<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 September 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 2,070,661 shares of Common Stock outstanding as of September
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 September 30, 1996 and December
31, 1995.
2. Interim Consolidated Statements of Earnings for the three months ended
September 30, 1996 and 1995 and for the nine months ended September 30,
1996 and 1995.
3. Interim Statement of Changes in Stockholders' Equity for the nine months
ended September 30, 1996.
4. Interim Consolidated Statements of Cash Flows for the nine months ended
September 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 $1,759,350 at September 30,
1996, $443,088 or 20.1% less than year-to-date earnings of $2,202,438 at
September 30, 1995. Third quarter net earnings were $843,525 for 1996 as
compared to $1,001,955 during the third quarter of 1995, a $158,430 or 15.8%
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. While the Company sells forward commitments to deliver
mortgages into the secondary market as a means of mitigating the risks of
interest rate movements, year-to-date secondary marketing losses of $319,000
have been incurred on the mortgage loan warehouse. Mortgage demand has also
been negatively impacted by rising interest rates. 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 $.78 at September 30, 1996, down $.17
per share from September 30, 1995 earnings per common share of $.95. Third
quarter earnings per common share was $.38 for 1996 as compared to $.47 for the
same period in 1995. The decrease in earnings per share is due primarily to the
increased expenses incurred during the first three quarters of 1996, as
described above, which are expected to enhance future returns to the Company.
Net earnings applicable to common stock of $1,608,224 year-to-date at September
30, 1996 compares to $1,914,638 at September 30, 1995. This represents a
$306,414 decrease. Year-to-date preferred
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stock dividends were $151,126 at September 30, 1996 as compared to $287,801
at September 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 opportunities. The Company's
strategy for future growth is based on internal growth of its Subsidiaries,
particularly in the mortgage loan origination line of business and selective
acquisition of financial institutions and financial services companies in
markets west of the Chicago metropolitan area.
The addition of two new major products in 1996 will also provide growth
opportunities for the banking subsidiaries. "Telebank," an interactive customer
inquiry/account transfer system, was implemented during the third quarter of
1996. "Check Card," an on-line debit card product, will be introduced during
the fourth quarter. Both of these products address customer demands in the
market place.
The following discussion of performance for the nine month period ending
September 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 nine months of 1996 increased approximately
$918,000 to $9,259,395 as compared to $8,341,125 at September 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 $34.3 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 $1,056,000 for the first three
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), remained relatively consistent for the first nine months of
1996 at 4.34% as compared to 4.36% 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 93.7%
for the first nine months of 1996 as compared to 92.6% for the same period in
1995. The mortgage loan held for sale portfolio increased $5.0 million from
$13.5 million at September 30, 1995 to $18.5 million at September 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 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,
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with quality credits. The gross loan portfolio has increased $24.1 million,
or 9.4%, from September 30, 1995 to September 30, 1996. The ratio of average
loans, including mortgages held for sale, to total average assets, has
increased significantly to 66.0% at September 30, 1996 as compared to 58.8%
at September 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. 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 1.31% as of September 30, 1996 which has remained constant
with 1.31% at December 31, 1995. The provision for loan losses recorded during
the first nine months of 1996 was $603,031 as compared to $274,568 during the
same period in 1995. This $328,000 increase can be attributed to maintaining
the 1.31% reserved level on the loan portfolio, which increased $24 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 closely 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 0.74% of total assets as of September 30, 1996, which has increased
from 0.53% at December 31, 1995. The following table summarizes the components
of non-performing assets:
Non-accrual loans $2,526,535 $2,063,974
Loans past due 90+ days & still accruing 493,825 16,464
Restructured loans, performing according
to terms of restructure agreement 324,367 270,007
Other real estate owned 74,996 -0-
---------- ----------
TOTAL NON-PERFORMING ASSETS $3,419,723 $2,350,445
---------- ----------
---------- ----------
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Subsequent to September 30, 1996, $123,000 of non-accrual loans were repaid in
full, in addition to a $99,000 recovery of interest income. The remaining
$340,000 increase in non-accrual loans from December 31, 1995 to September 30,
1996 relates to the addition of one large agricultural real estate loan
classified as non-accrual during the first quarter of 1996. Based on the
location and value of the collateral, full recovery of principal and collection
costs is anticipated.
