<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 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 INCORPORATION (I.R.S. EMPLOYER IDENTIFICATION
OR 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 had 2,080,976 shares of Common Stock outstanding as of July 31,
1997.
1
<PAGE>
PART I
ITEM 1 - FINANCIAL STATEMENTS
Consolidated Balance Sheets
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------
December 31,
ASSETS June 30, 1997 1996
(Unaudited)
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 12,182,809 10,616,722
Excess funds sold 1,400,000 1,950,000
Total cash and cash equivalents 13,582,809 12,566,722
- --------------------------------------------------------------------------------------------------------
Investment securities (note 2) 136,041,204 133,071,980
Mortgage loans held for sale, lower of cost or market 17,459,846 20,342,698
Loans (note 3) 306,799,987 292,340,920
Less:
Allowance for possible loan losses (note 3) 4,107,508 3,775,108
Unearned income and deferred loan fees 2,703,134 3,172,278
- --------------------------------------------------------------------------------------------------------
Net loans 299,989,345 285,393,534
Premises and equipment 10,849,861 10,233,862
Goodwill, net of amortization 4,823,266 5,062,350
Other assets 6,427,964 6,752,528
$ 489,174,295 473,423,674
LIABILITIES AND STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 42,563,658 43,232,861
Interest-bearing 370,782,065 360,876,356
- --------------------------------------------------------------------------------------------------------
Total deposits 413,345,723 404,109,217
Short-term borrowings 26,390,507 19,588,237
Long-term debt 9,700,000 10,150,000
Other liabilities 4,128,519 4,614,454
Total liabilities 453,564,749 438,461,908
- --------------------------------------------------------------------------------------------------------
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, 2,080,513 and
2,064,608 shares issued and outstanding in 1997 and 1996, respectively 693,504 690,873
Additional paid-in capital 5,105,765 5,001,343
Net unrealized gain/(loss) on investment securities (note 2) 219,108 447,057
Retained earnings 26,991,169 26,222,493
- --------------------------------------------------------------------------------------------------------
Total stockholders' equity 35,609,546 34,961,766
Commitments and contingent liabilities $ 489,174,295 473,423,674
- --------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
2
<PAGE>
CONSOLIDATED STATEMENT OF EARNINGS
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Unaudited
3 Months Ended
June 30, 1997 June 30, 1996
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $7,172,629 6,430,435
Interest and dividends on investment securities:
Taxable 2,163,248 1,640,102
Nontaxable 149,984 193,975
Interest on time deposits 0 0
Interest on excess funds sold 26,319 9,915
Interest on mortgage loans held for sale 219,800 920,968
Total interest income 9,731,980 9,195,395
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,276,428 3,916,787
Interest on short-term borrowings 350,616 385,973
Interest on long-term debt 190,021 207,204
Total interest expense 4,817,065 4,509,964
- ----------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 4,914,915 4,685,431
Provision for possible loan losses 239,440 289,500
Net interest income after provision for possible loan losses 4,675,475 4,395,931
- ----------------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 156,214 155,493
Deposit service charges 86,508 102,978
Other service charges 280,903 302,774
Data processing fees (1,283) 72,081
Investment securities gains (losses), net (note 2) 134,896 (9,089)
Mortgage loan origination income, net 1,302,618 1,521,956
Other income 254,671 290,627
Total other operating income 2,214,527 2,436,820
- ----------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 3,752,757 3,754,597
Net occupancy expense of premises 433,378 388,904
Furniture and fixtures 338,583 467,544
Office supplies 106,397 108,631
Outside services 125,491 235,060
Advertising expense 123,365 177,697
FDIC insurance assessment 12,910 2,000
Amortization expense - goodwill 130,902 101,567
Other expenses 823,627 695,301
Total other operating expenses 5,847,410 5,931,301
- ----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,042,592 901,450
Income tax expense 362,500 317,466
Net earnings $ 680,092 583,984
Net earnings applicable to common stock $ 629,717 533,609
- ----------------------------------------------------------------------------------------------------------------
Per common share data based on weighted average common
shares outstanding of 2,078,646shares in 1997, 2,066,407
shares in 1996 $ .30 .26
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------
Unaudited
3 Months Ended
June 30, 1997 June 30, 1996
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $14,011,492 12,518,025
Interest and dividends on investment securities:
Taxable 4,156,444 3,390,669
Nontaxable 306,597 392,745
Interest on time deposits 0 9,359
Interest on excess funds sold 73,528 91,241
Interest on mortgage loans held for sale 457,241 1,269,705
Total interest income 19,005,302 17,671,744
