<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 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 /X/ No / /
The registrant had 2,161,139 shares of Common Stock outstanding as of April 30,
1998.
1
<PAGE>
PART I
<TABLE>
<CAPTION>
ITEM 1 - FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- -----------------------------------------------------------------------------------------------
ASSETS March 31, 1998 Dec. 31, 1997
Unaudited
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and due from banks $ 9,160 11,377
Excess funds sold 0 0
Total cash and cash equivalents 9,160 11,377
- -----------------------------------------------------------------------------------------------
Investment securities (note 2) 134,965 129,479
Mortgage loans held for sale, lower of cost or market 37,578 44,761
Loans (note 3) 303,975 315,540
Less:
Allowance for possible loan losses (no 4,549 4,646
Unearned income and deferred loan fees 2,350 2,352
- -----------------------------------------------------------------------------------------------
Net loans 297,076 308,542
Premises and equipment 10,926 10,854
Goodwill, net of amortization 4,366 4,495
Other assets 6,789 6,042
- -----------------------------------------------------------------------------------------------
$ 500,860 515,550
- -----------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
- -----------------------------------------------------------------------------------------------
Liabilities:
Deposits:
Noninterest-bearing $ 41,864 42,589
Interest-bearing 377,067 381,094
- -----------------------------------------------------------------------------------------------
Total deposits 418,931 423,683
Short-term borrowings 28,355 39,057
Long-term debt 10,250 10,250
Other liabilities 5,036 5,698
Total liabilities 462,572 478,688
- -----------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock, 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,
2,160,677 and 2,152,593 shares issued and outstanding in
1998 and 1997, respectively 720 718
Additional paid-in capital 6,874 6,691
Accumulated other comprehensive earnings, net of tax 496 577
Retained earnings 29,898 28,576
- -----------------------------------------------------------------------------------------------
Total stockholders' equity 38,288 36,862
Commitments and contingent liabilities
- -----------------------------------------------------------------------------------------------
$500,860 515,550
- -----------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
2
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
- ------------------------------------------------------------------------------------------------------
Unaudited
3 Months Ended
Mar. 31, 1998 Mar. 31, 1997
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
Interest income:
Interest and fees on loans $ 7,127 6,839
Interest and dividends on investment securities:
Taxable 2,060 1,993
Nontaxable 148 157
Interest on time deposits 0 0
Interest on excess funds sold 7 47
Interest on mortgage loans held for sale 534 237
Total interest income 9,876 9,273
- ------------------------------------------------------------------------------------------------------
Interest expense:
Interest on deposits 4,370 4,034
Interest on short-term borrowings 396 309
Interest on long-term debt 176 183
Total interest expense 4,942 4,526
- ------------------------------------------------------------------------------------------------------
Net interest income before provision
for possible loan losses 4,934 4,747
Provision for possible loan losses 127 205
Net interest income after provision for possible loan losses 4,807 4,542
- ------------------------------------------------------------------------------------------------------
Other operating income
Trust fees 183 148
Deposit service charges 86 90
Other service charges 281 262
Investment securities gains (losses), net (note 2) 0 (7)
Mortgage loan origination income, net 2,487 1,073
Other income 294 202
Total other operating income 3,331 1,768
- ------------------------------------------------------------------------------------------------------
Other operating expenses:
Salaries and employee benefits 4,050 3,717
Net occupancy expense of premises 435 435
Furniture and fixtures 348 413
Office supplies 132 100
Outside services 251 232
Advertising expense 126 140
FDIC insurance assessment 16 14
Postage & courier 142 112
Amortization expense - goodwill 130 131
Other expenses 515 485
Total other operating expenses 6,145 5,779
- ------------------------------------------------------------------------------------------------------
Earnings before income taxes 1,993 531
Income tax expense 664 134
- ------------------------------------------------------------------------------------------------------
Net earnings $ 1,329 397
- ------------------------------------------------------------------------------------------------------
Net earnings applicable to common stock $ 1,322 347
