Total securities 109,907,720 1,288,045 (1,259,886) 109,935,879
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Statements
Six months ended June 30, 1996
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
December 31, 1995
-----------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 97,508,730 1,530,828 (503,967) 98,535,591
Obligations of state and political
subdivisions 12,386,226 570,457 (7,923) 12,948,760
Mortgage-backed securities 23,473,310 567,384 (83,868) 23,956,826
- ---------------------------------------------------------------------------------------------------------------------
Total debt securities 133,368,266 2,668,669 (595,758) 135,441,177
Equity securities 124,625 - - 124,625
- ---------------------------------------------------------------------------------------------------------------------
Total securities $133,492,891 2,668,669 (595,758) 135,565,802
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available-for-sale at June 30,
1996 and December 31, 1995 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.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
Unaudited
June 30, 1996 December 31, 1995
--------------------------- --------------------------
Amortized Fair Amortized Fair
cost value cost value
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 24,323,495 24,290,817 34,500,941 34,437,373
Due after one year through five years 46,009,114 45,878,231 51,438,692 52,381,742
Due after five years through ten years 18,033,674 18,226,713 23,760,323 24,462,196
Due after ten years 195,000 200,589 195,000 203,040
- ------------------------------------------------------------------------------------------------------------------------------
88,561,283 88,596,350 109,894,956 111,484,351
Mortgage-backed securities 20,647,812 20,640,904 23,473,310 23,956,826
- ------------------------------------------------------------------------------------------------------------------------------
Total debt securities 109,209,095 109,237,254 133,368,266 135,441,177
Equity securities 698,625 698,625 124,625 124,625
- ------------------------------------------------------------------------------------------------------------------------------
Total securities $ 109,907,720 109,935,879 133,492,891 135,565,802
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
16
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Statements
Six months ended June 30, 1996
- --------------------------------------------------------------------------------
Gross losses of approximately $60,917 and $339,390 occurred from security
activity during the six months ended June 30, 1996 and 1995, respectively.
Gross gains of $89,763 and $51,070 occurred from security activity during the
six month period that ended June 30, 1996 and 1995, respectively. All security
gains and losses that occurred during 1996 and 1995 were as a result of
transactions involving available-for-sale securities
Management reviewed the investment security portfolio and transferred all
securities that were designated as held-to-maturity to the available-for-sale
classification during the first quarter of 1995. Total transfers of these
securities during 1995 totaled $69,724,348 of amortized cost. An increase to
unrealized losses of $465,198, net of $158,168 of deferred taxes, were
recognized as a result of these transfers.
Investment securities carried at approximately $59,000,000 and $46,570,000 at
June 30, 1996 and December 31, 1995, respectively, were pledged to secure
deposits and for other purposes permitted or required by law.
(3) LOANS
The composition of the loan portfolio at the dates shown is as follows:
- --------------------------------------------------------------------------------
Unaudited
June 30, 1996 Dec. 31, 1995
- --------------------------------------------------------------------------------
Commercial, financial, and agricultural $ 67,682,321 63,196,344
Real estate mortgage (primarily residential) 169,162,313 159,927,950
Consumer 35,269,800 33,094,011
Lease financing receivable 1,226,997 1,455,342
- --------------------------------------------------------------------------------
Total loans, gross 273,341,431 257,673,647
- --------------------------------------------------------------------------------
Non-performing loans consisted of the following components:
- --------------------------------------------------------------------------------
Unaudited
June 30, 1996 Dec. 31, 1995
- --------------------------------------------------------------------------------
Non-accrual loans $ 2,384,105 2,063,974
Loans past due 90 days or more and still accruing 122,324 16,464
Restructured loans still accruing and less