$295,000 of loans 90+ days past due and still accruing interest at September 30,
1996 were either repaid in full or brought current within the first ten days
following quarter end. The remaining 90+ past due loans includes two
residential real estate properties on which foreclosure is anticipated. Based
on the substantial collateral value of these two loans, complete recovery of the
principal, interest, and collection costs are anticipated and, as a result, in
accordance with Company policy, interest income is still being accrued.
Other real estate consists of one single family residence located in Harvard,
Illinois. Complete recovery of principal, interest, and disposal costs is
anticipated based on the current appraisal value of the property. The property
is currently listed for sale with a local realtor.
Year-to-date net charge-offs at September 30, 1996 totaled $371,727 as compared
to $412,995. Management continues to closely monitor all past due loans and to
improve collection efforts.
OTHER OPERATING INCOME
Other income, excluding security gains and losses, totaled $7,398,000 for the
first nine months of 1996 as compared to $5,188,000 for the same period in 1995.
Approximately $1,907,000 of the $2,210,000 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 $31,709 were recognized during the first nine months of
1996 as compared to net losses of ($289,438) during the first nine 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.
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OTHER OPERATING EXPENSES
Other operating expenses increased approximately $3,825,000 year to date at
September 30, 1996 over the corresponding nine month period in 1995. Operating
expenses increased $2,423,000 due to the inclusion of the operations of Castle
Mortgage, Inc. for the entire nine months of 1996 as compared to inclusion for
only five months of operations at September 30, 1995. Increases in employee
salaries and benefit expenses accounted for another $948,000 of the increase.
Expenses relating to the start-up of two new mortgage origination offices also
contributed to the increase in operating expense, 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 $374,000 decrease in
FDIC insurance expense during the first nine months of 1996, as compared to the
same period in 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.
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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 loans
when the loans are to be sold and the servicing retained. In addition, SPAS No.
125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities," Supplements SPAS No. 122 and is effective in
1997. Currently, the Company primarily sells all mortgage loans with servicing
released, thus implementation of both of these accounting statements is not
expected to be material 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 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 nine months of 1996 increased by $44,627,000 or
approximately 10.8% as compared to the corresponding period in 1995. This
increase is attributed to a $31.1 million and $28.0 million increase in the
mortgage loans held for sale and loan portfolios, respectively, off-set by a
$18.2 million decrease in the investment portfolio. This restructuring of the
balance sheet is a result of management's effort to invest in higher yielding
assets. Total deposits increased $17,340,000 or 4.5% 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 had $2,080,000 of brokered deposits
at September 30, 1996, with interest rates ranging from 6.30% to 6.75% and
maturities ranging from August 1997 through August 2000. Deposit growth
requires the Subsidiary Banks to
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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
Tier 1 leverage ratio as of September 30, 1996 was 6.37%, a modest increase 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 September 30, 1996 total risk weighted capital ratio also increased to
11.01% from 10.95% at December 31, 1995. The Tier 1 capital ratio increased
from 9.33% at December 31, 1995 to 9.80% at September 30, 1996. Both the total
risk weighted and Tier 1 Capital ratios also continue to exceed regulatory
minimums.
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 nine months of 1996 as compared to the
same period in 1995. These fluctuations primarily relate to the significant
increase in the portfolio of mortgage loans held for sale, as explained
previously, 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.
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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.
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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
Not applicable.
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:
a. Exhibit 1 - computation of Net Income Per Share (page 11)
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 September 30, 1996.
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EXHIBIT 1
CASTLE BANCGROUP, INC.
COMPUTATION OF NET INCOME
9 MONTHS ENDED
SEPTEMBER 30
-----------------------
1996 1995
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Net income applicable to common stock $1,608,224 $1,914,638
---------- ----------
---------- ----------
Weighted average common shares outstanding 2,064,420 2,019,470
Weighted average common share equivalents (1) 9,126 0
---------- ----------
Weighted average common shares and equivalents 2,073,546 2,019,470
---------- ----------
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Net income per common share $.78 $.95
---- ----
---- ----
(1) COMMON SHARE EQUIVALENTS RESULT FROM STOCK OPTIONS BEING TREATED AS IF THEY
HAD BEEN EXERCISED AND ARE COMPUTED BY APPLICATION OF THE TREASURY STOCK
METHOD.