- ------------------------------------------------------------------------------------------------------
Basic earnings per common share $ 0.61 0.17
Diluted earnings per common share $ 0.61 0.17
- ------------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
Accumulated
Other
Retained Comprehensive Preferred Common
Total Earnings Earnings Stock Stock Surplus
- ----------------------------------------------------------------------------------------------------
Balance at January 1, 1998 $36,862 $28,576 $577 $300 $718 $6,691
<S> <C> <C> <C> <C> <C> <C>
Comprehensive Earnings
Net Earnings 1,329 1,329
Unrealized loss on
investment securities
(net of deferred tax (81)
benefit of $51) (81)
---------
Total comprehensive earnings 1,248
---------
Issuance of 8,165 shares
of common stock 185 2 183
Cash dividends on
preferred stock (7) (7)
- ----------------------------------------------------------------------------------------------------------
Balance at March 31, 1998 $38,288 $29,898 $496 $300 $720 $6,874
- ----------------------------------------------------------------------------------------------------------
Disclosure of reclassification amount:
Unrealized holding losses arising during the period $(81)
Less: reclassification adjustment for gains/losses
included in net income 0
-----
Net unrealized losses on securities $(81)
-----
-----
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENT OF CASH FLOWS (DOLLARS IN THOUSANDS)
- -----------------------------------------------------------------------------------------------------
Unaudited
3 MONTHS ENDED
--------------
Mar. 31, 1998 Mar. 31, 1997
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Interest received $ 9,295 9,213
Fees received 3,409 1,792
Net (increase)/decrease in mortgage loans held for sale 7,183 5,850
Interest paid (4,821) (4,480)
Cash paid to suppliers and employees (7,427) (6,109)
Income taxes paid (23) (587)
- -----------------------------------------------------------------------------------------------------
Net cash (used in)/provided by operating activities 7,616 5,679
- -----------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Proceeds from:
Maturities of investment securities available for sale 7,229 7,795
Sales of investment securities available for sale 0 5,260
Purchases of investment securities available for sale (12,704) (16,387)
Net (increase)/decrease in loans 11,324 (4,371)
Premises and equipment expenditures (406) (626)
- -----------------------------------------------------------------------------------------------------
Net cash (used in)/provided by investing activities 5,443 (8,329)
- -----------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net increase/(decrease) in demand deposits,
NOW accounts, and savings accounts (8,786) (8,040)
Net increase in certificates of deposit 4,034 7,048
Dividends paid on preferred stock (7) (50)
Net proceeds from short-term debt (10,702) 2,272
Issuance of common stock 185 80
- -----------------------------------------------------------------------------------------------------
Net cash (used in)/provided by financing activities (15,276) 1,310
- -----------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (2,217) (1,340)
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at beginning of year 11,377 12,567
- -----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of the period $ 9,160 11,227
- -----------------------------------------------------------------------------------------------------
Reconciliation of net earnings to net cash provided by
operating activities:
Net earnings $ 1,329 397
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Depreciation and amortization 501 512
Provision for possible loan losses 127 205
Losses/(gains) on sale of investment securities 0 7
Increase (decrease) in:
Income taxes payable 641 (454)
Interest payable 122 46
Unearned income (2) (110)
Other liabilities (1,424) (843)
Decrease (increase) in:
Interest receivable (486) 9
Other assets (283) 19
Decrease (increase) in mortgage loans held for sale 7,183 5,850
Discount accretion recorded as income (161) (51)
Premium amortization charged against income 69 92
- -----------------------------------------------------------------------------------------------------
$ 7,616 5,679
- -----------------------------------------------------------------------------------------------------
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<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 March 31, 1998 and December 31, 1997 follows: (DOLLARS
IN THOUSANDS)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------
Unaudited
March 31, 1998
------------------------------------------------
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Treasury and agency
obligations $105,118 618 (206) 105,530
Obligations of state and political
subdivisions 11,504 213 (3) 11,714
Mortgage-backed securities 15,764 214 (63) 15,915
- --------------------------------------------------------------------------------------------------
