<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED June 30, 1998
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE
TRANSITION PERIOD FROM TO
--------- ----------
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Commission File No. 0-25914
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CASTLE BANCGROUP, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
Delaware 36-3238190
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION 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 No
The registrant had 2,168,125 shares of Common Stock outstanding as of July 31,
1998.
1
<PAGE>
PART I
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------
ASSETS June 30, 1998 December 31,
(Unaudited) 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 10,524 11,377
Excess funds sold 6,250 0
- ---------------------------------------------------------------------------------------------------------
Total cash and cash equivalents 16,774 11,377
- ---------------------------------------------------------------------------------------------------------
Investment securities (note 2) 135,070 129,479
Mortgage loans held for sale, lower of cost or market 26,703 44,761
Loans (note 3) 313,998 315,540
Less:
Allowance for possible loan losses (note 3) 4,490 4,646
Unearned income and deferred loan fees 2,507 2,352
- ---------------------------------------------------------------------------------------------------------
Net loans 307,001 308,542
Premises and equipment 11,279 10,854
Goodwill, net of amortization 4,237 4,495
Other assets 6,539 6,042
- ---------------------------------------------------------------------------------------------------------
$ 507,603 515,550
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- ---------------------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 43,538 42,589
Interest-bearing 396,867 381,094
- ---------------------------------------------------------------------------------------------------------
Total deposits 440,405 423,683
Short-term borrowings 12,053 39,057
Long-term debt 10,775 10,250
Other liabilities 4,780 5,698
- ---------------------------------------------------------------------------------------------------------
Total liabilities 468,013 478,688
- ---------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, no par value; authorized 100,000 shares :
7.75% cumulative preferred stock; no par value; 300 shares
issued and outstanding 300 300
Common stock, $.33 par value; 5,000,000 shares authorized, 2,166,957 and
2,152,593 shares issued and outstanding in 1998 and 1997, respectively 722 718
Additional paid-in capital 7,035 6,691
Accumulated other comprehensive earnings, net of tax 614 577
Retained earnings 30,919 28,576
- ---------------------------------------------------------------------------------------------------------
Total stockholders' equity 39,590 36,862
Commitments and contingent liabilities
- ---------------------------------------------------------------------------------------------------------
$ 507,603 515,550
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
2
<PAGE>
PART I
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------------------------
Unaudited
3 Months Ended
June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 7,154 7,173
Interest and dividends on investment securities:
Taxable 2,112 2,163
Nontaxable 157 150
Interest on excess funds sold 9 26
Interest on mortgage loans held for sale 540 220
- ---------------------------------------------------------------------------------------------------------
Total interest income 9,972 9,732
- ---------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,360 4,276
Interest on short-term borrowings 420 351
Interest on long-term debt 176 190
- ---------------------------------------------------------------------------------------------------------
Total interest expense 4,956 4,817
- ---------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 5,016 4,915
Provision for possible loan losses 147 239
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 4,869 4,676
- ---------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 191 156
Deposit service charges 90 86
Other service charges 316 281
Investment securities gains, net (note 2) 72 135
Mortgage loan origination income, net 2,954 1,303
Other income 282 253
- ---------------------------------------------------------------------------------------------------------
Total other operating income 3,905 2,214
- ---------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 4,470 3,753
Net occupancy expense of premises 424 433
Furniture and fixtures 366 339
Office supplies 135 106
Outside services 223 125
Advertising expense 188 123
FDIC insurance assessment 13 13
Postage and courier 137 111
Amortization expense - goodwill 88 131
Other expenses 740 713
- ---------------------------------------------------------------------------------------------------------
Total other operating expenses 6,784 5,847
- ---------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,990 1,043
Income tax expense 704 363
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 1,286 680
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 1,281 628
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.59 0.30
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 0.56 0.30
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- ---------------------------------------------------------------------------------------------------------
Unaudited
6 Months Ended
June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 14,281 14,011
Interest and dividends on investment securities:
Taxable 4,172 4,156
Nontaxable 305 307
Interest on excess funds sold 16 74
Interest on mortgage loans held for sale 1,074 457
- ---------------------------------------------------------------------------------------------------------
Total interest income 19,848 19,005
- ---------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 8,730 8,311
Interest on short-term borrowings 816 660
Interest on long-term debt 352 373
- ---------------------------------------------------------------------------------------------------------
