<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------------------------
FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM _________ TO ___________
-------------------------------
Commission File No. 0-25914
-------------------------------
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 OR ORGANIZATION) NUMBER)
121 West Lincoln Highway 60115-3609
DeKalb, Illinois (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
Registrant's telephone number, including area code: (815) 758-7007
-------------------------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days: Yes /X/ No / /
The registrant had 2,081,924 shares of Common Stock outstanding as of October
31, 1997.
1
<PAGE>
PART I
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
ASSETS Sept. 30, 1997 December 31,
(Unaudited) 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 8,417,946 10,616,722
Excess funds sold 0 1,950,000
- --------------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 8,417,946 12,566,722
- --------------------------------------------------------------------------------------------------------------
Investment securities (note 2) 125,823,142 133,071,980
Mortgage loans held for sale, lower of cost or market 34,668,750 20,342,698
Loans (note 3) 309,354,496 292,340,920
Less:
Allowance for possible loan losses (note 3) 4,418,043 3,775,108
Unearned income and deferred loan fees 2,497,847 3,172,278
- --------------------------------------------------------------------------------------------------------------
Net loans 302,438,606 285,393,534
Premises and equipment 11,015,375 10,233,862
Goodwill, net of amortization 4,645,379 5,062,350
Other assets 7,153,082 6,752,528
- --------------------------------------------------------------------------------------------------------------
$ 494,162,280 473,423,674
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 39,988,023 43,232,861
Interest-bearing 373,887,767 360,876,356
- --------------------------------------------------------------------------------------------------------------
Total deposits 413,875,790 404,109,217
Short-term borrowings 28,796,375 19,588,237
Long-term debt 9,700,000 10,150,000
Other liabilities 4,940,329 4,614,454
- --------------------------------------------------------------------------------------------------------------
Total liabilities 457,312,494 438,461,908
- --------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value; authorized 100,000 shares :
7.75% cumulative preferred stock; 2,600 shares
issued and outstanding 2,600,000 2,600,000
Common stock, $.33 par value; 5,000,000 shares authorized,
2,081,918 and 2,070,661 shares issued and outstanding in 1997
and 1996, respectively 693,895 690,873
Additional paid-in capital 5,131,137 5,001,343
Net unrealized gain on investment securities net of tax (note 2) 543,486 447,057
Retained earnings 27,881,268 26,222,493
- --------------------------------------------------------------------------------------------------------------
Total stockholders' equity 36,849,786 34,961,766
Commitments and contingent liabilities
- --------------------------------------------------------------------------------------------------------------
$ 494,162,280 473,423,674
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Unaudited
3 Months Ended
Sept. 30, 1997 Sept. 30, 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 7,305,443 6,737,541
Interest and dividends on investment securities:
Taxable 2,127,319 1,579,315
Nontaxable 137,764 178,473
Interest on excess funds sold (42,748) 168,023
Interest on mortgage loans held for sale 457,233 596,043
- --------------------------------------------------------------------------------------------------------------
Total interest income 9,985,011 9,259,395
- --------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,389,086 4,142,877
Interest on short-term borrowings 452,801 180,395
Interest on long-term debt 158,138 195,160
- --------------------------------------------------------------------------------------------------------------
Total interest expense 5,000,025 4,518,432
- --------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 4,984,986 4,740,963
Provision for possible loan losses 290,798 157,500
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,694,188 4,583,463
- --------------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 165,453 156,635
Deposit service charges 97,536 94,774
Other service charges 304,363 299,191
Investment securities gains, net (note 2) 81,499 2,857
Mortgage loan origination income, net 1,979,951 1,262,246
Other income 136,836 339,994
- --------------------------------------------------------------------------------------------------------------
Total other operating income 2,765,638 2,155,697
- --------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 4,013,143 3,356,715
Net occupancy expense of premises 407,357 396,980
Furniture and fixtures 435,288 348,914
Office supplies 102,404 117,712
Outside services 239,189 280,627
Advertising expense 123,764 175,369
FDIC insurance assessment 12,683 2,000
Amortization expense - goodwill 127,723 158,903
Other expenses 556,801 611,915
- --------------------------------------------------------------------------------------------------------------
Total other operating expenses 6,018,352 5,449,135
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,441,474 1,290,025
Income tax expense 501,000 446,500
- --------------------------------------------------------------------------------------------------------------
Net earnings $ 940,474 843,525
- --------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 890,099 793,149
