10-Q 1 doc1.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------------------------------------- FORM 10-Q [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001 --------------------------------------------------- Commission File No. 0-25914 --------------------------------------------------- CASTLE BANCGROUP, INC. (Exact name of registrant as specified in its charter) Delaware 36-3238190 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 121 West Lincoln Highway DeKalb, Illinois 60115-3609 (Address of principal executive offices) (Zip Code) 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 4,420,161 shares of common stock outstanding as of July 31, 2001. 1

See accompanying notes to unaudited consolidated financial statements. 2

See accompanying notes to unaudited consolidated financial statements. 3

See accompanying notes to unaudited consolidated financial statements. 4

See accompanying notes to unaudited consolidated financial statements. 5

See accompanying notes to unaudited consolidated financial statements. 6 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The unaudited consolidated financial statements of Castle BancGroup, Inc. (the "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 consolidated financial statements should be read in conjunction with the Company's 2000 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) EARNINGS PER SHARE Basic earnings per share (EPS) is based on the weighted average number of common shares outstanding. Diluted EPS is based on the weighted average number of common shares outstanding, increased by the assumed exercise of the Company's stock options. The components of basic and diluted EPS for the three and six month periods ended June 30, 2001 and 2000 were as follows: (dollars in thousands, except share data)

(3) 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 as a component of accumulated other comprehensive earnings (loss). A comparison of amortized cost and fair value of securities available for sale at June 30, 2001 and December 31, 2000 follows (dollars in thousands): 7

The amortized cost and fair value of securities available for sale at June 30, 2001 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.

There were realized gains of $177,000 and realized losses of $71,000 from security activity during the six months ended June 30, 2001. There were no realized gains or losses from security activity during the six months ended June 30, 2000. For the three months ended June 30, 2001 there were $119,000 realized gains and $23,000 realized losses compared to no realized gains or losses for the same period in 2000. Securities carried at approximately $88,399,000 and $86,912,000 at June 30, 2001 and December 31, 2000, respectively, were pledged to secure deposits and for other purposes as permitted or required by law. 8 (4) LOANS The composition of the loan portfolio at the dates shown is as follows (dollars in thousands):

The following is a summary of activity in the allowance for loan losses (dollars in thousands):

(5) OPERATING SEGMENTS The Company's operations involve only banking activities. Through the Company's banking network of 11 retail banking facilities in Northern Illinois, the Company provides traditional community banking services such as accepting deposits and making loans. The Company's three subsidiary banks were consolidated into one charter, Castle Bank N.A., as of June 24, 2000. In prior years, the Company's operations also included a mortgage-banking segment. The mortgage-banking segment was entirely related to the Company's subsidiary, CasBanc Mortgage, Inc. (CMI), which was discontinued in January 2000 and included the origination and brokerage of primarily residential mortgage loans for sale to various investors. The results for the mortgage-banking segment are reported on the Consolidated Statements of Earnings under discontinued operations. The Company's consumer finance subsidiary, Castle Finance Company (CFC), ceased all new lending activities effective with the sale of a substantial portion of the loan portfolio in the first quarter of 1999. (6) COMPREHENSIVE EARNINGS The Company's comprehensive earnings for the three month periods ended June 30, 2001 and 2000, is as follows (dollars in thousands):