Total debt securities 132,386 1,045 (272) 133,159
- --------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,472 -- -- 1,472
Other Equity securities 334 -- -- 334
- --------------------------------------------------------------------------------------------------
Total securities 134,192 1,045 (272) 134,965
- --------------------------------------------------------------------------------------------------
</TABLE>
6
<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 March
31, 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
MARCH 31, 1998 DECEMBER 31, 1997
------------------- -----------------------
Amortized Fair Amortized Fair
cost value cost value
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 10,751 10,786 9,033 9,076
Due after one year through five years 31,073 31,355 35,121 35,460
Due after five years through ten years 31,461 31,739 32,474 32,731
Due after ten years 43,337 43,364 34,740 34,836
- --------------------------------------------------------------------------------------------------
116,622 117,244 111,368 112,103
Mortgage-backed securities 15,764 15,915 15,397 15,570
- --------------------------------------------------------------------------------------------------
Total debt securities 132,386 133,159 126,765 127,673
- --------------------------------------------------------------------------------------------------
Federal Home Loan Bank stock 1,472 1,472 1,472 1,472
Other Equity securities 334 334 334 334
- --------------------------------------------------------------------------------------------------
Total securities $ 134,192 134,965 128,571 129,479
- --------------------------------------------------------------------------------------------------
</TABLE>
Gross losses of approximately $0 and $13,391 occurred from security
activity during the three months ended March 31, 1998 and 1997, respectively.
Gross gains of $0 and $6,226 occurred from security activity during the three
month period that ended March 31, 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.
7
<PAGE>
Investment securities carried at approximately $61,900,000 and $77,024,000
at March 31, 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
Mar. 31, 1998 Dec. 31, 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Commercial, financial, and agricultural $ 71,214 73,908
Real estate mortgage 204,040 208,502
Consumer 28,260 32,606
Lease financing receivables 461 524
- -----------------------------------------------------------------------------------
Total loans, gross $ 303,975 315,540
- -----------------------------------------------------------------------------------
</TABLE>
At March 31, 1998 and December 31, 1997, the following items existed:
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Unaudited
Mar. 31, 1998 Dec. 31, 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Non-accrual loans and leases $2,757 3,968
Loans past due 90 days or more and still accruing 426 500
Restructured loans still accruing and less than
90 days past due 152 139
- -----------------------------------------------------------------------------------
Total non-performing loans and leases $3,335 4,607
- -----------------------------------------------------------------------------------
</TABLE>
The following is a summary of activity in the allowance for possible loan
losses: (DOLLARS IN THOUSANDS)
<TABLE>
- -----------------------------------------------------------------------------------
Unaudited
3 months ended Year ended
Mar. 31, 1998 Dec. 31, 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
Balance, beginning of year $ 4,646 3,775
Provision charged to expense 127 1,128
Additions to dealer reserves 0 33
Recoveries on loans previously charged off 64 448
- -----------------------------------------------------------------------------------
4,837 5,384
Less loans charged off 288 738
- -----------------------------------------------------------------------------------
Balance, end of period $ 4,549 4,646
- -----------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
The following is a summary of loan loss experience for the three months
ended March 31, 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 0 127 0 0 127
Additions to dealer reserve 0 0 0 0 0 0
Recoveries on loans previously
charged off 16 17 31 0 0 64
- ------------------------------------------------------------------------------------------------
1,795 1,424 1,405 13 200 4,837
Less loans charged off 2 150 136 0 0 288
- ------------------------------------------------------------------------------------------------
1,793 1,274 1,269 13 200 4,549
Reallocation (200) 0 200 0 0 0
- ------------------------------------------------------------------------------------------------
Balance, March 31, 1998 $1,593 1,274 1,469 13 200 4,549
- ------------------------------------------------------------------------------------------------
Ratios:
Loans in category to total loans 23.43% 67.12% 9.30% .15% 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.