Total interest expense 9,898 9,344
- ---------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 9,950 9,661
Provision for possible loan losses 274 444
- ---------------------------------------------------------------------------------------------------------
Net interest income after provision for possible loan losses 9,676 9,217
- ---------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 374 305
Deposit service charges 176 177
Other service charges 597 542
Investment securities gains, net (note 2) 72 128
Mortgage loan origination income, net 5,441 2,376
Other income 576 455
- ---------------------------------------------------------------------------------------------------------
Total other operating income 7,236 3,983
- ---------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 8,520 7,470
Net occupancy expense of premises 859 868
Furniture and fixtures 714 751
Office supplies 267 207
Outside services 474 358
Advertising expense 314 263
FDIC insurance assessment 29 27
Postage and courier 279 223
Amortization expense - goodwill 218 262
Other expenses 1,255 1,198
- ---------------------------------------------------------------------------------------------------------
Total other operating expenses 12,929 11,627
- ---------------------------------------------------------------------------------------------------------
Earnings before income taxes 3,983 1,573
Income tax expense 1,368 496
- ---------------------------------------------------------------------------------------------------------
Net earnings $ 2,615 1,077
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 2,603 977
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 1.20 .47
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
Diluted earnings per common share $ 1.17 .47
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Other
Retained Comprehensiv Preferred Common
Total Earnings e Earnings Stock Stock Surplus
- ------------------------------------------------------------------------------------------------------------------------------
<S> <S> <S> <S> <S> <S> <S>
Balance at January 1, 1998 $36,862 $28,576 $577 $300 $718 $6,691
Comprehensive Earnings
Net Earnings 2,615 2,615
Unrealized gain on
investment securities
(net of deferred tax
benefit of $23) 37 37
-------
Total comprehensive earnings 2,652
-------
Issuance of 14,445 shares
of common stock 348 4 344
Cash dividends on
preferred stock (12) (12)
Cash dividends on common stock
(260) (260)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at June 30, 1998 $39,590 $30,919 $614 $300 $722 $7,035
- ------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<S> <C>
Disclosure of reclassification amount:
Unrealized holding gains arising during the period $109
Less: reclassification adjustment for gains included in
net income 72
--
Net unrealized gains on securities $37
---
---
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
- ---------------------------------------------------------------------------------------------------------
Unaudited
6 Months Ended
------------------------------
June 30, 1998 June 30, 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 19,859 18,730
Fees received 7,903 4,298
Net decrease in mortgage loans held for sale 18,058 2,883
Interest paid (10,094) (9,131)
Cash paid to suppliers and employees (13,665) (11,292)
Income taxes paid (1,154) (320)
- ---------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 20,907 5,168
- ---------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities and calls of investment securities 19,187 12,894
Sales of investment securities 21,979 25,636
Purchases of investment securities (46,478) (42,208)
Net decrease (increase) in loans 1,079 (14,603)
Premises and equipment expenditures (1,065) (1,258)
Other real estate owned (532) 0
- ---------------------------------------------------------------------------------------------------------
Net cash used in investing activities (5,830) (19,539)
- ---------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase/(decrease) in demand deposits,
NOW accounts, and savings accounts 11,265 (4,081)
Net increase in certificates of deposit 5,458 13,318
Dividends paid on preferred stock (12) (101)
Dividends paid on common stock (260) (208)
Net change in short-term debt (27,004) 6,802
Proceeds from issuance of common stock 348 107
Net proceeds of long-term debt 525 (450)
- ---------------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (9,680) 15,387
- ---------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents 5,397 1,016
Cash and cash equivalents at beginning of year 11,377 12,567
- ---------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 16,774 13,583
- ---------------------------------------------------------------------------------------------------------
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 2,615 1,077
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 994 1,014
Provision for possible loan losses 274 445
Gains on sale of investment securities (72) (128)
Increase (decrease) in:
Income taxes payable 214 176
Interest payable (195) 212
Unearned income 156 (469)
Other liabilities (915) (355)
Decrease (increase) in:
Interest receivable 26 137
Other assets (76) 119
Decrease in mortgage loans held for sale 18,058 2,883
Discount accretion recorded as income (327) (106)
Premium amortization charged against income 155 163
- ---------------------------------------------------------------------------------------------------------
$ 20,907 5,168
- ---------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE>
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
- -------------------------------------------------------------------------------
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
(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 1997
Annual Report on Form 10-K. In the opinion of management, all normal
recurring adjustments necessary for a fair presentation of the financial
position and the results of operations for the periods presented have been
included. Results of operations for interim periods are not necessarily
indicative of the results that may be expected for the year.