- ----------------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 8,310,734 7,809,128
Interest on short-term borrowings 659,826 627,344
Interest on long-term debt 372,884 405,295
Total interest expense 9,343,444 8,841,767
- ----------------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 9,661,858 8,829,977
Provision for possible loan losses 444,524 445,531
Net interest income after provision for possible loan losses 9,217,334 8,384,446
- ----------------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 304,592 291,332
Deposit service charges 176,952 210,175
Other service charges 542,446 567,150
Data processing fees (110) 150,309
Investment securities gains (losses), net (note 2) 127,731 28,846
Mortgage loan origination income 2,375,680 3,258,136
Other income 455,245 309,508
Total other operating income 3,982,536 4,815,456
- ----------------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 7,470,231 7,633,863
Net occupancy expense of premises 867,924 750,012
Furniture and fixtures 751,592 759,889
Office supplies 206,660 224,803
Outside services 357,675 489,557
Advertising expense 263,035 332,558
FDIC insurance assessment 26,893 5,000
Amortization expense - goodwill 261,802 231,802
Other expenses 1,420,623 1,296,094
Total other operating expenses 11,626,435 11,723,578
- ----------------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,573,435 1,476,324
Income tax expense 496,000 560,500
Net earnings $ 1,077,435 915,824
Net earnings applicable to common stock $ 976,685 815,074
- ----------------------------------------------------------------------------------------------------------------
Per common share data based on weighted average common
shares outstanding of 2,076,195 shares in 1997, 2,062,905
shares in 1996 $ .47 .40
- ----------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Net unrealized
gain (loss)
Preferred Common on investment Retained
stock stock Surplus securities earnings Total
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Balance at January 1, 1997 $2,600,000 690,873 5,001,343 447,057 26,222,493 34,961,766
Issuance of 7,894 shares of common
stock -___ 2,631 104,422 -___ -____ 107,053
Change in unrealized gain/(loss) on investment
securities -___ -___ -___ (227,949) -____ (227,949)
Net earnings - -___ -___ -___ 1,077,435 1,077,435
Cash dividends on preferred stock -___ -___ -___ -___ (100,750) (100,750)
Cash dividends on common stock ($.10 per share) - - - - (208,009) (208,009)
Balance at June 30, 1997 $2,600,000 693,504 5,105,765 219,108 26,991,169 35,609,546
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
Consolidated Statement of Cash Flows
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
Unaudited
6 Months Ended
--------------
June 30, 1997 June 30, 1996
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 18,729,794 17,702,150
Fees received 4,298,438 4,926,820
Net (increase)/decrease in mortgage loans held for sale 2,882,852 (37,795,668)
Interest paid (9,131,164) (8,882,739)
Cash paid to suppliers and employees (11,292,097) (10,628,274)
Income taxes paid (319,695) (710,000)
Net cash provided by operating activities 5,168,128 (35,387,711)
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investment securities 12,894,664 23,765,729
Sales of investment securities 25,636,094 17,667,863
Purchases of investment securities (42,208,308) (17,536,973)
Net increase in loans (14,603,336) (15,951,632)
Premises and equipment expenditures (1,258,225) (843,130)
Other real estate owned 0 (74,996)
Net cash used by investing activities (19,539,111) 7,026,861
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net change in demand deposits,
NOW accounts, and savings accounts (4,080,981) (212,942)
Net change in certificates of deposit 13,317,487 7,811,830
Dividends paid on preferred stock (100,750) (100,750)
Dividends paid on common stock (208,009) (206,717)
Net proceeds from short-term debt 6,802,270 11,183,431
Proceeds from issuance of common stock 107,053 213,847
Repayment of long-term debt (450,000) (425,000)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 15,387,070 18,263,699
- ---------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 1,016,087 (10,097,151)
Cash and cash equivalents at beginning of year 12,566,722 21,049,903
Cash and cash equivalents at end of the period $ 13,582,809 10,952,752
Reconciliation of net earnings to net cash provided by
operating activities:
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 1,077,435 915,824
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 1,013,704 967,301
Provision for possible loan losses 444,524 445,531
Gains on sale of investment securities (127,731) (28,846)
Increase (decrease) in:
Income taxes payable 176,305 (149,500)
Interest payable 212,280 (40,972)
Unearned income (469,143) 318,250
Other liabilities (354,522) 495,136
Decrease (increase) in:
Interest receivable 137,144 22,970
Other assets 118,789 (226,922)
Decrease (increase) in mortgage loans held for sale 2,882,852 (37,795,668)
Discount accretion recorded as income (106,110) (483,754)
Premium amortization charged against income 162,601 172,939
$ 5,168,128 (35,387,711)
See accompanying notes to consolidated financial statements.