9
<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 $1,329,000 at March 31, 1998, an
increase of $932,000, or 234%, from year-to-date earnings of $397,000 at March
31, 1997. This increase in earnings is primarily attributable to increased
mortgage loan origination income as a result of the favorable interest rate
environment prevalent during the first quarter. A rapid increase or decrease in
interest rates could have a material affect on the earnings of the Company.
Mortgage loan origination income for the first three months of 1998 increased
132% to $2,487,000 as compared to $1,073,000 at March 31, 1997.
Year-to-date basic earnings per common share were $.61 at March 31, 1998, up
$.44 per share from March 31, 1997 basic earnings per common share of $.17. 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
also $.61.
Net earnings applicable to common stock of $1,322,000 year-to-date at March 31,
1998 compares to $347,000 at March 31, 1997. This represents a 281% increase.
Year-to-date preferred stock dividends were $7,000 at March 31, 1998 as compared
to $50,000 at March 31, 1997. The decrease was due to the preferred stock
redemption which occurred during 1997.
The following discussion of performance for the three month period ending March
31, 1998 as compared to the corresponding period 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 first
three months of 1998 increased 3.9% to $4,934,000 as compared to $4,747,000 at
March 31, 1997. This increase can primarily be attributed to a $297,000
increase in interest on mortgage loans held for sale as a result of volume
increases in the mortgage loan held for sale portfolio. 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 three months of 1998 at
4.26% as compared to 4.39% 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 quarter of 1998 as compared to the
same period for 1997.
10
<PAGE>
The ratio of average earning assets to average total assets increased slightly
to 94.4% for the first three months of 1998 as compared to 93.8% 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 quarter.
The subsidiary banks 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 origination fee income and reduces the Company's exposure to long-term
interest rate risk.
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 closely
monitors loan quality to minimize loan losses. The Company's loan review
program closely monitors credit conditions of specific loans, historical
trends in charge-offs at the subsidiaries as well as companies within their
peer group, experience and quality of lending staff, and general economic
conditions in the communities that the subsidiaries serve. This system
allows management to assess the adequacy of the allowance for loan losses.
The allowance for loan losses as a percentage of net outstanding loans
increased to 1.51% at March 31, 1998 as compared to 1.48% at December 31,
1997. The allowance level was at 1.31% of net loans at December 31, 1996.
The provision for loan losses recorded during the first three months of 1998
was $127,000 as compared to $205,000 during the same period in 1997.
Management intends to continue its conservative loan policies and to maintain
the Company's allowance for loan losses at levels deemed to be sufficient
based on the evaluation of the above factors.
Management continues to closely monitor and control asset quality.
Non-performing assets, defined as loans 90 days or more past due and still
accruing, loans in non-accrual status, restructured loans, and other real
estate owned, represented .71% of total assets as of March 31, 1998, which
has decreased from .89% at December 31, 1997. The following table summarizes
the components of non-performing assets at March 31, 1998 and at December 31,
1997. (DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
MARCH 31, 1998 DECEMBER 31, 1997
--------------- -----------------
<S> <C> <C>
Non-accrual loans $2,757 $3,968
Loans past due 90+ days & still accruing 426 500
Restructured loans, performing according
11
<PAGE>
to terms of restructure agreement 152 139
Other real estate owned 224 0
--------------- ------------------
TOTAL NON-PERFORMING ASSET $3,559 $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 March 31, 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 commercial property located in
Sandwich, Illinois. The property will be listed with a realtor in the very near
future.
Year-to-date net charge-offs at March 31, 1998 totaled $224,000 as compared
to $43,000 at March 31, 1997. The increase in net charge-offs was due to a
charge-off at CBH and an increase in charge-offs at Castle Finance Company
(CFC). During the period 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 $3,331,000 for the
first three months of 1998 as compared to $1,775,000 for the same period in
1997. As mentioned above, $1,414,000 of the $1,556,000 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.
No securities gains or losses were recognized during the first three months of
1998 as compared to net losses of $7,000 during the first three months of 1997.