(2) INVESTMENT SECURITIES
Investments in debt and equity securities have been classified as available
for sale and reported at fair value. The amortized value is adjusted for
amortization of premiums and accretion of discounts using a method that
approximates level yield. Unrealized gains and losses, net of related
deferred income taxes, are reported in stockholders' equity.
A comparison of amortized cost and fair value of investment securities
available-for-sale at June 30, 1998 and December 31, 1997 follows:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
Unaudited
June 30, 1998
-------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 88,456 719 (123) 89,052
Obligations of state and political
subdivisions 12,343 202 (11) 12,534
Mortgage-backed securities 31,199 228 (67) 31,360
- --------------------------------------------------------------------------------------------
Total debt securities 131,998 1,149 (201) 132,946
- --------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,687 -- -- 1,687
Other Equity securities 437 -- -- 437
- --------------------------------------------------------------------------------------------
Total securities 134,122 1,149 (201) 135,070
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
9
<PAGE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
December 31, 1997
-----------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $ 101,495 657 (173) 101,979
Obligations of state and political
subdivisions 9,873 253 (2) 10,124
Mortgage-backed securities 15,397 218 (45) 15,570
- --------------------------------------------------------------------------------------------
Total debt securities 126,765 1,128 (220) 127,673
Federal Home Loan Bank stock 1,472 0 0 1,472
Other Equity securities 334 0 0 334
- --------------------------------------------------------------------------------------------
Total securities $ 128,571 1,128 (220) 129,479
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
The amortized cost and fair value of securities available-for-sale at
June 30, 1998 and December 31, 1997 by contractual maturity, are shown
below (DOLLARS IN THOUSANDS). 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, 1998 December 31, 1997
- ---- ------------- ------------------
Amortized Fair Amortized Fair
cost value cost value
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 12,392 12,434 9,033 9,076
Due after one year through five years 25,689 25,949 35,121 35,460
Due after five years through ten years 40,232 40,627 32,474 32,731
Due after ten years 22,486 22,576 34,740 34,836
- --------------------------------------------------------------------------------------------
100,799 101,586 111,368 112,103
Mortgage-backed securities 31,199 31,360 15,397 15,570
- --------------------------------------------------------------------------------------------
Total debt securities 131,998 132,946 126,765 127,673
- --------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,687 1,687 1,472 1,472
Other Equity securities 437 437 334 334
- --------------------------------------------------------------------------------------------
Total securities $ 134,122 135,070 128,571 129,479
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE>
Gross losses of approximately $3,950 and $70,641 occurred from security
activity during the six months ended June 30, 1998 and 1997, respectively.
Gross gains of $76,158 and $198,372 occurred from security activity during
the six month period that ended June 30, 1998 and 1997, respectively. All
security gains and losses that occurred during 1998 and 1997 were as a
result of transactions involving available-for-sale securities.