- --------------------------------------------------------------------------------------------------------------
Per common share data based on weighted average common
shares outstanding of 2,080,945 shares in 1997; 2,068,641
shares in 1996 $ .43 .38
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Unaudited
9 Months Ended
Sept. 30, 1997 Sept. 30, 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 21,316,935 19,255,566
Interest and dividends on investment securities:
Taxable 6,283,763 4,969,984
Nontaxable 444,361 571,218
Interest on time deposits 0 9,359
Interest on excess funds sold 30,780 259,264
Interest on mortgage loans held for sale 914,474 1,865,748
- --------------------------------------------------------------------------------------------------------------
Total interest income 28,990,313 26,931,139
- --------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 12,699,820 11,952,003
Interest on short-term borrowings 1,112,627 746,230
Interest on long-term debt 531,022 600,456
- --------------------------------------------------------------------------------------------------------------
Total interest expense 14,343,469 13,298,689
- --------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 14,646,844 13,632,450
Provision for possible loan losses 735,322 603,031
- --------------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 13,911,522 13,029,419
- --------------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 470,045 447,967
Deposit service charges 274,488 304,949
Other service charges 846,809 866,341
Investment securities gains, net (note 2) 209,230 31,709
Mortgage loan origination income, net 4,355,631 4,520,382
Other income 591,971 738,297
- --------------------------------------------------------------------------------------------------------------
Total other operating income 6,748,174 6,909,645
- --------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 11,483,374 10,990,578
Net occupancy expense of premises 1,275,281 1,146,992
Furniture and fixtures 1,186,880 1,108,803
Office supplies 309,064 342,515
Outside services 596,864 771,184
Advertising expense 386,799 507,927
FDIC insurance assessment 39,576 7,000
Amortization expense - goodwill 389,525 390,705
Other expenses 1,977,424 1,907,010
- --------------------------------------------------------------------------------------------------------------
Total other operating expenses 17,644,787 17,172,714
- --------------------------------------------------------------------------------------------------------------
Earnings before income taxes 3,014,909 2,766,350
Income tax expense 997,000 1,007,000
- --------------------------------------------------------------------------------------------------------------
Net earnings $ 2,017,909 1,759,350
- --------------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 1,866,784 1,608,224
- --------------------------------------------------------------------------------------------------------------
Per common share data based on weighted average common
shares outstanding of 2,077,795 shares in 1997; 2,064,420
shares in 1996 $ .90 .78
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized
gain on
Preferred Common investment Retained
stock stock Surplus securities earnings Total
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 $2,600,000 690,873 5,001,343 447,057 26,222,493 34,961,766
Issuance of 9,157 shares of common
stock --- 3,022 129,794 --- --- 132,816
Change in unrealized gain on investment
securities --- --- --- 96,429 --- 96,429
Net earnings --- --- --- --- 2,017,909 2,017,909
Cash dividends on preferred stock --- --- --- --- (151,125) (151,125)
Cash dividends on common stock ($.10 per share) --- --- --- --- (208,009) (208,009)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance at September 30, 1997 $2,600,000 693,895 5,131,137 543,486 27,881,268 36,849,786
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS
- --------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------
Unaudited
9 Months Ended
--------------
Sept. 30, 1997 Sept. 30, 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 27,677,245 26,601,388
Fees received 6,682,307 6,962,320
Net (increase)/decrease in mortgage loans held for sale (14,326,052) (5,058,514)
Interest paid (13,907,303) (13,232,389)
Cash paid to suppliers and employees (15,915,854) (16,138,714)
Income taxes paid (1,268,763) (875,000)
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities (11,058,420) (1,740,909)
- --------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investment securities 23,076,587 30,806,072
Sales of investment securities 43,690,718 19,167,869
Purchases of investment securities (59,191,146) (36,644,474)
Net increase in loans (17,154,062) (24,472,918)
Premises and equipment expenditures (1,810,845) (1,136,560)
Other real estate owned 0 (74,996)
- ---------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (11,388,748) (12,355,007)
- --------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits,
NOW accounts, and savings accounts (5,429,770) 3,987,981
Net change in certificates of deposit 15,196,342 13,352,213
Dividends paid on preferred stock (151,125) (151,126)
Dividends paid on common stock (208,009) (206,717)
Net proceeds from short-term debt 9,208,138 2,714,799
Proceeds from issuance of common stock 132,816 268,026
Repayment of long-term debt (450,000) (425,000)
- --------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 18,298,392 19,540,176
- --------------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (4,148,776) 5,444,260
Cash and cash equivalents at beginning of year 12,566,722 21,049,903