9 (7) COMMITMENTS AND CONTINGENT LIABILITIES Because of the nature of their activities, the Company and its subsidiaries are subject to pending and threatened legal actions, which arise in the normal course of business. In the opinion of management, based on the advice of legal counsel, the disposition of any known pending legal actions will not have a material adverse effect on the financial position or the liquidity and results of operations of the Company. (8) DISCONTINUED OPERATIONS In January 2000, the Company formally adopted a plan to liquidate the mortgage-banking segment, which is comprised entirely of the operations of CMI. The mortgage-banking segment does not include the subsidiary bank's mortgage lending activities, which are a component of continuing operations. As a result of the decision to discontinue the mortgage-banking segment, all related operating activity was reclassified and reported as discontinued operations for financial reporting purposes. (9) NEW ACCOUNTING STANDARDS In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") 141, "Business Combinations", which requires that all business combinations be accounted for under a single method, the purchase method. Use of the pooling-of-interests method is no longer permitted. SFAS 141 requires that the purchase method be used for business combinations initiated after June 30, 2001. Since this accounting standard applies to business combinations initiated after June 30, 2001, it will have no effect on the Company's financial statements unless the Company enters into a business combination transaction. In July 2001, the FASB also issued SFAS 142, "Goodwill and Other Intangible Assets", which requires that goodwill no longer be amortized to earnings, but instead be reviewed for impairment. The amortization of goodwill ceases upon adoption of the Statement, which for most companies will be January 1, 2002. The Company is currently studying the requirements of this new accounting standard to determine the impact to the financial statements. 10 ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FORWARD-LOOKING STATEMENTS -------------------------- Certain statements in this Quarterly Report on Form 10-Q constitute "forward-looking statements" within the meaning of Section 21E under the Securities Exchange Act of 1934, as amended (the "Exchange Act"). For example, forward-looking statements may be made with respect to the Company's earnings prospects, pricing and fee trends, credit quality and outlook, new business results, expansion plans, and anticipated expenses. The Company intends these forward-looking statements to be subject to the safe harbor created by the Exchange Act and is including this statement to avail itself of these safe harbor provisions. Forward-looking statements, which are based on certain assumptions and describe future plans, strategies and expectations of the Company, are identified by statements containing words and phrases such as "may," "project," "are confident," "should be," "will be," "predict," "believe," "plan," "expect," "estimate," "anticipate" and similar expressions. These forward-looking statements reflect the Company's current views with respect to future events and financial performance, but are subject to many uncertainties and factors relating to the Company's operations and business environment, which could change at any time and which could cause actual results to differ materially from those expressed or implied by the forward-looking statements. There are inherent difficulties in predicting factors that may affect the accuracy of forward-looking statements. Potential risks and uncertainties that may affect the Company's operations, performance, development and business results include the following: - the risk of adverse changes in business conditions in the banking industry generally and in the specific Midwestern markets in which the Company's subsidiary bank operates; - changes in the legislative and regulatory environment that result in increased competition or operating expenses; - changes in the interest rates and changes in monetary and fiscal policies and the corresponding effect on the Company's interest rate spread and net interest margin; - increased competition from other financial and non-financial institutions; - the competitive impact of technological advances in the conduct of the banking business; and - other risks set forth from time to time in the Company's filings with the Securities and Exchange Commission. These risks and uncertainties should be considered in evaluating forward-looking statements, and undue reliance should not be placed on such statements. The Company does not assume any obligation to update or revise any forward-looking statements subsequent to the date on which they are made. RESULTS OF OPERATIONS --------------------- The Company's net earnings were $2,658,000 for the six months ended June 30, 2001, up from $1,486,000 for the six months ended June 30, 2000. This represents an increase of $1,172,000. The increase in net earnings for the year is primarily attributable to the impact of discontinued operations in 2000, which posted a loss of $837,000 for the year ended June 30, 2000. The discontinued operations relate to the Company's mortgage-banking segment. Net earnings of $1,432,000 for the three months ended June 30, 2001 compared to net earnings of $1,136,000 for the three months ended June 30, 2000, for an increase of $296,000. The increase for these three months is mainly due to a $416,000 increase in mortgage loan origination income partially offset by a $170,000 increase in salaries and benefits. Salaries and benefits were higher mainly due to increased commissions associated with the higher mortgage loan volume. The increased mortgage loan activity at the subsidiary bank was a result of the favorable low interest rate environment in effect for the fifteen and thirty year mortgages on one-four family residential properties. In the fourth quarter of 1999, the Company uncovered fraud and other irregularities in CMI's underwriting and documentation of certain mortgage loans originated and sold by CMI, which may have ultimately resulted in the purchasers of these loans putting them back to CMI under the recourse provisions of the 11 loan sale agreements and result in losses on such loans if and when they are put back to CMI. A more detailed description of the fraud is described in the Company's Annual Report of Form 10-K for the year ended December 31, 1999. As of December 31, 1999, the Company established a reserve liability of $2.3 million to cover such losses. Through June 30, 2001, the Company has repurchased and re-sold or indemnified investors for 50 loans. The remaining reserve liability as of June 30, 2001 was $1.6 million. During its ongoing investigation into the fraud and other irregularities at CMI, the Company decided to discontinue the mortgage-banking segment. All offices of CMI, which had not been previously closed, were closed in January 2000. The Company's net earnings from continuing operations for the six months ended June 30, 2001 were $2,658,000, a 14.4% increase from net earnings from continuing operations of $2,323,000 for the six months ended June 30, 2000. This increase is primarily due to an $864,000 increase in mortgage loan origination income, partially offset by an increase of $240,000 in the provision for loan losses and a $215,000 increase in salaries and benefits. Net earnings from continuing operations for the three months ended June 30, 2001 were $1,432,000 compared to $1,136,000 for the three months ended June 30, 2000. The increase is primarily attributable to a $416,000 increase in mortgage loan origination income, partially offset by a $90,000 increase in the provision for loan losses. Basic earnings per share from continuing operations increased to $0.60 for the six months ended June 30, 2001 as compared to $0.53 for the six months ended June 30, 2000. When including discontinued operations, basic earnings per share was still the same for the six months ended June 30, 2001 as compared to $0.34 for the six months ended June 30, 2000. Basic earnings per share from continuing operations increased to $0.32 for the three months ended June 30, 2001 as compared to $0.26 for the three months ended June 30, 2000. NET INTEREST INCOME ------------------- Net interest income before provision for loan losses, the Company's primary source of earnings, was $10,215,000 for the six months ended June 30, 2001, a $311,000, or 3.14% increase over the same period in 2000. Net interest income before the provision for the three month period ending June 20, 2001 was $201,000 higher than the same period in 2000. There were many factors that influenced changes in net interest margin. Declining interest rates, increases in the loan portfolio and improved liquidity were the most notable contributors to both the 3 month and 6 month improvement over prior year net interest margin. Management believes that net interest margins may narrow as competitive pressures in the marketplace increase. Competition from financial institutions and non-traditional competitors, as well as general economic trends, may 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. On a tax equivalent basis, net interest income increased to $10,635,000 for the first six months of 2001 from $10,398,000 for the first six months of 2000. The tax equivalent net margin decreased for the first six months of 2001 to 4.07% as compared to 4.14% for the same period in 2000. The decrease can primarily be attributed to a significant decrease in the average rate on interest-earning assets and a slight decrease in the average rate on interest-bearing deposits. The ratio of average earning assets to average total assets was 94.7% for the first six months of 2001 as compared to 93.1% for the same time period in 2000. 12