Investment securities carried at approximately $71,566,000 and $77,024,000
at June 30, 1998 and December 31, 1997, 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:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Unaudited
June 30, 1998 Dec. 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 79,570 73,908
Real estate mortgage 203,410 208,502
Consumer 30,915 32,606
Lease financing receivables 103 524
- --------------------------------------------------------------------------------------------
Total loans, gross $ 313,998 315,540
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
At June 30, 1998 and December 31, 1997, the following items existed:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Unaudited
June 30, 1998 Dec. 31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans and leases $ 2,423 3,968
Loans past due 90 days or more and still
accruing 612 500
Restructured loans still accruing and less
than 90 days past due 219 139
Total non-performing loans and leases $ 3,254 4,607
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE>
The following is a summary of activity in the allowance for possible loan
losses: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------
Unaudited
6 months ended Year ended
June 30, 1998 Dec.31, 1997
- --------------------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 4,646 3,775
Provision charged to expense 274 1,128
Additions to dealer reserves 0 33
Recoveries on loans previously charged off 119 448
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
5,039 5,384
Less loans charged off 549 738
- --------------------------------------------------------------------------------------------
Balance, end of period $ 4,490 4,646
- --------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------
</TABLE>
12
<PAGE>
The following is a summary of loan loss experience for the six months
ended June 30, 1998, including an allocation of the allowance, by loan
category, at period end: (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------
Commercial Real
and Agricultural Estate Consumer Leases Unalloc. Total
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ 1,779 1,407 1,247 13 200 4,646
Provision charged to expense 0 0 274 0 0 274
Recoveries on loans previously
charged off 19 17 83 0 0 119
- ------------------------------------------------------------------------------------------------------------------
1,798 1,424 1,604 13 200 5,039
Less loans charged off 4 265 280 0 0 549
- ------------------------------------------------------------------------------------------------------------------
1,794 1,159 1,324 13 200 4,490
Reallocation (200) 0 200 0 0 0
- ------------------------------------------------------------------------------------------------------------------
Balance, June 30, 1998 $ 1,594 1,159 1,524 13 200 4,490
- ------------------------------------------------------------------------------------------------------------------
Ratios:
Loans in category to total loans 25.34% 64.78% 9.85% .03% N/A 100.00%
- ------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------
</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.
13
<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 $2,615,000 at June 30, 1998,
an increase of $1,538,000, or 143%, from year-to-date earnings of $1,077,000
at June 30, 1997. This increase in earnings is primarily attributable to an
increase in the volume of mortgage loan originations and closings at the bank
subsidiaries and CasBanc Mortgage, Inc. The increased mortage loan activity
is a result of the favorable low interest rate environment in effect for
fifteen and thirty year mortgages on one to four family residential
properties. If interest rates for fifteen and thirty year mortgages
increase, the subsidiaries may not be able to maintain origination volume at
the present level and earnings may be adversely impacted. Mortgage loan
origination income for the first six months of 1998 increased 129% to
$5,441,000 as compared to $2,376,000 at June 30, 1997. In units, the year to
date originations for the first half of 1998 were 3,106 verus 1,781 during
the first half of 1997.
Year-to-date basic earnings per common share were $1.20 at June 30, 1998, up
$.73 per share from June 30, 1997 basic earnings per common share of $.47.
The increase in basic earnings per share is due primarily to the increased
mortgage loan origination income as described above. Diluted earnings per
share were $1.17.
Net earnings applicable to common stock of $2,603,000 year-to-date at June
30, 1998 compares to $977,000 at June 30, 1997. This represents a 167%
increase. Year-to-date preferred stock dividends were $12,000 at June 30,
1998 as compared to $100,000 at June 30, 1997. The decrease was due to the
preferred stock redemption which occurred in December, 1997.
Net earnings applicable to common stock of $1,281,000 for the three months
ended June 30, 1998 is an increase of $653,000 or 103% over the same three
month period ending June 30, 1997. This is also related to the increased
volume of mortgage loan originations in 1998 versus 1997.