- --------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 8,417,946 26,494,163
- --------------------------------------------------------------------------------------------------------------
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 2,017,909 1,759,350
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,567,462 1,459,150
Provision for possible loan losses 735,322 603,031
Gains on sale of investment securities (209,230) (31,709)
Increase (decrease) in:
Income taxes payable (271,763) 132,000
Interest payable 436,166 66,300
Unearned income (674,430) 227,031
Other liabilities 161,471 94,778
Decrease (increase) in:
Interest receivable (635,661) (157,636)
Other assets 143,363 (435,551)
Decrease (increase) in mortgage loans held for sale (14,326,052) (5,058,514)
Discount accretion recorded as income (229,641) (661,210)
Premium amortization charged against income 226,664 262,071
- --------------------------------------------------------------------------------------------------------------
Net cash used in operating activities $ (11,058,420) (1,740,909)
- --------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
6
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
(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 1996
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.
For the 1996 presentation, certain accounts have been reclassified to
present consistent account classification with 1997.
(2) INVESTMENT SECURITIES
Investments in debt and equity securities are classified as available for
sale and reported at fair value, adjusted for amortization of premiums and
accretion of discounts using a method that approximates level yield.
A comparison of amortized cost and fair value of investment securities
available-for-sale at September 30, 1997 and December 31, 1996 follows:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
Unaudited
September 30, 1997
------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 100,777,102 857,593 (324,481) 101,310,214
Obligations of state and political
subdivisions $ 9,510,880 232,933 (75,035) 9,668,778
Mortgage-backed securities $ 12,882,268 195,722 (39,115) 13,038,875
- ----------------------------------------------------------------------------------------------------------------------------------
Total debt securities 123,170,250 1,286,248 (438,631) 124,017,867
- ----------------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,471,700 0 0 1,471,700
Equity securities 333,575 0 0 333,575
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities 124,975,525 1,286,248 (438,631) 125,823,142
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
<TABLE>
<CAPTION>
NOTES TO CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------------
December 31, 1996
--------------------------------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 101,080,871 897,567 (634,488) 101,343,950
Obligations of state and political
subdivisions 10,627,931 350,110 (72,682) 10,905,359
Mortgage-backed securities 19,574,597 290,026 (133,177) 19,731,446
- --------------------------------------------------------------------------------------------------------------------------------
Total debt securities 131,283,399 1,537,703 (840,347) 131,980,755
Federal Home Loan Bank stock 966,600 - - 966,600
Equity securities 124,625 - - 124,625
- --------------------------------------------------------------------------------------------------------------------------------
Total securities $ 132,374,624 1,537,703 (840,347) 133,071,980
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available-for-sale at
September 30, 1997 and December 31, 1996 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>
- --------------------------------------------------------------------------------------------------------------------------------
Available-for-sale
--------------------------------------------------------------------------
Unaudited
September 30, 1997 December 31, 1996
-------------------------------- ----------------------------
Amortized Fair Amortized Fair
cost value cost value
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,876,756 8,895,654 14,872,387 14,907,813
Due after one year through five years 37,089,529 37,415,354 54,661,029 54,954,129
Due after five years through ten years 46,120,300 46,389,486 42,175,386 42,387,367
Due after ten years 18,201,397 18,278,498 - -
- --------------------------------------------------------------------------------------------------------------------------------
110,287,982 110,978,992 111,708,802 112,249,309
Mortgage-backed securities 12,882,268 13,038,875 19,574,597 19,731,446
- --------------------------------------------------------------------------------------------------------------------------------
Total debt securities 123,170,250 124,017,867 131,283,399 131,980,755
Federal Home Loan Bank stock 1,471,700 1,471,700 966,600 966,600
Equity securities 333,575 333,575 124,625 124,625
- --------------------------------------------------------------------------------------------------------------------------------
Total securities $ 124,975,525 125,823,142 132,374,624 133,071,980
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross losses of approximately $162,657 and $120,920 occurred from security
activity during the nine months ended September 30, 1997 and 1996,
respectively. Gross gains of $371,887 and $152,969 occurred from security
activity during the nine month period that ended September 30, 1997 and
1996, respectively. All security gains and losses that occurred during
1997 and 1996 were as a result of transactions involving available-for-sale
securities.