- ---------------------------------------------------------------------------------------------------------
</TABLE>
6
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
SIX MONTHS ENDED JUNE 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 June 30, 1997 and December 31, 1996 follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
Unaudited
June 30, 1997
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 105,414,028 559,709 (606,640) 105,367,097
Obligations of state and political
subdivisions 8,922,545 265,885 (79,550) 9,108,880
Mortgage-backed securities 19,549,577 305,557 (95,182) 19,759,952
Total debt securities 133,886,150 1,131,151 (781,372) 134,235,929
- -------------------------------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,471,700 0 0 1,471,700
Equity securities 333,575 0 0 333,575
Total securities 135,691,425 1,131,151 (781,372) 136,041,204
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------
<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 $ 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
June 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
June 30, 1997 December 31, 1996
------------------------- ---------------------------
Amortized Fair Amortized Fair
cost value cost value
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 8,925,598 8,951,274 14,872,387 14,907,813
Due after one year through five years 39,133,223 39,397,194 54,661,029 54,954,129
Due after five years through ten years 44,553,244 44,431,260 42,175,386 42,387,367
Due after ten years 21,724,508 21,696,249 -___ -___
- ------------------------------------------------------------------------------------------------------------------------
114,336,573 114,475,977 111,708,802 112,249,309
- ------------------------------------------------------------------------------------------------------------------------
Mortgage-backed securities 19,549,577 19,759,952 19,574,597 19,731,446
- ------------------------------------------------------------------------------------------------------------------------
Total debt securities 133,886,150 134,235,929 131,283,399 131,980,755
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 $135,691,425 136,041,204 132,374,624 133,071,980
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
Gross losses of approximately $70,641 and $60,917 occurred from security
activity during the six months ended June 30, 1997 and 1996,
respectively. Gross gains of $198,372 and $89,763 occurred from
security activity during the six month period that ended June 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
SIX MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------
Investment securities carried at approximately $68,885,750 and
$59,000,000 at June 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
June 30, 1997 Dec. 31, 1996
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 67,669,354 69,594,462
Real estate 205,910,243 186,612,809
Consumer 32,395,147 35,242,151
Lease financing receivable 825,243 891,498
- --------------------------------------------------------------------------------------------
Total loans, gross $ 306,799,987 292,340,920
- --------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1997 and December 31, 1996, the following items existed:
<TABLE>
<CAPTION>
Unaudited
June 30, 1997 Dec. 31, 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans $ 2,294,000 2,348,000
Loans past due 90 days or more and still accruing 360,000 201,000
Restructured loans still accruing and less than 90 days past due 307,000 314,000
- -----------------------------------------------------------------------------------------------------
Total non-performing loans $ 2,961,000 2,863,000
- -----------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of activity in the allowance for possible loan
losses:
<TABLE>
<CAPTION>
Unaudited
6 months ended Year ended
June 30, 1997 Dec. 31, 1996
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 3,775,108 3,308,721
Provision charged to expense 444,524 1,112,836
Additions to dealer reserves 29,378 118,253
- -------------------------------------------------------------------------------------------
Recoveries on loans previously charged off 168,866 341,153
4,417,876 4,880,963
- -------------------------------------------------------------------------------------------
Less loans charged off 310,368 1,105,855
- -------------------------------------------------------------------------------------------
Balance, end of period $ 4,107,508 3,775,108
- -------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
NOTES TO CONSOLIDATED STATEMENTS
SIX MONTHS ENDED JUNE 30, 1997
- -------------------------------------------------------------------------------
The following is a summary of loan loss experience for the three months
ended June 30, 1997, including an allocation of the allowance, by loan
category, at period end:
(DOLLAR FIGURES IN THOUSANDS)
<TABLE>
<CAPTION>
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 44 100 301 0 0 445
Additions to dealer reserve 0 0 29 0 0 29
Recoveries on loans previously charged off 75 0 94 0 0 169
- -----------------------------------------------------------------------------------------------------------------------------
Less loans charged off (42) 0 (268) 0 0 (310)
- -----------------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1997 $1,468 1,230 1,210 0 200 4,108
- -----------------------------------------------------------------------------------------------------------------------------
Ratios:
Loans in category to total loans 22.06% 67.12% 10.56% .26% 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 $1,077,435 at June 30, 1997,
an increase of $161,611, or 17.6%, from year-to-date earnings of $915,824
at June 30, 1996. This increase in earnings is 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 12% when comparing June
30, 1997, gross loans to June 30, 1996. The increase in interest and fees on
loans were partially off-set by a decrease in mortgage loan origination
income as compared to year-to-date at June 30, 1996. Mortgage demand was
negatively impacted by the higher rate environment prevalent during the first
two quarters of 1997.