For 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 $366,000 year to date at March
31, 1998 over the corresponding three month period in 1997. Increases in
employee salaries and benefit expense accounted for $333,000 of the increase.
The majority of the salary increase was due to higher mortgage loan origination
production during the first quarter, 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
12
<PAGE>
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
Total assets at March 31, 1998, decreased $14,690,000 as compared to December
31, 1997. This decrease was primarily due to a decrease in the net loan
portfolio of $11,466,000 as a result of decreases in the consumer loan
portfolio and the seasonality of a population of loans. This decrease was
off-set by a decrease in short-term borrowings. Average assets for the first
three months of 1998 increased by $30,145,000 or approximately 6.45% as
compared to the corresponding period in 1997. This increase is primarily
attributed to a $19 million increase in the mortgage loan held for sale
portfolio, and a $15 million increase in the net loan portfolio. This
increase was funded primarily with an increase in total deposits of
$20,445,000 or approximately 5.14% over the corresponding period in 1997.
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 $4,059,000 of brokered
deposits at March 31, 1998, with interest rates ranging from 6.10% to 6.75%
and maturities ranging from June 1998 through October 2002. Brokered
deposits at December 31, 1997, were $4,174,000.
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 March 31, 1998 was 6.71%, an increase from 6.38% at
December 31, 1997. The ratio exceeds the regulatory well capitalized levels,
and management believes the Company is maintaining a strong capital position.
The Company's March 31, 1998 total risk weighted capital ratio also increased to
11.50% from 10.67% at December 31, 1997. The Tier 1 capital ratio at March 31,
1998 increased to 10.25% 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
13
<PAGE>
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 three months of 1998 as compared to the
same period in 1997. These fluctuations primarily relate to the average
increase in the loan portfolio.
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 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.
14
<PAGE>
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 to
address processing of transactions in the year 2000. Testing, upgrades, and
replacement of equipment is expected to cost approximately $200,000 to $300,000
over the next 21 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 quarter of 1998 was immaterial.
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, 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
15
<PAGE>
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 affect 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.
16
<PAGE>
PART II
ITEM 1--LEGAL PROCEEDINGS
Neither the Company nor any subsidiary is a party to any material legal
proceedings, other than routine litigation incidental to its business.
ITEM 2--CHANGES IN SECURITIES
Not applicable.
ITEM 3--DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4-- SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS
None.
ITEM 5-- OTHER INFORMATION
Not applicable.
ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
11 Computation of Per Share Earnings
27.1 Financial Data Schedule
27.2 Restated 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: May 13, 1998
/s/ Victoria S. Maher
- ------------------------
By: Victoria S. Maher, Chief Accounting Officer
and Controller
Castle BancGroup, Inc.
Date: May 13, 1998
18
<PAGE>
EXHIBIT INDEX
EXHIBIT 11 Computation of Per Share Earnings
EXHIBIT 27.1 Financial Data Schedule
EXHIBIT 27.2 Restated Financial Data Schedule
19
<PAGE>
<PAGE>
EXHIBIT 11
CASTLE BANCGROUP, INC.
COMPUTATION OF PER SHARE EARNINGS
The components of basic and diluted EPS for the periods ended March 31,
1998 and 1997 were as follows: (DOLLARS IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Basic EPS:
Net Income 1,329 397
Less: preferred stock dividends: (7) (50)
--------- ----------
Income available to common stockholders 1,322 347
--------- ----------
--------- ----------
Average common shares 2,154,189 2,073,658
--------- ---------
--------- ---------
Basic EPS .61 .17
--------- ----------
--------- ----------
Diluted EPS:
Income available to common stockholders 1,322 347
Assumed conversion of preferred stock
(anti-dilutive in 1997) 7 N/A
--------- ----------
Income available to common stockholders after
assumed conversion 1,329 347
--------- ----------
--------- ----------
Average common shares 2,154,189 2,073,658
Assumed conversion of preferred stock
(anti-dilutive in 1997) 13,043 N/A
Assumed exercise of stock options 24,153 21,729
--------- ----------
Average common shares after assumed
conversions 2,191,385 2,095,387
--------- ----------
--------- ----------
Diluted EPS .61 .17
- ---------------------------------------------------------------------------------
</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.