8
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Investment securities carried at approximately $64,045,000 and $59,000,000
at September 30, 1997 and December 31, 1996, 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, 1997 Dec. 31, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 68,175,387 69,594,462
Real estate 209,154,182 186,612,809
Consumer 31,457,946 35,242,151
Lease financing receivable 566,981 891,498
- -----------------------------------------------------------------------------------------------------------
Total loans, gross $ 309,354,496 292,340,920
- -----------------------------------------------------------------------------------------------------------
</TABLE>
At September 30, 1997 and December 31, 1996, the following items existed:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------
Unaudited
Sept. 30, 1997 Dec. 31, 1996
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $ 2,592,000 2,348,000
Loans past due 90 days or more and still accruing 270,000 201,000
Restructured loans still accruing and less than 90 days past due 302,000 314,000
- -----------------------------------------------------------------------------------------------------------
Total non-performing loans $ 3,164,000 2,863,000
- -----------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of activity in the allowance for possible loan
losses:
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Unaudited
9 months ended Year ended
Sept. 30, 1997 Dec. 31, 1996
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 3,775,108 3,308,721
Provision charged to expense 735,322 1,112,836
Additions to dealer reserves 34,485 118,253
Recoveries on loans previously charged off 407,199 341,153
- ----------------------------------------------------------------------------------------------------------
4,952,114 4,880,963
Less loans charged off 534,071 1,105,855
- ----------------------------------------------------------------------------------------------------------
Balance, end of period $ 4,418,043 3,775,108
- ----------------------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
NINE MONTHS ENDED SEPTEMBER 30, 1997
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
The following is a summary of loan loss experience for the nine months
ended September 30, 1997, including an allocation of the allowance, by loan
category, at period end:
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
(DOLLAR FIGURES IN THOUSANDS)
Commercial Real
and Agricultural Estate Consumer Other Unalloc. Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 $ 1,391 1,130 1,054 0 200 3,775
Provision charged to expense 50 135 550 0 0 735
Additions to dealer reserve 0 0 35 0 0 35
Recoveries on loans previously
charged off 277 0 130 0 0 407
- ------------------------------------------------------------------------------------------------------------------------------------
Less loans charged off (62) 0 (472) 0 0 (534)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, September 30, 1997 $ 1,656 1,265 1,297 0 200 4,418
- ------------------------------------------------------------------------------------------------------------------------------------
Ratios:
Loans in category to total loans 22.04% 67.61% 10.17% .18% 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.
10
<PAGE>
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 $2,017,909 at September 30,
1997, an increase of $258,559, or 14.70%, from year-to-date earnings of
$1,759,350 at September 30, 1996. This increase in earnings is primarily
attributable to increased interest and fees on loans. The increase in
interest and fees was due to increased volume in the loan portfolio which was
up 9.8% when comparing September 30, 1997, gross loans to September 30, 1996.
The increase in interest and fees on loans were partially off-set by a
decrease in mortgage loans held for sale interest income as compared to
year-to-date at September 30, 1996.
Year-to-date earnings per common share were $.90 at September 30, 1997, up
$.12 per share from September 30, 1996 earnings per common share of $.78.