than 90 days past due 300,506 270,007
- --------------------------------------------------------------------------------
Total non-performing loans $ 2,806,935 2,350,445
- --------------------------------------------------------------------------------
17
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Statements
Six months ended June 30, 1996
- --------------------------------------------------------------------------------
The following is a summary of activity in the allowance for possible loan
losses:
- --------------------------------------------------------------------------------
Unaudited
6 Months ended Year ended
June 30, 1996 Dec. 31, 1995
- --------------------------------------------------------------------------------
Balance, beginning of year $3,308,721 3,474,929
Addition from acquisition of subsidiary - 650
Provision charged to expense 445,531 488,011
Additions to dealer reserve 71,902 51,728
Recoveries on loans previously charged off 114,123 283,618
- --------------------------------------------------------------------------------
3,940,277 4,298,936
Less loans charged off 437,731 990,215
- --------------------------------------------------------------------------------
Balance, end of period $3,502,546 3,308,721
- --------------------------------------------------------------------------------
The following is a summary of loan loss experience for the six months ended
June 30, 1996, including an allocation of the allowance, by loan category, at
period end:
- -------------------------------------------------------------------------------
(Dollar figures in thousands)
Commercial Real
& Agricultural Estate Consumer Other Unalloc. Total
- -------------------------------------------------------------------------------
Balance, December 31, 1995 $1,421 1,144 518 26 200 3,309
Provision charged to expense 0 25 421 0 0 446
Additions to dealer reserve 0 0 72 0 0 72
Recoveries on loans previously
charged off 68 0 46 0 0 114
- -------------------------------------------------------------------------------
1,489 1,169 1,057 26 200 3,941
Less loans charged off (108) (52) (278) 0 0 (438)
- -------------------------------------------------------------------------------
Balance, June 30, 1996 $1,381 1,117 779 26 200 3,503
- -------------------------------------------------------------------------------
Ratios:
Loans in category to total loans 24.76% 61.89% 12.88% 0.47% N/A 100.0%
- -------------------------------------------------------------------------------
The allocation of the allowance for loan losses is based on historical trends in
charge-offs, general economic conditions, peer comparisons and management
experience.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ John W. Castle
- -------------------------------------------------------
By: John W. Castle, Chairman of the Board
Chief Executive Officer and Director
Castle BancGroup, Inc.
Date: August 13, 1996
----------------------------------
/s/ Larry D. Beaty
- -------------------------------------------------------
By: Larry D. Beaty, Executive Vice President
Chief Financial Officer, Treasurer and Director
Castle BancGroup, Inc.
Date: August 13, 1996
----------------------------------
/s/ Jea Nae B. Wood
- -------------------------------------------------------
By: Jea Nae B. Wood, Controller and Chief
Accounting Officer
Castle BancGroup, Inc.
Date: August 13, 1996
----------------------------------
19
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> APR-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 10,941,752
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 11,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 109,935,879
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 321,228,397
<ALLOWANCE> 3,502,546
<TOTAL-ASSETS> 461,086,310
<DEPOSITS> 393,768,625
<SHORT-TERM> 17,774,343
<LIABILITIES-OTHER> 5,147,638
<LONG-TERM> 10,575,000
0
2,600,000
<COMMON> 689,524
<OTHER-SE> 30,531,180
<TOTAL-LIABILITIES-AND-EQUITY> 461,086,310
<INTEREST-LOAN> 6,430,435
<INTEREST-INVEST> 1,834,077
<INTEREST-OTHER> 930,883
<INTEREST-TOTAL> 9,195,395
<INTEREST-DEPOSIT> 3,916,787
<INTEREST-EXPENSE> 4,509,964
<INTEREST-INCOME-NET> 4,685,431
<LOAN-LOSSES> 289,500
<SECURITIES-GAINS> (9,089)
<EXPENSE-OTHER> 6,104,769
<INCOME-PRETAX> 901,450
<INCOME-PRE-EXTRAORDINARY> 901,450
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 583,984
<EPS-PRIMARY> .26
<EPS-DILUTED> .26
<YIELD-ACTUAL> 4.24
<LOANS-NON> 2,384,000
<LOANS-PAST> 122,000
<LOANS-TROUBLED> 301,000
<LOANS-PROBLEM> 2,807,000
<ALLOWANCE-OPEN> 3,308,721
<CHARGE-OFFS> 437,781
<RECOVERIES> 186,025
<ALLOWANCE-CLOSE> 3,502,546
<ALLOWANCE-DOMESTIC> 3,502,546
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