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 9,160,000
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 134,965,000
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 339,203,000
<ALLOWANCE> (4,549,000)
<TOTAL-ASSETS> 500,860,000
<DEPOSITS> 418,931,000
<SHORT-TERM> 28,355,000
<LIABILITIES-OTHER> 5,036,000
<LONG-TERM> 10,250,000
0
300,000
<COMMON> 720,000
<OTHER-SE> 37,268,000
<TOTAL-LIABILITIES-AND-EQUITY> 500,860,000
<INTEREST-LOAN> 7,127,000
<INTEREST-INVEST> 2,208,000
<INTEREST-OTHER> 541,000
<INTEREST-TOTAL> 9,876,000
<INTEREST-DEPOSIT> 4,370,000
<INTEREST-EXPENSE> 4,942,000
<INTEREST-INCOME-NET> 4,934,000
<LOAN-LOSSES> 127,000
<SECURITIES-GAINS> 0
<EXPENSE-OTHER> 6,145,000
<INCOME-PRETAX> 1,993,000
<INCOME-PRE-EXTRAORDINARY> 1,993,000
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,329,000
<EPS-PRIMARY> .61
<EPS-DILUTED> .61
<YIELD-ACTUAL> 4.26
<LOANS-NON> 2,757,000
<LOANS-PAST> 426,000
<LOANS-TROUBLED> 152,000
<LOANS-PROBLEM> 3,559,000
<ALLOWANCE-OPEN> 4,646,000
<CHARGE-OFFS> 288,000
<RECOVERIES> 64,000
<ALLOWANCE-CLOSE> 4,549,000
<ALLOWANCE-DOMESTIC> 4,349,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200,000
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 10,616,722
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 1,950,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 12,566,722
<INVESTMENTS-CARRYING> 0
<INVESTMENTS-MARKET> 0
<LOANS> 309,511,340
<ALLOWANCE> (3,775,108)
<TOTAL-ASSETS> 473,423,674
<DEPOSITS> 404,109,217
<SHORT-TERM> 19,588,237
<LIABILITIES-OTHER> 4,614,454
<LONG-TERM> 10,150,000
0
2,600,000
<COMMON> 690,873
<OTHER-SE> 31,670,893
<TOTAL-LIABILITIES-AND-EQUITY> 473,423,674
<INTEREST-LOAN> 26,248,059
<INTEREST-INVEST> 7,691,327
<INTEREST-OTHER> 2,497,745
<INTEREST-TOTAL> 36,437,131
<INTEREST-DEPOSIT> 16,090,419
<INTEREST-EXPENSE> 17,857,970
<INTEREST-INCOME-NET> 18,579,161
<LOAN-LOSSES> 1,112,836
<SECURITIES-GAINS> 40,809
<EXPENSE-OTHER> 23,076,099
<INCOME-PRETAX> 2,770,502
<INCOME-PRE-EXTRAORDINARY> 2,770,502
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,844,502
<EPS-PRIMARY> .80
<EPS-DILUTED> .79
<YIELD-ACTUAL> 4.42
<LOANS-NON> 2,348,000
<LOANS-PAST> 201,000
<LOANS-TROUBLED> 314,000
<LOANS-PROBLEM> 2,863,000
<ALLOWANCE-OPEN> 3,308,721
<CHARGE-OFFS> 1,105,855
<RECOVERIES> 459,406
<ALLOWANCE-CLOSE> 3,775,108
<ALLOWANCE-DOMESTIC> 3,575,108
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 200,000
</TABLE>