The increase in earnings per share is due primarily to the increased interest
and fees on loans as described above. Net earnings applicable to common
stock of $1,866,784 year-to-date at September 30, 1997 compares to $1,508,224
at September 30, 1996. This represents a $258,560 increase. Year-to-date
preferred stock dividends were $151,125 at September 30, 1997 as compared to
$151,126 at September 30, 1996.
The following discussion of performance for the nine month period ending
September 30, 1997 as compared to the corresponding period in 1996 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 before provision for possible loan losses for the first nine
months of 1997 increased $1,014,394 to $14,646,844 as compared to $13,632,450 at
September 30, 1996. This increase can be attributed to the interest earnings on
the Company's portfolio of real estate mortgages, with a portfolio balance at
September 30, 1997 of $209,154,182 as compared to the September 30, 1996 balance
of $175,480,089.
The average net interest margin, on a tax equivalent basis (including
non-accruing loans), increased slightly for the first nine months of 1997 at
4.38% as compared to 4.34% in 1996. Local competition continue to put
pressure on the subsidiaries' net interest margins.
The ratio of average earning assets to average total assets decreased
slightly to 93.11% for the first nine months of 1997 as compared to 93.7% for
the same period in 1996. The mortgage loans held for sale portfolio
increased $16.2 million from $18.5 million at September 30, 1996 to $34.7
million at September 30, 1997. 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
11
<PAGE>
yielding assets, with quality credits. As mentioned above, the gross loan
portfolio has increased $27.5 million, or 9.8%, from September 30, 1996 to
September 30, 1997. Total cash and cash equivalents have decreased $4.1
million from September 30, 1997 to September 30, 1996.
Management believes that net interest margins will continue to narrow as
competitive pressures in the market place expand. Competition from both
financial institutions and non-traditional competitors, as well as general
economic trends, will continue to impact future earnings. Earning asset mix, as
well as the net interest margin, are monitored and evaluated by management to
develop strategies to help maintain and improve earnings.
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 adequacy of the allowance for loan losses.
The allowance for loan losses as a percentage of net outstanding loans increased
to 1.44% at September 30, 1997 as compared to 1.31% at December 31, 1996. The
allowance level was at 1.30% of net loans at December 31, 1995. The provision
for loan losses recorded during the first nine months of 1997 was $735,322 as
compared to $603,031 during the same period in 1996. 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 0.64% of total assets as of September 30, 1997, which has
increased slightly from 0.62% at December 31, 1996. The following table
summarizes the components of non-performing assets at September 30, 1997 and at
December 31, 1996.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 DECEMBER 31, 1996
------------------ ------------------
<S> <C> <C>
Non-accrual loans $2,592,000 $2,348,000
Loans past due 90+ days & still accruing 270,000 201,000
Restructured loans, performing according
to terms of restructure agreement 302,000 314,000
Other real estate owned 0 75,000
---------- -------------
TOTAL NON-PERFORMING ASSETS $3,164,000 $2,938,000
---------- -------------
---------- -------------
</TABLE>
12
<PAGE>
The increase in non-accrual loans was primarily due to an additional commercial
real estate loan which was placed in non-accrual status during the third quarter
of 1997. $160,000 of loans 90+ days past due and still accruing at September 30,
1997 relate to two residential real estate loans at CasBanc Mortgage, Inc.
(formerly known as Castle Mortgage, Inc.). Foreclosure proceedings have started
on both properties. Based on the collateral value of both 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.
Year-to-date net charge-offs at September 30, 1997 totaled $126,872 as compared
to $371,727 at September 30, 1996. Management continues to closely monitor all
past dues and to improve collection efforts.
OTHER OPERATING INCOME
Other income, excluding security gains and losses, totaled $6,538,944 for the
first nine months of 1997 as compared to $6,877,936 for the same period in
1996. Approximately $164,751 of the $338,992 decrease over the prior year
period relates to fee income earned by CasBanc Mortgage, Inc. and the other
subsidiaries on the origination of mortgages sold in the secondary market.
Net securities gains of $209,230 were recognized during the first nine months
of 1997 as compared to net gains of $31,709 during the first nine months of
1996. For both periods, all recognized gains and losses related to the sale
or call of securities classified as available for sale.