11
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CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
ASSETS Sept. 30, 1996 Dec. 31, 1995
Unaudited
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 10,494,163 15,499,903
Excess funds sold 16,000,000 5,550,000
- ----------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 26,494,163 21,049,903
- ----------------------------------------------------------------------------------------------------------------
Investment securities (note 2) 120,672,776 135,565,802
Mortgage loans held for sale, lower of cost or market 18,542,487 13,483,973
Loans (note 3) 281,827,380 257,673,647
Less:
Allowance for possible loan losses (note 3) 3,640,780 3,308,721
Unearned income and deferred loan fees 3,301,456 3,074,425
- ----------------------------------------------------------------------------------------------------------------
Net loans 274,885,144 251,290,501
Other Real Estate Owned 74,996 0
Premises and equipment 10,240,812 9,983,628
Goodwill, net of amortization 5,192,585 5,583,290
Other assets 7,189,306 6,680,028
- ----------------------------------------------------------------------------------------------------------------
$ 463,292,269 443,637,125
- ----------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 39,731,343 40,523,691
Interest-bearing 363,778,588 345,646,046
- ----------------------------------------------------------------------------------------------------------------
Total deposits 403,509,931 386,169,737
Short-term borrowings 9,305,711 6,590,912
Long-term debt 10,575,000 11,000,000
Other liabilities 5,091,801 5,530,036
- ----------------------------------------------------------------------------------------------------------------
Total liabilities 428,482,443 409,290,685
- ----------------------------------------------------------------------------------------------------------------
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, 2,070,661 and
2,057,131 shares issued and outstanding in 1996 and 1995, respectively 690,220 685,710
Additional paid-in capital 4,958,920 4,695,404
Net unrealized gain on investment securities (note 2) 165,752 1,371,900
Retained earnings 26,394,934 24,993,426
- ----------------------------------------------------------------------------------------------------------------
Total stockholders' equity 34,809,826 34,346,440
Commitments and contingent liabilities
- ----------------------------------------------------------------------------------------------------------------
$ 463,292,269 443,637,125
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
12
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CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Unaudited
3 Months Ended
Sept. 30, 1996 Sept. 30, 1995
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 6,737,541 5,990,001
Interest and dividends on investment securities:
Taxable 1,579,315 1,757,987
Nontaxable 178,473 252,937
Interest in time deposits 0 876
Interest on excess funds sold 168,023 76,653
Interest on mortgage loans held for sale 596,043 262,671
- --------------------------------------------------------------------------------------------------
Total interest income 9,259,395 8,341,125
- --------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,142,877 3,809,898
Interest on short-term borrowings 180,395 187,903
Interest on long-term debt 195,160 98,308
- --------------------------------------------------------------------------------------------------
Total interest expense 4,518,432 4,096,109
- --------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 4,740,963 4,245,016
Provision for possible loan losses 157,500 110,818
- --------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,583,463 4,134,198
- --------------------------------------------------------------------------------------------------
Other operating income:
Trust fees 156,635 138,628
Deposit service charges 94,774 119,412
Other service charges 299,191 356,687
Data processing fees 11,508 73,506
Investment securities gains (losses), net (note 2) 2,857 (1,118)
Mortgage loan origination income 1,176,134 1,466,943
Other income 567,395 423,318
- --------------------------------------------------------------------------------------------------
Total other operating income 2,308,494 2,577,376
- --------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 3,356,715 3,286,784
Net occupancy expense of premises 396,980 333,742
Furniture and fixtures 348,914 256,843
Office supplies 117,712 99,596
Outside services 280,627 217,844
FDIC insurance assessment 2,000 (21,295)
Amortization expense - goodwill 158,903 124,978
Loan and collection expense 228,195 224,749
Other expenses 711,886 719,378
- --------------------------------------------------------------------------------------------------
Total other operating expenses 5,601,932 5,242,619
- --------------------------------------------------------------------------------------------------
Earnings before income taxes 1,290,025 1,468,955
Income tax expense 446,500 467,000
- --------------------------------------------------------------------------------------------------
Net earnings $ 843,525 1,001,955
- --------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 793,149 951,575
- --------------------------------------------------------------------------------------------------
Per common share data based on weighted average common
shares outstanding of 2,068,641 shares in 1996, 2,049,607 shares
in 1995 $ .38 .47
- --------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
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CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Statements of Earnings
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
Unaudited
9 Months Ended
Sept. 30, 1996 Sept. 30, 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 19,255,566 17,160,034
Interest and dividends on investment securities:
Taxable 4,969,984 5,502,679
Nontaxable 571,218 814,899
Interest on time deposits 9,359 4,731
Interest on excess funds sold 259,264 240,168
Interest on mortgage loans held for sale 1,865,748 308,140
- ----------------------------------------------------------------------------------------------