The following discussion of performance for the three month and six month
periods ending June 30, 1998 as compared to the corresponding periods in 1997
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 second
quarter of 1998 was $5,016,000 versus $4,915,000 at June 30, 1997 for an
increase of 2% or $101,000. Net interest income before provision for
possible loan losses for the first six months of 1998
14
<PAGE>
increased 3.0% to $9,950,000 as compared to $9,661,000 at June 30, 1997.
These increases are primarily attributed to increases in interest on
mortgage loans held for sale as a result of volume increases in the mortgage
loan held for sale portfolio at the subsidiary banks. This interest income
is generated as a result of mortgage loans held for sale that have been
originated through CasBanc Mortgage, Inc. (CMI), but not yet sold in the
secondary market. The subsidiary banks purchase these loans from CMI when
the loans are made to the borrowers. The subsidiary banks then hold these
interest earning assets until they are sold into the secondary market,
providing short-term liquid investments for the banks.
The average net interest margin, on a tax equivalent basis (including
non-accruing loans), decreased slightly for the first six months of 1998 at
4.25% as compared to 4.41% in 1997. This decrease can primarily be
attributed to a decrease in the average yield earned on the mortgage loan
held for sale portfolio during the period due to the lower mortgage loan
interest rate environment for the first half of 1998 as compared to the same
period for 1997.
The ratio of average earning assets to average total assets increased
slightly to 94.5% for the first six months of 1998 as compared to 93.2% for
the same period in 1997. This increase was the result of an increase in the
average mortgage loans held for sale for the first half of 1998.
Competition from both financial institutions and non-traditional competitors,
as well as general economic trends, will continue to impact future earnings.
The 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 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
decreased to 1.44% at June 30, 1998 as compared to 1.48% at December 31,
1997. The provision for loan losses recorded during the first six months of
1998 was $274,000 as compared to $444,000 during the same period in 1997.
The balance in the allowance for loan loss account is derived from the
quarterly assessment of adequacy performed in the ordinary course of business
by management. The allowance for loan loss balance does appropriately
reflect the underlying credit risk in the loan and lease portfolio. As such,
fluctuations are expected in the allowance balance, however, as noted, the
fluctuations have not been material.
15
<PAGE>
Management does maintain conservative loan policies and the Company's
allowance for loan losses are 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 .75% of total assets as of June 30, 1998, which has
decreased from .89% at December 31, 1997. The following table summarizes the
components of non-performing assets at June 30, 1998 and at December 31,
1997.
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Non-accrual loans $2,423 $3,968
Loans past due 90+ days & still accruing 612 500
Restructured loans, performing according
to terms of restructure agreement 219 139
Other real estate owned 532 0
------ ------
TOTAL NON-PERFORMING ASSET $3,786 $4,607
------ ------
------ ------
</TABLE>
The decrease in non-accrual loans was primarily due to paydowns of
non-accrual loans, especially at Castle Bank Harvard, N.A. (CBH). The
majority of loans 90+ days past due and still accruing at June 30, 1998
relate to residential real estate loans at CasBanc Mortgage, Inc. Foreclosure
proceedings have started on all the properties. Based on the collateral
value of the loans, complete recovery of the principal, interest, and
collection costs are anticipated and, as a result, in accordance with Company
policy, interest income is still being accrued. Other real estate owned
consists of one to four family properties in Yorkville, Illinois and a
commercial property located in Sandwich, Illinois.
Year-to-date net charge-offs at June 30, 1998 totaled $430,000 as compared to
$142,000 at June 30, 1997. The increase in net charge-offs was due to a
charge-off at CBH and an increase in net charge-offs at Castle Finance
Company (CFC). In the first quarter, a $200,000 reallocation of the allowance
account was made from the commercial and agricultural portfolio to the
consumer portfolio. This reallocation was done based on a historical
analysis of the charge-off history for both portfolios. Management continues
to closely monitor all past dues and to improve collection efforts.