OTHER OPERATING EXPENSES
Other operating expenses increased approximately $472,073 year to date at
September 30, 1997 over the corresponding nine month period in 1996.
Increases in employee salaries and benefit expense accounted for $492,796 of
the increase. The majority of the salary increase was due to higher mortgage
loan origination production during the third quarter, which caused higher
commission expense to be paid to commissioned employees. The increase in
employee salaries and benefit expense was partially offset by a decrease in
advertising expenditures.
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. During 1997,
increased efficiencies in the operations area of the holding company have
allowed reductions in personnel without compromising the level of quality
service being delivered to the customer.
13
<PAGE>
ACCOUNTING STANDARDS
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 $25,000 (after tax effect) for the
period ending December 31, 1996.
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. Based on the most recent periodic analysis, 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, SFAS
No. 125, "Accounting for Transfer and Servicing of Financial Assets and
Extinguishments of Liabilities," superceded SFAS No. 122 and is effective in
1997. Currently, the Company primarily sells all mortgage loans with
servicing released, thus implementation of this accounting statement is not
expected to be material to the Company's business practices or results of
operations.
In February 1997, FASB Statement No. 128, "Earnings Per Share" (Statement
128), was issued. Statement 128 supersedes APB Opinion No. 15, "Earnings Per
Share" and specifies the computation, presentation, and disclosure
requirements for earnings per share (EPS) for entities with publicly held
common stock or potential common stock. Statement 128 was issued to simplify
the computation of EPS and to make the U.S. standard more compatible with the
EPS standards of other countries and that of the International Accounting
Standards Committee. It replaces the presentation of primary EPS with a
presentation of basic EPS and replaces fully diluted EPS with diluted EPS.
It also requires dual presentation of basic and diluted EPS on the face of
the income statement for all entities with complex capital structures and
requires a reconciliation of the numerator and denominator of the basic EPS
computation to the numerator and denominator of the diluted EPS computation.
Basic EPS, unlike primary EPS, excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted EPS reflects the potential
dilution that could occur if securities or other contracts to issue common
stock were exercised or converted into common stock or resulted in the
14
<PAGE>
issuance of common stock that then shared in the earnings of the entity.
Diluted EPS is computed similarly to fully diluted EPS under APB 15.
Statement 128 is effective for financial statements for both interim and
annual periods ending after December 15, 1997. Earlier application is not
permitted (although pro forma EPS disclosure in the footnote for periods
prior to required adoption is permitted). After adoption, all prior-period
EPS data presented shall be restated to conform with Statement 128. The
Company does not expect adoption of Statement 128 to have a significant
impact on the Company's financial statements.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income."
The statement establishes standards for reporting and display of
comprehensive income and its components in a full set of general-purpose
financial statements. This statement requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income, be reported in a financial statement that is displayed
with the same prominence as other financial statements. The statement is
effective for fiscal years beginning after December 15, 1997.
Reclassification of financial statements for earlier periods provided for
comparative purposes is required. The Company will adopt this statement in
the first quarter of 1998.
In June, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." The statement establishes standards for
the way that public business enterprises report information about operating
segments and certain other information in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports issued to shareholders. The statement is
effective for financial statements for periods beginning after December 15,
1997. The Company will adopt this statement in the first quarter of 1998.
FINANCIAL CONDITION
Average assets for the first nine months of 1997 increased by $21,092,000 or
approximately 4.4% as compared to the corresponding period in 1996. This
increase is attributed to a $29.6 million increase in the loan portfolio,
which was partially offset by a decrease in the average mortgage loans held
for sale portfolio. This increase was funded primarily with an increase in
total deposits of $14,691,000 or approximately 3.8% over the corresponding
period in 1996. The subsidiary Banks are all experiencing significant
competition for deposits which continues to put pressure on each Bank's
overall cost of funds. Management continues to view "core" deposits
(individuals, partnerships and corporate deposits) as the primary long term
funding source for internal growth of the Company. The Company had
$2,079,000 of brokered deposits at September 30, 1997, with interest rates
ranging from 6.10% to 6.80% and maturities ranging from October 1997 through
August 2000.