PROVISION FOR LOAN LOSSES ------------------------- The Company establishes a provision for loan losses which management believes is sufficient to maintain adequate reserve levels. The second quarter provision of $195,000 was $90,000 higher than the same period a year ago. The provision is a result of credit analysis, historical trends in net charges to the allowance, loan portfolio configuration, and loan growth. Loan growth was the major factor that contributed to the increase in the provision from prior year. 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 at 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 total outstanding loans was 1.17%, which was unchanged at June 30, 2001 as compared to December 31, 2000. The provision for loan losses recorded during the first six months of 2001 was $450,000 as compared to $210,000 during the same period in 2000. The increase is due to charge-offs recorded in the first quarter of 2001, as well as other credit quality factors identified in the Company's analysis of the allowance for loan losses. The balance in the allowance for loan loss is derived from the quarterly assessment of adequacy performed in the ordinary course of business by management. Each loan officer grades their individual commercial credits and the Company's internal loan review function validates the officers' grades. The grading system is in compliance with regulatory classifications and the allowance is allocated to the loans based on the regulatory grading, except in instances where there are known differences (i.e., collateral value is nominal, etc.). Once the specific portion of the allowance is calculated, management calculates a historical portion for each loan category based on loan loss history, current economic conditions and trends in the portfolio, including delinquencies and impairments, as well as changes in the composition of the loan portfolio. Although management believes the allowance for loan losses was at a 13 level adequate to absorb probable incurred losses on existing loans at June 30, 2001, there can be no assurance that such losses will not exceed estimated amounts. The allowance for loan loss balance reflects the underlying credit risk in the loan portfolio. Management continues to closely monitor asset quality. Non-performing assets, defined as loans 90 days or more past due and still accruing interest, loans in non-accrual status, restructured loans, and other real estate owned, represented 0.34% of total assets as of June 30, 2001, which decreased from 0.46% at December 31, 2000. The following table summarizes the components of non-performing assets at June 30, 2001 and at December 31, 2000:

Year-to-date net charge-offs at June 30, 2001 were $268,000 as compared to $89,000 at June 30, 2000. Management continues to closely monitor all past due loans and improve credit administration and collection efforts. OTHER OPERATING INCOME ---------------------- Total other operating income is comprised of mortgage loan origination income from the subsidiary bank, trust services, deposit service charges, other customer service charges, and other miscellaneous income. Excluding security gains and losses, other operating income was $3,265,000 for the six months ended June 30, 2001, an increase of 40.8% from $2,319,000 for the six months ended June 30, 2000. This change can be primarily attributed to an increase in mortgage loan origination income of $864,000. The increased mortgage loan activity at the subsidiary bank was a result of the favorably low interest rate environment in effect for fifteen and thirty year mortgages on one-to-four-family residential properties. For the three months ended June 30, 2001, other operating income, excluding security gains and losses, was $1,683,000 as compared to $1,167,000 for the same period in 2000 an increase of $516,000. This increase is mainly due to the increased mortgage loan origination income of $416,000. Securities net gains of $106,000 were recognized during the first six months of 2001 as compared to no gains or losses for the same time period in 2000. The decision to purchase or sell a security is based on a number of factors including, but not limited to, the potential for increased yield, improved liquidity, asset mix adjustment, improvement in the interest rate gap, and collateral (pledging) requirements of local municipalities. For the three months ended June 30, 2001, net security gains of $96,000 were recognized as compared to no security gains and losses during the same time period in 2000. OTHER OPERATING EXPENSES ------------------------ Other operating expenses were $9,125,000 for the six months ended June 30, 2001 as compared to $8,590,000 for the six months ended June 30, 2000. Salaries and employee benefits expense represents the largest component of other operating expenses. This category increased $215,000, or 4.15% from the six month period ended June 30, 2000 to June 30, 2001. The increase, which occurred primarily in the second quarter, is mainly due to the commissions associated with the high volume of mortgage loan activity and unusually higher recruiting costs. Occupancy and furniture and fixtures expenses were $1,636,000 for the six months ended June 30, 2001, an increase of $129,000, or 10.4%, from the same period in 2000. Outside services increased 25.1% to $414,000 during the six months ended June 30, 2001 as compared to $331,000 for the same period in 2000, mostly related to legal and professional consulting fees. Advertising expense decreased 12.2% in the first six months of 2001 to $179,000 versus $204,000 for 14 the first six months of 2000. For the quarter ended June 30, 2001, total other operating expenses increased $237,000 over the corresponding three-month period in 2000. Tax expense increased to $1,353 for the six months ended June 30, 2001 as compared to $1,100 for the same period in 2000. The tax expense also increased to $742 for the three months ended June 30, 2001 as compared to $552 for the same period in 2000. The increase in the tax expense is attributable to the increase in the earnings before taxes of the Company for the periods noted above. FINANCIAL CONDITION ------------------- Total assets at June 30, 2001, increased $26,703,000 as compared to December 31, 2000. The increase was due to increases in net loans of $14,325,000, federal funds sold of $6,550,000, mortgage loans held for sale of $3,508,000, and securities available for sale of $3,548,000. Deposits increased $22,013,000 while other borrowings increased $3,959,000. Average assets for the first six months of 2001 increased by $17,542,000 or approximately 3.3% as compared to the corresponding period in 2000. This increase was primarily attributed to a $21,689,000 increase in the average net loan portfolio and $5,043,000 in Federal funds sold offset by a decrease in average securities available for sale of $9,773,000. Average total deposits grew 4.4% over the corresponding period in 2000 to $482,664,000. Despite this growth in average deposits, the subsidiary bank continues to experience competition for deposits that continues to put pressure on the 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, but also recognizes the need to use wholesale funding sources, such as Federal Loan Home Bank advances, to fund loan portfolio growth. CAPITAL ------- The Company is committed to maintaining a strong capital position at the subsidiary bank and on a consolidated basis. Management monitors, analyzes and forecasts capital positions 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, 2001 was 7.93%, an increase from 7.73% at December 31, 2000. The ratio exceeds the regulatory well-capitalized levels, and management believes the Company is maintaining a strong capital position. The Company's June 30, 2001 total risk weighted capital ratio also increased to 11.87% from 11.56% at December 31, 2000. The Tier 1 capital ratio at June 30, 2001 increased to 10.73% from 10.44% at December 31, 2000. Both the total risk weighted and Tier 1 capital ratios also continue to exceed regulatory well-capitalized levels. Total stockholder's equity increased $2,726,000 from December 31, 2000 to June 30, 2001, primarily due to an increase in retained earnings of $2,129,000 and an increase in accumulated other comprehensive earnings of $393,000 due to the change in unrealized gains/losses on securities available for sale. In addition, the Company issued 20,241 shares of common stock through its Dividend Reinvestment and Stock Purchase Plan and its Stock Benefit Plan, which generated $204,000 of new stockholders' equity. LIQUIDITY --------- The Company ensures the subsidiary bank maintains 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 securities available for sale, Federal Home Loan Bank advances, and the bank's federal funds position that, 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 bank through its discretionary access to short-term funding provided by its line of credit, in case of unanticipated demand for funds. Should the subsidiary bank's loan portfolio grow faster than customer deposits, the Company may need to increase its use of alternative funding sources. 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 2001 as compared to the same 15 period in 2000. These fluctuations primarily relate to the changes in the loan, investment, and mortgage loans held for sale portfolios, as explained above. INTEREST RATE SENSITIVITY ------------------------- The Company's overall success is largely 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 in 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 Funds Management Committee reviews interest rate exposure on a regular basis. 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. 16 ITEM 3 - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The business of the Company and the composition of its balance sheet consist of investments in interest-earning assets (primarily loans and securities), which are primarily funded by interest-bearing liabilities (deposits and borrowings). All of the financial instruments of the Company are for other than trading purposes. Such financial instruments have varying levels of sensitivity to changes in market rates of interest. The operating income and net income of the Company depend, to a substantial extent, on "rate differentials," i.e., the differences between the income the Company receives from loans, securities, and other earnings assets and the interest expense it pays to obtain deposits and other liabilities. These rates are highly sensitive to many factors that are beyond the control of the Company, including general economic conditions and the policies of various governmental and regulatory authorities. The Company measures its overall interest rate sensitivity through a net interest income analysis. The net interest income analysis measures the change in net interest income in the event of hypothetical changes in interest rates. This analysis assesses the risk of changes in net interest income in the event of a sudden and sustained 100 to 200 basis point increase or decrease in market interest rates. The tables below present the Company's projected changes in net interest income for the various rate shock levels at June 30, 2001 and March 31, 2001.