OTHER OPERATING INCOME
Other income, excluding security gains and losses, totaled $7,164,000 for the
first six months of 1998 as compared to $3,855,000 for the same period in
1997. As mentioned above, $3,065,000 of the $3,309,000 increase 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.
16
<PAGE>
$72,000 in net securities gains were recognized in the first half of 1998 as
compared to net gains of $128,000 during the first half of 1997. For 1998
and 1997, 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 $1,302,000 year to date at
June 30, 1998 over the corresponding six month period in 1997. Increases in
employee salaries and benefit expense accounted for $1,050,000 of the
increase. The majority of the salary increase was due to higher mortgage
loan origination production during the first half of 1998, which caused
higher commission expense to be paid to commissioned employees. Salary and
employee benefits expense also increased due to normal salary increases
granted during the year.
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.
FINANCIAL CONDITION
From December 31, 1997 to June 30, 1998, total assets decreased $7,947,000.
At June 30, 1998 the portfolio of mortgage loans held for sale was down
$18,058,000 from December 31, 1997. This reduction was off-set by an
increase in the investment portfolio of $5,590,000 and an increase in excess
funds sold of $6,250,000 when comparing June 30, 1998 to December 31, 1997.
In contrast, from June 30, 1997 to June 30, 1998, average assets were up
$29,632,000 or 6.30%. This increase relates to a $22,874,000 increase in
mortgage loans held for sale along with an $11,355,000 increase in net loans
from June 30, 1997 to June 30, 1998. These increases have been primarily
funded with interest bearing deposits and, as necessary, short term
borrowings. From a short term funding perspective, the use of short term
borrowings and Federal Home Loan Bank borrowings are the most advantageous
methods of funding the balances in the mortgage loans held for sale
portfolios.
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, 1998 was 6.98%, an increase
from 6.38% at December 31, 1997. The ratio exceeds the regulatory well
capitalized
17
<PAGE>
levels, and management believes the Company is maintaining a strong capital
position. The Company's June 30, 1998 total risk weighted capital ratio also
increased to 11.63% from 10.67% at December 31, 1997. The Tier 1 capital
ratio at June 30, 1998 increased to 10.38% from 9.42% at December 31, 1997.
Both the total risk weighted and Tier 1 Capital ratios also continue to
exceed regulatory well capitalized levels.
LIQUIDITY
The Company ensures the subsidiary banks maintain appropriate liquidity and
provides access to secondary sources of liquidity in case of unusual or
unanticipated demand for funds. Primary bank sources of liquidity are
repayments of loans, high-quality marketable investment securities available
for sale, and the bank's federal funds position which, together, are more
than sufficient to satisfy liquidity needs arising in the normal course of
business. The Company is a secondary source of liquidity for its subsidiary
banks through its discretionary access to short-term funding in case 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 1998 as compared to
the same period in 1997. These fluctuations primarily relate to the changes
in both the loan and mortgage loans held for sale portfolios, as explained
above.
INTEREST RATE SENSITIVITY
The Company's overall success is dependent upon its ability to manage
interest rate risk. Interest rate risk can be defined as the exposure of the
Company's net interest income to adverse movements in interest rates.
Because the Company has no trading portfolio, the Company is not exposed to
significant market risk from trading activities. Other types of market risk,
such as foreign currency exchange and commodity price risk, do not arise in
the normal course of the Company's business activities. The Company does not
currently use derivatives to manage market and interest rate risks. A
derivative financial instrument includes futures, forwards, interest rate
swaps, option contracts, and other financial instruments with similar
characteristics.
The Company is party to financial instruments with off-balance sheet risk in
the normal course of business to meet the financing needs of its customers.
These financial instruments include commitments to extend credit and standby
letters of credit. These instruments involve to varying degrees, elements of
credit and interest rate risk in excess of the amount recognized in the
consolidated balance sheets. Commitments to extend credit are arrangements
to lend to a customer as long as there is no violation of any condition in
the contract. Commitments
18
<PAGE>
generally have fixed expiration dates and may require collateral from the
borrower if deemed necessary by the Company. Standby letters of credit are
conditional commitments issued by the Company to guarantee the performance of
a customer to a third party up to a stipulated amount and with specified
terms and conditions. Commitments to extend credit and standby letters of
credit are not recorded as an asset or liability by the Company until the
instrument is exercised.