Year-to-date earnings per common share was $.47 at June 30, 1997, up $.07 per
share from June 30, 1996 earnings per common share of $.40. 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
$976,685 year-to-date at June 30, 1997 compares to $815,074 at June 30, 1996.
This represents a $161,611 increase. Year-to-date preferred stock dividends
were $100,750 at June 30, 1997 as compared to $100,750 at June 30, 1996.
The following discussion of performance for the six month period ending
June 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
six months of 1997 increased $831,881 to $9,661,858 as compared to $8,829,977
at June 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 June 30, 1997 of $205,910,243 as compared to the June 30, 1996 balance of
$169,162,313.
The average net interest margin, on a tax equivalent basis (including
non-accruing loans), remained consistent for the first six months of 1997
and 1996 at 4.41%. Local competition continue to put pressure on the
subsidiaries' net interest margins.
11
<PAGE>
The ratio of average earning assets to average total assets decreased
slightly to 93.2% for the first six months of 1997 as compared to 93.9% for
the same period in 1996. The mortgage loans held for sale portfolio
decreased $33.8 million from $51.3 million at June 30, 1996 to $17.5 million
at June 30, 1997. The decrease is due to higher long-term mortgage rates
which slowed customer demand. 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, with quality credits. As
mentioned above, the gross loan portfolio has increased $33.5 million, or
12.2%, from June 30, 1996 to June 30, 1997.
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
requirements of the allowance for loan losses. The allowance for loan losses
as a percentage of net outstanding loans increased slightly to 1.35% at June
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 six months of 1997 was $444,524 as compared to
$445,531 during the same period in 1996. Management's desire is to maintain
the allowance level at 1.35%. 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
12
<PAGE>
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 0.61% of total assets as of June 30, 1997, which has decreased
slightly from 0.62% at December 31, 1996. The following table summarizes the
components of non-performing assets at June 30, 1997 and at December 31,
1996.
<TABLE>
<CAPTION>
JUNE 30, 1997 DECEMBER 31, 1996
------------- -----------------
<S> <C> <C>
Non-accrual loans $2,294,000 $2,348,000
Loans past due 90+ days & still accruing 360,000 201,000
Restructured loans, performing according
to terms of restructure agreement 307,000 314,000
Other real estate owned 0 75,000
---------- ----------
TOTAL NON-PERFORMING ASSETS $2,961,000 $2,938,000
---------- ----------
</TABLE>
The decrease in non-accrual loans was due to repayments and pay downs on
non-accrual loans. $344,000 of loans 90+ days past due and still accruing at
June 30, 1997 relate to three residential real estate loans at CasBanc
Mortgage, Inc. (formerly known as Castle Mortgage, Inc.). Foreclosure
proceedings have started on all three properties. Based on the collateral
value of these three 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 June 30, 1997 totaled $141,502 as compared to
$323,608 at June 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 $3,854,805 for the
first six months of 1997 as compared to $4,786,610 for the same period in
1996. Approximately $882,456 of the $931,805 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 into the secondary market.
Net securities gains of $127,731 were recognized during the first six months
of 1997 as compared to net gains of $28,846 during the first six months of
1996. For both periods, all recognized gains and losses related to the sale
or call of securities classified as available for sale.
13
<PAGE>
OTHER OPERATING EXPENSES
------------------------
Other operating expenses decreased approximately $97,143 year to date at June
30, 1997 over the corresponding six month period in 1996. Decreases in
employee salaries and benefit expense accounted for $164,000 of the decrease.
The majority of the salary decrease was due to lower mortgage loan
origination production during the first two quarters which caused lower
commissions to be paid to commissioned employees. The decrease in employee
salaries and benefit expense was partially offset by an increase in furniture
and fixture 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 the first
half of 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.
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," Supplements SFAS 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.
14
<PAGE>
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 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
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.