Based upon the Company's model at June 30, 2001, the effective of an immediate 200 basis point increase in interest rates would increase the Company's net interest income by 0.87% or approximately $191. The effect of an immediate 200 basis point decrease in rates would increase the Company's net interest income by 0.38% or approximately $83. Many deposit products are near their interest rate floor at June compared to March, reducing the net interest income opportunity in a decreasing interest rate environment.

Based upon the Company's model at March 31, 2001, the effective of an immediate 200 basis point increase in interest rates would increase the Company's net interest income by 1.47% or approximately $305. The effect of an immediate 200 basis point decrease in rates would decrease the Company's net interest income by 1.46% or approximately $302. 17 PART II ITEM 1--LEGAL PROCEEDINGS Neither the Company nor any subsidiary is a party to, and none of their property is subject to, any material legal proceeding at this time. However, the Company and its subsidiaries are from time to time parties to routine litigation incidental to their businesses. 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 Company was held on April 25, 2001 at which one proposal was submitted to a vote of security holders: Proposal 1: Election of three members to the board of directors of the Company. Votes For Votes Withheld --------- -------------- Dewey R. Yaeger 3,546,362 51,444 Katherine L. Halloran 3,548,272 49,534 Ernest A. Basler 3,548,272 49,534 ITEM 5-- OTHER INFORMATION Not applicable. ITEM 6--EXHIBITS AND REPORTS ON FORM 8-K Not applicable. ITEM 11-COMPUTATION OF EARNINGS PER SHARE See EPS computation on Page 7 Note 2. 18 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. Castle BancGroup, Inc. /s/ John W. Castle --------------------------- By: John W. Castle Chairman of the Board and Director Date: August 13, 2001 /s/ Dewey R. Yaeger --------------------------- By: Dewey R. Yaeger President, Chief Executive Officer, and Director Date: August 13, 2001 /s/ Nathan C. Kloster --------------------------- By: Nathan C. Kloster, Vice President and Controller (Principal Financial Officer and Principal Accounting Officer) Date: August 13, 2001 19

CASTLE BANCGROUP INC 10-Q