Total interest income 26,931,139 24,030,651
- ----------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 11,952,003 10,523,319
Interest on short-term borrowings 746,230 376,544
Interest in long-term debt 600,456 680,300
- ----------------------------------------------------------------------------------------------
Total interest expense 13,298,689 11,580,163
- ----------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 13,632,450 12,450,488
Provision for possible loan losses 603,031 274,568
- ----------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 13,029,419 12,175,920
- ----------------------------------------------------------------------------------------------
Other operating income:
Trust fees 447,967 393,065
Deposit service charges 304,949 361,939
Other service charges 866,341 882,555
Data processing fees 161,811 197,902
Investment securities gains (losses), net (note 2) 31,709 (289,438)
Mortgage loan origination income 4,218,584 2,311,806
Other income 1,398,213 1,040,340
- ----------------------------------------------------------------------------------------------
Total other operating income 7,429,574 4,898,169
- ----------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 10,990,578 8,301,862
Net occupancy expense of premises 1,146,992 883,569
Furniture and fixtures 1,108,803 811,837
Office supplies 342,515 277,131
Outside services 771,184 560,409
FDIC insurance assessment 7,000 381,431
Amortization expense - goodwill 390,705 321,147
Loan and collection expense 766,965 484,267
Other expenses 2,167,901 1,845,998
- ----------------------------------------------------------------------------------------------
Total other operating expenses 17,692,643 13,867,651
- ----------------------------------------------------------------------------------------------
Earnings before income taxes 2,766,350 3,206,438
Income tax expense 1,007,000 1,004,000
- ----------------------------------------------------------------------------------------------
Net earnings $ 1,759,350 2,202,438
- ----------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 1,608,224 1,914,638
- ----------------------------------------------------------------------------------------------
Per common share data based on weighted average common
shares outstanding of 2,064,420 shares in 1996, 2,019,470
shares in 1995 $ .78 .95
- ----------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
14
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Statement of Changes in Stockholder's Equity
<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 13,530 shares of common
stock - 4,510 263,516 - - 268,026
Change in unrealized gain/(loss) on
investment securities - - - (1,206,148) - (1,206,148)
Net earnings - - - - 1,759,350 1,759,350
Cash dividends on preferred stock - - - - (151,126) (151,126)
Cash dividends on common stock - - - - (206,717) (206,717)
($.10 per share)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1996 $ 2,600,000 690,220 4,958,920 165,752 26,394,394 34,809,826
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
Unaudited
9 Months Ended
Sept. 30, 1996 Sept. 30, 1995
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 26,601,388 23,789,972
Fees received 6,962,320 4,401,026
Net (increase)decrease in mortgage loans held for sale (5,058,514) (13,521,602)
Interest paid (13,232,389) (11,580,163)
Cash paid to suppliers and employees (16,138,714) (11,026,212)
Income taxes paid (875,000) (1,004,000)
- --------------------------------------------------------------------------------------------------------
Net cash provided by operating activities (1,740,909) (8,940,979)
- --------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investments available for sale 30,806,072 18,352,962
Sales of investments available for sale 19,167,869 17,258,658
Purchases of investments available for sale (36,644,474) (22,374,007)
Net (increase)decrease in loans (24,472,918) (14,460,261)
Premises and equipment expenditures (1,136,560) (904,648)
Net cash used for acquisition of subsidiary 0 (1,967,000)
Other Real Estate Owned (74,996) 0
- --------------------------------------------------------------------------------------------------------
Net cash used by investing activities (12,355,007) (4,094,296)
- --------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits,
NOW accounts, and savings accounts 3,987,981 (4,425,220)
Net change in certificates of deposit 13,352,213 26,454,260
Dividends paid on preferred stock (151,126) (287,800)
Dividends paid on common stock (206,717) (183,984)
Net proceeds from short-term debt 2,714,799 776,196
Proceeds from issuance of common stock 268,026 895,037
Repayment of long-term debt (425,000) (400,000)
Redemption of preferred stock 0 (2,750,000)
- --------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 19,540,176 20,078,489
- --------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 5,444,260 7,043,214
Cash and cash equivalents at beginning of year 21,049,903 17,011,312
- --------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 26,494,163 24,054,526
- --------------------------------------------------------------------------------------------------------
</TABLE>
(Continued on next page)
16
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Unaudited
9 Months Ended
Sept. 30, 1996 Sept. 30, 1995
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 1,759,350 2,202,438
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,459,150 1,278,808
Provision for possible loan losses 603,031 274,568
Losses (gains) on sale of investment securities (31,709) 289,438
Increase (decrease) in:
Income taxes payable 132,000 581,000
Interest payable 66,300 345,627
Unearned income 227,031 131,462
Other liabilities 94,778 636,004
Decrease (increase) in:
Interest receivable (157,636) 0
Other assets (435,551) (786,581)
Increase in mortgage loans held for sale (5,058,514) (13,521,602)
Discount accretion recorded as income (661,210) (675,349)
Premium amortization charged against income 262,071 303,208
- -----------------------------------------------------------------------------------------------------------
$ (1,740,909) (8,940,979)
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
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.