FINANCIAL CONDITION
-------------------
Average assets for the first six months of 1997 increased by $15,553,000 or
approximately 3.4% as compared to the corresponding period in 1996. This
increase is attributed to a $30.1 million increase in the loan portfolio,
which was partially off-set by a decrease in the mortgage loans held for sale
portfolio. This increase was funded primarily with an increase in total
deposits of $19,320,000 or approximately 5.01% over the corresponding period.
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 $2,080,000 of brokered
deposits at June 30, 1997, 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 continue to develop and offer high value
deposit products that attract new customer relationships, as well as
maintaining existing relationships.
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 June 30, 1997 was 6.44%, a modest
increase from 6.39% at December 31, 1996. The ratio exceeds the regulatory
minimum, and management believes the Company is maintaining a strong capital
position. The Company's June 30, 1997 total risk weighted capital ratio also
increased slightly to 11.00% from 10.66% at December 31, 1996. The Tier 1
capital ratio increased from 9.45% at December 31, 1996 to 9.75% at June 30,
1997. Both the total risk weighted and Tier 1 Capital ratios also continue
to exceed regulatory minimums.
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 six months of 1997 as compared to
the same period in 1996. These fluctuations primarily relate to the
significant 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 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 The annual
meeting of the registrant was held April 23, 1997 at which time three matters
were submitted to a vote of security holders:
MATTER 1: The Board of Directors was elected. There was no solicitation in
opposition of management's nominees, which included Robert T. Boey, John W.
Castle, Peter H. Henning, Donald E. Kieso, James N. McInnes, John B. Hiatt,
Bruce P. Bickner and William R. Monat, all of whom received 1,334,330 votes
out of a possible 2,117,686 shares outstanding on the record date.
MATTER 2: The proposal to amend the Certificate of Incorporation of the
Corporation to classify the Board of Directors received 1,251,113 votes for,
18,812 votes against, and 14,650 abstaining votes out of a possible 2,117,686
shares outstanding on the record date. The amendment passed.
MATTER 3: The proposal to amend the Certificate of Incorporation of the
Corporation to adopt a supermajority voting requirement to alter, amend or
repeal the classified board provisions set forth in Proposal No. 2 received
1,250,664 votes for, 19,262 votes against, and 14,649 abstaining votes out of
a possible 2,117,686 shares outstanding on the record date. The amendment
passed.
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: August 12, 1997
----------------------------------
/s/ Victoria S. Maher
- -----------------------------------------------------
By: Victoria S. Maher, Chief Accounting Officer
and Controller
Castle BancGroup, Inc.
Date: August 12, 1997
----------------------------------
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
6 MONTHS ENDED
JUNE 30
1997 1996
---- ----
Net income applicable to common stock $ 976,685 $ 815,074
Weighted average common shares outstanding 2,076,195 2,062,904
Weighted average common share equivalents (1) 17,838 8,943
Weighted average common shares and equivalents 2,094,033 2,071,847
Net income per common share $ .47 $ .39
(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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<CASH> 12,182,809
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,400,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 136,041,204
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 304,096,853
<ALLOWANCE> 4,107,508
<TOTAL-ASSETS> 489,174,295
<DEPOSITS> 413,345,723
<SHORT-TERM> 26,390,507
<LIABILITIES-OTHER> 4,128,519
<LONG-TERM> 9,700,000
0
2,600,000
<COMMON> 693,504
<OTHER-SE> 32,316,042
<TOTAL-LIABILITIES-AND-EQUITY> 489,174,295
<INTEREST-LOAN> 14,011,492
<INTEREST-INVEST> 4,463,041
<INTEREST-OTHER> 530,769
<INTEREST-TOTAL> 19,005,302
<INTEREST-DEPOSIT> 8,310,734
<INTEREST-EXPENSE> 9,343,444
<INTEREST-INCOME-NET> 9,661,858
<LOAN-LOSSES> 444,524
<SECURITIES-GAINS> 127,731
<EXPENSE-OTHER> 11,626,435
<INCOME-PRETAX> 1,573,435
<INCOME-PRE-EXTRAORDINARY> 1,573,435
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,077,435
<EPS-PRIMARY> .47
<EPS-DILUTED> .47
<YIELD-ACTUAL> 4.41
<LOANS-NON> 2,294,000
<LOANS-PAST> 360,000
<LOANS-TROUBLED> 307,000
<LOANS-PROBLEM> 2,961,000
<ALLOWANCE-OPEN> 3,775,108
<CHARGE-OFFS> 310,368
<RECOVERIES> 198,244
<ALLOWANCE-CLOSE> 4,107,508
<ALLOWANCE-DOMESTIC> 4,107,508
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200,000
</TABLE>