The subsidiary bank's interest rate exposure is reviewed on a regular basis
by the Asset/Liability Committee (ALCO) for each bank. The principal
objective of the Company's interest rate risk management function is to
evaluate the interest rate risk included in certain balance sheet accounts,
determine the level of risk appropriate given the Company's business
strategy, operating environment, capital and liquidity requirements and
performance objectives, and manage the risk consistent with the funds
management policy of the Company. Through such management, the Company seeks
to monitor the vulnerability of its operations to changes in interest rates.
The extent of the movement of interest rates is an uncertainty that could
have a negative effect on the earnings of the Company.
YEAR 2000
The Company is aware of the issues associated with the programming code in
existing systems as the millennium (year 2000) approaches. The "year 2000"
problem is pervasive and complex as virtually every computer operation and
every system with an embedded date chip will be affected in some way by the
rollover of the two digit year value to 00. The "year 2000" issue will
affect almost every area of the Company. The issue is whether systems and
date chips will properly recognize date sensitive information when the year
changes to 2000. Systems that do not properly recognize such information
could generate erroneous data or cause a system to fail.
The Company is utilizing both internal and external resources to identify,
correct, and test the systems for the year 2000 compliance. It is
anticipated that testing of mission critical applications will be complete by
December 31, 1998, allowing 1999 to be used for testing of non-mission
critical applications and other problem solving. To date, confirmations have
been received from the Company's primary system vendors that testing plans
are being developed, and being implemented to address processing of
transactions in the year 2000. The Company, however, continues to bear some
risk related to the year 2000 issue and could be adversely affected if other
entities (e.g., vendors or customers) not affiliated with the Company do not
appropriately address their own year 2000 compliance issues. Testing,
upgrades, and replacement of equipment is expected to cost approximately
$200,000 to $300,000 over the next 18 months; however these amounts may
change significantly as the Company continues to analyze year 2000 issues.
This estimate includes both capitalizable costs and costs which will be
expensed as realized. The amount expensed in the first half of 1998 was
immaterial.
19
<PAGE>
ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (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 has adopted this statement in
the first quarter of 1998.
In June, 1997, 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 during 1998.
In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". SFAS No. 132 amends the
disclosure requirements of SFAS No. 87, "Employers' Accounting for Pensions",
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of
Defined Benefit Pension Plans and for Termination Benefits", and SFAS No.
106, "Employers' Accounting for Postretirement Benefits Other Than Pensions".
This statement standardizes the disclosure requirements of SFAS No. 87 and
No. 106 to the extent practicable and recommends a parallel format for
presenting information about pensions and other postretirement benefits. The
statement does not change any of the measurement or recognition provisions
provided for in SFAS No. 87, No. 88, or No. 106. The statement is effective
for fiscal years beginning after December 15, 1997. This statement will have
no effect on the Company.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities. SFAS No. 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded
in other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies
as part of a hedging relationship and, if so, on the reason for holding it.
If certain conditions are met, entities may elect to designate a derivative
instrument as a hedge of exposures to changes in fair values, cash flows, or
foreign currencies. If the hedged exposure is a fair value exposure, the
gain or
20
<PAGE>
loss on the derivative instrument is recognized in earnings in the period of
change together with the offsetting loss or gain on the hedged item
attributable to the risk being hedged. If the hedged exposure is a cash flow
exposure, the effective portion of the gain or loss on the derivative
instrument is reported initially as a component of other comprehensive income
(outside earnings) and subsequently reclassified into earnings when the
forecasted transaction affects earnings. Any amounts excluded from the
assessment of hedge effectiveness as well as the ineffective portion of the
gain or loss is reported in earnings immediately. Accounting for foreign
currency hedges is similar to accounting for fair value and cash flow hedges.
If the derivative instrument is not designated as a hedge, the gain or loss
is recognized in earnings in the period of change. This statement will have
no effect on the Company.
ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
There have been no material changes in the market risks faced by the Company
since December 31, 1997. For information regarding the Company's market
risk, refer to its Annual Report on Form 10-K for the year ended December 31,
1997.
21
<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 22, 1998 at which time one
matter was submitted to a vote of security holders:
Matter 1: The following members of the Board of Directors were elected.
<TABLE>
<CAPTION>
VOTES FOR VOTES WITHHELD
--------- --------------
<S> <C> <C>
Kathleen L. Halloran 1,830,457 30,845
Richard C. McGinity 1,861,298 4
</TABLE>
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.
22
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
/s/ JOHN W. CASTLE
- --------------------------------------------------------------
By: John W. Castle, Chairman of the Board
Chief Executive Officer and Director
Castle BancGroup, Inc.
Date: August 13, 1998
----------------------------------------
/s/ VICTORIA S. MAHER
- --------------------------------------------------------------
By: Victoria S. Maher, Chief Accounting Officer
and Controller
Castle BancGroup, Inc.
Date: August 13, 1998
----------------------------------------
23
<PAGE>
EXHIBIT INDEX
EXHIBIT 11 Computation of Per Share Earnings
24
<PAGE>
EXHIBIT 11
CASTLE BANCGROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
The components of basic and diluted EPS for the periods ended June 30,
1998 and 1997 were as follows: (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS:
Net Income 2,615 1,078
Less: preferred stock dividends: (12) (101)
--------- ---------
Income available to common stockholders 2,603 977
--------- ---------
--------- ---------
Average common shares 2,157,945 2,076,195
--------- ---------
--------- ---------
Basic EPS 1.20 .47
--------- ---------
--------- ---------
Diluted EPS:
Income available to common stockholders 2,603 977
Assumed conversion of preferred stock (anti-dilutive in 1997) 12 N/A
--------- ---------
Income available to common stockholders after assumed conversion 2,615 977
--------- ---------
--------- ---------
Average common shares 2,157,945 2,076,195
Assumed conversion of preferred stock (anti-dilutive in 1997) 12,000 N/A
Assumed exercise of stock options 67,500 22,510
--------- ---------
Average common shares after assumed conversions 2,237,445 2,098,705
--------- ---------
--------- ---------
Diluted EPS 1.17 .47
--------- ---------
--------- ---------
- -------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------
</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.
25
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<CIK> 0000723043
<NAME> CASTLE BANCGROUP INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 10,524
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 6,250
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 135,070
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 338,194
<ALLOWANCE> 4,490
<TOTAL-ASSETS> 507,603
<DEPOSITS> 440,405
<SHORT-TERM> 12,053
<LIABILITIES-OTHER> 4,780
<LONG-TERM> 10,775
0
300
<COMMON> 722
<OTHER-SE> 38,568
<TOTAL-LIABILITIES-AND-EQUITY> 507,603
<INTEREST-LOAN> 14,281
<INTEREST-INVEST> 4,477
<INTEREST-OTHER> 1,090
<INTEREST-TOTAL> 19,848
<INTEREST-DEPOSIT> 8,730
<INTEREST-EXPENSE> 9,898
<INTEREST-INCOME-NET> 9,950
<LOAN-LOSSES> 274
<SECURITIES-GAINS> 72
<EXPENSE-OTHER> 12,929
<INCOME-PRETAX> 3,983
<INCOME-PRE-EXTRAORDINARY> 3,983
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,615
<EPS-PRIMARY> 1.20
<EPS-DILUTED> 1.17
<YIELD-ACTUAL> 4.25
<LOANS-NON> 2,423
<LOANS-PAST> 612
<LOANS-TROUBLED> 219
<LOANS-PROBLEM> 267
<ALLOWANCE-OPEN> 4,646
<CHARGE-OFFS> 549
<RECOVERIES> 119
<ALLOWANCE-CLOSE> 4,490
<ALLOWANCE-DOMESTIC> 4,490
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200
</TABLE>