17
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Statements
Nine months ended September 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
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------
Unaudited
Sept. 30, 1996 Dec. 31, 1995
- ----------------------------------------------------------------------------------------
<S> <C> <C>
Available-for-sale, at fair value $ 120,672,776 135,565,802
- ----------------------------------------------------------------------------------------
</TABLE>
A comparison of amortized cost and fair value of investment securities
available-for-sale at September 30, 1996 and December 31, 1995 follows:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
Unaudited
Sept. 30, 1996
---------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $89,205,624 602,900 (792,523) 89,016,001
Obligations of state and political
subdivisions 11,110,144 352,275 (72,419) 11,390,000
Mortgage-backed securities 19,533,884 265,514 (231,248) 19,568,150
- ------------------------------------------------------------------------------------------------------------
Total debt securities 119,849,652 1,220,689 (1,096,190) 119,974,151
Equity securities 698,625 0 0 698,625
- ------------------------------------------------------------------------------------------------------------
Total securities 120,548,277 1,220,689 (1,096,190) 120,672,776
- ------------------------------------------------------------------------------------------------------------
</TABLE>
18
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Statements
Nine months ended September 30, 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------
December 31, 1996
---------------------------------------------------
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
September 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
September 30, 1996 December 31, 1995
---------------------------- -------------------------
Amortized Fair Amortized Fair
cost value cost value
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 23,234,510 23,196,666 34,500,941 34,437,373
Due after one year through five years 54,847,194 54,893,631 51,438,692 52,381,742
Due after five years through ten years 22,234,064 22,300,901 23,760,323 24,462,196
Due after ten years 0 0 195,000 203,040
- ---------------------------------------------------------------------------------------------------------
100,315,768 100,391,198 109,894,956 111,484,351
Mortgage-backed securities 19,533,884 19,582,953 23,473,310 23,956,826
- ---------------------------------------------------------------------------------------------------------
Total debt securities 119,849,652 119,974,151 133,368,266 135,441,177
Equity securities 698,625 698,625 124,625 124,625
- ---------------------------------------------------------------------------------------------------------
Total securities $ 120,548,277 120,672,776 133,492,891 135,565,802
- ---------------------------------------------------------------------------------------------------------
</TABLE>
Gross losses of approximately $120,920 and $340,508 occurred from security
activity during the nine months ended September 30, 1996 and 1995,
respectively. Gross gains of $152,629 and $51,070
19
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Statements
Nine months ended September 30, 1996
- -------------------------------------------------------------------------------
occurred from security activity during the six month period that ended
September 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 $57,000,000 and $46,570,000 at
September 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:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Unaudited
Sept. 30, 1996 Dec. 31, 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 69,761,480 63,196,344
Real estate mortgage (primarily residential) 175,480,089 159,927,950
Consumer 35,625,887 33,094,011
Lease financing receivable 959,924 1,455,342
- ----------------------------------------------------------------------------------------------------------
Total loans, gross $ 281,827,380 257,673,647
- ----------------------------------------------------------------------------------------------------------
Non-performing loans consisted of the following components:
- ----------------------------------------------------------------------------------------------------------
Unaudited
Sept. 30, 1996 Dec. 31, 1995
- ----------------------------------------------------------------------------------------------------------
Non-accrual loans $ 2,526,535 2,063,974
Loans past due 90 days or more and still accruing 493,825 16,464
Restructured loans still accruing and less than 90 days past due 324,367 270,007
- ----------------------------------------------------------------------------------------------------------
Total non-performing loans $ 3,344,727 2,350,445
- ----------------------------------------------------------------------------------------------------------
</TABLE>
20
<PAGE>
CASTLE BANCGROUP, INC.