15
<PAGE>
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, 1997 was 6.47%, a modest
increase from 6.39% at December 31, 1996. The ratio exceeds the regulatory
well capitalized levels, and management believes the Company is maintaining a
strong capital position. The Company's September 30, 1997 total risk
weighted capital ratio also increased slightly to 11.09% from 10.66% at
December 31, 1996. The Tier 1 capital ratio increased from 9.45% at December
31, 1996 to 9.84% at September 30, 1997. Both the total risk weighted and
Tier 1 Capital ratios also continue to exceed regulatory well capitalized
levels.
LIQUIDITY
The Company monitors the subsidiaries so that they maintain adequate liquidity
and also provides access to secondary sources of liquidity in case of unusual or
unanticipated demand for funds. Primary bank sources of liquidity in the normal
course of business are repayment of loans, marketable investments, and the
bank's federal funds position. 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 1997 as compared to the
same period in 1996. These fluctuations primarily relate to the average
decrease in the portfolio of mortgage loans held for sale, as explained
previously, which has allowed the subsidiaries to increase their investment
portfolio holdings, as well as decreased 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 the
maturities of 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.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
16
<PAGE>
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 its business.
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
None.
ITEM 5-- OTHER INFORMATION
Not applicable.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Computation of Per Share Earnings
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None
17
<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: 11-13-97
---------------------------
/s/ Victoria S. Maher
- ------------------------------------------------------
By: Victoria S. Maher, Chief Accounting Officer
and Controller
Castle BancGroup, Inc.
Date: 11-13-97
-----------------------------
18
<PAGE>
EXHIBIT INDEX
EXHIBIT 11 Computation of Per Share Earnings
EXHIBIT 27 Financial Data Schedule
19
<PAGE>
EXHIBIT 11
CASTLE BANCGROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
9 MONTHS ENDED
SEPTEMBER 30
--------------
1997 1996
------ -------
<S> <C> <C>
Net income applicable to common stock $ 1,866,784 $ 1,608,224
------------- -------------
------------- -------------
Weighted average common shares outstanding 2,077,795 2,064,420
Weighted average common share equivalents (1) 17,118 9,126
------------- -------------
Weighted average common shares and equivalents 2,094,913 2,073,546
------------- -------------
------------- -------------
Net income per common share $ .89 $ .78
------------- -------------
------------- -------------
</TABLE>
(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.
20
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000723043
<NAME> CASTLE BANCGROUP, INC.
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 8,417,946
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 125,823,142
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 306,856,549
<ALLOWANCE> 4,418,043
<TOTAL-ASSETS> 494,162,280
<DEPOSITS> 413,875,790
<SHORT-TERM> 28,796,375
<LIABILITIES-OTHER> 4,940,329
<LONG-TERM> 9,700,000
0
2,600,000
<COMMON> 693,895
<OTHER-SE> 33,555,891
<TOTAL-LIABILITIES-AND-EQUITY> 494,162,280
<INTEREST-LOAN> 21,316,935
<INTEREST-INVEST> 6,728,124
<INTEREST-OTHER> 945,254
<INTEREST-TOTAL> 28,990,313
<INTEREST-DEPOSIT> 12,699,820
<INTEREST-EXPENSE> 14,343,469
<INTEREST-INCOME-NET> 14,646,844
<LOAN-LOSSES> 735,322
<SECURITIES-GAINS> 209,230
<EXPENSE-OTHER> 17,644,787
<INCOME-PRETAX> 3,014,909
<INCOME-PRE-EXTRAORDINARY> 3,014,909
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,017,909
<EPS-PRIMARY> .90
<EPS-DILUTED> .89
<YIELD-ACTUAL> 4.38
<LOANS-NON> 2,592,000
<LOANS-PAST> 270,000
<LOANS-TROUBLED> 302,000
<LOANS-PROBLEM> 3,164,000
<ALLOWANCE-OPEN> 3,775,108
<CHARGE-OFFS> 534,071
<RECOVERIES> 441,684
<ALLOWANCE-CLOSE> 4,418,043
<ALLOWANCE-DOMESTIC> 4,218,043
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200,000
</TABLE>