AND SUBSIDIARIES
Notes to Consolidated Statements
Nine months ended September 30, 1996
- -------------------------------------------------------------------------------
The following is a summary of activity in the allowance for possible loan
losses:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Unaudited
9 months ended Year ended
Sept. 30, 1996 Dec. 31, 1995
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 3,308,721 3,474,929
Addition from acquisition of subsidiary - 650
Provision charged to expense 603,031 488,011
Additions to dealer reserve 100,755 51,728
Recoveries on loans previously charged off 300,539 283,618
- ----------------------------------------------------------------------------------------------------------
4,313,046 4,298,936
Less loans charged off 672,266 990,215
- ----------------------------------------------------------------------------------------------------------
Balance, end of period $ 3,640,780 3,308,721
- ----------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of loan loss experience for the nine months ended
September 30, 1996, including an allocation of the allowance, by loan
category, at period end:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------
(DOLLAR FIGURES IN THOUSANDS)
Commercial Real
& Agricultural Estate Consumer Other Unalloc. Total
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1995 $1,421 1,144 518 26 200 3,309
Provision charged to expense 0 25 578 0 0 603
Additions to dealer reserve 0 0 101 0 0 101
Recoveries on loans previously
charged off 229 7 65 0 0 301
- ------------------------------------------------------------------------------------------------------------
1,650 1,176 1,262 26 200 4,314
Less loans charged off (197) (52) (424) 0 0 (673)
- ------------------------------------------------------------------------------------------------------------
Balance, Sept. 30, 1996 $1,453 1,124 838 26 200 3,641
- ------------------------------------------------------------------------------------------------------------
Ratios:
Loans in category to total loans 24.75% 62.27% 12.64% 0.34% N/A 100.0%
- ------------------------------------------------------------------------------------------------------------
</TABLE>
The allocation of the allowance for loan losses is based on historical trends
in charge-offs, general economic conditions, peer comparisons and management
experience.
21
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ John W. Castle
- ----------------------------------------------------------
By: John W. Castle, Chairman of the Board
Chief Executive Officer and Director
Castle BancGroup, Inc.
Date: November 14, 1996
/s/ Larry D. Beaty
- ----------------------------------------------------------
By: Larry D. Beaty, Executive Vice President
Chief Financial Officer, Treasurer and Director
Castle BancGroup, Inc.
Date: November 14, 1996
/s/ Jea Nae B. Wood
- ----------------------------------------------------------
By: Jea Nae B. Wood, Controller and Chief
Accounting Officer
Castle BancGroup, Inc.
Date: November 14, 1996
22
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 10,494,163
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 16,000,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 120,672,776
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 297,068,411
<ALLOWANCE> 3,640,780
<TOTAL-ASSETS> 463,292,269
<DEPOSITS> 403,509,931
<SHORT-TERM> 9,305,711
<LIABILITIES-OTHER> 5,091,801
<LONG-TERM> 10,575,000
0
2,600,000
<COMMON> 690,220
<OTHER-SE> 31,519,606
<TOTAL-LIABILITIES-AND-EQUITY> 463,292,269
<INTEREST-LOAN> 19,255,566
<INTEREST-INVEST> 5,541,202
<INTEREST-OTHER> 2,134,371
<INTEREST-TOTAL> 26,931,139
<INTEREST-DEPOSIT> 11,952,003
<INTEREST-EXPENSE> 13,298,689
<INTEREST-INCOME-NET> 13,632,450
<LOAN-LOSSES> 603,031
<SECURITIES-GAINS> 31,709
<EXPENSE-OTHER> 17,692,643
<INCOME-PRETAX> 2,766,350
<INCOME-PRE-EXTRAORDINARY> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,759,350
<EPS-PRIMARY> .78
<EPS-DILUTED> .78
<YIELD-ACTUAL> 4.35
<LOANS-NON> 2,526,535
<LOANS-PAST> 493,825
<LOANS-TROUBLED> 324,367
<LOANS-PROBLEM> 3,419,723
<ALLOWANCE-OPEN> 3,308,721
<CHARGE-OFFS> 672,266
<RECOVERIES> 401,294
<ALLOWANCE-CLOSE> 3,640,780
<ALLOWANCE-DOMESTIC> 3,640,780
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
